Full Year 2022 Elanor Investors Group Earnings Call SYDNEY Aug 24, 2022 (Thomson StreetEvents) -- Edited Transcript of Elanor Investors Group earnings conference call or presentation Wednesday, August 24, 2022 at 2:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Glenn Norman Willis Elanor Investors Group - MD, CEO & Director * Marianne Ossovani Elanor Investors Group - Head of Hotels, Tourism & Leisure * Paul Siviour Elanor Investors Group - COO ================================================================================ Conference Call Participants ================================================================================ * Edward Day MA Moelis Australia Securities, Research Division - Executive Director & Head of Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Elanor Investors Group Investor Call Conference. (Operator Instructions) I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead. -------------------------------------------------------------------------------- Glenn Norman Willis, Elanor Investors Group - MD, CEO & Director [2] -------------------------------------------------------------------------------- Thank you, and good morning. Thank you for joining this presentation today, the presentation of Elanor Investor Group's financial results for the 2022 financial year. We appreciate your interest in the group. On the call today, I'm joined by my executive management committee colleagues, and as usual, we'll be pleased to take questions at the end of this presentation. In our presentation, I'll be providing an overview of our results for the last financial year, and I'll make some comments on the progress we've made over the years, progress in our mission for Elanor to be a leading real estate funds management group in this country. Indeed, we strive to be known and recognized for our investment performance, leading investment performer in the real estate funds management sector but also to being known as being a leader in making impactful social and environmental contributions in the communities in which we operate. This is what your management team is striving for. Following my brief overview of the year, I'll hand over to my colleague, Paul Siviour, Elanor's COO. He'll be pleased to take you through our financial results in some more detail, and I'll make some closing comments on our outlook at the end of the presentation. I'll now refer to our results presentation pack that we released to the ASX this morning. I'd like to commence by saying that I'm pleased with the growth we achieved in both funds under management and earnings over 2022, a year that presented challenges in some of our sectors. COVID-related border closures impacted our hotel investments, our leisure park investments and some of our retail investments over the year. But despite these challenges, we achieved strong growth on all fronts. We grew funds under management by over $680 million over the year to $2.72 billion at the end of the year, this being a 31% increase over FY '21. And as we highlight on Page 5 of the presentation pack, we grew recurring Funds Management earnings by 48%, a result I'm particularly pleased with and a particular focus of the group to grow recurring Funds Management earnings. I'm also pleased with the diversity of revenue streams we now have across the group. These revenue streams not only include Funds Management fees, which are set are growing strongly but also include leasing fees, development management fees and hotel operating fees, all of which are growing strongly. We continue to see growth in our other revenue streams being performance fees and gains on sales of investments and co-investments. This diversity and revenue streams we consider very, very positive for the group, and we now consider it a valuable attribute of Elanor's Funds Management platform. And the growth in the diversity of revenue streams is very much a direct result of the investments we've made in our platform over recent years. We made significant investments in talent and capability at the recent times. These investments I'm confident will enable us to grow earnings going into the future. Regarding available growth capital, we have significant balance sheet capital, over $50 million, to support our projected growth in funds under management. This capital for new Funds Management growth will substantially come from recycling our current core investments. We continue to experience strong investment demand for our funds, as a direct result of our strong investment performance. And as said, we're experiencing strong demand for our current investment positions, particularly for hotel funds where we plan to further sell down our current investment holding from 35% to 15% over the year. So in summary, we believe we are well positioned to grow earnings again this year. We recognize that market conditions remain somewhat challenging. The interest rate environment has contributed to that. And also the -- I guess, the bid-offer spread that we're seeing in some sectors where understandably vendors' assets are reluctant to adjust their prices to the changing interest rate environment. But despite the prevailing market conditions, we do indeed believe that we are well positioned to grow earnings again this year. We are positive, we'd like to add, in regard to the growth opportunities across all of our sectors, retail, hotels, health care and office. Whilst we're not relying upon growth in funds under management to achieve earnings growth, which is very important to add, we are indeed confident growing funds under management this year notwithstanding. These short and ongoing investments we've made in growing our Funds Management platform