Elanor Investors Group (ENN) Earnings Call Transcript & Summary

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, and good morning, and welcome to this results presentation, the presentation of the Group's first-half results for this financial year. Thank you for joining this call today. We do appreciate your interest in the group. With me on the call this morning, I have my colleagues, my management committee colleagues. And indeed, my colleagues and I look forward to answering any questions you may have at the end of this presentation. Before the call today, we'll be referring to the half year results presentation pack that we released to the ASX, this morning. I'd like to commence by saying that I'm pleased with the progress we made over the last half. It was a half where we achieved a great deal, a great deal despite yet again confronting challenging market conditions in some of our investment sectors. The COVID-19-related border closures impacted, in particular, a number of our hotel and real estate funds -- retail real estate funds and thereby impacted the group's current investment income from these funds over the period. We'll elaborate more on this impact later in the presentation. But as I've said, notwithstanding these impacts, I'm pleased with what we achieved over the half. I feel that we made significant progress, indeed a lot of progress, on our mission to be a leading real estate funds management group. Our mission is to be a leading, if not the leading real estate funds management group. And when I say leading, we mean leading in the sense of being known for delivering exceptional investment performance for our fund investors, but also for making impactful social and environmental contributions to the communities in which we operate. And more broadly, we aim to be #1 in investment performance in our space. We aim to be a leader in community contribution. Page 14 of the results pack, we're pleased to provide an overview to some of our sustainability accomplishments we achieved over the half. Whilst we have very significant short- and medium-term growth objectives for both Funds Under Management and security holder value, we firmly believe that we will achieve strong growth in security holder value by continuing to be acutely focused on delivering both exceptional investment returns to our fund investors, but also by continuing to make impactful sustainability contributions to our communities. These objectives, in our view, are mutually dependent. And these objectives indeed have underpinned the culture of Elanor since inception and well before Elanor was listed in 2014. I can now direct you to Page 5 of the presentation. Once again, I'm pleased with the progress we made over the half -- over the last half. We achieved close to a 20% growth in Funds Under Management over the half, $2.44 billion at the end of the year -- end of the last calendar year. We achieved a 35% increase in funds management income to over $20 million in the half. And more than doubling of our earnings in distribution, despite significant COVID-19 led impacts was also very pleasing. I can now direct you to Page 6 of our presentation. Whilst I'm pleased with the growth we achieved over the last half, I'm more than pleased with how the group is positioned to deliver further strong growth in security holder value. As I said, we have significant short- and medium-term growth objectives for both Funds Under Management and security holder value. But critically, we are confident that we have the funds management platform to support these objectives. Our current funds management platform, in our view, supports annual growth of over $1 billion in Funds Under Management. And as we achieved new Funds Under Management $600 million in calendar year 2021, a year with some challenges, we're confident that this $1 billion per annum objective is really achievable. We also have significant balance sheet capacity to facilitate our growth objectives. We assume an average 10% co-investment in our new funds, we believe we can grow our Funds Under Management to over $4 billion with our current capital base. Again, we firmly believe that we're well positioned for further strong growth, strong growth in both Funds Under Management and security holder value. I'll now hand over Paul Siviour, Elanor's Chief Operating Officer, to take you through our results in some more detail.

