I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.
Thank you, good morning, and welcome to this results presentation call for Elanor Investors Group for the 2023 financial year. Thank you for joining the call this afternoon, and thank you for your interest in the group. On the call today, I'm joined by my Elanor leadership team colleagues, who, along with me, will be pleased to answer questions at the end of the presentation. I'll commence this presentation by providing some opening remarks on what we achieved over the 2023 financial year, I'll then be pleased to hand over to Paul Siviour, Elanor Investors Group's COO. Paul will discuss our results in more detail, I'll make some closing comments, and provide an outlook for the group at the end of the presentation. Excuse me.
2023 was another year of significant growth for Elanor. A year of growth as we strive to build Elanor into the leading real estate fund manager in Australia. Our focus, to be clear, is on being the leading real estate fund manager in delivering investment outperformance for our fund investors, our capital partners. As I've stated many times before, our mission is not for Elanor to become the largest real estate fund manager in Australia. It's to be the leading real estate fund manager in delivering investment outperformance. Our long-held belief, as many of you will know, is that if we continue to deliver investment outperformance for our fund investors, growth will follow, and indeed, it has this year. Over 2023, we grew funds under management by 10% to AUD 3 billion.
We achieved strong growth in funds management income to AUD 49.5 million, a 20% increase on financial year 2022. Over 2023, the recurring funds management income grew to AUD 34.1 million, a 20% increase on FY22. There were many achievements that were made for the group over the year, and I'll just highlight a few, a few call-outs. The privatization and delisting of the Elanor Retail Property Fund, I consider that to be a key achievement, particularly a key achievement for investors in that fund. Security holders were delivered a 15% premium to the then trading price upon that privatization and delisting, and a fantastic result for security holders in that fund.
Really, it evidences our investor-first approach and our focus on delivering investment performance for our fund investors. That fund has now evolved into being the Elanor Property Income Fund, which we are pleased to have that in our group. Our ambition is for this fund to be indeed the best performing and leading property for income funds in Australia, a fund that will be available to all investors, including retail investors. Another key achievement over the year was the recapitalization of the AUD 300 million Elanor Healthcare Real Estate Fund.
Again, providing a fantastic liquidity event for foundation investors in that fund, and that indeed is now the has been established as a partnership with a sovereign institutional investor to grow that fund as a core healthcare real estate fund. Across all sectors, we had significant achievements over the year, which I'm pleased to state, and I'm also pleased with the addition of a new real estate sector, with the establishment of a high-caliber industrial real estate investment capability throughout the year. These were just some achievements that we made in FY23. Over the second half of financial year 2023, we experienced, like most participants in the market, significantly less transactional activity as markets adjusted to the high interest rate environment.
An environment where originating high investment value opportunities was a lot more difficult, as vendors in the main were yet to reprice their assets for the higher interest rate environment. This has changed significantly, however, over the last three months, and we're now seeing some, some really interesting deep value investment opportunities across the sectors. While transactional activity in the second half of 2023 was low, strategic activity was high, was very high. Over the, over the half, we more than doubled the size of the group's funds under management, with the highly accretive acquisition of the Challenger Real Estate business. That acquisition resulting in our funds under management, growing from AUD 3 billion to AUD 6.2 billion, and our occurring bank management fees growing from AUD 23.6 million to AUD 40.7 million.
Indeed, it has been a transformational acquisition for the group, Paul Siviour will be pleased to take us through the acquisition in more detail shortly. This acquisition, I firmly believe, was a direct result of not just our investment capability, but importantly, our investor-first focus as a real estate funds manager. Our capability and performance track record, I firmly believe, were fundamental to us successfully executing this acquisition. Suffice to say, we are delighted with this acquisition and how it positions us for further strong growth, both in funds under management and security holder value. As I said, Paul Siviour will talk more about that shortly. Ladies and gentlemen, Elanor has always strived to do business the right way, as we call it, to deliver investment outperformance and to make impactful social and environmental contributions to the communities in which we operate and more broadly.
