Arena REIT (ARF): The listed childcare and medical centre owner reported its 2025 results, which were better than expected. One of the key reasons we like ARF is the predictability of company earnings. With 100% occupancy, government support, and a lease term of 19 years, there is little scope for unexpected surprises.  The HNW Income Portfolio has a 4% weight to ARF.

Key Points:

  • Profits Up: Net profit increased by +17% to $73 million, driven primarily by a 15% increase in rents collected and the completion of developments and acquisitions. ARF continues to have 100% occupancy and an average weighted lease term of 18 years, by far the best in the entire LPT sector, with the first expiries in 2033.
  • Distributions Up: ARF increased distributions by +5% to 18.25 cents per security, representing a payout ratio of 99%. Unlike office or retail landlords, ARF benefits from “triple net leases,” which hold tenants responsible for the building’s insurance, taxes, utilities, and all capital expenditures.
  • Strong Balance Sheet: ARF’s gearing ratio stands at 22%, with 70% of the debt hedged over the next three years. ARF continues to remain conservatively geared and is a long way from meeting its loan covenants, which require a gearing ratio of no greater than 50% and 2 times interest coverage (currently 6 times).
  • Regulatory Beneficiary: To boost early childcare staff availability, the Labour government has agreed to a 15% wage increase for early childcare workers, provided that services agree to limit daily fee increases to 4.4%. This wage increase will ultimately benefit ARF by attracting more financially stable tenants, demonstrating the underlying demand for the assets that ARF provides.
  • Outlook: ARF management gave guidance of FY26 distributions of 19.25 cps, representing a +5.5% increase on FY25 distribution. Rent reviews linked to CPI and ARF will benefit from 14 new childcare centres coming online over the next two years.

Portfolio Strategy: ARF is a well-managed company that owns 295 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 5.2% yield paid quarterly.

ARF declined -1% to $3.73.