Arena REIT (ARF) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Arena REIT Half Year 2026 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Bailey, Managing Director and Chief Executive Officer. Please go ahead.

Good morning everyone and welcome to Arena REIT's Half Year 2026 Results Presentation. I'm Justin Bailey, Managing Director of Arena. I'm joined today by our CFO, Gareth Winter; and our Head of Investment and Portfolio, Carla Hayes. I'm pleased to report that the first half of FY '26 has been another positive period for Arena. All key financial metrics were positive and our portfolio of early learning and healthcare assets continued to perform strongly. Solid earnings growth for the period was underpinned by contracted annual and market rent reviews, together with the impact of acquisitions and development projects completed in FY '25 and the first half of this year. Our develop-to-own pipeline of new ELC projects has been replenished, securing Arena's investment program for the next 2 years. It demonstrates our ability to identify and access high-quality opportunities, working with our preferred tenant partners to expand their networks to meet community demand. We have maintained our investment discipline, investing through Arena's well-established fund-through and triple-net lease structures. These structures provide access to long-term contracted income with embedded rent growth whilst mitigating development risk. During the period, we further enhanced the quality of our portfolio through the divestment of selected assets, recycling capital into higher quality properties and new developments. The direct market for early learning assets remains very active, with deep liquidity, visible transaction results and tightening yields supporting valuation improvements, and highlighting the maturity of the asset class. In this context, Arena's portfolio and operations are in a strong position. Turning now to our financial highlights on Page 3. Today we report net operating profit of $39 million, which is up 9% on HY '25, with corresponding statutory net profit of $110 million for the period. Earnings per security increased to $0.097 for the period, up 5.4% on HY '25. Net asset value per security increased 5% to $3.64 and total assets have increased to $1.98 billion, up 7% from June 2025. These results reflect both the quality of our portfolio and successful execution of our investment strategy. We have maintained Arena's disciplined approach to capital management in the period, with hedging in place over 93% of borrowings and gearing at 23.2% at 31st December. As you will shortly hear from Gareth, we have taken the opportunity to expand our debt facilities and extend the term of those facilities at improved margins. Our balance sheet is well positioned and provides capacity to fund the existing development pipeline and new investment opportunities as they arise. So I am pleased to reaffirm distribution guidance for the full financial year of $0.1925 per security, reflecting an increase of 5.5% on FY '25. Moving to the next slide. We have continued to actively manage our portfolio in the period. We divested 6 assets at a 10.4% premium to book value. We acquired 3 newly completed properties and we completed 8 Early Learning Center developments in the period, demonstrating our continued ability to complete projects in our expanded development pipeline. We have replenished our pipeline, which has 29 projects, all of which we anticipate completing over the next 2 years. The anticipated net initial yield on all costs for these projects is 6%. As you will hear shortly from Carla, these capital transactions have improved the quality of Arena's portfolio and contributed to our WALE of 17.9 years. We've seen a tightening in yields for early learning properties in the market, which, combined with increased passing and market rents, has provided an uplift in portfolio value of 3.3% in the period. The passing yield on the portfolio firming 8 basis points to 5.39%. A weighted average like-for-like rent increase for the period was 3.6%. Sustainability remains a key focus for the business. We believe that by embedding sustainability in the decisions we make, we're creating long-term value for our investors and delivering real benefits to the communities we invest in. We're proud of the positive social impact our portfolio delivers. Our early learning centers and healthcare properties support the essential community services that tens of thousands of Australians rely on daily. I'm pleased to advise that in FY '25 we reduced our downstream leased asset emissions intensity by 53% and are on track to achieve our interim goal of a 60% to 70% reduction by 2030. We've continued our renewable energy rollout with 93% of the portfolio now being powered by rooftop solar. This result not only reduces the energy intensity of our portfolio, it lowers utility costs for our tenant partners. Together these initiatives helped Arena achieve our 2025 margin discount on our sustainability-linked loan. I'll now pass over to Gareth to provide more detail on our financial results.

