MA Financial Group Limited (MAF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MA Financial Group Market Update. [Operator Instructions] I would now like to hand the conference over to Mr. Julian Biggins, joint CEO. Please go ahead.

Thank you, Darcy, and thank you, everyone, for joining the call. Good afternoon and apologies we're a few minutes late. The reason for the call today, we're very pleased to announce the strategic acquisition of IP Generation. It's a very complementary business for us. I won't have the -- I got the presentation in front of me, and I hope you do as well. We also don't have it on the screen [indiscernible]. If you want to just run along the slides with me, that would be great, and I'll keep you on track in terms of where I'm talking to. But yes, really excited to make this acquisition. IP Generation is a $2 billion real estate fund management business based out of Melbourne. And it's one of the leading, I think, if not, the leading retail shopping centers syndicators in the country. IP Generation had approximately $2 billion of shopping centers today. And yes, they have an impressive track record as well across their investment track record in the period. So we're really pleased about the quality of the platform. It takes our AUM to just in excess of $12 billion. And importantly for me, it's really about scaling our real estate business. So in the context of MA Financial, we obviously talk a lot about private credit. We talk a lot about real estate. This puts our real estate assets under management to just sort of around about $8 billion, and that's spread across both debt and equity alternative real estate, core real estate and obviously, the real estate credit. So we think it really balances out our business very well and sets us up very well at this part of the cycle. In terms of -- yes, I might just -- I think I'm on Slide 3. So I might just go into the slide here around consideration. The consideration is about $90 million, really pleasingly it's been in line with us. IP Generation and MA Financial are both founder-led businesses. They see the value in our business, and we're basically providing 100% consideration in shares. And that shows you the confidence both ways in the business, and we're pleased that they're on long-term escrows as well. So the IP Generation business is really a business that's set about the people in that business. It's a syndicator. They have a very high-quality team of individuals, and we're going on the journey of this together. So it's not a cash-out moment for the sellers. I guess on the impact on MA Financial, a lot of people on the line, would be interesting, we're buying the business at about an 8x multiple. That's sort of backwards looking, so FY '24 multiple. For us, we think it's a very -- it's a fair multiple. It's got a lot of recurring income in that number, and we expect it to be broadly, broadly neutral this year depending on how many funds are raised in the second half. So these are very transactional businesses in some ways and depending on how active we are post-integration, will depend on what the ultimate results are. But I think on a pro forma basis, it would definitely be an accretive. So we feel like it's a great acquisition for us strategically. It's a great acquisition financially. And most importantly, actually is that the people in the business were very aligned culturally and in terms of what success looks like. As always with transactions like this, there's conditions precedent. There's a number of consents that we need to receive, and we expect those to happen early in the second half of the year in terms of closing the deal. So with that, I might just turn forward to Slide 4 and some of the strategic rationale. One thing that I've probably been chatting about for a little while, I think, is the consistent threat in this acquisition is that the real estate market is really in a very positive point of the cycle in terms of the underlying asset class. And for us as a business, we've been looking at ways that we could increase our exposure to the real estate asset class from a funds management perspective but almost more importantly, for our investor base as well. We think the assets that are bought through this part of the cycle will generate very strong returns for investors and really set ourselves up very well as a funds management business. So we think it's a great part of the cycle to be leaning into an acquisition like this. We also -- we've talked about this a lot as well, the strength in having a fully integrated platform. So that means managing every part of the asset management cycle whether it's origination. There's property management, leasing, et cetera. So again, this business of IP Generation coming together with our existing RetPro business and the real estate asset management business here in Sydney, we'll have a very integrated platform to offer to investors in terms of managing the assets and managing them very proactively. As I said, it takes our AUM in real estate to about $8 billion, 250 professionals, so a broad strength -- a broad bench of capability in the business covering investment management, development leasing, all the things that are fundamental to creating returns for investors. And also, in terms of sectors, we obviously -- maybe not obviously but we do very well in the alternative real estate space. We are active in the core real estate space, but this really beefs up that area for growth. So whilst I'll talk a bit today about the retail shopping centers, it's sort of a key focus for IP Generation and what they've done recently and sort of what we like about the core real estate space, that doesn't mean that this is solely about retail shopping centers. And essentially, IP Generation are looking for opportunistic ways to buy real estate and create value similar to our DNA. And as we go through a cycle, we'll see that move between the asset classes as they become more or less attractive. As I said, a highly complementary high-growth real estate funds management business, roughly $2 billion. They've been growing very quickly, which I think is a good part of the cycle in terms of identifying opportunities and being able to basically not just knock down the opportunity but also raise the capital to fund those assets. And we'll talk about how the team has gone through -- how the team goes about that a bit later. 