Mirvac: Interim result 2019

When we last looked at diversified property trust Mirvac, we were concerned that a cooling in the high-density apartment market might prompt a sharp rise in defaults for the trust's residential developments business. But there's little sign of it at the moment, with defaults remaining below 2% for the six months to December.

In fact management appeared to be leading with its chin, saying that competition in the sector had reduced 'due to more restrictive developer access to financing', although it also noted that lending conditions had tightened 'across all purchaser groups'.

All up, the operating profit from residential developments jumped 52% to $67m.

In contrast to the volatile residential division, Mirvac's office, industrial and retail businesses are relatively sedate. Even so, Mirvac made the most of tight CBD markets in Sydney and Melbourne to raise rents on new leases of its office holdings by 16% - a clear highlight of the result. The retail portfolio also showed surprising resilience, reporting sales growth of 2.5 per cent, driven by good performances from supermarkets and specialty retail.

The net result was an impressive 33% jump in group operating profits, to $390m. However, that was largely due to an additional $77 million in development profits, without which the increase would have been a modest 4%. Given the weakening in the Australian housing market, there's a good chance that Mirvac's development profits - and therefore most likely its earnings - will fall.

Indeed a 10% earnings fall in second-half earnings is implied by management's guidance for 3-4% earnings per share growth. The payout is conservatively pitched, though, at around 74% of distributable profit, so it can weather a slight fall in earnings. Guidance is for the full-year distribution to increase by 5% to 11.6 cents.

That puts the stock on a distribution yield of 4.5% and, with a premium to NTA of 5%, it doesn't leave much room for error. We're raising our price guide slightly, largely due to the passage of time (capital growth of a few per cent a year is required to bridge the gap between the yield and our targeted total return). But it remains close to our Sell price and less risk-tolerant investors might choose not to wait. For now, though, it remains a HOLD.