Arena REIT (ARF) Earnings Call Transcript & Summary

Good morning. On behalf of the Board of Directors, it is my pleasure to welcome you all to the general meetings of security holders in Arena REIT No. 1 and Arena REIT No. 2 and the Annual General Meeting of Shareholders in Arena REIT Limited, which, together, constitute Arena REIT's 2020 Annual General Meeting. My name is David Ross, and I am the Independent Chair of the Board of Directors of Arena REIT Limited and of the Board of Directors of Arena REIT Management Limited, and I have been appointed as the Chair of today's meeting. The time is now 10 a.m., and a quorum is present. I, therefore, declare the meeting open. Attending the meeting today by audio link are the other members of your Board of Directors. Rob de Vos, Managing Director; Gareth Winter, CFO and Company Secretary and an Executive Director of Arena REIT Management Limited; Rosemary Hartnett, Independent Chair, Nonexecutive Director, who will act as alternate chair in the event that I experience any technical issues; Simon Parsons, Independent Nonexecutive Director; and Dennis Wildenburg, Independent Nonexecutive Director. Also with us today are members of the Arena REIT management team: Charles Christie, Partner; and Leona Goh, Audit Manager representing PwC, Arena's Auditor; John Hutchinson representing Hall & Wilcox, Arena's Corporate Legal Adviser; and [ Andy Mah ], Returning Officer from Boardroom Limited. The agenda for today's meeting includes a brief presentation from me, followed by a presentation from Arena's Managing Director, Rob de Vos, on the operating performance of Arena in the 2020 financial year and the outlook for the 2021 financial year. We will then move to general questions followed by the formal business of the meeting being consideration and voting on 8 resolutions. Today's meeting is being held online via the Lumi platform. This allows security holders, proxies and guests to attend the meeting virtually. All attendees can watch the webcast of the meeting. In addition, security holders and proxies have the ability to ask questions and submit votes. Questions can be submitted at any time. [Operator Instructions] Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on 1 topic, amalgamated together. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. In terms of voting virtually via Lumi, if you are eligible to vote at this meeting, a polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to press a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your vote at any time. I will give you a warning before I move to close voting. We acknowledge the impact and challenges COVID-19 has brought to many communities, and on behalf of Arena, I would like to express our gratitude to our tenant partners and the frontline workers in each of our early learning and health care properties. Despite ongoing uncertainty, we remain confident in Arena's strategy. The strength of our portfolio and the important contribution the services we accommodate will make in aiding economic recovery and improving future communities. In a challenging environment, Arena has produced earnings and capital growth successfully delivered development completions, replenish the development pipeline, reduced gearing and maintained the long duration of its leases with our tenant partners during financial year 2020. These positive outcomes are a result of the quality of Arena's property portfolio, the proactive approach of Arena's management team and the strong macroeconomic themes that support investment in social infrastructure property. It is also an endorsement of Arena's discipline strategy and ability to deliver against our investment objective. Arena's net operating profit increased by 16% to $43.8 million in financial year 2020. Key contributors to the result were rental income growth from annual rent reviews and income from acquisitions and development projects completed in financial year 2019 and 2020. The result represents earnings per security, or EPS, of $0.1455, an increase of 5% over the prior year. Arena has paid a full year distribution of $0.14 per security, an increase of 4% on the prior year. Statutory net profit for the year was $76.6 million, 29% higher than the prior year. Arena's total assets increased by 23% to $1,012.6 million as a result of acquisitions, development, capital expenditure and the positive reevaluation of the portfolio. The revaluation of uplift was the primary contributor to the 6% increase in net asset value, or NAV, per security to $2.22 at 30 June 2020. Arena raised $60 million via a fully underwritten institutional placement in June 2020 and a further $25 million via a security purchase plan in July 2020. An additional $8 million was raised via the dividend and distribution reinvestment plan during FY '20, which remains open. Arena increased its total debt facility limit by $50 million to $330 million during financial year 2020. The weighted average remaining facility term was 3.5 years at 30 June 2020, with no debt expiring until March 2023. Arena's weighted average cost of debt fell to 3.15% as at 30 June 2020, compared with 3.65% at June 2019. Arena's gearing was 14.8% as at 30 June '20, with $76 million of cash reserves and $115 million of undrawn debt capacity as at balance date to fund development capital expenditure, forecast at $57 million, and new investment opportunities. Arena is operating well within our banking covenant requirements and the new equity raise provides capacity to pursue future social infrastructure property investments consistent with strategy, while also improving liquidity and reducing gearing. Finally, Arena commenced its renewable energy program during financial year 2020. The program is currently focused on working with tenant partners to invest in sustainable initiatives with a multisite solar installation project completed during the year. On to strategy. Strong