Interim Management Statement

RNS Number : 9149L

Unite Group PLC

14 May 2010

 



14 May 2010

THE UNITE GROUP PLC

("UNITE" / "Group")

Interim Management Statement

The UNITE Group plc publishes its first interim management statement for 2010 covering its activities during the period to 13 May 2010.

Highlights

§ Strong growth in secured London development pipeline. Group now has approximately 2,300 bed spaces secured in the capital via contract, option or lock-out agreements for delivery between 2012 and 2014, up from 900 at the end of February.  Expected returns from the projects are in line with business plan;

§ Development commenced on two projects outside London which will deliver 1,000 bed spaces for 2011 at attractive returns.   All funding and planning consents are in place for these projects;

§ Clear evidence of increased letting activity in recent weeks, partly as a result of planned promotional activity. Reservations for 2010/11 increased to 71% from 59% reported at the end of February (reservations at 14 May 2009: 74%);

§ Forecast like-for-like rental growth for 2010/11 remains at 3% to 5%.

Commenting, Mark Allan, Chief Executive, said: "So far in 2010, we have made good progress in delivering on the commitments outlined both at the time of our 2009 equity raise and our full year results. Our development pipeline continues to grow and sites in London capable of providing up to 2,300 beds have now been secured under contract, option or lock-out agreements for delivery before 2014.  In addition, we have started on site with two further schemes totalling 1,000 beds that will complete in 2011.

"We remain highly focused on delivering our operational and financial objectives and continue to manage the business and its finances prudently to enhance net asset value and grow profits from the management of our portfolio. Reservations for the 2010/11 academic year are encouraging and we expect to see rental growth of 3% to 5%, in line with previous guidance.

"The success of the above, combined with the new growth opportunities we have identified, which would allow us to leverage our market leading position, unrivalled knowledge of the sector and scaleable platform, provide UNITE with strong and tangible foundations for growth in changing economic conditions and an evolving market."

Development activity

London development pipeline 2012 to 2014

As expected, the market conditions supporting our objective to acquire development sites in London have improved over the past couple of months.  The Group has secured approximately 2,300 beds across six projects under contracts, options and lock-out agreements in the capital for expected delivery between 2012 and 2014, representing an increase of 1,400 beds since the end of February. Where the Group's position is currently secured via lock-out agreements, which is the case for 1,700 of the secured beds, we expect contracts to be exchanged over the next couple of months. Planning is in place for approximately 700 of the secured beds and, for all projects, expected development costs and returns are in line with the assumptions that were set out at the time of the Placing and Open Offer in September 2009.

Approximately £175 million of development debt will be required to build out these beds, of which around £100 million will be funded from existing facilities. New facilities will be required to finance the remaining £75 million. The market for new development finance remains relatively tight with only a small number of banks currently offering terms to favoured partners. We will seek to secure this funding during the first half of 2011.

2011 deliveries

As outlined in its Preliminary Results announcement in March, the Group has been considering the potential to deliver projects for 2011 occupation where specific criteria are satisfied. Following this review, the Group has now committed to two schemes: one in Reading from its existing land holdings and one in Glasgow that has recently been acquired with full planning consent in place.  These projects, for which all necessary funding is in place, total 1,000 beds. In addition, the Group is considering proceeding with a further 150 bed scheme in London from its land bank.

The two committed schemes require a total capital expenditure of £64 million, increasing to £79 million if the third scheme is progressed, and are expected to deliver an average development yield of between 8.25% and 8.5%. These anticipated returns are lower than those expected on schemes for delivery in later years.  However, this difference is largely offset by the acceleration of income returns on the Group's investment, effectively by two years.  Committing to development at this stage also allows the Group to take advantage of very low build costs and fully implementable planning consents.

The majority of development profit and uplift in adjusted net asset value resulting from the Group's development activity will arise in 2011 and later years.  However, given the earlier commencement of the 2011 development programme, we would expect a small amount of uplift to be recognised in the second half of 2010 as development progresses.

2010 Deliveries

The three 2010 schemes being developed in our joint venture with Oasis Capital Bank, representing 1,119 beds, remain on budget and on track to be delivered this summer ready for occupation at the start of the 2010/11 academic year.

