Mirvac Group (MGR) Earnings Call Transcript

Good morning, and thank you for joining us for Mirvac's interim results presentation for FY 2024. Here with me today are Courtenay Smith, Richard Seddon, Scott Mosely and Stu Penklis. I'd like to begin by acknowledging the traditional custodians of the land on which we meet. For us, it's the Gadigal people of the Eora Nation, and I pay my respects to elders past and present. It's been almost a year since we announced our new business structure, and it's been great to see momentum continuing across our divisions, along with efficiencies in capital and resourcing being realized. In April last year, we outlined our key strategic objectives: ensuring balance sheet flexibility, expanding our funds management, increasing our investment portfolio resilience, leveraging our development capability and maintaining our focus on ESG and culture. I'm pleased to say we've made excellent progress in executing on these over the past 6 months, and I'm extremely proud of what our team has delivered. Notably, we sold $480 million of noncore assets, strengthening both our balance sheet and the quality of our investment portfolio. And subsequent to year-end, we agreed revised terms for the sale of 367 Collins Street in Melbourne. We expanded our relationship with Australian Retirement Trust with Aspect North now settled into the Mirvac Industrial Venture. We maintained high occupancy across our investment portfolio, underpinned by a strong period of leasing activity, including the forward leasing of several major upcoming office lease expiries, and we grew our industrial exposure through the completion of Switchyard, delivering quality, recurring income to the group. We also achieved strong leasing success at our build-to-rent asset LIV Munro, and maintained high occupancy at LIV Indigo. We committed to acquiring an interest in the Serenitas platform, immediately increasing our exposure to the land lease sector with one of Australia's leading operators, and I'll talk more about the living sectors in a moment. And we have set our long-term asset allocation targets, which Courtenay will share with you in her update. Leveraging our in-house creation capabilities continues to be a key focus, helping us to prudently manage our capital and utilize our resources more efficiently across the business. We made good leasing progress at our development projects, including at 55 Pitt Street in Sydney, where we now have Heads of Agreement for around 27% of net level area. We settled 1,131 residential lots, including first settlements at high-value apartment projects such as Green Square, Nine at Willoughby and The Langlee all here in Sydney. And it's great to see sales and settlement activity start to improve. We restocked our residential pipeline on capital-efficient terms, positioning us well for the next cycle. We're also actively in discussions on a number of residential joint venture partnerships, and we progressed on our sustainability initiatives with the continued electrification of our assets. Our business is in a good position. We have $1.5 billion of pre-sales on hand, product on the ground, ready to meet increasing demand, a modern, high-quality investment portfolio, a strong focus on managing our costs and positive momentum in our funds business. Our financial results for the first half were driven by higher interest rates, elevated pressures in construction and cautious sentiment in the residential market. Our operating profit after tax of $252 million represents $0.064 per stapled security, and we paid distributions of $0.045 per stapled security, representing a payout ratio of 70%. Continued cap rate expansion impacted our investment assets with asset devaluations of $396 million. This resulted in a 3% reduction in our NTA to $2.56. In the current environment, our integrated model positions us well to deliver high value to our partners and securityholders. The 14 new assets we've delivered across industrial, build-to-rent and office have created approximately $1.4 billion of value and $150 million of new NOI for our securityholders. We now have a modern, sustainable, low CapEx diversified investment portfolio, which has maintained high occupancy of 97% and has delivered over 200 basis points of outperformance over the past 10 years. This is further underpinned by our 50-year track record of delivering residential product for our customer with a deep forward-looking pipeline and a high level of repeat purchases. This integrated platform and capability remains a key competitive advantage. We have a strong focus on the living sectors, where we can leverage our reputation for quality and certainty of delivery across a broad spectrum and housing typologies, including land, detached homes, terraces, mid-rise and high-rise apartments and more recently through our build-to-rent portfolio. This depth of capability means we're well placed to benefit from the structural tailwinds supporting the broader living sector in Australia, including a growing population, boosted by immigration and a chronic undersupply of housing. Our 47.5% acquisition of the Serenitas platform during the first half further expands our customer offering to deliver quality product to over 55-year olds at a lower price point. Alongside build-to-rent, we are now exposed to a growing cohort of renters amid housing affordability challenges in Australia. While the Serenitas transaction is not typical for Mirvac, our investment allows us to fast track our exposure to the land lease sector and gives us scale with an established and experienced operator along with recurring income and development opportunities to further grow our exposure in a capital-light manner. We have a pathway to 100% ownership in the future. Our internal design construction procurement capabilities provide us with a unique advantage in pursuing our Scope 1, 2 and 3 emissions targets by 2030. We have continued to progress the electrification of our assets with 2 assets retrofitted to date and an ambition to roll this out across our MPT portfolio by 2030. Our newly created all-electric Heritage Lanes office building in Brisbane received Australia's first 6 Star Green Star rating, while our first new distribution center at Aspect in Kemps Creek is on track to be our first carbon-neutral industrial asset for embodied carbon. We're also working closely with suppliers to find innovative solutions to lower our carbon footprint and deliver savings as well as implementing modular construction into our product design. Our strong focus on the environmental performance, good governance and our people will ensure we continue to maintain our social license to operate into the future. I'll now hand over to Courtenay to run through our financial results in more detail.

