Mirvac Group (MGR) Earnings Call Transcript & Summary

Good morning, and welcome to the Mirvac First Half 2022 Results Briefing. I'll now hand over to CEO, Susan Lloyd-Hurwitz. Thank you, Susan. Over to you.

Good morning, everyone, and welcome to our first half '22 results presentation. Due to Omicron, we're going to follow the same format as the full-year presentation, audio on the phone line and the slides on the webcast. Hopefully, we'll be back in person for the full year. Joining me today in this remote format, each from their own location, Courtenay Smith, Brett Draffen, Campbell Hanan and Stuart Penklis. We'd like to acknowledge the traditional custodians of the lands where we all gather, for me, that's the Dharug people of the Eora Nation, and I pay my respects to elders past and present. We've got a lot to get through this morning, so let's get started. 2022 marks Mirvac's 50th anniversary, and I think it's fair to say calendar '22 has not begun as any of us were expecting. In December, Omicron turned conditions around in Australia very swiftly. You'll remember that at the full year, we said that our outlook for FY '22 was that H1 would be challenging and that conditions will start to normalize in the second half. However, in the last 6 weeks, we've seen impacts to supply chains and reduced availability of labor, individuals moderating their own mobility behavior to create a voluntary lockdown and the extension of the commercial code of conduct from an end in January now mid-March. In addition, there's also a growing sentiment around potential interest rate increases. Nonetheless, Mirvac's portfolio and balance sheet is exceptionally well positioned, and the business is resilient and agile with a highly engaged workforce and stable team. Together, we expect to be able to continue to successfully navigate current challenges and uncertainties, and we're maintaining our earnings guidance of at least $0.15 per stapled security. Despite lockdowns of around 450 days in Sydney and Melbourne and enduring border restrictions, both domestically and internationally, we have been energetically and resolutely delivering on our strategy, continuing the considerable forward momentum we've seen in the business over the past several years, pandemic or no pandemic. Obviously, there's way too much detail on this slide to unpack here. We've just included that detail for you to be able to review at a later time. I'm going to call out just a few achievements of which we are particularly proud. We achieved net positive scope 1 and 2 emissions, a full 9 years ahead of target, and we're now working on scope 3. So stay tuned for that plan. We continue to improve the already market-leading quality in our investment portfolio with ongoing asset creation, focused asset curation and select asset disposals at a premium to book. One achievement I'd like to call out is that LIV Indigo is now 93% let. Our commercial development pipeline continues to meet the financial hurdles and programs despite the significant COVID challenges. We achieved early occupations at Suncorp at 80 Ann Street, completed the locomotive workshops, commenced demolition at 55 Pitt Street, commenced construction of Switchyard Auburn and appointed architects for Harbourside, just to mention a few highlights. And our residential business is in excellent shape, with 95% of EBIT secured for FY '22, an increase in secured presales to $1.5 billion, settlements on track with minimum defaults, exchange loss up 33% on PCP, and we launched several successful apartment projects as we foreshadowed at the full year. As a result, we are on track to deliver on our promises for FY '22, and these numbers clearly demonstrate ongoing forward momentum. Operating profit and statutory profit are up 9% and 44% on PCP, respectively. NTA is up 3% on F '21, external assets under management have grown to $10.3 billion, and gearing is marginally lower at 22.3%. The integrated model that drives Mirvac's advantage can be thought of as a flywheel. Our in-house asset creation capability not only delivers NTA uplift, development profit and new high-quality recurring income, but also reduces risk and allows us to incorporate customer feedback into front-end design and drive for sustainable outcomes from the very beginning of the life cycle. Our newly created assets become part of our high-quality, young, low-CapEx integrated investment portfolio, delivering recurring income and capital partner fee income. This model demonstrably drives outperformance. For example, our office portfolio has outperformed the Australian Index by around 300 basis points over the last 3, 5 and 15 years, an enviable and consistent investment track record over a sustained period of time. Our active earnings, both commercial and residential, are largely reinvested into the development pipeline, with the growing distribution funded by passive income. We funded growth in the business through noncore asset sales, deployment of active income and third-party capital. Leaving the world a better place than when we found it is one of our enduring passions. Guided by our ESG strategy, this changes everything, which sets out our ambitious targets. We pursue these targets not just because it's the right thing to do and our corporate responsibility but also because it adds value to security holders. We are able to better attract and retain not only customers but also talent. Implementing our strategy reduces operating costs and tenant overheads, improves asset resiliency, list asset values and is part of the reason we can command a premium for our residential products. And so we will continue on, creating meaningful benefits for the community, setting out our approach to scope 3 emissions and continuing our strong progress towards our water and waste targets. I spoke earlier about the Mirvac difference being the integrated flywheel of asset creation and curating but there's another Mirvac difference, without which, we couldn't do what we do, and that's our people and culture. With the great resignation making headlines around the world, we were very pleased to achieve global top quartile employee engagement and to retain 93% of our key talent. We're proud to have maintained a 0 like-for-like pay gap for 6 years in a row, and we ranked #2 company in the world by Equileap for gender equity. Thank you, and I'll now hand to Courtenay to walk through the financial results.