and critically, our strong long-term investment track record, we believe position us well for further strong growth in both funds under management and earnings. A final comment before I hand over to Paul Siviour to take you through our results for the year in more detail. I want to point out that the group is well positioned in regard to interest rate risk. Across the group, our funds are well hedged, and that is a direct result of our philosophy, our interest rate risk management policy. And the key tenet of that philosophy is that investors, we believe that investors invest in our real estate funds for the real estate exposure on the real estate value upside, not to take interest rate risk, and that philosophy obviously, is standing us in very good stead now that interest rates have increased substantially. I'll make further comments in regard to our outlook for this financial year as we end the presentation, but I'll now hand over the call to you. Thanks, Paul. -------------------------------------------------------------------------------- Paul Siviour, Elanor Investors Group - COO [3] -------------------------------------------------------------------------------- Thank you, Glenn. Can I refer participants on the call to Page 5 of our investor presentation that was released to the market earlier today? This summarizes the key outcomes for the group in FY '22, and they are elements that Glenn has already mentioned. But to resummarize, first of all, we've achieved strong growth in our funds under management during the year, an increase of 31% to $2.72 billion. And that's despite the current market conditions. Secondly, we've grown core earnings by 21% to $18.3 million, and that is despite COVID impact in relation to those numbers, which I'll speak further about shortly. And thirdly, we've grown the value of our Funds Management platform as, yes, evidenced by the growth in our Funds Management EBITDA, but particularly, by the very strong growth in our recurring Funds Management income of 40% -- 48% increase to $32.2 million, and we'll provide some more color to the componentry of that number during the presentation. Turning to Page 6. Investors in Elanor are very familiar with the key drivers of our core earnings. They are our Funds Management EBITDA, the distributions we receive from the co-investments that we make in our managed funds, investing alongside our capital partners. And thirdly, transactional income that primarily reflects gains on recycling of our co-investments and the sale of balance sheet assets. Funds Management EBITDA grew strongly by 38% to $14.7 million during the year, and that was without any contribution from performance fees in the period. Our co-investment income at $7.9 million has been materially COVID impacted, particularly in respect of 3 funds, the Elanor Hotel Accommodation Fund, the Elanor Wildlife Park Fund and Waverley Gardens, a shopping center in the southeast corridor of Melbourne. Transactional income, I'll remark on later in the presentation when we talk about the profit and loss. You can see at the bottom of the page, core earnings EBITDA, we showed a componentry of core earnings EBITDA which totaled $25.4 million for the year, and the reconciliation of that number to core earnings is depreciation, interest and tax, and that's set out in respect of the profit and loss that we'll refer to and take you through a little later. Turning to Page 7. We've talked about the continuing growth that we've been able to achieve in the value of our funds management platform. I mentioned the growth in our Funds Management EBITDA, but we're particularly pleased with the growth in our recurring Funds Management income, and recurring Funds Management income is our total Funds Management income, excluding acquisition fees and excluding performance fees. That really reflects 2 things: growth and the maturing of our business, but also the capability within our funds management platform and the revenue streams that, that generates. Our recurring funds management income of $32.2 million comprises 4 elements: our core management fee income of $24 million; our hotel operator fees, those on the call will be familiar that we have a fully integrated end-to-end hotel operating capability within our platform, and that provides very significant advantages to us in the context of driving investment returns from the hotels that sit within the Elanor Hotel Accommodation Fund. And during the year FY '22 we generated hotel operator fees of $3.1 million. We also generate strong fees from both development fees and leasing fees, development fees of $2.4 million during the year and leasing fees of $2.7 million. And that reflects, again, the capability within our platform in respect of particularly the repositioning of retail real estate for higher and better use. Also the strength of our leasing capability within our commercial office business, where we have very strong points of difference in respect of the assets regarding their -- the way they compete within their market, and that enables us with our skills to provide very strong leasing outcomes and has been true during the year. In respect of each of these 4 revenue streams, we are forecasting growth in respect of FY '23. And that's just reflecting our current funds under management and our current platform. Just to comment briefly. In respect of management fees of $24 million, we will enjoy further increases in this fee stream by virtue of the increase in our funds under management during FY '22, a significant increase of $677 million, and we'll enjoy the full annualized benefit of that increase during FY '23. In respect of hotel operator fees, we expect those fees