Arena REIT (ARF) Earnings Call Transcript & Summary

Good morning. On behalf of the 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 together, the trusts and the general meeting of shareholders in Arena REIT Limited, which together constitute Arena REIT's 2021 Annual General Meeting. My name is David Ross, and I'm the independent Chair of the Board of Directors of Arena REIT Limited and of the Board of Directors of Arena REIT Management Limited, the responsible entity of the trusts, and I've been appointed as the chair of today's meeting. We acknowledge the traditional custodians of the various lands on which we meet today and recognize their ongoing connection to land, waters and community. 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 Nonexecutive Director, who will act as alternative chair in the event that I experience any technical issues; Simon Parsons, independent nonexecutive Director; and Dennis Wildenburg, independent non-executive Director. Also with us today are members of the Arena REIT or Arena 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 of Boardroom Limited. The agenda for today's meeting includes instructions for asking questions and voting by the Lumi virtual meeting platform. 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 2021 financial year and the outlook for the 2022 financial year. We will then move to general questions followed by the formal business of the meeting being consideration and voting on 7 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 a webcast of the meeting. In addition, security holders and proxies have the ability to ask questions and submit votes. Asking questions via Lumi, questions can be submitted at any time. To submit a written question, select the messaging tab and then type your question in the ask a question box. Once you have finished typing your question, please press the arrow symbol to send. To submit an audio question, pause the broadcast before you click the link under asking questions, a new page will open. Please enter the requested details and click submit request to join the audio questions queue. You will hear the meeting while you wait to ask your question. 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 one 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. If you are eligible to vote at this meeting, a polling or voting 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 the 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 votes at any time. I will give you a warning before I move to close voting. So our highlights for 2021 financial year for Arena REIT. In a period affected by the direct and indirect challenges of COVID-19, Arena has produced strong earnings, distribution and capital growth, successfully delivered acquisitions and development completions, replenished the development pipeline, further extended the portfolio's existing long WALE through a post balance state portfolio released and renegotiation and further improved our progress with regard to sustainability outcomes. These positive outcomes are a result of the resilience and support of our stakeholders, particularly our tenant partners, the quality of Arena's portfolio, the proactive approach for Arena's management team and the strong macroeconomic themes that support investment in social infrastructure property. It is also an endorsement of Arena's disciplined strategy and ability to deliver against our investment objective. Arena's statutory net profit for the year was $165.4 million, an increase of 116% on the prior year, primarily due to the revaluation uplift during FY '21. Underlying net operating profit increased by 18.5% to $51.9 million. Key contributors to higher operating income included contracted annual rent growth and positive outcomes on market rent reviews, acquisitions of operating early learning center properties and development projects completed during the 2020 financial year and 2021. The result represents earnings per security of $0.152, an increase of 4.5% over the prior year. Arena has paid a full distribution per security of $0.14.8, up 5.7% on the prior year. Arena's total assets increased by 14% to $1,151.5 million I think it is million, as a result of acquisitions, capital expenditure and the positive revaluation of the portfolio. The reevaluation uplift was the primary contributor to the 15% increase in net asset value per security to $2.56 at 30 June 2021. Arena continues to operate well within its banking covenant requirements. As at 30 June, Arena's gearing was 19.9%, with $90 million of undrawn debt capacity to fund the balance of the development capital expenditure of $57 million and future social infrastructure property investments consistent with strategy. I'll now move on to sustainability. Sustainability is fundamental to Arena's investment approach, and we believe that approach best positions arena to achieve positive long-term commercial outcomes. Arena's portfolio of social infrastructure properties provides direct access to essential community services. Our early learning centers provide early childhood education and care, which allows parents and carers the opportunity to remain in or rejoin the workforce. Arena's medical centers provide local community-based primary health care services. Our specialist disability accommodation is designed to provide a better quality of life for residents with higher physical support needs. Given the environmental and social footprint of its assets, Arena has an opportunity to leverage its own sustainability initiatives to create a multiplier effect on its sustainability impacts by partnering with its tenants. Accordingly, Arena's overarching approach to sustainability is to actively seek out partnerships for change. Our partnership approach delivers mutually beneficial outcomes for our communities, team, tenant partners and ultimately, our investors. Post balance date, Arena released its 2021 Sustainability Report, which provides detail on our commitment to strategies that address sustainability challenges faced by Arena and our stakeholders and identifies opportunities to progress positive change. It outlines goals and targets over the short and medium term for ongoing action and future reporting. We continue to welcome feedback from all stakeholders to ensure that we can build upon our disclosures moving forward. On to remuneration. Arena's key remuneration objectives are to attract, retain and incentivize talent by providing market competitive rewards with incentive opportunity designed to align the remuneration with performance and strategy and to guide the behavior and actions of the executive key management personnel. There were no changes to the remuneration framework in FY '21. Executive KMP remuneration and target remuneration mix was maintained at FY '20 levels, and there were no changes to Board fees. The remuneration outcomes in FY '21 reflect Arena's strong financial performance of 4.5% earnings per security growth and 5.7% distribution per security growth and strong operational outcomes achieved notwithstanding the COVID-19 pandemic. Executive KMP were awarded 95% of their target short-term incentive, which reflects 2 things: the delivery of above-target distribution and earnings growth in FY '21, and the performance of executive KMP in respect of nonfinancial objectives. The FY '19 long-term incentive was tested at the 30th of June '21 and will fully vest as the FY '21 distributable income of $0.152 per security representing a 5.1% compound annual growth rate over the 3-year performance period exceeded the high hurdle of $0.15 per security and Arena's TSR of 83%, which was equivalent to a 22% compound growth rate for the 3-year period ended 30 June 2021, ranked at the 89th percentile of the ASX300 A-REIT comparator group. An independent review of Arena's remuneration framework was completed in FY '21 for implementation in FY '22. Details of the review are provided in the remuneration report. In the 4 years since the previous independent review, Arena has experienced significant growth, including a 60% increase in property income, an 85% increase in total assets and a 134% increase in market capitalization. The key decisions to be implemented with respect to FY '22 remuneration reflect contemporary market practice, talent retention in an increasingly competitive market, the progression of Arena's strategy and individual and collective employee performance. I'll now move to strategy. Government support for the Early Learning Centre sector was reinforced through the various COVID-19-related funding commitments undertaken by the federal government over the last 18 months. The federal government has also recently committed a further investment of $1.7 billion to the sector to support ongoing economic recovery in the short term and improve workforce participation, general quality, women's financial security and economic activity over the medium to long term. Strong structural demand for services and a record female work participation rate continue to drive increased long day care participation rates over the medium to long term. Macroeconomic drivers also continue to support Australian health care accommodation,; including a growing and aging population and increased prevalence of chronic health conditions. Strong occupancy has also been maintained across the specialist disability accommodation portfolio. Health care properties remain strongly sought after with increased domestic and international interest in Australian health care property and increasing interest in social infrastructure property more generally. In this environment, Arena continues to differentiate its brand in the marketplace through a partnership approach, working collaboratively with our tenants and other stakeholders. Arena's management team has specialist asset management and development expertise and a strong track record that includes the successful delivery of 54 development projects for our tenant partners over the past 9 years at a total cost of $262 million. I'll now move to the outlook. Arena remains well positioned to navigate ongoing and emerging economic and investment challenges and to consider new opportunities that are consistent with 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 FY '22 and distribution guidance for FY '22 of $0.158 per security, which was issued in August 2021, reflecting 6.8% growth over the prior year 2021. Before handing over to Arena's Managing Director, Rob de Vos, 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 2022. Thank you. I'll now hand over to Rob de Vos to make his Managing Director's presentation.

