Thank you for standing by, and welcome to the Arena REIT Half Year 2023 Results Teleconference. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by one on your telephone keypad. I would now like to hand the conference over to Mr. Rob de Vos, Managing Director. Please go ahead.
Good morning, everyone. A very warm welcome to Arena REIT's results presentation for the first half of financial year 2023. Our announcement investor presentation and financial statements were released to the ASX earlier this morning. My name's Rob de Vos, Arena's Managing Director. Joining me on the call today is Gareth Winter, Arena's Chief Financial Officer. Our presentation today will include an update on our highlights for the six months of the financial year 2023. Our progress against our investment objective and strategy. Gareth will provide insights and detail into Arena's financial results and capital and interest rate management programs. I'll close the presentation with an update on portfolio operations and commentary on Arena's outlook in a changing investment environment. As always, there'll be an opportunity for questions at the end.
Moving into the presentation on page three, in the period of heightened macroeconomic and geopolitical risks, higher inflation and higher interest rates, the underlying community need for the services that Arena accommodates continues to increase. A net demand for the services we accommodate alongside disciplined capital, asset, and interest rate management has provided for an overall positive period for the business in the first half of financial year 2023. Highlights include a net operating profit of AUD 29.9 million, which is up 8.6% against half year 2022, which has been supported by an average like-for-like rent increase of 6.45%. We've seen moderate increase in overall portfolio value as a result of higher passing and market rents, which were offset by an expansion in capitalization rates.
We've increased and extended our debt facility, providing further liquidity for the business, which positions us well to execute on new opportunities that may be available in a changing investment environment. We've made further positive steps on our sustainability programs, including entering a sustainability-linked overlay across our AUD 500 million debt facility. We've completed seven early learning center development projects and replenished the development pipeline, which will support future earnings growth. Today, we are reaffirming our full-year distribution guidance for financial year 2023 of AUD 0.168 per security, reflecting an increase of 5% on financial year 2022. Moving to the next slide. Arena's conviction on maintaining our discipline and executing on our investment objective and strategy has again underpinned positive operational outcomes.
We've taken advantage of a strong healthcare real estate market by selling 2 properties that relative to the balance of the healthcare portfolio are less efficient and have higher reversionary risks. Sale proceeds were AUD 33 million, which provided an aggregate premium of 2% to June book value. We've booked a moderate increase in overall portfolio value in an environment where yields are expanding. The passing yield for the portfolio is now 5.05%, which is 14 basis points higher than as at June. Our sector-leading WALE of just under 20 years has been maintained with lease extensions and WALE accreted new projects being delivered in the period. The portfolio is currently 99.6% occupied. The 0.4% vacancy relates to two small suites above our well-performing Murarrie Early Learning Center.
The ongoing high occupancy of the portfolio highlights the quality of the assets, the strong underlying fundamentals that support the social infrastructure sector, and the proactive management programs of the Arena team and our tenant partners. Average rental growth was 6.45% across the portfolio. The escalation mechanisms in our leases are doing exactly what they're designed to do, provide investors real growth in a low inflation environment and maintain their real value in a higher inflation environment as we are in now. During the period, we progressed our renewable energy program that is focused on collaborating with our tenant partners and installing and promoting the use of solar and reducing the energy intensity of our portfolio. These activities have reduced the utility costs of our tenants in the environment of otherwise material increases in their business operating costs.
We've received 100% of contracted rent during the six months to 31 December and all of the deferred rent owed from COVID relief programs. We've acquired two operating early learning centers, one in Queensland and one in South Australia. Both were acquired on our preferred long-term triple net lease and at aggregate cost AUD 7.8 million and have provided a net initial yield on all costs, including transaction costs of 6%. We've completed seven early learning center developments. These projects had a total investment cost of AUD 44 million and a net initial yield on all costs, including transaction costs of 5.9%. We've also replenished our development pipeline with the acquisition of seven new early learning center development sites.
Each project has been pre-committed on a new 20-year triple net lease, and combined, the projects have a total forecast cost of AUD 55 million. Moving on to slide five and an update on our sustainability programs. Sustainability is fundamental to our investment approach, and we believe that best positions the business and our stakeholders to achieve positive long-term commercial outcomes. We have a disciplined investment process, and being an internalized manager with strong governance protocols means that we're aligned with investors for the long term. We are looking for sustainable growth and quality in our financial metrics, not simply short-term balance sheet scale.
Arena's portfolio facilitates access to essential community services that provide a positive social impact. We work with our tenant partners to invest the capital necessary to provide efficient, flexible, and well-located accommodation at sustainable rents, allowing them to focus on their core purpose of delivering essential services to Australian communities. We proudly released our 2022 sustainability report in the period, which sets out our achievements and future goals. Some of these include further collaboration on sustainability initiatives with our tenant partners as part of our Partnerships for Change program, which to date has focused on using our position of influence to assist our tenant partners in education programs on the likes of modern slavery and climate action.
