Unite Group PLC (UTG) Earnings Call Transcript & Summary

Good day, and welcome to The Unite Group Full Year Results Conference Call. At this time, I would like to turn the conference over to Richard Smith. Please go ahead.

Great. Thank you very much, and good morning, everybody. Welcome to our results presentation. I'm sorry, we can't be with you in person. We're here in our head office in Bristol. But hopefully, as we look to the future, we'll be able to get together again some time in the not-too-distant future. This year has been a year like no other. Fraser, perhaps if you could move to delivering on our purpose slide, sorry, I should have said. This year has been a year like no other. COVID has impacted our business, our customers, our employees and obviously each and every one of us in different ways. But I'm hugely proud of the response of our business. Our focus has been on doing what's right, one of our values, specifically prioritizing the safety of our students and also our teams but also balancing the needs of all of our stakeholders. Through our people and our platform, I believe we have really demonstrated the resilience of our business. And the support that we have provided, particularly to students during this period, has enhanced our reputation with students, parents and universities. And I really do believe that will hold us in good stead as we look to the future. Our financial performance has obviously been significantly impacted. However, we have delivered close to GBP 100 million of EPRA earnings. And we are today announcing the reinstatement of our dividend with 12.75p payable in May of this year. And also the balance sheet underpinning the business remains strong. And as we continue to emerge from COVID, I think we can look ahead with real confidence. We expect near-term growth in student numbers but also strong growth looking out to 2030. Mostly near-term growth is really supported by the application data for '21/'22, which are again at record levels. And off the back of this, we're anticipating a return to full occupancy for the start of the next academic year and rental growth of 2% to 3% per annum. And that rental growth being supported by, obviously, that return to full occupancy but also our valued offer and service that we provide. And on that point, we've reached an inflection point this year, where purpose-built student accommodation is now cheaper on a comparable basis than university halls and also cheaper than private sector, HMO, student digs, call it what you will, again on that comparable basis. And that's before you value the services that we provide, the safety, the security, the student services and the welfare, so I think really does support both the value and affordability of what we offer. Our response to COVID, I think, really has demonstrated we are a business that has a strong social purpose, and we're led by that social purpose. So I'm also delighted to be able to announce today our new Sustainability Strategy, which will set out challenging targets for us to deliver over the next 10 years. Fraser, if you could move on to operational delivery slide, please, Slide 5. Looking briefly at business performance, and obviously, we've updated you all quite a lot through the course of the pandemic. But our letting performance, we reached 88% for the '20/'21 academic year. And that outperformed our peers by about 15%, so I think a strong performance. Our cash collection has obviously been something, I think, we're very much focused on. That has also been strong. Cash collection has been at around 95%, supporting our real confidence in our ICR headroom. And the pandemic has also created some excellent development opportunities for us. We've secured 2 schemes totaling GBP 175 million from the GBP 300 million placing proceeds that we raised towards the end of the summer last year. And we also have a deep hopper of opportunity. And for those of you who know the TP Paddington site, it is a real marquee site. We're excited to be back in Zone 1 London delivering really affordable accommodation. We're also now well into the '21/'22 academic sales cycle. Clearly, early progress has been impacted by the pandemic. Our reservations are 66%, which I believe is actually a strong performance. And as I say, we're confident, given the strength of demand that what we're seeing in the market, that we will return to full occupancy by the end of the sales cycle. And this confidence is really supported by, firstly, the government's road map they announced, as we all know, on the 22nd of February. Since that point, looking at sort of a daily run rate of sales, sales have increased by 150% on a daily basis since that period. And that demand is driven by both domestic students and international students who are now seeing the U.K. as somewhere they want to be and somewhere that is safe to be. And it's also supported by an expectation of record acceptances when we come to the autumn. I think we will see further grade inflation. Obviously, we've got teacher assess grades again this year. So I think we'll see further grade inflation. As you all know, demographics are now in our favor. That's both domestically and actually internationally. And if we look to history, higher education has always performed very well in periods of economic downturn. And during the last year, we're also able to complete the integration of Liberty Living despite COVID. We had to adapt our approach. But again, our people and our platform showed great resilience and adaptability. And we're now confident in delivering GBP 18 million worth of synergies from this year, which is an increase of GBP 3 million over the initial plan. Fraser, if you can move to Slide 6, please. As already mentioned, I am proud of our response to COVID. We provided over GBP 100 million of financial support for students who have clearly been significantly impacted by the pandemic. And we've also offered our students increased flexibility, particularly for international students that maybe initially weren't able to get home or subsequently haven't been to get to the U.K. We have remained open and operational throughout the pandemic. And I'd like to extend my thanks to our teams for that. They've been out there on front line every day. But they and we have had a really clear focus on safety and welfare. And examples of that include we were the first student accommodation operator to achieve COVID Secure status across our entire platform and that was independently accredited by the British Safety Council. And we also enhanced our welfare support, both physically, where we're able, for example, using our ambassadors to connect the students that continue to live with us to check-in to make sure they're all right, and also through our app, where we were able to add some sort of COVID functionality, which enabled students to let us know if they were self-isolating if they had symptoms such that we could provide the necessary support and connect them if need be with the relevant sort of health authorities. Fraser, we could move on one more slide to creating responsible and resilient business. Thank you. As I've mentioned, we're today launching our Sustainability Strategy. And it feels to me even absolutely right, given the challenges we're all facing, that we do this now. As I said, I believe we are a socially responsible business. But setting out 5 key objectives with some clear targets supporting each of them is something that I'm excited about and I'm confident about our ability to deliver. We will update more fully at a Capital Markets Day later in the year, when conditions allow. But very briefly, we are targeting to become a net zero carbon business by 2030. That is across our operations and our developments. And we'll achieve this through the development of science-based targets. And we'll publish our pathway on how we're going to achieve that by the end of this year. And we also plan to purchase 100% certified renewable electricity. And we're already well on the way to achieving that. We'll also look not only in terms of carbon we emit, but also how we can make our estate more resilient and resource-efficient. So we'll look to improve energy and water efficiency through -- as examples, through proactive upgrades. We've already got a good track record of that through investments in areas such as LED. And also we're supporting our students to live much more sustainably. Students are very focused on sustainability. We work very closely with the NUS, the National Union of Students with their positive impact program. And that's something that we will continue to do to ensure that our students sustainably as possible are supported by us. We'll also look to enhance the health and well-being of our employees and our customers. I think the pandemic, if we ever needed a reminder, shows the importance of people and how they can really contribute to success or failure. So we will look to improve our engagement scores. We will look to reduce employee turnover. And also for our students, really focus on increasing the positive outcomes from the interactions we have with students in areas such as well-being. And during the period of the pandemic, we've also been all reminded through the tragic killing of George Floyd and Black Lives Matter movement around the real need to provide opportunities for all. We want to create an environment where everyone can be successful, whatever their background, whatever their gender and whatever their ethnicity. So we're going to set ourselves very stretching targets across areas such as having a 50-50 gender split in our [indiscernible] in the business by 2023; to fill 60% of our managerial roles internally rather than going to the external markets as we're a business that is very diversed at the front line, but we need to do more to bring that talent through the organization; and also to ensure fair representation of all minority groups across the business by 2024. And then finally, to lead to the student housing sector, I believe we do already lead the housing sector, but there's more that we can do to raise standards in areas such as governance, safety and transparency to the benefit of all students in U.K. higher education. We'll also seek to achieve ISO 45001 accreditation for our health and safety system. We've already announced we'll have full compliance with TCFD financial disclosure and reporting requirements. And we will also target a year-on-year improvement in our GRESB score. And I'm pleased to say we saw good improvement this year with a score of 81 and a 4-star rating. And we're definitely looking to do better there. And so I think an exciting strategy, one that we'll really see us playing our part over the course of the next 10 years. And I'll now hand over to Joe to take you through the financials, which does include, I'm sure you'll all be pleased to hear, an updated earnings bridge.

