Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Arena REIT Full Year 2024 Results. [Operator Instructions] I would now like to turn the conference over to Mr. Rob de Vos, Managing Director. Please go ahead, sir.

Good morning, everyone, and a very warm welcome to Arena REIT's Financial Year 2024 Results Presentation. I'm Rob de Vos, Managing Director of Arena, and joining me on the call today is Gareth Winter, our Chief Financial Officer and Justin Bailey, Arena's Chief Investment Officer. The presentation we'll shortly commence has been lodged for the ASX this morning and is also available on our website. Some of the headline financial and operational outcomes presented today, as well as our distribution guidance for financial year 2025, were announced to the market on the 23 July in disclosures relating to an institutional placement and security purchase plan. And in that regard, I'd like to take this early opportunity to thank both new and existing investors for their participation in that equity raise and their continued support of Arena's growth. Financial year 2024 was another challenging year for real estate investment markets, persistently higher inflation and higher interest rates, and a development and acquisition market that continues to be slow to respond to market changes in investors costs of capital. Arena has entered into this new period in a strong position with a portfolio that is exclusively invested in essential social infrastructure property, profitable tenants, solid rental growth, ongoing disciplined cost management and a balance sheet that has increased capacity to pursue new opportunities that are consistent with our purpose and investment objective. Highlights for financial year '24, and I'm on Page 3 for those following the presentation materials, include a statutory profit of $57.5 million and an underlying cash based net operating profit of $62 million, which is up 4.7% on financial year '23. Our net asset value per security was stable as an increase in portfolio capitalization rates was offset by increases in passing and market rents. Our earnings per security increased to $0.1765, up 3.2%, a result of strong net property income growth of 8% being partially offset by higher interest costs. Like-for-like average rent increases were 4.9%. We maintained our sector-leading WALE of 18.5 years with 7 WALE accretive development completions. We've extended the term of our debt facilities and maintained consistency on our interest rate hedging programs. We've advanced our solar renewable energy projects that are now installed at over 90% of Arena's property portfolio. And we continue to make excellent progress on our broader sustainability programs, having adopted an emissions reduction plan targeting net 0 financed emissions by 2050 and making solid progress on this target with a 42% reduction as measured from 2021 to the end of 2023 alone. Arena's performance and positive outlook remains underpinned by the growing community demand for the essential services that our tenant partners provide. We can see that increase in demand with strong underlying operator occupancy across Arena's child care and specialist disability accommodation portfolios. Partnering and understanding the needs of our tenant partners and the community demand for their services has allowed us to achieve efficient long-term earnings growth and we're pleased today to reaffirm distribution guidance for financial year 2025 of $0.1825 per security, reflecting an increase of 4.9% on financial year '24. Moving to the next slide. And in an environment where we anticipate new opportunities to start to emerge, we remain committed to our strategic discipline and with a clear focus on the needs of our stakeholders. Understanding and addressing those needs underpins the long-term success of our business that helps shape our strategy and informs our decision-making and ultimately this positions the business to create value on a long-term and predictable basis. Highlights and outcomes over financial year '24 across key management focus areas include maintaining that sector-leading WALE of 18.5 years through lease renewals and the completion of WALE accretive development projects. We've seen the portfolio passing yield expand by 23 basis points over 2024 to an average of 5.4% at June. The negative value impact of that yield expansion has been mitigated by passing and market rent growth across the portfolio with average like-for-like annual rent increase for the period of 4.9%. The portfolio continues to have high occupancy at 99.7%, which is a testament to the quality of our assets, the community demand for the services we accommodate and the proactive management efforts of our tenant partners and the Arena team. We completed 26 market rent reviews in the period at an average of a 7.7% increase. We have made further progress with our renewable energy projects, collaborating with our tenant partners to install solar systems and reduce the energy intensity of our portfolio. These initiatives are lowering utility costs for our tenants at a time of significant increases in other operating expenses for their business. We completed 7 early learning center development projects for a total investment cost of $54 million. These projects deliver a net initial yield of 5.1% on all costs, including transaction costs. We have also expanded our development pipeline with the acquisition of 14 new early learning center development sites and post balance date, we've acquired and now settled 6 operating