Mirvac Group (MGR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to MGR Acquisition of Serenitas Land Lease Platform Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Campbell Hanan, CEO and Managing Director. Please go ahead.

Good morning all, and thank you very much for joining us at short notice. I'd like to start by acknowledging the traditional custodians of Atlanta, which we're meeting today, for us, that's the Gadigal people of the Eora Nation, and I pay my respects to elders past and present. As you've heard from us in recent updates, one of our key strategic goals is to leverage Mirvac's experience and capabilities and increase our exposure to the living sectors. Particularly against the current backdrop of rising housing demand and critical undersupply. Aligned to this strategic objective, I'm very excited to announce our expansion into the Land Lease sector with the acquisition of a 47.5% stake in the Serenitas platform in partnership with Pacific Equity Partners for a total consideration of just over $1 billion on a 100% basis, with settlement targeted for Q3 of FY '24. The acquisition of the Serenitas platform retained the existing and experienced management team to continue the management of the business. The transaction propels Mirvac to be an owner of one of the largest operational land lease portfolios in the country. Our 47.5% investment represents an initial capital investment of $300 million with $240 million paid on settlement in the balance 12 months post completion. The returns expected are well above our current hurdle rates and will be accretive to EPS from FY '25. The acquisition will be funded from existing debt facilities and comes after the recent successful disposal of 60 Margaret Street Met Center assets in Sydney for $388 million, in line with our June book value. We're excited about this acquisition with strategic benefits the platform will deliver to our business. As we mentioned in our investor update last week, the Land Lease sector has considerable appeal, providing an affordable housing solution for a rapidly growing aging population customer base, underpinned by government support and delivering attractive resilient recurring cash flow streams with development upside. This acquisition provides immediate scale in this attractive emerging sector. There is also the potential to leverage Mirvac's existing land bank and recycle capital while broadening the diversity of housing within our MPC projects. The Serenitas platform currently comprises 27 communities across Western Australia, Queensland, New South Wales and Victoria with a total of over 6,200 sites once fully developed. Importantly, over 4,200 sites are currently occupied and income generating and have been acquired on a 5.4% weighted average cap rate, with the balance of around 2,000 largely DA-approved sites offering future development upside. Serenitas is a well-regarded suite of brands and targets the affordable mid-market segment, which had the largest market opportunity. This transaction provides a compelling value proposition for shareholders and is a directly reigned with our strategic objectives outlined in April this year. The investment increases the cash flow resilience of our investment portfolio by expanding our exposure to the living sector with attractive investment fundamentals and compelling returns. We also achieve immediate scale in the Land Lease market with an experienced operator. We are also broadening our residential product offering and providing the opportunities to leverage our MPC land bank and recycle capital over time, and are helping to service an acutely undersupplied housing market across the country. The asset class has low capital intensity with a self-funded growth model. The transaction also provides exposure to a new residential segment with aligned capital partners and potential to introduce new capital partners over time. And finally, we will continue to deliver affordable housing solutions to Australians with the creation of new infrastructure that promotes healthy and connected lifestyles. Mirvac has over 50 years' experience in the residential sector, and over that time, we have broadened our internal design and construction capability to span land subdivision, built-form home and terraces and mid- and high-rise apartments. We were the pioneers in the build-to-rent sector back in 2017, and today's acquisition of Serenitas further broadens our capability and solidifies our position as one of the leading players in the living sector in Australia. Mirvac is the only residential developer in Australia, delivering across spectrum of housing typologies from rental housing, build-to-rent, land lease, house and land, medium density and high-density living. Against the backdrop of record immigration, shifting demographic trends, tight vacancy and restricted market supply, Mirvac's track record and expanded capability is well placed to drive considerable value for shareholders over time. The combination of low risk secure passive recurring income with embedded contracted rental growth, together with development profits and the recycling of capital from the sale of homes provides the base of a very strong investment proposition. This rapidly growing market has strong structural tailwinds. We currently have around 7.5 million Australians over 55 today and this will almost double over the next 40 years with the land lease sector having a modest penetration rate of just 2% compared to 6.4% in the United States. We also see this sector helping to address the housing supply and affordability challenges and is aligned with government strategy to deliver over 1 million homes over the next 5 years and for over 55 to age in place and remain in the communities. The sector delivers attractive recurring income streams from the rental income on land ownership. These income streams are underpinned by some government support and recurring growth with CPI and CPI plus rental increases every year. Compared to traditional asset classes, there is very low cash flow leakage with no incentives slow CapEx downtime and minimal arrears. And there are attractive development margins on the creation of the new homes for the residents, which can be recycled into the purchase of new sites, creating an attractive self-funding model. These strong fundamentals are driving robust capital demand for an asset class with limited institutional ownership. As well as being a highly compelling investment proposition, Land Lease also provides a strong customer proposition. It enhances our customers' lifestyle with lower home maintenance, connection to the community and locations typically close to key services and facilities. It's financially attractive to customers due to the affordability relative to average homes, presenting the opportunity to release equity from their homes and is a simple acquisition process. The majority of customers are supported by the Commonwealth Government's rental assistance and it's aligned with government policy. Importantly, for this age group, it provides social connection and access to well-run community facilities, addressing loneliness and promoting engagement with other residents. I'll now pass over to our CFO, Courtenay Smith, to run through the Serenitas platform and the financials of the deal.

