• Regulatory risks.
• Deteriorating property fundamentals.
• Concentration tenancy risk, especially around Goodstart Early Learning.
• Sentiment towards REITs as bond proxies stocks impacted by expected cash rate hikes.
• Oversupply of childcare centres
• Slow wage growth and on the back of rising costs of living. (however, increased funding at mid-lower end of the income families may provide relief.

Figure 1: : Segment split by carrying value

Source: Company

• Property portfolio performance continues to stand out.

Key highlights: 1. annual income of $61.2m, was up +5.0%. 2. Value of properties grew +14.7% to $984.2m. 3. Weighted average lease expiry (WALE) grew to 9.9 years (from 9.1 years) and the portfolio is 100% occupied. 4. 34 market reviews resulted in a +4.7% increase overall. 5. Over FY18, 62 properties out of the 355 properties in the portfolio were revalued resulting in an uplift of ~$56.7. 6. FET disposed of 19 properties providing total gross proceeds of $56.7m at an average yield of 6.3% and a +8.9% premium to carrying values as at the contracted date.

• Development pipeline remains strong. FET’s development pipeline consists of 29 sites with a forecasted completion value of A$170.3m. Upon completion (expected to be settled in FY19), management believes that they will add ~A$10.6m per annum of net rental income
• Strong industry outlook despite rising childcare fees and low wage growth. While rising costs of living and low wage growth may hinder demand and hence profitability, the government has issued a new funding package to mitigate such issues. The CCS package (started in July 2018) will reduce out of pocket expenses to parents who may be eligible based upon income levels and utilisation. Further, increasing population and job growth has fueled the construction of new childcare centres, adding to a historically undersupplied market, and in FET’s management’s view, in line with demand. Management has also indicated that concerns about overall oversupply are overblown, as the tightening criteria for debt funding and a general reduction in expansion plans by operators will moderate growth in supply. Further, it is likely that any added pressures from oversupply will likely lead to delay in delivery, deferment or cancellation of numerous projects (over 5 years, <50% of sites that have received development approval for childcare have been constructed).
• Solid balance sheet. Whilst FET’s gearing increased to 29.1% (from 27.7%), FET still retains significant headroom, with gearing level well below debt covenants and below its targeted long-term rate of 30-40%. FET’s cost of debt (all-in) has decreased from 4.1% to 4.5% over the previous period and weighted average debt maturity extended from 2.4 to 5.0 years. FET has $47m in debt capacity to fund the development pipeline.
• Strong FY19 outlook. Management expects completion of 8 developments during FY19, 14 market rent reviews and 11 option renewals due. On the analyst call, management guided to FY19 distributions forecast of 16.0 CPU (up +6.0% pcp).