It would be fair to say that industrial real estate runs in Greg Goodman’s blood. His father, well-known Australasian food industrialist Sir Patrick Goodman, instilled in his middle son a strong work ethic, having started as a baker in New Zealand and grown his business into one of Australia’s more enduring public companies. Given the nature of that business, he also imparted in his son an understanding of and love for industrial property.
Greg Goodman started to invest in industrial real estate when he was just 19 and attending Massey University in Wellington. Being in a hurry to start his career, however, he left the university – where he was studying business and property – without completing a single paper and, in 1985, left New Zealand to make his fortune in Australia. Now 50, he recalls that he moved to Sydney because Australian industrial property was undervalued compared to values in New Zealand.
Clearly, Greg Goodman made the right move as he currently runs the Goodman Group, one of the world’s three largest developers and owners of logistics and industrial properties. As of December 31, the company managed more than A$17.1 billion in third-party capital and total assets valued at A$21 billion.
Through his firm, Goodman is looking to capitalize on a global shortage of quality, modern industrial property. “Vacancy rates in Asia range from 5 percent to 7 percent, 3 percent in Australia and 3 percent to 5 percent in the US,” he tells PERE. “I expect demand will continue to outstrip supply over the next decade.”
As a result, Goodman envisages that third-party capital under management will more than double to A$40 billion over that period. Capital partners will share in that growth in the Americas and Asia, particularly China.
Meanwhile, the Goodman Group has outperformed the Australian market by a comfortable margin in the 12 months through July 31, chalking up a total return of 30.7 percent. That compares to an average total return of 23.8 percent for Australia’s benchmark index, the S&P ASX 200, over the same period.
John Kim, a property analyst with the independent brokerage firm CLSA, has the Goodman Group as his top pick. “The company’s guidance to the market on earnings per share growth is expected to be 6 percent this year, but the consensus is for 8 percent growth both this year and next,” he says.
A long and winding road
The Goodman Group has its genesis in 1995, when a youthful Goodman and his then-partner Duncan Hardie, floated the Goodman Hardie Industrial Property Trust on the Australian Stock Exchange with a portfolio valued at A$75 million. Despite his family name, Goodman says: “It was the hardest $25 million I’ve ever raised.”
In a game-changing move in 2000, Goodman struck a deal with the Macquarie Group, merging Goodman Hardie with the Sydney-based investment bank’s industrial property trust to create the A$1 billion Macquarie Goodman Industrial Trust. More significantly for Goodman, the merger with Macquarie unlocked doors to the discreet world of sovereign wealth funds and global pension plans.
Brett Robson, Macquarie’s global head of private capital markets, introduced Goodman to the likes of China Investment Corporation (CIC), the Abu Dhabi Investment Authority (ADIA) and the Government of Singapore Investment
Corporation (GIC), as well as global pensions such as the Canada Pension Plan Investment Board (CPPIB) and Algemene Pensioen Groep (APG). Since then, Macquarie’s global head of real estate, Chris Green, and his team have continued to play a pivotal role in all of the Goodman Group’s capital raisings.
By December 2007, the Goodman Group was at its pinnacle in terms of market capitalization at A$12 billion – 30 percent higher than its present value of A$8.2 billion. Of course, corporate historians will note that the company went through a “near death” experience in 2009, following the global credit crunch and ensuing stock market collapse. Indeed, some A$10 billion of the Goodman Group’s market value vaporized during the financial chaos that followed the collapse of Lehman Brothers.
“Goodman’s share price went from an all-time high of A$33.76 in December 2007 to an all-time low of A$0.61 in March 2009,” recalls Sydney-based fund manager Winston Sammut of Maxim Asset Management.
Unlike other executives, where risk is confined to loss of bonus or job, Goodman’s personal paper loss at the time was substantial – the value of his family stake shrank from A$756 million at its peak to just A$87 million. The family stake shrank even further following subsequent dilutive share issues, although they were able to recoup some of those losses by selling a treasured piece of industrial land in Melbourne to the company through an asset for equity swap.
Some four years on, Goodman still winces at the description of 2009 as ‘near death’, or ‘near catastrophic’. The truth is, he says, Macquarie and CIC probably would not have put up the $500 million in bridge financing if it were not for the $1 billion-plus worth of unsecured assets that could be tapped as security.
According to analysts and investors, being in that position was a cathartic experience that is seared into the collective corporate memory of the Goodman Group. “The company does not need leverage today,” says Pete Peterson, a veteran fund manager with BT Investment Management. “It is financially prudent and is conservative in its approach and earnings forecasts. It has come to appreciate liquidity and solvency.”
