Mirvac Group (MGR) Earnings Call Transcript

[Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Lloyd-Hurwitz, CEO and Managing Director of Mirvac Group. Thank you.

Good morning, and welcome to Mirvac's First Half '23 Results Presentation. With me today are Courtenay Smith, Campbell Hanan, Scott Mosely and Stuart Penklis. Firstly, I'd like to acknowledge the traditional custodians of the land that we're meeting on today for us. That's the Gadigal people of the Eora Nation, and I pay my respects to elders past and present. There's been a number of changes since our last results with Courtenay taking responsibility for capital allocation, which she's going to present on today. Commercial and mixed-use development has been combined with our residential capabilities under Stuart and Scott has joined Mirvac as a Head of Funds Management, which he'll be presenting on today. We do have a lot to get through, so let's get right on to it. We remain on track for our full year expectations despite challenging conditions, including wet weather, continued inflation, rising interest rates, supply chain challenges and labor shortages. Operating profit of $305 million is up 3% on the prior corresponding period. NTA is stable, and third-party capital is up 75% with the addition of MWOF, which Scott will talk to shortly. Gearing is right in the middle of our range, which Courtenay will address. We've had a very busy half continuing to deliver on our urban asset creation and curation strategy. There's a lot on this slide, let me just call out a few points. Pleasingly, our employees remain highly engaged, and we continue to maintain a like-for-like 0 gender pay gap for 7 years in a row. Our quality, balance sheet investment portfolio and the MWOF portfolio continue to deliver outperformance against their respective benchmarks. Our asset disposal program is progressing well with $445 million of asset sales exchanged or settled and 60 Margaret Street in exclusive due diligence. LIV Munro opened in Melbourne near the Queen Victoria Market. And as of the end of last week, it's 32% leased, which is significantly ahead of our expectations. And we became the first Australian construction company to be awarded a 5 Gold Star iCIRT rating for excellence in construction quality. We're now on to the third generation of This Changes Everything. Continuing our journey during the period, we committed to the science-based targets initiative and published our scope 3 emissions plan, which is to be net positive by 2030. This very ambitious target is increasingly critical for all our stakeholders and will require us to leverage our in-house design and construction capabilities, collaborate with our partners and harness our buying power. There is no doubt that the operating environment in which we're in is challenging. We believe Mirvac is extremely well positioned not only to navigate this part of the cycle, but also to benefit from the upswing that will follow. This resilience relies on our unique integrated capability, effective capital management, our strong culture and engagement and a high-quality investment and residential portfolio, with a consistent track record of outperformance throughout many cycles. I'll now hand to Courtenay to talk through the financials.

