Good morning, and welcome to our first half twenty twenty one results presentation. Thank you for taking the time to be with us no matter where you are in the world. We're meeting today on the lands of the Gadigal people of the Eora nation, and I pay my respects to elders past and present. With me today are Stephen Gould, Brett Drapfen, Campbell Hannan and Stuart Penklas. Stephen Gould, who many of you know, will be presenting the financial section today.
I'm very pleased to say that Courtney Smith will be joining Murvac as CFO on the March 8, and we are very much looking forward to welcoming her to the team. Shane is going to be conducting a handover and will leave Murvac on the March 31. Shane and I have enjoyed a wonderful seven year partnership, and I'm sure you'll join with me in wishing him all the very best in this next phase of his life. Before we get into the results, I'd like to make a few opening remarks. We're here in Sydney today, for many of us fortunate to live here, sometimes it feels almost normal.
But clearly, this is not the case. The world is still in crisis on many dimensions, health, of course, but also economic with deep social division. For those of you on this call who are outside Australia and even many of you within Australia but in a different state, thank you for staying in touch with us virtually over the last year, and we truly look forward to the day when we could meet again in person. Daily, we are reminded by how well we have been served in Australia by cooperation and decisive action, although not perfect, amongst government, policymakers, citizens, health workers, scientists, not for profits and corporate Australia. There's no going back to before COVID, and we don't yet know what after COVID looks like or when we'll get there on a global scale.
In Australia, we'll be imminently joining other nations on the rollout of the largest vaccination program in history. We're optimistic that in time, as society, we will work out what a post COVID world looks like on many levels, including international migration and the return of students to Australia. We will work out how we want to live in the economic agglomerations we call cities and how we at Mervak will need to continue to respond to the changing urban needs of our customers. Some commentators have pointed to the exodus out of high cost gateway cities such as San Francisco, New York or London as an indicator that urbanization is in reverse. This is way too deep a topic to do justice to on a results presentation, and so we will be releasing a thought piece for discussion in the next couple of months.
We are convinced that while COVID will change how cities are structured and how they function, the future of our major markets, Sydney and Melbourne, remains strong. The demand for the social and economic connectivity that drive wealth creation in these cities will not wane. In fact, the global experiment in social isolation has only served to remind us of the power of social interaction. Cities will retain primary importance, particularly in Australia, but they will evolve, and we are well placed to participate in that evolution as cities deliver what people want: deep employment pools, amenity, connectivity and convenience. We've got the pipeline and the capability to cover the entire spectrum of residential built form from the inner and middle rings to the urban fringe as well as build to rent.
Our industrial portfolio is capitalizing on the
growth in demand arising from e commerce through the creation of new investment logistics assets in key locations. Our modern, smart, long whale, low CapEx office portfolio is well positioned to respond to
the changing needs of office customers as we all rethink how workplaces can serve strategy and build culture. Our experience across multiple asset classes, including bespoke urban retail, gives us a competitive advantage in securing and delivering large scale urban mixed use developments, supported by the desire for hyper local living that has emerged during COVID. Our urban asset creation strategy delivering high quality recurring income streams has never been more relevant. So to the results for the first half, which are solid despite the very challenging conditions. We've presented headline operating numbers largely against the second half of FY 2020.
The first half of FY 2020, the traditional prior corresponding period, was six months in which you barely heard of the word of COVID, while the second half comprised three months of emerging COVID and then three months of the depths of COVID. And we think, as a comparator, the second half provides a much more accurate view of the progress of the business as we move through this crisis. Of course, if you want to do the traditional PCP analysis, the information is all there in the additional information. To start, I'd like to highlight the support our business has provided to our commercial property customers. Under the code, MIRVAC, and hence our security holders and joint venture partners, has contributed $68,000,000 in COVID rental abatements and waivers, 48,000,000 in the last three months of FY $20.20 and $20,000,000 in the six months to date in FY 2021.
This represents approximately 19% of commercial property NOI for those nine months. First half operating profit is up 10% on the previous six months. EBIT is up 8%. Cash flow is pleasingly very strong at four fifty million dollars and DPS is up 60% on the second half of twenty twenty. Against FY 2020, NTA is up 2%, gearing is down at the bottom of the range at 21.4%, and assets under management has grown by 4% to $24,000,000,000 including $9,700,000,000 of third party capital.
We continue to be prepared for challenges that will arise, and at the same time, we are positioning for and executing on opportunities. We do expect a gradual recovery in Australia. We're seeing increased foot traffic and sales in our retail portfolio, strong residential conditions supported by stimulus and a gradual return to the office, although we're very careful to say not a return to work. There's plenty of work being done over the last year, just in a different location. The recovery will be accelerated as the vaccination program rolls out across the country.
However, we do remain cognizant of risks as federal and state support measures taper off and the structural changes in each of our asset classes play out. We do remain vigilant around people and safety, particularly concerning physical and mental health. I'm convinced that all the work we've done over the last eight years prepared us for the year just past. We entered COVID with a strong balance sheet, clearly defined disciplined strategy, deep capabilities, a passion for sustainability and highly engaged people who are well versed in flexible working. These things have enabled us to continue to move forward with great conviction.
As you're going to hear throughout this presentation, we maintained significant momentum across the business in the six month period, commencing construction, launching new projects, securing commercial pre leases and residential sales, acquiring sites, deploying capital to our projects, securing rezonings and development approvals. We completed some major projects, and we're accelerating our technology transformation. Our award winning asset creation capability continues to provide modern, low CapEx, long rail assets for our balance sheet and for our capital partners. This is central to our strategy. As we create and deliver new high quality assets, we add new NOI to the portfolio, create value through NTA uplifts and development profit, and we are growing our earnings from third party capital management.
