Mirvac Group (MGR) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Mirvac Group 2022 Full Year Results. [Operator Instructions] Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to Susan Lloyd-Hurwitz, CEO and Managing Director. Thank you. Please go ahead.

Good morning, and welcome to our FY '22 results presentation. We are very happy to be back in 200 George Street together, hosting this webcast. With me today are Courtenay Smith, Brett Draffen, Campbell Hanan and Stuart Penklis. We'd like to acknowledge the traditional custodians of the land on which we meet. For us, that's the Gadigal people of the Eora Nation, and I pay my respects to elders past and present. We do have a lot to get through this morning, so let's get started. As you know, 2022 marks Mirvac's 50th anniversary. Mirvac is an extremely resilient business with a highly engaged workforce, a robust balance sheet and modern, sustainable, low-CapEx portfolio, a track record of investment outperformance through cycles, the largest pipeline in our history, agility around residential cycles, and most importantly, 50 years of experience in asset creation with the proven in-house skills to add value to our assets and those of our third-party investors. We continue to execute to meet our goals and position Mirvac for growth in long-term value creation. We have an enviable track record over the last 10 years in navigating cycles, and we remain confident that we can navigate this cycle as well. The resilience of Mirvac is demonstrated by the strong operating results we achieved in FY '22. Operating profit was up 8%, operating cash flow up 41%, NTA up 4%, and gearing is at the low end of our range. And these strong operating results were achieved against a very challenging macroeconomic backdrop with ongoing COVID impacts, rising interest rates, the highest rate of annual inflation in 21 years, labor shortages, supply chain disruption, wild weather and significant market volatility, much of which we expect to continue into FY '23. 5 key pillars are important to enable us to create value for all our stakeholders, to execute our open strategy and fulfill our purpose to reimagine urban life as a leading creator and curator of extraordinary urban places. You will increasingly see us report under these pillars: place, performance, people, partners and planet. Each are important. We aspire not only to deliver financial performance, but also to improve people's open lives, to provide Mirvac's people with a great place to work, to be a trusted partner and to leave the world a better place than when we found it. We are very proud of our investment portfolio track record of outperforming the Australian benchmark consistently over a 15-year period, and it is our integrated model that delivers this performance. Our asset creation capability delivers development EBIT, NTA uplift, asset and funds management income, and importantly, new recurring, high-quality income. And this integrated model has been in full swing in FY '22. And let me call out just a few highlights. We leased over 100,000 square meters across the portfolio. We divested $120 million of assets at a significant premium to book. We completed $1.3 billion of new commercial and mixed-use development ahead of initial feasibility. Our total assets under management grew to $26 billion. In our residential business, we settled 2,523 lots, and we're delighted with 2,898 exchanges, including 6 successful apartment launches with a very high level of repeat Mirvac customers. And we achieved net positive carbon Scope 1 and 2, 9 years ahead of our target. It's more important than ever to optimize our portfolio to focus on creating through development and curating through ownership a modern, low-CapEx, highly sustainable and technology-rich portfolio, one which is best suited for the needs of tenants and capital. Following FY '22's divestments in FY '23, we have a $1.3 billion asset sales program along the same theme. This is also designed to enable us to keep the balance sheet in a position whereby we can take advantage of opportunities that we believe the challenging macro conditions will provide into the future. Looking further into the future, we have a clear runway for growth, with $1.6 billion of residential presales secured, up from $1.2 billion, and the largest and most diverse secured development pipeline in our 50-year history at $30 billion. In July, we were very honored to secure the management of the high-quality $7.7 billion AMP Wholesale Office Fund through a vote of unitholders. The fund is expected to transition by October and will increase our external assets under management by 75% to $17.9 billion. Working with the AWOF investors over the last 18 months, we've put in place a market-leading governance and management structure to drive investment performance for investors into the future. We continue to explore further capital partnership opportunities in our thriving industrial and BTR portfolios. There is a further $5 billion of future organic external AUM growth potential from our secured development pipeline. Underpinning everything that we do is our high conviction that culture, safety and ESG leadership are not only the right things to do, but also critical competitive advantages. I've already mentioned net positive Scope 1 and 2, and we're now focused on the very difficult Scope 3 as well as water and waste, where we have very clear plans that set out how we will achieve our goals. Like to call out just a few other highlights. After many years of work around diversity and inclusion, we were delighted to be ranked #1 in the world for gender equality by Equileap, and we're proud to have had a zero like-for-like pay gap every year since 2015. We were also ranked #1 in Best Places to Work in the construction, property and transport sector by the AFR. In a highly competitive labor market, we retained 96% of our key talent and 93% of people are proud to work at Mirvac. We released our second reconciliation action plan and our second modern slavery report. There's so much more and not much time, so, as always, if you would like more time to explore with us what we're doing around ESG and what we're learning, we're very happy to share. Thank you, and I'll now hand over to Courtenay to discuss the financial results.

