Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Arena REIT Half Year '23 Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.

Good morning everyone and a very warm welcome to Arena REIT's results presentation for the first half of financial year 2023. Our announcement, investor presentation and financial statements were released to the ASX earlier this morning. My name is Rob de Vos, Arena's Managing Director; and joining me on the call today is Gareth Winter, Arena's Chief Financial Officer. Our presentation today will include an update on our highlights for the 6 months of the financial year '23 and our progress against our investment objective and strategy. Gareth will provide insights and detail into Arena's financial results and capital and interest rate management programs, and I'll close the presentation with an update on portfolio operations and commentary on Arena's outlook in a changing investment environment. As always, there'll be an opportunity for questions at the end. Moving into the presentation on Page 3, in a period of heightened macroeconomic and geopolitical risks, higher inflation and higher interest rates, the underlying community need for the services that Arena accommodates continues to increase. The net demand for the services we accommodate, alongside disciplined capital, asset and interest rate management, has provided for an overall positive period for the business in the first half of financial year '23. Highlights include, a net operating profit $29.9 million, which is up 8.6% against half year '22, which has been supported by an average like-for-like rent increase of 6.45%. We've seen moderate increase in overall portfolio value as a result of higher passing and market rents, which were offset by an expansion in capitalization rates. We've increased and extended our debt facility providing further liquidity for the business, which positions us well to execute on new opportunities that may be available in a changing investment environment. We've made further -- positive steps on our sustainability programs, including entering a sustainability linked overlay across our $500 million debt facility. We've completed 7 Early Learning center development projects and replenished the development pipeline, which will support future earnings growth. And today, we are reaffirming our full year 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, Arena's conviction maintaining our discipline and executing on our investment objective and strategy has again underpinned positive operational outcomes. We've taken advantage of a strong healthcare real estate market by selling 2 properties that, relative to the balance of the healthcare portfolio, were less efficient and had higher reversionary risks, sales proceeds of $33 million which provided an aggregate premium of 2% to June book value. We've booked a moderate increase in overall portfolio value, in an environment where yields are expanding, the passing yield for the portfolio is now 5.05% which is 14 basis points higher than as of June. Our sector-leading WALE of just under 20 years has been maintained with lease extensions and WALE accretive new projects being delivered in the period. Our portfolio is currently 99.6% occupied, a 0.4% vacancy relates to 2 small suites above our well performing Murarrie Early Learning Centre. The ongoing high occupancy of the portfolio highlights the quality of the assets, the strong underlying fundamentals that support the social infrastructure sector and the proactive management programs from the Arena team and our tenant partners. Average rental growth was 6.45% across the portfolio. The escalation mechanisms in our leases are doing exactly what they are designed to do, provide investors real growth in a low inflation environment and maintain their real value in a higher inflation environment as we are in now. During the [ Q ], We progressed 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 have reduced the utility costs of our tenants in an environment of otherwise material increases in their business operating costs. We've received 100% of contracted rent during the 6 months 31 December, and all of the deferred rent owed from COVID relief programs. We've acquired 2 operating Early Learning centers, one in Queensland and one in South Australia both were acquired on a preferred long-term triple-net lease, and an aggregate cost of $7.8 million, and it provided a net initial yield on all costs including transaction costs of 6%. We've completed 7 Early Learning center developments. These projects had a total investment cost of $44 million and a net initial yield on all costs including transaction costs of 5.9%. We've also replenished our development pipeline, with the acquisition of 7 new Early Learning center development sites. Each project has been pre-committed on a new 20-year triple-net lease and combined, the projects had a total forecast cost of $55 million. Moving on to Slide 5, and an update on our sustainability programs; and sustainability is fundamental to our investment approach and we believe 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're aligned with investors for the long term. We are looking for