Goodman posted strong results for the year ended 30 June 2016. Operating profit increased by 9% which was driven primarily by the group’s development and management business units (EBIT up 33% and 43% respectively). These solid set of results reflect the global diversification of the group’s portfolio (59% of operating earnings derived outside Australia) consisting primarily of high quality industrial real estate. This quality is evident in the portfolio’s consistent capitalisation rate compression (from 7.0% to 6.4% over 2016) resulting in a valuation uplift of $810 million At 2016 year-end that group was compliant with all covenants and has significant headroom under each. This included headroom of 34.9% (vs 50% covenant) under its gearing ratio covenant and headroom of 3.5x (vs 5.0x covenant) under its interest cover ratio covenant. As a general rule, property groups are involved in development activities are typically higher risk than groups that purely manage and invest. However, given the group’s strong financial position and strategic off-balance sheet partnerships, we believe the group will continue to take less balance sheet risk. This has lead Goodman to reduce its debt position (~$400 million decrease) while improving its cash balance (~$700 million increase) which we believe is the correct capital management policy at this point in the global real estate cycle. As a result, Goodman are in a financially sound position to counteract any potential turbulence in asset values. Click here for updated research.