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Is this the best REIT on the ASX?

Arena REIT No 1 (ASX: ARF) is one of the largest childcare centre landlords on the ASX and reported its FY18 result today.

Statutory profit was down 33% to $64.4 million, primarily because the revaluation gains were less compared to last year.

Net operating profit was up 21% to $34.7 million compared to the prior corresponding period. The operating earnings per security (EPS) was 6.5% higher to 13.1 cents for FY18.

The distribution was also up a very healthy 6.7% to 12.8 cents per security. This meant that the payout ratio was 97.7%, leaving a little bit of wriggle room.

The underlying value of Arena’s shares, the net asset value (NAV) per security, rose by 7.1% to $1.97 during FY18. When combined with the distribution this is a solid return over the 12 months.

Arena achieved an average like for like rent review increase of 2.6%, comfortably more than inflation. Most rental contracts are either ‘fixed’ or ‘greater of 2.5% or CPI’, which leads to pleasing continuous rental increases.

One of the main reasons I like Arena is that it maintained its 100% occupancy and also extended its weighted average lease expiry (WALE) by 0.1 year to 12.9 years. These are both strong metrics for a REIT.

Head of Property, Mr Rob de Vos said “We continue to closely monitor the underlying operating performance of our tenants. In aggregate, their business operations are more profitable than the same time last year despite a slight reduction in their centre occupancy.”

During the year 14 ELC development projects were completed for a total cost of $88 million at a 6.7% yield and there is also a development pipeline of five ELC projects for a total cost of $31 million.

One of the key things that I’m concerned about for REITs is rising interest rates. However, Arena reduced its gearing from 27.5% to 24.7%. The weighted average cost of debt is 3.85% and 78% of borrowings is hedged for an extended term of 5.9% at 2.44% per annum. Arena appears to be in good shape.

Mr Bryce Mitchelson, Managing Director of Arena, said “With a well-capitalised balance sheet and funding capacity we remain focused on identifying attractive investment opportunities to build long-term value for investors.”

Foolish takeaway

Arena has guided that the distribution will grow by 5.5% in FY19 to 13.5 cents per security. This represents a distribution yield of 6.1% on the current price of $2.22. I think Arena could be a pretty good choice for income investors, however there may be some better shares out there for growth-minded investors.

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Motley Fool contributor Tristan Harrison owns shares of ARENA REIT STAPLED. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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