Interim Results
Unite Group PLC
15 September 2004
Date: 15 September 2004
On behalf of: The UNITE Group plc ('UNITE')
Embargoed until: 0700hrs
The UNITE Group plc
Interim Results for the six months ended 30 June 2004
Highlights
• Net assets of £343 million (316 pence per share) up from £312 million (290 pence per + 10%
share) as at 30 June 2003.
• Profit before tax of £0.4 million (June 2003: loss of £(3.5) million) driven by +£3.9m
steadily improving margins, the benefits of economies of scale and reduced one-off costs.
• Strong growth in rental income to £32.9 million (June 2003: £23.3 million). +41%
• 5,104 beds completing in 2004, bringing total completed portfolio to 26,319 (2003: +24%
21,215).
• Profit on the investment portfolio after interest and before tax of £4.3 million (June +23%
2003: £3.5 million).
• 92.2% of available beds booked for the forthcoming academic year 2004/2005 (September
2003: 92.5%).
• Solid progress in implementing the financing strategy, with new bank facilities agreed
and new joint venture formed.
• Disposal of nominations portfolio progressing well.
Commenting on the Group's interim results, Geoffrey Maddrell, Chairman of The
UNITE Group plc, said:
'We have a clear strategy to lead the development of a new market sector in
large scale student accommodation. The results of the first half of 2004 have
been important in further validating this strategy and our business model to
deliver it.
'With a strong financial performance in the first half and clear evidence of our
asset class capturing greater investor interest, we have every confidence in
being able to deliver continued growth in shareholder value.'
An analysts' presentation, by invitation only, will be held at 0930hrs on 15
September 2004 . It will be held at Tower 42, 25 Old Broad Street, London, EC2N
1HQ.
Enquiries:
The UNITE Group plc
Nicholas Porter, Chief Executive Officer Tel: 020 7902 5055
Mark Allan, Group Finance Director
Redleaf Communications Ltd Tel: 020 7955 1410
Emma Kane/James White Mob: 07876 338339
Chairman's Statement
Overview
The first half of 2004 has seen UNITE continue its record of growth. Net asset
value per share increased by 4.6% during the six months, compared to 1.4% growth
for the same period in 2003 and 5.6% for the full year 2003. Portfolio revenues
grew by 41% year on year. For the first time the Group has commissioned a full
external portfolio revaluation at the half-year stage, which has seen initial
yields on our completed portfolio harden marginally to an average of 6.59% at
the period end (31 December 2003: 6.61%).
Since the Group last raised new equity in 2002, the business has continued to
develop new accommodation at a steady rate, opening over 15,000 new bed spaces
by the start of the 2004/05 academic year funded entirely from the Group's
internal resources. In the process the Group has started to achieve the
financial benefits of scale. As a result of continually improving operating
margins (65% versus 63% for the first six months of 2003), the larger portfolio
and reduced one-off costs, the Group is reporting a profit. These continued
improvements in financial performance and proven scalability are an important
validation of our business model, upon which we will continue to build.
Our market fundamentals are stronger than ever. Student numbers continue to
grow, with university acceptances for the 2004/05 academic year up 3.4%.
Importantly, the continuing appeal of UK higher education to foreign students,
coupled with both a decline in foreign demand for US-based study and the
enlargement of the European Union, has seen the number of overseas students
studying in the UK grow strongly, up 12% in 2004. We anticipate this trend
continuing in the medium term.
There is little doubt that the perception of higher overall study costs amongst
students is driving a stronger consumer attitude in the market. UNITE has been
addressing this for some time, with the introduction in 2004/05 of several new
initiatives, such as full broadband connectivity and improved common facilities
in many of our buildings. The importance of aligning our offering with the
aspirations of our customers is increasing and further initiatives are already
being planned for the future.
During 2004 both property investment and debt markets have been strong and our
asset class is capturing the interest of an increasing number of investors,
reflecting greater recognition of a non-cyclical, affordable residential
investment opportunity. Furthermore, our clear focus on urban regeneration is
helping to keep the pipeline of new development opportunities buoyant.
Operations
Portfolio performance
Portfolio performance in the first half of 2004 was characterised by strong
revenue growth (driven primarily by the larger portfolio) and improving margins.