Thanks, Sue, and good morning, everyone. Today, we deliver another strong set of financial results. These results are a testament to the quality of our investment portfolio and our development projects and the dedication of our people. At the start of the year, we issued guidance for earnings of at least $0.15, distribution of $0.102 per security and residential lots of 2,500. We have delivered on all of these targets, with operating profit after tax of $596 million, representing an 8% growth on the prior year. Statutory profit of $906 million, representing a 1% increase and operating cash flow of $896 million, up 41% on the prior year. Within the result, the investment NOI was flat, but comprised a number of movements. There were positive contributions to income with 1.5% like-for-like growth driven by office and industrial. New income from our development completions, including the locomotive workshop and a full year contribution from 477 Collins Street and South Eveleigh. And also an improved COVID impact compared to the prior year. However, these were offset by reduced income from asset disposals, including 340 Adelaide Street, Cherrybrook Village and Tramsheds. And assets entering into development, including 55 Pitt Street, Harborside and 34 Waterloo Road. These assets are part of the next generation of commercial and mixed-use developments. Growth in assets and funds under management EBIT was driven by higher investment management and transaction fees, partly offset by lower leasing fees. Our commercial and mixed-use business delivered EBIT of $90 million, an increase of $57 million on the prior year. This comprised profit contributions from the Locomotive Workshop and 80 Ann Street. Turning to residential. EBIT for the year was $195 million, representing 16% growth on the prior period. The result included the delivery of 2,523 settlements and profit from the sell down of 50% of the Smiths Lane Project in Melbourne. The sell-down was to Supalai, a Thai real estate property developer, and aligns with our objective of capital partnering and improving capital efficiency. Group unallocated overheads increased by $9 million. This was driven by increases in insurance costs and investment in technology. Net financing costs reduced by $9 million. And as we benefited from lower floating rates for the majority of the year, this reduced our full year weighted average cost of debt to 3.4% from 3.8% in the prior year. We booked development revaluation gains of $70 million relating to balance sheet interest held in Locomotive Workshop and 80 Ann Street. And we achieved a $305 million uplift across our investment properties, predominantly driven by increases across the industrial and office portfolios. And this movement includes a $216 million write-down at Toombul Shopping Center. And finally, AFFO was 22% higher than the prior year, mainly driven by higher operating earnings and lower maintenance CapEx. Turning to collections and COVID impacts. Cash collections across the investment portfolio continued a steady improvement through FY '22. Overall, we achieved a cash collection rate of 97%. There was strong collections across office and industrial portfolios, while CBD retail assets remained challenged. Our aged arrears balance was $17 million, reduced to $17 million and mainly is comprised of retail tenants but is still fully provided for. The full year impact to -- because of COVID was $12 million with the $25 million incurred in the first half offset by a receipt of $13 million in land tax rebates in the second half. No additional ECL provisions were taken up in the second half. Faced with rising cost of debt and continued volatility in capital markets, we believe that maintaining a prudent approach to capital market -- capital management is critical to providing options to navigate the challenging times ahead and provide the flexibility to capitalize on growth opportunities as they emerge. With the exception of Allendale Square, which is still under negotiation, we have successfully executed on our asset disposal program this year, further strengthening our balance sheet, resulting in year-end gearing of 21.3% at the lower end of our 20% to 30% target range, and liquidity of $1.4 billion comprised of cash and undrawn facilities. With hedging at 55%, modest gearing, limited maturities over the next 2 years, we believe our exposure to rising market rates is minimized. We maintained our A3 and A- credit ratings from Moody and Fitch with a stable outlook, ensuring we continue to have diversified debt sources at competitive pricing. Overall, with a strong balance sheet and access to capital, we believe we are well positioned financially to pursue the next phase of growth in generating the next generation of assets. With that, I'll hand over to Brett to provide an update on capital allocation and the commercial mixed-use business.