Thanks, Sue, and good morning, everyone. Turning to the financial results for the first half of FY '23. Despite elevated uncertainties in the broader operating environment, I'm pleased to announce and report a set of strong financial results for the half. As Sue mentioned, operating profit after tax is at $305 million, representing a 3% increase on the prior corresponding period. The result comprised of a growth in investment EBIT of 24% to $335 million, led by a 3.5% like-for-like growth in NOI, incremental NOI mainly from development completions at 80 Ann Street and Locomotive Workshop, recovery from COVID, mainly driven by our retail assets and growth in assets and funds management EBIT with the commencement of the MWOF mandate and performance fees relating to Switchyards. Offsetting this was a decline in the development EBIT of $68 million. In commercial mixed-use, we sold 34 Waterloo Road Macquarie Park and unlocked significant development value. Our residential -- in our residential business, we settled 807 lots with EBIT of $36 million. Compared to the prior corresponding period, this result was lower due to a function of delays in production due to wet weather, supply chain disruptions and labor shortages. In addition, high settlement volumes and EBIT in the first half of FY '22 were in part driven by the timing of apartment settlements, including at Voyager in Melbourne. During the last 6 months, the RBA tightened monetary policies to curb inflation. And as a result, we saw an increase in our cost of funds. The 10% increase in net financing costs was a result of an increase in the floating rate with our weighted average cost of debt for the 6 months 4.5% compared to 3.4% for the prior period. And higher levels of debt drawn led by development spend and a skew of residential revenues towards the second half. This was partly offset by higher capitalized interest as a result of our development projects underway. Statutory profit for the period was $215 million, a 62% decline versus the prior period. We recorded an unrealized net development revaluation loss of $19 million, driven by a reduction at LIV Albert Fields due to an increase in construction costs related to planning outcomes. This was partly offset by gains at LIV Munro, which reached practical completion in the half. Our investment properties recorded a net revaluation gain of $35 million, driven mainly by increases in industrial assets. And the increase in other nonoperating items in the period related to one-off transaction costs for the transition of the MWOF mandate and selling costs associated with asset sales. Turning now to our capital position. We continue to adopt a disciplined approach towards capital management, which saw us retain our A3 and A minus credit ratings from Moody's and Fitch. These strong credit ratings provide us with access to diverse sources of capital and ensure we have the capacity to fund our development pipeline and capitalize on growth opportunities, particularly during volatile periods, which we have seen over the last 6 months. Gearing to -- increased towards the middle of our 20% to 30% target range, driven by development settlements and spend -- sorry, development spend and the skew of residential settlements to the second half. This is expected to moderate in the second half of FY '23 with the receipt of settlements and disposal proceeds. Liquidity is at $1.2 billion and in line with the stated target, we are 53% hedged. Consistent with our commitment to our ambitious ESG goals, we issued our sustainable finance framework late last year, which sets out how the group will issue and manage sustainable finance instruments. Under this framework, all financing arranged during this period was certified by -- green by the Climate Bonds Initiative, taking the total green debt facilities to $2 billion. We remain focused on improving the quality of our portfolio by exiting noncore assets and investing capital into the creation of our next generation of assets. This will further modernize our investment portfolio, enhance our ESG credentials and meet the changing needs of customers. We will increase our capital allocation to Build to Rent, industrial and modern commercial and mixed-use assets, which we believe will generate superior total returns and our sector supported by strong market fundamentals. As part of the MWOF transition, we also committed $500 million to a co-investment stake in the prime Wholesale Office Fund, which we expect to deploy in the second half. During this half, we made significant progress executing on our $1.3 billion noncore divestment program, including the settlement of Allendale Square in Perth, 189 Gray Street in Brisbane and exchange of contracts on Stanhope Gardens in Sydney. Despite lower transaction volumes in the market, as investors take a cautious approach, we were still able to achieve an aggregate sale price just slightly below book value. As we unlock the value of our development pipeline, we will be disciplined in our approach. By utilizing capital-efficient structures, ensuring relationships with partners who have aligned interest and only proceeding on selective developments where return hurdles are met and market conditions are supportive. Entering this next phase of the cycle, we believe the bifurcation of valuations of prime versus secondary assets will become more evident. Our portfolio strategy of investing in modern, prime quality assets will minimize the impact of potential headwinds. Finally, we will continue to maintain our 80/20 passive active capital allocation target to ensure the group is well positioned to deliver long-term sustainable earnings growth, whilst also having sufficient capital set aside to unlock the value of our development pipeline and deliver high-quality future income. I'll now hand over to Campbell to go through the investment portfolio.