Thank you, Richard, and good morning, everybody. So if we could move to Page 9. Given the backdrop, I'm pleased to be able to report EPRA earnings of GBP 97 million and EPS of 25.5p. NAV, or net tangible assets as it is now known, is down 3%. And that's been driven primarily by the COVID-related valuation adjustment that has been made to reflect the shortfall in income in the current academic year, which together in turn has resulted in a total accounting return of minus 3.4%. With improved visibility over the remainder of this academic year and the start of '21/'22 means that we are reinstating our dividend at a 50% payout ratio. On Page 10, we have set out the earnings statement, which has been significantly impacted by the Liberty acquisition and also by COVID. And it's easy if I talk through the main moving parts on the earnings bridge over to page -- on Page 11. So we completed the Liberty acquisition at the end of November '19, as you know. And therefore, the earnings have benefited from an additional 11 months of trading from this portfolio. As Richard mentioned, the integration has gone extremely well despite the challenges of having to do this remotely. And it's a real credit to members of both Unite and the former Liberty team in making this happen. We've delivered GBP 11 million of savings so far from our plan. And we are targeting an increase from the GBP 15 million we originally set out to up to GBP 18 million. And this is primarily through the rationalization of our central overhead teams. And this will all be realized in 2021. In 2019, we sold GBP 250 million of assets. And the full year impact of this compared to 2019 is a loss of GBP 11 million of earnings in 2020. And then turning to COVID. Overall, this has had a GBP 50 million impact on our 2020 performance. The decision to release students from their tenancies in April cost GBP 44 million on a Unite share basis, the loss of summer income, a further GBP 6 million. And then there's a GBP 15 million reduction relating to the current academic year relating to lower occupancy, flexible starts and the reduced number of international students, who typically take up more 51-week tenancies. In response, we reacted quickly in order to take cost out of the business and preserve cash, asking our teams to undertake work over the summer that would normally be outsourced, to drive energy savings and to reduce our head office staffing levels through both a restructuring program and then also reduced remuneration of bonus costs for directors and senior leaders across the business. Together, these actions delivered in-year savings of GBP 15 million. Moving to Page 12. The cash collection performance has been very positive for the current academic year, particularly through this second term. And that has been supported by the structure of our discount offered to students that requires them to be paid and up-to-date in order to benefit from that discount. We've now collected 95% of the contracted rents due. And we expect this to continue as we collect the remaining balances from universities and also further outstanding moneys from students. And given the payment profile of term 3, which only represents 25% of the full academic year amounts, the bulk of this will be invoiced in April. So this strong collection performance has meant that we've now collected over 95% of the cash needed to meet all of our covenants for the 2021 academic year. And given our ongoing cash collection and occupancy rates, we are fully confident that we will meet our covenant requirements in relation to this year. And we expect the headroom position in Q2 and beyond to improve materially. On Page 13, we set out the guidance for the 2021 earnings position. And recognizing that there are a lot of moving parts this year, we thought it would be helpful to provide a little bit more detail and color on that earnings performance, which we are today upgrading -- updating to 27p to 30p. The wider range than usual reflects the uncertainty around the return of students for the final term of this academic year and also the potential for '21/'22 to be disrupted by travel restrictions for international customers. So setting out the assumptions then for each of the terms. Term 2 is now largely done with income being recognized and largely collected. Term 3 does assume that students will return after the Easter break and will build on the current occupancy levels of 65% and assumes that all those students who have already checked in will return and we will collect rents in line with historical levels. Given the uncertainty around travel restrictions, we are assuming that we do not collect any summer income. And this will really allow our teams to ensure that the buildings, and they are ready to welcome students when they return in September. And term 1 of the next academic year assumes that we do return to full occupancy of 95% to 98% with pricing up 2% to 3% on the current academic year on the basis that the bookings proceed as we expect. The cost side of the equation is a bit easier to predict. We've initiated a cost reduction program to deliver around GBP 5 million of further savings in response to the discounted rents. We will also see a full year benefit of the Liberty synergies and some of the overhead structuring that was concluded at the back end of 2020. Together, this will deliver an EBIT target -- an EBIT margin in the mid-60s as well as planning to return to historic levels in 2022 and grow from there. And we will look to increase the dividend level as we get greater confidence over the '21/'22 and also the '22/'23 academic year sales performance. And we aim to get back to a dividend