Unite Group PLC (UTG) Earnings Call Transcript & Summary

Right. Good morning, everybody, and welcome to our results presentation. Thank you to all those who have come along to Numis's offices in person, and thank you to Numis for hosting them in the excellent new office. And thank you for everyone who's joined on the webcast and by audio as well. We're delighted to be presenting this morning a very strong set of results, which I believe demonstrates the enduring attractiveness of our offer to our customers, our ability to deliver sustainable and attractive returns, and our clear commitment to doing what's right. Our sector remains structurally supportive and the consistent strategy we've had for a number of years now, I think is central to the performance that we're delivering, and it will continue to guide us as we move forward, and we'll continue to ensure we deliver meaningful growth in what remains a volatile external environment, but an operationally very positive period for us. Looking at 2022, headline financial performance, record earnings, EPS and dividend, each up 48%. The dividend represents a 40 -- sorry, an 80% payout, and therefore, signifying our continued confidence as we look forward. And we've delivered a total accounting return of just over 8%. But looking more currently and what we're seeing in the here and now, operationally, we're arguably enjoying the strongest conditions we've experienced for many years. There is greater urgency amongst our customers, both students and universities to secure their accommodation with us. We're seeing growing demand from all our key customer groups. And therefore, there is a material rental growth opportunity. And as a result of that, and what we're seeing for the next academic year, our reservation performance for the '23-'24 academic year is at record levels at 83%. And we're also alongside these results, upgrading our rental growth guidance for the next academic year to 6% to 7%. As we've always done, we will continue to ensure that we balance rental increases with investment in our service, investment in our proposition to deliver value for money and affordable price points for our customers. These results are underpinned by a robust balance sheet, and I'm delighted to be able to announce as well today that we're committing to 2 further development schemes in our development pipeline. That's a total of 3 development commitments we've made since the mini budget, and I think demonstrates the ongoing viability of this key growth pillar and demonstrates that we can continue to deliver value through development even in our new higher rate environment. And so our confidence in the demand outlook, the rental growth prospects that, that is delivering for us means that we believe our values are very well supported. I've said before, our business is underpinned by the enduring strength of U.K. Higher Education, and I don't think that strength is diminished at all. And we do expect to see sustained domestic and international growth. And that growth will be strongest in Unite cities. We've been very deliberate over the course of the past 5 years through disposals, through development, through acquisition to ensure that we are aligned to the universities that are performing the best. And international students, they do still continue to value U.K. higher education and the degrees that they can secure here. And by international students coming to the U.K., they do generate significant value for the U.K. economy. It's one of our largest and most successful exports. But you will have seen press speculation about the government looking at tightening student visa rules. While we don't yet know quite where this will land. There's been no formal announcement. We are expecting any tightening of visa rules to very much focus on restricting dependence coming to the U.K. with international students. Now given our offer is single occupancy rules, therefore, that is not a market where we have exposure. So we'd expect any changes around dependence to have very limited impact on us. And as I mentioned, the business is supported by U.K. Higher Education. And the demand drivers I hope are clear. We continue to see demographic growth in the 18-year-old population domestically, and we'll continue to do so out to 2030, and we're continuing to see sustained international growth. And both of these are core customer groups, customer groups that need high-quality, purpose-built affordable accommodation in great locations. We are seeing a material slowdown in the supply of PBSA in many of the markets we are operating in. And we're also now starting to see a net reduction in the number of hours of multiple occupancy, so your traditional student digs, HMOs as those HMOs are consistently now starting to leave the student market. So over the next few years, we would expect student demand to increase, an increase by up to 20%. And that additional need for accommodation, we believe will be largely met by purpose-built student accommodation. And so our market position, our university relationships leaves us uniquely placed to provide a solution for that growing need. The opportunity is just one of a number that we'll look to leverage over the coming period. Development will continue to offer attractive returns, and we would expect to add more opportunities during the course of 2023. We've identified a series of opportunities to invest in our estate and drive improvements for students and to achieve strong returns, and there remains the opportunity for targeted acquisitions. Additionally, to this sort of core growth potential, we're progressing meaningful discussions with our university partners about on- and off-campus development opportunities. And we'll continue to explore our build-to-rent pilot. And I'll come back to each of these sort of growth areas a little bit more at the end of the presentation. But to say we have a highly attractive set of opportunities ahead of us, supported by that positive operational environment and the sector fundamentals that I've mentioned. So now I'd like to hand over to Joe, who will take us through the financial performance in a little bit more detail.