Thanks, Campbell, and good morning, everyone. Turning to the financial results for the first half of FY '24. We've delivered a solid set of results over the first half with an operating profit after tax of $252 million. Our operating result comprised of a slight decline in investment EBIT of 3% to $309 million, led by the impact of lost income from noncore asset disposals and reduced retail NOI from Toombul. This was offset by 2.2% like-for-like NOI growth, contribution from our co-investment stake in MWOF and new NOI from Switchyard, which reached final practical completion during the period. Funds EBIT, which includes funds and asset management, improved by $1 million to $16 million due to a full 6 months contribution from our new funds on the platform across MIV, MWOF and LIV build-to-rent, which was offset by the absence of a performance fee recorded in the first half of '23. Development EBIT was down $8 million to $86 million. Within this result, commercial and mixed use EBIT included profit on Switchyards's and 7 Spencer Street and development fees and construction margin on our build-to-rent pipeline projects. The lower half year result for commercial and mixed use also reflects the higher profit earned from the sell-down of 34 Waterloo Road in the first half of '23. Our Residential business saw an improvement on the first half '23 due to increased volumes and contributions from high-value apartment settlements across 9 Green Square and The Langlee in Sydney. Unallocated overheads were down $3 million as a result of cost-saving initiatives implemented in the first half and a timing skew in the spend to the second half. Our net financing costs increased $41 million over the prior period, driven by a higher weighted average cost of debt at 5.4% this half versus 4.5% in the first half of '23, a higher average debt balance in the period and the inclusion of our net interest expense from MWOF and build-to-rent. Turning to our statutory results. This included the impact of revaluation loss on our investment portfolio, predominantly led by capitalization rate expansion in the office portfolio. Turning to the balance sheet. We continue to adopt a disciplined approach towards capital management. Gearing at December was within our target range of 20% to 30% at 27.2%. We expect this to remain steady over the second half with inflows expected from noncore asset sales, progressing settlement of our $1.5 billion residential pre-sales and capital partnering initiatives on our development projects. And these will be offset by outflows for the investment into Serenitas and progression on selective residential and commercial projects. An important part of our balance sheet management is our $1.2 billion of noncore asset sales. During the 6 months, we completed approximately $480 million of sales with the settlement of 60 Margaret Street and the exchange contract on 383 La Trobe Street in Melbourne. 367 Collins Street, we had an exchange contract, which was subject to capital being raised. That condition has not been met and we have terminated that contract. However, we have agreed terms with another party who is in due diligence, and we are targeting close and settlement toward the end of the financial year. The balance of the $1.2 billion is progressing, and we will provide updates at the appropriate time. And finally, on the balance sheet, we retain our A3 and A- credit ratings from Moody's and Fitch and hold significant headroom against key debt covenants. We have $1.1 billion of liquidity, no remaining maturities in FY '24, while our average borrowing cost at 5.5% at December, which is in line with the market. Moving to portfolio management and capital allocation. We manage the business within a clearly defined portfolio framework to optimize returns to securityholders. The framework is made up of four components: Firstly, capital allocation, which is determined by our medium- to long-term outlook across sectors; secondly, earnings with a focus on maintaining higher contribution from recurring investment income; thirdly, returns, which are set with reference to our cost of capital and adjusted for risk based on macro and sector outlooks; and finally, capital structure, including our gearing target credit rating and payout ratio. So focusing on capital allocation in a little more detail. We have a capital allocation strategy of greater than 70% to investment and less than 20% to development, which we believe provides a balance between delivering secure recurring income, whilst being able to support our value-creating development activities. Within the investment portfolio, we have set more explicit long-term targets to drive cash flow resilience, stronger growth and maintain the right level of income diversity over time. We will continue to tighten the focus of our office portfolio to Premium CBD assets, where we see the best growth outlook targeting a lower portfolio exposure over time of around 40%, supported by progressing our noncore asset sales and being more selective on future investments. We are focused on increasing our exposure to both industrial and living, given favorable long-term structural tailwinds in these sectors. With industrial, we have a target to increase our weighting from 14% to around 20% over time, which we will meet through the delivery of our secured industrial pipeline. With living, which includes build-to-rent and land lease, we have a target to increase our weighting from 3% to around 25%. This transition will be supported by delivering our existing build-to-rent development pipeline and the completion of our Serenitas acquisition and the subsequent growth of both platforms. Our retail exposure is expected to be around 15% over the long term, maintaining an urban focus. Moving to development. The majority of development capital continue to be allocated to our residential pipeline with selective restocking on capital-efficient terms as opportunities arise. We will continue to utilize third-party capital where we can to unlock additional value and accelerate releases across the residential portfolio, which we are making good progress on. Commercial and mixed use capital will be allocated more towards living and industrial to align with our investment portfolio targets. This is illustrated in the $2.8 billion of office developments canceled or deferred over the last 12 months. We believe these long-term allocation targets and recent progress towards these goals will set the business up for a stronger performance over time. Thank you, and I'll now hand over to Richard.