Our future controlled pipeline now has the potential to deliver over 800,000 square meters of NLA, which could generate another $250,000,000 of future additional high quality rental income. Our capital partnering strategy has supported growing our third party capital management to $9,700,000,000 generating $12,000,000 of EBIT in the first half. And as we deliver that pipeline, this earnings stream will continue to grow. At the start of the pandemic, some commentators thought that the demands of responding to COVID would brush all else aside. Turns out the opposite is true.
The fragility of our world has been exposed. And in that context, the importance of ESG only continues to grow. There are many things I could talk about, but I'm just going to call out three highlights. Firstly, we are progressing rapidly towards 100% renewable electricity in our operations. 100% of our retail assets and 90% of our office assets are now powered by renewables, resulting in an 80% reduction in carbon emissions.
And we've installed another 300 kilowatt solar PV systems in the industrial portfolio. We also continue to focus on transparent governance and released our first modern slavery statement. And finally, I'm pleased to report that we received the Board Leadership of the Year Award at the Climate Alliance Leadership Awards in recognition of the Murvac Board's demonstrable commitment to managing the risks and opportunities of climate change across the group while taking a leadership role in climate response within the business community. I'm extremely proud of what we've been able to achieve over the past six months and grateful to be able to play our part in a sustainable economic recovery for Australia. Thank you, and I'd now like to hand over to Stephen.
Thanks, Sue, and good morning, everyone. It's my pleasure to be presenting MEVAC's financial results today. And before I go on, I'd just like to take a moment and personally thank Shane for his leadership as CFO over the last seven years. Today's financial results highlight Mirvac's continued financial strength as well as demonstrating our successful response to the many challenges we've faced as a result of COVID and our ability to position the business for future success. As already described by Sue and will be further explained by Brett, Campbell and Stuart, when comparing the operating position we faced in the six months to June 2020, we've seen improving market conditions and as a group, our focus is to accelerate momentum and capitalize on this improving outlook.
Compared to the six months ended June 2020, operating EBIT and operating profit are some 810% higher. Office and Industrial EBIT grew by 4%, largely driven by growth in net operating income from recent development completions at 477 Collins Street and South Everly. This result was also impacted by reduced management and administration expenses, lower COVID rental assistance and offset by lower contribution from development activities. A 44% improvement in retail EBIT was driven by the reopening of the retail economy and a reduction in COVID rental assistance in the period. And EBIT in the residential division was lower primarily due to reduced lot settlements and a greater weighting towards master planned communities.
Overall, total COVID related tenant support expense has reduced from 48,000,000 in the second half of FY 2020 to $20,000,000 in the current half. Mervak continues to focus on capital management and the capital position at the first half provides long term stability and financial headroom to support existing and future growth opportunities. Gearing remains at the low end of our preferred range, 21.4%, and our average cost of debt continues to decrease, now at 3.7%. Importantly, we maintained our A3 Moody's rating and A minus Fitch rating. And finally, our continued focus on liquidity is evident with $1,300,000,000 of cash and undrawn debt facilities, an average debt maturity profile of six point eight years with no significant debt maturities until FY 2022 and strong operating cash flows of $450,000,000 which continue to support the ability to adequately fund distributions.
So on that note, I'll hand over to Brett, who will provide an update on commercial and mixed use development.
Thank you, Stephen, and good morning, everyone. As you're aware, during the reporting period, we announced a restructure of components of our business, part of which will now see us report to you separately for the Commercial and Mixed Use Asset Creation business unit. Performance will be reported at the full year. However, today, we'll focus on some key observations relating to our value creation capabilities and our forward secured pipelines. A key part of our strategy and a competitive advantage for Mervak has long been our ability to create high quality investment grade assets through our integrated development capabilities.
As you're aware, our capital allocation strategy favors deployment of capital to create quality assets in preference to purchasing them on market. These assets will continue to outperform post development through active management within our commercial property business and also lead to opportunities with our aligned capital partners as we continue to grow third party capital under management. We continue to demonstrate a consistent track record of unlocking value through asset creation with some $913,000,000 of value created since 2016, comprising $367,000,000 in EBIT and a further $546,000,000 in value completion valuation uplift. Although value creation recognition is partly dependent on project timing, our capital partnering activities combined with revaluations means that we can deliver meaningful year on year contributions with $156,000,000 per annum delivered on average since FY 2016, representing on average a 30% total return. Through this asset creation strategy, we have created a legacy of high quality sustainable buildings, which meet the evolving needs of occupiers and have a track record for delivering exceptional returns.
The case studies for South Everly and 477 Collins Street are two prime examples of this strategy in execution. The large scale urban revitalization of our South Everly precinct in Sydney, which comprises three new state of the art commercial workplaces, including Axle, the foundry and the community buildings, was completed over FY 'twenty and the first half of 'twenty one. This mixed use project delivered 20% return on investment with $187,000,000 of value creation. And just as importantly, we exceeded the expectations of the Commonwealth Bank, our major tenant at South Everly, who are delighted with their new office space. In addition, South Everly has one more stage with the locomotive workshops due to provide additional returns in the second half of twenty twenty one, and our capital partnering process has just commenced.
Similarly, older fleet at 477 Collins Street down in Melbourne has achieved practical completion in the first half, delivering a 38% return on investment and $245,000,000 of value creation for Mirvac. Of course, as with all our developments, both of these assets now completed will continue to deliver high quality income and earnings for years to come through growing NOI and fee income from co invested capital partners, which is why we think the development capability of our business is so crucial and why we have utilized it to grow our pipeline to approximately $28,000,000,000 of future developments. Our diversified expertise means that today, we have a forward pipeline of $8,800,000,000 in office, including a growing mixed use workbook, dollars 1,500,000,000.0 in industrial, 1,400,000,000.0 in built to rent and $16,000,000,000 in residential. These projects are secured and in various phases of either construction or being unlocked through planning with expected completion timing noted in this slide. In addition, we continue to work on a number of well advanced new business opportunities that have the potential to substantially grow our secured development pipeline on capital efficient terms, and we remain confident on our ability to provide meaningful development returns year on year that will also contribute to a growing high quality investment portfolio.