We'll be continuing our focus on the use of renewable energy, reducing our tenant partners' utility costs, and reducing negative impacts on the environment, which with our work to date, will prevent the emission of approximately 3,000 cubic tons of carbon into our environment each year. We continue to welcome and encourage feedback from all of our stakeholders on these projects and on our ESG programs and disclosures more broadly. I'll now pass you over to Gareth to provide some detail on our financial results.
Thanks, Rob. Good morning, everyone. Just turning to page seven of the presentation, you will find a summary of Arena's operating income statement for the period, which shows a 9% increase in the net operating profit to AUD 30 million and a statutory profit of AUD 48 million for the half. There is a reconciliation of net operating profit, statutory profit included in the appendix of the presentation, with the most substantial reconciling item being the periodic revaluation of investment property. Operating EPS of AUD 0.086 is 8% higher than the prior period, with the key driver of the increase in operating profit being the 13% increase in property income, which has been derived from a combination of rent reviews and capital deployment.
Like-for-like rent reviews year to date have averaged 6.5%, noting that over 80% of rent reviews in FY 2023 have a direct link to CPI outcomes. For comparison, the national quarterly CPI has averaged 7.6% during the year to date. Using a nationalized average CPI rate is a simplified way of looking at our CPI-based rent reviews, as the actual reviews are staggered throughout the year and use state-based CPI measures. The recent high CPI prints will provide further inflation protection to our cash flow into the remainder of FY 2023 and into FY 2024. Arena's ongoing program of investment in ELC developments in new acquisitions has also contributed to earnings via this capital deployment, including, as Rob mentioned, the completion of seven ELC developments in the half at total project costs of AUD 44 million.
The addition of seven new ELC development projects to the pipeline and also the acquisition of two operating ELCs in conjunction with tenant partners for AUD 8 million. We've also continued our program of selective capital recycling, with proceeds of AUD 33 million from the sale of two healthcare properties at a small premium to their June book value to be received in February and ultimately to being reinvested. Some specific comments on rent collections for the period. Arena's portfolio has continued to demonstrate high resilience. There are no rent arrears, all contracted rent is being received, including the collection of AUD 400K of deferred rent in the half. Our COVID-related rent deferrals were relatively short-term, with only AUD 700K of deferred rent still to be collected over the course of calendar 2023.
Deferred rent is previously being recognized in income in the relevant period and booked as a receivable, with only the cash to be collected. Just some other line items. Property expenses reduced primarily as a result of allowances for, or smaller allowances for independent valuation costs and property inspection costs compared to the increased spend from 12 months ago post-COVID lockdowns, where there was some catch-up required. Operating expenses. There's been a modest decline in operating expenses compared to the comparative period. This is largely due to some minor staff mix changes and also due to some timing on staff costs, particularly annual leave, compared to the prior comparative period. Overall, we expect FY23 costs to be substantially similar to FY22.
Pleasingly, property revenues increased by AUD 4.1 million in half, while OpEx slightly reduced and our cash in the hour remains around 30 basis points. Looking at finance costs. The increase in finance costs is due to two main factors. The most substantial being an increase in our all-in weighted average cost of debt, which at a spot value was 2.9% at June 2022, has averaged 3.5% for the half year period, and was a spot value of 3.9% at December 2022. Noting that this does include the expanded facility and also extension of debt term.
Due to our high levels of hedging at 80%, the increase in debt cost is primarily due to the substantial increase in floating rates since June, with lesser contributions from the increase in average fixed rates on our spot book, as well as the AUD 17 million increase in debt facility and extension of average debt term. Contributing was a higher average debt balance of AUD 340 million in the current half, versus AUD 265 million in the comparative period. The increase in the funding due to the investment in development acquisitions over the course of FY2022 and FY2023. The lower statutory profit of AUD 48 million is primarily due to a lower asset revaluation of AUD 18 million in the half, compared to AUD 153 million in the first half of FY22.
As Rob mentioned, we have affirmed FY 2023 distribution guidance at AUD 0.168 per security, representing growth of 5% on FY 2022. We expect our payout ratio to be relatively consistent with recent years, but there is still a degree of uncertainty on future interest rates movements and inflation, and some growing divergence in the views of market commentators on where and when in rates and inflation will stabilize. What is apparent is that the CPI rent review mechanisms in Arena's leases are working effectively to offset the increase in debt funding costs and still demonstrate growth in distributions. This offset has also allowed us to expand liquidity via the debt facility to take advantage of market opportunities, and also to recycle capital from selective asset sales to reinvest into future opportunities, which we believe will offer greater long-term value for investors.