Thanks Justin and good morning everyone. Just turning to Page 6 of the presentation, you will find a summary of Arena's half-year operating income statement, which shows the 9% increase in net operating profit to $39 million and statutory profit of $110 million. There is a reconciliation of net operating profit to statutory profit included in the appendix to the presentation, with the most substantial reconciling items being the periodic revaluation of investment properties and our interest rate hedges. Operating EPS of $0.097 per security is 5.4% higher than the comparative period, with the key driver of the increase in operating profit being the relative 12% increase in property income, which arose from a combination of periodic rent reviews and capital deployment. Like-for-like rent reviews averaged 3.6% in the half, which was a combination of the minimum annual rent escalations and the market rent reviews. Also contributing to the increase in operating profit were the acquisition of operating ELCs in the full year impact of FY '25 acquisitions and also some of those that occurred during the period in FY '26. And we also have income from Arena's ongoing program of investment in ELC developments, including 8 ELC developments completed during the period. Just looking at some of the other line items, other income is interest income, slightly higher than the prior period due to holding cash proceeds from property sales prior to being reinvested in the development program or being repaid off debt. There was no real change in property expenses in the period, noting that these largely comprise independent valuation and property inspection costs. There has been a $600,000 increase in cash-based operating expenses in the first half compared to the prior period, of which around $500,000 is nonrecurring and is primarily the result of management succession and the crossover of the transition of our retiring CEO, the Chief Investment Officer and the Head of Investment and Portfolio roles in the first half of the year. The change in underlying operating expenses was otherwise generally in line with inflation and our cash-based MER remains around 33 bps. Just looking at finance costs. The increase in finance costs was volume driven with our average drawn debt in the first half of FY '26 being around about $100 million higher than the first half of FY '25 plus incremental line fees on the $100 million facility expansion from the refinance we completed back in April 2025. The overall cost of debt was relatively stable during the period. Capitalized interest on the development book in the first half was $1.7 million, which was slightly higher than the comparative period by around $150,000, which is again due to the greater volume in the development book. In addition to the higher operating profit, this higher statutory profit of $110 million is primarily due to higher asset revaluations of $61 million compared to $7 million in the prior comparative period and an $11 million positive revaluation on the hedge book. We have paid distributions of $0.09625 per security for the first half, which is in line with our FY '26 guidance representing growth of 5.5% on FY '25. We expect that our FY '26 payout ratio will be consistent with recent years, noting FY '25 was 98.4%. Just turning to Page 7, we've got a waterfall chart just representing the EPS change for the period. The chart obviously demonstrates the relativity of those individual items supporting the EPS growth, noting that the key drivers of growth remain the periodic rent reviews and the deployment of capital into acquisitions and developments. With the main offsets being the funding mix from equity raised in FY '25 annualizing out and some asset recycling noted prior to those funds being deployed into new investment, and as I noted earlier, the non-recurring increase in the current period operating expenses for the management succession program. Turning to Page 8, this slide presents a summary of Arena's balance sheet. The full balance sheet is in the appendix to the presentation. Key points here are the 6% growth in investment property being primarily due to $83 million invested in the half into acquisitions and development CapEx. Positive asset revaluations of $61 million, offset by $30 million of asset sales and transfers to assets held for sale. Noting that the majority of those proceeds will be received in the first quarter of 2026 and then subsequently recycled back into the development program. Following our December revaluations, net assets per security increased 5.2% to $3.64 per security and gearing at 23.2% remains relatively low and stable. Turning to Page 9 and the capital management summary. The highlights here, we completed a debt refinancing after period end. The facility was increased by $100 million and all tranche maturities were extended with additional weighting to the 4 and 5 year tranches providing a weighted average term of 4.5 years and no expiry before 31 May 2029. Margins were also further reduced across all maturities. Following the refinance, we had immediately available liquidity of $225 million from the debt facility, which fully funds our development commitments of $164 million and our relatively modest gearing allows us to further consider new investment opportunities. Overall, hedge cover was increased during the period including additional forward cover, with active hedge cover of 93% at 31 December with a weighted average term of 2.6 years. In addition to the active swaps, the chart on the bottom right of the slide illustrates the forward hedge cover across FY '27 and FY '28 for the future funding of the development pipeline. Based on our current expectations of funding capital deployment and asset recycling, this provides an average hedge cover of over 90% of drawn debt across FY '26 through FY '28. We will continue to add to the hedge profile for FY '29 and beyond over time and through the interest rate cycle. The result of this activity is a small increase in our all-in weighted average cost of debt to 4.2%, with the change in average swap rates offset by hedges at lower rates than the floating rate applying as at 30 June 2025. And finally, it is important to note that Arena continues to operate with substantial headroom in our banking covenants. I'll now pass you over to Carla for an update on Arena's property portfolio.

