Arena REIT (ARF) Earnings Call Transcript & Summary

Well, we might make a start. So good morning, and thank you for joining us today. As it is now 10 a.m., we'll start the live broadcast for our online attendees. On behalf of the Board of Directors, it is my pleasure to welcome you all to the general meetings of security holders in Arena REIT No. 1 and Arena REIT No. 2 and the Annual General Meeting of Shareholders in Arena REIT Limited, which together constitute Arena REIT's 2022 Annual General Meeting. My name is David Ross, and I am the Independent Chair of the Board of Directors of Arena REIT Limited and the Board of Directors of Arena REIT Management Limited, the responsible entity of the trust, and I have 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 just after 10:00 a.m. and I declare the meeting open. Attending the meeting today are the other members of your Board of Directors, Rob de Vos, Managing Director; Gareth Winter, at the other end, CEO and Company Secretary and an Executive Director of Arena REIT Management Limited; Rosemary Hartnett, Independent Non-Executive Director; Simon Parsons, Independent Non-Executive Director; and Dennis Wildenburg, the other Independent Non-Executive Director. Also with us today are members of the Arena REIT management team. We also have Charles Christie, Partner; and Will Drummond, Audit Director, representing PwC, Arena's Auditor; John Hutchinson and Vanessa Murphy, representing Hall & Wilcox, Arena's Corporate Legal Adviser; and [ Andy Mah ], the returning officer from Boardroom Limited. The agenda for today's meeting includes instructions for a hybrid meeting, 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 '22 financial year and our outlook for the 2023 financial year. We will then move to general questions, followed by the formal business of the meeting being consideration of and voting on 7 resolutions. Today's meeting is being held as a hybrid meeting, which allows security holders, proxies and guests to attend the meeting either in person or online. Security holders and proxy holders attending the meeting in person and holding yellow cards are permitted to vote and ask questions at this meeting. Security holders holding orange cards are permitted to ask questions but not to vote. Holders of white cards are not permitted to vote or ask questions at this meeting. Online attendees can submit questions at any time. To ask a written question, select the messaging tab at the bottom of the online platform. Type your question into ask a question box and once you're finished, please press the arrow symbol to send. To submit audio questions, click on the request to speak button at the bottom of the broadcast window. The audio question interface will now display. You will be prompted to confirm your name and enter the topic of your question. To submit your request and follow the instructions to allow access to your microphone and connect to the queue. Please note that while online attendees can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that questions may be moderated to avoid repetition or remove in appropriate language. Voting today will be conducted by a way of a poll on all items of business. Shortly, I'll declare voting on all items of the business, declare them open. At that time, if you are eligible to vote at this meeting, a voting tab will appear on screen. Selecting this tab will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to press a submit or enter button. I now declare the online voting open on all items of business. The voting tab will soon appear. Please submit your votes at any time. I will give you a warning before I move to close voting. I'd like to move to the financial year 2022 highlights. The COVID-19 pandemic continued to present challenges for our tenant partners in FY '22, and more recently uncertainty arising from inflationary pressures, interest rate increases, wages pressures and staff shortages have combined to create further uncertainty. On behalf of the Board of Arena, I would like to express our gratitude to our tenant partners for their continued resilience and ability to deliver essential services to Australian communities, and our team for their commitment and performance during FY '22. Arena has produced strong earnings distribution and capital growth, successfully delivered acquisitions and development completions, and replenished the development pipeline, maintained the portfolio [indiscernible] and further improved our progress with regard to sustainability outcomes. These positive investment in community outcomes are a result of the quality of Arena's property portfolio, the proactive approach of Arena's management team and the strong macroeconomic themes that support investment in social infrastructure property. It is also an endorsement of Arena's discipline strategy and the ability to deliver on our investment objectives. Arena's statutory net profit for the year was $334 million, representing an increase of 102% on the prior year. Underlying net operating profit increased by 8.4% to $56 million due to higher operating income from contracted annual rent growth and positive market rent review outcomes, acquisitions and development completions. The result represents earnings per security of $0.163, an increase of 7.2% on the prior year. Arena has paid a full year distribution per security of $0.16, an increase of 8.1% on the prior year. Arena's total assets increased by 32% to $1.52 billion, as a result of acquisitions, development capital expenditure and the positive revaluation of the portfolio. The portfolio revaluation uplift was a primary contributor to the 32% increase in net asset value per security to $3.37 at 30th of June 2022. Arena continues to operate well within its banking covenant requirements. We have expanded our liquidity while maintaining hedging discipline and capacity to pursue investments consistent with strategy. Arena remains well positioned to navigate ongoing and emerging economic and investment challenges, and to continue 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'm pleased to advise that we are forecasting DPS growth for FY '23 and reaffirm distribution guidance for FY '23 of $0.168 per security, representing 5% growth over FY '22. Sustainability is integral to Arena's investment approach and best positions