Thanks, Sue, and good morning, everyone. Today's financial results are solid and underscore the quality and resilience of Mirvac in the face of continued headwinds and business disruption caused by COVID. Our operating EBIT for the period of $391 million is up 8%, and operating profit of $297 million is 9% higher than the prior corresponding period, with this growth largely driven by our development businesses both mix -- commercial mixed use and residential. Commercial mixed use EBIT of $73 million, includes contribution from the successful completion sell-down of 49% interest of the Locomotive Workshop to Sunsuper and earnings from 80 Ann Street. With Suncorp taking early occupation late last year, we are on track for full completion of this project in the coming months. The Locomotive Workshop is now 97% leased and will provide additional NOI to the group in the second half of FY '22 and beyond. 80 Ann Street is 93% leased and will contribute to NOI growth from FY '23. Development revaluation gains of $48 million were recognized in the half, representing the value uplift of Mirvac's retained ownership interest in the Locomotive Workshop and 80 Ann Street. These 2 projects highlight the value of Mirvac's integrated asset creation and curation capabilities in driving development profits, NTA uplift through development revaluation gains, and future recurring income. Residential EBIT increased 17% in this year period driven by higher lot settlements and elevated margins, reflecting the higher weighting towards master plan community projects. The Residential business has enjoyed buoyant market conditions, with exchanges up 33% and presales increasing to $1.5 billion, providing good visibility of future earnings. Turning now to the Investment business. Overall Investment EBIT is down 5% in this period, reflecting the impact of asset disposals, moving of assets into predevelopment and COVID. IIP net operating income was $7 million or 2% lower in the period. Contributing factors include lost income from the divestment of 340 Adelaide Street, which settled in November '20, and Cherrybrook Village, which settled in August '21. Reduced income from assets moving into predevelopment, including 55 Pitt, Harbourside and 34 Waterloo Road. And lower cash collections have resulted in a $25 million impact in EBIT in the period compared to $20 million in first half '21. All of this has been offset in part by new income from 477 Collins and South Eveleigh, both of which completed in the prior period. Asset and funds management impact -- EBIT was impacted by lower leasing fees due to less leasing activity in the period. Group unallocated overheads have increased by $21 million compared to December '20. However, are more consistent with the half year to June '21. The movement was driven by, firstly, JobKeeper. The prior period included a $10 million benefit from JobKeeper with no similar benefit in the current period. Also, higher insurance costs that -- as we have previously highlighted, and increased technology spend, which is now expensed as incurred. Statutory profit for the period is 44% higher, largely driven by investment property and development revaluation gains of $308 million and reflects a 2.4% valuation uplift. And finally, AFFO is 18% higher, assisted by a reduction in incentives. As I noted earlier, the total COVID impact to EBIT in the period was $25 million, which compares to $20 million in the full year '21 -- FY '21, and $48 million in FY '20, and most of this impact over these periods relating to retail assets. Retail cash collections in the period was 78% compared to 92% for the portfolio as a whole, with strong cash collections in office and industrial. The retail environment remains challenging, particularly due to the recent Omicron outbreak and extension to the commercial code in New South Wales and Victoria until mid-March 2022. Total IIP debtors have increased to $67 million, the majority relating to retail assets, with aged arrears of $54 million. We have prudently increased our ECL provision to 100% of aged arrears, reflecting an increase in the age in the risk of recovery. Despite this, we expect our cash collection rates to improve over the remainder of the financial year. Mirvac's capital position continues to provide longer-term stability and financial headroom to support existing and future growth opportunities and the activation of our significant pipeline over coming years. Gearing at 22.3% continues to be at the lower end of our preferred 20% to 30% range. And our average cost of debt at 3.3% continues to decrease. Whilst we expect marketing interest rates to increase towards the end of this calendar year, we expect that increases in floating rates will largely be offset by our more expensive debt facilities rolling off at the same time. At December, our debt book is 57% hedged, within our target range. We continue to maintain our A3 in Moody's and A- Fitch Ratings, had sufficient liquidity through $750 million of cash and undrawn facilities, and average debt maturity profile of 6.1 years. And strong operating cash flows of $413 million, which adequately funded commissions. And on that note, I'll hand over to Brett, who will provide an update on capital allocation.