Indeed, the Goodman Group’s total gearing currently is just 30 percent (compared to 51 percent in 2009), and it has uncalled capital totaling A$3 billion. “This is the highest we’ve ever been,” says Goodman. “We’ve always had around A$1 billion to A$1.5 billion.”
Furthermore, 90 percent of its debt (A$1.9 billion) is now in long-dated US dollar- and Euro-denominated bonds with an average expiration of 5.5 years. “We don’t want the vulnerability that we are exposed to with bank debt,” adds Goodman.
A new world order
Post-crisis, in the new low-growth global environment, institutional investors have shown an elevated interest in industrial assets. And the recapitalized and re-energized Goodman Group has become a partner of choice for some of the world largest sovereign wealth funds and global pensions.
“There does not appear to be enough opportunity for capital seeking investment in this segment of the property market,” says Goodman.
Indeed, Goodman had to increase a recent capital raising for its largest unlisted wholesale fund, Goodman Australia Industrial Fund (GAIF), from A$600 million to A$1 billion. And most recently, the Goodman European Logistics Fund (GELF) raised €500 million – double its original target of €250 million.
“We opened a new world of capital to Greg in 2005 when he launched GAIF, his first wholesale fund,” says one investment banker who did not wish to be named. “We were looking for $800 million and ended up with sovereign wealth funds and global pension plans putting up $1.2 billion. Greg immediately understood the significance of tapping into this source of long-term capital.”
The investment banker notes that Goodman developed a strong rapport with his capital partners. “The difference between Greg Goodman and others is that he leaves something on the table for his partners – and he is consistent,” he adds.
CPPIB, for example, made its first investment in the Goodman Group in 2009. “We are willing to move at various points of the cycles alongside them,” says Graeme Eadie, senior vice president and head of real estate investments at the Canadian pension. “They know we will be there in good or bad times.
Eadie continues: “We have said our ideal structure is finding a partner who invests alongside us and who has the financial wherewithal and the execution skills to carry out acquisitions, development or property management.”
So far, CPPIB has committed some A$2.73 billion to the Goodman Group, representing eight percent of the investor’s total real estate commitments. Asked about its high exposure to the company, Eadie replies: “The risk is acceptable to us. We constantly evaluate it.”
One might assume that, given its current level of exposure, CPPIB has hit the ceiling with its investment in the Goodman Group. “We have no hard and fast lines,” Eadie counters. “Obviously, we view a large investment with a high-quality company that is in multiple markets differently from where we have a single smaller investment with a far weaker company.”
CPPIB was in talks with the Goodman Group for some years before forming its first joint venture to develop modern warehouses in China. The partners have since quadrupled their capital investment to A$1 billion as they ride the boom in online sales in China, which McKinsey & Co estimates will grow to $650 billion by 2020.
A tailored approach
“We offer a cradle-to-grave approach in what I call a contemporary attitude to funds management,” says Goodman. “We treat each partnership as a little company. We have regular consultations on a range of issues, from business plans to projects.”
Capital partners confirm that they are happy with the level of consultation, and Goodman stresses that these partnerships are for the long haul. Indeed, sovereign wealth funds and global pensions want to be in on the ground floor with Goodman in order to share in development profits, as well as have access to assets that provide predictable stable returns for the long term. So far, the company has invested A$3.2 billion alongside its partners, often as the cornerstone investor in a suite of wholesale funds.
The Goodman Group’s relationship with Malaysia’s Employees Provident Fund (EPF), however, is slightly different. EPF is attracted to industrial assets considered ‘Sharia compliant’ under Islamic teaching, and the pair have invested A$800 million to own existing assets in Australia.
With big names and big egos in the mix of its capital partners, the Goodman Group finds itself balancing numerous interests. “Our partners have first look at all new opportunities we offer,” says Goodman. “Only after they decline will we offer the project to outsiders.”
Quips a source at one sovereign wealth fund: “The world of LPs is very small. If he tries to do something behind our backs, we will soon find out.”
That relationship with capital partners works both ways. In 2009, Goodman worked with a consortium led by APG to make a takeover offer for ProLogis European Properties (PEPR). A key investor in the listed vehicle, APG and other institutional investors were unhappy with the manager and the fund’s net tangible asset value.
According to one industry source, Goodman agreed to go through the motions of a $1.7 billion takeover bid, which was abandoned when ProLogis came with a counter offer – at a 22 percent premium to PEPR’s unit price. This allowed unhappy investors to exit and resolved the impasse.
