Final Results
Unite Group PLC
07 March 2007
The UNITE Group plc
Preliminary Announcement for the year ended 31 December 2006
UNITE ANNOUNCES STRONG PROGRESS
AND 17% INCREASE IN ADJUSTED NAV PER SHARE
The UNITE Group plc, the UK's largest provider of student hospitality, today
announces its preliminary results for the year to 31 December 2006.
Highlights:
• Adjusted fully diluted Net Asset Value per share increased by 17% to 425p
(31 December 2005: 363p), after a charge of 16p in relation to establishing
the UNITE UK Student Accommodation Fund. Reported NAV per share rose 25% to
391p (31 December 2005: 314p).
• Creation of UNITE's UK Student Accommodation Fund, a dedicated student
accommodation fund for which UNITE acts as property and fund manager and in
which UNITE owned a 39% stake as at 31 December 2006, thereby transforming
UNITE's business model to that of a co-investing fund and asset manager and
developer.
• 19 additional development projects secured during the year, worth an
estimated £461 million at completion (2005: 12 properties worth £236
million) and 13 planning consents attained (2005: 10) contributing £33
million of adjusted NAV Growth (2005: £21 million before SDLT impact),
including our share of joint ventures.
• Nine projects successfully completed, commissioned and opened for the
academic year 2006/07 of which 63% of the bed spaces were delivered using
the Group's modular build technology (2005: 51%).
• Securing since the year-end of a £114.5 million portfolio of complementary
assets in Liverpool, Sheffield, Manchester and Leicester.
• Clear strategy to double net rent from the student portfolio over the next
five years.
• Launch of a new accommodation proposition targeting graduates and young
career professionals.
Commenting, Geoffrey Maddrell, Chairman of The UNITE Group plc, said:
'UNITE has developed a unique set of skills which give us real competitive edge
for the continued growth of our business. We have pioneered the development and
professional management of student accommodation and, combined with powerful
market insight, have been able to differentiate our brand by seeking to
understand our customers' needs and evolving our product and service to deliver
their desired experience.'
Mark Allan, Chief Executive of The UNITE Group plc, commented:
'Our aim over the next five years is to double the size of our student
hospitality business in the UK. This will be achieved primarily through organic
development activity, particularly in London, and consistent year-on-year growth
in net rents. We will also move beyond our existing reach to pioneer a new
accommodation proposition for graduates and young professionals, focused in
London.
'With these aims in mind, the backing of a robust capital structure and a strong
management team, we are well placed to grow and confidently compete in the key
growth markets of the future.'
Enquiries:
The UNITE Group plc
Mark Allan / Tony Harris
Tabitha Aldrich-Smith Tel: 0117 302 7000
Financial Dynamics
Stephanie Highett / Dido Laurimore Tel: 020 7831 3113
A copy of the investor presentation is available on our website:
www.unite-group.co.uk
Publication quality photographs are available on request.
Notes to Editors:
UNITE is the UK's leading student hospitality company. Listed in the FTSE 250
index of the London Stock Exchange and managing a property portfolio of £1.6
billion located across the UK, the Group focuses on the provision and management
of high quality, well-located student accommodation and hospitality services in
strong higher education markets.
UNITE delivers the real student experience, whilst at the same time helping to
regenerate cities as part of the community and contributing to the improvement
of the country's housing. It undertakes the planning, development and
management of sites, often working closely with the universities and colleges,
to deliver accommodation for students across all ages and nationalities. UNITE
developments typically show high occupancy levels and robust rental growth as
demand continues to rise for places in UK Higher Education and for safe, high
quality accommodation for students.
Further information on UNITE is available at www.unite-group.co.uk
PRELIMINARY ANNOUNCEMENT
Introduction
2006 stands out as a landmark year for UNITE and the broader student
accommodation sector. The sector became firmly established as an asset class in
its own right, whilst UNITE delivered a strong 17% growth in adjusted fully
diluted NAV per share for the year. This growth is after a 16 pence per share
charge relating to the establishment of the Group's £1 billion UK Student
Accommodation Fund ('USAF'), which has transformed the Group's business and
financing model to support future development-led expansion. UNITE continues to
lead and innovate in this rapidly evolving sector.
Financial performance
2006 was a year of strong growth for UNITE, underpinned by solid business
performance in all areas. Reported net asset value per share increased 25% to
391 pence from 314 pence at 31 December 2005. Adjusted net asset value per
share increased 17% to 428 pence* (2005: 367 pence); on a fully diluted basis,
adjusted net asset value per share increased 17% to 425 pence from 363 pence a
year earlier. (* See note 10 of financial statements for adjusted NAV
reconciliation.)
This growth was driven by ongoing development activity at attractive margins,
which contributed a £33 million increase in adjusted net asset value or 27 pence
per share (2005: £21 million or 18 pence per share, before the reduction in
value resulting from the removal from the exemption from SDLT for properties in
disadvantaged areas), as well as growth in the value of UNITE's investment
portfolio, which contributed a £70 million increase or 56 pence per share;
(2005: £46 million or 40 pence per share). £15 million of the investment
portfolio revaluation was attributable to rental growth, whilst the remaining
£55 million was attributable to compression in valuation yields, which moved to
5.8% on a stabilised basis from 6.3% a year earlier. Without USAF set up costs,
growth in NAV per share was 21% on an adjusted fully diluted basis.
