Rating Action Overview
- Accelerated redevelopment of existing properties with debt-funding and a time lag before the properties generate income have weakened the credit metrics of Goodman Property Trust (GMT). We project a ratio of debt to EBITDA of about 8x for the next 12 months, at the upper end of our tolerance for the 'BBB' rating.
- GMT's redevelopment of brownfield sites has stretched its credit metrics. However, the redevelopments are supported by high tenant pre-commitments and will ensure a sizable and growing portfolio of high-quality assets.
- A leading position in the industrial real estate market in Auckland, New Zealand, quality assets with a strong lease maturity profile, and a diverse tenant base will continue to underpin the credit quality of GMT.
- On Sept. 15, 2023, S&P Global Ratings affirmed its 'BBB' long-term issuer credit rating on GMT and its 'BBB+' long-term issue ratings on the company's senior secured debt. The outlook on the ratings is stable.
- The stable outlook reflects GMT's strong market position in Auckland and proven strategy of enhancing asset quality through new developments and acquisitions. While credit metrics have weakened and rating headroom is limited, we expect the redeveloped assets to generate additional income upon completion over the next 18 months. The redevelopments will also reduce GMT's exposure to Highbrook Business Park and cement the trust's status as a leading provider of high-quality industrial space in Auckland.
Rating Action Rationale
Accelerated redevelopment with debt-funding and a time lag before the projects generate earnings have weakened GMT's credit metrics. The trust had financial leverage (debt-to-EBITDA ratio) of 8x in fiscal 2023 (March year-end). This provides minimal credit metrics headroom for the 'BBB' rating. In our view, the ratio will remain flat until completion of the redeveloped properties in calendar 2024 and the projects start earnings contributions.
The redevelopment of existing sites is consistent with GMT's operating strategy, accelerated by tenant demand. The trust's tenants are capitalizing on and strengthening their e-commerce offerings post-COVID. To meet their demand, GMT has brought forward its development pipeline.
The redeveloped sites will offer more efficient space. They are also close to existing infrastructure and will provide GMT with higher recurring earnings potential. As a result, we expect EBITDA margins to improve above 74%. This compares favorably with peers. As of March 31, 2023, GMT's uncommitted build-to-lease exposure was 0.4% of its total portfolio and 5% of its work-in-progress.
GMT can further cement its position in the Auckland market. The trust's proven development track record, strong lease precommitments, and favorable industry dynamics should support continuing improvements in portfolio quality and diversity. Over time, Highbrook Business Park's earnings contributions will also drop as the trust completes new assets.
A NZ$4.8 billion portfolio of high-quality industrial real estate in Auckland will continue to underpin GMT's credit quality. Highbrook Business Park has several assets with a total asset value of NZ$2.2 billion as of March 31, 2023. This accounts for about 51% of the trust's reported stabilized property portfolio. We expect this asset concentration to drop by about 5% once GMT completes its redevelopment projects.
GMT's portfolio benefits from high demand, driven by strong growth in e-commerce.
The trust's high occupancy rate of 99.5% and high weighted average lease term (WALT) of 6.4 years (including the WALT of leased developments) reflect this.
We believe robust demand for warehouse and logistics facilities will sustain healthy occupancy over the next two years. Tight supply of well-located Auckland warehouse and logistics properties coupled with GMT's market position will support favorable leasing.
We expect credit metrics to improve and offer greater headroom at the 'BBB' rating. GMT's financial policy settings emphasize gearing (debt-to-assets ratio). Amid low interest rates previously, the trust became more conservative in its gearing policy, from a target rate of below 35% in fiscal 2018 to below 30% by fiscal 2023.
As of March 31, 2023, GMT reported a gearing ratio of 25.9% (29.1% including committed acquisitions and developments). While this was at the higher end of the trust's target range of 20%-30%, we expect the trust to fund future growth initiatives with proceeds from asset sales or equity raising.