Thanks, Courtenay, and good morning. Throughout FY '22, we continue to deliver on our strategy by leveraging the strength of our integrated model to prioritize the creation of investment-grade assets over that of on-market acquisition. We have a strong forward pipeline of quality development opportunities across all our portfolios, and we have made good progress on our development completions. Equally, we've continued to cycle out of older style or non-aligned assets across our portfolios, with the successful settlement of the Travelodge Hotel portfolio, Tramsheds and Quay West Car Park assets in the second half and all compelling premiums to book value. We maintained our relentless focus on improving portfolio quality with recent completions such as 80 Ann Street in Brisbane and excellent progress in our industrial and build-to-rent projects, meaning our portfolio metrics continue to improve around the thematic of modern, low-CapEx, technology-enabled assets that are fit for purpose for the changing needs of our customers. This focus will see further strategic divestments in FY '23 with $1.3 billion of assets on market or premarket and a busy year for further capital partnering initiatives in BTR, office and also the potential for an office fund, given the development status at Switchyard in Auburn and Aspect Kemps Creek. And of course, all on the back of the successful AWOF transaction. Asset pricing and divergence in implied cap rates between the listed and the direct markets is certainly a hot topic at the moment. Our view remains that older style secondary assets will underperform in this environment. However, prime quality, modern assets will be less impacted given the continued weight of capital demand, sector rental growth prospects and scarcity of quality opportunities. This is clearly aligned with our capital allocation and asset creation strategies. We believe there is sufficient demand to support our divestment plans in FY '23. And the opportunity for third-party capital to partner with our balance sheet remains compelling, given the quality of the assets in our pipelines and the capacity of our platforms. Disciplined deployment of capital remains a consistent theme with limited restocking in FY '22, given pricing and cost trends with active capital at 12% and no change in our longer range of 80 -- or 20%, 80% active passive targets. The flywheel effect of our asset creation model has created some $160 million in value in FY '22 and a further $1.3 billion over the last 9 years with a 28% average return on cost for those completed projects, well above our benchmark hurdles and clearly demonstrating our track record for asset creation. Development completions have created $5.4 billion in new assets producing an additional $120 million in recurring income, plus providing a platform for a 20% CAGR increase in our funds under management whilst also continuing to improve the quality of our passive portfolios. Cost inflation and material and labor shortages have intensified across the industry over the year, and we expect to remain elevated in the near term. In this environment, our development experience built over many years, over many cycles and the true integrated nature of our model becomes increasingly valuable and a key differentiator. Our model ensures that our key skill sets in the life cycle of a project are in-house, which offers maximum adaptability to market opportunities and sound controls over construction costs, supply chain and other risks. The combination of this integrated model, together with our diversified sector skill sets, means that we are better placed than most to manage cost and program pressures generally within our feasibility tolerances, while still delivering on our quality, financial and ESG outcomes. Our commercial and mixed-use pipeline now represents -- the recent completion of Heritage Lanes at 80 Ann Street in Brisbane is a great demonstration of the value creation capability of our integrated model. This premium office tower has raised the bar for office development, targeting 6 Star Green Star, utilizing low-carbon construction methods and incorporating next-generation smart technologies. In a challenging construction environment, we delivered early occupation for our anchor tenant Suncorp 6 months prior to completion, with building now 98% leased and a 9.4 year WALE. Pleasingly, this development also delivered an 18% return on cost and $131 million of development value, exceeding our benchmarks. Our commercial and mixed-use pipeline now represents some $12.4 billion. Whilst we maintain an overweight exposure to core CBD and fringe office, we continue to accelerate production in our industrial and BTR pipelines, supported by strong leasing markets. Demolition and civil works remain on track at 55 Pitt Street, and a decision on the timing of the commencement of the main tower will be made early in the next calendar year. Our mixed-use project Harbourside has issued vacant possession notices and demolition is planned to commence at the start of the calendar year also. Our first BTR development in Melbourne, LIV Munro, is nearing construction completion. And we have started work at LIV Aston and LIV Anura. Across our industrial pipeline, we've commenced at Switchyards and also recently at Aspect, both with strong levels of pre-leasing. The ongoing rollout of our committed projects, together with the near-term commencements of our industrial mixed-use and BTR projects, provide a strong line of sight in terms of earnings recognition and organic growth in our third-party capital mandates. Within our office pipeline, the majority of the development approvals have now been secured and improving leasing demand will be the main driver for the timing over the next round of commencements. We have a large secured pipeline with a potential to create over $250 million per annum of future NOI, $1.8 billion of development value and $5 billion of organic AUM, further advancing our third-party capital strategies, whilst continuing to improve our portfolio metrics. I'll now hand to Campbell to discuss the integrated portfolio investment portfolio.