Thanks Gareth. Good morning everyone. I'm Carla Hayes, Arena's Head of Investment and Portfolio. Today I'll provide an update on Arena's portfolio and operating environment, starting on Slide 11 of the presentation. Arena's portfolio comprises 274 early learning centers, 18 development sites and 10 healthcare properties with a total value of $1.9 billion. Consistent with our purpose of Better Communities Together, the portfolio supports the delivery of essential services across Australian communities, including early learning, primary healthcare, disability and key healthcare worker accommodation. Demand for these services continues to underpin the strength of the portfolio supported by long-term triple-net lease structures with annual and market-based rent reviews that provide embedded income growth. The portfolio remains fully occupied with a WALE of 17.9 years, reflecting the long-dated defensive nature of the income profile. It is also well diversified, nationally and by tenant exposure, with 35 tenant partners and no single tenant contributing more than 20% of total income. During the period, the portfolio delivered like-for-like rental growth of 3.6%, underpinned by market reviews averaging 7.6% while the weighted average passing yield firmed by 8 basis points to 5.39%. At 31 December, the portfolio delivered a $61.2 million valuation uplift or 3.3%, driven primarily by strong growth in passing and market rents and yield compression of 9 basis points on the early learning assets. We continue to take a disciplined approach to capital recycling, selectively deploying capital through developments and acquisitions while divesting assets where future income growth is more limited. Moving on to the lease expiry profile on Slide 12. We have no lease expiries in FY '26, FY '27 or FY '28. As per the graph on this slide, less than 1% of portfolio income expires prior to 2032 and more than 60% of income extends beyond 2040. We remain focused on maintaining and extending the portfolio's WALE. This is achieved through measured capital deployment, targeting acquisitions with long-term leases in place, securing new lease terms where opportunities arise, renegotiating existing leases to extend duration and delivering new 20-year leases through our development program. Since 2020, this approach has enabled us to increase the portfolio WALE from 14 years, in line with our investment objective. Moving on to the rent review profile on Slide 13. This slide highlights the strength of the portfolio's rent review profile with CPI-linked structures providing embedded income growth. Approximately 95% of rent reviews are linked to CPI, higher of CPI or fixed increases or market reviews, supporting predictable and resilient rental growth. The portfolio delivered like-for-like rental growth of 3.6% during the period, with 12 market rent reviews achieving an average increase of 7.6%. A further 28 market rent reviews are expected to be completed in the second half of FY '26 with 36% of portfolio income subject to market review over the FY '26 to FY '29 period. Importantly, rental levels remain well supported by operator fundamentals, with net rent to gross operator revenue ratios averaging 9.7% across the portfolio comfortably below long-term averages, providing headroom for sustainable rental growth over time. Moving now to Slide 14. This slide reflects our strategic approach to transactions and development with a clear focus on improving the overall quality and resilience of the portfolio. From a transactions perspective, we continue to benefit from strong liquidity in the secondary market for early learning centers. This has enabled us to recycle capital from assets with lower income growth potential into well-located, high-quality assets partnering with institutional grade tenants to strengthen covenant quality and the underlying income profile while also supporting our development program. During the period we divested 6 properties for total proceeds of $33.9 million with all transactions achieving premiums to book value averaging 10.4%. This outcome reinforces both the depth of demand for these assets and the quality of the underlying income streams. In parallel, we acquired 3 properties for a purchase price of $19.6 million at a weighted average initial yield of 6.1%. These acquisitions were selective and aligned with our strategy of upgrading the portfolio through well-located assets secured on long-term leases. Our develop-to-own strategy continues to be a key contributor to portfolio quality and growth. During the period we completed 8 developments for a total cost of $65 million at a weighted average initial yield of 6% and 20-year lease terms, further enhancing portfolio WALE and income quality. Looking ahead, the development pipeline has been replenished with a pipeline of 29 developments at a total forecast cost of $225 million. This positions us well to continue upgrading the portfolio in a disciplined and measured way as opportunities arise. Over the past 10 years, Arena has delivered 95 early learning developments. This track record demonstrates the capability of the team to consistently source and deliver purpose-built assets for our tenant partners across Australia and remains core to our growth strategy. Turning to Slide 15. This slide provides a brief update on the early learning and healthcare sectors, where social and macroeconomic drivers continue to support underlying demand. In early learning, federal and state governments continue to progress reforms focused on improving quality and accessibility. The removal of the activity test and introduction of the 3-day guarantee from January 2026 is expected to further support demand across the sector. Recent regulatory reforms are expected to lift standards and improve confidence across the industry, which will ultimately lead to a stronger early learning sector. Supply growth remains measured, with net new early learning supply of 3.2% during the 12 months to September 2025, in line with the 5-year average. Transaction activity and pricing also remained elevated through half year '26, reflecting continued investor interest in the sector. From an operating perspective, tenant performance remains in line with expectations. Average daily fees continue to grow, occupancy remains robust despite a modest easing and rent affordability metrics remain below long-term averages at 9.7% of gross revenue. In healthcare, the portfolio continues to perform in line with expectations. We remain active in assessing opportunities with a continued focus on assets that meet our investment objectives and return thresholds. Overall, fundamentals across both sectors remain supportive and continue to underpin the resilience of the portfolio. I will now hand back to Justin.

