Our top two REIT’s to invest in for 2019 have been Goodman Group (ASX:GMG) and Centuria Industrial (ASX:CIP). However, Mirvac Group (ASX:MGR) is also looking attractive here. With the shares up over 40 per cent since the start of the year, we analyse the fundamentals and technicals.
Mirvac Group (MGR) is a fully-integrated property company with internalised management. Its investment portfolio is diversified across office, retail and industrial assets in capital cities across Australia. These operations are supplemented by high and medium density apartment and house & land development operations and commercial development.
Why We Like the Fundamentals
1. Equity Raising Expands Development Pipeline
On 30 May 2019, MGR announced a $750m share placement at $2.97 per share, in addition to a $75m Share Purchase Plan (SPP). While the precise uses of proceeds have not been specified, the Company intends to use these funds to fund its development pipeline, with MGR highlighting a number of secured (but un-commenced) developments as well as potential acquisitions.
MGR’s medium-term development pipeline equates to $6b end value. This comprises $4b in already-identified developments (which included three new development opportunities) and $2b to be set aside for potential acquisition opportunities (mainly across the Sydney and Melbourne office markets), which are at various stages of due diligence.
Strategically, the medium-term development pipeline also reduces MGR’s exposure to residential, given that 90% of the $6b pipeline is in non-residential sub-sectors. Effectively, MGR has thought ahead of the curve in regards to the impact from the expected downturn in residential housing on its residential exposure – and has accordingly re-positioned its business portfolio towards office, industrial and commercial development.
2. Positive Implications for FY20 EPS Guidance
FY19 EPS is expected to be 17.1 cents per share (cps) (+4% on FY18), which is at the top end of the prior guidance range of 16.9 to 17.1cps and slightly ahead of consensus estimates prior to the announcement of the equity raising. The FY19 EPS guidance is predicated on MGR achieving >2,500 residential settlements prior to 30 June 2019, which the Company has indicated is on track for delivery.
In addition, preliminary FY20 guidance was also issued. The Company expects >2% EPS growth (implying EPS of ~17.4c) and 5% DPS growth. Excluding the impact of the equity raising and the sale of the non-core assets, the Company stated that FY20 EPS growth guidance would have been ~8% (instead of >2%). Importantly, the progressive deployment of proceeds from the recent equity raising is likely to be significantly earnings accretive, which creates scope for future EPS upgrades.
Guidance for ~2% EPS growth in FY20 also appears conservative in the context of MGR delivering ~9% growth on average over the past three years. It is also worth noting that the Company has a history of delivering EPS each year at the top end of its own guidance. Depending upon the mix of acquisition strategies executed & the level of risk that MGR is willing to assume, scenario analysis (around what portion of the $2b is utilised) suggests ~3-4% EPS accretion is attainable in FY20.
3. Gearing Level Remains Below Target Range
Balance sheet gearing as at 31 December 2018 was 24.4% and is expected to decline to 19.2% on a pro-forma basis following completion of the equity raising. This is below the target gearing range of 20-30%. Importantly, the gearing level of 19.2% does not take into account any deployment of funds as per the opportunities identified above. As referred to earlier, MGR can support its existing pipeline of development opportunities from the current balance sheet. So the proceeds from the equity raising will be used to fund future opportunities.
It is worth noting that MGR’s pro-forma gearing level of 19.2% following the completion of the equity raising is lower than the gearing range for most other diversified REITs (with the exception of Charter Hall Group (5.5% gearing) and Goodman Group (6.5% gearing)). Further, the lift in MGR’s gearing to ~30% (i.e. the upper end of the target range) in the event of full deployment of the $2.0b in identified opportunities still leaves gearing at a comfortable level.
4. A Number of Factors Support NTA Growth
Following completion of the equity raising, NTA increases by 3c to $2.47 per share on a pro-forma basis. NTA growth of 5.7% over the six months to 31 December 2018 was driven by MGR’s office portfolio delivering a strong result with 5% like-for-like (LFL) net operating income (NOI) growth and office revaluations up 4.7%. Further upside to the underlying NTA is expected, with the Company commenting at the 1H19 results release that it anticipates further compression of its office cap rate, based on transactional evidence.
Fundamental View of Mirvac
Investors are likely to continue to favour REITs that have actively re-positioned their portfolio exposures and/or reduced gearing and away from REITs with a large exposure to retail and a stretched balance sheet. To this end, it is worth noting that MGR has typically been successful at identifying cycles in each property sub-market well (in particular capitalising on previously-favourable conditions in the residential market).
However, given that the shares are trading at a substantial premium to NTA (~25%), we would prefer to enter on any weakness from present levels.
Charting View of Mirvac
The breakout earlier this year saw MGR rally from about $2.40 to current levels above $3.20. The shares are looking overbought based on the RSI, so there is a good chance that if the market experiences some weakness, MGR could pull back to consolidate the move. Support on any dips is likely to occur in the $2.80 – $2.90 region.
Michael Gable is managing director of Fairmont Equities.
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