Unite Group PLC (UTG) Earnings Call Transcript & Summary

Good morning. Good morning, everyone, and thank you all for joining us today for our half year results. Today, in addition to our updates on performance, today's presentation will start with a deeper focus on strategy, and we will update you on our key initiatives, which are enhancing our position as the home for students at the U.K.'s strongest universities and how that's really then driving and impacting our financial performance. Karan will then take you through our operations, including what we've been doing to drive income ahead of the year and occupancy at Hello Student. And Mike will present the finance and property review, explaining how portfolio and capital allocation decisions are contributing to our future earnings growth. So before talking about the past 6 months, I just wanted to explain our vision at Unite. Our business model is to provide modern accommodation to students at the very best universities across the U.K. For these universities, demand from students significantly exceeds the supply of places. And these universities are at the heart of our major cities, where land is scarce, most new development is not viable, supply is tight, and it's probably getting tighter. And we'll explain how we're sharpening our focus on these top universities through our disposal and investment programs and how our leading operating platform enables us to deliver higher occupancy at a lower cost than other providers. So looking forward, our focus is growth, both organically through rental growth across the portfolio and externally through partnerships and winning share from the HMO market. It's been a busy first half and it's an exciting transition. We're improving the operational performance. We're delivering the portfolio of the future, and we're fully focused on making this happen, and we'll update you on our progress that we've been making today. So let me start on that focus of being the home for students at the U.K.'s strongest universities. These universities continue to excel. We've seen a 7% applications growth to high tariff university, which is the fastest growth for over 10 years. And we see more than twice the number of applicants for each place at these universities. And that's because they have the best outcomes and also the highest demand for accommodation. And that's why we're increasing our share and our alignment to these universities with our ambitious disposal program through the completion of our committed pipeline and providing more homes to returning students. The middle box shows we're being disciplined with our capital, focusing on completing our pipeline and using surplus capital to buy back shares. And it's great to see that our platform is driving positive leasing momentum. Reservations are up, and this is down to our insight, our marketing campaigns, our targeted pricing in a few cities and empowering and incentivizing our local teams to drive sales. And I really want to thank them for their hard work and focus because without it, it wouldn't be possible. And reservations are up at Unite Students, and we have transformed the Hello Student sales cycle from a slow start, and we're now 9 points ahead of the same point last year. We've got the best operating platform for student accommodation. We're 11 points ahead of the market. I'll come back to explain that. And we're cost efficient across our operations, and we're showing this through our progress on Empiric synergies. The next few weeks are critical for sales, so we're not getting ahead of ourselves, but we're pleased with the progress across both Unite and Hello, and we're well set to deliver into the critical clearing market. It's clear that the stronger universities are performing better. Bifurcation across the sector is accelerating, and we expect this to continue. High-tariff universities now receive twice as many applications as low tariff, and that's reversing the position from 20 years ago. Universities are facing into their financial pressures, and they are getting more efficient. They're competing for students and the strongest are winning share. U.K. universities are actually quite small on a global basis, but they are getting bigger. The majority of that is through organic growth, but we're also starting to see some consolidation as well. And young people still see the value in university. Applications are up 5% from 18-year-olds this year. Students want to go to university and they want to go to the stronger universities. They are more focused on outcomes and they're more focused on the experience. And as more head to strong universities, they're more likely to travel and need accommodation. And this is why we are increasing our alignment. The strongest universities is performing and growing to meet student demand and enhance their financial strength. So we've looked hard again at which universities to build our business around. And as you can see from the boxes on the top of the slide, we are using a combination of factors. The league tables are important, but there's no single league table that tells its own story. So QS Global Top 200, Times Top 50 and the tariff groups all feed into our analysis. We look where there is the strongest demand and that demand exceeds places. We look where the best student outcomes are delivering across employment, earnings and value add and