Mirvac Group (MGR) Earnings Call Transcript & Summary

Welcome to Mirvac Group's First Half 2025 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to Mirvac's CEO and Managing Director, Campbell Hanan.

Well, good morning, everybody, and thank you for joining us for our half year results presentation. Joining me today is Courtenay Smith, our CFO; Richard Seddon, our CEO, Investments; Scott Mosely, our CEO of Funds; and Stuart Penklis, our CEO of Development. Before we begin, I'd like to acknowledge the traditional owners of the land on which we're meeting today, which is the Gadigal people, and I pay my respects to elders, past and present. 18 months ago, we reset our strategy. We reallocated our capital -- investment capital to focus on better cash-on-cash returns in the living sector. We ensured our balance sheet would remain strong. We ensured we could fund our development pipeline. We exited noncore assets, including development sites, and we focused on improving the capital velocity of our Development business by bringing in more capital partners. And we did this in a context of a really tough construction environment and with falling office valuations, which had a 300 basis point impact on our gearing. So it's really great to be standing in front of you today to outline the significant progress we've made on all of these initiatives. Drilling down more specifically to the highlights of the last 6 months, the investment portfolio is doing exactly as we planned, strong occupancy, low CapEx, positive leasing spreads across all asset classes. Our future investment NOI will be bolstered by the completion of our commercial and mixed-use development pipeline with a further $100 million of annualized income to be delivered in coming years. We've driven a more meaningful contribution from the living sectors, with $26 million of EBIT contribution in the half, up from $2 million in the previous period. Pleasingly, we've executed on capital partnering in our MPC business with 3 projects now in joint ventures. This improves the velocity of our capital, improves returns and will allow us to get more sites ready for the resi recovery, which we believe is underway. And you can see this in our strong residential sales volumes, which were up 51% on the PCP, along with leads up 36%. And today, we report our highest presales balance since 2018. We've also made great progress in pre-leasing our upcoming office and industrial development pipeline and further capital partnering initiatives so well advanced for Badgerys Creek and for Harbourside. And we've achieved this with a balance sheet well within our 20% to 30% gearing range. So this strong period of execution is now setting us up for earnings growth in FY '26 and beyond. Culture and sustainability remains a critical feature of our business. We will continue to focus on executing our decarbonization targets and drive a lower carbon footprint. It makes good business sense to continue to electrify our assets and champion energy-efficient designs, and it remains a critical ticket to play with our capital partners and customers. Two things I do want to call out: Firstly, is the creation of our Mirvac Masters program. This is a university-style education program for our people, led by our own senior experts with support from the University of Sydney, to build Australia's best property people in the fields of development, investment and asset management. This will help Mirvac. I'm sure Mirvac will have the best capabilities to deliver on our strategy and help us continue to attract, retain and develop the best property professionals in Australia. Secondly, we've become a major sponsor of the GWS Giants AFL team. We've kept our good brand a bit of a secret for many years, and this is a great opportunity to increase our brand awareness nationally with the most watched football code and broaden our relationship with the Western Sydney community. We were active across MPC, industrial, retail and build-to-rent. To take you through the financials, I'll now hand over to Courtenay.

