- Statutory Profit: $19 million.
- Underlying Cash-Based Net Operating Profit: $31 million, up 3% on half year '23.
- Net Asset Value Per Security: Stable.
- Portfolio Passing Yield: Expanded by 10 basis points to 5.26%.
- Average Like-for-Like Annual Rent Increase: 5.4%.
- Portfolio Occupancy: 99.7%.
- Completed Development Projects: 3 early learning centers with a total investment cost of $22.7 million.
- Development Pipeline: 7 new projects with an average yield on completion of 6.3%.
- Operating EPS: $0.087, up 1.5% from the prior comparative period.
- Property Income Increase: 7%, normalized to 9% when adjusted for asset sales.
- Rent Collections: $300,000 of COVID-related deferred rent collected; all COVID-related rent deferrals now fully collected.
- Distribution for First Half: $0.087 per security, growth of 3.6% on the comparative period.
- Investment Property Growth: 2%, with $33 million invested in developments.
- Gearing: 21.7%, well below the maximum range of 35%-40%.
- Available Liquidity: $144 million.
- Weighted Average Debt Term: 3.2 years.
- Weighted Average Cost of Debt: Increased from 3.95% to 4.1%.
- Hedge Cover: 80% for a remaining weighted average term of 3.1 years at a weighted average rate of 2.03%.
- Portfolio Value: $1.54 billion across 275 properties.
- Average Daily Fees for Childcare: $140 per day, up 10.5% from the prior year.
- Rent Affordability: Stable at 10.6% of tenant partners' gross revenue.
- Distribution Guidance for FY '24: $0.174 per security, an increase of 3.6% on FY '23.
Release Date: February 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Arena REIT (ASX:ARF, Financial) reported a statutory profit of $19 million and an underlying cash-based net operating profit of $31 million, up 3% from the previous half year.
- The company completed three early learning center development projects and added seven new projects to its development pipeline, supporting future earnings growth.
- Arena REIT (ASX:ARF) achieved all targets on its sustainability-linked loan and advanced its solar renewable energy projects, now installed at 88% of the portfolio.
- The portfolio maintained a high occupancy rate of 99.7%, reflecting the quality of assets and strong community demand for services.
- Arena REIT (ASX:ARF) reaffirmed its distribution guidance for FY24 at $0.174 per security, reflecting a 3.6% increase from FY23.
Negative Points
- The real estate investment environment remains challenged by higher interest rates, impacting the development and acquisition market.
- Finance costs increased by $1.7 million due to higher interest rates and increased debt volume.
- The statutory profit was lower at $19 million, primarily due to negative asset revaluations and derivative valuations.
- Construction cost inflation has been a challenge, although there are early signs of moderation.
- The healthcare sector faces short-term challenges, although there is potential for medium-term opportunities.
Q & A Highlights
Q: The first question is just on the development book. So you're on cost clearly improving, those 2 projects being added at 6.3%. Just keen to hear how tenants (inaudible) further expansion from here? Any additional color you can provide on the sort of pricing on new developments you're discussing at the moment being considered at, please?
A: Yes. Thanks for the question, Caleb. So we're still definitely seeing network expansion being discussed and thought through from tenant partners. I guess the challenge for us has been those input costs for developments have been high relative to early years, which has meant to achieve higher yields. We've been looking at increases in rent. We've been more comfortable with those increases in rent as a result of, I guess, daily fees being increased as well as the occupancy. So we're seeing a healthy tenant market there. And we are seeing early signs, as I mentioned, of some of the input costs starting to come down or at least flat or not have as much inflation. So yes, definitely demand out there. I think the other thing I'd point out is that we're starting to see more discussions from smaller developers that have been holding land for some time and getting caught on holding costs. So we're seeing enough deal flow coming through the door. The challenge is always making sure that we set rents at a sustainable amount for our tenant partners that does (inaudible).
Q: And with all of those phases going into particularly on the rental side, is 6.3% that level we should be thinking about on a go-forward basis? Or is it still room for improvement, do you think?
