Eureka Group Holdings Limited (EGH) Earnings Call Transcript & Summary

Good day, and welcome to the Eureka Group Holdings FY '26 Results. [Operator Instructions]. And finally, I would like to advise all participants this call is being recorded. Thank you. I'd now like to welcome Simon Owen, CEO and Managing Director, to begin the conference. Simon, over to you.

Good afternoon, everyone, and thank you for your time. It is really exciting to be presenting Eureka's 2026 results and discussing our plans for the current year. I think the numbers we have released earlier today are very strong. Guidance achieved, revenue up, underlying earnings up, cash flow up, and a balance sheet well-positioned for sustainable growth. You can really get a sense of the momentum building in the business. Out of the gate in the current year, today, we announced our third acquisition in the first 6 weeks of the year. These 3 acquisitions add nearly 600 additional income collecting homes and sites to our portfolio and add another 180 development sites to our pipeline. When we wrote the strategy for Eureka 18 months ago, it was predicated on delivering fairly priced rental homes in community settings located in out of metro and employment-centric regional markets. At no stage did we think the federal government would look to blow up the housing market. But the demand for fairly priced rental homes has never been stronger. Demand greatly exceeds our capacity to supply, and we have strong pricing power. The sales journey for our customers is not measured in months or years. It is measured in hours and days. Literally, what do you have available? Our residents don't want wellness centers, concierge, or dog walking services. They want secure long-term leases, security, fair rents, clean and fit for purpose housing, and somewhere to park their car. The market opportunity is immense, and there is virtually no other institutional capital in Australia looking at this space. This is not a niche market. Over 30% of Australian households rent, and that proportion is increasing across every age group every year. Eureka has established a reputation as a reliable counterparty, and our deal flow remains significant. Whilst demand is incredibly strong, there do remain some areas for improvement. We still have a few communities in regional Victoria and South Australia, which are trading below expectations. We have much to do in procurement across energy waste and construction, and our customer journey can be improved. I can assure everyone on the call today that we are working incredibly hard to address these challenges. Joining me today on the call is Shiv Chetan, our CFO, and Mike Heffernan, our head of capital transactions. This presentation should go for 10-15 minutes, and then we'll jump into some questions. Moving on to the map of Australia on page 2. Eureka is Australia's only ASX-listed rental specialist. 67% of our portfolio is weighted to the high-growth states of Western Australia and Queensland, and that is a deliberate weighting. Compared to 2024, our portfolio is now 60% larger than where it is today, and we have more growth to come along. Jumping now onto page 4. Eureka's business is underpinned by resilient cash flows, and we have multiple levers for earnings growth. The structural tailwinds driving our business forward are underpinned by a significant shortage of affordable housing, and demand is driven by the housing crisis, migration, changing household formation, and the aging of the population. One of the most pleasing aspects of our results today is that net operating cash flow is up 41%, driven by the expansion of our rental base. We have multiple growth levers in place. In 2026, we've settled on seven properties at an 8.1% weighted average yield and an AUD 86,000 average cost per site. Our acquisition pipeline, even after today's announcement, remains at over AUD 120 million of deals. Now, jumping forward to page 6. Some of the key achievements and priorities, and Shiv will talk more on what we delivered in 2026. The focus for the next 12 months is in development. We want to deliver on 150 new rental homes, which will all be built by modular construction and will accelerate the lease-up across the portfolio. We want to convert the AUD 120 million acquisition pipeline into earnings. We want to broaden our access to capital, including the use of joint ventures and capital partnerships. We want to hold our overhead growth below revenue growth as the portfolio rapidly scales. Most importantly, we want to deliver underlying EPS growth of at least 13% on the year that we've just delivered. I'll now jump forward to page 9, which is the operating performance by segment. In our seniors rental business, which remains the core platform of the business, our underlying EBITDA margin is now 52% and not far below our target of 53%. In the All Age, which is our key growth platform, our underlying EBITDA margin was 53%, and our target over the next couple of years is to grow that to 55%. Across funds, JVs, and partnerships, our annualized fee revenue from that business is now AUD 6 million. Earlier this month, we closed our first new All Age fund with two assets that we ceded off our balance sheet, which freed up around AUD 14 million of capital for reinvestment in development and acquisitions. We're also finalizing an asset swap, which I'll talk about shortly. I'll now jump forward to page 12 and just talk a little bit about what's driving the rental market in Australia. This slide we've shown before, that in the 20 years to the start of COVID, broadly rents -- the rate of rent increases year-on-year broadly tracked wages. What we're seeing since COVID is that the cost of renting has increased by two and a half times wage growth over that last five or six-year period. More concerningly, that divergence is accelerating. Recent changes in government policy are likely to put an even bigger fire under rents. This has been a decade in the making. Now moving forward onto page 13. Our same-store rent growth for FY '26 was 6%, and as the relative weighting of All Age grows across the business, so will likely our same-store rent growth. I will now move on to page 16. This is some new data which Eureka specifically commissioned. This page here I think is really interesting. It shows how rents have grown since COVID compared to the last six decades. Rents in Australia, which