Arena REIT: Result 2018

There'd be many a young parent who'd take a trip to the shops over caring for children, but in the property world, the latter seems to be a more profitable enterprise.

Childcare centre landlord Arena REIT chalked up a 21% increase in operating profit in the year to June, although earnings per share rose by only 7%, due to the increased number of shares to develop 14 new centres and acquire nine more. 

Arena's centres are leased to high-quality tenants that enjoy significant government support thanks to childcare subsidies. Additionally, unlike office or shopping centre trusts, the tenants are responsible for almost all operating expenses, including repairs and maintenance which both reduces earnings volatility and boosts profits available to be distributed to shareholders.

In 2018 Arena maintained occupancy at 100% and increased the portfolio's weighted average lease expiry to 12.9 years, after renegotiating some leases and adding the 14 completed developments with an average lease term of 19.7 years. This provides confidence in long-term distributions, which the trust pays quarterly. 

In July 2018, the Federal Government increased the childcare subsidy as well as the number of families that are eligible for it – positive developments for Arena as it should improve the profitability of its tenants. 

Arena expects solid earnings growth for 2019, based on contracted rent increases, some market rent reviews and the full year impact of developments competed in the 2018 financial year. Accordingly, it plans to increase distributions by 6%, which represents one of the highest growth rates in the listed property sector.  We're increasing our Buy price to $2.00 and our Sell price to $3.20, but it remains a HOLD.