Reported profit before tax for the year was £58.6 million, up from £28.1 million
in 2005. This includes revaluation movements of £70.5 million and deferred tax
and ineffective hedge movements of £2.4 million. When these items are excluded,
the adjusted loss before tax is £14.3 million (2005: profit of £3.4 million) due
primarily to the one-off impact of establishing USAF (£12.1 million charge),
certain non-recurring profits arising from asset sales booked in 2005
(£5.3million) and a substantial increase in pre-contract development expenditure
as a result of our increased acquisition activity (£1.9 million).
Dividend
In accordance with our stated policy, the Board is pleased to recommend a final
dividend of 1.67 pence per share, maintaining the total dividend for the year at
2.5 pence per share (2005: 2.5 pence). Subject to approval by shareholders at
the Annual General Meeting to be held on 17 May 2007, the final dividend will be
paid on 21 May 2007 to shareholders on the register on 16 March 2007.
2006 achievements
Operationally, 2006 was a year in which UNITE stepped up its acquisition and
planning activity. Over the course of the year, the Group secured 19 additional
development properties worth an estimated £461 million on completion (2005: 12
properties worth £236 million) and attained 13 planning consents (2005: 10).
Together with net asset value uplift booked during development, this activity
contributed £33 million of adjusted NAV growth (2005: £21 million, before SDLT
impact), including our share of joint ventures. Profit on cost averaged 27% for
schemes completed during the year (2005: 20%), including those funded through
joint ventures. The outperformance above our 20% target margin is attributable
predominantly to yield compression. The Group is planning to open new properties
with a combined value of £241 million during 2007, of which £59 million are held
in joint ventures, and the pipeline of properties scheduled for delivery in 2008
and beyond is healthy.
Modular building remains a key ingredient to our ongoing development success
and, during 2006, 63% of the bed spaces in completed schemes were modular (2005:
51%). 3,285 standard modular units were produced in total during the year (2005:
3,438). 2006 also saw the development of medium rise modular units capable of
being used in buildings of up to 10 storeys, compared to the previous limit of
seven, representing a significant technological advancement for the building
industry.
From a demand perspective, occupancy across the total portfolio for the current
academic year was 91% (2005: 94%) and like for like revenue grew at 6%,
reflecting the increased levels of 51-week lets and growing revenue from our
stabilising properties. Portfolio profit (UNITE's share of portfolio operating
profit less attributable interest charge) showed healthy growth, up 48% to £8.0
million from £5.4 million, reflecting top line rental growth driven by like for
like revenue growth, the increased size of the managed portfolio and the
contribution from management fees.
In 2006 we also continued our work to improve UNITE's systems and processes,
which will bring greater operational efficiency and scalability as we grow. One
key project is the development of our new on-line customer proposition due to be
launched later in 2007. This will greatly enhance our web presence and enhance
our customers' experience and their access to our services. Together with
focusing on our systems and processes, we also continued our commitment to
enhancing our customers' experience. This was externally recognised twice in
2006, as UNITE won two prestigious national customer service awards.
Market overview
Higher education in the UK is characterised by long-term sustained growth in the
number of students from both the UK and overseas. This is driven by the combined
factors of demographics, Government policy and successful international
marketing by UK universities. Continuing the long-term trend, applications for
higher education courses in the 2007/08 academic year have increased by 6.4%.
Against this demand picture, the supply of good quality student accommodation
continues to be insufficient. The Government has sought to address the quality
issue through the introduction of the Housing Act, which came into force in
April 2006 and places more stringent standards on the private rented sector. As
yet there is still only anecdotal evidence of any retreat by smaller scale
private landlords from the rental market as a result of the new legislation,
although looking ahead it remains an opportunity to gain market share in the
future.
Whilst the national picture remains strong, we are seeing some regional
variation. A small number of University cities, such as Sheffield, have reached
a point where supply of purpose-built accommodation is significant and
competition is becoming more intense. We remain confident of solid performance
in these markets in the medium term, acknowledging that there will be short-term
constraints to both rental growth and new development opportunities. Our
investment strategy recognises this and is focused on four core areas:
• Opportunities, through acquisition or development, to consolidate or
strengthen our position in established markets. An example of this was our
acquisition of a portfolio of properties from Base Limited in February 2007;
• Significant new development in London, where the imbalance of supply and
demand remains acute and the requirement for good quality accommodation is
therefore high;
• Continued development in provincial cities where clear opportunities for
growth remain, such as Newcastle, Glasgow and Edinburgh;
• Smaller scale, but higher value development in smaller but well
established University cities, such as Cambridge, Reading and Bath, which
are characterised by high residential land values.
Financing and investment activity
During 2006, against the backdrop of a strong investment market, UNITE
transformed its business and financing model through the creation of, and sale
of assets to, the UNITE UK Student Accommodation Fund ('USAF'). In doing so,
the Group has changed its business model to one of a co-investing fund and asset
manager and developer and has created a sustainable capital structure to support
ongoing development of new assets in the coming years. A combination of
building on our earlier portfolio sales and joint venture initiatives, the
establishment of USAF and sale of an initial portfolio to it for £515 million,
has resulted in a significant reduction in adjusted gearing (to 78% from 162% a
year earlier), giving us further borrowing capacity, and released £66 million of
capital for reinvestment into the development pipeline. UNITE has retained
exposure to the performance of the assets in USAF through its initial 39%
retained stake and the performance and asset management fees it receives. There
are clear strategic benefits for the Group:
• USAF has sufficient further equity commitments from investors, coupled
with borrowing capacity, to fulfil its obligation to acquire approximately a
further £500 million of newly and yet to be developed UK direct-let student
accommodation properties from UNITE. This provides a clear source of growth
capital for UNITE in the medium term.