sustainable growth and quality in our financial metrics, not simply short-term balance sheet scale. Arena's portfolio facilitates access to central community services that provide a positive social impact and 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 of delivering essential services to Australian communities. We proudly released our 2022 sustainability report in the period, which sets out our achievements and future goals. Some of these include further collaboration on sustainability initiatives with our tenant partners as part of our partnerships, for Partner for Change Program, which to-date has focused on using our position of influence to assist our tenant partners in education programs, on the likes of modern slavery and climate action. We'll be continuing our focus on the use of renewable energy, reducing our tenant partners' utility costs, and reducing negative impacts on the environment, which with our work to-date will prevent emissions of approximately 3,000 cubic tonnes of carbon into our environment each year. We continue to welcome and encourage feedback from all of our stakeholders on these projects and on our ESG programs and disclosures more broadly. I'll now pass you over to Gareth to provide some detail 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 period, which shows a 9% increase in net operating profit of $30 million and a statutory profit of $48 million for the half. There is a reconciliation of net operating profit and statutory profit included in the appendix of the presentation with the most substantial reconciling item being the periodic revaluation of investment property. Operating EPS of $0.086 is 8% higher than the prior period with the key driver of the increase in operating profit being the 13% increase in property income, which has been derived from a combination of rent reviews and capital deployment. Like-for-like rent reviews year-to-date have averaged 6.5%, noting that over 80% of rent reviews in FY '23 have a direct link to CPI outcomes. For comparison, the national quarterly CPI has averaged 7.6% per annum year-to-date. Using a nationalized average CPI REIT is a simplified way of looking at our CPI-based rent reviews, as the actual reviews are staggered throughout the year and use state-based CPI measures. The recent high CPI prints will provide further inflation protection to our cash flow into the remainder of FY '23 and into FY '24. Arena's ongoing program of investment in ELC developments and new acquisitions has also contributed to earnings via this capital deployment, including as, Rob mentioned, the completion of 7 ELC developments in the half, with a total project cost of $44 million, the addition of 7 new ELC development projects to the pipeline and also the acquisition of 2 operating ELCs, in conjunction with tenant partners of about $8 million. We've also continued our program of selective capital recycling, with proceeds of $33 million from the sale of 2 healthcare properties at a small premium to their June book value to be received in February, and ultimately to be reinvested. Some specific comments on rent collections for the period; Arena's portfolio has continued to demonstrate how resilience. There are no rent arrears or contracted rents being received, including the collection of $400,000 of deferred rent in the half. Our COVID related rent deferrals were relatively short term, with only $700,000 of deferred rents still to be collected over the course of calendar '23. Deferred rent has previously been recognized in income in the relevant period, and booked as a receivable with only the cash to be collected. Here are some other line items; property expenses reduced primarily as a result of allowances or smaller allowances for independent valuation costs and property inspection costs compared to the increased spend from 12 months ago post COVID lockdowns, where there was some cash up required. Operating expenses, there has been a modest decline in operating expenses compared to the comparative period. This is largely due to some minor staff mix changes and also due to some timing on staff costs, particularly annual leave compared to the prior comparative period. Overall, we expect FY '23 costs to be substantially similar to FY '22. Pleasingly property revenues increased by $4.1 million in the half, while OpEx slightly reduced and our cash MER remains around 30 basis points. Looking at finance costs, the increase in finance cost is due to 2 main factors, the most substantial being an increase in our all-in weighted average cost of debt, which at a spot value was 2.9% at June '22, has averaged 3.5% for the half year period and was at a spot value of 3.9% at December '22, noting that this does include the expanded facility and also extension of debt term. Due to our high levels of hedging, at 80%, the increase in debt cost is primarily due to the substantial increase in floating rates since June, with lesser contributions from the increase in average fixed rates on our spot book as well as the $70 million increase in debt facility and extension of average debt term. Also contributing was a higher average debt balance of $340 million in the current half versus $265 million in