This approach underpins our ESG governance framework, caring for those in our community who are in need and caring for the environment. We're honored to have again this year, provided very significant support to both The Smith Family and FSHD Global Research through our strategic partnerships with those organizations. Not just financial support, but broader team support, expertise from the group, our group to their groups, and advice to those organizations. These partnerships are important, are very important to our group. Elanor again donated over 1% of earnings to not-for-profit organizations more broadly over the year. We are focused on making positive environmental impacts to our communities, and as I said, more broadly. Improving our carbon emissions intensity across the group's portfolio of investments as we've grown, has been a key area of focus.
Elanor, indeed, Elanor's emissions intensity, excluding any purchased carbon credits, we don't, haven't purchased any, pleasingly lower than financial FY22. In summary, doing business the right way, having an investor-first focus, has again resulted in significant growth this year, and leading to significant growth in both funds under management and security holder value. I'll now hand over to Paul to discuss our results in more detail, and look forward to providing an outlook shortly.
Thank you, Glenn. As Glenn mentioned that during the year we achieved, frankly, a step change in our business in the context of its size and scale, in the context of our earnings, and in the context of our growth potential. That step change was a result of the acquisition of Challenger's Real Estate Funds Management business on the seventh of July, 2023. In the investor presentation today and the investor pack, which perhaps many of you will have in front of you, we've sought to present information on our run rate performance post the Challenger transaction, particularly in respect of our funds management EBITDA as we move into FY24. We've compared that information to our actual results for FY23, as well as setting out, of course, more detail in respect to our actual results for FY23.
The Challenger transaction has three key drivers of security holder value. O- one is the key elements of the transaction, and as Glenn mentioned, it is significantly EPS accretive. Secondly, in terms of operational leverage, the transaction adds very significantly to our recurring funds management income and drives operational leverage in the context of our funds management, EBITDA and EBITDA margin. Thirdly, the transaction results in a strategic partnership with Challenger that delivers, among other things, a powerful distribution capability for growth. That partnership combines Elanor's real estate funds management capability with Challenger's market-leading capital raising platform for Fidante. I invite listeners, if they have the investor presentation released to the ASX this morning, to turn to page 4, where we highlight some of the key results for the year.
In respect of our funds management business, we drove recurring funds management income to AUD 34.1 million for the year, and funds management EBITDA to AUD 17.1 million, a 16% increase on FY22. Core earnings for the year were AUD 12.5 million. We continued to distribute 90% of our core earnings, resulting in a distribution per security for the year of AUD 0.0913. Glenn mentioned our success in raising capital during the year, and I won't go into the detail of that. Suffice to say, as Glenn mentioned, it was a direct result of our ability to drive strong investor performance through our capital partners. Turning now to the first element of the key driver of security holder value of the Challenger transaction. That is the key elements of the transaction itself.
You'll see on page four, if we were to take a very simple approach to pro- formaring the Challenger transaction over our FY23 results, core earnings would have risen to AUD 20.9 million from AUD 12.5 million. That increase is simply the after-tax impact of the AUD 12 million of incremental EBITDA that the transaction is delivering now. Following completion of the transaction on the seventh of July, we have completely settled the incremental cost structure to go with the incremental income, have confidence in that incremental EBITDA. I'll turn in a moment to provide some more detailed information on the earnings accretion of that number.
Glenn's also mentioned a key transactional impact, is that our funds under management have grown 109% from AUD 2.97 billion at the end of FY23, to now AUD 6.2 billion. I invite you to turn to page 7 of the presentation, where we'll just complete the analysis on the earnings accretive nature of the Challenger transaction. This page simply takes our FY23 funds management EBITDA of AUD 17.1 million in the left-hand column of the table and increases that funds management EBITDA by the AUD 12 million of incremental earnings that I spoke of. When one takes into account tax of 30%, our core earnings would have risen from AUD 12.5 million by AUD 8.4 million- AUD 20.9 million.
