Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Arena REIT FY '21 results. [Operator Instructions] I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.

Good morning, everyone, and a very warm welcome to Arena REIT's results presentation for the 2021 financial year. 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, and joining me on the call today is Gareth Winter, Arena's Chief Financial Officer. Before commencing our presentation today and recognizing that many participants on the call are in lockdown and some for the second year running, on behalf of the Arena team, I'd like to acknowledge the challenges the pandemic has presented but also acknowledge the resilience and support that we've seen from our stakeholders through this period. I'd particularly like to thank our tenant partners for their tenacity and their ability to continue delivering essential services to Australian communities. In our usual format, today's presentation will include an overview of the highlights of the financial year and an update on our performance against strategy. Gareth will provide insight into Arena's financial results and capital management position. And I will close the presentation with an update on portfolio operations and commentary on Arena's outlook. As always, there will be an opportunity for questions at the end of the presentation. Moving into the presentation on Page 3, and despite the external challenges, I'm pleased to report that financial year '21 has been a successful year for the business. We've made solid progress against our investment objective and ultimately achieved strong outcomes across the portfolio, which has contributed to strong investment outcomes and ongoing positive outcomes for the many communities across Australia that use our properties. Our highlights for the period include a record statutory profit of $165 million, underlying cash-based net operating profit of $51.9 million, which is up 18.5% on financial year '20. We've seen further valuation growth across the portfolio, contributing to an increase in net asset value, which is up 15% over the 12-month period. We've deployed $106 million of capital into exciting new projects in Victoria, New South Wales, South Australia, Western Australia and Queensland. We've taken the opportunity of strong direct market conditions and divested 6 older early learning properties at a premium of 16% on prevailing book value, and we've recycled those proceeds back into our development pipeline, which now includes 15 projects with an anticipated total cost of $91 million. We've collaborated with our tenant partners that has provided the opportunity to do more for the environment, and at the same time, significantly increased the portfolio WALE, which now sits at over 20 years and by far the longest in the Australian-listed REIT market. Obviously, this is consistent with our objective of providing our investors predictable distributions over the long term. Gearing remains below 20%, providing balance sheet capacity to take advantage of new opportunities that are consistent with our strategy. We've distributed $0.148 per security in financial year '21, which reflected a 6% increase on financial year '20. And today, we are providing distribution guidance for financial year '22 of $0.158 per security, reflecting an increase of 6.8% on financial year '21. So pleasing operational and financial outcomes in an active period for the business. Moving on to the next slide. Underpinning those positive outcomes achieved through the year is Arena's consistent approach, strong industry relationships and high conviction on maintaining our discipline and executing on strategy. Highlights of the period of the team's key focus areas are the extension of portfolio WALE to over 20 years, which is principally a result of collaborating with our largest tenant partner, Goodstart, to extend 87 leases for a further 25 years in a program where Arena is responsible for installing solar power systems across all of our Goodstart-owned sites. This is a great outcome for all stakeholders with environmental benefits from a reduction in carbon emissions of over 1,000 metric tons per annum, benefits to our tenant partner from meaningfully reducing their utility costs and benefits to the community as those savings will be reinvested back into children's programs. The cost of the installation program, which is anticipated to be around $5 million will be borne by Arena and offset against securing over $610 million of future rent. During the year, we sold 6 early learning centers that relative to the balance of the portfolio are older and less efficient for total proceeds of $17 million and a premium of 16% to book value. And we've seen further valuation growth across the portfolio of $108 million for the full year. Passing yield for the portfolio is now 5.77%, having compressed by 45 basis points. We've maintained 100% occupancy across the portfolio, which has been the case for now over 5 years. And this achievement really highlights the quality of the portfolio, strong underlying fundamentals that support the social infrastructure sector and the proactive asset management programs undertaken by the Arena team. Average rental growth was 3.3% across the portfolio. It is worth noting that this includes the 25 FY '20 market