Thanks, Campbell, and good morning, everyone. Three messages from me today. We continue executing on our strategy with results in line with expectations. With active management, the balance sheet is in great shape, and we have good visibility of earnings into FY '26 and beyond. Our first half result is in line with expectations, with operating profit after tax of $236 million or $0.06 per stapled security. We delivered this by executing on key initiatives and are on track to deliver our FY '25 full year guidance. Within the first half result, the Investment segment contributed $302 million, which was down 2% on the prior half due to the impact of asset sales in office and retail. This was offset by completions in industrial and living and in particular, a full 6-month contribution from land lease. The Fund segment contributed $14 million, down $2 million as a result of asset devaluations in funds management and increased CapEx fees in asset management. The Development segment contributed $81 million, down $5 million. Within this, commercial mixed-use was $8 million. This includes contributions from our committed projects, such as 55 Pitt Street, which were partly offset by a construction loss at LIV Anura, with the challenging construction environment in Queensland impacting delivery. Residential contributed $101 million. This includes lower residential sales or settlement, sorry, than the prior period and earnings from capital partnering. Finance costs were flat for the period with lower COGS interest due to fewer residential settlements, offset by increased interest from debt in our co-investment vehicles. We've reported a small statutory profit impacted mainly by devaluations in the office sector, with signs we are nearing an inflection point. So overall, we continue executing on our strategy with these results in line with our expectations. Moving to the balance sheet. We've maintained a highly active approach to managing the balance sheet with asset sales and capital partnering initiatives helping to manage our capital commitments. So far this year, we have refinanced $1.7 billion of debt on favorable terms, completed $340 million of asset sales and our residential capital partnering initiatives raised $1 billion, with $300 million of this received to date. We have good visibility of further funding sources and specifically in the second half had the balance of our asset disposal program, the execution of further capital partnering in our Development division, and in Residential, with 30% of our $1.9 billion presales balance expected to settle in the second half of FY '25. Our balance sheet is in a strong position with headline gearing at 26% on a pro forma basis, following the settlement of 10-20 Bond Street in mid-January, which put gearing well within our 20% to 30% range. We have $1 billion of liquidity and a strong credit rating. The weighted average cost of debt lifted modestly to 5.7%, reflecting a higher proportion of floating rate debt in the period. We're in a good position to benefit from any reduction in the cash rate, with hedging at 58% and a less than 3-year average hedge maturity. So overall, with our active approach to managing capital, the balance sheet is in great shape, providing us with the capacity and flexibility to be ready for future opportunities. Now moving to the visibility of earnings. Campbell outlined, we have improved the quality and visibility of EPS and NAV growth into FY '26 and beyond across all parts of platform. This improved visibility will be delivered through an integrated model and driven by our committed commercial and mixed-use developments, an expected pickup in residential settlements and margin recovery, continued cost discipline and potential interest rate tailwinds. To bring this to life, in the investment segment, we estimate the committed and -- committed commercial and mixed-use development pipeline and our expected share of Badgerys Creek Stage 1 will deliver over $100 million of new stabilized NOI. Investments will also benefit from the delivery of our land lease development pipeline. In commercial mixed-use, we have greater visibility of the value generated from our committed development pipeline with $650 million yet to be realized through development profits and NTA uplift. In funds, we will receive growing fees as we manage our partner share of these assets and then to residential, where we expect to see market recovery and margin returning back to our through-cycle range in FY '26. Underpinning this is a continued focus on costs and potential tailwinds of lower debt costs. This all provides strong visibility of earnings growth into FY '26 and beyond. So in closing, our half year result is in line with our expectation. The balance sheet is in good shape, and we have good visibility of earnings into FY '26 and beyond. Thank you. And with that, I'll hand over to Richard.