are measured by the blue bar, over the last six decades, rents on average grew by around 6.5% per year. But post-COVID, those rents for a two-bedroom apartment have grown by approximately 17%. What this is saying is that rents in Australia post-COVID are growing at approximately three times the average rate over the previous six decades. Residential building costs in Australia, and I am just on page 17. Residential building costs in Australia continue to rapidly grow. The average cost for building an attached dwelling is now around AUD 637,000. That is just the cost of the unit alone. That does not include land, finance, the developer's margin, or government charges and levies, which typically add another 40%-50% of the price. If you are building a new property, let us say your unit, including the government, the land, the financing, the developer's margins, if you build an AUD 800,000 unit, you would need a rent of approximately AUD 923 per week just to cover the interest cost. It just does not work. Whereas for Eureka, we are able to deliver a two-bedroom, brand-new, prefab modular home for between AUD 150,000 and AUD 180,000, and we are getting a yield in excess of 12.5% on our modular expansions. Now just touching on page 18. Again, this is some unique Eureka-commissioned data which we are releasing to the market for the first time. Australia's rental market relies on private investors. Approximately 83% of Australia's rental dwellings are owned by private landlords, compared to across the key OECD countries, 53% of rental properties are owned by private landlords. In Australia, the rental market relies on private landlords. Private landlords have substitution. They can sell their home, and you cannot replace that stock easily. It is hard for institutions in Australia to build scale in rental housing in Australia because the yields are too low. But Eureka has identified a unique, scalable, and highly accretive market opportunity, which we are executing on rapidly. On page 20, what could Eureka look like in two to three years? We have upscaled this a little bit compared to the last six months. But in FY '25 -- FY '26, we added 937 homes and sites to our portfolio. In the first six weeks of this financial year, we have added another 550. I think getting to 6,000 homes over the next 2 to 3 years is not going to be particularly taxing. The other key takeout here is that the use of partnerships and funds management, where accretive to scale, is going to be a critical part in how we fund that. On page 21, today we are pleased to announce our third acquisition, which is in Western Australia, and that is the acquisition of the Sunset Beach Holiday Park and Lifestyle Village in Geraldton. Geraldton is located about four hours by car north of Perth, and it is a key regional center with a population of over 42,000 people. We have purchased this community off-market for AUD 16.8 million, which provides us with a 10% ingoing yield and a 17% targeted five-year IRR. We have acquired it significantly below replacement costs at less than AUD 69,000 per homesite. In Geraldton, where I was a couple of weeks ago, the vacancy rate in Geraldton is 1.1%, and in the last 12 months, rents in Geraldton were up by 19.4%. This is another straight-down-the-fairway acquisition for Eureka. It has a very strong local economy underpinned by a large port, transport operations, minerals processing, energy, and renewables. And pleasingly, it also has an amazing coffee culture. Jumping now onto page 23, capital partnerships. I touched earlier that we closed our first new All Age funds several weeks ago, and today, we are also working on an asset swap. We currently have 2 high-occupancy communities in Townsville where we are only the manager. We have no underlying equity interest. What we are doing is we are converting those low profitability management contracts. We are buying a 50% equity interest in both of those communities, and we are transitioning to a much higher profitability management contract. To fund that transaction, we are going to sell down our 50% interest in our two Cairns rental villages and establish new high profitability management contracts for both of those. That is another way we can grow our portfolio in a very capital-efficient manner. Jumping now onto disciplined capital deployment on page 25. Over the last 12 months, we have deployed more than AUD 18 million in immediately accretive acquisitions. The weighted average acquisition yield on these seven properties exceeds 8%. We are buying at an average of AUD 86,000 per site, which includes the land, it includes the building, it includes all the roads, piping, and infrastructure. We are buying these assets significantly below replacement value. Our ability to originate off-market deal flow is a critical competitive advantage for Eureka. The vast majority of the deals we are closing on and the AUD 120 million in additional deals we have that we are working on at the moment, the vast majority of these are off-market. We are not in a competitive process. We are dealing directly with the vendor, and we are not having to compete with people who might have a lower cost of capital than us. We jump onto page 26. Again, this slide here shows our ability to originate significant off-market deal flow. In FY '26, acquisitions alone expanded our portfolio by over 26%. We have another AUD 120 million of deals that are either under due diligence or in advanced price discovery. On page 28, modular construction delivery. I know there are a lot of companies in Australia which are talking about we should be looking at modular, but Eureka is already doing it. In FY '27, we already have over 200, 1 and 2-bedroom prefab modular homes locked in. We have 8 communities at the moment across Australia, where we are delivering prefab modular homes, and these homes are either being built in factories at the moment or are in the process of being installed. Eureka is an advanced user of prefab modular construction, and for Eureka, it delivers high-quality housing in a much quicker timeframe than if we were to use traditional on-site construction. Furthermore, in a lot of the regional markets we operating, it is actually very hard to secure trades. This is a way, at a great cost, we can quickly scale our portfolio. Now I am going to hand over to Shiv, who is going to step through the P&L, which is on page 31.