And on that note, I'll hand to Campbell to discuss the Commercial Property portfolio.
Thanks, Brett, and good morning. The Commercial Property division was created last October as an amalgamation of all the recurring income businesses within Mervak, including office, retail, industrial and build to rent. The new structure retains our sector specialization. However, the underlying operations have been redesigned into an integrated cross disciplined service team focused on standardization of processes and reporting, a single view of customer and utilization of our scale to procure and service our customers in a more consistent and efficient way. This ensures that customers are at the heart of how we organize ourselves.
COVID continued to have a substantial impact on our business in the first half, and it remains a challenge. The impact of legislative rent relief has required in excess of 800 lease amendments in the retail portfolio and 60 in the office portfolio, the consequence of which has seen a negative impact on our EBIT of $18,000,000 in the retail portfolio and $2,000,000 in the office portfolio. Pleasingly, our net cash collection has improved markedly over the last quarter with retail collections up to 84% from 64% in Q1, while the office and industrial portfolios have collected 97100% of first half billings, respectively. For some time, we've been espousing the merits of a modern office portfolio with a
long
while, and we've worked very hard in recent years to limit our vacancies to no more than 9% in any one year. This focus has generated reliable cash flows and increased the resilience of our office portfolio, which, considering the environment, demonstrated some outstanding results. NOI was up 2% to $180,000,000 led by a 0.5% increase in like for like income and the first rental contributions from the foundry at South Everly and Alder Fleet in Melbourne. Our like for like income growth includes all the COVID related impacts. Occupancy has held up well considering market conditions at 96% and remains well above the markets we trade in.
30% of the portfolio was externally valued during the half, delivering net gains of $141,000,000 up 1.9%. Maintenance CapEx remains low at just $6,000,000 and our whale has increased to six point seven years following the completion of the two development assets previously mentioned. Leasing activity remains subdued. However, progress has been made at the locomotive workshop with terms agreed for a further 16% of the area, taking the level of pre commitment to 86%. This asset will reach practical completion in April, and the sale process for a 50% interest will begin imminently.
Looking forward, our limited lease expire exposure in FY 'twenty one and FY 'twenty '2 will be key to performing in a period of lower tenant demand, higher vacancy and higher tenant incentives. Turning to the Industrial business. This asset class continues to be a beneficiary of economic tailwinds in the form of growing online retail sales, automation and the buildup in inventories. NOI was up 3.6% to $29,000,000 including like for like growth of 3.3%. Occupancy has increased to 99.7% and while maintained at seven point three years.
Twenty six percent of the portfolio was revalued during the period, delivering gains of $44,000,000 up 4.6%. As Brett has highlighted, we believe one of our key competitive advantages is our ability to create our own future. This is particularly true for our industrial portfolio and significant headway has been made with the development pipeline. Settlement of our Switchyard acquisition at Auburn is due this half, and the site has been demolished and benched in preparation for construction commencement midyear. A development application has been submitted at Aspect Industrial Park at Kemp's Creek, and we anticipate commencement of civil works on-site in first half 'twenty two.
We are now in a position to advance discussion with precommitment opportunities, and we remain encouraged by the level of tenant interest to date. Elizabeth Enterprise Park at Badgeries Creek has also submitted its initial planning application and is likely to commence civil works in calendar year 2022. This site has benefited greatly from the New South Wales government accelerated planning program and the massive $20,000,000,000 infrastructure commitment, and timing is now well ahead of our own initial underwriting assumptions. Our Retail business has weathered a challenging business environment with consistent improvement in cash collection, foot traffic and sales over the period. With 48% of our income exposed to SMEs, we have concluded over 800 COVID related deals.
This has been a significant task, and pleasingly, it is now largely complete with a further 400 deals now agreed but subject to execution. Turning to our operational results. NOI was down 21% to $72,000,000 on a pcp basis, reflecting the impact of COVID and the sale of our St. Mary's asset in Western Sydney. Pleasingly, our NOI is up 41% on the previous six months, demonstrating improving conditions and the recovery in cash collection.
Occupancy remained strong at 98%, and leasing volumes, apart from COVID relief deals, continue to improve, albeit at lower rental levels. 100% of the retail portfolio has now been externally revalued since June, with December valuations declining $28,000,000 or 0.9%. Our asset allocation philosophy remains unchanged. We retain our view that smaller, high quality assets in densely located inner urban catchments that can deliver bespoke offerings for loyal local communities will outperform in the longer term, albeit we acknowledge that the speed of return of office workers, tourists and students will be a key influencer in our performance in the shorter term. Turning to Build to Rent.
We've been operating our first asset, Live Indigo, at Sydney Olympic Park for four months. Occupancy has now reached 48% with a consistent let up of 1.5% per week. Customer feedback has been incredibly positive and universally consistent. Security of tenure, being pet friendly, the high level of amenity and high level of customer service is something really experienced as a residential renter and is clearly welcomed and even celebrated by our customers. The demographics of demand by age group, household formation, existing location, industry type and affordability is providing significant newfound insights into the positioning of this new asset class in Australia.
Added to this, the advantage of being first mover in this market, which allows us to set customer expectations for the sector and work closely to shape supported government policies, is significant. Along with our experience in design and construction and site selection in our residential business, we believe there is a significant competitive advantage for Mervak in the emerging BTR industry. And the proof point is the rent premium we are consistently achieving relative to our build to sell asset next door, which remains at approximately 20%. We have now been actively expanding our BTR development pipeline and now have 2,200 apartments in differing levels of design, development approval, construction and completion. The focus over the next twelve months is to leverage our operational experience and to reinvigorate our third party capital engagement.
