Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Arena REIT FY '22 Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.

Thanks very much, operator, and good morning, everyone, and a very warm welcome to Arena REIT's results presentation for the 2022 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. Joining me on the call today is Gareth Winter, Arena's Chief Financial Officer. Our presentation today will include a summary of highlights for the financial year and an update on our performance against strategy. Gareth will provide insights in detail 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 positive outlook in a changing investment environment. As always, there will be a question -- opportunity for questions at the end of the presentation. So moving into the presentation on Page 3. And despite the lingering direct and indirect impacts of the pandemic, changing work patterns, increased inflation and increased interest rates, the community need for the services that Arena accommodates has remained strong. And in this context, I'm pleased to report that financial year '22 has been another successful year for the business. We've made solid progress against our investment perspective and ultimately, achieved strong outcomes for investors and ongoing positive outcomes for the many communities across Australia that rely on the essential services delivered from our tenant partners and Arena-owned properties. Arena's highlights for financial year '22 include a record statutory profit of $334 million, an underlying cash-based net operating profit of $56 million, which is up 8.4% on financial year '21. We've seen further valuation growth across the portfolio, contributing to an increase in net asset value, which is up 32% over the 12-month period, and we've made further positive steps on our sustainability programs. And I'm pleased to announce today that Arena REIT has been certified carbon neutral by Climate Active for business operations in '21-'22. We've also advanced our sustainability programs across our investment portfolio with solar renewable energy systems now installed at over 200 properties, including 100 installations that were completed in the last 12 months. We've completed 6 Early Learning Centre development projects and replenished the development pipeline, which will support future earnings growth. We upgraded our financial year '22 distribution during the period to $0.16 per security, which reflected an 8% increase on financial year '21. And today, we are providing distribution guidance for financial year '23 of $0.168 per security, reflecting an increase of 5% on financial year '22. Moving to the next slide. In an environment of heightened external risks, it is Arena's high conviction on maintaining our discipline and executing on our strategy that has underpinned positive outcomes, and the highlights of the period under the team's key focus areas are in the portfolio management. We've sold 2 Early Learning Centres that relative to the balance of the portfolio were less efficient and had lower utilization. They're sold for total proceeds of $10.1 million and a premium of 15% to book value. We've seen further valuation growth across the portfolio of $254.5 million for the 12 months. That passing yield on the portfolio is now 4.91%, having compressed by 86 points over the 12-month period. Our loan portfolio WALE has been maintained with lease extensions and WALE accretive new projects being delivered throughout financial year '22. The portfolio remains 100% occupied, which has been the case for over 6 years, and highlights the quality of the assets with strong underlying fundamentals that support the social infrastructure sector and the proactive management programs undertaken by the Arena team and our tenant partners. Average rental growth was 4.1% across the portfolio, and the escalation mechanisms in our leases are doing exactly what they are designed to do, providing investors real growth in a low inflation environment as it's been the case up until recently and maintain their real value in a higher inflation environment as we are in now. During the period, we made further progress on our renewable energy program that is focused on collaborating with our tenant partners and installing and promoting the use of solar and reducing the energy intensity of our portfolio. These activities will reduce the operating cost of our tenants in an environment of otherwise steep increases in operating costs and reduced carbon emissions by approximately 2,700 tonnes per annum. We've received 100% of our contracted rent here in financial year '22, including all the deferred rent payable under [ the programs struck back ] in financial year '20. We've acquired 7 operating properties, 6 in South Australia and 1 in Melbourne, all have been acquired on our preferred long-term, triple net lease and an aggregate cost of $47 million and have provided a net initial yield on all costs, including transaction costs of 5.4% and an initial weighted average lease term of 24 years. We've completed 6 Early Learning Centre developments. And these projects had a total investment cost of $36 million and a net initial yield on all costs, again, including transaction costs, of 6.4%. We also have finished the development pipeline with the acquisition of 9 new Early Learning Centre development sites. Each project has been precommitted on a new 20-year triple net lease. And combined, they have a forecast cost of $56 million. Moving now to an update on our sustainability programs. And as you've heard from me before, sustainability is fundamental to our investment approach. And we believe that, that best positions the business and our stakeholders to achieve positive, long-term commercial outcomes. We have a disciplined investment process and being an internalized manager with strong governance protocols means that we are aligned with our investors for the long term when looking for sustainable growth and quality in our financial metrics, not short-term balance sheet scale. Arena's portfolio facilitates access to essential community services that provide a positive social impact. We work with our tenant partners to invest the capital necessary to provide efficient, flexible and well-located accommodation at sustainable rents, allowing them to focus on their core purpose, to deliver the central services to communities throughout Australia. Further detail in relation to our sustainability activities will be provided in our 2022 sustainability report, which is scheduled to be released in late September. And the key outcomes over the period include an increase in collaboration with our tenant partners, including undertaking tenant workshops as part of our partnerships for positive change program, a material increase in renewable energy and reducing our tenant partners' utility cost and reducing those negative impacts on the environment. With improved action on climate change, including greenhouse gas inventory of Arena's financed emissions, and inaugural TCFD-aligned climate risks and opportunity disclosures, we've been certified carbon neutral by Climate Active to business operations in '21-'22. And analyzed operations and supply chains assist us to voluntary opt into Modern Slavery reporting. I'll now pass it over to Gareth to provide further details on our financial results.

