Elanor are proposing the breakup of the $193m of assets in the listed Elanor Retail Fund and the establishment of two wholesale funds.
The proposal will see existing investors receive a special distribution of $0.36 per security for their interest in Tweed Mall and the choice of a $0.79 per security buy back offer or to retain their interest in the new open-ended, multi-sector managed fund, the Elanor Property Income Fund (EPIF).
Commenting on the Proposal, ERF Chair, Paul Bedbrook, said: “The Board of ERF has conducted a rigorous review of the Proposal and based on the options reviewed, believes that it is the most attractive path to maximising value for ERF Securityholders. The Board continues to believe in the fundamentals underpinning the ERF reliable income retail portfolio and that the Proposal is in the best interests of ERF Securityholders. The Board therefore recommends securityholders vote in favour of the Proposal.”
For exiting investors, the total cash consideration equates to $1.15 per security and implies a 7.9% premium to the last closing price of $1.07 per security, but a discount to the implied NTA of the Fund which is estimated to be $1.22 per security.
As part of the process and year end accounts, Elanor completed independent valuations of the Fund’s portfolio, announcing a $2 million valuation increase to $193.2 million. The ERF portfolio’s weighted average capitalisation rate of 6.91% is 0.07% lower than December 2021.
Elanor Property Income Fund
The spin off Elanor Property Income Fund is proposed to be an open ended wholesale fund seeded with Manning Mall, Gladstone Square, Glenorchy Plaza and Northway Plaza, at a combined value of $106.2m.
The Centres are predominantly located in regional areas and anchored by a major supermarket with other everyday good & services tenants.
The Fund proposes to target other real estate assets (multi-sector) that have a defensive tenancy mix and differentiated competitive advantages in their markets. It proposed a gearing of up to 40% and monthly distributions of 5.5%pa – 6.0%pa in FY23.
Tweed Mall is proposed to be sold out of ERF at its current valuation of $87m into a new unlisted single asset fund, the Tweed Mall Fund, which is also to be open to investment by wholesale investors. The valuation of Tweed Mall was unchanged from the December 2021 valuation which assumed a cap rate of 6.75% and equates to $3,739/sqm of NLA.
Tweed Mall is a triple supermarket anchored sub regional Centre with a Target and 65 specialty shops. Elanor have worked to re-mix the Centre over the past few years and replaced Lincraft with a new Aldi on a 15 year lease from 2020. Targets’ lease was due to expire in September 2020 and whilst they remain on hold-over for the time being, it is likely that the store will close in the near future.
Elanor had previously proposed to add a office building to the site to accommodate a potential 4,000sqm Commonwealth Government Tenant requirement and other uses but have not advanced with any plans at this stage.
The Centre’s primary catchment is limited and its retailers generate around $102m per annum in total sales ($4,384/sqm), which is low in comparison to other sub regional centres. Recent re-mixing of the Centre has improved the outlook, however sales and rental growth will remain difficult with the larger Tweed City Shopping Centre, providing significant competition.
The cap rate for Tweed Mall appears soft when compared to Elanor’s peers, however the clouds hanging over the Target tenancy account for much of this. The Runaway Bay Shopping Centre, at the other end of the Gold Coast is twice the size of Tweed Mall and was sold in November last year to Qualitas for circa $260m ($6,140/sqm) reflecting a passing yield of 5.9%. Runaway Bay generates circa $236m ($5,488/sqm) in annual sales.
The deal is subject to an independent expert concluding that the proposal is in the best interests of ERF securityholders. We will watch this with interest.
The Board of ERF unanimously recommend that ERF Securityholders vote in favour of the Proposal, in the absence of a superior proposal and subject to the independent experts’ endorsement.
Elanor Investors Group intend to maintain an investment of approximately $15 million in EPIF and will invest a maximum of $13 million in the Tweed Mall Fund (the combined investment of approximately $28 million is equivalent to the value of its current holding in ERF). ENN will redeem some of its existing holding in ERF in the Buy-Back ($4.5 million), in addition to ENN’s proceeds from the Special Distribution, which will be invested in the Tweed Mall Fund.
ERF’s largest securityholder MA Asset Management Ltd (“MAAM”) (19.9%) has agreed not to participate in the Buy-Back and to retain its securities in EPIF after delisting.
The Buy-Back will be funded by a new $67.5 million leveraged debt facility provided by MA Investment Management Ltd to the extent that it is required.
The Proposal is also subject to ASIC and ASX regulatory approvals, and ERF security holders passing a special resolution to approve the proposed delisting and passing various related resolutions.
The Meeting of ERF Securityholders to approve the Proposal is expected to be held on or around Friday, 12 August 2022. ENN, MAAM and their associates will be excluded from voting on the resolutions