It hasn’t been an easy time for some ASX Real Estate Investment Trusts (REITs) since COVID-19 but Arena REIT (ASX:ARF) has been one of the better performing.

Arena is an ASX REIT specialising in “social infrastructure”, particularly early learning and healthcare facilities.

It is up 75% in five years and up 15% since mid-February 2020 just prior to COVID-19 sweeping global markets.

Arena REIT (ASX:ARF) share price chart

 

After the initial market panic, Arena REIT’s share price recovered and its annual results earlier this week depicted a strong 12 months.

Arena increased its portfolio by 14% to $1.15 billion through acquisitions and capital expenditure, yet announced a statutory net profit of $165.4 million, up 116% on the prior year.

The company is paying out 14.8 cents per share, up 6% on the prior year, and is tipping 15.8 cents in FY22.

Stockhead caught up with Managing Director Rob de Vos in the aftermath of the entity’s results.

 

Would it be fair to say ARENA REIT has performed better than other REITs because of the space it is in?

“It is certainly to do with the assets we have – we invest exclusively in social infrastructure, predominantly that’s early learning centres and medical centres,” he said.

“Both of them, particularly early learning, received significant pandemic support to stay open and the reason that support is there is two-fold.

“One to allow healthcare workers to make sure they could present to work and weren’t staying home to look after children.

“Perhaps more importantly from a structural perspective is those childcare centres allow people to remain or engage in workforce, the government wants to have more people working so they’re willing to subsidise fees for working families.

“All of that has meant from a real estate perspective, we’ve seen strong rent collection, we received  100% of the rent that was contracted to be received over the period and helped us focus on development activities, some acquisition and focusing on managing the business.”

 

Is there concern these tides may turn as COVID-19 wanes?

“We said we’ll see continued growth both in early learning and medical centres.

“What’s driving the market is investors wanting to get long term yield, so long term yield assets like healthcare that we’re invested in, or service stations which we’re not invested.

“That chase for long term yield in an environment with such low term deposit rates and dividends generally, it’s looking attractive.

“We’re certainly seeing a lot of support, that underlying property values continue to go up. If you look at early learning as an example, the seven transactions that happened (that is, people buying early learning centres in the last eight weeks) – average yield is 4.8%.

“So that’s materially down from last year with 5.6% which was the average we’re seeing it flow through with the interest in our stock.

“So that direct market is pushing prices up and yields down and we’re seeing that in Arena REIT as well.”

 

Looking back to March 2020, was there doubt things might’ve gone pear-shaped even for a company in your position?

“There was certainly a couple of weeks there about April 2020 when the security price went to $1.20.

“And that was a market over-reaction at a time when the government hadn’t completely supported the sector, so we certainly felt that.

“But it was always our investment thesis the government would support early learning as it has – there was that moment of terror in regards to whether that was going to be there.

“It was and has been in a meaningful way, in fact it’s gone up over the period – government support has increased significantly – and that was reflected in our share price.

 

You acquired a number of assets in FY21 – seven operating ELC and nine new ELC developments?

“Yes and I think the big part is we completed 14 developments.

“So despite the pandemic holding up a lot of activities and logistics, we’ve made 14 completions.

“And that’s really the driver of future income, we did acquire seven assets but those development completions are a bigger portion of our capital deployment.”

 

In terms of developments, have incidents such as the trouble at Mascot Towers caused you to do more due diligence?

“There’s a stack of due diligence that goes on in our business. The due diligence around contractors at the moment is very high and we’ve got great governance processes that sit around that.

“Ultimately they [our properties] aren’t sophisticated, they’re not like high rise apartments where you’ve got significant issues and defects that arise.

“From that perspective we’re somewhat sheltered, but due diligence has certainly heightened over the last little while.”

 

You said yesterday you were open to more acquisitions. Is Arena REIT looking for acquisitions and what would you be looking for?

“We are certainly looking and we are actively looking in early learning where we’ve got a large portion of our portfolio and it is our skillset.

“We still see good risk adjusted returns and we consider a number of opportunities there.”

 

Arena REIT also divested from seven properties. What goes into your thinking when divesting?

“We haven’t got material divestments that we’re looking at doing at the moment, so we wouldn’t expect more.

“But when we do look at that we measure what those properties are likely to participate in portfolio growth.

“Are we better off – as we were with those properties – taking those proceeds and replenishing our pipeline to improve our returns in the medium to long term proceeds to get better?

“That was the thinking we look at – how well are they trading and do we think we can get a price that allows us to reinvest in something else that would do better.”

 

Arena REIT has an average gearing of 19.9%. Could that get higher and what level would you be comfortable with?

“We’ve got maximum gearing range of 35-40 [per cent] and we’ve typically been highs 20s-30s for the last 6-7 years, it’s where we sit naturally.

“You’ll see that 19.9% creep up a bit with developments we’ve got underway – we have 15 that are underway.

“And we’ll see a couple of percentage points come on as we complete those developments.”

 

You mentioned tenants are a key part of your strategy. Do you take a hands-on approach and what do you look for?

“It’s key to our business – dealing with right tenant partners.

“We’re a long term holder of real estate and that means we need to have meaningful relationships with the right tenants.

“So, we’re pleased to say tenant partners we have are happy with us.

“We’ve got what we see as leaders in early leaning and healthcare as our tenant base and there’s more business to be done and that’s very exciting.”

 

What can investors expect from Arena REIT in FY22?

“I think, we pride ourselves on being predictable and I think we delivered that in our results.

“And I think investors can expect that same level of predictability and transparency they’ve become accustomed to at Arena REIT.”

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