Thank you, Courtenay, and good morning, everyone. Our high-quality investment portfolio continued to perform well over the first half, and we're making strong progress to improve cash flow resilience and upgrade our exposure to the living sectors, industrial and high-quality offers. Our prime modern and sustainable office portfolio demonstrated strong performance with solid NOI for the half, robust like-for-like growth of 2% and occupancy at 95%. Following the sale of our 60 Margaret Street in Sydney, the portfolio is now 46% Premium-grade, a 16% improvement since 2019 with an average age of just 9 years. We've had an exceptional period of leasing, which was up 47% on pcp at 36,000 square meters with long average terms of 6.5 years and positive leasing spreads. We've also secured an additional 32,500 square meters under Heads of Agreement, which will further reduce our forward expiry profile from 11% to just 5% over the next 18 months. The office portfolio has delivered continued outperformance of benchmark returns despite net valuations being down 4.7%. Strong leasing activity is reaffirming the important role offices play with tenants attracted to high-quality, well-located buildings. This is illustrated by vacancy for younger assets, almost half that of older assets, while the future supply outlook is restricted in our key markets. We will continue to upweight the quality of our portfolio to capitalize on this trend. Within our logistics portfolio, NOI was up 14%, benefiting from the completion of Switchyard in Auburn with positive re-leasing spreads of 13% and robust occupancy at 99%. Like-for-like growth was impacted by some vacancy during the period, however, will benefit from positive re-leasing spreads already secured, and the portfolio is now approximately 17% under rented. Future NOI will benefit from our $2.5 billion industrial development pipeline strategically located near the new Western Sydney Airport expected to open in 2026 with the first building at Aspect completing in January this year. Valuations were down slightly by 2.6% with a 50 basis point expansion to 5.1%, and this was partially offset by solid rental growth. Occupier demand for quality, well-located assets remains robust, particularly in Sydney, where vacancy remains sub 1%, the tightest in Australia and the supply outlook is constrained. We'll continue to expand our exposure to industrial through our development pipeline. Turning to our urban retail portfolio, which achieved positive like-for-like growth of 3.2%, supported by improved occupancy of 98%. Moving annual turnover sales growth remained positive at 3.2% with robust leasing volumes across 38,000 square meters. Pleasingly, valuations were up 1.3% despite a softening in cap rates by 6 basis points to 5.65% supported by robust income growth and improved turnover rent. Following the sale of MetCentre, our CBD retail exposure is now just 3% of the portfolio. Whilst retail sales growth is expected to slow, Mirvac's uniquely urban retail portfolio is supported by strong catchment population growth, the return of tourists and students, a more affluent consumer base with salaries 25% higher than the national average and modest occupancy costs of 14%. Our build-to-rent portfolio continues to perform well with high occupancy maintained at LIV Indigo in Sydney, 10% leasing spreads and an average downtime of just 25 days. LIV Munro in Melbourne is now 92% leased and on track for stabilization over the coming months. We have over 800 apartments under management and a 7-year track record, allowing us to leverage valuable insights into our next generation of buildings. This includes 3 developments comprising a further 1,350 apartments completing over the next 18 months, starting with LIV Aston in the second half. BTR's modest penetration in Australia, coupled with strong market fundamentals is expected to provide significant opportunities for growth over time. Our acquisition of the Serenitas platform, which we announced in October last year provides us with an accelerated exposure to the highly attractive land lease sector with a portfolio of over 6,200 sites, including over 4,300 operational sites and a development pipeline of over 1,890 sites, 98% of which are DA approved. We're excited about the organic growth opportunities in this fragmented emerging sector and the resilient cash flows as stabilized portfolio will generate over time, boosted by development earnings from new home sales in the development pipeline. Land lease sector fundamentals remain robust with strong over 55s population growth, low market penetration of around 2%, CPI-plus indexation rent reviews, low cash flow leakage and no downtime. The acquisition is on track to complete this quarter and is already demonstrating strong trading momentum. I'll now hand over to Scott Mosely for an update on funds management.

