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. Welcome to the annual results presentation for Elanor Investors Group for the 2021 financial year, and thank you for your interest in the group. On the call today, I'm joined by the executive leadership team of Elanor, and I and my colleagues look forward to taking questions at the end of this call. And during the presentation, we'll be referring to the results presentation pack that was released to the ASX this morning. Today, I'm pleased to provide an overview of Elanor and more particularly, an update on the progress we've made in executing on our key strategic objective for the group over the year. That key strategic objective being to build Elanor into a major ASX-listed real estate funds management business. The funds management business known for delivering superior investment returns and critically, a funds management business, an organization that does business in a sustainable and socially positive manner. It is what we call Elanor doing business the right way, that is growing our business, growing the group but being acutely conscious of all whom we interact with and effect in operating our business. I'd like to commence by making an obvious comment, and that is that these times continue to present challenges for a great many across our country and within our economy. And whilst the COVID pandemic has been a boom for some sectors, it has and is causing harm and offer great harm to many sectors. And indeed, we've confronted challenging market conditions in some sectors of our business over the period of this pandemic. Our Hotels, Tourism and Leisure funds and some of our retail funds, in particular, have been affected. But despite some of the significant challenges across the group and media sectors, our Funds Management business achieved strong growth over the year. Indeed, I'm pleased with the growth that we've achieved in FY '21 and the broader performance of the group over the year. Before I go into detail here, I'd like to, at this juncture, provide an overview of the group, particularly for those who are new to Elanor, and I'll ask you that you now turn to Page 4 of the presentation. [Technical Difficulty] real estate funds management that delivers market-leading investment returns. The average return, or IRR, that we've realized from investors in our funds is just under 20% per annum. And it's this investment performance's track record that we are acutely focused on. We prioritize investment performance over growth. This approach and track record is resulting in very strong growth in our investor base our capital partners in our funds, both our wholesale private capital partners and our institutional capital partners. The growth we've achieved in our investor base, particularly over the last year is and will be a key contributor to the growth of the group in the future. This slide here highlights our key real estate sectors of focus. Our $2.1 billion Funds Management business at 30th June '21 is currently focused on 4 key real estate sectors: Office real estate, healthcare real estate, retail repositioning investments and the Hotels, Tourism and Leisure sector. Indeed, all investment divisions achieved growth over the year with some achieving significant growth. And importantly, we have a strong pipeline across our sectors and in some sectors, retail and healthcare, we have strong and mature pipelines. Furthermore, as we say here, we have a highly scalable investment management platform. Our Funds Management platform we firmly believe will enable us to deliver strong growth and security holder value going forward. If I can now turn to Page 6, or Slide 6, of the presentation pack for the results highlights. As I said, despite some market challenges and significant market challenges over the year, our Funds Management business achieved strong growth over the period. Funds under management increased by 23% to over $2.07 billion over FY '21. Funds Management income increased by over 38%. And most pleasingly, recurring funds management increased -- recurring funds management income increased by over 40% over the year, this being a key objective we have for our business. 2021 was the first year since we've been listed where we did not generate transactional income that is gains on sales of investments. As such and despite the strong growth in Funds Management income, our core earnings were steady at $15.15 million. And an important correction here is that our EPS was 18% higher at $0.1127 for the year. Pleasingly, core earnings increased by over 200% on a pre-transactional income basis over the year, has been the key highlight for the year, and as I said, a key objective for our business. As you may be aware, FY '22 has started off well with transactional income again being a significant contributor to the group's earnings with the establishment of the Elanor Hotel Accommodation Fund. NTA increased 11% over the period, substantially as a result of the positive revaluations on our co-investments. And finally, the group has substantial capital available to grow funds under management. At 30th June, we had approximately $38 million of available growth capital. And upon completion of the Elanor Hotel Accommodation Fund, a further $25 million will be available. And as we've stated, we will be selling down our co-investment in our hotel accommodation fund to 15%, which will result in us having approximately $120 million of available capital to facilitate Funds Management growth. I'd like to now hand over to Paul Siviour to continue the presentation, Paul, being the Chief Operating Officer of Elanor Investors Group.