Thanks, Courtenay, and good morning. We've had a busy 6 months, which has included the onboarding of the MWOF portfolio, executing on the sale of noncore assets, progressing the capital raise in BTR and commencing the capital raise in industrial development. Pleasingly, rent collection has recovered. Like-for-like NOI growth has returned in all asset classes. And leasing volumes, particularly in retail, are back to pre-COVID levels. We continue to execute on our portfolio strategy to increase our asset allocation to industrial, Build to Rent and new office developments by disposing of noncore shopping centers and older office assets. The quality of the Mirvac portfolio is really showing through despite this challenging environment. We've continued outperformance in office and industrial, strong leasing progress in BTR and improving retail sales. As you heard from Courtenay, our office business has enjoyed the full NOI benefit of recent development completions of Heritage Lanes at 80 Ann Street, Brisbane and the Locomotive Workshop in South Eveleigh. Combined with strong like-for-like income growth from the balance of the office portfolio these projects have helped deliver a 13% increase in NOI on a PCP basis. As you can see from the chart on the right, our strategy of developing and owning a new CapEx-light portfolio of sustainable prime-grade assets is delivering significant outperformance to benchmark returns over all time horizons. As well as like-for-like growth of 3.5%, occupancy and leasing activity in our office portfolio improved. The modern nature of our portfolio, 84% of which is developed by Mirvac, is also reflected in continued low CapEx, averaging just 24 basis points over the past 4.5 years. Whilst market conditions remain subdued, demand is returning. The flight to quality continues and large tenant pre-leasing interest is growing as the sentiment to return to office improves. Our industrial business continues to perform well, benefiting from strong market conditions as historically low vacancy rates in Sydney of just 0.5% and persistent structural demand drive double-digit rental growth in this market. NOI was up, driven by like-for-like NOI growth, and we completed over 40,000 square meters of leasing deals with spreads of 9%. The strength of industrial assets is reflected in revaluation gains of $41 million as market rental growth more than offset the expansion in cap rates. We continue to make strong progress across our development pipeline with Switchyard, Auburn, now 76% committed and due for completion in the next 6 months. Aspect at Kemps Creek is now 64% committed, and construction is underway with the northern precinct due for completion by the end of this calendar year. These developments, along with elevated expiries over the next 18 months, leave us well placed to benefit from strong leasing conditions. During the period, we purchased the outstanding interest in Switchyard from our JV partner, which has allowed us to benefit from improving rental rates and leasing success. More importantly, it has allowed us to control the capital raise program currently underway to sell down minority stakes now to active developments, which we expect to contribute to development profits this financial year. Turning to our retail business. We continue to enjoy a rebounding conditions over the half. We saw sales rates exceed pre-COVID levels, leasing activity return, cash collection improve and valuations stabilize. NOI was up 38% on PCP, finishing the half at $90 million. Along with improved total sales, which are now ahead of pre-COVID levels, specialty occupancy costs, including CBD have stabilized at 14%, which augurs well for years to come. We exchanged contracts for the sale of Stanhope Village during the period, slightly above book value and will settle at the end of the financial year. This sale aligns with our portfolio strategy of investing in retail in dense interurban catchments, a strategy which is expected to benefit from the recovery in tourists and students already underway. Turning to Build to Rent. We continue to make good progress in this growing asset class and underlying fundamentals across the sector remain compelling. As vacancy rates for capital city's rental stock approaches 1%, rents continue to lift as evidenced at LIV Indigo with 5.9% leasing spreads achieved. With significant demographic tailwinds following the resumption of immigration and the return of international students, combined with the restricted supply backdrop, the outlook for the sector is very positive. Leasing at LIV Indigo at Sydney Olympic Park remains high at 95%, and our second asset, LIV Munro in Melbourne, which completed 490 apartments in mid-November, is already more than 30% leased, well ahead of our expectation. Our future pipeline of LIV Anura, Brisbane and LIV Aston in Melbourne are under construction and scheduled to complete in early and mid-2024, respectively. Our capital raising progress is also well advanced with exclusive due diligence underway with 2 parties. These parties are aligned with our developed to core strategy with growth expectations to develop 5,000 apartments. We anticipate a financial close prior to year-end. I'll now hand over to Scott for an update on funds management.

Thanks, Campbell, and good morning, everyone. It's great to be with you this morning, having joined Mirvac as the Head of Funds Management in November last year. While I've only been here a couple of months, I've been particularly impressed with our highly capable funds management team and the significant work already undertaken in the first half. Our third-party assets under management have grown considerably over the last 8 years to approximately $18 billion. At this point in the market cycle, our funds management capability is particularly important to diversify our source of capital with aligned co-investors and allows us to leverage our scale, accelerate our security -- your development pipeline and improved returns to our stakeholders. The $7.9 billion AMP wholesale office fund has been successfully transitioned onto the Mirvac platform and is now known as the Mirvac Wholesale Office Fund, or MWOF. We are humbled to have been given the opportunity by investors to be the custodians of this high-quality portfolio, which complements Mirvac's on-balance sheet portfolio. Mirvac's asset creation capability, combined with our ongoing asset ownership provides a unique alignment model that produces assets that are designed and capitalized to outperform during the operational phase of their life cycle. This powerful combination is well understood as a point of difference by our prospective capital partners. We expect to see further growth in our funds management platform with our BTR capital partnership program in advanced stages. And as Campbell mentioned, we expect this to complete in the second half. We've also commenced the process to introduce partners across our high-quality industrial pipeline, including Aspect North and our Switchyard project. With an identified $5 billion pipeline of capital partnering opportunities, our funds management business will introduce diversity to our capital sources, providing resilience in our earnings and an ability to partner at different points in the value chain and cycle. Following the successful transition of MWOF, the fund has now been through a quarterly reporting cycle with Mirvac. We have welcomed over 50 talented people to the platform without disruption to the performance of the assets or the reporting rhythm to our investors. The fund continues to lead its peer set over 1, 2, 3 and 5 years and is well positioned to leverage the broader Mirvac asset creation and asset curation skill sets. As previously reported, Mirvac will provide up to $500 million of co-investment into the fund, which together with external capital appetite will place the fund in a strong position to continue to execute on strategy through the cycle. MWOF's modern high-quality portfolio recently enhanced by the completion of [ Cape Water Tower ] here in Sydney is strongly aligned with Mirvac's investment strategy and existing portfolio. I'll now hand over to Stuart to run through development.

