Earnings Call: H1 2021

Feb 22, 2021

I would now like to hand the conference over to Mr. Glenn Willis, CEO. Please go ahead. Thank you very much. Good afternoon, ladies and gentlemen, and welcome to Al Anon Business Group results presentation for the first half of this financial year. And thank you for your interest in the group. I'm joined here by our executive team of Al Anonor today, and we'll be pleased to answer questions at the end of this brief presentation. We'll be referring to the results presentation pack that was released this morning for the group. And I'd like to turn to Page 4 of the pack to overview the results for the half. I'd like to commence by saying that we firmly believe that as we say here that the group, the Illinois Business Group is well positioned for growth. Whilst the economic environment against the backdrop of the COVID-nineteen pandemic, particularly for the last half of last calendar year, continue to present challenges in the markets, in most of the markets in which our funds operated. We are nonetheless firmly of the view that we're well positioned for growth. Given that we've come out of 2020 calendar year in a very good position. Whilst our investments faced extraordinary and as often quoted unprecedented challenges over the period, we are very pleased with the operational efficiency of our investments of our funds and believe that we are very well positioned to significantly improve performance for our funds, for our investments and therefore for Eleonore Investors Group and creating shareholder value for our Eleonore Investors Group. A brief overview of the sectors in which we participate. Our commercial office assets performed exceptionally well over the half. The El Anor Commercial Property Fund, our listed office REIT collected 99.5% of rent over the period. So mostly unaffected by the last half, which is a testament to the assets, the asset selection, the way in which we invest in commercial office assets and the acute focus on investing in office assets that have differentiated positions in their respective markets. Similarly, the commercial healthcare assets performed exceptionally well with 100% of rent collected over the period. Again, those assets being unaffected by the economic environment and again, testimony to the asset selection and the management of those assets. Hotel assets experienced challenges over the period with border closures particularly made it challenging. Having said that, the COVID-nineteen period gave us a tremendous opportunity to improve the operational fitness of those assets. And as such, that is an area where we're particularly positive in regard to how those assets and how those investments and how those funds are positioned to perform going forward as domestic borders stay open, are opened and not those assets not being affected by the closure of international borders. Our Wildlife Park assets, the Mogo asset performed exceptionally well over the period despite the environment. A feather tile asset in that fund obviously encountered challenges that asset being half of its business being traditionally inbound visitation. However, the team, the management team, they've done a very good job again in improving the operational platform to cater for the domestic visitation, the offshore visitation losses in that asset. And the fund is now performing well. Our retail assets, ERF performed very well given the challenges of the environment. 95% of rent was collected in the last half for those assets and 98% of the rent was collected for the income assets. Again, testimony to the asset selection and the asset management and the team's capability in managing retail assets. Clearly, we had challenges with our Wobble Gardens asset that we have in partnership with Hartman Group. That's a Victorian based asset and that obviously was impacted by the Victorian border closures and the lockdowns in that state. Similarly, Hunter's Plough, their asset had challenges with the lockdowns in New Zealand over the period. But all in all, the investments, our funds performed very, very well in a lot of the economic conditions. And we're particularly pleased with how they're positioned in operational fitness sense to improve profitability and fund performance as we now operate in this half. So as such, we believe we are in a strong position. Our core earnings over the half, we're pleased with the period on period growth in funds management income increasing by 79% period on period. That's a strong increase in funds management income being our key focus in terms of driving value for E and N security holders. Obviously in the half, we did not receive distributions on $120,000,000 of our hotel investments and Wapley Gardens investments, choosing to withhold distributions from those funds during the period. We expect distributions to recommence this half. And over the half, we did not generate performance fees or transaction income. However, we are positive about the short term prospects here, including the sell down of our hotel current investments. So all in all, we are as we state here, we believe we are well positioned for growth. And if we think about the fundamentals to growing our business, growing our funds management business, growing our funds under management, our funds management earnings and value for E and N Security Holders. We think about it in 5 key areas. Clearly, we think about the funds management platform of which we believe is very scalable. Having achieved $200,000,000 of growth in some over the last half, whilst that could be considered modest per se, Those the new funds generated the last half were the back end of the last half, a half that it was difficult to generate pipeline over the period, but nonetheless it was a pleasing end of the half having generated, as I said, 200,000,000 dollars of new funds over that period. And particularly our team, we've got, I believe, a highly capable funds management team, a high caliber