1,100 active investors. Again, we don't have a lot of overlap in terms of our distribution channels, so this is, again, a really nice part of the fit between the 2. IP Generation has a stronger focus on the ultra-high net worth direct market and also some of the private wealth channels that we're less prevalent in and then -- so it couples together with our distribution channels to be very complementary, where I don't think we'll see a lot of cannibalization. And you'll see a lot of -- we'll be able to help each other get things done and I guess in saying that it's one business, but we'll get to raise more money effectively for greater opportunity in the future. In terms of cultural fit, I think this thing -- this is probably the most important bit. As I've said a few times, we're both sort of founder-led businesses. We're both pretty nimble in the way we like to think about things, heavily analytical and trying to find opportunistic sort of acquisitions for our clients. We have very similar DNA in that aspect, and we have a combination of both senior people in the business and also very hungry younger people as well. So in terms of bringing the culture together, bringing both businesses together and just how we think about building businesses, we're very similar. And I think this is a real -- we're very excited about the level of energy that this is bringing our business, and also, I think the IP Generation guys are as well. So just turning forward and obviously it's not a presentation without a few numbers. So just the increase in AUM, and I think you can see through the, I guess, the color in the column chart the -- just a split between real estate and private credit, and I'll talk about equity and debt. There's a lot more balance in our business post this transaction. And I think also from that sort of direct high net worth channel, we also have a lot stronger exposure. On Slide 6, just gives you a snapshot of the real estate funds management platform, and again, there's diversity in this post settlement, so post -- maybe it's a couple of months' time, over $3 billion in retail, $500 million between logistics and office. And then alternative real estate, again, 1 of our sort of powerhouses, $1.8 billion in alternative real estate and $3.3 billion in credit. So really putting us in a strong position to be a meaningful player in the real estate market in Australia. As I've mentioned a few times, the favorable positions in the retail sector at the moment but just layering this through the sort of, I guess, real estate cycle full stop, interest rates have probably rolled over. We're also seeing elevated construction costs, meaning that the supply side is not really quite visible. There will be very little supply. What we do like about the retail shopping centers is they're a very defensive asset class. They're underpinned by a lot of nondiscretionary retailers. They're also very cash generative. So in terms of cash flow and generation of cash flow, they're very stable, generates that cash. They don't have massive incentives. They do have CapEx strategies that you do need to be mindful of. But they generally generate quite a high level of cash-on-cash yield versus some of the other sectors. Also large land components, so very large land holdings in well-located areas, infill locations generally. And over time, we think investing in land is a very sensible place to put your money. That consistent and highly resilient sales growth, obviously, supply side, we haven't seen a lot of shopping centers built in recent times and retailing underpinned by wage growth and population growth is kind of, we think, a good place to invest. And then e-commerce, we've really seen e-commerce through COVID, obviously, tested, tested the boundaries of how far it would push. And we're comfortable that, that has sort of shown us covered and where it sits today, will continue to grow no doubt. But there's definitely a place for bricks-and-mortar retailing as well. So this really saw the sector substantially rebased, and we think it's now very much positioned for growth. And then also because supply is so constrained, we see population growth and one of the key metrics of retailers around sort of floor space per capita, Australia has generally had a low level of floor space per capita. And we see that continuing to be a feature as population grows coupled with lack of supply. So we really do see the retail shopping center space is a very favorable place to invest at the moment. Just turning forward to Slide 8. When you think about IP Generation, so Chris Lock founded it in 2018, really was about finding mid-priced real estate opportunities. And I think Chris and his team have a great approach to how do you think about underwriting the downside risk but also thinking about how do you proactively create value. And that's really what that -- the journey that's been on. I think that found that retail shopping centers probably offers the best risk-return profile in the market, and that's why that's focused on the retail shopping center as a strategy. Again, growing their AUM, their funds are typically closed-end single asset or 2 asset funds, and they might have a 5- to 7-year duration. So they really go out and find specific assets, launch a fund around that asset and then raise the capital. And they've been very active in this space and been able to