Thanks Carla. I'm now on the final slide. Today I reconfirm full-year distribution guidance for FY '26 of $0.1925 per security, an increase of 5.5% on FY '25. Looking forward, Arena's outlook is positive. Long-term social and economic themes including population growth, supportive government policy and rising community expectations for essential services continue to underpin the sectors Arena invests in. Expanding access to affordable high-quality early education and care remains a key priority for government, which is expected to support further growth of the early learning sector. Our portfolio is well positioned with embedded income growth. Our healthcare and early learning properties are fully occupied with long-term leases providing income security. And future earnings growth for the business is underpinned by contracted rent escalations and periodic market rent reviews. Key tenant metrics remain robust, with average tenant occupancy costs, a key measure of rental affordability, at 9.7%, below long-term averages. We continue to focus on our portfolio. All of our acquisition and divestment decisions are data-driven, based on detailed analysis of individual communities and catchments using market information and our own proprietary data. We will continue to look for opportunities to improve the quality of our portfolio through further divestments, acquisitions and development with a focus on assets which provide the greatest potential for long-term rent growth, consistent with our investment objective. And we maintain discipline in our approach to growth. Develop-to-own early learning investment remains core to Arena's growth strategy, investing through well-established fund-through and triple-net lease structures. But we will continue to monitor activity in healthcare and other social infrastructure sectors consistent with our mandate and our investment criteria. Finally, we have capacity for growth. With an experienced management team, a strong balance sheet and deep industry relationships, Arena is well positioned to pursue further growth opportunities consistent with our strategy and our investment objective. In closing, I'd like to thank you for your ongoing interest in Arena. I'll now hand the call back to the operator to open up for questions.

[Operator Instructions] And our first question for today will come from Cody Shield with UBS.

First question just on tenant health across the portfolio. I mean, if you look at some updates across the space it does look like some operators are doing it tough. I get that your metrics are sound, but how are you thinking about your ability to grow rents in that context?

Yes, great question Cody and very contemporary given announcements from yesterday. We've obviously had a good look at our occupancy data through to September 2025 and compared it to September 2024 and we acknowledge there's a bit of modest easing in occupancy. But at the same time we've seen continued strong growth in daily fees, so 6.2% over the same period of time. So what we're seeing is operators who maybe are a little bit softer in occupancy still being able to increase daily fees. The net result of that for us is when we look down at the occupancy cost, we see that occupancy costs still continuing to run further down. So traditionally we would have been up around 11%, we're seeing that now start to come down below 10% and at 9.7%. For us, what does that say? It says our rents are affordable and it says there's opportunity for market rent growth over time. That's the key metric for us, Cody.

Okay. That's clear. Maybe just thinking about having not-for-profits or for-profits in the book. Is there any benefit to having not-for-profits? I mean, does the payroll tax piece for example give them a bit more of a buffer to absorb higher OpEx?

The kind of business models historically have been a little bit different. Not-for-profits tend to run a heavier resource and a heavier head office often tied to advocacy, whereas private operators might run a more efficient resourcing model. So trying to compare, is there a payroll tax benefit, it kind of comes out I think in the wash. I think for us when we look at it, we love having not-for-profits and for-profits as part of our portfolio. You'll know the history of Arena, Goodstart at a point was sort of 60% or 70% of Arena's portfolio. We haven't seen Goodstart necessarily in a growth phase, but we're pleased to see them starting to look to grow, which we're excited about. So when we look ahead, we've got 29 developments in that development pipeline, there's seven different operators in there. There are absolutely not-for-profit operators in there and we really like the story that that brings. When we think about the politics around it, we're probably not really buying into that. What we think is having a good balance of tenants in our portfolio makes really good sense to us, provided they're delivering high quality services.

Got it. Okay. One for you Gareth. You touched on the margin benefit on the debt refinance but didn't specify the quantum. Can you just let me know how that stepped down?

Yes. We've done about 4 refis I think in the last 3 years, so we've been bringing it down each time. On this occasion, a weighted average of 6 bps, noting that we've also reweighted out the 4 and 5 year.

Okay. So where is it sitting in total?

We're about 105 bps weighted average.

The next question will come from Andrew Dodds with Jefferies.

Just firstly on CapEx, I think you're guiding to around $175 million split across '26 and '27 back in August. And looking at Slide 14 in the deck, it looks like the remaining spend is now about $164 million, but you've completed $65 million. So it just sort of implies a bit of an upgrade. I mean, I was just hoping you could talk to the strategy around development. I mean you're obviously very confident in getting the returns that you've sort of outlined.

