UNITE AND GIC EXTEND AND EXPAND JV RELATIONSHIP

RNS Number : 2543M

Unite Group PLC

14 September 2012

 



Press Release 14 September 2012

THE UNITE GROUP PLC

('UNITE', the 'Group', or the 'Company')

UNITE AND GIC EXTEND AND EXPAND JOINT VENTURE RELATIONSHIP  AND TARGET £1 BILLION LONDON PORTFOLIO

- TRANSACTION WILL ENABLE UNITE TO GROW RECURRING EARNINGS, FOCUS ON ACCRETIVE DEVELOPMENT ACTIVITY AND REDUCE LEVERAGE OVER TIME -

The UNITE Group plc, the UK's largest developer and manager of student accommodation, and GIC Real Estate ("GIC RE"), the real estate arm of the Government of Singapore Investment Corporation, today announce the extension of their existing joint venture (UNITE Capital Cities, "UCC") and the creation of a new partnership through which UNITE will undertake its next phase of London development activity.

The transaction, which is expected to be accretive to both UNITE's earnings and NAV whilst also delivering a reduction in the Group's leverage, comprises four principal components:

•           An extension in the life of UCC until September 2022 from March 2013.

•          The establishment of a separate 50:50 joint venture (the London Student Accommodation Joint Venture, "LSAV"), which will seek to invest £330 million in development activity in London over the coming years.

•          The forward sale by UNITE to LSAV of two of its existing London development projects following practical completion and stabilisation for cash consideration in line with previously disclosed valuations on completion. For LSAV, these acquisitions will be in addition to its planned development programme.

•          A mechanism whereby UNITE has the ability to increase its stake in UCC from 30% to 50% by 31 December 2016, at which point UCC and LSAV can be merged into a single entity.

From a strategic perspective the transaction allows UNITE to accelerate its investment in London development activity at a time when potential returns are particularly compelling and the scale of opportunity is greater than UNITE could fund alone. Furthermore, the forward commitment sale of two properties to LSAV will allow the Group to realise meaningful development profit and reinvest capital into development activity without diluting earnings.

UCC extension

UCC, which was established in March 2005 and had an original maturity date of March 2013, will be extended to a new maturity date of September 2022. In conjunction with the extension, UNITE will be undertaking a portfolio repositioning and refinancing exercise for UCC in the coming years as follows:

•          Approximately £100 million of UCC's existing assets, equivalent to around 25% of its total portfolio at 30 June 2012, will be sold over the next four years. The disposals will be targeted so as to focus UCC's remaining holdings on its highest quality London locations and the majority of proceeds will then be applied to de-leveraging in the JV.

•          UCC's existing senior debt facility of £236 million, provided by a syndicate of lenders headed by HSH Nordbank, matures in September 2014 and will need to be replaced with a new facility. It is UNITE's intention to have the replacement facility arranged and in place during 2013.

UNITE's UCC performance fee will become payable on the later of 31 March 2013 and the refinancing of the current senior debt facility. UNITE expects this performance fee to be worth between £5 million and £8 million, although no value is currently recognised in the Group's accounts.

Formation of LSAV and future London development programme

LSAV will be a new joint venture between UNITE and GIC, alongside UCC. Both UNITE and GIC will have a 50% stake and LSAV will have the same maturity date as UCC (September 2022). It will be the primary vehicle through which UNITE undertakes development activity in London and will have a right of first refusal over UNITE's London development projects until such time as its capital investment targets are met.

LSAV has contracted to acquire two properties from UNITE on a forward commitment basis (see below) and in addition plans to invest approximately £330 million in London development activity over the coming years, equivalent to between 3,500 and 4,000 new bed spaces. UNITE's share of LSAV development capital expenditure is £165 million, which is expected to be invested over the period 2013 to 2017 (by which time all projects are expected to be operational) at anticipated leverage of 65% loan-to-cost.  This means that the Group expects to invest approximately £58 million of equity into LSAV's development programme.

Development opportunities in London remain compelling and the Group already has potential development projects in solicitors hands or at an advanced stage of negotiation that would account for nearly 75% of LSAV's planned development spend if pursued. LSAV will focus the majority of its investment in projects offering below average rents for London, targeting sites with strong transport links and local amenities. UNITE and GIC can agree to extend the development programme by a further £200 million once the existing capital has been committed.

Forward commitment sales

UNITE has contracted to sell, on a forward commitment basis, two of its existing London development projects (following practical completion and stabilisation) to LSAV for an initial cash consideration totalling £129 million. This initial consideration is subject to a performance-related adjustment of +/- 10% after two years' operation of each asset. The properties to be sold are North Lodge, Tottenham Hale, a recently completed 528 bed property scheduled for occupation later in September , and Stratford City, a 951 bed development scheduled for completion in 2014. These sales are at values in line with the most recently disclosed estimated valuations on completion for the properties and will realise £39 million of development profit for the Group.

The disposals will release approximately £34 million of cash, after accounting for UNITE's 50% retained investment, which will be used to fund part of the Group's planned equity investment into LSAV's development programme. The cash released is equivalent to approximately 60% of the required investment and the remainder will be released from the Group's ongoing disposal programme.

UCC/LSAV merger mechanism

UNITE has an opportunity to increase its stake in UCC from 30% to 50% by 31 December 2016 and UNITE and GIC have agreed a number of ways in which this can be achieved:

•          The Group will apply its share of proceeds from UCC's asset disposal programme, after the repayment of associated senior debt, to acquire units in UCC from GIC at prevailing NAV.

•          The Group will also use its UCC performance fee, when paid, to acquire further UCC units from GIC, again at NAV.