to grow strongly in FY '23 for 2 reasons. Firstly, there is a COVID -- adverse COVID impact in respect of the FY '22 results; and secondly, we see strong opportunities to grow the fund within our Elanor Hotel Accommodation Fund. Development management fees and leasing fees are also forecast to grow strongly in FY '23, and this reflects our current pipeline of development projects and repositioning. And I'll take you through some further detail on these 2 elements further -- later in the presentation. Turning to Page 8. I've referred to an adverse COVID impact on our core earnings results for FY '22. And of course, we all remember although somewhat in the revision there that back in November, December and January, there were significant relaxations of mandated operating restrictions and state border closures that were brought in, in the context of managing COVID at that time. What we've sought to do is to provide you with some clear guidance in respect of just precisely what that COVID impact has been in respect of FY '22, and the way we have prepared that information is to show you what the annualized results for the affected revenue streams would have been if we take Q4 '22 actuals as a run rate and annualize that quarter's results and then compare that to the actual results for FY '22. What that results in is a turnaround just in respect of the COVID impact on FY '22 results of $10.4 million. Therefore, if the run rate in respect of these earnings streams remained as it was for Q4 '22 throughout Q4 '23, we would expect to see that level of improvement in our FY '23 results in respect of these revenue streams. Just to touch on them individually. I mentioned we've enjoyed a strong level of hotel operator fees during the year $3.1 million. However, our hotel operator fees are referenced to the EBITDA performance of the hotel, so as to align our interest directly with those with our capital partners in that fund as the EBITDA performance of the hotels has improved throughout the year, but particularly in respect of Q4 '22, we can see that the annualized impact would be an uplift in those fees of $1.4 million. In respect of co-investment income, I mentioned 3 funds that where distributions during the year were adversely impacted by COVID, the Elanor Hotel Accommodation Fund, Waverley Gardens Fund and Elanor Wildlife Park Fund. If one takes the actual distributions that we received in respect of Q4 '22 and annualize it, we would see a $3 million uplift from the earnings we received from these funds in respect of FY '22. And lastly, which is a component of transactional income, you'll recall from previous calls that we established the Elanor Hotel Accommodation Fund last August and raised $73 million at the time. In respect of that raise, there was a one-off guarantee of an 8% distribution return to our capital partners in that fund for the period from the 31st of July '21 to 30 June '22 and ending on 30 June '22. That resulted in a one-off nonrecurring expense in our FY '22 core earnings of $6 million. And I now turn to Page 9, in respect of our confidence in our ability to continue to grow funds under management in respect of current market conditions. And what we've demonstrated is that we are able to deliver value to our capital partners by virtue of our investment approach in respect of the assets that we pursue; and secondly and importantly, in respect of the capability that fits within our funds management platform that generates strong value add to the returns in funds from our ability to reposition real estate, from our ability to manage the operating performance of our hotels and from a very strong strategic leasing capability within our commercial office and health care sector focuses. So in that regard, we feel that our differentiated Funds Management platform and capability positions us well in the current environment to continue to grow funds under management. I mentioned before the growing and strong development pipeline that sits within our managed funds, and if I can refer now to Page 13 of our presentation, just to provide a little more color in that regard. In respect of our retail focus, we have a development pipeline of $200-plus million in respect of our Hotels, Tourism and Leisure pipeline of -- excuse me, a division of pipeline of over $100 million and in our commercial and health care sector, our pipeline is over $50 million. This pipeline is current and drives development and leasing fees through the next period and beyond. In respect of the retail development pipeline on Page 14, we've set out there some information in respect of the key components of that pipeline. But in summary, this pipeline is -- reflects our capability in repositioning retail real estate for higher and better use and to focus it increasingly on everyday needs and secure income. The pipeline relates to projects that deliver a strong yield on cost, and that reflects in increased value for our capital partners in those respective managed funds. In relation to the hotel development pipeline, the pipeline relates particularly to facility upgrades and room refurbishments, and that drives revenue improvement, and particularly average daily rates for the rooms. Similarly to our retail development pipeline, we see a very strong yield to our managed funds in respect of the cost of those repositioning projects. Just referring now to our Funds Management section, Page 19. And not to elaborate really at all, but Page 19 shows our continued growth in funds under management year-by-year to $2.72 billion. Page 20 sets out both the growth in our Funds Management income year-by-year. But importantly, the componentry of that funds management income. And