Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Group CEO and Managing Director, Mr. Campbell Hanan. Please go ahead, sir.
Good morning, everyone, and thank you for joining us for Mirvac's four-year results presentation for FY 2024. Here with me today are Courtenay Smith, Richard Seddon, Scott Mosely, and Stuart Penklis. I'd like to acknowledge the traditional custodians of the land on which we're meeting today. For us, that's the Gadigal people of the Eora Nation, and I pay my respects to elders past and present. We set a number of ambitious objectives at the start of the financial year, and I'm incredibly proud to say that we've executed on all of these despite a challenging macro environment. We maintained a strong balance sheet with gearing at 26.7%, supported by AUD 1 billion of non-core asset disposals and approximately AUD 400 million of capital release from partnering initiatives.
We further improved the cash flow resilience of our investment portfolio, lifting our exposure to the living sector through our investment in the Serenitas Land Lease platform, as well as the stabilization of new developments across industrial and build-to-rent. We also maintained a high portfolio occupancy of 97%. Across our development division, we settled 2,400 residential lots and restocked our pipeline on capital-efficient terms, ensuring we are well positioned for the expected recovery in residential activity. Our strong performance across commercial and mixed use saw us book close to AUD 150 million of profits, supported by the successful sell-down of a 67% interest in our state-of-the-art 55 Pitt Street office development to Mitsui Fudosan. The sale, which has been confirmed as the largest single office transaction globally in 2024, crystallizes profits for our security holders and provides visibility of development earnings for the next three years.
The sell-down of a 49% interest in Aspect North and Aspect South to the Australian Retirement Trust was an important step in our Mirvac industrial partnership, growing the venture to over AUD 1 billion. The completion of our third operational asset, LIV Aston, in Melbourne in July this year helped to expand our BTR venture, with the asset already attracting strong tenant demand. The developments we have underway across industrial, BTR, and office are expected to provide over AUD 90 million of additional income to Mirvac security holders as they complete over the next two to three years, while growing our funds under management by AUD 1.6 billion. This is a strong illustration of Mirvac's creation model in action. Importantly, these strategic objectives were achieved while maintaining a sharp focus on sustainability and culture.
The strength of our operating performance in FY 2024 was reflected by our EBIT growth of 12% to a record AUD 860 million, reflecting a strong performance across the operating divisions. This was more than offset by a significant increase in our interest expense, with earnings per share down 5% to AUD 0.14 per stapled security. Our distribution per share was flat at AUD 0.105, in line with our guidance to market. Continued cap rate expansion impacted our investment assets, with asset devaluations of AUD 1.1 billion, resulting in an 11% reduction in our NTA to AUD 2.36. Mirvac has a purpose to reimagine urban life, and we see three distinct features that set Mirvac apart from our peers, which we believe will continue to drive value for security holders over time. Firstly, we're a leader in the living sector.
We develop, we sell, we own, and we manage residential assets across the housing spectrum. The sector is well supported by solid structural tailwinds, including strong population growth, a restricted supply outlook, low rental vacancy, and robust rent growth. Secondly, we have a proven asset creation platform that provides a unique competitive advantage. Our integrated design, development, and construction capability across living and commercial real estate sectors means we're able to create modern, sustainable, fit-for-purpose assets, driving earnings, valuation uplift, and delivering new resilient income streams. Finally, these assets that we create form part of a high-quality investment portfolio, a collection of cash flow resilient assets with high occupancy, low CapEx requirements, and a steady recurring growth profile for investors. These assets continue to attract strong tenant and capital demand throughout the cycle.
All of this is underpinned by our balance sheet focus, unique aligned capital partnership model, and culture and capability. At our half-year update, we outlined our portfolio framework and capital allocation targets, including some long-term targets for our investment sector allocations, and we've already made progress. We've reduced our office exposure from 66% to 59%, supported by our successful non-core asset sales program, and we continue to sharpen our focus towards premium core CBD assets. Our industrial exposure has lifted towards our 20% target and will continue to grow as we roll out our AUD 2.5 billion Sydney industrial development pipeline. We further sharpened our urban growth retail focus with the sale of Cooleman Court in Canberra. Finally, our living sector exposure has lifted from 2% to 6%, supported by the completion of our acquisition in Serenitas and the rollout of our BTR development pipeline.
The resilient performance of the living sector this year and continued positive fundamentals have justified this strategic decision. The key objective of this repositioning is to enhance the resilience and growth profile of our investment portfolio, deliver more cash flow back to investors over time. Over the past two years, Mirvac has paid around AUD 135 million in CapEx and incentives each year, representing around 30% of our dividend. Improving the strength of our investment portfolio will allow us to pay back more to our security holders every year. However, we acknowledge this transition will take time to execute. Within our development business, we continue to apply a disciplined approach, turning off AUD 2.8 billion of office developments, introducing capital partners, and entering into capital-efficient structures when restocking our residential development pipeline.
Having already achieved carbon positive on scope 1 and 2 emissions ahead of target, we are leveraging our integrated platform to make steps towards scope 3 emission target by 2030. Our integrated model provides us with multiple levers that we can pull to achieve this outcome. You'll hear more from us on this topic over the next year as we formally set out our plans to reach this goal. Electrification is a critical lever. We've already made strong progress on this journey. We have clear plans in place for the investment portfolio and a strong focus on electrification across our development pipeline. Sustainability is increasingly being considered by our customers, tenants, and security holders, making it an important driver of our future success.
Along with our social focus, we've also maintained a high focus on corporate governance and culture, with high employee engagement across our teams, and we've been recognized by Equileap as one of the top 10 companies globally for gender equality for the third year in a row. With that, I'll now hand over to Courtenay.