Yes. Look, we really like the development program. And you're right, when you sort of work the math through you might form the view there's a little bit more CapEx in that period. Ultimately for us we sort of guide to $100 million a year of CapEx for a development program. We think that's a sensible assumption to make. We're really pleased we were able to replenish the pipeline. We obviously completed 8 in the last period. We've now got 8 more in the pipeline so we've got it back up to 29. We like that higher run rate provided we can secure opportunities at the right pricing and fundamentally at the right risk and reward.

All right. And then just I guess slightly bigger picture kind of question. I mean can you just talk to the general environment for childcare operators right now and how this has sort of evolved over the past 6 to 12 months just kind of as it relates to all of the safety and quality standards right across the industry?

Yes, absolutely. So if we sort of go back 12 or 18 months, really what we saw was policies that were set up to really expand access to affordable and high quality child care. Really what came out of last year was there hadn't been necessarily all the focus there should have been on what does quality mean. And so what we saw was really out of those unfortunate incidents earlier last year, and it's a relatively small number but dramatic incidents earlier last year, really governments respond to that in very quick time with a series of reviews that a federal level and at a state level. We've seen a range of regulatory announcements off the back of that. Those are progressively being implemented, so a lot of things for the federal government was announced last year, it's being presented, it's being implemented through this first half of the calendar year. Operators are having to work with that, definitely. There are different requirements that they need to get comfortable with. Key question for all of us is, how comfortable are we about their ability to meet those requirements? A lot of the feedback we get from operators is, look there's a lot to get through but they're sort of comfortable with how things are landing. Really then for us it's a focus on cost. Where does sort of cost fall in this period? And when we think about the sorts of costs that we see, we obviously look at the center level P&L. We haven't necessarily seen a lot of change in the cost base. Other costs will obviously sit at a headquarters level, at a corporate level. And that's where we've heard certainly a number of operators needing to put on some additional compliance and oversight sort of resources. So I think the answer is we're working our way through it. I know recent announcements from a number of operators have sort of highlighted the need to meet these new regulatory requirements. I think our long-term view is really having a system that is operating to a standard that the government and the community expects and operators actually expect themselves, puts the industry on a stronger footing. So we're sort of in that transition period with the end result being a stronger sector.

The next question will come from James Druce with CLSA.

And say a couple of questions if I may. Can you just going through how we're thinking about the second half in terms of like-for-like growth, got a lot of rent reviews coming through, are they sort of back-ended or are they going to come through sort of straight line? You sort of touched on development and acquisition or at least developments, but how should we be thinking about acquisitions? And yes, just sort of try to get through a bit more color on that second half, please.

Yes, look, we obviously reported that we completed 12 or 13 market rent reviews in the first half. It does naturally mean there's 27 odd to complete in the second half. A number of those are capped. We'll probably see some of those being closer to the to the back end of the year before they're fully resolved. But we'd expect to have all of the balance of the 27 completed in the period. In terms of acquisitions, it's a little bit opportunistic, James. I mean the development program gives us a really good line of sight of a predictable investment for the next 2 years. Acquisitions are really going to come down to opportunities that might emerge in the market. I think we've spoken in the past that buying on-market childcare centers and bidding against high net worths is quite a tricky, certainly quite a tricky market to try to navigate, particularly where we've seen the level of appetite in the direct market over the last 6 to 12 months. But we'll continue to look, but at this point in time we don't have specific guidance around any additional acquisitions that we can provide. Gareth?

Yes. From an EPS perspective the second half tends to be a little bit stronger than the first half. That's just our traditional flow, which is really just the full period effect of what's been happening in the business.

Okay. And then maybe just following up from Dodds's questions around regulatory costs and compliance. Do you guys have a feel internally around where occupancy costs will move to given the conversations that you've had with operators? Can you provide any color on sort of your internal expectations?

No, look we really don't have any sort of guidance that we can provide around that as a metric. I think, we know there's some comfortable headroom there where the business has been in the past, upwards of around 11% has certainly been sustainable for tenants. When we look at other, I guess industry benchmarks, we see benchmarks that are often in the 12% to 15% range. That's not where Arena likes to be. We like to know we've got affordable rents and opportunities for rent growth over the medium- to long-term. On the specific where do we expect it to come out, with whether it's price increases or additional costs or occupancy, we don't have a specific guidance that we can provide for James, sorry.

Yes, and just one more if I may. Looking at the Queensland transactions comp from the back of the presentation, there seems to be a bit more compression in that market. Just looking at compression or cap rate compression more generally, can you just provide some color across the states please?

