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, and good morning, and welcome to this results presentation for Elanor Investors Group for the 2023 financial year. Thank you for joining the call this afternoon, and thank you for your interest in the group. On the call today, I'm joined by my Elanor leadership team colleagues who along with me will be pleased to answer questions at the end of the presentation. I'll commence this presentation by providing some opening remarks on what we achieved over the 2023 financial year and I'll then be pleased to hand over to Paul Siviour, Elanor Investors Group's COO to discuss our results in more detail, and I'll make some closing comments and provide an outlook for the group at the end of the presentation. 2023 was another year of significant growth for Elanor. A year of growth as we strive to build Elanor into the leading real estate fund manager in Australia. Our focus to be clear is on being the leading real estate fund manager in delivering investment outperformance for our fund investors, our capital partners. And as I've stated many times before, our mission is not for Elanor to become the largest real estate fund manager in Australia, is to be the leading real estate fund manager in delivering investment outperformance. Our long-held belief as many of you will know, is that if we continue to deliver investment in outperformance for our fund investors, growth will follow and indeed, it has this year. Over 2023, we grew funds under management by 10% to $3 billion. We achieved strong growth in funds management income to $49.5 million, a 20% increase on financial year 2022, and over 2023 recurring funds management income grew to $34.1 million, a 20% increase on FY '22. There were many achievements that were made for the group over the years. And I'll just highlight a few, a few call outs. The privatization and delisting of the Elanor Retail Property Fund, I consider that to be a key achievement, particularly a key achievement for investors in that fund. Securityholders were delivered a 15% premium to the then trading price upon that privatization and delisting, a fantastic result for securityholders in that fund and really evidence of our investor-first approach and our focus on delivering investment performance for our fund investors. And that fund has now evolved into being the Elanor Property Income Fund, which we are pleased to have that in our group and our ambition is for this fund to be indeed the best performing and leading property for income fund in Australia, a fund that will be available to all investors, including retail investors. Another key achievement of the year was the recapitalization of the $300 million Elanor Healthcare Real Estate Fund, again, providing a fantastic liquidity event for foundation investors in that fund and that indeed has now been established as a partnership with a sovereign institutional investor to grow that fund as a core healthcare real estate fund. Across all sectors, we had significant achievements over the year, which I'm pleased to state. And I'm also pleased with the addition of a new real estate sector with the establishment of a high caliber industrial real estate investment capability throughout the year. These were just some achievements that we made in FY '23. Over the second half of financial year '23, we experienced like most participants in the market, significantly less transactional activity as markets adjusted to the high interest rate environment, an environment where originating high investment value opportunities was a lot more difficult as [indiscernible] yet to reprice their assets for the higher interest rate environment. This has changed significantly, however, over the last 3 months, and we're now seeing some really interesting big value investment opportunities across the sectors. While transactional activity in the second half of 2023 was low, strategic activity was high, very high. Over the half, we more than doubled the size of the group's funds under management with a highly accretive acquisition of the Challenger real estate business. That acquisition resulting in our funds under management growing from $3 billion to $6.2 billion and their recurring base management fees growing from $23.6 million to $40.7 million. Indeed has been a transformational acquisition for the group, and Paul will be pleased to take us through the acquisition in more detail shortly. And this acquisition, I firmly believe was a direct result of not just our investment capability, but importantly, our investor-first focus as a real estate funds manager. Our capability and performance track record, I firmly believe were fundamental to us successfully executing this acquisition. Suffice to say, we are delighted with this acquisition and how it positions us for further strong growth, both in funds under management and securityholder value. As I said, Paul will talk more about that shortly. Ladies and gentlemen, Elanor has always strived to do business the right way as we call it, to deliver investment outperformance and to make impactful social and environmental contributions to the communities in which we operate and more broadly. This approach underpins our ESG governance framework. Going for those in our community who are in need and caring for the environment. We're honored to have again this year, provided very significant support to both The Smith Family and FSHD Global Research through our strategic partnerships with those organizations, not just financial support, but broader team support, expertise from the group, our group to their groups and advice to those organizations. These partnerships are important, are very important to our group. Elanor again, donated over 1% of earnings to not-for-profit organizations more broadly over the year. And we are focused on making a positive environmental impacts to our communities and as I said, more broadly, improving our carbon emissions intensity across the group's portfolio of investments as we have grown has been a key area of focus. Indeed Elanor's emission intensity, excluding any purchase of carbon credits, we don't purchase any, pleasingly, were lower than financial FY '22. So in summary, doing business the right way, having an investor-first focus has again resulted in significant growth this year and leading to significant growth in both funds under management and securityholder value. I'll now hand over to Paul to discuss our results in more detail and look forward to providing an outlook shortly.