Thanks, Simon, and good day, everyone. I am pleased to be presenting our results with Simon. On page 31, the profit and loss. Revenue of AUD 56.7 million, up 24%. Rental income, which is our recurring component, was up 32% to AUD 44.9 million. This is the full year impact of our FY '25 acquisitions and organic growth. Underlying EBITDA of AUD 21.7 million, up 29% against a guidance range of AUD 20.2 million to AUD 21.1 million. Underlying profit before tax of AUD 14.7 million, up 23%, and underlying earnings per share of AUD 0.0345, up 10% against a guidance range of AUD 0.0337 to AUD 0.0344. The full-year dividend is AUD 0.0146, with a final dividend of AUD 0.0073. If we can please move to slide 33, cash flow. Operating cash flow of AUD 15.2 million, up 41%. This is on the expanded rental base and rental growth across the portfolio. Adjusting for investment in inventory and GST, the underlying cash generation is stronger than the headline. Moving to slide 34 is capital management and covenant headroom. The key numbers which represents our strong balance sheet position. Loan to value ratio of 34.2% against our internal ceiling of 40% and a bank covenant of 55%. Interest cover of 3.5 times against covenant of 2 times, and a facility limit of AUD 185 million with a documented AUD 200 million accordion. At 30th June, the undrawn headroom was AUD 48 million, and we had AUD 39.5 million of capacity against our 40% ceiling. This was increased by AUD 15 million after we launched the All Age Fund and seeded Barrier Reef and Benalla Tourist Park. Our toolkit is wider than the facility. We have the accordion, we have capital coming back from home and unit sales, and the funds and JV platforms which grow our assets under management. Thank you. I will hand it back to Simon to go through the priorities and guidance, and then we will take questions.

