Good morning, and welcome to the Mirvac first half 2022 results briefing. I'll now hand over to CEO, Susan Lloyd-Hurwitz. Thank you, Susan. Over to you.
Good morning, everyone, and welcome to our first half 2022 results presentation. Due to Omicron, we're going to follow the same format as the full year presentation, audio on the phone line and the slides on the webcast. Hopefully, we'll be back in person for the full year. Joining me today in this remote format, each from their own location, Courtney Smith, Brett Draffen, Campbell Hanan, and Stuart Penklis. We'd like to acknowledge the traditional custodians of the lands where we all gather. For me, that's the Darug people of the Eora Nation, and I pay my respects to elders past and present. We've got a lot to get through this morning, so let's get started. 2022 marks Mirvac's 50th anniversary, and I think it's fair to say calendar 2022 has not begun as any of us were expecting. In December, Omicron turned conditions around in Australia very swiftly.
You'll remember that at the full year we said that our outlook for FY 2022 was that H1 would be challenging and that conditions will start to normalize in the second half. However, in the last six weeks, we've seen impacts to supply chains and reduced availability of labor, individuals moderating their own mobility behavior to create a voluntary lockdown, and the extension of the Commercial Code of Conduct from an end in January to now mid-March. In addition, there's also a growing sentiment around potential interest-rate increases. Nonetheless, Mirvac's portfolio and balance sheet is exceptionally well-positioned, and the business is resilient and agile with a highly engaged workforce and stable team. Together, we expect to be able to continue to successfully navigate current challenges and uncertainties, and we're maintaining our earnings guidance of at least 15 cents per stapled security.
Despite lockdowns of around 450 days in Sydney and Melbourne and enduring border restrictions both domestically and internationally, we have been energetically and resolutely delivering on our strategy, continuing the considerable forward momentum we've seen in the business over the past several years, pandemic or no pandemic. Obviously, there's way too much detail on this slide to unpack here. We've just included that detail for you to be able to review at a later time. I'm gonna call out just a few achievements of which we are particularly proud. We achieved net positive scope one and emissions a full nine years ahead of target, and we're now working on scope three. Stay tuned for that plan. We continue to improve the already market-leading quality in our investment portfolio with ongoing asset creation, focused asset curation, and select asset disposals at a premium to book.
One achievement I'd like to call out is that LIV Indigo is now 93% let. Our commercial development pipeline continues to meet the financial hurdles and program despite the significant COVID challenges. We achieved early occupations of Suncorp at 80 Ann Street, completed the Locomotive Workshop, commenced demolition at 55 Pitt Street, commenced construction at Switchyard, Auburn, and appointed architects for Harbourside, just to mention a few highlights. Our residential business is in excellent shape with 95% of EPAs secured for FY 2022, an increase in secured pre-sales to AUD 1.5 billion, settlements on track with minimal defaults, exchange lots up 33% on PCP, and we launched several successful apartment projects as we foreshadowed at the full year. As a result, we are on track to deliver on our promises for FY 2022, and these numbers clearly demonstrate ongoing forward momentum.
Operating profit and statutory profit are up 9% and 44% on PCP, respectively. NTA is up 3% on FY 2021. External assets under management have grown to AUD 10.3 billion, and gearing is marginally lower at 22.3%. The integrated model that drives Mirvac's advantage can be thought of as a flywheel. Our in-house asset creation capability not only delivers NTA uplift, development profit, and new high-quality recurring income, but also reduces risk and allows us to incorporate customer feedback into front-end design and drive the sustainable outcomes from the very beginning of the life cycle. Our newly created assets become part of our high-quality, young, low CapEx integrated investment portfolio, delivering recurring income and capital partner fee income. This model demonstrably drives outperformance.
For example, our office portfolio has outperformed the Australian index by around 300 basis points over the last three, five, and 15 years, an enviable and consistent investment track record over a sustained period of time. Our active earnings, both commercial and residential, are largely reinvested into the development pipeline with the growing distribution funded by passive income. We fund the growth in the business through non-core asset sales, deployment of active income, and third-party capital. Leaving the world a better place than when we found it is one of our enduring passions, guided by our ESG strategy, This Changes Everything, which sets out our ambitious targets. We pursue these targets not just because it's the right thing to do and our corporate responsibility, but also because it adds value to security holders. We are able to better attract and retain not only customers but also talent.
Implementing our strategy reduces operating costs and tenant overheads, improves asset resiliency, lifts asset values, and is part of the reason we can command a premium for our residential products. We will continue on creating meaningful benefits for the community, setting out our approach to scope three emissions, and continuing our strong progress towards our water and waste targets. I spoke earlier about the Mirvac difference being the integrated flywheel of asset creation and curation. There's another Mirvac difference without which we couldn't do what we do, and that's our people and culture. With the great resignation making headlines around the world, we were very pleased to achieve global top-quartile employee engagement and to retain 93% of our key talents.
We're proud to have maintained a zero like-for-like pay gap for six years in a row and be ranked number two company in the world by Equileap for gender equity. Thank you, and I'll now hand to Courtney to walk through the financial results.
Thanks, Sue, and good morning, everyone. Today's financial results are solid and underscore the quality and resilience of Mirvac in the face of continued headwinds and business disruption caused by COVID. Our operating EBIT for the period of AUD 391 million is up 8% and operating profit of AUD 297 million is 9% higher than the prior corresponding period, with this growth largely driven by our development businesses, both commercial mixed use and residential. Commercial mixed use EBIT of AUD 73 million includes contribution from the successful completion and sell-down of 49% interest of the Locomotive Workshop to Sunsuper and earnings from 80 Ann Street. With Suncorp taking early occupation late last year, we are on track for full completion of this project in the coming months.