again, that highlights the strength of the recurring funds management income flows. On Page 21, I'll leave you to look through at your leisure that, that outlines our particular Funds Management initiatives during the year that have underpinned our growth in funds under management. And I just turn briefly to our interest rate risk management in respect to the group's managed funds, and Glenn referred to it specifically, and it's a very important focus to enable us to provide investment opportunities in a real estate-based focused and don't have speculation around interest rates or interest rate risk as a key element of returns. You can see that across our managed funds, our weighted average hedging profile was 71%. That hedging profile is particularly strong in office and health care, where those revenue streams are more consistent and regular. It is lower in Hotels, Tourism and Leisure, and that is because within our Elanor Hotels Accommodation Fund, we have decided to only hedge that debt to 50% of the debt. And that's because hotels provide a natural inflation hedge, and that is because you can effectively reprice average daily room rates on a daily basis. In respect of retail, we're hedged to approximately 60% of the debt and the element that isn't hedged relates to our development facilities that have drawn down progressively to meet our development pipeline and also a number of assets that are close to their investment horizon. We've touched on Page 24, where we outlined the elements that comprise our total co-investments in managed funds of $219 million. As Glenn mentioned, we have growth capital for -- from the recycling of co-investments to support our growth in funds under management. And we've shown there some key elements to that. One is our intention to sell down our co-investment in the Elanor Hotel Accommodation Funds to 15% which would release $40 million of capital for applications to new managed funds, and we've also outlined the 4 funds that are becoming closer to their investment horizon. That would also mean we could recycle our co-investment within those funds. Page 25 sets out the distributions we've received on our -- each of our co-investments. I won't go through that because I've highlighted the elements where there's been COVID impact. Turning now to Page 27, our core earnings summary. I'll just mention briefly the $11.2 million profit on sale of assets and co-investments. This is driven particularly in respect of our hotel platform and relates to the sell-down of our co-investment in Elanor Hotel Accommodation Fund and the predecessor funds and also a gain on the sale of an asset from the balance sheet. These streams of income are less easy to forecast. But as we recycle our co-investments, we do expect further gains and therefore, further transactional income. Turning briefly to the balance sheet. I would just point out, again, the growth capital that sits within our equity accounted investments $219 million and our gearing conservative at 30%. Finally, just on Page 29. We've outlined the elements of the successful refinancing of the group's debt in June 2022. That is debt of $105 million, and it's structured in a way that is very capital efficient for Elanor, and that is a base level of unsecured mix, both fixed and floating notes of $40 million and then a fully revolving senior secured debt facility of $65 million, which enables us to manage our capital requirements well in the context of both drawing on that facility and then reducing it in respect of cash flows and sell-downs of co-investment prior to reinvestment in new managed funds. On that note, I'll hand back to Glenn for some closing remarks and also some commentary in relation to our outlook. -------------------------------------------------------------------------------- Glenn Norman Willis, Elanor Investors Group - MD, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Paul. As I said earlier, we, the Elanor team, the management team, strive to be a leading real estate funds management group in this country, leading the way for investment performance and known for delivering investment outperformance. But we're also -- we also strive to be known and recognized for delivering impactful social and environmental contributions. On Page 7 of the pack, we covered just some of the sustainability achievements we've made over the year. I'd like to point out a few achievements that I'm particularly proud of, particularly proud of the impact the group is making in regard to disadvantaged kids across the country through our partnership with The Smith Family. This is a strategic partnership that we continue to invest in, recognizing that we as a group are very fortunate, importantly, recognizing that we have the people and resources to make an impact in this area. Our strategic partnership with the FSHD Foundation, a foundation that focuses on finding a cure for FSHD, which is a serious muscular dystrophy that affects thousands of Australians and millions worldwide, somewhat unknown disease, not regarding the effect it has on senior people. I believe that my friend and former business colleague have most suffered from. And FSHD Global, who we support, is a global leader in finding a cure and making great progress with the support of Elanor and many others. Other call-outs I'd like to make. The teams across the group is executing on many important energy initiatives across our portfolio, particularly in the retail and office with our retail investments, where the team has and continues to make significant accomplishments in that area. And also, the teams in our hotels division and leisure parks division are executing on numerous environmental