Elanor Investors Group (ENN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Elanor Investors Group conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, the CEO, Mr. Glenn Willis. Thank you. Please go ahead.

Thank you, and welcome to the results presentation call for Elanor Investors Group for the first half of 2020, and thank you for your interest in Elanor. I have with me here our executive team of Elanor to field questions at the end of the call as they are post, and we look forward in the first instance to going through this presentation. I'll talk initially, and Paul Siviour, our COO, will discuss the financial results. So just I'll talk to the presentation that was released to the ASX this morning. And please turn to Page 4 of that presentation which highlights the first half. The first half was a half characterized by strong growth for the group once again and also characterized by the execution of some very significant new funds management initiatives. The listing of the Commercial Property Fund was an important initiative that was achieved over the half as well as the establishment of the Luxury Hotel Fund, the Elanor Wildlife Park Fund and also the Elanor Health Real Estate Fund. So it made for a busy first half and one that achieved good growth. Period-on-period, our growth in funds under management, as you can see there, has increased by over 46%. And particularly pleasing is our growth in our listed funds under management that now totals in the order of $730 million being made up of the Commercial Property Fund and the real estate -- retail funds. That was a -- we see that as a key achievement. Obviously, establishing funds into the public markets is one of the major sources of funds for the broader group that complements our institutional investment funds and our wholesale product capital funds. Also pleasing was the nearly 19% increase in the annualized recurring Funds Management fees on a period-on-period basis. That's -- the key objective of the group is to -- in establishing Elanor as a listed real estate Funds Management business is to grow our recurring Funds Management fees, and it's pleasing to see the growth rate in the order of approaching 20%. Our core earnings grew strongly half-on-half and not just from the growth in Funds Management fees but also pleasingly, again, the consistent and continuing success of transaction fees that the group's being able to generate, which includes gains on the sales and performance fees, and I'll talk a little bit more about that in the presentation. And as a consequence, our distribution per security increased significantly on a half-on-half basis. Once again, our gearing, we believe, is conservative, obviously, particularly conservative when we look at the secured gearing ratio being just over 1%, but our total gearing at around 24.5%, we believe, is conservative for the group. If we turn to Page 6 now, we wanted to discuss in the presentation this half and highlight how Elanor business group as what we described here is a pure-play real estate funds manager. Elanor continue to co-invest alongside our capital partners and investors in our listed and unlisted funds. But our balance sheet consists predominantly of cash and co-investments. Now in the past, we've had a larger amount of assets on the balance sheet that were in preparation to seeding new funds, but the Elanor Investors Group business is one that's, as you all know, acutely focused on building a major listed real estate Funds Management business. And the co-investments on the balance sheet is the enabler to achieve that key objective. So we -- at $1.7 billion of funds under management at the end of the half, we have grown well. We still consider ourselves in scale as being very modest, particularly against our ambitions. But we're very pleased with how we are positioned for growth. We're pleased with the active pipeline of opportunities across our core real estate sectors of focus. And also, we're pleased with our capital availability to enable us to achieve growth. We are very focused on our points of difference, and indeed, playing to our points of difference and in the strength. As an investor, we're very focused on investing in real estate assets that generate strong, sustainable income. We're very focused on assets that have positively differentiated market positions, and we're very focused on actively managing our assets and not just in an operational sense but in a -- to achieve the value-add opportunities. And what that means is that across all the sectors of focus, being the commercial office, the retail, Hotels, Tourism and Leisure, and indeed, our new sector of focus being health real estate, it's playing to those factors, which is investing in assets with very strong income levels and assets that we believe will deliver outsized returns over the period but particularly outsized risk-adjusted returns. As we [ chat ] today, we believe we've got a highly scalable platform, and indeed, we continue to invest in our platform. We're very focused on delivering security holder returns in a consistent and growing basis. But we're also very focused on investing in our platform to -- for growth, and we believe we're managing those 2 factors reasonably well. And last but not least on this slide, we talk about our returns that we've achieved on our funds since we've been listed. And we particularly -- we believe there are particularly strong returns when we think about our investments and the -- we would claim to be lower-volatility investments being assets that generate strong, sustainable cash flows. And so therefore, our returns against those types of investments, we believe, in a risk-adjusted basis, are very strong. If we turn now to Page 7. Most of you would have seen this slide before that we like to table to reiterate the consistency of our Funds Management strategy. And indeed, the overarching ambition for the business is to grow our funds under management and as I said, our recurring Funds Management fees complemented by other revenue streams. And that will occur if we continue to deliver strong returns for our capital partners. So we're very cognizant of the fact that growth in the business and growth in the value of the business will be a function of growth -- a function of delivering value for our investors in our funds. And our strategic objective is underpinned by being cognizant of growing in a capital -- we call it capital-light basis. And whilst we are investors that converse with our capital partners in a co-investment sense, we are very focused on growing the group and the Funds Management business in a capital-light manner. In that bottom box, we talk about our capital partners. And as I mentioned earlier, the growth in our listed public markets, funds has been pleasing, and we expect that to grow strongly as it will be a source of strong growth for our broader funds under management. But alongside our growth in our institutional investment -- investor-led funds but also our wholesale capital funds, our traditional family office and private capital investor funds, we still have a strong focus on growing our capital partnerships in that sector. Next slide, we illustrate and table at each presentation, which really just gives everyone a look at the growth in funds since the IPO. On Page 9, based on -- again breaks up the slide that we've all seen before, breaks up the components of our Funds Management income. Again, pleased with the close to 19% increase in the annualized rate of recurring Funds Management fees. And Page 10 is a new slide where we draw out, indeed, our growth in the Funds Management recurring income. As I mentioned earlier, the key strategic objective of the business is to grow funds under management and particularly, recurring Funds Management fees, and we're pleased with the annualized run rate of our Funds Management recurring income at present. Indeed, this is the key focus for us to continue to grow that strongly. Slide 11. As I mentioned in the overview, we continue to generate consistent transactional income that we believe will continue to be the case for the group, either performance fees or gains on our co-investments. And the table here provides a history of our transactional income over the last 4 years, and we believe that we're well positioned to continue to generate consistent transactional income to complement our growing and recurring Funds Management fee income. Page 12 is -- provides -- for illustration, provides a breakup of our managed funds and our investment portfolio. And Page 13, highlights the capital available to us to grow our business. We believe we have significant capital to facilitate our growth. And as we say here, we believe we can increase our funds under management by about $800 million to about $2.5 billion based on a consistent 15% co-investment level in our funds and an average gearing of those funds of 40%. So certainly, we believe we've got significant capital to -- for the next phase of our growth. I'll hand over to Paul Siviour now who will provide us with an overview of our financial results. And I look forward to picking up in regards to the outlook after that. Paul?

