1 March 2020
Arena REIT (ARF) reported solid FY18 results largely in line with market expectations with solid headline numbers with growth.
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Real Estate||52-Week Range: A$2.13 – 2.54|
|Market Cap: A$613.5m|
We rate ARF as a Buy for the following reasons:
- Upside from ‘Jobs for Families Package’ now forms part of larger Omnibus Savings and Childcare Reform Bill 2017 which has seen further funding of $37bn to the sector (over four years) from 1 July 2018.
- High quality property portfolio in childcare centres (86% of total) and medical centres (14%) 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.
- Potential upside from its development pipeline in childcare centres.
- Solid balance sheet with low gearing.
- Strong and experienced management team.
- Strong tenant profile (21% listed on ASX; 42% not for profit; 37% private operator
We see the following key risks to our investment thesis:
- 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 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.
Arena REIT (ARF) reported solid FY18 results largely in line with market expectations with solid headline numbers with growth
ARF saw outstanding growth in Net Operating Profit (distributable income) increasing by +21% to $34.7m on the prior year – driven by rental income growth from annual rent reviews and income from acquisitions and development projects completed in FY17/18.
Other key points compared to the previous corresponding period (pcp) include:
1. EPS up +6.5% to 13.1 cents
2. DPS up +6.7% to 12.8 cents.
3. Total assets up +17% to $726.1m, leading to an increase of +7.1% Net Asset Value to $1.97 per security.
4. Gearing down to 24.7% (from 27.5% in FY17).
In terms of guidance figures, FY19 DPS has been forecasted at 13.5 cents per security, reflecting growth of +5.5% on FY18. ARF trades on 15.5x PE20 and 6.0% dividend yield – reiterate Buy.
- Solid property fundamentals: Key metrics include:
1. Average like-for-like rent reviews increasing by 2.6%, due to a “high level of ‘Fixed’ or ‘Greater of 2.5% or CPI’ reviews”, with the number of market rent reviews during FY18 completed increasing by 6.3% on average.
2. Weighted average lease expiry (WALE) increasing slightly by +0.1 years to 12.9 years.
3. 100% portfolio occupancy.
4. Portfolio revaluation uplift of $31.6m (reflecting an increase of +5.3%) on all 214 properties. ARF also acquired a portfolio of nine Early Learning Centre (ELC) properties for development with a forecast average yield on cost of 6.25%, each with a triple-net lease for an initial 20 year term and annual rent reviews at a minimum of 3% per annum.
- $31m Development pipeline underway. During FY18, 14 ELX development projects were completed, with a total cost of $88m and an initial yield in cost of 6.7%. ARF’s development pipeline is currently comprised of five ELC projects, forecasted to cost $31m ($14m CAPEX remains outstanding). The weighted average initial yield on costs for this pipeline stands at 6.5%, with two projects completed since balance date.
- Pressure on occupancies? In the early learning sector, management has stated that some centre operators have experiences pressure on occupancies due to
1. Families reaching their subsidy cap prior to the end of the financial year. However, this should be alleviated with “the new childcare government funding package, which took effect in July 2018, targeted at improving the affordability of childcare for lower and middle income working families, and is expected to increase childcare participation for these families over time. More immediately, it is expected to alleviate the affordability pressures faced by the majority of families that are currently reaching their subsidy cap prior to the end of each financial year”.
2. Potential ELC oversupply, with “an estimated 289 net new centres (+4.2%) opened in calendar year 2017 (315 new centres, 26 closed centres), and a further net 224 centres opened in the first half of calendar year 2018.
- Strong financial position. During the year,
1. Management raised $69.3m of new equity ($55m via an institutional placement, $10m via security purchase plan in August 2017 and a further $4.3m via the dividend and distribution reinvestment plan which remains open to 100% equity fund development portfolio acquisitions.
2. ARF’s borrowing facilities have been refinanced to extend duration and increase limits, leading to a 4.4 year weighted average debt duration (from 2.5 years in FY17) and an increased facility limit to $230m.
3. Notwithstanding the extended debt and hedge terms, ARF’s all- in weighted average cost of debt is at 3.85% p.a (78% of borrowing hedged for an extended average term of 5.9 years at 2.44$ p.a.). 4. Gearing reduced to 24.6% from 27.5% in FY17.
- Solid FY19 guidance. ARF has provided distribution guidance of 13.5 cents per security for FY19, reflecting a +5.5% increase over FY18, and compound annual growth of DPS since listing (June 2013) of 8.7% p.a.
FY18 RESULTS SUMMARY…
Figure 1: ARF FY18 Summary
Source: Source: Company, BTIG
Figure 2: ARF Financial Summary
Source: BTIG, Company, Bloomberg
Arena REIT (ARF) owns, develops and manages a portfolio of childcare properties and healthcare facilities. As of FY18, ARF property portfolio comprised 207 ELC properties and development sites (86% of portfolio value) and 7 healthcare properties (14% of portfolio value). The portfolio is 100% occupied by 19 tenants, the largest three being Goodstart Early Learning (40% portfolio income), Primary Health Care (15% of portfolio income) and Affinity Education (15% portfolio income). The majority of Arena’s portfolio is located in Australia’s eastern states of Queensland (33% of portfolio value); Victoria (32% of portfolio value); and NSW (22% of portfolio value).