“It didn’t matter to Greg whether he took over the management,” says the source. “He had done his capital partners a favor in lifting the fund’s value.”
The second leg to the Goodman Group’s growth and strength is its customers. It counts multi-national groups including DHL, e-tailers such as Amazon and regional firms like Toll Group, a leading transportation and logistics company in Asia Pacific, as top customers. Together, such tenants underpin Goodman’s expansion in existing and new markets.
Chris Noble, property director at Toll Group, says the Goodman Group has provided a development platform with key geographic holdings, which have complimented Toll’s activities in Australian cities over the past decade. “We see Goodman as a key supplier of property solutions throughout Australia and, more recently, Asia with new ventures negotiated in Hong Kong,” he adds.
Loyal customers, together with long leases, provide de facto cash flow guarantees. “We have a 15-year lease, with an option for another 15 years, on a distribution center in Western Sydney,” says Shane Bisset, national asset manager for Metcash, Australia’s third-largest grocery group. “Our operational investments in these distribution centers are worth as much as the value of the buildings, and we need the long leases to justify the investment we put into them.” The combined landlord and tenant investment in the 100,000-square-meter warehouse is about A$100 million.
Last year, the Goodman Group entered the US and Brazilian markets and ramped up its operations in Japan, which had been wound back during the global financial crisis to preserve capital. However, Goodman tells PERE that the company is now in consolidation mode.
“We are now operating in the top 10 economies of the world,” says Goodman. “From now on, it will be more of the same for us. We will build up our development from $2.2 billion this year to $2.5 billion per year.”
With its rolling sovereign debt problems, Goodman points to Europe as the market to watch. “It is hard, and we don’t know when Europe will grow again,” he says. “Luckily, our core market is Germany, which is among the top five economies in the world. Poland also is a relatively strong market.”
France is struggling, and the Goodman Group is working closely with its customers there to help them restructure their businesses to cope with the hard times. Ironically, Goodman came into its own in Europe just as European developers began to struggle to finance projects. As a result, it has cornered a significant market share in Europe.
In the Americas, WT Torre, one of Brazil’s largest developers, hived off its industrial division to form the WT Goodman joint venture. “We have a standalone business with WT Torre in Brazil, and it does not carry legacy assets,” Goodman says. “It is our intention to build the business up brick-by-brick – just like we are doing in China.”
A first project is coming off the ground in Rio de Janeiro. “The market there is different,” Goodman notes. “E-tailing is in its infancy, and we will build for traditional retailers and third-party logistics groups.”
On China, Goodman believes growth may come down from double digits to “6 percent or 7 percent” per year, but it still is a large growing market. “We are there for a long-term play, not to win a foot race,” he says. “We will be prudent and sensible.”
Simon Wheatley, an analyst at Goldman Sachs, says the weak link in the Goodman Group’s operations is the United Kingdom. “They have unproductive capital tied up there,” he explains. “It has been a challenging market for them.”
Goodman responds: “The UK has started to turn in the first half of this year. We will bring some 150,000 square meters of space to the market this year. Our occupancy rate is more than 90 percent.”
Meanwhile, the Goodman Group has timed his foray into the US well, coinciding with an economic recovery. Last year, the company teamed up with Birtcher Development, a fifth generation family business in California that now oversees the US operations, known as Goodman Birtcher. Again, CPPIB has stepped in as Goodman’s capital partner in a $1 billion joint venture to own US assets.
CPPIB sees this as a good opportunity to enter the US industrial market, which has bottomed out and is recovering. “We think we have the best of both worlds – a global player in Goodman and a strong local team on the ground,” says Eadie.
Goodman says the US venture has a development pipeline of $1.5 billion, mostly in Los Angeles and San Francisco, and is moving into such markets as Seattle, Pennsylvania and New Jersey.
The industrial evolution
Over decades now, Goodman has seen a constant re-rating of industrial assets. “In the 1980s, institutional investors shunned the asset class, believing it to have in-built obsolescence,” he says. “But it has evolved to become a sought-after investment.”
Goodman expects this evolution to continue over the next 10 years, in part driven by online shopping. “Currently, e-tailing accounts for 4 percent of global retailing, and that figure is likely to climb to 15 percent to 20 percent over the next decade,” he says.
Some 40 percent of the Goodman Group’s projects globally are geared towards e-tailers. “I was in Japan last week to meet three key customers,” Goodman says. “They, too, were talking about e-tailing, and next week I will be in China to meet our Chinese customers.”