payout ratio of 80%-plus over this time horizon. Back by popular demand on Page 14, the earnings outlook chart shows the building blocks of our key activities over the next 3 to 4 years. The return to full occupancy, together with the cost synergies, should take EPS above 45p. The impact of the 2020 openings and further pipeline openings delivers another 10p. Rental growth of 3% for the next 2 years adds 4p. And this will be offset by planned disposals assumed in the chart of GBP 300 million over the next 2 years, reducing earnings by 3p. If all of this happens, EPS will increase to the high 50s on a full year basis once the pipeline is completed. If any of these assumptions change, we'll obviously let you know in due course. We're also restating our target to drive the EBIT margin to 74% as an exit rate in 2023. And whilst this benefit is not fully reflected on the chart, it does provide some balance, the potential for a higher level of disposals, funding costs or lower rental growth. On Page 15, we set out the NAV bridge. This position is slightly easier to follow. As I mentioned, we have adopted an EPRA NTA measure as our core measure of net asset value, stripping out intangibles from the old measure. Valuations have reduced by 2% in 2020, reflecting the lower level of income on the 2021 tenancies. We expect this reduction to unwind during 2021 as we return to full occupancy. There has been a small yield movement of 3 basis points, which Nick will come on to talk about. Retained profits were offset by swap breakage costs on the 2 facilities that were repaid following the placing in the summer and the integration costs of Liberty Living. We also made a provision of GBP 34 million in the year to replace the high-pressure laminate, HPL, cladding on our buildings, which I will come on to cover on Page 16. So on Slide 16, as you all know, the issue of fire safety has always been of critical importance to us. We work with fire safety experts, both within the business and externally as well as working with the government and the Avon fire brigade, who acts as our unitary fire authority to provide guidance for us across our estates. All of our buildings have been confirmed as safe to occupy based on the whole building fire safety systems, such as alarms, evacuation procedures, fire doors and fire stopping measures and building patrols, where necessary. Having been one of the first companies to act on ACM cladding, we've also been proactive in identifying and taking action to drill out all of our buildings with HPL cladding are safe to occupy. And we have started the process of replacing this cladding where necessary. Work is underway or complete on 7 of these buildings. And we expect to start on the remainder over the next 12 to 18 months. We do expect fire safety regulations to remain under the spotlight. And we will continue to ensure that our buildings are safe and in line with the latest safety regulations. And we'll continue to make any required investments. We will be working hard to recover those costs from build contractors, where appropriate, but have not included any recoverable sums within our accounts. On Page 17, you will see that we reduced our LTV to 34% and maintained our investment-grade credit rating through the pandemic. And we've kept a very high level of cash and debt headroom through this last 12 months and have received continuing and good support from our lenders, who've actually provided an increased headroom of GBP 150 million over the course of the year. The level of cash that we have been holding will reduce over the year to more normal levels through the repayment of some of our RCF facilities. We have maintained full compliance for all of our covenants. And we are confident of maintaining this position going forward. The end of Q1 is the tightest period as this 12-month look-back period covers the period when all the discounts are being provided. And the expectation is that the position will improve going forward on the basis that Q2 will be significantly better than it was at this stage last year. We're maintaining our debt targets of LTV in the mid-30s and ICR cover getting to a 4x cover level as we returned full occupancy and normalized rents. Disposals do play an important part in managing our net debt, offsetting our continued investment into development CapEx in order to manage LTV and also to maintain the quality of our portfolio. We aim to sell GBP 200 million to GBP 300 million of assets this year, reflecting the lower level of disposal in 2020 and then revert to disposals in the region of GBP 150 million to GBP 200 million per annum on an ongoing basis. On Page 18, we set out the performance of the co-investment vehicles, which has been similarly impacted by COVID, as you'd expect, with USAF's total return being broadly in line with that of the group and LSAV having outperformed as the valuations in London have held up more strongly. Both funds suspended their distributions during 2020 but are expected to restart in Q2 as the outlook continues to improve. We're continuing to make really good progress with our discussions with GIC about the long-term extension of LSAV. LSAV will remain focused on investment assets in London. And we will maintain our 50% share in that JV in order to retain our exposure to this important market. We recognized a further GBP 4.6 million of net performance fee this year. And we'd expect to crystallize the remainder of the performance fee on the close of the transaction later this year, which we'll be guiding to be in the region of GBP 15 million to GBP 20 million. On that basis, I'll hand over to Nick to take us through the property updates.