where students are more likely to live away from home, and we will work with the most financially robust universities. These universities are the ones which will continue to grow and are best placed to withstand future challenges. The market has changed and will continue to evolve. So we are upping our game on how we use data to stay ahead of these changes, the data and analysis is more important now than it ever has been. We know that these universities want to work with us, and we can help them to deliver a fundamental part of their offer, the accommodation. We're seeing how when we get it right, they will trust us to go deeper, giving us more opportunities for nominations and joint ventures. Whilst university strength and demand sits at the heart of our portfolio selection, where we position our portfolio also takes into account wider factors, supply and constrained comply clearly plays into that across university stock, purpose-built, HMOs and build-to-rent. We also want to focus where we have the best relationships and the highest potential for joint ventures and nominations and ensuring we have the prime locations for our target universities, which means that we will often be reducing our exposure in cities to more peripheral assets. We are making an ambitious statement to realign to these universities that will have enduring performance and demand. And we will focus our portfolio on 55,000 to 60,000 beds across 20 cities. We will work with fewer, stronger universities, and we expect demand growth to outpace supply in these locations, supporting our 95% to 97% occupancy, CPI plus rental growth and higher margins. We will also serve customers for longer. By extending the customer life cycle, we will use the Hello Student brand to retain customers after living with us for the first year. And Mike will provide more color on the portfolio direction and how this will evolve. This is the portfolio of the future. These are great institutions, and we are proud to be working alongside them, providing homes for their students whilst they spend their time at university. So disposals and investments are working in tandem to reshape the portfolio for the long run. We will sell 15,000 to 20,000 beds to make sure we are aligned to those strongest universities. And our pipeline will see us deliver 6,000 new beds in London, Glasgow, Manchester and Newcastle. We sold GBP 130 million of assets in the first half, and there's GBP 500 million of assets, which are currently being marketed across 12 different processes, and we have just over GBP 100 million under offer today. We've kicked off a wider portfolio disposal process, and we are exploring all options to ensure that we can deliver the portfolio of the future as quickly as we can. We are speaking to investors now, and we are making progress. And this will see us delivering our portfolio of the future over the next 12 to 24 months. The market is softer than it was at the start of the year, as I'm sure you know, due to sustained higher funding costs and macro uncertainties, both at home and abroad, and real estate transactions take time, and we're not sellers at any price, but we will continue to operate at pace and evaluate offers based on forward returns from the assets and the alternative uses of that capital such as share buybacks. So we remain focused on allocating capital to high-quality accommodation. To say we're investing in 2 areas: first development, high-quality, high income returning schemes such as the Hawthorne House scheme opening this summer, which is now fully let. We're also on site with over 4,000 university beds, and we continue to see a meaningful opportunity to add further joint ventures. We've completed GBP 165 million of share buybacks in H1, and we still see Unite shares as the best way for us to invest in high-quality student accommodation today. And we will continue to evaluate further buybacks as we complete on disposals. And our platform is a sustainable competitive advantage for Unite in both revenues and costs. And we see the benefits of this in our operations every day, and that's why we're ahead of the market. If you look at the chart on the bottom left, StuRents now produce a monthly market report, which covers around 2/3 of the direct let beds. At the end of June, the direct let sales across the sector were at 59% reserved. On our direct let beds, we were 11 points ahead at Unite and 10 points ahead at Hello. And this is showing the great progress that we've been making on our sales, and Karan will talk in more detail about the precise actions that we've undertaken to drive that. We also see it in our lower costs because of our scale and our efficiency. We're on target to capture GBP 18 million of Empiric synergies ahead of target, having closed the head office and taking out the cost of city teams while improving performance. And we're working on further improvements to manage costs across our portfolio. There's more to come from our new IT infrastructure. We're embracing the benefits of AI, and we're focusing on both improving margin and investing alongside and into student welfare and our building quality. We know that we've got work to do, but we've been busy and we've been effective in the first half, and it's good to see momentum building. So I'll now hand over to Karan to provide more detail on the great work the operations team have been delivering.

