Mirvac Group (MGR) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Mirvac 2021 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your first speaker today, Mr. Susan Lloyd-Hurwitz, CEO and Managing Director. Please go ahead.

Thank you. Good morning, and welcome to our FY '21 results presentation. I'm joining you from the lands of the Darug people of the Eora nation, and pay my respects to elders past and present right around the country, wherever you are today, locked down or not. As we're working remotely here in Sydney, we've gone with the least risky remote presentation method this morning, good old fashioned phone call and a webcast of the slides. We look forward to meeting with many of you virtually in the coming days and truly look forward to meeting in person next time. With me on the call today are Courtenay Smith, Brett Draffen, Campbell Hanan and Stuart Penklis. We've got a lot to get through, so let's go. Our resolutely urban strategy continues to evolve. It seems clear that trends before COVID have been turbocharged work from anywhere, rapid digitization, online shopping, retailers and experience, demand for logistics space and a focus on sustainability, health and well-being. Citizens have elevated expectations around communities and places. We were well placed before COVID to respond to these trends and are even more so now, aspiring to be a leading creator and curator of extraordinary places and experiences to make life better for millions of people in Australia. ESG is at the heart of everything we do through our This Changes Everything strategy, which we've been running since 2014. We've been heartened by the significant increase in ESG-related meetings with our investors over the past few years and look forward to more engagement. There's obviously way too much here for me to get into today. The summary is we continue to have very ambitious goals, and we are well on our way to meeting them. I'd like to call out a couple of highlights. We have a goal to be net positive carbon by 2030, and we already have achieved an 80% reduction in our carbon footprint. During the year, we launched our second reconciliation action plan including confirmation of our support for the Uluru Statement from the Heart. We also released our first modern flavor report. We were pleased to be ranked third for ESG in property out of a survey of 1,400 companies in the Asia ex China Institutional Investor survey. We drove Mirvac forward with significant momentum over the last year, exceeding earnings guidance positioning us for future growth despite all the challenges, COVID continues to throw at us all as a society and as individuals. Our statutory profit is up 61%, operating cash flow up 41%, DPS up 9%, AUM is up 8%, NTA up 5% and ROIC increased by 200 basis points. We undertook multiple transactions selling $840 million of noncore assets, 22% ahead of book, including Australia's largest hotel transaction. We also facilitated the purchase of 49.9% interest in 200 George Street by line capital partner, which was Australia's largest office transaction for the year. In July, we formed a new partnership to manage a portfolio of Sunsuper's real estate assets and sold a 49% interest in the locomotive workshops to this partner. Our average debt cost reduced to 3.4% and our future development pipeline grew by 18%. We responded to strong residential conditions and increased releases by 117%, achieved our best sales level in over 5 years with sales up 83%, and we comfortably exceeded our settlement target with 2,562 lots settled. But most importantly, throughout all the challenges of constantly changing rules, lockdowns, isolation, mental health challenges and home scoring we have kept our focus on doing our very best to care for our people and our customers. And as you would expect, we've been unwavering in our commitments to sustainability, innovation, safety and diversity. This considerable momentum is set to continue into our 50th year with our risks well managed. I pay tribute to the founders of Mirvac, Bob Hamilton and Henry Pollack, and we look forward to honoring them in our 50th year reflections. As we move into FY '22, you can expect us to continue to execute on our core competencies, creating new high-quality assets, curating those assets through customer experience and management moving our residential business forward and growing our third-party capital under management. We will continue to respond to favorable capital market conditions and recycle noncore assets with capital released being recycled into funding the next wave of value-accretive projects. And most importantly, we have a clear runway for future growth. Our secured pipeline is $28 billion across all sectors of the business. Some of this is going to take some time to play out. But in the near term, we hold $1.2 billion of residential presales and expect to release over 2,700 lots in FY '22, including 7 apartment buildings. Visibility for FY '22 is exceptional, with over 90% of residential EBIT secured and substantial commercial development profit from 80 Ann Street and locomotive workshops locked in. This is all part of our journey. We have shifted from being a predominantly residential developer to demonstrating our award-winning capability as a top-tier commercial developer. And now we are aspiring to be a leading creator and curator of extraordinary urban places. Our asset creation capability delivers full benefits for security holders, development profit, new recurring, high-quality income, asset and fund management fees and valuation uplift. Over the past 6 years, this flywheel has delivered development profit of $368 million, new recurring high-quality income of $113 million per annum. Asset and funds management fees of $30 million per annum and development revaluation gain of $518 million. Before I hand to Courtenay, I'd like to understand -- underscore our commitment to culture. Employee engagement is the single most important predictor of company performance and regular pulse checks over the year confirm that our engagement remains high. And more importantly, we build areas we could work on. We are extremely focused on our people, HSE, diversity, innovation and aspiring to be a force for good even when we don't get it quite right. I'm especially proud that we were ranked #2 globally for gender equity according to Equileap for the second year in a row and that we were named AFR Boss, most innovative company in the property sector also for the second year in a row. But there is so much more that we can do, and we'll keep working on it. Now I'd like to hand to Courtenay to discuss the financial results.

