Arena REIT (ARF):  The listed childcare and medical centre owner reported their half-year 2024 results, which, as always, were consistent and steady. 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 not much scope for nasty surprises.  ARF is a 3.3% weight in the HNW Income Portfolio.

Key Points:

  • Profits up: Net profit was up +3% to 31 million due to the combination of contracted rental increases that are linked to inflation and prior acquisitions and development competitions.
  • Dividends Up: The dividend is 8.70 cents up, +4%,  representing a payout ratio of 100%.
  • Operationally rock solid: ARF enjoys 100% occupancy and an average 19 year average weighted lease term, by far the best in the entire LPT sector. In November 2022, the Australian Federal Government’s Cheaper Childcare Bill successfully passed through the Senate. This increases the maximum childcare subsidy to 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, so the taxpayer is helping the battlers on half a million a year, effectively underwriting ARF’s earnings.
  • Balance sheet a highlight: ARF’s gearing remains low at 22%, with debt hedged for the next 3 years. Consistent with other companies in the portfolio, we strongly prefer companies with lower gearing levels as they face fewer issues than highly indebted companies in a rising rate environment.  ARF is more conservatively geared than loan covenants of less than 50% and 2x interest coverage (currently 5x). Conversely, last week, Charter Hall Long Wale REIT revealed a gearing of 41% and announced plans to sell $500 million of assets in a weak market to reduce gearing.
  • Valuation Slightly Down: ARF will likely be the only trust in 2024 that will post a tiny decline in NTA, hereby -1 % to $3.38. A portfolio cap rate of 5.26% looks very conservative considering recent transactions in childcare and health properties.
  • Outlook:  ARF management reaffirmed Full year 2024 distribution guidance 17.4 cents or +4% on FY23, 95% of the rent reviews due over the next four years are linked to CPI, so sustained higher inflation will flow through to company earnings along with earnings from new developments.  Here, we see the benefit of lower gearing for ARF.

Portfolio Strategy:  ARF is a well-managed company owing 276 childcare & medical centres valued at $1.5 billion. This exposes our investors to rental income from 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. The next major set of lease expiries are in 2037 and 2038, so we have few near and medium-term concerns.

ARF finished down -1 % to $3.47 in a result that was largely ignored on a heavy day of reporting.