Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Arena REIT Half Year 2025 Results Call. [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 First Half Financial Year '25 Results Presentation. I'm Rob de Vos, Managing Director of Arena. Joining me today are Gareth Winter, Chief Financial Officer; and Justin Bailey, Arena's Chief Investment Officer. The presentation, which will shortly commence has been lodged with the ASX this morning and is also available on Arena's website for those that want to follow. First half 2025 has been another positive period for Arena. Over the last 6 months, the business has accelerated investment activity as the trajectory for market interest rate costs became clearer and new opportunities emerge where our competitive cost of capital and deal sourcing expertise could be used. With an experienced and expanded management team and a balance sheet with substantial capacity, we are well-positioned to capitalize on further growth opportunities that are consistent with our strategy and investment objective. The growing needs of Australian communities continues to support the social infrastructure property sector, population growth, government indebtedness and a higher expectation from communities for improved quality and availability of the essential services that Arena accommodates provides the business with strong long-term macroeconomic tailwinds. In this context, Arena's portfolio, operations and outlook are in a strong position. Highlights of the outcomes and achievements for the first half of financial year '25 include a statutory profit of $36 million and an underlying cash-based net operating profit also of $36 million [Technical Difficulty] 16% on half year '24. Our earnings per security increased to $0.092, up 5.5%, a result of strong net property income growth of 13%, being partially offset by higher interest costs and additional securities on issue. Like-for-like average rent increases were 3.2%. Our net asset value per security was stable as an increase in portfolio capitalization in our healthcare portfolio was offset by increases in passing and market rents in our early learning portfolio. And perhaps most pleasing, we've increased our capacity for new investment at a time when new opportunities are emerging and have taken advantage of that environment with 11 operating properties acquired, 6 early learning center developments completed and replenished our development pipeline to now include 19 projects. Arena's performance and positive outlook remains underpinned by the growing community demand for the essential services that our tenant partners provide, and we continue to see that increase in demand with strong underlying operator occupancy across Arena's early learning and specialist disability accommodation portfolios. Partnering and understanding the needs of our tenant partners and the growing 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 '25 of $0.1825 per security, reflecting an increase of 4.9% on financial year '24. Moving on to the next slide; in an environment where we are seeing short-, medium- and long-term growth opportunities 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 Arena that helps shape our strategy and informs our decision-making and ultimately best positions the business to create value on a long-term and predictable basis. Highlights and outcomes over first half '25 across key management focus areas include an increase in development and acquisition activity has seen the portfolio increase to 289 properties, providing essential services to Australian communities. We have maintained our sector-leading weighted average lease expiry for the portfolio of 18 years through lease renewals and the completion of WALE accretive acquisition and development projects. We've seen a small expansion in yields of about 3 basis points across the portfolio for the period, which has been mitigated by passing market rent growth, again, particularly across the early learning portfolio, providing for an overall immaterial uplift in portfolio value. The passing yield for the portfolio is now 5.4%. We've divested one asset in the period in Inner Metropolitan Melbourne at its prevailing book value as part of a transaction that we arranged an early surrender of 2 early learning center leases that underperformed in terms of business occupancy post COVID. That transaction has allowed us to unlock value for alternate uses. The portfolio continues to have high occupancy at over 99%. We have 18 market rent reviews that are currently in negotiation, and we anticipate completing all of those in the second half. We've made further progress on our renewable energy projects with 93% of the portfolio now being powered by solar energy. And these initiatives are not only reducing the energy intensity of our portfolio, but they are lowering the utility cost for our tenant partners and are favored by our tenants' customers, the families and communities that use our properties daily. Pleasingly, we achieved all of our sustainability-linked loan targets, which entitles the business to a small discount of interest payable under our syndicated loan facility. We've acquired 11 operating properties in the period, including the 6 that were announced as part of the July equity raise and have completed 6 early learning center developments. We've also expanded our development pipeline, which now has 19 projects at various stages of completion, all of which we anticipate completing over the next 18 months with a forecast total cost of $131 million and $93 million of expenditure forecast to complete as at the end of December. The anticipated net initial yield on all costs for these projects is 6.1%. Moving on to an update on our sustainability programs on Slide 5 and 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 are aligned with