At 65.3%, the operating margin across the portfolio is 2.5 percentage points
higher than the same period in 2003 and a full 12 percentage points higher than
the first half of 2002. This contributed to a year on year increase in
portfolio profit (portfolio operating profit less the associated interest
charge) of 23% to £4.3 million.
The Group has also succeeded in driving 50-plus week tenancies, thereby
improving occupancy outside of the academic year. The number of these longer
tenancies for 2004/05 stands at 3,500 up from 1,100 in 2003/04, although the
positive financial impact of this increase will not be felt until the second
half of 2004. Overall, reservations for the 2004/05 academic year had been
received for 92.2% of the portfolio as at 10th September, broadly in line with
prior year performance (2003: 92.5%).
Development activity
5,104 beds are to be completed this year, of which 4,674 will be occupied in the
autumn and 430 have been reserved for 2005 occupation. Our pipeline of future
growth opportunities remains encouraging with at least 4,850 beds opening for
2005/06; 4,305 of these are already on site and the remainder are scheduled to
commence build during September.
A further 3,244 beds are already contracted for 2006/07, with a total of 2,188
new bed spaces having been secured in the first half.
Modular construction and partnering
Build cost inflation continues to put pressure on development margins. Together
with our partner contractors, we intend to redouble our efforts to maintain and
manage these costs down as far as possible. Moving into our third year with
partner contractors, we are seeing more benefits of collaboration, although much
greater opportunities remain. We have refined our partnering agreements and
four contractors have now had the opportunity of working with our off-site
modular products. 1,227 modules were produced in the first half, in line with
plan and our 2,500 full year target. At these volumes the factory overhead is
more effectively absorbed and modular construction becomes financially
competitive with traditional construction methods.
It is acknowledged that the process of off-site manufacture and modular
construction will play an integral role across the whole industry in helping to
manage the challenge of build cost inflation. Our own investment in a leading
edge production facility is supporting our objectives of controlling cost, and
of improving quality and delivery time. Following the commissioning of the
factory in 2002 and ramp up of production in 2003, the Manufacturing division is
beginning to require much less support from Group and is now operating as an
autonomous unit.
People
In the reporting period, excellent progress has been made in enabling our people
to experience challenging, meaningful and rewarding careers at UNITE. Notably,
we have introduced personal development programmes to support career success at
UNITE. The Accommodation Services division has also made progress with its
national training framework, particularly emphasising customer service skills.
Meanwhile, the Development division teams have been undertaking a year-long
process of personal and professional development to ensure functional
excellence, innovation and collaboration.
Our clear commitment to people development is showing demonstrable results. In
the first half of the year, overall employee satisfaction stood at 64% (ahead of
the MORI norm by 4%).
Looking ahead, UNITE continues to take its people development very seriously.
We know that employee satisfaction has a strong correlation with customer
loyalty and brand strength, which in turn signify a healthy business with the
ability to deliver increased shareholder value.
Financing
At the time of the preliminary announcement of our 2003 results, we outlined an
important evolution in our financing strategy based around more flexible debt
funding and a programme of asset disposals and joint ventures to generate equity
capital. Against a background of reasonably buoyant property investment and
banking markets, I am pleased to report significant progress on all fronts:
• In April, the Group announced its first student village joint venture
with Lehman Brothers, initially to fund the development and operation of The
Forge, a £45 million 1,162-bed modular development in Sheffield. Securing such
an investment has helped validate the financial viability of our developments
and, in particular, the financial merits of modular construction. It also
demonstrates the clearly emerging investor interest in our sector. Joint
venture initiatives such as this will constitute an ongoing element of our
financing, provided that the joint venture parameters are clearly defined, there
is no conflict with the Group's broader operations, and the financial impact is
not dilutive to earnings or net asset value.
• More recently, the Group has commenced marketing and has received
offers for the sale of a portfolio of 4 student properties comprising 1,246
beds, all subject to nominations agreements. We have been encouraged by the
response from prospective institutional and leveraged purchasers and have now
entered due diligence with a preferred bidder.
• In July, the Group agreed terms with one of its major lenders to
underwrite £300 million of additional debt facilities, of which £200 million
will subsequently be refinanced by the lender through a bond issue. The new
facility will be for a term of 7 years and the increased borrowing capacity
extends the Group's refinancing horizon into the third quarter of 2006 from July
2005.