We are now confident that we've successfully proven the customer use support case, but we are still of the view that we have more to do in proving up the design, operations and financial underwrite prior to raising third party capital. I'll now hand over to Stu Penklas for the residential update.
Thank you, Campbell. Today, I'm very pleased to share the strong results we have achieved across both our Apartments and MPC businesses despite ongoing uncertainty. Following a record number of apartment settlements last year, we settled ten seventy six lots during the period, with two thirds of these in our MPC business. We have achieved over 400 further settlements since the December. Strong margins were maintained at 23%, and our focus on actively recycling capital as well as demand for completed high quality apartments has seen a 50% reduction in unsold completed stock on a like for like basis.
While defaults have increased to 3.5%, it is due to our Sydney Olympic Park project and not a broader shift in market fundamentals. Without this, defaults would have remained below 2%. We have continued to capitalize on acquisition opportunities, adding over 1,100 lots to our pipeline, including the new Waverley project in Sydney's Eastern Suburbs, an additional 600 lots at Smiths Lane in Melbourne, and the buyout of the New South Wales government at Green Square, now with a pipeline of over 1,100 apartment lots for development. Our commitment to our strategy and principles over the past few years, along with our belief in the fundamentals of Mervak's quality offering, means we can keep moving with confidence while many others may hesitate. This confidence saw us launch several new projects during the period, including Portman On The Park, Green Square, Georges Cove, Moorbank, both in New South Wales, and Henley Brook in WA.
There is no doubt state and federal stimulus introduced midyear has fueled demand, particularly for MPC product. We are well positioned to capitalize on this demand and accelerated the release of over seven fifty MPC lots with a total of twelve sixty lots released. 76% of these lots are already sold or deposited. We achieved thirteen sixty five sales, including 1,200 in MPC, a 68% increase on the same period last year. 65% of these first half sales are expected to settle in FY 'twenty one.
Momentum is continuing with over four fifty lots currently on deposit as we continue to see elevated levels of activity across all our states. Owner occupiers dominated sales during the period, including the resurgence of first homebuyers who represented nearly 50% of purchases. While presales are broadly in line with the prior year at $946,000,000 MPC presales have increased to by $155,000,000 driven by stimulus as well as demand for off the plan housing product. 2020 has been an exciting year to reimagine new ways of living with the convergence of family, work, leisure requiring a more flexible home. Mervak is at the forefront of responding to this shift with our new developments.
We've seen an increasing demand across our built form offerings from detached homes, terraces right through to apartments. Following the first home buyer boom and growing consumer confidence, upgraders downsizers have become increasingly more active, representing 33% of first half sales. Our diverse pipeline and capability puts us in a unique position to respond quickly to changes in demand, meeting the needs of the widest range of customers. While some customers are looking for more room in the outer ring, inner city living is very much alive. Our recent launch at Portman On The Park is testament to this as people recognize the value proposition of higher density living, better affordability, greater access to physical and social infrastructure and vibrant active communities.
At Portman On the Park, we achieved over $46,000,000 of presales in the first few months with strong demand from owner occupiers. Pleasingly, 42% of these purchases are repeat Mervak buyers. The temptation for many developers in uncertain times is to cut corners. However, we are different. We have doubled down on quality across our product range and remain steadfast in our commitment to quality and design excellence.
We are confident this strategy will continue to pay off as the market recovers, immigration returns and purchases gravitate to developers that have a track record for delivering upon their promises. Our focus continues to be on the execution of our well defined strategy, launching apartment projects when market fundamentals are strong, restocking at the right time and in the right location and being shovel ready. All of this has put us in a strong position to capitalize on opportunities while building upon the foundations for sustained long term growth. While the greatest activity may be currently with first homebuyers, demand for owner occupiers and eventually investors will continue to grow as first homebuyer demand is exhausted similar to previous stimulus cycles. We have very limited completed stock in our apartment projects across the country.
This is testament to demand for our product when customers can physically see the Mervak quality difference. This gives us the confidence to utilize our balance sheet strength to bring four major new projects to the market in the next six months, including the highly anticipated former Channel nine site at Willoughby. With overseas migration expected to return in 2023, completion of these projects will be well timed to meet the demand for completed stock that will follow. As I mentioned at the start, our commitment to our strategy and principles, along with our belief in the fundamentals of Mervak quality, means we can move with confidence while others will hesitate. This puts Mirvac Residential in a very strong position to continue to navigate market cycles and capitalize on opportunities.
Thank you, and I will now hand back to Sue.
Thanks, Stuart. Finally, to guidance. As you know, we removed guidance in March due to the extreme uncertainty at that time, and we're now in a position to reinstate guidance given greater visibility of likely outcomes. However, while we do have greater visibility, there is still significant uncertainty due to the ongoing impacts of COVID, and so that is why our range is slightly wider than usual. EPS guidance is $0.01 €31 to $0.01 €35 per staple security, and we're guiding to DPS of zero nine six euros to €0.98 per staple security, representing 6% to 8% growth over FY 'twenty.
Thank you. And we'll now open up the line for questions.
Our first question comes from the line of Sholto Matconaki from Jefferies. Please ask your question.
Hi, Sholto.
Hi, Susan and team. Thanks for your time. Just a quick one for Campbell. On the office like for like, it was positive 0.5% including COVID, but I noticed the vacancy ticked down about two thirty basis points since June. Was that just the timing at the end?
So if it was in the period, it would have been a lower number? Just trying to reconcile that like for like?
Yes, you're absolutely right. So most of the vacancy we picked up was in the last couple of months of the period.
Okay. And then is any assets in particular where that was more prevalent by region or you could flag out?