Thank you, Scott, and good morning. Our commercial and mixed-use pipeline now represents some $12.5 billion. Against the current backdrop, we are increasingly selective on the deployment of development capital with our committed capital largely centered around Build to Rent and industrial projects. These are progressing well with the successful completion of LIV Munro in November, LIV Aston and LIV Anura, both under construction and LIV Albert Fields expected to commence construction in the second half of FY '23. We also continue to achieve strong preleasing success across our industrial development pipeline. Our Build to Rent and industrial portfolios are a powerful demonstration of the flywheel benefits of our asset creation capability with new high-quality rental income streams being created, reoccurring funds management earnings, potential for development profits and NTA uplift. We continue to demonstrate strong traction across our mixed-use portfolio. At Harbourside, the main works DA was lodged in December, and the project has now achieved vacant position with demolition works underway. At Waterloo Metro Quarter, we expect to commence construction on the southern precinct, consisting of social housing and student accommodation in the first half of this calendar year. Within our office pipeline, the majority of development approvals have been secured with construction commencement subject to pre-leasing. We commenced demolition and civil works at 55 Pitt Street, and we expect to make a decision on the timing of the construction of the main tower in the coming months. Being prudent with our capital in this environment, we have deferred the near-term redevelopment of our assets at 90 Collins Street and 383 La Trobe Street in Melbourne and 75 George Street in Parramatta with a strategy to re-lease in the short term. The ability to adapt to the market and be flexible and selective in our deployment of capital is the strength of the Mirvac integrated model. The combination of this model, together with a diversified sector focus means that we are better placed than most to manage and respond to market pressures while delivering on our quality, financial and ESG commitments. The recent completion of LIV Munro is a great illustration of the value creation capability of our integrated model. Our ability to leverage our group procurement allowed us to manage cost escalation in a challenging environment. And now this operational asset is a key offering of our planned capital partnership platform that Campbell discussed. These purposely designed and constructed Build to Rent development has raised the bar for this asset class, achieving an 8.1 star NABERS rating, the highest in Victoria for a building of this scale and leasing well, supported by strong underlying market fundamentals. Now turning to our residential business. Against the backdrop of inclement weather and COVID-related delays, we settled 807 lots during the first half. Woodlea, Googong, Smiths Lane were the main contributors with MPC projects contributing 93% of lot settlements. We delivered a gross margin of 28% and expect this to normalize by the end of the financial year as apartment settlements commenced at The Langlee and Waverly and 9 in Willoughby. Pleasingly, no defaults were reported during the period. Our full year guidance of more than 2,500 lots remains on track, subject to ongoing impact of weather and labor constraints on our construction programs. Cost pressures are still being felt across our industry. And while we expect that these will moderate in 2023, we anticipate it will take another 6 months before we begin to see normalization completely. While Mirvac is not immune from these pressures, our integrated model, detailed forward planning, scale of operations and track record for delivery continue to leave us a better place to respond to these challenges. Sales activities have moderated from its peak, coming off a period driven by government stimulus and historically low interest rates. The slowdown in sales activity is particularly evident within the first home buyers group, with buyer sentiment impacted by 9 consecutive interest rate rises. Despite this, we remain well positioned with owner-occupiers representing 72% of total presales and customers recognizing Mirvac's strong brand and point of difference. Our strategy to develop for the owner-occupier and a focus on quality and care in every detail continues to drive demand and customer loyalty, demonstrated by presales growing to $1.7 billion in the first half. We expect sales activity to improve in the coming 12 months as we progress our apartment release programs, supported by strong residential fundamentals. While interest rate pressures have impacted customer sentiment and sales, market consensus is that we are nearing the end of the rate hike cycle. Despite the rising interest rates, underlying fundamentals remain strong with the resumption of immigration to pre-COVID levels and unemployment rates at a near time, 50-year low. This, coupled with tight vacancy rates of just 1.1% against the long-term average of 2.2% is driving strong rental growth and demand for more housing. Rental growth across our projects such as Green Square, Marrickville and Harold Park have seen increases of up to 40% from pre-COVID levels. Relative affordability for apartments remains at a near time high, driving a structural shift away from detached homes. Our high-quality, well-located apartment pipeline, strategic investment in upfront amenity and strong balance sheet position us well to capitalize on the next phase of a strengthening market. We continue to progress our release program with a number of projects launched to date, including [ Form at Telemor ], 9 at Willoughby, the Langlee at Waverly and the Fredrick at Green Square. Isle Waterfront and Charlton House in Brisbane also launched in the past 12 months now at 82% and 77% presold, respectively, inclusive of deposits. We have a pipeline of further high-quality, well-located master plan communities and apartment projects ready to launch into a deeply undersupplied market. The fundamentals that support residential demand remains strong, and our customers value the quality of our build, design excellence and delivery certainty. Our robust balance sheet ensures that we're able to maintain a disciplined approach to releases and bring projects to market in response to demand and growing supply constraints, which we expect will deliver significant earnings from FY '24. Residential markets are cyclical, but we remain confident in our ability to continue to differentiate our product, capitalize on market demand for quality as well as the underlying shortage of supply and take advantage of opportunities as they emerge. Thank you, and I'll now hand back to Sue.

