Mirvac Profits down from Residential Markets

10 August 2019

Mirvac Group announced this week its full-year results for the financial year ended 30 June 2019 (FY19). Whilst Mirvac have been impacted heavily from a poor residential sector they have performed exceptionally well, trading well in excess of the ASX AREIT index due to the diversity, quality and value creation capability of its investment portfolio. The Group achieved a statutory profit of over $1 billion for the fourth consecutive year and successfully delivered at the top end of guidance, with an EPS of 17.1 cents per stapled security (cpss), up 4% on FY18, and DPS of 11.6 cpss, up 5% on FY18. Despite this, Statutory profits were down 6% due to lower valuation gains and a 33% drop in revenue from its residential business, whilst its retail busines faired well (up 4%) and its office and industrial business was exceptionally strong (up 26%). In a similar strategy to Gooman, Mirvac are focused on driving profits through allocation of capital to the ongoing urbanisation of gateway cities, with particular emphasis on Sydney and Melbourne, where 80% of the capital is invested. Mirvac’s CEO & Managing Director, Susan Lloyd-Hurwitz, said, “The strength and resilience of our business were evident throughout the year, underpinned by our award-winning urban asset creation capability, our high-quality investment portfolio and our diversified model. Our robust capital position and the acceleration of passive earnings growth means we are well placed to continue to generate strong returns for our securityholders, while making a positive contribution to our urban landscape.” Key highlights across the Group: operating profit increased by 4 per cent to $631 million (FY18: $608 million) , representing 17.1 cpss, at the top end of guidance, driven particularly by a strong performance in the Group’s Office & Industrial business; full-year distributions increased 5 per cent to $440 million, representing 11.6 cpss completed approximately 250,000 square metres of leasing across the investment portfolio, with high occupancy maintained at 99.0% and a WALE of 5.7 years; achieved a Group Return on Invested Capital (ROIC) of 10.1%; realised strong net property revaluation uplifts across the Investment portfolio of $516 million (4.9%), supported by the portfolio’s 82% weighting to Sydney and Melbourne; settled 2,611 residential lots, with $1.7 billion in residential pre-sales secured; further extended the build-to-rent (BTR) development pipeline, with a second purpose built BTR project confirmed close to Queen Victoria Market in Melbourne; completed a fully underwritten $750 million institutional placement and a $46 million Security Purchase Plan to support the delivery of the next generation of value accretive office, industrial, residential and mixed-use projects; maintained an employee engagement score of 90%, 3 percentage points above the global high performing norm ; and released Planet Positive: setting out the steps we will take to become net positive carbon by 2030, including developing buildings powered by 100% renewable energy. Financial and capital management highlights: net tangible assets (NTA) per stapled security increased to $2.50 (30 June 2018: $2.31); delivered operating cashflow of $518 million (June 2018: $663 million); reduced gearing to 20.5%, within the Group’s target range of 20 to 30% ; increased liquidity to $1.4 billion in cash and committed undrawn bank facilities; increased weighted average debt maturity to 8.5 years from 6.8 years (June 2018); maintained stable average borrowing costs at 4.8% per annum (June 2018: 4.8%), including margins and line fees; issued $665 million US Private Placement notes with tenors of 11,13, 15 and 20 years; and received an A- rating with a stable outlook from Fitch Ratings during the first half year and maintained the A3 rating from Moody’s Investor Service (equivalent to A-). Office portfolio highlights: increased occupancy to 98.2 per cent with a WALE of 6.4 years; achieved net operating income of $338 million and a like-for-like net operating income growth of 5.7%; completed 82 leasing deals over approximately 96,400 square metres, with positive leasing spreads of 16.6%; total office asset revaluations provided an uplift of $392 million (or 6.3%) over the previous book value, supported by an overweight to prime assets in Sydney and Melbourne; assets under management increased to $15 billion , leading to a significant increase