Thanks, Sue, and good morning, everyone. As a relative newcomer, it's clear to me that the people at Mirvac are passionate and truly believe in Mirvac's purpose to reimagine urban life. And I'm particularly impressed by the commitment and dedication of everyone I've met within the business today. I'm excited to have joined the Mirvac team and look forward to being part of Mirvac's continuing success. It's a pleasure today to be delivering these financial results. Today, we reported an operating profit after tax of $550 million, a statutory profit after tax of $901 million, earnings per share of $0.14 and distributions per share of $0.099. As market sentiment and conditions have progressively improved over the last year, the business has built considerable earnings momentum, particularly in the last 6 months with the result being delivered today exceeding the earnings guidance provided in February this year, as well as the upgraded guidance provided in April as part of our Q3 operational update. In addition to this strong earnings outcome, operating cash flows of $635 million are materially higher in FY '21 with growth of 41% and NTA increasing by 5%, overall, delivering a 7.2% return on invested capital. The key performance drivers of this result include in our integrated investment portfolio, better cash collections with reduced rental relief and an increase in operating income, principally from the completion of our newest assets Olderfleet in Melbourne and South Eveleigh in Sydney. We saw an uplift in value of $274 million in our investment portfolio, reflecting the quality of the portfolio. And we finished the year with 100% of our aged arrears covered by our ECL provision. Commercial and mixed-use earnings were driven by development profit recognition relating to Olderfleet, South Eveleigh as well as 80 Ann Street in Brisbane, which is now 81% precommitted and on track to reach practical completion in late FY '22. In residential, we've experienced strong sales and settlements during FY '21 with sales up 83% and settlements of 2,526 lots comfortably exceeding our guidance of greater than 2,200 lots. Our residential gross margins were elevated at 26%, driven by the higher weighting towards higher-margin MPC projects. And whilst we are cautious given the current circumstances with an expectation of markets opening towards the end of this calendar year, we are confident that this momentum will continue into FY '22 and beyond, reflecting the strength of the platform. Moving to the status of our rent collection. We have made good progress through the year with 89% of tenant relief requests resolved. The FY '21 result includes a $20 million negative impact on NOI relating to the resolution of those tenant requests. In FY '20, the total equivalent COVID impact was a negative $48 million. As business conditions improved during the year, cash collection rates improved each quarter with an overall cash collection outcome of 98% of net billings. The impact of COVID has effectively been contained to retail, which represents only 27% of our NOI. And despite the challenges in the retail sector, our cash collections reached 94% of net billings by the end of the year. At 30 June, aged arrears stood at $32 million, mainly in retail and 100% of aged arrears are covered by our ECL provision. And whilst we are monitoring the impact of the latest lockdowns, we believe we are appropriately positioned, benefiting from having a strong track record of managing relationships with our tenants. Turning now to the detail of the FY '21 results. Investment EBIT of $576 million is a 6% growth from the prior year, largely driven by a 5% increase in net operating income following the completion of Olderfleet and South Eveleigh earlier in the year, improved cash collections plus lower COVID relief. The overall development EBIT of $201 million is lower in FY '21 by 32%. Commercial and mixed-use development earnings include contribution from the completion of Olderfleet and South Eveleigh as well as profit recognized on 80 Ann Street. Given they completed earlier in this financial year, contributions from Olderfleet and South Eveleigh are lower in FY '21 compared to FY '20. And in residential, notwithstanding the number of lots settled in FY '21 being similar to FY '20, the earnings contribution in FY '21 is lower due to 82% of what's settled being MPC lots, which have higher margins, but a lower profit contribution compared to FY '20, which was made up of a greater percentage of apartment settlements, which have a higher profit contribution. Unallocated overheads reflect the overheads within the group, which are not directly incurred by or allocated to a business unit. These overheads, whilst increased materially compared -- when compared to FY '20, have actually started to normalize, and this has been driven by 4 factors: Firstly, FY '20 did not include short-term incentive payments with $14 million included in FY '21. Secondly, in FY '20, Mirvac received the benefit of $9 million in JobKeeper payments with no benefit recognized in FY '21, following our decision to repay all JobKeeper payments received in FY '21 in March this year. Thirdly, as was highlighted at the half year, insurance costs across the market have risen materially in FY '21, and Mirvac has not been immune from these increases. And finally, FY '21 includes a $7 million increased expense relating to Software as a Service or SaaS implementation costs due to a change in accounting for these types of costs. Overall, operating profit is 9% lower in FY '21. However, statutory profit has increased by 61%, driven mainly by a $395 million gain in property revaluations across the portfolio made up of $121 million development gain and a net uplift of $274 million across our investment property portfolio. Operating cash flows in FY '21 is strong at $635 million, which represents a 41% increase compared to FY '20, driven by the capitalization of Olderfleet at 477 Collins Street and improved cash collection rates within our investment portfolio. FY '21 distributions are comfortably funded from both operating earnings and adjusted funds from operations, with a 71% and 88% payout ratio on each, respectively. Heading into FY '22 and beyond, we expect future distributions and distribution growth will continue to be funded by recurring passive income as our development pipeline is completed. Mirvac remains in a strong capital position and our capital management strategy continues to focus on diversifying our capital sources, increasing long-term debt and limiting debt expiries in any 1 year. A 6.6 year average debt maturity profile without significant debt maturities until FY '23, support our solid and stable balance sheet position. Gearing of 22.8% remains at the low end of our preferred 20% to 30% range. Our credit rating remains unchanged from A3 Moody's and A- Fitch rating, and we have $867 million in cash and undrawn debt facilities to provide financial headroom and flexibility. So with that, I'll now hand over to Brett.