A: I think there's somewhere between 6.25% and 6.5% is kind of where we've been putting new business and I think that feeling comfortable for us and tenant partners at this point.
Q: My second question, just around your comments on particularly direct to market valuations in ELC remaining really strong. Conscious that you've got a lot of balance sheet capacity up to 35% to 40% you've spoken to previously. But is there any opportunity to maybe take advantage of that market remaining really tight and selling down some of the older relatively underperforming assets in the current portfolio at all?
A: Yes, there's always, always the case. I think this is probably the first half. We haven't actually had divestments. We did quite a lot of divestments, particularly in health care in the last period, as you'll remember. But we did do a lot of cleaning up. We're watching -- we've obviously got the benefit of every one of our properties providing operating data and feeling comfortable with the positions we've got. Frankly, we're starting to see more transactions. We expect to see more transactions. And as I mentioned, we're expecting perhaps yields to push out a little further from where they are at the moment. And frankly, we'd rather be buyers than sellers in a market where we've got perhaps competitors selling assets. So that's one point. But look, there's always room for sort of trimming, Caleb. So you certainly expect us to continue to do what we have in the past is sell a few out and then recycle those proceeds back into development projects.
Q: Great. And my final question is just on the health care side. So you flagged that there's a potential that some of those opportunities are starting to look more attractive. Is that more around the tenant side, improving outlook for tenants? Or is that a pricing movement you're starting to see? Just kind of get a little bit more color on what's giving you the confidence or the expectation that you had that there could be some opportunities to come up in that?
A: It's more the latter. It's actually -- I think the pricing is starting to come back into frame. We've always been attracted to the macro and health care, (inaudible). We thought that the sector got bid up too high over the last couple of years, we're starting to see a retreat on some of that in some areas. But as I pointed out, we're in a fortunate position, we can be patient and watch that if that does come, we're certainly ready to participate.
Q: Just a follow-up on the development. Could you just expand on what the dollar cost per place is for these new projects?
A: So you're probably better looking at sort of rental is probably a better example. Steve, I'll probably give a bit of context here. So rentals are sort of pushing out around that sort of high 3%s and into 4%s and in some instances, over 4.5%. That's probably been a bit of a red light for us previously, as a sort of prior call. But it's now sort of the new norm. If you looked at anywhere in Australia at the moment, it's pretty hard to sort of develop new stock at under sort of 4.2% to 4.5% for 100 place center. So we're getting used to that, but that's about where on a rental basis is and you can sort of work back from the yield about what that looks like on the capital cost, but that's, I think, the important metric that we should be looking at.
Q: And on the leasing spread, obviously, there's a strong outcome there. If there was no cap, where do you kind of expect those leasing spreads could have been -- given that revenue seems pretty sustainable?
A: Yes, that's a good question. We -- it's a bit of a mixed bag on the ones that we completed. So all of them are over 7.5%. Some sort of dribbled over, some were a bit higher. And that's got to do with location and levels of profitability and all things that sort of go into that. But I think it is direction -- directionally, there is more market rental growth in the system and we do feel comfortable that at a gross accommodation cost of 10.6%, there's room there for operators. It is sensible, I did try and emphasize on the call, but there are other expenses that our operators are sort of dealing with at the same time, not only accommodation costs, but labor, primarily going up too. So we are mindful of all of that in our usual way to be careful about where we're sitting initial rents.
Q: Could you provide more details on the sustainability initiatives and their impact on the portfolio?
A: We've made good progress on our sustainability programs, achieving all of the targets on our sustainability-linked loan and advancing our solar renewable energy projects that are now installed at 88% of the portfolio. These initiatives are lowering utility costs for our tenants at a time of significant increases in other operating expenses for their business. Some of the specific sustainability outcomes we've worked on and achieved over the last 12 months include achieving zero organizational Scope 1 and 2 emissions and a 13% reduction in the intensity of Arena's Scope 3 emissions for assets under management and facilitating
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