The Locomotive Workshop is now 97% leased and will provide additional NOI to the group in the second half of FY 2022 and beyond. 80 Ann Street is 93% leased and will contribute to NOI growth from FY 2023. Development revaluation gains of AUD 48 million were recognized in the half, representing the value uplift of Mirvac's retained ownership interest in the Locomotive Workshop and 80 Ann Street. These two projects highlight the value of Mirvac's integrated asset creation and curation capabilities in driving development profits, NTA uplift through development revaluation gains, and future recurring income. Residential EBIT increased 17% in the period, driven by higher lot settlements and elevated margins, reflecting the higher weighting towards master planned community projects. The residential business has enjoyed buoyant market conditions, with exchanges up 33% and pre-sales increasing to AUD 1.5 billion, providing good visibility of future earnings.
Turning now to the investment business. Overall investment EBIT is down 5% in this period, reflecting the impact of asset disposals, movement of assets into pre-development, and COVID. IIP net operating income is AUD 7 million or 2% lower in the period. Contributing factors include lost income from the divestment of 340 Adelaide Street, which settled in November 2020, and Cherrybrook Village, which settled in August 2021. Reduced income from assets moving into pre-development, including 55 Pitt, Harbourside, and 34 Waterloo Road. Lower cash collections have resulted in a AUD 25 million impact in EBIT in the period, compared to AUD 20 million in first half 2021. All of this has been offset in part by new income from 477 Collins and South Eveleigh, both of which completed in the prior period.
Asset and funds management in that EBIT was impacted by lower leasing fees due to less leasing activity in the period. Group unallocated overheads have increased by AUD 21 million compared to December 2020, however, are more consistent with the half-year to June 2021. The movement was driven by, firstly, JobKeeper. The prior period included a AUD 10 million benefit from JobKeeper, with no similar benefit in the current period. Also, higher insurance costs that we, as we have previously highlighted, and increased technology spend, which is now expense as incurred. Statutory cost for the period is 44% higher, largely driven by investment property and development revaluation gains of AUD 308 million, and reflects a 2.4% valuation uplift. Finally, AFFO is 18% higher at AUD 50 million by a reduction in incentives.
As I noted earlier, the total COVID impact to EBIT in the period was AUD 25 million, which compares to AUD 20 million in the full year 2021, FY 2021, and AUD 48 million in FY 2020. Most of this impact over those periods relating to retail assets. Retail cash collections in the period were 78%, compared to 92% for the portfolio as a whole, with strong cash collections in office and industrial. The retail environment remains challenging, particularly due to the recent Omicron outbreak and extension to the commercial code in New South Wales and Victoria until mid-March 2022. Total IIP debtors have increased to AUD 67 million, the majority relating to retail assets, with aged arrears of AUD 54 million. We have prudently increased our ECL provision to 100% of aged arrears, reflecting the increase in the age and the risk of recovery.
Despite this, we expect our cash collection rates to improve over the remainder of the financial year. Mirvac's capital position continues to provide longer-term stability and financial headroom to support existing and future growth opportunities and the activation of our significant pipeline over coming years. Gearing at 22.3% continues to be at the lower end of our preferred 20%-30% range, and our average cost of debt at 3.3% continues to decrease. While we expect market interest rates to increase towards the end of this calendar year, we expect that increases in floating rates will largely be offset by our more expensive debt facilities rolling off at the same time.
At December, our debt book is 57% hedged within our target range. We continue to maintain our A+ RE ratings and A- Fitch ratings, have significant liquidity through AUD 750 million in cash and undrawn facilities, an average debt maturity profile of 6.1 years, and strong operating cash flows of AUD 413 million, which adequately fund divisions. On that note, I'll hand over to Brett, who'll provide an update on capital allocation.
Thanks, Courtney, and good morning. In an environment of increased volatility associated with ongoing COVID uncertainty and the acceleration of some factors driving the outlook for interest rates, we remain committed to our disciplined allocation of capital against our strategy. This strategy leverages our asset creation capabilities to generate strong returns and long-term value, focusing on the urbanization of key Australian gateway cities. Our integrated investment portfolio has grown on the back of project completions to AUD 13.4 billion, with a continued focus on modern, long-WALE, low CapEx office and accelerating Sydney-focused industrial exposure, a committed rollout of our BTR pipeline, and a focused urban retail strategy. Within our development activities, our active capital base is AUD 1.9 billion as we've accelerated deployment to strong residential markets and advanced key commercial, industrial, and mixed-use projects while maintaining a disciplined stance on restocking.
As our asset creation capability delivers a strong pipeline of new project completions, we've continued to optimize our portfolio allocation strategies with planned disposals well advanced for non-core assets across older-style office, retail, and hotels, with completed transactions secured at an attractive premium to book value. Of note, the sale of Tramsheds and Quay West Car Park were at 53% and 35% premiums respectively over the half. The associated movement in capital sees active capital at 12% and the passive portfolios representing 88% of invested capital. As we have previously stated, the combination of the planned asset disposals combined with the accelerating deployment of capital to development activities will see our active capital increase over the next five years.
With such a strong forward development pipeline, it is pleasing to see continued momentum in our third-party capital strategies, with funds under management now AUD 10.3 billion, representing a 20% CAGR since 2015, and future growth supported by our AUD 13 billion pipeline. The central engine to our value creation strategy remains the integrated development model. In our 50th year, this model remains relevant and has been honed during both strong and challenging markets to truly represent a core competitive advantage. The flywheel effect of our asset creation model has created AUD 1 billion of value since 2015, representing some AUD 566 million in asset revaluations and AUD 449 million in development profits, with a 30% average total return on completed projects, well above our benchmark hurdles.
