Mirvac/MGR

The Mirvac result looked like a slight miss, on the half, from what we could see in Bloomberg. That always makes it a little hard to parse why or what the market liked (eps of 6.8cps expected, vs 6.4cps delivered).

Given that the full year guidance is for 14cps-14.3cps, it does seem to set them up for some earnings disappointment. However, note that the street is below company guidance for the year, at closer to 13.8cps.

Not super clear.

MGR has a big resi business, and that looks quite weak to us, and is unlikely to change in the near term with rates still moving higher (e.g, that November cash rate hike, and the lagged impact of policy that is set to overhang the sector). Our view is that rates will fall, and that’s good for bonds, and will eventually be good for MGR, but it seems plausible it causes more earnings pain first).

Mirvac have quite a large office exposure (we tend to think of it as a big diversified REIT, but the office exposure is very sizeable) and the outcomes here have been quite good, for a hated sector. MGR vacancies are very low, as per the below…

…and they are well located near travel options. As such, unless you zoom in, it doesn’t look quite as dramatic as you might expect.

Leasing spreads appear positive, although I am always suspicious about the size of the incentives offered.

I would accept managements’ comments about “return to office is slowly increasing” in general, and that the “flight to quality office space” continues; e.g. lower tier grades will be struggling, and whilst that will weigh on valuations overall it does reflect quite a different demand environment from prime to sub-prime.

We have a shortage of homes, in the country, and MGR does offer a way to play that thematic, although we don’t own it.

At first glance, the balance sheet seems low enough (MGR have a line about gearing being towards the lower end of the target range) but it has ticked up, and it is not an easy environment to get asset sales away.

So you wouldn’t want cap rates to widen too much further.

If industrial assets started to turn, that would leave MGR without a growth engine…

and the development arm (below funds from operations) has been on the nose.

We’ll revisit this note after we’ve listened to the conference call.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.