Arena REIT (ARF): The listed childcare and medical centre owner reported a full-year trading update ahead of its annual results later this month. The HNW Income Portfolio has a 3% weight to ARF.

Key Points:

  • What happened? Edge Early Learning, a childcare operator that leases 31 ARF-owned properties or 14% of rental income, has asked to defer its rent as it pursues a corporate restructure. Edge had paid July’s rent but missed its first weekly payment on the 3rd of August.
  • What is happening now? ARF determined not to agree to this deferral and, when Edge missed last week’s rent, issued a 21-day notice to pay the rent or move out.
  • Annual Results delayed: Due to the 21-day notice, ARF has decided to delay its annual results, which were to be held on Wednesday, until next week when management can provide more colour on the details.

Our Take:

ARF owns properties in a tight market for early learning centre rentals, which will likely see new childcare operators move into the premises if Edge collapses. With $4 million in cash from Edge guarantees, ARF has until October to find new operators before they start to lose rental income. Following today’s share price move, Atlas is likely to add to the position depending on how our meeting with ARF management pans out next week.

Portfolio Strategy:  ARF is a well-managed company that owns 284 childcare and medical centres across Australia, which are exposed to tenants offering non-discretionary services such as childcare and healthcare, both of which enjoy bipartisan support.  ARF pays a solid, growing yield directly linked to inflation and is paid quarterly, providing regular cash flow to our investors. The next major set of lease expiries is in 2037 and 2038, so we have few near- and medium-term concerns. ARF trades on a 7.3% yield paid quarterly. The release was light in detail but caused a big reaction.

ARF finished down -22% to $2.56, taking $300M off ARF’s market cap for a tenant that pays $15M in annual rent and equates to 20 years’ worth of rental receipts.  We will discuss both Westpac and Arena at the IC tomorrow morning