Thanks, Brett, and good morning. IIPs had an active 12 months, and the team has delivered some solid results during the period. Pleasingly, the earnings impact from asset sales and assets transitioning to development has been offset by like-for-like NOI growth, NOI contribution from new developments, significant improvement in cash collection and favorable COVID impact in the second half. 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. Our asset sales and development completions have significantly improved the quality of our investment portfolio across all asset classes. The quality of our portfolio also ensures that we are benefiting from the current bifurcation of tenants and capital demand for modern sustainable real estate. As you've heard from Brett, last quarter seen the completion of our latest premium grade asset, Heritage Lanes at 80 Ann Street in Brisbane. We have delivered 12 new office developments to the portfolio over the last 8 years, reducing the average age of the portfolio to below 10 years for the first time. As you can see from the charts on the right, prime-grade assets continue to outperform for both the financial and tenant demand perspective. It's now clear from the data, the flight to high-quality, sustainable and digitally enabled office space is gathering pace. And with the portfolio now 99% exposed to prime grade we believe we are well placed to weather the current market challenges. We continue to enjoy low maintenance CapEx and anticipate incentives will remain low over the next 12 months given the portfolio is only exposed to 5% lease expiry by income in FY '23. Other highlights for the year include 55% of the portfolio was externally valued delivering net gains of $224 million, up 2.9%. Occupancy has improved to 95.7% and remains well above the markets we trade in. Cash collection has improved to 99%. Leasing activity continues to improve with 42,800 square meters of deals completed at positive leasing spreads of 2.8%, and the portfolio delivered like-for-like growth of 1.9%, which is particularly pleasing in the current environment. Turning to the industrial business. Market conditions remain robust for our 100% strategically located Sydney portfolio, with tight market vacancy below 1%, strong market rental growth and rising land values. NOI was relatively flat at $55 million with the 3.3% of like-for-like NOI growth, offset by the reclassification of 34 Waterloo Road into the development pipeline. Occupancy remains at 100% and WALE at 6.7 years. 63% of the portfolio was revalued during the year, delivering gains of $207 million, up 14%. And capital demand for quality industrial asset remains strong. Our development sites have been secured at attractive points in the cycle as illustrated on the chart on the right. And much of our $2.5 billion pipeline is now being activated into strong leasing conditions. Switchyards, Auburn is now 58% committed, is under construction and due for completion mid-2023. And Aspect at Kemps Creek is now 48% committed, commenced construction and due for completion in the first half of FY '24. Our retail business has rebounded strongly in the last 6 months. Cash collection improved significantly to 91%. Leasing deal activity was 76% higher in the second half and valuation growth, stripping out the impact of the devastating flood at Toombul, was up 3.3%. Talking to some of the detail. NOI was up strongly in the first half, finishing the year at $153 million, driven by improved cash collection, offset by the lost income following the disposal of Cherrybrook Village and Tramsheds. We've experienced strong improvement in leasing activity, with 348 leasing deals completed across 52,200 square meters. And we've achieved positive like-for-like rental growth of [ 0.12% ] for the first time since the impact of COVID. And total monthly sales in June exceeded pre-COVID levels for the majority of centers, with the exception of our CBD assets at Metcentre and Greenwood Plaza. As you are aware, Toombul Shopping Center in Brisbane was severely damaged by floods in February, and we made a very difficult decision not to reinstate the center as is given the catastrophic damage and the risk of future flooding. We have reported a significant revaluation loss of $216 million on the asset, reflecting its land value. Over the next 6 months, we will continue to work with our local community and stakeholders to design a flood-resilient development for this iconic site. And finally, turning to build-to-rent. We continue to make good progress in this growing asset class, and the underlying fundamentals across the sector remain compelling. As vacancy rates for rental stock continue to fall, we are seeing a strong recovery in rental growth underway. With significant demographic tailwinds, a resumption of immigration, combined with restricted supply backdrop, the outlook for the sector is positive. Leasing at LIV Indigo at Sydney Olympic Park has stabilized at 98%, having achieved strong leasing success over the period. We've taken many of the operational experiences from LIV Indigo and are implementing this into the design and strategy of our development projects currently underway. LIV Munro in Melbourne, is due for completion at the end of this calendar year. With LIV Anura, Brisbane and LIV Aston in Melbourne scheduled to complete early and mid-2024, respectively. We have commenced the process to raise external capital to invest alongside us. Our target is to raise equity with a developed to core strategy, with leverage in the structure and retaining a 40% interest on our balance sheet. We will continue to update you on our progress over the coming quarters. I'll now hand over to Stu Penklis for the residential update.