Thank you, Courtenay, and good morning, everyone. Our investment portfolio is performing very well. We've delivered strong operating metrics, including positive leasing spreads across all sectors. We've continued to execute on our strategy to increase our weighting to living, logistics and premium office with disposal of further noncore assets and development completions. This will continue to improve the quality of the portfolio, increase underlying cash yields and improve our valuation outlook. Whilst valuations have been a headwind in the last few years, particularly in office, we believe we're now at an inflection point for quality assets which is also improving the outlook for our NTA. And growth is further underpinned by over $100 million of net operating income to come from our committed development pipeline over the next few years. In office, we're turning a corner. It's clear customers want better quality, better located and more sustainable space, and we are leaning into this trend with one of the youngest, most sustainable and highest quality portfolios in the sector. This is enabling us to drive strong operating metrics with great forward leasing progress and attractive leasing spreads of 3.7% which, by the way, would be closer to 5%, including heads of agreement. Valuations fell 4%. However, as mentioned, we believe the devaluation cycle is near the end for quality assets supported by improved transaction volumes, particularly in Sydney. Market data provides further reason for optimism. Effective rental growth and net absorption is improving across most markets for quality assets. For example, net absorption in Sydney in the last year, was the strongest it's been in nearly a decade, and there's an emerging lack of new supply with largely prohibitive economic rents at this point in the cycle. The way we think about our industrial portfolio is we have multiple growth drivers. We're achieving strong NOI growth up 13% with development completions at Aspect and further completion to come at Aspect and Badgerys. We have substantial positive reversion to play for, with portfolio under renting at around 20% and leasing spreads at 33%. And we have a focused exposure to the attractive Sydney market with solid fundamentals backed by continuing capital appetite and excellent proximity to a substantial infrastructure pipeline, including the Western Sydney Airport. You will note on this slide, there's been a slight decline in occupancy. However, this is due to a strategic vacancy at Gow Street, which presents a significant reversion opportunity. In retail, we've been focused on curating a uniquely urban portfolio with strong catchment fundamentals, and you've seen us divest some noncore assets in previous years to reshape the portfolio accordingly. Active management initiatives are driving positive leasing spreads supported by robust sales growth. Record specialty sales productivity and low occupancy cost of 14% also bode well for future rent increases, and we are optimistic about the outlook, supported by real wages and population growth against a backdrop of diminishing new supply. Capital has also identified the resilient outlook for the sector, resulting in a material uplift in transaction volumes and supporting valuation growth in our portfolio. Living is a key competitive advantage for Mirvac, and we have a strategic focus to upweight our investment exposure to the sector. Pleasingly, this half year, we've generated $26 million of EBIT, which is a significant increase on the $2 million achieved in the prior corresponding period. Our established platforms are delivering. In build to rent, leasing at LIV Aston is progressing well, now 66% leased since opening in August with a further 900 apartments to be delivered at LIV Anura and Albert this calendar year. Leasing spreads remained strong at over 4% and valuations are positive. In land lease, progress has been very encouraging. We now have over 7,000 lots under control, a 15% improvement since we secured the acquisition just over a year ago. We achieved an increased average settlement price of 8%, 209 settlements and a 10% increase on re-leasing. And our growth outlook is further supported by the acquisition of 3 new communities, including around 200 lots at our Everleigh MPC site, and we'll be activating 7 new communities in the coming 12 months. Within Living, both build-to-rent and land lease provide enormous potential for scale, and our market leadership position and established platforms provide an excellent foundation for continued momentum and growth. Thank you, and I'll now hand over to Scott.

Thanks, Rich, and good morning, everyone. We have established our funds management platform with the right talent, processes and policies now in place to support our growth. Our third-party capital under management has grown to almost $16 billion with established vehicles across premium office, industrial and the living sectors, all with the line capital partners in place. Our unique and market-leading [ leap PGR ] fund has seen great momentum in the last 6 months. By the end of this year, we will have 2,200 operational apartments across 5 assets and 3 states. We remain committed to our medium-term target of 5,000 apartments and after purposely pausing for a couple of years due to the disruption that we've seen in the construction sector, we're now actively engaged on our next opportunities. With the recent MIT changes and the overall supply-demand imbalance for rental product, international capital interest has been reaffirmed. And domestic capital is now showing interest in our portfolio as it moves towards a stabilized income profile. Now Mirvac Industrial Venture and our partnership with Australian Retirement Trust continues to grow, and is on track to exceed $1 billion with the completion of aspect. We also had strong visibility of future growth opportunities from Mirvac's $2 billion industrial pipeline. In Office, we have recently seen a return of capital interest for well-located premium portfolios that have been appropriately mark-to-market. MWOF is well positioned and we believe we have seen the inflection point for portfolio valuations over the period. Redemptions are on track to be cleared this year. Gearing is one of the lowest in the peer set at 29% and 33 Alfred Street is on track to complete this half with 86% precommitments in place. So with capital interest returning for the highest-quality assets in best locations, we're targeting a capital raise later this year. In closing, our 3 established platforms had clear visibility of a further $2.4 billion of FUM growth as our developments complete and we've got further opportunities identified. We have deep capability in our targeted subsectors, which are supported by strong fundamentals and growing capital demand. Our relationships with our trusted and aligned line capital will continue to free up Mirvac's balance sheet, deliver new earnings streams and generate a higher return on our invested capital. Thank you, and I'll now hand to Stuart.