our investors, which facilitates sustainable growth and long-term 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 that we've delivered over the last 6 months include achieving zero organizational Scope 1 and 2 emissions. We've adopted and are progressing with an emissions reduction plan that targets net zero financed emissions by 2050 with an interim 2030 target of a 60% to 70% reduction in emission intensity. And as mentioned on the prior slide, we remain focused on increasing the use of renewable energy with 93% of Arena's portfolio now powered by solar energy. Further detail in relation to our sustainability activities and future goals are available in our 2024 Sustainability Report. I'll now pass the call over to Gareth to provide 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 first half of FY '25, which shows a 16% increase in net operating profit to $35.8 million and a statutory profit of $36.3 million. There is a reconciliation of net operating profit to statutory profit included in the Appendix of the presentation with the most substantial reconciling items being the periodic revaluation of investment property and derivatives. Operating EPS of $0.092 is 6% higher than the first half of FY '24 with the key driver of the increase in operating profit being the relative 13% increase in property income. The increase in property income is from a combination of rent reviews and our capital deployment and like-for-like rent reviews averaged 3.2% in the period, noting that 95% of rent reviews in FY '25 have a minimum review of CPI or market-based reviews. As the inflation rate has declined over recent quarters, we are moving towards the minimum standard annual rent review increase, which averages close to 3% per annum. Also contributing to the increase in income with the acquisition of 11 ELCs, including 6 announced in early FY '25 in conjunction with institutional placement and income from Arena's ongoing program of investment in ELC developments with rent from a further 6 developments commencing during the period. Just looking at some other line items; other income is interest income and is simply higher because some of the proceeds from the July capital raise were held in cash pending our near-term property settlement. Property expenses, minor change in property expenses. Ultimately, the property expenses are linked to the size of the portfolio and dependent on the number of property inspections and independent valuations performed during a particular period. For context, the cost across the portfolio averaged a little over $1,000 per property. Operating expenses, there's been a $500,000 increase in cash-based operating expenses compared to the first half of FY '24. This increase was expected, and we flagged this at the FY '24 results with the increase being primarily from our investment in new staff resources, including a new Chief Investment Officer and an analyst role within the property team, which both commenced in the second half of FY '24. Our expectation is for this investment in our team to continue to drive new growth opportunities. And I note that the operating costs for the first half of FY '25 are in line with costs for the second half of FY '24. As a point of comparison and illustrating the operating leverage of the business when compared to the prior period, revenues increased by over $5 million compared to the $0.5 million increase in OpEx and our cash-based MER remains in the low 30 basis points. There's been a slight reduction in finance costs in the first half of FY '25, primarily due to a portion of the proceeds from the institutional placement in July and the STP in August being used to reduce debt pending the use of those funds on our development pipeline. This resulted in the average monthly debt balance across the first half of FY '25 being lower than the comparative period. Average rates were relatively stable across both periods. Capitalized interest on the development book for the first half was $1.6 million, which was slightly higher than the comparative period by $100,000 as there was more relative value in the project pipeline. The higher statutory profit of $36 million in the first half is primarily due to higher asset revaluations of $7 million compared to negative $4 million in the comparative period. We have paid distributions of [ $0.09125 ] per security to date for FY '25, which is in line with our FY '25 guidance of $0.1825, which represents growth of 4.9% on FY '24. In terms of considering the status of some of our core assumptions for our FY '25 guidance, we applied the BBSY forward curve at the time of giving guidance with an average floating rate of 4.3% across FY '25 and an average CPI assumption of 3.25% each quarter and a payout ratio reasonably consistent with prior -- recent years. Our view is that these assumptions remain reasonable across the course of FY '25. Just turning to Page 8; there's a waterfall chart of EPS change for the period. The chart obviously just demonstrating the relativity of the individual items supporting EPS growth, noting the key drivers of growth remain the periodic rent reviews and the deployment of capital into acquisitions and developments, with the main offset being funding mix from the capital raise prior to those funds being deployed into new investment. The relativity of each component and mix is returning to a more normal profile with the declining inflation rate. Turning to Page 9; this slide presents a summary of Arena's balance sheet. The full balance sheet is in the appendix of the presentation. Key points to note here are the 10% growth in investment property being primarily due to $154 million invested in acquisitions and development CapEx during the period and positive asset revaluations of $7 million, offset by an asset sale of $6 million. New investment deployment in FY '25 to-date was well above recent periods as more opportunities have become available in the market. Gearing of 20.8% represents a 1.8% reduction on June given the net effect of the capital raising in July and subsequent investment proceeds. Turning to Page 10 and the capital management summary; the approach to capital management remains directly linked to our investment objective of predictability of distributions with scope for growth over the medium term. Accordingly, we have maintained relatively low gearing consistent levels of hedge cover within our expected ongoing range and maintained liquidity in excess of our development commitments. To support new investment, we completed an institutional placement of $120 million in July and an SPP, which raised $24 million in August. All tranches of our debt facility were extended in May '24 with a weighted average term remaining of 3.6 years and no expiry before 31 May 2027. We have immediately available liquidity of $118 million in our debt facility to cover our development commitments of $93 million. And this liquidity in combination with our relatively 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 with a modest pricing adjustment in relation to those targets. These targets were fully achieved in respect of FY '24. Our all-in weighted average cost of debt has increased slightly to 4.25%, which was expected and primarily due to a natural change in the swap book as expiring swaps roll off and new swaps commenced in the half. The weighted average cost of debt quoted is all in and includes the cost of undrawn facilities. The primary objective of our hedging program is smoothing rates through the cycle and with a substantial and sustained increase in floating rates since FY '23, mitigated by our practice of holding consistently high levels of hedge cover with a staggered expiry profile across the curve, which is evident in the average swap rate over time. At December, we had hedge cover of 79% on active swaps with a weighted average term of 2.8 years remaining and a current weighted average rate of 2.45%. The average hedge rate, including forward start swaps doesn't go above 3% until FY '28 and remains below prevailing market rates through FY '29 with the scope to participate in any interest rate reductions in our future hedging program as the development pipeline is funded. And finally, it is important to note that Arena continues to operate with substantial headroom in our banking covenants. I will now pass 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. I'll provide an update on Arena's portfolio and our operating environment. Starting on Page 12 of the presentation; at 31 December 2024, Arena owned 289 early learning and healthcare properties with a portfolio value of $1.73 billion. The underlying community demand for the essential services we accommodate continues to support the position of Arena's portfolio. We have the longest contracted rent profile in the listed REIT sector at 18 years. We've maintained our exceptionally strong occupancy record at over 99%. The portfolio is diversified both in terms of geographies with the portfolio well balanced across major population centers, particularly the East Coast. And in terms of tenants, we currently have 35 tenant partners across the portfolio with no individual tenant accounting for more than 21% of our income. The portfolio provides very low single asset concentration with the largest single asset accounting for 2% of the value of the portfolio. The passing yield on the portfolio is 5.42%, representing a very mild expansion in yields in the period of 3 basis points with our ELC yield stable and yields on our healthcare assets expanding 32 basis points to December. The value of the portfolio overall remained stable over the period with a small net increase of $7 million or 0.4% resulting from rent increases. Moving on to the lease expiry profile on Page 13; we have no lease expiries due in FY '25 or '26, '27 or '28. We have less than 2% of the portfolio's income expiring prior to 2033 and over 55% of the portfolio lease income expires after 2040. We continue to focus on the portfolio WALE, undertaking acquisitions of operational properties with long-term leases in place and where possible, putting new leases in place and adding new properties through our development program, all with our 20-year standard form lease. This disciplined focus on lease term helps maintain that market-leading WALE. Moving on to rent reviews on Page 14; like-for-like rent increased by 3.2% in half year '25. The majority of the portfolio's income is structured as an annual escalation that is higher of CPI or an agreed fixed amount, providing an opportunity for rent growth through the cycle. As shown on this slide, 95% of financial years '25, '26, '27 and '28 have annual rent reviews that are contracted either CPI or the higher of CPI or a fixed amount, typically 3% or a market review. This provides continued income growth linked to CPI in periods of high inflation, but also provides a floor on rent growth as inflation abates. In terms of market reviews, we have 18 HY '25 market reviews in negotiation and anticipate all to be resolved in the second half. For those reviews to be completed 17 are subject to a 7.5% cap and one is uncapped, all have the benefit of a 0% collar. We are anticipating continued rent growth -- market rent growth rather as a result of strong demand for early childhood education and care services, which is evidenced by high occupancy and increases in daily fees in the sector. Moving now to Page 15; we completed 6 early learning center developments in the first half, which were located in Queensland, New South Wales and South Australia, all with existing tenant partners. During the period, we settled on 5 new developments that will complement the portfolio and