Thanks, Courtenay, and good morning. In an environment of increased volatility associated with ongoing COVID uncertainty and the acceleration of some factors driving the outlook for interest rates, we remain committed to our disciplined allocation of capital against our strategy. This strategy leverages our asset-creation capabilities to generate strong returns and long-term value, focusing on the organization of key Australian gateway cities. Our integrated investment portfolio has grown on the back of project completions to $13.4 billion, with a continued focus on modern, long-WALE, low-CapEx office, and accelerating CV-focused industrial exposure, a committed rollout of our BTR pipeline and a focused urban retail strategy. Within our development activities, our active capital base is $1.9 billion as we've accelerated deployment to strong residential markets and advanced key commercial, industrial and mixed-use projects, whilst maintaining a disciplined stance on restocking. As our asset creation capability delivers a strong pipeline of new project completions, we've continued to optimize our portfolio allocation strategies, with planned disposals well advanced for noncore assets across older-style office, retail and hotels, with completed transactions secured at an attractive premium to book value. Of note, the sale of Tramsheds and Quay West Carpark were at 53% and 35% premiums, respectively, over the half. The associated movement in capital sees active capital to 12% and the passive portfolios representing 88% of invested capital. As we have previously stated, the combination of the planned asset disposals, combined with the accelerating deployment of capital to development activities will see our active capital increase over the next 5 years. With such a strong forward development pipeline, it is pleasing to see continued momentum in our third-party capital strategies, with funds under management now $10.3 billion, representing a 20% CAGR since 2015 and future growth supported by our $13 billion pipeline. The central engine to our value-creation strategy remains the integrated development model. In our 50th year, this model remains relevant and has been honed during both strong and challenging markets to truly represent our core competitive advantage. The flywheel effect of our asset-creation model has created $1 billion of value since 2015, representing some $566 million in asset revaluations and $449 million in development profits, with a 30% average total return on completed projects, well above our benchmark hurdles. During the same period, development completions have created $4.2 billion of new assets, producing an additional $120 million in recurring income, plus providing a platform for a 20% CAGR increase in funds under management and associated fee income, whilst at the same time improving the quality of our modern, long-WALE asset portfolios. Our development DNA has been built over many years. And as we operate in environments with greater volatility, the true integrated nature of our model will become increasingly valuable. Our model ensures we have all key skill sets in the life cycle of a project in-house, which offers maximum adaptability to market opportunities and excellent controls over the construction cost, supply chain and other risks. The combination of our integrated model, together with our diverse sector skill sets, means that we are ideally placed to be leaders in complex, large-scale commercial and mixed-use projects where we can drive both financial and ESG outcomes for the benefit of security holders, our capital partners and the greater community. Mirvac continues to demonstrate its credentials when it comes to large-scale, city-defining precincts, and our current active pipeline demonstrates the growth of our diversified activities and the consistent execution against our strategy. In the past 6 years, our development activities have grown almost fourfold as we have leveraged our integrated skill set to move from what was largely a residential and office capability to now a true mixed-use urban asset creator. Our commercial and mixed-use pipeline now represents some $12.9 billion. And whilst we maintain our overweight exposure to core CBD and fringe office, we have seen strong execution in our development plans for our industrial and BTR pipelines, together with significant planning momentum in our mixed-use projects. This diversified pipeline is now less dependent on single-sector contributions, with future years shaped by growing earnings contributions from large-scale industrial BTR and precinct-wide mixed-use projects. The projects listed on this slide have all made material movements in either completion or de-risking of key planning pathways. With a further review of our portfolio is leading to the reclassification of 34 Waterloo Road across the staple as we advance development options with a potential for multiple users on this site. For over 4 years, we've provided general commentary on our future plans for Harbourside. Whilst the existing asset continues to be challenged post-COVID and is certainly at the end of its functional life span, it is pleasing to be able to provide a more material update on our proposed redevelopment. The half year has seen strong progress on planning approvals, with the project now well advanced gaining stage 1 DA approval and with the selection of the winning Snohetta+Hassell design from the international design competition. Calendar year '22 will be focused on advancing the balance of DA approvals and the finalization of the approval process with the New South Wales government, and then moving into vacant possession and demolition of the existing center. Much work is still required in the Stage 2 DA process to finalize the exact mix of uses. However, the proposal will create a new precinct with an end value in excess of $1.8 billion and include approximately 24,000 square meters of campus-style office, 7,000 square meters of carefully curated retail uses and some 320 luxury apartments. As you would expect, the project will showcase Mirvac's sustainability credentials, together with the creation of some 10,000 square meters of unique public domain. We have a forward pipeline of development opportunities with an end value of $29 billion. This is the most diverse combination of quality projects across multiple asset classes in our history and perhaps fitting in our 50th year. Over the near term, our focus for this pipeline falls into 4 categories. Firstly, to continue our track record for strong delivery and the creation of investment-grade assets that deliver sound development earnings and quality new assets into our integrated investment portfolio at attractive spreads to fair value. Examples being the Locomotive Workshop and 80 Ann Street projects in FY '22, and the de-risking of the next wave of office projects. Secondly, to continue the tremendous momentum we have in unlocking the next wave of earnings in residential mixed-use, particularly with the growing apartment release program. Thirdly, FY '23 will see the emergence of growing contributions from our industrial development projects as both Switchyard Auburn and Aspect Kemps Creek come online with already impressive leasing commitments. And finally, the conversion of further BTR projects to stabilize earnings with the completion of LIV Munro and the advancement of current projects of the LIV brand in Melbourne and Brisbane. Clearly, this is a large pipeline. And together with additional new business opportunities, we equally look forward to advancing our third-party capital strategies as we implement further partnerships across office, industrial, BTR and residential, alongside our balance sheet. I'll now hand to Campbell to discuss the integrated investment portfolio.

