Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Arena REIT FY 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.

Thanks, Amanda, and good morning, everyone, and a very warm welcome to Arena REIT's results presentation for the full financial year of 2020. Our announcement, investor presentation and financial statements were released to the ASX earlier this morning. My name is Rob de Vos, Arena's Managing Director. Joining me on the call today is Gareth Winter, Arena's Chief Financial Officer. Before moving into today's presentation, I'd like to acknowledge the impact and challenges COVID-19 has brought to many communities. And on behalf of Arena, I'd like to express our gratitude to our tenant partners and particularly those frontline staff keeping each of our early learning centers and health care properties opened over this period. Challenges and uncertainties remain, but our executive team and Board are confident in Arena's strategy, the strength of our portfolio and the important contribution of the services we accommodate will make in aiding economic recovery and improving future community outcomes. Moving into the presentation, for those who are following it, on Page 3. Arena has demonstrated its resilience through the year. We've seen positive outcomes from our portfolio and capital management programs, including those in the more challenging environment in the second half. Our headline results reflect that resilience. Statutory profit for the year is up $76.6 million, so 29% up on financial year 2019. Earnings per security of $0.1455, up 5%, and distributions per security of $0.14 per security, which is up 4% on the prior year. We've seen further growth in net asset value, up 6%. Our average rent increases for the period were 3.4%. And as a result of valuation increases and our equity raise in June, we have a low gearing ratio of 14.8%. So pleasing headline numbers in the context of current external challenges. Portfolio and capital management programs are performing well and with significant balance sheet capacity. We're well positioned to take advantage of new opportunities that are consistent with our strategy. Moving to the next slide. Underpinning those positive portfolio and capital management outcomes is a really consistent approach, our strong industry relationships and high conviction on maintaining our discipline and delivering on strategy. Operational highlights for the period, one of the key focus areas for our team. 100% occupancy across the portfolio has been maintained. Average rental growth of 3.4%, which includes 10 uncapped market reviews that were resolved in the period, but related to financial year '19, and these market rent reviews provided an average increase of 19% in aggregate. We've acquired 4 operating properties, 2 early learning centers in Victoria, 1 early learning center in Queensland and a medical center in Western Australia. Each have been acquired on our preferred long-term triple net leases and an aggregate cost of $27 million and have provided a net initial yield on all costs, including transaction costs of 6.3%. We've completed 3 successful early learning center developments with 2 existing tenant partners in New South Wales, South Australia and Queensland for a total investment of $17 million, which has provided the net initial yield on all costs, again including transaction costs of 6.7%. We've acquired 17 new early learning center development sites that are located across 4 states, each are pre-committed to new and existing tenant partners, all on 20-year triple net leases on sustainable rents of between $2,500 and $3,800 per licensed place. During the period, we commenced our renewable energy program that is focused on working with our tenant partners to install and promote the use of solar and reduce the energy usage across our portfolio. We currently have approximately 10% of the portfolio using solar power and have agreed terms for further 18 properties to have solar installations completed over the course of the first half of financial year '21. We've undertaken further upgrade in rejuvenation works across 15 properties that has allowed us to improve asset quality and access better rental profiles, and we've worked hard with our tenant partners over the second half to find an appropriate and proportionate balance on rent relief and have reached agreements with all eligible tenant partners where relief is required and justified to 30 June. Our WALE has been maintained at 14 years. We've sold 5 early learning centers, but relative to the balance of the portfolio, were older and less efficient. Each were located in Regional Queensland. Total proceeds of those transactions in aggregate was $13.3 million, which provided a premium of about 11.6% to our prevailing book value. And we've seen further valuation growth across the portfolio of $36.9 million for the year, and the passing yield for the portfolio is now at 6.22%. Moving on to the next slide. And clearly, a major focus of the business over the last 5 months has been assessing and addressing the direct and indirect impacts of COVID-19. The business has 2 primary risks as a result of the pandemic. Firstly, the health and well-being of our team and as a result of that, our ability to provide business continuity. And the second primary risk is our tenant's ability and willingness to pay rent in a challenging operating environment. In response to the first risk, our team has responded exceptionally well, invoking our business continuity programs. Our business systems, stakeholder engagement and governance programs continue without hindrance. In relation to our tenant's ability and willingness to pay rent, it is worth recapping on the challenging early learning operating environment over this period. As was well publicized, the first lockdown period saw a significant reduction in occupancy levels and threatened the viability of the sector. The federal government provided a very strong response to support early learning in the form of subsidy payments equal to 50% of an operator's pre-COVID revenue, which, coupled with the JobKeeper allowance, effectively put most services in a breakeven position. The condition of that government support was that operators were prevented from charging families a fee, and they no longer receive the childcare subsidy. Post the removal of lockdown restrictions in most states and territories, we have seen a strong rebound in occupancy levels, but are generally now within 5% of pre-COVID levels. As of 13 July, JobKeeper allowance has been removed, but operators are able to charge families for gap fee and receiving the childcare subsidy as well as a transitionary payment equal to 25% of their gross revenue as at the end of February, which will be in place until the end of September. Unfortunately, challenging operating conditions remain in the Stage 4 lockdown areas of Greater Melbourne, where only children and families with at least 1 permitted worker are able to attend early learning services. To protect the viability of operators from lower attendance levels and to ensure services are open to support the families of permitted workers, the federal government has increased the transitionary payment. So that 25% of pre-COVID revenue support becomes 30% for operators in those affected areas. And operators will continue to receive the childcare subsidy and be entitled to further transitionary payment support if their childcare subsidy rate at the relevant centers are less than 50% and they have low attendances. What has been consistent through the pandemic period is the efforts by the federal government to ensure early learning services remain open and viable not just for now, but for the important contribution they will make to an economic recovery, allowing working families to get back into the workforce. Every one of Arena's early learning centers is currently open, operating and delivering essential community services including in the Stage 4 lockdown areas of Greater Melbourne. Likewise, in our health care portfolio, our medical centers and our SDA portfolio, all properties are open and trading. And across our health care portfolio, we have no material challenges in relation to rent collection at this time. Over the last 5 months, our team has acted decisively, applying for and passing on state government relief in the form of land tax rebates. We are available and have completed all rent relief programs, were justified, including incorporating relief under the National Code of Conduct programs with our SME tenants. On the next slide, you can see the impact of those rent relief programs on our cash receipts. As we've advised previously, we've collected 100% of our contracted rent in the period July '19 to March 2020, and we've set out the chart for rent collection for the period 1 April to June 30. As you can see, 84% of contracted income was received over that period, 14% was deferred and 2% was abated. We've agreed a relatively short period for deferred rent to come back into the business with over 70% due in financial year '21. Whilst it's obviously been a challenging period, we believe that we've found the balance of supporting real estate value by supporting our tenant partners over this period as well as adhering to National Cabinet's Code of Conduct as it's legislated in the various jurisdictions for our SME tenants. I'll now pass you over to Gareth to provide some further details on our financial results. Thanks, Gareth.

