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Edited Transcript of ENN.AX earnings conference call or presentation 19-Aug-19 12:01am GMT

Full Year 2019 Elanor Investors Group Earnings Call

SYDNEY Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Elanor Investors Group earnings conference call or presentation Monday, August 19, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn Norman Willis

Elanor Investors Group - CEO, MD & Director

* Paul Siviour

Elanor Investors Group - COO

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Conference Call Participants

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* Edward Day

Moelis Australia Securities Pty Ltd, Research Division - Research Analyst

* William Macdiarmid

Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Elanor Investor conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, to Mr. Glenn Willis. Thank you. Please go ahead.

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [2]

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Thank you very much, and welcome, everybody, to the results presentation call for Elanor Investors Group for the year ending 30 June 2019. I'm joined here with my leadership team who will be pleased to answer questions in the question-and-answer part of the presentation at the end of my brief overview. Again, thank you for joining the call, and thank you for your interest in Elanor Investors Group.

I guess to sum up the year that was, we're pleased with the achievements of last year, particularly in the growth in our funds under management and the revenues that have been generated from the Funds Management business. Also, I'm pleased with the growth in the capability of our investment management and asset management platform.

Over the course of the year, we've invested significantly in Funds Management and asset management platform, particularly in attracting and recruiting senior leadership talent to the business. So against a year that we invested strongly in talent for the business, we've still been able to grow earnings, total business over the period, and indeed, growing core earnings of about 8% albeit a modest increase in core earnings. I'm pleased with the growth in earnings against the investments that we made in the Funds Management business over the course of the year.

Particularly pleased with the increase in recurring funds management fees, particularly the over 24% increase in recurring funds management fee run rate on a period-on-period basis. That's a -- obviously, the key objective for the business, as most of you will know, if you were to grow our Funds Management -- funds under management and our fee income from that business and growing the recurring management fees is a -- of 24% is pleasing.

Having said that, we continue to focus on growing our performance fees and our gains on sale. As we grow the business, we believe that gains on sales and particularly performance fees will be -- become much more consistent and a much more consistent part of our broad revenue for core business.

NTA decreased modestly as we see in the presentation. That's predominantly due to the establishment and transaction costs that are incurred and are written off upfront in the establishment of new funds. And gearing at 28%, just over 28%, we believe is conservative for a business (inaudible). And it might be that if we look at the secured gearing ratio, it's very modest when we look at it separately from the corporate notes. The corporate notes, we believe, are very good part of our capital structure and a very efficient part of our capital structure.

So all in all, over the course of the year, in summary, we've invested strongly in building our funds management and asset management capability, particularly our people, and we're pleased with how we're positioned. We're very pleased with how we're positioned through our capability for growth in -- for the business, and we're pleased with the growth in the funds under management over the period.

If we turn to the strategy and business overview, that's on Page 6 of the pack that was distributed this morning. We put this slide in a chart to summarize our broad funds management strategy. And this has remained very consistent, as it should do, from the asset of the business at listing in July 2014.

It remained very consistent, say, for 2 important changes that I'd like to highlight, and I'll come to those shortly, a broad -- and as broad strategic -- it's broad strategic objective is to grow funds under management. An important subset of that is to deliver strong returns for our capital partners. We are firmly of the view that if we continue to deliver strong returns for our investors and our funds, and we have done over the long period of time now, that will enable us to grow our funds under management. And of course, that will enable us to increase returns for security holders.

One of the key changes to the strategy since inception back in July 2014, we're now in a position to adopt a much more capital-light approach to building our Funds Management business. At the outset of Elanor back in 2014, we were very clear to say that we believe we'll be able to grow our funds under management if we've got a strong alignment between Elanor and its investment partners. And that has been a very important enabler to our growth to be able to co-invest in funds with our investors and capital partners.

We (inaudible) ourselves after 5 years of delivering very strong investment performance, and we've just by way of what that performance looks like, we've delivered a realized return on our funds of over 18% for our capital partners, that's a -- we believe it's a very strong return. And it's a particularly strong return given the investments and the assets that we invest in. We, as you know, invest in very strong cash flow assets, cash flow real estate assets. And as such, we believe the -- having achieved the investment performance that we have done with -- we believe with this -- what we believe are lower risk real estate assets that provides for a very strong risk-adjusted return.