During the same period, development completions have created AUD 4.2 billion of new assets, producing an additional AUD 120 million in recurring income, plus providing a platform for a 20% CAGR increase in funds under management and associated fee income, while at the same time improving the quality of our modern long-WALE passive portfolios. Our development DNA has been built over many years, and as we operate in environments with greater volatility, the true integrated nature of our model will become increasingly valuable. Our model ensures we have all key skill sets in the life cycle of a project in-house, which offers maximum adaptability to market opportunities and excellent controls over construction cost, supply chain, and other risks.
The combination of our integrated model together with our diverse sector skill sets means that we are ideally placed to be leaders in complex, large-scale commercial and mixed-use projects where we can drive both financial and ESG outcomes for the benefit of security holders, our capital partners, and the greater community. Mirvac continues to demonstrate its credentials when it comes to large-scale city-defining precincts, and our current active pipeline demonstrates the growth of our diversified activities and the consistent execution against our strategy. In the past six years, our development activities have grown almost four-fold as we have leveraged our integrated skill set to move from what was largely a residential and office capability to now a true mixed-use urban asset creator.
Our commercial and mixed-use pipeline now represents some AUD 12.9 billion, and while we maintain our overweight exposure to core CBD and fringe office. We have seen strong execution in our development plans for our industrial and BTR pipelines, together with significant planning momentum in our mixed-use projects. This diversified pipeline is now less dependent on single sector contributions, with future years shaped by growing earnings contributions from large-scale industrial, BTR, and precinct-wide mixed-use projects. The projects listed on this slide have all made material movements in either completion or de-risking of key planning pathways. With a further review of our portfolios leading to the reclassification of 34 Waterloo Road across the staple as we advance development options with the potential for multiple uses on this site. For over four years, we've provided general commentary on our future plans for Harbourside.
While the existing asset continues to be challenged post-COVID and is certainly at the end of its functional lifespan. It is pleasing to be able to provide a more material update of our proposed redevelopment. The half year has seen strong progress on planning approvals, with the project now well advanced, gaining stage one DA approval and with the selection of the winning Snøhetta + Hassell design from the international design competition. Calendar year 2022 will be focused on advancing the balance of DA approvals and the finalization of the approval process with the New South Wales government, and then moving into vacant possession and demolition of the existing center. Much work is still required in the stage two DA process to finalize the exact mix of uses.
However, the proposal will create a new precinct with an end value in excess of AUD 1.8 billion, and include approximately 24,000 sq m of campus style office, 7,000 sq m of carefully curated retail uses, and some 320 luxury apartments. As you would expect, the project will showcase Mirvac's sustainability credentials together with the creation of some 10,000 sq m of unique public domain. We have a forward pipeline of development opportunities with an end value of AUD 29 billion. This is the most diverse combination of quality projects across multiple asset classes in our history and perhaps fitting in our fiftieth year. Over the near term, our focus for this pipeline falls into four categories.
Firstly, to continue our track record for strong delivery in the creation of investment grade assets that deliver sound development earnings and quality new assets into our integrated investment portfolio at attractive spreads to fair value. Examples being the Locomotive Workshops and our Ann Street projects in FY 2022, and the de-risking of the next wave of office projects. Secondly, to continue the tremendous momentum we have in unlocking the next wave of earnings in residential mixed use, particularly with the growing apartment release program. Thirdly, FY 2023 will see the emergence of growing contributions from our industrial development projects as both Switchyard Auburn and Aspect Kemps Creek come online with already impressive leasing commitments. Finally, the conversion of further BTR projects to stabilize earnings with the completion of LIV Munro and the advancement of current projects of the LIV brand in Melbourne and Brisbane.
Clearly, this is a large pipeline, and together with additional new business opportunities, we equally look forward to advancing our third-party capital strategies as we implement further partnerships across office, industrial, BTR, and residential, alongside our balance sheet. I'll now hand to Campbell to discuss the integrated investment portfolio.
Thanks, Brett, and good morning. IIP has had an active six-month period. We continue to execute our portfolio strategy to increase our asset allocation to industrial, build-to-rent, and new office developments by disposing of smaller convenience shopping centers and older office assets. During the period, we have sold or exchanged contracts on two retail assets, plus our Quay West Car Park, and we have transitioned to development both 55 Pitt Street, Sydney, and 34 Waterloo Road, Macquarie Park. COVID lockdown and legislative rent relief has impacted performance with increased ECL and lower cash collection. The retail portfolio has carried the majority of the AUD 25 million negative impact to NOI. We have continued to focus on managing the NOI timing impacts of the disposals and development vacancy previously mentioned, relative to the NOI contributions from recent development completions.
We anticipate growing contribution from IIP in the second half as income production from the Locomotive Workshop commences ahead of further contributions from 80 Ann Street next financial year. The delivery of 11 high quality, sustainable, long-WALE developments over the last eight years has contributed to long-term financial outperformance over the past three, five, and 15 years for the group and positions us well for the changing nature of customer demand as the flight to quality office space gathers pace. We continue to enjoy low maintenance CapEx and anticipate incentives will remain low over the next 18 months, given the relatively minimal lease expiry in the portfolio. Other highlights for the half include 24% of the portfolio was externally valued at December, delivering net gains of AUD 127 million, up 1.6%.
Occupancy has held up well at 95% and remains well above the markets we trade in. Interestingly, 80% of our current vacancy resides in lower grade assets, demonstrating the resilience of our portfolio in the face of soft market conditions. Cash collection remains solid at 97%. Leasing activity is improving despite COVID impacts and remains low given our limited expiry profile. 25,000 sq m of deals were completed during the period at positive leasing spreads of 5.2%. The portfolio delivered like-for-like growth of 0.8%, which is pleasing given market conditions. As you can see from the chart on the right, our portfolio of modern, sustainable assets that facilitate collaboration and innovation puts us in good stead for a market that has seen bifurcation of tenant demand.