funds management team and a team that's been together for a good period, which I believe is an asset to any funds management business. So we are very positive about the scalability and the capability of our funds management platform. We're pleased about the pipeline we have for the business as we now placed. We're particularly pleased with the pipeline of opportunities in the retail sector, in our commercial assets sector, but also in our hotel sector. And whilst execution is everything, we fully appreciate that. We are pleased with the pipeline of opportunities that we have within the business at present. The 3rd fundamental to how we think about the growing the business pertains to growth capital. We have $115,000,000 of growth capital when we think about recycling our balance sheet assets, particularly the Cornerstone position in the group's hotel funds. And that assumes retaining of 15% in those funds going forward. So $115,000,000 consists of $80,000,000 there and about $35,000,000 of cash and facilities. So we have significant growth capital to grow our funds under management. We also have pleasingly strong and growing investor demand for our funds, both from traditional wholesale domestic capital partners, family offices and wholesale product capital, but increasingly from offshore particularly, but offshore and domestic institutional investors. We're very pleased and particularly over the last 24 months, the investment we made into growing our investor demand and our capital partners is well and truly returning to business as we see the growth in demand our funds. And that's evidenced by even in the last half, the demand for our funds was very, very strong, requiring the group or even not allowing the group to participate in Cornerstone because such was a demand for those funds. And that growth in investor demand is significantly, if not substantially a function of our investment track record, the 5th element to growing our funds management business. Having a track record of over 20% on realized returns for our funds, for our capital partners, for our investors, we believe is an exceptional result. Clearly, we acknowledge that the market has been positive in terms of returning good returns for capital partners, but that level of performance, that track record, we believe is exceptional. And that obviously positions us very well in regard to growing investor demand. So in summary, we believe that in delivering exceptional investment performance for our fund investors will enable us to grow our funds under management and our funds management earnings. And that we believe will result in driving Al Anonor's security value. That's our firm belief. Our overarching objective is to grow security holder value for Eleonore, but that will come in our firm view by continuing to deliver outstanding investment performance for our funds. I'll hand over to Paul Sibienow, our COO to review the results highlights for the period. Thank you, Glen. Turning to Page 5 of the presentation. Our current results were $5,550,000 of core earnings in respect of the 6 months to 31 December. That was a figure that was struck very significantly on strongly growing funds management income. Importantly, in relation to that result, and Glen has mentioned this point, there was no co investment income in the form of distributions from our co investments in $120,000,000 across our hotel funds and also Waverly Gardens. We expect distributions from these funds to recommence in the second half of FY twenty twenty one and therefore be reflected in our core earnings. In addition, in respect of the comparative to the prior year, the prior year included approximately $10,000,000 of transactional income and for the half to 31 December, twenty twenty, there was no transactional income recorded. That saw us produce a result for the half pre transactional income to reflecting 160% increase on the prior half. Distributions have been struck at a 90% payout ratio and our net tangible asset backing for security at 31 December is 1.47 dollars an increase of 13% on 30 June 2020. And that's reflected by an improvement in the value of the properties within our co investment in the underlying managed funds. Turning to funds under management, funds under management of $1,870,000,000 at the 31st December, an 11% increase on the 30th June figure of $1,690,000,000 and that reflects acquisitions of $200,000,000 during the half. Those acquisitions really came in the 3rd in the second quarter of the half because of course there was limited transactional activity around June, July, August, September. In addition, the group sold Auburn Central Shopping Center from within the portfolio of ERF and that has reduced the funds under management at December by approximately $100,000,000 Glenn has mentioned our funds management income of $14,900,000 for the half, a significant 79% increase on the prior year. Turning to our current investments, distributions of approximately $3,000,000 included in our core earnings, but down on comparative periods. And we've mentioned the reason that there's $120,000,000 of co investments where we expect distributions to recommence in the second half of the year. To just emphasize two points that Glenn made, we've seen strong investor demand for our new funds during the half. And that has meant that we have not made any investment from a co investment point of view in those new funds. And in fact, in addition to that, by virtue of demand across a number of funds, we have also sold down some of our co investment that's particularly relevant to the healthcare fund, which acquired 2 new assets in the half. We sold down our position to reflect the level of investor demand for that fund. We're well positioned in respect of our investment capacity to grow $25,000,000 of cash and available debt. And as Glenn mentioned, capital for future growth of $115,000,000 which includes $80,000,000 of expected recycling of our capital on sell down