Unite Group PLC (UTG) Earnings Call Transcript & Summary

Hello, and welcome to The Unite Third Quarter Trading Update Call. My name is Laura, and I will be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Richard Smith, to begin today's conference. Thank you.

Thank you very much, and thank you, everyone, for joining the trading and valuation update call this morning. I know it's a busy morning for many of you. Getting straight to it. Our operational performance has been very strong, and we expect 2022 earnings at the top end of our guidance. Our occupancy stands at 99%, and rental growth has been strong. And we believe that rental growth is sustainably strong. And our cost base is well protected from inflation. And looking at the valuations, they have increased on the back of the occupancy and rental growth I've just referenced. For the academic year that's just completed, the -- we completed the sales, rental growth was 3.5%. However, on a like-for-like basis, this increases to 4.5%. This like-for-like adjustment is simply that we have sold additional beds over last year in our lower-priced markets, markets such as Sheffield and Leicester. So the strong overall performance across all markets supports increased rental growth guidance for the '23-'24 academic year of 4.5% to 5%. And our confidence in this growth is underpinned by the demand drivers that we have talked about previously, demographic growth, increasing participation and a return of international students to the U.K. and a continuing attraction of the U.K. to international students but also 2 newer but no less valuable drivers. Firstly, in terms of supply, the supply of new purpose-built beds is slowing pre- the pandemic. Roughly around 30,000 new purpose-built beds were opening each year. That slowed to 15,000 to 20,000 beds during the pandemic. And this year, we expect new supply at around 10,000 beds, and that level of new supply is where we see things, obviously, not a perfect environment looking through planning, et cetera, but only around 10,000 new beds per year in terms of new supply. You then look at the HMO market, so student takes a market that's got 1 million or so students in it. That market is actually declining as buy-to-let landlords are selling or not renting to students. Therefore, over the course of the next 2 to 3 years, we actually expect a net reduction in the total number of beds available for students to rent at university. So a positive support there in terms of supply. And also in the current environment and the cost of living crisis that is impacting all of us, our all-inclusive offer provides real price certainty to parents and to students. And we believe that is making us even more attractive to all types of students, not just first years, but first years, second years, mature students, postgraduates to come and live in purpose-built student accommodation. We, therefore, believe that rental growth at the level of which we're guiding, the 4.5% to 5%, that continues to represent value for money and is sustainable, as I said. And this rental growth, combined with the inflation protections that we have within our cost base, means that we are well placed to continue to deliver strong operational performance. On costs, very briefly, we are well protected. On energy, we're fully hedged for 2022, 2023 and through the summer of 2024. And we'll, therefore, hedge the remainder of '24 and '25 energy requirements by this time next year. And on staff costs, we took the opportunity in the first half of the year to completely restructure our operational business. That restructuring has led to additional pay awards above the normal annual increment that we pay in January to all of our operational teams and also generated GBP 2 million of annualized savings. And our operating platform, PRISM, continues to support us in driving further cost efficiencies. I'll now hand over to Joe to take us through financing and the balance sheet more generally.

Thank you, Richard, and good morning, everyone. Given the volatility and macro events for the last few weeks, understandably much attention has turned to balance sheet and funding. Having recently completed the previously announced disposals and a small portfolio in Aberdeen, our pro forma LTV is currently 29% and net debt-to-EBITDA is in our target range of 6 to 7x, and we have cash headroom of GBP 350 million at the current moment. We're well protected in the near term from rate increases with 93% of our current debt hedged at a cost of 3.4%, with an average debt maturity of just under 4.5 years and less than 10% of our C3 debt maturing in the next 2 years. The debt markets are open. We recently extended our GBP 450 million RCF by 12 months into 2026, and that was at current pricing. On the development side, we have completed Hayloft Point in London and Campbell House in Bristol and the 3 asset management schemes in Manchester, which many of you saw at our Capital Markets Day last year. These are all fully let and all delivered strong returns. We're on site with one further project at Derby Road in Nottingham, where we have about GBP 35 million of remaining CapEx. The build costs are fixed, and we are working with a long-established partner contractor on that scheme. Given the increase in funding costs and the moving picture on build costs and increasing rents, we will review further investment plans to ensure that they deliver earnings accretion, attracting those returns whilst also maintaining a robust balance sheet. Investment market has remained positive over the last quarter, over GBP 0.25 billion of transactions in Q3 with buyers, including family offices, private equity and U.K. institutions. The uplift in USAF and LSAV valuations have been driven by rental growth, stable yields and the positive lettings performance that Richard mentioned and the offset of some of those cost increases. As we've seen in previous cycles, student yields should be more robust, helped by the supply and demand characteristics that Richard outlined, the countercyclical demand drivers and the fact that we're starting from a 5% net initial yield, and rental growth should be possible in order to offset those cost pressures. But clearly, we will be impacted by increased funding costs and any wider market repricing. Given the strong lettings performance, we have restated guidance for '22 at 40p to 41p and expect this to be at the upper end of that range with the additional rents more than offsetting the cost and interest pressures. Looking forward to '23, we are focused on capital discipline, maintaining a robust balance sheet as well as growing rents and maintaining cost control in order to manage the upward pressure on costs and interest. And we'll provide further guidance in February alongside our results for the '23 outturn.