Thanks, Rich, and good morning, everyone. Over the past 18 months, we have attracted over $8.8 billion of new fund inflows from our capital partners, co-investing alongside them under our unique alignment model in sectors where we have deep expertise. The new corporate structure we implemented last financial year has resonated well with our existing and our potential capital partners as we expand our offering into new product types and sectors with aligned growth-minded partners under market-leading governance. During the half, we continued to invest in our people and our systems to position us for further expansion where we can create aligned value for our investors and our security holders. We have $16.4 billion of third-party capital under management, which reflects some softening in asset valuations and asset sales in managed vehicles, where we are focused on capital management and maintaining strong balance sheets. Over the half, we have continued to grow our recently launched vehicles with a focus on the industrial, living and office sectors. Our Mirvac Industrial Venture with Australian Retirement Trust expanded with the acquisition of Aspect North in Kemps Creek, and we expect to see further growth in our industrial partnerships as our $2.2 billion development pipeline completes. In our living sector, we continue to develop the remainder of our secured $1.8 billion BTR pipeline, topping out at LIV Aston in Melbourne, and we remain on track to deliver 2,200 apartments by calendar year 2025. We are also assessing further BTR opportunities across our Eastern states as we move towards our goal of 5,000 lots in the medium term. In office, our Mirvac Wholesale Office Fund continues to outperform over 2, 3, 5 and 7 years. During the half, there was strong leasing success across the portfolio with approximately 55,000 square meters of space either leased or under Heads of Agreement, reflecting the quality and the premium locations of the portfolio. Gearing remains low at 22.6%, reflecting our focus on prudent capital management. Our partnership with Daibiru also remains on track as the development at 7 Spencer Street progresses. Institutional capital whilst being disciplined and selective continues to deploy capital for the right product with the right aligned partners, and we are progressing discussions with capital partners on 55 Pitt Street and Harbourside. We are also seeing strong interest in the living sector, including residential, where we have a deep pipeline and the ability to deliver into an undersupplied market, and we continue to progress opportunities to expand our capital relationships in these areas. I'll now hand over to Stu to run through development.