the comparative period, with the increase in the funding due to the investment in developments and acquisitions over the course of FY '22 and FY '23. The lower statutory profit of $48 million is primarily due to a lower asset revaluation of $18 million in the half, compared to $153 million in the first half of FY '22. As Rob mentioned, we have affirmed FY '23 distribution guidance at $0.168 per security, representing growth of 5% on FY '22. We expect our payout ratio to be relatively consistent with recent years, but there are still a degree of uncertainty on future interest rates movements and inflation, and some growing divergence in the views of market commentators on where [ our blended ] rates and inflation will stabilize. What is apparent is that the CPI rent review mechanisms in Arena's leases are working effectively to offset the increase in debt funding costs, and still demonstrate growth in distributions. This offset has also allowed us to expand liquidity via the debt facility to take advantage of market opportunities, and also to recycle capital from selective asset sales to reinvest into future opportunities, which we believe will offer greater long term value for investors. When we first provided guidance in August, we allowed for an average floating rate across FY '23 of around 3%, with floating rates into the mid 3s by June '23 and also adding incremental hedging when required to maintain hedging at around 80% cover at the 5 year swap rate. Our expectation is that we won't be far off that over the full course of the year, albeit, it appears that there is greater risk on rates averaging slightly higher. Offsetting this is inflation, which we assumed at a quarterly annualized average of 6% across FY '23, which currently as compared to 7.6% year-to-date. Also, there is some complexity in the timing of the rent reviews occurring throughout the year. So, the full contribution from the CPI review won't necessarily be received until FY '24. Turning to page 8, we got a waterfall chart of EPS for the period. The chart demonstrates the relativity of the individual items supporting EPS growth, noting the impact of key drivers of growth being the CPI linked rent reviews, the deployment of capital into acquisitions and developments, offset by funding costs in DRP. The relativity of each component is a little different this time around, as rent reviews are contributing more than the recent history, and the development is slightly less, which is to be expected, given the current interest rate and inflation environment. Turning to page 9, slide presents a summary of Arena's balance sheet, the full balance sheet is in the appendix of the presentation. Some key points to note; the 4% growth in total assets, which is primarily due to CapEx of $43 million in the period invested in acquisitions and developments, and also asset revaluations of $18 million, which is also the primary driver of the increase in net assets per security. Our net gearing at 21.5% is well below Arena's maximum gearing range of circa 35% to 40%. However, this level of gearing provides substantial capacity to fund the existing pipeline developments, allows us to take advantage of growth opportunities and as we've talked about in recent years, also provides a material buffer around market volatility at this point in cycle. Turning to page 10 and capital management summary, our approach to capital management continues to prioritize resilience and risk reduction through low gearing, ongoing high levels of hedge cover, regular extension of debt facility terms and maintaining immediately available liquidity, in excess of our development commitments. During the period. The debt facility was expanded by $70 million, with around $150 million of immediately available liquidity to cover the $66 million of future development commitments at 31 December, this liquidity in combination with our modest gearing, allows us to actively consider further growth opportunities. The weighted average debt term is 4.2 years with no expiry for over 3 years of until March '26, noting that our March '24 expiry was recently extended out till March '28. Our high ongoing hedge cover of 80% at 31 December, up slightly from June, is for a weighted average term of 4 years. Our interest rate hedging combined with the natural inflation protection provided by rent reviews that is substantially directly linked to CPI outcomes, protects our net operating income in an environment where inflation and interest rates have materially increased in an extremely short timeframe. As mentioned earlier, our all-in weighted average cost of debt as at 31 December, has increased since June, which is reflective of the substantial increase in floating rates on the unhedged portion of our debt, along with other contributing factors being the average swap rate, the increased debt facility and relative margin pricing on extended debt term, that would have been around 3.7% in the absence of the debt extension and debt expansion. Finally, it's important to note that Arena continues to operate with substantial headroom in both our ICR and LVR covenants. I'll now hand you back to Rob, who will update you on Arena's property portfolio.

