Sep 24:

Wow things have gotten VERY interesting over in Elanor land.

Without going into too much detail:

1)     The covenant for the loan against the Pyrmont property was breached, the debt is non-recourse to ECF (who own 49.9% of the fund).

2)     The Pyrmont fund needs to raise capital, it looks like Elanor will attempt to do this do this by issuing a hybrid instrument.

3)     ECF has committed to take up their full entitlement to the hybrid instrument in the Pyrmont fund.

4)     To fund this, ECF will need to some raise capital, possibly via a rights issue. They have also flagged that they are looking to divest some assets.

5)     Simultaneously, ENN (ECF’s fund manager) levered itself up and got into some trouble (IMO management were very mediocre).

6)     ENN has now sold its whole stake in ECF to Lederer group, who have also pledged to underwrite any capital requirements.

Despite all the above, I don’t think anything has changed in the underlying investment thesis:

1)     We knew Pyrmont wasn’t worth anything to ECF holders anyway

2)     The performance of the portfolio excluding Pyrmont has been pretty good (see below). The forecast distribution for FY25 is 7.5 cents per security, in line with expectations.

3)     A distribution of at least $0.065 is maintainable throughout the cycle.

Lastly, Lederer also owns a big stake in COF, which is Centuria’s listed office REIT. Elanor have disclosed that they’ve had approaches from third parties.

I wonder if Centuria are having a look at Elanor, given their plans to simplify the business to focus on just Office, Retail, Industrial and Healthcare? If something like this did eventuate, ECF and COF would likely end up being merged. Or am I being too imaginative?

Aug 24:

Sneaking in a quick update before results. Not too much has changed since October and Pyrmont is still the main concern. I've calculated the distribution once interest expenses have normalized as being somewhere between 6.5 and 7.5 cps.

I think some hedging will remain in place next year so the distribution should hold up somewhere around 7 cps. A 10% yield is pretty good buying I think.

Keep an eye on Pyrmont and the prospect of equity raisings. Gearing will be getting up there.

Oct 23:

Both divestments have fallen over which won't impact my long term forecast for cashflow too much however gearing is somewhat of a concern. That being said, the passing yield of most assets in the fund should be above the marginal cost of debt, so WALE and occupant is worth keeping a really close eye on. If the assets keep performing ok, there's plenty of yield to compensate for the risk.

Sep 23:

I've done some investigation post the FY23 results and think the below still looks pretty good. There are a few things worth pointing out:

1) The Harris Street Investment has been a disaster, they've taken an absolute bath and are getting close to the LVR covenant (65%).

2) FFO is such a deceptive indicator of what the underlying cashflows of the fund are. Completely ignoring capex ($8 mil) and rent free incentives ($4 mil) means distributions will always be well under FFO. Even with the target 85% payout ratio, I think ECF has had to top up this year distribution with some debt. The cashflow statement sums it up:

Capex has been $8mil for two years running, but I expect this to roll off somewhat in FY24. I also expect rent free incentives to roll off as well, so maybe the 85% payout is achievable going forward.

3) If the two recently announced divestments proceed, the fund will be significantly de-risked from a leverage standpoint, but something will need to be done about Harris Street to make sure no covenants are breached.

I've done some analysis and come up with a distribution figure that I think would be sustainable once interest expenses normalise to current market levels. Somewhere around $0.07 per unit is doable. On this basis I think somewhere around $0.80- $0.85 is fair value.

May 23:

Recent update was encouraging, the announcement of a big lease renewal with a government tenant is a good outcome. Directors have also bought on market.

Depending on how much of the FFO/Distribution gap is made up of genuine capex and up front lease incentives, there is a possibility that the yield at current prices could still be around 10% on a forward looking basis.

Despite this, my concerns mentioned below still exist. Going to value on an estimated 9% FY24 Distribution yield of $0.082 p/s.

March 23:

It's very hard to see where earnings will sit in 2-3 years time. Interest expense is going to increase dramatically unless the RBA decreases rates significantly.

It's also hard to ascertain what % of FFO is going to be eaten up by incentives and capex. ECF's reporting doesn't really give much insight into this.

Given I have low confidence in my ability to forecast future distributions, I'm happy to sit out for now and see what new information comes to market.

10% yield today could easily become 5-6% once hedging roles off.

Gearing of 37% today can easily become >55% if the market deteriorates (and I'm pretty sure their covenant is 45%).