Turning to the industrial business, the 100% strategically located Sydney portfolio continues to enjoy the benefits of e-commerce, robust tenant demand, and rising land values. NOI was down to AUD 27 million for the half following the transfer of 34 Waterloo Road to the development book. However, we did enjoy like-for-like NOI growth of 1.7%. Occupancy remains at 100% and WALE at 7.1 years. 31% of the portfolio was revalued at December, delivering gains of AUD 106 million, up 7.2%. As you can see from the graph on the right, all of our development sites have been secured at attractive points in the cycle.
The key opportunity is now the timely conversion of the AUD 2.3 billion development pipeline into pre-leasing and delivery mode. Our Auburn development Switchyard has settled, secured pre-commitments on 38% of the 72,000 sq m of NLA, and is under construction. Income production will begin in FY 2023. Aspect Industrial Park at Kemps Creek has also settled, secured agreements on 100,000 sq m of NLA, and is due to commence construction imminently. Elizabeth Enterprise Precinct at Badgerys Creek has also settled, secured rezoning, and we have commenced discussions with a number of potential customers. Our retail business continues to weather challenging business conditions following the Omicron outbreaks and the reintroduction of rent relief legislation.
Whilst this has impacted our cash collection, we have undertaken significant leasing activity with 128 deals completed during the period, with negative leasing spreads of just 0.98%. Pleasingly, we're seeing the return of growth and valuations. Turning to our operating results, NOI was down AUD 65 million on a PCP basis, impacted by the sale of Cherrybrook Village and a further AUD 4 million of COVID impact. Occupancy remains strong at around 98%. 28% of the portfolio was externally valued at December, with growth of AUD 75 million, up 2.5%. MAT total sales were down just 1% at December, despite a 17% fall in foot traffic.
While the COVID-19 impacts have been difficult, we know from recent experience that recovering the cash collection can rebound quickly in a post-lockdown, post-rent relief world, particularly as our portfolio is leveraged to the return of international students, office workers, and tourists. Turning to build-to-rent, we are making good progress in this growing asset class. We are confident that we have proven up the customer proposition at LIV Indigo, the only operational build-to-rent asset in the market at the moment. With consistently strong customer survey results and leasing success, we're also happy to report that leasing commitments has now reached 93%, and we expect to approach leasing stabilization shortly.
Pleasingly, we are seeing great momentum on our build-to-rent development pipeline, with AUD 1 billion of assets now under construction, including LIV Anura in Brisbane, LIV Aston in Melbourne, and LIV Munro also in Melbourne, which is due for completion late 2022. Our focus will now turn to raising external capital to invest alongside us, and this process is due to commence shortly. We'll have more to say about this at our full year results. I'll now hand over to Stuart Penklis for the residential update.
Thank you, Campbell Hanan, and good morning. I'm very pleased to share that despite ongoing COVID challenges, we settled 1,303 lots during the half, a 21% increase on the prior corresponding period. This includes completion of two apartment projects, Voyager in Melbourne and Tulloch in Brisbane, along with a significant number of MPC settlements. This skew to MPC has resulted in an elevated development gross margin of 24%, a trend that will continue until FY 2023, when apartments and built form contribute a larger proportion of earnings. Defaults have returned to below 2%. Sales of over 1,800 lots reflect demand across all customer segments, including a 20% increase in MPC sales from the prior corresponding period, despite the roll-off of government stimulus. Overall, 83% of sales were in MPC, primarily to upgraders and first home buyers.
Our continued focus on owner-occupiers has paid dividends, accounting for over 70% of sales and driving demand across the four apartment projects we launched in the period. This has seen our pre-sales grow to AUD 1.5 billion. With over 95% of our FY 2022 EBIT now secured, the benefit of ongoing sales momentum is primarily for FY 2023 and beyond. We added over 1,500 lots to our pipeline, including the acquisition of Cobbitty, an MPC site in southwest Sydney, which will allow us to bring a further 950 lots to the market in the near term. While we remain alert to the impact of Omicron on construction activities, with some uncertainty for late FY 2022 settlements, we are on track to settle more than 2,500 lots with a slight skew to the second half.
Our plan to bring over 1,000 apartments to the market this year is well underway. In the last six months, we have successfully launched four major apartment projects, often in challenging circumstances. Forme, the last apartment building at Tullamore, launched during Melbourne's lockdown, is now 48% pre-sold as at the end of January. The first stage of NINE by Mirvac is now 70% pre-sold. Following the launch of The Frederick, Green Square is 49% pre-sold in total. These sales are a testament to our focus on delivering well-designed owner-occupier product. Our shovel-ready strategy has put us in a strong position to accelerate apartment releases in response to demand. Looking ahead, we expect to bring a further three apartment launches to the market in the next six months, along with the next stage at NINE by Mirvac.
The Langley, Charlton House, and Waterfront Isle have all been designed for the owner-occupier, with the product reflecting the structural shift we've seen to larger, well located quality apartments with superior finishes and amenities. With the strength of our balance sheet, we've been able to commence construction on six of these projects. These apartment sales will drive pre-sales growth in the coming 18 months, providing significant visibility on residential earnings in future years. The purchase of a home is the largest investment most people make. Mirvac's reputation and 50-year track record on delivering high quality, well-designed homes, investing in infrastructure and communities early, and continued product innovation means people trust us to deliver on our promises. We have continued to diversify our offering from land, detached homes, and terraces through to mid and high-rise apartments.
This means everyone from first-time buyers through to upgraders, right-sizers, and investors can benefit from Mirvac's commitment to quality as we respond to demand across all customer segments. This trust is demonstrated by the high level of repeat customers we have, particularly in off-the-plan apartment sales. At the first NINE by Mirvac release, repeat customers accounted for 40% of sales. There is no better testament to the Mirvac difference. As customer preferences and value propositions change, our integrated model means we can quickly respond and pivot our projects in response. During the last six months, this has also put us in a strong position to mitigate the impacts of supply chain disruption and rising costs through our strategic procurement and forward pipeline visibility.