Thanks, Courtenay, and good morning. Despite the ongoing volatility post-COVID, FY '21 has witnessed a strong year with disciplined allocation of capital against our strategy and excellent momentum into future years. A strategy that leverages our asset creation capabilities to generate strong returns and long-term value focused on the urbanization of key Australian gateway cities. We believe major cities and urban environments will continue to remain Australia's foundation for economic growth, wealth creation and innovation, driven in part by the proximity to deep skilled talent pools and high levels of [ liability ], including the abundance of physical and social infrastructure. Despite the headwinds of COVID, our FY '21 ROIC has increased 200 basis points to 7.2% above our average cost of capital. COVID impacts have largely been isolated to our retail portfolio. And clearly, there has been tailwinds in industrial and residential supporting our diversified portfolio stance. Our integrated investment portfolio has grown on the back of project completions to $12.7 billion with a continued focus on modern, long-WALE, low-CapEx office and accelerating Sydney focused industrial exposure, a committed rollout of our BTR pipeline and a focused urban retail strategy. Within our development activities, our capital base has increased to $2 billion. As we have accelerated deployment to strong residential markets and advance key commercial, industrial and mixed-use projects whilst maintaining a disciplined stance on restocking. With a strong pipeline of new project completions, we have continued to optimize our portfolio allocation strategies with disposals completed or planned for some $600 million of noncore assets across secondary office, retail and hotels with completed transactions secured at an attractive premium to book value. Mirvac has long had a strategy of investing alongside our aligned capital partners, either through joint venture or co-ownership. Over more recent years, we've accelerated our third-party capital strategies to grow external assets under management and recurring funds management earnings. Funds under management have grown at an average of 23% since FY '15. However, more recently, has seen strong acceleration with improved resourcing and capabilities, significant transactions and growing external mandates to match the momentum of opportunities within our business. FY '21 has witnessed some strong outcomes, including securing a new partnership with leading Australian superannuation fund, Sunsuper, which now includes the sale of a 49% interest in the locomotive workshops. And in the largest office transaction this year, we utilized our preemptive rights on the Mirvac developed 200 George Street to secure a 49.9% stake for an aligned capital partner, whilst retaining our existing 50% ownership, which increased in value by 11%. Mirvac secured development pipeline provides a platform to grow the size and quality of our own balance sheet but equally provides future opportunities for our capital partners as we continue to grow our funds under management into FY '22 and beyond. At the half year, we outlined a restructure, which included the creation of a mixed -- commercial and mixed-use development division to better focus on large-scale commercial and mixed-use precincts that shape and define our fusion cities. Importantly, this division does not operate as a silo, fully leveraging Mirvac's sector-leading skill sets, including new business, design, residential, construction, leasing and asset management capabilities. Courtenay has already outlined the EBIT results for FY '21. However, it should be remembered that EBIT is only a partial representation of the true return generated from our asset creation capabilities. EBIT is recognized on the portion of project interest sold to capital partners. However, this measure does not reflect the revaluation gain for the interest retained within our integrated investment portfolio. Combined, the total return achieved in FY '21 is $154 million, representing an improvement of 15% on FY '20. Looking to FY '22. EBIT is expected to significantly increase on the back of the completion and sale of the locomotive workshops which is now settled, and the completion of 80 Anne Street in the second half, again, already derisked with the sale of the 50% interest to M&G. Likewise, the future pipeline includes our well-advanced Sydney industrial projects, 55 Pitt Street and the recent progress at Harbourside, which provides strong momentum to sustain strong earnings into FY '23 and beyond. Mirvac continues to demonstrate its credentials when it comes to large-scale city-defining precincts with the upcoming completion of the last building in their multi-award-winning South Eveleigh. Likewise, we were one of the leaders in the establishment of the Sydney's vision for the circular key precinct in Sydney with the completion of the EY Centre at 200 George Street in 2016. Much activity is now underway to add to this precinct, and it is pleasing to see that our 55 Pitt Street development will add to this precinct, having advanced through the design competition phase. DA is now lodged for demolition of main works and vacant possession notices issued to enable the buildings to be located at the end of this calendar year. Testimony to our development capabilities, our team has secured additional development rights and advanced the design concept to achieve a significant uplift in NOI with the current scheme now reflecting an approximately 50% uplift to the original concepts. We are yet to announce timing for the commencement of construction. However, we will balance the current low occupancy with leasing momentum and the favorable feasibility outcomes associated with the age of ownership, NOI uplift, cap rate compression and capital partner demand that will see this project not only being a valuable addition to the Sydney skyline, but also a significant EBIT and total return contributor for the group. It is worth reflecting on the groundbreaking South Eveleigh precinct, which has created a $1.8 billion collection of assets and again showcase Mirvac's development capabilities to create a low-rise campus-style collaborative workspace and a mixed-use precinct that includes world-class adaptive reuse of heritage buildings and an indigenous partnership for the creation and management of cultural landscapes. The locomotive workshop building is in its final stages and features the creation of a 31,000 square meter ground scraper within the 1880s built heritage-listed former locomotive workshop building. As previously mentioned, we have last week settled the sale of a 49% interest to our capital partner, Sunsuper for approximately $231 million, reflecting a cap rate of 4.7%. Earnings will be fully realized in the first half of '22, again, evidence of the momentum already secured for the balance of the year. Mirvac enters FY '22 with a forward pipeline of development opportunities with an end value of $28 billion. This is the strongest combination of quality projects across multiple asset classes I have personally seeming my time at Mirvac, which combined with our new business opportunities, gives us great confidence that we can continue to deliver strong embedded margins, sustainable earnings and attractive total returns. On that note, I'll hand to Campbell to discuss the integrated investment portfolio.