Thanks, Campbell, and good morning, everyone. Turning to the financial results for FY 2024, we delivered operating profit of AUD 552 million, or AUD 0.14 per stapled security, in line with our FY 2024 guidance. We delivered this by executing on key initiatives, which has translated to a 12% growth in group EBIT to AUD 860 million. Within this result, the investment segment was down AUD 7 million, with a 3% like-for-like growth in property NOI, additional contribution from co-investment stakes in MWOF, build-to-rent, and Serenitas, as well as new income following the completion of our industrial development Switchy ard in Sydney. This growth was offset by lost income from non-core disposals, which have occurred over the past two years.
The funds segment was up AUD 13 million, with funds management EBIT AUD 2 million down, with the full-year impact of new funds in build-to-rent and MWOF offset by a performance fee that was earned in the prior period. Asset management performed strongly, with a AUD 12 million increase in EBIT, led by an increase in office leasing activity, which in turn supported the high occupancy of our investment portfolio. The development segment was up AUD 83 million. Commercial and mixed-use earnings of AUD 146 million included contributions from the 67% sell-down of 55 Pitt Street to Mitsui Fudosan, and both Aspect North and South through the sell-down of 49% interest to the Australian Retirement Trust. We expect to continue to realize earnings at 55 Pitt Street over the next three years as the development progresses.
Residential earnings grew by AUD 56 million to AUD 212 million, driven by higher apartment settlements and an increase in volume to 2,401 lots. We also took active steps to reduce our cost base, leading to a AUD 10 million decline from FY 2023 across management and administration expenses and unallocated overheads. The improvement in group EBIT was more than offset by an increase in our net financing costs, driven by a higher weighted average cost of debt increasing from 4.7%-5.5%. Higher average debt balances, both on balance sheet and through our co-investment stakes in MWOF, build-to-rent, and Serenitas. Also the impact of development settlements in the period with the unwind of previously capitalized interest. A statutory loss of AUD 805 million was heavily impacted by investment property devaluations of AUD 1.1 billion, predominantly due to declines in the office portfolio.
Other non-operating items this year comprised transaction costs for Serenitas, an impairment of the Waterloo Over Station Development joint venture, and movements in derivatives. Moving to the balance sheet. Throughout FY 2024, we continued to be disciplined in the management of our capital, with the delay or deferral of select projects and a focus on key capital management initiatives, including the execution of our non-core asset disposal program and the release of capital through our sell-down of major development projects to align partners. We succeeded on both of these, completing AUD 1 billion of asset sales and raising AUD 1.6 billion of capital for the delivery of our development pipeline. These initiatives support our strategy to reposition our investment portfolio, progress our development pipeline, grow our funds under management, and ensure that our balance sheet remains robust, with headline gearing at 26.7%, well within our target range of 20%-30%.
We retain significant headroom to our financial covenants and have over AUD 1 billion of available liquidity at year-end. Our credit rating of A3 stable was also reaffirmed by Moody’s. Heading into FY 2025, we will continue to take an active approach in managing our capital position, with the selective deployment of capital to projects once they have been de-risked and focus on inflows from the final settlement of 367 Collins Street, settlement of 49% of our AUD 1.3 billion residential pre-sales, capital partnering on the next wave of our development projects, and targeting at least AUD 500 million of asset sales. These strategic initiatives are at the center of our prudent capital management approach and will create balance sheet capacity for longer-term growth opportunities. With that, I'll now hand over to Richard to take through investments.
Thank you, Courtenay, and good morning. I'm very pleased to confirm our investment portfolio is delivering consistent outperformance, with high occupancy of 97% and 3% like-for-like net operating income growth over the year. Our strategic objective is to further increase cash flow resilience by sharpening our office exposure towards premium core CBD, maintaining our high-growth urban retail, and growing our exposure to structurally supported living and industrial sectors. Turning to office, our performance has been very strong. Occupancy increased slightly to 95.1%, one of the highest levels in the market, with minimal near-term expiry of only 5% in each of the next two years. We've had another very strong year of leasing, with over 77,000 square meters, up 25% on the previous year, average lease terms of over seven years, and positive leasing spreads of 1.2%.
This includes a number of major lease deals such as AGL across 19,000 square meters, and we've now agreed terms with EY across 26,000 square meters at 200 George Street. Following the successful execution of our non-core asset sales, the portfolio is now 48% premium grade, a 6% improvement on last year. While broader market vacancy remains elevated, tenant demand continues to be focused on premium assets, as the chart on the right illustrates. Valuations were down 12.5% over the year, with the devaluation cycle nearing completion, albeit we do anticipate some further moderation in the coming 6 months, led by lower quality assets. Encouragingly, rents are growing for premium assets in most markets, and the supply outlook is increasingly restricted. Softer cap rates and higher construction costs are putting upward pressure on rents for new developments, which will support rent growth over time.
In industrial, our 100% Sydney portfolio continues to deliver. Occupancy remains high, with positive re-leasing spreads and scope for further growth, with under-renting of 19% across the portfolio. NOI growth was up 18% over the year, supported by the completion of Switchy ard and the first building at Aspect. Development completions have underpinned industrial NOI growth of 46% over the past six years. The staggered completion of Aspect, including a 66,000 square meters new facility for Winnings completed last month, together with Elizabeth Enterprise at Badgerys Creek, provide a clear line of sight of further uplift to industrial income. Market demand is becoming more selective, and rent growth has continued to moderate from the exceptionally strong conditions, however remains positive and vacancy remains low at around 2%. This has helped to offset valuation declines of 7%, driven by cap rate expansion.
