Goodman Group (ASX: GMG) is a global property business that develops, owns and manages industrial properties in 33 cities across 16 countries. It has a market capitalisation of $11.8 billion, making it one of the largest real estate investment trusts (REIT) on the ASX.
Goodman's share price has dropped by 15% since its $7.72 high in August 2016, despite this it's still grown by 21% over the last two years. It's hard to say where the share price will go in the short term, but the underlying business looks like it can keep growing for a long time to come.
Here are three reasons why I think Goodman Group is one of the best REITs:
Very high quality tenants
Goodman has one of the highest quality lists of tenants out of all the REITs on the ASX. In its list of top 20 global customers by net income there are tenants like Japan Post (including Toll), which comprises 3.3% of net income, Deutsche Post (including DHL) is 2.5%, Amazon is 2.1% and BMW Group is 1.3%.
High-quality tenants are more likely to be able to afford rent increases, be long term tenants and not run into difficulty with their underlying business.
By having good properties in gateway city locations with quality tenants, Goodman boasted a 96% occupancy level across the group and partnerships.
Further growth in markets
Goodman always has a pipeline of developments that will fuel growth in the future including the Oakdale Industrial Estate which already has six DHL facilities, DSV, Petbarn (run by Greencross Limited (ASX: GXL)) and Toyota signed up.
Amazon already works with Goodman overseas and would likely work with Goodman in Australia as well, with Amazon's expected move here next year.
At the end of 30 September 2016 Goodman had $3.5 billion worth of developments as work in progress, which it expects to earn a yield of 7.7% on when complete.
Strength of the business
Goodman is in a strong position for future growth, or as security in case of a market downturn. At the end of FY16 its gearing ratio was only 20.1%, even though its covenant allows up to 55%.
It has an interest ratio cover of 5.5x even though the covenant only requires 2x. There is a lot of headroom with both of these ratios. Its debt ratio is so good because it had over $1.3 billion in cash.
In FY16 it grew operating earnings per share by 7.8% and statutory profit by 5.5%, when including one-off non operating items.
Time to buy?
Management expect to grow earnings per share by 6% during FY17, which is pretty good for a global REIT in the current low growth world.
It currently has a dividend yield of 3.6% which is forecast to grow by 6% during FY17. This yield is quite low for a REIT but only represents a 60% payout ratio. By keeping more of its profits, it's able to fuel more growth in the future.
I think Goodman would be a good investment for most investors due to its diverse portfolio of tenants, properties, geographical locations and likely future growth. But Foolish investors would likely benefit by being patient and waiting as the share price may drop further between now and January. At that point, I may become a new shareholder of Goodman.
