Arena REIT (ARF):  The listed childcare and medical centre owner reported their first half 2023 results which nice and consistent. One of the key reasons we like ARF is the predictability of company earnings with 100% occupancy, government support and a lease term of close to 20 years there is not much scope for nasty surprises.

Key Points:

  • Profits up: Net profit up +9% to $30 million due to the combination of annual rental growth, additional income from some acquired assets and new rental income from child centres developed in house by ARF. These gains offset an increase in ARF’s funding costs.
  • Dividends Up: interim dividend 8.4 cents up +6% and a little weaker that earnings growth as ARF sensibly retains capital for their development pipeline.
  • Operationally rock solid: ARF enjoys 100% occupancy and an average 19.5 years average weighted lease term, by far the best in the entire LPT sector. In late November 2022 the Australian Federal Government’s Cheaper Childcare Bill successfully passed through the Senate. This increases the maximum childcare subsidy for 90% for the first child in care and 95% for the second and increases the earnings threshold for subsidies to $530,000 annual household income.
  • Balance sheet a highlight: ARF’s gearing remains low at 21%, with debt hedged for the next 4 years. Consistent with other companies in the portfolio we strongly prefer companies with lower levels of gearing as they face fewer issues than highly indebted companies in a rising rate environment.  ARF’s is very conservatively geared compared with loan covenants of less than 50% and 2x interest coverage (currently 6x)
  • Outlook:  Full year distribution guidance 16.8 cents or +5% on FY22, 90% of the rent reviews due over the next 4 years are linked to CPI so sustained higher inflation will flow through to company earnings.

Arena REIT is held in several of the HNW portfolios and is a well-managed company exposed to tenants offering very non-discretionary services such as child 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.

ARF was up 1% to finish at $3.74 – one of the few spots of green on a red day.