Thanks, Brett, and good morning. The integrated investment portfolio was created last October as an amalgamation of all the recurring income businesses within Mirvac, including office, retail, industrial and build to rent. The new structure retains our sector specialization. However, the underlying operations have been redesigned into an integrated cross-disciplined service team focused on standardization of process and reporting, a single view of customer and utilization of our scale to procure and service our customers in a more consistent and efficient way. This has delivered immediate benefits to the group, whether it be the centralized team focused on cash collection, the seamless rollout of facility services to our first build-to-rent asset or the cost benefit of removing duplication, which lead to an improvement in our operating costs. The impact of COVID, while significant in the first half recovered dramatically in the second half. The retail portfolio carried almost all of this burden with a $20 million impact from more than 1,200 rent relief requests. The subsequent leasing activity together with significant improvement in cash collection during the second half has helped secure a 5% increase in our NOI over the prior period. I'm particularly proud of our team's ability to drive our cash collection to 98% of billings on a net basis, driven by our retail collections, which finished the year at 94%. This year has really demonstrated the benefit of our office strategy. Modern, long-WALE, low CapEx assets have delivered resilient NOI and capital growth. We continue to enjoy the benefits of our long WALE with expiries limited to a maximum of 8% per annum for the next 3 years. This number will continue to fall as we complete the 80 Ann Street and locomotive workshop developments during the next 12 months. Key highlights for the year include: NOI was up 5% to $366 million led by a 0.2% increase in like-for-like income and the rental contributions from the foundry at South Eveleigh in Sydney and Olderfleet in Melbourne. Occupancy has held up well at 95.5% and remains well above the markets we trade in. Interestingly, 80% of our current vacancy resides in buildings built before the year 2000, demonstrating the resilience of our portfolio in the face of soft market conditions. 55% of the portfolio was externally valued during the year, delivering net gains of $277 million, up 3.8%. Maintenance CapEx remains low at $32 million and our WALE remains high at 6.3 years by income. Leasing activity improved in the second half with approximately 41,500 square meters of deals completed through the year and great progress was made at the locomotive workshop, which is now 97% preleased, up from 72%. And at 80 Ann Street in Brisbane, pre-commitments are now at 81% from 73%, with strong interest in the remaining space. Looking forward, our limited lease expire exposure over the next 3 years will continue to drive our performance as the market deals with the challenges of higher vacancy and higher tenant incentives. Whilst we've been espousing the benefits of a modern office portfolio with long WALE and low CapEx for many years, we're now seeing the financial benefits of this strategy with the Mirvac office portfolio outperforming the Australian office benchmark. These results are endorsement of our strategy, and you should expect to see us continue with the sale of older assets to help fund the next office developments in our substantial pipeline. Our retail businesses leave at a challenging environment with consistent improvements in cash collection, foot traffic and sales over the period. In June, with the exception of our CBD assets, our monthly sales results almost returned to pre-COVID levels. Whilst lockdown post June is likely to impact FY '22 NOI, we have made adequate provisions through the ECL and our forecasting OI assumptions and do take some comfort knowing the sector is capable of rebounding relatively quickly in a post lock down trading environment. Turning to our operational results. NOI was up 11% to $157 million on a PCP basis, demonstrating improving conditions over the course of the year and the recovery in cash collection. Occupancy remained strong at 98% and leasing volumes improved, albeit at lower rental levels. 100% of the retail portfolio has now been externally revalued since COVID, with valuation stabilizing in the second half to be down $12.7 million or 0.4% for the year. Our asset allocation philosophy remains unchanged. We retain our view that high-quality assets in densely located inner urban catchments that deliver bespoke offerings for loyal local communities will outperform in the longer term, albeit we acknowledge the speed of return of office workers, tourists and students will be a key influencer in our performance in the shorter term. We have taken advantage of the convenience-based hyperlocal retail trend by selling Cherrybrook Village for a significant 43% premium to book value. And we will look to dispose another of our convenience-based assets,, Tramsheds, this financial year. Turning to the Industrial business. This asset class continues to be a beneficiary of the economic tailwinds in the form of growing online retail sales, automation and the buildup in inventories. Capital continues to chase this sector with cap rates tightening considerably over the course of the year. Key highlights include NOI was up 4% to $56 million, including like-for-like growth of 4.5%. Occupancy has increased to 100% and WALE increased to 7.4 years. 51% of the portfolio was revalued during the year, delivering significant gains of $137 million, up 13%. We're excited the development pipeline is now progressing from the statutory approval and design phase into the construction phase. Settlement of our infill last mile site in Morgan is due this quarter, construction is imminent and 30% of the 73,000 square meter development opportunity is now secured with tenant agreements. We are very close to securing our development application and Aspect industrial park at Kemps Creek. And pleasingly, we have agreed terms with a 30,000 square meter tenant. We aim to be on site in coming months, [indiscernible] civil works, and we remain encouraged by the growing level of tenant interest with the first building expected to be completed in FY '23. Elizabeth Enterprise Badgerys Creek, has also secured rezoning with DA plans progressing and is likely to commence civil works in calendar year '22. We have also acquired Stage 2 of this site, adding a further 52 hectares of developable area to the 38 hectares decline in Stage 1. With a sizable $2 billion industrial pipeline, there is opportunity to continue to upgrade the balance sheet exposure while undertaking our usual capital partner activities to unlock development profit. Importantly, these development sites were acquired at attractive pricing. So we're confident these developments will deliver strong returns from FY '23. Turning to build-to-rent. We've been operating our first asset, LIV Indigo at Sydney Olympic Park for 10 months. Occupancy has now reached 80% with a relatively consistent monthly let-up rate. The customer proposition remains strong. Our customer surveys tell us that security of tenure, being pet friendly, the high level of amenity, the creation of community and the high level of customer service is of high importance and that our customers are prepared to pay a premium in rent for the experience. The rent premium at LIV Indigo is still in the 15% to 20% range when compared to neighboring properties. 73% of our renters are millennials/Gen Z with approximately 84% in either shared, singles or couples accommodation. This insight has been important for the design of our future projects particularly the mix of 1, 2 and 3 bedroom apartments. On this front, we've made great progress. Our 490 apartment development, LIV Monroe at Queen Victoria markets on the Melbourne Fringe is built to Level 21 and is due for completion in late '22. Our LIV Anura development in Newstead, Brisbane has commenced work on site and is due for completion in early '24. And LIV Aspen in Melbourne CBD has received planning approvals and is due to commence construction early next year. LIV is a new business for Mirvac continues to benefit from our experience in design, construction and site selection in our residential business. And we continue to work together to find opportunities to grow the business to our medium-term target of 5,000 apartments. Post the first rent roll with LIV Indigo at Sydney Olympic Park, which will occur in October this year we will finalize our third-party capital strategy. Whilst we continue to be approached by interested third-party capital partners, we remain resolute improving up the financial performance of this asset class before raising capital. I'll now hand over to Steve Penklis for the residential update.