early learning centers leased to Affinity Education for total proceeds of $58 million. Moving on to an update on our sustainability programs on Slide 5. We believe that Arena's focus on sustainability across everything we do best positions the business and our stakeholders to achieve positive long-term commercial and community outcomes. We have a disciplined investment process and being an internalized manager with strong governance protocols means that we remain aligned with our investors, which facilitate sustainable growth and quality in our financial metrics. Arena's portfolio facilitates access to essential 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 our tenant partners to focus on their core purpose and for us collectively to deliver better communities together. Some of the key sustainability outcomes we've delivered over the last 12 months, including achieving a 0 organizational Scope 1 and 2 emissions and being certified carbon neutral by climate active for our business operations and services. We're again focused on increasing the use of renewable energy with 90% of Arena's portfolio now powered by solar energy and we've formally adopted our emissions reduction plan targeting net zero financed emissions by 2050 and with an interim 2030 target of 60% to 70% reduction in emissions intensity. And as mentioned on the prior slide, we're making good progress on those targets with a 42% reduction in that intensity of Arena's financed emissions from '21 to the end of '23. Further detail on these achievements and on our sustainability activities and future goals will be available in our 2024 sustainability report, and we anticipate releasing that report in September. I'll now pass the call to Gareth to provide further 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 FY '24, which shows a 5% increase in net operating profit to $62.4 million and a statutory profit of $57.5 million. I'll start by confirming that there was no change between the unaudited results we've released a few weeks ago at the time of the institutional placement and the final audited results released today. There is a reconciliation of net operating profit to statutory profit included in the presentation, with the most substantial reconciling items being the periodic revaluation of investment properties and derivatives. Operating EPS of $17.65 is 3.2% higher than FY '23, with the key driver of the increase in operating profit, the 8% increase in property income, offset by an increase in finance costs. The underlying increase in property income was 9% when normalized for the sale of the 2 health care assets midway through FY '23. The increase in property income is from a combination of rent reviews and capital deployment. Like-for-like rent reviews averaged 4.9% for the period, noting that 95% of rent reviews in FY '24 had a minimum of CPI or market-based reviews. The annualization of the FY '23 CPI-based rent reviews into FY '24 has provided further protection to our cash flow and has substantially mitigated the effect of a rapid increase in interest rates that occurred throughout FY '23. Also contributing to rent growth were Arena's ongoing program of investment in ELC developments and new acquisitions with rent from 7 developments commencing during the period. Our rent collections and tenant rent affordability remain resilient and the final $300,000 of COVID related deferred rent was collected back in December. Looking at some other line items. Property expenses, had a minor change in property expenses, slightly up on the prior year, and this is really dependent on the number of property inspections and independent valuations that are performed year-on-year. Operating expenses has been a $700,000 increase in cash-based operating expenses compared to FY '23. Managing underlying costs in a higher inflation environment has been a priority, with the increase in costs primarily due to investment in new staff resources, including a senior CIO role and a property analyst role, which we expect will drive new investment and growth initiatives into the future. There are also some additional costs and restrictions from cybersecurity projects and a higher STI pool in FY '24 compared to FY '23. As a point of comparison, after normalizing for prior year asset sales, property revenue increased by $7 million in FY '24 compared to $700,000 increase in operating expenses and our cash based MER is around 33 basis points. An increase in the finance costs was expected in FY '24, given the annualization effect of the rapid and substantial increase in interest rates in FY '23. However, the increase was limited to only $2.6 million due to substantial mitigation from our hedging program. The increase is ultimately due to a combination of changes in both rate and volume. Overall, the increase in average interest rate in FY '24 compared to FY '23 contributed to around 70% of the increase in finance costs. Average volume of drawn debt and the increase in facility capacity in mid-FY '23 contributed to most of the rest of the increase with capitalized interest on the development book for the period being $2.9 million, which was slightly less than the comparative period by around $200,000. The lower statutory profit of $57.5 million is primarily due to lower asset revaluations of $4 million compared to $17 million in FY '23, albeit valuations in both years positive. And this is offset by derivative valuation changes of negative $5 million, which is primarily due to a reduction in term. We have paid a