Thank you Richard, and good morning everyone, put the glasses on. Yes, likewise delighted to announce a very strong financial performance and the strong recovery in earnings has been delivered by the returns for occupancy, the positive rental growth and managing operational and funding costs in an inflationary environment, delivering the EPS of 40.9p and the dividend of GBP 32.7 million, both up 48% in the year. The combination of earnings, rental growth and development has delivered the total accounting return of 8.1%, of which the earnings yield importantly, was 4.6%. The balance sheet is in good shape with net debt-to-EBITDA at 7.3%, ICR at 3.7% and LTV at 31%. Our performance has really been underpinned by the growth in our like-for-like net operating income, and this has been delivered through that return for occupancy, a full summer program post COVID and positive rental growth. The income growth of 20% has significantly outstripped the cost growth that we've seen from utilities, staffing, cleaning and maintenance and marketing, which have grown through a combination of that increased activity and also the inflationary pressures. Our utility hedging has meant that the growth in utility costs has been limited to GBP 2.2 million. We are fully hedged for 2023, and we're 65% hedged for 2024. And as a real living wage employer, we've increased our pay by 10% for the lowest members, paid numbers of our teams, and we've increased wages on average by 8% across the business on a tiered basis. Overall, this has supported the increase in the EBIT margin to 68%, and we're confident that the strong rental growth and ongoing cost discipline will allow us to improve that to around 70% in 2023. And the earnings growth has been dominated by that NOI growth, as I've talked about, but also supported by growth in asset management fees and also the proactive overhead management and staff costs around and other discretionary spend. The new openings that we've delivered together with USAF unit acquisitions has offset the loss of income from disposals whilst also improving the portfolio quality. And whilst funding costs have increased, we've been able to utilize our flexible debt facilities to ensure that the overall debt cost has remained broadly flat throughout the year. Looking forward to 2023, we're guiding to a 5% to 8% growth in EPS for 2023 to a range of 43 to 44p. We'll see 2 terms worth of benefit from the '22, '23 sales cycle and one turn from the higher rental growth that Richard talked about on '23, '24. And the full year impact of new openings and disposals adds around GBP 6 million to NOI. And the NOI growth is therefore expected to more than offset the cost growth that we're seeing, delivering that EBIT margin of around 70%. Funding costs are broadly fixed now for 2023 with 90% locked in at an average rate of 3.6%. Property valuations have been a bit of a tale of 2 halves for us in 2022 with H1 dominated by the GIC acquisition of Student Roost in the first half, which underpinned a real boost to regional yields of about 25 to 30 basis points. And then in the second half saw the market coming to terms with the higher funding costs and saw yields move back in by about the same amount as to where they had started the year. And whilst not all of those roof yields have been reflected in our valuations in H1, our yields were broadly flat over the course of the year as well with rental growth driving the full element of that investment value uplift. And it's that investment growth outlook and performance that means that yields really haven't moved out as far as we've seen in some other real estate sectors. And Mike will come on to talk about this in a little bit more detail. The contribution from development was lower than it is in normal years, and that's as a result of our decision to pause or slow down development activity when the cost of funding spiked in Q3 and Q4 and we've continued to invest in fire safety as planned throughout the year. So overall, NTA is up by 5%, delivering that TAR 8.1%. And we are guiding to total accounts return of 8% to 10% in 2023, excluding yield movements, and that's made up of earnings, rental growth, development and less any CapEx. On capital allocation, it's been another busy year for disposals with GBP 339 million of disposals, GBP 256 million our share. That represents just under 5% of our total portfolio. And given the ongoing focus that we've got on maintaining capital discipline, that effectively completes the portfolio rationalization following the Liberty acquisition and the disposal activity and the strong operational demand means that we've now pretty much completed the sale of all of our non-core assets. These disposals have allowed us to hold LTV at 31% whilst continuing to commit capital to development. And we'll continue to manage LTV to that target of 35%, but with a greater focus on bringing leverage down rather than up at this stage of the cycle. And we're increasingly focusing on keeping ICR and net debt to EBITDA in line with our targets of 3% to 4% and 6 to 7x, respectively. Given the increased funding costs, we have increased our hurdle rates, and we'll look to maintain 100 to 200 basis points spread to the long-term funding rate, and that's relative to the risk of each project. And the property team have done a great job at reworking a number of our developments to enhance returns, and we see a growing opportunity to deploy capital into developed and accretive asset management opportunities as we work through this year. We are fully funded on our committed development schemes, and we're in the process of looking at a range of funding options for the growing number of opportunities that we see in front of us given the strength of those operational markets. The balance sheet is in a good place. Debt metrics are all in the right ballpark, and we have GBP 400 million of firepower to fund those committed opportunities. The debt markets have and are stabilizing. We had a good year managing those short-term or near-term debt exposures. We increased the group sustainably linked to RCF by GBP 150 million and extended that by a year. We refinanced the GBP 400 million of debt within LSAF. And we now have credit-approved terms to refinance the GBP 380 million bond within USAF. Marginal cost of debt is in the 5% to 5.5% range for long-term funding and we're using that as the base to underpin those opportunities that we've been talking about. And USAF and LSAF, they do remain an important part of our balance sheet and an important source of fees for us. Following the disposal of assets in weaker locations last year, we did redeploy around GBP 140 million into USAF, increasing our share to 28%, and that supported the group's earnings performance in the year as well as improving asset quality. Our JVs continue to be a useful addition to our capital stack, enhancing core returns from fees, providing an alternative pool of capital and providing an opportunity to efficiently deploy capital to enhance returns. Our core business will remain focused on those 2 vehicles of USAF and LSAF and we will explore further JVs or other private capital options for growth opportunities such as build to rent and possibly university partnerships. On that note, I'll let Karan talk you through the operational performance.

