Arena REIT Provides Solid Results11 August 2021
Arena REIT announces a net operating profit for FY21 of $51.9 million, an increase of 18.5% on the prior year.
Key contributors to higher operating income include growth in contracted annual rental growth and market rent reviews, acquisition of operating early learning centre (ELC) properties and development projects completed during FY20 and FY21. The result represents EPS of 15.2 cents, an increase of 4.5% over the prior year. Arena has paid a full-year distribution of 14.8 cents per security, up 6% on the prior year. Statutory net profit for the year was $165.4 million, an increase of 116% on the prior year.
Arena’s total assets increased by 14% to $1,151.5 million as a result of acquisitions, development capital expenditure and the positive revaluation of the portfolio. The revaluation uplift was the primary contributor to the 15% increase in NAV per security to $2.56 at 30 June 2021.
Occupancy was maintained at 100% and the portfolio’s existing long WALE was further increased to 20.1 years following the acquisition of seven operating ELC properties with initial weighted average lease expiry of 27.3 years, the completion of 14 ELC developments with an initial weighted average lease expiry of 20.8 years and a post balance date portfolio lease renegotiation with Goodstart which included an increase of 25 years of term on 87 ELC properties.
Government support to the sector was improved by the introduction of Childcare Subsidy (CCS) in July 2018 and the essential nature of the services provided by the ELC sector was reinforced through the various COVID-19 related funding commitments over the last 12 months. The Federal Government has recently committed a further investment of $1.7 billion to the sector to support ongoing economic recovery in the short term; and improve workforce participation, gender equality, women’s financial security and economic activity over the medium to long term.
Commenting in respect of today’s announcement, Arena’s Managing Director Mr Rob de Vos said “Despite a challenging external environment, Arena has achieved strong portfolio and investment outcomes in FY21. Our portfolio of social infrastructure property has also facilitated positive outcomes for the Australian communities that access our properties to utilise the essential services provided by our tenant partners.”
Mr de Vos said “Early learning and healthcare services are integral to economic recovery and improving community outcomes. Arena remains well positioned to navigate the ongoing and emerging challenges arising from COVID-19, including potential changes in economic conditions. We also remain well positioned to consider new opportunities that are consistent with strategy and deliver on Arena’s investment objective.”
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The REIT commenced the year with a security price of $2.17 against a NAV of $2.22 (-2% discount to NAV) and closed the year at $3.60 (41% premium to NTA). The REIT provided a 14.8c distribution for FY21, equating to a 6.8% yield, which together with a 66% lift in unit price would provide investors with a total return of 72%.
Key financial and operational highlights for the period are:
- Statutory net profit $165.4 million, up 116% on prior year
- Net operating profit (distributable income) of $51.9 million, up 18.5% on prior year
- Earnings per security (EPS) of 15.2 cents, up 4.5% on prior year
- Distributions per security (DPS) of 14.8 cents, up 6% on prior year
- Total Assets of $1,151.5 million, up 14% on 30 June 2020
- Net Asset Value (NAV) per security of $2.56, up 15% on 30 June 2020
- Gearing 19.9%, increased from 14.8% at 30 June 2020
- 100% of contracted rent collected in FY21
- FY22 DPS guidance of 15.8 cents per security, reflecting growth of 6.8% on FY21
- 100% occupancy maintained
- Average like-for-like rent review increase of 3.3%
- Weighted average lease expiry (WALE) increased to 20.1 years
- Portfolio revaluation uplift of $107.6 million
- Portfolio weighted average passing yield of 5.77%
- Acquired seven operating ELC properties at an average net initial yield of 6.1% on total cost
- Acquired nine new ELC development projects with forecast total cost of $54 million
- 14 ELC developments completed at an average net initial yield on total cost of 6.6%
Rent reviews during the year resulted in an average like-for-like rent increase of 3.3%. Contributing to this result were 25 market rent reviews from FY20 and 11 from 1H21 which were all resolved during FY21 at an average increase of 6.5%.
100% of contracted rent has been receipted for the period 1 July 2020 to 30 June 2021 and Arena’s origination and development programs remain largely unaffected by COVID-19. Arena’s medical centre properties are assisting in the national COVID-19 vaccination program and there is precedent for a strong recovery in elective procedures following easing of any COVID-19 related restrictions. The essential nature of the services provided by the ELC sector was reinforced through the various COVID-19 related funding commitments over the last 12 months.
Acquisitions & Developments:
Seven operating ELC properties were acquired at an average net initial yield of 6.1% on total cost, with an initial weighted average lease expiry of 27.3 years. 14 ELC developments were completed at an average net initial yield on total cost of 6.6%, with an initial weighted average lease expiry of 20.8 years.
The development pipeline comprises 1512 ELC projects with a forecast total cost of $91 million, with $57 million of capital expenditure outstanding as at balance date. The forecast weighted average initial yield on total anticipated cost for the development pipeline is 6.2%.
At 30 June 2021, Arena’s portfolio comprised 226 ELC properties, 12 6 ELC development sites (86% of portfolio by value) and 11 healthcare properties (14% of portfolio by value). 84 ELC properties and seven healthcare properties were independently valued and the balance of the portfolio was subject to directors valuations during FY21. A revaluation uplift of $107.6 million was recorded for the period, equivalent to an increase of 11.8%.
The portfolio’s weighted average passing yield firmed 45 basis points to 5.77%. The weighted average passing yield on the ELC portfolio firmed 40 basis points to 5.84% and the healthcare portfolio firmed 78 basis points to 5.34%
Strengthening the REIT’s capital position
- Borrowing facility of $330 million, weighted average remaining facility term of 3.7 years.
- Post balance date extension of $130 million facility tranche from 31 March 2023 to 31 March 2026
- Gearing 19.9%, increased from 14.8% at 30 June 2020
- Weighted average cost of debt was 2.65% at 30 June 2020 compared with 3.15% as at 30 June 2020
- 81% of borrowings hedged for an average term of 4.4 years at 1.67% p.a. incorporating interest rate hedging completed post 30 June 2021
Post balance date, Arena extended a $130 million facility tranche from 31 March 2023 to 31 March 2026, increasing the weighted average remaining facility term to 3.7 years at 30 June 2021 with no debt expiry until March 2024. Arena’s weighted average cost of debt fell to 2.65% as at 30 June 2021 compared with 3.15% as at 30 June 2020.
The REIT reconfirms that based on information currently available and barring any unforeseen events or further COVID-19 impacts, FY22 Distribution guidance 15.8 cpu, reflecting a growth of no less than 6.8% over FY21. This equates to a forecast FY22 Distribution yield of 4.1% based on the closing price as at 1 July 2021 of $3.82.
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