raise quite a bit of equity as the business has grown over time. I think the type of investor base of IP Generation focuses on and has focused on in the past is very much a trust and a word-of-mouth investor, so the -- those ultra-high net worth, those circles. And that's something that we probably haven't been as focused on as we've been more in the platform market and the independent financial adviser market. And that bodes well for how much their investor base supports the opportunities to invest with IP Generation as they have a lot of repeat investors in their business as well over their journey. And we look forward to continuing on. I think one of the important things for our business and for the IP Generation business is as part of this transaction, all of the leadership team, they don't change within IP Generation. We've got the same focus and style of investing, so not a lot of changes around that. Hopefully, we've got broader bench strength. And when you think about institutional capital, we've probably got a broader bench to offer the institutional capital as well as we look to grow the business going forward. Just turning forward to Slide 9 and some photos. They're not always high quality, but they're there anyway. But as you can see, Chris Lock, I've talked about a fair bit. David Blight is the Chairman of IP Generation today. He'll come in and take on Executive Chairman of Core Real Estate. We've known David for a long time. He's a very senior leader in the real estate industry and has played some very big roles in Australia but also globally such as with ING Real Estate. So we think someone of David's caliber joining the business and playing that role in the leadership role but also helping us open up networks and institutional capital for our business is great. And we also think another important thing about the acquisition, also bringing the business together is strengthening that offering in the Melbourne market. Greg Miles is one of the leaders in the retail shopping center space. He's been with Westfield for many, many years before he came out to [ impact investing ]. So he worked both in Australia and in the U.S. And Greg will join us and be responsible for the management of the assets and the performance of the assets, very similar to what Greg is doing today. And we think when you think through what's important to an investor in generating returns in assets, Greg is one of the best in the industry in doing that. We really look forward to him coming on and focusing on our assets, focusing on the team as we build out that leasing and the operational side of managing the assets. Ingrid has been with Chris for a long time. Ingrid is the Chief Operating Officer of IP Generation. I think Ingrid is a very focused investor-first sort of operating officer. She really focused on the investor experience and how to make sure that, that is seamless through the journey of someone putting money in and also ultimately getting money out. So we really think the senior leadership team is first rate and really is additive to our business as we move forward and merge the 2 businesses. I won't spend a lot of time on the history of IP Generation. I'll let you consume this. But what I would say is that many of these assets, we've looked at over the journey as they've come to market or they've been around being converged. And we've always liked the assets that IP Generation had bought. So we think -- when you think about the value of the portfolio and what that does for track record going forward, we really like this portfolio and think that there's a lot of embedded value to the investor base in the portfolio. Okay, I'll leave you with Slide 11. That shows a nice pictorial of the assets. And then probably close out before Q&A on Slide 12. Clearly, this is a strategic acquisition for MA Financial and leveraging more into, I guess, the real estate cycle and also really enhancing that sort of both investment capability and the capital raising platform. So we think this has not just come about overnight with Chris and his team, David Blight for probably decades. This has been a conversation that's been ongoing for a couple of years, and we're really pleased to bring it to the market today and finally execute it. As I've said many times, I think it's a fantastic part in the cycle to be investing in real estate, and this will really let us accelerate that growth. And really importantly is the IP Generation people, they're coming into our business. We're putting everyone together, and we're in this together. So through the 100% share deal, the long escrows, it's really fully aligned in terms of what we're trying to do here and aligns everyone that's in the transaction with the shareholders, which largely the people on the call are as well. So we're very, very pleased with that alignment. In terms of Melbourne presence, this is important. We do have a Melbourne office. This will probably add another 30 people roughly to that Melbourne office. It gives us a lot of scale and also a lot of the network in Melbourne will -- it will just strengthen our presence in Melbourne, which is not insignificant for this business. And finally, the financial metrics are very compelling for us. We're mindful of integration, that we need to do that very well. And obviously, we're halfway through the year at the minute. So just in terms of timing, as we roll the clock forward, we think this will be materially accretive to us as we get a full year sort of contribution, and we think we get the growth right behind the business. So with that, obviously, I've been working on it a fair well, so I'm pretty excited about what we've done. And we just look forward to sort of getting on and showing the market that we -- how we can accelerate our growth in the real estate market. So with that, I'll pass back to the moderator, Darcy, for any questions that are coming.