Thank you, Campbell, and good morning all. Today, I'm very pleased to report that we settled 2,523 lots this year, above our target of 2,500. This was a great result achieved against the backdrop of extreme wet weather and COVID-related impacts across our projects, which saw a significant number of settlements push into early 2023. We've settled a further 123 lots since June 30. As forecast, gross margins remained elevated at 25% due to over 80% of settlements coming from MPC. This was supported by our integrated internal delivery model and forward planning helping us to minimize the impact of cost escalation. Revenue growth, driven by strong owner occupier demand for our high-quality product was also a key contributing factor. Defaults were well below our long-term average, excluding Voyager apartments, which was impacted by many long-dated offshore sales. The introduction of a new 50% capital partner at our Smiths Lane project in Victoria is consistent with our capital partnering approach. This will allow us to leverage our capital even further as new opportunities increasingly come to market. Our Shovel Ready strategy saw us successfully bring 6 new apartment projects to the market in FY '22, our largest release since 2017. Strong owner occupier demand for premium apartments saw over 50% of released slots sold. More recently, at the launch of Isle at Waterfront in Queensland last week, close to 50% of lots were deposited as buyers continue to value the Mirvac brand and relative affordability and lifestyle new generation apartment living offers. We found that off-the-plan sales are typically slower, with our customers, in particular rightsizes preferring to touch and feel a more completed product before purchasing. As we near completion, we are confident in the product we are delivering will meet the needs of our customers as they fully appreciate the Mirvac difference. MPC sales normalized through the financial, year with 2,400 sales achieved despite the roll-off of COVID-related government stimulus. 89% of released MPC lots were sold. The diversity of our land and built-form offering saw owner-occupiers as well as investors, offset the moderation of first home buyers in this segment. We've maintained a high level of repeat buyers at our projects as the quality of our build, design excellence, delivery certainty and amenity investment are increasingly valued. A recently sold out release at our master planned community, Eveleigh in Queensland, saw over 38% repeat Mirvac purchases from Sydney, Melbourne and within Eveleigh itself. This is a testament to the strength of our brand and highlights our competitive advantage against our peers in the current market. Off the back of successful launches this year, we expect to bring over 900 new apartments to the market across a further 6 apartment projects during FY '23. Our deep MPC pipeline also means we're able to bring over 2,000 land and built form lots to the market in the same period. This includes our first release at Cobbitty in Southwest Sydney, a 950-lot project acquired in December 2021. With zoning in place, we can accelerate the release in this very supply-constrained corridor. Leveraging our strong balance sheet provides a competitive advantage as we maintain our disciplined approach to releases. We're able to bring projects to market in response to demand and growing supply constraints, which will deliver significant earnings from FY '23. Our integrated in-house design and construction model provides a competitive advantage when managing risks through costs, visibility, strategic procurement and delivery certainty as well as the agility to respond to changing customer needs. A number of years ago, we identified the need to shift to greater prefabricated construction methods as a way to mitigate delivery risks. Our early investment in this area means we are now well progressed and leading the industry, particularly in attached housing, realizing considerable savings in time and waste. As we celebrate our 50th year, Mirvac Residential continues to be a trusted brand and partner, delivering legacy projects and progressive communities across the country. It is fair to say the headwinds facing residential sector are diverse and complex, including interest rate rises, cost escalation, supply chain challenges, labor shortages and softening sentiment. While these are all challenges to be navigated, they must be viewed in the context of the fundamentals that drive residential demand: low unemployment, rising wages, the return of overseas migration, rising rents, falling vacancy rates and a growing scarcity of supply in many markets. In the December quarter, we saw 27,000 international migrants into Sydney and Melbourne. With immigration forecast to continue, while new apartment supply in 2024 is forecast to be 40% below 2018 levels. Mirvac will be well positioned to respond to this critical undersupply. Our robust pipeline of over 25,000 lots provide significant visibility of our forward earnings profile. Our $1.6 billion presales balance will continue to grow through FY '23, driven by 6 exciting new apartment launches. FY '23 will also see us further explore a land lease offering, leveraging our capabilities in new adjacencies and bringing even greater diversity to our pipeline. We expect to settle more than 2,500 lots this year, noting that weather and COVID-related risks are factored into this guidance with a fourth quarter skew settlement. A substantial contribution from apartments in the second half will see FY '23 gross margins normalize, while remaining just above our through-cycle targets. Residential markets are cyclical, but we remain confident in our ability to differentiate our product, to capitalize on demand for quality and underlying supply shortages and to take advantage of opportunities as they emerge. Thank you, and I'll now hand back to Sue.