Thank you, Joe. As both Richard and Joe highlighted earlier, we delivered exceptionally strong performance last year, exceeding our targets, both for occupancy and rate at 99% and 3.5% respectively. We saw good year-over-year growth in every city in our portfolio. Clearing was strong as the impact of grade inflation unbound and our strong locations and deep university partnerships allowed us to drive both occupancy and rate. In our stronger markets like Edinburgh, Bristol and Manchester, we continue to operate long waiting list as well. This performance has continued into this current sales cycle. As Richard mentioned, we are now 83% booked. That is 16 points ahead of the same time last year. Sorry. As always, there are several factors that are driving this level of performance. Firstly, we've put a significant amount of focus on our current first year customers as they move into their second year of study. This segment, which we call as returners and also includes third years as well as post graduates, is up significantly over the years. And I think that demonstrates the value of our enhanced service as well our fixed price offer all-inclusive offer. So it's resonating both the students as well as their parents. This has also been backed by improved marketing and sales execution at the front line as well. All of it focused on that returners segment. Secondly, nomination demand has been growing from universities across our cities, and we have by far the strongest nominations footprint in key cities in the U.K. This gives us the all-important base business that we need from where we can then yield our rents. And finally, the scarcity of high supply in some cities is leading to students making a decision on their accommodation earlier in the sales cycle. Here, we've seen students trading up in terms of room type when they are booking with us. Going on to just a little bit on our university partnerships and the nomination agreements a little bit. So nominations remain a key strength of our business, and they delivered strong rental growth last year at 4%. And this underpins the 67% sales guidance that Richard shared earlier at the start of the presentation. In fact, NORMS rate growth outperformed our direct-led sales last year, demonstrating the value of these partnerships to Unite. These relations have been built up over a very long period, and it gives the University and Unite great visibility and security as well. What we are doing is we are going to focus more on income quality from our nomination partners. So we are converting more single-year deals into multiyear deals. We are ensuring there are clear index-linked rental uplift as part of each deal. And finally, we're ensuring that every new development we do is underpinned by a university partner, which means that we ramp up our developments in the shorter space of time and at the lowest cost possible. Universities for their part, are much more confident in their own demand coming out of COVID, and they are looking for more beds for longer and they're also looking for a deeper, more meaningful partnership with us as well. As a result, we expect to maintain our nominations base around the 50% to 57% mark. Hopefully, that gave you a good overview of our performance last year and what the outlook looks like for this year. But our commercial success is only possible on delivering an outstanding experience for our students, and we've continued to make investments in improving both the product as well as the service proposition we provide them. We have now moved to a service model that is 24/7/365. So we are there whenever our students need us. This has been a redesign of how we operate and has led to more frontline resources and roles in our properties, providing service and support to students. We funded this investment by delayering our management structures, which led to an overall net EUR 2 million saving in operating costs on an annualized basis as well. We've also reinvigorated our resume and Baxter program. That's our peer-to-peer student support program. And last year, we took the entire operation stream through a learning program designed to deliver more enriching experience for our residents as well. As a result, we've retained more of our students and our customers, and we delivered a 3-point increase in our Net Promoter Score. Looking ahead, I do see there being more upside in student satisfaction as we fully embed some of the initiatives that we launched last year. We've also continued to invest in our market-leading student support programs with the launch of support to staying, which now makes Student Welfare a core part of every front-run role responsibility, and they are then supported by a specialist team, which works very closely with the University Resident Life programs as well. And this month, we have extended this program to include financial support for those students who needed most as well. Additionally, and for those who were here last year, I highlighted some of the new digital tools that we launched for our commercial teams, such as our group room booking as well as the virtual show-arounds. We are now upgrading our core PRISM technology platform with a new booking engine as well as a new property management system. This will allow us to be more sophisticated in how we price our product. It will improve how we present ourselves to our customers, and it will also improve our core operating processes from how you book a maintenance requests to how we take goals in our contact center. So when you bring all of that together, hopefully, that gives you a sense of the scale of investments that we are making in continuing to offer a high-quality value-for-money proposition for our students, their parents and our universities as well. Finally, from my side, in addition to the investments in our service and technology, we have started to selectively invest in our product as well. Last year, we conducted a more significant piece of market research that Unite has ever done to really understand customer needs. Insights from that study are now informing everything that we're doing from our service proposition, to how we market ourselves, to how we think about our next-generation product as well. This segmentation has already led to several innovations that are being implemented to improve our proposition. Now for the most part, these are the first phase of the innovations have been more service-focused and they can be delivered with little to no CapEx. The trials that we've done with our postgraduate offer is a good example of that, and they continue to perform really well. But the segmentation data is also powerful in helping us think about how we reposition our product as we renovate and refurbish them. And to illustrate that with some examples here, we've completed the refurbishment of 3 properties in Manchester. So New Medlock, which we have now positioned as primarily a first year undergrad building. We've developed new common spaces with a real emphasis on social spaces and social connections. Parkway Gate, which is primarily for international students and therefore has a full suite of amenities because that is what they expect. And finally, Kincardine Court, which appeals mostly to postgraduates and returners because it has smaller cluster sizes. Here, we've upgraded our specification and also added new amenities such as a dishwasher in every flat as well. All of these renovations are now delivering ahead of our expectations, both in terms of student experience as well as rental growth. These projects will be key -- have been key in terms of driving customer retention and we'll continue to explore more customer-led asset management initiatives as we go forward. So that's all for me. I'm going to hand over to Mike now to talk through the performance of our property portfolio.