Thanks, Rob, and good morning, everyone. Just turning to Page 7 of the presentation, you will find a summary of Arena's operating income statement for the year, which shows an 8% increase in net operating profit to $56 million and a statutory profit of $334 million for the year. There's a reconciliation of net operating profit to statutory profit included in the appendix of the presentation with the most substantial reconciling after being the periodic revaluation of investment property. Our operating EPS of $0.163 is 7% higher than the prior period, with the key driver of the increase in operating income and the 11.3% increase in property income, which has been derived from a combination of rent reviews and capital deployment. And like-for-like rent revenues averaged 4.1% for the year, not even over 80% of record use in FY '22 had a direct link to CPI outcomes. For a comparison, the national quarterly CPI averaged 4.4% during the FY '22. And using a national annual rate is a simplified way of looking at our CPI-based rent reviews, as the actual reviews are staggered throughout the year and new state-based quarterly CPI measures. The recent higher quarterly CPI prints will provide further inflation protection to our cash flow into FY '23 and FY '24. Also contributing with Arena's ongoing program of investment in ELC developments and new acquisitions, which contributed earnings by our capital deployment of $105 million in FY '22, including the completion of 6 ELC developments, total CapEx of $36 million, the addition of 9 new ELC development projects to the pipeline with CapEx of $56 million and the acquisition of 7 operating ELCs in conjunction with tenant partners for $47 million. We've also continued our program of selective capital recycling with proceeds of $10 million from the sale of 2 ELCs during the year at a 15% premium to book value to be reinvested into the development pipeline. Some specific comments on rent collections for the year. Arena's portfolio has continued to demonstrate high resilience. There are no rent arrears. And all contracted rent is being received, including the collection of $1 dollars of deferred rent in the year. Our COVID-related rent deferrals were relatively short term, with only $1 million of deferred rent still to be collected by December 23. Deferred rent has been previously recognized in income and is booked as a receivable with only the cash to be collected. Just looking at some other items. Property expenses, whilst relatively small on the scale of things, have primarily increased due to additional allowances for independent valuation costs and property inspections and from growth within the portfolio. Looking at our operating expenses. There have been a relatively modest increase in operating expenses compared to the comparative period from FY '22, which we highlighted at the half year. This is due to a combination of factors such as corporate insurance and custodian fees and also building our ESG capabilities, but it's substantially due to the implementation in FY '22 of the outcome of an independent remuneration review completed in late FY '21. The rent review was focused on making sure Arena's remuneration framework was in line with contemporary market practice. And the remuneration of Arena's team was in line with market and importantly, in the current environment, is to assist with staff retention. I note that it has been 4 years since the last independent review was performed. Pleasingly, and this is the benefit of the internalized venture platform of delinking cost to asset values, whilst property revenues increased by $6.8 million in the year, OpEx increased by less than $0.5 million. And our cash MER remains well below 40 basis points. Our expectation is that underlying costs will not grow at the same rate in FY '23. Increase in finance costs is due to a combination of factors. The most substantial being a higher operating debt balance the completion of 20 development projects over the past 2 financial years, which moved them from a period of capitalization of interest in WIP to operating and the commencement of rental payments and the expansion of our debt facility by $100 million during the year to fund the development pipeline. Due to our ongoing high levels