• UNITE has retained long-term management of the portfolio through its
position as manager of the Fund and, accordingly, the receipt of both
management and potential performance fees. This allows the Group to
maintain and develop further the benefits of scale whilst creating a new and
valuable revenue stream.
• It further establishes student accommodation as an institutionally
recognised asset class and enhances the value of UNITE's brand and
management platform.
• Investor demand for USAF remains strong and we intend to reduce our 39%
stake moderately during the course of 2007, releasing further capital to
support our development activities.
Our people and our organisation
To support a much closer focus on our local markets, recognising that they are
each at different stages of growth and maturity, we have effected a
reorganisation across our business. We have fully integrated our hospitality
and development teams across the UK and formed the UK Student Business; in
addition and managed separately, we have formed a dedicated London business,
strengthening the team to focus on the important opportunities in the capital.
The Managing Directors of both the UK business and the London business report
directly to Mark Allan, the Group's Chief Executive. Our specialist project
management and modular manufacturing teams have also merged to facilitate the
delivery of our pipeline of properties.
Following the appointment of Mark Allan as Chief Executive in 2006, and Nicholas
Porter stepping up to the role of non-executive Deputy Chairman, a number of
other changes have been made at Board level since the end of the year. Tony
Harris, Chief Financial Officer, previously of Hilton Group plc, and John
Tonkiss, Managing Director of UNITE's UK Student Business, joined the Board on
25 January 2007. Both Tony's and John's expertise will prove invaluable as we
continue to capitalise upon the opportunities presented by the rapid evolution
of the sector and its growing appeal to investors.
Andrew Lee, Human Resources Director, stepped down from the Board in January
2007 and the Board's appreciation of the strong foundations established by
Andrew goes on record. Andrew took the lead in inspiring and implanting UNITE's
culture and processes, which have enabled us to set benchmarks for the total and
effective commitment to our people and customers.
As a values-orientated business, we attract and retain a highly talented team of
people who in turn seek challenging, meaningful and rewarding careers. Our
people have embraced the changes and our employee engagement measures continue
within the top 10% of UK companies.
Strategy
UNITE has developed a unique set of skills in site acquisition, planning and
modular construction which give us a real competitive edge for the continued
growth of our business. We have pioneered professional management for student
accommodation and, combined with powerful market insight, have been able to
differentiate our brand by seeking to understand our customers' needs and
evolving our product and service to deliver their desired experience. We now
set out a clear strategy for growth over the next five years.
We aim to double the size of our student hospitality business in the UK.
• We intend to double the net rent derived from our portfolio and optimise
the return to UNITE through innovative capital structures designed to ensure
the Group retains funding capacity for its growth plans. We expect this
growth to come through both organic development activity and through
consistent year-on-year growth in net rents as a result of careful
investment decisions and operational expertise.
• Development activity will be weighted towards London, which has
significant untapped potential, with more focused opportunities being
pursued elsewhere in the UK.
• Net rental growth will be delivered through focusing on UNITE's business
needs in each individual market, supported by a national brand to capture
and share best practice and secure operational economies of scale.
• We will move beyond our existing reach to pilot a new accommodation
proposition for graduates and young professionals, focused in London. We
will open our first pilot project later in 2007 and establish medium term
growth targets for this new business in early 2008.
• We aim to build upon our existing modular building technology and project
management capability to create a unique and sustainable building delivery
solution that gives us a real edge over our competitors.
Summary
2006 was a landmark year for UNITE. We have taken the lead in establishing the
student accommodation asset class, evolving our business and financing model to
capitalise on the positive market environment. Throughout the year, we have
performed well across all areas of our business, continuing to improve our
product and service offering to customers. With unique expertise and depth of
knowledge about our sector and our customers, we have been able to align our
business capabilities and structure, so that we are well placed to grow and
confidently compete in the key growth markets of the future.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2006
Note 2006 2006 2006 2005
£'000 £'000 £'000 £'000
Before impact Impact of
of creating creating
fund fund
Total Total
Revenue 2 110,636 - 110,636 113,799
Cost of sales 2 (49,889) - (49,889) (54,864)
Administrative expenses (19,751) - (19,751) (15,671)
40,996 - 40,996 43,264
(Loss) / profit on disposal of property (923) (4,474) (5,397) 2,534
Net valuation gains on investment property 60,817 - 60,817 23,377
Profit / (loss) before net financing costs 100,890 (4,474) 96,416 69,175
Loan interest and similar charges 3 (44,440) (9,159) (53,599) (44,212)
Changes in fair value of interest rate swaps 3 2,396 2,618 5,014 (4,317)
Finance costs (42,044) (6,541) (48,585) (48,529)
Finance income 3 1,551 - 1,551 1,541
Net financing costs (40,493) (6,541) (47,034) (46,988)
Share of joint venture profit / (loss) 6 10,219 (1,039) 9,180 5,944
Profit before tax 70,616 (12,054) 58,562 28,131
Tax (charge) / credit 4 (11,413) 24,334 12,921 4,179
Profit for the year 59,203 12,280 71,483 32,310
Earnings per share
Basic 10 58.4p 28.7p
Diluted 10 57.8p 28.3p
Profit for the year is wholly attributable to equity holders of The UNITE Group plc.