deliver future earnings growth. In addition, we conditionally contracted a further 8 developments prior to 31 December. Including these 8 developments, our pipeline has 19 developments in total with a forecast cost of $131 million, of which we have capital expenditure outstanding of $93 million. The forecast weighted average initial yield on all costs for these developments is 6.1%, and each of them has the benefit of our standard form triple net lease. Consistent with our strategy, each of our development projects is being undertaken on a fund-through basis, which provides contractual protections for time and cost overruns. In the last 10 years, Arena has delivered 83 ELC developments for 14 tenant partners, which has been undertaken in all states and territories, except the ACT. It continues to demonstrate the capability of the Arena team to source and deliver new purpose-built properties for our tenant partners around the country. As we reported in our FY '24 results, we settled on the acquisition of a portfolio of 6 operating centers in New South Wales in early FY '25, all tenanted by an existing tenant partner. We acquired a further 2 ELC properties on a sale and leaseback basis in December, which will also provide an immediate contribution to our portfolio yield. We have a further 2 operating acquisitions that are conditionally contracted at 31 December and are expected to complete in the second half of FY '25. Together, those 11 acquisitions we reported for the period have a weighted average lease expiry of 16 years. Moving on to Slide 16; in line with the developed countries around the world, demand for early learning services continued to increase with a result of changing community expectations, population growth and an increase in female workforce participation. That rising female workforce participation, in particular, continues to drive demand for early childhood education and care in Australia. The most recent data from the ABS reports female workforce participation at 77%, the highest level observed in the data series. Federal government investment into creating affordable child care for working families has consistently demonstrated bipartisan support. The then Federal Coalition government introduced the CCS in July 2018, followed by an increase in CCS funding in July 2022. Additional funding to the sector was introduced by the Australian Federal Labor Government in 2023, which was designed to increase the use of childcare and in doing so, provide 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. It's apparent in our tenant partners' occupancy data that this investment has had the desired effect of increasing childcare participation. It is our expectation that demand for services will continue to increase in the short- and medium-term. The shortage of appropriately qualified and experienced educators has been a well-documented challenge for the sector, particularly in terms of expanding capacity. During 2024, the federal government announced additional funding to support a 15% wage increase for early childhood education and care workers in services that agreed to limit daily fee increase to 4.4% over a 12-month period. Increased wages funding is expected to result in improved staff availability and better outcomes for families. And pleasingly, feedback from our tenant partners is that labor supply constraints have eased which has improved tenant profitability and supports further expansion in the sector. Net new LC supply for the 12 months to 31 December 2024 was 3.7%, highlighting the confidence for operators in expanding their networks in the context of ongoing government support. Moving on to the next slide on our ELC portfolio; Arena's early learning portfolio remains in a strong position. Our ELC occupancy at 99.2%, slightly down on FY '24. Our tenant partners' average underlying business occupancy remains robust, the equal highest occupancy on record. Average daily fees have increased to $150 a day at September 2024, up 7% over the 12 months. This average daily fee remains below the government's benchmark fee of $157 a day. As you can see on 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. Our average rent across the portfolio has increased to $3,150 per place. Whilst rents have increased, on average, the affordability of rent for our tenant partners has improved with a rent-to-revenue ratio of 10%, improving from 10.3% over the half year. Moving on to the next slide on the healthcare sector; our existing portfolio of community-based healthcare and specialist disability accommodation properties continues to perform in line with expectation. We are closely tracking the healthcare sector and selectively reviewing opportunities in subsectors that are integral to the delivery of healthcare services and that are aligned with Arena's purpose and investment objective. The long-term fundamentals of the sector remain attractive. Community demand for healthcare services will continue to increase as a result of Australia's growing and aging population. Consistent with our strategy, we acquired a key health worker accommodation property in Bendigo, Victoria. The property is fully leased to Bendigo Health, the Victorian Government's provider of healthcare services to the Bendigo region. The property was purpose-built in 2014 under a 30-year triple net lease arrangement and comprises a 120 apartment residential village on a site, which is located approximately 500 meters from the main Bendigo Hospital site. The lease has 19 years remaining, providing a long-term income security from the investment. This investment provides an example of how we are very selectively looking for opportunities to deploy capital in the healthcare sector and other social infrastructure sectors that support our purpose and our investment objective. I'll now hand back to Rob.