Thanks, Rob, and good morning, everyone. Just turning to Page 8, you will find a summary of Arena's operating income statement for the year, which shows a 16% increase in net operating profit to $44 million and a statutory profit of $76 million. There is a reconciliation of net operating profit to statutory profit in the appendix to the presentation with the most substantial reconciled items being the periodic revaluation of the invested property and interest rate hedges. The operating EPS of $0.1455 is 5% higher than last year and was in line with our expectations. The key driver of the increase in operating profit was the 10% increase in property income, which was derived from the lack of rent reviews, which averaged 3.4% during the year, and the contribution of Arena's ongoing investment in ELC developments and new acquisitions, noting the total investment expenditure in FY '20 of $90 million, which included the completion of 3 ELC developments, the acquisition of 3 operating ELCs in conjunction with tenant partners, the acquisition of a health care asset and the annualization of the $70 million in development and acquisition expenditure during FY '19. Some specific comments in respect of the COVID-19 related rent relief program. The property income, as presented in the statement is net of around $300 million in allowances for COVID-19-related rent abatement. Rent deferred in FY '20 of around $1.9 million is included in property income, with the cash flow timing culminated in our reduced distribution payout ratio in FY '20. And as Rob just mentioned, the FY '20 rent deferrals were predominantly short term, with over 70% scheduled to be received in FY '21 and 40% actually receivable around 60 days after the end of the financial year. There are no rent arrears in the portfolio, and all of our expected July rent has been received. Other income includes fees from managing our unlisted health care property syndicate and interest income, with a small reduction compared to last year due to lower interest rates on cash balances over the second half. Property expenses increased due to additional allowances for independent valuations. And ordinarily, we complete independent directions on a rolling 3-year cycle. Due to the onset of COVID-19, we elected to independently value 100% of the operating property portfolio. And there was also a portion of portfolio that was previously independently valued at 31 December 2019 year. There's a modest increase in cash operating expenses in FY '20, primarily due to costs related to the growth of the business, including custodian, insurances and the addition of resources to support growth and the engagement of a new Independent Director, being Rosemary Hartnett. The reduction in finance costs reflects a combination of reduced cost of borrowing and the expansion of development WIP, increasing total capitalization of interest costs during the period. The average monthly WIP balance in FY '20 was around $38 million versus about $10 million in FY '19, and our overall cost of borrowing reduced to 3.15% by the end of the year compared to 3.65% in FY '19. End of year gearing has also reduced by 7% to just under 15%. The higher statutory profit of $76 million is primarily attributable to the higher positive asset revaluations of $37 million versus $32 million in FY '19 and a lower negative revaluation of interest rate hedges of $4 million versus $8 million in the prior year. Notwithstanding that operating earnings were in line with expectation to accommodate COVID-19-related rent deferral and the timing of subsequent collections, the distribution payout ratio was reduced in FY '20 and a distribution of $0.14 per security has now been paid compared to our initial guidance of $0.143 per security. That distribution represented growth of 3.7% on FY '19. Turning to Page 9, it's a waterfall chart of EPS, which demonstrates the relativity of the individual items supporting EPS growth, noting that rent abatements had a relatively modest impact on FY '20 EPS. And the key drivers of growth remain ongoing rent reviews and the deployment of capital into developments and acquisitions. Turning to Page 10. We've got a summary of Arena's balance sheet. The full balance sheet is in the appendix of the presentation. Key points to note are that growth of total assets is primarily due to a net $80 million invested in acquisitions and developments in FY '20; asset revaluations of $37 million, which was also the primary driver of the 6% increase in net asset per security. We're all holding also $76 million in cash reserves at 30 June, $25 million of which was SPP proceeds. We have generally held liquidity of circa $40 million to $50 million during the COVID-19 pandemic. The 50% increase in net assets was largely due to the $60 million institutional replacement in June and the receipt of the SPP proceeds of $25 million in June and property valuations. Net gearing at around 15% is well below Arena's maximum gearing range of circa 35% to 40%. However, this level of gearing provides us with substantial liquidity to fund the existing pipeline of developments and will enable us to take advantage of growth opportunities at a low incremental cost of capital and also provides a buffer around future market volatility. And as I just mentioned, the June balance sheet includes the proceeds from the SPP of $25 million. However, the related securities were actually issued on the 1st of July 2020. In order to not distort the 30 June 2020 NAV per security calculation as shown, we actually included those securities issued on 1st of July in that calculation. I will note that gearing is expected to increase by a few percentage points from completing the development projects as outlined later in this presentation. Turning to Page 11, capital management. Again, there are some additional information included in the appendix. Our approach to capital management continues to prioritize resilience and risk reduction in the face of market volatility. $60 million is raised via an institutional placement in June and the further $25 million just mentioned from the associated security purchase plan. Both of those issues were heavily oversubscribed and well supported by our existing investor base. At 30 June, we had around $190 million of immediately available liquidity through the cash reserves and debt facilities. The debt facilities were expanded by $50 million to $350 million in February, while we also extended the term at that time. So the weighted average term in June was 3.5 years, and there is no expiry before March 2023, i.e., near 3 years from now. The combination of the modest gearing and the available liquidity allows us to actively consider new growth opportunities with circa $60 million of investment CapEx presently scheduled for FY '21. Our average cost of debt reduced 3.15%, and we expect the interest rate hedge cover to be maintained in that 70% to 80% range. If the reduction in interest rates experienced over FY '20 prevails, we also expect that our average cost of debt will further reduce over time as there is positive reversion value in the current hedge book, noting the average rate of 2.2%. Finally, it is important to note that Arena is operating well within the requirements of our debt facility, and we have substantial headroom in both our LVR and ICR covenants. I'm going to hand you back to Rob, who will update you on Arena's property portfolio.