Arena to achieve positive long-term investment in community outcomes. Arena's portfolio facilitates access to essential community services with positive social impact. Early Learning Centers provide early childhood education and care, which improves lifelong learning, prospects of Australian children and allows parents [indiscernible] the opportunity to remain in join or rejoin the workforce. Medical centers provide local community-based primary health care services, and specialist disability accommodation is designed to provide a better quality of life for residents with high physical support needs. Given the environmental and social footprint of its assets, Arena has an opportunity to leverage its own sustainability initiatives by partnering with its tenants. Accordingly, Arena's overarching approach to sustainability is to actively seek out partnerships for change. Our partnership for change approach delivers mutually beneficial outcomes for our communities, team, tenant partners and ultimately, our investors. Key sustainability outcomes detailed in Arena's FY '22 sustainability report include active collaboration with tenant partners on sustainable initiatives, solar renewable energy systems were installed on 80% of Arena's property portfolio. Our climate action plan, including greenhouse gas inventory of Arena's financed emissions, inaugural TCFD-aligned climate risks and opportunities disclosures, Arena REIT certified carbon neutral by Climate Active for Business Operations in 2021, 2022, and analyzed operations and supply chains to voluntarily opt into Modern Slavery reporting. Key future sustainability goals are to continue to collaborate with tenant partners on appropriately identified ESG sustainability initiatives and report progress, install solar renewable energy systems on 90% of Arena's property portfolio, develop a detailed transition plan, including an emissions reduction road map for our operations and asset portfolio, align reporting with recommendations of the TCFD, achieve gender balance for the ARL Board using the 40:40:20 model, develop a reconciliation action plan that is endorsed by Reconciliation Australia, and continue to build on our Modern Slavery response with our road map. I'll talk a bit about remuneration. We remain focused on the development of our team in maintaining remuneration structures that equitably reward, retain and incentivize the achievement of sustainable business outcomes and behaviors that reflect our purpose, values and community expectations to create long-term value for our stakeholders. An independent review of Arena's remuneration framework was completed in financial year 2021 for implementation in FY '22. Details of the review were disclosed in the FY '21 remuneration report and are also provided in the FY '22 remuneration report. In the 4 years since the previous independent review, Arena's experienced significant growth, including a 60% increase in property income and 85% increase in total assets and a 134% increase in market capitalization. The key decisions 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. The executive KMP were awarded 97.5% of their target short-term incentive, which reflects the delivery of above-target DPS and distributable income per security growth in FY '22 and business initiatives in FY '22 supported minimum DIS growth target in FY '23. The performance of KMP in respect of nonfinancial objectives, including high level of retention, team alignment and engagement and substantial advancement in our sustainability credentials. The FY '20 long-term incentive was tested at the 30th of June 2022 and fully vested. That was because Arena's FY '22 DIS of $0.163 per security, representing a 5.7% compound annual growth rate over the 3-year performance period, exceeded the high hurdle of $0.16 per security, which was set at a 5.1% CAGR. And Arena's 3-year total security holder return of 69%, which is equivalent to 19% per annum compound for the 3-year period ended 30 June '22 ranked first amongst the comparator group comprising the 28 A-REITs, including Arena in the ASX300 REIT Index at the 1st of July 2019. Moving forward, there are no changes to the remuneration framework proposed in FY '23. Forming Arena's entry into the ASX200 A-REIT Index in FY '22, the Board determined the comparator group for the relative TSR measure in the FY '23 LTI grant will be members of the ASX200 A-REIT Index on 1 July 2022, was previously the ASX300 Index. We recognize it is important for KMP to be aligned with security holders, not just through the remuneration framework, but also by maintaining a material security holding interest. In recognition of this, Arena introduced a minimum security holding requirement for executive KMP in FY '22 set at 100% of their fixed annual remuneration, to be accumulated over a maximum period of 4 years, and the executives already comply with that. The existing nonexecutive director minimum security holding requirement was increased in FY '22 to 100% of the baseboard fee to be accumulated over a maximum period of 3 years. Arena is strongly committed to diversity among both team members and the Board. We believe that a diverse set of team members reflects the communities in which we all live, makes us a better company and ensures that a range of different perspectives can be brought to the table when considering issues. It assists with team retention and engagement, and helps us meet our stakeholder expectations regarding key attributes of a sustainable company. With regard to achieving Board gender balance, as outlined in the notice of meeting and explanatory memorandum for today's meeting, Arena is currently in the process of recruiting another female nonexecutive director, which we expect to finalize shortly. Following this appointment, Dr. Simon Parsons, who is standing for reelection today is expected to stay on the Board for an orderly period of transition before retiring. At this point and assuming the reelection of Rosemary Hartnett at today's meeting, the Arena REIT Limited Board will be comprised of 40% female directors. 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, who are here today, for their ongoing commitment and contribution to Arena's performance. I'd now like to hand over to Rob de Vos, who will make his Managing Director's presentation.