When we first provided guidance in August, we allowed for an average floating rate across FY2023 of around 3%, with floating rates into the mid-3s by June 2023, and also adding incremental hedging when required to maintain hedging at around 80% cover at the five-year swap rate. Our expectation is that we won't be far off that over the full course of the year, albeit it appears there is greater risk on rates averaging slightly higher. Offsetting this is inflation, which we assume at a quarterly annualized average of 6% across FY2023, which currently is compared to 7.6% year-to-date. Also, there is some complexity in the timing of the rent reviews occurring throughout the year. The full contribution from the CPI review won't necessarily be received until FY2024. Proceeding to page eight.
We've got a waterfall chart of EPS for the period. The chart demonstrates the relativity of the individual license supporting EPS growth, noting the impact of key drivers of growth in the CPI-linked rent reviews, the deployment of capital into acquisitions and developments offset by funding costs and DRP. The relativity of each component is a little different this time around, as rent reviews are contributing more than the recent history and the development slightly less, which is to be expected given the current interest rate and inflation environment. Turning to page nine. The slide presents a summary of Arena's balance sheet. The full balance sheet is in the appendix to the presentation.
The key points to note are the 4% growth in total assets, which is primarily due to CapEx of AUD 43 million in the period invested in acquisition developments and also asset revaluations of AUD 18 million, which is also the primary driver of the increase in net assets per security. Our net gearing at 21.5% is well below Arena's maximum gearing range of circa 35%-40%. However, this level of gearing provides substantial capacity to fund the existing pipeline developments, allows us to take advantage of growth opportunities, and as we've talked about in recent years, also provides a material buffer around market volatility at this point in the cycle. Turning to page 10 and capital management summary.
Our approach to capital management continues to prioritize resilience and risk reduction through low gearing, ongoing high levels of hedge cover, regular extension of debt facility terms, and maintaining immediately available liquidity in excess of our development commitments. During the period, the debt facility was expanded by AUD 70 million, with around AUD 150 million of immediately available liquidity to cover the AUD 66 million of future development commitments at 31 December. This liquidity, in combination with our modest gearing, allows us to actively consider further growth opportunities. The weighted average debt term is 4.2 years, with no expiry for over three years, i.e., March 2026, noting that our March 2024 expiry was recently extended out to March 2028. Our high ongoing hedge cover of 80% at 31 December, up slightly from June, is for a weighted average term of four years.
Average interest rate hedging, combined with the natural inflation protection provided by rent reviews that are substantially directly linked to CPI outcomes, protects our net operating income in an environment where inflation and interest rates have materially increased in an extremely short timeframe. As mentioned earlier, our all-in weighted average cost of debt as at 31 December has increased since June, which is reflective of the substantial increase of floating rates on the untended portion of our debt, along with other contributing factors being the average swap rate, the increased debt facility, and relative margin pricing on extended debt term. That would have been around 3.7% in the absence of the debt extension and debt expansion. Finally, it's important to note that Arena continues to operate with substantial headroom in both our ICR and LVR covenants.
I'll now hand you back to Rob, who will update you on Arena's property portfolio.
Thanks very much, Gareth. I'm now on page 12. As at 31 December, Arena owned 271 properties across Australia with a value of AUD 1.5 billion. Given the growth in the underlying demand for the services we accommodate and our tenant partners' disciplined and proactive management programs, the portfolio continues to be in great shape. At just under 20 years, the portfolio has the longest contracted rent profile in the REIT sector, and to give that some context, the value of contracted future rent is well in excess of the current total portfolio value. Every lease has an annual escalation, and the vast majority of those escalate at least as high as inflation. The portfolio has low single asset concentration, with the largest asset accounting for less than 2% of portfolio value.
The passing yield of the portfolio is 5.05%, which has expanded 14 basis points since June. The land and building rate remains at just over AUD 2,100 a meter, which continues to look like compelling value when measured against other real estate asset classes. Sector diversity for the portfolio will reduce following the settlement of the Bondi and Caboolture healthcare assets. The sale of these two properties, which was undertaken at a moderate premium to book value, is not a change in strategy. We continue to be attracted to healthcare real estate and aspire to grow as part of the portfolio, but frankly, we see better buying opportunities in the future than the 4.4% aggregate yields achieved. Geographically, we have over 80% of the portfolio located in the high population eastern seaboard states.
In terms of tenant diversification, we have 34 tenant partners, with about 24% of our rent roll supported by Australia's largest early learning provider, Goodstart. Moving on to our lease expiry. Every one of Arena's leases is triple net with no exposure to variable property expenses. They are highly efficient and highly predictable cash flows. We have less than 3% of the portfolio's income expiring prior to 2030 and no material concentration of expiries in any year to beyond 2045. With some minor leasing work relating to two small suites above our Murarrie Early Learning Center, which we have a conditional heads of agreement on one of the suites. 0.3% expiring in current year relates to our pathology suite in our Kalamunda Medical Center, which we are in renewal discussions and are confident of a positive outcome.