Thanks very much, Gareth. I'm now on page 12. As of 31 December, Arena owned 271 properties across Australia, with a value of $1.5 billion. Given the growth and the underlying demand for the services we accommodate, with our and our tenant partner's disciplined and proactive management programs, the portfolio continues to be in great shape. At just under 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. Every lease has an annual escalation and the vast majority of those escalate at least as high as inflation. The portfolio has low single asset concentration, with the largest asset accounting for less than 2% of portfolio value. The passing yield of the portfolio is 5.05%, which has expanded 14 basis points since June. The land and building rate remained at just over $2,100 a meter, which continues to look like compelling value when measured against other real estate asset classes. Sector diversity for the portfolio will reduce, following the settlement of the Bondi and Caboolture healthcare assets. The sale of these 2 properties, which was undertaken at a moderate premium to book value is not a change in strategy. We continue to be attracted to healthcare real estate and aspire to grow as part of the portfolio, but frankly we see better buying opportunities in the future, than the 4.4% aggregate yields achieved. Geographically, we have over 80% of the portfolio located in high population Eastern Seaboard states, and in terms of tenant diversification, we have 34 tenant partners with about 24% of our rent roll supported by Australia's largest Early Learning provider, Goodstart. Moving onto our lease expiry; every one of Arena's leases is triple net, with no exposure to variable property expenses, so they are highly efficient and highly predictable cash flows. We have less than 3% of the portfolio's income expiring prior to 2030, and no material concentration of expiries in any year to beyond 2045. With some minor leasing work relating to 2 small suites above our Murarrie Early Learning Centre, which we have a conditional heads up agreement on one of the suites. The 0.3% expiry in current year relates to our pathology suite in our Kalamunda Medical Centre, which we are in renewal discussions and are confident of a positive outcome. And further along in FY '24, the Early Learning center expiry relates to a profitable Early Learning center in metropolitan Brisbane, which again we are confident of a new or renewed lease on an increased rental. Moving onto our rent review profile on page 14, and on this graph, we've broken out the types of annual rent reviews for the first and second half of the current year, as well as financial years '24, '25 and '26. You see there, more than 90% of the annual rent reviews are either market rent reviews or escalate in line with inflation. As a result of the higher inflation in the period, we've recorded an average increase of 6.45%, with a relatively low exposure to market rent reviews in financial year '23 of 2.2%, which relates to 7 Early Learning centers. 4 of those reviews are capped and collared at between no increase and a 7.5% increase. And 3 are collared, but have no cap on the increase. All of the market rent reviews for financial year '23 are in negotiation currently and we anticipate, in aggregate, a result that will be at least as high as prevailing inflation. Looking forward, the rental escalation profile is relatively consistent over the next 3 years, albeit with more market reviews. All of those reviews have a collar at the passing rent and approximately half are kept at 7.5%, while the other half have no cap on increase. Moving to page 15, and as we noted in June, the environment for development and construction was challenging throughout financial year '22, with heightened cost inflation, extreme weather events and higher finance costs for contractors. Pleasingly we've seen some moderation in construction cost escalation, both in labor and materials and reduced incidence of extreme weather events in the first half of financial year '23. We proudly completed 7 Early Learning center projects in the half, which were located in Victoria, Queensland, New South Wales and South Australia. The total cost of these projects was $44.3 million and provided net initial yield on all costs, including transaction costs of 5.9%. Each center was designed to suit each individual tenant's operations and each will positively add to consumer choice in their respective catchments. In the absence of any material worsening in the development and construction environment, we anticipate completing up to a further 5 projects over the course of the second half of financial year '23 and the balance over the course of financial year '24. In total, our development pipeline has 15 Early Learning center projects that are located in Queensland, Victoria, South Australia, Western Australia and New South Wales, with a total forecast cost of $106 million of which we have capital expenditure outstanding of $66 million. We anticipate that the average initial yield on all costs, including transaction costs for these developments will be 5.4%. Arena has contractual protection from cost and time variability, as every project is being undertaken on a fund-through basis and we've secured agreement for leases with existing tenant partners on every project in our standard 20-year triple-net lease format. Arena is a partner of choice in the development of Early Learning centers in Australia, by value more than 1/3 of our Early Learning center portfolio has been developed by us since listing in 2013. In that time, we've completed 74 development projects, with 16 tenant partners across all states and territories except the ACT. These projects have increased access to Early Learning services for over 8,000 children in local communities, and provided our investors access to an excess of $26 million of current annual rent. Moving on to the next slide; as has been well publicized, the federal government has now legislated a reduction in the cost of childcare for Australian families by lifting the maximum childcare subsidy rate to 90% the first child in care and maintaining a 95% subsidization rate for any subsequent child in care attending a service at the same time. The government has also reduced the rate that the childcare subsidy tapers, and to increase the maximum family income threshold for eligibility from $354,000 to $530,000. This additional investment of $5 billion is designed to provide a significant economic and social return to Australia, including