Unite Group PLC (UTG) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining the call, where I'll be giving a short update covering the positive momentum in reservations since we last spoke, progress on disposals and capital allocation and valuation movement in the first half. Please do pop any questions into the webcast, and Mike and I will cover off at the end. So overall, we're performing well with reservations. We're seeing the strongest universities underpin this. It does continue to be a competitive leasing market, but we are seeing the value of our relationships with universities and the benefits of our leading operating platform. It's fair to say that [indiscernible] sales cycles are the same, and we still have a few important weeks to run, but we are guiding to 94% to 96% occupancy and 1% to 2% rental growth. Reservations are currently at 86%, which is 1 point ahead of the same time last year, having been 1 point behind in our last update. And it is clear that our platform is making an impact. We've got a real focus on sales and marketing across the business. And if any of you happen to be watching Love Island, you may have seen our Live. Your. Now. campaign. It's driving inquiry levels, which our teams are chasing down hard, and we're seeing good conversion rates across both our web and direct channels, and it's great to see our tech investment making a difference. We've made targeted pricing adjustments, and this has allowed us to secure bookings earlier and reducing our reliance on sales in August and September. And we are outperforming the market and winning share from both HMO and PBSA. We expect to see slightly stronger [indiscernible] to be offset by lower growth in pricing, and we'll continue to focus on securing income through occupancy through the back end of the cycle. We're on track to deliver 0% to 2% income growth for the '26, '27 academic year. Nominations are down by 1 point from the last update, and this is mainly at weaker universities, but we have been successful in selling these beds again, showing the power of our platform. We continue to have positive discussions with universities about nomination beds when A level results are announced, but we're not holding back where we see the opportunity to sell these beds on a direct-let basis. We are disappointed about the demand from universities, but it is clear that they have remained cautious about making a financial commitment until they've got absolute certainty on their student numbers. But our occupancy guidance does not assume an increase in nominated beds, and we'll get there with direct-let sales. Competitive pricing and incentives remain sensible, and we are gearing up for the peak weeks of the sales cycle ahead with better visibility than last year. U.K. and international undergraduate intake is still expected to be strong, up 1% to 3% on last year, but international postgraduates is expected to be soft again this year, driven by the policy environment, although this does feel like it is now stabilizing. These again are both factored into our guidance. Moving on to Empiric. We're starting to see the benefits of our platform on the Empiric portfolio. Reservations are now at 71%, meaningfully ahead of last year. And this comes having taken over the business when we were significantly behind prior year. Again, using our platform, we broadened sales channels. We've introduced a dedicated international team, and we've repriced in certain markets, and that has all made a difference. We have successfully reduced the reliance on postgraduates and are demonstrating demand from rebookers, both U.K. and international. We've increased our expectation for the '26, '27 academic year by a couple of percentage points, and we expect to deliver rental growth broadly in line with the Unite performance. As with the Unite portfolio, we will trade price for occupancy where we see the opportunity to secure rooms later on in the cycle. On the integration side, we've made good progress, having recently closed Empiric head office and transferred all operational staff onto our platform, and we're on track to deliver synergies of GBP 17 million, GBP 3 million ahead of our original target. So in summary, we are tracking ahead of last year on occupancy, but slightly behind on pricing, but overall, therefore, in line on income. The sales performance across the 2 brands on both direct-let and nomination supports our strategy to focus on the leading universities, first years and returners. And we're seeing a marked performance difference between by university type and also supply-constrained markets. We got -- we have a critical few weeks to go, but we feel in a good place. Our trading performance in H1 is in line with expectations, and we're reconfirming our 41.5p to 43p EPS guidance for the year. This does reflect the one-off impact of students giving notice under Renters' Rights Act, which we outlined in the statement. Turning to property activity. Our new development Hawthorne House in Stratford has now reached completion. We've done everything we can to get the accommodation and school ready for September, and we're working closely with the Building Safety Regulator in one of the first gateway 3 processes for the sector. The building is fully let for September, and we were looking forward to welcoming students at the start of term. On disposals, it is clear that our focus on leading universities is central to our strategy. And given the changes that we are seeing in the sector, the portfolio repositioning remains a key focus for us to return to more predictable and earnings growth. And we're making good progress towards our disposals target. We've seen a high level of interest across the spectrum of assets. Capital is still attractive to the sector with strong operational cash flows and assets priced significantly below replacement cost. We delivered GBP 130 million so far this year. We have a further GBP 500 million on the market with over a dozen live processes, including a portfolio of lower-growth assets, development land, non-PBSA assets and Empiric assets. A number of these are at more advanced stage, although generally smaller lot sizes, and we expect to make progress through H2. We're not dependent on any single transaction to meet our GBP 300 million to GBP 400 million target for the year, which reflects the breadth of activity underway. And we'll continue to assess offers based on our conviction in the future returns implied by an offer price rather than by reference to historic valuations. And following our announcement in April, we're continuing to make good progress in determining how to further accelerate disposals and faster reposition the portfolio, and we'll share more details with you at the interim results. On valuations, whilst transaction volumes are lower in H1, valuers have reflected increased capital costs and the more uncertain operating backdrop in the valuations. As with other sectors, yields have moved out and rental growth has been broadly flat over the first half. Encouragingly, valuers are starting to recognize the income visibility that nomination agreements provide and how this becomes more valuable to asset owners. This reverses the trend seen a couple of years ago where the nominations premium was eroded in a particularly strong direct-let market. Values have moved most in London, where starting yields are the lowest and in the more provincial markets where operating dynamics are less certain. Flowing this through, we expect valuations at Unite share to be down between 6% and 6.5% at the half year, and there will also be an impact on the carrying value of development assets, which will be reflected in NTA. We've reduced leverage in recent years, and we're well placed to manage changing asset values with our strong balance sheet and flexible sources of funding. Finally, on buybacks, we've completed GBP 165 million of buybacks so far in H1. This was done at an average of 505p and will partially offset some of the NTA dilution from the valuation decline. Today, share buybacks remain the most attractive use of surplus capital for the business, and we see it as the most effective way to invest in high-quality accommodation well below book value. And we will make decisions about extensions to the buybacks as we make further progress with disposals. So wrapping up, we've had a productive quarter. Reservations are progressing well. Empiric is starting to perform. Earnings and income guidance have been confirmed, high levels of disposal activity, and we are on track to deliver our target. Valuations are adjusting and our balance sheet is positioned to absorb this. With that, we'll now turn to questions. So please do submit them if you haven't already, and we will work through them over the next 10 or so minutes.