Thank you, David. I, too, would like to acknowledge the traditional custodians of the various lands on which we meet today, and recognize their ongoing connection to land, waters and community and to offer a very warm welcome to everyone to Arena REIT's 2021 Annual General Meeting. Community well-being is at the very core of the services that our tenant partners provide from within Arena's property portfolio. The last 18 months have been an uncertain and challenging period for tenant partners and their staff who've 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 would like to take this opportunity to thank our tenant partners for their resilience and tenacity. Looking forward, we anticipate that, that 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 broader economic recovery. These factors will, of course, 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. Despite the broad challenges COVID-19 has presented our stakeholders, Arena's disciplined strategy has supported overall positive operational and financial outcomes. We've received all contracted rent and maintained 100% occupancy across the portfolio and achieved average rental growth of 3.3%. The portfolio's existing long WALE was further increased to 20.1 years following the acquisition of 7 operating Early Learning Centre properties with an initial weighted average lease expiry of 27.3 years; the completion of 14 Early Learning Centre developments with an initial weighted average lease expiry of 20.8 years; and a post-balance date portfolio lease renegotiation with Goodstart, which included an increase of 25 years of lease term on 87 Early Learning Centre properties. We have again had success in executing on our asset recycling, investment and development activities with 6 Early Learning Centre properties divested at an average premium of 16% to book value; 7 operating Early Learning Centre properties acquired at an average net initial yield of 6.1% on total cost; 14 Early Learning Centre developments completed at an average net initial yield on total cost of 6.6%; and replenishment of our development pipeline with a further 9 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 Centre rejuvenation programs with 2 of our tenant partners. We've seen further net valuation growth across the portfolio of over $107 million, and the passing yield for the portfolio at June was 5.77%. Recent direct property transactions point to the potential of further reduction in yields, which may give rise to further increase in valuations at December 2021. So our portfolio metrics are in great shape. During financial year '21, we have achieved strong rental growth with like-for-like increases of 3.3%; the portfolio remained 100% occupied and has been for 6 consecutive years; we have long contracted lease duration of over 20 years; and the portfolio was up 11.8% or at $107 million for the 12-month period. As a result of our focused management activities and ongoing prudent capital management, our earnings per security was up 4.5% from $0.1455 to $0.152 in financial year '21. You can see on this slide that the growth in our rent roll arising from annual rent escalations and market rent reviews, along with the impact of our acquisitions and development completions are the predominant drivers of Arena's ongoing earnings and distribution growth. And this has been offset by some marginal increases in operating costs and the impact of raising equity earlier in the year. As at 30 June, Arena's portfolio consisted of 249 social infrastructure properties, occupying over 66 hectares of land. All assets were valued at 30 June 2021, which provided for a full year valuation of $1.1 billion, again, up $107 million or 11.8% from the prior year. In terms of portfolio diversification, our early learning and health care investments have grown in value proportionately over the 12 months to June 2021. So no overall change in sector diversification. Geographically, we have over 83% of the portfolio located in high population eastern seaboard states, and we continue to improve our spread of tenant partnerships with 32 tenant partners in total as of June 2021. Looking forward, 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 provided distribution guidance for the current financial year of $0.158 per security, an increase of 6.8% on financial year '21. Our positive outlook is underpinned by long contracted leases with rental growth and inflation protection from annual rent reviews as well as the opportunity for ongoing selective development and acquisition activity. We've increased our funding capacity. And as of June '21, our gearing was approximately 20% with no debt expiry until March 2024. With a proven ability to secure and execute on high-quality opportunities whilst maintaining our discipline and in a changing external environment, I have comfort in assuring our business stakeholders that the Arena team will continue to work hard to achieve positive investment outcomes that, in turn, provide positive outcomes for Australian communities. In closing, I'd 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 to thank you, our security holders, for your support and ongoing interest in Arena REIT. I'll now hand you back to our Chair for today's meeting. 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 2021, as contained in the 2021 annual report. I note that there will also be an opportunity to ask questions related to the formal business of the meeting as each resolution is proposed. It doesn't look like there are any questions, so I will now move to the formal business of the meeting. The first item of business to receive and consider, the financial report, the director's report and the auditor's report, each for the financial year ended 30 June 2021. The 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: one, to consider 3 resolutions of the company being an advisory resolution to adopt the remuneration report and ordinary resolutions to reelect Dennis Wildenburg as a Director and then to increase the maximum total aggregate annual amount of fees payable to the nonexecutive directors; and two, to consider 4 resolutions as separate ordinary resolutions of the company and each of the trusts to grant deferred short-term incentive rights and long-term incentive performance rights to Mr. de Vos and Mr. Winter. Resolution 1 is an advisory resolution. Resolutions 2 to 7 are ordinary resolutions, which will be passed if 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. Information in relation to the resolutions is included in the explanatory memorandum which form 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. So Resolution 1, which is a nonbinding advisory vote 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 if you please cast your vote. I remind you that to cast your vote, simply select one of the options. There is no need to press submit or enter button as the vote is automatically recorded. [Voting]