Thanks, Justin. I'm now on the final slide. Today, we are reaffirming full year distribution guidance for financial year '25 of $0.1825 per security, an increase of 4.9% on financial year '24. As you've heard, the portfolio is in a strong position. Our healthcare and childcare investments are performing well and underlying occupancy for our childcare tenant partners is at the equal highest position on record. We have solid rental growth across the portfolio with long leases that have embedded income growth and inflation protection. Future income growth will be underpinned by those contracted annual rent increases, including outstanding and future market rent reviews and the impact of our financial year '24 and '25 acquisition and development completions. Looking forward, 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 security holders with prospects for growth. We have substantial balance sheet capacity with gearing under 21%, which positions us well to explore and execute on new growth opportunities. And our expanded and experienced management team has strong industry relationships and expertise that will assist us in sourcing those new opportunities in our usual disciplined manner. That concludes today's presentation. So I'll now pass the call back to the operator to open up for questions. Thank you.

[Operator Instructions] Your first question comes from Cody Shield from UBS.

Just a question on CapEx to start. So you had the high CapEx there in first half '25, committed CapEx in the second half. Your balance sheet is obviously in a good position. But just looking at that undrawn debt capacity, how should we be thinking about both the run rate and funding of additional CapEx over the next 12 to 18 months?

Yes. Cody, it's Gareth. As you pointed out, yes, we have adequate liquidity to cover the existing development pipeline to the extent that we have further growth opportunities that we will consider capital requirements at that time. Obviously, the low gearing that we've got gives us opportunity to both consider debt or equity at that time, and we'll make a decision of what's best.

Yes. I think I'd add to that, Cody, we're definitely seeing some more opportunities emerge in the marketplace. Slow shift in cycles opening up opportunities for us.

Okay. Sure. I think I recall at the -- when you guys raised it, you mentioned there were some larger ELC acquisition opportunities emerging just in terms of portfolio size. Is that still something that's that you're looking at or is it kind of development that's going to be the focus from an ELC perspective?

Yes. We only we get paid to look at everything, Cody. So we're looking at everything in the market. It'd be fair to say that there's still some exuberance in the early learning pricing in our view. So vendors are somewhat anchored in sort of pricing that we think that should be pushing out a little bit further. But look, there's opportunities that are out in the marketplace. We'll be prosecuting those as best we can, but as always, in our usual disciplined manner.

Okay, great. And just the last one. Sorry, I might have missed the market rent reviews to be completed, where are you expecting these to land?

So the majority of those are sort of capped at 7.5%. So historically, we've been sort of that 6% to 7%. So careful to sort of forecast forward on these, but it would be fair to say that market rent growth, and you can see it in the rent to revenue ratios market rent growth, given replacement cost changes and tenants performing pretty well, there's market rent growth that's available to us in those.

Your next question comes from Lou Pirenc from Jarden.

A quick question on the acquisitions as well. On your Slide 15, the $127 million, does that include the Bendigo acquisition or is that a separate kind of CapEx?

It's called in that number. So the $127 million includes Bendigo.

Right. Great. And how unique is an opportunity like that? Are there many of those around the country kind of is it a bit of a one-off or we're quite excited about the opportunity there.

Yes. Look, we think it's a good model. There's clearly a need for key worker accommodation, particularly in those more regional larger health precincts. Fair to say government has been trying to address that through direct funding to date. So there aren't a huge number of these leasehold type structures, but we're quite interested in seeing how that market evolves and are still looking for opportunities in that space that meet that kind of long-term triple net structure that we're looking for.