Thank you, Campbell, and good morning, everyone. Serenitas is one of the leading pure play land lease platform with a national presence across Australia. Platform includes an experienced management team with a strong track record in developing and managing lifestyle residential communities. The well-regarded team is led by Rob Nichols, has over and includes over 100 employees. Portfolio includes 27 communities with around 4,200 occupied sites, making one of the largest occupied portfolios in the market and a further 2,000 development sites, 98% of which a DA proved. The portfolio is split roughly 50-50 between West and East Coast with significant growth opportunity in Victoria and New South Wales where Mirvac established landowners. The Serenitas business model is to acquire sites with DA approvals in place, develop the land and build the community facilities and homes, sell the homes to residents, generating development profit and support the community operations ongoing, collecting a rental income and valuation uplift on the retained community facilities in the land. Serenitas is focused on the affordable middle market where demand is deepest and most robust with an average sale price of $460,000, excluding GST, 20% below the local area and 80% of customers qualify for Commonwealth rental assistance. The investment in this platform provides immediate attractive returns to shareholders. The investment portfolio is valued at $800 million and includes over 4,200 occupied sites, which have an average -- which have been acquired on an average cap rate of 5.4%. Rent growth on these contracts are set at a minimum of CPI for 2/3 of the portfolio with the other 1/3 of the portfolio on CPI plus 2%. On the development side of the business, which currently includes around 2,000 development sites, attractive development margins are generated, which in turn deliver additional annual recurring passive rental income. Business is currently operating at an annualized new home sales run rate of over 350 per annum on a calendar year-to-date basis. Over time, we expect this annual run rate to increase as new development projects are secured and activated by the business. As Campbell mentioned earlier, our 47.5% investment in the Serenitas platform represents an initial capital investment of $300 million with $240 million paid on settlement and the balance 12 months post completion. Returns expected are well above our current hurdle rates and will be accretive to EPS from FY '25. The investment will be managed as part of our investment portfolio and reported in that segment following completion. The acquisition will be funded from existing debt facilities and comes after the recent successful disposal of 60 Margaret Street and Met Center assets in Sydney. This is an important acquisition for Mirvac aligned to our strategy to increase our exposure to the living sector and gives us immediate scale in the growing and capital-efficient land lease sector. We look forward to the growth of our exposure in this attractive asset class over time. We will now open to questions, and Campbell and I have been joined by Stephen Gould, Mirvac's General Manager of Land Lease.

[Operator Instructions] Our first question is from Lauren Berry from Morgan Stanley.

Can you please just give us a bit more of an idea of how the Serenitas acquisition is going to fit in with the Mirvac balance sheet -- land lease aspirations? For example, are you going to be transferring any of your existing sites into Serenitas? Will everything be under the Serenitas brand? Or you do like a dual process with your balance sheet versus Serenitas please?

Yes, Lauren, it's Campbell. So yes, the intent is certainly for the over-55s product to work with Serenitas, understanding, of course, the different ownership structures that exist in Serenitas as our balance sheet. So any transactions that would happen across Mirvac's balance sheet will be done on an arm's length basis.

So to clarify, there is opportunity for you to vend in Mirvac land into Serenitas over time?

Absolutely. But Serenitas will have its own independent Board, of which we will have 2 board seats. And there will be traditional conflict of interest process that you'd expect for related party transactions.

