Rising Interest Rates and Takeover Threat Cloud Elanor Commercial Property Fund’s Outlook

Financial Results and Distribution

Elanor Commercial Property Fund (ASX, ECF) has released its preliminary final report for the year ended 30 June 2025, revealing a statutory loss of $5.4 million. Despite this, the Fund's underlying performance, as measured by Funds from Operations (FFO), rose 6.9% to $35.4 million, or 8.7 cents per security. The Fund declared distributions totaling 7.5 cents per security, consistent with an 80% payout ratio, reflecting management’s commitment to steady income for investors.

The Fund corrected a typographical error in its Appendix 4E, confirming the final quarterly distribution at 1.875 cents per security, aligning with the earlier Appendix 3A notification.

Portfolio and Leasing Highlights

ECF’s portfolio comprises nine commercial office properties across major Australian cities including Brisbane, Sydney, Perth, and Canberra, valued at $495.3 million including its 49.9% stake in the Harris Property Trust. The portfolio maintained a strong occupancy rate of 96.3%, supported by nearly 12,000 square meters of new leases and renewals during the year. Notable leasing deals included agreements with NBN, National Australia Bank, and Open Colleges, enhancing tenant quality and income security.

However, the Fund’s portfolio valuation declined by 3.66%, primarily due to rising capitalisation and discount rates amid a persistently high interest rate environment. The valuation of the equity accounted investment in 19 Harris Street, Pyrmont, fell sharply by 26.95%, reflecting broader market pressures on Sydney’s commercial office sector.

Capital Management and Strategic Moves

During FY25, ECF successfully completed a fully underwritten 1 for 3.5 pro-rata entitlement offer, raising $52 million at $0.58 per security. The strategic investor Lederer Group increased its stake from 14.8% to 25.8% through this offer and a sub-underwriting arrangement. The Fund deployed most of the proceeds into acquiring 95.8% of the Harris Street Fund Capital Notes, a hybrid security instrument, while also reducing existing debt and bolstering working capital.

The Fund’s gearing ratio stood at a conservative 38.1%, within its target range, supported by hedging strategies that fixed 76.9% of its floating rate debt. The balance sheet remains robust with net assets of $279.7 million and $10.5 million in cash.

Governance, Risks, and Sustainability

Elanor continues to advance its climate-related financial disclosures and sustainability initiatives, aligning with Australian Sustainability Reporting Standards. The Board oversees these efforts through a dedicated Sustainability Committee, reflecting growing investor focus on environmental, social, and governance (ESG) factors.

Risks remain from economic uncertainty and interest rate volatility, which could impact capital values and leasing dynamics. The Fund mitigates these through active asset management, tenant engagement, and maintaining a diversified tenant base including ASX-listed companies, multinationals, and government tenants.

Takeover Offer and Market Outlook

Post-reporting date, the Lederer Group made an unsolicited off-market takeover offer valuing ECF securities at 70 cents each. The Fund’s Independent Board Committee, comprising independent directors Ian Mackie and Kathy Ostin, recommended securityholders reject the offer, citing it undervalues the Fund’s prospects. The Committee has engaged Ord Minnett Corporate Finance and Arnold Bloch Liebler as advisors to represent securityholder interests.

Looking ahead, ECF’s strategy remains focused on active portfolio management, income growth, and selective acquisitions, while navigating a challenging market environment. The Fund’s ability to maintain occupancy and leasing spreads will be critical to sustaining distributions and capital values.