Thank you, Glenn, and I'll refer, for those on the call, to Page 7 of our presentation released to the ASX this morning. As we set out, there are 3 key drivers to core earnings results for Elanor Investors Group. They are our funds management EBITDA, our co-investment income received on the co-investments we hold in our managed funds and transactional income. In respect of our funds management EBITDA for the period, we recorded a result of $7.6 million, which when one adjusts the comparable prior half period for Jobkeeper is a 38% increase period-on-period. That was driven by a 35% increase in our funds management income to $20.2 million for the half. The EBITDA margin for the period is at 38%. We expect both growth in our funds management income moving forward and also growth in our funds management EBITDA, and I'll make some further comments on the income side of that. In respect of management fees, we see strong growth in management fees as a result of both the full year impact of more recently added management -- funds management initiatives, but also, and I'm now referring to elements of Page 8 of the presentation, also the impact in the second half of the financial year '22 as a result of the abatement of various COVID restrictions that have adversely impacted our results for the half. In respect of management fee income, that relates particularly to the hotel management fees that we receive in respect of the management of the 14 luxury and regional hotels in our hotel accommodation fund. We expect that the management fees generated in the second half will be -- will show a material increase in respect of the management fees generated in total for the first half of $12.4 million. In relation to acquisition and transaction fees of $5.6 million for the half, that was a strong result, reflecting the significant increase in our Funds Under Management during the period of $400 million on a gross basis. And indeed, for the calendar year to the 31st of December, the group added $600 million of gross new fund. We see acquisition fees continuing to make a strong contribution to group results as a result of the strong pipeline we have for new funds management initiatives. Leasing and development fees of $2.2 million were generated in the half. These fees flow directly from the repositioning and development projects that we complete across our managed funds. They particularly relate in respect of the current pipeline of opportunities to repositioning projects within the retail shopping center assets within our managed funds. The $2.2 million for the half, we see increasing as we continue to execute on those development and repositioning opportunities and indeed add further development pipeline to the overall project flow. There were no performance fees for the half, and they will contribute as we move forward as liquidity opportunities are provided to the investors within our managed funds. Corporate costs increased during the half as a result of an investment in both our investment and capital origination capacity, and also in respect of building out our hotel management platform, an important initiative over the last 12 months. We see our annualized funds management EBITDA of $15.2 million, $7.6 million annualized growing in the second half. And that compares to an FY '21 funds management EBITDA number of $10.7 million. That number is not included on Page 7, but I make reference to it in the context of the annualized results for this half. Co-investment income of $3 million for the half relates to the $200 million that the fund has -- that Elanor has co-invested in our managed funds. This number is a number that is materially impacted by COVID, and I'll now refer to Page 8 of the presentation. We see material upside in respect of our co-investment earnings for the second half of FY '22. This relates to a number of funds, but most particularly the Elanor Hotel and Accommodation Fund. This is a fund that during the period, we established a $346 million fund across 14 hotels focused on the luxury and regional accommodation space. During the half to December, we raised $73 million as part of the establishment of that fund, and we released $25 million of growth capital for Elanor. The fund is very well positioned for strong earnings moving forward in a post-COVID environment. We would refer you to the information memorandum release for the fund in August of last year, where we anticipated a forecast distribution yield of approximately 8% in a post-COVID environment. That's a number that we continue to have confidence in. And in that regard, in a post-COVID environment, that would translate to co-investment income for a half of approximately $3.2 million or for a full year of $6.4 million based on our current co-investment of $80 million. In respect of the half to December, there were no distributions in respect to the Elanor Hotel Accommodation Fund. Turning finally to transactional income, and I've mentioned the establishment of the Elanor Hotel Accommodation Fund during the period. That transaction resulted in one of our funds acquiring the assets or acquiring the portfolio of another fund. The Elanor Metropolitan Prime Regional Hotel Fund acquired the Elanor Luxury Hotel Fund. As a result of that transaction, the group enjoyed a $10.5 million gain on sale of the portfolio of those assets. That gain has translated into an $8 million core earnings contribution on the basis that the group has retained $2.5 million of that gain for future capital as part of our capital-light approach. Turning to Page 9, to frame for you the expectation we have of ongoing contribution of transactional income and, potentially, performance fees, timing of which is difficult to forecast, our view is that we will sell down over the period to the end of December '22 our co-investment in the Elanor Hotel Accommodation Fund to approximately 15% from the current level of investment of 43.6%. This reflects the capital-light approach to the group where we release growth capital from the sell-down of our co-investments, which in turn is then invested as co-investments in new managed fund initiatives. As a result of that expected sell-down during the balance of calendar year '22, we would expect a $4 million gain on sale in respect of our co-investment. That number is -- reflects the current hotel valuations held for the group. So therefore, does not anticipate any further increases in the value of those hotels, which may well be possible, indeed probable. Secondly, as part of other recycling of our balance sheet, we expect to generate gains of up to $2 million from transactions that we are targeting to complete by the end of calendar year '22. I'll now hand back to Glenn.

