Elanor Investors Group (ENN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Elanor Investors Group Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen, and welcome to Elanor Investors Group results presentation for the first half of this financial year, and thank you for your interest in the group. I'm joined here by our executive team of Elanor today. And we'll be pleased to answer questions at the end of this brief presentation. I'll be -- we'll be referring to the results presentation pack that was released this morning for the group, and I'd like to turn to Page 4 of the pack to overview the results for the half. I'd like to commence by saying that we firmly believe that, as we say here that, the group -- the Elanor Investors Group is well positioned for growth. Whilst the economic environment against the backdrop of the COVID-19 pandemic, particularly for the last half, of last calendar year, continue to present challenges in the markets -- in most of the markets in which our funds operated. We, nonetheless, certainly of the view that we're well positioned for growth given that we've come out of 2020 calendar year in a very good position. Whilst our investments faced extraordinary and as often quoted unprecedented challenges over the period, we are very pleased with the operational efficiency of our investments or our funds and believe that we are very well positioned to significantly improve performance for our funds, for our investments, and therefore, for Elanor Investors Group and creating shareholder value for our Elanor Investors Group. A brief overview of the sectors in which we participate. Our commercial office assets performed exceptionally well over the half. The Elanor Commercial Property Fund, our listed office REIT, collected 99.5% of Brent over the period, so mostly unaffected by the last half, which is a testament to the assets, the asset selection, the way in which we invest in commercial office assets and the acute focus on investing in office assets that have differentiated positions in their respective markets. Similarly, the commercial health care assets performed exceptionally well with 100% of rent collected over the period. Again, those assets being unaffected by the economic environment and, again, testimony to the asset selection and the management of those assets. Our hotel assets experienced challenges over the period, with border closures, particularly, made it challenging. Having said that, the COVID-19 period gave us a tremendous opportunity to improve the operational fitness of those assets. And as such, that is an area where we're particularly positive in regard to how those assets and how those investments and how those funds are positioned to perform going forward as domestic borders stay open -- are opened and not -- those assets not being affected by the closure of international borders. Our Wildlife Park assets, the Mogo asset performed exceptionally well over the period despite the environment. And Featherdale asset in that fund, obviously, encountered challenges. That asset being -- half of its business being traditionally inbound visitation. However, the team -- the management team, they have done a very good job again in improving the operational platform to cater for the domestic visitation -- the offshore visitation losses in that asset, and the fund is now performing well. Our retail assets, ERF performed very well, given the challenges of the environment. 95% of rent was collected in the last half for those assets, and 98% of the rent was collected for the income assets, again, testimony to the asset selection and the asset management and the teams capability in managing retail assets. Clearly, we had challenges with our Waverley Gardens asset that we have a partnership with Heitman Group. It's a Victorian-based asset, and that obviously was impacted by the Victorian border closures and the lockdowns in that state. Similarly, Hunters Plaza asset had challenges with the lockdowns in New Zealand over the period. But all in all, the investments, our funds performed very, very well in light of the economic conditions. And we're particularly pleased with how they're positioned in operational fitness sense to improve profitability and fund performance as we now operate in this half. So as such, we believe we are in a strong position. Our core earnings over the half, we're pleased with the period-on-period growth in Funds Management income, increasing by 79% period-on-period. That's a strong increase in Funds Management income, being our key focus in terms of driving value for ENN security holders. Obviously, in the half, we did not receive distributions on $120 million of our hotel investments and Waverley Gardens investments, choosing to withhold distributions from those funds during the period. We expect distributions to recommence this half. And over the half, we did not generate performance fees or transaction income. However, we are positive about the short-term prospects here, including the sell-down of our hotel co-investments. So all in all, we are -- as I -- as we state here, we believe we are well positioned for growth. And if we think about the fundamentals to growing our business, growing our Funds Management business, growing our funds under management, our Funds Management earnings and value for ENN security holders, we think about it in 5 key areas. Clearly, we think about the Funds Management platform of which we believe is very scalable. Having achieved $200 million of growth in FUM over the last half, whilst that could be considered modest per se, those -- the new funds generated the last half were -- the back end of the last half, half that it was difficult to generate pipeline over the period, but nonetheless, it was a pleasing end of the half, having generated, as I said, $200 million of new funds over that period. And particularly, our team -- we've got, I believe, a highly capable Funds Management team -- a high-caliber Funds Management team and a team that's been together for a good period, which I believe is an asset to any Funds Management business. So we are very positive about the scalability and the capability of our Funds Management platform. We're pleased about the pipeline we have for the business as we're now placed. We're particularly pleased with the pipeline of opportunities in the retail sector, in our commercial assets sector, but also in our hotel sector. And whilst execution is everything, we fully appreciate that. We are pleased with the pipeline of opportunities that we have within the business at present. The third fundamental to how we think about the -- growing the business pertains to growth capital. We have $115 million of growth capital when we think about recycling our balance sheet assets, particularly the cornerstone position in the group's hotel funds, and that assumes retaining a 15% in those funds going forward. So $115 million consists of $80 million there and about $30 million -- $35 million of cash and facilities. So we have significant growth capital to grow our funds under management. We also have pleasingly strong and growing investor demand for our funds, both from our traditional wholesale domestic capital partners, family offices and wholesale private capital, but increasingly from offshore, particularly, but offshore and domestic institutional investors. We're very pleased, and particularly over the last 24 months, the investment we made into growing our investor demand and our capital partners is well and truly returning to dividends, as we see the growth in demand in our funds. And that's evidenced by -- even in the last half, the demand for our funds was very, very strong, requiring the group or even not allowing the group to participate in cornerstones, such was the demand for those funds. And that growth in investor demand is significantly, if not substantially, a function of our investment track record, the fifth element to the -- to growing our Funds Management business. Having a track record of over 20% on realized returns for our funds for our capital partners, for our investors, we believe is an exceptional result. Clearly, we acknowledge that the market has been positive in terms of returning good returns for capital partners. But that level of performance, that track record, we believe, is exceptional. And that obviously positions us very well in regard to growing investor demand. So in summary, we believe that we -- in delivering exceptional investment performance for our fund investors, will enable us to grow our funds under management and our Funds Management earnings. And that, we believe, will result in driving Elanor's security value. That's our firm belief. We -- our overarching objective is to grow security holder value for Elanor, but that will come in our firm view by continuing to deliver outstanding investment performance for our funds. I'll hand over to Paul Siviour, our COO, to review the results highlights for the period.

