Who said physical stores were dead? This small cap tells how it just sold a $129.5m mall

Ecommerce has boomed in 2020 but it is still possible to succeed in brick and mortar stores – just ask Elanor Investor Group (ASX:ENN).

Yesterday Elanor announced the sale of Auburn Central, owned by its separately listed property fund for $129.5 million.

Elanor only bought it four years ago but realised a 24.5 per cent internal rate of return (IRR) for four years and a 5 per cent premium to its present book value.

Yesterday shares in Elanor Group rose by 4 per cent while its property fund rose by over 10 per cent.

Elanor Group (ASX:ENN) and Elanor Retail Property Fund (ASX:ERF) share price charts

Death of retail greatly exaggerated

Elanor’s co-head of real estate and fund manager for the real estate fund Michael Baliva told Stockhead it was a “fantastic outcome” for investors.

“As a result of the sale, our gearing will go down to 17 per cent, we will have some cash in the balance sheet and what we will look to do is use that capacity to buy more of these value add type shopping centres, reposition them and continue to generate strong returns for investors,” he said.

But is there any point if people can just shop online?

Baliva said just because people can, it doesn’t mean they always will. In fact much of consumer staple spending still occurs in the physical world.

“What’s happened with COVID-19, people are truly understanding that all retail is not dead,” he said.

“What we’re seeing is a differentiation between the big malls, the department store and fashion-based malls are very different in their risk profile and returns against what we call neighbourhood and regional shopping centres which are about essentials and moving away from that discretionary spend.

“And that’s what we do – we buy assets where there’s weakness around that discretionary spend and reposition those assets.”

Bliva named supermarkets and personal services as the two categories people were unlikely to shop online for.

“People will go to those if it’s convenient,” he said.

“Shopping centres occupy large land masses as well in important locations with essential infrastructure.”

But how do you capitalise on it?

Matt Healy, the head of retail at Elanor, said the company has 13 centres, half part of the listed fund and the rest unlisted. It has two other centres undergoing a repositioning like at Auburn.

At Auburn, the company credited its move with closing a Big W outlet and adding ALDI and Tong Li supermarkets as well as improving car park access at the centre.

“A lot of people talk about it [remixing] but not a lot are doing it,” Healy said.

“We actively remix, release, reposition these assets to make them more relevant to the customers using that centre but attracting new customers.”

“So that’s very much what we’ve done. There was a Big W store doing $12 million of sales – in that same space we generated $64 million.

“It all sounds simple when you say it quickly but a lot of strategic research goes into understanding the demographic, the trade area, the tenancy gaps, what do we need to do to keep this centre relevant – both now and into the future.

“Not only does it make the asset more sustainable in terms of its income, but also because of the sustainability of the income, it re-rates the asset which assists in providing returns to your shareholders.”