Further along in FY 2024, the early learning center expiry relates to a profitable early learning center in metropolitan Brisbane, which again, we're confident of a new or renewed lease on an increased rental. Moving on to our rent review profile on page 14. On this graph, we've broken out the types of annual rent reviews for the first and second half of the current year as well as financial years 2024, 2025, and 2026. You see there more than 90% of the annual rent reviews are either market rent reviews or escalate in line with inflation.
As a result of that higher inflation in the period, we've recorded an average increase of 6.45% with a relatively low exposure to market rent reviews in financial year 23 of 2.2%, which relates to seven early learning centers. Four of those reviews are capped and collared at between no increase and a 7.5% increase, and three are collared but have no cap on the increase. All of the market rent reviews for financial year 23 are in negotiation currently, and we anticipate in aggregate a result that will be at least as high as prevailing inflation. Looking forward, the rental escalation profile is relatively consistent over the next three years, albeit with more market reviews.
All of those reviews have a collar at the passing rent, and approximately half are capped at 7.5%, while the other half have no cap on increase. Moving to page 15, as we noted in June, the environment for development and construction was challenging throughout financial year 2022 with heightened cost inflation, extreme weather events, and higher finance costs for contractors. Pleasingly, we've seen some moderation in construction cost escalation, both in labor and materials, and reduced incidents of extreme weather events in the first half of financial year 2023. We proudly completed seven early learning center projects in the half, which were located in Victoria, Queensland, New South Wales, and South Australia. The total cost of these projects was AUD 44.3 million and provided net initial yield on all costs, including transaction costs, of 5.9%.
Each center was designed to suit each individual tenant's operations. Each will pro- positively add to consumer choice in their respective catchments. In the absence of any material worsening in the development and construction environment, we anticipate completing up to a further five projects over the course of the second half of financial year 2023 and the balance over the course of financial year 2024. In total, our development pipeline has 15 early learning center projects that are located in Queensland, Victoria, South Australia, Western Australia, and New South Wales, with a total forecast cost of AUD 106 million, of which we have CapEx outstanding of AUD 66 million. We anticipate that the average initial yield on all costs, including transaction costs for these developments, will be 5.4%.
Arena has contractual protection from cost and time variability as every project is being undertaken on a fund through basis. We've secured agreement for leases with existing tenant partners on every project in our standard 20-year triple net lease format. Arena is a partner of choice in the development of early learning centers in Australia. By value, more than a third of our early learning center portfolio has been developed by us since listing in 2013. In that time, we've completed 74 development projects with 16 tenant partners across all states and territories, except the ACT. These projects have increased access to early learning services for over 8,000 children in local communities and provided our investors access to in excess of AUD 26 million of current annual rent. Moving on to the next slide.
As has been well-publicized, the federal government has now legislated a reduction in the cost of childcare for Australian families by lifting the maximum Child Care Subsidy rate to 90% for the first child in care and maintaining the 95% subsidization rate for any subsequent child in care attending a service at the same time. The government's also reduced the rate that the Child Care Subsidy tapers and to increase the maximum family income threshold for eligibility from AUD 354,000 to AUD 530,000. Its additional investment of AUD 5 billion is designed to provide a significant economic and social return to Australia, including increased workforce participation, better economic security, particularly for women, and improving the lifelong learning prospects of children, in turn creating better socially and emotionally well-adjusted communities and a more qualified and productive workforce for future generations.
The underlying demand for early learning services increased in the period and the additional federal government subsidization, which will take effect in July 2023, is designed to further increase demand for early learning services. The federal government has also directed the ACCC to conduct an inquiry into the market for the supply of early learning services, particularly in relation to costs and availability of labor, the use of land and related costs, finance and administrative costs, regulatory compliance costs, and the cost of consumables. A wide consultation program has been proposed and a final report is due in December 2023. Labor availability and cost remains a primary challenge for early learning operators, albeit there has been some early signs of a reduction in the need for casual labor, which is more expensive, amongst some service providers.
Despite that, it remains, like many industries across Australia, that the current labor pool is too low and as a result, it is our expectation that labor costs will continue to increase in the short term, which added with increases across consumablesAccommodation costs and finance and administrative costs will lead to further increases in daily fees. In relation to supply, there was a net increase of 240 centers across Australia in calendar year 2022, an increase of 2.8% in the twelve-month period, which is lower than we had anticipated. Despite the strong underlying demand for the early learning services, we anticipate that new supply is likely to be further constrained due to higher development costs and higher rates of return required to attract capital. Moving on to the next slide.
