• High quality portfolio composition with stronger weighting towards Melbourne and Sydney minimizing risk from submarket weakness from Brisbane.
• MGR has delivered 3,400 lot settlements in FY18 (driving greater passive NOI) and has 60% of FY19 residential EBIT already secured.
• Strong pipeline of residential projects to come, delivering earnings growth by FY20/FY21.
• Solid balance sheet. Gearing at an all-time low of 21.3% and is at lower end of target range of (20%-30%).
• Potential recovery in weak retail sales especially for supermarkets.
• Strong management team.

• Deterioration in property fundamentals for Office, Industrial and Retail portfolio, such as delays with developments or lower than expected rental growth causing downward asset revaluations.
• Tenant defaults as economic landscape changes (increasingly competitive retail sector). For instance, retailer bankruptcies causing rising vacancies in retail portfolio.
• Residential settlement risk and defaults.
• Potential rate hikes in 2018 to come affecting bond-proxy stocks and their yield and debt books.
• Consumer sentiment towards impact of higher interest rates and effect on retail and residential businesses.

Figure 1: : Breakdown of MGR earnings (EBIT) 

Source: Company

• Office and Industrial business (~46% of EBIT). On property portfolio fundamentals:

1. Occupancies: Office – 97.5% down slightly from 97.6% in the previous year; Industrial – 100% up from 95.3% in from the previous year.;

2. Cap rates: Office – 5.69% down from 5.92 at FY17; Industrial – 6.19% down from 6.37% at FY17.

3. WALE: Office – 6.6 years, up from 6.5 years at FY17; Industrial – 7.1 years up from 7.0 in the prior period. We note $60m of potential additional annual NOI and >$160m potential development EBIT to be delivered by the active development pipeline by FY21

• Residential outlook sturdy (~36% of EBIT). MGR fulfilled guidance in completing 3,400 settlements in FY18 despite flat EBIT of A$300m (compared to FY17). The segment secured strong pre-sales of $2.9bn with 72% of settlements driven by the Sydney and Melbourne markets. A$2.2bn of pre-sales are on hand and 60% of residential EBIT have also been secured for FY19, indicating good visibility of future earnings, this stability supported by the high level of apartment project pre-sales (83%), already presold out to FY21. Regarding trends in residential conditions, MGR highlighted market moderation amidst signs of improved buyer sentiment and long term demand amongst owner-occupiers from strong population growth in Sydney and Melbourne. Tighter lending conditions have also led to a reduction in competition. Management also notes that strategic overweight to Melbourne MPC (currently benefitting from strong population growth, relative affordability, employment strength and strong major infrastructure initiatives) may negate any weak submarket residential condition risks in Brisbane.
• Retail segment dips despite like for like NOI growth (~18% of EBIT). Retail saw a decrease of -1% in FY18 EBIT to A$154m, despite seeing like-for-like NOI growth of 3%. Occupancy rates slightly decreased to 99.2% (from 99.4 in the pcp). In terms of MGR’s tenants, MAT sales growth reached 3.1%, with comparable specialty sales growth of 3.7%.
• Maintained strong balance sheet and robust cash flow. Gearing of 21.3% is at the lower end of Management’s 20-30% target range and weighted average debt maturity was up from 6.2 years to 6.8 years. 77% of MGR’s debt is currently hedged, and A$906m of cash and undrawn committed debt facilities gives MGR both flexibility and security against unexpected headwinds. NTA rose $2.31 from $2.13 in FY17 (driven by revaluations – uplift of $487.7 million for the 12 months to 30 June 2018 and development completions).