I'll now move on to Resolution 2, the reelection of Mr. Dennis Wildenburg, 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. There are no questions coming through, so I'll ask you to please cast your vote. I'll remind you again 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]

Moving to Resolution 3, the grant of deferred STI rights to Mr. Rob de Vos. 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 coming through, so I'll ask you to please cast your vote. [Voting]

We'll move now to Resolution 4, grant of LTI performance rights to Mr. Rob de Vos. Resolution 4 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 again, so I'll ask you to please cast your vote on resolution 4. [Voting]

Resolution 5, grant of deferred STI rights to Mr. Gareth Winter. Resolution 5 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 on this resolution, so I ask that you please cast your vote. [Voting]

Moving to Resolution 6, grant of LTI performance rights to Mr. Gareth Winter. Resolution 6 and the proxy votes received in relation to this resolution are displayed on the screen. If you have any questions regarding this resolution and have not already done so, please submit them now. No questions. I'll ask you to please cast your vote. [Voting]

Resolution 7, remuneration of nonexecutive directors. Resolution 7 and the proxy votes received in relation to this resolution are displayed on the screen. If you have any questions regarding this resolution and 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. So that covers all the resolutions. So ladies and gentlemen, that concludes our discussion on the items of business. In a couple of minutes, I will close the voting system. Please ensure that you've cast your vote on all resolutions. I'll now pause to allow you time to finalize those votes and ask security holders if there are any final questions. I'll just pause and give security holders time to vote and ask a question, and I will come back in a minute or so. [Voting]

Voting is now closed, and I declare the meeting closed as well. Results will be announced to the Australian Securities Exchange following the meeting. I would like to thank all security holders for attending. Thank you.