of hedging, the recent increases in floating rates have had only a very minor impact in the final quarter of FY '22. Higher statutory profit of $334 million is primarily due to the growth in net operating earnings and also the positive asset revaluations of $254 million during the year. We've established FY '23 distribution guidance of $0.168 per security, which represents growth of 5% on FY '22. I think it's worthwhile touching on some brief comments around guidance this year. There is still a degree of uncertainty on future interest rate movements and inflation and some obvious and substantial divergence between market rates and the views of a variety of market commentators, bank economists, et cetera, on where and when rates and inflation will stabilize. It's fair to say that we've left a bit more of a buffer in the distribution guidance this year than normal, and we will now see how the year unfolds. We have allowed for a further expansion in liquidity and average BBSW across FY '23 of circa 3% with floating rates into the mid-3s by June '23 and also adding incremental hedging when required to maintain our hedging in the usual 70% to 80% range [ after 5 years ] [indiscernible]. We forecast inflation of quarterly annualized average of 6% across FY '23, and there is obviously some complexity in the timing of the rent reviews occurring throughout the year. So the full contribution from a CPI review isn't necessarily occurring until FY '24. Turning to Page 8, the presentation. There's a waterfall chart demonstrating the relativity of the individual license supporting EPS growth, noting the impact in FY '22 of the key drivers I've just discussed at growth in the rent reviews and the deployment of capital and acquisitions and developments, offset by OpEx and funding mix, which is primarily the expanded liquidity in the debt facility and the DRP. Turning into Page 9. This slide presents a summary of Arena's balance sheet. The full balance sheet is in the Appendix of the presentation. Key points to note are the growth in total assets, primarily due to the $105 million invested in acquisitions and developments during the year and the asset revaluations of $254 million, which is also the primary driver of the 32% increase in net assets per security. Net gearing at 20% is well below Arena's maximum gearing range of circa 35% to 40%. [ Told that ] this level of gearing continues to provide substantial capacity to fund existing pipeline developments and allows us to take advantage of further growth opportunities and also provides a buffer around any future market volatility. Turning to Page 10, we've got our capital management summary. Our approach to capital management continues to prioritize resilience and risk reduction to relatively low gearing, ongoing high level of hedge cover, regular extension of debt facility terms and maintaining immediately available liquidity in excess of our development commitments. During the year, the debt facility was expanded by $100 million. And at 30 June, we have over $100 million of immediately available liquidity to cover the $88 million of future development commitments. This liquidity, in combination with our modest gearing, allows us to actively consider further growth opportunities. The weighted average debt term of 3.4 years has now expired before March '24, noting that our March '25 expiry was extended out to March '27 during the year. Our relatively high ongoing hedge cover of 77% at 30 June for a weighted average term of 4.3 years, combined with the natural inflation hedge provided by the rent review mechanisms that are directly linked to CPI outcomes, provides us with substantial protection on our net operating income in an environment where inflation interest rates may rise. Our all-in cost of debt as at 30 June has shown a modest increase of 25 basis points from the prior year, which is reflected at the circa 100 bps increase in floating rates over the last quarter of FY '22 on the unhedged portion of the debt. Finally, it is important to note that Arena is operating well within the requirements of our debt facility, and we have very substantial headroom in both our LVR and ICR commitments. I'll now hand back to Rob, who will update us on the Arena's property portfolio.

