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Edited Transcript of ARF.AX earnings conference call or presentation 13-Aug-19 1:00am GMT

Full Year 2019 Arena REIT No 1 Earnings Call

MELBOURNE Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Arena REIT No 1 earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gareth Winter

Arena REIT - Company Secretary, CFO & Director

* Robert Andrew de Vos

Arena REIT - CEO, MD & Director

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Conference Call Participants

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* Darren Leung

Macquarie Research - Analyst

* Gareth James

Morningstar Inc., Research Division - Senior Equity Analyst

* Pete Davidson

Pendal Group Limited - Head of Listed Property

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Arena REIT's FY '19 Annual Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [2]

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Thanks very much, and good morning, everyone, and a very warm welcome to Arena REIT's FY '19 Full Year Results Presentation. Arena's results announcement, investor presentation and financial statements were released to the ASX earlier this morning. My name is Rob de Vos, Arena's Managing Director, and joining me on the call today is Gareth Winter, Arena's Chief Financial Officer.

The format of today's call have Gareth and I walk through the investor presentation and there will be an opportunity for questions at the end. So moving straight into the highlights for the period and I'll punch through the presentation. I'm very pleased to report that Arena has, again, been successful in delivering on its strategy and investment objectives over the last 12 months, and as a result, is that we're reporting strong operational and financial outcomes.

To touch on some of the highlights. Our cash-based net operating profit of $37.7 million represents an 8.7% increase on the prior year, with the revenue growth from ongoing development activity and strong rent reviews substantially flowing through the bottom line net earnings due to a comparably stable operating expense structure. Our EPS is up 5.3% to $0.138 and we paid a full year distribution of $0.135 per security, which is in line with guidance set 12 months ago and represents a 5.5% increase on the prior year.

We've completed $72 million of selective new acquisitions and development programs providing an average net initial yield on all costs, including transaction costs of 6.4%. We've achieved like-for-like rental growth in the portfolio of 3.6% including market reviews in the period of 9.4%. Gearing reduced to just under 23% as a result of the capital raising undertaken in May as well as continued net valuation growth across the portfolio of about 4.6% for the 12-month period. So pleasing headline numbers for the year in line with our expectation and positioning us well to commence financial year '20.

Moving on to the next slide on portfolio performance. In supporting our strong headline numbers, we've seen positive outcomes achieved across the portfolio. Highlights for the period under the team's key focus areas: Lease management, we've maintained 100% occupancy. We've achieved rental growth of 3.6% including average of 9.4% increase across 39 market rent reviews. We've worked in partnership with our tenants to extend leases out of cycle, resulting in a material increase in our WALE over the period, increasing those transparent predictable cash flows that we prefer.

We've also worked with 3 of our early learning tenant partners in renovation programs to allow for rejuvenation and expansion of existing early learning centers.

Portfolio management, as I mentioned awhile, has been extended to 14.1 years. We've sold 1 early learning center in Queensland. We've seen further valuation growth across the portfolio of $32 million, 4.6%, and the passing yield for the portfolio is now 6.38%.

We've again had success in executing on our investment development activities with 8 operating centers acquired, being 5 early learning centers and 3 specialist disability accommodation properties. We've completed 4 high-quality early learning center development projects at a total cost of $25 million and an average yield on cost of 6.4%. And we've replenished our development pipeline with a further 8 exciting new development sites acquired that will support future earnings growth.

Our portfolio metrics are in great shape. We're achieving strong rental growth. The portfolio has no vacancies. We have profitable tenants. Our WALE is at 14.1 years, and portfolio value up 4.6% for the 12-month period.

To present the financial results for the last 12 months in more detail, I'll now pass you over to Gareth. Thanks, Gareth.

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Gareth Winter, Arena REIT - Company Secretary, CFO & Director [3]

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Thanks, Rob, and good morning, everyone.

Just turning to Page 6 of the presentation, you'll find a summary of Arena's operating income statement for the year, which shows a 9% increase in net operating profit. The net operating profit is a representation of Arena's cash-based earnings and is the source of distributions to investors. There is a reconciliation of net operating profit to statutory profit in the appendix of the presentation, the most substantial reconciling items being the periodic revaluation of investment property and the interest rate hedges.

Our EPS of $0.138 is 5.3% higher than last year and was in line with our expectations throughout the year. A key driver of the result was the 14% increase in property income. This income growth has been derived on a basis consistent with prior years and is coming from the like-for-like rent reviews, which averaged 3.6% in the year and in the contribution for Arena's ongoing investment in ELC developments and new acquisitions, noting the 4 ELC developments completed in FY '19, 5 ELCs acquired in conjunction with tenant partners and the acquisition of the specialist disability accommodation portfolio. The FY '19 acquisitions were weighted towards the second half of the year.

