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Folkestone Education Trust FY17 Report


Summary

The Folkestone Education Trust released its annual results last week with continued a strong performance driven by a sound expansion and management strategy. FET now holds 389 early learning centres, and 17 developments generating an average income yield of 6.7% .

The Childcare industry has been a growing industry, necessary to support labour supply in an economy that will see declining workforce participation as baby boomers retire. As a result Childcare packages are heavily subsidised by the Federal Government. FET is a landlord and holds long term leases to a range of Childcare operators. The average lease expiry of the portfolio is 9.1 years.

NTA for the trust was up 7.0% to $2.51 per unit, driven by 60bps improvement in yields to an average of 6.7%.

The Fund is trading at approximately $2.73 per security, which is a premium to NTA of around 8%.

Funds from Operations

FET delivered a statutory profit of $122.3M up 14.5% from FY16. Its Earning per Unit was 15.2 cpu (up 8.6%) and its distribution per unit was 14.2 cpu (up 6.0%). FET has delivered an 8.6% growth in distributions per unit since 2011.

Growth in DPU of 9.6% was largely been driven by income growth of 6.9%, comprising new income from acquisitions in addition to rental growth across the existing portfolio of 3.1%. Property expenses were contained to 6.2% growth on pcp.

Balance Sheet

The Balance Sheet showed a positive variation of $97.9M due predominantly to $81M in valuation gains (Fair Value Adjustments), but offset by higher borrowings ($-49M).

FET increased gearing during the last financial year from 26.6% to 27.7% and holds a weighted average debt expiry of 3.5 years and an average cost of debt of 4.2%.

NTA per unit increased 17.3% to $2.51.

Portfolio

As mentioned, FET holds 389 early learning centres, and 17 developments in the fund. FET is heavily weighted to QLD with 30% of the assets followed by NSW (22%) and VIC (20%). Acquisitions and developments will seek to focus on NSW and VIC due to the strong population and economic growth prospects of the region. The majority of the leases in the portfolio are tripple net leases which limits FET exposure to increases in outgoings. Across the portfolio, FET has 28 tenants with a 64% exposure to Goodstart Early Learning.

Folkestone's approach to developing its own assets ensures that it will continue to build its portfolio in a very cost efficient manner. FET currently has 15 sites with DA or under development worth $81M with further acquisitions earmarked for FY18. FET yield on cost from development is 7.4% which is accretive to the earnings of the fund.

Key Risks

  • Potential for Child Care operator to see margins squeezed by higher staffing costs and relatively fixed incomes. This could impact the viability of existing operators.

  • Potential for changes in government rebates could impact on viability of operators.

  • Potential for physical improvements in assets to meet building regulations

  • Potential for near term debt expiries to increase cost of debt

  • Potential for valuations to decline if market yields soften.

Key Opportunities

  • Continued demand for new centres in growth areas

Outlook

FET has provided a distribution guidance for FY18 of 15.1cpu, an increase of 6.3%

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