reviews that achieved an increase of 6.5%, which is consistent with our results from prior periods. During the period, we made further progress on our renewable energy program that is focused on collaborating with our tenant partners in an attempt to install and promote the use of solar and reduce the energy intensity of our portfolio. We also completed 6 refurbishment programs with 2 tenant partners, which provide for better amenity for families, better rents to Arena and a reduction in terminal value risks of those properties. In relation to rent relief programs, all of our tenant partners remain compliant with agreements struck in FY '20, and we've received 100% of contracted rent through the year. We've acquired 7 operating properties, 6 in Metropolitan Melbourne and 1 in Brisbane. Each have been acquired on our preferred long-term triple net lease and an aggregate cost $40 million and have provided the net initial yield on all costs, including transaction costs of 6.1% and an initial weighted average lease term of 27 years. In addition, we've completed 14 early learning center developments with 5 new and existing tenant partners. These projects had a total investment cost of $74 million and a net initial yield on all costs, again, including transaction costs of 6.6%. We've replenished our development pipeline with the acquisition of 9 new early learning center development sites. Each of those have been precommitted on a new 20-year triple net lease; and combined, they have a forecast cost of $54 million. Moving on to an update on the COVID impacts on the business on Slide 5. And as I mentioned at the start of the call, we're very aware of the challenges that the pandemic has had and is continuing to have on many of our stakeholders. As Arena's portfolio exclusively accommodates essential community services, we've been somewhat sheltered from the financial impacts that other businesses are dealing with. Nevertheless, we remain vigilant in assessing the direct and indirect risks of the pandemic, including the risk of heightened inflation during and following the recovery period, which is a risk that Arena is well positioned for. At an operational level, all Arena's properties are open and trading, delivering essential services. We've received 100% of contracted rent paid to June '21 and therefore, have no arrears. All repayments of deferred rent agreed in financial year '20 that has fallen and due has also been paid. Progress on our development and origination programs has largely been unaffected to date. Looking forward, our medical centers will play an important role in assisting the national vaccination program. And whilst attendances are reduced at both medical centers and early learning centers during lockdown periods, there is precedent for strong rebounds for those seeking elective procedures as well as families resuming routine programs for early learning. What has been consistent through the pandemic period is the efforts by the federal government to ensure that early learning services remain open and viable not just for now but the important contribution they make to an enduring economic recovery, allowing parents and carers to get back into the workforce and providing opportunity for better financial security, particularly for women. Moving to the next slide. During the year, Arena released its 2020 sustainability report, which provides the detail on our commitment to strategies that address sustainability challenges and opportunities faced by our business and our stakeholders. We've made good progress throughout the year on these strategies, including a material increase in the use of renewable energy, reducing our tenant partners' utility costs and reducing the negative impacts on the environment. We've increased our stakeholder engagement, which has allowed us to collaborate and create partnerships for positive change. And we've also identified new sustainability priorities for the business, which will be presented in our 2021 sustainability report, which will be released next month. Sustainability is fundamental to our investment approach, and we think that that approach best positions our business to achieve positive long-term commercial outcomes. Our development activities are not designed for short-term profits. They're designed to be flexible and efficient for our tenant partners with sustainable rents for the long term, which allows our tenant partners to focus on their core purpose of delivering essential services to Australian communities. With a disciplined investment process and being an internalized manager with strong governance protocols means that we are aligned with investors for the long term. We are looking for sustainable growth in our financial metrics, not short-term scale. Our partnership approach promotes ongoing business and mutually beneficial outcomes for all of our stakeholders. And if we do all of these things well, not only will we achieve those positive sustainability and commercial outcomes, we will continue to broaden our universe of capital providers for the growing number of investors seeking better sustainability and social impact attributes from businesses they invest in. And in that context, Arena is very well positioned. I'll now pass you over to Gareth to provide detail on our financial results.