Thanks, Joe. So overall, we are pleased by how teams across the business have responded to the changing market dynamics and grown share for both brands. On the Unite portfolio across nominations and direct let, we are now 89% reserved versus 87% last year. Strong growth in the undergraduate applications at U.K.'s strongest universities has underpinned this performance. In addition, direct let bookings have increased with returners up almost 1/3. Pricing has been pragmatic but disciplined. At the outset, we took a decision not to offer high incentives. Instead, our simple, transparent pricing with tenancy lengths that work for the undergraduate market have helped us win more customers. Some prices have been adjusted to drive overall income. Nottingham is a good example of this, where we will be fully occupied this year versus 70% last year with income up 20%. Overall, we are on track to achieve occupancy and rental growth guidance -- rent growth in line with our guidance with focus very much on maximizing income. Clearing is a critical period, and we have an important few weeks ahead of us. We are taking decisive action to make sure we capitalize on every opportunity, and we will share a sales update in mid-September. One of the strengths of our platform is that we have great long-term inflation-linked nominations and a commercial engine that can drive direct let bookings. Nominations continue to be critical for the U.K.'s strongest universities as their offer of guaranteed accommodation for first year and international students is a core part of their value proposition. This has enabled us to improve the overall quality of our nominations. 94% are now either with high tariff or medium tariff universities who continue to drive a great residential experience. We also have a strong pipeline of future nominations with early renewal requests from several leading universities. We have 3,500 rooms in advanced stage negotiations on long-term agreements ahead of previous cycles. That said, as we have seen this year, universities are being more cautious and some lower tariff universities have taken fewer beds with us. Where we have seen nominations reduce, we have successfully sold these directly. We have sold nearly 1/3 more rooms through our direct let channels this year. In addition to our pricing strategy, two initiatives that have contributed to the success are worth calling out. First, our city teams have done brilliantly to retain more of our current customers. On-site sales are up 80% year-on-year. And as you can see from this visual, this was our mobile advertising van in Leeds that went around campus on open day, generating hundreds of leads for the team. We have been more local and more creative with our marketing efforts. Second, we have optimized our website and refined our marketing programs, which has helped drive nearly 30% more online bookings. Overall, direct lets still command a 10% premium to our nomination beds, and we will continue to invest in our platform capabilities. This ability to sell both to universities and direct to students is a great example of why I believe Unite has the best operating platform in the U.K. and why we have consistently beaten the market. So what happens next? Here is the typical sales cycle. We are now starting its last leg. The international booking window is very much open, and our sales teams are exceptionally busy helping students make the right choice. That said, this market is still tough to predict, especially post-graduate demand from markets like China. On the home front, in 3 weeks, U.K. students will find out how they've done in their A levels and where they are going. Clearing is always massive for the undergraduate segment. Around 77,000 students use clearing either to find a course, switch their university or do both. We expect stronger universities to go hard for U.K. domestic students to compensate for any international post-graduate uncertainty. And some of our existing partners have already approached us to see if we could hold some rooms. We have a critical few weeks to go, but we are well prepared and well positioned. We are talking to our nomination and university partners weekly, which will soon become daily. We have stress tested all our sales channels, including our websites, and our teams are trained and ready to go. Let me shift gears and talk Hello Student and how we have driven value by making it part of our best-in-class operating platform. At the time of the Hello acquisition in February, there were questions about our ability to sell a proposition and operating model that differed from Unite's traditional offer. While we still have work to do, I am really proud of how our teams have seized this opportunity. They have made great progress, and we are confident we can unlock the full potential of the Hello brand as part of the Unite platform. At the headline level, we are 77% occupied. That's up 9% on last year. And as Joe shared earlier, Hello is now 10 points ahead of the market. A key part of the success has been the introduction of a dedicated international sales team who are all native Mandarin speakers. They have adopted the same sales tools and processes that we use on the Unite portfolio and have driven nearly GBP 22 million in sales in just 6 months. We have also enhanced their marketing programs and brought the same sales focus that we have at Unite Properties to the Hello frontline as well. As a result, we have increased the weekly sale -- weekly rate of sale by 50% since they joined the group. We now expect occupancy in the 88% to 90% range, which is well supported by the current weekly sales trajectory. Rental growth will also be broadly in line with the Unite portfolio. Again, we are targeting overall income growth rather than purely occupancy or rental growth. On the integration side, we are ahead of plan as well. Citi teams are now operating as one, above property teams have been streamlined, finance platforms have been migrated and central roles and contracts have been rationalized. As a result, I'm pleased to say that we have increased the annualized run rate savings to GBP 18 million and have already secured GBP 9 million of that in '26. Final bit for me. Unite has built a market-leading position in first year accommodation with nearly 60% of our residents in this segment. And we will grow our share here through our on-campus joint ventures. However, first year students represent only about 1/4 of the total student accommodation market. The biggest segment is students who are returning undergraduates. We have a great opportunity to grow our share through this segment, which accounts for over -- for around half of the market but represents only 1/4 of our customer base today. The majority of the students are currently being poorly served by an HMO sector in decline with variable levels of quality and increasing regulation. Hello strengthens our proposition for this segment, enabling us to retain more students and capture a greater share of this attractive market. I'm personally really excited that over the next few years, we can further differentiate our brands and provide students with a place they can call home throughout the university journey. And on that note, let me hand over to Mike.

