Mirvac Retail and Resi yet to recover

12 February 2021

Mirvac’s results show signs of recovery with an operating profit of $276m, up +10% on previous 6 months but still -20% on pcp as Retail and Residential still to yet to recover.

The impacts of COVID on the retail sector continued through to December with lower rent collections and higher operating costs impacting the Group as retailers struggle to generate sales from significantly lower customers numbers. Comparable moving annual turnover sales were down -8.6% and comparable specialty sales were down -18.6%.

Rental collection in the Retail portfolio as at 9th February is at 84% despite most cities returning from lockdown. Tenant waivers and doubtful debt provisions have cost Mirvac $20m for the 6 months to December compared to $48m in FY20 but looks set to grow through to the end of FY21.

Mirvac has benefited from economic stimulus into the residential market with significant increase in lot sales, however production has dragged and settlements are down -20% on the pcp.

Operating earnings for the Group are down to $364m (vs $460m for pcp).

The market has moved against Mirvac in recent months as the actual and potential future impacts from COVID are considered. With 63% of its commercial portfolio in the Office sector and 27% in the Retail sector, Mirvac are heavily exposed to structural changes in the way we work and shop.

Financial Highlights

  • operating earnings before interest and tax of $364m (December 2019: $460m);
  • operating profit after tax of $276m (December 2019: $352m);
  • statutory profit of $396m (December 2019: $613m);
  • half year distribution of $188m, representing 4.8 cpss;
  • operating cash flow of $450m (December 2019: $354m);
  • net tangible assets (NTA) per stapled security increased to $2.585 (June 2020: $2.54);
  • gearing at the lower end of the Group’s target range of 20 to 30 per cent at 21.4 per cent
  • substantial available liquidity of $1.3bn in cash and committed undrawn bank facilities held;
  • weighted average debt maturity of 6.8 years;
  • average borrowing costs reduced to 3.7 per cent per annum as at 31 December 2020 (June 2020: 4.0 per cent), including margins and line fees; and • maintained A-/A3 ratings with stable outlooks from Fitch Ratings and Moody’s Investors Service (equivalent to A-).

Mirvac are at pains to express the historical importance of CBD’s and Urban areas and in their ability to meet the changing the needs of our cities, however with office vacancies set to rise further, the market is not yet convinced by the rhetoric.

Mirvac’s CEO & Managing Director, Susan Lloyd-Hurwitz, said “The pandemic continued to disrupt our operating markets during 1H21 and the world remains in crisis. Mirvac’s ability to maintain productivity and respond quickly to our customers’ changing needs has underpinned our recovery and safeguarded our business from the worst of the pandemic.

“Mirvac has long believed in the power and importance of cities, and while cities will evolve as a result of the pandemic, they remain more important than ever. Our proven asset creation capability and our $28bn total development pipeline will enable Mirvac to continue to deliver city shaping, mixed-use precincts that cater to our customers’ changing lifestyles.

“Industrial and build to rent are both important growth areas for our business. COVID-19 has accelerated the growth in e-commerce which is in turn driving demand for high quality logistics facilities in Sydney. Our Industrial team remains focused on progressing our strategically located sites through the planning process.

“The emergence of the build to rent sector is gathering pace in Australia. LIV Indigo, Mirvac’s first build to rent property, is now 48 per cent leased and we are gaining valuable insights that will inform the rollout of our growing pipeline. The team further extended the build to rent development portfolio during 1H21 with the addition of LIV Newstead in Brisbane, taking the future portfolio to approximately 2,200 units across five sites with an estimated total end value of $1.6bn.

“Our Residential division continues to benefit from current Government housing stimulus measures which have boosted residential housing demand and the economy. Mirvac settled 1,076 residential lots and exchanged 1,365 lots in 1H21. With a robust pipeline of approximately 27,800 lots, we are focused on enhancing the designs of our homes and communities to meet changing customer needs, including home offices and flexible family spaces. We are also anticipating more than 2,200 residential settlements for the full year to 30 June,” added Ms Lloyd-Hurwitz.

The Group has provided guidance for the full year, with operating EPS forecast of between 13.1 to 13.5 cents per stapled security (cpss) and distribution guidance of 9.6 to 9.8 cpss for the year ending 30 June 2021.