Great. Thanks very much, Gareth. I'm now on Page 12. As at 30 June, Arena owned 263 properties across Australia with a value of $1.46 billion. The portfolio was just over 70 hectares in area, predominantly residentially zoned with improvements for the purpose built for our tenant partners. The portfolio accommodates over 25,000 families. In the early learning needs across the country, our health care portfolio contributes to meeting the primary health care needs of 8 communities and higher acuity care of 35 people living with high physical support needs in our SDA portfolio. The growth in the demand for the services we accommodate along with our and our tenant partners' disciplined and proactive management programs has resulted in the portfolio being in an excellent position. In 20 years, the portfolio has 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 in over 6 years. The portfolio has low single-asset concentration with the largest single asset accounting for only 2% of the value of the portfolio. And the land and building rate remains at just over $2,000 a meter, which looks like compelling value when measured against other real estate asset classes. The passing yield is 4.91%, which has seen compression of 86 basis points in the last 12 months, which added with rent increases has provided valuation growth of just under 23%. So exceptional valuation growth in the period in a more recent environment with increasing interest rates. We do see the likelihood of some yield expansion in real estate markets, including in the social infrastructure property sector. A mitigating fact that the yield expansion is, of course, rental growth, for which the portfolio is well positioned, not only as a result of having strong occupancy and triple net leases and the fact that the vast majority of our leases escalate in line with inflation but also a long-held focus of ensuring our rents had room for growth, so effectively coming from a lower base. Sector diversity for the portfolio has not materially changed in the period. Geographically, we have over 80% of the portfolio located in the high population at eastern seaboard states. In terms of tenant diversification, we continue to improve our spread of tenant partners, now totaling 34, with 25% of Arena's income supported by Australia's largest early learning provider, Goodstart. Moving on to the lease expiry on Page 13. As you can see on the graph on this slide, we have less than 4% of the portfolio's income expiring prior to 2030. And no material concentration of expiries in any year to be on 2045. These are very long-term cash flows that have contracted annual escalations providing inflation protection in the current environment. All of the leases are triple net with no exposure to variable property expenses, so highly efficient and highly predictable. We have some very minor leasing to do this financial year at 2 properties in Brisbane and Perth, which combined equates to about 0.9% of income, and we're confident of the positive outcome on both of these programs. The last point I want to make or emphasize on this slide is that every one of our Early Learning Centre properties and our SDA properties provide us important business operating information that assists us in our asset management and capital allocation decisions. It has been an important tool in assisting the portfolio to remain 100% occupied for over 6 years and is particularly important in the current inflationary environment. And moving on to our rent profile on Page 14. Here, on this slide, we've broken down our rent review structures for financial year '23, '24 and '25. At the bottom of the first column on that graph, you can see that 79% 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% or 3%. And moving up that column, 10.7% of this year's income is subject to a CPI-only increase. So if you add those 2 components together, that is the dark blue and dark gray components of the column, you can see that just over 90% of this financial year's income escalate in line with CPI. Further up the same column, we have 7.5% of fixed reviews, which averaged to around 3% and 2.2% of income subject to a market review. These market reviews relate to 7 Early Learning Centres, 4 of the reviews are capped and collared at between no increase on a 7.5% increase, and 3 are collared but have no cap on the increase. And it's a similar profile in each of the financial year '24 and '25. However, in financial year '24, we have more market rent reviews, totaling about 15% of that year's income. All of those reviews have a collar at the passing rent, so the rent can't go backwards. And half of the reviews are subject to a cap of a 7.5% increase whilst the other half had no cap on an increase. Turning to page 15. And the environment for development construction was challenging throughout financial year '22, particularly in the second half, with heightened construction cost inflation, extreme weather events and more recently, higher interest costs for all contractors. In this context, we've seen relatively minor delays in some projects to date. And importantly, we've been sheltered from any meaningful economic impact as a result of the fund through nature of our development programs, which provides contractual protections for time and cost overruns. The 6 Early Learning Centre projects completed in the financial year were located in metropolitan Brisbane and Perth. Each were designed to suit each individual tenant's operations. And pleasingly, all of them are operating in line with our and our tenant partners' expectations in their first year of trading. 4 projects that we had originally anticipated completing in the second half of financial year '22 will now complete in the first half of this year. And in the absence of any worsening in the development and construction environment, we anticipate completing 12 projects over the course of financial year '23. Our origination programs continue to perform to our expectation. We've secured a targeted pipeline of quality Early Learning Centre development projects that will complement the portfolio and deliver future earnings growth. Looking forward, our development pipeline has 20 Early Learning Centre projects that are located in Queensland, Victoria, South Australia and New South Wales, with a total forecast cost of $139 million, of which we have capital expenditure outstanding of $88 million. We anticipate that the average initial yield on all costs, again, including transaction costs for these development projects, will be 5.5%. Each of these development projects are again being undertaken on a fund through basis, where Arena has contractual protection from cost and time variability. We've secured agreement for leases with existing tenant partners on every project in our standard 20-year, triple net lease format. As you've heard me before, Arena is a leader in Early Learning Centre development in Australia and has an enviable record of executing on its development pipeline. By value, more than 1/3 of our Early Learning Centre portfolio has been developed by us since listing in 2013. In that time, we've completed 60 development