ELC portfolio valuations up as rent increases offset rate rises Arena REIT says

The value of Arena REIT’s freehold early learning centre portfolio has remained steady, the REIT’s full year 2023 financial results showed, with a substantial increase in like-for-like rent offsetting a rise in passing yields.

Arena reported a net operating profit of $60 million, up 6 per cent from last year, and a statutory net profit of $74 million, down 78 per cent from last year, after a period of strong revaluation growth came to an end. 

Tenant occupancy across the portfolio remains strong with overall occupancy levels above the same period last year and higher than any corresponding period over the last ten years with reported fee increases since March 2022 up to around 7.1 per cent. 

“Arena’s investment proposition and partnership approach are integral to building better communities, together,” Managing Director Rob de Vos said.

“We remain well positioned to patiently deploy capital into quality assets that support Arena’s investment objective – to generate an attractive and predictable distribution to investors with earnings growth prospects over the medium to long term.”  

Portfolio valuations steady as rental increases offset rate rises 

The early learning portfolio, which consists of 249 operating centres and 16 development sites, is now valued at $1.377 billion, 6.9 per cent higher than last year, with the average value per site up 3.7 per cent over the same period. 

The increase was supported by a second consecutive period of well above average like for like rental increases of 7.1 per cent, although larger gains were mitigated by a rise in the yield used to value the overall portfolio. 

Passing yields remain steady as interest rates jump higher 

Arena confirmed that the passing yield used to value its early learning centre (ELC) portfolio increased to 5.13 per cent up 23 basis points from June 2022 and now sits at the same level reported eighteen months ago in December 2021.

The rather muted step higher in passing yields comes against the backdrop of an unprecedented rise in the RBA’s prime rate which, at 4.10 per cent, is nearly five times higher than in June 2022. 

Having tracked the fall in prime rates quite closely from June 2013, so far Arena’s passing yield has remained resilient in the face of a broader steep rise in interest rates. 

Development pipeline replenished after the completion of 10 centres in FY23

Arena continues to maintain development pipeline numbers within the broad range that has been in place since December 2019. 

The development pipeline now comprises sixteen projects with a forecast total cost of $112 million and $66 million of forecast capital expenditure remains outstanding. Ten development projects were completed and nine new development projects were acquired in the period. 

Elsewhere, two operating ELC properties were acquired for $7.8 million at a net initial yield on total cost of 6.0 per cent with an initial average lease term of 25 years. 

The Trust’s balance sheet gearing remains relatively modest at 21.0 per cent with future growth supported by substantial headroom between current debt levels and borrowing facility limits.

Read Arena’s results presentation here.