macroeconomic drivers continue to support the Australian Early Learning Centre sector, including provision of early learning services integral to assisting Australians to get back to work in the short term and improving workplace productivity over the medium to long term; secondly, strong structural demand for services and record female work participation rate, which drove increased long day care participation rates pre-COVID-19; and government support improved through the introduction of CCS in July 2018, and ongoing COVID-19-related funding commitments. Strong macroeconomic factors continue to support Australian health care accommodation. Medical center visitation, imaging and pathology services reduced up to May 2020 due to COVID-19 but have been improving in line with the broader economy opening up. Arena's management team has specialist asset management and development expertise and a strong track record that includes the successful delivery of 40 development projects over the past 8 years at a total cost of $187 million. Arena continues to differentiate its brand in the marketplace through a partnership approach, working collaboratively with our tenants and business partners. Arena is well placed to continue to deliver on its investment objective to generate attractive and predictable distributions to investors with earnings growth prospects over the medium to long term. On to remuneration. The Board considered the guidance issued by the Australian Securities and Investment Commission in relation to Board oversight of executive variable pay decisions during the COVID-19 pandemic when assessing the financial year 2020 STI and LTI outcomes. In considering variable pay decisions in respect of financial year 2020, the Board noted: firstly, the actions taken by the executive KMP throughout the year, and that is also including the difficult COVID period; the underlying earnings growth of 5.3 -- 5.4% and 3.7% growth in distributions per security during the period, notwithstanding COVID-19; and the reduction in the distribution payout ratio in direct response to rent deferred under COVID-19 rent relief arrangements. The Board exercised its discretion to award the executive KMP 94% of their total FY 2020 STI opportunity based on the strong underlying performance of the Arena business, the assessment of financial targets and individual performance against nonfinancial KPIs throughout the year. 50% of the STI awarded to executive KMP is deferred for 1 year with payment delivered in the form of Arena securities. With regard to the LTI outcomes for executive KMP for financial year 2020, 84% of the FY '18 LTI vested based on, firstly, Arena's financial year 2020 distributable income per security of $0.1455 exceeding the performance hurdle range; and Arena's 3-year TSR of 21%, ranked at the 59th percentile of the comparator group. The key performance objectives have been reset for financial year 2021, with the LTI distributable income per security performance hurdle measure outlined in the remuneration report section of Arena's 2020 Annual Report. The objectives have been designed to enable Arena to continue to attract and retain a high-quality, committed and dynamic management team, aligning the interest of the management team with security holders, while challenging and appropriately incentivizing management to achieve not only relatively strong EPS growth performance, but also take into account consideration the level of risk undertaken to achieve that growth in the prevailing market conditions. I'll now move to governance. Arena's strong culture enables us to deliver positive outcomes to our stakeholders. A clearly defined positive and well-communicated culture ensures that Arena is able to live by its values and retain team members who are engaged and productive, resulting in better outcomes for Arena, our tenant partners and our investors. Arena is pleased to have separately issued our inaugural sustainability report for financial year 2020. This marks Arena's commitment to progress and disclose strategies to address sustainability challenges and opportunities faced by our business and stakeholders. The main purpose of Arena's financial year 2020 Sustainability Report is to consolidate and communicate the plans, activities and initiatives that are already embedded in the way Arena is managed. The reporting process has provided an opportunity to identify areas where performance can be improved, and these opportunities are reflected in the commitments included in the report. In future years, where possible, we intend to include additional quantitative data to further enhance our disclosures. We welcome feedback from all stakeholders to ensure that we can build upon our disclosures moving forward. Outlook. Arena remains well positioned to navigate the ongoing and emerging challenges arising from COVID-19 and to consider new opportunities that are consistent with strategy and Arena's investment objective of delivering an attractive and predictable distribution to investors with earnings growth prospects over the medium to long term. As in previous years, I am pleased to advise that we are forecasting distribution growth for financial year '21 and distribution guidance for financial year '21 was issued in August 2020 in a range of $0.144 to $0.146 per security, reflecting 3% to 4% growth over financial year 2020. In conclusion, before handing over to Rob, I would like to take the opportunity, on behalf of the Board and the management team, to thank our investors, tenants and business partners for their ongoing support. On behalf of the Board, I would also like to acknowledge and express our appreciation to the Arena management team for their ongoing commitment and contribution to Arena's performance. We will continue to work hard for our security holders, and look forward to reporting to you in 2021. Thank you. I'll now hand to Rob de Vos for his presentation.

