Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We are initiating coverage of <a href="https://www.smartkarma.com/entities/12209" target="_blank" data-smartkarma-citation="entities:12209:1">Arena REIT (ARF AU)</a> with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty rating. At the current market price of AUD 2.18, we believe the securities are undervalued. Arena’s fair value estimate of AUD 2.50 per security, implies a fiscal 2018 distribution yield of 5.1%, a 35% premium to net tangible asset backing of AUD 1.84 per security as at June 30, 2017, and a P/E ratio of 18. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 7.3%.Arena REIT is the second-largest listed childcare centre-focused real estate investment trust, or REIT, in Australia, after <a href="https://www.smartkarma.com/entities/8288" target="_blank" data-smartkarma-citation="entities:8288:1">Folkestone Education Trust (FET AU)</a> and owns a portfolio of 188 long day care centres which provide preschool care for children aged from 0 to 5 years. Arena’s childcare centres comprise 80% of its portfolio by book value, with the remainder comprising seven healthcare centres. The Australian childcare and healthcare sectors both receive significant government funding which we expect to continue, and even increase significantly near term, due to the essential nature of the services they provide.We expect Arena to generate average annual like-for-like rental growth of 3% over the next decade from its portfolio of Australian childcare centres, underpinned by robust long-term demand growth for Australian childcare services. Arena benefits from several supportive trends such as population growth and growing government subsidies in addition to attractive characteristics such as an occupancy rate of around 100%, high tenant renewal rates, triple net leases, and a relatively long weighted average lease expiry of 13 years. Childcare centre valuations tend to have a relatively high proportion of land backing due to the regulated ratios of floor space to children. Arena is internally managed which aligns management and security holders' interests better than if it were externally managed.The childcare sector benefits from positive long-term tailwinds including a growing population of 0 to 5 year olds, an increasing proportion of children using childcare, an increasing female workforce participation rate, an increasing time spent by children in care each day, and increasing childcare fees. On average, around 60% of childcare costs are ultimately borne by federal government subsidies which have consistently increased in recent decades. Subsidies will increase materially in 2018 under the federal government’s Jobs for Families legislation and we expect support for childcare subsidies from all major political parties to continue due to the politically sensitive nature of the sector.Analyst: Gareth James

We are initiating coverage of Arena REIT (ARF AU) with a AUD 2.50 fair value estimate, a no-moat rating, and a medium fair value uncertainty rating. At the current market price of AUD 2.18, we believe the securities are undervalued. Arena’s fair value estimate of AUD 2.50 per security, implies a fiscal 2018 distribution yield of 5.1%, a 35% premium to net tangible asset backing of AUD 1.84 per security as at June 30, 2017, and a P/E ratio of 18. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 7.3%.Arena REIT is the second-largest listed childcare centre-focused real estate investment trust, or REIT, in Australia, after Folkestone Education Trust (FET AU) and owns a portfolio of 188 long day care centres which provide preschool care for children aged from 0 to 5 years. Arena’s childcare centres comprise 80% of its portfolio by book value, with the remainder comprising seven healthcare centres. The Australian childcare and healthcare sectors both receive significant government funding which we expect to continue, and even increase significantly near term, due to the essential nature of the services they provide.We expect Arena to generate average annual like-for-like rental growth of 3% over the next decade from its portfolio of Australian childcare centres, underpinned by robust long-term demand growth for Australian childcare services. Arena benefits from several supportive trends such as population growth and growing government subsidies in addition to attractive characteristics such as an occupancy rate of around 100%, high tenant renewal rates, triple net leases, and a relatively long weighted average lease expiry of 13 years. Childcare centre valuations tend to have a relatively high proportion of land backing due to the regulated ratios of floor space to children. Arena is internally managed which aligns management and security holders' interests better than if it were externally managed.The childcare sector benefits from positive long-term tailwinds including a growing population of 0 to 5 year olds, an increasing proportion of children using childcare, an increasing female workforce participation rate, an increasing time spent by children in care each day, and increasing childcare fees. On average, around 60% of childcare costs are ultimately borne by federal government subsidies which have consistently increased in recent decades. Subsidies will increase materially in 2018 under the federal government’s Jobs for Families legislation and we expect support for childcare subsidies from all major political parties to continue due to the politically sensitive nature of the sector.Analyst: Gareth James

Charter Hall Social Infrastructure REIT (CQE AU)

Initiating Coverage on Arena REIT with AUD 2.50 FVE and No-Moat Rating

Arena Reit

Initiating Coverage on Arena REIT with AUD 2.50 FVE and No-Moat Rating