Okay. Great. And will Mirvac have an opportunity to earn any management phase on Serenitas? Or is it an entirely separate business that's being managed by itself?

Yes. Lauren, it's Courtenay. That's right. It's an investment for us. So we're investing into the vehicle. Our returns will come out of that investment. We won't provide services separately into that vehicle. The opportunity for Mirvac, as Campbell has said, is to [bend] in land if those opportunities exist. I would say Transat is a well-established people. The management. It's got good runs on the board, deep capability and we're effectively investing in their capability to continue to grow the business.

Great. And just final one. Are you able to give a bit more color on the margins, development margins you expect in Serenitas and also what margins you're hoping to earn on the rent side of things as well?

I think probably the way to think about it. We do expect within the vehicle, the development margins are above what we see in our residential portfolio at the moment. And the rental streams present a strong return. Overall, we are expecting a return on the capital that we're investing in the low double digits. So it's well above our current cost of capital and our current hurdle rates.

Next, we have Tom Bodor from UBS.

Just interested in the -- just what you're buying in terms of the capital on a 100% basis, there's $800 million on investment portfolio, $50 million of development inventory. Is it right to assume it's circa $150 million of goodwill is being paid as part of this transaction?

Tom, it's a little bit lower than that. There are other assets on the balance sheet than what we've put into the pack. I think just to help -- the headline price that we've disclosed is the one that we've agreed with the seller. There are -- off the top of that, there will be completion adjustments once we get to completion and there's a series of transaction costs that we've incurred [indiscernible] and then the vehicle is geared. But there is goodwill that we've played to get access to the platform.

Is it in the order of $100 million or more or less than $100 million that?

Between $100 million and $150 million. That's pretty close.

Yes. Okay. And then out of that capital, I appreciate that it's 50% by lots, WA 50% East Coast, but how much of the capital is in WA versus the East Coast?

I think it's about 50%, but we might confirm that for you. I think it's about 50%.

Yes. And then just around sort of the overhead within the platform, 100 people, what is the per annum rough overhead cost of the platform?

I don't think that we've necessarily flagged that. It's a small team. It operates leanly. It's develop that 100 people largely a site-based running the assets and the villages and then they do a great job. Rob has done a great job in running a really lean ship and delivering good returns. So I don't know that we need to go into the details of cost of it.

Okay. But a lot of those would be recovered in the village level and is that what you're saying? Overhead.

Yes.

And then just sort of finally, do you have any metrics around the multiple you've acquired it on or development settlements per annum just in terms of the -- what sort of development settlements you could expect in the next couple of years or the last couple of years?

Well, look, Tom, I think the way to think about it, we've sort of given the run rate at the moment is around about 350 odd lots per annum. We certainly would like to think that we can grow that over time, particularly as the business expands into the East Coast, which is a market that obviously, Mirvac has a lot of depth and strength in. So we do see opportunities to grow that over time. Probably don't paint a picture just yet until we get our feet under the table, so to speak, and get a much better feel over time. But we're pretty confident on the run rate they're achieving at the moment.

Next we have Sholto Maconochie from Jefferies.

These are sort of follow-ups from Lauren and Tom's questions. Just on the purchase price, is that an equity -- you said it was a geared. So that 300 up on that, an equity investment, not -- because the purchase is [indiscernible] at 100 that's a $1 billion enterprise value, and that's an equity investment. How much is the -- what leverage is in that EV either the 1010, how much is [indiscernible]?

Sorry. The way to think that the assets are geared between 50% to 60%. So just to play back headline price we've agreed is $1 billion. That with [indiscernible]. There's completion adjustments that will come off that there are transaction costs that the partners have incurred. Statutory mainly that. Then there is gearing in the vehicle and our equity investment is the $300 million that we talked about, the gearing in the vehicle against the assets is between 50% and 60%.

Okay. So it looks like your sort of 20%, 25% goodwill premium based on circa $120 million, but we can take that offline. But -- and then just the purchase on the accounting. You obviously said a [recount] investment for statutory, but you said it would go through investments. So that your proportionate share of rental income will go through the investment line as the BTR investment income?

Yes, at the moment, you can see BTR line. Imagine that being a living line, we'll give you the right disclosures with that living line would have built to rent and the land lease contributions and earnings. And as Campbell said, it is moving up to that allocation on the balance sheet that we've indicated towards living.

And the development company is get your proportionate share of development profit as well, what was it? Is it in the development income line? In the development profit line?