Thank you, Scott, and good morning. Mirvac's integrated development model continues to be a key competitive advantage, providing diversity and resilience of earnings through the cycles and driving efficient capital allocation and skill utilization across the business. We are renowned for our quality and our reputation as a trusted developer independently recognized by our industry-leading 5 Star iCIRT rating. Our integrated model provides us with the ability to respond to the market and be selective in our deployment of capital as demonstrated by the $2.8 billion of office developments with either sold or put on hold. Our diversified residential business has been a significant contributor of earnings over time, and we are well positioned to capitalize on the critical undersupply of residential housing in Australia in the coming years. We are focused on leveraging capital partnerships and securing new opportunities on capital efficient terms to unlock embedded value across our pipeline. Our commercial and mixed-use development pipeline currently represents some $11.2 billion. We continue to focus on our committed capital on sectors supported by strong market fundamentals and sites where we have a competitive advantage. Our Harbourside development is gaining traction, securing a Heads of Agreement for over 4,000 square meters of commercial space, and we are targeting a residential launch later this calendar year. We are also progressing our $1.2 billion build-to-rent development pipeline with three developments currently in delivery. LIV Aston in Melbourne is expected to complete in June this year with the completion of LIV Anura in Brisbane, a partnership project with the Queensland government that will deliver 25% of apartments for key workers expected to complete later this calendar year. Our 55 Pitt Street Sydney office development achieved further preleasing success in the period with the 63,000 square meter building, now almost 30% preleased. Civil works have been completed and early structural works continue to progress. Capital partnering discussions for this project are also underway. We've seen positive momentum in our industrial development pipeline with Switchyards in Sydney reaching final practical completion during the period. At Aspect Industrial Estate in Kemps Creek, we have completed our first warehouse, which is expected to be our first carbon neutral development, welcoming CEVA Logistics into the estate. Continued strong customer demand in the market with very low vacancy supports the rollout of our Sydney pipeline, which includes the balance of Aspect and Elisabeth Enterprise precinct at Badgerys Creek. These well-located projects were secured early on attractive terms. And as Richard mentioned, will significantly benefit from the completion of the new Western Sydney airport in 2026. Moving to residential. Despite continued market headwinds, we achieved 1,131 settlements during the period, including first settlements across our apartment projects in Sydney, Nine Willoughby, The Langlee and The Frederick at Green Square. This positive momentum has continued in the second half with an additional 170 settlements to date. Our MPC projects, including Smiths Lane, Woodlea and Olivine in Melbourne, Everleigh in Brisbane and Henley Brook in Perth also made a material contribution to first half settlements. As noted at the full year, the higher weighting towards built form settlements in the second half led to a lower gross margin, but a higher EBIT per lot as we continue to experience the impact of inclement weather and subcontractor insolvencies. This resulted in a lower than typical gross margin of circa 17%. We expect this to continue through the balance of the year as we trade through our apartment projects here in Sydney. While sales activity remains subdued in the first half, we continue to see strong inquiry across our projects, reflecting underlying demand and the lack of new stock. Sales have been led by upgraders and rightsizers who are attracted to our track record of delivery, the quality of our product and upfront amenity. Charlton House and Waterfront Isle in Brisbane and Green Square in Sydney are all over 90% presold and Trielle in Yarra's Edge is now close to 40% presold. We have $1.5 billion of presales on hand with close to half of this anticipated to be realized through the balance of FY '24 as we settle our Sydney apartment projects. Taking advantage of market conditions, we have started to restock our residential development pipeline with around 8,400 lots secured on capital-efficient terms, entering into a project delivery agreement for a new masterplanned community site of approximately 7,200 lots in Queensland as well as adding another 1,200 MPC lots at Mulgoa here in Sydney, following an approval of a Mirvac-led planning proposal and rezoning. We are actively in discussions to introduce capital partners to our projects, which will help to accelerate value creation, speed to market and capital returns. Our deep apartment pipeline of completing and DA approved sites is expected to be supported by the relative affordability of apartments compared to established detached housing. During the period, we had 2 major launches at Prince & Parade and the Albertine in Melbourne, and we expect to launch Harbourside and our next stage Ascot Green in Brisbane later this year. Completions of residential drillings in the coming years in Australia are expected to be 50% lower than the FY '18 peak, which, coupled with a surge in demand driven by an estimated 1.4 million new residents over the next few years is expected to result in an acutely undersupplied market. This is further exacerbated by low vacancy rates below 2% and strong rental growth at 10%. With this backdrop of strong fundamentals supported by a development pipeline of almost 30,000 lots with a variety of product and delivery timeframes, along with a loyal customer base, we are well positioned to capture demand as market conditions continue to improve. Thank you, and I'll now hand back to Campbell.