Thank you, Glenn. As Glenn mentioned that during the year, we achieved, frankly, a step change in our business in the context of its size and scale, in the context of our earnings and in the context of our growth potential. And that step change was a result of the acquisition of Challenger's real estate funds management business on the 7th of July 2023. In the investor presentation today and the investor pack, which perhaps many of you will have in front of you, we've sought to present information on our run rate performance post the Challenger transaction, particularly in respect of our funds management EBITDA as we move into FY '24. We've compared that information to our actual results for FY '23 as well as setting out, of course, more detail in respect to our actual results for FY '23. The Challenger transaction has 3 key drivers of securityholder value. One is the key elements of the transaction and as Glenn mentioned, is significantly EPS accretive. Secondly, in terms of operational leverage, the transaction adds very significantly to our recurring funds management income and drives operational leverage in the context of our funds management EBITDA and EBITDA margin. And thirdly, the transaction results in a strategic partnership with Challenger, that delivers, among other things, a powerful distribution capability for growth. That partnership combines Elanor's real estate funds management capability with Challenger's market-leading capital raising platform, Fidante. I invite listeners if they have the investor presentation released to the ASX this morning to turn to Page 4, where we highlight some of the key results for the year. In respect of our funds management business, we drove recurring funds management income to $34.1 million for the year and funds management EBITDA to $17.1 million, a 16% increase on FY '22. Core earnings for the year were $12.5 million and we continued to distribute 90% of our core earnings, resulting in a distribution per security for the year of $0.0913. Glenn mentioned our success in raising capital during the year. And I won't go into the detail of that, suffice it to say, as Glenn mentioned, it was a direct result of our ability to drive strong investor performance for our capital partners. Turning now to the first element of the key driver of securityholder value of the Challenger transaction and that is the key elements of the transaction itself. You'll see on Page 4, if we were to take a very simple approach to pro forma in the Challenger transaction over our FY '23 results, core earnings would have risen to $20.9 million from $12.5 million. That increase is simply the after-tax impact of the $12 million of incremental EBITDA that the transaction is delivering now. Following completion of the transaction on the 7th of July, we have completely settled the incremental cost structure to go over the incremental income and so have confidence in the incremental EBITDA. I'll turn in a moment to provide some more detailed information on the earnings accretion of that number. Glenn has also mentioned a key transactional impact is that our funds under management have grown 109% from $2.97 billion at the end of FY '23 to now $6.2 billion. And I invite you to turn to Page 7 of the presentation where we just complete the analysis on the earnings accretive nature of the Challenger transaction. This page simply takes our FY '23 funds management EBITDA of $17.1 million in the left-hand column of the table and increases that funds management EBITDA by the $12 million of incremental earnings that I spoke of. When one takes into account tax at 30%, our core earnings would have risen from $12.5 million by $8.4 million to $20.9 million and adjusting our securities on issue from $124 million to $148.8 million following the issue of 24.75 million securities to Challenger, results in a pro forma earnings per security EPS of $0.14, a little over $0.14 for FY '23 compared to actual earnings per security for FY '23 at $0.105. Just turning now briefly to Page 6 to Page 5. This shows a graphical representation of the incremental income, funds management income from the Challenger transaction and that incremental income is $16.9 million, increasing our FY '23 recurring funds management income from $34.1 million to $51 million. The entire incremental funds management income from the Challenger transaction of $16.9 million is all recurring. Just before we turn to Page 10, I'll refer readers to Page 5. This is a presentation of the makeup of our FY '23 core earnings EBITDA that we provide each year. It comprises our funds management EBITDA of $17.1 million, our investment income of $9.3 million, that is the distributions we have received on our current investments and transactional income, which for FY '23 was low, whereas there was $5.2 million in FY '22. Those that have joined calls before will know that the bridge between core earnings EBITDA of $24 million and core earnings of $12.5 million is simply depreciation, interest and tax and you can find those details on Page 33 of the pack. So now, turning to Page 10 of the pack. We'd like to just unpack for you a little bit more detail in respect of the Challenger transaction and the drivers of securityholder value of the transaction. We've spoken of the financially compelling financial aspects of the transaction and its significant earnings accretion for the business. But we just like to turn our attention now to the drivers of the operating leverage improvement in the business as a result of the transaction and also the elements of the strategic partnership with Challenger that position us well for growth. And I'll make some brief comments on each of these. Turning to Page 11 of the pack. On this page, we've sought to set out for readers what our current that is today's run rate recurring funds management EBITDA is. And this is an important indicator of the value generated by the transaction. And you can see on the left-hand side of the page that our total recurring management fees -- funds management fees of $34.1 million were reduced by our total corporate costs of $32.4 million to arrive at recurring funds management EBITDA of $1.7 million. Taking into account today's run rate management fees from the Challenger transaction, our recurring management fees increased from $34.1 million to $54.6 million. And our recurring total corporate cost as of today are $38.4 million. So this drives a run rate today, annualized run rate, if you will, recurring funds management EBITDA of $16.2 million. This number includes, as I've mentioned, the run rate of the Challenger transaction from a management fee point of view, but also the run rate of Elanor's other managed funds, incorporates a forecast of our hotel operator fee income based on the current portfolio for FY '24, and it incorporates an estimate of our leasing and development fees from our current portfolio for FY '24. This demonstrates, as I mentioned, very significant re-rate of the size, certainty and quality of our funds management fees. It increases our operating leverage markedly and widens the jaws of our EBITDA margin on a fund management recurring basis from 5% to 30%. I'll just remind