Thanks, Joe. Good morning, everyone. If we move on to Slide 20, strong investment appetite. The sector showed remarkable resilience during the pandemic with growing interest from both existing and new investors into the sector. Transaction volumes were up at GBP 6 billion last year. And whilst this was heavily weighted towards the iQ transaction, interestingly there was a lot of activity on single asset transactions. Around GBP 1.25 billion single assets were sold in -- last year, which is the highest level since 2017. We're forecasting that transactions for this year will be in line with the average annual run rate between GBP 3 billion and GBP 4 billion per annum. So far, around GBP 550 million worth of assets have transacted this year. And we expect that rate to accelerate as we move out of lockdown and universities reopen. In terms of our portfolio, as Joe has been talking about, our yields have broadly remained stable and yields remained stable within the sector, albeit the trend of growing divergence between prime and secondary assets continues. We've had a 3 basis points expansion, which has been primarily related to write-down of assets located at weaker markets. In addition to this, we've had lost income through rental discounts broadly being deducted from valuations. However, this is a temporary measure. And we expect that this discount will unwind in 2021 as we return to full occupancy and rental growth. We move on to the next slide. Rents have remained resilient. They're up 1.1%, helped by our strong nominations position. Tenancy lengths have shortened due to flexible check-in and start dates, the start of the academic year. And as Richard mentioned at the start, rents are now, on average, cheaper than comparable HMO rents once we make deductions for utilities and WiFi costs. In terms of disposals, we've been making very good progress. We sold a single asset at GBP 10 million last year. We're well advanced with a GBP 130 million portfolio of regional assets. These assets are forecast to underperform average portfolio returns. And we expect to announce further progress on this portfolio sale by the end of this month. And therefore, we are reiterating our guidance of GBP 200 million to GBP 300 million worth of disposals in-year. If we move on to the next slide, the pandemic has had a significant impact on pipeline, both in terms of programs as sites were shut down and materials have been harder to come by, but particularly the funding environment has also got tougher for smaller- and medium-sized developers. We're forecasting around 20,000 beds will be delivered this year. However, I wouldn't be surprised if those numbers reduce as schemes come under program pressure and slip to the following academic year. Some of you would have been aware of recent changes and announcements from government around changes to planning policy. Whilst student accommodation isn't referenced specifically, the general tenor of those changes are supportive towards student accommodation and residential rented market. The London Plan is due to be adopted shortly. That puts pressure on developers to secure support for funding applications and nomination agreements in order to obtain planning consents. And I think this is a trend that we'll see start to merge regionally as well. Interestingly, I see this as an opportunity for us rather than a threat, given the quality of university relationships that we have across key markets in the U.K. In addition, the London Plan also states that 35% of all new bedrooms need to be affordable on all new London schemes moving forward. This will further enhance the attraction of our new scheme to universities but also will help strengthen our brand by opening up a wider customer base, who may otherwise not have been able to live in our accommodation. Moving on to the next slide. We've had a very strong year again on pipeline. We've delivered just under 2,500 beds last year, 40% of which were secured under long-term nomination agreements with a WAULT of 22 years, which gives the business strong income visibility into the medium term. As you'll be aware, we, of course, work on both BRI and Middlesex Street in order to preserve cash during the pandemic. However, we've restarted work on both of those projects. And both will be completed in time for the '22 academic year. For those of you who have been following us for some time would have heard me talk about the value of our partnerships with our contractors. And that really became apparent last year. We managed, of course, to restart both of those schemes with limited additional cost exposure to the business, which has enabled us to maintain returns on both of those projects. In terms of new bed sites, we secured both Edinburgh and Paddington. Paddington is a really exciting opportunity for us. It will be our first application and first building located in the city of Westminster. Discussions with the local authority have been very positive to date. The design is almost finalized. And we'll be submitting a planning application for that scheme in quarter 2 this year. We've got around GBP 200 million worth of assets under offer and in legals, which we're working through in high-quality markets. But also, we're seeing a growing opportunity emerging in London to secure further the development pipeline as other markets and other uses continue to suffer as a result of the pandemic. And we hope to be briefing you further on that as we go through the course of the year. And finally, I just wanted to touch on our net zero carbon ambitions. As Richard has mentioned, we'll be trialing our ambitions at both Edinburgh and Paddington developments. And we're working through the design and cost implication of those during the course of this year. But all further schemes will have that ambition in mind. We'll be providing a further update at the Capital Markets Day towards the end of this year. So on that basis, I'll hand over to Richard, who's going to wrap up and then take through to questions from analysts.