Thank you, Campbell, and good morning. I'm very pleased to report we completed to 2,526 settlements well ahead of our guidance despite the ongoing challenges of COVID. We've settled a further 200 lots since the end of the year. Off the back of homebuilder and other stimulus, MPC settlements contributed 74% of our FY '21 result and over 80% of our lots settled. At 26%, our gross development margin was well above our through-cycle target. This was driven by a high proportion of MPC settlements as well as the contribution from the sale of development rights to the Victorian state government related to the future Metropolitan Ring Road at our Woodley project. Owner occupier demand for Mirvac's quality product has resulted in a 70% year-on-year reduction in unsold completed apartment stock. We've completed apartments only available at 2 projects across the country. This strong demand also saw us settle the final lots at Marrick & Co, Beachside Leighton, Tullamore Phoenix, Ascot House and at St Leonards Square as well as at Crest at Gledswood Hills in New South Wales. Defaults remained slightly elevated at 2.7% due to the previously disclosed COVID-related settlement challenges at Sydney Olympic Park. Settlements at all other projects have gone well despite the ongoing impacts of COVID. Throughout the year, we received over 20 awards, recognizing our high-quality product and continued focus on design excellence including the prestigious ULI Asia Pacific Award for Excellence for our Marrick & Co project. Owner-occupied demand remained very strong during the year with these purchases making up 80% of all sales and driving an 83% year-on-year increase with 3,375 sales achieved. This demand is well aligned to Mirvac's strategy to develop for the owner-occupier with our focus on quality and attention to every detail continuing to drive demand and customer loyalty. This strong market momentum across all product types has seen our presales balance grow by 25% to $1.2 billion. MPC presales went from strength to strength, growing by over 100% year-on-year as purchases recognize the benefits of our continued commitment to early investment in physical and social infrastructure. Presales will continue to grow during FY '22 with the launch of 7 apartment projects as well as ongoing demand for MPC with many projects selling 12 months in advance. In addition to our significant presales, we are well positioned for FY '22 and '23 with over 600 deposits on hand worth over $225 million. Mirvac's competitive advantage continues to be our diverse product offering, providing purchasers a range of options from greenfield land to touch times through to middle ring terraces and intercity apartments. Our strategy to be shovel ready to respond to demand has paid dividends during the year as we released over 3,300 lots to the market. This was more than double our prior year releases, including an acceleration of over 1,500 MPC lots. Our ability to launch the right product at the right time saw us successfully launched 6 projects during the year as customers sort out our design and build quality that only Mirvac can offer. These launches included 2 new apartment projects, Green Square in Sydney, 50% presold; and Key in Brisbane, now over 70% presold with both projects contributing over $200 million in presales. During the year, we also added over 1,700 lots to our pipeline with the acquisition of an over 55 apartment project in Waverly, New South Wales, an apartment site on Princess Park in Melbourne and the addition of a further 2 land holdings are joining our highly successful Smiths Lane project in the Southwest -- Southeast of Melbourne. The success of this year's apartment project launches demonstrated that well-designed, well-constructed apartments are still very much part of the future canvas of our cities. Nearly 80% of apartment sales were to owner-occupiers who place their confidence and trust in Mirvac to deliver. A clear post-COVID trends has been the high demand for amalgamated and larger apartments. We are consistently seeing our larger and more premium products selling first. Amenity is also taking a new level of focus in our buildings with premium levels of specification and finishes now standard. The growing differential between the established housing market and apartments is seeing prices and many owner occupiers gravitate to apartment living in lieu of standalone homes. Nationally, established house prices have risen by almost 16% in the last 7 months compared to just 8% for apartments, and this is forecast to continue. The average difference between house and apartment prices is now over 50% in Sydney, Melbourne and Brisbane and even higher in areas of our up-and-coming apartment launches. Significant falling supply across the Eastern Seaboard provides Mirvac a unique opportunity to commence projects when many others can't. This puts us in a very strong position to have completed stock available when immigration levels return to normal. These trends give us the confidence to launch up to to 7 projects of over 1,100 apartments during FY '22, including the much anticipated Nine at Willoughby and our third and final apartment building at Tullamore, Forme. This will be our largest apartment release program since FY '16, and customer anticipation for these new projects is strong. These new launches will significantly contribute to Mirvac's presales balance until these projects begin settling in FY '23. FY '22 will again be heavily weighted to MPC settlements with only 2 apartment projects completing during the year. This waiting will also see gross margins remain above our through-cycle target. With 91% of our EBIT for the year now secured and limited settlements in New South Wales, we are confident in our ability to settle greater than 2,500 lots subject to broader extended lockdowns across the country. We anticipate continuing to see a slow return of investors to the market in both MPC and apartments, followed by offshore buyers. Our pipeline remains strong with plans to release over 11,000 lots in the next 5 years, above what we released between FY '16 and FY '20. Our commitment to restocking at the right time, in the right place, on the right terms remains. We are excited to be entering the next phase of the cycle delivering high-quality, well-designed homes to suit the needs of our customers and are confident in our ability to continue to deliver strong results. Thank you, and I'll now hand back to Sue.

