Mirvac’s upside on Serenitas clipped by passive status: analysts

Modular housing is seen as a way to solve the country’s housing shortage by listed developers like Mirvac Group. Picture: Supplied

Mirvac Group’s ability to cash in on the land lease community sector may not be as strong as its rivals in the short term through its acquisition of Serenitas, but that may change over time.

Mirvac on Wednesday announced it had bought the land lease communities business Serenitas with Pacific Equity Partners for a price that valued the business at about $1bn.

It’s pivoting away from the office sector, hit by more staff working from home and soft economic conditions, and looking to find ways to provide cheaper accommodation nationally amid a housing shortage with rising immigration.

The hope for Mirvac is that it will put a rocket underneath its share price after real estate stocks have struggled to see much gain for their investors over the past decade.

Since 1999, Mirvac’s share price has fallen 28 per cent.

In this deal, it will own a passive 47.5 per cent stake in Serenitas at first, investing about $300m that it will pay for with debt.

It offers the group exposure at a large scale to land lease – a sector where the occupants on a residential site owns their own modular house, but lease the land from the landlord within a community development.

But while others like Stockland, the country’s largest residential developer, are also pushing into land lease community investment in a big way, Macquarie Group analysts say that returns from the purchase may be more limited than such peers until it can take over as manager, providing the opportunity to generate third-party fees or vesting profits from the transfer of land into the joint venture, which peers such as Stockland generate.

The deal increases Mirvac’s investment exposure to living sectors to 5 per cent from 2 per cent of its portfolio, with the 6200 sites that Mirvac is buying from Serenitas, 4200 of which are operating sites and 2000 of which are subject to development across 27 communities in Australia.

Macquarie says that the acquisition will be about 2 to 3 per cent accretive to Mirvac’s operating earnings in the 2025 financial year, generating a return on equity of about 5 per cent.

With debt at between 20 and 30 per cent, they believe that Mirvac will continue to sell assets to fund future build-to-rent, industrial property and office development opportunities, where opportunities exist to generate stronger returns.

Morgan Stanley analysts estimate that the acquisition multiple is 16 times earnings, assuming the initial $240m contribution by Mirvac will be fully debt funded at a cost of about 5 per cent, implying it will add $7m to earnings in the first year of ownership.

Serenitas is a self-funding business, Morgan Stanley says, in that it generates enough cash to fund new land acquisitions and developments, but means Mirvac is unlikely to repatriate much cash for the next three to four years.

Citi analysts say the cap rate on the operating portfolio is 5.4 per cent, in line with peer land lease valuations.

But the portfolio has a large Western Australia presence, contrary to other listed players which haven an eastern seaboard skew.

PEP will own 47.5 per cent of Serenitas while Tasman Lifestyle, the company of chief executive Rob Nichols, will own 5 per cent.

Mirvac’s share price was down almost 1 per cent in early Thursday trade to $2.06.