Thanks, Stuart. Subject to no material changes in market and delivery conditions, we maintain operating EPS guidance for FY '24 of $0.14 to $0.143 per stapled security and DPS guidance of $0.105 per stapled security. Front of mind is looking to the balance of the financial year. We've still got a lot to do. Our key priorities are to achieve the remainder of our planned residential settlements targets, progress tenant pre-commitments and secured capital partners for our 55 Pitt Street development in Sydney and finalized the sell-down of Aspect South. As you've heard before, we're continuing our discussions with capital partners in our residential business, combined with the other transactions, this will ensure we have headroom on our balance sheet. As for the medium-term outlook, signs and interest rates are at or near their peak level and falling inflation position Mirvac well to capitalize on a market recovery across all of our operating segments. Our modern sustainable investment portfolio with low capital expenditure will continue to deliver a resilient and stable passive income stream over time, which we expect to further improve as we execute on our capital reallocation strategy. Capital efficiency remains a key focus. We will continue to sell-down noncore assets and selectively lift our exposure to our preferred sectors through the conversion of our secured development pipeline. Combined with third-party capital aligned to our vision of creating world-class assets, this will help us to ensure we remain well placed to deliver value to our partners and securityholders. Thanks all for listening in. I'd now like to open the line to any questions that you may have.

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

Good results. Just a couple of questions. It looks like the resi presales accelerated in the second quarter quite a lot. I know there's some seasonality there. But can you sort of talk to what you're seeing in the resi market? Because I know they also improved post-balance, I know that's 270. Where you're seeing demand and how you see that tracking for the rest of the year?

Stuart, do you want to take that?

Yes. Sholto, I think it's fair to say, as I foreshadowed at full year, demand is from upgraders or dominated by upgraders and rightsizers. One of the challenges we probably had last year was due to the delay of some of our projects because of COVID-related issues, labor shortages and weather. We didn't have completed product on the ground. And what we've seen in the last few months, in particular, as projects like Langlee and Willoughby have now got completed stock on the ground. We've seen an uptick in sales, particularly with those rightsizers who are able to see, touch and walk through the product and being able to buy and sell their existing home in the same market is a key factor. I think, Sholto, the other thing that we're seeing in display suites, particularly around built form is certainty of delivery in this market. People are gravitating to Mirvac built form because of obviously the certainty of delivery but also the quality. And there is certainly an element of fear of missing out, recognizing that over the next few years, supply will be a critical shortage in particularly the major cities. And we think that we're well positioned over the next few years to be able to respond to that demand as we roll out our launch program.