Thank you, Stuart. So subject to no material changes in the market or delivery conditions, we're very pleased to confirm FY '23 guidance of operating EPS of at least $0.155, distribution of at least $0.105 and residential settlements of greater than 2,500. And we've outlined on this slide some of the contributors to earnings for the year, including an expectation that the average cost of debt will be around 5% over FY '23. So here we are at the end of my 20th and final Mirvac results presentation. It's been quite a remarkable decade during which we have driven a deep-seated transformation of the company. This team has achieved an incredible amount over 10 years. We've grown EPS by 41%, NTA by 68%. ROIC has been driven upwards from minimal to above our weighted average cost of capital. Our office and industrial portfolios have outperformed the benchmark for the past 10 years, with the office portfolio delivering more than 180 basis points of outperformance over 1, 3, 5 and 15 years. In large part, this is due to our creation of Australia's youngest lowest CapEx, most sustainable portfolio, leveraging our unique integrated model. In 2012, only 1/3 of our portfolio was built by Mirvac. Now that number is approaching 85%. We've delivered 13 award-winning commercial assets over the past 10 years with a value of $6 billion. We've divested $3.3 billion of older style assets, and at the same time, doubled the value of the balance sheet portfolio to $13 billion, and our third-party capital under management has grown 28% per annum to $18 billion. We've delivered 28,000 homes in Australia's major cities in the past 10 years at a value of $15 billion with a further $17.4 billion of residential projects secured. Add to that, our $12.5 billion commercial pipeline, and we have the largest pipeline in Mirvac's history. I have no doubt that this pipeline will continue to gather recognition and awards to add to the 280 awards we've won over the last decade. It's no secret that I'm especially proud that we launched a whole new asset class and Build to Rent to revolutionize the rental experience in Australia. So far, we've delivered 805 apartments with another 1,400 under construction. But most importantly, our customers love the experience of living in a secure home in our purpose-built rental communities. It's also no secret how proud I am of the culture that we've created at Mirvac. 93% of our staff are proud to work here and engagement has risen significantly over the decade. Women in senior management has doubled to 43%. We've had a 0 like-for-like pay gap, 0 to 7 years in a row. We're ranked the #1 best place to work in property, construction and transport by AFR Boss. And the one I'm most proud of, by Equileap as the most gender equitable company in the world. But as wonderful as all those achievements are, they're not what actually matters in the end. What matters is that we found our purpose to reimagine urban life and be a force for good. What matters is that we aspire every day to put that purpose into action, not always perfectly but with genuine intent. I've said many times that people don't come to work to generate EPS. It's not what drives us. We want to belong to something that has purpose, something that has meaning that resonates with our ambition to leave the world a better place than what we found it. And over the past decade, I've seen that purpose come to life. We're not just creating assets of building buildings. We set out to shape people's lived urban experiences. We set out to create more sustainable, more connected and more fluid, more striking urban environments that bring communities together and enhance well-being. And we set out to make a significant difference when it comes to our impact on the planet. When we first launched This Changes Everything back in 2014, there were some who saw us, me as having our head in the clouds, particularly when we set our goal was to be net positive in water, waste and energy by 2030. But we saw it as part of our role to change the game to be conversation starters to help our industry move ahead. And as ambitious as those targets were at the time, we actually achieved net positive scope 1 and scope 2, 9 years ahead of that target. And now we've set even more far reaching targets, including scope 3. We're talking to our customers and suppliers about eliminating every little bit of carbon that we can. And we're looking at how we can improve social connections, create a greater sense of belonging and improve our governance even further. It has been fascinating over that decade to see the increased focus and interest in ESG from investors and indeed customers, once seen as nice to have or window dressing. It's now an integral consideration for you as you make investment decisions and your expectations of us continue to rise. That's a responsibility we take very seriously. I find it hard to express just how privileged I feel to have journeyed with this amazing group of people for 10 years and how proud I am of what we have achieved, but more importantly, how we have gone about achieving it. What's not hard to express is my certainty that Mirvac is in safe hands with the Board, Campbell, the leadership team and all the passionate people of Mirvac. That I'm handing over to an internal successor is testament to the talent in the group. Mirvac has had an unrelenting commitment to quality. And for 50 years, we have not deviated from the high standard of excellence set by our founders. I look forward to watching very proudly from the sidelines how Campbell and the leadership team will drive Mirvac's next evolution. I'm also looking to the next phase of my career and focusing on how I can contribute towards positive change, leveraging all the lessons I've learned during my time at Mirvac. Creating positive change isn't easy, and it isn't someone else's problem. We all have a role to play, and I hope that I can continue to play mine. So all that remains is for me to say thank you from the bottom of my heart for your support, your constructive challenge and your partnership over the past 10 years. And now for the very last time, I get to say let's open up for questions.