Thanks, Shiv. The last slide to talk through today is page 36, which is our priorities and guidance. Across operations and development, this is going to be the key focus for the business as we look to continue to drive occupancy and rent growth across the portfolio, and as I outlined before, we do have a small number of communities where we do have some further work to do. We are looking to deliver over 150 plus new rental homes, which will all be built with modular construction, and focusing on accelerating lease-up at some of our key communities, including Emerald and Kin Kora, which are in Queensland, Hillside, which is in Perth, and Benalla and Nagambie in regional Victoria. We are going to continue to progress DAs across our pipeline. We are going to look to continue the All Age cost normalization program. As I mentioned before, we do think there are some significant opportunities in the group across procurement. From a capital and growth perspective, we do have another AUD 120 million of acquisitions, which we are looking to work through that pipeline at the moment. Divestment of non-core and remote communities is going to continue. We are looking to exit low profitability management contracts where there is no pathway to ownership. We are not interested in managing other people's assets and making them money. Unless we have a meaningful equity interest and a profitable management contract, we will happily hand those contracts back. We are looking to maintain balance sheet discipline and keep LVR well below 40%. We are looking to continue to diversify our capital base, including joint ventures and capital partnerships. We are going to deliver on guidance and build the earnings base to achieve our medium-term target of greater than 6,000 homes and a 40% operating margin. We are delighted to announce guidance for underlying EPS of at least AUD 0.039 per share for the year, representing at least 13% growth on FY '26. The key variables there are rent growth and occupancy, the scale of further acquisitions, how quickly we can ramp up development, and our discipline around costs. With that is the end of the presentation, and we are happy to move to Q&A.

[Operator Instructions] Your first question comes from line of James Bisinella from Unified Capital Partners. Your line is open.

Hi, Simon, Shiv. Congratulations on a strong year and a strong start to this year in terms of the acquisitions. Just a couple of questions from me. Just first one around, a bit of noise on CGT hearing and the like and sort of property prices moving around a bit. Any comments on kind of the change of shape of discussions and negotiations in terms of the AUD 120 million pipeline that you are having with vendors and perhaps any sort of impact this is having on potential entry and prices and the like on that pipeline?

Yeah. Hey, James. Thanks for your feedback. Yeah, look, I think the changes that were announced by the central government several months ago has definitely changed market dynamics. It has made some vendors sit back and consider whether now is the right time to sell. I think thinned out the ranks of prospective purchasers in the market. One of the last three acquisitions we made was by a person retiring, and that was definitely CGT-driven, and we were able to move really quickly, and with that going into the details, we were able to secure what I think is a pretty attractive outcome. The point is that our earnings guidance that we have given for FY '27 doesn't rely on a huge amount of additional acquisitions. I mean, to come out of the gate and close three deals in the first six weeks of FY '27 really sets us up for an incredibly strong year. We have got eight communities where we are developing at the moment. When I joined Eureka a couple of years ago, we didn't really do development. We didn't have a development pipeline. Development for Eureka is incredibly profitable. We are just dropping in homes on existing streetscape where all the existing services are in, and where we see value we will continue to buy -- we have got a strong pipeline and I can't overstate the importance of being considered a reputable counterparty. We are not a tire kicker. When we turn up on settlement day, we have got a check. We are not trying to do a [New York], close and renegotiate the price. We have an incredibly strong deal flow in place. A lot of people come to us. We have also mapped out another 40 towns and cities across the country where we want to build our asset base. Acquisition is an important part of the business, but it is certainly not for the next year going to be the key driver in whether we can achieve guidance.

Excellent. That makes sense. In terms of a particular focus on states, I think you are doing a bit more in W.A., but any comments around where that pipeline is focused on a state perspective?

Yeah, look, we are underway New South Wales. New South Wales traditionally has the highest rents in the country, but it is also probably the hardest state in the market in the country to do development, just because of the planning. I think you will see us look to grow our business in New South Wales. But we are very happy with Queensland and W.A. Those markets have performed the strongest. They have got the strongest economy, both underpinned by renewable energy, minerals, and minerals processing. Both are struggling with affordability issues. Rents in the past 12 months in Queensland and W.A. have gone up mid-teens. Two-thirds of Eureka's portfolio is based in those high-growth resource states, and we are really happy with that weighting. Yeah.

Certainly. Just on the occupancy as well, that is very strong, 97% in the seniors and 95% on All Ages. Can you maybe talk towards confidence in holding these levels and maybe wait lists and things like that sitting behind those numbers that really support that trend?