Thank you, David. I too would like to offer a very warm welcome to Arena REIT's 2020 Annual General Meeting. I'd like to commence my presentation today by reflecting on the challenges COVID-19 has brought to many communities, including, of course, the Australian communities in which Arena invests. Community well-being is at the very core of the services that our tenant partners provide from within Arena's property portfolio. The last 9 months have been an uncertain and challenging period for our tenant partners and their staff, who have played a vital role in ensuring that the essential community services they provide remain open to support community well-being during the COVID-19 pandemic. I join David in offering our gratitude for their tenacity and resolve over this period, which combined with community need and government support, enabled every one of Arena's property investments to remain open and trading throughout financial year '20. Looking forward, we anticipate that the community need for the services that Arena accommodates will continue to increase. The services that Arena accommodates are fundamental to well-performing communities, and in relation to early learning services, integral to allowing working families to get back to work and assist a broader economic recovery. These factors, of course, will drive demand for the types of assets that Arena owns and develops, and as such, will assist Arena's investment objective of delivering an attractive and predictable distribution to investors with earnings growth prospects over the medium to long term. Whilst each of Arena's properties remained open and operational, the lockdowns in response to COVID-19 significantly impacted attendances at our early learning centers. With the exception of 8 centers in South Australia, that as of this morning, will only be accepting children of permitted workers for the next 6 days, there has been a strong rebound in early learning attendances post the easing of lockdown restrictions with centers now generally trading at pre-COVID-19 attendance levels, including early learning centers in Greater Metropolitan Melbourne. In relation to other parts of our portfolio over this time, medical center services reduced up to May 2020, but again, have improved in line with broader economic opening up. And Arena's specialist disability accommodation portfolio was unaffected outside the introduction of increased sanitation, resident security and well-being programs; and progress in our development programs has largely been unaffected. I'm incredibly proud of the work that the Arena team undertook to implement measures to support the safety and well-being of each other, and increase engagement we have with our tenant partners and all of Arena stakeholders, including, of course, our investors. We undertook capital management initiatives to provide capacity to pursue further social infrastructure property investments consistent with our strategy while also improving liquidity and reducing gearing, and quickly reached agreement for rent relief with our tenant partners where justified. The impact of those agreements for the period 1 July 2019, to 30 June 2020, with 96% of contracted rent was receded; 3.5% of contracted rent was deferred, of which 71% is scheduled to be received in financial year '21; and 0.5% of contracted rent was abated over that period. I'm pleased to report that as of today, all of Arena's tenant partners are in compliance with their lease rental obligations and rent relief agreements. Despite the broad challenges financial year '20 has presented our stakeholders, Arena's disciplined strategy has supported overall positive operational and financial outcomes. We've maintained 100% occupancy across the portfolio and achieved average rental growth of 3.4%. We have again had success in executing on our investment and development activities, with 4 operating centers acquired at a net initial yield of 6.3%; the completion of 3 high-quality early learning center development projects at a total cost of $17 million and an average net initial yield on all costs of 6.7%; and the replenishment of our development pipeline with a further 17 exciting new development sites that will support future earnings growth. We've worked in partnership with our tenants and completed multisite solar installations as part of our renewable energy program as well as early learning center rejuvenation programs with 4 of our tenant partners. We acted decisively in reaching agreements with our tenant partners on rent relief programs that were justified to 30 June as a result of the impact of COVID-19. Our weighted average lease expiry has been maintained at 14 years. We have seen further net valuation growth across the portfolio of about $39 million. The passing yield for the portfolio at June was about 6.2%. Recent direct property transactions point to the potential of further reduction in yields, which may give rise to further increases in valuations at 31 December. Our portfolio metrics are in great shape. We've achieved strong rental growth. The portfolio has no vacancies. We have long contracted lease duration of 14 years, and portfolio value was up 4.6% for the 12-month period. As a result of proactive management activities and ongoing prudent capital management, our earnings per security was up 5% and distributions for the year were $0.14 per security. I acknowledge the disappointment of some investors in our decision to delay our March distribution for a few months as we assess the risk of the escalation of the pandemic on our tenant partners at that time. Notwithstanding that delay, overall distributions to investors were up 4% from the previous year. You can see on this slide the growth from our rent roll from those annual rent escalations and market rent reviews along with the impact of our development completions and acquisitions are the drivers of that growth in earnings. Pleasingly, we also reduced gearing over the period to just under 15%, as a result of the capital raising undertaken in June and continued net valuation growth across the portfolio. So in summary, an increase in net earnings and increase in net assets and a reduction in gearing over the 12-month period. As at 30 June, Arena's portfolio consisted of 239 social infrastructure properties occupying over 65 hectares of land. All operating assets were independently valued at 30 June, which provided for a total value of the portfolio of $914 million. In terms of portfolio diversification, we have grown both our early learning and health care investments proportionately over the 12 months to June, so no change in overall sector diversification. Geographically, you can see in that middle graph, if you tally Queensland, Victoria and New South Wales, we now have 82% of the portfolio in the high population eastern seaboard states. We continue to improve our spread of tenant partners with 4 new health care and early learning center operators joining the portfolio over the last 12 months. Looking forward, Arena is well positioned, and despite broader economic uncertainty, our outlook remains positive. We have provided distribution guidance for the current financial year of between $0.144 and $0.146 per security, an increase of between 3% and 4% on financial year '20. Our positive outlook is underpinned by our long contracted leases with earnings growth from annual rent reviews as well as ongoing selective development and acquisition activity. Early learning and health care services are integral to economic recovery and improving community outcomes. These important themes support Arena's portfolio value and will continue to provide opportunities for further disciplined growth. We've increased our funding capacity. And as of June, our gearing was 14.8% with no debt expiry until March 2023. We have a highly engaged and dedicated management team with strong relationships with our tenant partners and a proven ability to secure and execute on high quality, new investment opportunities. I would like to thank our Board members and our executive team, our contractors and service providers for their dedication and hard work through the period and take the opportunity to assure investors that we will continue working hard to achieve positive outcomes. In closing, I'm pleased to advise that we are well placed to continue delivering benefits to our tenant partners and the communities that use our assets and on our investment objective of providing long-term predictable distributions to our investors with prospect for growth. Thank you for your interest and ongoing support of Arena. I'll now hand you back to our Chair. Thank you, David.