Adjusting our securities on issue from AUD 124 million- AUD 148.8 million, following the issue of 24.75 million securities to Challenger, results in a pro forma earnings per security, EPS of AUD 0.14, a little over AUD 0.14 for FY23, compared to actual earnings per security for FY23 of AUD 0.105. Just turning now briefly to page six, the page prior. This shows a graphical representation of the incremental income, funds management income from the Challenger transaction, and that incremental income is AUD 16.9 million, increasing our FY23 recurring funds management income from AUD 34.1 million to AUD 51 million. The entire incremental funds management income from the Challenger transaction of AUD 16.9 is all recurring.
Just before we turn to page 10, I'll refer readers to page five. This is a presentation of the makeup of our FY23 core earnings EBITDA that we provide each year. It comprises our funds management EBITDA of AUD 17.1 million, our investment income of AUD 9.3 million, that is the distributions we have received on our co-investments, and transactional income, which for FY23 was low, whereas there was AUD 5.2 million in FY22. Those that have joined calls before will know that the bridge between core earnings EBITDA of AUD 24 million and core earnings of AUD 12.5 million, is simply depreciation, interest and tax. You can find those details on page 33 of the pack. Now turning to page 10 of the pack.
We'd like to just unpack for you a little bit more detail in respect of the Challenger transaction and the drivers of security holder value of the transaction. We've spoken of the financially compelling financial aspects of the transaction and its significant earnings accretion for the business. But we'd just like to turn our attention now to the drivers of the operating leverage improvement in the business as a result of the transaction and also the elements of the strategic partnership with Challenger that position us well for growth. I'll make some brief comments on each of these. Turning to page 11 of the pack. On this page, we've sought to set out for readers what our current, that is, today's run rate, recurring funds management EBITDA is.
This is an important indicator of the value generated by the transaction. You can see on the left-hand side of the page that our total recurring management fees, funds management fees of AUD 34.1 million, were reduced by our total corporate cost of AUD 32.4 million, to arrive at a recurring funds management EBITDA of AUD 1.7 million. Taking into account today's run rate management fees from the Challenger transaction, our management fee, our recurring management fees increased from AUD 34.1 million- AUD 54.6 million. Our recurring total corporate costs as of today, are AUD 38.4. This drives a run rate of today, annualized run rate, if you will, recurring funds management EBITDA of AUD 16.2.
This number includes, as I've mentioned, the run rate of the Challenger transaction from a management fee point of view, but also the run rate of Elanor's other managed funds. It incorporates a forecast of our hotel operator fee income based on the current portfolio for FY24, and it incorporates an estimate of our leasing and development fees from our current portfolio to FY24. This demonstrates, as I mentioned, very significant rerate of the size, certainty and quality of our funds management fees. It increases our operating leverage markedly and widens the jaws of our EBITDA margin on a funds management recurring basis from 5%- 30%. I'll just remind listeners and those, those on the call that what this analysis excludes is our acquisition fees, transaction fees and performance fees. For FY23 and FY24, they're set out earlier in the pack.
Transaction fees, acquisition fees and performance fees for the prior 2 years have averaged $14 million. It's not a forecast of what might be expected in FY24, it's certainly an indication of what the business has been able to achieve historically. I ask readers to turn to page 14. Page 12 and 13 provide a graphical representation of what we've just been describing, with 13 providing the graphical representation of our increase in FUM. To give more color to the makeup of that FUM of $6.2 billion, please refer to page 14. This FUM is across each of our five key areas of focus: retail, office, hotels, tourism and leisure, healthcare, and industrial. I'll make some important comments on the asset valuations underpinning this FUM a little later in my comments.