During the period the Group's gearing increased to 199% from 182% at the
previous year end, in line with expectations and reflecting the cost of funding
the continuing development pipeline. Importantly, despite this anticipated
increase in borrowing, portfolio interest cover has been maintained at an
acceptable level (1.25x vs 1.32x for the same period in 2003 and 1.15x for the
full year 2003) as underlying portfolio revenues have continued to grow.
In an environment of modestly rising interest rates, the Group's hedging
strategy continues to play an important role. At 30 June 94% of our investment
borrowing was either at fixed rates or hedged using interest rate swaps and our
total borrowings had an average unexpired life of 6.7 years. In spite of the
general upward movement in interest rates, our average cost of investment
borrowing remained at 6.3% for the period, the same as for financial year 2003.
Dividend
In line with our stated policy, your Board recommends that the interim dividend
be maintained at 0.83 pence per share (2003: 0.83 pence). The dividend becomes
payable on 12 November to shareholders on the register at 15 October.
Outlook
We have a clear strategy, to lead the development of a new market sector in
large scale student accommodation, as well as a unique model for its execution.
The results of the first half of 2004 have been important in further validating
both our strategy and our model, notably:
• in confirming the benefits of scale supported by the investment in
systems;
• in confirming the potential for addressing build cost inflation
through off-site manufacturing combined with a partnership approach to
construction;
• in providing external evidence to support our portfolio valuations;
and
• in confirming the achievement of growth without raising new equity
from shareholders.
We are putting greater focus on achieving higher levels of employee and customer
satisfaction. Approximately 26,000 students will have moved into our
accommodation by the start of the new academic year and we intend to build our
brand step-by-step through increasing levels of customer service.
With the results of the commitments and investments lying behind our strategy
becoming visible and with clear evidence of our asset class capturing greater
investor interest, we have every confidence in being able deliver increasing
shareholder value accordingly.
Consolidated profit and loss account
for the six months to 30 June 2004
Unaudited Unaudited Audited
6 months to 6 months to Year to
30 June 2004 30 June 2003 31 Dec 2003
Note £'000 £'000 £'000
Group turnover 32,918 23,300 48,055
Cost of sales (7,591) (5,447) (12,848)
Gross profit 25,327 17,853 35,207
Administrative expenses (7,339) (8,618) (15,110)
Goodwill amortisation (75) (1,375) (5,570)
Group operating profit 17,913 7,860 14,527
Loss on disposal of investment properties 2 (394) (268) (125)
Profit on ordinary activities before interest and 2 17,519 7,592 14,402
taxation
Net interest payable and similar charges 3 (17,167) (11,096) (25,190)
Profit/(Loss) on ordinary activities before taxation
and
goodwill amortisation 427 (2,129) (5,218)
Profit/(Loss) on ordinary activities before taxation 352 (3,504) (10,788)
Taxation 4 - - -
Profit/(Loss) on ordinary activities after taxation 352 (3,504) (10,788)
Dividends paid and proposed (900) (894) (2,702)
Retained loss for the period (548) (4,398) (13,490)
Profit/(Loss) per share 5
Basic 0.3p (3.3)p (10.0)p
Excluding goodwill amortisation 0.4p (2.0)p (4.8)p
Diluted 0.3p (3.3)p (10.0)p
Statement of total recognised gains and losses
for the six months to 30 June 2004
Unaudited Unaudited Audited
6 months to 6 months to Year to
30 June 2004 30 June 2003 31 Dec 2003
£'000 £'000 £'000
Profit/(Loss) for the financial period 352 (3,504) (10,788)
Unrealised surplus on revaluation of properties 15,099 8,282 31,308
Unrealised surplus on revaluation of joint venture 1,125 - -
Total recognised gains and losses 16,576 4,778 20,520
Consolidated balance sheet
at 30 June 2004
Unaudited Unaudited Audited
30 June 2004 30 June 2003 31 Dec 2003
Note £'000 £'000 £'000
Fixed assets
Intangible assets 5,065 9,335 5,140
Tangible assets
Investment and development properties 6 1,048,462 815,625 948,792
Other fixed assets 19,062 21,666 19,726