Look, we had a you might recall a year or so ago, we had about 14 or 15 major expiries in sort of FY 2021 and 2022. The majority of those were complete. The one that wasn't was ANZ's renewal at Allendale in Perth, and they have left the asset. So that has seen that asset grow to just over 7,000 meters of vacancy over that period. Shilto, can
I add on to that? Vacancy is really interesting, concentrated in five of our older style assets. And absent that, we're pretty much at full occupancy across the modern part of the portfolio. So it really does show the difference between space that is fit for purpose in the current environment and space which is more challenged.
And in that regard, will you look at sell I mean, is there demand? I know there's capital markets are strong for office. Would you look at sell some of those older assets if you could? Or would you is that you're done trimming?
Well, I think as you'll see from the result, we did sell one of the older assets in the first half, being our 340 Adelaide asset in Brisbane. Yes, look, we're always considering the sale of assets in light of where return on invested capital is across the portfolio and our capital needs as we start to secure pre commitment activity for the next round of developments that we have in the pipeline.
All right. And then just if you switching to resi to stew, obviously, pretty strong with presales, broadly flat because you had a lot of apartments settling. Is it fair to assume you got onethree of apartments in that settled number that the second half will be dominant not there won't be too many apartments now that you've rolled out of the Perth stuff and pavilions? It will be more MPC SKU, like I think it was 67 MPC, it will be probably over eighty percent second half?
Yes, correct. So we will see the next half dominated by MPC. And obviously, as we've said previously, 2022 will also be largely dominated by MPC before we start to see the apartments starting to contribute. And that was always to be expected. It was the strategy.
We didn't restock at the top of the cycle from an apartments perspective. So MPC was always going to dominate these couple of years, and you'll start to see the contribution from our very sort of strategic apartment pipeline coming through into 2023,
'20 '20 '4.
Yes. And I apologize, I haven't looked through all the disclosure yet, but do you break out the pre sales where the expected settlement timing will be instead of from like you normally do in terms of 2021, '20 '20 '2, '20 '20 '3? Do you break that out?
In the additional information, we break out when the expected settlements are to come through, yes.
Here we go, yes, 51% in this half and 44% in the 5%. Okay, great. All right, that's it from me. Thanks everyone. Cheers.
Our next question comes from the line of Stuart McLean from Macquarie.
Just looking to look a little bit further into the guidance and the SKU in earnings, it looks like if you take the midpoint of guidance that February earnings are about $30,000,000 lower. Just wanted to confirm a couple of things and I can add to that hopefully COVID rent relief starts to roll off. So potentially that's even a bigger reduction somewhere else in the P and L. I think in Brett's comments, you confirmed that you're looking to still sell down locomotive in the second half. Can that just be confirmed?
Yes, we are. I was about to start the sell down process. Obviously, we're aiming for this half, but timing will be what it is. Just to give you some color around the second half compared to the first half, there's really three things driving what is going on in the second half that led to that level of guidance. Firstly, was the residential skew to the first half with the apartment settlements at Pavilions in the first half.
There's no JobKeeper in the second half and some regulatory costs, particularly insurance, are increasing in the second half as is an acceleration in our technology transformation program. And those are the component parts of the movements to the second half.
Do you have to provide a breakdown of the JobKeeper regulation costs, tech transformation? Just what's the impost in two half for those items?
So JobKeeper contributed And JobKeeper contributed $10,000,000 in the first half, and we can take offline the insurance number.
Okay. Thank you for that. Second question is probably also for Brett and maybe Campbell as well. Just on the ability to continue to fuel that development profit line going forward, What's the outlook for development such as Pitt Street, the ability to get capital in to build to rent in 'twenty three, 'twenty four as that the visibility on those profit items is now starting to reduce post ADN, completing next year?
Yes. Thank you. I'll make some comments and Campbell will probably jump in as well, particularly the BTR. Look, I think as you could see with that forward pipeline, you see we were holding a very, very strong pipeline. We've obviously got some buildings under construction, which are being percentage complete reported in terms of profit recognition.
And likewise, we've now gone to the next phase where we're looking to we're in the planning phase of sort of unlocking the next wave of commercial type opportunities. Importantly, we're through the start of the planning process and the balance of this year will probably be the complete derisking of industrial development opportunities we have and then they'll start making a contribution beyond 2022. We've got the Auburn project coming online as well and obviously a big resi book as Stews said also coming online as well and particularly with some of the higher end department projects coming online. So it's a compositional piece, but we're pretty confident that the pipeline is on track for progressive unlocking. And obviously, you'll start to see percentage complete type reporting coming through in terms of profit recognition as we go.
But Campbell, do you want to make a note on VTR as well?
I'll again, just quickly on office. Probably the only other comment I would make is despite the fact that conditions are pretty challenging in office markets, probably as anticipated as a result of COVID, There is a surprising amount of larger corporate activity looking for potentially new homes out in 2026 and 2027. So we are certainly having engagement with large tenants as much as we ever have in the last three or four years. On the BTR side, yes, we're still active on in that front. I think as mentioned during my speech, we just want to make sure that we're 100% comfortable with our underwrite assumptions, particularly as we move out of COVID to ensure that we put our business in the right light in terms of our potential capital partners going forward.
So it's just a time process rather than anything else.
And what is it about the current underwriting assumption that in particular is being reviewed?
Look, I think it's a couple of What's there? I think it's a couple of things. Firstly, it's design to ensure that we've got the right mix of apartment types is an important part. I think we want to make sure that we get a lot of comfort around how long it takes to let up and normalize these assets. Certainly, like to see the first rent roll after tenants have been in the asset for a period of time to understand what the growth profile looks like and therefore the IRR looks like.
And all of those things, I think, are really important in terms of securing confidence in the sector and confidence in third party capital.
