In Australia, commercial property has been getting a lot of attention in financial news recently such as with the takeover offer for Commonwealth Property Office Fund (ASX: CPA) from Dexus Property Group (ASX: DXS) and GPT Group (ASX: GPT).
Also, international companies and investments funds are looking for opportunities to snap up office buildings and retail centres at the beginning of a real estate upturn here.
It's still unclear how quickly Australia will grow its GDP over the next few years, so improvement may slow. Over the next 3-4 years international markets as a whole may grow at a faster rate.
Goodman Group (ASX: GMG) has 3 good reasons why it can deliver strong earnings, and take advantage of that potential growth overseas and the expansion here domestically.
Recovering earnings
2009 and 2010 saw large abnormal charges take its reported NPAT into the red courtesy of the GFC, but over the past 3 years Goodman has seen a good recovery in its NPAT (before abnormals), from $306.9 million in 2011 to $566.4 million in 2013.
Abnormal items in 2013 were once again high, but the company explained that because of their extensive overseas business, they use currency hedging to counteract any movements in the exchange rate.
The mark to market movement of hedging derivatives flows through the income statement, showing what looks to be a big negative, but the investment that is being hedged flows through the balance sheet. The 2013 income statement charge of $293 million was offset by the $269 million in foreign currency translation differences. The relatively small net difference is the sign of good hedging actually.
Lower net gearing
The company is making its equity position stronger by reducing net gearing to the lowest it has been in 5 years. Its book value per share went from $0.60 in 2011 to its current $3.21 in 2013, thanks to good earnings and debt reduction. Currently the share price is $4.92 or about 1.5 times book value.
International diversification
In 2013 Goodman had development commitments of $2.2 billion taking place in 11 countries. 41% of the companies revenue is generated domestically, with Asia and Europe providing about 22%-23% each, and the US around 11%.
The company is expanding its presence into Brazil, which has a growing population and associated potential for logistics and transport businesses.
Japan is also on their radar for acquisitions and developments because it is still the world's 3rd largest economy, and the economy is reviving thanks to the implementation of US Fed-like monetary policy, called "Abe-nomics" after the current prime minister.
Foolish Takeaway
Large scale property investment and development projects take time to plant and reap the harvest of investment returns. Acquiring in the low cycle periods to buy more cheaply, and developing for increased income, or for future sale is the name of the game in real estate. Good investments pay good returns over the long term.
Goodman should be able to grow earnings from here, with exposure to different growth stories around the world.