distribution of $0.174 per security of FY '24, which was in line with our original FY '24 guidance and represented a growth of 3.6% on FY '23. The growth in distributions demonstrates that the CPI-based rent review mechanisms in Arena's leases, combined with the interest rate hedging, have been effective in offsetting the substantial increase in interest rates and still result in overall growth in earnings and distributions. We have provided FY '25 DPS guidance in conjunction with our recent institutional placement of $0.1825 per security, which represents 4.9% growth on FY '24. In terms of core assumptions for the FY '25 guidance we gave at the time, we've applied a forward BBSY curve, which had an average floating rate of 4.3% across FY '25 and using a CPI assumption of an average quarterly annualized rate of 3.25%, which starts at 3.5% and reducing down to 3% throughout the course of the year. We expect that our FY '25 payout ratio to be consistent with recent years, and our guidance is otherwise established on our usual status quo basis and assumes no asset sales or deployment of capital beyond what has already been announced and no material change in general market or operating conditions. Just turning to Page 8. We've got a waterfall chart of the EPS change through the period. The chart demonstrates the relativity of each item supporting EPS growth, noting that the key drivers of growth were the CPI-linked rent reviews with the deployment of capital into acquisitions and developments, and offset by the health care asset sales from mid-FY '23 and a minor change in funding costs and also the DRP. The relativity of each component is a little different to our normal profile. As rent reviews contributed more in FY '24 than recent history, the development is slightly less, which was to be expected given the interest rate and the inflation environment. Turning to Page 9. This slide presents a summary of Arena's balance sheet. The full balance sheet is in the appendix to the presentation. Key points to note, the 4% growth in investment property, primarily due to $63 million invested in developments and acquisitions, the positive asset revaluations of $4 million offset by a single asset sale of $4 million. New investment CapEx in FY '24 was a little below our run rate, as you'll see in the chart off to the right. This reflects our investment discipline in a market that has been in a period of transition and pricing to accommodate the new cost of funds. Gearing at 30 June before the institutional placement was 22.6% and the post-IP pro forma is 19.9%. This provides substantial capacity to fund the existing pipeline of developments and growth opportunities. Turning to the next page. We've got a capital management summary. Our approach to capital management is directly linked to our investment objectives of predictability of distributions with scope for growth over the medium term. Accordingly, we prioritize resilience and reduce risk through relatively low gearing, high levels of hedge color, regular extension of debt facility term and maintaining liquidity in excess of our development commitments. The consistent execution of our capital management strategy, combined with the natural inflation protection of our -- provided by [indiscernible] outcomes have protected our net operating income in an environment where inflation and interest rates materially increased in a very short time frame. As foreshadowed at the half year and consistent with our usual practice of regular extension of debt term, all tranches of our debt facility were extended in FY '24, with a weighted average term remaining of 4.1 years, noting that the first expiry is not until 31 May 2027. We have immediately available liquidity to cover our development commitments. As of today, we have over $180 million available to cover the remaining spend on the current pipeline of $95 million. And this liquidity, in combination with our modest gearing is also allowing us to actively consider new investment opportunities. In FY '23, we introduced a sustainability overlay on our debt facility with a range of targets across our solar program, emissions reductions, and modern slavery program. There is a modest pricing adjustment in relation to those targets. The targets were fully achieved in respective FY '23 with the FY '24 positioned to be resolved in the next couple of months. Our all-in weighted average cost of debt at 4% has been relatively stable with a 5 bps increase over the year with an increase in floating rates in FY '24, offset by reduced facility margins. The weighted average cost of debt quoted is all in and includes the cost of undrawn facilities. Just looking at our hedging program. The primary objective of our hedging program is smoothing rates through the cycle, with a substantial and rapid increase in floating rates during FY '23, mitigated by our practice of holding consistently high levels of hedge cover with a staggered expiry profile across the curve. As of today, we have hedge cover of 86% with a weighted average term of 4.5 years and a current weighted average rate of 2.03% with the annual average hedge rate on the book just going a little bit over 3% by FY '29. As the development pipeline is funded, we expect that hedge cover will reduce to our normal expected range of 70% to 80%. Finally, it is important to note that Arena continues to operate with substantial headroom in both our ICR and LVR covenants. I will now pass over to Justin Bailey to give an update on Arena's property portfolio.