CONSOLIDATED BALANCE SHEET
At 31 December 2006
Note 2006 2005
£'000 £'000
Assets
Investment property 5 656,969 1,028,747
Investment property under development 5 124,980 80,004
Property, plant and equipment 9,533 19,303
Investments in joint ventures 6 106,287 18,861
Intangible assets 5,216 5,465
Other receivables 4,973 8,618
Total non-current assets 907,958 1,160,998
Property under development 5 12,093 -
Inventories 22,982 13,418
Trade and other receivables 70,165 66,011
Cash and cash equivalents 55,143 30,297
Total current assets 160,383 109,726
Total assets 1,068,341 1,270,724
Liabilities
Borrowings and financial derivatives 7 (63,563) (124,541)
Trade and other payables (78,594) (73,559)
Total current liabilities (142,157) (198,100)
Borrowings and financial derivatives 7 (403,181) (644,671)
Deferred tax liabilities 8 (41,816) (45,255)
Total non-current liabilities (444,997) (689,926)
Total liabilities (587,154) (888,026)
Net assets 481,187 382,698
Equity
Issued share capital 9 30,763 30,435
Share premium 9 173,008 169,957
Merger reserve 9 40,177 40,177
Retained earnings 9 218,035 129,508
Revaluation reserve 9 18,053 17,531
Hedging reserve 9 1,151 (4,910)
Total equity 481,187 382,698
Total equity is wholly attributable to equity holders of The UNITE Group plc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER EQUITY
For the year ended 31 December 2006
Note 2006 2005
£'000 £'000
Investment property under
development: - revaluation 5 23,602 6,208
- deferred tax 8 (6,982) (1,843)
Other property - revaluation (495) 3,933
- deferred tax 8 50 (1,180)
Effective hedges - movements 9,077 (4,212)
- deferred tax (2,723) 1,264
Gains on hedging instruments transferred to income statement (2,839) -
Deferred tax on gains transferred 852 -
Share of joint venture valuation gain on investment property under development
(net of related tax) 6,006 2,898
Share of joint venture movements in effective hedges (net of related tax) 1,694 (845)
Net gains recognised directly in equity 28,242 6,223
Profit for the year 71,483 32,310
Total recognised income and expense for the year 99,725 38,533
Dividends paid 9 (3,060) (2,787)
Own shares acquired 9 (2,420) -
Shares issued 9 3,379 31,243
Fair value of share options expensed 865 443
98,489 67,432
Equity at start of year 382,698 315,266
Equity at end of year 481,187 382,698
Total recognised income and expense for the year is wholly attributable to equity holders of The UNITE Group plc.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2006
Note 2006 2005
£'000 £'000
Operating activities
Profit for the year 71,483 32,310
Adjustments for:
Depreciation and amortisation 2,446 2,486
Equity settled transactions 865 443
Change in value of investment property 5 (60,817) (23,377)
Net finance costs 3 47,034 46,988
Loss / (profit) on sale of investment property 5,397 (2,534)
Share of joint venture profit 6 (9,180) (5,944)
Tax credit 4 (12,921) (4,179)
Cash flows from operating activities before changes in working capital 44,307 46,193
Decrease / (increase) in trade and other receivables 28,806 (29,765)
(Increase) in inventories (21,657) (17)
Increase / (decrease) in trade and other payables 9,825 8,790
Cash flows from operating activities 61,281 25,201
Investing activities
Proceeds from sale of investment property 432,146 134,817
Payments to / on behalf of joint ventures - (2,539)
Equity invested in joint ventures (1,951) (8,798)
Dividends received 578 -
Interest received 1,551 1,541
Acquisition of intangible assets (2,188) (1,361)
Acquisition of property, plant and equipment (2,473) (1,402)
Acquisition and construction of investment property (106,990) (108,936)
Cash flows from investing activities 320,673 13,322
Financing activities
Interest paid (57,807) (51,637)
Proceeds from the issue of share capital 3,379 31,243
Payments to acquire own shares (2,420) -
Proceeds from other non-current borrowings 487,423 160,462
Repayment of borrowings (778,548) (184,076)
Payment of finance lease liabilities (395) (307)
Dividends paid (3,060) (2,787)
Cash flows from financing activities (351,428) (47,102)
Net increase / (decrease) in cash and cash equivalents 30,526 (8,579)
Cash and cash equivalents at start of year 19,917 28,496
Cash and cash equivalents at end of year 50,443 19,917
NOTES
1. Basis of preparation
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 December 2006 or 2005. Statutory
accounts for 2005, which were prepared under International Financial Reporting
Standards, as adopted by the European Union ('IFRS'), have been delivered to the
registrar of companies, and those for 2006 will be delivered in due course. The
auditors have reported on those accounts; their reports were (i) unqualified,
(ii) did not include references to any matters to which the auditors drew
attention by way of emphasis without qualifying their reports and (iii) did not
contain statements under section 237(2) or (3) of the Companies Act 1985.
The effects of the transactions undertaken to create the Unite Student
Accommodation Fund on 15 December 2006 are shown in the column 'impact of
creating fund' on the income statement, as they have a material effect on the
Group's result for the year. The Group's share of the subsequent trading
activities are included in the share of joint venture profit in the 'before
impact of creating fund' column.
2. Segment reporting
Segment information is presented in respect of the Group's business segments
based on the Group's management and internal reporting structure. The Directors
do not consider that the group has meaningful geographical segments as it
operated exclusively in the United Kingdom in the year.
Segment results, assets and liabilities include items directly attributable to a
segment as well as those that can be allocated on a reasonable basis.
Unallocated assets and liabilities consist of deferred tax and interest bearing
loans and borrowings. Segment capital expenditure is the total cost incurred
during the period to acquire segment assets that are expected to be used for
more than one period.