initiatives at our investments and again, making significant accomplishments in those areas. We continue to make progress in regard to our broader sustainability objectives. I am indeed proud of the social and environmental contributions the team is making across the group, and the impact of sustainability is at the heart of Elanor and will continue to do so. Important to add that. So in closing, turn to Page 31, where we summarize our outlook. And as I've mentioned, as Paul has mentioned as well, we believe we're well positioned to grow funds under management in the current environment. You see the current environment being one that genuinely suits value investors, which we will truly consider ourselves to be and are. And whilst we're growing, made some fantastic investments in growing the business over the last past several years, it's been more difficult to find that over the last 7 years with the historically low interest rates, et cetera. So we believe these changing conditions, and we're excited about these changing conditions returning our opportunities to grow funds under management. Again, as we mentioned, we believe that we are well positioned with our current portfolio, with our current funds under management, with our current business, with our current revenue streams to grow core earnings this year all has taken us through the -- why we believe that is the case. So in the short term, we are positive about driving security higher value with the growth capital we have available to us, with the growth prospects that we have across our sectors, most importantly, with the capability and the talent that we have with our management team. So on that note, I think we will take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Edward Day from MA Financial. -------------------------------------------------------------------------------- Edward Day, MA Moelis Australia Securities, Research Division - Executive Director & Head of Equity Research [2] -------------------------------------------------------------------------------- Just wondering if you can provide some commentary on the momentum within the hotels -- the hotel fund. Just really what you're seeing in terms of occupancy and rate compared to maybe 6 months ago. -------------------------------------------------------------------------------- Glenn Norman Willis, Elanor Investors Group - MD, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Well, I'll introduce Marianne Ossovani, who headed our hotels through the retail division. Marianne, please give an update on rates (inaudible) that area. -------------------------------------------------------------------------------- Marianne Ossovani, Elanor Investors Group - Head of Hotels, Tourism & Leisure [4] -------------------------------------------------------------------------------- Absolutely. Look, we've seen the demand return, so it started to return in December last year. We certainly built that momentum through January. And since then, what we've seen is the market recover, so that demand is back. We've finished towards the end of last year, achieving above 60% occupancy. That's continuing through this year. That's what we're seeing coming into this current financial year, and rate has held. So if you look at our budget for last year, we actually budgeted a lower rate this year, already tracking ahead of it. So we're seeing that hold. And the business on the books, the business that we're writing is continuing to hold and increase beyond our expectations in the future. So this business being written every day, whether it be business that's sitting on the books now, those prospects that we're working, but we continue to see strength in that space, going well for the next 12 months and then occupancy continuing to build. -------------------------------------------------------------------------------- Edward Day, MA Moelis Australia Securities, Research Division - Executive Director & Head of Equity Research [5] -------------------------------------------------------------------------------- And then just on the color you've provided on the development opportunities. Do you have a feel for the capital contribution from ENN with regards to those? -------------------------------------------------------------------------------- Glenn Norman Willis, Elanor Investors Group - MD, CEO & Director [6] -------------------------------------------------------------------------------- Ed, there is no capital contribution from Elanor in respect of those -- that development pipeline. It is all secured by debt facilities that we can draw down to execute on the delivery of that -- of those development projects. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- (Operator Instructions) As there are no more phone questions, I'll now hand back to Mr. Willis for any closing remarks. -------------------------------------------------------------------------------- Glenn Norman Willis, Elanor Investors Group - MD, CEO & Director [8] -------------------------------------------------------------------------------- Thank you, and thank you all for your interest in Elanor Investments Group. We appreciate you attending our call today. I'd like to close by thanking our colleagues across the group. I said earlier, the reason why we are -- I am confident, and we are confident about our growth prospects is because of the talent but also the commitment and dedication of the team at Elanor, a team that's (inaudible) striving to achieve our broader mission for the group. Thank you for your attendance today and look forward to keeping you updated as we make further progress. Thank you very much. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.