Thank Karan. Good morning everyone. 2022 was another year of strong investment returns for the student accommodation sector. The sector's structural growth characteristics continue to attract new capital and investment transactions reached record levels in the year. This included the acquisition of the student Roots platform for GBP 3.3 billion, which was announced in the second quarter and completed just before the year-end. Assets continue to trade in the second half, albeit at reduced volumes and around GBP 500 million of large transactions completed post the many budget of pricing supportive of our year-end valuations. Our portfolio delivered a 4% valuation increase in the year driven by strong rental growth. The yield on the portfolio remained broadly unchanged over the year, as Joe said, supported by the positive rental growth outlook for the '23-'24 academic year. Pricing on the student root transaction implied around 25 basis points of yield compression and the fact that yields remain flat on the year suggests valuations have factored in a similar level of outward yield movement in the second half. 2022 was also another busy year for investment activity within our portfolio. In total, we completed more than GBP 700 million of projects for investment transactions, and this has further increased the portfolio's alignment to our strongest universities. We delivered 2 major development projects in London and Bristol, both of which were underpinned by our university partnerships. Looking forward, the current housing shortage in leading university cities creates the strongest opportunity for new developments in recent years. And this confidence is reflected in our decision to commit to 3 additional development projects since the start of 2023. As Karan mentioned, we completed the refurbishment of 3 buildings in Manchester during the year, and these delivered a yield on cost of just under 7%. These projects provide a template for future asset management initiatives where we see annual investment increasing to up to GBP 50 million per annum from 2024. 2022 also marked the completion of the disposal program set out at the time of our acquisition of Liberty Living. These sales saw us reduce our exposure to nonstrategic markets as well as certain smaller, less operationally efficient assets. The disposal proceeds were partly redeployed into our acquisition of USAF units. USAF is a high-quality portfolio that we know extremely well, and we see significant opportunities for value add in the future. On the next slide, we discuss our 2022 development completions in a little more detail. Both of the projects were delivered as university partnerships with universities providing planning support as well as a high level of income visibility through nomination agreements. At Hayloft point in London, we delivered our largest development to date, totaling 920 beds in a Central London location. We've entered into a 5 year nomination agreement for 2/3 of the building with Kings College London. At Campbell House in Bristol, our 431 bed property is fully nominated with the University of Bristol for 15 years, extending our partnership together. In total, the 2 projects delivered over GBP 130 million in development profits, underlying the significant value created through our development activity. Both developments are fully electric buildings with no gas use and achieve high sustainability credentials. In addition, the projects achieved around a 30% reduction in body carbon compared to baseline figures through design efficiencies and selection of low-carbon materials. This puts us on track to reach our stretching targets to half-in-body carbon by 2030. Given the backdrop of higher funding costs and build cost inflation, we've carefully reviewed our development pipeline over the year. While we see extremely supportive demand conditions, we are focused on ensuring our pipeline delivers healthy earnings accretion alongside NAV growth. As Joe mentioned, we've seen a notable improvement in funding conditions in recent months, and that's given us the confidence to commit to those 3 additional developments since the start of the year in Nottingham, Edinburgh and Stratford and East London. This takes our committed pipeline to 4 projects totaling over 2,000 beds. There are GBP 200 million of cost to complete these projects, which are fully funded from the group's available cash and debt facilities. In addition, we continue to review the 4 projects in our uncommitted pipeline, which have a total cost of around GBP 500 million. Despite widespread acknowledgment of the need for new student housing, it's increasingly challenging to secure planning, giving planning capacity constraints within planning departments. Despite these challenges, we've had success in achieving planning consents at Jubilee House and Stratford and Temple Quarter in Bristol during the year. We are still seeking planning approval on 3 of the schemes in our uncommitted pipeline, including our Travis Perkins site in Central London. We've had good engagement with the local authority regarding our revised scheme for the Travis Perkins site, and we're hopeful of achieving a planning consent in the first half of 2024. Our uncommitted development projects remain under review while we seek to improve returns through planning enhancements, land price reductions and build cost efficiencies. We're making good progress in all of these areas, which has helped deliver a 90 basis point improvement in yield on cost over the past 6 months. We're also seeing new opportunities to add our development pipeline in London and prime regional cities, and we will prioritize our capital towards those projects offering the strongest risk-adjusted returns. Our portfolio strategy also considers how we reduce our environmental impact and keep students safe in our buildings. During the year, we made GBP 13 million of investments in energy efficiency projects as we accelerated the retrofitting of our portfolio to achieve our net 0 carbon objective. These investments included LED lighting, air source heat pumps, smart heating controls and on-site solar panels. These projects have directly contributed to the significant improvement in our EPC ratings in the year. 80% of our properties are now EPC AC rated, and we have clear plans to further improve these ratings for every property. There's a strong financial case for these investments through utility cost savings, which deliver a payback period of under 10 years. We have a track record of leading the sector on safety standards, and all of our buildings remain safe to operate. We have a proactive approach to investment in fire safety and complete cladding remediation works for a further 6 properties in 2022. We made an additional planning provision of GBP 22 million in the year, taking our total provision to GBP 59 million for our share of planned future works. This relates to properties with HBL cladding or other planned fire safety improvements where remediation works will be carried out over the next 2 years. We're progressing with detailed surveys on low-risk properties and expect our remediation program to continue at an annual cost of around GBP 500 per bed in the near term. We expect to recover a substantial portion of these costs through claims from contractors and we were successful in 2022 in recovering GBP 18 million. With that, I'll hand you back to Richard.