So getting back to the capital-light approach, we believe going forward that our requirements to invest in our funds to the degree that we have done in the past will be less, and that will enable us to grow our funds under management in a much more capital-light manner. And obviously, in doing so, that will result in, we believe, a stronger growth in earnings per share and security holder value.

That's the first key shift to our strategy that we've had consistently as I said since July 2014. We continue to invest in the sectors described here, in Hotels, Tourism and Leisure, in office and in retail. And as we say, we continue to look at and look for new sectors to participate in. We continue to assess the opportunities to build out our Funds Management platform and other sectors. A key requirement there is to have the capability, and we wouldn't at all invest in new sectors without having what we believe is the market-leading capability, the same market-leading capability that we have in the other 3 sectors in which we participate in and establish funds in.

The second key shift, if you like, to our broader strategy since inception is the focus on a capital-led growth strategy. Some of you may recall when we listed the business back in July 2014, we said we will grow if we're able to find -- continue to find and identify and originate great real estate investments. And that very much is the case. We -- so that asset-led growth strategy has been the key plank to our focus over the last 5 years. Over the last 12 months, we've complemented that asset-led growth strategy with a capital-led growth strategy. In other words, we've invested resources, significant resources, in identifying investment partners to enable us to grow our business, and that the focus there is particularly on institutional investors and more particularly on global offshore institutional investors. We've had good success over the last 12 months in building out into that segment, and we continue to do so (inaudible) resource in our capital-led growth strategy, and we are very pleased with the prospect that we have in that regard.

So just turning to Page 7. In terms of the capital-led strategy and the -- particularly the institutional part of the capital-led strategy, we've established several new funds over the course of the year as a result of that focus. And the key point that I'd like to make here is that we have significant prospect in regard to the capital partners that are seeking to partner with us in investing in our funds and new fund strategy. So we're very positive about our ability to grow our funds under management with offshore institutional capital partners to complement the growing base of domestic more family office and private investors.

In terms of the execution of the growth in funds under management, as I mentioned before, very pleasing is the 24% increase in the recurring management fees' run rate year-on-year. And over the course of the year, we are also pleased to see with the establishment of over $450 million of new funds. And again, I'd like to reiterate there a key ingredient to the success and the growth of our Funds Management business comes from the achievement of the return of over 18% on realized funds essentially since we've -- since Elanor was listed back in July 2014. We believe we're very proud of the return and we're focused on maintaining a very, very strong investment, and we believe that's exceptionally important to growing funds under management and also to delivering security holder value for ENN investors.

Turning to Page 8. We provide this again every half. This bar chart shows the growth that we've had since July 2014. The compound annual growth rate, that's a good growth rate. We -- it's over 50% compound growth rate. We quickly (inaudible) from a very, very low base. So that's just a mathematical result. That mathematical result is one that I guess underpins our ambitions for the business. Most of you know that we have ambitions to grow Elanor into a major ASX-listed real estate investment management business. And from July 2014 to now, we've grown funds under management 8x. Again (inaudible) that's off a very low base back in July 2014.

If we achieve the same growth rate over the next 5 years that will then get us into the realm of being a major in terms of scale, a major real estate funds management business, and a table that -- so that all can understand what our ambitions are. Our ambitions are robust. We've got very, very clear -- very clear growth ambitions for Elanor. We've got a fantastic real estate platform that we are establishing, and we believe that we're very well positioned to grow funds under management at the rate that we talk about here.

Turning to Page 9. Again, we're very focused on growing the recurring management fee stream. We understand, as all of you do, that's a very valuable part of the business, recurring management fees. And we're pleased that we've had that 24% increase on a run rate basis year-on-year. Again, that's -- whilst that's a very strong focus for us to grow the recurring management fees. We also are certainly of the view that performance fees and gains on sale will play a much more consistent part of our revenue for Elanor as we grow and establish more funds.

Turn to Page 10. Again, we provide that every half, and that's just to provide investors with an understanding of where our funds, managed funds, are and also where our business portfolio is including our current investments.