Thank you, Joe. And just to conclude then stating the obvious, the economic environment is challenging and uncertain. But as Joe said, we will remain disciplined, and we're focused on controlling the controllable. The operational performance of the business will remain strong and deliver real value. And our product is perhaps its greatest appeal to students given what's going on in the wider market. And that widening appeal and the operational strength we have has led us to acquire our first BTR trial asset in Stratford and as we previously mentioned, we believe there's an exciting opportunity for us at the right point to grow our platform to support young professionals. 180 Stratford provides the perfect opportunity to test this given its location, given that it's valuable price point and also product specification opportunity. And as I say, in Stratford, we have a significant presence there and the asset fits nicely within our operating platform and our operating capability. So looking forward, the structural tailwinds that supporting our business remains strong. Our alignment to the strongest universities in the U.K., those that are growing is still very much a core focus for ours and our operating platform will ensure that we can continue to deliver. All-in-all, it supports our confidence of continuing to deliver strong operational results. I'll now hand back to Laura to take us through the Q&A. Thanks, Laura.

[Operator Instructions] We will now take our first question from Paul of Barclays.

Just a couple for me. First one is on the build-to-rent scheme. I think in your statement, you mentioned focusing on the future investment opportunities given the change in financing costs. My understanding is your developments always used to give a better return than this build-to-rent scheme. Just wondering why you've acquired it at a 4.3% yield and almost sort of -- is this something that was agreed pre every order changes? It just doesn't quite fit with the comments around sort of future investment opportunities. And then also linked to that, is the -- is that included in the pro forma LTV, the acquisition of that asset? And I'll have a couple of questions on the operational side and once we go through those things.

Yes. Paul, I think that was very much a strategic decision that we've taken over the last 12 months as a business that we want to expand into the build-to-rent arena. The price has been renegotiated on that site. It was something that was committed to prior to 2 weeks ago. So we have committed to that. Would we have carried on with it anyway? Yes, I think probably would, given the strategic importance of that site, the operational learnings and the longer-term growth opportunities that it will present. So very much seeing that as a long-term strategic opportunity in the business and signaling our intent that we do intend to continue growing. The numbers are included in the pro forma LTV in terms of that acquisition. So -- and the free cash flow numbers are often having committed to that.

And just on the operational side, obviously, I appreciate you give detailed guidance at the full year results. We have the 2, I suppose, factors, cost increases versus the better operational performance and stronger operational performance moving forward. On that operational side, you mentioned the supply constraints in the market. Are you getting more confident over, I suppose, higher levels of rental growth moving forward? I appreciate you've increased next year to 4.5% to 5%. Is that more of a level that we should expect moving forward, and therefore, working to offset utility cost increases in 2024 and thereafter? Just to get a feel for that.

Yes. I mean we're providing guidance out through '23 and '24. And we always look a little bit further on. I do believe that, that level of rental growth is sustainable if the current set of circumstances that we find ourselves in do persist. Rental growth in alternatives, I think, will be at least at that level. So without providing definitive guidance beyond '23, '24, I do believe rental growth at that level is sustainable for a period of time.

We'll now take our next question from Veronique of Kempen.

I was just wondering, you mentioned that you're investigating the future investment plans. During the half year figures, you mentioned the 20 basis point increase or expected to increase in yield on cost for the '24-'25 schemes. Do you perhaps have an update on that? And is it right to assume that those kind of schemes are now also being investigated?

Yes. So the update that we provided in June was factoring in our sort of current view on build costs at that time and sort of was based on the market data we're getting from our build contractor partners. The build cost movement over the last quarter has been in line with the anticipated position at June. So from a pure build cost perspective, we wouldn't see any change in that '24, '25 yield on costs. Probably the bigger impact has been on that longer-term rental growth but also funding costs. So the bit that we will work through over the next quarter before we commit to those '24 and '25 deliveries will be what the total returns are, what our cost of capital will be. And as I say, we will ensure that we can deliver earnings accretion and meaningful total accounting returns and keeping the balance sheet in a place we want it to be in. And so we can't give any definitive update on that today, but we will look at each of those schemes on its merits before we commit to it.

We will now take our next question from Neeraj of Barclays.

So during H1, you mentioned that you're working on a new structure to refinance the USAF 2023 secured bond through unsecured means. Can you please provide any update on that, if you have any?

Yes. So we're looking at a variety of options on that refinancing potentially reducing the overall amount that we need to refinance looking at both secured and unsecured and a range of different providers. No kind of substantive update on that. We'd expect that to meaningfully progress in the first quarter of next year.

Yes. I don't see any questions in queue. [Operator Instructions] Okay, we'll go on with our next question from [ Paul of CTI ].

And just a very quick one, just to understand the moving parts. So simplistically, you've moved forward the rental growth expectation by 1% for 2023. I think previously, you gave a kind of proxy saying every 20 basis points of cost of debt was equivalent to 1% of rental growth. So with the new expectation now 40 basis points higher than previously. I'm taking it that effectively that cost of debt moving forward has offset the rental growth by around 1%. So it's -- there's a positive part and a negative part, but an overall kind of impact would be minus 1%. Is that kind of fair sort of simplistic take?