I'll just add on to that, that we're still on track for a 4.5 yield on cost and a greater than 8% IRR. It's not so much that we're reviewing assumptions, but we want to really make sure that before we put ourselves as a fiduciary for other people's money that we have a full understanding not only of the customer proposition, which we now do, but also the performance of the income and cash flow from the asset.
You. Maybe for Campbell as well. Just on the office side of things and the additional pack, it looks like the leasing spread on the office book was positive 14.5. Just wondering, can you given the recent movements in effective rents, Just how under rented or over rented do
you see your book as we stand today?
Sure. Look, you're right. So the additional information does talk about positive leasing spreads of around about 14.5%. And look, I just wouldn't read too much into that particular fact point. For no other reason, then it's a relatively small sample of leasing deals, and it just happened to be in assets that were deeply under rented.
So there were specific tenants in deeply under rented positions. So certainly, I don't think it reflects market per se, but we're certainly happy to bank it.
And how then how under rented is the book or over rented as we stand today?
Yes. So we think now, give or take, that the office portfolio is about 1.5% to 1.6% under rented. So the catch up has been over the last sort of eighteen months as we've been renewing tenants has been quite good.
Okay.
Thank you. And maybe just one last final one for Stuart on the residential side. You obviously gave a split of expected owner occupiers at Willoughby and Tullamore apartment releases compared to investors?
Yes. So Willoughby, we haven't launched yet. But at Tullamore, we're sitting at about 95% pre sold, and we're sitting at about 75% owner occupier.
Would you expect something similar? Will it be though? Is it a more owner occupier style product or is it more of an investor style product?
Yes, absolutely. So if you look at our experience recently at Green Square, where obviously it's been dominated by owner occupiers, the three bedrooms selling first, followed by the large two bedrooms. We expect to see a very similar scenario at Willoughby. And interestingly, what we're seeing in our markets, particularly obviously in Sydney, is the substantial growth of the established housing market and how compelling the proposition is in buying larger apartments. So to give you an example, at Green Square A Few Years back, our three bedrooms were three bedroom apartments were roughly 90% of the value of a surrounding three bedroom home.
That has now changed because of the significant growth in prices in the established market. Our three bedrooms now are 60% of the price of a three bedroom in the established market. So very compelling and we're seeing demand for amalgamated apartments really coming through, so four bedroom and five bedroom homes apartments, which we expect to see at Willoughby as well.
Great. Thanks for your time.
Our next question comes from the line of Tom Bodder from UBS. Please ask your question.
Good morning, Susan and team. I just wanted to go back to the underwrite assumptions on the build to rent. And if I go back to sort of October, the presentation talked about pricing exceeding the underwrite. And then today, we're seeing revenue in line with expectations. I just wanted to understand, is that does that reflect a deterioration in rents as a trade off to getting the occupancy up?
No. What that relates to is the differential between, as Stuart was just explaining in the apartment build to sell market, the preference for larger apartments is also abundantly clear in build to rent. And we have we're ahead of our underwrite and rent in the larger apartments and the speed of let up of the one beds has been slower than anticipated, largely because in the traditional rental market for one beds, there's been significant price falls in the area, which means that the build to rent one beds are significant premium to that. So that's where there has been something slower than we expected. And that's largely because if you think about the market for who lives in a one bed, it's emptied out in two directions and it affects build to sell as well.
They've either upgraded to a two bed because they need more space in the current environment or they've moved back home. So they're both cyclical rather than structural.
Okay, thanks. And then the other sort of question leading on from that is, is there ways you can sort of improve flexibility in your schemes in how you design things going forward to allow you to sort of scale up or scale down to bigger and smaller apartments? Or is it pretty challenging to do it in
the sense that once you've done
your design, it's sort of fixed?
Yes. Look, it is a bit challenging once we've completed design and lodge DAs and start construction. I think the key now for us is around about 60% of the inquiry that is coming into our build to rent opportunity at Indigo at Sydney Olympic Park. Most of the acquirers are now coming through our own website, whereas four or five months ago, the majority were coming through channels like realestate.com and Domain. So now we're starting to get a much better sense of the style and nature of demand, and we'll certainly use that going forward to shape our thinking when it comes to composition of one, two and three bedrooms as part of the mix.
Okay. And then final question is sort of the future projects on the build to rent have they seem to have pushed out a little bit from a timing perspective. Is there any sort of comment you can make around why that is? Or indeed, if I'm reading that the completion dates correctly compared to prior disclosure?
Look, no, I don't think there's been any push out in timing at all actually. So no, we're still very much on expectation.
Okay, that's great. And then just in terms of the defaults you sort of saw at Homebush, just wanted to understand the strategy there around them. Was it around valuations not coming in as expected? And then what are the implications for the sale of the remaining stock there?
Yes, I'll start on that one. Really, Sydney Olympic Park, the pavilions was sold at the height of the apartment market and settled in the depths of COVID. And in that context, we were very pleased to do two zero one settlements there, but there clearly is pressure on the valuations. As Stu mentioned in his remarks, when we have completed unsold inventory in this environment, we are making very significant moving through those very significantly, and you've seen that in Western Australia. And so we're confident we'll work through it, and we're still within our feasibility assumptions with some incentives that we could use if we so desire.
Okay. Thanks.
Our next question comes from the line of Lauren Barry from Morgan Stanley.
Just can I confirm on your guidance if that includes profit from the sale of the locomotive shed or not?
Yes, it does.
It does? Okay, cool. And for Stew, are you able to talk about your sales momentum for the MPCs in January after the homebuilder, the largest stimulus package rolled off?
Yes. So we've continued to see very strong demand, particularly in Victoria. Obviously, the stimulus was extended, and that's produced remarkable numbers week on, week out, particularly in Victoria. We've obviously seen, I think, WA start to slow and Queensland start to slow, but our projects in Smiths Lane, Olivine and Woodley continue to produce week on week very strong deposits coming through, and we expect that to continue. Interestingly, we've in recent weeks, we've actually started to see some investor demand coming through for that product as well, But it's still very healthy and still positive momentum right through into the middle ring.