Thank you, Paul. And if I can now refer you back to Page 12 of the presentation as I'd like to briefly talk about our real estate funds management business model. Elanor Investors Group is a multi-sector real estate funds management business. We have clear differentiated competitive advantages in each of our sectors of focus, retail real estate, office real estate, health care real estate and the hotels, tourism and leisure sector. Our differentiated sector capabilities and our differentiated investment approach, what we call our risk-first investment approach, in our view are critical to enabling us to continue delivering outsized investment returns to our fund investors. And furthermore, our multi-sector fund management platform provides diversified growth opportunities for the group. We have, in our view, a market-leading real estate funds management platform that positions us for growth. Before we take questions, I'd like now to refer to Page 27 of the pack to provide a brief outlook for the group. In regards to our outlook for the group, I'd like to summarize why we believe we're well positioned to grow security holder value. Firstly, we continue to have a quality pipeline of new investment opportunities, opportunities to grow funds under management across all of our investment sectors. Clearly, our pipeline in some sectors is stronger than others, but we're pleased with the pipeline across our sectors. We have significant balance sheet capacity to facilitate our near-term growth objectives. As I mentioned, we can grow our Funds Under Management to over $4 billion with our current capital base. We also have a strong pipeline of development opportunities across our sectors and funds, providing further funds management growth and earnings potential. And we see -- as Paul said, and we see our current investment earnings normalizing, so to speak, as COVID-related border closures end being positive for short term earnings growth. So in addition to the above, in addition to our pipeline, our balance sheet capacity, our pipeline of development opportunities and co-investment earnings prospects, we also have several strategic opportunities in progress, both new sector opportunities and strategic acquisition opportunities. So to conclude. Again, we believe we're well positioned for further strong growth, growth in both Funds Under Management and growth in security holder value. At this juncture, we'd be pleased to take questions.

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

Just a couple from me quickly. You've called out an FUM growth target of $1 billion per annum. Could you just give a bit of color? I think, you did a net $370 million during the half plus I think you've got the [indiscernible] out. Does the -- I guess the pipeline you've got under review at the moment, does that get you to the $1 billion for FY '22?

Ed, without wanting to get too specific in terms of guide to, as I said, we -- in calendar year '20 or last calendar year, we established $600 million of new funds in a year that was -- had some challenges. We've had a satisfactory first half. We feel positive about our work in progress in the office sector, in the hotel sector, in the retail sector, particularly. So suffice to say, across those sectors and, more broadly, we are confident of strong growth this year. Key point was that we have a platform well and truly able to deliver $1 billion of new fund on an annual basis, and that's what we're striving for this year.

And then just on the hotel fund, a couple of points. Could you just give some insight into whether you're seeing a recovery in the operating performance firstly? And then secondly, I think you called out in the corporate costs part of the increase was to do with hotel management. Could you also just sort of connect the dots between the increased expense there and how that ties in with 1834?

We'll answer the latter part of that question first, and then Marianne would be pleased tease to give you some color on the hotel operations.

Ed, we have established a comprehensive and fully integrated funds management platform in-house. 1834 is an investment we continue to hold but that is not the manager of our hotels in respect of the Elanor Hotel Accommodation Fund. We've now established the entire capability of sales and marketing, yield management, personnel executives to lead each of the hotels to manage that in-house, and Marianne can comment more. That provides really a very strong ability and capability to manage and extract the value, the operating performance of the hotels, and I'm sure Marianne will make some further comments in that regard.