Currently, the Goodman Group has 88 development projects underway around the world. Goodman is well versed with most, if not all, of those projects.
“I am hands on, and so is my team,” says Goodman. He and his trusted lieutenants – Anthony Rozic (deputy chief executive), Nick Vrondas (group chief financial officer) and Nick Kurtis (group head of equities) – take turns visiting operations in 19 countries.
“Goodman is inspirational and passionate,” says Goldman Sachs’ Wheatley. “That passion is spread to his management.”
Adds one fund manager: “If I have a reservation, it is that the team is too close – they have become Greg’s cheer squad.”
Differentiating fear from fundamentals
How a Chinese play became the key piece in solving Goodman’s liquidity puzzle
Those were tumultuous days. In 2009, the global credit market had seized up following the collapse of Lehman Brothers, and the Goodman Group had severe problems, not the least of which was negative market sentiment.
Then, out of left field came China Investment Corporation (CIC) to the rescue. The Chinese sovereign wealth fund provided an initial stop-gap loan of A$200 million, paving the way for a subsequent capital injection of A$500 million. The cash provided breathing space for the Goodman Group’s corporate advisor, Sydney-based Macquarie Capital, which frantically put together a debt and equity package of A$8 billion to recapitalize, refinance and restructure the firm’s balance sheet.
Chris Green, Macquarie’s global head of real estate, says it was the most complex series of transactions that he has ever worked on. “All the pieces of the jigsaw were conditional on the others,” he recalls. “We couldn’t refinance or restructure the debt until we injected further equity, and we couldn’t raise equity until the debt was refinanced.”
Green adds: “The fact that this could get done was a testament to the quality and integrity of Greg Goodman and his management team. We always knew this was a fundamentally solid company that just needed to de-lever.”
In hindsight, it was fortuitous for Macquarie – and the Goodman Group – that Collin Lau had just joined CIC as head of its real estate division. Given his background – he previously ran the Asian operation of Starr International in Hong Kong – Lau could see the opportunity available from Goodman’s predicament.
Earlier that year (in February), CIC had been introduced to the Goodman Group when a delegation, headed by former CIC chairman Lou Jiwei, visited Australia to assess the opportunities in the resources sector. Although nothing came from that initial meeting, as Goodman’s debt problems started to unravel in April, Macquarie’s global head of private markets capital Brett Robson made an urgent trip to Beijing to visit CIC and Lau.
Indeed, the Goodman Group was facing a potential debt crisis. Its immediate problem was a A$460 million facility set to roll over in May, but the existing bank syndicate was having cold feet because liquidity had disappeared.
“When Macquarie went to visit CIC in Beijing, what caught the sovereign wealth fund’s interest was the fact that the investment bank itself had agreed to put up bridging finance from its own balance sheet,” says a source close to the situation. “It would not have been an easy decision at the time.”
Indeed, Macquarie already had agreed to provide the Goodman Group with a A$300 million bridge loan. CIC consequently took the view that Goodman had good assets and that, although its capital structure was wrong at the time, it could be stabilized. Therefore, CIC decided to join with Macquarie in providing a convertible bridge loan totaling $500 million.
“CIC was comfortable with the underlying assets and the management platform, and it was also convinced that the world was not going to collapse even though there was a lot of fear at the time,” says the source. “What makes a good investor is the ability to focus and to differentiate fear from the real fundamentals of a business.”
In those subsequent weeks, as Macquarie scrambled to raise capital, key executives from CIC accompanied the advisor to meetings with major banks and shareholders to convince them that Goodman’s debt problems could be resolved.
By August, the Goodman Group was ready to tap the public market to raise A$1.3 billion, while CIC underwrote a special A$500 million hybrid security. The source explains that CIC chose to take a convertible preferential position because it provided the sovereign wealth fund with downside protection, good current income based on a high coupon (10 percent) and the ability to enjoy upside as Goodman recovered.
This past December, CIC sold 6.9 percent of its 17.8 percent stake in the Goodman Group for A$519.2 million. The sovereign wealth fund remains the single largest investor in the company, which now has a market capitalization of almost A$8.2 billion.
Number of offices worldwide: 35
Chief executive officer: Greg Goodman
Other senior executives: Anthony Rozic, Nick Vrondas and Nick Kurtis
Total number of employees: 971
Total asset under management: A$21 billion
Third-party capital under management: A$17.3 billion
Total space under management: 15 million square meters
Value of development pipeline: A$11 billion