Profitability, occupancy and rental growth

The Group's key measure of profitability is Net Portfolio Contribution, which effectively represents the income from its investment and management activities less all business costs and overheads except those relating to development activity.  For the financial year ended December 2009, the Group achieved a profit at this level and the Group has continued to trade profitably, as measured by Net Portfolio Contribution, during 2010.

A key feature of the Group's move into profit in 2009 was its focus on, and investment into, its sales and operational capabilities, from which it continues to derive benefits. As at 13 May, reservations across the Group's managed portfolio comprising 39,500 beds stood at 71% compared to 74% at the same time last year and 59% at the end of February. The rental performance outlook remains in line with the range indicated in our Preliminary Results announcement in March 2010, at 3% to 5% growth for the 2010/11 academic year.

Following the Easter break, the Group launched a planned seasonal promotional campaign in a number of its key markets.  This activity, which involved offering discounts on a small number of rooms in a small number of properties, was part of the Group's normal marketing cycle.  The campaign was designed to increase awareness and has successfully resulted in a significant increase in student registrations and bookings.  The current weekly rate of reservations is well ahead of last year and in line with management expectations for the current year.

The Group's London portfolio for 2010/11 comprises 6,600 beds, representing 17% of the portfolio's bed spaces (2009/10: 5,500 beds and 14% of bed spaces).  Direct let sales in London tend to commence later than elsewhere due to the high proportion of international customers. Bookings typically commence from early June each year and the Group has a number of initiatives planned, designed to ensure a strong lettings performance in this key area.

The higher proportion of London beds in the portfolio also partly explains the slight dip in reservations compared to the same point in 2009/10.  In addition, we believe that an increase in the number of conditional places offered by certain Universities has contributed to a delay in bookings in some markets. Taking into account the reversal of these timing differences, together with the current increased weekly rate of reservations and planned future sales and marketing activity, the Group is comfortable that its reservations performance for 2010/11 will be in line with its expectations.

Valuations

The UNITE UK Student Accommodation Fund ('USAF') valuation dated 31 March 2010 showed that yields moved from 6.87% to 6.79% during the first three months of the year. The USAF valuation movement should provide a reasonable read across to stabilised assets in UNITE's managed portfolios that are valued on a half-yearly basis. Certain properties that have been completed in the past two years and which are stabilising, representing approximately £200 million of the Group's on balance sheet portfolio, will not experience the same impact of rental growth or valuation movement until stable levels of occupancy are reached. Until this time we would expect the value of these stabilising assets to remain broadly level.

USAF and acquisition of existing operational assets

At the time of its Preliminary Results in March, the Group outlined its intention to pursue new growth opportunities through the acquisition of existing third party operational assets by USAF.

During the period, the Group has reviewed a number of opportunities to acquire such assets from third parties where it believes it can add value through the application of its property and asset management capabilities. To date, suitable opportunities have proven difficult to secure as vendors and/or lenders have been reluctant to trade at acceptable prices. However, given the uncertain outlook in debt markets, we will continue to monitor these opportunities and seek to identify similar situations over the remainder of the year.

Following its successful capital raise in December 2009, USAF has the capacity to acquire assets up to a total value of between £200 million and £250 million, depending on gearing levels maintained in the fund.  Some of this capacity will be retained to pursue the opportunities outlined above but, in addition, it is likely that USAF will acquire further operational assets from UNITE in the second half of 2010 under the Development Pipeline Agreement that exists between the two parties.  We would expect between £100 million and £125 million of such assets to be sold to USAF later in the year, with the resulting capital released to UNITE, enabling it to manage gearing levels and/or invest into new development or other growth opportunities over time.

University partnership opportunities

The Group has continued to make progress in building its pipeline of opportunities to work in partnership with Universities to develop, upgrade and manage their on-campus accommodation.  As expected and outlined in our Preliminary Results announcement, funding pressures in the sector have acted as a catalyst for a number of Universities to examine their options in this area.  UNITE, with its excellent track record in attracting institutional capital into the sector, remains well placed to offer attractive solutions to these Universities by partnering with third party investors and then providing its proven development, asset and property management services across the University's portfolio.

The bidding process involved in such opportunities is relatively long and complex, but the Group has allocated sufficient resources to this area to ensure it has a reasonable chance of success.  It is unlikely that the outcome of any opportunities will be clear until much later in 2010 but, if successful, they will bring scale benefits to the Group as it is able to extend its operating platform across a larger portfolio and thereby enhance its profitability.