Thanks, Scott. We've built positive momentum in our Development business, making significant progress across our projects. In the CMU portfolio, the execution on pre-leasing and the introduction of capital partners has substantially derisked our development earnings in the years ahead. As a result, we have clear visibility over the contributors to development earnings and NTA uplift in the coming years, with new NOI and around $650 billion of development value to be unlocked. The Mirvac creation capability remains our competitive advantage, and our major projects are progressing well. At 55 Pitt Street, 35% of the building is pre-leased. We're in advanced discussions on further leasing, and we are completing into a very restricted supply environment. Construction is progressing well, and we expect profits to be realized over the next 3 years, along with revaluation gains on completion. Our seed industrial project adjacent to the new Western Sydney Airport is in advanced discussions with Capital to unlock value with profit contribution expected in the second half. Finally, at Harbourside, the record presales and strong preleasing is attracting deep capital appetite with active discussions underway, with the majority of profit recognition to come on completion in FY '28. While the realized profits from these projects is significant, there are considerable additional benefits of these completed developments, including new quality reoccurring income, funds management streams and NTA uplift. Moving to residential. Our unique offering spanning from inner ring to outer markets, strong brand reputation, a focus on quality and upfront amenity is paying dividends with a significant increase in sales activity. We had a number of successful launches during the period. Unconditional exchanges are up 51% to 947 with a further 361 conditional sales on hand, and leads were up 36% over the period. We had a record launch weekend at our flagship Harbourside project with 143 apartments sold, equating to over $700 million of presales with over 40% of those customers being repeat Mirvac customers. We saw robust MPC sales momentum highlighted by our Sydney middle ring projects at Highforest and Riverlands. As a result of our success, our presales have risen to $1.9 billion this period, the highest level since 2018. We expect a second half skew to settlements with our presold Queensland apartment projects completing in the coming months. Sales at Willoughby have been slower. However, we are seeing improved activity now that the precinct has been completed, retail is trading, and we expect this strong momentum to continue in the second half. As foreshadowed at our FY '24 result, we have a focus on unlocking value and driving higher returns from our residential development pipeline. Consistent with this strategy, we've introduced high-quality partners in Sumitomo and an existing partner across 3 projects, which has unlocked value, driven higher returns and released capital. Gross margins were 19% over the period, but we expect these to be lower in the second half with the settlements of delivery impacted apartment projects in Queensland. We expect these changes to be contained to these projects, which will all be completed in FY '25. We are seeing signs of stabilization in New South Wales and Victorian construction markets with a return to competitive tendering, with pricing coming in at or below budget. Our recent restocking of 8,400 lots last year plus the approval of the conditional acquisition of an additional 1,200 lots in the period will bring our total lots under control to over 28,000 and leave us well placed to benefit from an increase in launches over the next 12 to 18 months. We are encouraged by the strong market fundamentals and improving market outlook. Our improved sales momentum is well supported by a pent-up in demand driven by strong immigration, supportive government policies at all levels of government. We anticipate that this will continue to build momentum and drive sales volumes as buyers benefit from greater certainty over interest rates and the corresponding improved affordability. There are 3 clear emerging drivers underpinning the performance in our Residential business in the coming years. First, a continuation of the rebound in sales across our established projects. Secondly, a direct line of sight to improve margins in FY '26 and beyond. And finally, our business is shovel ready to respond to improving demand with new releases and launches across more fronts than ever before. Thank you, and I'll now hand back to Campbell.

Thanks, Stuart. As we look to the future, we remain laser focused on our financial performance and setting ourselves up for growth. The investment portfolio will benefit from the living, industrial and office assets under construction that will deliver a circa $100 million of recurring NOI in coming years. We're seeing more meaningful contributions from land lease, and we'll be releasing 7 new projects shortly. Our Residential business is showing signs of recovery as volumes return, construction costs stabilize and margins return to their historic averages. Our restock pipeline and ability to sell on more fronts than we have before means we're well prepared to take advantage of a pickup in activity. Capital partnering will continue to be a focus area. The 3 MPC JVs we've announced and successful partnering across living, industrial and mixed use projects clearly shows that Capital wants to align with Mirvac given our strong creation capability. These important partnerships allow us to accelerate our residential release program and receive fees over and above the development returns that we enjoy. And our balance sheet is now well placed to selectively restock the pipeline with opportunities across CMU, with active engagement on new build-to-rent opportunities and almost 10,000 residential lots secured in the past 12 months. The significant construction challenges are largely behind us. We see more favorable outlook for valuations, and we're well positioned to capitalize on our recovery across all parts of our business. We remain on track to deliver on our EPS guidance for FY '25 and feel positive about returning to growth in FY '26 and beyond. With that, I'll now open up for questions. Thank you.