Thanks, Gareth, and good morning, everyone. I'm Justin Bailey, Arena's Chief Investment Officer. Today, I'll provide a little bit more detail on Arena's portfolio and operating environment. Starting on Page 12 of the presentation. At June 30, Arena owned 276 early learning and health care properties with a portfolio value of $1.58 billion. Aligned with our purpose, the portfolio supports essential services across many Australian communities. We accommodate over 32,000 families in their early learning center needs. We support the primary health care needs of 6 communities. The portfolio also accommodates the care of people with higher physical support needs in our 3 disability accommodation properties. The demand for the essential services we accommodate, along with the work of our team and our partners, has resulted in the portfolio being in excellent position. At 18.5 years, the portfolio has the longest contracted rent profile in the REIT sector. We've maintained an exceptionally strong occupancy record with at or near 100% occupancy for over a decade. The portfolio is diversified both in terms of geographies, where the portfolio is well balanced across the major population centers. And in terms of tenants, we currently have 35 tenant partners across the portfolio with no individual tenant accounting for more than 25% of our income. The portfolio also has very low single asset concentration, with the largest single asset accounting for less than 2% of the value of the portfolio. The passing yield on the portfolio at June 30 was 5.4%, an expansion of 23 basis points from FY '23. The value of the portfolio remained stable over the period, with a small net increase of $3.8 million from FY '23 as we saw strong property income growth in the period. Moving on to Page 13. We have no lease expiries in FY '25. As you can see from the graph on this slide, we have less than 3% of the portfolio's income expiring prior to 2031 and no material concentration of expiries in any particular year. We continue to add properties through our development program with 20-year leases, which helps maintain our market-leading WALE. Moving on to our rent review profile on Page 14. Like-for-like rent increased by 4.9% in FY '24 as a result of annual escalation and market reviews completed during the year. The majority of the portfolio's income is structured with an annual escalation that is the higher of CPI or an agreed fixed amount, providing positive exposure to the current high inflation environment. As shown on this slide, 95% of years '25, '26, '27 and '28 have annual rent reviews that are contracted either CPI or the higher of CPI or a fixed amount or a market review. This provides continued income growth linked to CPI and market rent increases. In terms of market reviews, we had a relatively high number of reviews in FY '24 with 26 reviews completed. Those reviews have been resolved at an average increase of 7.7%. For the balance of the reviews to be completed, 8 are subject to a 7.5% cap and 2 are uncapped. All have the benefit of a 0% collar. We are anticipating further short-term growth in market rents as a result of strong demand for early childhood education and care services, which is demonstrated by the high occupancy and increases in daily fees in the sector. Moving now to Page 15. We completed 7 early learning center developments in the financial year, which were located in Metropolitan Melbourne, Adelaide and Perth, all with existing tenant partners. During the period, we settled on 5 new development projects that will complement the portfolio and deliver future earnings growth. In addition, we conditionally contracted a further 4 development projects prior to June 30, and we are progressing exclusive due diligence on a further 4 projects. Each of these development projects has our standard 20-year triple net lease. Looking forward, including those 8 projects, our development pipeline has 21 ELC projects with a total forecast cost of $139 million, of which we have capital expenditure outstanding of $95 million. We anticipate the weighted average initial yield on all costs for these projects will be 6%. The challenges in the construction sector seen in recent years, including cost inflation and labor shortages, did continue in FY '24 with reported insolvencies in the sector peaking during the year. The situation looks to be improving, which is positive. So we see an improved outlook for the construction sector moving forward. It is worth noting that we've not had any material exposure to the construction issues across our portfolio. Our approach to structuring developments on a fund-through basis means that we've been sheltered from any meaningful economic impact. The structures provide