Great. And then finally for me, on the supply side in healthcare, kind of how is that tracking at the moment? It's hard to get reliable statistics. So are you seeing pockets of oversupply or do you feel that developers are quite disciplined right now?

Lou, was that question in regards to healthcare or early learning?

Early learning, sorry, child care.

Yes. So yes, it's moderated. I guess the best way to look at that is just what's happening with the sort of 9,000 services around the country. And it's fair to say that occupancy is up stimulated by demand and consumer wants. So the supply/demand is in check. The added -- I guess what's moderating that's an obvious point is just the higher cost of construction. And we're not seeing that abate. We think we're seeing it plateau but not abate. So I think it's likely to sort of moderate supply for the medium-term.

Your next question comes from Simon Chan from Morgan Stanley.

Rob, in your prepared remarks, I think at the start of it, you mentioned about early surrender of 2 ELC leases. Can you elaborate on that? What happened there?

We can, Simon. So we took the opportunity in sort of improving market to negotiate a surrender of 2 leases, both in Metropolitan Melbourne. It would be fair to say that Metropolitan Melbourne in -- from an early learning perspective, hasn't recovered well out of COVID. So we took the opportunity to surrender those leases. We've got a substantial surrender payment and elected to sell one of those properties and the buyer profile developer. So it sort of unlocked a position to sort of get out of something that ultimately we thought might have higher terminal risks in time.

What happened to the other one, the one you didn't sell? Are you just going to re-lease it to another ELC operator or?

That option is available to us. The 2 options there to sell it or to re-lease it. Look, as we stand right now, we haven't made that call entirely, but you can see that just that small blip up in occupancy or occupancy coming down a tiny bit from prior period. That's where that sits on the chart. But that's available for re-leasing or for sale at the moment.

Great. And was surrender payment form part of the property income for the half?

Only the rental income for the first half.

Any idea of the quantum, Gareth?

That was $800,000.

Okay. Cool. My next question just relates to Slide 10, bottom right-hand corner, the hedge maturity profile chart there. If I think about FY '27, FY '28, the hedged amount seems to be a fair bit smaller than the hedged amount you last disclosed back in August. Like what happened there? Like back in August, FY '28 hedge position was $276 million. It's now $210 million. So for FY '27, it was like $315 million, it's now $256 million. What happened?

Treatment of the forward starts. So a forward start hedge is still hedging and that was included in the volume, but we've tried to simplify the presentation of that disclosure so that it's only got active swaps at a point in time, but including forward swaps, if that makes sense. It was just a bit of confusion that was coming out of that.

Your next question comes from Adam Calvetti from CLSA.

My first question is how many tenants are participating in the child worker retention payment scheme?

Yes. I think we'll see almost 100%, Adam. There's a little bit of -- as the rules became a little bit clearer, I think we've seen the majority of our tenants take that up. There are a couple that are contemplating splitting up, so not doing it across the whole network, but the majority will be taking it up. Certainly, our biggest tenants, that's the ones on the big wagon wheel that we show there are all taking the advantage of that wage subsidy.

Yes. Okay. So we can expect the average daily fee to plateau at that 4% or maybe slightly above over the next 12 months?

Well, I think 4.4% is exactly where the market will go. Yes.

Yes. Okay. And your development yield on cost has been continually trending up. So 6.1% is that expected to plateau or are you seeing potentially that continue to trend upwards?

Yes, good question. Certainly, we would like to see it trend up. We'd love to see a little bit more margin in there for the development pipeline. We -- land costs continue to be really stubborn. So I think we've absorbed as an industry, the economic cost of the additional construction. A lot of that going to rent, but land costs continue to be quite stubborn. We're working at the moment, sort of putting new deals, if you like, is probably a good way to answer that sort of with a 6 in front of them. And we'll continue to try and push that. But we are very conscious not to push through too much of that on to rents, as you would have heard from us previously, the sustainability of rents on these specialized assets is important to us. And we have seen strong market rent growth, but we just want to be careful. We're not putting economic rents where we need to be careful they are actually at market rents. So happy to let deals go if the economic rents are too high or the feasibility economic rents are too high on these.

Just on that, your net rent to revenue ratio is the lowest that I have in my -- on record in my data series. So could you push that further?