Thank you, Stuart. And so to guidance. We're targeting FY '23 EPS of at least $0.155 per stapled security and DPS of at least $0.105 per stapled security. We've detailed some of the assumptions contained in that guidance on the slide, which we'll leave you to absorb following this call. We are very proud of the strong and resilient result we have delivered this year for our securityholders. And looking to the future, we are well positioned for medium-term earnings growth. Our modern high-quality investment portfolio, largely created by Mirvac, will benefit from tenant and capital preference for high-quality sustainable assets, the normalization of trading conditions and the delivery of new recurring income from development completions. Our expanding funds management platform will deliver a growing income stream. Our residential business is underpinned by presales to be delivered into an increasingly undersupplied market also supported by the resumption of immigration. And value creation will flow from the delivery of our pipeline using our in-house design and construction platform. And all this is underpinned by a strong balance sheet, a vibrant culture, a platform of scale, passion for delivering sustainable outcomes and a 50-year track record in creating and curating assets for performance. Thank you very much for spending time with us this morning, and we'll now open up for questions.

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

I just had a couple of questions on the guidance so I'll stick to that today and keep the rest for later. In the resi presales, I'm not sure it's related to what was launched, but if you look at the presales in the period between the first and second half, it was only about $608 million versus $855 million in the first half to sort of down 29% sequentially and 22% year-on-year. Was that due to the launches or softer demand or both?

Stu?

It was just timing of launches. And I think it's important to note that in the second half, we obviously had significant settlements in the final quarter that came through.

Okay. Okay. And then just on the guidance, the second question. In the guidance, how much do you assume, if any, of Toombul income, and any retail CBD support, even if the [indiscernible] finished?

So on Toombul, there was no impact on FY '22 covered by insurance, and we expect that to continue into FY '23, but you should factor in now that there will be no income from that asset into FY '24 as we work through, as we said, with the local community, what we rebuild in a flood-resilient way on that site. And in terms of COVID impacts, we took no further COVID impact in the second half, and we don't expect any in the coming year.