Thanks, Brett, and good morning. IIP has had an active 6-month period. We continue to execute our portfolio strategy to increase our asset allocation to industrial, build-to-rent and new office developments by disposing of smaller convenience shopping centers and older office assets. During the period, we have sold or exchanged contracts on 2 retail assets plus our Quay West Carpark, and we have transitioned to development both 55 Pitt Street, Sydney and 34 Waterloo Road Macquarie Park. COVID lockdown and legislative rent relief has impacted performance with increased ECL and lower cash collection. The retail portfolio has carried the majority of the $25 million negative impact to NOI. We have continued to focus on managing the NOI timing impacts of the disposals and development vacancy previously mentioned relative to the NOI contributions from recent development completions. We anticipate growing contribution from IIP in the second half as income production from the Locomotive Workshop commences, ahead of further contributions from 80 Ann Street next financial year. The delivery of 11 high-quality, sustainable, long-WALE developments over the last 8 years has contributed to long-term financial outperformance over the past 3, 5 and 15 years for the group and positions us well for the changing nature of customer demand as the flight to quality office space gathers pace. We continue to enjoy low-maintenance CapEx and anticipate incentives will remain low over the next 18 months given the relatively minimal lease expiry in the portfolio. Other highlights for the half include: 24% of the portfolio was externally valued at December, delivering net gains of $127 million, up 1.6%; occupancy has held up well at 95% and remains well above the markets we trade in. Interestingly, 80% of our current vacancy resides in lower-grade assets, demonstrating the resilience of our portfolio in the face of soft market conditions. Cash collection remained solid at 97%. Leasing activity is improving despite COVID impacts and remains low given our limited expiry profile. 25,000 square meters of deals were completed during the period at positive leasing spreads of 5.2%. And the portfolio delivered like-for-like growth of 0.8%, which is pleasing, given market conditions. And as you can see from the chart on the right, our portfolio of modern sustainable assets that facilitate collaboration and innovation puts us in good stead for a market that has seen bifurcation of tenant demand. Turning to the Industrial business. The 100% strategically located Sydney portfolio continues to enjoy the benefits of e-commerce, robust tenant demand and rising land values. NOI was down to $27 million for the half, following the transfer of 34 Waterloo Road to the development book. However, we did enjoy like-for-like NOI growth of 1.7%. Occupancy remains at 100%, and WALE at 7.1 years. 31% of the portfolio was revalued at December, delivering gains of $106 million, up 7.2%. And as you can see from the graph on the right, all of our development sites have been secured at attractive points in the cycle. The key opportunity is now the timely conversion of the $2.3 billion development pipeline into pre-leasing and delivery mode. Our urban development at Switchyard has settled, secured pre-commitments on 38% of the 72,000 square meters of NLA, and is under construction. Income production will begin in FY '23. Aspect Industrial Park at Kemps Creek has also settled, secured agreements on 100,000 square meters of NLA and is due to commence construction imminently. Elizabeth Enterprise Park at Badgerys Creek has also settled, secured rezoning, and we have commenced discussions with a number of potential customers. Our retail business continues to weather challenging business conditions following the Omicron outbreaks and the reintroduction of rent relief legislation. And whilst this has impacted our cash collection, we have undertaken significant leasing activity, with 128 deals completed during the period, with negative leasing spreads of just 0.9%. And pleasingly, we're seeing the return of growth in valuations. Turning to our operating results. NOI was down to $65 million on a pcp basis, impacted by the sale of Cherrybrook Village, and a further $4 million of COVID impact. Occupancy remains strong at around 98%. 28% of the portfolio was externally valued at December, with growth of $75 million, up 2.5%. And MAT total sales were down just 1% at December despite a 17% fall in foot traffic. Whilst the COVID-19 impacts have been difficult, we know from recent experience the recovery in cash collection can rebound quickly in a post-lockdown, post-rent relief world, particularly as our portfolio is leveraged to the return of international students, office workers and tourists. Turning to build-to-rent. We are making good progress in this growing asset class. We are confident that we have proven up the customer proposition of LIV Indigo, the only operational build-to-rent asset in the market at the moment, with consistently strong customer survey results and leasing success. We're also happy to report that leasing commitments has now reached 93%, and we expect to approach leasing stabilization shortly. Pleasingly, we are seeing great momentum on our build-to-rent development pipeline, with $1 billion of assets now under construction, including LIV Anura in Brisbane, LIV Aston in Melbourne and LIV Munro also in Melbourne, which is due for completion late '22. Our focus will now turn to the raise in external capital to invest alongside us, and this process is due to commence shortly. We will have more to say about this at our full-year results. I'll now hand over to Stuart Penklis for the residential update.

Thank you, Campbell, and good morning. I'm very pleased to share that despite ongoing COVID challenges, we settled 1,303 lots during the half, a 21% increase on the prior corresponding period. This includes completion of 2 apartment projects, Voyager in Melbourne and Tulloch in Brisbane, along with a significant number of MPC settlements. This skew to MPC has resulted in an elevated development gross margin of 24%, a trend that will continue until FY '23 when apartments and built form contribute a larger proportion of earnings. Defaults have returned to below 2%. Sales of over 1,800 lots reflect demand across all customer segments, including a 20% increase in MPC sales from the prior corresponding period despite the roll-off of government stimulus. Overall, 83% of sales were in MPC, primarily to upgraders and first home buyers. Our continued focus on owner occupiers has paid dividends, accounting for over 70% of sales and driving demand across the 4 apartment projects we launched in the period. This has seen our presales grow to $1.5 billion. With over 95% of our FY '22 EBIT now secured, the benefit of ongoing sales momentum is primarily for FY '23 and beyond. We added over 1,500 lots to our pipeline, including the acquisition of Cobbitty, an MPC site in Southwest Sydney, which will allow us to bring a further 950 lots to the market in the near term. While we remain alert to the impact of Omicron on construction activities, with some uncertainty for late FY '22 settlements, we are on track to settle more than 2,500 lots, with a slight skew to the second half. Our plan to bring over 1,000 apartments to the market this year is well underway. In the last 6 months, we have successfully launched 4 major apartment projects, often in challenging circumstances. FORME, the last apartment building at Tullamore, launched during Melbourne's lockdown, is now 48% presold as of the end of January. The first stage of Nine by Mirvac is now 70% presold; and following the launch of The Frederick, Green Square is 49% presold in total. These sales are a testament to our focus on delivering well-designed, owner-occupier product. Our shovel-ready strategy has put us in a strong position to accelerate apartment releases in response to demand. Looking ahead, we expect to bring a further 3 apartment launches to the market in the next 6 months, along with the next stage at Nine by Mirvac. The Langlee, Charlton House and Waterfront Isle have all been designed for the owner-occupier, with the products reflecting the structural shift we've seen to larger, well-located quality apartments with superior finishes and amenities. With the strength of our balance sheet, we've been able to commence construction on 6 of these projects. These apartment sales will drive presales growth in the coming 18 months, providing significant visibility on residential earnings in future years. The purchase of a home is the largest investment most people make. Mirvac's reputation and 50-year track record on delivering high-quality, well-designed homes, investing in infrastructure and communities early, and continued product innovation means people trust us to deliver on our promises. We have continued to diversify our offering from land, detached homes and terraces through to mid- and high-rise apartments. This means everyone from first home bias through to upgraders, rightsizers and investors can benefit from Mirvac's commitment to quality as we respond to demand across all customer segments. This trust is demonstrated by the high level of repeat customers we have, particularly in off-the-plan apartment sales. At the first Nine by Mirvac release, repeat customers accounted for 40% of sales. There is no better testament to the Mirvac difference. As customer preferences and value propositions change, our integrated model means we can quickly respond and pivot our projects in response. During the last 6 months, this has also put us in a strong position to mitigate the impacts of supply chain disruption and rising costs through our strategic procurement and forward pipeline visibility. Our ability to consistently deliver earnings through the cycles and execute on our strategy by appropriately taking and managing risks highlights the business' resilience in managing and responding to change. A few years ago, I shared our disciplined approach to restocking at the right time, in the right place and for the right price. This meant limiting acquisitions when the market got heated and commencing again as competition cooled. Our success in the last few years is a result of this continued discipline and rigor. Our earnings will continue to benefit from the decisions we made many years ago through the cycle. Our pipeline of 26,800 lots comprises projects where we are confident in our ability to create value and deliver great product for our customers. Relative affordability for apartments is at an all-time high, which is driving a structural shift away from detached established homes and into apartments. At Green Square, for example, an average 3-bedroom apartment is now 65% of the price of a 3-bedroom house in the surrounding established market. While interest rates are anticipated to rise later this year, in line with RBA forecasts, rates remain relatively low by historical standards. The current cycle we're in, particularly for apartments, is different to the last cycle, with significantly more constrained supply, a greater focus on owner occupiers and larger, more premium products. History will tell us, owner-occupiers are not as sensitive to interest rate rises. Recent significant price growth in the detached established market means Mirvac's project diversity presents an even more compelling value proposition for well-capitalized upgraders and rightsizers. The impact of a 45% fall in apartment supply on the East Coast in the next few years, combined with the return of the immigration sets the foundation for continued demand for high-quality, well-designed product even in times of rate rises. We are confident in our ability to navigate this next part of the cycle while leveraging our strong brand and reputation as we respond to a critical shortage in new supply. Thank you, and I'll now hand back to Sue.