Thanks, Nick. If we could move on to Slide 25, please. The fundamentals of the U.K. higher education sector do remain robust. The student intake for '20/'21 was strong, delivered growth of 5.4%. Actually, if you look at sort of Unite statistics, we actually delivered stronger growth of 6.3%, reflecting our alignment to the best-performing universities. And within that, international demand was and remains strong, but it was clearly impacted to an extent by COVID travel restrictions. Universities have continued to remain open through the latest national lockdown. And we are expecting a full return of students post Easter. Really positive to hear yesterday that the Welsh government announced the full return of students to Welsh campuses from April 12. And I'm hopeful Scotland and England will surely announce that they are following suit. Being on-campus is absolutely where students want to be. We've undertaken 3 sort of research surveys during the course of the pandemic. And absolutely, students are telling us in very significant numbers they want to be on-campus. Yes, they know it's going to be different, but it's -- they want to get on with their lives. University is so much more than the academic experience, it's a life experience. And we've actually seen our occupancy steadily improve over recent weeks. And we're now 65% occupied. And also in terms of higher education, we welcome the government's recent skills white paper, where it's setting out a clear commitment to widen participation in post-18-year-old education, not just higher education but also further education. But within that, a clear focus on quality research and quality teaching, and they are absolutely things that are delivered by our partners. If we turn to Slide 26. Now what does that mean for our student numbers? We're obviously expecting strong demand supporting that move to full occupancy for '21/'22. UCAS applications were up 8.5%. And that growth was strong, both domestically and internationally. I do expect the participation rates to continue to increase. And obviously, we're now in a period of sustained demographic growth, both domestically and internationally. Also the U.K. initially, in response to the pandemic, was perhaps not necessarily seen as handling things as well as it could. But more recently, the U.K., with the vaccine rollout, the more stringent lockdowns, is now seen as the most attractive U.K. student destination with particularly strong growth from India. And outside of the management of the pandemic and vaccines, that's also supported by the U.K.'s position on post-study visas, where we've got some of the most attractive visa arrangements of any country in the world. So I think that's very positive for the international student outlook. To put that sort of demand in context, in the U.K. by 2030, we can expect to see growth in number of students at university by at least 15%. And that's without any kind of significant increase in participation rates. The U.K. government have again recently reiterated their target of getting to 600,000 international students in the U.K. by 2030. Interestingly, the government are now starting to talk about 600,000-plus because they've seen good growth in the last couple of years. And again, if you even take current numbers, that's growth of another 15-or-so percent in terms of international numbers. And we're also really pleased to hear the Chancellor's statement in the recent budget, where he talked about the government's desire to see the U.K. as an international research superpower. And that can only be achieved with the support of a thriving higher education sector. If we move to Slide 27. Our university partnerships continue to deliver really strongly for us. And they do remain central to our strategy. 60% of our beds are sold via nominations agreement, that's over 20,000 beds, significant percentage of those secured on multiyear index-linked agreements with an average remaining life of 6 years. And our response to COVID, I genuinely believe, has enhanced our reputation with our university partners. I believe that COVID has really made universities think again as to whether they are best-placed to operate their own accommodation. And that will lead to opportunities for us as we look to the future. Obviously, early in the pandemic, any partnership discussions that we had were paused for obvious reasons. But more recently, we're now again having really meaningful conversations, and we're having conversations with 3 highly ranked existing university partners covering 7,000 beds. And those opportunities would see potential on-campus development, off-campus development and also long-term nomination agreements. And as Nick referenced here, we're really seeing London as an opportunity. TP Paddington is a really exciting scheme. And it's really positive that our London university partners, some of the strongest institutions in the world, are really supportive of our growth plans for the capital, which is obviously incredibly important, given the requirements of the London Plan. If we can move to Slide 28. Just to conclude, I think we can now look ahead with real confidence. I do accept there are still short-term uncertainties created by COVID, but I believe that we can navigate those. If we look past that, there is a really positive and growing demand outlook. Our focus on delivering high-quality, affordable homes for the U.K.'s best universities is absolutely the right strategy. We're well positioned for sustainable and meaningful growth in earnings through our secured development pipeline and things within our control, as Joe has outlined. And as demonstrated, I think, by the pandemic, our brand, our platform and our capital structure does provide that platform for growth, whether that's for further development opportunities, new university partnership opportunities that I have just picked up. But also the opportunity to continue to attract more nontraditional first years to our market -- to our products, sorry, with nearly 1 million students living in that market, it really is a very significant opportunity. So that brings the formal presentation to an end. So thank you all for listening, and we can now take questions starting with the webcast and then also then any other questions after that.