So you won't -- even though the CBD tenants that -- of the foot traffic is down, if you're a cafe, would you give any support in terms of reduced rent? Was that done as part of the deals? Or it's sort of a case-by-case?

Sholto, we'll deal with that -- sorry, we'll deal with it on a case-by-case basis. But we've got good ECL coverage on our position at the end of the year, and we'll manage with those tenants through. But obviously, that is where our focus is, CBD retail, but we haven't no material allowances in our guidance for future COVID impacts.

And just on the guidance, just finally on the related to that, do you see continued [indiscernible] in the costs and any weather because the weather has been pretty bad for that because you mentioned in the call of 4Q '23 settlement. Is that -- are there quite a lot of contingencies for settlements given rain delays and stuff? Or is that factored in the guidance as well?

We have taken that into account in guidance. So the extreme wet weather on the Eastern seaboard certainly has -- does create an impact. We've lost this year -- calendar year '22, we've lost 54 working days, which is 39% on site, which is significant. So yes, we do have -- we have factored in rain delays and COVID absenteeism in forecasting what we think we will achieve for the year. But I do think that the result that we achieved in this year with very considerable wild weather and COVID absenteeism, plus all the other things we talked about, getting to our target of 2,500 lots, I think, was a job extremely well done.

Our next question comes from Ben Brayshaw at Barrenjoey.

I was wondering if you could just provide any feedback on price growth expected over the course of FY '23 for MPC, just presumably based on visibility from contracts at hand, and how they would compare with the last 12 months?

Stu?

Yes, I'm happy to take that. So over the last 12 months, it's been interesting because we've seen in MPC price growth, probably strongest in Queensland, followed by New South Wales and then followed by Victoria. To give you some numbers from -- Eveleigh up in Queensland in the last 12 months, we saw about 27% average price increase. Googong in New South Wales, we saw about 29%. And at Woodlea in Victoria, we saw about 21%. So very strong price growth, a bit slower in Victoria off the back of the lockdowns and that market recovery. But it is also important to note that, on average, we did see 15% increase in civil costs across the board as an average. So benefit of revenue growth, but there certainly has been cost coming to -- cost increases coming through.

And so you're broadly suggesting that, that should be reflected in revenue per lot for MPC over the course of FY '23?

I think we'll start to see those numbers moderate, particularly as we're now starting to see the softening of first home buyers and the roll-off of COVID government stimulus.

Okay. Just a second question, if I may, on Toombul. I was wondering if you could just touch on what the issues were that has prevented, I suppose, the site from being reinstated in its current use. And just so far as plans for highest and best years going forward where the Mirvac would consider redeveloping that site itself?

As we said in our remarks, the center suffered catastrophic damage. Recall, in February, the Brisbane area received 5x its average February rainfall in the month. And on the day of the flood itself, which was called The Rain Bomb, that area received its entire average February rainfall on 1 day. The center flooded to over my head height, which was -- caused catastrophic damage into the center. And given our view that, that kind of flooding was more likely into the future with climate change, we decided that the only thing that we could possibly do is to create a flood-resilient asset for an iconic and beloved site. We had no concrete plans for what that might look like, nor do we. We will consult with the community, but I can say that it will involve retail and services because that's a really key part of the role that Toombul plays in that community. It was heartbreaking all around.

Our next question comes from Stuart McLean from Macquarie.

Firstly, I just want to understand a few components of FY '22 earnings. Just regarding Smiths Lane, it looks like there's a gain on sale in the accounts of $16 million in the resi book. Is that the profit that came from the Smiths Lane sale?

The Smiths Lane sale actually is made up of a number of different lots. The $16 million that you've identified as part of the revenue that's been recognized on the sale of Smiths Lane. I think just to help you, it has contributed to earnings this year, the sell-down. And going forward, we will then collect 50% of the settlements plus a DM fee. The presales that exist at 30th of June are 100% ours, just to help you understand how to think about it. So that $16 million in the account is only a part of what contributed.