The group comprises the following main business segments:
• Investment (the management and holding of investment property)
• Development (construction of investment property, primarily for the
investment business segment)
2006 2005
£'000 £'000
Segment revenue
Rental income 92,265 81,080
Management fees to joint ventures 1,557 597
Investment revenue 93,822 81,677
Development sales to external customers - 16,694
Development sales to joint ventures 16,814 15,428
Development revenue 16,814 32,122
Total revenue 110,636 113,799
Of which:
Revenue with external customers 92,265 97,774
2006 2005
£'000 £'000
Segment cost of sales
Property operating expenses (33,843) (26,009)
Development cost of sales (16,046) (28,855)
Cost of sales (49,889) (54,864)
Property operating expenses are wholly attributable to properties which were income generating during the year.
2006 2005
£'000 £'000
Segment results
Investment 50,269 47,676
Development (3,323) 1,094
Unallocated:
- corporate costs (5,950) (5,012)
- joint venture set up costs - (494)
- net valuation gains on investment property 60,817 23,377
- (loss) / profit on disposal of property (5,397) 2,534
- net financing costs (47,034) (46,988)
- share of joint venture profit 9,180 5,944
- tax credit 12,921 4,179
Profit for the year 71,483 32,310
2. Segment reporting (continued)
Operating margin
The calculation of operating margin on the total portfolio under management on a comparable basis year over year is as
follows:
2006 2005
£'000 £'000 £'000 £'000
Rental income
- wholly owned 92,265 81,080
- operated in joint ventures 14,993 5,117
107,258 86,197
Property operating costs
- wholly owned (33,843) (26,009)
- operated in joint ventures (3,028) (878)
Overheads attributable to property operations (9,710) (7,994)
(46,581) (34,881)
60,677 51,316
Rental payments on properties under management 6,526 3,145
Gross margin on portfolio under management 67,203 54,461
Gross margin expressed as a percentage 62.7% 63.2%
Portfolio profit is calculated as follows:
2006 2005
£'000 £'000 £'000 £'000
Investment segment result 50,269 47,676
Net financing costs (47,034) (46,988)
Add back: changes in fair value of ineffective hedges (5,014) 4,317
Add back: loan break costs & costs written off on refinancing 9,159 -
Net loan interest payable (42,889) (42,671)
Share of joint venture 626 392
8,006 5,397
3. Net financing costs
2006 2006 2006 2005
£'000 £'000 £'000 £'000
Before
impact of
creating Impact of
fund creating
fund
Total Total
Interest income (1,551) - (1,551) (1,541)
Finance income (1,551) - (1,551) (1,541)
Gross interest expense 50,649 - 50,649 54,846
Interest capitalised (6,209) - (6,209) (10,728)
Loan break costs - 4,846 4,846 -
Loan set up costs written off on refinancing - 4,313 4,313 94
Loan interest & similar charges 44,440 9,159 53,599 44,212
Changes in fair value of interest rate swaps (2,396) (2,618) (5,014) 4,317
Finance costs 42,044 6,541 48,585 48,529
Net financing costs 40,493 6,541 47,034 46,988
4. Tax credit
Recognised in the income statement:
2006 2005
£'000 £'000
Current tax expense
Current year - -
Income tax on UK rental income arising in
overseas group company 78 -
78 -
Deferred tax credit
Origination and reversal of temporary (14,501) (3,272)
differences
Adjustments for prior years 1,502 (907)
(12,999) (4,179)
Total tax credit in income statement (12,921) (4,179)
Reconciliation of effective tax rate 2006 2005
% £'000 % £'000
Profit before tax 100.0% 58,562 100.0% 28,131
Income tax using the domestic corporation tax 30.0% 17,569 30.0% 8,439
rate
Effect of indexation on investment and
development property (16.71)% (9,786) (28.5)% (8,028)
Non-deductible expenses 0.18% 105 0.8% 234
Capital allowances gain crystallised (1.55)% (906) (7.8)% (2,204)
Share of joint venture profit (2.59)% (1,516) (6.1)% (1,713)
Movement on unprovided deferred tax asset 0.76% 444 - -
Effect of property disposals to USAF (34.72)% (20,333) - -
Adjustments for prior years 2.56% 1,502 (3.2)% (907)
(22.07)% (12,921) (14.8)% (4,179)
Deferred tax recognised directly in equity
2006 2005
£'000 £'000
Relating to hedging reserve movements 2,020 (1,264)
Relating to net valuation gains recognised 7,540 3,023
directly in equity
9,560 1,759
5. Investment and development property
Investment Property
Investment property under Under
2006 property development development Total
£'000 £'000 £'000 £'000
Balance at start of year 1,028,747 80,004 - 1,108,751
Cost capitalised 2,049 100,062 12,093 114,204
Interest capitalised - 6,209 - 6,209
Transfer from property, plant and 693 - - 693
equipment
Transfer from investment property under 84,897 (84,897) - -
development
Disposals (520,234) - - (520,234)
Valuation gains 78,935 24,775 - 103,710
Valuation losses (18,118) (1,173) - (19,291)
Net valuation gains 60,817 23,602 - 84,419
Balance at end of year 656,969 124,980 12,093 794,042
Investment Property
Investment property under Under
2005 property development development Total
£'000 £'000 £'000 £'000
Balance at start of year 991,460 119,732 - 1,111,192
Acquisitions 1,102 - - 1,102
Cost capitalised - 99,507 - 99,507
Interest capitalised - 10,728 - 10,728
Transfer from investment property under 120,723 (120,723) - -
development
Disposals (107,915) (35,448) - (143,363)
Valuation gains 43,357 9,497 - 52,854
Valuation losses (19,980) (3,289) - (23,269)
Net valuation gains 23,377 6,208 - 29,585
Balance at end of year 1,028,747 80,004 - 1,108,751
Property has been valued on the basis of 'market value' as defined in the RICS
Appraisal and Valuation Manual issued by the Royal Institution of Chartered
Surveyors as determined by CB Richard Ellis Ltd and Messrs King Sturge,
Chartered Surveyors as external valuers. Investment property and investment
property under development are carried at fair value. Property under development
of £12.093m held in current assets is carried at cost, but its fair value has
been determined as described above.
