ASX-listed Arena REIT’s portfolio valuation program is expected to result in a net revaluation decrease of a modest $4m for the six month period ending 31 December 2023. This represents a decrease of only 0.2% from 30 June 2023 and a decrease equivalent to $0.01 in Net Asset Value (NAV) per security.

Today’s announcement helps to vindicate managing director Rob de Vos’s nod to the market four months ago that the REIT can successfully avoid any “material” write-downs in asset values.

To put this result in context, AREITs, implied valuations are down by a third since December 2021, and it’s understood that major office-holding AREITs currently trade at discounts of 30% to 40% to their net asset value (see recent comments by Dr David Parker, former NSW valuer general).

de Vos attributes Arena’s ability to avoid a “material” write-downs outcome to the nature of its underlying investments, which centres around the REIT’s exposure to the heavily subsidised early learning centre (ELC) sector.

de Vos’s recent comments follow revelations that the country’s second-biggest early learning centre landlord actually managed to produce a 1.2% – or $17m – valuation gain over the previous financial year.

Recent developments

A total of 59 ELC assets and three healthcare assets were independently valued as of 31 December 2023, with the remaining ELC and healthcare assets and ELC development projects subject to directors’ valuation.

A summary of the circa $4m portfolio revaluation decrease is detailed below:

It’s understood that the valuation effect of an expansion in capitalisation rates has been offset by increases in passing and market rents resulting in an overall flat revaluation outcome.

Within a recent portfolio update, Arena highlighted strong macroeconomic drivers continuing to support the Australian childcare sector.

In addition to rising female workforce participation, which continues to drive demand for childcare services, improved affordability measures introduced by the federal government, include:
• Increasing the maximum Childcare Subsidy (CCS) rate to 90% for the first child in care;
• Retaining the increased CCS rate at a maximum of 95% for subsequent children in care; and
• Increasing the CCS for every family earning less than $530,000 in annual household income with one child in care.

How did Arena benefit?

Arena’s ELC tenant partners reported the following underlying business operating data as of 30 September 2023:

• Average daily fee of $140.63, up 8.53% from March 2023;
• Like-for-like operator occupancy remains robust and higher than any prior corresponding period over the past seven years.
• Net rent-to-revenue ratio of 10.6%.

Development pipeline

As of December 2023, the development pipeline is expected to comprise 199 ELC projects with a forecast total cost of $125m, with approximately $78m of capital expenditure outstanding.

The forecast weighted average initial yield on the total forecast cost for the development pipeline is 5.7%.

Meanwhile, rent reviews during HY2024 resulted in an average like-for-like rent increase of 5.4%.

Further details of revaluations, portfolio performance and financial results will be provided in HY2024 results which Arena intends to release to the ASX on Thursday 15 February 2024.