Our strategic decision to uplift our industrial exposure is supported by structural tailwinds, including population growth, e-commerce, and supply chain management. We also expect the new Western Sydney Airport opening in 2026 and associated road infrastructure would directly benefit our development precincts and support future demand. Moving to retail, our urban-focused retail portfolio has delivered strong 4.4% like-for-like growth, supported by resilient sales growth and improved occupancy. Through our continued repositioning of the portfolio, we've exited non-core assets and reduced our CBD retail exposure to 3%, helping to lift our specialty sales productivity to 11,200 per square meter, with occupancy costs remaining low at 14.2%. Re-leasing spreads excluding Greenwood Plaza have now turned positive at 0.4%, and valuations have remained flat. Our portfolio metrics remain favorable, supporting by average customer income above the national average, expenditure 20% above benchmark, and catchment population growth of around 3% year-over-year.
These favorable portfolio characteristics and a constrained supply outlook will support continued resilience. In build-to-rent, as Australia's largest and most experienced platform, we're making great progress, with almost 1,300 apartments now operational and continuing our leadership position in this growing asset class. The first two operational assets are performing in line with expectations, with strong occupancy, positive re-leasing spreads, only 23 days average downtime, and minimal CapEx and incentive spend. Our third asset, Liv Aston in Melbourne, completed in late July and is already demonstrating strong inquiry momentum. Valuations have proven resilient, up 4.3% for the year, with rent growth, occupancy, and minimal downtime offsetting some cap rate expansion. Longer-term sector fundamentals remain attractive, with the rental population exhibiting strong growth, a structurally undersupplied housing market, and growing market awareness of the product offering. Moving to land lease and our investment in the Serenitas platform.
Early momentum is very encouraging, with over 400 settlements achieved over the year and tracking ahead of expectations. Pleasingly, the platform has grown since our initial investment, with a further 203 home sites acquired, increasing our total occupied sites to approximately 4,600 across 28 communities, one of the largest in the market. We have close to a further 1,900 development sites under control to be delivered in coming years, 98% of which are DA approved. The team has been busy executing on growth opportunities, with a further acquisition completed in July and two other communities under contract, which will deliver around another 900 future development sites. We continue to target the affordable middle market with an average settlement price of around AUD 500,000.
The long-term sector fundamentals remain attractive, with an aging population, compelling customer proposition, growing market awareness, and strong government support, with the latest federal budget lifting Commonwealth Rent Assistance by 10%. I'll now hand to Scott to provide an update on our funds division.
Thanks, Rich, and good morning, everyone. We've now established our funds division, and we continue to attract capital to the platform with AUD 1.6 billion raised during FY 2024. This brings the total third-party capital commitments secured over the last 24 months to AUD 11 billion. We have progressed our LIV BTR venture with the stabilization of LIV Munro and the recent completion of LIV Aston. Together with the further two assets in development and our seed asset, LIV Indigo, we expect to have around 2,200 operational lots by the end of 2025. The continued performance of our stabilizing portfolio demonstrates the attractiveness of the asset class and will support growth going forward. Our operating track record and in-house design and construction expertise are key differentiators in the current market.
We expanded our Mirvac Industrial Venture with Australian Retirement Trust, adding Aspect North and Aspect South to the venture alongside Switchy ard in Sydney. This takes the end value of the vehicle to over AUD 1 billion, and there are further opportunities for partnering on our remaining AUD 1.9 billion industrial pipeline. Mirvac Wholesale Office Fund's strong focus on capital management has positioned the fund well for the next part of the cycle. The disposal of a 50% interest in 255 George Street has reduced gearing to 23%, and its A-minus credit rating was retained. The fund's high exposure to quality assets in two of the most desirable core submarkets in Sydney and Melbourne has seen it successfully lease 104,000 square meters of space during the period.
We have now established a number of managed vehicles with high-quality aligned capital partners across the living, industrial, and the CBD office sectors that are now set up to scale as opportunities present themselves. Our established partnerships across LIV, 7 Spencer Street, Mirvac Industrial Venture, and the recent partnership at 55 Pitt Street provide visibility of embedded funds under management growth of around AUD 2.6 billion over the next 3 years. We continue to explore opportunities to grow the platform where we have deep operational expertise, and we see significant opportunity in the living sectors where we can leverage our integrated model and our 52 years of experience. Ongoing access to like-minded aligned capital positions us well to expedite our development pipeline and participate in the market at a time others are constrained. I'll now hand over to Stu.
Thank you, Scott, and good morning, all. Despite a very challenging backdrop, the commercial and mixed-use business has performed strongly, recognizing AUD 146 million in earnings as it continues to commit projects, providing line of sight to both development earnings and future NOI as these projects reach completion over the next three years. Highlights across the portfolio include the progression of our AUD 1.1 billion build-to-rent development pipeline, with three developments in delivery over the course of the year, including LIV Aston, which completed last month. We've seen continued positive momentum in our industrial development pipeline, with Switchy ard reaching final practical completion during the year, along with being 100% leased. At Aspect in Kemps Creek, we have completed our first two warehouses, welcoming both CEVA Logistics and Winning Group into the estate.
As Campbell mentioned, we sold down a 67% interest in our 55 Pitt Street commercial development, with this transaction being a material contributor to this year's earnings. The development is progressing well, with the completion of civil and the commencement of structural works, and pre-leasing progressed to 34%, including heads of agreements. Our commercial and mixed-use pipeline of AUD 10.1 billion represents a deep and diverse mix of development opportunities, with significant embedded value for us to unlock selectively over time. We continue to focus on our committed capital on sectors supported by strong market fundamentals and sites where we have a clear competitive advantage. Moving to residential, I'm extremely pleased to report that we achieved 2,401 settlements during the period, underpinned by our apartment projects in Sydney, 9 Willoughby, The Langlee, and Green Square.