[Operator Instructions] Our first question comes from Tom Bodor from UBS.

Just wanted to ask about the 9 Willoughby project, 62% pre-sold and you expect to get the proceeds from the balance of the apartments in the second half of this year. Just wanted to understand how much capital is in that project and how recent sales rates have been going?

Stuart, do you want to take that?

Yes. Thanks. Look, we've really seen an uptick in sales in the last few weeks. In fact, last weekend alone, we did 5 sales. So we're starting to see the momentum as expected off the back of the project completing, the retail opening and really a recognition from the market of the quality that we've delivered into that market. But also a recognition of the significant undersupply that is now starting to appear, particularly in those infill locations.

So how much capital was in that project, Stuart, that's outstanding?

I think that we probably have around $250 million to $300 million of inventory to sell over the course of the next half.

Okay. And then just on the office one. I'm just trying to reconcile, like-for-like growth was I think 3.1%. Occupancy stable, re-leasing spreads 3.7%, fixed rental reviews also would have been around 3.7%, say. But how do I reconcile that like-for-like?

Richard?

Tom, so the main driver is -- has been the 275 Kent Street vacancy, which we have had in the period. We've had the full impact of handing back of about 16,000 square meters, for which we've leased about half of that, but the lease is yet to commence that -- lease will commence in the second half. So you've seen a full half year contribution from that space. I should mention though that if you exclude 275 Kent Street, then the like-for-like number would be much stronger to be about 5.5%. So it gives you a feel for how the portfolio is otherwise performing. And we've seen really strong leasing momentum continue. So we're very pleased with the outlook that's giving us a really strong foundation and derisking our forward leasing profile, which is very pleasing.

The next question comes from Lauren Berry at Morgan Stanley.

Can I just on 7 Spencer Street. It looks like you've taken a development loss on that project, but there's been nothing going through FFO in the development line. So can you just talk about what happened there? And if that impacts your ability to unlock any CMU projects -- profits in the future, please?

Yes. Thanks, Lauren. So 7 Spencer is progressing well, actually. I think it completes within the next 12 months. And actually, the leasing in the period has been quite positive. So we're now at 16% heads of agreement. You might recall, we bought [ Dudaroo ] into that project in partnership about 18 months go. They're 50% sitting beside us. That allowed us to lock our development earnings in on the NOI spread, but on the part we've retained, sort of our 50% that we will own ongoing. We have taken a revaluation loss in the period. So we sold it down at about [ 4 7 ]. We've revalued it to 6.25 just given where markets are in Melbourne and where that asset sits. And so that's the $33 million loss that you're seeing in that development revaluation gain. But the project is on track to be completed and we've got a rent guarantee in there that runs about 10 months past PC. And so the progress on leasing is really positive, and we'll see what markets look like in 18 months or 2 years' time.

There's no risk that would be turning to a loss in the CMU line as well?

No. So -- no is the answer to that. Sorry, just quickly, no is the answer to that question. Remember, we locked in that profit upfront. The risk -- the 2 things that we have to do to continue to deliver that is deliver on time to cost, which is going according to plan and the lease-up period, which is why I mentioned the rent guarantee. And so we are making progress on the leasing.

Okay. Great. And then my other question is just around build-to-rent. It does sound like you're looking to pick up some new opportunities. Just wondering why the choice to invest in that sector, given that you've been in it for a few years, it's only doing $4 million to $8 million annualized at the moment. I know you're still in ramp up, but that's well under 2% yield on your invested capital at the moment. So can you just talk about why you want to pick up more in that sector, please?

