Mirvac is gradually reweighting its business in several ways

Business Strategy & Outlook

Mirvac trades as a stapled security, comprising one share in the corporation and one unit in Mirvac Property Trust. About 80% of earnings come from a passive commercial property portfolio housed within Mirvac Property Trust. Earnings from the rent-collecting business are usually stable and predictable, while most of the remainder comes from a residential development business that can be lucrative but more cyclical. Mirvac’s REIT status results in low company tax because trusts pass income and tax liabilities through to the end investor. Mirvac pays slightly more tax than some passive real estate investment trusts, because of the development business within the Mirvac corporation. Mirvac is gradually reweighting its business in several ways. It is allocating most of its capital toward passive rent collecting. Within that, it is allocating more to industrial and mixed-use commercial, trimming retail exposure, and refocusing its retail portfolio on urban areas. The residential development side has been weighted to houses and land lots recently, but a recovery is expected in apartment demand in coming years.

Mirvac is rolling out build-to-rent residential projects, though this is only a small portion of the portfolio at present. Initial projects have seen strong take-up from residents, however, it remains to be seen whether the sector can move beyond a niche offering. Mirvac’s current crop of projects completed or in development look well placed because of an acute shortage of housing and rising rents in inner urban areas. Mirvac’s first project, LIV Indigo in Sydney, was 98% leased by June 2022. LIV Munro in Melbourne is due for completion in November 2022 and other projects in Melbourne and Brisbane are scheduled to complete in 2024. The concept looks viable with low interest rates and low yields on commercial property, and few build-to-rent rivals, but should those conditions reverse, other business lines may look more attractive.

Financial Strengths

Mirvac is in reasonable financial health, with gearing (net debt/assets) of 21%, based on its June 30, 2022, accounts. This is at the low end of the group’s targeted range of 20%-30%. The group’s average cost of debt was 3.4% over fiscal 2022, and it is expected to grind higher in the wake of interest-rate rises. Even so, the group’s weighted average debt maturity is about six years, debt maturities are modest until fiscal 2025 and more than half of debt is hedged. This gives it flexibility, which could come in handy in acquiring new sites for the residential land bank or office portfolio during any downturn. Gearing will rise based on further acquisitions and development, and asset devaluations in its commercial property portfolio. However, Mirvac will remain prudent on committing to new developments, which should prevent gearing rising excessively until the economic outlook is clearer. Caution is appropriate, given that the extended boom in property has pushed up asset prices, which could make gearing appear to be lower than it really is. Moreover, pressure on earnings is likely, and dividend cuts remain a risk if the group decides it needs to preserve cash.

Bulls Say

Vicinity is arguably the REIT most exposed to an economic and health recovery. Vicinity’s operating performance will likely outperform other REITs as conditions normalise.
Vicinity has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.
Vicinity has substantial development opportunities, including the Bankstown and Box Hill town centres, Chatswood Chase upgrade, and several development opportunities at its flagship Chadstone asset.

Company Description

Mirvac is one of Australia’s largest residential developers, particularly apartments. Residential development earnings are volatile, generating about a fifth of EBIT in fiscal 2022, despite 88% of the group’s invested capital being allocated to passive property ownership. Over the 10-year discrete forecast period it is not expected that the residential development will exceed the lofty peaks seen in 2017, when Mirvac settled 3,400 residential lots, however, a modest growth over time as Mirvac gains market share. About 80% of Mirvac’s earnings come from a predictable commercial property portfolio, more than half of which is office and another fourth in retail, a small industrial portfolio, and a fledgling build-to-rent residential portfolio.

(Source: Morningstar)

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