World-Beating REIT’s Rally May Extend on AI Data Center Demand

(Bloomberg) -- Bullish investors are betting the peer-beating rally in Australia’s Goodman Group has further to run as its prime locations and ample financial resources continue to fuel its lucrative push into data centers for artificial intelligence.

Shares of Goodman have rallied 40% so far this year, making it the top performer on the Bloomberg World REIT Index. The firm has a portfolio of properties in sought-after locations, from its base in Sydney to Hong Kong, Los Angeles, and Frankfurt. It’s been working to convert some from warehouses to data storage space.

“The closer you are to the client, the better it is,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney. Goodman, which is among the top-five holdings in Liu’s fund, has properties near central business districts that make it “invaluable,” she added.

The rally in Goodman reflects how investors everywhere are looking for ways to capitalize on AI, even in markets like Australia, which is dominated by global miners and banks. “I would say it’s the best AI play here in Australia,” Liu said, adding “I think this company’s absolutely going higher.”

Last month the REIT boosted its forecast for earnings growth for the year ending June 30 to 13% from 11%, helped by demand for “infrastructure for the expanding digital economy”. Goodman said its strong balance sheet leaves it well-placed amid the outlook for continued volatility in global real estate markets.

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The firm’s pivot to data centers from its traditional industrial focus is “not an AI gimmick,” Bloomberg Intelligence analyst Matt Ingram wrote in a note. Goodman “can sustain strong earnings growth by repurposing existing assets and development projects to meet global data requirements.”

Valuations are a concern, with Goodman trading at 30 times estimated forward earnings, above its five-year average of 24 times and Singapore-based peer Keppel DC REIT’s 20 times. This may be justified given its growth potential, with only a fraction of the firm’s global power bank accounted for in its development pipeline, according to Howard Penny, an analyst at Citigroup.

“As more of the potential power bank shifts into development work-in-progress, this should continue to drive the duration of growth potential for Goodman relative to real estate peers,” wrote Penny, who rates the REIT a buy. Goodman has potential to beat its recently raised profit guidance and should give a strong forecast for the new year, he added.