Thank you, Stuart. In my opening remarks, I said we remain confident in achieving our full-year guidance of at least $0.15 per staple security, DPS of $0.102, and greater than 2,500 residential lot settlements, despite the Omicron curveball. We based this on several factors. Firstly, we benefit from high-quality investment income flowing from our modern, low-CapEx, long-WALE portfolio, supported by appropriate announces to manage bad debt and tenant relief. Secondly, we have a high level of commercial and mixed-use development EBIT already secured for FY '22. And thirdly, having over 95% of residential EBIT already secured. We do remain vigilant around execution risk and are always alert to respond to any new curveballs, COVID or indeed, anything else life would throw. And as we've said consistently over many years, we'll continue to assess opportunities and make investment decisions with an eye on both ROIC and operating income to generate value for security holders. Thank you, and we're now going to open up for questions. [Operator Instructions]

[Operator Instructions] Our first question comes from Sholto Maconochie at Jefferies.

Just a bit on the guidance. You've got -- you said over 300 lots, but you guided over 2,500. You mentioned the skew. Is that on a profit skew because you've got higher dollar value than margin? Or just sort of why -- that it basically implies you've got more lots over 2,600 if it's a skew? Is it more lots or is it dollar value on the skew?

Thanks, Sholto. I'll hand to Courtenay for this one.

Thanks, Sholto. As Sue indicated, there's a slight skew in lots to the second half. Our earnings skew slightly to the first half, and that's got to do with the makeup of MPC and apartments. So apartment has contributed strongly to the first half given the settlement of Voyager. Hopefully, that answers your question.

Okay. Yes, that's fine. And then just on cost, and as the costs are up for the full period, which you mentioned, are we to assume that should be the same in the second half? It doesn't -- it's going to be annualized to double what it was in the first half?

Yes, we do. As we indicated in June, actually, those costs are normalizing, and you should expect that they're in line with where they are for the second half.

Yes. And then just finally, on the -- on your -- just to confirm, did you take -- you've taken the 55 Pitt, Harbourside and Waterloo? Are they now -- is there any income in the second half in those? Or are they in the development bucket now? There's to be some income coming through from Harbourside and Pitt Street, still or there's no income?

No. So Pitt Street and Waterloo Road have been moved into development. Harbourside still sits in our investment properties, so we are collecting income. But it is reduced because of the impacts of COVID and where tenants are sitting on that asset. So there is still second-half income on Harbourside, but it's just less.

And do you have -- finally, this is the last one for me. On the development profit in the business, what it was between Ann Street and the Locomotive, and how much will be in the second half. It looks like it's more front-loaded in the first half, would that be correct?

Yes, there has been outperformance from the commercial mixed use, those 2 projects, actually, in the first half than what we expected. Both of those assets have actually delivered yield on costs above what we've previously indicated to the market. They're now at 6% or more. So that has meant total profit is more. And 80 Ann Street has contributed strongly. The most contribution in the first half is really from the sell-down of Locomotive Workshop, and then 80 Ann Street will continue to contribute in the second half as that project completes.

Our next question comes from Stuart McLean from Macquarie.

Just maybe a question for Campbell. Just, in regards to the earnings of the trust business. Looks like there was only $1 million of like-for-like income growth across a $280 million NPI. So we're talking less than 0.5% like-for-like growth there. Just wondering what are some of the key drags? And do you expect that to improve over the next 6 to 12 months, maybe with particular reference to office?

Yes. Thanks, Stuart, for the question. Look, the key drag is vacancy. So relative to PCP, the vacancy has slowly been increasing. We're now sort of stabilized, I'd say, on the vacancy side, so we'd expect the improvement in let up will be important also the importance of rent collection. I just don't think, when you look at ECL and release of future ECL, that's going to be an important thing for us to focus on in the second half. And then in second half, we have the full contribution from the Locomotive Workshop, which really didn't provide any income in the first half. And 80 Ann Street, obviously, into FY '23, will get us very, very small contribution in the back half of this year. But it's predominantly going to be next financial year.

