HY20 result: Top dividend share increases dividend by 6%

Arena REIT No 1 (ASX:ARF) is a top dividend share, in its half-year result it just increased its distribution by 6%.

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I think Arena REIT No 1 (ASX: ARF) is a top dividend share and it just increased its distribution by 6% in its half-year result to 31 December 2019.

What is Arena REIT No 1?

It's a real estate investment trust (REIT) which owns a large portfolio of social infrastructure properties which are predominately early learning properties as well as a few healthcare properties, which includes a few specialist disability accommodation properties. It now has 223 early learning centre (ELC) properties and 10 healthcare properties.

What are the profit numbers that Arena REIT reported?

As I already mentioned, Arena REIT said its distributions were up 6% on the prior corresponding period to 7.15 cents per security, supported by operating earnings per share (EPS) growth of 6% to 7.17 cents per security.  

Statutory net profit rose by 24% to $42.2 million after higher property valuation uplift, profits realised on the sale of divested properties and positive revaluation of interest rate hedges.

Arena's total assets increased by 8% to $890.4 million as a result of acquisitions, development capital expenditure and positive portfolio revaluation. The valuation uplift contributed to a 4% increase in the net asset value (NAV) per share to $2.18 at 31 December 2019.

Portfolio highlights

Arena REIT achieved an average like for like rent review increase of 3.1%, which was pleasing and comfortably above inflation.

It maintained its 100% occupancy rate which means every property had a tenant and was paying rent.

At the end of the half-year it had a weighted average lease expiry (WALE) of 14.1 years, which is one of the highest in the REIT sector.

It also informed investors that it has commenced a renewable energy program to invest in sustainability initiatives, including a multi-site solar installation project which is expected to be completed in FY20.

During the period it acquired three operating ELC properties with a net initial yield on cost of 6.2%, each with a 20-year lease. One ELC development was completed at a net initial yield on total cost of 6.5% on a 20-year lease. Arena REIT said it acquired 11 new ELC development sites.

It continues to recycle its portfolio – five ELC properties were sold at an average premium of 11.6% to the book value.

After the reporting period, Arena REIT said it acquired an $11 million multi-disciplinary healthcare centre co-located with the Kalamunda Hospital in Perth, leased to Mead Medical. It has a triple net lease with a 6.5% initial yield with a 10-year WALE.

Gearing was 23.2% – low for the REIT sector – with a weighted average cost of debt of 3.55%, which was an improvement.

Childcare update

The REIT disclosed that the ELC sector remains strong with a record 781,830 children attending day long care at 30 September 2019, a 4% increase over the previous 12 months and 12.5% increase since the introduction of the child care subsidy.

Is Arena REIT a buy?

It reaffirmed its distribution guidance for the year of 14.3 cents per share, an increase of 6% over FY19. That means it's trading with a FY20 distribution yield of 4.5% after a 28% increase of the share price since the start of 2019.

The REIT has grown its distribution each year since it started paying one in 2013. I think it will generate more income growth than banks, but it's now at a 45% premium to its underlying value (NAV), which is already higher from property valuation uplifts. I think it's a great REIT, but I'd only buy Arena REIT today if income is your only focus in the medium-term.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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