[Operator Instructions] Your first question comes from Tim Piper from UBS.

Just firstly around the EBITDA the business is generating, you've kind of given an FY '24 number and a recurring revenue margin for the business. Obviously, it looks like transaction fees are generated as well. Can you just give us a sense? I mean, you're saying it's going to be EPS accretive on a pro forma basis for '25. That would suggest that $11 million to $12 million of EBITDA is kind of a sustainable number in the short term, i.e., there'll be enough transaction and transaction revenues coming through to support that earnings base over the next year or 2. Is that right?

Yes. I think, Tim, it's a fair question. I think you can [ back ] for what the EBITDA of the group is through just the multiples and the price. But for me, the large majority, and it might be 85% of the EBITDA, is largely recurring, might be 80% to 85%, in that number. So we've taken a pretty conservative view of you've got to integrate the business. If we're sitting here in August and settling in, what transactions are we undertaking between now and the end of the year to really drive that -- both revenue and EBITDA higher? Clearly, the team at IP Generation has been very active in the market of buying assets. And they -- there is not a lot changing here. So we're pursuing things in the market as we speak. When I think about rolling forward, it's just hard to know exactly what will happen in the next 6 months. But if you go a normal acquisition fee, you're probably net 1% as a fee from an acquisition in this -- on the asset base in these sort of funds, you can sort of work out what the sensitivity is to AUM growth for the longer term. So I think 1 of the real benefits of this is actually having the 2 distribution teams that don't overlap each other and be able to take us into markets that we haven't been into in terms of scale, which allows us to do bigger deals as well.

Yes. Okay. That makes sense. Just on the distribution...

[indiscernible]

Yes, I mean, that makes sense. On the distribution side of things, I mean, these guys have obviously been extremely successful raising a lot of money through a pretty tough market over the last few years. You sort of called out Victoria centric and high net wealth. Can you maybe just dig into the relationships in the high net wealth side of the distribution of this business? Are there key people that hold these relationships? Just a bit more context around [ through the investors ], how they've been so successful?

Yes. I think there'll be a number of people in the business that are core to those investor relations, and that's both Chris and Ingrid and a couple of others. I think Chris has done a great job of building trust over a journey of being a very savvy investor, and they've run a very well-disciplined business in managing that investor base. I think when you think about the journey over the last sort of 6 to 7 years, navigating sort of COVID and sort of the interest rate environment has been a little bit tricky. But they've been able to convince their investors on the contrarian view of getting set into these assets at a very good point in the cycle when many couldn't -- it was very hard to raise capital for real estate, as you know. And now what you're seeing is the benefit of that track record keep playing out. I think I said it on this call a bit earlier. This is very much a word-of-mouth network and people -- you do good things and more people join your business, right, in terms of wanting to be investors in the business. So there are some key risks there around people. But what I'd say is when you look at the structure of the deal, we've been very mindful that these businesses are people businesses and put in place very long protection around sort of making sure we're aligned. And to be perfectly honest, both of us came out the same way. Chris and his -- and the leaders and -- all wanted to have shares in our business for the long term. It's not about cashing out.