Just a follow-up on that, if I may, in regards to occupancy in the office portfolio. Do you think that we're likely to see stable occupancy from here? Or the expectation would be over the course of calendar year '22, that it ends up north, back towards 96%, 97%? Or can you just provide us with an update there, please?

Yes, that's an interesting question, and certainly one which is a little bit hard for us to give guidance on. What I do know is when you look at the stats in office market, it's pretty clear that the best-performing real estate is doing very well. And certainly, we've seen significant improvements in vacancy and demand for the premium-grade real estate. And given 69% of our portfolio was built after the year 2000 and around about 7% of our portfolio are assets that are held for development, certainly, holds us in pretty good stead going forward.

Okay. My second question is just quick one, hopefully, for Courtenay. Just with regard to the second half, what are your expectations for COVID rental relief that's been built into guidance?

We expect rental -- or cash collections to recover or improve in the second half. Obviously, we've been impacted, and the main impact has come through the retail business. So we do expect that to recover. We had hoped that the retail conduct -- or the code of conduct would come to an end in January and allow us to successfully move forward with those tenants and resolve. Pushing out to March does make that a little more complicated, but I think it's a timing issue. So we do expect it to recover, and we'd assume that in providing the guidance today at maintaining $0.15.

Do you happen to be any more specific in regards to a dollar amount or a range expected for the second half?

No. Look, I think our outlook is we're indicating $0.15 or at least $0.15 in guidance, and we've allowed appropriately for the recovery of that part of the business.

Our next question comes from Ben Brayshaw at Barrenjoey.

Question, so perhaps for Stuart, I was wondering if you could comment on buyer demand at Willoughby. And just your thoughts around the pace of presales for the remaining lots. And if you could also just touch, on as part of that, what presale level that you would like to be at in order to sort of commit to the FY '23 planned completions that you have in your guidance.

I'm going to start with that and Stu can jump in. And we were really pleased with the launch of Nine by Mirvac at Willoughby, along with the launch of -- the other launches that we did in the 6 months, as we foreshowed at the full year. And I think, there probably will be a little bit of revenue surprise upside, which has been very pleasing to see. And I think the most telling status and one that Stuart talked about in his remarks, that 40% of our customers are repeat Mirvac customers, which is a great testament to that product. And we're very confident in the build-out of our pipeline and the commitment to bring those apartments to market and commence construction. We remain very disciplined around presales, as you would expect us to. And we also feel very confident about the cost profile of that. We have 100% of our procurement already locked in for the remainder of FY '22, with 62% of everything we need in FY '23 already locked in. And given the challenges around the global supply chain, I think that gives us great confidence, both on the cost and the revenue side, to commit capital going forward to build out that pipeline. Stu, do you want to add?

Well, the only thing that I would add is that, obviously, we had a very strong stage 1 launch. We're actually now getting ready for our stage 2 launch that will come to market in the next few weeks. As I said, 40% repeat Mirvac purchase is remarkable and testament to the brand. We are now obviously seeing the owner occupiers, the rightsizers now coming through in search of the larger product. And we're working with, obviously, a number of those purchases in the lead-up to the next launch. The one thing that I think -- just as important to call out is the affordability of apartments, and Willoughby is a great example. If you look at a 3-bedroom apartment at Willoughby, it's 47% of the value of a 3-bedroom house in the surrounding market. So the value proposition of apartments, particularly in these infill locations, is very compelling. And what we're seeing is buyers are searching for those larger apartments. Buyers are looking for customization. And on a project like Nine by Mirvac, we're at able to fully provide that customization with the off-the-plan sales. And we expect demand to continue to be strong for that product.

And just as a follow-up to that, just going back to my original question of the 440-or-thereabouts lots, what would a presale level be in terms of your expectations to commit to the project? Are you happy to commit to the project at 50%? Do you have a threshold in mind? I wondering if you could talk to that, please.

Yes. So typically, we would work to a 50% threshold. We've achieved, obviously, over 70% on stage 1, and we're very comfortable with the momentum across the different product types to be able to deliver those earnings into '23.

Great. And just as another question, being my last. The composition of the investment income for build-to-rent, the $2 million of EBIT. Does that include, if you could just clarify, please, perhaps for Courtenay, any allocation of overhead against property income? I was wondering if you could just talk about the composition of that number, please.

It does include allocation of income. So that's a net income out of that asset. You can see that it's improved in the period because we're coming to -- close to stabilization, as Campbell indicated in his speech.

So it's essentially all property income. Is that how we should think about it?

Yes. It does have an allocation of overhead to it, but it's commensurate with the earnings that it gets. And it's one asset trading, and you can see the income is coming online.

Our next question comes from James Druce of CLSA.

Maybe a question just around Kemps Creek. How lumpy do you see that project being? Or is it going to be split out in stages when that starts to come through?

Sue, if you're happy, I'll jump in and take that one. Look, it's -- that's probably a little bit hard to call at the moment. So we've now secured around about 48% of site area in deals done. So one of the challenges that we'll continue to work through is making sure that we optimize the size of site relative to the precommitment demand. So we constantly keep working on that. What I can say is the demand has been incredibly strong. Traditionally, in previous cycles, you might expect to develop 25,000 or 30,000 square meters per year. Certainly, as you can see from the 100,000 meters of pre-commitments already secured, we have executed agreements for lease. That demand is substantially higher than normal. And if we keep up on this run rate, we'll be through the asset reasonably quickly, and with a focus well and truly on the Badgerys thereafter.