Thanks, Gareth. And I'm now on Page 13 for those sort of following. Arena owns 239 properties across Australia with a value of $914 million. Portfolio comprises over 650,000 square meters of generally residential zone land with purpose-built improvements to accommodate some 20,000 families for their early learning needs as well as contributing to the needs of 8 communities, primary health care needs in our medical center portfolio, and 35 people with the highest physical support needs in our specialist disability accommodation portfolio in metropolitan Adelaide. The portfolio's passing yield is 6.22%, which has seen compression over the 12-month period of about 10 basis points. Sector diversity remains unchanged for the period. Geographically, we have over 80% of the portfolio located in the Eastern states, including 27% in Victoria and 20% in Greater Metropolitan Melbourne. We've also seen a slight increase to WA over the period following the acquisition of the Kalamunda health care asset. In terms of tenant diversification, we continue to improve our spread of tenant partners, now totaling 28 with 30% of Arena's income supported by Australia's largest early learning provider, Goodstart. Moving on to the lease expiry slide. The portfolio WALE, you can see that's been maintained at 14 years during the period as a result of proactive management initiatives, strong tenant relations and new development and acquisition activity with no current vacancies and no income expiring in the next 2 years. As you can see on the graph on this slide, we've less than 4% of the portfolio's income expiring in the next 8 years. And from there, the expiry profile of the portfolio is staggered relatively evenly from financial year '29 to '40 and a small proportion of income expiring in financial year '43 and beyond. These are very long-term, highly transparent, predictable cash flows, with annual escalations providing real growth to our securityholders. Every one of our early learning center properties and our specialist disability accommodation properties provides important operating information that assists us in making informed asset management and capital allocation decisions. Moving on to our rent review profile on the next slide. Here on this slide, we've broken down our rent review structures for financial year '20 and the following 2 financial years. Looking at the first column on the chart, you can see that financial year '20 consisted of 79% of ratcheted rent reviews at the higher of CPI and at least 2.5%, just under 10% with CPI reviews, with 7.7% unresolved market reviews, which relates to 26 properties. Each of those market reviews are capped and collared at that 0% to 7.5% range, and we anticipate these will be resolved over the first half of financial year '21. The final component on that graph there, on that first column, is the 3.3% of renegotiated leases that involved increasing rents for incentive, so rentalized capital expenditure, such as an upgrade of place caps and a new lease term. We haven't included those renegotiated outcomes in our like-for-like increase, but they and themselves provided for an aggregate increase of 19%. Looking forward for financial year '22 and '23, you'll note the vast majority of rent reviews continue to be those fixed or CPI with at least 2.5% ratchet. Our exposure to market reviews is 8.7% for financial year '21, plus, of course, the unresolved market reviews of financial year '20. In financial year '22, market reviews account for about 3.8% of income. Each of the market reviews in '21 and '22 has a capped 7.5% increase in collar at the prevailing rent. So that again, that's 7.5% to 0%. Perhaps most importantly, our exposure to CPI over the next 2 years is limited to less than 10% per annum. Moving on to Page 16. Our origination programs continue to perform well. We've secured a targeted pipeline of quality, early learning center development projects that will complement the portfolio and deliver future earnings growth. We anticipate completing 14 of our development projects through the course of financial year '21 and in total, our development pipeline now has 20 early learning center projects that are located in Queensland, Tasmania, Western Australia, Victoria and New South Wales, with a total forecast cost on completion of $112 million, of which, as Gareth mentioned, we've got capital expenditure outstandings at 30 June of $57 million. All of our development projects are being undertaken on a fund-through basis and secured agreement for leases with existing tenant partners on every project in our standard 20-year triple net lease format. We have a very strong track record in delivering positive outcomes on our development pipeline. Over 25% of our current operating portfolio has been developed by us since listing in 2013. We've completed 40 successful early learning center developments with 9 tenant partners across all states and territories, with the exception of the ACT. During financial year '20, we completed 3 further successful developments: Spring Farm in New South Wales with our existing tenant partner Oxanda; North Harbour in Queensland with an existing tenant partner Edge Early Learning; and Bellevue in South Australia with an existing tenant partner Green Leaves. Both North Harbour and Bellevue properties were handed over successfully to our tenant partners during the COVID-19 affected period. Moving on to the next slide. And just in regards to the early learning center operating environment. Despite a challenging current environment, both major political parties and Australian communities more generally recognize that a well-performing early learning sector is integral to assisting Australia to get back into the workforce in the short term. There is also a growing awareness of the positive life-long learning prospects of children that attend early learning services