of our co investment in the hotel funds to a 15% co investment level. Our gearing at the end of December was 25%, which is conservative. Turning to Page 6. There's 4 key drivers of our core earnings and that is they are our funds management income, our co investment income, transactional income that comes from formant fees, but also from the sale of assets that generate profit for us and that includes profit on co investments and our corporate costs. Now these four items we've highlighted for readers on this page that have reconciled core earnings and really the only key differences are interest and tax. So these are the key drivers of our business. We can see that in the half to December, our funds management income was very strong at $14,900,000 and we'll talk a little more about that during the balance of our presentation today. Co investment income of $3,000,000 expected to grow, no transactional income for the half and corporate costs of $8,800,000 compared to $9,100,000 in the prior year, which show the scalability of our platform. I'll hand back to Glen to talk more about our strategy and business. Thank you, Paul. Just turning to Page 8. Here we seek to give an overview of how we think about Eleonore as a fund manager of real estate investments. As I mentioned before, overarching objective is to deliver exceptional investment performance for our capital partners and investors in our funds and thereby growing funds under management. And again to that end, we originated $200,000,000 of new investments over the half and we're well positioned with regard to pipeline for new investments in this half. Clearly, our focus is about unlocking an investor value as opposed to taking a passive view to managing real estate investments. And to that end, the active asset management of the open central asset generated a very strong return for the ERF investors that asset being realized over the half. And another example of active asset management is a significant major refurbishment at Croton Mountain Lodge asset, which has improved the value substantially for that asset. And I'd say there's been value add initiatives executed across most of our hotel assets and in other and in a number of other retail assets across the business. A lot of activity in terms of improving the value of our assets in those two sectors and other sectors, but particularly in those two sectors. And that unlocking of investment value is critical to us delivering the investment performance that I spoke about. If we turn to Page 10, Again, yes, we have funds under management of approximately $1,900,000,000 across the group now. And we continue to reiterate that we believe we're well positioned for growth. The sharp air demonstrates the growth over the last several years. Clearly, we're looking for growth rates whilst the growth rates since listing is a strong growth rate and we appreciate us from a very modest starting base. However, it's been since 2014. So that's that puts in some context, but our aspirations are for the velocity of growth to be much, much greater. Turn to Page 11 that we table our sectors there in which we participate. And that shows the growth in each of the sectors and the funds that we have across the sectors within the group. Again, we're positive about growing all those sectors. Some sectors have a lot more potential to grow than others, but nonetheless we are positive in regard to growing funds under management across all of our sectors. Paul, I'll hand it back to you for the any more comments you'd like to make on results. Thank you, Glen. Just turning to Page 13 to look specifically at the components of our funds management income. You can see that there's been good steady and strong growth half on half in respect of our funds management income and the funds management income for the half to December of $14,900,000 shows a 79% growth on the prior comparative period. Importantly, 64% there was 64% growth in our underlying funds management fees. That is our core recurring funds management fees and those fees are expected to grow as we continue to grow the portfolio. Indeed, the run rate of our funds management income as at the end of December is of course stronger than what it is for the actual half given the addition of further funds management initiatives during the half. I'd like to point out leasing and development fees of $1,800,000 for the half. This is a fee stream that flows specifically from our strategy in the retail at retail real estate asset class and our hotels asset class. And in respect of retail, these fees are driven by the repositioning activity that our retail team is focused on in converting space within retail assets to highest and best use. We expect the leasing and development fee stream from this activity to continue strongly into the future. In addition, we receive development fees from the refurbishment of our hotels. The most recent and important one being a significant refurbishment of Cradled Mountain Lodge. In respect of acquisition fees, good growth, half on half to $3,700,000 And as we grow our funds under management, we expect growth within that fee stream also. Performance fees occur, of course, on realization of profit in respect of assets in our underlying managed funds. We only record performance fees when those returns are realized for investors. And so they occur at the point of transactions. There are a number of assets within our managed fund portfolio that are coming closer to their investment horizon. And so there'll be opportunities for performance fees as we move forward. I'll hand back to Glen to talk more about our strategy and overview. Thanks, Paul. Just to conclude, turning to Page 21. As we state here, we don't state it lightly. We firmly believe we're in a strong position. Coming out of 2020 with the all the obvious challenges that the marketplace presented all participants, we feel positive about our position. We feel positive about our investments and