Thank you, Rob. I now ask if there are any general questions in relation to Arena REIT, including in relation to the financial report, the directors' report and the auditor's report for the financial year ended 30 June 2020, as contained in the 2020 annual report. I note that there will also be an opportunity to ask specific questions related to the formal business of the meeting as each resolution is proposed. If there are no questions, I will now move to the formal business of the meeting. Formal business. The first item of business is to receive and consider the financial report, the director's report and the auditor's report, each for the financial year ended 30 June 2020. This item of business does not require a vote. However, the reports are open for discussion. If any security holder has questions or comments relating to this item and has not already done so, please submit your question now. If there are no questions, as this matter does not require a vote, we will move to the remaining items of business, which include, firstly, to consider 2 resolutions for the company, being an advisory resolution to adopt the remuneration report and an ordinary resolution to reelect myself, David Ross, as a director; two, to consider 5 resolutions as separate ordinary resolutions of the company in each of the trusts, to ratify placements and to grant deferred short-term incentive rights and long-term incentive performance rights to Mr. de Vos and Mr. Winter; and thirdly, to consider a resolution as a separate special resolutions of the company and the trust to amend the constitution. Resolution 1 is an advisory resolution. Resolutions 2 to 7 are ordinary resolutions which will be passed to 50% or more of the votes cast by security holders present, that is in person or by proxy, and eligible to vote are cast in favor of the resolution. Resolution 8 is a special resolution and will be passed if at least 75% of the votes cast by security holders present, in person or by proxy and eligible to vote, are cast in favor of the resolution. Information in relation to the resolutions is included in the Explanatory Memorandum which formed part of the Notice of Meeting. As security holders have already received a copy of the Notice of Meeting and Explanatory Memorandum, I propose to take each of the resolutions as read. We will now proceed to the resolutions, each of which will be displayed on the screen along with the details of the proxy votes received. Following the opportunity for security holders to ask questions relevant to the resolution, we will then proceed to a poll on each resolution. All undirected votes for which the Chair of the meeting holds, a valid proxy will be cast in favor of each resolution. Moving to resolution 1, which is the nonbinding advisory note on the Remuneration Report. Resolution 1 and the proxy votes received in relation to this resolution are displayed on the screen. If you have any questions regarding this resolution and you have not already done so, please submit them now. We don't have any questions. So I'll ask you to please cast your vote. I remind you that to cast your votes, simply select one of the options. There is no need to press the submit or the enter button as the vote is automatically recorded. [Voting]

I will now call on Rosemary Hartnett to take the Chair and to call the motion in relation to my reelection.

Thank you, David. Resolution 2, reelection of Mr. David Ross as a Director of the company. Resolution 2 and the proxy votes received in relation to this resolution are displayed on the screen. If you have any questions regarding this resolution and you have not already done so, please submit them now. No questions have been received. So please cast your vote. I remind you that to cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. [Voting]

I will now pass the chair back to Mr. Ross for the remaining resolutions.

Thank you, Rosemary. Resolution 3, ratification of the placement. Resolution 3 and the proxy votes received in relation to this resolution are displayed on the screen. If you have any questions regarding this resolution and you have not already done so, please submit them now. There are no questions. So I will ask you to please cast your vote. [Voting]