and the role that plays in creating a more socially well-adjusted community and a more qualified and productive workforce in future generations. Prior to the onset of COVID, Australia recorded its highest number of children attending long day care to December 2019, with attendances up 11.5% since the introduction of the childcare subsidy just 18 months earlier. The childcare subsidy was doing exactly what it was designed to do, increasing early learning participation and promoting higher workforce productivity. It's for that reason that the government has provided such a strong and consistent response in supporting the sector through COVID. It is recognized by both major political parties that an investment in early learning allows for stronger workforce productivity and future tax receipts and is integral to economic recovery. I won't repeat the various measures that have been undertaken by government recently. They are listed there, for those who want to go through it later, but they are substantial and have allowed for the sector to remain viable through the depths of the isolation programs and have included provisions for the transition of the sector back to the previously well-performing childcare subsidy regime. So what does all that mean for Arena? And moving on to the next slide. Our portfolio is in a strong position. We're 100% occupied. Every one of our 211 operating early learning centers is open and trading, and every one of those centers provides us that important business operating data. And that data provides us the information that assists on asset management capital allocation decisions as well as providing insight to the general health of the sector. As we have in previous reporting periods, we've included operating data up to the prior quarter. I appreciate this is prior to the impact of COVID-19, but the consistency we thought it sensible to include this information. And that data provides the underlying operator occupancies remained stable up to March -- in the March, in that sort of high 70% range across the portfolio. Daily fee growth has again increased 5% from June 2019 to reflect an average of $109 per day, which importantly remains significantly below the government's benchmark fee of $134 per day. As you can see on the graph at the bottom of the page, the government funding suits our early learning center portfolio, which is typically geared towards that middle-income families. And to give this some context, 99% of our early learning centers have daily fees under the government's child care subsidy benchmark fees at March. Our average rent per place across the portfolio is approximately $2,350 per place. And given that we have developed more than 25% of the portfolio, as I mentioned, over the last 5 years, it remains highly affordable. So net to revenue ratio continuing to sit below that 11% market as of March. Moving on to the next slide. In respect to the health care sector and despite recent disruption to visitation and a higher usage of teleservices as a result of isolation measures, the macro trends for health care also remain positive. A higher number of people are moving into the older age brackets and a higher proportion of the population is living with chronic illness, which underpins an increased need for health care services and, of course, the infrastructure to accommodate those services. During the period, we acquired an $11 million medical center at an initial yield of 6.5%, which is co-located with the Kalamunda Public Hospital, approximately 17 kilometers east of Perth CBD. Property was purpose-built 7 years ago and is majority leased to Mead Medical, a leading health care provider that has been operating in the Kalamunda community for over 60 years. Our largest health care tenant partner, the ASX-listed Healius has traded well through the COVID-19 period and has recently announced their intention to sell their medical center business to BGH Capital. We've commenced discussions with Healius regarding the change of control for -- our change of control provisions in each of those leases. SACARE, our specialist disability accommodation tenant partner continues to perform well, maintaining high occupancy and increasing profitability over the period. Moving on to the outlook on Page 20. And today, we're announcing full year distribution guidance for financial year '21 of between $0.144 and $0.146 per security, equating to an increase of between 3% and 4% on financial year '20. Income growth is underpinned by contracted annual rent increases and the full impact of financial year '19 and '20 acquisition development completions. We also continue to make good progress in our development pipeline with 14 projects anticipated to be completed in financial year '21, which will support future earnings growth. Looking forward, early learning and health care services are integral to economic recovery and improving community outcomes. And those important themes underpin Arena's portfolio value and investment objective of providing long-term predictable distributions to our securityholders with prospects for growth. We've increased our funding capacity, and now have gearing at 14.8%. We have no debt expiry falling due until March 23. We've a highly engaged and experienced management team that has strong industry relationships and in-house origination and development expertise, and that will assist us in sourcing future opportunities in a disciplined manner. And finally, we remain well positioned to navigate the new and emerging challenges arising from pandemic conditions. And whilst uncertainties remain, we are confident in our strategy, and we'll be working hard to meet our own and our stakeholders' expectations to deliver on our investment objectives. That concludes the formal presentation. So I'll now pass the call to the operator to open up for questions. Thank you, operator.