Cool. And are you able to just comment on what your margin outlook might look like for the second half and also into next year if you're doing more MPC settlements rather than apartments?
Yes. Look, we still for this year and I won't make comment on future years, but for this year, our 18% to 22% through cycle indication of margins will still remain elevated, and that really is a reflection of the fact that we bought so well in the cycle and we will remain elevated.
Okay. And just on the development pipeline, I think six months ago, you were potentially talking about keeping more of your industrial developments on balance sheet to kind of remix the weighting of your balance sheet assets. Is that still something you're considering? And if so, does that mean that those developments won't be able to generate as many development profits in future?
Brett? Yes. Thank you. I think probably the fair comment we'd make at the moment is that we'll look at that as we get a little bit closer to the start of the construction phase. As we said earlier, the team have done a tremendous job basically ahead of schedule in terms of some of the rezoning and how the planning process is tracking.
So it's we are looking at trying to incrementally improve the industrial weighting within the portfolio, but we haven't made a final decision exactly how much will be on balance sheet versus with capital partners. So that's something we'll look at later in the year.
Okay. And just last one from me. In your accounts, there's a note about tucker box potentially having going concern issues. Are you able to just talk about what's happening there and if a sale of that portfolio is still expected?
Yes. So we're actually active in terms of the sale program as you may be aware and we've been very, very happy with the amount of inquiry. Obviously, that's a process that's in flight at the moment, we won't make any more comment until we advance through that process. In terms of the note, it was really about just obviously, imagine in COVID mode that those the occupancy on those individual assets has been challenging. And in fact, the two owners did look at giving some support to the Travelodge portfolio just in terms of some underwrite there.
But it's basically operating at a breakeven. And I think the note is just there in a normal sense, I wouldn't read too much into it in terms of further concern. Our focus is particularly on the sale process. And as I say, we've got we've had very strong interest and we continue to advance through that.
Okay. Thank you.
Our next question comes from the line of James Joyce from CLSA. Please ask your question.
Yes. Hi, good morning, Susan and team. My first question is for Campbell. Just you're talking about some tenants looking at some 2026, '20 '20 '7 deals for your developments. Just wondering what you're seeing in terms of their requirements versus how they're looking today?
Yes. Look, at this stage, we haven't seen anything that would suggest that their expectations are lower than they otherwise would have been. So that seems to be quite consistent. I think one of the sort of unknowns or unexpecteds in this cycle office is the majority of large corporate users have significantly more people in desks in their workplaces. And particularly when you start to remove desks as a result of enforced social distancing, Really, what it does do is suggest that the concept of lots of underutilized space may not be there at this stage.
So I've got to say there's nothing we're seeing yet which would suggest a wholesale change in space utilization.
If I could add to that sorry, if I could add to that, there's the things that we are seeing are very much a desire to co create a new style of workplace. Many of our customers are telling us that fit outs are no longer fit for purpose and how they want to use space going forward, which gives a great opportunity for new modern and newly created assets to participate in that. And we are seeing things like, obviously, touchless entry, fresh air, all sorts of things health related around a building. That's where expectations are changing in the discussions we're having with customers.
Okay. That's clear. And maybe just a follow-up. How much of your tenant base have made a call on what they'll do with regard to work from home long term? Is it still a small proportion?
Or are seeing that number pick up?
We're definitely seeing an increase in people coming back into the CBDs, particularly in Sydney. Melbourne's got different conditions, obviously, but there is a return into CBDs. That's very much a case by case basis. So if we look at ourselves, for example, we pre COVID had five fifty desks. We now have four fifty desks in our tenancy.
And this week, we hit a high of three forty one people on Tuesday. I think people really as I said in my remarks, the experiment around socialization has just underscored how much social interaction does for us in terms of osmosis learning, culture building, ideations, collaboration, all very challenging to do remotely even if tasks can be done remotely. So this will continue to play out as people experiment with new forms of working and how to build organizations that embrace both flexibility but also culture building.
Okay. Good answer. Maybe moving on to retail. Can you comment on any potential ongoing rent support? Just thinking about the CBD, it is pretty slow, I suppose, in the retail space and traffic is still quite tough.
And how do you think about rental support that might sort of keep going post the end of the government regulations?
James, that's a really good question and that's probably exactly why we've maintained ECL provisions to ensure that we have just enough to ensure that should there be significant changes coming through in a post JobKeeper world that we're capable of withstanding any pressure that may arise. That being said, 800 odd retail deals done, 400 agreed but still to be documented. On the commercial side of the business, I think 60 deals done with about another 50 still remaining to do, of which the majority of those still refer to ground floor retail style food and beverage operations.
Yes. Okay. How much of the rent income should we think about in terms of being that ground floor retail operations?
How much sorry, could you just repeat that?
How much rental income is really coming from those sort of floor retail operations?
Look, I've got to say, personally, I haven't quite cut that number out. But as a percentage of income for tenants of 400 square meters or below in the office portfolio, it's less than 2%. So again, one of the benefits of large floor plated brand new buildings with anchored by large tenants is the exposure to the SMEs is pretty marginal in our portfolio.
Okay. And maybe a question on the residential side of things. Stuart, just thinking about the migration story, So you're sort of saying that bodes well for developments completing, I don't know, 'twenty three, 'twenty four, thereabouts. Can you just talk to how you think the migration story impacts apartments versus greenfield demand, how you distinguish the impact between those two?
Yes. I'll make a couple of comments, James. I think that over the last twelve months, we have actually seen, obviously, nearly 400,000 expats return back to Australia, which has obviously filled a significant portion of demand, particularly around owner occupiers. In the MPC business, we obviously see immigrants moving to Australia. They traditionally purchase within sort of the first or after the first eighteen months of moving into their residency in Australia.