Thanks, Rob, and good morning, everyone. Just turning to Page 8 of the presentation, you will find a summary of Arena's operating income statement for the year, which shows the 18.5% increase in net operating profit to $52 million and a statutory profit of $165 million for the year. A reconciliation of net operating profit to statutory profit is included in the appendix to the presentation with the most substantial reconciling item being the periodic revaluation of investment property. Operating EPS of $0.152 is 4.5% higher than FY '20 and was in line with our expectations. The key driver of the increase in operating profit is the 11% increase in property income, which has been derived from a combination of rent reviews and capital deployment. Like-for-like rent reviews averaged 3.3%, noting that this includes market rent reviews for around 10% of the portfolio, [ a greater than ] average rate of 6.5%. Arena's ongoing program of investment in ELC developments and new acquisitions contributed to earnings by capital deployment of $106 million in FY '21, including the completion of 14 ELC developments and the acquisition of 7 operating ELCs in conjunction with tenant partners. There was also a capital recycling of $17 million from the sale of 6 ELCs at a 16% premium to book value. Some specific comments in relation to rent collections in FY '21. Arena's portfolio has demonstrated high resilience throughout the pandemic period. There are presently no rental relief, and all contracted rent for FY '21 has been received, including the collection of $1.4 million of deferred rent. COVID-related rent deferrals relatively short term with 72% of rent deferred in FY '20 received in FY '21 with all $2.1 million of remaining deferred rents scheduled to be received within the next 2.5 years. Deferred rent has been previously recognized in income and is booked as a receivable with only the cash inflow to come. And as looking at some other line items, other income includes fees from our healthcare property syndicate, which was extended by investors for a further 2-year term in late 2020, and interest income. Property expenses primarily increased due to additional allowances for independent valuations and property inspections due to growth in the portfolio. There was a modest increase in operating expenses in FY '21 primarily due to costs related to the growth of the business, including custodian and corporate insurances and also some expenditure related to the ongoing development and advancement of Arena's ESG programs. Pleasingly, and this points to the benefit of our internalized management platform is that revenues increased by comparative $6 million, and cash OpEx increased by less than $100,000 in FY '21. The reduction in finance costs reflects the combination of the reduced cost of borrowing and the significant expansion of development WIP increasing in the capitalization of interest, which was $3.6 million in FY '21 versus $2.1 million in FY '20. The average monthly development WIP balance was circa $16 million during FY '21 compared to around $35 million in FY '20. The overall cost of borrowing has reduced to 2.65% compared to 3.15% at June '20, primarily as a result of lower swap rates. The higher statutory profit of $165 million is due to the growth in net operating earnings and also the higher positive asset revaluations of $108 million in FY '21 versus $37 million in FY '20. Given the substantial deployment of capital in FY '21 and greater clarity on the impact of COVID-19 on tenant operations, Arena's FY '21 distribution guidance was upgraded in December to $0.148 per security, representing growth of 5.7% on FY '20. As Rob mentioned, we've given guidance today for FY '22 distributions of $0.158 per security, representing growth of 6.8%. With that growth due to the annualization of capital deployed in FY '21, and we also expect our payout ratio to be consistent with recent years. Page 9 presents a waterfall chart of EPS for FY '21. This demonstrates the relativity in individual items supporting EPS growth, noting that the rent abatement has no impact in FY '21 and that the key drivers of growth remain ongoing rent reviews and the deployment of capital into development and acquisitions. Also notable is the effect of the capital raising performed in late FY '20 with our relatively low gearing throughout FY '21 providing substantial opportunity for further accretive investments into FY '22 as the remainder of that capital is deployed. Turning to Page 10. This slide presents a summary of Arena's balance sheet. The full balance sheet is in the appendix to the presentation. Key points to note are the growth in total assets is due to the $106 million invested in acquisitions and developments in FY '21; the asset revaluation of $108 million, which is also the primary driver of the 15% increase in the asset value per security, less a reduction in cash holdings, which reduced by about $70 million over the course of the year as we felt more comfortable holding less cash throughout FY '21. Net gearing at just under 20% is well below Arena's maximum gearing range of circa 35% to 40%. However, this level of gearing provides substantial liquidity to fund the existing pipeline of developments and will enable us to continue to take advantage of growth opportunities at a low incremental cost of capital. It also provides a buffer around any future market volatility. And gearing is expected to increase by around 3% as existing development projects are completed. Turning to Page 11 on the capital management summary. Our approach to capital management continues to prioritize resilience and risk reduction. At 30 June, we had $90 million of immediately available liquidity through our debt facility to cover the $57 million of development commitments. This, in combination with our modest gearing, allows us to actively consider further growth opportunities. The weighted average debt term is 3.7 years with no expiry before March 2024. This incorporates the recent extension of our March '23 expiry, which was extended out to March '26 in July. Our all-in cost of debt has reduced to 2.65% with interest rate hedge cover approximately at 81%. If interest rates remain around existing levels, we expect that our average cost of debt will further reduce over time as there remains positive reversion value in the hedge book. Finally, I will note that Arena operates well within the requirements of our debt facility, and we have very substantial headroom in both our LVR and ICR covenants. I will now hand you back to Rob, who will update you on Arena's property portfolio. Thank you.