Just looking at others line items there, other income includes fees from an unlisted health care property syndicate and interest income. We invested in that syndicate, extended the investment term for a further 2 years during the year. And the small reduction in other income compared to last year is largely due to lower interest income on cash from equity raised in August of 2017. Property expenses are stable, notwithstanding the increased activity levels, which is pleasing.

Looking at operating expenses. Cash operating expenses, an increase was expected there with the substantial growth of the business. However, I will note, there's around $200,000 of one-off costs in FY '19 in that number, particularly around the transition of managing directors back in February.

In terms of other general OpEx there, the increases during FY '19 were largely due to registry costs as we average more investors over FY '19 versus FY '18, albeit we have been on reducing these costs through an ongoing campaign to convert investors to e-mail rather than mailed paper correspondence.

Other compliance costs, regulatory costs such as custodian and corporate insurances were up during the year. And there was also the recent introduction of ASIC industry levies, which is the first time that's appeared in the profit and loss statement. Our expectation is that operating costs will be relatively flat in FY '20 by comparison, notwithstanding that we recently added some additional resources to our property team to support the substantial growth and opportunities in the business. And some of you may have also seen that we appointed an additional nonexecutive director today.

The increase in finance costs simply reflects the funding of the recent acquisitions and the developments completed over the past 12 to 18 months, which have transitioned from interest capitalization during the development phase to operating expense now that leases have commenced. Our overall cost of borrowing reduced to 3.65% during the year and our end-of-year gearing reduced by 2% to just under 23%, although the average drawn debt balance throughout FY '19 is around 20% higher than FY '18. Obviously, given the proceeds of the institutional placement in May that was paid off, the debt bal will be redrawn to fund future investment.

The lower statutory profit is primarily attributable to the negative revaluation of interest rate hedges of around $8.6 million, which was driven by the significant decline in domestic interest rates during FY '19, and the positive revaluations of the property portfolio were around $32 million in both FY '18 and FY '19. With operating performance being in line with expectation, we paid distributions in FY '19 of $0.135 per security, which is in accordance with our FY '19 distribution guidance and represents an earnings growth of around 5.5% on FY '18. The payout ratio is consistent with recent years, which reflects the strong underlying cash flow generated by the business and predominantly triple in nature. Of our leases, expectations are there will be a similar payout ratio in FY '20.

Turning to Page 7. This is a summary of Arena's balance sheet. The full balance sheet is in the Appendix of the presentation. Key points to note, the growth in total assets is primarily due to a net $66 million invested in acquisitions and ELC developments in FY '19 and the asset revaluations of $32 million, which is also the primary driver of the 7% increase in net assets per security.

Gearing at just under 23% is below Arena's maximum gearing range of circa 35% to 40%. However, we remain comfortable that the current gearing gives Arena significant scope to take advantage of growth opportunities at a low incremental cost of capital and provides a buffer around future market volatility. I'd note that the June balance sheet does not include the proceeds from the security purchase plan of $16 million, which was settled in July of 2019. Pro forma gearing is around 21% if the SPP proceeds are taken into account. Gearing is expected to increase by a couple of percentage points from completing development projects, as Rob will outline later in the presentation.

Just turning to Page 8 and the capital management summary. Again, there's some additional information in the appendix. Our approach to capital management continues to prioritize resilience and risk reduction in the face of significant market volatility. We raised $50 million in an institutional placement in May and a further $16 million from the associated security purchase plan which was settled in early July. As at 30 June, we had around $90 million of immediately available liquidity through existing debt facilities, which were expanded by $50 million back in February.

You may also recall, we completed a debt extension in early 2018, out to a weighted average term of near 5 years. And there is presently no facility expiry until March 2022, i.e., nearly 3 years. The combination of modest gearing and available liquidity allowed us to actively consider growth opportunities with around circa $50 million of invested CapEx presently scheduled for FY '20.

Our average cost of debt has reduced to 3.65%, and we expect the interest rate hedge cover to be maintained in that 70% to 80% range as debt is drawn to fund the development pipeline and new acquisitions. If the reduction in interest rate experienced over FY '19 prevails, we also expect that our average cost of debt will further reduce over time as there is significant reversion value in the hedge book. Finally, it is important to note that Arena is operating well within the requirements of our debt facility, and we have substantial headroom in our OBR and interest cover covenants.