[Operator Instructions] First question comes from the line of Sholto Maconochie from Jefferies.

Just on the result. Originally, the guidance had about 45 built commercial properties. I think we flagged a little bit higher at the quarterly update. How -- can you break out that $58 million into the sort of projects that are contributing that you've played on Slide 9?

Sholto, it's Courtenay. The majority of that $58 million has come from our sale of 34 Waterloo Road. There are other contributors from the [ wash up ] of other projects like 80 Ann Street and Locomotive, but the majority of it is from the sell-down of 34 Waterloo Road.

Okay. I think [indiscernible] guidance. If you look at the higher cost of debt, you released $5 million of -- or added back [indiscernible] in retail. Is there any other COVID add backs [indiscernible] in this result?

No, there isn't. And 34 Waterloo Road was considered in our guidance. We've been in conversations around the use of that asset and what we would do with it for some time. We think we flagged the change of view strategy that we were looking at. So it was always considered in guidance. But there's always a lot of moving parts in guidance, and I think that the team has done a great job to execute the sale of that asset. And actually, even in the IIP business will recover some monies that we actually previously had written off, but that's not necessarily material to the half year result, and we don't necessarily expect more of that in the second half.

So that's lower in the second half. And just to guidance, so the cost of debt guidance up about 40 bps. So there's not a bigger -- it is only a slight second half decline about $0.73 on the earnings to get to your guidance. But it seems like that's more resi recovering in the second half because about a 70% skew on settlements, but lower commercial mix use. So it seems with that part of that -- the really thing to say in this result was the commercial profits have been a big contributor.

Yes. The commercial profits have been and contributing in the first half, and I just would flag we do expect them to contribute in the second half. So maybe just sitting back from the whole thing, we are -- we have retained guidance, as Sue said, we expect NOI to be lower in the second half, mainly because of the asset sales and some vacancy and development assets, which we've flagged. Asset and funds management will largely be flat. We will have the MWOF mandate come on for the full 6 months, which will offset the Switchyard performance being recognized in the first half. Commercial and mixed use, we do expect to contribute at least the same amount as it had -- has in the first half, in the second half. And that will come from us bringing in a partner into our industrial pipeline. We've been talking for a little while about extracting value from that pipeline and bringing someone in to help us grow, and we progress that, and both Campbell and Scott have talked to that, and we expect that to contribute in the second half. The remaining disposals will occur towards the second -- the end of the second half of the year, which will bring gearing back down toward the lower end of the range. And then we've got the higher weighted average cost of debt, which we've picked up. In relation to resi, we are expecting still to deliver our greater than 2,500 lots. The only thing I would flag is -- and we did flag at the half and in our guidance. It's very heavily -- quarter 4 skewed. And the contributors from the New South Wales apartments, some of those have deferred into FY '24. So whilst we're on lock guidance, there has been an impact to the earnings contribution from residential. But overall, we expect the development segment to contribute from residential and commercial mixed use.

And then just to finish off on the guidance question on the -- because it just wasn't -- originally it was at 40, you are saying about half of the commercial mixed-use profit, so that's more than double the 40 sort of it was 90 last year. So clearly you have the 90 this year. I guess the composition of guidance has sort of moved around a bit.