Thanks very much, Gareth. I'm now on Page 13. So as at 30 June, Arena owned 249 properties across Australia with a value of about $1.1 billion. Portfolio is approximately 66 hectares predominantly residentially zoned with improvements that are almost exclusively purpose-built for our tenant partners. The portfolio accommodates over 20,000 families in 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 high physical support needs in our SDA portfolio. The portfolio is in great shape. It's the longest contracted rent profile in the REIT sector. And to give that some context, the value of contracted future rent is well in excess of the current total portfolio value. We have an exceptionally strong occupancy record having had no vacancy for over 5 years. The portfolio has low single asset concentration with the largest single asset accounting for 2% of the value of the portfolio. The land and building rate remained under $1,700 a meter, which looks like compelling value when measured against other real estate asset classes. The passing yield is 5.77%, has seen compression of 45 basis points in the last 12 months, which added with rent increases has provided for valuation growth of just under 12%. With increased investor interest in social infrastructure property, the current low interest rate environment and recent strong direct market evidence, we see the likelihood of further yield compression and as such, the likelihood of further valuation growth in the short term. Sector diversity for the portfolio has not materially changed in the period, and geographically, we have over 83% for the portfolio located in the high population areas of the Eastern Seaboard states. In terms of tenant diversification, we continue to improve our spread of tenant partners now totaling 32 with 27% of Arena's income supported by Australia's largest early learning provider, Goodstart. Moving on to the lease expiry profile. And as you can see in this graph on this slide, with only 10% of the portfolio's income expiring in the next decade, and no material concentration of expiries in any year to beyond 2044. These are obviously very long-term cash flows that have annual escalations providing real growth to our securityholders. All of the leases are triple net with no exposure to variable property expenses, so highly efficient and highly predictable. Every one of our early learning center properties and our SDA properties provides us important business operating information data, and that assists us in our asset management and capital allocation decisions. And that's been an important tool for us in assisting the portfolio remain 100% occupied for over 5 years. Moving on to our rent review profile on Page 15. And here on this slide, we've broken down our rent review structures for FY '22, '23 and FY '24. At the bottom of the first column, you can see that 76.5% of this financial year's income is subject to a review at the higher of CPI and a fixed amount, which is generally 2.5% to 3%. Moving up the same column, 11.2% of this year's income is subject to a CPI increase. If you add those 2 components together, that is the dark blue and the dark gray components, you can see that at least 87% of this financial year's income will escalate at least as high as CPI, providing strong inflation protection. Further up the same column, we have 9% of fixed reviews, which will average to around 2.9% through the year; and 3.4% of income is subject to a market review. And each of those market reviews have now been resolved at an average increase of 6.5%. It's a similar profile of annual rent reviews in financial year '23. And in financial year '24, we have more market rent reviews, totaling 16% of that year's income. All of those reviews have a collar at the passing rent. In other words, the rent can't go backwards, and half of the reviews are subject to a 7.5% increase -- cap, I should say, 7.5% increase cap and whilst the other half have no cap on increase. Moving on to Page 16. And our origination programs are performing well. We've secured a targeted pipeline of quality early learning center development projects that will complement the portfolio and deliver future earnings growth. The 14 projects that we completed in the financial year '21 were designed and completed to suit each individual tenant's operations. And we and our 5 tenant partners are very pleased with the new additions to the portfolio. I'm particularly pleased with our Coomera development with Edge Early Learning that won the best community service facility at the Master Builders Award in the Gold Coast a fortnight ago. So great stuff there. Looking forward, in total, our development pipeline has 15 early learning center projects that are located in Queensland, Victoria, South Australia and New South Wales, with a total forecast cost of $91 million, of which we have capital expenditure outstanding of $57 million. We anticipate that the average initial yield on all costs for these projects will be 6.2%. Each of these development projects are being undertaken on a fund-through basis, and we've secured agreement for leases with existing tenant partners on every project in our standard 20-year triple net lease format. Arena is a leader in early learning development and has an enviable record in executing on its development pipeline. Over 