the contractual protections we need for time and cost overruns. Consistent with our strategy, each of our new development projects is being undertaken on a fund-through basis. In the last 10 years, Arena has delivered 77 ELC developments for 14 tenant partners. They've been undertaken in all states and territories, except the ACT. It demonstrates the capability of the Arena team to source and deliver new purpose-built properties for our tenant partners. Our expectation is that the fund through development model will continue to provide access to further investment in the sector as our tenant partners look to further expand their operations. Finally, as Rob mentioned, we've settled on the portfolio of 6 operating centers in New South Wales, which we announced to the market in July, so they will be immediately contributing to our yielding portfolio. Moving on to Slide 16. Rising female workforce participation continues to drive demand for early childhood education and care over the medium to long term. It's our expectation that demand will continue to increase as both major political parties recognize that a strong early learning center is -- sector, rather, is integral to assisting parents and carers participate in the workforce. The package of government subsidies, which was introduced by the Australian federal government in July last year, was designed to increase the use of early childhood education and care. The impact of the subsidies is reflected in our occupancy data, with our tenant partners on average reporting sustained high levels of occupancy. In terms of supply, we've seen another year of relatively subdued net new supply. There was an increase of 288 centers across Australia to June '24, an increase of around 3.3%. The shortage of appropriately qualified and experienced educators has been a well-documented challenge in the sector, with wages and conditions identified as a key area that needed to be addressed to attract and retain sufficient qualified staff. The federal government has very recently announced that it will fund a 15% pay increase for workers to be phased in over the next 18 months. The pay increase is linked to a proposed limit on daily fee increases. The full details are yet to be disclosed. However we expect it to result in improved staff availability, addressing one of the key challenges in the sector, so it's definitely a net positive. Moving to Slide 17. With this context, Arena's early learning portfolio remains in a very strong position. We are 100% occupied. Our tenant partners' average underlying business occupancy is in line with last year, which was the highest on record. Average daily fees have increased to $141 per day at March '24, up 9% from 2023. This average, though, remains below the government's benchmark fee of $157 a day. As you can see in the graph at the bottom of the page, the government funding package continues to suit our portfolio, which is typically geared towards middle-income families. To give this some context, 87% of our early learning centers have daily fees below the government's maximum daily fee rate. Our average rent across the portfolio has increased to around $3,100 per place. Whilst rents have increased, on average, the affordability of rent for our tenant partners has remained largely stable and, in fact, slightly reduced, with a rent-to-revenue ratio of 10.3%, reducing from 10.5% in FY '23. Moving now to Page 18. Consistent with our social infrastructure mandate, we continue to closely track the health care sector. We see the longer-term fundamentals of the sector as attractive and we remain supportive of further investment for the right opportunities. Our existing portfolio of community-based health care properties continues to perform in line with expectation as does our SDA portfolio, which has operated at near full capacity over the last 12 months. In the short term, we expect to see some continued challenges from inflation and higher interest rates, as well as sector-specific funding issues and changes in how health care services are delivered. We anticipate short-term downward pressure on the values of some Australian real estate as a result of the more challenging operating conditions. Over the medium to long term, though, we expect community demand for health care services will continue to increase as a result of Australia's growing and aging population and private capital will be required to support those services through the investment in new and redeveloped infrastructure. In Arena's usual disciplined way, we'll patiently seek opportunities to deploy capital into health care and other social infrastructure sectors that support our purpose and our investment objective. I'll now hand back to Rob.

