Arena REIT sustains commitment to ECEC with significant growth in new development sites

Early learning centre (ELC) landlord Arena REIT has added seven new development projects to its greenfield pipeline at a time when its larger peer Charter Hall Social Infrastructure Fund has elected to pursue the opposite strategy in recent years. 

 

Arena’s development pipeline closed the HY2024 reporting period with eighteen sites, or (around seven per cent) of the Trust’s total ELC portfolio of 252 centres. This compares to Charter Hall’s pipeline of just three centres, of which one is due to be divested in 2024. 

 

Arena has been consistent with its development strategy over the last several years with its HY2024 results confirming this key differentiator between itself and Charter Hall’s Social Infrastructure Fund is still intact. 

 

“Arena’s investment proposition and partnership approach are integral to building better

communities, together,” Arena’s Managing Director Mr Rob de Vos said.

 

“In a changing investment environment, Arena is well positioned to pursue opportunities that are consistent with our purpose and investment objective.” 

 

Rental increases pull back as inflation rates cool

 

Property income rose seven per cent in the HY2024 to $39.1 million, supported by annual and market rent reviews, as well as acquisitions and development projects completed, although net operating profit rose by a more modest three per cent as increase in finance costs impacted performance. 

 

Rental increases were 5.50 per cent, down from the 7.1 per cent reported as at June 2023, and 6.9 per cent reported this time last year. Although increases are still elevated relative to the past, the shift lower is the first such fall since around the beginning of COVID-19 and another indication that inflation pressures within the broader economy are cooling. 

 

 

This was also reflected to some degree in Arena’s portfolio valuation which fell for only the second time in the last eight years as higher interest rates, and in turn, higher yields started to have an impact. 

 

The network is now valued at $1.35 billion, down two per cent from June 2023, on a yield of 5.24 per cent that has risen 34 basis points from the low point registered in June 2022. 

 

Looking ahead, as the probabilities of further interest rate rises recede, valuation pressure on Arena’s portfolio should also start to alleviate. 

 

Balance sheet remains robust providing flexibility going forward 

 

Arena closed the period with $14.6 million of cash on hand and $144 million remaining on its debt facility to draw down upon. Borrowings are currently $356 million with gearing at a relatively low 21.7 per cent. 

 

Arena’s weighted average facility term was 3.2 years as at 31 December 2023 with no near term expiry and the weighted average cost of debt was 4.10 per cent compared with 3.95 per cent as at 30 June 2023. 

 

Interest cover was reported as 4.9x, down from 5.4x reported in June but still at relatively comfortable levels. 

 

Arena also has a Sustainability-Linked Loan (SLL) in place over its existing debt facility totalling $500 million with the payment framework aligned to the Sustainability-Linked Loan Principles that govern the margin to be paid. 

 

As at December 2023, 100 per cent of the SLL margin discount for the FY2023 sustainability performance targets had been achieved.