Yes, sure. James, it's Carla. Yes, so we've certainly seen heightened activity in Queensland. I will just point out though that a large portion of those transactions in Queensland have been at the lower end of the scale where we've seen significant under-renting. So the average rent across those ones were around that $2,500 a place versus across the broader market which was closer to that $3,500 a place.

The next question will come from Daniel Lees with Jarden.

Just looking at the hedging outcomes in the result, it looks pretty strong there. Looks like you've topped up on favorable rates. Can you perhaps talk to the strategy here and where you want to see hedge levels kind of generally?

Yes. I mean, we've consistently talked about a hedge range of I guess, normal basis of 70% to 80% cover. We obviously saw some significant dips in the curve over the course of 2025. And we took the opportunity to basically top up including looking at some more forwards to cover debt draws that we knew were coming for the development book. So it was really around building up that capacity across, say, the next 3 financial years and then topping up through FY '29 and beyond over time as we go through the interest rate cycle. Again, so noting that we have did put a bit more volume into FY '29 and beyond during the period as well. So it's really a matter of just watching where the interest rate cycle goes next, how long this, I guess, this increasing or the RBA increasing rates for, how far will they go have to go to get inflation back down again. I think general feeling is there might be another rate rise and then we'll be out the other side of it. So we'll watch that closely.

And then maybe a bit of a high level question. Can you give us any update on the broader strategy specifically your intentions to pivot further into the broader healthcare sector away from childcare?

Yes, great question and I know a consistent question that, that we get asked. Hopefully out of the FY '25 results and out of and out of these half year results you get a really strong steer from us that we see really good opportunities with that build-to-own model in early learning. We see the benefit of the skills and capability of the team that we have, the depth of partner relationships, we are highly, highly confident about our ability to transact and deliver the sort of yields that are anticipated on those transactions. We do like to keep the discussion open on other parts of our mandate and so we do track the market pretty closely. What we were trying to do in the in the FY '25 results was really trying to provide a bit of color around how disciplined we are and what we're looking for. And just to, sort of, restate that it's if we're to do something outside that ELC sector has to has to be a good compliment in terms of long WALE, good covenant, genuine triple net, really something that we're confident that we've got skills and capability in. We like the small portfolio of healthcare assets we have today. They're all a little bit different but they give us really good insights into medical centers and key health care worker and disability. But to come away from this call what I'd say is we're monitoring closely. Almost all of our time is being spent though on really trying to build out that development pipeline and deliver those developments to a yielding properties.

Your next question will come from Callum Bramah with Macquarie.

I just wondered just to follow up a couple of questions have come through. Are you able to just let us know of those 28 reviews, I think, in the second half, the number that are actually capped. Can you just quantify it?

Yes. So on that, we have 9 of those 28, Callum, are uncapped. So the balance are capped.

And then maybe just to summarize on what you've done in debt. What are you expecting in the weighted average cost of debt to do into the second half and then into fiscal '27? So you're at 4.2% for the first half. Can you give us an idea of how you're seeing it play out?

Yes. Our expectations are that there'd be a small increase over the second half. REIT metric do it the way [ indiscernible ]

Drop to 10 basis points or?

Call it 10 basis points or so, yeah.

And then into fiscal '27?

Again, I guess we're projecting a fair way out in terms of where floating rates are, but we aren't have big exposure to floating rates. So if you look at the chart that we've provided there, you'll see that, that swap rate go up about another 20 bps over the course of that year.

Perfect. And then maybe just one other one, just how you think about the attractiveness of development versus acquisition and what risk, if any, you're taking in relation to development because it would seem that the yield on that you're achieving is the same.

Yes. Really, really great question, particularly putting those acquisitions and development side by side. What do we get out of development? We get a low-risk pathway to a purpose-built asset with a tenant we like and a lease which is ours. That's why we like development because we control a lot of the ingredients to success. Often acquisitions, the challenge for us is partly pricing, but partly is who's the tenant, what's gone into the property, what's in the lease, can we get comfortable? And it's really why over a long period of time, Arena hasn't been a buyer of all that many centers out of the market. The 3 that are listed there are off-market transactions acquiring newly completed assets, and we're putting our lease in place, and it's a tenant that is an existing tenant of ours. And in fact, the developer is an existing developer of ours. So the deal there is they look very close side by side. The outcome to us is actually very close side by side, mainly because we're avoiding the fund through development piece where we think we've mitigated pretty much all risk anyway. But we're getting access to the tenant, the property and the lease that we like at the end of both. So those 2 -- those 3 alongside the development pipeline, actually, the product at the end of it are very, very close. If we think back to the 6 assets we bought in New South Wales 18 months ago, that question was a really clear one because we were having to get comfortable that we were taking somebody else's lease, and it was very close to ours, but it wasn't perfect. And we were able to secure assets that we thought were good assets at a good price. It's not often that we can, and that's the challenge for us, the ability to outbid and now compete even if we like the assets, the high net worth. And they are just -- the level of appetite seems to be insatiable, which is kind of why the valuations have improved over particularly the last 18 months. We're just seeing a lot of appetite. So hopefully, that answers your question in particular for this period, Callum.