Yes. So I'll take that, Lauren, and thanks for the question. Look, we like this sector for a couple of things. It's really resilient income first and foremost. There's very little CapEx associated with the income streams that we're generating. We're getting good like-on-like growth and have been getting that for a period of time. But the buildup phase has taken not a lot of balance sheet, delivering not a lot of income over the last 3 or 4 years. Once we get through this year, you'll start to see a more meaningful contribution from that business as we move to stabilize income. The bit that we're really pleased with is just where occupancy is sitting in the portfolio, the speed of lease-up at LIV Aston has probably exceeded our expectations and the stabilized portfolio of LIV Munro and LIV Indigo is leased really well. So we think all of the characteristics that we're looking for and good long-term resilient income is there. It's just a matter of getting to scale, and we're not far from that.

The next question comes from Ben Brayshaw at Barrenjoey.

Campbell, just a question on the capital partnering transaction at Highforest with Sumitomo. Has that contributed to development profit for the residential in the first half? Could you just clarify it, please?

Yes. Look, I will and I'll probably hand to Courtenay as well. Yes, all of the JV partnering will help deliver profit into the group. And the way we think about it is kind of twofold. As a developer, we're in the business of creating value, and we can do that in numerous ways. That can be through rezoning of land. It can be through sales, it can be through multiple different avenues, including built form. We still own 50% of these projects. So all we've done is lighten our own capital load to help us deliver these projects. Yes, it does realize some profit upfront. But most importantly, we're still aligned with that capital to keep generating profits for the foreseeable future as we roll out all of those programs. So we just see it as a way of improving the velocity of our capital. It means we can do more with less money. And all of those things help us grow the residential pipeline a little quicker than we otherwise would. Do you want to add to that, Courtenay?

No. I mean the 3 projects we've partnered on, I would just like Mulgoa has probably just given the stage of where those projects are in their life cycle. Mulgoa has probably contributed the most amount to the earnings this year. But as Campbell said, we're focusing on doing it. We've done it before. It's [ Mislan ], and we'll continue to do it just to increase the velocity of the capital.

Yes, terrific. Just on the retail lease expiry profile. It would appear as though that there is quite a bit of space to work through in the second half of this year. Could you just discuss how you're positioned on that? And how confident are you that the [ next ] occupancy can, I guess, continue to hold at levels?

Richard, do you [indiscernible]

Yes. Thanks, Ben. The expiry profile is not too dissimilar to what you've seen in other periods. And once you look through the strategic holdovers leases that are already committed, the true underlying expiry profile is far more modest. It's closer to around 10%. What I would say is we've got very strong occupancy at 98.5%. We've seen strong like-for-like growth. We've highlighted the positive leasing spreads, and we're very encouraged with the leasing activity across the portfolio generally, and that's giving us continued reason for optimism. Average rent reviews have improved materially from about 3.9% of that 4.5%. So we're getting good traction, and we think the broader backdrop is resilient with the outlook of consumption generally.

The next question comes from David Pobucky at Macquarie Group.

Campbell, Courtenay and team, just the first one on resi. It sounds like resi activity is picking up. Sheldon sold [ 685, 9.7 ] plots in the first half. Just curious if you could provide any color on what you've seen this half to date, please?

Stuart, do you want to take that?

Yes. Look, I think that what we have seen is our strategy and our capability really playing out in terms of being able to respond to demand in that middle ring, inner ring in particular. And I suppose the one thing that sets Mirvac apart is that built-form capability where we've got really strong conviction, but also the ability to deliver turnkey solutions right through from inner, middle and outer ring, but in particular, that middle ring where we're delivering housing. At projects like Riverlands and Highforest with housing, both attached and detached anywhere between $1.1 million up to about $2.5 million, and that's probably where in the last half we've seen the deepest demand, the most unsatisfied demand in the market. And we think that will continue to play out, and we're just making sure that we're absolutely shovel ready to respond to that increasing demand as interest rates moderate equally, that premium end of the market, such as what we've seen at Highforest still remains very resilient and demand for that type of product, that high-quality product evident in the very strong sales result we had over the 3-day weekend of that launch.

And just the second one, you touched on cost discipline through the period. Maybe one for Courtenay, if you can just provide a bit of color around what you've been doing, please noting unallocated overhead as well being down $3 million versus the pcp.