[Operator Instructions] And we'll now take our first question. It comes from Paul May of Barclays.

Thanks for the presentation, obviously very confident outlook. Five questions that should be relatively quick. You've highlighted a slight reduction in the development target to 1,500 to 2,000 from circa 1,500 to 2,500 previously. It implies a greater proportion of reduction post-Liberty Living deal. Just wondering what driver it would be. Is that lowered development target? Second question is, do you see good opportunities to take on uni-owned [indiscernible] accommodation, especially given the issues some of those universities felt during COVID? Thirdly, what dictates the range of LSAV performance fees of GBP 15 million to GBP 20 million? I'm assuming that they're relatively locked in. So just wondering what the -- what's driving the range. Do you expect further yield compression to come through now, especially given the deals that concluded in 2020, particularly referring to iQ and Blackstone deal? And then finally, given where your shares are trading, obviously in the premium rating, [indiscernible] invest operating platform in the market that you could actually drive more synergies from acquiring others as we saw with Liberty Living. Just wondered, do you see further opportunities for those large-scale acquisitions and further consolidation within the industry? Or do you think that's best left to others and you have to focus on growth developments?

Thanks, Paul. Taking those in turn, I think the development bed number targets isn't a reduction in our ambition, it's probably a greater focus on London, where the cost per bed is higher, so the level of capital which we will be committing is not reducing. The second point around university opportunities, I think, as Richard mentioned, yes, we're definitely having more conversations sort of coming through COVID around universities questioning the best way for them to provide the accommodation to students. And I think we are having some more and very interesting conversations at the moment. So we are confident that we will continue to be well placed and be working to persuade universities to do that. On the LSAV performance fee, the range is really will be determined by the final valuations, the date at which that performance fee is calculated. And just where the valuations and therefore the overall returns of that vehicle over its 10-year life will get calculated. And so just given that uncertainty, we provided a range at this stage. On yield compression point, I think, as Nick mentioned, what we've seen over the last 12 months is this continuing divergence, where assets in London and the stronger markets have actually shown strength and some compression with weakness in those more regional or weaker markets, where the university's outlook for growth is weaker. That is a trend that we think will continue. So overall, we feel that a balanced yield position over the next 12 months remains the most likely outcome. But we could see strength in some of those stronger markets. And then finally, I think acquisition opportunities we talked about. With Liberty, I think we picked up what we felt was the best large-scale operation. There aren't actually that many large portfolios left, which we feel would fit very well with our portfolio, albeit we are still looking for smaller-scale portfolios and single asset acquisition opportunities, where we feel it will enhance the portfolio quality, enhance the earnings position of the business and the long-term quality of income.