The next question will come from Ben Brayshaw with Barrenjoey.

Justin, I was looking just on development if you could talk about how the development yield with your JV or development partners is negotiated. And just whether you see any I guess scope for the development return to adjust, in a high interest rate environment?

Yes, it's definitely a negotiated outcome and it's a negotiated outcome partly around development profit, but a big part of it is around where rents are set as well. Our preference is to be highly confident that the rents that are driving that initial yield are sustainable and that we're going to see a profitable operator in there and ultimately that's going to drive long-term rent growth for us. It is a pretty tricky negotiation. Like we've been across that pipeline needing to negotiate individual deals it's around a reasonably narrow band, but they don't magically all come out as 6%. You're right in saying as we look ahead if we're sort of entering a period of higher interest rates it is absolutely on our mind to be trying to push, certainly, push the yields up. All of that is just part of the negotiation so I can't provide any guidance around that at the moment but it's absolutely on our minds. But not at the expense of rents. We or the expense of risk. What we, I would say, more often than not turn down but we often turn down deals that optically look like they've got an attractive yield, but we can't see a way to get comfortable with a tenant paying rents that might be $5,500, $6,000 a place. When we look at the economics through our lens that we want to be highly confident that that's a sustainable rent that they can afford and will capture market rent growth over time.

That's terrific, thank you. And just on the 12 market reviews completed in the last 6 months were there any open market reviews in that bucket?

Yes. So there was one that was uncapped and that was -- that resulted in 7.7% and the balance were all capped at 7.5%.

And just what was capitalized interest for the last 6 months? Apologies if you mentioned this on the call. I just couldn't find it in the report.

Sorry, $1.7 million.

The next question will come from [ David Kingston ] with [ K Capital Group ].

Look I just wanted to come back to operator affordability. I think we're all aware that G8's has been belted 30% yesterday. Obviously, a different sector but Healthscope's landlords are obviously going to cop a rental reduction. I hear what you say that 9.7% of revenue is fine normally for rental. But I think in a little bit of a different period at the moment. Operating costs are going up with governance going up. Some of the operators, the occupancy is pretty flat. So I think when you've got special purpose properties, whether it's hospitals or aged care or sort of childcare, I tend to look more at what percentage is the rent of sustainable EBITDA of the operators. And I suppose the issue coming through in childcare at the moment and a number of the questions today is that EBITDA, not for everyone, but for a number of the operators is going down significantly. So if your rents are going up, but some of the operators, the EBITDA is going down, that could lead to a situation that could be challenged for a few of your tenants. But just interested in your thoughts on that, please.

Yes. It's a really good point to lean in on. I like the fact that we're at the levels of rent to gross revenue that we are currently because we know that there is a little bit of softness in occupancy and we know too that the capacity for operators to continue to increase daily fees will ultimately hit a point where market can bear or the government takes advantage of that through the capital tied to the wage subsidy. So I think it's a really good point. I like where we're sitting at the moment. It means we've got headroom. We do think a lot about rent affordability and I know that was my comment before, in striking new deals, we are very sensitive and we do all our own modeling to make sure we're confident the operator can sustain in the operator business in that catchment particular model and we got to tolerate those rents. I think we're going to have to watch it for a little while and see how the market handles it. I think the point to raise is not all operators are equal. We've obviously got 35 tenant partners across our portfolio which is a [ Technical Difficulty ]. We have to monitor it closely.

Okay. And do you -- look, if you look at other special purpose property businesses like pubs, usually the tenant might pay 40% of its EBITDA as rent because it needs to also look after CapEx and upgrading the plant equipment. If you look at hospitals, it might be a similar thing. Do you have a feel as to what the right percent of EBITDA is because in my view, it's more relevant than 9.7% of revenue. Because at the end of the day, the operator has EBITDA they pay the rent, which might be 40%, which is probably sustainable. But they also have to make a profit and they also have to look after the properties and upgrade the plant and equipment periodically and do some renovations. So in my view, the concern at the moment, I think you run a very good business, but the concern is that the EBITDA of a number of operators, I think, is going to is coming down significantly.