Thanks very much, David. I'd also 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 offer a very warm welcome to everyone to Arena REIT's 2022 Annual General Meeting. I'm pleased to report today despite an environment of heightened risk in financial year '22, Arena's disciplined strategy has again supported positive operational, financial and community outcomes. The growth and demand for the services we accommodate, along with our tenant partners' disciplined and proactive management programs, has resulted in the portfolio being in excellent position. During the year, we've maintained our sector-leading, long-contracted lease duration of 20 years. We've achieved a portfolio valuation increase of over $250 million as a result of the yield compression, rental growth and the completion of new developments, successfully divested 2 Early Learning Centers at a premium to book value and reinvested those proceeds back into our development pipeline. We've maintained 100% occupancy across the portfolio, which has been the case for the last 7 years. We've achieved strong rental growth, with like-for-like increases of 4.1%, and we've worked in partnership with our tenants to progress our solar renewable energy programs. 100 solar energy systems were installed across the portfolio in financial year '22, and we now have over 80% of the portfolio using solar renewable energy. We've had success in executing on our investment and development activities. We've acquired 7 operating Early Learning Center properties at an average yield of 5.4% on total costs. We've completed 6 Early Learning Center developments at an average net initial yield on total costs of 6.4%. We've replenished our development pipeline with 9 new projects to take our development pipeline to 20 projects that will support future growth. Arena's management team has specialist asset management and development expertise and a strong track record in delivering successful projects, with 60 development projects completed for our tenant partners over the last 10 years at a total cost of just under $300 million. At the core of what we do and how we do it are our values and purpose, and we continue to differentiate Arena's brand in the marketplace through a partnership approach, collaboratively working with our tenants and other stakeholders to achieve better communities together. We are confident in Arena's strategy, the strength of our team, the portfolio and the important contribution, the services we accommodate [indiscernible] community outcomes. As of 30 June, Arena's portfolio consisted of 263 social infrastructure properties, occupying just over 7 hectares of land. Asset revaluations during the period provided for portfolio valuation of $1.46 billion, representing an increase of 23% from the prior year. Geographically, we have 80% of the portfolio located in high population eastern seaboard states, and we continue to improve our spread of tenant partnerships with 32 tenant partners as of June '22. Strong structural demand continues for child care services, and a record female workforce participation rate continues to drive participation rates. Australia's federal government has committed to further reducing the cost of child care by lifting the childcare subsidy rate to 90% for first childhood care, and to keep the recently increased subsidy rate at a maximum of 95% for subsequent children care. The government also intends to reduce the rate at which the subsidy tapers and to lift the maximum household income threshold in order to promote the use of and make childcare more affordable for Australian families. These measures have been specifically designed to improve lifelong learning prospects of Australian children, increased workforce productivity, improve gender equality, including women's financial security and to stimulate broader economic activity over the medium term. Strong structural macroeconomic drivers also continue to support Australian health care accommodation, including a growing and aging population and an increased prevalence of chronic health disease. Health care properties remain strongly sought after with increased domestic and international interest in Australian health care property and increasing interest in social infrastructure properties generally. Moving on to the outlook. Thank you. Arena remains very well positioned to navigate ongoing and emerging economic challenges. Our portfolio of social infrastructure properties facilitates access to central community services with positive social impact. Strong macroeconomic themes underpin the value proposition of Arena's portfolio, which provides long-term income predictability with the prospect of income growth with inflation protection. Our investment in capital management discipline sees us well positioned to consider new opportunities that are consistent with strategy and deliver on Arena's investment objective. We are reconfirming distribution guidance today for financial year '23 of $0.168 per security, representing an increase of 5% on financial year '22. I have comfort in assuring our business stakeholders today, 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 would like to thank our Board members, our executive team, our contractors and service providers for their dedication and hard work through financial year '22. 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.