Thank you, Stuart. Finally, to guidance. Regarding to EPS of at least $0.15 per staple security, 7.1% growth and DPS of $0.102 or stable security. This is based on our view that with an accelerating vaccine rollout, the introduction of rapid antigen testing, which, for example, we're piloting for the New South Wales government at Green Square this week and potentially a vaccine passport, business conditions will start to normalize again towards the end of calendar '21. We're confident to put out guidance despite the currently exceptionally challenging COVID conditions. And to end, I want to be clear about why. Firstly, international evidence is clear that a high level of vaccination significantly reduces severe health outcomes, allowing economies to open up. Australia's vaccine supply will shortly be plentiful and vaccine willingness is rising. We have seen that economic conditions can rebound swiftly when restrictions ease and that remains the expectation of the RBA. Secondly, we have outstanding visibility of earnings. More than 90% of our expected residential earnings for the year ahead are already secured. And we've also already locked in commercial development earnings from the locomotive workshops and 80 Ann Street. Finally, our modern integrated investment portfolio has very low exposure to small losses tenants, few near-term lease expiries, a long WALE, low CapEx and high-quality growing recurring NOI, including from our newly completed assets. We believe we have risks well covered with appropriate current provisioning, and we have made an allowance for deterioration in conditions in the first half particularly in retail. We look forward to continuing the Mirvac's momentum into FY '22 and beyond. Thank you for spending time with us this morning, and we look forward to speaking with you one-on-one in the coming days. I'll now open up for questions and see if we can successfully mute and unmute ourselves as we share the questions around. Operator, over to you for questions.

[Operator Instructions] Your first question comes from the line of Lauren Berry.

I just wanted to start on your guidance, if I could. You've said on the call that you're expecting a significant increase in development profits you'll have more NOI coming through from those completed office developments. You've obviously got build to ramping up this year and very strong resi margins. It seems like everything is going pretty well in the business apart from perhaps retail. Could you just comment on why I guess your guidance is only 7% in light of all of that? And maybe what any expectations that you have for COVID-related rent relief this year?

