Arena REIT has today announced a net operating profit for the half-year ended 31 December 2021 of $27.5 million, up 11% on the pcp.
Key contributors to the result were income growth from contracted annual rent reviews, acquisitions and development projects completed in financial year 2021 (FY21) and half year 2022 (HY22).
This result equated to EPS of 8.0 cents, up 10% on the pcp. Arena has paid DPS of 7.9 cents for the half-year, an increase of 7.5% on the pcp and financial year 2022 (FY22) forecast distribution guidance has been increased from 15.8 to 16.0 cents per security (cps), an increase of 8.1% on FY21.
Statutory net profit for the half-year was $185.8 million. This was an increase of 204% on pcp predominantly due to an increase in operating profit, investment property valuation uplift, profits realised on the sale of divested properties and the positive revaluation of interest rate hedges.
Arena’s total assets increased by 17% from 30 June 2021 to $1.35 billion as a result of acquisitions, development capital expenditure and the positive portfolio revaluation. The valuation uplift contributed to an 18% increase in NAV of 46 cents per security to $3.02 at 31 December 2021.
Commenting in respect of today’s announcement, Arena’s Managing Director Mr Rob de Vos said, “I would like to acknowledge the significant efforts and achievements of our tenant partners under ongoing challenging conditions. I’d also like to express my appreciation to the Arena team for their dedication and hard work and true partnership approach in delivering positive community and investment outcomes.”
Highlights
- 100% of the portfolio facilitates access to essential community services
- 100% portfolio occupancy maintained
- 100% of contracted rent has been received for the period 1 July 2021 to 31 December 2021
- Weighted average lease expiry (WALE) of 19.8 years
- Portfolio valuation uplift of $153 million
- Portfolio weighted average passing yield 5.14%
- Continued to rollout the installation of solar renewable energy systems
- One operating early learning centre (ELC) and eight ELC development sites acquired
- Terms agreed post balance date for the acquisition of six operating ELC properties for $38 million
- Three development projects completed
- Two ELC properties divested at an average premium of 15% to book value
- Development pipeline of 19 ELC projects at a forecast total cost of $122 million2
- Average like-for-like rent review increase of 3.6%
Sustainability is integral to Arena’s investment approach and best positions Arena to achieve positive long term commercial outcomes.
Arena’s properties facilitate access to essential community services:
- ELCs provide early childhood education and care which allows parents and carers the opportunity to remain in, join or re-join the workforce.
- Medical centres provide local, community-based primary health care services.
- Specialist disability accommodation is designed to provide a better quality of life for residents with high physical support needs.
Key FY2022 sustainability goals include:
- Collaborating with tenant partners on ESG initiatives.
- Reporting on collaboration with tenant partners regarding installing solar renewable energy.
- Reporting on renewable energy production for properties where it has been installed.
- Outlining an organisational carbon emission reduction plan.
- Outlining a carbon emission reduction plan for Arena’s property portfolio.
- Outlining a plan to align with the Task Force on Climate-Related Financial Disclosures (TCFD).
- Voluntarily opting into Modern Slavery reporting.
- Implementing company specific policies/procedures for managing ESG risks.
- Extending and disclosing Arena’s approach to various employee initiatives.
COVID-19 update
All of Arena’s properties are open and in operation. Arena’s origination and development programs are largely unaffected and all tenant partners are compliant with COVID-19 related rent relief agreements.
The Portfolio
Arena has agreed terms post balance date to acquire a portfolio of six operating ELC properties for $38 million with a forecast initial yield on total cost of 5.6% to be leased to an existing tenant partner on a 25 year initial lease term. Two ELC properties were divested for $10.1 million at an average premium of 15% to book value.
One operating ELC property was acquired for $9.4 million at a net initial yield on total cost of 4.7% and three ELC development projects were completed for $16.9 million at a net initial yield on cost of 6.4%, each with an initial lease term of 20 years, and eight new ELC development projects were acquired.
Portfolio occupancy was maintained at 100% and the portfolio WALE is 19.8 years following the ELC acquisition and developments completed during the half year.
At 31 December 2021, Arena’s property portfolio comprised 245 ELC properties and development sites (87% of portfolio value) and 11 healthcare properties (13% of portfolio value). All 256 properties were revalued during HY22, with 51 properties independently valued and the remaining 205 at directors’ valuation. A valuation uplift of $153.3 million was recorded, an increase of 13.8% from FY2021.
The portfolio’s weighted average passing yield firmed 63 basis points to 5.14%. The weighted average passing yield on the ELC portfolio firmed by 71 basis points and healthcare portfolio firmed by 12 basis points.
Annual rent reviews have been completed for 56.3% of portfolio income in HY22, with an average like- for-like rent increase of 3.6% achieved.
ELC sector update
Strong macroeconomic drivers continue to support the Australian ELC sector. Demand for services and record female workforce participation rate have been driving increased long day care participation rates over the medium to long term.
Government support was improved by the introduction of the Childcare Subsidy (CCS) in July 2018 and strongly reinforced through various COVID-19 related funding commitments.
The Federal Government brought forward an additional $1.7 billion commitment to the sector, with the removal of the annual CCS cap to apply in FY22 and a higher CCS for families with more than one child in care to commence from 7 March 2022, in order to:
- Support the economic recovery from COVID-19 in the short term; and
- Improve workforce participation, gender equality, women’s financial security and economic activity over the medium to long term.
Arena’s healthcare portfolio continues to perform well
Development pipeline of $122 million
The development pipeline now comprises 19 ELC projects with a forecast total cost of $122 million; $71 million of forecast capital expenditure remains outstanding. The weighted average initial yield on forecast total cost on completion of the development pipeline is 5.9%.
Capital Management
- Gearing 18.8%, decreased from 19.9% at 30 June 2021
- Weighted average cost of debt decreased to 2.6% p.a. as at 31 December 2021
- 76% of borrowings hedged for weighted average term of 4.7 years at 1.60% p.a.
- Weighted average facility term of 3.9 years with no expiry until March 2024
Low risk funding profile maintained
Arena’s weighted average facility term is 3.9 years with no near term expiry and the weighted average cost of debt fell 5 basis points to 2.6% p.a. as at 31 December 2021. Interest rate hedging decreased during the period with 76% of drawn debt hedged at 31 December 2021 compared with 81% at 30 June 2021. The weighted average hedge term was 4.7 years at an average rate of 1.60% compared with 4.4 years at 1.67% as at 30 June 2021. Arena raised $4.9 million during the half-year via the DRP, which remains open.
At 31 December 2021, Arena’s gearing was 18.8%, decreased from 19.9% at 30 June 2021 with undrawn debt capacity of $155 million to fund the post balance date ELC portfolio transaction of $38 million, the balance of the development pipeline of $71 million, and future growth opportunities.
Commenting on Arena’s financial position, Chief Financial Officer Mr Gareth Winter said, “Arena’s balance sheet gearing and expanded debt facilities fully fund the development pipeline with capacity to deploy capital into further growth opportunities.”
Outlook
FY22 forecast distribution guidance increased to 16.0 cents
FY22 forecast distribution guidance has been increased from 15.8 to 16.0 cps, reflecting growth of 8.1% over FY21.
Mr de Vos said “Early learning and healthcare services are integral to improving community outcomes. This important theme underpins Arena’s portfolio value proposition which provides long term income predictability with the prospect of income growth with inflation protection.”
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