listeners and those on the call that what this analysis excludes is our acquisition fees, transaction fees and performance fees. And for FY '23 and '24, they're set out earlier in the pack. Transaction fees, acquisition fees and performance fees for the prior 2 years have averaged $14 million. It's not a forecast of what might be expected in FY '24, but it's certainly an indication of what the business has been able to achieve historically. I ask readers to turn to Page 14. Page 12 and 13 provide a graphical representation of what we've just been describing with 13 providing the graphical representation of our increase in FUM. To give more color to the makeup of that FUM of $6.2 billion, please refer to Page 14. This FUM is across each of our 5 key areas of focus; retail, office, hotels, tourism and leisure, healthcare and industrial. I'll make some important comments on the asset valuations underpinning this FUM a little later in my comments. I'd also just indicate to everyone that Challenger is a long-term holder of real estate. Elanor is the real estate investment manager for Challenger Life and Challenger Life invest in real estate on -- for a long-term hold to drive income that can then be matched against the obligations of the annuity profile in respect of the business that it writes. The makeup of our FUM now presents significant institutional stakeholder support, but also importantly, a significant component, driven by the strength of our historical relationships with high net worth capital partners and also the listed market in respect of ECS. I would make one point, which is very important and does distinguish us from some of our peers. And that is that of all of our FUM, 98% is not subject to redemptions of any manner. The only managed fund of Elanor that has a redemption feature is our Elanor Property Income Fund and of that $6.2 billion that accounts for $0.1 billion of FUM. Turning now to Page 15 and the strategic partnership that we have with Challenger as a result of the transaction. I mentioned before that the transaction combines Elanor's real estate funds management capability with Challenger's market-leading capital raising capability. In respect of our real estate funds management capability, in respect of our areas of focus, we are the exclusive real estate investment manager for Challenger Life in respect of its real estate portfolio. In respect of Challenger's capital raising platform, Fidante, there is mutual exclusivity. Fidante will be our exclusive generator or distributor of our managed funds, our capital raising platform and capability while Elanor for its part will be the exclusive provider of real estate investment opportunities on that platform. This presents significant growth opportunities for Elanor as we move forward. Firstly, in respect of our new institutional capital partners of Challenger, but also the Abu Dhabi Investment Council, ADIC. Secondly, in respect of Fidante itself, which has deep relationships with domestic institutions and, in fact, covers really 100% effectively of Australia's superannuation sector. It also has strong relationships across the high-net-worth investment capital partners and our team of capital raises is now embedded within Fidante to both continue to raise capital from our relationships as well as embed and enable that broader capability across the Fidante's relationships. And then thirdly, Fidante has very deep and wide retail capital raising capability across major national financial intermediaries, platforms and 15,000 financial planners. Finally, cementing a strategic partnership together is the fact that Challenger as a result of the consideration for the transaction hold 13.6% of Elanor and the Abu Dhabi Investment Council, ADIC hold 3% of Elanor. Please turn to Page 18. Page 18 sets out our differentiated and deep asset investment management capability, which has been an important element of being able to complete the Challenger transaction. I'd just point out and Glenn has mentioned that during the year, we have added a deeper capability in relation to the industrial real estate sector with the addition of a team that has very deep experience across that entire subsector. Turning now to Page 27. As mentioned before that we'd like to make some comments on asset valuations. Certainly, the press has been very negative in respect of potential valuation and actual valuation declines in real estate. We're delighted to report that across our entire managed funds, the valuation of those assets on a strictly like-for-like basis that is for assets that have been held throughout the year of FY '23 have only declined by less than 0.007%. That's quite an achievement in the current environment and it reflects our risk-first approach to real estate investing. It reflects our deep capability across the repositioning of assets for higher embedded use, our deep leasing capability, our development capability in respect of repositioning and in respect of hotels, tourism and leisure, our fully end-to-end hotel operating platform capability. Finally, it reflects our highly active approach to asset management and our total focus on delivering investment returns to our capital partners. You can see on this page that, that valuation result has been achieved notwithstanding decompression in cap rates across each sector, most notably office. Turning to Page 28. We present here the hedging -- interest rate hedging position across our managed funds by sector and we've shared previously that the group continues to provide investment opportunities from a real estate investment point of view to our capital partners as opposed to speculation in respect of interest rates. The group -- the managed funds are particularly strongly hedged across office and healthcare where the income profile is fixed or known with various CPI increases. In respect of hotels, tourism and leisure, our policy is to hedge to approximately 50% of the debt given that, that portfolio of assets provides the opportunity to effectively reprice the offering daily through the adjustment of average daily rates. And in respect of retail, there are a number of funds where investment horizons are approaching and irrespective of those funds, we have not re-hedged the interest rate position. Briefly, with respect to Page 30, we've set out, as we have in prior years, the makeup of our managed fund co-investments. These are the assets that we hold on balance sheet that reflects our investment in certain managed funds and drive our investment income. Glenn will speak further about our approach to becoming a more capital-light fund manager, enabling us to drive ROE and EPS more strongly. Page 31 sets out a breakdown of the distributions received from those managed funds and I won't spend any time on it. The core earnings results and the balance sheet are set out on Pages 33 and 34. Key elements have been discussed already. Our gearing remains at a modest 31% and we've said it on Page 35, the makeup of those different facilities. We'd note that post the Challenger transaction, gearing reduces to 28%. I'll now hand back to Glenn for some closing remarks and particularly some comments on our outlook.