So we think that for the next few years, we have obviously got good demand, good local demand in the market, and that's definitely showing through. And we are obviously, in many of our MPC projects, are seeing an increase in our market share, particularly because owner occupiers are gravitating to Mervak projects because of the social and physical infrastructure that we deliver upfront on many of our projects across the country. By 2023, we think that immigration will start to come back and it will very much fuel continued demand in the apartment space and we're well aligned with many of our projects going to be complete by that time to capitalize on that demand.
Okay. Thank you.
Our next question comes from the line of Richard Jones from JPMorgan. Please ask your question.
Good day, Steve. Just a couple of clarifiers back on guidance, sorry. So just in terms of NPI, if you're assuming, I would imagine, less COVID drag in the second half plus you're getting a more meaningful contribution coming from the two office development completions. Is that right?
The office completions, I think, are largely in the first half. So it would be lower in the second half. It's just the loco is
can be income coming from $4.70 7
From an income perspective, we'll get more income from the new completions second half related to first half, given that Alder Fleet finished and was sort of a constant lead up through and income production through to about September. And Building 2 at South Everly was around about a November commencement. So you're right, we will see more income coming from the development assets. However, we still have the ECL provisions just to ensure, as per one of the prior questions, that we have enough coverage in the event that JobKeeper ending has any kind of negative consequence for the business.
And then locomotive, I assume hardly any of that potential profit has been booked, so the bulk of that should come through in the second half, it should largely cover the commercial profits that you had in the first half of $25,000,000
James. That would be if you think about the full year as being slightly ahead of double the first half, that's probably about the right rule of thumb.
Okay. It seems hard to get only the guidance. Just one more question. Just in terms of retail, can you talk through how many or what proportion of your income is on short term or kind of percentage rent deals as opposed to traditional five year leases?
Sure. So our holdovers at the moment are around about 4.6% of income, which is probably high. I think historically, it's traveled around sort of the 3% to 3.5% range. Percentage rent is pretty small, less than 1% of the income of the fund is exposed to turnover provisions.
So you don't have COVID related short term deals where you're doing percentage rent at the moment?
We've the majority around about 80% of the COVID deals that we're doing are some kind of rent extension and rent free in lieu. So it's a bit of both. In terms of true rent waiver deals, there are certainly a percentage of those as well.
And when did they roll off? How do you determine that?
Look, the while of the portfolio is around about three point seven years, if that helps, but every asset is slightly different.
Sorry, I meant the short term deals, how do you short term COVID deals, how do you determine when they roll off?
Well, lot of them aren't short term deals. They're short term extensions. So some of those leases may still be two or three years away from completion. So they're extensions from that point in time and in lieu offering some level of incentive in the form of rent free on the way through.
Okay. All right. Thanks.
Our last question comes from the line of Adrian D'Arc from Citi.
Susan, I think you made a comment about structural changes across property types. I was interested to understand how clear your view is on what those changes might be at this point and which ones you think are most significant for Mervak from an earnings or valuation perspective?
That's a very good question. We've given a lot of thought over the last year to what things have changed that will stay changed, what things have changed that will go back and really have come to a conclusion that many of the things that have changed over the past year are just on an accelerator of things that were already happening. We were already talking in retail about the value of retail space not being fully linked to the value of sales per square meter in a physical sense. Purpose and the value of urban real estate in a retail sense is marketing and customer acquisition and showrooming and returns and last mile delivery and sales. It's a much broader than that very narrow measure.
And we were talking about that before COVID, and that's accelerated. Online retailing, that was there before, accelerated. And the flow on impacts into industrial and the demand for logistics space, given the significant increase in parcel delivery, was already happening just faster. And the same thing around offices and flexible working and people working out, tasks can be either automated or done somewhere else. What are we going to use?
What is the purpose of a collaboration space in a CBD or close CBD office location? Those were already trends that we were talking about, which have just become faster. The hyper local trends of people wanting to live, work and play in a much tighter vicinity, people really enjoyed not commuting by and large during the past year, which and people explored their local areas in ways that they maybe hadn't before. So the hyper local theme is something that, yes, that was a theme before, but now is an even stronger theme. So from our perspective, we're just moving faster through all of those changes than we were pre COVID.
How would the urbanization fit in?
Sorry, can you say that again?
In terms of urbanization, I guess it's what I think of as a key point of the group's strategy. Could you maybe just elaborate a little bit on that?
Sure. And as I said, we're going to issue a paper because I could talk for about an hour on this topic. Now it's very clear that government projections are showing that these are post COVID government projections that that Sydney and Melbourne will still have one out of every two people that that grow in Australia, whether that's natural growth or immigration growth, they're still going to add millions of people between now and 02/1930. And why? Because of the wealth generation of agglomeration in a knowledge economy where ideas create ideas that create innovation, and that happens much better in a physical location.
Cities have got deep employment pools. Their pay is higher in cities if you've got a two family two person working family and you decide just to move to Mudgy. One person loses their job, employment pool is a lot more shallow and the jobs that are available are significantly lower in remuneration than they are in cities. So we're very much firm believers in urbanization. But as I said in my remarks, it will change.
And how people want to live in the cities, that hyper local theme, the desire to live, work, play, shop in a much tighter zone and not commute an hour and a half every day will change how people think about the structure of urban society. I could really go on for a long time, but I'll stop. You can read the paper when we release it.
No problem. I'll leave it there as well. Thanks for your thoughts.
There's no more question at this time. I would now like to hand the conference back to our speakers. Please continue.
Well, thank you very much for spending time with us from all over the world this morning. We really wish we could be with you in person, but that will return in due course. Thank you very much for your time this morning.