[Operator Instructions] Your first question comes from Darren Leung from Macquarie.

A few quick questions from me. First one is just in relation to the payout ratio into FY '21. So it's good outcome. You've provided FY '21 divi guidance of $0.144 to $0.146 per share. From memory, your FY '20 divi was, I suppose, linked to operating earnings per share, but then your June half distribution almost linked to cash flows. So how should we think about distribution guidance relative to earnings? Are you looking at the cash flows or earnings or...

Rob, do you want me to take that one?

Yes. Go ahead, Gareth. Yes. Yes.

That's fine. We're looking at the combination of both, really, Darren. So in the past, we've paid about 98% of operating earnings, which is pretty much also represented cash flow as well. Obviously, we dropped that down to about 96% this year to adjust for some of that rent deferral. As I said, most of that is to be received in FY '21 and actually a quite substantial portion of that receivable in the first 6 days of this financial year. So we didn't drop it down as far as total rent deferral, but we've made an allowance for -- in forming that distribution. And I think you'll see us do the same thing in FY '21. So it will be in that similar kind of 96% to 98% range.

Of earnings?

Of underlying earnings, but we are keeping an eye on, obviously, on the cash flow. Correct.

Okay. I understand. And the second question I had was just rent relief agreed so far. And so you said, you've collected those -- the bulk of your deferrals provided. When should we expect the remainder of this? I think Rob mentioned 71% in FY '21, but when is the remainder due to come through?

Yes. So the reminder is due mainly from the SME tenants. So we agreed mainly 3-year terms on them. So it's about a 3-year on the remainder. So the weighted average is around about 29 months, all up over that full collection period.

Yes. I noticed you've taken a credit provision of $315,000 against your deferrals. Is this recognized as a property expense or negative revenue?

It was a negative revenue margin.

Okay. Is it fair to say if all these tenants end up paying the deferrals, that's why you end up having to recognize more revenue in [indiscernible]?

Yes. I would just -- that's an allowance we've put in place. And if it's required, we'll use it. Otherwise, we'll write it back at the end of that deferred period. Yes.

So that's mainly like the SMEs or any other...

Maybe it's more -- a bit more general than that. But yes, it's might be the SMEs.

Okay. The other question I want to ask was just in relation to Melbourne. It sounds like all you will be seeing this sort of all your COVID discussions have concluded. But given all the -- the situation of Melbourne at the moment, have had any of these discussions started up again?

I can field that one. Thanks, Darren. No, they haven't. I think the government's done a great job in regards to setting up this, I guess, emergency relief for Stage 4. And no, we have had no additional rent relief discussions across the portfolio.

Are there any hurdles that you look towards where you think the discussions might start again? Obviously, one of the ones -- the JobKeeper was ending -- JobKeeper ending 30 September, which ended earlier the child care subsidy. How do you view that?

