Mirvac downgraded residential settlements and EPS guidance. We flagged in our last note that we question the ability for MGR to meet settlements guidance under the guise that peer Stockland (SGP) had downgraded FY23 numbers in February 2023 and conditions were yet to improve.
The ~12% downgrade to residential settlements guidance (2200 vs >2500 prev) was attributed to adverse weather conditions and issues with labour supply, a story which we have heard a lot over the past 24 months.
The market was largely expecting an impact to settlements as interest rate pressures increased and issues arose with getting product to market. Given the 1H23 result was CEO Campbell Hanan’s first after being appointed as CEO, it was likely seen as beneficial to hold the downgrade until a later date.
The residential default rate remains low (0.2%), and presales remained robust throughout the period. We will note that the Willoughby (NSW) and Waverly (NSW) aren’t seeing the pickup that MGR were expecting, due to greater interest in seeing a finished product prior to purchasing.
The silver lining of it all is that the downgrade isn’t attributed to a loss buyer demand, but rather an inability to get product to market, which suggests that FY24 should gain the benefit of 300+ settlement opportunities.
Industrial asset Aspect North (Kemps Creek, NSW) settlement has been pushed back into FY24. As a result of this, alongside the downgrade in residential settlements, Group EPS guidance was downgraded to 14.7cps from 15.5cps (vs 15.3cps consensus).
This is largely a timing issue more than anything. The project is ~76% pre-leased (as at 1H23) and with both Aspect North and Switchyard (Auburn) being 100% owned, it provides opportunity to introduce capital partners (a process which is already underway).
The ~A$1.3bn asset disposal program continues. The sale of 60 Margaret Street is due to settle in Q4, at value not far from the December valuation. Alongside this, 367 Collins Street (Melbourne) has met agreed terms and entered exclusive due diligence. The divestment of assets should continue to pad the balance sheet which remains robust with gearing at 24% (down 0.5% from 1H23 and in the target range of 20%-30%). Available liquidity is ~A$1.2bn.
Investment View
The positive share price reaction is a clear indicator that the downgrade was largely expected by the market. The market wants to buy Australian housing recovery stories. Operationally, the cash generation for the business appears to be holding strong and the group should be able hold dividend growth into FY23 & FY24. We aren’t overly worried about the downgrade given we see it as a timing issue.
On a multiple basis, MGR is trading at a discount to its long-term average price to funds from operations (P/FFO), 14.9x vs 15.5x average.
Over the past month, MGR has begun to match peer SGP outperformance vs market on expectations of pausing/slowing rates and a renewed investor interest in residential exposure. SGP now trades on a 1SD premium to its long-term average P/FFO whilst MGR trades at a discount.
We will remain patient on MGR, looking for further information out of the FY23 result before we consider a more positive outlook. For investors, willing the look through the cycle the 4.6% dividend will hold some appeal.
Figure 1: MGR P/FFO approaching long-term average but remains at a discount.
Figure 2: MGR yet to catch up to peer SGP’s outperformance.