Our MPC projects, including Smiths Lane, Woodlea, and Olivine in Melbourne, Everleigh in Brisbane, Cobbitty in Sydney, and Henley Brook in Perth, also made a material contribution to settlements. As noted at the half, there was a higher weighting towards built-form settlements in the period, with a lower gross margin but a higher EBIT per lot, as we continued to experience cost impacts associated with inclement weather and subcontractor insolvencies. This resulted in a lower than typical gross margin of circa 17%. We anticipate a further moderation of margins in FY 2025 as we trade out of our apartment projects in Sydney, along with Charlton House and Waterfront Quay in Queensland, where site productivity and corresponding delivery programs have been impacted. The margin impact is isolated to these selected New South Wales and Queensland apartment projects.
Importantly, margins on recent and up-and-coming apartment releases and our MPC projects in New South Wales and Victoria have not been impacted. Our project underwrites reflect current market conditions, and we are rigorously managing through an increase in costs through an increase of direct procurement, refined designs, and leveraging the use of digitization to maximize prefabrication. While sales activity over the year was subdued, we continue to see elevated inquiry across our projects, reflecting underlying demand and a lack of new supply. The Western Australian and Queensland markets, in particular, remain resilient. Our recent successful launches at Riverlands and Highf orest in Sydney's Middle Ring are testament to the buyer appetite, particularly amongst upgraders and rightsizers who are less sensitive to interest rates and attracted to our track record of delivery, quality, and built-form product and upfront amenity.
The sellout of the first stages of these releases contributed to a material increase in our fourth quarter exchanges, totaling over 560 sales. The outlook for the market fundamentals remains positive. Completions of residential dwellings in the coming years in Australia are projected to be 50% lower than FY 2018 peak, which, coupled with a surging demand driven by an estimated 1.1 million new residents over the next five years, is expected to result in an acutely undersupplied market. Paired with increasingly motivated federal and state governments focused on housing as a key issue, the market is primed for a recovery. Over the course of the financial year, we have materially restocked our residential development pipeline with around 8,400 lots secured on capital-efficient terms, increasing our pipeline by over 20%.
We are actively in discussions to introduce capital partners to our projects, which will help to accelerate the value creation and speed to market and capital returns. We have a number of launches to look forward to in FY 2025, offering diversity of product and affordability. This includes the former Western Sydney University campus at Milperra in Sydney and our first stage of apartments at The Fabric in Melbourne, as well as the highly anticipated Harbourside Residences at the iconic site in Darling Harbour, which we expect to attract significant interest. With this backdrop of strong fundamentals supported by a development pipeline of over 28,000 lots with a variety of product and delivery timelines, along with a loyal customer base, we are well positioned to capture demand and return to normal through cycle margins as market conditions improve. Thank you, and I'll now hand back to Campbell.
Thanks, Stu. Turning to FY 2025 and our outlook. Against a backdrop of sticky inflation and increased construction costs, we expect to see lower development earnings in FY 2025, with residential margins on settlement expected to be temporarily below our 18%-22% through cycle range, predominantly impacted by New South Wales and Queensland apartment settlements, where gross margins are expected to be around 10%. We also expect higher development interest to be expensed. For FY 2025, we're expecting earnings per security of between AUD 12 and AUD 12.30 and distributions per security of AUD 0.09. Supporting this guidance, we expect to execute on a further AUD 500 million of non-core asset sales, deliver between 2,000 and 2,500 residential settlements, progress construction and pre-leasing across committed developments, including 55 Pitt Street, Aspect, and 7 Spencer Street, secure capital partners, and progress on the next tranche of developments across both CMU and residential pipelines.
While we're disappointed to be guiding to a decline in earnings in FY 2025, the business is gearing itself up for recovery. I do want to call out Stu Penklis and the entire development team who are working tirelessly to minimize the impacts we are seeing in the construction sector. The margin impact is largely isolated to these selected projects, and we expect the next phase of projects to return to more normalized margins. While we've done as much as we can to insulate the business in a tougher environment, we expect FY 2025 to be a trough year for us with a recovery thereafter. There is significant value to play for and multiple drivers of earnings growth in FY 2026 and beyond. Our modern investment portfolio continues to deliver resilient, positive like-for-like income growth, supplemented by our development completions.
Our successful capital raising initiatives with aligned capital partners in recent years also provide strong visibility of funds under management growth. The recovery of our residential division will be supported by an expected improvement in residential sales volumes from current to pre-sales levels, a pickup in project launches, including our flagship AUD 2 billion Harbourside project, and launches across five new MPC sites and four land lease sites over the next 18 months. And finally, a return of margins to our through cycle 18%-22% range as the impacted apartment projects roll off. The building blocks are in place. There is also significant value to selectively unlocked from our AUD 10 billion commercial and mixed-use pipeline. Looking ahead, we remain committed to delivering on our strategic objectives to deliver value for security holders.
We continue to see strong tailwinds across the broader living sector, and our experience, integrated platform, and robust residential pipeline ensures we're well positioned to take advantage of improved market conditions over time. We appreciate you spending time with us this morning, and we'll now open up the call to questions.
Thanks. Please continue to ask questions on the telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Question comes from Lauren Berry Morgan Stanley. Please go ahead, Lauren.
Yeah, good morning, everyone. Thanks for the presentation. The first question, can you give us a bit more color around what is actually factored into your guidance, particularly on the CMU profit side? And as part of that, how much, what percentage of that active earnings is actually secured at the start of the year? Thank you.