•          The Group has an option to sell its recently completed Waterloo Road property (currently wholly owned) to UCC at Open Market Value subject to the NOI yield at sale being no lower than 6%. The asset is currently valued at approximately £22 million.

At 30 June 2012, UCC's NAV was £156 million and UNITE estimates that between 75% and 100% of the cash required to exercise its option to increase its UCC stake from 30% to 50% will be derived from the various mechanisms outlined above. To the extent that further funds are required, and if it so chooses, the Group can use its cash resources to acquire further units from GIC at NAV, prior to 31 December 2016.

If UNITE's stake in UCC reaches 50% before 31 December 2016 then UCC will merge with LSAV by way of a unit for unit exchange at NAV. In the event that UNITE's stake does not reach 50% before that date, then UCC will continue as a separate vehicle.

UNITE's management role

The Group will act as Property Manager, Asset Manager and Development Manager for the duration of both joint ventures. Its fees for performing these services are in line with the existing UCC fee levels.

Financial impact

The transaction enables UNITE to continue growing its recurring earnings whilst also investing in development activity and reducing leverage over time. It is expected to be meaningfully accretive to both earnings and NAV over the coming years. The key financial elements of the transaction are as follows:

•          It allows the Group to accelerate significantly accretive development activity at a time when returns from development are particularly compelling.

•          The sale of assets on a forward commitment basis allows the Group to commit capital to future development activity without the earnings dilution that would arise from the sale of income producing assets to fund this investment.

•          The probable early crystallisation of the UCC promote in 2013/2014 (estimated value £5 million to £8 million) will increase NAV as there is currently no value attributed to it in the Group's accounts.

•          The Group's share of NOI from the future development pipeline is expected to contribute to earnings growth from 2015.

•          Fees receivable are accretive to earnings and the Group's return on equity.

•          A greater proportion of the proceeds from the Group's ongoing asset disposal programme can be applied to de-leveraging, thereby helping to reduce gearing over time both on a balance sheet and on a look through basis.

Mark Allan, Chief Executive of UNITE, said:

"This transaction is a further important step for UNITE and is consistent with our objectives of growing recurring earnings, undertaking accretive development activity without stretching the Group's balance sheet and reducing leverage over time. It also gives us increased firepower in the London market at a compelling time, allowing us to increase our presence and investment in London, our key target market, where we now expect to have over 13,000 bedrooms within five years.

"Successfully extending and expanding our joint venture relationship with such a high calibre partner as GIC is testament to the track record that UNITE has built and further demonstrates the continued appeal of the UK student accommodation sector to investors around the world."

ENDS

Presentation

There will be a conference call for analysts this morning at 10.00am.

The presentation is available on the Company's website: www.unite-group.co.uk/investors.

Dial in numbers are as follows:

The UNITE Group conference call

Telephone number: 020 3450 9987

Participant code:  1469860

For further information, please contact:

The UNITE Group plc                                                                                                         Tel: [phone]

Mark Allan, Chief Executive

Joe Lister, Chief Financial Officer

Paul Harris, Strategy and Corporate Relations Director

J.P. Morgan Cazenove - Financial Advisor and Joint Corporate Broker               Tel: [phone]

Robert Fowlds

Bronson Albery

Numis - Joint Corporate Broker                                                                                      Tel: [phone]

Heraclis Economides

FTI Consulting                                                                                                                     Tel: [phone]

Stephanie Highett

Dido Laurimore

Faye Walters  

About The UNITE Group 

The UNITE Group is the UK's leading developer and manager of student accommodation, with a business model that focuses on two core areas:

1.         Development and Asset Management: UNITE undertakes the acquisition, planning and development of purpose-built student accommodation in the UK. Through the continuous assessment of quality and location of its investment portfolio, UNITE is well positioned to deliver value-adding strategies to those assets where further opportunities are identified. Working on behalf of its partners, UNITE acts as Fund Manager for the UNITE UK Student Accommodation Fund in which it owns a 16.3% share. UNITE also manages a number of Joint Venture partnerships.

2.         Professional property management: UNITE is home to some 41,000 students and has consistently proven high occupancy levels across its portfolio.

UNITE works closely with universities and colleges, in order to deliver high quality, well-located student accommodation at affordable prices in strong higher education markets. 

Founded in 1991, UNITE is listed on the London Stock Exchange (UTG).

For more information, please visit www.unite-group.co.uk or www.unite-students.com.  

About GIC

GIC is amongst the world's largest fund management companies.  It was established in 1981 to manage Singapore's foreign reserves. GIC strives to achieve good long-term returns on assets under its management, so as to preserve and enhance Singapore's reserves. Since its inception, GIC has grown from managing a few billion dollars to well above US$100 billion today.  GIC is headquartered in Singapore with a network of offices in nine cities worldwide. It invests internationally in equities, fixed income, natural resources, real estate, private equity and infrastructure.

About UNITE Capital Cities Joint Venture

UCC is a joint venture with GIC Real Estate, the real estate investment arm of the Government of Singapore Investment Corporation (GIC). Established in 2005 to develop new properties, UCC holds a portfolio of 15 properties located in London and Edinburgh valued at over £377 million at 30 June 2012. UNITE currently has a 30% holding in UCC, with GIC holding the remaining 70%.

Disclaimer

J.P. Morgan Limited, which conducts its UK investment banking business as J.P. Morgan Cazenove and is authorised and regulated by the UK Financial Services Authority, is acting solely for the UNITE Group plc in relation to the matters referred to above and for no one else in connection with such matters and will not be responsible to anyone other than UNITE Group plc for providing the protections afforded to clients of J.P. Morgan Limited nor for providing any advice in relation to any of the matters referred to herein.

 

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