1,067,524 837,291 968,518
Joint venture undertaking
Share of gross assets 4,546 - -
Share of gross liabilities (3,421) - -
1,125 - -
1,073,714 846,626 973,658
Current assets
Stock and work in progress 2,202 1,836 2,769
Debtors 24,388 16,816 20,072
Cash at bank and in hand 23,169 7,109 24,980
49,759 25,761 47,821
Creditors: amounts falling due within one year 7 (228,610) (199,205) (183,487)
Net current liabilities (178,851) (173,444) (135,666)
Total assets less current liabilities 894,863 673,182 837,992
Creditors: amounts falling due after more than one year 8 (552,054) (361,180) (511,200)
Provisions for liabilities and charges - - -
Net assets 342,809 312,002 326,792
Capital and Reserves
Called up share capital 27,116 26,901 27,054
Share premium account 137,215 136,233 136,936
Merger reserve 40,177 40,177 40,177
Revaluation reserve 177,944 142,563 161,786
Profit and loss account (39,643) (33,872) (39,161)
Equity shareholders' funds 342,809 312,002 326,792
Net asset value per share 316p 290p 302p
Consolidated cash flow statement
for the six months to 30 June 2004
Unaudited Unaudited Audited
Year to 31
6 months to 6 months to Dec 2003
30 June 2004 30 June 2003
£'000
£'000 £'000
Cash flow from operating activities 21,073 9,572 23,513
Returns on investments and servicing of finance (20,210) (15,710) (32,062)
Taxation - - -
Capital expenditure and financial investment (87,343) (72,077) (172,127)
Equity dividends paid (1,807) (1,793) (2,689)
Cash outflow before management of liquid resources and
financing (88,287) (80,008) (183,365)
Financing
Issue of shares (net of costs) 341 - 1
Increase in debt 84,114 76,859 192,766
84,455 76,859 192,767
(Decrease)/Increase in cash in the period (3,832) (3,149) 9,402
Reconciliation of net cash flow to movement in net debt
for the six months to 30 June 2004
Unaudited Unaudited Audited
6 months to 6 months to Year to
30 June 2004 30 June 2003 31 Dec 2003
£'000 £'000 £'000
(Decrease)/Increase in cash in the period (3,832) (3,149) 9,402
Cash inflows from increase in debt financing (84,114) (76,859) (192,766)
Loan stock converted into Ordinary shares - - 856
Amortisation of debt issue costs (999) (599) (1,389)
Movement in net debt in the period (88,945) (80,607) (183,897)
Net debt at beginning of the period (593,884) (409,987) (409,987)
Net debt at end of the period (682,829) (490,594) (593,884)
Note of consolidated historical cost profits and losses
for the six months to 30 June 2004
Unaudited Unaudited Audited
6 months to 6 months to Year to
30 June 2004 30 June 2003 31 Dec 2003
£'000 £'000 £'000
Reported profit/(loss) on ordinary activities before 352 (3,504) (10,788)
taxation
Realisation of property revaluation gains of previous
years 66 73 1,422
Historical cost profit/(loss) on ordinary activities
before taxation 418 (3,431) (9,366)
Historical cost loss for the year retained
after taxation and dividends (482) (4,325) (12,068)
Reconciliation of movement in shareholders' funds
for the six months to 30 June 2004
Unaudited Unaudited Audited
6 months to 6 months to Year to
30 June 2004 30 June 2003 31 Dec 2003
£'000 £'000 £'000
Profit/(Loss) attributable to ordinary shareholders 352 (3,504) (10,788)
Dividends paid and proposed (900) (894) (2,702)
(548) (4,398) (13,490)
Net surplus on revaluations 16,224 8,282 31,308
New share capital subscribed (net of issue costs) 341 - 856
Net addition to shareholders' funds 16,017 3,884 18,674
Opening equity shareholders' funds 326,792 308,118 308,118
Closing equity shareholders' funds 342,809 312,002 326,792
Notes to the Interim Report
1 Basis of preparation
The interim results of the group for the six months ended 30 June 2004
incorporate the results of the company and its subsidiary undertakings for the
period then ended. The results have been prepared on the basis of the
accounting policies adopted in the accounts of the group for the year ended 31
December 2003.
The comparative figures for the financial year ended 31 December 2003 are not
the company's statutory accounts for that financial year. Those accounts have
been reported on by the company's auditors and delivered to the registrar of
companies. The report of the auditors was unqualified and did not contain a
statement under section 237(2) or (3) of the Companies Act 1985.