increased workforce participation, 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. The underlying demand for Early Learning services increased in the period, and the additional federal government subsidization, which will take effect in July '23, is designed to further increase demand for Early Learning services. The federal government has also directed the ACCC to conduct an inquiry into the market for the supply of Early Learning services, particularly in relation to costs and availability of labor. The use of land and related costs, finance and administrative costs, regulatory compliance costs, and the cost of consumables. A wide consultation program has been proposed and final report is due in December '23. Labor availability and costs remains a primary challenge for Early Learning operators, albeit, there has been some early signs of a reduction in the need for casual labor, which is more expensive amongst some service providers. Despite that, it remains, like many industries across Australia, that the current labor pool is too low, and as a result, it is our expectation that labor costs will continue to increase in the short term, which added with increases across consumables, accommodation costs and finance and administrative costs, will lead to further increases in daily fees. In relation to supply, there was a net increase of 240 centers across Australia in calendar year '22, an increase of 2.8% in the 12 month period, which is lower than we had anticipated and despite the strong underlying demand for the Early Learning services, we anticipate that new supply is likely to be further constrained due to higher development costs and higher rates of return required to attract capital. Moving on to the next slide and in that context of the Early Learning operating environment, Arena's portfolio is in a strong position. We've collected 100% of contracted rent during the first half, every one of our Early Learning centers is open and trading, and 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 to the general health of the sector. As we have in previous reporting periods, we've included operating data up to the quarter prior and that data provides underlying operator occupancy is higher than any prior corresponding period in the last 6 years, that's been supportive of a tight employment market, government funding and low new supply. Average daily fees have increased to $127 per day, which remain significantly below the government's benchmark fee of $140 per day, which is indexed to inflation. Our average rent per place across the portfolio has increased to just under $2,800 per place, and particularly given that we've developed more than 1/3 of the portfolio over the last 10 years remains highly affordable in our view. And despite strong rent increases across the portfolio, rent affordability as measured against gross revenue remains under 11%. Moving on to healthcare on the next slide, we continue to have a positive outlook on the increased community need for healthcare real estate, a view which is supported by Australia's aging population, a higher prevalence of chronic illness as well as improvements in science and new healthcare service offerings. Relative to other real estate sectors, healthcare real estate continues to be favored by private and institutional investors, perhaps to a level currently, that does not reflect the pressures on some healthcare business operating margins nor increases more broadly in real estate discount rates. In this environment, we've contracted the sale of 2 healthcare properties at a modest premium to June book value, whilst both properties have a strong tenant and a relatively long lease, our capital allocation screening provided that the divestment in the current market at the rates achieved was warranted due to the relatively higher rent as compared to other local real estate options. For example, converting depressed suburban office buildings in competition to our offering, and importantly in the current environment, our ability to recycle sale proceeds into projects that better meets our investment objective over a longer time period. The aggregate passing yield on divestment was under 4.4%, which crystallized in aggregate threefold total return on those properties in the 10 years since listing. Whilst these sales reduced our healthcare exposure in the short term, we continue to be attracted to the right new opportunities and aspire to grow as part of the portfolio, we're doing that in our usual disciplined way, 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 reaffirming full year distribution guidance for financial year '23 of $0.168 per security, an increase of 5% on financial year '22. Portfolio is in a strong position, record underlying family occupancy in our Early Learning portfolio, strong fee growth for our tenant partners and a further increase in demand foreseeable with additional government funding taking effect in July, 100% of our rent has been collected across the portfolio and we have a long WALE of just under 20 years, with a transparent and highly predictable rental profile that has inflation protection. Future income growth will be underpinned by contracted annual rent increases, as well as the impact of our financial year '22 and financial year '23 acquisition and development completions. Looking forward, despite the likelihood of continuing economic and geopolitical uncertainty and a clear expectation of further interest rate increases, Arena's outlook remains positive. Early Learning and healthcare services are integral to economic stability and improving community outcomes and those themes underpin Arena's portfolio value and investment objective of providing long term predictable distributions to our securityholders, with prospects for growth. We have balance sheet capacity and increased liquidity to take advantage of new opportunities that are consistent with our strategy, with gearing at 21.5%, and no debt expiring until March '26. Our experienced management team has strong industry relationships and in-house development and origination expertise, that will assist us in sourcing new opportunities in a changing investment environment. In closing, I'd like to thank our team and our tenant partners contributing to the positive portfolio and community outcomes that have been achieved in the first half of financial year '23. That concludes the formal part of today's presentation. So I'll now pass you back to the operator to open up for questions. Thanks, Lucy.