Outlook
The stable rating outlook on GMT reflects its strong and improving market position in Auckland, and proven strategy of enhancing asset quality through new developments and acquisitions.
The stable outlook also reflects our expectation that GMT will progressively reduce its debt-to-EBITDA ratio from the current 8x as it completes new developments over the next 18 months. In our view, the group has limited headroom at the current rating level for additional debt-funded growth over the next 12 months.
Downside scenario
Downward rating pressure could occur if GMT sustains a debt-to-EBITDA ratio of above 8x. This could arise from further material debt-funded developments or acquisitions or, over the longer term, from higher vacancies from a major reduction in tenant demand for the group's assets.
Upside scenario
We consider upward rating momentum to be unlikely. However, we could raise the ratings if GMT commits to maintaining a sustainably stronger financial profile, with support from more conservative financial policies.
Company Description
GMT is one of the largest property owners and developers of high-quality industrial properties in Auckland, New Zealand. The trust had a NZ$4.8 billion asset portfolio as of March 31, 2023. It is constantly seeking opportunities to improve its property mix and provide a sustainable supply chain infrastructure by investing in greenfield and brownfield assets.
GMT's most significant industrial property is the Highbrook Business Park. This asset made up over 51% of the trust's stabilized property portfolio (NZ$2.2 billion in asset value) as of March 31, 2023.
GMT is externally managed and listed on the New Zealand stock exchange. The manager of the trust is a subsidiary of Australian Securities Exchange-listed Goodman Group. Goodman Group is also the trust's largest investor, holding 25.2% of its units as of March 31, 2023.
Our Base-Case Scenario
Assumptions
- New Zealand's real GDP growth of 1.7% in 2024, 2.5% in 2025, and 2.6% in 2026.
- Consumer Price Index growth of 3.4% in 2024, 2.6% in 2025, and 2.5% in 2026.
- Occupancy rate of 99.5% and a high proportion of fixed and CPI-linked rental increases for the stabilized portfolio.
- No significant divestments or acquisitions in fiscal years 2024-2025.
- Developments and stabilized capital expenditure of about NZ$210 million in fiscal 2024, NZ$65 million in fiscal 2025, and NZ$19 million in fiscal 2026.
- Yield of 7.0% for development assets, reflecting the impact of elevated interest rates.
- Revenue growth of 14%-16% in fiscal 2024. Drivers to be high occupancy, rising rental rates, new development completions, and strategic acquisitions.
- Revenue growth of 9%-11% in fiscal 2025.
- EBITDA margins of 74%-76% over fiscal years 2024-2026 from increased rental income.
- Effective tax rate of about 12% of operating earnings before tax, less depreciation and amortization.
- Dividend distribution of 75%- 80% of funds from operations (FFO).
Key metrics
Goodman Property Trust--Forecast summary* | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Mil. NZ$ | 2022a | 2023a | 2024e | 2025f | 2026f | |||||||
Revenue | 196 | 222 | 255 | 280 | 300 | |||||||
EBITDA | 146 | 164 | 190 | 210 | 230 | |||||||
Funds from operations (FFO) | 105 | 103 | 110 | 120 | 130 | |||||||
Capital expenditure (Capex) | 311 | 228 | 210 | 60 | 15 | |||||||
Debt | 1,080 | 1,318 | 1,510 | 1,570 | 1,570 | |||||||
Adjusted ratios | ||||||||||||
Debt/EBITDA (x) | 7.4 | 8.0 | 8.0 | 7.5 | 7.0 | |||||||
FFO/Debt (%) | 9.7 | 7.8 | 7.5 | 7.5 | 8.5 | |||||||
EBITDA margin (%) | 74.5 | 74.0 | 75.0 | 75.0 | 76.0 | |||||||
Debt/Debt and equity (%) | 22.8 | 27.7 | 30.4 | 31.0 | 30.7 | |||||||
*All figures adjusted by S&P Global Ratings. The forecasts are mid-point estimate of the likely ranges. a--Actual. e--Estimate. f--Forecast. NZ$--New Zealand dollar. |
Liquidity
We assess GMT's liquidity as adequate. We expect the company's liquidity sources to cover 1.2x liquidity uses over the 12 months ending March 31, 2024.