Our ability to consistently deliver earnings through the cycles and execute on our strategy by appropriately taking and managing risks highlights the business's resilience in managing and responding to change. A few years ago, I shared our disciplined approach to restocking at the right time, in the right place, and for the right price. This meant limiting acquisitions when the market got heated and commencing again as competition cooled. Our success in the last few years is a result of this continued discipline and rigor. Our earnings will continue to benefit from the decisions we made many years ago through the cycle. Our pipeline of 26,800 lots comprises projects where we are confident in our ability to create value and deliver great product for our customers.
Relative affordability for apartments is at an all-time high, which is driving a structural shift away from detached established homes and into apartments. At Green Square, for example, an average three-bedroom apartment is now 65% of the price of a three-bedroom house in the surrounding established market. While interest rates are anticipated to rise later this year in line with RBA forecasts, rates remain relatively low by historical standards. The current cycle we're in, particularly for apartments, is different to the last cycle, with significantly more constrained supply, a greater focus on owner-occupiers, and larger, more premium product. History will tell us owner-occupiers are not as sensitive to interest rate rises. Recent significant price growth in the detached established market means Mirvac's project diversity presents an even more compelling value proposition for well-capitalized upgraders and right-sizers.
The impact of a 45% fall in apartment supply on the East Coast in the next few years, combined with the return of immigration, sets the foundation for continued demand for high quality, well-designed product, even in times of rate rises. We are confident in our ability to navigate this next part of the cycle by leveraging our strong brand and reputation as we respond to a critical shortage in new supply. Thank you, and I'll now hand back to Susan.
Thank you, Stuart. In my opening remarks, I said we remain confident in achieving our full year guidance of at least AUD 0.15 per stapled security, DPS of AUD 0.102, and greater than 2,500 residential lot settlements despite the Omicron curveball. We base this on several factors. Firstly, we benefit from high quality investment income flowing from our modern low CapEx long-WALE portfolio, supported by appropriate allowances to manage bad debt and tenant relief. Secondly, we have a high level of commercial and mixed-use development, EBIT already secured for FY 2022. Thirdly, having over 95% of residential EBIT already secured. We do remain vigilant around execution risk and are always alert to respond to any new curveballs COVID or indeed anything else would like to throw.
As we've said consistently over many years, we'll continue to assess opportunities and make investment decisions with an eye on both ROIC and operating income to generate value for security holders. Thank you, and we're now going to open up for questions. Please limit the questions to one or two so that as many people as possible have an opportunity to ask questions.
Thank you, Susan. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you need to cancel your request, please press the pound or hash key. Our first question comes from Sholto Maconochie at Jefferies. Please go ahead.
Hi, Susan, team. Thanks for your time. Just a bit on the guidance. You've got, you've settled over 300 lots, but your guide's over 2,500, but you mentioned a skew. Is that on a profit skew because you've got higher dollar value than margin, or just sort of why that basically implies you've got more lots over 2,600 if it's a skew. Is it more lots or is it dollar value on the skew?
Thanks, Sholto. I'll hand to Courtney for this one.
Thanks, Sholto. As Stu indicated, there's a slight skew in lots to the second half. Our earnings skew is slightly to the first half, and that's got to do with the makeup of MPC and apartments. Apartment has contributed strongly to the first half given the settlement of Voyager. Hopefully that answers your question.
Okay. Yeah, that's fine. Then just on the cost, I know the costs are up for the full period, which you mentioned, we assume that should be the same in the second half. It's just gonna be annualized, double what it was the first half.
Yeah, we do. As we indicated at June, actually, those costs are normalizing, and you should expect that they're in line with where they are for the second half.
Just finally, on your, just to confirm, you've taken the 55 Pitt, Harbourside and Waterloo. Is there any income in the second half in those, or are they in the development bucket now, and there's to be some income coming through from Harbourside and Pitt Street still?
Yeah.
there's no income?
No. Pitt Street and Waterloo Road have been moved into development. Harbourside still sits in our investment property, so we are collecting income, but it is reduced because of the impacts of COVID and where tenants are sitting on that asset. There is still second half income on Harbourside, but it's just less.
Do you have a split? Finally, it's the last one for me. On the development profit in the business, what it was between Ann Street and the locomotive and how much will be in the second half? It looks like it's more front loaded in the first half. Would that be correct?
Yeah. There has been outperformance from the commercial mixed use, those two projects actually in the first half from what we expected. Both of those assets have actually delivered yield on costs above what we previously indicated to the market. They're now at 6% or more. That has meant total profit is more, and 80 Ann Street has contributed strongly. The most contribution in the first half is really from the sell down of Locomotive Workshop, and then 80 Ann Street will continue to contribute in the second half as that project completes.
Okay, great. Thanks very much.
Our next question comes from Stuart McLean at Macquarie. Please go ahead.
Good morning. Thanks for your time. Just probably maybe a question for Campbell Hanan, just in regards to the earnings of the trust business. Looks like there was only AUD 1 million of like income growth across a AUD 280 million NPI. So we're talking less than half a percent like growth there. Just wondering, what are some of the key drags, and do you expect that to improve over the next six to 12 months? Maybe with particular reference to office.
Yeah, thanks Stuart for the question. Look, the key drag is vacancy. Relative to PCP, the vacancy has slowly been increasing. We're now sort of stabilized, I'd say, on the vacancy side. We'd expect the improvement in let up will be important. Also, the importance of rent collection. I just don't think when you look at ECL and release of future ECL, that's gonna be important thing for us to focus on second half. Second half, we have the full contribution from the Locomotive Workshop, which really didn't provide any income in the first half. 80 Ann Street obviously into FY 2023 will give us very, very small contribution in the back half of this year, but it's predominantly going to be next financial year.