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

My first question is just on the ACCC inquiry, you touched on it in the prepared remarks, I was just wondering if you could provide any further commentary and high-level thoughts on how that might exactly play out from a property perspective, the media release that put out towards the back end of last year, particularly [ flagged ] property costs in that cost structure, in addition to labor. I'm just wondering if you had any high level thoughts on [ reckoning ] how that might play out from your perspective?

So certainly not a new, this is sort of being proposed as part of the Labor election platform. The terms of reference have been released, that's pretty fulsome, it is a broad review. I can say it's not a competition issue, so ACCC are running that inquiry, but there's 8,700 services and 3,500 operators across the country. So I don't think it's a competition issue. It is more about funding efficiency and justifying that further government investment. In regards to land -- in regards, I guess, our value proposition in that context, we've got rents at $2,800 per place, and I think that's far below where economically you would be able to provide those at the moment. We've got 72 hectares of land, if you divide it simply our portfolio value into that, it's a pretty good result, sort of $2,100 a meter. So feeling comfortable about the tangible value, feeling very comfortable about the social impact and our ability to provide efficient funding into facilitating Early Learning services. Beyond that, mate, it's -- there's a wide consultation process, the larger operators involved in that January, February, we expect to have better color on what's happening over the next few months.

Great. Just a follow-up to that in terms of the discussions you've had with regulators or your tenants in terms of that rental escalation and maybe the types of control that might come through as a result, I think it was one of your tenants [ G8 ] in the press saying that they were pushing through price increases off the back of labor and property costs both going up, which seems to play into that ACCC argument, if you had any discussions with tenants in terms of how they're feeling on sustainability of rents they are paying?

Yes, we do. Constantly in sort of discussion and you can sort of see it in the numbers, the profitability of tenants has actually remained quite healthy through the period. So at EBITDAR with an R on again, 38% split, this means that there is sort of strong profitability amongst tenants. What you are seeing at the moment and what the government will be focused on is the daily fee growth is running ahead of inflation at least on our numbers at the moment, and I think that's likely to continue. I think the big players behind that, as we mentioned, will be labor. But there's no question that accommodation costs, consumable, as well as regulatory costs are going up, Caleb. So I think [ passing ] that sits behind Labor, but again, I think from a sort of market efficiency perspective, we've got a strong value proposition.

Okay, thank you for that, Rob. My second question is just around the outlook for development, particularly yield on costs have come down 50 basis points over the past year or so. Just wondering how your incremental discussions are now going with tenant partners and the forward-looking or any expectations on what your costs might begin to do over the next 6 to 12 months, given obviously some rising interest expenses, and as you mentioned, moderation in costs?

Yes, there's no doubt -- there's no doubt, there's a shift in capital as we all know, Caleb. So, we're sort of using that. Direct market has been pretty stubborn. So land input costs at this stage haven't reduced materially. We've still got construction costs, but not too similar from where we were sort of 6 months or 12 months ago. What we are seeing is, market rents starting to move. So, I think in combination with the expectation that land costs will come down and higher rents would still be sustainable for tenant partners, that's where we will start seeing yields come out, and we were doing deals early 5s. We're now sort of shooting with opportunities with about 6 at least in front of them and higher. I think that's where the market needs to get to and I think it will in the short term.

Fantastic and final one from me, just on development volumes as well, it looks like the total pipeline has come down from about $140 to about $110 or so at the moment. Are your tenants still looking to expand their footprint and should we expect to see that potentially recover as well over time?

There's no question, from a business network expansion and as a result of the underlying demand from families, there is definitely want for business expansion. This is, I guess, a wait and see, the big gap between the bid and the ask on real estate at the moment, which we're sort of taking advantage of. So I guess pushing a little time into some of our origination programs, we've got a development pipeline that we're focused on. We've got plenty on the desk, just pushing pricing a little bit at the moment, Caleb.

Your next question comes from Lou Pirenc from Jarden.

2 quick questions from me. Can you talk about the maintenance CapEx, particularly with relation to the solar that you've committed to some of your lease negotiations. What are they striking at and what you expect that to be going forward?

Lou, very, very little, we are now sort of at 81%. We've got a couple of leg out tenants that we will get a hold off, but we've spent the order of $6 million to get to that point. Most of that's been rentalized or we've taken a value by extending leases. So, that's been a very efficient program from a maintenance -- going forward there is very little, the triple-net leases are very predictable in that regard.

Great. And then just in terms of -- and you mentioned it in terms of finding development land, is there any shift in finding -- making it easy to find acquisition opportunities in this environment, where you may have some peers with less -- strong balance sheet or is it still very much -- is your expansion still very much development led?

We certainly feel that we're well positioned to exploit any price dislocation. As I mentioned, the direct market has been a little stubborn to be quite honest. The deal transaction is down in Early Learning and healthcare, I think that will bounce back up and I think we'll see yields pushing out a little more. So that will become interesting for the business. As to input land costs, everything, all the ingredients are therefore yet to come off, It's harder to get anything, residential, commercial to childcare up as a result of the cost of capital. So we're just not seeing that at the moment a little bit. Our expectation is that we will. And frankly no super-rush to do. We'd like to see that the market has sort of settled down and the direct market to better reflect what's happening and the changes in cost of capital.

Okay. Your next question comes from Murray Connellan from Moelis Australia.

Could you please unpack the like-for-like income growth and your expectations there near term in a bit more detail. Just mindful that the impact of CPI bumps can be noisy given geographical spread and timing lag from inflation prints versus when the rent reviews actually kick in, what are you expecting in terms of income growth over perhaps the next 6 to 12 months, we've had inflation prints nationally in the last 6 months of 7% to 8%. Would you expect to be able to realize those near term or is that sort of an FY '24 story?