Interim Management Statement

RNS Number : 1673S

Unite Group PLC

16 November 2011

THE UNITE GROUP PLC

("UNITE" / "Group" / "Company")

Interim Management Statement

The UNITE Group plc, the UK's leading developer and manager of student accommodation, today publishes its second interim management statement for 2011, covering its activities since the Company's half year results from 1 July 2011 to 15 November 2011.

Highlights

· Very strong sales performance for 2011/12 with 99% of rooms sold compared to 97% for 2010/11.

· Like-for-like net operating income growth of 3.1%, with recurring profit for the full year likely to exceed management expectations.

· Successful completion and letting of the Group's 2011 openings and 2012-14 development pipeline progressing in line with plan.

· Good progress in arranging new debt facilities, with £145 million of facilities arranged or extended in the Group's co-investment vehicles and £100 million on-balance sheet debt arranged or approved.

Mark Allan, Chief Executive of The UNITE Group, commented:

"We have continued to make good progress in line with our strategy and have seen excellent performance through the third quarter, in terms of reservation levels, customer service and financial performance.

"We remain well positioned to outperform the wider student accommodation sector as a result of our London focus, the high quality of our portfolio, strong university relationships and our established brand platform. However, we continue to monitor closely the capital markets and the broader economic picture and believe that a cautious approach to investment and managing debt is prudent in the near term."

Sales, rental growth and profitability

Reservations across the managed portfolio of 41,000 beds for 2011/12 are at 99% compared with 97% in 2010/11, following an extremely strong conclusion to the sales cycle over the summer. Year-on-year growth in net operating income for the full year is expected to be approximately 3.1%, with strong rental growth (4%) partially offset by higher operating costs, principally relating to utilities.

Lettings for the 2012/13 academic year commenced in early November and we have seen an early positive response to our rebooking campaign. Initial discussions with Universities regarding their demand are also encouraging and we expect rental growth for 2012/13 to be at a similar level to this year.

Based on the strong lettings performance for the 2011/12 year and continued effective control of costs, we expect recurring profits for the full year (Net Portfolio Contribution) to be ahead of management expectations. This also provides a strong foundation for further improvements in profitability in 2012 which we anticipate will be further enhanced by the impact of cost saving initiatives, worth approximately £2.5 million per year, recently implemented and announced (with exceptional implementation costs of £1.5 million being expensed in 2011).

Development activity

The Group's programme of 2011 openings, comprising four properties in Glasgow, Manchester, Reading and London, was completed and let during the reporting period on schedule and in line with budget. In addition, work progressed on the Group's 2012-14 secured development pipeline as follows:

· Construction activity commenced on each of the Group's 2012 openings, comprising three properties in London (1,341 beds) and one in Glasgow (477 beds), and is proceeding in line with plan.

· Planning consent and debt finance has been secured for a 563 bed project in Camden, central London due to open in 2013. Construction activity is expected to commence early in the New Year.

· A planning application was submitted for the Group's first 2014 opening, a 902 bed project in Stratford, East London.

Looking forward, the Group continues to see attractive development opportunities emerging but is maintaining a cautious stance towards committing to further development activity at this time until the funding climate becomes clearer. The Group has £200 million of debt facilities maturing on balance sheet in 2013 and will not make any development commitments beyond those outlined above until these debt maturities have been addressed. Consequently, the Group's secured development pipeline has not increased beyond the 3,283 beds disclosed above and as described within the Group's interim results.

Investment market activity

Transaction activity in the student accommodation sector has continued at healthy levels with over £500 million of investment transactions announced since 30 June. This activity has been supportive of current yields, which remain stable in the range of 6.0% to 7.0%. The most recent valuation of USAF's portfolio was at 30 September and showed an average yield of 6.7%, broadly in line with yields for its portfolio throughout 2011, and overall asset value growth of 3.1% for the year as a result of rental growth for the 2011/12 academic year. We consider this performance to be broadly indicative of the wider UNITE portfolio.

Against this backdrop, the Group is making good progress with its programme of selective asset disposals and remains confident of achieving its target of £100 million to £150 million of disposals by the end of 2012 at price levels supportive of current valuations.

USAF, joint ventures and debt financing

USAF (the "Fund")

The USAF portfolio continues to trade well, with occupancy and rental growth in line with the Group's wider portfolio, and important progress has been made in other areas as well:

· The Fund's £115 million debt facility with Lloyds, previously maturing in 2012, has been extended by four years and is now due to mature in 2016. The overall cost of the facility has fallen from 6.2% to 5.7%, with higher borrowing margins more than offset by lower swap rates.