I, I, I'd also just indicate to everyone that Challenger is a long-term holder of real estate. Elanor is the real estate investment manager for Challenger Life, and Challenger Life invests in real estate on the-- for a long-term hold to drive income, that can then be matched against the obligations of the annuity profile, in respect of the business that it writes. The makeup of our FUM now presents significant institutional stakeholder support, but also importantly, a significant component driven by the strength of our historical relationships with high-net-worth capital partners and also the listed market in respect of ECF. I would make one point, which is very important and does distinguish us from some of our peers, and that is that of all of our FUM, 98% is not subject to redemptions of any manner.
The only managed fund of Elanor that has redemption, a redemption feature is our Elanor Property Income Fund, and of our AUD 6.2 billion, accounts for AUD 0.1 billion of FUM. Turning now to page 15 and the strategic partnership that we have with Challenger as a result of the transaction. I mentioned before that the transaction combines Elanor's real estate funds management capability with Challenger's market-leading capital raising capability. In respect of our real estate funds management capability, in respect of our key areas of focus, we are the exclusive real estate investment manager for Challenger Life in respect of its real estate portfolio. In respect of Challenger's capital raising platform, Fidante, there is mutual exclusivity.
Fidante will be our exclusive generator or, or distributor of our managed funds, our capital raising platform and capability, while Elanor, for its part, will be the exclusive provider of real estate investment opportunities on that platform. This presents significant growth opportunities for Elanor as we move forward. Firstly, in respect of our new institutional capital partners of Challenger, but also the Abu Dhabi Investment Council, ADIC. Secondly, in respect of Fidante itself, which has deep relationships with domestic institutions, and in fact, covers really 100% effectively of Australia's superannuation sector. It also has strong relationships across the high-net-worth investment capital partners, and our team of capital raisers is now embedded within Fidante to both continue to raise capital from our relationships, as well as embed and enable that broader capability across Fidante's relationships.
Thirdly, Fidante has very deep and wide retail capital raising capability across major national financial intermediaries, platforms, and 15,000 financial planners. Finally, cementing the strategic partnership together is the fact that Challenger, as a result of the consideration for the transaction, hold 13.6% of Elanor and the Abu Dhabi Investment Council, ADIC, hold 3% of Elanor. Please turn to page 18. Page 18 sets out our differentiated and deep asset and investment management capability, which has been an important element of being able to complete the Challenger transaction. I'd just point out, and Glenn has mentioned it, during the year, we have added a deeper capability in relation to the industrial real estate sector, with the addition of a team that has very deep experience across that entire subsector. Turning now to page 27.
I mentioned before that we'd like to make some comments on asset valuations. Certainly, the press has been very negative in respect of potential valuation and actual valuation declines in real estate. We're delighted to report that across our entire managed funds, the valuation of those assets on a strictly like-for-like basis, that is, for assets that have been held throughout the year of FY23, have only declined by less than 0.7%. That's quite an achievement in the current environment, and it reflects our risk-first approach to real estate investing. It res- it reflects our deep capability across the repositioning of assets for higher and better use, our deep leasing capability, our development capability in respect of repositioning, and in respect of hotels, tourism, and leisure, our fully end-to-end hotel operating platform capability.
Finally, it reflects our highly active approach to asset management and our total focus on delivering investment returns for our capital partners. You can see on this page that, that valuation, result has been achieved, notwithstanding, a decompression in cap rates, across each sector, most notably office. Turning to page 28, we present here the hedging, interest rate hedging position across our managed funds by sector. We've shared previously that the group continues to provide investment opportunities from a real estate investment point of view to our capital partners, as opposed to speculation in respect of interest rates. The group, the managed funds, are particularly strongly hedged across office and healthcare, where the income profile is fixed or known, with various CPI increases.
In respect of hotels, tourism, and leisure, our policy is to hedge to approximately 50% of the debt, given that, that portfolio of assets provides the opportunity to effectively reprice the offering daily through the adjustment of average daily rates. In respect of retail, there are a number of funds where investment horizons are approaching, and in respect of, of those funds, we have not re-hedged the interest rate position. Briefly, in respect of page 30, we've set out, as we have in prior years, the makeup of our managed fund co-investments. These are the assets that we hold on balance sheet, that reflect our investment in certain managed funds and drive our investment income. Glenn will speak further about our approach to becoming a more capital-light funds manager, enabling us to drive ROE and EPS more strongly.