the Elanor Funds Management business. We're very confident about the capability and caliber of our funds management platform. We feel positive about our pipeline of opportunities that we have around us at the moment. Again, execution is everything, but it's good to be in a position of having a pipeline of high quality opportunities around us. Our growth capital is now significant. That was a focus for the last half in terms of improving our capital position to enable us to grow. Again, I reiterate our investor demand has increased substantially and that is a function of 2 things. Firstly, it's a function of the investments and the effort and the focus and resources that we've focused in growing our capital partner base, but it also is a function of our exceptional track record. So therefore, we believe we are well positioned to grow funds under management and we note here to grow funds under management in a capital light manner. In terms of the broader outlook, we were positive again about the problem, the opportunities we have in the sectors in which we currently participate. We're making we've made very good progress in new sectors. We expect to announce in the near term a new sector of real estate funds that we'll be establishing. And we continue to actively pursue strategic opportunities to as we state here to deliver our growth objectives. So all in all, we're pleased with how we're positioned. And so against that background and that overview, we'd be pleased to take questions at this juncture. Thank Your first question comes from Ed Day from Moelis Australia. Please go ahead. Good day, Glen and Paul. Thanks for the presentation. Just a couple of questions with regards to the NTA. Just wondering if you could talk through some of the key valuation uplifts, notably Belle Common, the Regional Hotel Fund and Blue Water Syndicate? Yes. Thanks, Ed. Happy to. The revaluations and the improvement in value came across the portfolio a bit in a couple of key areas. Certainly in respect of hotels, it's come across a number of our regional hotels within Illinois Metropolitan and Prime Regional Hotel Fund. And that reflects the very strong performance of those hotels in the COVID environment where people were looking to redirect tourism spend from potentially international travel to more regional focused travel. So those hotels are showing strong and sustainable returns. Similarly, our Cradle Mountain Hotel following its refurbishment has shown the benefits of that, notwithstanding the fact that, of course, the Tasmanian borders have been closed for the majority of the half. We're seeing strong uplift in average daily rate and Mary Anne might make some further comments. In respect of the retail portfolio, we've seen some uplift in the Waverly Gardens asset as we move towards de risking the repositioning of a DDS space in that asset. And Blue Water Square Syndicate has improved in value by virtue of quite significant leasing up initiatives that have been affected during the half by the team. They're the key items, Ed, happy to elaborate on any of That's helpful. Thank you. And then just one last question. Perhaps, are you able to make any more comments on the potential sell down within the luxury hotel fund, just around timing and what form it may take? We won't get into too much detail in terms of what form it may take because there are a number of options in that regard. But suffice to say that with the 2020 behind us and the operations of all those hotels getting back to, I don't know how to describe it, a new normal, I guess we could describe it. Those assets are now able to be well presented to bring in external capital. It wasn't appropriate if we did in the last come of the year, obviously, with the complications of domestic water closures and so forth. But as I said, all of the hotels, COVID-nineteen allowed us to improve the operational fitness of all of those hotels. Each and every one of our hotels is much better positioned now for operational profitability. And as such, we're confident about the that those funds are going into this half and also our being in a position to sell down our positions in those funds and particularly the luxury hotel fund. Great. Thank you. Thank you. Your next question comes from Suleyman Rivel from Wealth Focus BTY Ltd. Please go ahead. Hi, guys. I was just having a look at your chart and the growth on management fees. What's the I'm sorry, I just lost the chart here. What's the key driver on in terms of the increase of I'm assuming it's increase of from, but what's been the big driver there? Suleiman, thanks for the question. It really flows from the increase in our underlying funds under management. It's driven, you can see on the chart on Page 13, if I just refer listeners back to that chart, you can see the dark maroon color is our base level funds management fees. These are our recurring fees from our funds under management. And you can see very steady increase in that, which tracks and reflects the increase in our funds under management. Leasing and development fees are a feature really only of the results for the last two piles. And they relate to the matters I spoke of during the presentation. And that team and that leasing and repositioning development capability is in place. And it has completed a number of projects already, most recently, Auburn Central in the retail portfolio and Crater Mountain Lodge in the hotels portfolio. And a good amount of the revenue from those initiatives were included in the first half of the second half, excuse me, of FY 2020, but in respect of all of them also in FY 2021. So this is a new revenue stream, relatively new. It's a stream that we expect to continue as we continue to execute on our value add strategy in retail and the refurbishment that's important in respect of hotels moving forward. Is this primarily organic or has it been some acquisitions along the road as well? It's the leasing and development fee, acquisitions