projects with 14 tenant partners across all states and territories, except the [indiscernible]. These projects have increased access to Early Learning Centre services for over 7,000 children and provided our investors access to an excess of $22 million of current annual rent. Moving on to the next slide, a quick update on the Early Learning Centre operating environment. And both major political parties recognize the importance of a well-functioning childcare system. Changes to the Child Care Subsidy that we implemented in March '22 by the previous coalition federal government had, had the effect of reducing the out-of-pocket cost of childcare services by 4.6% according to recently published ABS data. It has been well publicized, the newly elected Labor Federal Government has committed to further reduce the cost of childcare for Australian families by lifting the maximum Child Care Subsidy rate to 90% for the first child in care and maintain the 95% subsidization rate for any subsequent child in care. The government has also proposed reducing the rate of the Child Care Subsidy tapers and to increase the maximum family income threshold for eligibility from $354,000 to $530,000. This additional investment of about $5 billion is designed to provide a significant economic and social return to Australia, including increased workforce participation and ultimately higher tax receipts, better economic security, particularly for women and improving the lifelong learning prospects of children in turn creating better socially and emotionally well-adjusted communities and a more qualified and productive workforce for future generations. Demand for early learning services increased in the period, and the additional federal government subsidization, which is proposed to be implemented in July 23, is designed to further increase demand for early learning services. The current challenge for the early learning operators that needs to be addressed to service that increased demand is a shortage of labor. Like most industries across Australia, the current labor pool is simply too low. And as a result, operators' labor costs have increased as businesses seek to retain and attract staff. It is our expectation, and more importantly, that of our tenant partners that labor costs will continue to increase in the short term, which added with increases across consumables and accommodation costs, will lead to increased daily fees. In relation to supply, there is a net increase of 224 centers across Australia in financial year '22, an increase of 2.7% in the 12-month period, which equals the lowest annual growth rate since 2016. There's no real surprises in these numbers from us as the majority of those new centers in this period commenced development in the early stages of the pandemic, and activity was lessened due to the unknown impacts of COVID-19 at that time on the economy, childcare demand and construction processes. We expect that future periods will see higher levels of new supply due to the increased government support of the sector, and as smaller, less efficient and older centers continue to be replaced by newer, more efficient centers. Moving to the next slide. Arena's early learning portfolio remains in a very strong position. We are 100% occupied, and we've collected 100% of contracted rent through financial year '22. Every one of our Early Learning Centres is open and trading. Every one of those centers provides us business operating data. And that data provides us important information that assists asset management and capital allocation decisions as well as providing insight into the general health of the sector. As we have in previous reporting periods, we've included operating data up to the quarter prior net data provides, average underlying operator occupancy is in line with March '21, which was the highest rate in 5 years. Daily fees have increased to $120 per day, which remains significantly below the government's benchmark fee of $140 per day, which is indexed to inflation. As you can see on the graph at the bottom of the page, the government funding package continues to suit our Early Learning Centre portfolio, which is typically geared towards middle-income families. And to give you some context, 96% of our Early Learning Centres have daily fees under the government's told care subsidy benchmark fleet as of March. Our average rent per place across the portfolio has increased to $2,663 per place. And particularly given that we've developed more than 1/3 of the portfolio over the last 9 years, it remains highly affordable in our view. Despite strong rent increases across the portfolio, rent affordability is measured against gross revenue for our operators remains at under 11%. Moving on to the next slide and an update on the health care sector in our portfolio. The 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. Despite the prospect of some yield expansion in real estate markets, we continue to see increased investor interest in Australian health care property, which was reflected in further increases in the asset values for our health care portfolio. Arena took advantage of the current environment to divest the PHC Darlinghurst property and wind up the [ trust and Syndicate ], which crystallized a 13.6% compound annual total return for those investors over a 20-year investment period. Whilst we continue to be attractive to new opportunities in the health care property market and aspire to grow as part of the portfolio, we'll be doing this in our usual, disciplined way. We're looking for quality over the long term that will support our investment objective, not short-term scale. Moving on to the outlook. And today, we are announcing full year distribution guidance of -- for financial year '23 of $0.168 per security, an increase of 5%. The portfolio is in a strong position, 100% occupied, 100% of rent collected, a 20-year WALE with a transparent and highly predictable rental profile that has inflation protection. Income growth will be underpinned by those contracted annual rent increases as well as the impact of our financial year '22 and '23 acquisition and development completions. Looking forward, despite the likelihood of further economic and geopolitical uncertainty, Arena's outlook remains positive. Early learning and health care services are integral to economic stability and improving community outcomes. Most themes underpin Arena's portfolio value and investment objectives, providing long-term, predictable distributions to our security holders with prospects for growth. We have balance sheet capacity to take advantage of new opportunities that are consistent with our strategy, with gearing at 20% and no debt expiry 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 and exploiting price dislocation should that occur. In closing, I'd like to thank our team and our team partners contributing to the positive investment portfolio and community outcomes that have been achieved in financial year '22. That concludes the formal part of today's presentation. So I'll now pass the call back to the operator to open up for questions. Thank you, operator.