Then just on the last one or two questions on it. It looked like you've marked down 367 Collins Street, so down 8%. So that's down 18% over the last 4 months. Is that in line with where the market is sort of pricing this for the indicative offer you've got on the table now?

Yes. Sholto, yes, that's correct. So we've mark-to-market where we've agreed terms on the asset.

And I'll just sneak one more. The retail release, was there any provision release because the retail are quite strong?

Yes. There is a little bit of wash up of the ECL as we go back to a normalized position. And remember, we did flag there might be a little bit of a tail at Toombul in the retail result of this year, this half, which you're seeing also, but that is not there in the second half, just to remind you.

Our next question comes from Lauren Berry with Morgan Stanley.

I just wanted to pick up on some of the comments you made about residential JVs and sell-downs and realizing value. Can you just give us a bit more color on what projects or types of sites, et cetera, you would look to sell-down? And realizing value, does that imply that there would be profit recognition on this? And would anything be included in your guidance for FY '24?

Yes. Lauren, I think it's something we've been talking about before these results actually to bring capital into residential -- the residential business. And we've done it before. You saw us do that with Smiths Lane about 18 months ago. Our focus is on making sure that the residential business is operating in a capital-efficient way. And if you look at the capital deployed into resi at the moment, we're over $2 billion. So we're looking to partner into some of those projects and future projects to release some of that capital, but also efficiency of returns. And Stu did talk about releasing value, essentially, depending on the IRRs that those partners coming on and where those projects are trading, we would expect that they will release value earlier but we'll work through that. It's probably a bit too early in the process that we've got on the processes and the discussions we've got running to give you any more color than that. But I guess today, we're just flagging that the discussions are progressing, and we're making good progress actually, and there's some good interest in there.

Would it be more around the apartment pipeline or the MPCs?

We've had conversations on both. At the moment, we're probably more focused on MPC, but I would also count Habourside in some of that. Harbourside's got significant value in the residential in there, and we flagged previously that we're talking to capital partners or thinking about the capital partnering structure and strategy on that project. So it's across all of the products, but timing will depend on the launch of those products and where they're up to at any point.

And then my other question is around Kemps Creek. It looks like the first completion date has slipped from FY '26 to FY '28. Can you just talk about what the progress is on that project, what's happening there, please?

I think you're referring to Badgerys Creek, Lauren, is that correct?

Badgerys Creek, yes, sorry. [indiscernible]

Yes. So as you know, we were one of the first movers in that precinct with Kemps Creek. That project is progressing well. First completion of CEVA happened a few weeks ago and good inquiry and a number of buildings under construction on Aspect. We will then roll into Badgerys Creek. Badgerys Creek probably in terms of the movement that you've seen in the program has been largely driven by planning, but we are now making good traction there. But the move in timing largely driven by planning rather than any demand softening, we're still seeing very good demand in that precinct.

So for industrial completions, it looks like you're probably going to have a hole between FY '24 and FY '28 now. Is that correct?

Well, I do not want to call it a hole. I think we're working through the staging of those projects. We've got Aspect South we're focused on the second half of the year. And then the completion of Badgerys has pushed out, but there's a staging of parts of that before you get to the final completion. So it's probably just something to think about in the timing.

Our next question comes from Ben Brayshaw with Barrenjoey.

I was wondering if you could just expand a bit on the target return on invested capital for development and the portfolio management framework you talked about. Courtenay, I think you set out some targets for capital allocation. So could you just expand a bit on how you're thinking about where you would like the return on invested capital for development to be going forward?