No, no, no. We've got an investment in this vehicle, which will have underlying returns that are from rental income and development that our -- we will equity income this investment, and it will be in the investment portfolio.

So the total income will be in one line item and it is land lease. Okay. That makes sense. And then just on the -- on your existing assets, you outlined last week at your 2 other some pilot sites. Is there any first rights on any Mirvac? Or is this totally Mirvac continue to develop or JV other sites with other partners? How do we think about that in terms of your [indiscernible] on the MPC?

Sholto, we've obviously made a big investment in Serenitas and our expectation is that this is a portfolio controlling it. It's a portfolio for us that we want to see grow. It certainly makes a lot of sense for us to ensure that opportunities on our balance sheet that fit the criteria of Serenitas [indiscernible] to Serenitas. But as I mentioned earlier, acknowledged that they will be traded if they are traded on an arm's length basis, acknowledging the inherent conflicts that happen as a result of different ownership structures.

Yes. That makes sense. And then just finally, the price pace that seems in line with the transaction about 161,000 per site. So it's sort of in line. Is it fair to say, given the exposure in the West Coast that you'll be sort of providing a bit more stock for the East Coast at New South Basin [indiscernible] were then underweight in that portfolio so that it probably helped vend in some sites there. And if you've vended in there'll be a profit contribution to Mirvac, I'd assume?

I think all of those things are right. Just on WA, I just don't underestimate. It's one of the fastest-growing populations in the country. We have a really strong presence in WA as well. And Serenitas is absolutely the market leader in that market, which is great. Its growth, though, is certainly on the East Coast, and we certainly enjoy a lot of those similar attributes on the East Coast. So we see it as a really nice match between where they are today and where Serenitas can be in the future. So we're particularly positive about that, but we certainly have confidence in the WA market and the strength of the resi market in WA at the moment.

Our next question comes from Richard Jones from JPMorgan.

I understand this was a transaction which would have been obviously hard to fund on your own at the moment. I'm just wondering why you've chosen this path like expanding into land lease by our stake in a partnership as opposed to the alternatives, which would have obviously been are you setting up or buying a management vehicle that you run directly or via growing through your own MPC opportunities, which you outlined at the Investor Day last week?

Yes. Look, I think that's a fair question, Richard. I think the way we would we think about it is we see a great opportunity to scale up this business, opportunities to play in scale as we've learned in BTR, it takes time. This is an opportunity. It was under an exclusive position with PEP. There was an opportunity for us to join PEP. It's a significant co-investment for us upfront. We did have deep faith in the management team, and we take absolute confidence in Rob Nichols team to work with us and to -- and PEP at some point will exit. And so that provides a longer-term opportunity for us to continue to allocate more capital into this sector over time.

Okay. Okay. And is there any more detail about what their investment horizon may be then?

No. Look, I think that will be up to them, but they have their funds traditionally hold assets for a period of time. PEP has got a really great track record in building portfolio companies and generating market-leading returns, and we're excited to be working alongside them given their experience in this space. So again, we see it as a really nice match in the short to medium term, and it will give us lots of time to consider an exit whenever that exit may be.

I would say, Richard, I mean, PEP is holding this in funds that are being to hold it a little longer than a typical pace of fund. So there's a runway to build the business and grow with them.

Okay. And Courtenay can you just follow up just in terms of the return on capital comment. Obviously, that was a geared return. Are you able to give us clarity as to what that might be on an ungeared basis? And then -- and secondly to that question, just the gearing at 50% to 60% on assets, I think it's close to 40% at the entity level. It seems quite high for a vehicle that is looking to grow. Just can you comment around that?

Yes. I think -- well, I think that the debt package that the team's got in place in the existing business is strong, and so we've leveraged that into the vehicle. And I think the returns work. In the underlying vehicle, the returns over the top of that, but I don't think we'll go into the geared ungeared of returns. I think you should assume -- as I said, our return on the capital we're investing is low double digit. And if we can get to scale quickly, then we hope that, that return outperformed. But I think the underwrite we've got is solid. And as Campbell said, there's opportunity in the development pipeline to continue to grow the home sales beyond the $350 million annual run rate that they're running today.

Next, we have Lou Pirenc from Jarden.

Yes. Two quick questions. And first one, I may have missed it. Is there just a cash flow or earnings multiple that you're paying for this business?