Thank you, Glenn. Turning to Page 5 of the presentation. Our group results were $5.55 million of core earnings in respect of the 6 months to 31 December. That was a figure that was struck very significantly on strongly growing Funds Management income. Importantly, in relation to that result, and Glenn has mentioned, at this point, there was no co-investment income in the form of distributions from our co-investments in $120 million across our hotel funds and also Waverley Gardens. We expect distributions from these funds to recommence in the second half of FY '21 and, therefore, be reflected in our core earnings. In addition, in respect of the comparative to the prior year, the prior year included approximately $10 million of transactional income. And for the half to 31 December 2020, there was no transactional income recorded. That source produced a result for the half pre-transactional income to -- reflecting 160% increase on the prior half. Distributions have been struck at a 90% payout ratio. And our net tangible asset backing per security at 31 December is $1.47, an increase of 13% on 30 June '20, and that's reflected by an improvement in the value of the properties within our co-investments in the underlying managed funds. Turning to funds under management. Funds under management of $1.87 billion at the 31st of December, an 11% increase on the 30th of June figure of $1.69 billion, and that reflects acquisitions of $200 million during the half. Those acquisitions really came in the third -- in the second quarter of the half because, of course, there was limited transactional activity around June, July, August, September. In addition, the group sold Auburn Central Shopping Center from within the portfolio of ERF, and that has reduced the funds under management at December by approximately $100 million. Glenn has mentioned our Funds Management income of $14.9 million for the half, a significant 79% increase on the prior year. Turning to our co-investments. Distributions of approximately $3 million included in our core earnings, but down on comparative periods, and we've mentioned the reason that there's $120 million of co-investments where we expect distributions to recommence in the second half of the year. To just emphasize 2 points that Glenn made, we've seen strong investor demand for our new funds during the half, and that has meant that we have not made any investment from a co-investment point of view in those new funds. And in fact, in addition to that, by virtue of demand across a number of funds, we have also sold down some of our co-investment. That's particularly relevant to the health care fund, which acquired 2 new assets in the half. We sold down our position to reflect the level of investor demand for that fund. We're well positioned in respect of our investment capacity to grow $25 million of cash and available debt and, as Glenn mentioned, capital for future growth of $115 million, which includes $80 million of expected recycling of our capital on sell-down of our co-investment in the hotel funds to a 15% co-investment level. Our gearing at the end of December was 25%, which is conservative. Turning to Page 6. There's 4 key drivers of our core earnings, and that is -- they are our Funds Management income; our co-investment income; transactional income that comes from performance fees, but also from the sale of assets that generate profit for us, and that includes profit on co-investments; and our corporate costs. Now these 4 items we've highlighted before readers on this page, that have reconciled the core earnings and really the only key differences are interest and tax. So these are the key drivers of our business. We can see that in the half to December, our Funds Management income was very strong at $14.9 million, and we'll talk a little more about that during the balance of our presentation today. Co-investment income of $3 million expected to grow. No transactional income for the half. And corporate costs of $8.8 million compared to $9.1 million in the prior year, which shows the scalability of our platform. I'll hand back to Glenn to talk more about our strategy and business overview.