Thank you Mike. And just before picking up on the opportunities that I said I'd come back to is worth just pausing for a moment and sort of looking at the overall supply picture in our market because demand is clear. Hopefully, we've got strong demand environment, but we are seeing that material slowdown in supply. Given the events of the last few years, the supply of new PBSA that is its lowest level for many years, less than sort of 15,000 new beds opening against a historic run rate of perhaps twice that. And we estimate the supply of new purpose-built student accommodation beds will remain at that more moderate level for quite some time due to some of the planning challenges that has just been mentioned, but also obviously higher costs. And we also expect during the period of this sort of depressed supply of new purpose-built accommodation the supply of HMO to fall due to increased costs, due to increased regulation, due to the buy-to-let mortgages rolling off. We do expect HMO landlords to continue to leave the market. And that creates an interesting new opportunity for us. Our product has historically been targeted in the mainstay of first years or first year international students. But it does now have that much broader appeal. And as Karan has just described, we've demonstrated that we can keep students who would have historically otherwise gone into houses multiple occupancy. And we can attract them back from houses multiple occupancy to come and live in purpose-built, and our focus on segmentation, I think will only accelerate that. So the supply environment, I would argue, is a now a demand driver for us and it's an overall net positive picture. As I mentioned at the beginning, we do have a significant core growth opportunity. And as Mike has just set out, we've made really good progress with the existing development pipeline and also asset management opportunities. But on development, we do expect to add one to 2 more schemes prior to the end of this current year. And these schemes will deliver attractive returns. They will be delivered at revised hurdle rates, which will deliver returns consistent with the past. And that is after allowing for high development costs and also the higher funding rate environment. And as you've seen in Manchester, asset management does present an attractive multiyear investment opportunity for us with, we believe, a clear opportunity to invest between GBP 35 million and GBP 50 million per year in improving our product and obviously delivering a good return. And to deliver that development activity, to deliver that asset management activity, we've got proven in-house capability from site identification, through design, planning and then on to ultimately build and delivery. Just looking at university partnerships in a little bit more detail. We've obviously long held the view that university partnerships do provide a genuine growth opportunity for us. And in many markets, the growth of universities now, so the number of students that they're able to attract is not constrained by demand from students. It's actually constrained by a lack of supply of homes for those students to live in. I spend a lot of my time talking to vice chancellors at our university partners. And the lack of student accommodation is now the top of the agenda for many of those vice chancellors. And it's creating a real problem for them in terms of their future growth. So our sector-leading relationships with those universities, I think positions us uniquely to develop creative solutions as we look ahead. And I think that's evidenced by the extension of our relationship with Darren University. We're creating them a new college and the creation of that new college being supported by a 30-year nomination agreements. So a long-term commitment from one of the world's leading universities to work with us. So we're more confident than we've ever been about adding further university partnerships. And in the next 12 to 18 months, we believe we will do so. And we're actively engaged in several high-quality conversations right now. Also, obviously back in September, we did acquire an initial pilot build-to-rent asset in Stratford. And while the priority and the majority of our growth will be in our core student markets, we do want to continue to explore this adjacency. The pilot in Stratford is performing very well, and we will fully integrate the asset onto our operating platform in Q2 of this year. We've learned a great deal about how we would operate the asset, and we're confident in our ability to operate such assets efficiently and effectively. And the next stage of the pilot will now be to increase our operational scale a little bit, while at the same time preserving our capital for core growth, preserving our capital for student growth. And as Joe has mentioned, we're therefore exploring a JV where we would act as asset manager, and we have a proven track record in creating these JVs, creating value for them and doing that effectively. So we will continue to explore, build on that pilot basis. We do believe there is future due to the sheer scale, due to the fact that many young professionals will have lived in PBSA, arguably many of them will have lived at Unite, but we will continue to explore it very much on a sort of a pilot basis for the coming period. So to conclude and before we open up for questions, we are confident in the outlook for the business. As I said right at the beginning, and probably worth saying at the end, the external environment does remain volatile, but I think the demand drivers of our business are clear. And so we're confident due to growing demand due to our alignment to high-quality universities, which I think is really important, and obviously, our proven platform and operational capability. And our value drivers are as strong as ever. Rental growth will be very strong, 6% to 7%, and we will seek to balance that level of rental growth with ensuring value for money for students as Karan referenced, our earnings and margins will progress positively as we look to 2023, and we expect to deliver a total accounting return of between 8% and 10% before yield movements. So the opportunity for growth is significant, and I believe we are uniquely placed to deliver against that opportunity. Thank you very much. I think we'll now take questions in the room first and then on audio and then finally by webcast.