1/3 of our early learning portfolio has been developed by us since listing in 2013. In that time, we've completed 54 developments with 13 tenant partners across all states and territories, except the ACT. Moving on to the next slide. And as has been [ verbally and ] publicized, the federal government's support for the early learning sector through the pandemic has been significant and for the very most part, well designed and well received by operators that required support, particularly through the early lockdown periods. Both major political parties and Australian communities more generally recognize that a well-performing early learning sector is integral to assisting parents and carers and particularly females get back into the workforce in the short term and ongoing on a sustainable basis. There's also a growing awareness of positive lifelong learning prospects of children that attend early learning services and the broader role that plays in creating a more socially and emotionally well-adjusted community and a more qualified and productive workforce in future generations. The macro drivers supporting early learning sector continue to be positive, with increases in female workforce participation and children using long day care services, which now sits at a 52% national participation rate. In relation to supply. Net new supply of early learning centers was consistent with FY '20. Across the country, there were a net addition of 297 centers against a net addition of 294 centers in financial year '20. So that's net growth of about 3.6% over the last couple of years. Moving on to the next slide. Arena's early learning portfolio is in a strong position. We're 100% occupied, with 100% of contracted rent collected through financial year '21. Every one of our early learning centers is open and trading, and every one of those centers is providing us business operating data, and that data provides us important information, as I mentioned, that assist asset management and capital allocation decisions. It also provides us insight into the general health of the sector. And as we have done in previous reporting periods, we've included operating data up to the prior quarter. And that data for our portfolio provides average underlying operator occupancies increased marginally over 12 months from March '20 to March '21. Daily fee growth has also increased to reflect an average of $114 per day, which remains significantly below the government's benchmark fee of $135 per day. As you can see on the graph at the bottom of the page, the government's funding package continues to suit our early learning center portfolio, which is typically geared towards middle-income families. And to give this some context, 97% of our early learning centers have daily fees under the government's child care subsidy benchmark fee as of March. Our average rent per place across the portfolio has increased marginally to $2,549 per place, given that we've developed more than 1/3 of the portfolio over the last 5 years remains highly affordable in our view. Despite strong rent increases across the portfolio, rent affordability has improved for our tenant partners with net rent to revenue ratio of 11% as of March. Moving on to the next slide. And our health care portfolio continues to perform to our expectation. And like early learning, 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 the infrastructure to accommodate those services. We've seen increased investor interest in Australian health care property, which is reflected in an increase in asset values for our health care portfolio. And whilst we continue to be attracted to new opportunities in the health care property market and aspire to grow this part of the portfolio, we've no desire to rush where the market is heated and grow simply for scale's sake. In our usual disciplined way, we're looking for quality over the long term that will support our investment objective on a sustainable basis. Moving on to the outlook. Today, we're announcing full year distribution guidance for financial year '22 of $0.158 per security, an increase of 6.8% on financial year '21. The portfolio is in a strong position, 100% occupied, 100% of rent collected through the year, a very long WALE with transparent and highly predictable rent profile that has inflation protection. Income growth is underpinned by those contracted annual rent increases as well as the impact of our financial year '21 and financial year '22 acquisition and development completions. 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 security holders with prospects for growth. We have substantial balance sheet capacity to take advantage of new opportunities that are consistent with our strategy with gearing at less than 20% and no debt expiring falling due until March '24. Our experienced management team has strong industry relationships and in-house development and origination expertise that will assist us in sourcing future opportunities in a disciplined manner. In closing, I'd like to thank our team and our tenant partners for contributing to the positive investment portfolio and community outcomes that have been achieved in financial year '21. That concludes the formal part of today's presentation, so now, I'd like to pass the call back to our operator, Darcy, to open up for questions.