Page 11. We are well positioned in regard to having capital availability to facilitate our growth with the proceeds that we will see from the Merrylands sale, with the capital recycling initiative that we have in progress at the moment. It provides us in the order of $60 million of capital to invest in growing our Funds Management business as we state here. If we co-invest at a level of 10%, that will enable us to grow our funds under management to over $2.5 billion. It also exemplifies the capital-light growth opportunity and the capital-light growth strategy that is (inaudible) at hand within the business, as I said earlier. We are certainly of the view we'll be able to grow our funds under management with lesser amounts of co-investments, given the strong performance that we achieved over the last 5 years.

I'll hand it over to Paul Siviour now, our COO, for -- to take us through the financial results and the segment performance.

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Paul Siviour, Elanor Investors Group - COO [3]

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Thank you, Glenn. Can I refer those on the call to Page 13 of the investor presentation that we released earlier today? That's a summarized adjusted profit and loss which shows that our adjusted group profit after income tax for the year was $17.6 million, and that's an increase of 7.9% on the FY '18 result. I'd just remind those listening that the adjusted group results account for our investments in the Elanor Metro and Prime Regional Hotel Fund, Bluewater Square Syndicate and Auburn Office Syndicate on an equity accounted, not consolidated basis. Our statutory results show those results on a consolidated basis, which we don't regard as the most appropriate method of presentation, and that's, of course, because there are funds, like all of our other managed funds, that we had levels of co-investment in the Elanor Group assets.

Particularly important is the Funds Management contribution to that earnings before interest and tax and also profit after tax of $12.1 million. That EBITDA has shown an increase of 14% on the prior year. As Glenn mentioned, within that profit number are our recurring Funds Management fees. And because of taking into account the full year run rate of managed funds established during the year, run rate of recurring fees at the end of the current year, that's 30 June 2019, was $11.3 million. And that compared with $9.1 million at the start of the year, a 24% increase which will flow through, on a full year run rate basis, to our results in FY '20.

Also relevant for investors is the Funds Management EBITDA less unallocated corporate costs. We are a funds manager and investor, and that's the message that we want our investors look at, to consider the growth and the value of our Funds Management business. That net EBITDA is now $5 million, and we can expect that to grow further even nearly because of the run rate of recurring fees that I've mentioned before.

The core earnings for the year of $17.5 million includes the net profit after tax on the sale of Merrylands that hadn't been previously reported of $5.9 million. We've also announced though the establishment of a new -- the Elanor Luxury Hotel Fund. That fund will be established in October. The fund will include Cradle Mountain Lodge and will generate quite a profit on the sale of Cradle Mountain Lodge, both in respect of investors in Elanor Metro and Prime Regional Hotel Fund, but obviously also for Elanor in the context of its co-investment. The earnings from that new funds management initiative will be included in the first half of FY '20.

Turning to Page 14. The adjusted balance sheet prepared on precisely the same basis as the profit and loss that is with all of our funds under management equity accounted, shows net assets at the end of the year of $159 million. That's an increase during the year from $153 million. Importantly, the shape of our balance sheet has -- the shape of our profit and loss is becoming increasingly very much pure Funds Management and investment. We have 2 remaining assets on the balance sheet which is shown as part of property, plant and equipment, $46 million out of $258 million of total assets, and these are assets that we would expect to be externalized into Elanor managed funds in the future. Glenn mentioned earlier that our interest bearing debt remains conservative at $83.5 million or a gearing level of 28%. The majority of our interest bearing debt are 5-year unsecured corporate notes, which perhaps can be used sort of more mixed debt in the context of the capital structure from equity down to debt. Our corporate secured debt facility is a revolving $30 million debt facility.

Turning now to the segment performance, Page 16 of the investor presentation if you have that with you. And this page merely shows the adjustment from our adjusted group EBITDA to core earnings for each of our segments. The adjustment relates to one item, and that is the removal of the equity-accounted result from our funds under management and the inclusion of the distributions that we receive or receivable from those funds. Those that have listened to a number of our calls and invested with us will know that in our core earnings what we include is the cash that we've received from our investments in those underlying funds, and that's what's passed through as part of our distributions to our investors. This page simply makes that calculation, and those numbers are incorporated then within the individual segment performance.