This -- we're obviously sort of keeping with it. There's 2 levers here that I think most businesses sort of look at. For us, one is the health trajectory. And I guess that you're waking up with newspapers every morning can take your own opinions on where the health trajectory is going. The second is government support. But we've got, at this stage, what we think is a good [indiscernible] and a very sensible investment by government to support the early learning center businesses that operate our accommodation. We expect that to continue. There's been some recent press that many may have seen over the last couple of days seeking more. We're not sure about the likelihood of that. But there is calls for universal care or free care for the community. And there's some very good reasons why that might be committed. But our baseline expectations that we'll see an early transition back to the child care subsidy as it was and that the government will continue to support. And if we see a worsening health trajectory, the government will continue to support that. What it's implemented for the Stage 4 Greater Melbourne area is working. It's effectively putting back as it was in the broadest Stage 3 isolation the country went through. Certainly, it's viewed, in the Prime Minister's terms, back into sort of hibernation. So they're not -- people aren't losing money. They're open -- able to operate even without the JobKeeper allowance there. And then there's further allowances that are available if you've got a low CCS recovery rate and lower attendance there too, Darren. So the government has been quite smart the way they've designed Stage 4 relief package at this stage.

Okay. And final one for me. You mentioned you're in discussions regarding the change of control for Healius. Can you give a bit color as to how much control you have there? Are you able to block that change? Obviously, you're dealing with a different tenant covenant there when it comes to fruition.

Yes. Yes. So I guess at this point, they are early discussions. We've sought some comprehensive information, haven't got all of that back yet. We have a -- I guess, going back 18 months ago, we renegotiated the leases included perhaps a harder change of control provisioning there. We're aware of some activities that might have seen a change in control with another part, in fact, at that time. But to our benefit we have change of control provisions that require us to act reasonably, but they do require our consent acting reasonably to any change. We're obviously acutely aware of not just -- and we'll work through the financials of the BGH proposition. But the continuous disclosure piece, too, as you know, our business, we really appreciate the data on the underlying properties and what's been done in our properties. And a lot of our leases have operating provisions. We really appreciate the continuous disclosure regime that listed tenants provide. So just trying to work through the balance of all those things there, Darren. But as I say, early days. We look forward to a discussion with BGH. That hasn't happened yet. We're dealing with Healius owner at this stage and it is early days.

Your next question comes from Simon Chan from Morgan Stanley.

Just a couple of quick ones for me. Those projects in the pipeline, I think, 20-odd projects, I forgot the exact number, there's no risk to timing whatsoever, right, in terms of -- against the backdrop of COVID and the Victoria one. I'm just trying to make sure that there's no shifting, timing, modeling, that sort of stuff in terms of contribute to revenue.

Yes. I certainly feel that there's always risk in developments. There's always risks. We think we have done a superb job contractually. We think we've done a superior -- we've got a fund-through system, and we protected the time and cost in regards to all that sort of contractual arrangements there. So coupons still need to get paid. We obviously have got a heightened level of diligence and work going on to make sure that they continue to work. To date, that development pipeline, frankly, quite surprisingly hasn't had material issues. I mean we're fortunate that we don't have a lot in Melbourne, so that helps. And we haven't seen delays through. I mean we've got a couple of lifts that are a couple of weeks behind. We're not talking months. We haven't had isolation measures on sites that have slowed up labor. So from all that perspective, we've been pleasantly surprised. Looking forward, again, it sort of relates to a couple of things. The strength of those contracts, which we think is very strong as well as what the health trajectory looks like if we're forced to sort of down [indiscernible] because we see a worsening health trajectory. Obviously, that will have a bearing. We think we've put prudent expectations around budgeting and how that sort of flows into accounts and financial performance. But there's always risk. I don't want to sort of move away that even though we've done our very best to derisk that 20 projects, and we're expecting 14 to complete over FY '21. There's always risk, to be honest.

Those 14, are they more due for the June half or December half completion?

It's the second half not so in June.

Yes, cool. And your guidance of a 3% to 4% growth, what assumptions, if any, did you make relating to the 26 reviews?

Very, very modest increases. I mean we've had quite a -- we had some extraordinary results in the longer-dated and uncapped reviews as we've seen both in this period and the last period. These are all 0% to 7.5%, just to recap on that. We think that we've got good prospects for solid growth out of them. But at the end of the day, it is negotiation. So there is some small amount, but not -- certainly not trying to squeeze it all out in our expectations.

Your next question comes from [ Nira ] from Evans & Partners.

Just a couple of questions from me. Firstly, on occupancy. So you mentioned that occupancy is roughly weighting the positive marks regarding to pre-COVID levels. Is that across all your portfolio?

Excluding Greater Melbourne and parts of Regional Victoria. So I think I made the point there that outside those sort of lockdown areas that sets our experience to date is that we've seen a very strong rebound back in respect of occupancy. I think for those that perhaps are not familiar with it, the concern was when consumers needed to start paying again, which is sort of a month ago today, in fact, is that we might see some deterioration of that. There has been some, but certainly not material.

All right. And just next one on rent relief. So can you provide more color on the rent that was provided by -- how much of that went to just the SME and non-SMEs?