Courtenay, do you want to take that?
Thanks, Lauren. So in terms of guidance and the outlook, I think Campbell talked through the main contributors to the things we're thinking about. So asset sales of AUD 500 million through the course of the year, residential settlements between 2%-2.5%, but we are expecting depressed margins on those few apartment projects that we've called out. And then in the commercial and mixed-use business, I think just keep in mind we have committed projects across 55 Pitt Street, 7 Spencer Street, and then Aspect. And the job to do on those projects is continue to let-up and deliver the projects on time and budget, which will contribute to the FY 2025 earnings. Across both residential and commercial and mixed-use in FY 2025, we have flagged capital partnering initiatives, and we have considered those. We've factored them into guidance.
So overall, we're flagging that development will be down, but I'd look at the underlying secured income off commercial mixed-use projects under delivery to underpin the result. In terms of what's secured, we are going into FY unsecured, sorry, we are going into FY 2025 a little less secured on the residential side than we were in FY 2024, but we've got stock on the ground in completed projects at Willoughby and Waverley, and the masterplanned community business has got stock ready to go as well. I think pleasingly, hopefully the market turns back on and we're ready to go for that as well.
So on that, the CMU, just to be clear, do you need to do additional leasing across those three projects to hit your guidance number?
There is leasing to do at 7 Spencer Street, largely. The rest will come through the delivery of the projects.
Okay. Then just on the apartment side, obviously, the Queensland, New South Wales low margin is a bit disappointing. I think when you look at the Cobbitty interest release as well, it looks like these projects potentially have no profit impact or could be potentially negative to operating profit. I just want to know if there's been any lessons learned from these projects. I know you've talked about the fact that it could potentially swing back up in FY 2026 the margin, but I don't think when you kicked off these projects, you expected them to be such low margins, or I hope you didn't. So could you just talk through what's happened here and what you're doing going forward?
Stu, yeah.
I'll take that question. So, Lauren.
Absolutely, we didn't expect some of the circumstances that have played out over the last few years. When you look at a number of these projects, they were obviously started very early on in COVID. So the projects have been impacted by obviously some of the supply chain challenges, some of the lockdowns early on in those projects. That was followed by some significant inclement weather. And then more recently, it has been a number of subcontractor insolvencies on those projects, which has come at a cost, which ultimately resulted in us having to replace some of those subcontractors. But also the loss of some of those subcontractors has resulted in a prolongation of program, which obviously has resulted in a delay in those projects, which again comes at a holding cost and also a delay to those settlements coming through.
So importantly, what we're seeing now is the release of the next phase of projects into the market. They're obviously reset at current cost base, but also we're obviously seeing some really positive signs in terms of the releases of this next phase of projects, particularly projects such as Highf orest here in Sydney and Milperra in the southwest, where we're seeing really strong demand from that upgrader market and also that downsizer market.
Are you taking any extra provisions just in case these conditions happen again?
Certainly. So we've certainly looked at the way in which we build up our programs from the grossing perspective to allow for additional inclement weather. We're also taking a real focus in terms of ensuring the subcontractors that we appoint to these projects are tier one subcontractors, doing very rigorous assessments of their financial capability, and also just making sure that the design of our projects are conducive to ensure the buildability sits comfortably within our development programs. The other factor that we've really spent a lot of time focusing on is really embedding the digitization into our projects to allow for the procurement of those projects, the opportunities to procure offsite through global supply chains, but also importantly, leveraging our buying power across a number of projects to maximize our buying and look to increase our margins on those projects through strategic procurement.
Great. Thank you.
Thank you. And from Jarden for the question, Lou.
Yeah, good morning. Just to follow up from Lorraine's question just now, all these issues with weather and subcontractors, does that change your view on your mix between apartments and MPC projects going further? I mean, clearly you've done a lot of restocking in MPC. Is that just because MPC is more profitable?
No, the answer is that we're equally focused on both our MPC and our apartments parts of our business. I think importantly, what we're looking at at the moment is particularly delivering into projects that are in the middle ring where we're seeing resilient demand. But equally, we're still focused on restocking our apartment pipeline. And in fact, we have launched a number of apartment projects in recent times and equally started a number of apartment projects in recent times. But importantly, I think it's critical that we reflect on the last few years. They have been a challenging period, particularly off the back of a record number of insolvencies in the market. In fact, in 2024, we saw 2,832 construction-related insolvencies, which was a 28% increase over 2023.
Equally focused on both sides of the business, we do believe that there will be an increasing shortage of apartments moving forward, and we think that we're well positioned to be able to capitalize on that undersupply.
And Lou, I might just add to that. Affordability is a key feature now, which is impacting residential markets in Australia. And we can't lose sight of the fact that apartment living, by its nature, is cheaper than standalone housing, particularly in these inner urban catchments. So we certainly see a long-term opportunity for us to continue to push into that space. But we need to make sure our balance sheet is capable of withstanding the pressure that comes from apartment developing. And we need to make sure that the balance sheet is not put in a position where we're undertaking too many apartment activities at one time. And certainly, we're addressing that with the way we release going forward.
All right, thank you. And another follow-up, actually. Courtenay, in previous years, you've kind of been quite specific in guiding towards AUD 120 million of commercial development profits. This time, you seem to not be really willing to give that number. Is that just because you don't know, or why is there more uncertainty now than in previous years?
