Unite Group PLC (GB0006928617.SG) Earnings Call Transcript & Summary

Good morning, and thank you all for joining us on the call this morning. Today, Mike and I will be taking you through the highlights of our announcement released earlier this morning. We will be taking some questions at the end of the run through. So please do log them through the Q&A function on the webcast. So turning to the transaction. Early this morning, we announced a recommended cash and share acquisition for Empiric Student Property at 94p per share based on the current price, 1/3 in cash and 2/3 in shares. Our initial terms that were disclosed a few weeks ago were revised down by 2p, reflecting a cautious approach to trading following our diligence and a small increase in the cash component. This represents a 4% discount based on both companies' NTAs and a 20% discount to the replacement cost of the assets. We have concluded our diligence, and we've identified just under GBP 14 million of synergies. These can be delivered over the next 6 to 12 months following completion, and they represent around 50% of the earnings of Empiric and are responsible for the earnings accretion from the transaction. We also believe that the transaction will deliver a low double-digit unlevered IRR. The acquisition creates a really exciting growth opportunity for us as a business, and that's based on the fact that Empiric is a high-quality portfolio. It is focused on the strongest universities and locations. Secondly, it extends our customer life cycle and enhances our total addressable market to more returning students, second and third years and postgraduates at a time when the HMO market is under pressure. We will look to enhance and accelerate Empiric's performance and growth by using our platform, our customer base and our sales capability to drive performance. And we will look to add around 15 to 20 of our own assets to the portfolio, focusing on those returners and postgraduates, which could see this grow to around 15% to 20% of our overall portfolio over the next few years. So turning to the portfolio itself. Over the last few years, Empiric have drastically improved the quality of their property portfolio. 97% is focused on high and mid-ranked universities. Looking at it another way, 95% are in the global QS top 200, this measure being a critical appeal for international students. The locations are in very central locations, and this is where returning students want to live. And we have identified around GBP 100 million of the GBP 1.2 billion portfolio that we will look to sell and see us exiting 5 cities where we do not see the same prospects for rental growth over the medium term. The 2 portfolios fit well together. We have overlap in 16 cities. The Empiric asset age is 10 years on average. We will see our nominations agreements fall from 56% to 51%, but we would expect to grow this back to the mid-50s as we did after the Liberty Living acquisition by adding more nominations agreements to our existing estate. And we are acquiring the portfolio at an attractive valuation metric at around 20% below the replacement costs. And then looking at the addressable market, Unite has built a business that's focused on first year students and nominations with our university partners. And this acquisition gives us the opportunity to extend our customer life cycle to what we see as an underserved returners and post-graduate market. At Unite, we provide homes to just under 70,000 students every year and around 2/3 of them will go on to live in the HMO market. We've been targeting this market over the last 3 years through various trials, and we see Empiric as the best way to address it at scale immediately. Empiric's offer attracts this returners market with over 75% of their customers being returners or postgrads and it is popular with international students, given their more independent style of living, smaller building sizes and smaller flat sizes, and we have a lighter staffing model that means that their margins are comparable to ours. Just under 1 million students currently live in HMO. This has been shrinking due to higher taxes and mortgage costs and increased regulation around licensing and environmental performance, and we expect this to face further pressure from the Renters' Rights Act. The acquisition gives us immediate scale in the return to market, and we expect this to grow over the next 3 years after those disposals. And we think it would take nearly 5 to 10 years to build up an equivalent portfolio if we were to do that from scratch. As I say, we've identified around 15 to 20 of our own properties that would fit well on the platform, we'd aim to convert these over the next 3 years, and we will continue to look at further acquisitions and developments to keep growing the platform. And we believe that we can drive better performance from this portfolio. We will sell the product to our first years internationals, the majority of whom would go on to live in HMO. We will use the Hello Student brand to distinguish the offer to our students and those students who are looking at more independent living, and we see this as a natural progression for Unite students. And we can also use our sophisticated sales platform and agent networks to drive occupancy and rental growth. We've priced the deal off a lower occupancy in year 1, and the accretion analysis shows us returning to full occupancy over the next 3 years. The deal will require CMA approval, and we've started the process and we'll engage with the CMA following announcement. We've been through the process before when we bought Liberty Living, and we understand what is required and where the risks sit, and we feel that these risks are manageable and have been factored into our approach and overall bid. On that note, let me pass you over to Mike, who will take you through some of the financial returns analysis.