Yes. Look, we obviously get the benefit of the full center level P&L. So we have clear line of sight on center level EBITDA and rent coverage. So we've got good visibility. Over recent years, we've seen upwards of 3x rent cover, which provides a level of confidence that when we are talking about that sort of rent to revenue ratio, it is translating ultimately to a level of rent cover that's certainly not the sort of levels that you've quoted there in other specialized asset classes. We know for well sale and leaseback on specialized health care assets can prove challenging. At the moment, we feel comfortable where our book. We are -- we stay very close to our tenants. One of the focuses that we have, we review all of our properties regularly with the benefit of operating data, we're concerned about a particular property, we have an ability to act on that. It might be we can assign to another operator. It might be we can invest some money into the property to make it more competitive or ultimately, it might be that we can sell. And I think the one really powerful part of Arena's business that often doesn't get talked about is is the ability to sell assets well into that high net worth market because they're attractive, but it's also there at a price point where there's deep liquidity.

The next question will come from Thomas Ryan with Moelis Australia.

Just a quick question on the divestments, building what Daniel was asking earlier, if that's okay. Were the divestments on or off market? And how did that come through?

Yes, Thomas. So they were all on-market transactions, so all through competitive processes.

And just with regards to values, if that's okay, just noting the passing of 5.39% and your childcare assets, what would be the tightest out of your portfolio? And do you see that there's much downside risk to that at present?

This is in the portfolio that we've got or the portfolio we sold.

Stabilized that you have?

No, the portfolio we've got. I mean I think it's in the accounts. I think the lowest is a 4% yield. The reality is we've got some very long-dated arguably under-rented assets that certainly would trade very well on a tight yield. That's what we've seen a lot of in Queensland, for example. We're certainly comfortable there. Does that answer your question?

Yes. And just one last one, if that's okay, with regards to healthcare and what you're talking about earlier. Can you just confirm what you would not look at in terms of the sector?

It's a great way to try and narrow the topic. Look, we've deliberately tried not to. Our mandates on paper are reasonably broad. What I would say is we think very, very carefully about deploying capital outside early learning, and we're very conscious of the sort of criteria that we need to consider. I don't think -- just to give you some comfort, I don't think we're going to be looking to buy major tertiary hospitals, private hospitals in the short-term, just if that's what your level of concern is.

The next question will come from Simon Chan with Morgan Stanley.

Justin, I appreciate that your rent to revenue is 9.7% across the portfolio. But can you give us a feel for the range across the 270 assets?

Simon, I couldn't even -- to be honest, I couldn't give you a range. There will absolutely be a range on an asset-by-asset basis. I mean we've got 270 properties. We can look down and form a view how they're all trading, but I couldn't actually give you a range today. Would I say out of all of the properties we've got, we've got some that are loss-making for operators? Of course, there are. There's going to be some. But the overall position is that I think that the 9.7% gives you good color.

Okay. Okay. Fair enough. The 29 projects that you have in your development pipeline, how much discretion do you have with them? Well, let's just say rates go up another 50 bps, all of a sudden, the yield on cost of 6% doesn't look as attractive. Can you make the call and say, let's put this off for a couple of years? Or have you signed up for them and you've got to build them rain hail or shine?

Look, for the deals that we've got in our pipeline today, there's a level of commitment behind all of those deals, and we'll look to complete on those deals. For everything else, it's an absolute negotiation. And what we're very conscious of, obviously, the forward interest rate environment and cost of capital. And so we'll look to negotiate a better outcome. But equally, developers have got alternative ways to fund these. They can fund them themselves and then sell them into the market themselves at the end and take a view on maybe getting a better outcome. We really like the fund-through model because it gives us certainty of access to that real estate and developers like access to our cost of capital and a certain exit. So it kind of works when it works. We do find a lot of negotiations don't get there. We would turn down ourselves including direct market deals, 90-odd percent of deals that come across our desk. And there's a lot of other transactions, fund through transactions, we can't -- we just can't get to a point that we're comfortable that the pricing works. So I think it's on our minds, we're very aware of cost of capital changes and where we can, we'll look to negotiate an appropriate risk return.

This concludes our conference for today. Excuse me, there are no further questions at this time. And I would now like to hand the conference back over to Mr. Justin Bailey for closing remarks. Please go ahead, sir.

Thank you for your attendance on the call today. That concludes Arena's investor briefing. Please don't hesitate to contact Susie, Gareth, Carla or I directly with any questions. We look forward to seeing a number of you over the coming days and weeks.

This concludes our conference for today. Thank you for participating. You may now disconnect.