Just a follow up on that, if I may. In regards to occupancy in the office portfolio, do you think that we're likely to see stable occupancy from here? Or would the expectation be over the course of calendar year 2022, that it ends up north back towards 96%-97%? Or yeah, can you just provide an update there, please?
Yeah, look, that's an interesting question, and certainly one which is a little bit hard for us to give guidance on. What I do know is when you look at the stats in office market, it's pretty clear that the best performing real estate is doing very well. Certainly we've seen significant improvements in vacancy and demand for the premium grade real estate. Given 69% of our portfolio was built after the year 2000 and around about 7% of our portfolio are assets that are held for development, certainly it holds us in pretty good stead going forward.
Okay, thank you. My second question is just a quick one, hopefully for Courtney. Just in regards to the second half, what are your expectations for COVID rental relief that's been built into guidance?
We expect rental or cash collections to recover or improve in the second half. Obviously we've been impacted, and the main impact has come through the retail business. We do expect that to recover. We had hoped that the Retail Code of Conduct or the Code of Conduct would come to an end in January and allow us to successfully move forward with those tenants and resolve. Pushing out to March does make that a little more complicated, but I think it's a timing issue. We do expect it to recover, and we've assumed that in providing the guidance today at maintaining AUD 0.15.
Are you able to be any more specific in regards to a dollar amount or a range expected for the second half?
Oh, no. Look, I think our outlook is we're indicating AUD 0.15 or at least AUD 0.15 in guidance, and we've allowed appropriately for the recovery of that part of the business.
Thank you.
Our next question comes from Ben Brayshaw at Barrenjoey. Please go ahead.
Oh, thank you. Question, Su, perhaps to Stuart. I was wondering if you could comment on buyer demand at Willoughby. Just your thoughts around the pace of pre-sales for the remaining lots. If you could also just touch on as part of that, what pre-sale level that you would like to be at in order to sort of commit to the FY 2023, you know, planned completions that you have in your guidance.
I might start with that, and Stu can jump in. We were really pleased with the launch of NINE by Mirvac at Willoughby, along with the other launches that we did in the six months as we foreshadowed at the full year. I think there's probably a little bit of revenue surprise upside, which has been very pleasing to see. I think the most telling stat is the one that Stuart talked about in his remarks, that 40% of our customers are repeat Mirvac customers, which is a great testament to that product. We're very confident in the build-out of our pipeline and the commitment to bring those apartments to market and commence construction. We remain very disciplined around pre-sales, as you would expect us to.
We also feel very confident about the cost profile of that. We have 100% of our procurement already locked in for the remainder of FY 2022, and 62% of everything we need in FY 2023 already locked in. Given the challenges around the global supply chain, I think that gives us great confidence both on the cost and the revenue side, to commit capital going forward to build out that pipeline. Stuart, do you wanna add?
Yeah, well, the only thing that I would add is that obviously we had a very strong stage one launch. We're actually now getting ready for our stage two launch that will come to market in the next few weeks. You know, as I said, 40% repeat Mirvac purchase is remarkable and testament to the brand. We are now obviously seeing the owner-occupiers, the right sizes now coming through in search of the larger product. We're working with obviously a number of those purchasers in the lead up to the next launch. The one thing that I think just is important to call out is the affordability of apartments, and Willoughby's a great example.
If you look at a three-bedroom apartment at Willoughby, it's 47% of the value of a three-bedroom house in the surrounding market. The value proposition of apartments, particularly in these infill locations, is very compelling. What we're seeing is buyers are searching for those larger apartments. Buyers are looking for customization and on a project like NINE, Mirvac's able to fully provide that customization with the off-the-plan sales. We expect demand to continue to be strong for that product.
Thanks, Stuart. Just as a follow-up to that, just going back to my original question of the 440 or thereabouts lots, what would a pre-sale level be, you know, in terms of your expectations to, you know, to commit to the project? Are you happy to commit to the project at 50%? Do you have a threshold in mind? I was wondering if you could talk to that, please.
Yes. Typically we would work to a 50% threshold. We've achieved obviously over 70% on stage one. We're very comfortable with the momentum across the different product types to be able to deliver those earnings into 2023.
Great. Thank you. Just another question, being my last, the composition of the investment income for build to rent, the AUD 2 million of EBIT, does that include, if you could just clarify please, perhaps for Courtney, any allocation of overhead against property income? I was wondering if you could just talk about the composition of that number, please.
It does include allocation of income, so that's the net income out of that asset. You can see that it's improved in the period because we're coming to, you know, close to stabilization as Campbell Hanan indicated in his speech.
It's essentially all property income. Is that how we should think about it?
Yes. It does have an allocation of overhead to it, but, you know, it's commensurate with the earnings that it gets and it's one asset trading, and you can see the income's coming online.
Thank you.
Our next question comes from James Druce at CLSA. Please go ahead.
Yeah, good morning, Susan and team. Maybe a question just around Kemps Creek. How lumpy do you see that project being, or is it gonna be spread out in stages when that starts to come through?
Su, if you're happy, I'll jump in and take that one. Look, it's. That's probably a little bit hard to call at the moment. We've now secured around about 48% of site area in deals done. One of the challenges that we'll continue to work through is making sure that we optimize the size of site relative to the pre-commitment demand. We constantly keep working on that. What I can say is the demand has been incredibly strong. Traditionally in previous cycles, you might expect to develop 25,000 or 30,000 sq m per year. Certainly as you can see from the 100,000 square meters of pre-commitment that's already secured with executed agreements for lease, that demand is substantially higher than normal.
If we keep up on this run rate, you know, we'll be through the asset reasonably quickly and with a focus well and truly onto Badgerys Creek thereafter.