Yes, there's definitely room for that. So that's a gross number. It's the lowest on our record series as well, which is very, very long. And it's fair to say that the net is looking pretty healthy as well. So yes, there is room for that. I think what we've seen is higher occupancy, higher daily fees, the acute issues on labor have been mitigated somewhat. So we're seeing better labor conditions. So cost on labor has been reduced. And as a result of that, the higher profitability, which some of which should ultimately come to real estate.

Yes, maybe one more, if I may. I mean you've now got an analyst and a CIO, and I think we've touched on that acquisition run rate going forward. But how do we think about that just long-term, $120 million, $130 million worth of acquisitions? Is that expected to continue?

We certainly got the capacity on the balance sheet and the human resources available for us to do it. So bandwidth is absolutely there. But we've never aspired to have the biggest balance sheet. What we want to do is get the best financial metrics. And I think we're in a really interesting position. The business is well-positioned to explore and execute those. It will all be on existing strategy. And we've got a very clear idea of what that investment objective is to, Adam. So look, there are opportunities that are opening up.

Your next question comes from Ben Brayshaw from Barrenjoey.

I was wondering if you could just discuss the federal government's commitment to build new early learning centers in outer suburbs or in regional locations. What, if any, impact you think that might have on the broader market and the relevance for your portfolio?

Yes. Good question, Ben. So yes, federal government -- there's obviously a lot of election campaign going on at the moment, but ALP have federal incumbent labor government have proposed $1 billion that may be put towards subject to them getting into next term into regional areas, what has previously been called child care deserts. There's not a lot of detail around that. It'd be fair to say that we've got differing views in regards to what has been publicly released in regards to childcare deserts. Frankly, some of the child care deserts are literally deserts, but there is a need in some areas that, frankly, real estate doesn't work. Is it going to be an issue for us? No. Directionally, is it interesting? Absolutely. I think government support for the sector continues to push pretty hard. I think you've heard universal care being on the long-term agenda for the labor government. Whether it gets there or not, who knows? But at the moment, that $1 billion, as big as it sounds, is not -- it's in areas that probably wouldn't suit us. There may be opportunities for the private market, including businesses like us to assist government in deploying some of that and -- or saving some of that, frankly. So look, there is a watching brief, but not a concern in regards to what that might do to supply or certainly the opportunity set for this business.

The next question comes from Murray Connellan from Moelis Australia.

Just a quick one for Gareth, please. Just wanted to find out whether there is much of a difference in the base rate on the hedges half-on-half across FY '25. Can we -- you obviously report what the full year base rate is, but just wondering sequentially what that's going to look like?

Not a great deal of difference. It will go up a little bit. There's some forward starts that will come in, but -- so a minor increase. The chart on Slide 10 is the one to kind of look at in terms of what happens to rate over time.

[Operator Instructions] Your next question comes from Callum Bramah from Macquarie.

Just a couple of follow-ups. Most of mine have been covered. But just thinking about that under-renting position, and I suppose you guided -- well, you talked about 6% to 7% historic potential upside. Is it fair to sort of assume that going out into '26, '27 or is there something more nuanced in the portfolio that we need to be aware of?

I think I'm always careful about giving forwards in this, Callum, but historically, we've been 6% to 7%, yes, that if you looked at the ingredients, I guess, to rent reviews, we have got perhaps a little bit more powder available to us. We are capped though for the majority of those. So the majority of our leases -- market rent reviews are capped at 7.5%. So we may not access full market rents for some time.

And then second one, just how do you think about the yield on cost for development versus acquisitions?

Yes, a good question. At the moment, we would love to see a little bit more return in our developments. We have very much derisked those, but they are still developments that have higher risks than acquisitions. We are seeing similar yields come out of the market for those. What pleases us we are getting a build-to-own strategy of getting real estate where we -- with a preferred tenant partner on our lease. That's not always the case with acquisitions. But yes, take your point, there's -- strangely, the market is not showing a differential in some of the development risks that are taking on versus acquisitions at the moment.

There are no further questions at this time. I'll now hand back to Mr. de Vos for closing remarks.

Great. Thanks very much. Thanks for the engagement on the call today. We look forward to talking to many of you over the coming days and weeks. Thanks very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.