Thanks, Karan. Good morning, everyone. I'm now going to take us through a review of finance and property for the first half. I'll start with a run-through of our H1 numbers. I'll then build on what Joe said earlier and dig a bit deeper into how we're delivering our strategy to grow our alignment to the U.K.'s strongest universities. First, turning to our H1 performance, which is in line with our expectations. We're pleased with the operational performance delivered in what's been a challenging trading environment. We've also taken proactive steps to reduce costs in response to reduced earnings. This has come as valuations adjust to a new operating environment. We've delivered a good operating performance in the first half. Rental income increased by 1.5% on a like-for-like basis as rental growth more than offset lower occupancy. This includes additional income secured since the start of the year through short-term lettings of unsold rooms, which has added 0.5 percentage point to occupancy. We completed our Empiric acquisition in late January, and H1 includes 5 months contribution from the transaction. We've been proactive in reviewing our cost base, taking actions to deliver savings in staffing and central costs. This has held underlying costs broadly stable, and we'll continue to drive efficiencies now that we've integrated the Hello Student platform. Our target is first to stabilize and grow our margins as we transition to our future portfolio. Earnings and EPS in the first half were in line with our expectations. Adjusted EPS reduced 8% to 27.1p, reflecting higher interest costs and the impact of the Hello Student acquisition ahead of full realization of the cost synergies to come. Our interim dividend is unchanged at 12.8p. As Joe said, the investment market for student accommodation is in a period of adjustment with investors seeking higher returns to reflect increased funding costs and less certain occupancy. There's still significant capital targeting the sector, but transaction activity has slowed as buyers show pricing discipline and take time to work through due diligence, particularly around fire safety. We've seen this sentiment reflected in our first half valuations. Property yields increased by 29 basis points in the half to an average of 5.5%. Yields have increased in all markets, but valuations have been less impacted for properties benefiting from multiyear nomination agreements with universities. We're seeing value-add investors remain the most active. They're attracted by the opportunity to acquire housing at substantial discounts to replacement cost. Turning to the balance sheet. EPRA net tangible assets per share reduced by 9% in H1 to 865p. This reflects a minus 6.4% movement in property values, mainly driven by that increase in property yields. Rental values have reduced slightly, reflecting those properties where we've made targeted price adjustments to drive higher income. Development properties were also impacted by lower assumed values on completion. We bought back GBP 165 million of shares in H1, representing 6% of our equity. This added 28p to NTA due to the discount at which we acquired the shares. We've continued to deliver our program of fire safety enhancements in the first half and expect to recognize further remediation costs in our year-end valuations. This will be partly offset by further success in recovering costs from contractors. I'll now move on to discuss our priorities for capital allocation and how we're delivering the strategy set out by Joe earlier. Our approach to capital allocation is based on growing our alignment to the U.K.'s strongest universities. This is the same plan we set out at our investor event in November. What's changed is the pace at which we're delivering it. We and our teams are fully committed to delivering this plan with a clear focus on the value this delivers for investors. Over the first half, we significantly increased our disposal activity and the majority of properties identified for sale are now on the market or set to be launched. This puts us on track for GBP 300 million to GBP 400 million of disposals this year and significant further asset sales in 2027. The capital we released from disposals will be used in 3 ways: firstly, to maintain our strong balance sheet; secondly, to fund the investment into our committed development and university partnerships and where we have surplus capital, it will be invested where it delivers the strongest risk-adjusted returns for shareholders. This next slide expands on how we reposition our portfolio for the future with a clear focus on the U.K.'s strongest universities. The column in gray shows where we stand today, 72,000 beds in 29 markets across Unite and Hello Student. This is already a high-quality portfolio, but performance has become more variable between cities and properties over the past 2 years. Based on our detailed analysis of the market and our universities, we've identified 15,000 to 20,000 beds for disposal. This will see us exit a number of markets and increase the focus of our portfolio in the strongest locations within these cities. These disposals are priced at very affordable rents, but generate lower occupancy and rental growth and operate at lower margins. These properties are not part of our future portfolio, but other investors see the potential to drive healthy returns through higher occupancy, underpinned by valuations at significant discounts to replacement cost. Our planned disposals account for around 1/4 of our operational beds, but