I'll start and then Courtenay can join on that question. I think as we were saying, Lauren, we've got very good and clear visibility of the earnings for next year already. So next year, FY '22 is largely about execution. We've never had 90% of resi EBIT secured this time before, and we've got a significant chunk of the commercial profit. Now this is upside to FY '22. It will come from potentially faster resi sales and settlements potentially and maybe less rent release than we are currently forecasting for. But at this stage, and given that Sydney is an indefinite lockdown, I think it would be imprudent to bake those things at this stage. Courtenay, do you like to add to that?

I think your answer has covered it. Just to raise, we have flagged that there are some asset sales on the horizon. So that will obviously have impact on our NOI. But then we're looking forward on rent collection and the timing around our residential settlements just to make sure we have considered that in the way we've positioned guidance.

Okay. Sure. And just on those noncore asset sales, you've highlighted around $600 million in the presentation. Is that about the extent of sales that we should expect this year? And then going forward, are there any other assets you're considering noncore at the moment that you might look to divest?

Hand that one to Brett.

Yes. Thanks, Lauren. Yes. Look, the $600 million number is certainly a figure that is a representation of what's planned for FY '22. I think going further forward, I think what we've always said is that we will continue to optimize our portfolio, particularly as we have the new development projects coming online. So I think some of the probably more older style assets in our portfolio, we'll continue to look at over time. But the $600 million is the figure that you should allow for now.

And what's the average yield on those $600 million of assets that you're selling?

Yes. Look, the average yield will be around sort of 5%. But give or take, but we can get you the exact number, if you like.

Okay. Cool. Just jumping to resi now. So I would be interested to know what the impact of the current lockdown is that you're seeing? Has this impacted sales rates in any way across your projects?

Look, I suppose from a Sydney perspective, we had the 2-week construction pause, which obviously impacted on program, but we are back now up and running. From a sales perspective, amazingly, we have still been successfully able to continue to sell our product in a virtual environment. We do have a number of launches as we -- as I highlighted in my speech over the next 6 months. So we're just working through at the moment, the timing of those launches. But at this point in time, we're being able to navigate around the lockdowns.

Okay. Great. And just last one for me. You've obviously got a huge apartment pipeline coming up, and that's going to make profits look pretty juicy over the next 2 or 3 years. Have you considered capital partnering any of these projects like you did last cycle with a few of your bigger marquee projects?

Look, I think -- and I'm happy for Brett to jump in. But obviously, we will always look at capital and looking -- look at the most efficient way of structuring deals. We are seeing a lot more opportunity at the moment. And with that opportunity, we will certainly consider capital partners coming in on our projects.

Your next question comes from the line of Sholto Maconochie.

Just a follow-on from Lauren's question. Just on the invested capital. I know you sort of have a target. It's up to $2 billion now of the active side. Does that -- obviously, that's going to ramp up when you launch these new apartments and with built to rent without the capital partners there. So it'd be fair to assume you'd bring in some capital partners, obviously, with the build to rent, but potentially in the active pipeline given that may tick up. But I do note your investment portfolio has grown commensurate with that tick up, too. So just keen to sort of hear your views on that.

Brett?

Yes. Look, good question. I think it's fair to say that we -- you've seen the active invested capital increase up to the $2 billion mark, and that's really on the back, as I said in the speech, around some acceleration of deployment. That figure has the ability to move up a little bit more, not significantly in terms of our own balance sheet. But as you rightly mentioned, there is clearly some very good opportunities for aligned capital partners as we go hand in hand, I guess, in deploying our pipeline, both on balance sheet and also with key aligned capital partners. So it's very much going to be across the board, that type of strategy. And it's not just a commercial type strategy in terms of capital partners. You should expect to see that in other asset classes as well.

And we should assume no more than 15% of the total capital in active, give or take. We may exceed that slightly, but that's sort of the max range you sort of target still.

Look, I think on a longer-term run rate basis, I would sort of -- I always go to the 80-20 myself, and it will vary a little bit. It really -- quite a big determinant of it is the timing of the fund through structures in our commercial development activities, the fund through structures are very efficient use of capital, obviously, and so just the timing around those fund-throughs has the ability to change that percentage a little bit.

Yes. And then just on the production, 2,500 lots like given the run rate we're at today and the contracts on hand and the visibility, how much are you constrained by production and settlement in order to get above that? Is it a big item that's giving us selling out 12 months forward? Like you expect you to do -- I know you've only got 2 apartments, but you expect to do at least [ 200 ] more than that given where you're at? Because I think we put a run rate of where your contracts on hand is settling, but I couldn't see that in the presentation. I may have missed it.

Yes. Look, it's really constrained by production at the moment. Obviously, we had a lot of pull forward. We accelerated a lot of projects into '21 in response to significant demand on the ground. And '22 will be dominated by MPC and the constraint really is production in the field.

Okay. Okay. And then just on the new -- thanks for the new disclosure, a bit clearer. But would you expect to have any cost synergies from that integrated investment portfolio? Or is it more operational and decision-making key? Just keen understand that.