Thanks very much, Justin. I'm now on the final slide. Today, we're reaffirming full year distribution guidance for financial year '25 of $0.1825 per security, an increase of 4.9% on financial year '24. The portfolio is in a strong position. Our health care and child care investments are performing to expectation and underlying occupancy for our child care tenant partners is at the equal highest position on record with solid rental growth across the portfolio and a long 18.5-year WALE with a transparent and highly predictable rental profile. Future income growth will be underpinned by contracted annual rent increases, including market rent reviews, as well as the impact of our financial year '24 and '25 acquisition and development completions. Looking forward, Arena's outlook is positive. Early learning and health care 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 security holders with prospects for growth. We have additional balance sheet capacity following our institutional placement with gearing at 19.9%, which positions us well to carefully explore and execute on new growth opportunities. Our recently expanded and experienced management team has strong industry relationships and expertise that will assist us in sourcing new opportunities in our usual disciplined manner. As a closing point, I'd like to thank our team and our tenant partners for contributing to the positive outcomes that have been achieved for our investors and the communities in which we invest in financial year 2024. I'll now pass the call to the operator to open up for questions. Thank you.

[Operator Instructions] And our first question today will come from Steven Tjia with Barrenjoey.

Just a couple of questions for me. Just firstly, are you seeing any opportunities in the non-child care space? We've seen cap rates move quite a bit in this part of the market.

Thanks, Steven. The short answer is yes, we're starting to see opportunities emerge. I think for us, we've always had a focus on rent affordability. And if you looked at health care, which is the obvious step for us, we're still concerned about some of those operating conditions that Justin mentioned. So it's reconnaissance more than execution at the moment. But we have done a lot of work over 2024 to get the business ready and patiently waiting for it. This business is not about getting the biggest balance sheet. It's about ultimately predictability of distributions, which really goes to rent cover. So a lot more work there needed in the short term, Steven.

And maybe just on expectations for market rent reviews in '25. If you can just talk about maybe any timing excuse as well that we should be aware of?

No, from a timing perspective, they'll sort of flow through. There's a couple that are outstanding. That's not unusual. There will be -- the usual negotiation sits around sort of the last quarter of market rent reviews this period. I think, looking forward, we've got a mixed bag of those that have been -- haven't had access to market -- a market review and some that have had a recent, so in the last 5 years. So it'd be a bit of a mixed bag. As a global comment, though, we're still seeing market rents move upward quite quickly. There's a few reasons that are sitting behind that. Obviously, further government subsidization into the child care sector, which is allowing for rents to increase, obviously picking up the inflation, but growingly, the economic cost of new stocks actually increasing the sample set too, Steven. So for a number of reasons, we think that market rent growth will continue at a reasonable rate.

And our next question will come from Caleb Wheatley with Macquarie.

Just be keen to get your thoughts, a bit more detail on the recent labor cost funding that's coming through from the government. Obviously, good from a profitability point of view, but also the limit on potential fee increases and therefore, revenue. So keen to hear how you're thinking about that implications for rents, please.

Yes. Thanks, Caleb. Look, the announcement by the government of a 15% wage increase has been very much welcomed by the sector. We're sort of on record that it has been the largest issue both in retaining and attracting new staff to the sector. The government is aware of it. We had a productivity commission report that's been delivered to the federal government. There's no question that has got something. Again, in fact the Prime Minister himself is on record saying it does have points relating to needing to increase wages in that sector. That report hasn't been released yet. We expect it will be imminently. The impact of 15% is positive. Our tenant partners are pleased with the outcome. There's a number of them made public releases on that. I guess, simplistically, if you look at sort of 2/3 of the -- 2/3 of an operator's revenues going towards labor cost, getting that 15% increase will ultimately help that retention and quality of that labor force. And then you've got a 4.4% increase cap. So I'm expecting that we'll see a pretty uniform 4.4% increase across services up to the election period, which is quite [ neat ] in regards to how this has been put forward. But that will ultimately provide higher profitability. So 4.4% across daily fees, plus the 15% wage increase will ultimately mean better trading conditions for tenant partners, some of which we put back to high labor ratios, I suspect, Caleb. So net positive, I guess, directionally consistent with what the government has been wanting to do here. I think what will be interesting over the next 12 months is Productivity Commission report being released, which we anticipate will be recommending further subsidization and then seeing where the government gets to with this journey on universal care, which will be the next big swing if it happens behind child care.

And on those market rent reviews, my understanding is that it's typically linked pretty closely to the top line? Or is there anything to read into in terms of the 4.4% cap given where inflation has been running?

It's more often on the bottom line. So profitability at a net level is probably where we sort of -- where we're very careful. We want to make sure that we've got a high degree of rent cover at a net level across the portfolio. We want our tenants to have profitable outcomes, reduce our terminal risks at lease renewal and know that the rent is going to be paid. So no, I think it's only going to be a net benefit for us, Caleb.

