S&P/ASX 200 Index (ASX: XJO) share Goodman Group (ASX: GMG) has a very attractive future in my opinion, which I'll outline below.
Goodman describes itself as an integrated property group with operations in Australia, New Zealand, Asia, Europe, the UK and the Americas. It owns, develops and manages these industrial properties around the world.
The Goodman share price has dropped over 20% since December 2021, as we can see on the chart above, however, I think the business is as strong as it has ever been. The following reasons are why I think the ASX 200 share is good value for the long term.
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Strong rental performance supporting the ASX 200 share's asset prices
Interest rates have jumped higher around the world, including in Australia and the US. In theory, this is meant to push down on asset prices like property.
In global markets, there is concern about commercial real estate categories like office buildings and shopping centres amid the growth of work-from-home online shopping, respectively.
But, industrial property may be able to endure much better, with strong demand for logistics and distribution properties. Goodman said that rental occupancy in the FY23 third quarter was 99% and that its 12-month rolling like-for-like net property income (NPI) growth was 4.4% thanks to "scarcity of assets and the "complex planning and delivery environment for new space".
In Goodman's FY23 third quarter update, boss Greg Goodman said:
The group is in a strong position, with high occupancy, rental growth and profitable developments largely mitigating the impact of higher capitalisation rates on valuations.
But, the market is now valuing the Goodman Group share price at over 20% less than the peak, so it seems much better value to me. If Goodman's rental income keeps growing at a good rate, it can offset a lot of the damage of higher interest rates.
Impressive operating profit growth
The ASX 200 share can't really control what happens with property values. However, the business is doing very well at growing its operating profit each year thanks to rental profit growth and completing developments.
In the FY23 third quarter, it pointed to development activity, high occupancy and growth in rents as the reason for increasing its guidance for FY23 operating earnings per share (EPS) to growth of 15%.
The business saw total assets under management (AUM) increase to $80.7 billion at 31 March 2023. I think the increase of AUM increases the underlying value of Goodman as it helps underlying earnings.
If operating EPS continues to grow, I think this would also be a support for the Goodman share price.
Excellent development pipeline
Future property completions can drive the value of Goodman shares higher, with a development profit when the building is ready for the tenant(s) and the start of rental income.
Goodman says that the quality and location of its sites "continue to underpin the strength of the development workbook". The ASX 200 share targets "tightly held, strategic, large scale sites that display infrastructure-like characteristics, and sites that can be rezoned to higher and better use, or value-add opportunities."
At 31 March 2023, the business had work in progress (WIP) of $13 billion. The yield on cost is 6.4%.
It said that the average annual production rate for WIP in FY23 is expected to remain at around $7 billion. I think the next two years are very promising for the ASX 200 share with the development pipeline and ongoing demand.