That's clear. Thank you. Maybe one just for Stuart. Just talking about the margin, project margin being around 24% for a couple of years. You've been doing, I think, 25%-27% over the past few years, and arguably you've got a big skew to MPC at the moment, which is typically higher margin. At the same time, house prices seem to be outstripping costs, as well. I'm just wondering why that's not a little bit higher. Is there anything I'm missing there?
No, I don't think so. I think you'll see that margin increase marginally in the second half. As we've flagged, in the coming years, we'll see that margin start to come back as we see greater contribution from apartments and built form homes.
All right. That's it for me. Thank you.
Our next question comes from Tom Bodor at UBS. Please go ahead.
Good morning. I was just interested if you could talk to the improvement in the cash collections in the retail part of the portfolio, how that was, whether that trajectory continued into January.
Campbell?
Yeah, Tom, look, certainly what we learned in leading into December of last financial year is that we acknowledged that the Code of Conduct was coming to an end. We started to see an elevated increase in deals done and rent collection, which you would have seen in the PCP. I think now we're starting through January to see exactly the same thing, with a mid-March date for the code to roll off. We're certainly having elevated discussions now on our arrears book.
Okay. Collections have improved from, say, the December month into January?
Yeah. Look, they have, and I think if you look at first quarter to second quarter, we're at sort of 88%. Second quarter, we've now grown to 92%, so there is an improvement. That's across the-
Okay.
the whole business.
Yep. No, that's good. Thank you. Then the other one was around the build to rent portfolio. I just was interested in coming up on the anniversary of your initial tenants, what sort of retentions are you seeing and/or tenant retention are you seeing, and where tenants are leaving, what are the new leases being struck at compared to sort of outgoing rents?
I'm gonna start with that.
Oh, sorry.
Sorry. No, I'll start with that one. Obviously, the anniversary of the asset and the starting of rollover leases happened at not the greatest time with lockdowns and not being able to have the amenity floor open and some of the customer value proposition not being accessible to customers. It was a pretty challenging period. I think as we've shown on the leasing momentum to get to 93%, we're back on track with that. Campbell can talk a little bit about new leases and retention rates.
Yeah. Thanks, Tom. Look, it's probably just a little soon to give any real guidance around what that looks like. The reason for that is we elected to roll a lot of those early leases for quite short periods of time, two, three, and four months, because we just wanted to get a sense of getting back to a more normalized market before we could understand what those real retention rates and relet spreads might look like. We're sort of in the middle of that now. I think we'll have much more color at our full year results, which we can talk to that.
Okay, thanks. Well, can you at least quantify where you see the rents in the build to rent asset versus the next door build to sell that you've got a handle on?
Yeah.
We can do-
Sorry.
Go, Campbell. Yep.
Look, we have pretty consistently over the last 18 months been securing rental premiums in the sort of 15%-20% range versus our Pavilions development next door. Interestingly, we've had three or four renters which have subsequently become buyers of units in Pavilions. That really hasn't changed. I think the more important thing we're seeing is a holistic change in vacancy across some of these areas, particularly in inner Melbourne and Sydney. That's certainly important for the long-term rental growth relative to the short-term drop in rents that we experienced through those initial COVID lockdown periods.
Thank you.
The other interesting data point there is we've got now a substantial portfolio of apartments under management through our RES by Mirvac business. What we consistently see is that our vacancy rates and our downtime between leases for our investor customers when we're managing the apartment is considerably better than the surrounding market. In some cases, the vacancy rate is, you know, a third of what the vacancy rate is in surrounding market. I think that is a testament to the quality of the product and the investment return our investor customers are getting.
Yep. Thanks for that.
Our next question comes from Richard Jones, JP Morgan. Please go ahead.
Hi. Just to follow up on Tom's question, just clarifying your answer on retail cash collection in January versus Q4 of 2021. Can you clarify that, Campbell?
What I mentioned in my comments to Tom is that cash collection across the IIP business increased from about 88% first quarter to 92% in the second quarter.
What we are seeing through January and early February is we're starting to see increased cash collection again in certain elements of our retail base. Really now what's been different this time around with retail tenants relative to the first lockdown period is that a lot of tenants, rather than undertaking commercial deals, have waited to see whether the Code of Conduct would be extended or not. A lot of tenants are sitting on their hands, and probably rightly so, to get a sense of whether there's gonna be any more legislation to protect. That being said, we're seeing much better sales numbers coming out of certain elements in certain categories which we hadn't seen in that prior slowdown period.
Okay. Thank you. Just a second question. Just in relation to the hurdles required to kick off 55 Pitt and Harbourside. Can you just work through what the main hurdles you need?
Brett?
Thanks, Richard. Look, we don't have a specific pre-leasing hurdle on those two projects. You know, at the moment we're in a lot of discussions on 55 Pitt Street with various tenants. We'll evaluate that, but we've got a fairly long runway really over the balance of this calendar year in terms of, I guess, the forward and demo works that, you know, we've already commenced. We'll continue to evaluate that and we'll just look at it. You know, we probably don't think we'll be at 50%-70% pre-commit levels. You know, I think it'll be a lower level, but we'll just look at that, you know, on a run rate as we further advance our leasing inquiry.
In terms of Harbourside, look, this year the balance is really around de-risking the stage two DA. We're in some early conversations with potential tenants but, you know, really that decision around pre-leasing, particularly for the office component of Harbourside, is probably a decision that we'll be looking to make probably later this calendar year.
Okay. Just a final question. Just in terms of labor cost inflation, which you've called out, which we're seeing obviously as well, just interested in the implications that has on the development pipeline.
Yeah. I'll start with that one. From a construction cost point of view, there certainly have been pockets of particular materials or particular trades that have seen some significant cost pressure. Overall, we're seeing costs still within a 2%-4% band, which is well within our feasibility assumptions. As I commented before, our very visible pipeline and the integrated model allow us to manage the construction cost risk really well. To the extent that we've now got 100% of everything we need to build out the rest of FY 2022 already locked in under fixed prices and 62% of raw materials and contracts for FY 2023.