2 Segmental analysis of operations
Unaudited Audited
Unaudited 6 months to Year to
6 months to 30 June 2003 31 Dec 2003
30 June 2004 £'000 £'000
£'000
Turnover
Investment activities 32,918 23,300 48,055
Development activities - - -
Corporate activities - - -
32,918 23,300 48,055
Profit before interest and tax
Investment activities 21,502 14,633 29,088
Development activities (1,272) (3,401) (4,975)
Corporate costs (2,242) (1,997) (4,016)
Loss on disposal of investment
properties (394) (268) (125)
Goodwill amortisation (75) (1,375) (5,570)
17,519 7,592 14,402
Portfolio profit is calculated as follows:-
Profit before interest and taxation on investment
activities - as above
21,502 14,633 29,088
Net interest payable (17,167) (11,096) (25,190)
4,335 3,537 3,898
The loss on disposal of investment properties in 2004 relates predominantly to
the sale of development sites.
Notes to the Interim Report continued
3 Interest
Unaudited Audited
Unaudited 6 months to Year to
6 months to 30 June 2003 31 Dec 2003
30 June 2004 £'000 £'000
£'000
Bank loans and overdrafts 13,842 7,599 15,863
Interest on other loans 9,633 9,757 19,474
23,475 17,356 35,337
Transfer to development properties (5,906) (5,926) (9,466)
17,569 11,430 25,871
Less: interest receivable (402) (334) (681)
Net interest payable 17,167 11,096 25,190
4 Taxation
There is no corporation tax or deferred taxation charge in the period due to the
availability of capital allowances and tax losses to offset both the taxable
profits accrued in the period and deferred tax assets and liabilities arising
from timing differences between the recognition of gains and losses in the
financial statements and their recognition in the tax computations.
5 Earnings per Share
Basic earnings per share has been calculated using a weighted average number of
shares of 108,332,483 (2003 interims - 107,604,772; 2003 final - 107,859,284)
and for diluted earnings per share, a weighted average number of shares of
109,544,365 (2003 interims - 107,604,772; 2003 final - 107,859,284) as follows:
Earnings EPS
After Before goodwill After goodwill Before
goodwill amortisation amortisation goodwill
amortisation amortisation
£'000 £'000 pence pence
Period ended 30 June 2004
Basic earnings 352 427 0.3 0.4
Diluted earnings 352 427 0.3 0.4
Period ended 30 June 2003
Basic earnings (3,504) (2,129) (3.3) (2.0)
Year end 31 December 2003
Basic earnings (10,788) (5,218) (10.0) (4.8)
The share options and convertible loan stock in issue during 2004 gave rise to
dilutive potential ordinary shares of 1,211,882. (2003 interims & final: nil).
6 Investment and development properties
Properties
Completed Developments in held for future
developments progress development Total
£'000 £'000 £'000 £'000
Cost or valuation
At 1 January 2004 788,304 124,281 36,207 948,792
Additions 970 85,125 10,167 96,262
Transfers 14,543 (9,088) (5,455) -
Disposals (760) - (10,931) (11,691)
Revaluations 6,500 5,308 3,291 15,099
At 30 June 2004 809,557 205,626 33,279 1,048,462
At 30 June 2003 543,588 237,066 34,971 815,625
At 31 December 2003 788,304 124,281 36,207 948,792
Investment properties were valued as at 30 June 2004, on the basis of 'market
value' (as defined in the RICS Appraisal and Valuation Manual issued by the
Royal Institution of Chartered Surveyors) by CB Richard Ellis Ltd. and Messrs.
King Sturge, Chartered Surveyors as external valuers.
Developments in progress and properties held for future development have been
incorporated at valuations by the directors at acquisition or when planning
permission and appropriate pre-let agreements are in place, plus subsequent
expenditure. These valuations were based on completed property valuations by CB
Richard Ellis Ltd. and Messrs King Sturge, Chartered Surveyors.
The current valuation of all properties when complete is £1.34 billion.
7 Creditors: amounts falling due within one year
Unaudited Audited
Unaudited 30 June 2003 31 Dec 2003
30 June 2004 £'000 £'000
£'000
Build loans and other short term financing 153,944 139,029 107,664
Other creditors 74,666 60,176 75,823
228,610 199,205 183,487
8 Creditors: amounts falling due after more than one year
Unaudited Unaudited Audited
30 June 2004 30 June 2003 31 Dec 2003
£'000 £'000 £'000
Long term borrowings 552,054 358,674 511,200
Other creditors - 2,506 -
552,054 361,180 511,200
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