ASX code: ARF
Share price: $1.62
Industry: Real Estate
Forecast FY2016 Distribution: 10.7c
When Arena REIT (ASX:ARF) first hit the ASX boards back in mid-2013, the Dividend Detective was quite excited about its prospects. ARF has certainly delivered since, rallying in excess of 60 per cent as management delivered on its stated objectives of providing an attractive income stream backed by a growing earnings profile.
Today, ARF is an internally managed ASX300 listed AREIT whose growing asset base is comprised of a large childcare portfolio and embryonic healthcare portfolio. ARF owns a total of 197 properties, split between 179 childcare centres, 7 medical centres and 11 childcare development sites.
ARF recently reported a sound set of results, with statutory profit up 37% per cent to $61m. This figure notably includes gains on property revaluations. However, even after backing this out, operating profit surged 19 per cent to $22m.
In our view, ARF has several attractive features in terms of lease longevity, occupancy and rental income growth. ARF enjoys a healthy weighted average lease expiry (WALE) of 8.9 years, has high levels of occupancy at 99 per cent while like for like rental growth continues to tick along nicely at about 3.4 per cent per annum.
The balance sheet remains well placed, with gearing receding to a conservative 29 per cent in the 12 months to 30 June 2015.
Though quite heavily exposed to Goodstart Early Learning at 46 per cent of the tenancy base, this exposure has reduced as a percentage over time. This is a trend we expect to continue as the asset base grows further. Today, ARF’s tenant base is spread across 14 key tenants, the most notable being ASX listed entities G8 Education (GEM) and Primary Healthcare (PRY).
A further positive is that ARF pays distributions on a quarterly basis, with distribution periods ending on 31 March, 30 June, 30 September and 31 December each year.
ARF has forecast annual distributions of 10.7 cents per unit for FY16, reflecting growth of 7 per cent on FY15. Importantly, given favourable macro fundamentals, considerable funding capacity and a sound development pipeline, we believe ARF is capable of at least maintaining this rate of distribution growth into the medium term.
ARF offers an attractive 6.6 per cent yield, paid quarterly. As such, we believe ARF offers investors a sound mix of regular income and growth potential.