Following the formation of the UNITE Student Accommodation Fund it is likely
that the fund will acquire the Group's future developments. Hence properties
acquired with the intention of selling them to the UNITE Student Accommodation
Fund following completion are now treated as property under development in
current assets, (carried at the lower of cost and NRV), rather than fixed
assets, (carried at fair value). The impact if these properties were carried at
fair value rather than cost is as follows:
Investment Property
Investment Property Under
2006 property under development Total
development
£'000 £'000 £'000 £'000
Balance at end of year (from above) 656,969 124,980 12,093 794,042
Valuation gain not recognised on - - 2,214 2,214
property held at cost
Fair value at end of year 656,969 124,980 14,307 796,256
6. Investments in joint ventures
Joint Venture
Undertakings
2006 2005
£'000 £'000
Share of profit:
- net revaluation gains 9,713 6,222
- deferred tax (17) (533)
- other (516) 255
9,180 5,944
Share of items recognised directly in reserves:
- Valuation gains (net of deferred tax) 6,614 2,898
- Movements in effective hedges (net of deferred tax) 1,843 (845)
Additions 70,367 10,047
Distributions received (578) -
87,426 18,044
At start of year 18,861 817
At end of year 106,287 18,861
The Group's interests in joint ventures are held at a carrying value equivalent
to its share of the underlying net asset value of the undertaking. The Group's
share of joint ventures' results are as follows:
Gains/(losses) Gains/(losses)
recognised directly recognised directly
Profit in equity Profit in equity
2006 2006 2005 2005
£'000 £'000 £'000 £'000
Capital Cities JV 7,654 4,922 3,755 1,083
Student village JV's
- LDC (Project 110) Ltd 1,526 896 2,173 (228)
- LDC (Project 170) Ltd 790 2,639 16 1,198
UNITE Student Accommodation Fund (790) - - -
9,180 8,457 5,944 2,053
6. Investments in joint ventures (continued)
On 15 December 2006, the Group formed a joint venture with a consortium of
investors to set up and manage the UNITE Student Accommodation Fund.
This joint venture takes the form of a Jersey unit trust that controls a number
of UK based limited partnerships in which the general partners are USAF GP No.1
Ltd, USAF GP No.4 Ltd and USAF GP No.5 Ltd, companies incorporated in England
and Wales.
The agreements integral to the above include the Group managing the properties
and assets of the venture. Revenue for the year includes £0.137m in respect of
management fees receivable for these. In addition investors in the fund have
committed future equity to enable the fund to purchase UNITE's completed
development properties for approximately the next three years.
On formation of the fund, the Group sold 31 investment properties for £514.989m.
The impact of this transaction on earnings and reported and adjusted net
assets are set out below:
Profit and Reported net Adjusted net
loss assets assets
£'000 £'000 £'000
Profit relating to the sale of USAF properties 5,100 5,100 5,100
pre disposal costs
USAF disposal costs (7,954) (7,954) (7,954)
Goodwill impairment (1,620) (1,620) (1,620)
Loss on disposal of property (4,474) (4,474) (4,474)
Loan set up costs & break costs written off on (9,159) (9,159) (9,159)
refinancing
Recycling previously recognised hedging gains 2,618 - -
Swap settlements - - (5,161)
UNITE's share of fund set up costs (1,039) (1,039) (1,039)
Pre-tax impact (12,054) (14,672) (19,833)
Deferred tax 24,334 24,334
Post-tax impact 12,280 9,662
The goodwill impairment charged against the loss on disposal relates to
synergistic benefits associated with the disposed properties.
The Capital Cities JV refers to the joint venture formed with GIC Real Estate
Pte Ltd to develop and operate student accommodation in the capital cities of
London, Edinburgh, Dublin and Belfast, in which the Group owns a 30% equity
share. This joint venture takes the form of a UK based limited partnership in
which the general partner is LDC (Capital Cities) Ltd, a company incorporated in
England and Wales.
The agreements integral to the above, which include the Group assuming primary
responsibility for development, property and asset management of the venture,
result in the Group having joint control of this entity in conjunction with the
majority partner.
The Group receives management fees from the joint venture and recharges build
costs in relation to the investment property under development. Revenue for the
year includes £17.217m (2005: £13.192m) in relation to these.
The Group's joint venture in student villages with Lehman Brothers is held as
75% interests in the ordinary shares of LDC (Project 110) Ltd and LDC (Project
170) Ltd, companies incorporated in England and Wales, whose principal activity
is the construction and letting of investment property. Under the Articles of
Association, the Group cannot exercise control over these companies and its
interest amounts to a 51% share of the profits and assets of the joint venture.
Under the articles of LDC (Project 170) Ltd, the Group is additionally entitled
to the first £1.250m of net assets on any winding up of the company. Revenue
for the year includes £0.822m (2005: £2.677m) charged to LDC (Project 110) Ltd
and £0.198m (2005: £0.156m) charged to LDC (Project 170) Ltd in respect of fees
and construction costs.