No, we know what's in our plan. I guess I'm flagging that development will be down in FY 2024 compared to in FY 2025, sorry, compared to FY 2024. We do expect that to be in commercial mixed use, so it will be below where we were in 2024 and potentially below where we were in 2023. But I do flag that there's committed earnings in the pipeline through delivery of Pitt Street, 7 Spencer Street, and Aspect that will be the base of the earnings. And then the next capital partnering initiatives for us will come from our next wave of projects, which is Harbourside and then Badgerys Creek we're moving on to in the industrial pipeline. So it depends on where we get to with those projects and whether they contribute or not.
I guess I'm factoring all of that in, flagging that development overall will be down, largely through commercial mixed use, but there's a bit to play out with residential as well.
Great, thank you. And then a very quick final one, maybe a bit niche, that Serenitas does. Is that all sitting in investments, or do you break down the development?
No, yeah.
Property, procuring, rental income?
Yeah, thanks. It's all in investment. So we've got an investment in the platform, and so there is underlying development earnings, but the investment in the platform is all within the investment segment.
Great, thank you.
Thank you. Our next question comes from the line of David Olwagen from Macquarie. Please go ahead, David.
Good morning, Campbell, Courtenay, and team. Thanks for taking my questions. Again, just the first one on guidance, please, if I could. Obviously, a few moving pieces there and obviously low consensus. It feels like a large part of it is on finance costs and capitalized interest. Could you conceptualize that for us, please? I mean, simplistically, do you expect higher net financing costs in FY 2025 versus FY 2024?
I think just on guidance, I think the two things to think about that are down in 2025 compared to 2024, the development EBIT line and the interest line will be higher, but it's going to be higher in relation to development activities. So that's the overarching message on 2025. Then, David, within the interest line, the key movement where we do expect growth on the interest expense line from 2024 to 2025 is really got to do with development activities. So we're going to be capitalizing less because we own less. We've sold down projects during the year, and they're in structures where we no longer capitalize to. So joint venture on Aspect, for example, we don't capitalize into that project. So there's less capitalization of interest. And then there's more release of costs interest.
And so on completion of all these residential apartments that have been longer dated or incurring greater costs, we've been capitalizing interest along the way. As those projects settle, then that interest all gets released. And on a project like Willoughby that completes toward or now-ish and into the early parts of the year, we no longer capitalize interest on completed stock. So those things are going into what's going on in that EBIT line. I think about those two things together. The gross interest we expect to sort of largely hold, but the movement is going to be in that development activity line, and it's got to do with completions and new projects coming on and what we can and can't capitalize to.
Thanks, Courtenay. That's very helpful. The second one for me is on recurring gross margins. Your expectation is for them to be below that 18%-22% in FY 2025. I think we spoke to those challenging projects where those margins are at around 10%. Is there a gross number that you could guide us to for the full year, please, or talk to us?
Yeah, I'm happy to, well, happy is probably, we're at 17.4 this year across the residential business. I would assume another 100 basis points comes off that as we go into FY 2025, and that is largely driven by those apartment projects that we're flagging.
Thank you. And just one last one for me before I turn it over. Positive to see sales momentum picked up in the fourth quarter. What have you seen on the Resi sales post-balance date? I mean, would you expect that momentum to be maintained over the December half, or were there any kind of one-offs in that fourth quarter?
Yeah, look, I think that that fourth quarter we saw very strong sales come through. It did coincide with our recent launches of Riverlands and Highf orest. That product was, in the case of Riverlands, was attached and detached Mirvac Built Form housing product, priced between AUD 1.1 million-AUD 1.6 million. Again, we saw very strong, in fact, a sellout of that first stage from the upgraders in the market. We're also seeing an increase in the number of investors in the market coming through, again, as a result of low vacancy and quite healthy gross yields. So we are seeing strong demand from the owner-occupier in the market and, again, evidenced more recently at Nine in Willoughby, where we did 10 sales in the month of July.
We're continuing to see strong momentum off the back of the completion of that project, particularly the public domain and public parks that we always knew would be a key driver of demand moving forward. Fair to say we're still seeing strong momentum, but driven by owner-occupiers, particularly upgraders and downsizers.
Thank you. Ladies and gentlemen, please limit to two questions at a time. If you have follow-up questions, please request to rejoin. Our next question comes from the line of James Druce from CLSA. Please go ahead, James.
Yeah, good morning. I just wanted to follow on just on the question around rental margins. Is the message for land that they're going to be roughly flat or hold and everything is coming through the apartment line or land margins also softening a bit?
I'm happy to take that, James. Look, largely MPC margins are holding. It's really been the impact of those select apartment projects that we've spoken to that have had an impact on those margins.
Okay. And this would follow on to hopefully just another same question. But I mean, development approvals are at decade lows for apartments. You're saying you're sort of pricing your apartments further than your conditions, but the labor conditions still seem pretty tight. What gives you confidence you're just not going to have as much cost pressure down the track?
I think importantly, we're seeing now some green shoots in the market in terms of capacity coming back into the market. We're seeing subcontractors, Tier 1 subcontractors gravitate to Mirvac because of certainty of payment, because of certainty of delivery in terms of the way in which we run our sites. So we are seeing more capacity come back into the market. We are seeing more appetite from those T1 subcontractors looking for their next job, with certainty being out in the market more recently here in New South Wales and in Victoria tendering to subcontractors. And we're starting to see that subcontractor market really open up and deliver us the certainty we need to be able to progress with the next phase of projects.
I think importantly, what we're also seeing, James, in the market at the moment is there is an absolute flight to quality, and we're seeing positive revenue growth on those apartment projects, particularly in the apartment space in those infill locations where owner-occupiers, particularly the downsizers, are gravitating to those brands that have got a track record for quality.