In that context of the early learning operating environment, Arena's portfolio is in a strong position. We've collected 100% of contracted rent during the first half. Every one of our early learning centers is open and trading. Every one of those centers provides us business operating data. That data provides us important information that assists asset management and capital allocation decisions, as well as providing insight to the general health of the sector. As we have in previous reporting periods, we've included operating data up to the quarter prior. That data provides underlying operator occupancy is higher than any prior corresponding period in the last six years. It's been supported by tight employment market, government funding, and low new supply.
Average daily fees have increased to AUD 127 per day, which remains significantly below the government's benchmark fee of AUD 140 per day, which is indexed to inflation. Our average rent per place across the portfolio has increased to just under AUD 2,800 per place, and particularly given that we've developed more than a third of the portfolio over the last 10 years, remains highly affordable in our view. Despite strong rent increases across the portfolio, rent affordability as measured against gross revenue remains under 11%. Moving on to healthcare on the next slide. We continue to have a positive outlook on the increased community need for healthcare real estate, a view which is supported by Australia's aging population, a higher prevalence of chronic illness, as well as improvements in science and new healthcare service offerings.
Relative to other real estate sectors, healthcare real estate continues to be favored by private and institutional investors, perhaps to a level currently that does not reflect the pressures on some healthcare business operating margins, nor increases more broadly in real estate discount rates. In this environment, we've contracted the sale of two healthcare properties at a modest premium to June book value. Whilst both properties have a strong tenant and a relatively long lease, our capital allocation screening provided that a divestment in the current market at the rates achieved was warranted due to the relatively high rent as compared to other local real estate options. For example, converting depressed suburban office buildings and competition to our offering, and importantly, in the current environment, our ability to recycle sale proceeds into projects that better meet our investment objective over a longer time period.
The aggregate passing yield on divestment was under 4.4%, which crystallized an aggregate three-fold total return on those properties in the 10 years since listing. Whilst these sales reduce our healthcare exposure in the short term, we continue to be attracted to the right new opportunities and aspire to grow as part of the portfolio. We're doing it in our usual disciplined way, looking for quality over the long term that will support our investment objective, not short-term scale. Moving on to the outlook, today we're reaffirming full-year distribution guidance for financial year 2023 of AUD 0.168 per security, an increase of 5% on financial year 2022. Portfolio is in a strong position.
Record underlying family occupancy in our early learning portfolio, strong fee growth for our tenant partners, and a further increase in demand foreseeable with additional government funding taking effect in July. 100% of our rent has been collected across the portfolio and we have a long WALE of just under 20 years with a transparent and highly predictable rental profile that has inflation protection. Future income growth will be underpinned by contracted annual rent increases as well as the impact of our financial year 2022 and financial year 2023 acquisition and development completions. Looking forward, despite the likelihood of continuing economic and geopolitical uncertainty and a clear expectation of further interest rate increases, Arena's outlook remains positive.
Early learning and healthcare services are integral to economic stability and improving community outcomes. Those themes underpin Arena's portfolio value and investment objective of providing long-term predictable distributions to our security holders with prospects for growth. We have balance sheet capacity and increased liquidity to take advantage of new opportunities that are consistent with our strategy, with gearing at 21.5% and no debt expiring until March 2026. Our experienced management team has strong industry relationships and in-house development and origination expertise that will assist us in sourcing new opportunities in the changing investment environment. In closing, I'd like to thank our team and our tenant partners for contributing to the positive portfolio and community outcomes that have been achieved in the first half of financial year 2023. That concludes the formal part of today's presentation.
I now pass you back to the operator to open up for questions. Thanks, Lucy.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up the handset to ask your question. Your first question comes from Caleb Wheatley from Macquarie Group. Please go ahead.
Good morning. Welcome, Gareth. Thank you for your time this morning. My first question is just on the ACCC inquiry. I know you touched on it in the, in the prepared remarks, but just wondering if you could provide any further commentary on high level thoughts on how that might exactly play out from a.
A property perspective. The media release they put out towards the back end of last year, particularly flagged property costs in that cost structure in addition to labor. Just wondering if you have any high level thoughts on, I guess, how that might play out from your perspective.
Thanks. Thanks, Caleb. Certainly this is sort of being proposed as part of the Labor election platform. The terms of reference have been released. That's pretty fulsome. It is a broad review. I can say it's not a competition issue. ACCC are running that inquiry. There's 8,700 services and 3,500 operators across the country. I don't think it's a competition issue. This is more about funding efficiency and justifying that further government investment. In regards, obviously, our value proposition in that context, you know, we've got rents of AUD 2,800 per place. I think that's far below where economically you would be able to provide those at the moment.
We've got 72 hectares of land. If you divide it simply our portfolio value into that, it's a pretty good result. It's sort of AUD 2,100 a meter. Feeling comfortable about the tangible value, feeling very comfortable about the social impact and our ability to provide, you know, efficient funding into facilitating early learning services. Beyond that, mate, it's, you know, there's a wide consultation process. The larger operators are involved in that January, February. We expect to have better color on what's happening over the next few months.