6. Investments in joint ventures (continued)
Summary financial information on joint ventures -
100% 100% UNITE share UNITE share
2006 2005 2006 2005
£'000 £'000 £'000 £'000
UNITE Student Accommodation Fund
Non-current assets 504,891 -
Current assets 15,163 -
Current liabilities (32,053) -
Non-current liabilities (276,534) -
Net assets/equity 211,467 - 67,356 -
Profit for the period (11,742) -
Capital Cities joint venture
Non-current assets 210,609 114,098
Current assets 28,626 3,702
Current liabilities (13,519) (7,897)
Non-current liabilities (132,558) (64,947)
Net assets/equity 93,158 44,956 27,947 13,487
(Loss) / Profit for the period 25,513 12,517
Student Villages JV - LDC (Project 110) Limited
Non-current assets 62,395 49,043
Current assets 4,320 6,587
Current liabilities (8,166) (2,788)
Non-current liabilities (48,313) (47,022)
Net assets/equity 10,236 5,820 5,118 2,910
Profit for the period 3,052 4,346
Student Villages JV - LDC (Project 170) Limited
Non-current assets 49,612 23,574
Current assets 2,388 196
Current liabilities (2,281) (13,395)
Non-current liabilities (39,236) (6,698)
Net assets/equity 10,483 3,677 5,866 2,464
Profit for the period 1,580 32
Investments in joint ventures per balance sheet 106,287 18,861
7. Borrowings and financial derivatives
2006 2005
£'000 £'000
Non-current
Bank and other loans 403,146 624,450
Finance lease liabilities 35 474
Interest rate swaps - 19,747
403,181 644,671
Current
Overdrafts 4,700 10,380
Bank loans 46,155 61,185
Build loans 12,289 52,601
Finance lease liabilities 419 375
63,563 124,541
Maturity analysis
Non-current bank loans and other loans fall due as follows:
2006 2005
£'000 £'000
Between one and two years 102,794 6,437
Between two and five years 46,479 133,081
In five years or more 253,873 484,932
403,146 624,450
The Group has various borrowing facilities available to it. The undrawn
committed facilities available at 31 December 2006 in respect of which all
conditions precedent had been met at that date were as follows:
2006 2005
£'000 £'000
Expiring in one year or less
Build facilities 6,513 11,552
Other facilities 5,010 19,000
11,523 30,552
In addition, there are further committed facilities available where not all
conditions precedent have yet been met amounting to £339m (2005: £294m). Of
this amount £212m (2005: £158m) remains available for completed properties and
£127m (2005: £136m) for development properties.
Security for the Group's property development and investment financing is by way
of first charges over the properties to which they relate. In certain
instances, cross guarantees are provided within the Group.
7. Borrowings and financial derivatives (continued)
The Group's gearing ratios are calculated as follows:
2006 2005
£'000 £'000
Net debt per balance sheet:
Cash and cash equivalents 55,143 30,297
Current borrowings (note 7) (63,563) (124,541)
Non-current borrowings (note 7) (403,181) (644,671)
Interest rate swaps 601 -
(411,000) (738,915)
Add back interest rate swaps (601) 16,807
Adjusted net debt (411,601) (722,108)
Basic net asset value 481,187 382,698
Adjusted net asset value (note 10) 526,480 446,960
Basic gearing 86% 193%
Adjusted gearing 78% 162%
8. Deferred tax liabilities
Recognised deferred tax assets and liabilities are attributable to the
following:
Assets Liabilities Net
2006 2005 2006 2005 2006 2005
£'000 £'000 £'000 £'000 £'000 £'000
Investment property - - 27,103 47,193 27,103 47,193
Investment property under
development - - 7,254 4,142 7,254 4,142
Property, plant and (449) - - 1,395 (449) 1,395
machinery
Investments in joint - - 9,741 - 9,741 -
ventures
Financial instruments - (5,042) 129 - 129 (5,042)
Tax value of losses
carried forward (1,962) (2,433) - - (1,962) (2,433)
Tax (assets) / liabilities (2,411) (7,475) 44,227 52,730 41,816 45,255
Set off of tax 2,411 7,475 (2,411) (7,475) - -
Net tax (assets) / - - 41,816 45,255 41,816 45,255
liabilities
Movement in temporary differences during the year:
Year ended 31 December 2006
At 31 Dec Recognised in Recognised At 31 Dec
2005 Transfers income in equity 2006
£'000 £'000 £'000 £'000 £'000
Investment property 47,193 3,870 (23,960) - 27,103
Investment property under 4,142 (3,870) - 6,982 7,254
development
Property, plant and equipment 1,395 - (1,794) (50) (449)
Investments in joint ventures - - 8,984 757 9,741
Financial instruments (5,042) - 3,300 1,871 129
Tax value of losses carried (2,433) - 471 - (1,962)
forward
45,255 - (12,999) 9,560 41,816
Year ended 31 December 2005
At 31 Dec Recognised in Recognised At 31 Dec
income in equity
2004 Transfers 2005
£'000 £'000
£'000 £'000 £'000
Investment property 50,461 4,716 (7,984) - 47,193
Investment property under 7,015 (4,716) - 1,843 4,142
development
Property, plant and equipment 240 - (25) 1,180 1,395
Financial instruments (2,804) - (974) (1,264) (5,042)
Tax value of losses carried (7,237) - 4,804 - (2,433)
forward
47,675 - (4,179) 1,759 45,255
9. Capital and reserves
Issued
share Share Merger Retained Revaluation Hedging
capital premium reserve earnings reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At January 2005 27,825 141,324 40,177 90,687 16,370 (1,117) 315,266
Profit for the year - - - 32,310 - - 32,310