in asset management fees to $19 million; reached practical completion on Buildings 1 and 3 at the reimagined South Eveleigh precinct, Sydney in March 2019; acquired 383 La Trobe Street, Melbourne, with potential to create a 40,000 square metres, A-grade office tower; and maintained a 5.0 star NABERS Energy rating average across the office portfolio Industrial portfolio highlights: maintained high occupancy of 99.7 per cent, with a WALE of 7.7 years achieved over 91,700 square metres of leasing activity increased our future industrial development pipeline in Sydney to $1.2 billion by securing the following sites: Stage 1 of a future 244-hectare industrial estate at Badgerys Creek in Western Sydney19, NSW, located just 800 metres from the new Western Sydney International Airport, for a total consideration of $71 million, under a put-and-call option arrangement. The site is set to benefit from excellent transport links and approximately $20 billion of infrastructure investment in the Western Sydney region; a 56-hectare future industrial estate and logistics hub at Mamre Road, Kemps Creek, approximately 6 kilometres from the new Western Sydney International Airport; a 14-hectare, future industrial estate and logistics hub at Manchester Road, Auburn, Sydney, 3.3 kilometres from the Parramatta CBD and 18 kilometres from the Sydney CBD, for $94 million. The project is a joint venture with an investment vehicle sponsored by Morgan Stanley Real Estate Investing and has an estimated end value of $250 million; and sold a 50 per cent interest in Calibre at Eastern Creek, Sydney to the Mirvac Industrial Logistics Partnership for approximately $125 million. Practical completion was achieved on the Estate during the year and the development is 100 per cent leased. Retail portfolio highlights: achieved solid net revaluation gains of 2.2% underpinned by like for like income growth of 2.6%; maintained high occupancy at 99.2%; achieved comparable MAT sales growth of 2.7% and comparable specialty sales growth of 2.0%; maintained comparable specialty sales productivity of $10,063 per square metre; increased specialty occupancy costs to 15.5%; closed a record amount of leasing transactions with 432 deals (including 36 across the Office portfolio), with average leasing spreads of 1%; completed the construction of a 6,900 square metre expansion of Kawana Shoppingworld, Sunshine Coast, QLD, introducing Event Cinema’s only Gold Class offering on the Sunshine Coast as well as an expanded dining precinct. The project was 100 per cent leased at completion; completed the construction of a 3,700 square metre redevelopment of Rhodes Waterside, Sydney, NSW, introducing ALDI and relocating Bing Lee to strengthen the fresh food and homewares offer. The project was fully leased on completion; and progressed a $43 million, 4,500 square metre re-development of Toombul, Brisbane, introducing a dining and entertainment precinct. The precinct will be anchored by Archie Brothers, Cirque Electriq and an upgraded cinema. The development is due for completion in mid-FY20 Residential highlights: settled 2,611 residential lots, exceeding the Group’s FY19 target. Defaults remained below 2%; secured future income with $1.7 billion of residential pre-sales; Mirvac’s existing pipeline supports the ability to release over 10,000 lots over the next four years; delivered gross development margins of 27%, driven by the Group’s ability to buy and sell at the right time, and in the right markets; released over 1,280 residential lots across both new and existing projects and exchanged over 1,700 lots in FY19; supplemented the Group’s residential pipeline of approximately 28,000 lots with the acquisition of a 33.5-hectare site at Henley Brook, WA, 22 kilometres north of Perth and a 171-hectare, quarry site at Wantirna South, VIC, 25 kilometres south-east of Melbourne; and won the prestigious Lloyd Rees Award for Urban Design and the Lord Mayor’s Prize at the 2019 NSW Australian Institute of Architecture Awards for Harold Park. The new precinct was also named a ‘great new place to live and/or work’ by the Greater Sydney Commission at its 2019 Planning Awards. Outlook and guidance Mirvac has provided operating EPS guidance of between 17.6 to 17.8 cpss for FY20, which represents an increase in earnings of between 3 to 4%, and distribution guidance of 12.2 cpss, which represents DPS growth of 5%. MGR Trading Chart vs ASX200 AREIT Blue – MGR, Purple ASX200 AREIT Last 12 months #Mirvac