Great. Just a follow-up to that, in terms of the discussions you've had with regulators or your tenants in terms of that rental escalation and maybe the types of control that might come through as a result. I think it was one of your tenants, G8, in the press saying that they were pushing through price increases off the back of labor and property costs both going up, which seems to play into that ACCC argument. Have you had any discussions with tenants in terms of how they're feeling on sustainability of rents they're paying?
Yes, we do. Sort of, constantly in sort of discussion, and you can sort of see it in the numbers. The profitability of tenants has actually remained quite healthy through the period. You know, at a, at an EBITDAR, 38% split means that we're sort of, you know, strong profitability amongst tenants. What you are seeing at the moment and what the government will be focused on is the daily fee growth is running ahead of inflation based on our numbers at the moment. I think that's likely to continue. I think the big players behind that, you know, as we mentioned, will be labor, but there's no question that accommodation costs, consumable as well as regulatory costs are going up, Caleb.
I think, you know, our part in that is, you know, sits behind labor. Again, I think from a sort of market efficiency, perspective, you know, we've got a strong value proposition.
Okay. Thank you for that, Rob. My second question is just around the outlook for development. Particularly, yield on cost has come down 50 basis points over the past year or so. Just wondering how your incremental discussions are now going with the tenant partners, and the forward-looking or any expectations on what that yield on cost might begin to do over the next six to 12 months, given obviously some rising interest expenses, as you mentioned, moderation in cost.
Yeah. Yeah. Yeah, there's no doubt there's a shift in capitals. We all know, Caleb. We're sort of using that. you know, direct market has been, you know, pretty stubborn. Land input costs at this stage haven't reduced materially. You know, we've still got construction costs that are not dissimilar from where we were sort of, you know, six or 12 months ago. What we are seeing is market rents starting to move. I think that, you know, in combination with the expectation of land costs will come down, and higher rents would still be sustainable for tenant partners. That's where we'll start seeing yields come out. you know, we were doing deals early five's.
We're now sort of, you know, shooting with opportunities, we've got six at least in front of them, and higher. I think that's where the market needs to get to, and I think it will in the short term.
Fantastic. Final one for me, just on development volumes as well. It looks like the total pipeline, has come down to about 140 to that 110 or so at the moment. Are your tenants still looking to expand their footprint? Should we expect to see that potentially recover as well over time?
There's no, there's no question that there's, you know, from a business network expansion, there's, you know, and as a result, the underlying demand from families. There's definitely a want for business expansion. There's, I guess, a wait and see the big gap between ask and, you know, the bid and the ask on real estate at the moment, which is, you know, we're sort of taking advantage of. I guess putting a little time into some of our origination programs. We've got a development pipeline that we're focused on. We've got plenty on the desk, just pushing pricing a little bit at the moment, Caleb.
Great. Thank you for your time this morning.
Thanks.
Your next question comes from Lou Pirenc from Jarden, sorry. Please go ahead.
Thank you. Good afternoon. Two quick questions from me. Can you talk about the maintenance CapEx, particularly with relation to the solar that you've committed to in some of your lease negotiations? What are they tracking at, and would you expect that to be going forward?
Lou, very, very, very, very little. We've now sort of got 81%. We've got a couple of leg out tenants that we'll get a hold of. You know, we've spent in the order of AUD 6 million to get to that point. Most of that's been rentalized or we've taken a value by extending leases. That's been a very efficient program from a cap maintenance. Going forward, there's very little, you know, the triple net leases are very predictable in that regard.
Great. Just in terms of, and you mentioned it in terms of finding development land, is there any shift in, you know, making it easy to find acquisition opportunities in this environment where you may have some peers with less, you know?
Strong balance sheets, or is it still very much is your extension still very much development led?
I think we certainly feel as though we're well-positioned to exploit any price dislocation. As I mentioned, the direct market's been a little stubborn, to be quite honest. Deal transaction's down in early learning and healthcare. I think that will bounce back up, and I think we'll see, you know, yields pushing out a little more. That will become interesting for the business. As to input land costs, you know, everything all the ingredients are there for that to come off. You know, it's harder to get, you know, anything residential, commercial to childcare up as a result of the cost of capital.
You know, we're just not seeing that at the moment, Lou, but our expectation is that we will and, you know, frankly, with no super rush to do it. We'd like to see the markets sort of settle down in the direct market to better reflect what's happening with changes in cost of capital.
Great. Thank you.
Sure.
Your next question comes from Murray Connellan from Nomura Australia. Please go ahead.