Yes. I think the main picture is we're in an inflationary environment and largely costs are flat period-on-period across all of our cost lines. They've only gone up $2 million. We've got a technology program rolling off. We've got businesses growing like build-to-rent. So we're bringing resources on. But overall, we're still focused on trying to keep the cost line flat. And I guess that's why we call out that cost discipline and particularly in an inflationary market, that's hard. We want to reward our people and make sure that that's coming through. And therefore, we've got to make other decisions. And I think we're focused on that, and that's the reference throughout the speech.

The next question comes from Richard Jones of JPMorgan.

Just in relation to the JV sales in resi, you called out that $1 billion in sales will be recognized but $300 million has been received to date. Can you just talk us through the timing of that? And whether all the profit on sale has been recognized?

Yes. Yes. Thanks, Richard. So the $1 billion I referred to is their capital commitment, of which we've received $300 million. So we've executed on the sales. We've recognized all of the upfront profit from the sale of the land into those joint ventures, and ongoing beside our partners will recognize settlement revenue is how to think about it. So the flagging of the $1 billion is about capital management and the fact that our partners will contribute that $1 billion versus us needing to.

Okay. That's clear. Just a question on the earnings trajectory. I understand you're not going to give guidance beyond this year. But I guess the guidance at June was well below where market expectations were for this year. And the market has got a strong earnings recovery factored in with EPS above $0.13 next year and circa $0.15 in FY '27. Just wondering if you can comment whether you're comfortable with these projections? Maybe just leave it with that.

Yes. Look, Richard, we probably, as you understand, probably not going to go into guidance for FY '26 yet. Certainly, there's a bit to play for going through. I guess what we did want to bring to everyone's attention is that we are creating a lot of net operating income in our CMU pipeline, and it's pretty much funded. We are seeing a growth in residential volumes and a return to margins. And the big one is the return to margins. And look, we've been through a pretty tough construction environment. We've made no secret of that over the last 12 months. Now that that's recovering and we're starting to see just more normalized cost excitations, we're seeing deeper pools of subcontractors. We're seeing pricing coming in at our underwrite or even better than our underwrite. We're seeing more stability in the subcontractor market. All of those things are certainly helping us get a much better sense of where we think margins are returning to in resi, and that's important for us. And look, we've got 3 or 4 pretty tough projects that we're finishing which are late, which have had significant cost escalation on the way through. They're coming to the end. And that's pretty much why we've always said that we're ring fencing the challenges that we've had really to this financial year. And so if there's one message we do want you to take away, it is that we have ring-fenced most of that. That will come through in the second half. So you should see that in the margin line as we get into 30 June. We'll talk about '26 thereafter.

The next question comes from Adam [ Calvedy ] at CLSA.

Yes. It's actually James Druce. Just picking up on your comments around residential margins normalizing in FY '26, since I think from a comment in the press as well. Can we just touch on -- a bit more of the conviction that you have around that?

Yes. Stuart, do you want to take that? Adam, I mean, James?

James, look, I think that the conviction we have around that is just -- and the proof is in the sales numbers that we've seen come through in the half. Again, it's that middle ring attached housing product, where obviously strong embedded margins that we've got really good now visibility of sales rates. And the confidence that we have in those projects delivering. But in addition to that, in the greenfield, obviously, we've got some very established projects that in past cycles in that '21-'22, the ability to turn on volume was significant, and we're starting to now be shovel ready to be able to respond to that pent-up demand. So into '26, we're confident in terms of improved market conditions and driving that margin back to that through-cycle margin of 18% to 22%.

Yes. Just on that through-cycle target, I mean, your 10-year average is 24%. It just seems a bit light.

Look, I think the 18% to 22% is reflective of a contribution from both apartments and MPC. We will see higher levels of apartments start to contribute into '26-'27. And then, as I said, we'll see the master planned communities, but probably a higher degree of attached housing contribution in that middle ring, which doesn't have the high gross margin that the greenfield projects has. But importantly, it has a higher profit per lot that will contribute into '26, '27 and '28.

One more, if I may. Can you just touch on what the first half resi margin was ex the partnership profit?