My name is Andres Toome from Green Street. So I have a few questions. I'll just go one by one. Firstly, on the supply side, I was just wondering what's driving the reduction in supply. Obviously, there is the COVID slump cyclical headwinds. But just looking at your development yields and development economics, they look pretty attractive. So is there anything more structural that's sort of keeping others from developing? Or what's the sort of outlook on that front?

Yes. I think that the main factor that's impacted that has been we've seen a significant level of build cost inflation over the past 2 years and actually to build a viable scheme now rents have to start at around GBP 160 per week. That means that a lot of the suppliers being built was in those more regional and lower-grade cities. That is no longer viable because the rents which you can achieve are well below that GBP 160 per week. So it's taken out a big slug of that marketplace in terms of what is viable and can be delivered. I think alongside that, then planning in London is still very challenging and the fact that you need to have a university nominations and you need to provide affordable housing is limiting the supply in London. So I think we've got a couple of factors going on there. And obviously, the impact of COVID over the last few years has probably just slowed the levels of activity that we've seen more generally.

And my second question is around just external growth opportunities. Your cost of capital is quite supportive of external growth. I'm just wondering, as you mentioned, sort of development opportunities coming along, is the opportunity set attractive also just on the acquisition market for assets which are stabilized and perhaps also on the pricing side, is the pricing already reflective of higher debt costs? And is there any distressed opportunities out there? Or is it just too early to talk about that?

Yes. I think as Richard has outlined, we do see this growing set of opportunities in front of us, and I think that comes off the back of the strong operational performance that's being delivered and the rental growth that we are seeing. I think that given that opportunity set to deploy capital into acquisitions doesn't really make sense for us. I think we've got a track record of generating the higher returning activity. So, and we're not seeing people in distress either. So you're not seeing kind of the opportunity to pick up assets at really strong prices. So I think we will continue to focus our capital into that higher generating activities that Richard has outlined.

My last question is around just occupation performance, rental performance across our different markets. Where do you see sort of more outperformance, underperformance in the markets you represent?

I think across all of our markets at the moment, we're seeing strong demand. Our business is made up of 2 elements, the nominations. Obviously, the nomination as Karan mentioned with the sort of multiyear agreement that sort of underpins the 6% to 7%, probably rental growth around 5% on those nominations as we look forward. And then it is the direct let that's driving that. There is obviously variation within cities. Our strongest market, slightly ahead of the 6% to 7% on average, probably the lowest market might be down at sort of 3%, 4%. But we're seeing rental growth across all markets consistent with what we saw with last year. And that is a change to if you roll the clock back even before COVID there were markets that were perhaps slightly closer to being flat, but we're seeing rental growth demand across all markets at the moment.

Sam King from Stifel. 2 questions please. First is just a follow-up question on developments and the opportunities that you're seeing in the market. Just interested in the levels of rental growth that you're typically factoring in to underwrite at the moment before you commit to projects? And then second question, slightly more technical one, but just on the difference between the Unite net initial yield, which was broadly flat like-for-like for the year versus what the EPRA yield was, which I think was up 60 basis points for the year. I appreciate it's not a strict like-for-like number, but there still seems like quite a big difference. Just interested what's driven that? Is it effectively that the year before the realized occupancy was lower versus what was assumed in the valuation?