Afternoon, Rob. Afternoon, Gareth. Could you please unpack the like-for-like income growth and your expectations there near term in a bit more detail? Just mindful that the impact of CPI bumps can be noisy given geographical spread and timing lag from inflation prints versus when the rent reviews actually kick in. What are you expecting in terms of income growth over, you know, perhaps the next six-12 months? We've had inflation prints nationally in the last six months of 7%-8%. Would you expect to be able to realize those near term, or is that sort of an FY 2024 story?
I think crystal balling it's probably a little hard from this point. You're right in regards to disparity, I guess, Murray. I guess to break that down, our lease escalations that have CPI reviews are state-based. They're, you know, if you looked at our weighting, which is the high eastern seaboard, you know, beyond that, I'd probably. I should add, you know, we're sort of getting good market rent reviews that are sort of, you know, at least prevailing inflation as well. Feeling good about the market rent reviews, which we've got higher prevalence of in the next couple of years, and some work to do underway at the moment with those seven that we mentioned.
The fixed reviews I'm sort of helping you out by giving you what the knowns are. The fixed reviews sort of sit at around 3%. You know, that small exposure we've got to fixed reviews is three, and then we'll be at the hands of, you know, what inflation looks like on a state-by-state basis, you know, which has obviously supported the 6.5% increase, you know, across the board.
Fair enough. Thanks for that. Then I just wanted to get your thoughts on, you know, you obviously mentioned the direct market having been stubborn, to date. You know, obviously, still plenty of capacity within your balance sheet, as you pointed out. Would you expect to see the potential for opportunities for deployment into the direct market as cap rates increase? Is the focus probably still gonna be on the development side?
I think both, Murray. We'll be certainly looking out. One of the things that's held us back on buying in-place income, so existing assets is they don't come with our lease. You know, we're quite careful about the provisions that sit in our leases. Where we're working with existing tenant partners to buy going concerns, so we'll buy the real estate, they'll buy the business, you know, it gives us the opportunity to put a new lease in place in standard format. We think there's likely to be good business there with, you know, again, underlying network expansion going on. There's, you know, there's prospect of, you know, business transactions supporting, you know, real estate opportunities.
You know, from a development perspective, you know, I think we'd like to see some of those land input costs coming out a little bit, before we sort of, you know, go, you know, put the foot down. We are in a nice position where, you know, we have got capital to deploy, so we've got good capacity. We've got, you know, good resource bandwidth and, you know, looking forward to what hopefully will be good opportunities in the future.
That's great. Thanks, Rob.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from James Druce from CLSA. Please go ahead.
Yeah. Good morning, Rob. Could you just talk to some of the transaction evidence that you're seeing at the moment? Talk to maybe buyer demand. On slide 30 where you sort of show some of the data, I was curious if Sydney's a bit of an aberration in terms of continuing to tighten a bit.
Yeah. Yeah. No, it's a good question. Demand as far as transaction goes is down to levels that are actually below 2020, James. I think we had something like 34 transactions in the half. The average yield for those, it was a move across the industry of moving what I'd call secondary stock. That might have inflated the yield out a little bit further than what the face of it says. The 5.2% was the average transaction value for those 34 centers. We are seeing, if you looked at page 30, you can sort of see that tick up in secondary yields across the eastern seaboard there.
You know, that's that light blue parabolic piece of the graph at the top there, that's ticking up. There's sort of no surprises in that. There's sort of, I guess a want to hang on to the quality assets that are performing well. You know, our expectation going forward is that that gap between bid and ask will slowly reduce as it always does, and we'll start seeing, you know, the yields push out a little further. You know, the game that we've always played is a focus on sustainability of rents and what the growth of that looks like over time. You know, there's still good opportunities that are sitting in there.
You just saw across our portfolio, you know, we had sort of 14 basis points expansion across the whole portfolio, and that is sort of mitigated by rent growth. You know, I think it'd be more of the same. I think we'll see yields pushing out a bit further. I think that the real story will be around income and income growth.
Yeah, okay, that makes sense. I was thinking your comments or your prepared remarks, you're talking about the actual government subsidy starting to be paid from June 2023, I think you said. What are your expectations about what happens to day rates? Can you just talk about the current outlook for supply, which, you know, feels a bit?
Yeah.
Wobbly.
Supply is in check at the moment. We're a little surprised that the, you know, 2.8% increase is significantly lower than sort of, you know, sort of pre-COVID times. It's sort of running at sort of 4%. I guess what's interesting is that the mix between supply and demand is showing that fee growth is happening. You know that, if you like, demand as an aggregate is outstripping aggregate supply at the moment. I think that the subsidization, the extra subsidization from the government is designed for higher demand. You know, I think the risk with that probably sits around the labor force.
You know, we've kind of got a few good straws that, you know, casual, you know, the, the prevalence or the very high prevalence of casual labor has actually come off a little bit in the last little while. That's good. You add more demand into the system, that's gonna put labor under pressure once again.
Yeah, that makes sense. One more, if I may. Anything to call out in terms of upside, downside risks, to guidance for the year?