All right, thank you. Just on Harbourside, what preconditions do you need to bring in a capital partner there? Obviously, you've started some of the commercial and retail leasing. You're looking at getting some pre-sales going in the second half of the year. Do you want to have that largely pre-sold on the residential front and a good chunk pre-leased before you would bring in a capital partner?
I think just maybe to, I think Stu can talk to the plan around the launch sales launch. I think there's positive momentum in all of that. I think they're underway building sales suites, etc., and that's expected in the second half of the year. We are looking for sales evidence to bring in a capital partner, but that's largely what we need to work through. The job to do in the next six months is to work through what's the most efficient, effective way to structure and fund the project. We'll be able to update you in December, I think, about what that looks like.
Thank you. Our next question comes from the line of Richard Jones from J.P. Morgan. Please pass your question, Richard.
Thank you. I was just wondering, given the substantial earnings rebase for FY 2025, was there any thought to deferring the timing of the sell down of 55 Pitt rather than what appeared to be rushing it on the last couple of business days to be here just to lessen the rebase?
Richard, I'm happy to take that. The process around 55 Pitt Street was not something that was rushed in the last two weeks. That was a process that ran for a long period of time. And it's a process that went through price discovery with multiple partners to get a sense of where that's at. And part of it was driven by seeing some stabilization in office value, stabilization in demand for premium-grade product, all of which has happened in the last six months. So to a certain extent, it was a product of its natural timing more than us trying to push the timing.
Okay. Then can you discuss whether the return hurdles for commercial mixed-use projects have increased? Obviously, they've seen a pretty consistent earnings drag in new project deliveries relative to where you've been selling assets. Just wonder whether, and there's obviously been significant market devaluations as well as wondering whether it's Badgerys Creek and Harbourside on the commercial side, should we be expecting yields and costs in the order of 6.5? Is that the type of range you need to be getting now?
No, I might start with that and then perhaps hand to Stu or to Richard. Look, obviously, when it comes to CMU pipeline itself, we've seen a softening in cap rates across pretty much all asset classes in response to what we've seen in the bond curve, which you'd probably expect. You've had the added impact of the increasing cost of construction across all asset classes, regardless of what it is. So both of those are certainly subdued margins that we would naturally have in our CMU pipeline. So they shrunk from certainly the underwrite when we acquired those assets. That being said, we acquired these assets really well, and we acquired them some time ago. And the cap rates that we're selling them on are pretty close or reflective of the cap rates we're holding real estate on our balance sheet.
I don't think there's any diminution from here. Now it's a product of ensuring that the demand side in the occupancy side is going to continue to drive activity in those spaces. Anyone want to answer?
Thank you. Next question. Our next question comes from the line of Ben Brayshaw from Barrenjoey. Please go ahead.
Hi Ben.
Good morning. Thanks for the presentation. Thank you, Campbell . Just wondering if you could, I mean, this is a question for Courtenay, just comment on the distribution guidance for FY 2025 and in terms of how the AUD 0.09 is derived. To what, I guess, extent is that representative of trust income given the policy to pay out all of the trust income, but nothing greater than 80% of the operating earnings?
Yeah, our guidance is up to 80% of operating earnings. The AUD 0.09 is 75% payout of the low end of the guidance range. We've got plenty, I guess, options and use of our sources or options to use our capital, and we've considered that in arriving at the distribution guidance is probably how to think about it.
Okay. So I appreciate that's the policy, but I'm just wondering, was consideration given to, I mean, Campbell's talked to the potential for a recovery in earnings in FY 2026 and beyond, this being the trough year. What was consideration given to maintaining the distribution in FY 2025 at AUD 10.5, just given that context?
Yeah, look, I think it's a fair question. The trust is definitely performing well. The income coming through the trust is strong, and the performance of the trust is strong. Absolutely, we considered it. I guess in the balance of all of those things and how we've got to deploy capital into development projects for future earnings for the trust, I guess we factor all of that in when we come up with the distribution guidance.
Okay.
I think, Ben, maybe just.
Sorry, Ben, just to add to that, and I think we'd really like to see the interest rate cycle come to its conclusion. So we're certainly thinking about balance sheet strength going forward. So all of those are considerations that we make when we talk about distribution policy.
Understand. Just on 55 Pitt Street, is there further scope of potential for profit recognition from that project in FY 2025? And secondly, just in relation to that, have you assumed any material profit contribution in guidance?
I'm happy to talk to it. Definitely, there's Pitt Street earnings in guidance. It will continue to deliver now or contribute to earnings through to the end of the project in end of FY 2027. Maybe to help on Pitt Street, so Stu can talk to the progress of the project. I think he covered it in his speech. We're at a 34% pre-leasing stage. 18% of those are at AFLs. We've bought Mitsui Fudosan into the platform. They've acquired 67%. It's great to have them as a capital partner on the platform. They've been great to work with, and I think will be an awesome partner as we go forward. We've effectively sold down the site, and it is in joint venture with Mitsui, but you can think about it as a fund-through arrangement.
So they'll be sitting beside us to fund their share as we do as we go forward. So we've recognized earnings on the upfront sale, and the balance of the earnings will come through the delivery, largely on a percentage complete basis, give or take. The risk for us through delivery is delivering on time and cost, and the risk of the balance of the let-up of the building is with the owners. And Mitsui and MPT see the opportunity of that leasing to come through, and we'll get the benefit of that through the NTA uplift. And so the way to think about the total earnings from 55 Pitt Street, which is pretty much in line with what we've guided to before now, the end value of the building is AUD 2 billion.