I will now hand you back to Rob, who will update you on the property portfolio.

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [4]

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Thanks very much, Gareth.

On now Page 10. We have 226 properties across Australia with a value of just short of $800 million. Our passing yield is 6.38%, which has seen minor compression over the period of about 14 basis points. It's predominantly a result of improved valuation metrics in the health care portfolio following the lease extensions.

In terms of diversification, we continue to improve our spread of 10 partners. And geographically, you can see in that middle graph, if you tally Queensland, Vic and New South Wales, worth about 84% of the portfolio in the Eastern Seaboard states. We've marginally increased our sector diversity to health care following the acquisition of our specialist disability accommodation portfolio in South Australia. And given the strong macroeconomic drivers of health care accommodation, we would like to be doing more in this space. There's unlimited opportunities over the last 12 months, and the transactions that have taken place have been on pricing metrics that are not consistent with our view on long-term value.

Moving on to lease expiry on Page 11, and the portfolio has increased -- the portfolio WALE has increased in the period as a result of proactive management initiatives, strong tenant relations and new development and acquisition activity with no current vacancies and no one income expiring in the next 3 years.

And as you can see on this graph on the slide, we have less than 3% of the portfolio's income expiring prior to financial year 2028. And from there, the expiry profile of the portfolio is staggered relatively evenly from financial year 2029 through 2039 and a small portion of income expiring in financial year '42 and beyond. So very long term, highly transparent and predictable cash flows that have annual escalations providing real growth to our investors.

Moving on to our rent review profile on the next slide. And we've broken down the financial year '19 review structures that made up the 3.6% like-for-like growth in the first column. It is the case for the next few years, the majority of our rental escalations are fixed or CPI with a ratchet of at least 2.5%, which are obviously providing real growth in the current low-inflation environment.

In the last 12 months, we also had about 17% exposure to market rent reviews, which is a higher-than-usual exposure and about half of those were uncapped. The outcome of the uncapped reviews is roughly a 20% increase in aggregate and the outcome of the capped reviews for the period was about 6.5%, which is consistent with the prior year periods. We have a further 10 market rent reviews equal to about 4% of the portfolio income that are still in negotiation, and we anticipate completing those over the next few months.

As we have in previous periods, we've also proactively restructured 11 leases, representing about 4% of income. And this involve rentalizing some capital expenditure used for rejuvenation and upgrade works for 3 of our tenant partners and extending lease terms to new 15- and 20-year leases. The uplift in rents on those assets was just over 20%, and we don't view that increase as like-for-like, so that increase of 20% on those leases is not included in the 3.6% like-for-like result.

Looking forward to the next 3 years, you'll note the vast majority of rent reviews continue to be those fixed or CPI with at least a ratchet of 2.5%. Our exposure to market rent reviews is 7.6%, 9.1% and 3.9% of income for financial year '20, '21 and '22, respectively. And each of those have a cap of 7.5% increase and a collar at the prevailing passing rent.

Moving to Page 13. And our origination and development programs continue to progress through expectation with 8 operating centers acquired, made up of 5 early learning centers with new and existing tenant partners and 3 high-acuity specialist disability accommodation properties in South Australia that are occupied by our tenant partner, SACARE.

We've also completed 4 exciting development projects in the period that are geographically spread out in Queensland, Victoria and New South Wales that each have the common investment rationale of being located in undersupplied catchment areas that have poor, older-style competition with the introduction of high-quality operations with ease in parking and good exposure that can be delivered at a cost that allows the tenant to be highly competitive with their daily fees. Each of the newly developed properties are exceeding early occupancy targets, with all 4 properties now operating profitably for our tenant partners.

Looking at the pipeline. In total, our development pipeline now sits at 9 projects with anticipated aggregate cost of $50 million. We also have a further 2 properties with anticipated cost of another $9 million contracted post 30 June. We are nearing practical completion on one of those projects and anticipate the balance to be complete in the second half financial year '20 and first half of financial year '21.

Each of our current development projects are being undertaken on a fund-through basis, where either a third-party developer or tenant undertakes the development and we pay capped progressive payments which we are going to return either by capitalized coupon or site rent. These projects typically have a lower level of inherent development risk, and as such, provide for lower anticipated yield. We anticipate that it will be in the order of about 6.7% looking forward. Of the $50 million total anticipated cost, about $36 million was outstanding to complete the projects as of balance date.