[Operator Instructions] Your first question comes from Simon Chan from Morgan Stanley.

Rob, you mentioned acquisitions and whatnot in the childcare space. I was just wondering if you could give us some insights into what you did on the health care side of things in the last 6 to 12 months, some of the opportunities. If you don't want to name specific opportunities, just talk about where the market ended up transacting at versus your expectation of pricing. And just give us a feel for what you're doing in that space.

Yes. Thanks, Simon. Look, as I mentioned, certainly, a part of the portfolio we aspire to grow. And it would be fair to say we've been bridesmaid on a couple of transactions over the last couple of years, in fact. We can compete -- our cost of capital, we can compete on yields. Where we get nervous on transactions is really around the rental profile. We've got such a strong portfolio, and obviously, our investment objective of making sure things are there for the long term sustainable. It's really around the rental profile. And there's been a number of transactions that have been reasonably high profile over the last 6 months, expected to be a few more, [ some start sort of trickling through ]. We'll continue to participate, but we're only going to put a foot forward where we know we can sort of nail on a sustainable rental basis, Simon. And that's a piece. I mean, to give you an example, this is an old example, but we've got some leasebacks in Victoria at $1,000 a meter in far-out suburbs. You'd only just call them metropolitan Melbourne, so just building up reversion value issues in undertaking those programs. And I think as a general comment, I think that the health care market is a little exuberant on valuing things in yields and perpetuity when I think that there will be some rental reversion issues in that sector going forward.

Yes. Okay. That's very clear. And just my second question today, your portfolio size is getting bigger and bigger. Are you at a stage now where you're perhaps going to consider getting some form of rating to get capital market debts which will be a lot longer duration? Or are we not there yet?

Yes, good question. Gareth do you want to take that on?

Sure. It's something that remains actively under consideration, so it's something which we talk about on a regular basis. And yet, as you would know, we've talked previously around there's a threshold around that $1 billion mark in terms of assets. We've just crossed over that. There's no particular need to rush to -- we've got very supportive banking syndicate giving us the liquidity we need at the moment, but it's certainly something that remains under active consideration.

Your next question comes from Caleb Wheatley from Macquarie Group.

Just a couple of questions from me. The first one, just on the [ given ] guidance. I'm just wondering if you'd give any additional color and components going into that, in particular, things like rental growth, cost of debt, any development completions you'd expect through FY '22?

Gareth, do you want to field the first one?

Sure. It's pretty much done as what we term as status quo basis. So we've got an existing development pipeline that we assume we'll complete as we expect it to over the course of FY '22, which is -- but that's the only kind of development activity that we assume in that [ provided ] guidance, so I assume no new acquisitions in that process. In terms of cost of debt, it's pretty much -- as we're currently saying, is at 2.65%. Obviously, there is some positive reversion value in that swap book, but we don't necessarily assume that that's going to come to pass this -- we'll obviously wait for those existing swaps to mature before they're replaced with new ones.