Yes. Look, Ben, I might take that. So obviously, you're aware that we're developing across a series of activities from build-to-rent, built form in resi, the whole way through to office, industrial and some retail. All of those have got slightly different hurdles that we look to, all of those based on different macroeconomic drivers, thematic drivers and risk. And so, we're probably not going to specify exactly what they sit on each, but obviously, the clear target here is to ensure that we're constantly delivering ROIC over our weighted average cost of capital. And that's particularly important in an environment where the investment side of the business has not been achieving that as a result of revaluation losses. So it's very, very front of mind, and that's why we're very, very keen to ensure that our message around balance sheet strength is important and well heard because we aren't going to start development activities that aren't meeting our hurdle objectives.

So just firstly -- sorry, my follow-up question is just around residential settlements for FY '24. I think you're talking at August circa 2,500 to 3,000. Is that still your expectation?

Look, I'll take that. So the first thing maybe to think about, Stu in his speech, mentioned the 1,131 settlements in the first half and then another 177 that have happened in the month of January. Remember that we've got presales of $1.5 billion, and roughly half of that is rolling off this year. So that's going to go straight to the settlement numbers. And also remember that we've got some conditional sales, which are also going to roll off this year. And so we're comfortable with our guidance at this stage. But we know that we've still got a bit to do in terms of selling some stock, but there is -- but we're comfortable with our guidance.

And maybe, could I just add, Ben, that guidance we've given you is between 2.5% to 3% on lot numbers. We probably expect to be lower or the low end of that range now, that is probably something important just to flag. And that's just to help -- sorry, the color on that is Charlton House, which is in Brisbane has slipped from the current year into next year. And the sales rates, which you will have seen in the first half on the MPC projects, so just a little bit behind. So that's why we're still sitting within the range, we're just at the low end of it.

Our next question comes from David Pobucky with Macquarie Group.

Just the first one on the pre-commit at 55 Pitt Street, if I may. I think you previously spoke to 30% to 50% before hit and go. When do you hit go? I mean in this obvious environment, would you need to be at the higher end of that range or if you could just provide a bit more color there?

Yes. Look, we're working through that now. And obviously, capital partnering is an important part of our conversation. We're advanced in discussions with a number of parties at this point. That's an important element of the decision we need to make. I think just going back to what's happening in office markets in Australia, I think it's absolutely clear now that there is a genuine bifurcation of what's happening by quality of real estate and by location and 55 Pitt Street ticks all of those boxes. And I think the other thing we need to remind ourselves of is that the supply outlook going forward is certainly not going to be as previously anticipated. Softening cap rates, increased cost to build and growing cost of incentives have really hurt probably a lot of market-based feasibilities. So now we're looking at that market and the supply outlook probably in a more favorable lens than we have in the past. So all of those things are things that we're tackling with. I probably can't give you a definitive answer yet. But over the course of the next quarter, we'll be able to talk to that.

And the second one, just on the balance sheet and gearing a bit higher than expected in the first half. Maybe if you can just touch on the key drivers there [indiscernible] will be higher that I suspect. And maybe on a longer-term basis, how do you think about gearing post the divestments given your capital commitments, please?

Yes, David, I think I flagged previously that in this half, we'd be a little higher. We're a little higher because of the asset sale deferrals and where we've ended up with resi. I'm also really guiding that we'll stay about where we are through to the full year. We've really positively got $1.5 billion of residential presales. 47% of that rolls off in the second half. We're making good progress on the balance of the asset sales. And then we've talked about capital partnering on key initiatives across all of the different asset classes in development. We do have some commitments. So the Serenitas acquisition, we do -- that settles, we expect that to settle in the first quarter of this year. And then we'll move forward with also development projects. So with those ins and outs, we expect to be around where we are actually. And we're also making sure we're thoughtful about where asset values go even in the next 6 months. And then in the long term, our objective is to make sure the balance sheet is strong. We'd like to get gearing at the mid to the low end of the range, but it does depend on commitments. And I think we've got a good strong debt book. We've got good access to markets. Our credit rating is strong. And so using debt to help us move the -- release capital and move the business forward, I think it's important. But our target longer term is within the range that we set, but to the midpoint to the low end, I would say.