[Operator Instructions] And we will now take our next question. It comes from Christopher Fremantle of Morgan Stanley.

Just as you start to look towards the future, could you just give a little bit more detail about what you think is the likely impact of the Augar Review? I mean it clearly seems quite a lot of time ago since it was published. Has it effectively been sort of pushed into the long grass? Or should we expect some of the sort of key headline measures to be adopted as the dust settles post COVID? Any insights you can give on that review's likely future impact, please? A bit more detail would be great, please.

Yes. I don't think the Augar Review is sort of completely dead. The can has certainly been sort of kicked along the road a number of times, whether that was Brexit or whether that was now the pandemic. I mean the skills white paper does, I think, bring forward a number of the thoughts and ideas that were in Augar, particularly around the level of funding available to further education as opposed to higher education and also focus on sort of the skills wallet to enable everyone, not just sort of young adults, to be able to go into education. I'm probably doubtful that we will see some of the headline recommendations of Augar coming in, so a headline fee reduction to GBP 7,500, as an example. I think we know that the current fee level has been frozen and will continue to be frozen. I think what we could see, as we look over time, is an increasing view that depending on the nature of the degree that you are studying, the level of financial support that will be available from the government might vary. So areas that the government really want to prioritize in terms of skills that are required for the economy may get the full GBP 9,250 or even could actually get a little bit more to encourage the universities to deliver those. But other courses, which perhaps the government don't believe are sort of critical to the skills requirement of the economy, maybe won't get access to such a generous level of funding. And therefore, universities and students will need to decide whether they want to do those courses, deliver them or attend them. But that really is sort of speculation. I'm not aware from any of my conversations anything that's likely to happen imminently. So the sort of the next comprehensive spending review is probably when we might hear a little bit more. But I don't think anything is imminent.

We'll now hand over for webcast questions.

It's Mike Burt here with webcast questions. So the first two questions we have come from Robbie Duncan at Numis. His first question is you've talked about portfolio segmentation initiatives to drive enhanced rental performance. Can you add some color to this, both around potential initiatives and also potentially impact on net rental income? And his second question is you've highlighted a return to an 80% dividend payout ratio as visibility improves. What is your current expectation around timing?

Just on the first question, I think one of the things that we increasingly appreciate is that perhaps parking the product, but certainly, our service offering at the moment is sort of relatively sort of homogenous. If you're a first year domestic undergraduate or a postgraduate or an international student, you largely get the same service from us, obviously a service that I would argue is good. But you clearly have different wants and needs. You've got a different level of independence. So I think a real opportunity to look at our portfolio and actually say in that particular building or that particular block, that will be focused on postgraduates. Maybe, therefore, you have a sort of a different service offering, a different level of access in terms of reception and welfare, which drives some cost benefits from us for the individual student. They then get to live in an environment with sort of like-minded students, which is incredibly important. So I think sort of segmenting the portfolio to deliver that is something where we can then deliver the real value, the real opportunities that students want to have to interact with one another within our portfolio. Within the portfolio itself, I think there will be some product variation potentially over time, postgraduate buildings, perhaps a different mix of social play and study space. And clearly, the rental growth and our 3% rental growth ambition is supported by demand. But it has always been supported by offering students what they want. And if we can really tailor the service proposition, I think it's actually supportive of that 3%.

And on the timing of the dividend point, I think we say that we want to see confidence and visibility returning. So clearly, the sales cycle for the '21/'22 academic year is an important milestone. And then we'll be looking for the visibility over '22/'23 returning in terms of both occupancy and rental growth. So within our results announcements in 12 months' time, we'll have a good idea. But it probably won't be until mid-'22 that we'll get that really clear visibility of how things will come out.

Our next questions come from Matthew Saperia at Peel Hunt. There are two questions. I'll take them each in turn. The first is it's interesting to know that the domestic students pay a 1/5 less than overseas. Given your guidance for your full occupancy and rental growth and you assuming this gap closes, are you anticipating the balance between domestic and overseas students return to more normal levels?