Page 31 sets out a breakdown of the distributions received from those managed funds. I won't spend any time on it. The core earnings results and the balance sheet are set out on pages 33 and 34. Key elements have been discussed already. Our gearing remains at a modest 31%. We've set out on page 35, the makeup of that, of those different facilities. We'd note that post the Challenger transaction, gearing reduces to 28%. I'll now hand back to Glenn for some closing remarks and particularly some comments on our outlook.
Thanks, Paul. Despite the prevailing market conditions, and we well and truly acknowledge that the market conditions within the real estate asset class more broadly continue to be, to be challenging for, for the reasons we spoke about earlier, predominantly a function of interest rate regime. Despite prevailing market conditions, we are positive about the growth prospects for the group over FY24. Positive about the pipeline of opportunities across, across all our sectors of focus, some sectors having more significant pipeline and work in progress than others. Across all our sectors of focus, we do have a pipeline of of opportunities, and we particularly look forward to growing funds in in new sectors, and the industrial and logistics sector being one of those new sectors.
As we have said, in previous outlooks, we continue to pursue strategic opportunities, strategic opportunities to deliver us growth for the group, and obviously, we were successful in that regard this year. Furthermore, a growing base of capital partners across the group in conjunction with our strategic capital raising partnership with Challenger and Fidante, which Paul spoke about, that indeed positions us well to establish new funds, make new investments, and indeed, grow funds under management. We feel very positive about our capital raising capability with the strategic partnership that we have with Challenger, as I said, in addition to the our loyal base of partners across the group. Finally, ladies and gentlemen, we are acutely focused on driving ROE and growing EPS for the group.
Be that capital light focus, as Paul spoke about in particular, and executing strategic initiatives to realize and recycle balance sheet investments, will be an important contributor to growing value for ENN security holders. We will now be pleased to take questions. I'll hand it over to the operator.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Edward Day with MA Financial. Please go ahead.
Morning, Glenn and Paul. Thanks for the presentation. Just firstly, Paul, probably for you, on capital management, on your slide there, I just was curious about your facility headroom. It doesn't look like there is headroom under the facility. Just wondering if you could talk through how you're thinking about that?
Are you talking about the undrawn element, Ed?
On slide 35, under headroom.
Yes.
Yeah.
Yes, and we're fully drawn against our facilities at 30th of June, and that position really varies significantly throughout the year as we generate capital and then deploy it. The AUD 67 million facility, our senior secured facility, is fully revolving to provide that capability. We know we had AUD 18 million of cash on balance sheet at 30 June.
Okay, thanks. Just one more on your co-investments, so your distribution income was about AUD 9 million on AUD 203 million of investments. That's about a 4.5% yield. I guess, where do you see that trending? What can that yield get to?
Yes. Ed, there's a couple of natural elements that will see that increase in FY24. The distribution on EPIF was only for part of the year. The distribution on the healthcare fund was only for part of the year, and we see continued improvement in the distribution from our hotel fund. As a general guide, we would say a 6%-7% distribution yield across our co-investments for AUD 200 million is reasonably indicative.
Thanks, Paul. That's all from me.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We'll now pause a short moment to allow questions to be registered. Your next question comes from Charlie Dalziel with Alka Funds . Please go ahead.
Oh, hi, guys. Thanks very much for the presentation. I was, I guess, as someone who's followed the stock for, I don't know, probably close to 10 years, I've always been a bit frustrated by the good fund growth and revenue growth being offset by very high cost growth, and which hasn't really translated into, you know, the sort of leverage at the bottom line that you would kind of hope for. With the Challenger transaction, I mean, do we get to the stage where you start to see some economies come through and some of that top-line revenue growth start to fall through to the bottom line?