Moving on to the next slide. You can see here, I'm on Page 14, that we have set out a chronology of the development programs we've completed over the last 7 years. We are very proud of our track record in delivering on our development programs. Over the last 7 years, we've completed some 37 successful development projects across the country, significantly more than any other group. We've learned plenty of lessons along the way to build up an enviable reputation on delivering the right projects with the right partners in the right locations. Our programs obviously provide benefits to our tenant partners as well as the communities that we invest in; benefits to the children that are accommodated in our centers; and of course, benefit to our investors.

In total, we've invested $170 million that has generated in excess of $28 million in additional rent over the last 7 years. The $170 invested is currently valued at over $205 million, which equates to a 20% margin. Whilst those margins are great to obtain and are an appropriate reward for the risks that we take on, it is not the driver of our development activity. We actually don't need to grow for growth's sake. Our development programs are not about building scale, they're about accessing long-term predictable cash flows with prospects for growth over the medium term. Our team are looking forward to putting our skills to work on our recently acquired development projects and using our skills to continue finding the best new projects in the market.

Moving on to market conditions, on Page 15. And the demand drivers for the early learning sector continue to be strong and we anticipate that demand will continue to increase in the medium term, driven by high female workforce participation and better recognition of the socialization benefits that early learning provides to young children. We're seeing continued population growth in the 0- to 4-year-old bracket. And importantly, the positive effects of the child care subsidy has encouraged stronger participation amongst, particularly, middle-income families.

In February, we're able to report that early indications were positive for operators. And this is shown through our reporting data over the last 9 months and is consistent with government-released data to December that provides increase in the number of hours and an increase in the number of children attending early learning with enrollments up in long day care by about 4.9% as of December year-on-year.

In relation to supply, there were 298 new centers added across the country in the year to June 2019, representing a minor reduction in the aggregate growth rate from 4% to 3.9% year-on-year. We anticipate supply is likely to continue to moderate in the medium term, principally as a result of a more measured approach from operators in relation to their expansion programs.

As we've consistently said, we should use a degree of caution when aggregating supply data as the early learning center market is better viewed as a collection of micro markets. By way of example, Arena mapped some 1,300 catchments for supply and demand imbalances and there are, as you would expect, catchments that are oversupplied and areas that remain or has become undersupplied. It sounds obvious, but a deep understanding of the industry and the markets being considered for investment is required, which is obviously fundamental to Arena's approach.

So today I'll go over Arena's early learning portfolio, I'm on Page 16. Arena's portfolio remains in a very strong position: 100% percent occupied; every one of our 210 operating early learning centers provide operating data, and that data provides us important information that assist our capital allocation decisions and provides insights into the general health of the sector. Across our portfolio, underlying operator occupancy has improved for our tenant partners in the last 12 months by approximately 2%.

Daily fee growth has increased by 5% to reflect approximately $103 per day, which remains significantly below the government's benchmark fee of $130 per day.

As you can see on the graph at the bottom of this page, the government funding package suits our early learning center portfolio, which is typically geared towards middle-income families. And to give you some context, all but 4 of our early learning centers have daily fees under the government's benchmark fee. And pleasingly, operator accommodation costs have moderated slightly despite strong rental growth across the portfolio. And as you can see on the graph there, rental gross revenue ratio decreased marginally from 11.2% to 10.6% over the year.

Moving on to the next slide. And looking forward, we have a positive outlook, which is underpinned by the prospect of strong underlyings growth and a market that is conducive to providing new investment opportunities.

Strategically, we are well positioned to continue delivering benefits to the communities that use our assets and on our investment objective of providing long-term predictable distributions to investors with good prospects for growth. From a macro level, we have a growing need for social infrastructure services based on population growth and changing community needs and values. We've increased our funding capacity to execute on selective new acquisition and development activities. And importantly, we have a highly engaged and dedicated management team with strong relationships with tenant partners and in-house origination and development expertise.

Moving on to the final slide, and that we are reaffirming our full year distribution guidance for financial year '20 of $0.143 today, an increase of 5.9%. To support our guidance, as you have picked up throughout the presentation, our portfolio metrics are in good shape. We've refinished our development pipeline and are seeing opportunities in the market for us to prudently invest new capital. And as Gareth advised, we've seen strong financial performance over the course of financial year '19 and are well positioned to commence financial year '20.

That concludes the formal presentation. So I'll now pass the call back to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Darren Leung from Macquarie.