Okay, guys. We'll wait for some questions to roll in. It's Mike here with Joe. We've got a first question though on the call from Thomas Musson at Berenberg. You mentioned 71% Hello Student reservations, which is 10 percentage points ahead of this point last year. What's stopping you from expecting occupancy to recover all the way to at least last year's level of 89%, given that your new guidance is still at least 87%, which is back year-on-...

Yes. Look, we're really pleased with the progress that we've made over the last quarter, both on sales and integration. And I do want to call out the great work the teams have performed and particularly the Empiric and Hello Student teams in the way in which they've sort of bought into the Unite family and the Unite Group, and it really clear to see the 2 businesses working well together. And yes, we've made some real wins, and I think that's from the fact we've introduced an international sales team, and that really is helping to drive conversion rates, a number of that -- those teams are Mandarin speakers. We've unblocked what were some clunky sales processes within the Hello Student way of selling. And we've also been cross-selling from the Unite portfolio and targeting domestic students. So we are feeling more confident. But as I say, this is our first time through this sales cycle. It is a different demographic, and we don't have that same level of confidence over our ability to sell volumes of bed through clearing just given that slightly different customer dynamic. So we are remaining a fairly cautious approach at this stage, but we will work really hard to see and hopefully, we will be able to outperform that number that we've guided to today.

