This article is from the Australian Property Journal archive
MAJOR developer Mirvac stunned the market with much-larger than anticipated forecast fall of 13% in earnings for the coming year, as its struggles with slimmer margins on apartment projects.
Mirvac shares slumped to $1.84 in early trading on the announcement of its full-year results, and finished the day at $1.92, down 9.00% on the previous close.
It posted a heavier $805 million statutory loss for the 2024 financial year, down from the previous year’s $165 million loss, as it also booked writedowns of $1.1 billion across its commercial assets.
Operating profit after tax was $552 million, down 5%, and operating earnings before interest and tax lifted 12% to $860 million.
Operating earnings per security fell 5% to 14.0c per security, and it said yesterday it is targeting operating earnings in FY25 of between 12.0c to 12.3c, and distribution of 9.0c.
“Earnings are expected to be lower next year, reflecting the impact of a lower contribution from our development business and higher net interest costs related to development activities,” Mirvac’s group CEO and managing director, Campbell Hanan said.
“This includes lower margins at selected Queensland and NSW apartments projects, however we expect the next phase of apartment projects to return to our normal target range.”
While growth in construction costs slowed to its lowest rate in 22 years in the June quarter, labour conditions will ensure more – albeit slow – growth is on the way, and capacity constraints may delay a meaningful recovery in activity until 2025. Building or renovating remains almost 30% more expensive now than pre-COVID following a surge in costs during the pandemic.
“While market conditions are likely to remain challenging in FY25, we are setting ourselves up for recovery. We have operated through numerous property cycles over the past 52 years, and our success lies in our ability to navigate through the challenges and adapt to market conditions,” Hanan said.
Gross margins in the residential division were 17%, impacted by a higher weighting toward apartment settlements and continued cost pressures from inclement weather and subcontractor insolvencies. Its through-cycle target range for margins is between 18% and 22%.
Its residential division delivered a 36% increase in EBIT to $212 million, driven by settlements at Sydney apartment projects, increased master-planned communities settlements in Perth, and settlements from its first release at Cobbitty in Sydney.
Mirvac exchanged 1,509 lots over the year, impacted by uncertainty over interest rates, fewer product launches, and lower first home buyer activity. It has $1.3 billion in pre-sales on hand, skewed to upgraders and right-sizers, which it said provided good visibility of future earnings.
“We are well positioned to benefit from improved market conditions, with a range of new apartment launches planned for FY25 – including our flagship Harbourside development in Sydney – along with the release of approximately 1,700 masterplanned communities lots.”
Moody’s Ratings analyst Mariano Ferreyra said Mirvac executed strategies that kept the company’s balance sheet in good shape.
“Mirvac successfully executed on its capital management initiatives, including selling AUD1 billion in non-core assets, securing a capital partner for its 55 Pitt street office development in Sydney and selling down an interest in Aspect North and South into its industrial joint venture. These initiatives, together with strong earnings growth, enabled the company to maintain its credit metrics and gearing within the tolerance levels for the rating,”
During FY24 Mirvac sold off $1 billion worth of non-core assets, including the 40 Miller Street, North Sydney office building for $140 million, and 367 Collins Street in Melbourne for $345 million, with both deals struck at a 20% discount to peak book values as the office market continues to face a reckoning on values.
Mirvac managed to secure a long-term capital partner for its $2 billion 55 Pitt Street office development in Sydney, with Japanese company Mitsui Fudosan taking a 67% stake in the project in the biggest deal of the year to date. It also sold down an interest in Aspect North and South to MIV, and expanded our exposure to the living sectors by investing in the Serenitas land lease platform.
Its commercial and mixed use division delivered EBIT of $146 million, up 22%, driven by the sell-down of key projects to capital partners, development earnings from completed projects, and development earnings from projects under construction.
Mirvac achieved practical completion at Switchyard, Auburn, the first warehouse at Aspect North in Kemps Creek, and has more recently completed the second warehouse at Aspect North and its LIV Aston build-to-rent development in Melbourne’s Docklands.
Build-to-rent projects LIV Anura, Brisbane, with 396 apartments, and LIV Albert Fields, in northern Melbourne, with 498 apartments, progressed and are expected to complete in 1H25 and FY26 respectively. Construction is underway at 7 Spencer Street in Melbourne, with heads of agreement signed for around 8% of office space, while it continued to progress the initial development application for its industrial site at Elizabeth Enterprise in Badgerys Creek, near the new Western Sydney Airport.
Looking ahead Ferreyra is expecting Mirvac to report weaker earnings in FY2025.
“We expect Mirvac to report weaker earnings in fiscal 2025 before resuming growth in 2026, reflecting a lower contribution from development EBIT and lower investment property income from recent asset sales.
“However, the company’s track record of operating through various property cycles and maintaining a conservative financial profile will help it navigate a period of lower earnings whilst maintaining its credit profile. We anticipate its interest coverage will remain weak for its rating.” Ferreyra said.