Yes. So obviously, the National Code of Conduct required us to deal with eligible tenants. We had some eligible tenants that didn't want rent relief. We abided by the code in our discussions with them. We've got about 23% of the portfolio that is an SME tenant eligible under that -- those various pieces of legislation. We did provide some to some of the large tenants, [ Nira ]. As you would have picked up, most of our rent relief is deferred, and as Gareth mentioned, quite a short payback period as well.

Okay. And just last question. So on the FY '20 market review, will the rent be backdated to -- how will the rent increase apply? Like, will it be backdated?

So these are the FY '19 that we're expecting to do in financial year 2021 year -- sorry, FY '20 is that we're expecting to do in '21. Yes, they are. We've got no limitation in regards to when they're done, and look there's some background there. With the tenant at the sort of peak of isolation programs because the tenants, we're obviously busy with more important things. We collectively agreed to sort of put the pens down and we'll view them in the next little while. It's now timely to do that. And we've got no -- there's no restriction, there's no timing in regards to when that can be done, and we would be entitled to get that. Yes.

Your next question comes from Jeff Pehl from Goldman Sachs.

I was wondering if we can touch on just health care, the health care market, and what you're seeing in terms of transactions. Have you seen any shift in buyers? And just the cap rates, just pre-COVID, they're fairly tight. So just -- maybe if you have a little color on that.

Yes. Yes. Thanks, Jeff. Look, still a lot of activity in that space. We're seeing transactions both nearly learning and health care. It's sort of pre-COVID yield or cap rates at the moment, still comping, less volume, but definitely still no change in yields and cap rates. As you know, and I think most of the audience would know, our focus has been really around what is an affordable rent. And it's probably that filter that's been holding us back a little bit more. We'd love to be doing more health care. Those macro themes are very strong. You've obviously seen Dexus announced something that's relatively small for their sales, but into the health care fund in the last couple of days. The yield looks about right. I can't talk too much of that transaction in regards to rent affordability. But it is the filter that we're watching very carefully. I'd love to be doing more, just understanding -- we understand that sector really well, given our Healius leases, we had them for over a decade. We've got good relationships, but just making sure that we've got affordable rents in there in that space.

And I guess, is it fair to say from a capital allocation standpoint, I mean, you're sitting with a pretty strong balance sheet now. Going forward, could you potentially maybe build some health care, even medical center assets, after you've gone through these discussions with Healius and the new agreements? Given cap rates are so tight, could that be a bigger chunk of your development pipeline going forward?

Look, potentially. Certainly not in respect to this sense, Jeff. But with an appropriate tenant partner and building out sensible network expansion as a real estate capital partner, yes, is the answer to that. Obviously, BGH have got growth aspirations. We don't know enough about those, whether that would be an appropriate avenue, but we think that the relationship we've got with Healius, for instance, might open -- or should open up a lot of goodwill there, I guess. And then in regards to what the sort of Australia's health needs are, there are reasonably interesting changes going on in regards to how medical centers actually work and provide for the community. There's obviously a very big push to get primary health care out of the public system into private. So I think that all becomes interesting for those that have got very low cost of capital.

And then my last question, just switching to childcare. I'm sorry if I missed this in the opening remarks. But just looking past COVID, just maybe what's your supply expectations overall and by state? And have you had any of your operators approach you, maybe Green Leaves or some others just saying they want to expand out of this? They see opportunity and maybe a competitive edge and potentially expanding coming out of this environment?

There's definitely a bit of entrepreneurial spirit that's going on there. I think that's -- in our view, a little early. We really like to see a -- whilst there's growth opportunities with good tenant partners there to be done, we think that any large-scale activity is probably a little bit early, Jeff. But there is definitely some talk around that. I guess, in regards to supply, they're still relatively elevated. It's one thing that we've always been pretty careful on. I think that we're -- something like 3.8% increase in early learning center to 30 June. So that's down a little bit, but not a lot. When you look at on a sort of per place basis, and it's sort of closer to 5%. And we are building -- as an industry, we're building bigger centers. So how that gets suggested with perhaps on the demand side, what's happening with unemployment and other things, I think, would be smart for the industry to be looking at very carefully. I think that we'll see moderation of supply. I think that's not hard to forecast on the basis of perhaps less speculative development going on, that there's a lot in the sector, as you know. But that a little bit at the edge is probably going to slow up a little bit. I think you said as a broad comment, a little bit more circumspect in respect of network expansion. I think the bigger operators would prefer to see what ongoing demand looks like before they start putting accelerator down on network expansion or, indeed, M&A with others.

Your next question comes from Caleb Wheatley from Macquarie Group.

Just one additional one for me. Just on the market rent outcome, so about 19%, up from about 15% at the half. Seems like a pretty good outcome. Just wondering if there was any incentives or any other discussion in there that were driving that?

No, Caleb, it's not. One thing I would point to those that they are long-dated. So they actually haven't had access to market for some time. It's a 10 years before we've had. So yes, the business has been sort of doing -- as a general comment, business has been doing sort of 6% CAGR, where we're sort of getting at 2.5% to 3%. So it's a rebalance of propco and opco is what's happening in those larger uncapped market reviews.