Obviously, there's two, I guess, this year, in terms of guidance. I guess the general comment, we used to have aggressive assumptions on things. As you said, back in August, we're gonna be trying to be relatively prudent on guidance because of the variables on interest rates and inflation. They really are the two key variables. I think whether, you know, the view on whether the RBA is going to continue to raise, I guess the short-term expectation is yes. I think the large amount of that those raises have already been reflected in the numbers for FY 2023 in terms of our weighted average cost of debt. We don't see that changing an awful lot over the second half of FY 2023.
Another thing to note there is obviously, when it comes to the weighted average cost of debt, there's both the rate and the volume component to that. As we draw down additional funds to fund the developments over the second half of the year, that spreads the fixed cost of the facility. That actually has a, I guess a, the effect of reducing your weighted average cost of debt. Then obviously inflation, which we assumed 6% flat for the year. We are currently running a little bit over 7%. There is more income there, but as I've said in my remarks, you know, the full effect of that really isn't felt until FY 2024. At this point, not seeing, I guess, a tremendous amount of variability from here.
Yeah. Looks pretty solid. Okay. Thank you.
No problems.
Your next question comes from Simon Chan from Morgan Stanley. Please go ahead.
Hi. Good morning, guys. I just got a follow-up to that previous guy's question. You guys had AUD 0.084 in the first half. Your full year goes to AUD 0.168, which essentially implies flat half on half. However, you have a stack of development which you've completed that'll be coming online in the second half, a couple of acquisitions at yields stronger than the 4.4% that you've divested. I'm just struggling to see why second half will be flat on first half.
I mean, you're looking at, I guess the full year effect of the rapid increase in floating rates at the beginning of the year flowing through into the second half, as well as the asset sales, which are, you know, at the beginning of this, second half as well. Whilst there's not a big margin between what we sold those assets around at 4.4% versus the cost of debt as we repay that debt, there's still a fixed cost of the debt associated with that. It's slightly dilutive, but it does enable us to obviously reinvest. We obviously we're looking at currently, you know, six, low sixes for new projects compared to that 4.4%.
Okay. That's fine, guys. Thanks.
Your next question comes from Vicky Mount, a private investor. Please go ahead.
Hi. I'm sorry if this question's sort of been answered or asked and answered before. I'm just gonna give it to you as I've wrote it down. I said I have concerns that you say you're building more early learning centers in Victoria, given Daniel Andrews' plan is to make kinder free and build 50 early learning centers. Given our portfolio is primarily early learning childcare based, 25% of which is currently in Victoria, would it be prudent to see where this initiative is heading before investing in building more early learning centers in Victoria, which will be in direct competition to the tenants who rent the early learning buildings in our fund? Would it be wiser to slant more towards healthcare in Victoria?
That's a great question. Thanks, Vicky. We look at, you know, we sort of map 1,300 catchments across the country. I guess we sort of earlier on state, but we sort of go right through and have a look at just what is happening on, you know, existing areas in which we invest into and have got investors' capital invested into as well as, you know, future prospects. You're right, the state governments, you know, two in particular, New South Wales and Victoria, sort of looked at adding to supply, particularly around free kindergarten.
Oh, okay.
The Andrews Government, I think it was Dan Fols, you know, some time ago promised further kindergarten services for which the Government's looking at, you know, building those as well. We've kept an eye on it. We've actually had a look at a couple of the areas in which those, you know, it's public record of where they're sort of focused on. I don't think they've actually secured the sites at this stage. We're well aware of them and, you know, we'll be adding those prospects into our sort of supply and demand for any future capital allocations and indeed looking at, you know, if there's divestment opportunities that might sort of flow from there as well.
Mm-hmm.
Sort of moving to healthcare, you know, strategically, yes, you know, we'd love to be doing more healthcare. You know, the macro community need for healthcare services is very significant. As you would have picked up, we sold two properties that were in the healthcare space. You know, that was more about real estate discipline. You know, rent at one of the properties was over AUD 1,100 a meter. And, you know, with pressure on some healthcare business margins at the moment, we just think that there's better risk-adjusted returns moving those proceeds back into our development pipeline. I can assure you, the team here are very interested in doing more in the healthcare space.
We'd just like to see some of the exuberance in real estate pricing to come out before we do that.
Okay. Thank you. I just thought I'd ask that question. It probably has been asked by other people in different ways. I just wanted to be more clear about it.
Appreciate the engagement. Thanks, Vicky.
Thank you.
There are no further questions at this time. I will now hand back to Mr. de Vos for closing remarks. Please go ahead.
Thanks everyone for your attendance on the call today. That obviously concludes today's investor briefing. Please don't hesitate to reach out to Gareth Winter or myself. Look forward to seeing a number of you over the next couple of days. Thanks very much. Bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.