Finance News Network transcription of ASX CEO Sessions discussion with Arena REIT (ASX:ARF) Managing Director, Bryce Mitchelson
Arena REIT (ASX:ARF)
Managing Director, Bryce Mitchelson discusses FY16 results and childcare property portfolio.
Arena is a top 300 ASX listed entity with a market capitalisation of just under $500 million. We invest in, own and manage social infrastructure style assets. We currently own a portfolio of childcare and medical centres – about 200 of those all situated around Australia. When we talk about social infrastructure assets, that includes things like police stations and hospitals – generally, they’re long lease structures. Arena REIT has performed very well since its IPO in June 2013. We’ve delivered an average annual return of about 33 per cent, per annum.
We announced a statutory profit of $72.6 million – that was largely driven by some strong revaluations across the portfolio. The property market has been pretty strong as you may be aware. And if you take that out, it brought our net operating profit back to $25.6 million, which (in a more meaningful way) reflects about 11.1 cents per security. Based on those earnings, we then distributed 10.9 cents to investors. That delivered about a nine per cent growth on the previous year.
Earnings were driven by three things. We had strong rent reviews across the portfolio. I think we delivered something like an average of about 3.6 per cent per annum, like-for-like basis. We also have a development portfolio, and we’ve been developing high quality child centres around Australia – that added to our earnings. Lastly, we had the benefit of low interest rates across the market and we were also able to negotiate lower margins over the period.
The childcare market is a fantastic market – there’s a shortage of childcare. There’s a Productivity Commission report, which was done some 18 months ago. It estimated there was a shortage of 50,000 places in Australia. Demand for childcare is really driven by knowing the number of kids, and the number of kids has been growing. The participation of number of kids in long day care has been growing as well. Also, the number of hours they’ve been spending in long day care has been increasing. So that’s all been contributing very strongly to demand.
Healthcare, we’re all getting older. As we get older, we need better quality healthcare services. And that gets back to fundamentally, yes we’re in the business of actual medical centres, multidisciplinary centres with Primary Health Care. That’s purely driven by a bulk billing sort of model, and that becomes a centre. And when you go to those GPs, they might refer you to pathology or blood test, and there are a number of services that flow from that.
We do have two unlisted Funds, which we mentioned on behalf of about 50 high net worth investors. Those assets are actually invested in healthcare as well – Primary Health Care assets, and they’ve done very, very well. We want to continue looking after those investors.
It’s been an incredibly strong property market over the last couple of years. We’ve chosen to focus on development. The reason for that is we can pick the site and the tenant. We’ve got the right lease structures. One of the good things about Arena is the underlying lease structures are very solid – the triple net leases. So we get to choose that and we also make a development profit, and develop a margin off those developments, which has driven our earnings.
We’ve announced to the market, in our results last month, that we’ll be distributing this year 11.7 cents per security. That’s a growth of around about seven per cent on last year – so it’s good growth. That’s on top of an income yield that we’re delivering of about 5.5 to 6 per cent.
If I look forward, for the next 12 months, hopefully we’ve completed some developments. We’ve had some good outcomes on rent reviews. We’re continually delivering on what we’ve been doing over the last few years. So nothing more than what we’ve been currently doing, but hopefully just progress the story a bit further.Ends