Arena REIT shows valuation gains as rents rise

16 December 2022

Strong macroeconomic drivers continue to support the Australian Early Learning Centre (ELC) sector with Arena REIT benefiting from strong rental growth.

Arena REIT’s (Arena’s) portfolio valuation program is expected to result in a net revaluation uplift of approximately $19 million for the six month period ending 31 December 2022, representing an increase of 1.3% from 30 June 2022 and an increase equivalent to $0.055 in Net Asset Value (NAV) per security.

A total of 51 Early Learning Centre (ELC) assets and one healthcare asset were independently valued as at 31 December 2022, with the remaining ELC and healthcare assets and ELC development projects subject to Directors’ valuation. These portfolio revaluations remain subject to review by Arena’s external auditors.

A summary of the approximate $19 million portfolio revaluation uplift is detailed below:

The valuation effect of the expansion in passing yields is offset by increases in market rents resulting in an overall positive revaluation outcome.

In late November 2022 the Australian Federal Government’s Cheaper Childcare Bill successfully passed through the Senate providing improved affordability measures from 1 July 2023,including;

  • Increasing the maximum Childcare Subsidy (CCS) rate to 90% for the first child in care;
  • Retaining the increased CCS rate at a maximum of 95% for subsequent children in care; and
  • Increase the CCS for every family with one child in care earning less than $530,000 in annual household income.

These measures have been designed to improve lifelong learning prospects of Australian children, increase workforce participation, improve gender equality, including women’s financial security and to stimulate broader economic activity over the medium to long term.

Arena’s ELC tenant partners reported the following underlying business operating data as at 30 September 2022:

  • Average daily fee of $127.31, +5.22% from March 2022;
  • Like-for-like operator occupancy remains robust and higher than any prior corresponding period over the past six years; and
  • Net rent to revenue ratio of 10.7%.

Arena added seven projects to the development pipeline during HY23 taking the total pipeline to 15 projects with a forecast total cost of $106 million. Approximately $67 million of capital expenditure is required to complete the projects. The forecast weighted average initial yield on total forecast cost for the development pipeline is 5.4%.

Two operating ELC properties were acquired at an average net initial yield of 6% on total cost, with an initial weighted average lease expiry of 25 years. Seven ELC developments were completed at an average net initial yield on total cost of 5.9%, with an initial weighted average lease expiry of 20 years.

Arena’s rent review profile remains well placed with regard to inflation uncertainty, with annual lease rent reviews predominantly subject to an increase of the higher of an agreed fixed increase or CPI.

The Rent reviews during HY23 resulted in an average like-for-like rent increase of 6.45%.

Arena has agreed terms to increase its syndicated borrowing facility by $70 million to $500 million and extended a $150 million facility tranche from 31 March 2024 to 31 March 2028 during HY23. As at 31 December 2022 the weighted average remaining facility term will be 4.2 years with no debt expiry before 31 March 2026.

Arena’s weighted average cost of debt was 3.5% during HY23 compared with 2.9% as at 30 June 2022 and 80% of borrowings are hedged for a weighted average term of 4.1 years at a weighted average rate of 1.93% as at 31 December 2022.

As at 31 December 2022, undrawn debt capacity of $148 million will be available to fund the development program and future growth opportunities.

Arena REIT has agreed terms for an inaugural Sustainability-Linked Loan (SLL) over its existing debt facility, totalling $500m; Arena’s Sustainable Finance Framework and SLL are aligned to the Sustainability-Linked Loan Principles.

Under the SLL, Arena is incentivised to accelerate our existing sustainability journey, with key performance indicators and associated sustainability performance targets based on the following material sustainability areas:

  • Maintaining organisational carbon neutrality, delivering a detailed emissions reduction plan for operations and assets under management and reducing scope 1 and 2 greenhouse gas emissions from operations and assets under management;
  • Further increasing the rate of the rollout of solar renewable energy systems on Arena’s property portfolio; and
  • Issuing our inaugural and ongoing annual Voluntary Modern Slavery Statement and refining Arena’s Modern Slavery response in line with our roadmap.

Full year 2023 distribution guidance of 16.8 cents per security

Arena reaffirms full year 2023 distribution guidance of 16.8 cents per security reflecting growth of 5% over financial year 2022.