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Why the Mirvac share price is defying the housing slump

It’s the property stock that’s defied the housing slump. The Mirvac Group (ASX: MGR) share price will be the one to watch, after management issued bullish profit guidance and launched a capital raise.

The update will keep the Mirvac share price ahead of the pack as the stock has rallied over 30% over the past year, while the Stockland Corporation Ltd (ASX: SGP) share price inched up just 6% and the Lendlease Group (ASX: LLC) share price fell 23%.

The Mirvac share price also stands in contrast to the 8% gain by the S&P/ASX 200 (INDEXASX: XJO) index, despite the company’s high exposure to the troubled apartment development market.

What is Mirvac’s FY19 earnings guidance?

This high exposure hasn’t stopped Mirvac from forecasting FY19 earnings per stapled security (EPSS) of 17.1 cents, which is 4% above the previous year and is at the top end of management’s guidance.

The group also reaffirmed it will up its dividend by 5% this financial year to 11.6 cents per security.

The growth momentum is tipped to extend into FY20. Management said dividends will increase by the same amount in the new financial year, thanks to passive income that is expected to grow by 5% on average till FY21.

It also expects EPSS growth of more than 2%, even with the $825 million capital raising announced today and the divestment of non-core Tucker Box (Travelodge Hotels) asset.

Capital raise on the back of Mirvac’s share price rally

Management is not wasting the share price rally. It announced it is undertaking a $750 million fully underwritten placement and will look to rake in another $75 million from existing shareholders through a share purchase plan (SPP).

What’s more significant is that the new share sales via the placement and SPP are priced at a relatively skinny discount of 4.2% to the stock’s last closing price of $3.10 (the stock is in a trading halt this morning).

The funds from the raising will be used to repay debt, top-up its cash for developing projects and acquire office, industrial, residential and mixed-use projects.

It’s the diversified portfolio of different property types that has served Mirvac well. While there’s some stress on its residential property division, the office and industrial space is running hot and has contributed to the group’s good half-year results in February.

The fact that the residential market is in an orderly decline is also helping, with management reporting relatively low default rates by its apartment buyers.

The return of confidence into the housing market post-federal election and the prospect of two or three rate cuts this year also bodes well for Mirvac, although I think the apartment market in Melbourne and Sydney will be the last segment in the property sector to recover.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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