I think really that sort of distinction between the sort of the different price points for our international students versus domestic student really supports that range of 2% to 3% this year. We are, as you would expect, currently in our mix a high proportion of domestic students. Our marketing activity has really been focused on the domestic market and particularly penetrating the HMO market. If the international student market comes back very strongly, as all signs are pointing to, and the international students can get here, then I think we would return to something closer to that traditional mix and be at the higher end of that rental growth guidance.

And then Matthew's second question is do you sense a new focus on value for money among all customers, noting the comment that your offer is now cheaper than HMOs when including services?

I think so. Yes, definitely. I mean, I think one of the things that students are clearly saying, and not just students, their parents, that there is a real need to focus on safety, security and cleanliness. And that is something that obviously is very much within our control. I think the flexibility that we've shown and the ready discounts also sort of play into the thinking of parents. So I do feel that understanding that broader offer, that notion of being a responsible landlord is absolutely now playing into the perception of value.

And we have two questions from Andres Toome at Green Street. The first is there is an 8 percentage points difference between check-in occupancy of 80% and contracted occupancy of 88%. Have you collected rent from this cohort? Do you expect these students to become rent-effective in the last semester?

So the students, they haven't arrived. Some will have paid sort of deposits, et cetera. But we are not anticipating that those students will now come to the U.K. They are effectively all past their check-in date, even the sort of extended check-in dates, where we've demonstrated flexibility, predominantly international students. So no, we are not anticipating that they now come this year.

And the second question from Andres is are rental guarantees in market transactions linked to the current academic year? Or do these apply also for the '21/'22 academic year?

So we're seeing a growing trend of portfolios covering both academic years now. And that is just a factor of the circumstances we find ourselves in. I think as the market normalizes, we'd expect rental guarantees to remain but only remain for the in-year or academic year as opposed to the subsequent academic year as well.

Next question has come from Thomas Buisson at Clearance Capital. The first one is can you please remind us which inflation number is used in most nomination agreements? Is it the 12-month change in CPI to August or September?

The majority of our nomination agreements actually still use the RPI measure rather than the CPI measure. There isn't though a specific month reference point. It's more determined by when the nomination agreement was signed. So there's a whole range of them. But it's generally RPI plus generally 0.5% is the measure that we use.

And then Thomas' second question is beds under nomination agreements between 2 to 5 years in length have almost halved whereas all other maturities have increased in number. Can you please provide additional color as to why?

It's really, say, just the sort of nature of the situation, where at the moment, a couple of agreements have rolled off. There is, I think, understandably from a number of universities, a little bit of caution as to what they're going to commit to. Conversations over the course of the last month or so with universities is generating an increased level of optimism. So I would expect us to be able to return to those historic levels of longer and better quality nomination agreements over time, but it really is just the churn and a degree of conservatism, which I absolutely understand from universities.

Next question comes from David Brunsdon at Aztec Alliance. Do you see an increased appetite by universities to realize the value in their own student accommodation to repair their finances?

Yes. I mean, I think, first and foremost, universities are really thinking about the operational intensity of operating student accommodation. I think the pandemic has really demonstrated to them some of the challenges that, that brings. Universities do want to continue to invest in their campuses in sort of nonacademic areas. It remains the case that very few university beds have been built over the course of the last 5 years. And I think very few university-built beds on their own will be built as we look to the future. So absolutely, they're looking at ways to leverage their estate, leverage their -- the land that they have available to support the student experience. And I think one thing that the pandemic has really proved to maybe some of the universities that still weren't quite getting the student experience as being really important, is that for a student, university life is so much more than just a pure academic experience. It is the whole campus experience. It's the facilities that are available. It's the quality of the accommodation supported by the service provision that they've got. And I think that's going to make them really think about do they want to be operating? Can they do that as well as others, such as us? Obviously, I'd argue not. Can they do it as efficiently as us? I would absolutely argue not. So yes, I think they'll be looking at that. I think what we will need to work closely with universities on is what's the structure of those deals. Universities, particularly when you're talking about on-campus assets, will want to retain a degree of control, a degree of ownership. And that's something that I think we can work through with university partners but will take a bit of time.

And then we have a final question from Rafael Torres Villalba, APG. Great initiative on sustainability. Will you follow a report on the CRREM pathway? Maybe I can pick this up. So Rafael, in developing the net zero ambition for 2030, we have used the CRREM tool. And certainly, as we pull together that forward pathway over the next sort of 6 to 12 months that we will revisit that and potentially report on it in the future. So there are no further questions from the webcast, so I'll hand back to Richard.

Great. Well, thank you very much, everybody, for joining. Obviously, if you've got any other questions, then please do fire them through to us. But with that, we can draw the presentation to a close. Thank you.