Do you want to take that, Courtenay?

Sure. So 19%, 19.5% overall. I think you can use a 15.5% EBIT margin, you can largely back solve to the contribution from the capital partnering and probably back solve to the answer to your question. I think what's important is there's no change as Stuart just talked about our guidance for resi for the full year. The margin in the second half will be impacted by these projects in Queensland completing. But yes, no change to the guidance we've given.

The next question comes from Suraj Nebhani at Citi.

So quick one on the residential sales. I saw the second quarter sales was obviously pretty strong. You have called out conditional sales as well separately. I just wanted to check, firstly, the contribution from Harbourside to those sales numbers. And what are those conditional sales, please?

Stuart?

Yes, certainly. So just to be very clear, the sales numbers have [ not ] over $900 million for the half, that include around 143 sales from Harbourside, all those 143 sales are unconditional sales. The sales that we refer to as being conditional are just the normal sales that we have in the MPC business, that in many instances are subject to title and finance that we'll see convert over the course of this second half, but also into FY '26.

Understand. And I guess the other question was just, again, first to around construction costs and margins. How are you seeing the construction market at the moment, Stuart?

Look, I think that as we've said for a number of halves, it has been challenging. But in particular, it has been challenging in the Queensland market. And I must call out the Queensland -- the Mirvac Queensland construction team that's done an incredible, magnificent job in navigating record number of insolvencies and getting those projects to completion in the next few weeks. But I think if you look at the projects that we've commenced in the last 6 to 12 months, particularly here in Sydney, at Harbourside, 55 Pitt, 7 Spencer Street in Melbourne, [ Triel ], Prince & Parade and Albertine. Those projects are absolutely flying from a construction perspective, from a programming perspective. We're seeing renewed depth in the subcontractor market, particularly amongst the Tier 1 contractors that want to work for Mirvac. And we're really seeing a stabilization in cost. And as I said in my speech, what we're seeing in the market at the moment when we were out to tender, competitive tendering, multiple tenders competing. And importantly, costs coming in at budget or below budget, which is quite refreshing.

Our last question today comes from Donald Chua at Bank of America.

A couple of questions from me. First on 55 Pitt Street, 35% saying is a little bit soft. Any color on the progress and what you expect in the next couple of quarters?

I'll take that, Donald. So I actually don't think that is a soft outcome, 35% pre-leased. We're still a number of years away from practical completion, so we've got time on our side. We're moving to a market of improving fundamentals in office. I think, as Richard mentioned in his speech, we've had a really significant uptake of space and absorption in Sydney CBD. We've talked for a long time about the difference between well-located, good quality premium grade real estate versus things that aren't that. And we've talked a lot about the really muted supply outlook in Sydney CBD, and this asset plays into all of those thematics. We had some really strong conversations underway at the moment with this asset. So we are optimistic is probably the way I'd describe it. And hopefully, you'll see that convert into deal activity over the coming 12, 18, 24 months.

Understood. And maybe just a follow up on this on office. Would you still be committed to disposal program, especially derating in the office sector, given that of this appears to be turning the corner? Will we be starting to look at more development or redeployment of capital into the sector?

Well, look, I think we've been pretty clear with our view of how we want to spend our own capital. But we do have a very significant funds platform in office as well, and a lot of that fund's capital is attracted to our capability of designing and building quality office assets. And over the last 10 years or so, we've delivered over 10 office assets, which now are the hallmark of our own portfolio, but that capability is very attractive to our funds platform as well. So we still want to play in office. We still are very focused on premium grade. We're very focused on the 2 big capital cities of Sydney and Melbourne. And we're really buoyed by the fact that we're starting to see a return to what I'd call a more normalized environment, which we have struggled with in a post-COVID world. But it certainly feels like we're seeing recovery across the board as working from the office versus home is starting to shift a little bit.

There are no further questions. I'll now hand back to Campbell Hanan for closing remarks.

Right. Well, look, thank you, everyone, for taking time out of your day on Valentine's Day to be with us. So thank you. We look forward to seeing many of you in person in the coming months and certainly the coming days. So thank you for listening.

That concludes today's call. Thank you for joining us. You may now log out.