Great. And my final question, just on hedging completed during the half, it seems like the hedge profile has picked up and got a huge amount of change or even potentially a benefit from a cost of debt point of view. Can you speak through some of the hedging you completed over the most recent 6 months, please?

Yes. Sure. Caleb, what we've done is put in place some forward start swaps. So when the curve was reduced [ there were ] some cuts back in March. So we put in some forward starting swaps over the next couple of years, which are a combination of replacing existing swaps as they mature and then also some incremental volume as we know that we'll be drawing down more debt going forward. So they were done at rates, which were obviously positive compared to current market conditions.

Great. Is there an easy way to simplify what those incremental hedge rates were?

It's at about 3.7%.

Great.

No, basically, sorry. And in terms of term, we're basically going up 4 or 5 years.

And our next question will come from Cody Shield with UBS.

I just want to pick up some comments on the 15% wage increase. You kind of touched on this from a rent perspective. I know it's early days, but how are conversations with tenants just around thinking about network expansion in that context?

Yes, it's a bit early, Cody. I think the net benefit to them should be a net benefit to us ultimately. There's a pretty big timing issue. I think what will be interesting is just how new stock comes on and where that 4.4% increase might sit for stock that is about to hit the market. So there's probably a bit more focus around that in our tenant discussions. So yes, a little early. I think we'll have some more color over the next 3 to 6 months.

Okay. Great. And just on that $95 million of outstanding CapEx, can you just run me through the staging of that spend over the next 12 to 18 months and kind of what contribution you're expecting from developments over '25?

Yes. I'm happy to take that, Cody. So the projects that we've got in the pipeline will be completed relatively evenly from a deployment perspective over the next 24 months. And I think that -- does that answer your question? And then sort of at the 6% sort of coupon rate and yield rate when they complete. Yes.

Okay, sure. Yes, that's great.

[Operator Instructions] Our next question will come from James Druce with CLSA.

Yes. I just wanted to dig in to some of the comments you made around the productivity report that's going to be released imminently. My understanding was that you weren't expecting too much of a change from what was released in a preliminary sense. Are you expecting a bit more of a chance of some sort of universal subsidy here? Or is it still your baseline?

Yes. To be clear, we're not sort of baking in anything. And I think from a sector's perspective, there's a level of empathy too, James. We had a lot of policy change over the last number of years. But just picking up on, I guess, the themes of the incumbent federal government, there's definitely a want to get to universal care. It was an early election promise and that kind of continues. [ Our house rated this ], and you need to be a bit careful with this, obviously, but there's a lot of work in the interim report pointed towards high subsidization for disadvantaged Australian communities. And we think that's probably likely to continue. We expect that we will see a higher push from the Productivity Commission in regards to what the government has responded to in the last couple of weeks, which is the obvious supply constraint of labor. And I think that that's been -- I think that this sort of preemptively hit that piece. Outside that, we're not expecting anything, but have been interested to note that the growing advocacy around cheaper child care and a universal system continues, including with federal ministers.

Okay. That's clear. And are you guys prepared to call the top of yields now for child care? Are we seeing the peak now for acquisition yields?

It's a great question. So we still had a bit over $0.5 billion, 87 transactions through '24, [ 4%, 5.5% ] was our record. We think we've got the best transaction records in the business. Maybe somewhat concerningly FY '25, we've actually seen nearly 25% -- 25 basis point reduction. So we've had some really sharp yields over the -- over a small amount. I think we've got 12 transactions across the country to date. So there's some possibility. I think there's still a big bet on some of those transactions in regards to debt coming down quicker than perhaps what we certainly anticipate, James. But we are seeing the market starting to compress. There's no doubt about that.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. de Vos for any closing remarks.

Thanks, everyone, for attendance on the call. Please don't hesitate to contact Sam, Gareth, Justin or I directly with any questions. We look forward to catching up with a number of you over the next days and weeks. Thank you.

The conference is now concluded. Thank you for participating and you may now disconnect your lines at this time.