Was there any CapEx spending? I know you mentioned something at the start of the call on CapEx. Is any of that involved in there as well?

No. No. Not in those deals. No, there wasn't. We did -- there was some renegotiated leases. So we did that 3.3% of income and renegotiated. Now they're outside market rent reviews. We did put capital expenditure into those, and we did get 19% out of those as well. Just, I guess, as a separate -- they're not the market rent reviews. Those capital expenditure programs is probably -- not a lot, but it's in those. But they obviously added to the appeal of the property and allowed us to get longer leases and better rental escalations as well as better rent to market rental profiles. So there's sort of 2 barrels there. One's got incentive in it, which was a proactive approach, and the other ones are just market rent reviews that have fallen due.

[Operator Instructions] Your next question comes from Joshua Hain from REST Investments.

Good results. Just a quick one following up on the occupancy question earlier. The comment you made about ex sort of Victoria occupancy levels are generally 5% of pre COVID-19. It sort of seems probably a bit higher than what some of the -- at least some listed operators have been talking about recently in the market. I think what I was saying they're sort of talking about 65% to 75% places booked and maybe 55% to 65% sort of actual attendance. So just trying to understand the disconnect or just the -- your portfolio outperforming or may not. Maybe comparing, that seems a lot.

I think there's probably a little bit of portfolio composition. We've got reasonably low in respect of ASX listed. So yes, I mean, composition of our portfolio is obviously there in the deck, but I suspect it's just that. We've probably got a portfolio. And remember, there's probably -- there's definitely hard work in curating this portfolio. We've been getting that operating data for a long time. And as a result of that, what has been a very good property market over the last few years allowed us to make decisions about selling things. I was looking last night, we've sold 26 assets since listing. And those assets are probably the ones that have perhaps not performing as well because they've got more challenging markets there is probably what I'm going to comment, mate.

Okay. Yes. And just the only one, I guess, a slight provocation. I think when the capital raise, you talked about like-for-like rent reviews at plus 3.4%. But I think that was pre-rent relief programs having been concluded. So is the number today post? Or is that the same number?

Yes. So not to be just confusing -- the net property income and average rent review increases there, Joshua. So both of those are the average rent review increase as opposed to an NPI number.

Your next question comes from Gareth James from Morningstar.

Are you able to give a rough indication of the attendance rates and occupancy rates you're seeing in Melbourne at the moment?

I can give only anecdotal there, Gareth. It's a good question. And very -- it's very different. As you can imagine, different communities and different circumstances. The barrier at the moment is twofold. One is you actually buy -- through the government, need to be a permitted worker. Obviously, you need to have one in family. You need to have not only that, but you need to actually prove that. And there are significant penalties, both individually and for business not to do that. There's also fear. There's also just generally people not wanting to present, even if they do pass those 2 tests in there. So it does bounce around a little. I did see good start. Talk about [ 1:3 ] in those Stage 4 lockdown areas as to attendance, no change in occupancy. As you'd be familiar with or may be familiar with, there's been a big push from all operators to ensure that they maintain occupancy that has enrolled people and then just use those extra absent days to allow them to continue receiving that child care, that important child care subsidy for that child. I think it's actually a bit higher. As I talked with our attendance, it's probably a bit high. It might be attendance down below 25% in some centers. 25% to 35% is probably where it sits as an average. But it does move around day-to-day and is quite volatile as you could expect.

Okay. And just one other one. On -- are you able to give kind of a rough indication of where attendance and occupancy peaked at during the free child care period?

Yes. It -- well, I can talk to our portfolio. And again, anecdotally, we haven't got this empirical data that we get from attendance. So at least a quarter behind by the way that our leases work. But we had a number of our operators with better occupancy. So that free child care was used. The obvious risk -- well, let me talk. Some of our operators used the -- that exercise as effectively investing in at their own cost to look after those children, not be supported, as you're aware, because the funding structure set their cost, but we're hopeful to obtain more occupancy. That largely has been successful. So those operators -- I'll name one, Green Leaves, is an example, invested heavily to ensure that they were open, giving the same level of care what they had prior to COVID going on to a new constituency that [indiscernible]. And for a very large part, that's been quite sticky. So they saw in a number of their centers higher rates of occupancy than what they had pre-COVID quite perversely. A lot of that -- some of that's gone away now, obviously, with fees getting charged back on. But yes, I think that business, as an example, thought that investment of working hard to keep the doors open and paying money to get the door open through that period was a smart idea.

There are no further questions at this time. I will now hand back to Mr. de Vos for closing remarks.

Thanks very much, Amanda. And thank you all for your attendance on the call today. And that concludes our investor briefing. Please don't hesitate to contact Sam, Gareth or I directly with any questions. Otherwise, I look forward to seeing a number of you over the next coming days and weeks. Thanks all.

That does conclude our conference for today. Thank you for participating. You may now disconnect.