Investment property under development
- revaluation - - - - 6,208 - 6,208
- deferred tax - - - - (1,843) - (1,843)
Other property - revaluation - - - - 3,933 - 3,933
- deferred tax - - - - (1,180) - (1,180)
Effective hedges - movements - - - - - (4,212) (4,212)
- deferred tax - - - - - 1,264 1,264
Share of joint venture valuation gain
(net of related tax) - - - - 2,898 - 2,898
Share of joint venture movements in
effective hedges (net of related tax) - - - - - (845) (845)
Transfer on completion or disposal of
investment property - - - 8,855 (8,855) - -
Share issue 2,348 28,652 - - - - 31,000
Share options exercised 262 1,169 - - - - 1,431
Expenses of shares issued - (1,188) - - - - (1,188)
Equity settled transactions - - - 443 - - 443
Dividends to shareholders - - - (2,787) - - (2,787)
At 31 December 2005 and 1 January 2006 30,435 169,957 40,177 129,508 17,531 (4,910) 382,698
Profit for the year - - - 71,483 - - 71,483
Investment property under development
- revaluation - - - - 23,602 - 23,602
- deferred tax - - - - (6,982) - (6,982)
Other property - revaluation - - - - (495) - (495)
- deferred tax - - - - 50 - 50
Effective hedges - movements - - - - - 9,077 9,077
- deferred tax - - - - - (2,723) (2,723)
Gains on hedging instruments
transferred to income statement - - - - - (2,839) (2,839)
Deferred tax on gains transferred - - - - - 852 852
Share of joint venture valuation gain
(net of related tax) - - - - 6,006 - 6,006
Share of joint venture movements in
effective hedges (net of related tax) - - - - - 1,694 1,694
Transfer on completion or disposal of
investment property - - - 21,659 (21,659) - -
Shares issued 328 3,068 - - - - 3,396
Expenses of shares issued - (17) - - - - (17)
Equity settled transactions - - - 865 - - 865
Own shares acquired - - - (2,420) - - (2,420)
Dividends to shareholders - - - (3,060) - - (3,060)
At 31 December 2006 30,763 173,008 40,177 218,035 18,053 1,151 481,187
9. Capital and reserves (continued)
Share capital
Number of Number of
Ordinary Ordinary
shares shares
2006 2005
Authorised shares of 25p each 155,000,000 155,000,000
Issued at start of year - fully paid 121,739,993 111,301,195
Share placing - 9,393,939
Shares issued to long term incentive plan 420,458 -
Share options exercised 890,207 1,044,859
Issued at end of year - fully paid 123,050,658 121,739,993
The holders of ordinary shares are entitled to receive dividends as declared
from time to time and are entitled to one vote per share at meetings of the
Company. All shares rank equally with regard to the Company's residual assets.
Merger reserve
This reserve represents the excess of the fair value over nominal value of
shares issued as part consideration for assets acquired.
Revaluation reserve
The revaluation reserve represents revaluations relating to properties under
development and land and buildings included in property, plant and equipment
less any related deferred tax.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change
in the fair value of cash flow hedging instruments where the hedged transaction
has not yet occurred, less any related deferred tax.
Dividends
The following dividends were declared and paid during the year:
2006 2005
£'000 £'000
Final dividend for 2005 of 1.67p (2005: 1.67p) per 25p ordinary share 2,040 1,861
Interim dividend of 0.83p (2005: 0.83p) per 25p ordinary share 1,020 926
3,060 2,787
After the balance sheet date the following dividends were proposed by the
directors, for which no provision has been made.
2006 2005
£'000 £'000
Final dividend proposed of 1.67p per 25p ordinary share 2,055 2,033
10. Earnings per share and net asset value per share
The calculations of basic and adjusted earnings per share for the Group are as
follows:
2006 2005
£'000 £'000
Earnings
Basic (and diluted) 71,483 32,310
Adjustments:
Net valuation gains on investment property (inc share of joint ventures) (70,530) (29,599)
Movements in ineffective hedges (2,396) 4,317
Deferred tax (inc share of joint ventures) (12,904) (3,646)
Adjusted (14,347) 3,382
Weighted average number of shares (thousands)
Basic 122,465 112,633
Dilutive potential ordinary shares (share options) 1,271 1,526
Diluted 123,736 114,159
Earnings per share (pence)
Basic 58.4 28.7
Diluted 57.8 28.3
Adjusted (11.6) 3.0
The share placing in 2005 increased the weighted average number of shares by
1.029m. All other movements in weighted average number of shares have resulted
from the issue of shares arising from the employee share based payment schemes.
The calculations of basic, adjusted and diluted net asset value per share for
the Group are as follows:
2006 2005
£'000 £'000
Net assets
Basic 481,187 382,698
Mark to market of interest rate swaps (inc share of joint ventures) (1,644) 17,687
Valuation gain not recognised on property held at cost 2,214 -
Deferred tax (inc share of joint ventures) 44,723 46,575
Adjusted pre dilution 526,480 446,960
Outstanding share options 3,938 5,458
Adjusted diluted 530,418 452,418
Number of shares (thousands)
Basic 123,051 121,740
Outstanding share options 1,899 2,895
Diluted 124,950 124,635
Net asset value per share (pence)
Basic 391 314
Adjusted pre dilution 428 367
Adjusted diluted 425 363
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