Australian Market - Investor Desk

Business Strategy & Outlook:

Mirvac securities take the form of a stapled security, comprising one share in the corporation and one unit in Mirvac Property Trust. About 80% of the group’s 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 is also 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 pure passive real estate investment trusts, though, 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 and is currently within its target of 85%-90% of capital invested there. Within that, it is allocating more to office and industrial, trimming retail exposure, and refocusing its retail portfolio on urban areas. On the development side, more houses are expected (via master-planned communities) and fewer apartments in Mirvac’s residential earnings in the coming years. It also has a higher weight to commercial property development, mainly in office. Within residential, it is rolling out some build-to-rent projects, though this business is only a small portion of the portfolio at present. The shift toward master-planned communities will diversify earnings. However, the build-to-rent business as a yet-to-be proven concept. It remains to be seen whether renters will accept institutions as landlords in Australia. Mirvac’s first project, LIV Indigo in Sydney, was 93% leased by December 2021. 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 22%, based on its Dec. 31, 2021, accounts. This is at the low end of the group’s targeted range of 20%-30%. The group’s average cost of debt was 3.3% at its December 2021 results, and it might grind higher in the wake of interest-rate rises. Even so, the group’s weighted average debt maturity is about six years and the group has no major debt maturities until fiscal 2023. 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 (with retail under particular threat). However, Mirvac’s development pipeline is expected to be lower-risk, with projects at or near completion, and with mostly high levels of tenant commitments. This should prevent gearing rising excessively until the outlook for recovery from coronavirus 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:

A resumption of inbound immigration should support the value of Mirvac’s assets and underpin the viability of major development projects that the group has in its pipeline.
Mirvac has been shifting toward industrial exposure, a sector that was less affected by the coronavirus, and could benefit as businesses seek to invest in local supply chains and e-commerce capabilities.
Demand could continue for quality real estate from the likes of pension funds, sovereign wealth funds, and other offshore investors, especially as the Australian economy has dealt with the coronavirus health crisis better than some, which could allow a faster resumption of business activity.

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 2019, despite only about 13% of the group’s invested capital being allocated there. There was a cyclical high and don’t expect development settlements to substantially exceed the 2019-20 high point in the next decade. 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. The company is allocating more capital to passive property ownership, and within that, trimming retail exposure and adding office, industrial, and residential.

(Source: Morningstar)

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