· Following a ruling of the Icelandic Supreme Court on 28 October, USAF's status as a priority creditor of Landsbanki in respect of its £30 million deposit has been confirmed and the Resolution Committee of the bank has reiterated its expectation of a 98% recovery, although the timing of this recovery remains unclear. The deposit, of which UNITE's effective share is £6 million, has been fully provided for.

Joint ventures

The Group's various joint ventures are all trading well and the Group is at various stages of discussions with its joint venture partners regarding the longer term strategy for each vehicle.

With respect to USV, the Group's student village joint venture with Lehman Brothers, a short extension has been agreed to a £10 million debt facility in the JV that had been due to expire in October. In addition, the Group is in advanced negotiations with the Administrator of Lehman Brothers to acquire the 49% of the venture that it does not already own. In the event that the acquisition proceeds, all remaining debt in the venture will be replaced by a new £40 million debt facility for which credit approved terms have already been agreed.

In the Group's OCB joint venture, a £30 million debt facility with Barclays that had been due to mature in 2011 has been successfully refinanced by Nationwide.

Debt financing and gearing

Despite the tougher environment, over recent months the Group has continued to successfully arrange new, or extend existing debt facilities on satisfactory terms both in respect of its own on-balance sheet debt and that of USAF and its joint ventures. In total, £145 million of new facilities have been arranged for the Group's co-investment vehicles during the period (as outlined above) and £100 million arranged or approved for the Group itself, comprising the £60 million development facility for our 2013 opening and the £40 million facility for the prospective buy-out of USV.

Based on this experience the Group remains comfortable that it will successfully replace or extend its debt maturing over the next couple of years and is making sound progress in this regard.

Development capital expenditure in the second half of 2011 is expected to be approximately £70 million, meaning that gearing at 31 December is likely to be in the region of 80% to 85% net debt to equity, depending on the timing of asset disposals. Committed capital expenditure beyond the end of 2011 is expected to be approximately £125 million and, taking planned asset disposals into account, we expect gearing to remain below the Group's100% target as the development pipeline is built out.

Higher Education sector update

Applications to study at UK Universities in 2011/12 increased by 1.2% above 2010/11 levels, with 208,000 applicants unable to obtain a place at University this year, underlining the continued strength of demand for places. The introduction of higher tuition fees in 2012 is likely to cause a small reduction in applications next year, with most commentators estimating a headline drop of between 5% and 10%. However, UNITE does not anticipate a reduction in actual student numbers, nor in the number of students requiring good quality purpose built accommodation, as the significant demand/supply imbalance still persists throughout the UK's main university cities. The Group is also closely aligned with the UK's stronger Universities, where demand is expected to remain high.

UCAS recently announced a drop of around 9% in early applications for 2012 courses. Given that there are very few courses with early deadlines (principally Oxbridge and medicine and veterinary science degrees) and approximately thirty Universities still have yet to confirm their final fee levels, we do not consider this likely to be representative of the final position. The data also indicates that reductions relate to groups not aligned with UNITE's customer base, such as mature students. However, even a total reduction in applications of this level for the full year would still leave approximately 145,000 students unable to secure a university place.

Summary and outlook

The Group has continued to make good progress in challenging economic conditions, with occupancy for the 2011/12 academic year at 99%, growth in net operating income above 3% and recurring profits for 2011 likely to exceed management expectations as a result. The outlook for the 2012/13 academic year remains encouraging and, based on initial indications of demand, we are confident of achieving a similar level of rental growth to that achieved in the current year.

The Group's development programme, which will be significantly accretive to both net asset value and profit as it completes, is progressing in line with plan, with the first major new London openings scheduled for 2012. However, in light of the increased uncertainty in debt markets, the Group will take a very cautious approach to new development commitments until the outlook becomes clearer.

Conditions in capital markets remain challenging and have deteriorated in recent months. Nonetheless the Group has continued to arrange new debt facilities, both on its own behalf and for USAF and its joint ventures, which it believes provides reasonable evidence that other debt facilities can be replaced or extended in good time.

In summary the Group is making very good progress against each of its strategic milestones while maintaining an appropriately cautious stance given the significant uncertainty prevailing in the global economy.

Conference Call

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