Page 17 shows the segment performance for our Funds Management business. The EBITDA contribution to core earnings is $12.1 million, up 14% from $10.6 million. It's important also to see an improvement in our margin, and we would expect that to continue, notwithstanding the fact that we continue to invest in our senior management capabilities in the context of both building institutional capital partnerships, both origination and asset management.

Net growth in funds under management for the year was $304 million after adjusting for the sale of the Bell City assets in July 2018. We established 5 new managed funds during the year. They are listed for you. And those new managed funds contributed $455 million of new funds under management at the end of the year.

The Elanor Retail Property Fund, there will be an investor call on that at 11:00 today, shows strong gross asset value increases during the year from $326 million to $341 million, and that is reflective of asset revaluations, most notably, Auburn Central.

The Funds Management business is, of course, our key strategic focus. The platform is highly scalable. We look forward to continued growth, and we also look forward to continuing to invest in it.

Our Hotels, Tourism and Leisure segment results are shown on Page 18. The EBITDA contribution shows a modest decrease from $7.7 million to $6.4 million. That relates to 2 methods in particular. One is that for the prior year, the business-owned hotels, ibis Styles Canberra Eaglehawk are on balance sheet for the first 4 months of the year, and therefore, the full results of that investment were incorporated in our FY '18 result. That asset was externalized back into our Elanor Metro and Prime Regional Hotel Fund at that time.

And in addition, importantly, during the year, we have reduced our co-investment in the Elanor Metro and Prime Regional Hotel Fund from $53 million to $30 million, with $53 million -- excuse me, was the carrying value investments at the end of last year that also included Bell City, but we have significantly reduced the investment in the Metro and Prime Regional Hotel Fund as a result of the strategic partnership with NRMA, who invested in that fund earlier in this year.

Turning to our real estate segment on Page 19. EBITDA contribution shows an increase from $2 million to $2.4 million. That reflects $4.8 million of distributions from our co-investments in real estate funds that are also shown on that page. That -- the carrying value of our co-investments in real estate funds increased considerably during the year with the establishment of our new funds of Waverley Gardens and Fairfield Center, most particularly. And that, therefore, means that it's not a full run rate number. We expect improvement in that withstanding growth in that area of our business.

I'll pass back to Glenn for his comments on our strategy and outlook.

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [4]

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Thank you, Paul. Again, if we reflect upon the year that was, we are pleased with the growth in our funds under management and the nature of our income that's generated from funds under management. I'm also particularly pleased with the strengthening of our Funds Management and asset management platform, particularly from the investments and the tracking key leadership talent to the business.

I believe it places us very well to grow Elanor, to achieve on our objective of building the business into a major listed real estate funds management business. And I'm pleased that we have the ability to grow the business in a much more capital-light manner on the back of very strong investment performance and fund returns that we've delivered to our capital partners over the last 5 years.

All that being said, that, I believe, means we're well positioned to grow security holder value for ENN investors. The capability coupled with the prospect we have in terms of fund -- establishment of new funds and also the prospect we have in attracting capital partners to invest in our funds. Those 2 big factors combined, again, I believe, positions us very, very well to grow the business and most importantly deliver security holder value for Elanor investors and Elanor security holders.

So thank you again for attending this call and for your interest in ENN, and I look forward to receiving questions. And we'll hand over to the operator now to do so.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The next question is from William from Ord Minnett.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [2]

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I'd just want to ask 2 questions around the management fees. So I confirm that the run rate, the recurring management or fund management fees that you're talking about, it's just management fees and that also includes full cost recoveries? And that's just over the base of that $1.38 million.

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [3]

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Yes, Will. Thanks for the question. The recurring management fees relate to base asset management fee, plus the cost recoveries that we are entitled to from the provision of various services to those funds, accounting, et cetera. It doesn't include any forecast acquisition fees, it doesn't include any forecast increasing fees. It's purely off the back of the funds under management we reported at the end of the year.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [4]

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Okay. Great. So then looking sort of back. So if you just take the [rollback of the] management fees that you did over FY '19 and apply it over the assets under management you had, it implies compression, but I understand that there's also timing differences and so on and potentially a contribution to institutional platform. So can you just talk a little bit around the composition of that management fees over the year including potentially [the things that you already stated?]