closer to 15% by value of the portfolio due to their lower price points. These disposals provide the capital for us to reinvest in our high-quality pipeline of developments and university partnerships shown in yellow. Income for this pipeline is underpinned by nomination agreements on our university joint ventures, where we're building new beds in the strongest on-campus locations. The column in blue shows our goal, a more focused and higher-quality future portfolio, which delivers stronger operating performance through income underpinned by a foundation of nomination agreements. Here, we illustrate the operational strength of our future portfolio. The chart on the left shows our occupancy has significantly outperformed our planned disposals in recent years. This reflects stronger demand and tighter supply conditions. We also see greater opportunities for nomination agreements in these markets where our university partners are most in need of new beds. London is a great example of this, where we have most demand for new long-term nomination agreements and healthy tension from a strong direct let market. There's a strong relationship between our occupancy and rental growth and the greater demand for our future portfolio supports higher rental growth. This outperformance has been borne out in recent sales cycles, and we expect it to continue. This slide shows how supply is tightening in our markets. It is really tough to develop new student accommodation today due to high costs and longer development programs. Valuations are now significantly below the cost of new build in most markets, and this has led to fewer planning applications for student housing and a significant slowdown in new construction starts. The wider supply picture is also getting tighter with obsolescence in university-owned stock and further contraction in the private rented sector. The net effect is the growth in housing demand is expected to exceed new supply in the next 2 to 3 years. And as the largest owner of operational student housing, we stand to benefit through stronger prospects for rental growth. Our development pipeline supports our strategy to grow with the U.K.'s strongest universities and will see us deliver 6,000 new beds over the next 4 years. We'll soon open Hawthorne House in Stratford, where we've delivered 700 student beds in a new academy school. We're fully let on opening with half the beds let to the University of Arts London on a long-term nomination agreement. UAL is ranked #2 globally for Art & Design, so it's elite in its field. You won't see it at the top of overall league tables because it's too specialized, but it has surplus demand similar to the U.K.'s elite universities, and it's a great example of one of those strongest universities we'll partner with in the future. University joint ventures remain a significant opportunity for us to grow in the future due to our partners' need for more high-quality beds at affordable rents. Building on the success of our joint ventures with Newcastle and Manchester Metropolitan, we have a handful of live opportunities for new joint ventures with high-quality universities. These take time to deliver, and we'll consider them alongside other uses of capital, such as share buybacks to ensure we invest where we deliver the strongest risk-adjusted returns. We have a strong balance sheet and our future capital allocation decisions will ensure we maintain this foundation. Our net debt-to-EBITDA increased to 7.5x on a pro forma basis at June following the Hello Student acquisition. We expect this to reduce back to our 6x to 7x target over the next 12 months as we make progress with disposals. The flexibility of our balance sheet is one of our key strengths, and our funds and joint ventures give us access to different forms of capital. The benefits of our structure were demonstrated in the first half through the disposal of St. Pancras Way to USAF. We will continue to use third-party capital to access opportunities we couldn't otherwise reach like university partnerships. And there's also the opportunity to generate new management fee income where other investors recognize the value of our operating platform. Our debt book is well hedged, but as we flagged before, higher marginal borrowing costs in our cost of debt will increase over time as we refinance. I'll now finish with our earnings guidance for 2026, which remains unchanged. This reflects our performance in H1 and good progress on sales the next academic year. On the slide, we step through the key updates underpinning our guidance. Starting with rental income, H1 was slightly ahead of our expectations, thanks to additional income from short-term leasing. This is offset by a one-off reduction in income linked to the introduction of the Renters' Rights Act. All new PBSA tenancies will be exempt under the act, but in the initial transition period, students have the ability to exercise early leave requests. And the result is a 0.6p impact to earnings in H2, which is greater than our initial assumptions. Costs are tracking in line with our expectations, but H2 will see a reduction in management fees linked to lower valuations. And the extension of our share buyback program from GBP 100 million to GBP 165 million is accretive to earnings. And finally, for Hello Student, the strong progress we've made on integration has led to us increasing our occupancy target. Taken together, these factors support a reiteration of our earnings guidance of 41.5p to 43p for the year. And with that, I'll hand you back to Joe.