Thank you, Glenn. Can I just encourage listeners on the conference call to turn to Page 8 of the investor presentation that we released earlier today. This slide shows very clearly what the composition of our core earnings is. And it comprises 3 key components. The first is the EBITDA that we generate from our Funds Management business. The second are the co-investment earnings that we enjoy from our co-investment in our managed funds. And the third is our transactional income that Glenn has already referred to. You'll see that in respect of the year FY '21, our Funds Management EBITDA was $10.7 million. And this EBITDA is after allocation of all corporate costs of the business against our Funds Management income. Glenn has already referred to the growth in that Funds Management income in FY '21 of 38%. Our Funds Management EBITDA has grown in excess of 100% from FY '22. And our margin -- our Funds Management margin has increased to 36% from 25% in FY '20. So as we continue to grow our Funds Management business, we can see the our margin, but -- and also, of course, the amount of EBITDA generated from the business increasing. In respect of co-investment income, a significant increase in FY '21 from FY '20 to $11.1 million. However, this level of co-investment income, which I'll just remind everybody, reflects the distributions that we actually received from the funds that we co-invested in. In other words, it's cash or receivables. That level of co-investment income still is impacted in certain areas, particularly the hotels and the Wildlife Park by COVID-19. So we can expect, as some of those restrictions continue to be relaxed, we'd look forward to some improvement in co-investment income surges, of course, to future conditions. Transactional income, Glenn mentioned, was not a component of our FY '21 result. So the three components add to $22 million of core earnings. The difference between that $22 million and the $15 million of core earnings that Glenn mentioned, is interest expense and tax. So quite a simple and clean result for people to understand the contributions that make it up. Can I ask you to turn to Page 12 of the pack, where we set out both the growth and also the components of our Funds Management income. Our Funds Management income grew from $21.5 million to $29.7 million throughout FY '21. From FY '19, over the last 2 years, we've enjoyed a 100% increase in our Funds Management income. This income is very substantially of a recurring nature. The key components of management fees and leasing and development fees, we expect to both continue and grow. The leasing and development fee income flows from our core strategy, particularly within our retail real estate sector of repositioning real estate, and that generates for us leasing and development fees from taking certain real estate and repositioning it to a higher and better use with an alternate tenant mix. Acquisition fees of $6 million reflects simply the fees we generate on the $374 million of increased FUM generated during the year. And you'll see that there's a very modest contribution in current year's Funds Management income from performance fees. I ask you to turn to Page 14, where I'll just make 1 or 2 comments on key events that have occurred since the 30th of June. In respect of our office real estate sector, listeners are probably alert to the fact that our listed multi-asset commercial office fund, ECF, acquired 50 Cavill Avenue for $113 million. In relation to our Hotels Tourism and Leisure division, the group made an announcement on the 19th of August that announced the establishment of the Elanor Hotel Accommodation Fund. This brings together the group's 14 hotels that focus on the luxury and the regional hotel subsegments. In respect of that fund, which has a starting gross asset value of $346 million, the group will enjoy acquisition fees of $3.9 million. And I would just make a note we don't provide guidance. I would just make a note that our acquisition fees, in respect of FY '21, the entire year, was $6.1 million. We've also referred a number of times to the fact that FY '21 did not include -- the results did not include any transactional income. As announced on the 19th of August, the establishment of the Elanor Hotel Accommodation Fund will mean that the group will book $10.5 million of transactional gains. And these gains reflect the uplift in values of the Elanor Luxury Hotel Fund that was sold into the Elanor Metro and Prime Regional Hotel Fund. Turning then briefly to our preliminary results, and our core earnings is set out on Page 19 of the investor presentation. We've touched on a number of the key points already in the presentation including the strong growth in our Funds Management income to $29.7 million. Our distributions, I've already mentioned from our co-investments, did increase significantly to $11.1 million. As I mentioned, still some impact on those distributions from COVID, and there's more information for readers of our results on Page 17 of our investor presentation. That provides a breakdown of the co-investments received from each individual fund and our co-investment level in those funds. And we've mentioned, of course, no transactional income in FY '21. In respect of our balance sheet, Page 20. The group has net assets of $173.8 million and an NTA per security of $1.44. That's an 11% increase from the prior year, and that reflects the growth in the underlying real estate properties within our managed funds that Elanor is invested in. We have cash and undrawn debt facilities of $37.9 million at 30th of June. That will be further bolstered by the capital release of $25 million from the establishment of the hotel accommodation fund announced in August. The gearing of the group at 30th of June '21 is 21%, a modest level of gearing. After adjusting that level of gearing on a pro forma basis for that capital release of $25 million that will flow to us from the Elanor Hotel Accommodation Fund launch results in our gearing being reduced on a pro forma basis to 11%. I'll hand back to Glenn for some closing remarks.

Thanks, Paul. And if I can ask you to turn to Page 22 for some outlook comments now. Despite the ongoing challenging market conditions in some sectors, we're very conscious of the conditions in which we operate in. Having said that, we are firmly of the view that we're well positioned for further strong growth in funds under management and therefore, to deliver growth in security holder value. Our strong market positions in the sectors in which we focus on, combined with the pipeline of funds management opportunities that we have across the business, we believe position us well for both this half and for the year. As I mentioned, we have achieved significant growth in our capital partner base over the year in both our private wholesale capital partners and institutional capital partners substantially due to the market-leading investment performance that we've delivered for our fund investors over a long period of time now. And this growing base -- this growing investor base, we believe, will be a key contributor to the growth of our Funds Management business. In summary, we're looking forward to delivering further strong growth in funds under management in what we call a capital-light manner. And the group indeed has significant growth capital to facilitate growth in funds under management and, as I said, grow value for ENN security holders. So thank you for listening in on this presentation, and we look forward to receiving questions now.

[Operator Instructions] Your first question comes from Ed Day of MA Financial.

Just a couple of quick ones. Firstly, just wondering if you could talk to the potential opportunities for performance fees in FY '22 or in '23 that you have visibility over?

Ed, I'll take that question. Look, as I've said before, we don't manage to performance fees. I mean, performance fees are a function of realizing on assets when they're in the -- when we believe that the time is optimal to divest those assets and realize returns for our investors. Suffice to say that as we grow our business and grow our funds under management and greater funds, our performance fees will continue to occur as a matter of course, but we don't manage core performance fees. We manage core performance. I think I'd leave it at that.

Sure. And then just on the combined hotel vehicle, could you perhaps dive into how the assets are performing as we speak? I mean clearly, there will be some impact from COVID, but just sort of what your expectations there are around recovery as well?

Yes. And I might get Marianne to add to my comments here. But the -- a number of the hotels have been impacted by the government closures and the government restrictions that are in place at the moment and as we have assets across the country -- for the assets across the country that being impacted to varying degrees, we -- as occurred when things opened up last time, we expect all hotels to come back strongly -- to very strongly. But in terms of the hotels across the country there, they're being impacted to varying degrees. And Marianne, maybe just give some color on the varying degrees of impact across the country, if you don't mind.