Yes. The only other thing I would say, Caleb, there's probably nothing in the disclosure, so nothing more in addition to the disclosures provided in regards to completion of other things. The one thing is in regards to CPI, we've not gotten carried away with what is high CPI rights. So we're just taking the -- what I think is a conservative view in the different states on those as well.

Sure. And just on the profile for those development completions, so about $90 million set to complete over '22 and '23. That's largely in a straight line, you would say, from here or...

It is best to model that with a straight-line basis, yes, that's right. So you'll see those sort of rolling out evenly over the next 24 months.

Sure, that's great. And just the second one for me, just on outlook -- sorry, an update on the outlook for deployment, stabilized acquisitions, looking at any more difficult, obviously, none complete in the second half. So it looks like development is the focus, but yield on cost seems to have come down a bit. Just wanted to get your view on how you're looking to deploy that balance sheet as these opportunities come up.

Yes, certainly seeing strong opportunities on the fund-throughs, which is where we've got our deepest experience. We'd like to do -- frankly, we'd like to do a little bit more with -- like we did in the first half of '21, where we bought a portfolio with an existing tenant partner. They bought the business, and we bought the real estate, then collectively upgraded those services. That's great business for us and want to do more. But I think at this stage, the expectation will be more fund-throughs, more of what we've been doing, I guess, Caleb.

The yield on cost number seems to have come from 6.6% at the half year to 6.2% on the development pipeline. Is there any color you can provide around what's happened there?

Yes, definitely. I think there's -- definitely input costs on development have gone up over this period. We've seen not just raw material cost increase but labor cost increases, which is primarily a result -- I think you know the business, what we try to do is back sold to a sustainable rent on a long-term basis. So if you like, that means if you keep those rents [ pegged ] as best you can, it means that the yields are obviously going to come down a little. We feel pretty comfortable about where they sit though, still with 6s in front of them. There's been a lot of direct market evidence. There's 109 transactions over FY '21 of completed properties and yields have very significantly increased. In fact, the few that have dribbled into FY '22, Caleb, interestingly, I think there's one child care center that is actually transacted over 5%. Most of them trading at 4%. I think the average is about 4.6%. So it's a premium to completed stock. We think that our security holders, they'd been well rewarded for the risks that we're taking on.

Your next question comes from Lou Pirenc from Jarden.

A few questions for me. Rob, can you talk a little bit more about the asset recycling and if you have any further noncore assets that you have in mind for disposal in '22?

Yes. Thanks, Lou. Obviously, the market being hot is we continue to sort of look at what might be at sort of the bottom quartile. And as a whole comment, we're very comfortable with the portfolio. It's obviously performing exceptionally well. There's always 1 or 2 that you sort of see at the bottom end of that. I mean we look through a lens of very long-term WALEs and making calls on probability of renewals, 25 or 30 years out, sometimes longer. Taking a view that the market might pay more for that and we can recycle into these development programs. Don't expect any large divestment programs from us. There's always 1 or 2 through the year that we've done. We did 6, FY '21. I think it's a little less than that in FY '20. It would not be a dissimilar number at the high end.

Yes. And just, I mean, linking that to Simon's questions on health care. I mean that's clearly -- that portfolio hasn't gotten any bigger. It's a great portfolio, but would you -- with the demand for health care, would you consider at some point saying sell that portfolio and just be a pure child care REIT?

Always. I mean, look, we -- as a global comment, we like the diversity that provides [ we always set ] the business up so that we would have a diversified portfolio of social infrastructure property. They have been working sort of in homogenized fashion over the pandemic period. There's no question about that. And the health care values have increased to a point where you sort of look at those and say, "Would we?" But look, they're fulfilling what they're meant to do under our investment objective, is delivering that long-term predictable distribution. We were successful last year in extending those leases out. The properties are performing really well. I don't think there's a need for us to be out there, but you -- saying that there is a price for everything, but at this stage, I wouldn't be expecting us to be a seller. We would, frankly, aspire to be doing more in the health care space given these strong macro trends.