Yes, sure. There's clearly some distribution and scale synergies here, but this is kind of a business being folded into MAF. So can we think about sort of some cost synergies as well associated with this deal?

I think there's both -- there's opportunities, but there's also costs, right? So I think one thing we're mindful of is -- I think on a stand-alone basis, I'm saying it's going to be pro forma accretive as we get to sort of -- as we launch new funds. I think from an operational side, I think it enhances -- like it's very complementary between even RetPro IP Generation and our real estate investment business. We don't have a lot of overlap in there because RetPro manages a lot of their assets on a property management basis today, there's just very few places where we've got a lot of that. I think we've strengthened the bench. I think distribution, we don't cannibalize each other. And I think it allows us to accelerate the growth of both entities, for both businesses' top line. There might be the odd synergy, but it's not something I'd be focused on. I'd be more focused on, when we think about AUM and we think about moving forward, how big will the real estate investment management business be for MA because we've got such a broader bench that can lean into institutional market as well as the high net worth market as well as the channels that we already distribute private credit to.

Okay. Just one last one if I can. Just there's also a comment that there's an additional earn-out consideration on future performance milestones. I mean, assumably, these are closed-end -- 10 closed-end syndicated funds. Is that right with what -- there's usually 7 years or something like that? Are those performance milestones on the additional consideration? What are the metrics they're based on? Is it on growing AUM? Or are they sort of earnings-based? Because assumably, there's some performance fees that may crystallize at the end of the term of some of these.

Yes, I think that is technicality, but I think there's a combination. Like the AUM growth is -- as you understand these businesses, it's a pretty easy measure to sort of put some sort of hurdles around. But we're very focused on how do you grow in the right way. So it's not about just an AUM chase. In terms of performance fees, they're very hard to value. So a significant amount of performance fees, some of the historic stuff, we just left with the sellers. Some of the more -- some of the later funds, we get the benefit of. But that's a pretty detailed question. I might just take that off-line. Maybe Michael and Giles can have a chat to you about how that all works.

[Operator Instructions] Your next question comes from Joseph Licciardi from MST Financial.

Just a couple of quick ones from me. Firstly, on the pipeline, I guess, IP Generation have grown their AUM by around $450 million per year on average for the last 3 years. Does the pipeline still look healthy? And I guess following on from that, would you, I guess, be disappointed if you didn't keep that level of growth up or exceeded over the next 3 years? And then just following on from that, I guess, is there appetite from your current, I guess, distribution lines to add net flow to these new products or existing products?

I think [indiscernible] I think the layer is, yes, it's -- the pipeline is very strong. I think we still see lots of sort of opportunities that real estate, whether it's -- whatever asset class is available, I think what you've got to find is vendors that are motivated to sell in the right terms, right? So we think the pipeline is strong. And if you go to your second question, Joe, I think in terms of the way the distribution channel works, what I would say is the sentiment for real estate, and we see this through our alternatives lens, has moved a little bit in the last sort of 6 months to be more pro, sort of real assets than it was, say, 12 months ago. So I think as everyone's saying within real estate that's been around it for a long time is the combination of sort of elevated construction costs, interest rates rolling over is only -- can only be good for real estate, right? And we think that continues to play through. We think probably as more competition comes in, the size of the assets that you've got to chase sort of probably gets a bit bigger. And that's why when you look at the combined group, we have a very strong balance sheet, and we've obviously raised a lot of capital ourselves. I think we can put the combined group behind IP Generation and the broader real estate business in MA. And that $450 million is probably a sensible number, but there's a lot of variables that go into that, as you understand.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Biggins for closing remarks.

Thank you, Darcy, and thank you for joining the call on short notice, and hopefully, it sounded interesting. And we look forward to catching up with you in person as we go through the journey. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.