Yes. I think that's fair, the composition within the development component of guidance has probably moved around. But I would say that when we put guidance together, there's a lot of moving parts, 34 Waterloo Road was on -- in the mix of that, and we're also considering how we're able to progress the capital partner coming into the industrial pipeline.

And just finally on cash flow questions, a lot of them, but I'll stay with the one-on-one. Cash flow was really weak, like operating cash flow, I know there's timing in development, but with negative $199 million versus $413 million in the PCP. What's driving that cash flow because I know costs are up because you're not selling as much in resi, but -- what's driving that weak cash flow?

The majority of it is development, spending to development and the skew of the residential settlements into the second half. We have flagged MWOF transition cost, which is in that operating cash flow. And then there's a series of other timing differences, which would allay to reconcile from operating profit to a negative cash flow. The majority of it, about $400 million of that net movement is actually in the development spend.

And just on [indiscernible] taking one on resi. It seems too that the resi business, the apartments, the affordable stuff in Brisbane and Green Square are doing pretty well, but it's a bit tougher at the higher end the Willoughby and The Langlee. Is that a fair comment?

Look, I think that -- I will unpack that later in the call, but I will give some color to it. If you look at the projects that continue to trade extremely well off the plan, they are projects where -- they're multistage projects where purchasers can see already completed product in that market by Mirvac. So Green Square, up in Queensland, [ Key ] is a 100% sold, Isle also sitting at 82% sold. It's actually not a cheap product. It's actually owner-occupier large product. And with Willoughby, obviously, sitting at 54% presold, we did very well at launch. We've got an extensive amount of inquiry each week and a long list of prospective purchases. They are all waiting to see completed product. And understandably, many of them are right sizes and want to see and touch completed product, which is not unusual. We've seen that at projects like Harold Park over the years, where until we've got completed product, we don't see those sales rates pick up. But I think importantly, what we're seeing is this undersupply coming through, particularly Eastern Seaboard of apartments, and that's only just got more exacerbated as many developers aren't starting new projects. So we remain extremely confident as we complete these projects into what is a very undersupplied market with enormous rental growth coming through that our projects and the quality of our projects will really resonate with our customers.

[Operator Instructions] Next question comes from Stuart McLean from Macquarie.

First question for me is just back on the commercial development profit. And how do we think about those going forward? Because historically, they've been relatively high quality that comes from [ ADM Street, Calabar ] at Waverly, 477 Collins Street, where [indiscernible] develop the asset, sell it down to a third party and the [ farm ] can stay within the platform. 34 Waterloo Road seems to be a bit more of a trading style profit. Is there anything else in the Mirvac portfolio that we expect to incur trading profit on a go-forward basis?

I'll start with that. We absolutely don't think of it as a trading profit. As Courtenay said, we've been working on a change of use for that asset for some time, and we understand the value in the asset. And when the opportunity emerged that we could create that development profit without taking the risk on the capital, and that seemed to us an exceptionally prudent thing to do and accelerate the receipt of those development profits with much less at risk. So I think you would agree that was a sensible choice to make. And there isn't anything else on in the books which we consider to be of the same nature. And so when we do get to unleash the development pipeline, which is there, the $12.5 billion through pre-commits, we will be -- the earnings will be coming exactly how you've seen them before with development profit, funds management coming through funds management fees, NTA uplift and new income coming into the portfolio. And as we said in the call, there is while still slow decisions in the pre-commitment market, there is an elevated level of inquiry, and we are hopeful that we will be able to secure some pre-commitments to unlock all the value that's sitting in that portfolio very soon.

Maybe a question [indiscernible] on a just on from that. With regards to the sell down to something like Aspect, [indiscernible] with any of those profits also go into FY '24? Or would they mainly just be 2 half '23 commercial development profit?

I do love this interpretation of 2 questions.

Stu, it's Courtenay. Maybe the way to think about it is industrial pipeline is quite large, where we're looking to make sure we can continue to grow and execute on the strategy around industrial. We've progressed Switchyard and Aspect North really well in terms of creating development value and leasing out those assets. The team has done an exceptional job. So they're ready now to bring a partner in, which can help us move forward with the rest of that pipeline. Those transactions are sell-downs into a fund and a vehicle that will then generate -- so generate development earnings, but also add to our funds under management and earnings from that part of the business going forward. But because we're selling those assets into the fund, there's a profit on sale that gets crystallized at that point. But we will continue to execute those sell-downs across that industrial pipeline with Aspect South and then into Badgerys Creek at the right time, and we've created the right amount of value. So that pipeline will contribute earnings into FY '24 and potentially beyond on that basis. And it is different to the way we've recognized earnings on something like an 80 Ann Street or other projects before because those projects are funded through arrangements, and we recognize earnings on a percent complete largely, whereas what we're doing here with Switchyard and Aspect North that we're looking at is actually selling those assets into the funds. So it does crystallize profit on sell-down.