Thanks, Paul. So despite the prevailing market conditions and we and well truly acknowledge that the market conditions within the real estate asset class more broadly continue to be challenging for the reasons we spoke about earlier, predominantly a function of interest rate regime. But despite prevailing market conditions, we are positive about the growth prospects for the group over FY '24. Positive about the pipeline of opportunities across all that sectors of focus, some sectors having more significant pipeline and work-in-progress and others. But across all our sectors of focus, we do have a pipeline of opportunities and we particularly look forward to growing funds in new sectors and the industrial logistics sector being one of those new sectors. And as we have said in previous outlooks, we continue to pursue strategic opportunities, strategic opportunities to deliver us growth for the group. And obviously, we were successful in that regard this year. Furthermore, our growing base of capital partners across the group, in conjunction with our strategic capital raising partnership with Challenger and Fidante, which Paul spoke about, that indeed positions us well to establish new funds, make new investments and indeed, grow funds under management. So we feel very positive about our capital raising capability with the strategic partnership that we have with Challenger, in addition to our loyal base of partners across the group. And finally, ladies and gentlemen, we are acutely focused on driving ROE and growing EPS for the group. With our capital-light focus, as Paul spoke about, in particular, and executing strategic initiatives to realize and recycle balance sheet investments, it will be an important contributor to growing value for Elanor securityholders. So we will now be pleased to take questions. We'll hand it over to the operator.