Okay. In terms of the profit on sell down, what was the dollar million impact to FY '22 earnings? And was that in plans at 1 half earnings when you provided the update? Or is that incremental profit that was achieved there?

We won't comment on the contribution in total of the sell-down to the earnings, but it was definitely always in our plan this year to partner on Smiths Lane, and it was factored into our guidance.

Okay. Fantastic. And then the other question just on FY '22 earnings, just the $13 million rebate they received in regards to land tax on the COVID rent release. That seems to be maybe 2%, maybe 3% earnings give or take, that wasn't factored into guidance. What -- is there something in the P&L that's a bit weaker than you expected there in order to offset that $13 million, $14 million fee?

Look, the $13 million -- the land tax rebates were always an option. They've been available to landlords who have provided tenant relief. We have provided significant tenant relief over the last 3 years, and it was something that came into the second half, which was on our radar when we put guidance together.

I thought that the mark has been guided to at least $25 million of COVID rent relief, it's coming at $12 million. So that's a benefit there. And is there an offset in the P&L?

No, I think we've indicated on ECL or COVID impact for the year that was it $25 million for the first half, and there may be some in the second half. We are working through that based on recovery. So we've thought through all of that when we put guidance together. Overall, if you sit back from the result, there's a lot going on in it, and we've been able to deliver across all of the different parts of the business, including in residential, which has been very difficult with weather and COVID absenteeism. So we think it is a good result, or a great result, actually.

Fantastic. And second question, just on construction costs. What are you seeing there in terms of commercial construction costs? And what does that mean for the development pipeline and returns on the pipeline as well?

I'll start on that one. In terms of construction costs, it is a great advantage to have our own construction capability. And a long track record in working with Tier 1 subcontractors, it gives us stability of subcontractors. It gives us real-time pricing insight into the market rather than lagged estimates that can come from quantity surveyor. So it's a great advantage, not only in visibility into the market, but also in being able to be very agile around the cycle and be able to control risk in a much more controlled manner than a third-party contracting model. We definitely are seeing cost escalation probably in Sydney running at about 4% overall in the high-rise construction, slightly higher probably in housing construction and higher, again, in Queensland, running 7% to 9% at the moment. We do have in our feasibilities, we have cost escalation up until the point we start construction. We generally will have 80% to 90% of trades let before we start construction at all. So we've got good certainty of cost going into a project before we deploy capital into it. We have appropriate allowances in our feasibility for contingency on top of all of that. So I think it is testament to the way the model works that with the cost increases that we've seen over the last couple of years with all of the disruption in the market that we have been able to deliver what we've been -- what we've delivered ahead of our initial feasibilities taking into account all those factors.

And does it delay any of the development pipeline at all, at 383 La Trobe, the 90 Collins. Do the returns still stack on the commercial development pipeline and we shouldn't expect a delay because of rising construction costs?

The key to the pipeline going forward, which is a very significant pipeline, as I said in my remarks, the largest pipeline we've had in our 50-year history is pre-commitments from tenants, which have been challenging over the last several years as major corporates deferred decisions in a time of uncertainty. But that will come. And the key to unlocking the developments such as 55 Pitt Street, 383 La Trobe, 200 Turbot Street, we are shortlisted for tenant commitments on all of those. And so we'll update the market as that moves forward, but it's not -- cost escalation is not the issue. The key to unlocking all of that value is some tenant precommitments.

Our next question comes from Lauren Berry at Morgan Stanley.

First one is just, again, on Smiths Lane. Are you able to just comment on the strategy around selling down a stake in that project because it does seem like a quite good project for you guys? And then also if you might look to do any more of these kind of deals across the rest of your residential book?

Lauren, yes. The answer is yes. It's very much our strategy to create value, create momentum, deliver the upfront social and physical infrastructure and then bring in a capital partner to be able to recycle that capital into new opportunities. And we believe over the next 12 to 18 months, there will be new opportunities for Mirvac to move forward on and secure and do it all again. I think it's also important to note that a project like Smiths Lane has reached a level of maturity now, and the timing was right to introduce a capital partner on that project.