Development updates:
• progressed the redevelopment of the Locomotive Workshop, Sydney. The asset is 86 per cent precommitted and on track for completion in late FY21;
• progressed construction at 80 Ann Street, Brisbane which is 73 per cent pre-committed with Suncorp as its anchor tenant. Completion is targeted for FY22;
• received planning approval for our proposed mixed-use commercial and build to rent precinct at 7 Spencer St, Melbourne. Construction is due to begin in FY22;
• lodged State Significant Development Applications with the NSW Department of Planning, Industry and Environment for Waterloo Metro Quarter, Sydney; and
• received rezoning approval for stage 1 of the Group’s future 244-hectare industrial estate, known as Elizabeth Enterprise at Badgerys Creek, Sydney

Office updates:
• rent collection rate of 97 per cent;
• occupancy of 96 per cent , with a WALE of 6.7 years;
• like-for-like net operating income growth of 0.5 per cent including COVID-19 impacts (31 December 2019: 5.6 per cent) completed 18 lease deals over approximately 28,000 square metres; and
• total office asset revaluations provided an uplift of $141m

Industrial updates:
• rent collection rate of 100 per cent
• occupancy at 99.7 per cent, with a WALE of 7.3 years;
• like-for-like net operating income growth of 3.3 per cent (December 2019: 3.1 per cent);
• completed 8 lease deals over approximately 28,900 square metres; and
• total industrial asset revaluations provided an uplift of $44m.

Retail updates:
• rent collection rate of 84 per cent;
• occupancy of 98.4 per cent;
• store openings of 95 per cent (98 per cent excluding CBD centres);
• net property income of $72m;
• comparable moving annual turnover sales movement (8.6) per cent and comparable specialty sales movement (18.6) per cent;
• achieved comparable specialty sales productivity of $8,867 per square metre on specialty occupancy costs of 16.8 per cent; and
• executed 131 leasing deals across approximately 24,300 square metres, with spreads of (5.7) per cent.

Build to Rent update:
• opened our first build to rent property, LIV Indigo, Sydney Olympic Park with 48 per cent of leases signed as at 9 February 2021, with pricing per unit consistent with the underwrite.

Residential updates:
• settled 1,076 residential lots including at Pavilions, Sydney, Gainsborough Greens and Everleigh, Brisbane, Olivine, Melbourne, Googong, NSW, and Compass, the final stage of Leighton Beach, Perth;
• exchanged over 1,300 lots driven by master planned community (MPC) projects across all states;
• released over 1,260 residential lots14 including Portman on the Park at Green Square and Georges Cove both in Sydney, and Henley Brook, Perth;
• defaults at 3.5 per cent due to market factors exacerbated by COVID-19 impacts (less than 2 per cent excluding Pavilions, Sydney Olympic Park);
• pre-sales of $946m with 51 per cent attributable to MPC projects;
• achieved a strong gross development margin of 23 per cent; and
• further supplemented the residential pipeline adding over 1,160 lots with an additional 600 lots acquired at Smiths Lane, Melbourne, 55 lots at Waverley Bowling Club, Sydney, and over 500 additional lots at Green Square

Sustainability updates:
• made significant emissions reductions through the purchase of renewable electricity, including the powering of all retail assets by 100 per cent renewable energy;
• released the Group’s first Modern Slavery Statement in accordance with Australia’s national Modern Slavery Reporting Requirement under the Federal Government’s Modern Slavery Act 2018;
• received the Board Leadership of the Year award at the Climate Alliance Leadership Awards, in recognition of the Board’s demonstrable commitment to managing the risks and opportunities of climate change across the company, while taking a leadership role in climate response within the business community; and
• maintained a AAA rating in the MSCI ESG Index, reflecting Mirvac’s robust investment framework and ESG governance

Our Views

As mentioned above, Mirvac are heavily exposed to the changing way we work and shop with 90% of the commercial portfolio exposed to the retail and office sectors.

The residential pipeline will improve for the next 12 months as lots become ready for settlement, however the re-opening of international borders will be required to provide the next surge required to maintain momentum.

Mirvac have been at the fore front of the Build to Rent game and this looks to be gaining momentum with more stock and investors joining the market.

With distributions of 9.8cps, the distribution yield is at 4.2% which is very low and another reason why the stock has been discounted and now trading below -11% NTA.