[Operator Instructions] Your first question comes from Caleb Wheatley from Macquarie Group.

I just had a couple of follow-up questions, conscious you provided good color on expected debt expenses into FY '23. Are you providing an average inflation expectation or what sort of growth you're expecting out of the inflation component of the portfolio in FY '23 on average?

Yes. I mentioned it was $0.06 as a quarterly average across the year. Obviously, the last couple of CPI prints annualized out at 8%. So we're tempering as I said inflation expectation over the remainder of FY '23.

Perfect. And there was also a comment around an allowance for further expansion of liquidity. It looks like there's about $110 million of undrawn debt, which seems like that's enough to fund the existing development pipeline. How much more liquidity might we expect to be, I guess, put into the platform for FY '23?

Yes. So Eric, obviously, from an ongoing perspective, we always make sure we have enough to cover our development commitments at any point in time, while we've got a pipeline of opportunities that we're looking at. We've been looking at circa $100 million in terms of additional liquidity, and that's what we did during the last year as well.

Great. Next one was just on the development pipeline. So volumes remaining quite high, which was a positive. It looks like the yield on cost has come down about 40 basis points over the half. Can you provide any additional color around the drivers of this and any comments around cost inflation you're observing if that is one of the drivers?

There's no doubt about that, Caleb. It is simply cost inflation. I think that you'll find that we've got some of those that are sort of mid-range, so that will be completed in '23, '24. It will be slightly lower-yielding as we're sort of picking those up in the last 6 to 12 months. But going forward, we're hoping -- we're starting to see a little bit of retreat from some of the cost inflation that we've seen on the development works, both from spec and materials and labor, so we hope that continues. And as I think we made the point gently through the presentation, we're certainly open for good, new business. And yes, if there's any price dislocation, we're going to be in a position that we can exploit that.