Thanks, Joe. Good morning, everyone. If you're looking at the pack, I'm now turning to Slide 6, where we discuss the financial effects of the transaction. The acquisition will help to enhance our earnings growth and also supports our target for total accounting returns of 10% per annum. Thanks to the cost synergies we're able to drive through our operating platform, we will deliver low single-digit earnings accretion within 12 months of completion. During the implementation phase of the synergies, we expect the transaction to be earnings neutral in the first year. We have identified GBP 13.7 million of annual cost savings in total, and these are broadly split 80-20 between overheads and property operating costs. To put this number in context, these savings equate to just over half of Empiric's EPRA earnings for 2024. The cost savings come from 3 main areas: firstly, removal of duplicate activity in roles; secondly, by leveraging our existing scale and in-house teams; and lastly, from economies of scale from transitioning Empiric contracts onto our superior terms. As Joe said, we're confident in achieving these cost savings for 2 key reasons. Firstly, the existing capacity of our platform to manage the additional Empiric beds. The acquisition will increase our portfolio back to 75,000 beds, which is in line with our operational scale prior to recent disposals. And secondly, we have the experience of having done this before through our acquisition and successful integration of Liberty Living, which delivered GBP 18 million of annual cost savings. There will be GBP 14 million of one-off implementation costs associated with delivering these synergies, meaning we will achieve a payback within 12 months. The acquisition also delivers attractive returns versus both our cost of capital and other investment opportunities. We forecast a low double-digit unlevered IRR with returns driven by the day 1 income yield, future rental growth and the value delivered from synergies. These returns compare favorably to other investment opportunities through acquisitions or new development, particularly on a risk-adjusted basis. Turning to Slide 7. We discuss the financing for the transaction. We've structured the acquisition to maintain our strong balance sheet with funding through a combination of new Unite shares, drawdown of our revolving credit facilities to fund the cash consideration and the rollover of Empiric's existing debt at an all-in -- in-place cost of 4.5%. Our leverage metrics remain healthy on a pro forma basis and in line with our pre-existing targets. LTV will rise to 29% and net debt EBITDA to just under 6x. We will also manage leverage through future planned disposals, both from our existing estate and the Empiric portfolio. Overall, we see the transaction as credit enhancing in the eyes of rating agencies, and this reflects a higher share of wholly owned and income-producing assets following the acquisition as well as our increased scale. Turning to Slide 8. We're also providing an update on current trading. Our reservations for the 2025-'26 academic year have continued to progress in line with the expectations set out with our interims at the end of last month. Today is A-level results day, and we head into the busy clearing period with occupancy of 90%, which compares to 95% at the same stage last year. As expected, we're seeing the pace of sales pick up as students and universities confirm their accommodation needs. We continue to target occupancy of at least 97% and rental growth in our sales to date is at the top end of our 4% to 5% guidance range. Empiric's interim results have also been released today and show they are 77% sold for the next academic year. They have noted the later sales cycle and like us, have seen an acceleration in sales over the past few weeks. They continue to target occupancy of 97% by the end of the calendar year with rental growth of around 4%. The 2p reduction in our offer price reflects the lower visibility over Empiric's occupancy this year as well as an increased allowance for cladding remediation costs. As Joe said, we've appraised the acquisition based on lower occupancy for this academic year, which we expect to recover to 97% over the following 2 sales cycles. The price adjustment, therefore, helps us protect our target earnings accretion from the acquisition. And with that, I'll hand you back to Joe.