I might take that one. There were some savings from the reorganization that have been reflected in FY '21, but they've been offset by some -- the cost of implementing those changes. And then also, we are seeing the cost base normalize generally. STI is now back in the cost base, we're seeing insurance increase. So yes, there has been savings from the restructure and operational efficiencies beyond that, but we're also seeing cost base shift otherwise.

Okay. And then just on the provisioning in retail. Obviously, you expect June cash collection to be strong, which it was, given you pay 1 month up for your rent. But what are you seeing at the moment in a cash -- obviously, you've got a lot of Sydney office and retail and CBD. What are you seeing across the board in rent collection given we're in August now across the asset classes. Can you give a color on that? And what provisioning did you put in? Is there currently in ECLs at 30 June could say maybe a bit light given where we are now?

Sholto, it's Campbell. I might jump in and go ahead. So July has actually been surprisingly good. And I think that, again, a lot of the July invoices were paid. Certainly, it's almost a little early for us to give color on August because a number of our August arrears are not due and payable yet. So certainly, over the next 2 to 3 weeks, we will get a better sense of what that looks like. But we certainly expect it to be more challenged than it was obviously 2 months ago. And we've had -- we've got adequate provision to cater for that.

Okay. So that's being factored into your provisioning. Do I think the provision in 30 June, that doesn't include -- is that at that date? Or is it there's a bit of retrospection you can apply when you do the accounts? Was that factoring in the...

Maybe, Sholto, I can answer that. We do have to take a provision at the 30th of June. So the ECL provision at the 30th of June is $35 million. Our aged arrears at the 30th of June is $32 million. So we are well covered on the age proportion. And we do have allowances in our forward forecast, particularly related to retail is how I would -- how you speak about that.

So in effect that is the guidance into that provisioning for this [ full year ]?

That's right. Yes, yes.

Okay. And then on the apartment launches, you're confident the demand there is still pretty strong given what you've seen in lack of net overseas migration. Is it more upgraded and first home buyers given that big pricing differential. Can you give a bit of color on apartment demand and the demographics?

Yes. Look, I think the 2 most appropriate measures, Green Square here in Sydney and Key in Brisbane. And those apartment launches have been dominated by owner occupiers, but also a significant proportion of rightsizes and obviously, upgrades as you know. So as I said in the speech, Sholto, it's really larger apartments. It's amalgamations, and it's people gravitating towards apartment living in these core locations because house prices in the established market have moved so significantly, and they're seeing the value in apartments.

Your next question comes from the line of Stuart McLean.

First question is just on the payout ratio moving into FY '22, it looks like it's about 71% in '21, but falling to 68% in '22, just looking at guidance, just what's driving that? Is it the outlook for AFFO with the more incentives required? A bit of color on that would be great.

Yes. Stuart, it's Courtenay. You see DPS growth is 3% versus our EPS growth of 7%. That growth in the EPS is coming from active earnings. So we're holding our DPS growth in line with what is prudent and the payout ratio in '22 based on our guidance is around 68%. On AFFO, it's around 84%. So we think that's appropriate, and we'll be focusing on paying out those distributions from recurring earnings.

Okay. And so going forward, we should expect that, that DPS is growing more in line with commercial earnings and kind of stripping out any growth that's coming through in the development book. Is that fair statement?

I think that's -- yes, that's the right way to think about it.

Yes. Okay. Second question, and sorry to hop on about COVID impacting guidance. But do you have a dollar million number that you can provide for what's in FY '22 in terms of those provisions? Is that in line with FY '21, for example, that $20 million mark?

I don't think we want to kind of disclose necessarily what we specifically allowed. I just would say we obviously well provisioned at the end of 30 June, and we do expect to collect even some of those aged arrears, to be honest, but we are well positioned, and we do have appropriate allowance in '22.

And I think I would want to add to that, that as we said, we do expect conditions to be challenging for the first 6 months. But given vaccine rollouts and antigen testing and so forth, and the rapid rebound that we've seen in economies all around the world when restrictions ease when health outcomes become better. I'd argue that the economy will have a significant amount of pent-up demand in the second half of this year. And that's still the context in which you should think about COVID -- current COVID issues.

Okay. My next question is probably for [indiscernible] with regard to the ROIC hurdles, I think you used to talk about 9% ROIC as being a target across the group through the cycle. Does that -- is that target still -- does that still exist in a post COVID world?

Yes. Look, the ROIC we obviously look at is in terms of how, I guess, we see the group's weighted average cost of capital and then how we see the basically roll up of the divisional performances within the business. I think it's fair to say that the 9% is probably going forward is probably high. now, you'd see that come back if you look at where returns are, particularly in the passive side of the portfolio. So I'd probably say that if you think about what growth performance you've seen in passive portfolios and probably not a significant change in expectation around the active portfolios. So that's probably the way to think about it.

Okay. So it's that it's now 7% to 8% kind of in line with where you were this year. Is that an appropriate target going forward?

Yes. Look, we don't specifically quote the group's weighted average cost of capital, but our expectation is that we would exceed the group's weighted average cost of capital.