along the road as well? The leasing and development fees are all organic, if I understand your question, that is they relate to assets that sit within our managed home. Yes, I'm referring to the management fees as well. So I'm just getting up to speed with Eleonore as a whole. Have you bought other businesses as well along the way there or is this purely you're raising capital and just deploying that? No, it's been no thank you for that question, Suleiman. There's been no strategic acquisitions. That's something that we have in our eye on and Glenn mentioned it in the context of future growth. This is solely management fees from funds management initiatives or funds management funds that we've established as a result of purchasing of assets and the funding of those assets by our capital partners. They are all funds wholly managed by Eleonore and wholly established by Eleonore. And I'm assuming that there's a typo on Slide 13 for financial where it says financial year 2020, it should be financial year 2021, the increase on the right hand side? The increase in the right hand side, so that's you're referring to the call out Yes. I'm sorry, so are you referring to the increase in our funds management income of 64% on the prior comparative period? Yes. Yes, that is. So that is the increase on the prior comparative period being first half FY twenty twenty. So our results for first half FY 2021 against the prior comparative period. Okay. I get it now. I was just misreading that. No problem. And then acquisition fees, I'm sorry to be spending more time on the answer than perhaps you need. Acquisition fees showing strong increase also of 68% on the prior comparative half. And those fees are generated as we purchase assets for existing funds or establish new funds. And then performance fees I mentioned did not feature in the half that we're reporting on at the moment. So what are you typically charging on an acquisition fee? It depends on the fund. Yes. It does depend on the fund settlements. Glen will assume it's function of the nature of the fund. If it's a high value add fund versus a more passive fund that can be a determinant of the acquisition fees, but anywhere between 0.5% and 1.5% is typically the range. Okay. Thank you. Your next question comes from Andrew Tan from Bell Potter. Please go ahead. Hi, guys. I just want to clarify that funds management income line, like so it increased by 64% over the first half. I just can't reconcile, like if your fund growth has been maybe 10%, 15%, how do you get a 64% increase in your management fee? Well, Andrew, the fund growth that we've quoted of $200,000,000 is just in respect to the period from the 30th June, 2020, so just in the last 6 months. What impacts our funds management income in any period is obviously our funds under management, but also the date within that reporting period that we added additional funds. So obviously, if we added additional funds right at the end of a reporting period, it doesn't yet contribute to our funds management income until the next half. That's why we and if I just refer Ron again to Page 13, we call out on the in the top left hand side of that page, what the increase in recurring funds management income is. So since 30th June, our underlying funds management income has increased by 12%. So really it's a function of the level of funds under management, but also the timing of the addition of funds during the reporting period. Okay. I guess that's where I'm getting confused because I would consider the management fees of 9.4% recurring, therefore, you would double that and you get 18.8%, but your recurring funds management income there is 15.5%. So that's where I'm getting confused. Okay. Thank you. We're pleased to clarify that. Within the funds management fee stream, it is also amounts that are paid to Eleonore as cost recoveries from the funds. And these are for particular services provided by Eleonore to those funds. And that is the difference. So Andrew, you're thinking around that 9.3 percent being essentially annualizing it by multiplying it by 2% is sound. Okay. I got that. Okay. And just any more color on, I guess, Glenn, you mentioned that you might expect to announce a new sector shortly. Like any color in terms of the quantum of that kind of investment in this sector? Would you go softly, softly as you start? Or would you would it be a material kind of investment from day 1? Loads of color on it, Andrew, because as many of you will appreciate, we might prefer to sort of talk about it once it's executed. And but it's a sector where we believe we can grow funds under management significantly. In other words, that it could be a significant investment sector for the group. And certainly our short term ambitions for that sector are strong. In other words, we look to do a significant amount of investment in the initial period. But you use the word softly, softly. Our plan is not to go softly, softly in this new sector, no. All right. Thanks. Thank you. That does conclude our time for questions today. I'll now hand back to Mr. Willis for closing remarks. Thank you very much. And again, thank you all for attending this results presentation call. I'd like to close by reiterating our positivity with how we're positioned to grow the business and particularly grow security holder value for Alamo Investor Group Investors. But as I mentioned before, whilst our platform and our capital base and our investor demand are all strong. It's up to us to execute on the pipeline that we have. So we look forward to doing so obviously. And I'd like to thank the team across the group, the tremendous efforts in the teams that across our investments and across our assets and the tremendous efforts for the broader corporate team at Al Anonor and also for the executive team for their efforts over the half and ongoing. So thank you to my team. Thank you everybody and have a good day. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.