Thank you, Paul. Just turning to Page 8. Here, we seek to give an overview of how we think about Elanor as a fund manager of real estate investments. As I mentioned before, our overarching objective is to deliver exceptional investment performance for our capital partners and investors in our funds, and thereby growing funds under management. And again, to that end, we originated a $200 million of new investments over the half, and we're well positioned in regard to pipeline for new investments in this half. Clearly, our focus is about unlocking investor value as opposed to taking a passive view to managing real estate investments. And to that end, the active asset management of the Auburn Central asset generated a very strong return for ERF investors. That asset being realized over the half. And another example of the -- of active asset management is a significant major refurbishment at Cradle Mountain Lodge asset, which has improved the value substantially for that asset. And I'll say there's been value-add initiatives executed across most of our hotel assets and another -- and a number of other retail assets across the business. A lot of activity in terms of improving the value of our assets in those 2 sectors and other sectors, but particularly in those 2 sectors. And that unlocking of investment value is critical to us delivering the investment performance that I spoke about. Turning to Page 10. Again, we have funds under management of approximate $1.9 billion across the group now, and we continue to reiterate that we believe we're well positioned for growth. The chart there demonstrates the growth over the last several years. Clearly, we're looking for growth rates, whilst the growth rate since listing is a strong growth rate and we appreciate it from a very modest starting base. However, it's been since 2014, so that's -- that put in some context, but our aspirations are for the velocity of growth to be much, much greater. Turning to Page 11. That -- we tabled our sectors there in which we participate, and that shows the growth in each of the sectors and the funds that we have across the sectors within the group. Again, we're positive about growing all those sectors. Some sectors have a lot more potential to grow than others. But nonetheless, we're positive in regards to growing funds under management across all of our sectors. Paul, I'll hand it back to you for the -- any more comments you'd like to make on results.

Thank you, Glenn. Just turning to Page 13 to look specifically at the components of our Funds Management income, you can see that there's been good, steady and strong growth half-on-half in respect of our Funds Management income. And the Funds Management income for the half to December of $14.9 million shows a 79% growth on the prior comparative period. Importantly, 64% -- there was 64% growth in our underlying Funds Management fees. That is our core recurring funds management fees, and those fees are expected to grow as we continue to grow the portfolio. Indeed, the run rate of our Funds Management income as at the end of December is, of course, stronger than what it is for the actual half given the addition of further Funds Management initiatives during the half. I'd like to point out leasing and development fees of $1.8 million for the half. This is a fee stream that flows specifically from our strategy in the retail -- at retail, real estate asset class and our hotels asset class. And in respect of retail, these fees are driven by the repositioning activity that our retail team is focused on in converting space within retail assets to highest and best use. We expect the leasing and development fee stream from this activity to continue strongly into the future. In addition, we received development fees from the refurbishment of our hotels. The most recent and important one being a significant refurbishment of Cradle Mountain Lodge. In respect of acquisition fees, good growth, half-on-half, to $3.7 million. And as we grow our funds under management, we expect growth within that fee stream also. Performance fees occur, of course, on realization of profit in respect of assets in our underlying managed funds. We only record performance fees when those returns are realized for investors, and so they occur at the point of transactions. There are a number of assets within our managed fund portfolio that are coming closer to their investment horizon. And so there will be opportunities for performance fees as we move forward. I'll hand back to Glenn to talk more about our strategy and overview.

Thanks, Paul. Just to conclude, turning to Page 21. As we state here, we don't state it lightly. We certainly believe we're in a strong position. Coming out of 2020, with the -- all the obvious challenges that the marketplace presented all participants, we feel positive about our position, we feel positive about our investments and the all-in-all Funds Management business. We're very confident about our -- the capability and caliber of our Funds Management platform. We feel positive about our pipeline of opportunities that we have around us at the moment. Again, execution is everything, but it's good to be in a position of having a pipeline of high-quality opportunities around us. Our growth capital is now significant. That was a focus for the last half in terms of improving our capital position to enable us to grow. Again, I reiterate, our investor demand has increased substantially. And that is a function of 2 things. Firstly, it's a function of the investments and the effort, and the focus and resources that we've focused in growing our capital partner base, but it also is a function of our exceptional track record. So therefore, we believe we are well positioned to grow funds under management, and we know here to grow funds under management in a capital-light manner. In terms of the broader outlook, we're positive again about the pipeline of opportunities we have in the sectors in which we currently participate. We're making -- we've made very good progress in new sectors. And we expect to announce in the near term, the new sector of real estate funds that we'll be establishing. And we continue to actively pursue strategic opportunities to -- as we state here, to deliver our growth objectives. So all in all, we're pleased with how we're positioned. And so against that background and that overview, we'd be pleased to take questions at this juncture.