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 director's report and the auditor's report for the financial year ended 30 June '22 as contained in the 2022 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.

Do we have any questions here in the room?

Thank you. My name is Jason Cole. I'm a volunteer for the Australian Shareholders' Association. And today hold proxies from 23 security holders for approximately 347,000 shares. I did have a question on the Board diversity target. You've already addressed that in your speech. So I'll just have a question, when you undertook the external assessment of the ESG issues, and they are detailed in the 2020 sustainability report, which is a very comprehensive document and not for the uninitiated. Just in high-level terms, what's your biggest ESG risk? And what are the challenges in meeting those expectations?

Okay. I'm happy to start with it. And Robert, you can add if you think you'd like to. First of all, Jason, thank you. We have had a good relationship with Jason as the representative of ASA for a while now and have had meetings with him, obviously, outside of this meeting just to respond to questions. So look, obviously, the area of sustainability is challenging for all companies, albeit the situation for Arena is not as complex as it is for many others because we own child care centers and medical centers, more complex property. Probably the biggest challenge for us is that we have triple net leases with our tenants. So we don't control what happens on the property, which is why Rob de Vos was saying that we operate on a partnership for change approach. So we work at having very strong relationships with our tenant partners. And as a consequence of that, we have agreed with many of the tenants to the point where we now have 80% of the properties with solar energy providing sustainable energy to that property, which is obviously a very strong reduction in emissions from the child care centers that we have. But as I said, because we have a triple net lease, which means that the tenant is responsible for all of the outgoings on the property, they're responsible for maintenance and repairs and maintenance for structural nature as well. We can't do the same things as you can, say, an office building or a shopping center, where they do control the way in which waste is managed in way the common areas are managed. So that's probably the biggest challenge. But I don't know, Robert, if you want to add anything to that?

I'd like to add, Jason, I think we also have opportunity [indiscernible] challenge, to your question, is [indiscernible].

We've done, I think, a good job so far in achieving that 80% on solar. Thanks, Jason. Do we have any other questions? Okay. Yes, we have one more question.

[indiscernible] shareholder of the REIT. Just a question on the rental prospect of the portfolio because if you look back the last 5, 8 years, and Arena has put a very respectable [indiscernible] increase in excess of the inflation rate during the period. Going forward, I mean, the world may have changed, inflation may be higher. Just kind of wondering what sort of expectation are you seeing in terms of how inflation may affect your like-for-like rental growth in the [indiscernible]?

I think we've got a good answer to that. And Rob, you would like to take that?

Thanks very much for your question, [indiscernible]. We have got 90% of our leases that are exposed to an escalation, annual escalation that is inflation adjusted in the next 12 months. And we are [indiscernible] inflation as I'm sure you're aware. So if you look at the stat today, the annualized rate is something like 70%, we will pick that up in our leases as a result of those escalation provisions. I think the real question becomes the affordability for the tenants and our tenants are able to absorb those costs at the moment with a fortunate position in the [indiscernible]. And the reason for that is that extra government subsidization is coming in and the prospect for our tenants to increase their rental fees as well. So that top line revenue is in reasonably good shape, which means the prospect for rental growth being affordable is high as well. Looking forward over a longer period, we think that in that sort of environment we'll continue to see higher top line revenue. Perhaps lower supply, as we talked about a little bit earlier in the meeting, which should allow for existing operators in the country to perform well on the top line and hopefully be able to pay the rent going forward on inflation [indiscernible] basis.

Yes. The only thing I would add to that is there is a headwind which is rising interest rates. So our interest expense goes up as interest rates have been rising. So that sort of offsets in part the benefits of the CPI-linked inflation. Any other questions? Okay. Let's move to the formal business of the meeting. The first item of business is to receive and consider the financial report, the directors' report and the auditor's report, each for the financial year ended 30 June 2022. This item of business does not require a vote. However, the reports are open for discussion. If any security holder attending in person has questions or comments relating to this item, please raise your hand. If any security holder attending online has questions or comments relating to this item and has not already done so, please submit your question now. Any questions in the room? No questions in the room, and I don't believe there are any questions on the line. So if there are no more questions, as this matter does not require a vote, we will move to the remaining item of business, which include to consider the 3 resolutions for the company being an advisory resolution to adopt the remuneration report and an ordinary resolution to reelect Simon Parsons and Rosemary Hartnett as directors. And to consider 4 resolutions as separate ordinary resolutions of the company in each of the trust to grant deferred short-term incentive rights and long-term 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, in person, online 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. Resolution 1 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. So we have one question in the room. Jason?