Thanks, Charlie.
Maybe, maybe you could just talk a bit about the cost base as well in terms of what's driving that. It's, it, it obviously had a big, big step up again this year, ex the Challenger business. Maybe just give us a bit more understanding around that.
Okay, Charlie, I'll answer that first, and then I'll hand over to Paul to talk about a bit more about what he spoke about in his presentation. Look, in growing this business, yeah, for sure, we've had to, and like any funds management business, you have to traverse the line, particularly this listed business of delivering security holder value, but whilst at the same time, security holder returns, whilst at the same time investing in the platform. The investment in the platform, which particularly means growing the, the, the, the, the, the team's strength, the funds management platform, people strength and capability, and that's. We've been successful in doing that, and yes, it has been an investment by shareholders over the last 8 to 9 years that we've been listed.
That investment, we believe has long-term paid off with the acquisition that we made this year. If we hadn't made that investment over the last eight to nine yea rs, we wouldn't be in the position we, we have been in to be able to execute on a transaction like we have just done. Indeed, you know, we've pursued many strategic growth transactions over the years. This one, we were successful in executing, and we believe we'll be able to execute more strategic transactions because of the investment that we have made and the shareholders have made in building the, the investment management platform over a long period of time.
As a result of this transaction, we are pleased to see the operational leverage improve markedly from the addition of the income and the highly accretive acquisition that it was. Paul? Thanks. Thanks, Glenn. Thanks, Charlie, for the question. It's a very important one for our security holders. Just to reecho Glenn's comments, it's best illustrated by the table on page 11. The corporate costs, you rightly point out, for FY23 were AUD 32.4 million, on a run rate basis, that is a full annualized cost of our entire cost base at the moment of AUD 34 million. That's about an AUD 6 million increase.
That, of course, does include the incremental costs of the Challenger transaction, as indeed do the management fees, the incremental income of AUD 16.9 million. As a result of that, we are seeing two things. One: investment in our platform historically paying off frankly, with securing the Challenger transaction in a completely uncompetitive environment and basis. Secondly, the direct and very significant impact on our recurring funds management EBITDA margin, increasing it from 5%- 30%. We're acutely focused on continuing to widen the jaws of our funds management EBITDA. Challenger certainly has presented that very significant opportunity, but we will be focused on continuing to widen those jaws as we grow.
Okay. The difference between that AUD 16 million EBITDA and the AUD 22 million pro forma is pretty much transaction fees, acquisition fees, and performance fees. Am I right in thinking that?
I think, Charlie, you might be comparing the run rate. The run rate information is really forward-looking.
Right.
The pro forma calculation we did just assumed the Challenger transaction was completed at the start of FY23, it generated AUD 12 million of EBITDA.
Got it. Okay.
We issued the additional. We were just showing that as a backward pro forma.
Okay
... to particularly illustrate the extent of the earnings accretion of the transaction.
Okay, great.
There are no further questions at this time. I'll now hand back to Mr. Willis for closing remarks.
Thank you very much, and thank you for joining the call today. We sincerely appreciate your interest in the group. I'd like to reiterate at this juncture that, indeed, despite the quantum leap in growth in the business last year and indeed in July, actually, when it completed, our mission has remained unchanged from the time we listed nine years ago, to be the leading real estate fund manager in Australia, as I said, known for delivering exceptional investment returns, but also making impactful social and environmental contributions. To that end, our key strategic objective also remains unchanged, which is to deliver investment outperformance for our investment capital partners, which in turn we believe will grow security holder value.
I'd like to take the opportunity to thank the team, my fellow team members across the group, for some fantastic contributions over the year, and contributions that have led to us being in the position we're in today, where our growth prospects and our outlook is very positive. Thank you again, and have a good day.
That does conclude our conference for today. Thank Thank you for participating. You may now disconnect.