That's great. And maybe one, just for Stuart. Just talking about the margin -- project margin being around 24% for a couple of years, you've been doing, I think, 25% to 27% over the past few years. And arguably, you've got a bigger skew to MPC at the moment, which is typically higher margin. At the same time, house prices seem to be outstripping costs as well. So I'm just wondering why that's not a little bit higher. Is there anything I'm missing there?

I don't think so. I think you'll see that margin increase marginally in the second half. And as we've flagged in the coming years, we'll see that margin start to come back as we see greater contribution from apartments and built-form homes.

Our next question comes from Tom Bodor at UBS.

I was just interested if you could talk to the improvement in the cash collections in the retail part of the portfolio. How that was -- whether that trajectory continued into January?

Campbell?

Yes, Tom. Look, certainly, what we learned in -- leading into December of last financial year, is that we acknowledge that the code of conduct was coming to an end. We started to see an elevated increase in deals done and rent collection, which you would have seen in the PCP. I think now, we are starting through January to see exactly the same thing, with a mid-March date for the code to roll off. We're certainly having elevated discussions now on our arrears book.

Okay, so collections have improved from, say, the December month into January?

Yes. Look, they have. And I think if you look at first quarter to second quarter, we're at sort of 88%. Second quarter, we've now grown to 92%. So there was an improvement. And that's across the whole line of business.

Yes. No, that's good. And then the other one was around the build-to-rent portfolio, I just was interested in, coming up on the anniversary of your initial tenants, what sort of retention are you seeing -- or tenant retention you're seeing? And where tenants are leaving, what are the new leases being struck at compared to sort of outgoing rents?

I'll start with that one. Obviously, the anniversary of the asset and the starting of rollover releases happened at not the greatest time, with lockdowns and not being able to have the amenities floor open and some of the customer value proposition not being accessible to customers. So it was a pretty challenging period. But I think, as we've shown on the leasing momentum to get to 92%, we're back on track with that. And with -- Campbell can talk a little bit about new leases and our retention rates.

Yes. Thanks, Tom. Look, it's probably just a little soon to give any real guidance around what that looks like. And the reason for that is, we elected to roll a lot of those early leases for quite short periods of time, 2, 3 and 4 months, because we just wanted to get a sense of getting back to a more normalized market before we could understand what those real retention rates and re-let spreads might look like. So we're sort of in the middle of that now. I think we'll have much more color at our full-year results, which we can talk to that.

Okay. Can you at least quantify where you see the rents in the build-to-rent asset versus the next-door build-to-sell and that you've got a handle on?

We do -- Campbell, go.

Look, we have, pretty consistently, over the last 18 months, being securing rental premiums in the sort of 15% to 20% range versus our provisions development next door. Interestingly, we've had 3 or 4 leasers, which have subsequently become buyers of units in provisions. That really hasn't changed. I think the more important thing we're seeing is a holistic change in vacancy across some of these areas, particularly in Melbourne and Sydney. And that's certainly important for the long-term rental growth relative to the short-term drop in rents that we experienced through those initial COVID lockdown periods.

I think the other interesting data point. Sorry, the other interesting data point there is we've got now a substantial portfolio of apartments under management through our RES by Mirvac business. And what we consistently see is that our vacancy rates and our downtime between leases for our investor customers, when we're managing the apartment, is considerably better than the surrounding market. In some cases, the vacancy rate is 1/3 of what the vacancy rate is in the surrounding market. And I think that is a testament to the quality of the product and the investment return that our investor customers are getting.

Our next question comes from Richard Jones JPMorgan.

Just to follow up on Tom's question, just clarifying your answer on retail cash collection in January versus Q4 2021. Can you clarify that, Campbell?

Yes. So what I mentioned in the -- Rich, what I mentioned in my comments to Tom is that cash collection across the IIP business increased from about 88% first quarter to 92% in the second quarter. What we are seeing through January and early February is we're starting to see increased cash collection again in certain elements of our retail base. And really, now, what's been different this time around these retail tenants relative to the first lockdown period is that a lot of tenants, rather than undertaking commercial deals, have waited to see whether the code of conduct would be extended or not. So a lot of tenants are sitting on their hands, and probably rightly so, to get a sense of whether there's going to be any more legislation to protect. That being said, we're seeing much better sales numbers coming out of certain elements in certain categories, which we haven't seen in the prior slowdown period.

Okay. And then just a second question, just in relation to the hurdles required to kick off 55 Pitt and Harbourside. Can you just work through what the main hurdles you need?

Brett?

Yes. Thanks, Richard. Look, we don't have a specific pre-leasing hurdle on those 2 projects. At the moment, we're in a lot of discussions on 55 Pitt Street with various tenants. We'll evaluate, that is, but we've got a fairly long runway really over the balance of this calendar year in terms of, I guess, the forward and demo works that we've already commenced. So we'll continue to evaluate that, and we'll just look at it. We probably don't think we'll be at 50%, 70% pre-committed levels. I think it will be a lower level, but we'll just look at that on a run rate as we further advance our leasing inquiry. In terms of Harbourside, look, this year, the balance is really around de-risking the stage 2 DA. We're in some early conversations with potential tenants. But really, that decision around pre-leasing, particularly for the office component of Harbourside, is probably a decision that we'll be looking to make probably later this calendar year.

Okay. And then just a final question. Just in terms of labor cost inflation, which you've called out, which we're seeing, obviously, as well. Just interested in the implications that has on the development pipeline.

