Mirvac fattens margins, loads up on emerging opportunities as profit hits $906m

Mirvac fattens margins, loads up on emerging opportunities as profit hits $906m

Mirvac's Waterfront Newstead development in Brisbane

Mirvac Group (ASX: MGR) is beating the odds in the troubled residential construction sector with healthy profit margins in its master-planned communities helping the company report a marginal increase in statutory profit to $906 million for FY22.

The property giant reported solid results across its business portfolio, particularly industrial assets. However, with its eye on emerging opportunities, Mirvac has announced it is planning to offload $1.3 billion in office and retail properties this financial year as it rebalances its investments to reflect ‘tenant and capital demand for modern, sustainable real estate’.

The sell-off may reflect the general softening in those sectors, but Mirvac CEO Susan Lloyd-Hurwitz says the move is aimed at further improving the quality of the group’s portfolio as it ramps up investments in the industrial and build-to-rent sectors.

Despite the solid result, Lloyd-Hurwitz concedes FY22 presented greater challenges for Mirvac than previous years.

“We experienced the ongoing impacts of COVID-19, supply chain issues, labour shortages, rising inflation and interest rates, geopolitical tension, and extreme wet weather, particularly across the east coast of Australia,” she says.

“Despite this, we have delivered a strong financial and operational result ahead of guidance, demonstrating the continued resilience of our people and the value of our integrated and diversified business model.

“We progressed our substantial development pipeline, improved the quality of our investment portfolio, secured new capital partners, and achieved our ambition to be net positive for our scope 1 and 2 emissions, nine years ahead of our target.”

Lloyd-Hurwitz says Mirvac has done so while maintaining a strong balance sheet and capital position.

Mirvac posted an 8 per cent increase in operating profit after tax of $596 million as revenue surged 27.5 per cent to $2.3 billion. Revenue growth was offset by a 48 per cent increase in development costs to $1.15 billion.

The group’s commercial and mixed-used developments were especially strong, delivering EBIT of $90 million, up 173 per cent from the previous year, following the completion of projects totalling $1.3 billion. These included the Locomotive Workshop in South Eveleigh, Sydney, and Heritage Lanes in Brisbane, both of which were close to fully leased on completion and achieved a minimum of 6 per cent yield on cost.

Mirvac has $12.4 billion in commercial and mixed-use developments currently in train.

“While cost inflation remains a headwind, our integrated design and construction capabilities provided a strong base from which to manage these risks, allowing us to continue to deliver value for our stakeholders,” says Lloyd-Hurwitz.

“Overall, our extensive pipeline has the potential to deliver approximately $250 million of recurring annual income over time, along with approximately $1.8 billion in potential development value creation.”

Upward revaluations of Mirvac’s investment property portfolio of $305 million were largely driven by strong demand for industrial assets which were up 14 per cent. These were partially offset by a $216 million write-down of the group’s troubled Toombul shopping centre in Brisbane which remains closed due to this year’s floods.

Mirvac achieved occupancy of 97.3 per cent across its investment portfolio, with its prime-grade office assets improving to 99 per cent.

Mirvac says retail sales have now recovered to pre-COVID levels, except for its CBD assets, with a broad increase in leasing activity.

Continued demand for residential housing has translated to strong results for Mirvac’s master-planned communities’ portfolio, with gross margins of 25 per cent well up on the target of between 18 and 22 per cent. The division released 2,750 lots during the year and sold 2,898 lots across its developments. The group is targeting more than 2,500 residential lot settlements this financial year.

While Mirvac notes that the heightened demand of the past 18 months has eased, it says the fundamentals of low unemployment, tight residential vacancies and a return of overseas migration will continue to support the sector.

“Our apartment projects are expected to complete into an undersupplied market, positioning us well to capture demand,” says Lloyd-Hurwitz.

“Our brand, focus on owner-occupiers, diversity of product, and reputation for quality, will help us to remain resilient in a rising interest rate environment.”

Mirvac is making a full-year distribution of 10.2c per share, an increase of 3 per cent on the previous year. The company is targeting operating earnings of at least 15.5c per share in FY23 and distributions of at least 10.5c.

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