Yes. If I start with the second one first Sam. So exactly that. The way the EPRA yield works is you basically have to take actual cash flows realized in the sort of the final month of the year just finished. So we were 94% occupied at that stage, which meant that you have a reduction in yield. The way the valuers look at the yield is they do it on a stabilized occupancy basis for the next 12 months. So there's a sort of a timing difference in terms of you're looking at future income versus sort of historical income and then is that occupancy top-up essentially that also comes into the yield for the valuers. And then in terms of your other question in terms of rental growth on developments, in our appraisals at the moment, we're underwriting around 5% rental growth both this coming academic year and the next academic year, which we believe is supportive based on where we are with reservations and the sort of 6% to 7% growth we're looking at. And then from sort of 2 years, hence, we're looking at rental growth reverting back to sort of more like the historical 3% to 3.5% level.

Kieran Lee from Berenberg. It was just a quick one on rental growth versus what you're seeing on the ground from students. So rental growth at the guidance is brilliant, but are you having more pushback on affordability? How does this compare to maintenance loans? And do you see the potential for any sort of regulation to cap what you can put through?

At the moment, we're not seeing any particular change in behavior. Some of the things that we track, for example, would be students dropping out of higher education. Dropout rates are consistent with where they've been before. We track the level of payment plans that we put in place with students, again, consistent level of payment plans. We obviously track debt with our students, again, a consistent level of debt with prior years. So I think what that speaks to is that obviously, we're an all-inclusive price. We offer a lot more than just sort of the bedroom. But the cost certainty, the comparability of our product and our pricing versus maybe the alternatives, we're now, as we've said before, cheaper on a comparable basis to HMO. If you look at rental increases by some of the alternatives for us at the moment, whether that's university stock or other PBSA providers, we're again the right side. In terms of your point around maintenance loans, clearly, maintenance loans did not increase to the same level that was sort of 2 and a little bit percent. And there is various small scale challenges to the government on that. I don't think we're going to see any sort of fundamental change from the government around the level of funding that they are going to provide students certainly not until we get to the next election. As regards sort of regulation, at the moment, no, there isn't that regulation. I think again, the position I would take is that where we have moved rents, we've consistently demonstrated value for money. We've consistently invested in the service, consistently invested in the product, and we've taken a sort of a very appropriate response. This set of circumstances that we're seeing ourselves at the moment does provide, as Mike has just mentioned, I think a couple of years probably a heightened rental growth opportunity. It clearly is at the same time as we're seeing heightened cost pressures in our business. But I think then going forward, reverting to a sustainable sort of 3% or so rental growth, I think is appropriate and deliverable given the quality of the offer that we provide to our students.

Just to add to that as well. It's obviously -- it's a very live composition of the front line as well in terms of really understanding how students are feeling and the impact on mental health. As I mentioned, we've historically always invested heavily in student welfare with our support to state program. We extended that with a, to add a financial component to that as well. So we are working with providers to provide more financial advice. We are doing a partnership with Aldi, where we're providing working with universities, supported those students who need it as well. So I think to Richard's point, where we can be targeted and provide the support it makes sense, but we're not seeing sort of a systematic sort of issue. In fact, debt levels are lower than they were last year. So yes.

Hemant Kotak from Kolytics. 2 questions from me please. The first one is on the buy-to-let pilot that you have. So what are the expected returns that you're expecting there? And are they commensurate with the student accommodation portfolio? Or is it actually a little bit about the fees that you can generate through JVs? And then the second question, just continuing with rental growth. When I look at the yields on slide 24, I'm seeing 200 to 300 basis points yield differentials between London and other regional and major regional. How long can the rental growth differential sort of make up for that gap? Because, obviously, it can't continue to perpetuity?

So on build to rent, I think when we appraise that, we bought that off a net initial yield of just under 4%. So it is lower than a comparable student building. With rental growth, again, we are modeling broadly in line with students. So the overall return was about 100 basis points lower than pure student, and that's been one of the challenges. I think we've been quite open with shareholders about and how we can justify that investment into build to rent when there's still meaningful opportunities for students is something that we've been obviously thinking long and hard about. We think over the medium term, that the fundamentals of the sector are very strong and will support ongoing long-term rental growth. But one of the reasons we are exploring that JV model is it allows us to generate returns, which are comparable to our target returns and are in line with our 8% to 10% total accounting return target. So it's sort of finding that way whilst we're learning and whilst we're piloting it, but we're not sort of having to take a kind of fundamental diminution in returns from that.

