Thread by @DownunderValue

Goodman Group $GMG $GMG.AX is arguably one of Australia’s best managed company over the past two decades. An industrial REIT powerhouse, it is a dominant global player in warehousing and logistics that powers e-commerce. A bet against treasuries?

Let’s take a deep dive. 👇

1. Investment Thesis: A stalwart, A-grade Industrial REIT, with excellent management, a long history of growth, in a cyclically growing industry, dependable dividends / future earnings. A buy and hold for the core portfolio.

2. Personal History. I first bought GMG for split-adjusted $3.40 in Feb 2011, and then sold for $6.20 in Dec 2015 – how clever I felt at the time, making 15.5% CAGR inc. divvies. Since then the market has uncovered the true value of GMG, driving up the price…

3. … Barely has there been a good entry price bar March 2020. and if I had held until today my IRR would be ~20% CAGR over a decade. Hubris and selling Tier 1 stocks is the difference between good and great investments. Lesson learned.

4. Macro. Growing e-commerce generates significant demands for industrial warehousing and logistics. Long runway aided by as e-commerce takes market share from bricks and mortar, though this will pull back over time.

5. Business Model. Own properties often as joint ventures with the partners; develop properties often for existing customers; manage industrial real estate for partners. Simple, now overlay capital allocation / management.

6. Own Properties. 98% occupancy, low churn leases with 4.4yr, recycles assets ($2.2bn sales in 1H21), high reevaluation gains ($1.5bn), net assets of $6.30 per share. Generated historical earnings growth.

7. Developments: GMG focus on infill sites and high tech fulfilment centres; mostly JVs with customers (85% leasing rate, 15.1yrs WALE), forecast yield on cost of 6.6%; $8.4bn WIP (3yrs of completions). Huge portion of current growth engine.

8. Management: AUM grown to $48bn, with moderate co-investments and leverage. Low churn lease with +4yrs WALE and high occupancy (+98%). Fast growing area (14.6% CAGR / 5yr). Long term growth as development picks up.

9. Customers: Lead by $AMZN $DPW.DE DHL $IRM $KMB $CCL.AX $COL.AX it’s like a who’s who of e-commerce… diversified and stable Tier 1 clients, highlighting GMG’s reputation.

10. Global: Grown in Australia (still growing), but a global player with a strong presence in Asia (high growth), US (room to grow), and Europe.

Aussies that survive global competition often thrive.. a good way to think about avoiding value traps.

11. Long Term Focus: I really liked their 2020 Annual Report, reflecting from 1995 listing to 2020 today and on to the 2030 strategy.

12. A Moat? I couldn’t sleep trying to answer this question, so probably not.

Scale? Expertise? Land banks? Capital access? Maybe.

Long term contracted clients is moat-y. 🤷

13. Financials: Operating income has not grown as fast as earnings or FCF. Covid depressed development expenses artificially pushing up earnings, while reevaluations have been important medium-term contributors. Buyer be warned..

14. Yields: Dividends are 1.6%, operating earnings 3.6%, payout ratio of 45% based on midpoint estimate. EPS growth of 12%, but 5yr avg ~9%. IRR of 11.5% is *just* above my >10% hurdle, just…
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15. Interest Rates: A strong inverse relationship with 10yr treasuries and REIT’s, as they essentially are seen as bond proxies. Three reasons for this:

16: Increasing rates increases expenses. GMG has moderate leverage (4.8% gearing, though 16.6% look through) increasing weighted average cost of capital (1.48% overall right now, though growing to 4% by 2030). This hits the expense line.

17: Increasing rates reduces reevaluations. Like a DCF on equities, the higher the rate used the lower the value today of net assets. This hits the asset line.

18: Increasing rates increases risk-adjusted yield. The PE ratio has to drop for yields to go up to compete with bonds – though bonds can’t grow earnings like equities, so there is still a trade off. This hits the stock price.

19. Prologis $PLD Comparison: More US, less Asia; more greenfield less infill sites; lower % of development revenue; higher yield (2.6% vs 1.6%); higher debt; Lower EV/FCF (~30 vs 25); comparable ~10% 5yr growth. PE is pretty different as Covid impacted PLD's bottom line.

20. Management: CEO Founder Greg Goodman (2% ownership) and management team have long term incentives focused on cash and operating earnings. May be the best boardroom in Australia.

Most importantly, they are adaptable visionaries…

21. Adaptability. @billbrewsterSCG and @sanjayayer discussed culture, and putting a premium on Co.’s ability to adapt. You may not know what opportunities will come up …

https://twitter.com/businessbrewpod/status/1375386539132354563

22. Adaptability: … but you should know who is best placed to take those opportunities. Goodman Group is that Co., growth may not be from e-commerce in 2030 but it will still be B2B, smart logistics, etc.

23. Valuation: Despite a 10% pull back, still overvalued.
The PE (20) is well above the long term average (15). At $17, I recently took a small holding position. But the real value isn’t until <$15. If I get a chance, this time I hope it will be to #neversell

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A deep dive per week is my commitment to FinTwit.

Questions and feedback always welcome. DYOR.

Disclaimer, I'm long GMG with a token ‘holding’ position.