You always make a comment on what you've seen on cost inflation over the past 6 to 12 months. So the number?

Yes, it's a -- yes, certainly can do that. And it's a little bit hard because we're different states, different jurisdictions, different build qualities, but there's -- and there's [indiscernible]. We've definitely seen steel increases around that sort of 50%. We've seen timber increase. The biggest challenge for us has really been in that we're not developing overly sophisticated properties and not caught on supply chain issues of importing. It has been around the play scopes and time around play scopes. We had 4 projects that were delayed immaterially, but the reason for that was really around whether -- which is the bigger challenge than cost inflation over the last period. We had something like 2 months average across those 4 projects of [ wet weather, time ], Caleb. So if you strip that out, it's really just those sort of base material, steel and timber and labor seems to be getting a little bit better at the moment.

Yes. Some of your peers are speaking to [ following ] sort of 10% to 15% over the past 12 months. Is that broadly in line with what you're seeing across all materials?

Yes. That feels about right, yes.

Yes. Perfect. Last question for me, just around labor costs. So flagged again by you guys in the presentation there, being flagged by operators as well as a concern. How do you think about that net rent-to-revenue ratio now going forward? I think historically, you've spoken to a 12% to 14% range being sustainable. It feels like there might be a little bit of downside, a bit of downside [ now ]? What do you feel is sort of more sustainable in terms of that net rent revenue now in the existing environment?

I don't think there will be a dramatic change in that. I think that the large part, those increase in costs are going to be pushed on to ultimate consumers with higher daily fees. And ultimately, those consumers, that's families across Australia, will be supported by that increase in -- that's proposed by the [indiscernible] government, Caleb. So I think the real risk is there's any delay in that additional funding from the federal government. So not seeing any major risk to the accommodation costs. As we reported, it's under 11% at the moment.

Your next question comes from Lou Pirenc from Jarden.

Can I just follow up on those development yields? Is there a level where you are just not comfortable given the -- your rising cost of capital to start new developments? Is it -- are we close to that?

There always is, Lou. Yes, there's no doubt about that. We've seen -- obviously, our cost of capital is as strong as it is. There's still deals going out there that are below what we would think as acceptable. So that's partly the market that we're in, we still got -- and competing with those that perhaps don't look at their cost of capital as strongly as we do given the sort of low value size. So yes, we're certainly missing out on a few of those, and we're getting close to it. I think that we're probably seeing yields push the other way. We've seen, in the direct market, a little bit of evidence over the course of the last couple of months that we have yield expansion there. And as I said, the inflation on developments, it seems to be sort of plateauing, which I think will open up some opportunities for us, frankly. But what -- used to be, we'd have people coming in the door, sort of seeking something with a 4% on it in completion value. It's just that, that paradigm has completely changed. And now there's more sensible numbers. And as we always have, we put a bit of 10-year Aussie government bonds versus childcare. And you can [ track your yields ] in the appendix. And the interesting thing on that, not only is the -- one of the tightest margins over the last few years, there's also a little tick up on the yields, so if you look at the very far right of that as well.

Can I just follow up on that? In terms of your 4.91% average cap rate, where do you see that compared to those market transactions either before or after the evidence of some yield expansion? I guess in other words, how conservative do you think your 4.91% is?

That's -- I don't think -- I think it's the right number for 30 June. I think the point I'm making is that the ingredients there for yield expansion, we've seen a little bit. I think we've seen only 7 transactions in financial year '23 that would suggest yields have pushed back over sort of 5% as a market comment, Lou. But -- and I think I made the point on the presentation that there's some protection available with our leases and the rent growth. And this is -- in that we report passing yields, you can do this math yourself. But I think 25 basis points expansion is something like 5% rent growth, so I think we'll be protected in sort of nominal dollars on capital value if we see some of the rent growth come through as well.

Makes sense. Final one for me. Any opportunities to do more asset recycling? I think you sold 2 assets on health care, on childcare this period or this year. Should we expect more of it?