Yeah, look, I note that two of the largest developers in Australia reported yesterday, and they talked about a significant drop-off in levels of inquiry. We are categorically not seeing any of that. The demand for rental housing remains incredibly strong. In the seniors portfolio, around 70% of our vacancies are concentrated in 5 or 6 markets. That is in places like Whyalla, Shepparton, Horsham, and a few other locations where there is structural issues at play. If we cannot get those occupancies up to a level that we need to be, then we will look to divest those communities. In the All Age space, the level of occupancy at the moment is more driven by as we acquire a community and convert what has previously been short-term or tourism stock across to long-term residential rental, we typically have to upgrade the kitchen, put in some additional storage, and that takes a bit of time. But 6 months ago, I think the weighted average occupancy for our All Age was 87%, and now we are up to 95%, which is in line with where I said I thought it would close, and we should be able to close that occupancy even closer to 97%, 98% over the next 6 to 12 months. So, we have got more work to do, but the underlying predictability of cash flow in Eureka is incredibly strong. There's no new supply coming on at the price points where we typically operate, and what's going on in the residential market in Australia, I think, is going to end up with more and more people renting because there's going to be less new supply delivered because the economics don't work.

That's definitely looking that way. Maybe last one from me, just on same unit kind of rental costs. What are you kind of seeing on back book, front book, and obviously continued tightening in the market? What can we expect to see on that trend moving forward?

I might get Shiv to answer that question, James.

James, thanks for your question. On the delivery of modular homes for us, that's done by a transit partner, especially in Queensland, which supplies around 80% of our new modular homes. We've seen about a 5% increase in the cost of modular homes, and then there is an increase in cost like transportation, but that makes up a small percentage of the full impact. So we're seeing between 5% and 10% in increase, but not a major increase.

Yeah. Excellent. That is it from me. Congrats on the result, guys.

Your next question comes line of Leanne Truong from CLSA. Your line is open.

Good morning. Oh, sorry, good afternoon. I am just wondering, in terms of your financial year '27 guidance, what is assumed there, like in terms of acquisitions, funding, or how much you are spending on development?

Hi, Leanne. Yeah, for acquisitions, we assumed a total of around AUD 50 million of acquisitions, so we are largely complete on that. If we make any additional acquisitions, we have a strong pipeline in place, and that will all be funded internally through operating cash flow, through available debt facility, and through capital partnerships. In terms of development, we are looking to build around 150 new homes, which we expect the vast majority of those to be leased up in the same financial year. And then we will have another 50 odd homes that will be built this year, but will only be delivered in the last couple of months of the year, which is why I spoke about how we have committed to 200, 1 and 2-bedroom modular homes this financial year. We have got 8 communities currently where modular homes are being delivered, and the vast majority of those will be rented, but there are maybe a dozen or so homes that we may also sell as well, if that represents the highest and best use.

Just a follow-up on the modular homes. I think on the last quarter, you said that you had not secured a supplier for W.A. Can you provide an update on that?

Yes. We recently have delivered 4 prefab modular homes with a new builder to our Hillside Village, which is in Armadale, in the southeastern suburbs of Perth. We have a [DA] there for another 19 homes, and we are just out to tender for that project. Then up in Geraldton, with the acquisition being out today, we are about to put in another order. We are just working through the supply chain in W.A. It is fair to say that in Western Australia, whether it is a cup of coffee or a modular home, everything costs more and takes longer to arrive. We are probably looking at a 25% increase in the cost of a modular home in W.A. relative to what we can get them delivered in Victoria or Queensland. So, we have probably got [indiscernible] 4 or 5 builders we are working with in W.A. at the moment. The largest prefab modular builder in the country is headquartered in W.A., which is [indiscernible]. We are talking to a few smaller groups as well. I am pretty comfortable that we have got good optionality in prefab builders in Western Australia.

Just my last question. I noticed that you increased your hedging. Could you just provide, I guess, some guidance on what you are shooting in terms of your cost of debt for FY '27?

Hi Leanne, Shiv here. Thanks for your questions. Yes, we did increase our hedging position both [indiscernible]. Internally, we target between 30% and 50% of the drawn debt to be hedged. After the new hedged instrument, it would be about 28% or 29% of our drawn debt being hedged. On the cost of [indiscernible], I am talking about all inclusive, which is the line fee as well. In our guidance, we have presumed about 6.4%-6.5% is the whole falling cost of debt. That is obviously higher than what we had for FY '26, which was around 6.1%-6.2%, given the rate rises during the year.

Leanne, I cannot tell you how excited you made Shiv to someone asking a question on hedging.