Market update

Demand for University places remains extremely strong for the forthcoming academic year, with applications made by 22 January 2010 up by 106,389 representing a 23% increase (source: UCAS January 2010). Following the Government's announcement on 24 March 2010 that 20,000 additional spaces will be made available, we anticipate a year on year increase in student numbers of approximately 70,000.

Clearly, there continues to be a degree of uncertainty around Higher Education funding following the General Election earlier this month.  The Browne Independent Review of Higher Education Funding and Student Finance is due to report back in July 2010 and is likely to provide the catalyst for any substantial change.

Whilst it is unlikely that the new Government will clarify the overall position for a few months, we anticipate that there will be further pressure on University budgets over the coming few years. These funding pressures will be particularly focused on capital budgets that have seen significant increases over the past ten years and we believe that teaching budgets will be protected to a greater degree. However, we expect the student accommodation sector to remain resilient overall due to the following factors:-

§ The growth in student numbers over recent years has exceeded the new supply of purpose built accommodation creating an ongoing demand/supply imbalance;

§ There is in-built growth in the sector for the next few years as three consecutive years of record student entries flow through the system, resulting in approximately 70,000 additional students in 2010/11;

§ The in-built growth considerably exceeds the current supply pipeline of beds under construction in the UK of approximately 9,000 beds;

§ The strong underlying demand for places continues (up 23% as noted above);

§ There is continuing strong and growing demand from international students for places at UK academic institutions (up 29% according to UCAS in January 2010).

In February 2010, more stringent controls over the granting of visas to students from outside the European Union were introduced. The new rules primarily relate to students applying for non-degree courses or to institutions that are not on the newly created register of 'highly trusted sponsors'. As UNITE's customer base  predominantly comprises students studying at degree or post-graduate level and as all of the Universities with whom we work are on the list of 'highly trusted sponsors', these changes will have a negligible impact on demand from overseas customers.

The current Higher Education budgetary pressures and the Browne review will result in a shift in funding patterns with regional and University variances likely to emerge.  Our market leading position, in-depth market knowledge and research-led approach towards this highly specialised  sector will ensure we are well placed to respond to changing patterns and regional variances by focusing carefully on the quality and location of our investment and operational portfolio and the partners with whom we choose to work.  We anticipate that there will be varying degrees of growth between different Higher Education institutions as funding cuts will impact some more than others and our approach will reflect this.

Outlook

Strong progress has been made in building the London development pipeline with 2,300 beds now secured under contract, option or lock-out agreements for delivery between 2012 and 2014. In addition, the Group has started on site with two schemes outside London totalling 1,000 beds that will be delivered in 2011 and has a further 150 bed scheme in London under consideration.

In the year to date, the Company has made good progress in meeting its operational and financial objectives.  It continues to trade profitably at the Net Portfolio Contribution level and its reservations performance for the 2010/11 academic year is encouraging, with the Group on track to deliver its rental growth targets of 3% to 5% for the 2010/11 academic year.  Furthermore, the first quarter valuation of USAF showed modest signs of yield compression as markets continued to recover and we expect this to be reflected in the 30 June 2010 valuation of the Group's stabilised assets.

The Group is, of course, mindful of the impact of the change in Government and the prevailing economic and market conditions and continues to manage the business and its finances prudently to enhance value and grow profits from the management of its portfolio.  Notwithstanding this, the fundamentals of the student accommodation sector remain strong and the Group's market leading status and unrivalled knowledge of the sector leaves it well placed to adapt to any changes that may arise and to take advantage of any regional or structural opportunities that emerge.

Conference Call

There will be a conference call for analysts and investors at 8.30 am today. To participate in the call, please dial:

Dial In No:     [phone]

Pin:                 5160438

Event title: UNITE Group Interim Management Statement Conference Call

A transcript of the conference call will be made available on the Group's website within 24 hours, www.unite-group.co.uk.

For further information, please contact:

The UNITE Group plc Mark Allan Joe Lister	Tel: [phone]
Financial Dynamics Stephanie Highett Dido Laurimore Rachel Drysdale Laurence Jones	Tel: [phone]

 

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