And then Hemant, just on your question around the yields. I think in terms of the yield differential, if you look at those other regional markets where the yields are sort of in the 6% to 7% range, they are relatively few and far between in the portfolio now, the bulk of the product will be around sort of the 4% to 5.5% yield mark. There is a differential there in rental growth and London has typically been an outperformer, which does explain some of the yield differential. I think the rest of it does tend to be more around liquidity, and that's what we hear from investors. There is the best bid on London assets, and it isn't just a pure function of rental growth as well.

I don't think there are any more questions in the room. I don't know if we've got any questions on the audio. Maybe one.

[Operator Instructions] There are no questions on the call.

On the webcast.

Yes, we've got a few on the webcast. So the first one is from David Brunsdon at Aztec. Is there an opportunity to convert the oversupply of office space into student accommodation. I'm happy to say that one. We do look at opportunities for sort of office to student conversion, albeit that we find it quite hard to make the economic stack up. The floor plates aren't hugely efficient relative to sort of new build. And if you think about sort of change of use in the student, where we're looking at development, it's often taking former industrial used car showrooms, pubs in some cases and sort of turning that into taking those sites and converting into student use as opposed to office. And again, it goes back to the earlier comments about asset management, we would prefer to invest in the refurbishment of existing student assets rather than looking at sort of office conversions in their own right. Next question then comes from Paul May at Barclays. He's trying to reconcile the earnings guidance for 2023. And he said 2023, '24 rental growth is better than expected. The average cost of debt is 20 basis points lower than previous guidance and EBIT margins are broadly in line with expectations. Given these building blocks, EPS is lower than I would expect. Are there any offsetting factors that I'm missing? Or is it fair to assume that the guidance is achievable.

Yes, a few points which go into that, obviously. The '23- '24% rental growth actually has a pretty minimal impact on the '23 financial year. It's only one term worth and 1% equates to about GBP 1 million impact, so a relatively small impact in '23. I talked about the pressure on costs. We're still seeing that utility cost increases. And whilst we're hedged, the cost of those hedges were put in place 12 months after the cost of hedges for this year. So we have seen another increase of probably around 10%, 10-ish percent on utilities, and we'll see the impact of staff cost growth this year. So that's sort of driving to that margin of 70% on an EBIT basis. And I think -- so you possibly would expect the EBIT margin to go up more given the strength of the rental growth, but we are still seeing cost pressures. But I think really importantly, we're able to absorb those cost pressures and still see EBIT margin growth. Cost of debt at 3.6 million is what it is. And I think, hopefully, by the time that runs through the sausage machines that that will get to the 43p to 44p, I don't think there's anything untoward within that, but happy to take through the details of what makes that up.

And the next question is from Veronique Meertens at Kempen. Do you have a view on your hedging policy for utilities costs after mid-2024.

Yes, I think our hedging policy actually hasn't changed fundamentally despite what we've seen over the last 12 to 18 months because we offer an all-inclusive price, we like to ensure that we effectively are locking in, so we know what the cost will be aligned to what the rents that we will be charging. So we typically, we always have hedged out 12 to 18 months ahead of time, and we will continue and we are continuing to roll that forward. I guess the one change that we are sort of transitioning towards is the use of more power purchase agreements, and this is where we can invest into broader energy programs, which provide us a longer-term certainty over energy pricing. We have one PPA in place, which is an investment we made in a wind farm in Scotland, which guarantees the cost of that energy for 5 years. We're currently looking at a few more, which would be between 5 and 10 years. And that therefore, will allow us to grow that level of fixed level of utility buying that we currently do. It's currently at 20% on PPAs. And I think we'll be looking to get that up to in excess of 50% over the next 12 to 24 months.

The next question is from Daniela Lungu at First Sentier Investors. What cap and collars for rental growth are built into the current nomination agreements? And what range is being negotiated on new agreements?

So on current agreements, it's sort of generally a 3% to 5% sort of floor and cap increasingly, as we're negotiating new agreements we're sort of moving that floor up and seeking to move the top end, although I think 5%, albeit that the 5% will be harder to move than the 3%, what we've also been able to negotiate is potential catch-ups as well. So if there is another higher rate environment during a long-term agreement, there is potentially a sort of a catch-up mechanism. But sort of that 3% to 5% and where ultimately, I guess inflation is guided to be, we believe still provides us the certainty that we would want. And it means that nomination agreements remain valuable given that sort of income certainty and obviously the lower cost of acquisition.

And then we've got a final question from Matthew Saperia at Peel Hunt. With regard to the potential build-to-rent joint venture, will the partner already have a portfolio of assets to plug into your platform? Or will you be charged with investing their capital to grow a portfolio.

So I think it's early days on that one, and we're open to both. So we are sort of thinking about how we structure that. We obviously got a seed asset of our own to bring to the table, and we're happy to go and find seed investments as well as work with a partner who had an existing portfolio. Great. If there are no further questions in the room, just to say thank you very much everybody. Thank you for coming along and listening and hope you enjoy the rest of your day. Cheers. Thank you everyone.