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Darren Leung, Macquarie Research - Analyst [2]

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Good results. Just one quick question for me. You mentioned in your opening remarks that you're looking to do a bit more on health care, but pricing metrics, obviously, weren't that favorable. Can you give us an indication as to what -- as well as pricing metrics are, what sort of asset cost that you're looking at within health care and where that sit relative to your hurdles?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [3]

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Yes. And thanks, Darren. So just looking at the low-acuity side, so if you look at our portfolio as it stands, multidisciplinary medical centers, that's the first level of care for the community. We see good prospects for that type of accommodation across the country. There has been a number of transactions that have been running through the smaller ones in that sort of high net-worth territory, which is difficult to compete with in many respects. But we'll keep being in there.

It's not so much a yield issue. It's more the rents that are sitting in that has been causing us some concern. So it's a bit like how we view the early learning centers. Yields are not the big issue in the sector at the moment, it's more what the rents are -- projected rates are.

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Darren Leung, Macquarie Research - Analyst [4]

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How much do you think rents need to reset before you'd be...

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [5]

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We're looking -- I think I made the point too that there being very few transactions in the marketplace, the couple ones -- the cap would have been in the market -- were probably 20% there. That's off in our view.

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Darren Leung, Macquarie Research - Analyst [6]

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On rental value?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [7]

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Rent. Yes.

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Darren Leung, Macquarie Research - Analyst [8]

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Understand. And then just the past extensions that obviously, health -- growing the health care portfolio, child care, core competency. Are there any other adjacencies that you're looking to, I suppose, expand more aggressively in the next 1 to 2 years?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [9]

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Aggressively, no. Yes. So I think we made the point that we don't need to grow for growth's sake. What interests us, definitely, the specialist disability accommodation portfolio that we've acquired. We'd like to do more in that space, and we're watching that carefully, and again health care space in the low-acuity side. But there's also plenty to do in early learning, too, Darren, in which we're definitely seeing a lot of opportunities in that marketplace, not necessarily new. Acquisitions, albeit that there are some, but definitely, the rejuvenation programs across the country. There's real estate capital that we put there to good use.

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Operator [10]

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(Operator Instructions) Your next question comes from Simon Chan from Morgan Stanley.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [11]

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Like-for-like rent increase of 3.6% across the portfolio, do you give the split of ELC and health care within that number?

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Gareth Winter, Arena REIT - Company Secretary, CFO & Director [12]

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Simon, it is in the appendix. 2.6% for health care, Simon.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [13]

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Okay. Okay, a bit of recovery. You mentioned in your presentation that you're getting the operating metrics from your tenants, et cetera. I mean we've had pretty much a full 12 months of the new subsidies now. Just wondering, are you seeing an increase in opportunities from your tenants knocking on your door, wanting to expand the portfolio, et cetera, et cetera, now that things are more profitable?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [14]

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Yes. That's -- look, some [territories]. I'd say as a general comment, though, the tenant base across the industry is probably a little bit more circumspect. So we're not seeing that high-volume and network expense, we're seeing more considered growth. But there's no doubt top line revenue is increasing. And there's still a number of tenants that are looking for new opportunities at the EBITDA. It's not -- it's definitely not the fever pitch that we saw, say, 2 years ago, Simon.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [15]

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Right. And you mentioned underlying occupancy increased by 2% across your portfolio, your tenants. So where does that take you to?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [16]

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I would think -- we actually haven't provided that data. We've got some -- we cannot provide the portfolio either on aggregate, partly because of the concentration we've got for one particular tenant. And people can potentially read through that, but it is consistent with others that report -- operators that report the listed space. If you look to [GA], for instance, they're sort of mid-70s type of -- mid-70s, at that sort of numbers, consistent with what we see as good profitable centers.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [17]

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Great. And just to confirm your earnings growth guidance, do you expect partial contribution from new centers in the second half of FY '20? Is that right?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [18]

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Yes, yes. I mean, there's a development program, which is operating throughout the financial year. So there will be some of the first half, and there'll be, obviously, second half, which will flow into more FY '21 earnings.

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Operator [19]

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Your next question comes from Peter Davidson from Pendal Group.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [20]

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Just a question about health care opportunities. Can you just sort of flesh out how large that opportunity set is, whether it's sort of meeting your expectations, whether it's more capital-intensive maybe than a standard ELC and what the returns are like? If I can just sort of close out our...