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

Glenn and Paul, thanks for the presentation. Just firstly, Paul, probably for you on capital management on your slide there, I just was curious about your facility headroom. It doesn't look like there is headroom under the facilities. Just wondering if you could talk through how you're thinking about that?

Are you talking about the undrawn element, Ed.

So on Slide 35, under headroom, there is...

Yes. we're fully drawn against our facilities at 30th of June and that position really varies significantly throughout the year as we generate capital and then deploy the $67 million facility, our senior secured facility is fully revolving to provide that capability. And we had $18 million of cash on balance sheet at 30th June.

And just one more. On your co-investments, so your distribution income was about $9 million on $220 million of investments. That's about a 4.5% yield. I guess, where do you see that trending? What can that you'll get to?

There's a couple of natural elements that we'll see that increase in FY '24. The distribution on the EPS was only for part of the year. The distribution on the healthcare fund was only for part of the year and we see continued improvement in the distribution from our hotel fund. As a general guide, we would say a 6% to 7% distribution yield across our co-investments of $200 million is reasonably indicative.

[Operator Instructions] Your next question comes from [ Charlie Dalziel with Alcor Funds ].

I was -- I guess, as someone who has followed the stock for I don't know, probably close to 10 years, I've always been a bit frustrated by the good fund growth and revenue growth being offset by very high cost growth and which hasn't really translated into the sort of leverage at the bottom line that you would kind of hope for. With the Challenger transaction, I mean, do we get to the stage where you start to see some economies come through? And some of that top line revenue go start to fall through to the bottom line. Maybe you could just talk a bit about the cost base as well in terms of what that's driving that. And it obviously had a big step up again this year ex the Challenger business. So maybe just give us a bit more understanding around that.

Charlie, I'll answer that first, and then I'll hand over to Paul to talk about -- a bit more about what he spoke about in his presentation. Look, in growing this business, yes, for sure, we've had to -- unlike any funds management business, you have to traverse the line, particularly this listed business of delivering securityholder value. But whilst at the same time, securityholder returns whilst at the same time investing in the platform. And so the investment in the platform, which particularly means growing the team strength, the funds management platform, people's strength and capability. And that's -- we've been successful in doing that. And yes, it has been an investment by shareholders over the last 8 to 9 years that we've been listed. And that investment, we believe that is going to be paid off with the acquisition that we made this year. So if we hadn't made that investment over the last 8 to 9 years, we wouldn't be in the position we have been in to be able to execute on the transaction like we have just done. And indeed, we've pursued many strategic growth transactions over the years. This one, we were successful in executing and we believe we'll be able to execute more strategic transactions because of the investment that we've made and the shareholders have made in building the investment management platform over a long period of time. And as a result of this transaction, we are pleased to see the operational leverage improve markedly from the addition of the income and the highly accretive acquisition than it was. Paul?

Thanks, Glenn. Thanks, Charlie, for the question. It's a very important one for our securityholders. And just to re-echo Glenn's comments and it's best illustrated by the [ tail ] on Page 11. The corporate costs, you rightly point out for FY '23 was $32.4 million. And on a run rate basis, that is a full annualized cost of our entire cost base at the moment of $34 million. So that's about a $6 million increase. That, of course, does include the incremental costs of the Challenger transaction as indeed to the management fee, the incremental income of $16.9 million. And as a result of that, we are seeing 2 things. One, investment in our platform historically paying off, frankly, with securing the Challenger transaction in a completely uncompetitive environmental basis. And secondly, the direct and very significant impact on our Recurring Funds Management EBITDA margin increasing from 5% to 30%. We're acutely focused on continuing to widen the jaws of our funds management EBITDA. Challenger, certainly has presented that very significant opportunity but we will be focused on continuing to widen those doors as we grow.

And the difference between that $16 million EBITDA and the $22 million pro forma is pretty much transaction fees, acquisition fees and performance fees. Am I right in thinking that?

I think, Charlie, you might be comparing the run rate. The run rate information is really forward-looking. Pro forma calculation we did just assumed the Challenger transaction was completed at the start of FY '23, generated $12 million of EBITDA. We issued the additional -- so we were just showing that as a backward pro forma to particularly illustrate the extent of the earnings accretion of the transaction.

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

Thank you very much and thank you for joining the call today. We sincerely appreciate your interest in the group. I'd like to reiterate at this juncture that indeed, despite the quantum leap in growth in the business last year and in July, effectively when it completed, our mission has remained unchanged from the time we listed 9 years ago to be the leading real estate fund manager in Australia to be known for delivering exceptional business returns but also making impactful social and environmental contributions. And to that end, our key strategic objective also remains unchanged, which is to deliver investment outperformance for our investment capital partners, which in turn, we believe will grow securityholder value. I'd like to take the opportunity to thank the team, my follow team members across the group for some fantastic contributions over the year and contributions that have led to us being in the position we're in today where our growth prospects and our outlook is very positive. Thank you again, and have a good day.

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