Thanks, Glenn. Turning to Page 15 of the presentation that was released this morning. Core earnings of the group for the half are $12.4 million. And with a maintenance of our payout ratio of 90%, that reflects a distribution per security for the half of $0.0951. Core earnings are the underlying cash earnings of the business, and that's what we focus on, and that's what supports distributions made by the group. The accounting results reflect the equity-accounted result of our share of co-investments in the underlying managed funds of Elanor. And those accounting results, which are reflected in the top half of the profit loss prior to the adjustment to core earnings, include a number of accounting write-offs related to transaction costs and establishment costs in relation to new funds. So what's relevant and important in the context of the performance of our co-investments is the distributions that are generated by us from our managed funds in respect of our share of those co-investments. And for the half, that's an amount of $4.3 million. The transactional income is -- has been included in the half, in respect of cash earnings from gains on sale of our co-investments and also a gain on the sale of Featherdale Wildlife Park into our new Elanor Wildlife Park Fund. Featherdale is an asset that has been -- has enjoyed 200% increase in value since listing and receded into that fund at $39 million. Turning to the balance sheet. As Glenn mentioned previously, the business really is quite simply positioned now as a pure-play real estate funds manager, and the balance sheet reflects this. Total assets of $280 million comprise primarily of cash, receivables and the equity-accounted value of our co-investments. Our liabilities primarily reflect the interest-bearing debt, which is a gearing of 24.4% for the year. I'll hand back to Glenn to comment particularly on our outlook from the conclusion of this reporting period.

Thanks, Paul. As I mentioned earlier, we're pleased with the growth of the half. There was a -- significant Funds Management initiatives were executed over the half. Again, the listing of the Commercial Property Fund, the establishment of the Wildlife Park Fund, the Health Real Estate Fund and the Luxury Hotel Fund, all important funds that we believe have strong growth prospects for the business. And the broader growth in funds was also pleasing, as was the growth in recurring Funds Management fees. We believe we're well positioned for growth, as I mentioned, and growing our funds under management. We will continue to actively manage our investment portfolio. It's, indeed, a key trait to Elanor, the active asset management approach to real estate investing and certainly a key contributor to the returns that we achieved. As I mentioned earlier, also, we'll look to grow the business on an ongoing basis in a capital-light structure. Obviously, we're very focused on growing earnings per security. And so we believe we're well positioned to grow value for security holders. We say here that we have an active pipeline and strong growth prospects, and that does describe how we believe we're positioned at present across all of our sectors of focus, commercial office, retail, Hotels, Tourism and Leisure and also the new sector of focus being the health real estate sector. We have a good pipeline and strong growth prospects. We continue to look at new growth sectors as -- new real estate sectors as we state that, and indeed, have always done. And it's -- pleased to have the health real estate sector as the latest sector of focus for the group. We continue to explore and assess new sector opportunities for -- within the broader real estate asset class for Elanor, and we continue to pursue strategic opportunities as well. So against that background, I'll be pleased to take -- or we'll be pleased to take questions at this juncture. Operator?

[Operator Instructions] Our first question is from William from Ord Minnett.

Glenn, Paul and Symon, I've got a few questions. First one, just in terms of the allocation of the Featherdale profit, will that retention -- is that retention largely to make sure there's capital available for growth? Or can we expect that you'll sort of periodically and relatively evenly sort of allocate profit over the following periods?

Thanks, Will. Yes, it's precisely what you've mentioned. The gain on sale of Featherdale was $26 million. That's a cash gain. We've retained $20 million of that profit in the business to assist with the funding of our future growth. And that's part of the $77 million of available capital that we have for co-investments in new funds moving forward.

So would that come under sort of that -- the $65 million of recycled capital effectively? Or is that more in the cash balance?

That amount is more on the cash balance, Will. That was the cash on sale of the business into the fund.

Okay. So I mean we can't necessarily assume that you'll allocate, let's say, $5 million to $6 million profit in the next half and thereafter. It's really going to be whether or not it's available given some of your growth initiatives.

Yes, that's correct.

Okay. And then on the capital -- on the recycled co-investment capital, is that going to be sort of dependent on actual sales of some of the assets? Or more of just a sell-down of the old co-investment to provide investors opportunity to get into an existing vehicle?

It's the latter, Will. There's a number of co-investments that we would expect to recycle in part in the short term, being 6 months to 30 June.

Okay. All right. And then just finally, there was obviously quite a big step-up in corporate costs. Can you just talk through a little bit how much of that is sort of more of a step-up in permanent overhead? And how much that is sort of one-off-related? I know there are some incentives in there. So if you could just provide some detail there, that would be great.