We also expect GMT to have positive liquidity sources over uses and sufficient covenant headroom even if its EBITDA falls by 10%. The trust's track record of debt issuances and diverse lender base support our liquidity assessment.
Principal liquidity sources:
- Cash of about NZ$6.6 million as of March 31, 2023;
- About NZ$739 million of undrawn bank facilities maturing beyond 12 months; and
- FFO of about NZ$115 million.
Principal liquidity uses:
- Capital expenditure of about NZ$230 million over the 12 months to March 31, 2024;
- Debt maturities of NZ$100 million over the same period; and
- Distribution of 75%-80% of FFO.
Covenants
GMT maintains significant headroom in its covenants. We believe the trust will maintain ample covenant headroom such that it can absorb a 10% decline in EBITDA without breaching key covenants.
The key financial covenants for GMT's secured bank facilities are:
- An EBITDA interest coverage ratio equal to or more than 2x (reported ratio of 3.6x in fiscal 2023);
- A loan-to-value ratio (total borrowings to total secured assets) equal to or less than 50% (reported ratio of 27.0% in fiscal 2023).
Environmental, Social, And Governance
ESG factors have an overall neutral influence on our credit analysis of GMT.
Environmental factors such as energy efficiency, water conservation, and greenhouse gas emissions are ongoing risks for real estate operators such as GMT. However, we do not regard these as material risk factors that directly affect the ratings.
We view GMT to have low exposure to social risks. This is because the sector is not labor-intensive, the trust maintains good community relations, and it faces no material safety issues.
We also view GMT's management and governance as satisfactory. We base our opinion on the trust's operating strategy and corporate governance framework.
Issue Ratings - Subordination Risk Analysis
Capital structure
All of GMT's debt are senior secured and share the same security package.
As of March 31 2023, GMT's debt comprised NZ$750 million of domestic bonds, NZ$660 million of undrawn syndicated bank facilities, NZ$321 million of drawn bilateral debt (with an undrawn balance of NZ$79 million), and US$120 million (NZ$197 million) of U.S. private placement notes.
In April 2022, GMT issued a NZ$150 million green bond.
Analytical conclusions
We rate the senior secured debt 'BBB+', one notch higher than the long-term issuer credit rating on GMT. This reflects enhanced recovery prospects under a stress scenario of loss of asset value through overcollateralization of pledged assets (more than 1.5x) and a first-lien security position over the property assets of the trust.
Ratings Score Snapshot
Issuer Credit Rating | BBB/Stable/-- |
---|---|
Business risk: | Satisfactory |
Country risk | Low |
Industry risk | Low |
Competitive position | Satisfactory |
Financial risk: | Intermediate |
Cash flow/leverage | Intermediate |
Anchor | bbb |
Modifiers: | |
Diversification/Portfolio effect | Neutral (no impact) |
Capital structure | Neutral (no impact) |
Financial policy | Neutral (no impact) |
Liquidity | Adequate (no impact) |
Management and governance | Satisfactory (no impact) |
Comparable rating analysis | Neutral (no impact) |
Stand-alone credit profile: | bbb |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | Industrials: Key Credit Factors For The Real Estate Industry, Feb. 26, 2018
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings Affirmed | |
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Goodman Property Trust |
|
Issuer Credit Rating | BBB/Stable/-- |
Goodman Property Trust |
|
Senior Secured | BBB+ |
GMT Bond Issuer Ltd. |
|
Senior Secured | BBB+ |
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
Primary Credit Analyst: | Craig W Parker, Melbourne + 61 3 9631 2073; craig.parker@spglobal.com |
Secondary Contact: | Tharkana Kulatunge, Melbourne 396312017; tharkana.kulatunge@spglobal.com |
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