[Operator Instructions] Your first question comes from Ed Day from Moelis Australia.

Just a couple of questions with regards to the NTA. Just wondering if you could talk through some of the key valuation uplifts, notably Belconnen, the Regional Hotel Fund and Bluewater Syndicate?

Yes. Thanks Ed. Happy to. The revaluations and the improvement in value came across the portfolio, but in a couple of key areas. Certainly, in respect of hotels, it's come across a number of our regional hotels within Elanor Metropolitan and Prime Regional Hotel Fund, and that reflects the very strong performance of those hotels in the COVID environment, where people were looking to redirect tourism spend from potentially international travel to more regional-focused travel. So those hotels are showing strong and sustainable returns. Similarly, our Cradle Mountain Hotel, following its refurbishment, has shown the benefits of that, notwithstanding the fact that, of course, the Tasmanian borders have been closed for the majority of the half. But we're seeing strong uplift in average daily rate, and Marianne might make some further comments. In respect of the retail portfolio, we've seen some uplift in the Waverley Gardens asset as we move towards derisking the repositioning of a DDS space in that asset. And Bluewater Square Syndicate has improved in value by virtue of quite significant leasing-up initiatives that have been affected during the half by the team. They are the key items, Ed. Happy to elaborate on any of that.

That's helpful. And then just one last question. Perhaps are you able to make any more comments on the potential sell down within the Luxury Hotel Fund, just around timing and what form it may take?

We won't get into too much detail in terms of what form it may take because there are a number of options in that regard. But suffice to say that with the 2020 behind us and the operations of all those hotels getting back to -- I don't know how to describe -- a new normal, I guess, we could describe it. Those assets are now able to be well presented to bring in external capital. It wasn't appropriate. We did in the last calendar year, obviously, with the complications, the domestic water closures and so forth. But as I said, all of the hotels in COVID-19 allowed us to improve the operational fitness of all of those hotels. Each and every one of our hotels is much better positioned now for operational profitability. And as such, we're confident about the -- those funds going in this half, and also our being in a position to sell down our positions in those funds, and particularly the Luxury Hotel Fund.

Your next question comes from Sulieman Ravell from Wealth Focus Pty Ltd.

I was just having a look at your chart in the growth on management fees. What's the -- I'm sorry, I just lost the chart here. What's the key driver on -- in terms of the increase of -- I'm assuming it increase of fund. So what's been the big driver there?

Sulieman, thanks for the question. It really flows from the increase in our underlying funds under management. It's driven. You can see on the chart on Page 13, if I just refer listeners back to that chart, you can see the dark maroon color is our base level Funds Management fees. These are our recurring fees from our funds under management. And you can see a very steady increase in that, which tracks and reflects the increase in our funds under management. Leasing and development fees are a feature really only of the result for the last 2 halves, and they relate to the matters I spoke of during the presentation. And that team, and that leasing and repositioning development capability is in place. And it has completed a number of projects already, most recently, Auburn Central in the retail portfolio and Cradle Mountain Lodge in the hotels portfolio. And a good amount of the revenue from those initiatives were included in the first half of -- the second half, excuse me, of FY '20, but in respect of Auburn, also in FY '21. So this is a new revenue stream, relatively new. It's a strength that we expect to continue as we continue to execute on our value-add strategy in retail and the refurbishment that's important in respective hotels moving forward. Then in relation...

Is this primarily organic? Or has there been some acquisitions along the road as well?

It's -- the leasing and development fees are all organic, if I understand your question, that is they relate to assets that sit within our managed fund. And...

I'm sorry, yes, I'm referring to the management fees as well. So I'm just getting into speed with Elanor as a whole. Are you -- have you bought other businesses as well along the way there? Or is this purely you're raising capital and just...

No. There's been no -- thank you for that question, Sulieman. There's been no strategic acquisitions. That's something that we have our eye on. And Glenn mentioned it, in the context of future growth, this is solely management fees from Funds Management initiatives or Funds Management funds that we've established as a result of the purchasing of assets and the funding of those assets by our capital partners. They are all funds wholly managed by Elanor and wholly established by Elanor.

And I'm assuming the type on Slide 13 for financial -- versus financial year '20, it should be financial year '21, the increase on the right-hand side?

The increase on the right-hand side, so that -- you're referring to the...