Thanks, Paul. Thanks, Ed. Look, we've been really very pleased and excited with strong rate growth and occupancy growth across the portfolio. We believe the hotels have performed very strongly this half. We've seen a lot of activity, certainly over the last couple of weeks and commenced late December going into January. We're really positive about the pickup activity, continue to see short lead times. However, activity is picking up and lead times are actually increasing and being pushed out that activities across all segments, leisure, corporate events and other segments such as sporting groups, so across the board. We're pretty -- we're excited about the activity going forward.

And just to finally round that out to Ed, our -- as Paul said, our internal operating model for our hotels business positions us better than we believe any other investor is positioned to be driving -- to be able to drive returns from our hotel investments, and we're very excited about the performance of the hotels now that the domestic borders, in particularly, are opened up. But we're also very excited about growing our portfolio of hotels given the internal capability that we have.

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

I think there may be one other further question.

My apologies. Your next question comes from Aiden Bradley from Shaw and Partners.

Do you have a -- can you provide any sort of guide on what the occupancy of the hotels was? If you don't want to give the exact percentage number, maybe relative to what was in the IM expectations? Probably down on that, I would imagine, obviously. But just in terms of getting an idea of that for the half that's just gone and where you think it's going to sit in the second half versus what was obviously published in the IM?

Yes. I'll set the scene and Marianne can add there. Without wanting to get too specific, Aiden. So look, rate is very strong. We're very, very pleased about the rate across the portfolio as it has been across the -- even in the more difficult times, but we're particularly excited about rate. And as Marianne said, we -- quite frankly, we're excited about the -- even over the last 2 weeks, as pretty much all the domestic borders opened, so for the West Australian one to be open shortly, we trust. But yes, we're pleased about the growth in demand for occupancy. And, Marianne, do you want to add any further color without talking specifically?

Yes. For the first half, there was obviously disruption across all markets, varied across the markets. But coming into the second half, rate and occupancy well ahead of expectations. An average yield budget is what we're expecting to see, certainly since the beginning of this month going forward after the rest of the financial year.

What we will say is though we forecast an average occupancy for our portfolio, Marianne, for the portfolio over the year of about mid-70%, that's 75%. And as a manager, we don't run our hotel businesses and hotel assets for 100% occupancy. That's -- there's significant folly in running full 100%. There's a whole marginal revenue, marginal cost dynamic we can regard you with. But suffice to say, to optimize profitability, it most always is not 100%. Having said that, our mid-70s occupancy targets in our IM, we believe that they're well and truly achievable for the half.

And can I just add to that, of course, the information memorandum, which I just referenced in some of my remarks, had a distribution yield of 8% in year 1 and a 10% distribution yield in year 2. But they are levels of distribution and performance that we're comfortable within a non-COVID-impacted environment. So the challenge for the second half is how quickly do we recover fully to that non-COVID environment. And as Marianne mentioned, perhaps the lingering element, the short lead times for people to book at the moment as they gain more confidence in a more stable situation in respect to border staying open and restrictions not being reintroduced.

But if I were to give summary guidance at all, we are very positive about the recovery of our hotels over the half. Very positive, indeed.

There are no further questions at this time. I'll now hand back to Mr. Willis for closing remarks.

Thank you. And in closing, I'd like to add that we're more than mindful of the risks that prevail at this time regarding COVID, but we expect that we'll be operating in a form of new normals, it's called. Going forward, indeed, we're experiencing -- already experiencing the new normal across most of our investment sectors. Inflation and interest rates seem likely to rise further. But in our view, probably not substantially. And any further interest rate rises presume that there are no major debilitants to economic growth in the short to medium term. And there are obviously some risks to global growth around us at present. But having said this, I want to reiterate that we firmly believe we're well positioned to grow Elanor's funds management business. And in doing so, we firmly believe we're well positioned to not only grow security holder value, but to also continue making impactful sustainability contributions to our broader communities. So thank you for joining us on the call today, and thank you for your interest in and support of Elanor Investors Group. I would like to take this opportunity to thank my team across the group and at our investments. As we say within our business, we are indeed only just getting started. But thank you to the broader team. Have a good day, and we very much look forward to providing further updates on the progress of the group over this half. Thank you.

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