Yes, more a comment than a question. So the ASA would like to compliment Arena on the recent review of its remuneration framework. The new structure now more closely resembles the objectives sought by the ASA, particularly the use of the 15-day volume-weighted average price for calculation of the LTI performance rights and the increased transparency of the STI scorecard performance and outcomes. So well done.

Thanks, Jason. And just so that everyone's across what that means. We moved, as part of the suite of changes to allocate rights for the service rights and for the performance rights on the basis of a face value methodology rather than a fair value methodology. The face value methodology is the preferred practice in the market. So what that means is that we allocate rights based upon the volume-weighted average price of Arena REIT, as Jason said, for the 15 days of June prior to the allocations. So thank you for that feedback, Jason. We appreciate that. Moving on to resolution 2, which is the reelection of Dr. Simon Parsons as a Director of the company. Resolution 2 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution has not already done so, please submit your question now. Do we have any questions in the room? No questions in the room. And I don't believe there are any questions online either. So I'll move to resolution 3, the reelection of Ms. Rosemary Hartnett as Director of the company. Resolution 3 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. We don't have any questions in the room. And as far as I can see, we don't have any questions online again either. So I'll move on to resolution 4, which is the grant of deferred STI rights to Mr. Rob de Vos. Resolution 4 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. Anything in the room? Don't have anything in the room. And it doesn't look like there's anything online again for this one, either. So I will move to resolution 5, the grant of LTI performance rights to Mr. Rob de Vos. Resolution 5 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. Any questions in the room? Nothing in the room. And again, it doesn't look like there's anything online. So I will move to resolution 6, which is the grant of deferred STI rights to Mr. Gareth Winter. Resolution 6 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. Anything in the room? If not, there's nothing online either that I can see at the moment. So I'll move to resolution 7, which is the grant of LTI performance rights to Mr. Gareth Winter. Resolution 7 and the proxy votes received in relation to this resolution are displayed on the screen. If any security holder attending in person has questions or comments relating to this resolution, please raise your hand. If any security holder attending online has questions or comments relating to this resolution and has not already done so, please submit your question now. Questions in the room? No questions in the room. And it doesn't look like there's anything online. So ladies and gentlemen, that concludes our discussion on the items of business. Just talk about the voting procedure. So I'll now put the resolutions to a poll, following which the votes will be counted. The results of the polls will be announced to the ASX after the close of the meeting and will also be available on Arena's website. I appoint [ Andy Mah ]. Where's Andy? Is he here or outside? All right, of Arena's registrar Boardroom, to be the returning officer and scrutineer for the in-person voting. Each eligible security holder or proxy holder attending in person should have received a yellow voting card on registration. For your votes to be counted in these polls, you must now complete your voting cards. Visitors holding white cards and security holders holding orange cards are not entitled to vote on the polls. The sum of the votes cast for and against the resolution must not exceed your voting entitlements. If a proxy holder has been directed to vote in a particular manner,by completing the yellow voting card, the proxy holder will be deemed to have voted in accordance with those directions. Please ask Andy, who is now here back in the room, if you have any questions in relation to completing your voting cards. Once you have completed your voting card, please place it in the box that will be brought around. In terms of voting online. I remind all online attendees to cast your vote by selecting from the options available for each resolution. There is no need to press submit or enter button as the vote is automatically recorded. As all of the -- so Andy, we can collect the votes now? As all of the in-person votes have now been collected, I will shortly close the voting system for online attendees, please ensure that you've cast your vote on all resolutions. I'll now pause to allow you time to finalize your votes. I'll come back in about a minute or so and close the voting. So I'm just going to give those online a little bit more time if they need it. [Voting]

Okay. Hopefully, that's enough time for everyone online. So I now declare that the voting is now closed, and I declare the meeting closed. Results will be announced to the ASX following the meeting. I would like to thank all the security holders for attending the meeting here in the room today and for those that have joined us online, and invite those attending who are in person today to meet with the Board and senior executives over refreshments. Thank you.