I think we're in a very solid position with respect to be able to manage through what has been a challenging time from a supply chain point of view and also from a labor point of view.
Thank you.
Our next question comes from Andrew MacFarlane at Jarden. Please go ahead.
Oh, hi, guys. Look, just still on the supply chain. On residential, obviously it's impacting from cost as you just spoke to. Do you have any concerns over delivery given lockdown across the various states?
Oh, I'll start with that one. You can maybe add to that, go for it. I think that we're very pleased with how the business has responded through very challenging conditions, not just for construction, but also for sales and marketing. When your sales suites are closed, we continue to be able to sell. We pivoted to digital interactions with our customers. We've been able to keep all our projects on time. Yes, we're always vigilant to it, but I suspect we're. I hope, I'm not jinxing us, but we're through the worst of the lockdowns. We seem to have entered a new and different phase of living with COVID.
No, we expect that we've weathered the worst and we are still on track, on budget, on time, with a very well-controlled cost outlook.
Great. Thank you. Just one other one, just on build to rent. You haven't restocked the pipeline in probably over 12 months now. Just wondering how actively you are at looking at projects or is it more of a case of, you know, increased competition in the market and the impact that's having?
Oh, no, we continue to look at new projects. I think we've got a very significant pipeline that we're focused on. As we've always said, firstly proving out the customer proposition. I think that job is thoroughly well done. Then making sure we can build out the pipeline and bring third party capital to sit alongside us. We continue to focus on that. Yes, we do look for new opportunities in the build to rent space. I certainly think it's not a question of there's more competitors making it more difficult, but we welcome more people to be in this sector. It can't just be one company. I think there's. It's a housing typology that Australia desperately needs.
We think it's great for the industry when more competitors are in the market providing product for customers and secure homes in a rental format.
Thank you.
Our next question comes from Lauren Berry at Morgan Stanley. Please go ahead.
Thanks. Morning, everyone. Just a question for Ju on residential. Are you able to talk about some of the price rises that you've been seeing, particularly across land sales? You know, there's been a lot of articles about price rises up to 30%.
In Sydney. You know, when should we start to see this price appreciation come through in, you know, the average value of your settlements?
Yeah. Thanks, Lauren, for that question. Yes, certainly, we've seen some very strong price growth across our projects, particularly in the last half. To give you some color, you know, a project like Woodlea, we've seen around 8.4% increase. Down in the southeast in Smiths Lane, we've seen about 11.8% increase. With that said, we're obviously selling 12 months out in terms of when we can deliver those lots for settlement. So there will be that price growth coming through into FY 2023. In saying that, and like the previous question that was answered, we are also seeing costs increase. It's fair to say that the price growth is certainly covering the cost increases that we're seeing in the MPC business.
Particularly where we're seeing the price growth in the MPC business is in civil works. We're also seeing obviously price growth in the home, in the domestic build segment of the market. To give you some color there, you know, reinforcement and timber frames. Timber frames are up about 40%. However, we do think that will normalize. In terms of our run rate of escalation in our cost plans, we run at about between 2% and 4%. Overall, we're still sitting within that 2%-4% band. In some instances ticking up. Yeah, that's sort of the snapshot of where we're seeing in the market.
Okay, cool. Thank you. My other one is just around build-to-rent and the capital partnering strategy. I know you've got in the presentation that you are gonna commence talks with potential capital partners soon. Are you able to just comment on, you know, whether that would be, I guess, adding your future pipeline into the current build-to-rent club and doing, I guess, a programmatic kind of sell down? Or would you look to, you know, source individual capital partners for each different project?
Brett.
Yeah. Hi, Lauren. Look, good question. It's probably a little bit early to say that. Probably directionally, I'd say at the moment we're thinking more of a club than individual project by project. As I say, we're just starting the process off with discussions with investors. That would be our thought process.
Okay, thanks.
The final question comes from Alex Prineas at Morningstar. Please go ahead.
Good morning. Thank you. Just another question on the supply chain issues. You did mention that there are some early signs of things improving as lockdowns end and borders reopen and so on. I noted that one of the slides, I think it was slide 26, talks about a lot of the costs are offset by price escalation that you've built into the feasibility studies. I was wondering if it's too early to sort of see on the horizon that some of that price escalation in the feasibility studies could be unwound or whether those feasibility studies are still seeing increasing price assumptions.
I'll take that question. I think that it is probably too early, but the one thing that we do from a Mirvac perspective and leveraging the integrated model is look very strategically as to how we procure, how we can bundle across as many projects as possible. Right across from the domestic builds to apartments to commercial. We've got the benefit of very good visibility of our needs over the short to medium term, and we procure in a very strategic way. I think it is early to start to wind back any of that, but we are certainly seeing some opportunities globally in terms of some better pricing starting to come through.
The other thing that's quite interesting is the resilience of the local market and the ability for the local market to really fill in where a lot of procurement was being undertaken offshore. We've seen some very good, I suppose, local manufacturers being able to really step into the market and supply the Mirvac business. An example of that is obviously we're seeing very strong supply chain coming domestically for kitchens and joinery, but also obviously bathroom pods and the supply of bathroom pods. The domestic market has been very capable to fill our demand needs.
Thank you.
Thank you, everyone. We have no further questions. Susan, I'll hand back to you for closing comments.
Thank you, and thank you for all of those questions. Thank you for spending time with us this morning. We're very proud of the momentum in the business, and we have excellent forward visibility given the strengths of our pipeline of quality projects that we will deliver in, as we go about our purpose of reimagining urban life. We look forward to speaking with many of you this afternoon one on one or over the coming days in investor meetings. And as I said at the very beginning, I think we all desperately hope that when we get to the full year, we'll be able to do this in person. Thank you for your time, and have a good day.