Thank you, Mike. Before we move on to Q&A, let me just summarize the key points from this morning's discussion. Unite is the home for the U.K.'s strongest universities, and we're excited about the strategy that we've set out today, and we are really focused on delivering it. The strongest universities are performing and will continue to do so, and we are serious about aligning to these institutions. We will be disciplined with our capital and our best-in-class platform is delivering higher occupancy at lower costs. We have an important few weeks to go of the sales cycle, and we have an ambitious disposal program, but we're in a good place at this stage of the year. So taken together, the work that we are doing is improving our business and positioning us for a return to growth. So let's take some questions. So if we've got any questions in the room, let's start there. We've got a microphone at the back. Thanks, Caroline.

Rebecca Parker from Goldman Sachs. Just regarding your disposal program, just wondering if you give us a time line there and maybe an expected NOI impact in the average yield, that you're expecting to dispose of those assets at? And then maybe just from your discussions with investors for those assets how are potential investors thinking about pricing, just given some of the valuation declines that you've seen in the first half?

Sure. Hopefully, you've kind of understood the reason why we are embarking on this disposal program from what we talked about and the need for us to get to a place where we have more consistent occupancy and stickier rent growth. As we stated, the overall plan is to deliver 15,000 to 20,000 beds of disposals, representing 20%, 25% by beds and 15% by value, as Mike talked about. And we've got a target of delivering GBP 300 million to GBP 400 million this year. We are restating that today given the progress that we are making. GBP 130 million of that has been delivered so far, and there's a further GBP 500 million, which is on the market through around a dozen processes, and we've got GBP 100 million of that, which is currently under offer. Beyond that, we've started a process to look at the remainder of those disposals, and we talked about this back in April, and we are looking at all options around how we go about delivering those sales and doing that with the pace that we want to deliver it. Yes, it's not a straightforward market to be selling into, and I think for all the reasons that we've been seeing. But we've seen good appetite and investor interest into the various processes that we're running. And as Mike said, these are good assets. They're high yielding, they're priced well below replacement costs. And the people that we're talking to see opportunities to drive NOI improvement from them and deliver the returns that they need to. Ultimately, the market will determine what the price of these assets will be. And our job is then to determine on what we think we can generate from the returns on those assets, how that compares to the alternative uses of our capital. And the thing that we've hopefully reiterated over the last 6 months is that focus on capital allocation, capital discipline to make those right choices when we are faced with bids on these different types of assets. So we are working at pace. We are set out a target for this year. And we believe that within 12 to 24 months, we will deliver the portfolio of the future that we think will then drive the long-term sustainable business and growth that we can take from there.

And just another one on nomination agreements. We've seen quite, I guess, solid student application numbers. How are your discussions with universities going post those numbers? And then perhaps into next year if application volumes are in robust, would you say, I guess, universities come back with those nomination agreements? Or is it more of a structural trend where universities are managing their finances differently?

Yes. I think as we've talked about on various trading updates, we have been a bit surprised by the fact that universities have not renewed nominations agreements at the level they have done in the past. And that doesn't quite fit with what we've seen around applications. And I think that reflects, as Karan talked about, a slight increase in caution, particularly among some of the lower tariff universities wanting to really wait until they see what their final numbers will be. And we are seeing that through conversations with universities, I think they will go hard in clearing, but clearing will be competitive. So there probably is greater levels of uncertainty around where those final numbers will turn up. But we are talking to them regularly. I think the option for us to pick up a few more nominations beds is relatively high over the remainder of the sales cycle. What is encouraging is, as we have those conversations, we look forward to the nominations agreements for '27, '28 and even '28, '29. And actually, with those stronger universities that we're aligning to, we're seeing actually really encouraging signs about the demand for longer-term agreements, which are sort of more akin to 7, 10, 15 years with CPI underpins as well. And we will obviously update as we make progress on those agreements. But I think this shift kind of plays into and feeds into the strategy that we've set out today that we think those nominations at the strongest universities are where we will continue to win and will be an important part of our overall lettings program.

It's Zachary Gauge from UBS. A couple of questions. First one on valuation. You were minus 6.4% on the portfolio. But if I take the weighted valuation change based on the USAF, LSAV valuations, you'd have been at minus 4.7%. Could you just touch on why there was quite a material difference between the Unite portfolio revaluation versus where USAF and LSAV would have implied? And is any of that related to the valuers having some early sight on where the disposals will go through at? And then the second question is on your occupancy guide for '26, '27. Perhaps I'm being a little bit simplistic here, but if you're running 2% ahead of where you were last year and last year was 95%, why would you not expect your outcome to be slightly stronger than 94% to 96%?

So I'll take the first one, Mike, and then you carry on, on the second. