Arena REIT (ARF) reported as expected FY22 results with the Company reporting FY22 net operating profit of $56m, up +8.4% relative to the previous corresponding period

Investment Thesis:

High quality property portfolio in childcare centres (85% of total) and medical centres (15%) with strong operating metrics (such as long weighted average lease expiries, triple net leases, and high-quality tenants) and outlook for childcare services and healthcare services (especially with aging population).
Potential positive regulatory changes to childcare subsidies (i.e. increase in subsidies for childcare services from ~28hours (or 3 days) to 4 days) and incentives for parents to work.
Increasing macro trends of increased female labour participation rates as a key driver for ELC demand.
Potential upside from its development pipeline in childcare centres.
Solid balance sheet with low gearing.
Strong and experienced management team.
Strong tenant profile.

Key Risks:

Property portfolio fundamentals risks. Assets in the portfolio are subject to risks from deterioration in the property fundamentals such as cap rates, rents received from tenants and rental growth, expense risks, net asset values, occupancy rates, tenancy risk and costs, weighted average lease expiry. Deteriorating economic and demographic trends (such as lower population growth or lower GDP growth) will impact assets.
Development risks. Poor execution or delays of development or redevelopment of existing properties may affect the rental income and value of assets of the Company.
Adverse interest rate movements affect bond-proxy stocks. Deterioration in credit markets may result in changes to the availability of borrowings, impact gearing levels and debt covenants and the interest rates charged by lenders resulting in the Company borrowing at higher interest rates, thereby affecting distributions.
Management performance risks. The Company relies on the expertise of managers to manage assets, asset recycling (acquisitions and divestments), and to execute the strategy.

Key Highlights:

FY23 Guidance + Outlook Commentary. ARF provided a solid FY23 Guidance, stating “FY23 DPS guidance of 16.8 cents per security, reflecting growth of 5% on FY22”.
ELC sector/portfolio. “Australia’s new Labor Federal Government has committed to further reduce the cost of childcare by lifting the maximum Child Care Subsidy (CCS) rate to 90% for the first child in care, and to keep the recently increased CCS rate at a maximum of 95% for subsequent children in care. The Government also intends to reduce the rate at which the CCS tapers with household income and lift the maximum household income at which the CCS ends from $354,305 to $530,000… Strong structural demand for services and a record female workforce participation rate continue to drive increased long day care (LDC) participation rates over the medium to long term”.
Healthcare portfolio. “Strong structural macroeconomic drivers continue to support Australian healthcare accommodation, including a growing and ageing population and increased prevalence of chronic health conditions. Strong occupancy has been maintained across the specialist disability accommodation portfolio. Healthcare properties remain strongly sought after, with increased domestic and international interest in Australian healthcare property and increasing interest in social infrastructure property more generally”.
FY22 Results Highlights. Relative to the pcp: Statutory net profit $334m, up 102% on prior year.
Net operating profit (distributable income) of $56m, up 8.4%, with 100% of contracted rent collected in FY22.
Earnings per security (EPS) of 16.3 cents, up 7.2%.
Distributions per security (DPS) of 16 cents, up 8.1%.
Total Assets of $1.52bn, up 32% due to acquisitions, development capital expenditure and positive revaluation of the portfolio. The revaluation uplift was the main contributor to the 32% increase in NAV per security to $3.37 at 30 June 2022. Net Asset Value (NAV) per security of $3.37, up 32%.
Gearing 20.2%, slightly up from 19.9% as of 30 June 2021.

Company Description:

Arena REIT (ARF) owns, develops and manages a portfolio of childcare properties and healthcare facilities.

(Source: Banyantree)

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