We're carrying our share of our 33% share on the balance sheet at 5.25% cap rate. The spread between the yield on cost and the cap rate is about 100 basis points. You should get to total development profit from that. We've taken about 40% of that in FY 2024, and that's because we've sold down the site and the value we've created on that site to date we've been able to bring to account. And then the balance of the earnings will largely come evenly between now and the end of FY 2027 as we deliver the project. And then on top of that, and post-completion, we'll get leasing fees, project management fees, and investment management fees.
Maybe just to add to that from a progression on site, we're 85% let on the project. We're on track for completion in May 2027. Structure is now above ground floor, and our cores are up to level three. So good line of sight in terms of the progression of the project moving forward.
Thank you. Our next question comes from the line of Tom Beadle from UBS. Please ask your question, Tom.
Hey, Tom.
Good morning, Campbell and team. Potentially, this is one for Courtenay. You talked about potential capital partnerships over the year in CMU and Resi, and that's sort of not being a major feature of guidance. I just would be interested to know if there's potential upside if you can do something more major on, say, Harbourside within the year?
I think I just characterize it has been considered in the way we've come to guidance. If we can execute bringing a partner into Badgerys Creek, then it will contribute to the year, just to think about it. And we've also made great progress, and we talked about it today with capital partners in discussion into residential projects. And I think we've been flagging that over the last 6-12 months as well. So that's how to think about the guidance and what's in there. The second part of your question was, sorry, it just escaped me.
It was on Harbourside.
Harbourside.
I guess what I'm asking, which would be sitting in your residential comment, but you've got a range of 12-12.3. Is the way to think about it, that would be getting you to the higher end of the range, or could that take you beyond the guidance range if you are successful in executing there?
I think we're focused on the 12-12.3, not necessarily beyond that. Harbourside in its own right may or may not contribute to the guidance, just depending on the structure. We flagged before most of the earnings in Harbourside are in the residential apartments, and really we don't get to recognize those until completion on settlement on completion. So structuring something that allows those earnings to come in earlier, that's quite difficult. But we're working through it. It's a bit early to guide exactly on the Harbourside structure, but we're thinking about it. It definitely goes into what the balance sheet might look like at the end of the year, but whether Harbourside contributes materially to earnings is a different thing.
Okay, great. Thanks. And then just around asset sales, there's sort of been a feature from recent results. You talk about another AUD 500 million. Is it fair to assume that continues each year for the foreseeable future to get you to your capital allocation targets, or do you sort of see once you've sort of got through this year's asset sales, it's sort of been largely through that?
No, look, I might take that, Tom. It's been a feature of Mirvac for probably the last 10 years where we've been selling our older quality real estate, redeploying capital through our development capability to create new quality real estate, half of which we own on balance sheet, half of which is traditionally sold that we get development profits on and ideally investment management fees as well. I think that feature continues. Clearly, we are still overweight office from where we want to be, but we're particularly proud of the fact that we're really now pushing our allocation in office into the premium-grade sector, and that's certainly the healthiest part of the office sector, and it's the one that's most exposed to inflation and rent, particularly if the cost to build these things goes up. So I think it'll be a feature for a little while.
I think we're on target on industrial. We're obviously pretty excited about the pipeline we have with both Serenitas and BTR and continue to build those out. So they'll require capital to continue that process, and it's most likely to come at expense of some of the older assets on our balance sheet.
Thank you. Our next question comes from the line of Suraj Nebhani, Citi. Please ask your question, Suraj.
Hi, good morning. Thank you. Just following up on that question from Tom around office disposals as well. Gavin, just making sure I heard this right. Are you essentially saying further to hit the 40% weighting target and we pass it capital for office? Would you say there's more disposal needed to be done, or is it more portfolio churning and ensuring quality assets and to disposal that part of that?
Yeah, look, it's a bit of both. And I think if you look at the performance this year in FY 2024, the investment portfolio from an NOI perspective was only down 1.2%, but we've been selling a lot of old office buildings over the last couple of years. So we are recycling, to your point, and repositioning the investment portfolio to the asset allocation that we've set in our strategy. So that is underway and will continue to be underway. And so I think it's a source of capital to ensure that we continue to drive the asset allocation process that we're looking for.
Okay, thank you. On the other side, obviously, living sector is where it seems like you need to really increase your exposure a lot, going from 6% of asset capital to 25%. Is there a major acquisition potentially that gets you there, or is it more organic growth over time?
Look, I think we'll get to that point. We've made it pretty clear that these are long-term targets. We know it's going to take time. We've got a natural pipeline which is underway already, but we certainly see opportunities for one-off acquisitions and the like. We certainly see opportunities for Serenitas to expand its footprint into some of the MPC projects that we enjoy. We're particularly excited that we've now got 4 new releases coming out of Serenitas in this coming sort of 12-18-month period. So there's lots of things that can come through that line over time, which we're very focused on.
Can I add, Suraj, just so we've got line of sight really to 11% growth in living. So if we deliver out the build-to-rent projects underway within the fund, then our investment in that fund obviously gets a benefit of that. And then even through Serenitas growth, it gets us to about 11%. So there's a pathway to that. And then depending on the decision or the timeframe with which PEP chooses to exit their investment, there's another 3%-4% that might come in after that. So that's a pathway to 14%. Beyond that, it's the work to do and timing to Campbell's point along the long term. So just to give you confidence, we have a pathway from where we are to those kind of numbers. The job to do is to then look for more assets beyond that.
Understood. Understood. Perfect. Thank you. That's all I have.
Thank you. I'm showing no further questions, and I'll turn the conference back to Campbell for closing comments.
Look, thank you everyone for taking the time to listen to our FY 2024 results. We certainly look forward to catching up with many of you over coming weeks and days. So thank you again.