Mirvac Group ((MGR)) is being sustained by its large pipeline of potential developments and the diversity and quality of its projects, although timing is of critical concern because of the uncertain demand for office rentals.
UBS concludes the business is a quality domestic urbanisation stock that has sufficiently re-based market earnings and is now positioned for strong growth in the BTR (build-to-rent) sector.
Nevertheless, Mirvac has been cautious in its guidance and this has caused brokers to question why. First half results were down -22% on the prior first half, albeit better than the previous half and ahead of most estimates. FY21 guidance is for earnings of 13.1-13.5c per security with distributions of 9.6-9.8c.
Citi notes guidance implies second half earnings will decline sequentially, in contrast to market expectations. A lower contribution from apartments appears to be the major cause along with more minor factors such as the rolling off of JobKeeper and increased regulatory costs. The broker is inclined to believe guidance is merely conservative rather than “soft”.
UBS points out there are risks around the settlement of the locomotive workshops that could slip into FY22. Moreover, at the Pavilions development the broker estimates around 8-10% of apartments have defaulted and the launch of Green Square was underwhelming with only 24% pre-sold.
The broker reduces earnings estimates by -5-10% for FY22-24 to reflect more conservative retail/office income, higher corporate costs and the sale of the Travelodge hotels. On the other hand, long-term projects such as Waterloo and Harbourside should provide investors with more confidence as the value of these projects emerges over the coming year.
Macquarie also found the outlook for the second half disappointing, given the size of the beat to the first half estimates. There is only one active office development at the moment and that is 80 Ann Street, Brisbane. The asset has been 73% pre-leased, presenting a risk to the remainder.
Nevertheless, the broker notes Brisbane has fared better regarding pandemic restrictions to date. The development pipeline has made limited progress on conversions and Mirvac is yet to finalise the desired capital structure for its industrial developments.
Macquarie is also wary of retail expiries as 15% of leases expire in the second half. Additional re-leasing will continue to be challenging, in the broker’s view, prior to the roll-out of a covid-19 vaccine.
Credit Suisse considers Mirvac well-placed to ride out a downturn, with the capacity to fund its diverse developments. Rent collection has improved and the impact of the pandemic on earnings has moderated.
The business is experiencing strong sales of developments in Victoria while Queensland and Western Australia have moderated and more investors are returning to the market, which has helped sales volumes.
UBS anticipates a strong residential market will broaden and push up pre-sales. In contrast to several years ago when pre-sales surged and regulators attempted to put a lid on the home investor market, no macro prudential policy tightening is anticipated in the next 6-9 months.
Mirvac has identified around $8.8bn in office/mixed-use potential. Focusing on the industrial side, Credit Suisse notes the BTR strategy is somewhat unclear, as to whether Mirvac can develop and hold 100% on the balance sheet or need to find capital partners.
Regardless the broker considers any meaningful earnings contribution is a longer-term proposition. UBS considers Mirvac well-placed, given the 2200 units across five projects that will settle in the current year.
Yet Morgan Stanley notes these will predominantly be land lots, rather than apartments, and this means the dollar value and earnings will decline in the second half and stay low in FY22.
In order to achieve its 5000 units target by FY22, Mirvac now needs to lease up existing secured projects while introducing external capital, and the broker suggests partners should come on board as operational success becomes evident.
UBS also calculates two projects per year will be needed in order to reach 5000 BTR units over four years and Mirvac can earn upside of 5% in FY23 if capital partners worth 50% can be introduced on two projects at a 4% yield.
Mirvac has noted a number of large office tenants with mandates for new space in 2026-27. Macquarie is also interested in the comment that floor space requirements have not shrunk as a result of working from home – at this stage.
The broker suspects there is downside risk in that area, which may be partially offset by the growth in employment in white-collar personnel. Office leasing spreads were 15% with incentives at 21%. Across the portfolio, Mirvac believes that it is around 1% over-rented at current market rents. On the positive side, Macquarie notes only 10% of leases will expire over the next 18 months.
Morgan Stanley does not find the office outlook that convincing, without the clarity on future active profits. The average duration of new leases of 3.5 years and the supposedly strong tenant enquiries for 2026-27 does not excite at this stage.
The broker finds the stock relatively inexpensive and it could offer investors with a longer-term horizon the opportunity to benefit from a late-cycle re-opening trade.
FNArena’s database has three Buy ratings and three Hold. The consensus target is $2.62, suggesting 11.6% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.1% and 4.5%, respectively.