Great. Next question is from Ana Escalante at Morgan Stanley. Any update on buybacks and use of proceeds from disposals to be completed in the second half? Maybe I can just expand on what Joe said earlier. Maybe it's helpful just to sort of reiterate what we've done on buybacks to date. So we have completed GBP 165 million of buybacks in the first half, as Joe said. That was really in 2 tranches. So the first GBP 100 million was a case of us really funding that from development that was no longer progressing. So where we redirected that capital into share buybacks. The second tranche, the GBP 65 million we committed to was then funded out of the proceeds of the disposals we've made in the year-to-date. So I think as you look forward on share buybacks, our ability to commit more capital to them or any other use of capital will be a function of the disposal progress we make. As we said today, we're confident we'll achieve the GBP 300 million to GBP 400 disposals in the year. That would free up additional surplus capital in the second half. And at the point that we have confidence over that, we would think about how we redeploy the proceeds. A portion will go to funding CapEx that's still to go in the development pipeline, but around half of those proceeds will be available for reinvestment. We've then got one further question here from Ana at Morgan Stanley. Any further color on the progression of nomination agreements and whether this year is a one-off and you're confident of your previous target of 60% of reservations come from nominations over the medium term?

Yes. Nominations have always been a really important part of our sales channel and the way in which we look to fill the portfolio. And if we go back over time when we bought Liberty, we saw nominations drop to low 50s, and we built them back up towards the high 50s. I think, though, it is fair to say that we weren't expecting to see the drop this time around. And the normal levels of renewal of those 1-year agreements just hasn't happened at the same level as we've talked about over the last couple of calls. And it is clear that universities are being more cautious, and I think they're being more cautious for 2 reasons. One is they are sort of less certain on the overall demand for beds, which they will have from their student intake, and that's both U.K. and international. And they are more cautious because of the financial position that they find themselves in. And this has been most notable in the lower-ranked universities who we work with. But where we continue to have really good conversations with universities. It's clear that we're not losing meaningful share to our competition. We've got a pretty good list of further opportunities that could come through towards through the back end of the cycle and once A-level results have been announced. And we are sort of having ongoing discussions about the renewal of longer-term agreements, which are maturing over the next 12 to 24 months. So we still see our ability to grow back to that 60% as a meaningful target. Much of that will come through the delivery of our 2 university joint ventures and our development pipeline. And we have a strategic target, and we believe that it will be deliverable alongside the portfolio repositioning. I think the other thing I would call out is the real success we've had in pivoting those beds onto the direct-let basis. And it does show our ability that these beds are well placed in the cities, the pricing is at sensible levels, and we can turn them on to our direct-let platform really effectively well and effectively sell them. So I think that it is a focus for us. We're comfortable that we'll get back to that 60%, and we'll work hard to ensure that we're engaging with the universities and do so on the repositioned portfolio.

We've then got the next question from Veronique Meertens at Van Lanschot Kempen. Are there any pricing initiatives in the form of cash back or vouchers, something that would not be showing in rent growth, but in cost. I'm happy to take that one. Yes, Veronique, we will use incentives and the use of sort of cash back offers and things like that in our marketing, it's not really any different from what we've done in previous years. They tend to be very targeted, and we do flex them according to which markets maybe need more incentivization than others. However, I think it's worth saying that the adjustments we've made around price, I think, are more significant than the adjustments we've made around incentives. We've talked about the rate growth for the year being more like 1% to 2% now, and we are seeing that drive an improvement in the rate of sale, which has been really pleasing. To give you a bit more color on that, that is a slight shortening in tenancy length, which is seeing that rate growth of more like the 1% to 2% versus the slightly above 2% that we've previously anticipated. So we think that use of price is really the thing that's made the difference. And yes, we will use incentives, but their use will be pretty targeted. I think that's it.

So thank you all for joining the call. And hopefully, you'll see that we continue to make decent progress with the reservations. We are very active in our repositioning of the portfolio, and we are fully geared up to work through the remainder of the sales cycle, and we'll look forward to speak to you in a few weeks' time when we announce our interim results. Thank you very much.