And second question, and one for Courtenay as well. Just how large was that performance fee from Switchyard that was [indiscernible] in the period as well?

It wasn't that large. The movement in that line is about $13 million. Just over half of it was a Switchyard performance fee and the balance was the MWOF mandate fees coming online.

The next question comes from the line of Ben Brayshaw from Barrenjoey.

So echoing earlier comments, congratulations on your tenure and all the best for the future. My first question is in relation to invested capital within development. Could yourself or Courtenay, please just discuss the key drivers of the increase in active invested capital for this period, in particular, commercial and mixed use. And as part of that, your expectations for active invested capital for the second half of this financial year?

Yes, it's largely coming from development spend on the commercial mixed-use pipeline that we've been progressing to make sure that we're ready for the moment when pre-commitments come into the market. So it's largely related to that. But we expect the overall proportion of invested capital, as Courtenay said, to remain stable with our 80/20 rule in the business.

And just to maybe add to what Sue said. So you look at the inventory, which is effectively where the invested capital comes from. There is just under $500 million of what was [ Park ] that's been moved into inventory in the period, which is getting ready for those assets to then sell down, which is in the normal course of what we would do. So the net increase in capital is what Sue talked about in terms of residential, but there's movements in the component parts, which is why you're seeing an increase in that active capital beyond that investment of resi.

And secondly, on the residential gross margin, to what extent can the increase for this period be explained by the mix shift towards MPC? Or were there other onetime factors that have contributed to the increase in the margin?

No, it's entirely related to the composition that is well over 90% contributed by MPC in the period, and they always are lower contributors from a dollar amount, but higher contributors from a percentage amount. And as Stuart said in his remarks, we expect that to normalize during the second half, when we start the settlements at Langlee and 9.

Next question, we have the line from James Druce from CLSA.

I don't want to sound like a broken record, but congratulations on doing such a wonderful job over the past decade. My first question is just on 55 Pitt Street just sort of the decision tree, going forward. Does that remain a bit of a hole in the ground until you get a pre-lease and you always get asked about what the minimum sort of amount is. But yes, will you require 3 or 4 leases, do you think to get that going, given that there aren't a lot of large tenants in the market at the moment?

The first thing I'll say is that it is an exceptional project in all regards, both financially will be an exceptional project and from a sustainability point of view and from attraction to customers' point of view. We're very excited about everything that we can deliver from that project. We did make the decision to demolish the existing buildings, as you say, dig a hole in the ground and bring it back up to street level so that we would be ready, as I said, for the moment, when there was a pre-commit in the market, and we are in discussions with a number of tenants around a pre-commit. And we will -- I think I've said consistently that we will not give you a number as to what the level of pre-commitment would be. It is a large building with a lot -- as Campbell would say, to play for. And so the pre-commitment I would expect will be under 50%, but we won't give any detail on what we think that right number is. That's something that we consider as a Board when that time comes. But we are in active discussions with a number of tenants with respect to the offering that we can make there.

And does that include sort of Mirvac's ability to pre-commit as well? Or is that still just something that sits out in the background?

Well, last I checked we're at 200 George Street, so we'll leave it there.

And then second question is just a bit of a boring question, but the capitalized interest number has doubled on PCP. The interest expense in COGS is 1/3 of what it was. So it's been a clear benefit for this period, and we sort of know the reasons why. But I just wanted to understand how that will look for the full year. Do you think those 2 items will marry up again as they have in previous halves and full year results, sorry?

It's not a boring question, James. Interest is important. At the interest line, we flagged a 5% weighted average cost of debt for the period. So I think the interest line will go up. But obviously, the capitalized interest will move around when we recognize residential settlements. So we'll continue to capitalize that interest to projects that are underway, but we do expect, given the skill of the residential settlements to the second half, that -- quite a bit of that capitalized interest will clear up.

So would there be much of a mismatch but on a full year number between those 2 items?

Maybe we can pick it up with you offline and then go through it in a bit of detail if that helps.

Next question is from the line of Richard Jones of JPMorgan.