Thanks, Mike. Just a couple of slides to wrap up. So we are allocating capital to this acquisition because we feel the returns are attractive relative to other uses at this time, as Mike mentioned, levered IRRs are in the mid-teens and comparable to development on a risk-adjusted basis. The transaction delivers a yield on cost of around 7% after synergies, which we expect to grow with rental growth, again, comparable to development. And on a day when A-level results are out, we expect record numbers of U.K. students to be offered places at university. And we continue to see broader growth opportunities within our sector, both within our traditional off-campus model and also the success we've made with the on-campus model, partnerships with universities. And we will continue to explore acquisitions where it's often cheaper to buy than to build in many markets. As we see lots of interesting opportunities, we will maintain our focus on the alignment to the strongest universities, our ability to drive earnings accretion and supporting our return on equity targets of 8% to 10% per annum. So finally, in summary, we are buying a high-quality portfolio that is aligned to the best universities, and we are doing this below replacement costs. We're excited by the opportunity to extend our customer life cycle. We see a clear opportunity to enhance and accelerate the growth in the Empiric portfolio over the next 2 to 3 years by leveraging our platform. And the transaction will deliver earnings accretion from the synergies and supports an IRR in excess of our cost of capital. On that note, we'll turn over to a few questions which will come in, which Mike will read from the pool of questions.

Thanks, Joe. I'll start with a couple of questions from Elliot Basford at CCLA. The first one is, will you retain a separate brand for the Empiric properties?

Yes, we will look to retain a separate brand. We do see that the students who live with Unite see as a really attractive brand to live within the first year. Our strong alignment to universities provides those students with a great place to come and get their first experiences with universities. But then the feedback we get from those students who go on to live elsewhere is that they would prefer a property and an environment which feels a little bit more independent. And we feel that the Empiric portfolio, Hello Student brand provides that. And so we will be operating under that brand. And as I mentioned, we see an opportunity to add around 15 to 20 of our own properties within this brand over the next 2 to 3 years.

And then the follow-up question from Elliot is, what are the GBP 14 million of implementation costs associated with the synergies? Can you break it down, please? Sure. So Elliot, I can give you a kind of a broad split of the breakdown. So about 60% of those costs relate to reductions in headcount that we're planning as part of the cost savings I highlighted and a further 20% or so are related to contract termination. So that is where we have -- we're anticipating savings from moving contracts on to essentially the Unite procurement basis, albeit there are some early termination costs associated with that. And then the last one is an increased investment in safety operationally that we'll be making, and that's just ahead of the planned remediation of CapEx of cladding on some buildings. Moving on then. We've got a question from Chris Millington at Deutsche Bank. Could you please break down the components of the low double-digit IRR between NOI, rental growth, occupancy and synergies? How does this compare to new developments, particularly considering elevated lead times? Thanks, Chris. So in terms of the IRR, so we're achieving an NOI yield day 1 of around 6%. We see that improving to around 6.5% with the benefit of occupancy recovery over the next 2 years as we discussed. That's then supplemented by our rental growth underwriting within the range of 3% to 4% per annum. And then there is some benefit from the synergies on top. And we do see some of that feeding into valuation given that about 20% of the synergies benefit NOI, which is essentially capitalized through the values. So that gets us to that low double-digit IRR. To give you a sense, we are generally targeting IRRs on new developments of between sort of low double digit to the mid-single digit -- mid-teens, sorry, IRRs. Although it's fair to say that on new opportunities we're seeing in the market today, it's getting harder to deliver those kind of returns. And as you would have heard us say, because of particularly protracted time lines around achieving PBSA approvals to get on site for new developments, we're finding not only are the returns under some pressure, but program is often under pressure as well. So on a risk-adjusted basis, we do think the visibility we have over this return compares really favorably to some of the other opportunities we see in the market. Next one then is from [ Mark Gubin ] of Olivetree Financial. Are you expecting any required disposals due to the CMA process? What other precedents do you think are relevant here?