I'll start with that. From a construction cost point of view, there certainly have been pockets of particular materials or particular trades that have seen some significant cost pressure. But overall, we're seeing costs still within a 2% to 4% band, which is well within our feasibility assumptions. And as I commented before, our very visible pipeline and the integrated model allows us to manage the construction cost risk really well. And that to the extent that we've now got 100% of everything we need in the -- to build out the rest of FY '22, we've already locked in under fixed prices, and 62% of raw materials and contracts for FY '23. I thought we are in a very solid position with respect to be able to manage through what has been a challenging time from a supply chain point of view and also from a labor point of view.

Our next question comes from Andy MacFarlane at Jarden.

Just still on the supply chain. On residential, obviously, it's impacting interim costs that you just spoke to. But do you have any concerns over delivery, given lockdown across the various states?

I'll start with that and Stu can maybe add to that. I think we're very pleased with how the business has responded through very challenging conditions, not just for construction, but also for sales and marketing. When your sell suites are closed, we continue to be able to sell. We pivoted to digital interactions with our customers, and we've been able to keep all our projects on time. So we -- yes, we're always vigilant to it, but I suspect with -- I hope I'm not jinxing it, but we're through the worst of the lockdowns. We seem to have entered a new and different phase of -- we're living with COVID. So no, we expect that we've weathered the worst, and we are still on track, on budget, on time with a very well-controlled cost outlook.

Great. And just one other one, just on build-to-rent. You haven't restocked the pipeline in probably over 12 months now. Just wondering how actively you are looking at projects. Or is it more of a case of increased competition in the market and the impact that's having?

No, we continue to look at new projects. So I think we've got a very significant pipeline that we're focused on. As we've always said, firstly, proving up the customer proposition. I think their job is thoroughly well done, then making sure we can build out the pipeline and bring third-party capital to sit alongside us. So we continue to focus on that. And yes, we do look for new opportunities in the build-to-rent space. And I certainly think it's not a question of there's more competitors making it more difficult. In fact, we welcome more people to in this sector. It can't just be one company. I think there's -- it's a housing typology that Australia desperately needs, and we think it's great for the industry when more competitors are in the market, providing product for customers and secure homes in a rental format.

Our next question comes from Lauren Berry at Morgan Stanley.

Just a question for Stu on residential. Are you able to talk about some of the price rises that you've been seeing, particularly across land sales? There's been a lot of articles about price rises up to 30% in Sydney. And when should we start to see this price appreciation come through in the average value of your settlements?

Yes. Thanks, Lauren, for that question. Yes, certainly, we've seen some very strong price growth across our projects, particularly in the last half. To give you some color, a project, like Woodlea, we've seen around 8.4% increase. Down in the Southeast, in Smiths, we've seen about 11.8% increase. With that said, we're obviously selling 12 months out in terms of when we can deliver those lots for settlement. So there will be that price growth coming through into FY '23. But in saying that, and like the previous question that was answered, we are also seeing costs increase. But it's fair to say that the price growth is certainly covering the cost increases that we're seeing in the MPC business. Particularly where we're seeing the price growth in the MPC business is in civil works. But we're also seeing, obviously, price growth in the home -- in the domestic build segment of the market. And to give you some color there, reinforcement and timber frames. Timber frames are up about 40%. However, we do think that will normalize. And in terms of our run rate of escalation in our cost plans, we run at about between 2% and 4%. So overall, we're still sitting within that 2% to 4% band. But in some instances, ticking up. So yes, that's sort of the snapshot of what we're seeing in the market.

Okay, cool. And then my other one is just around build-to-rent and the capital partnering strategy. I know you've got in the presentation that you are going to commence talks with potential capital partners soon. But are you able to just comment on whether that would be, I guess, adding your future pipeline into the current build-to-rent club and doing, I guess, a programmatic kind of sell-down? Or would you look to source individual capital partners for each different project?

Brett?

Lauren. Look, good question. It's probably a little bit early to say that. But probably directionally, I'd say at the moment, we're thinking more of a club than individual project-by-project. But is that we're just starting the process off with discussions with investors, but that would be our thought process.

The final question comes from Alex Prineas at Morningstar.

Just another question on the supply chain issues. So you did mention that there are some early signs of things improving as lockdowns end and borders reopen and so on. I noted that one of the slides, I think it was Slide 26, talks about a lot of the costs are offset by price escalation that you've built into the feasibility studies. I was wondering if it's too early to sort of see on the horizon that some of that price escalation in the feasibility studies could be unwound or whether those feasibility studies are still seeing increasing pricing assumptions.

I'll take that question. I think that it is probably too early. But the one thing that we do, do from a Mirvac perspective and leveraging the integrated model is, look very strategically as to how we procure, how we can bundle across as many projects as possible. Right across from the domestic builds to apartments to commercial, we've got the benefit of very good visibility of our needs over the short to medium term, and we procure in a very strategic way. I think it is early to start to wind back any of that, but we are certainly seeing some opportunities globally in terms of some better pricing starting to come through. And the other thing that's quite interesting is the resilience of the local market and the ability for the local market to really fill in, where a lot of procurement was being undertaken offshore. We've seen some very good, I suppose, local manufacturers being able to really step into the market and supply the Mirvac business. And an example of that is, obviously, we're seeing very strong supply chain coming domestically for kitchens and joinery but also, obviously, bathroom pods. And the supply of bathroom pods, the domestic market has been very capable to fill our demand needs.

Thank you, everyone. We have no further questions, so Susan, I'll hand back to you for closing comments.

Thank you, and thank you for all of those questions. Thank you for spending time with us this morning. We're very proud of the momentum in the business, and we have excellent forward visibility given the strength of our pipeline of quality projects that we will deliver in -- as we go about our purpose of reimagining urban life. We look forward to speaking with many of you this afternoon one-on-one or over the coming days in investor meetings. And as I said at the very beginning, I think we all desperately hope that when we get to the full year, we'll be able to do this in person. So thank you for your time, and have a good day.