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [21]

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Yes, thanks, Peter. So our interest here is obviously based on the macroeconomic things, so more population are getting old, all the things that we know, more, like, surgeries going on, and obviously, the history that we've had with our medical centers getting to know those and the Healius tenant partner we've got. We think that there is more to do with Healius or we're prepared to be [pressured] at the moment, and we think there's more to do with other tenant partners in that space. This is really community-based health care. Some of the states have actually coming on to this, trying to keep people out of the major hospitals. The Victorian government is one of them. Unfortunately, there's not an opportunity for private capital into that program that those sort of $10 million to $15 million, if you're going to try and put a ring-fence around them, ideally triple net lease, although sometimes very difficult to negotiate with them. Some more sophisticated counter-parties is what we're trying to unlock.

Transaction levels are very low in that space, typically -- for very good reasons that they operate very well and provide yield to the existing investors in that stock. We don't have deep skills in developing health care as it stands. So building spec development is not something that we want to be doing in the health care space. We've made a tenant partner for that. And we continue to work with -- Healius is a good example, they're renegotiation of leases and upgrade works on most assets and -- have to be doing more with them and others into the future. Nothing imminent on the medical space, and we continue to favor the work on the specialist disability accommodation portfolio, too. And we've got some good insight there with operating data flowing through from our -- inside key tenant partner. It is a very interesting space. Our expectation is that the community needs are not being met by the existing infrastructure.

Government is paying to do work in that space. And we think that we've got an important role to play as a sector and as a business. But it's a very small cohort, talking about potentially as little as 10,000 people that might need that high-acuity care in the space. And it will never be, in our view, a large component of our book. It's just too small a space. The lower end on the specialist disability accommodation just haven't got the barriers to entry that we look for. And I think it's susceptible to a lot of new entrants coming in very quickly, which is not something that's consistent with us generating those long-term predictable cash flows.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [22]

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And then high -- the high acuity in the audience, is that 10,000 nationwide, is it?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [23]

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Yes, that's right, Peter. Yes.

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Pete Davidson, Pendal Group Limited - Head of Listed Property [24]

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And also just circling back on the health -- on the medical centers, in those -- is that -- are morphing, changing in any way? Are we seeing, for instance, more specialist technology and uses in the medical centers? I mean one concern you always have with medical centers is that can be just sort of reformatted offices. Is the nature of those changing at all?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [25]

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It is. And rather quickly, too. So -- and if you think about from a community perspective, what used to be someone presenting with a broken arm or a cold in our centers that we own $100 million of real estate and we've got the health care, it's now ophthalmology. We've got complex eye surgery going on, fertility treatment. So the amount of services to the community is increasing very significantly. Technology is obviously playing a part in that. It is -- I guess, the changing community needs and expectations for medical providers.

We try to keep the very [pointy end] when all things being considered, I think our business has been concerned about its utilization rates in medical centers. So with the change of technology, if you looked at what's happening in office and retail and other sectors, technologies actually reduced the accommodation requirements. We continue to watch that pretty carefully. But at this stage, particularly the works that we've seen through Healius, a lot of effort in trying to fill space with new services. And our community is definitely responding to those new service offerings.

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Operator [26]

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Your next question comes from Gareth James from Morningstar.

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Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [27]

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Just going to clarify, were you saying that operating margins for the child care centers have increased across the portfolio? That's my first question. And secondly, do you think the benefits of the CCS have fully played out more? Or definitely more to come there?

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [28]

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Yes. Thanks, Gareth. So first question, profitability margins. Now there's not a discernible difference in profitability margins. I think what you're seeing at the moment is that top line revenue is growing for the operators and that is a result of obviously the average daily fees going up but also participation going up as well, so significantly higher top line revenue. But -- and as we've pointed out a number of times, the labor cost is actually starting to increase a little bit. So by and large, profitability, which is still quite healthy across our portfolio, I should say, is unchanged at the profit and profit margin level.

In respect to the question on CCS, we think that there's likely to be further growth as a result of the government's subsidization. And I think that it's partly the availability of the subsidization but there's a growing recognition. I think I've made this point a number of times. I feel like a bit of a broken record. But the socialization benefits, in a number of reports going to the need for earlier, more formal curriculum to children that will benefit their longer-term learning is definitely making a play through higher participation across our portfolio.

The team is talking direct to the partners. So CCS will continue to use well, and -- but I think there'll be a number of factors for the driving demand.

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Operator [29]

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

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Robert Andrew de Vos, Arena REIT - CEO, MD & Director [30]

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Thanks very much, and thank you all very much for the attendance on the call today. And that concludes today's investor briefing. Please don't hesitate to contact Sam, Gareth or I with any questions, and we look forward to seeing a number of you over the coming weeks. On behalf of the directors and management, thank you for your interest and ongoing support of Arena.