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [5]

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Yes. Will, the best place to go is Page 9 where you can see in the final 2 columns of the bar chart, that our management fees for the first half were $4.7 million and our management fees in the second half were $5.3 million, therefore, $10 million. In the first half of the year, it included 1 month management fees in respect of the Bell City assets. So if you deduct that off, you can get back to $9.1 million, and that number is the comparable number to the recurring management fees going forward of $11.3 million.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [6]

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Okay. All right. That makes sense. And then also looking forward, given the new focus or stronger focus on home and institutional capital, what do you think the outlook would be for management fees, presumably that comes down a fair bit, give an idea and one clear structure for (inaudible) partner?

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [7]

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Are you referring to the fee card or the gross fees?

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [8]

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The fee card is sort of what I am interested in.

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [9]

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Yes. The fee structure for larger funds and for larger capital investors is different to the more private capital investor funds. Having said that, they are larger funds. And importantly, the return for us is -- for Elanor is -- we believe, is greater, but we're dealing in larger investments and larger funds albeit the management fee per se will be lower than, say, traditional 1% ongoing management fee that we charge in a domestic product capital fund.

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Operator [10]

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(Operator Instructions) And our next question is from Edward Day from Moelis.

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Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [11]

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Paul, this one is for you just on Slide 11 with your capital management and raised offering of co-investment capital. Can you just talk through the process and sort of how you see that unfolding? Is that an ongoing process throughout the year or do you have specific initiatives in mind?

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [12]

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It's Glenn, Ed. No. It will be ongoing. And having said that, we are always looking at our co-investments and how -- and also the potential for new investors to come into those funds. So that recycling of co-investment capital is based on our program over the course of the year. And it supports our firm belief that we'll be able to grow our funds under management in a much more capital-light manner going forward, which was one of the function of recycling our existing co-investments but also having a requirement for a lower amount of co-investment and the establishment of new funds going forward.

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Paul Siviour, Elanor Investors Group - COO [13]

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And, Glenn, if I may just add one small thing to that, and that is the $31 million on that slide. I think people are very familiar with the $29 million sale proceeds from Merrylands that's funds that are due on the 30th of September. The $31 million does relate to particular initiatives that we have in relation to the selldown of particular funds and still leaves us generally with a co-investment in those funds of around 15%. So there are certain opportunities for further selldown as Glenn mentioned.

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Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [14]

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Okay. That's helpful. And, Glenn, maybe can you just talk about the sort of acquisition opportunity pipeline? What's the sort of reasonable targets, new funds for FY '20 and maybe '21?

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [15]

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Yes. Look, we have a target on it, but suffice to say that in our Hotels, Tourism and Leisure division and in our retail division, we have very strong work in progress and prospect. And furthermore, in our office division, we have very good work in progress. It's a more competitive sector than the other 2 sectors from our perspective. But across the 3 sectors in which we focus on, we have -- in 2 other sectors, we have very strong work in progress and prospect. And we're also pleased with the level of prospect in our office division and the funds that we are working on in that area as well. (inaudible) on the target, but we'll keep it general by saying that we're positive about our -- both our work in progress and new funds in pipeline and our prospect across the business.

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Operator [16]

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(Operator Instructions) And as there are no further questions from the telephone lines, I'd like to hand the call back to the speakers for closing remarks. Please go ahead.

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Glenn Norman Willis, Elanor Investors Group - CEO, MD & Director [17]

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Thank you again, ladies and gentlemen, for attending this call and for your interest in Elanor Investors Group. We're pleased to provide you with this update and to give you a sense of how we feel about the business in light of our broader growth ambitions -- broader, robust growth ambitions. I'd like to take this opportunity to thank my team -- the leadership team and the entire team across the business for their efforts and particularly for their enthusiasm for Elanor and for the endeavor to achieve on our broader growth objectives for the group. Thank you again, and we look forward to seeing you and speaking in 6 months' time. Thank you very much.

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Operator [18]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Goodbye.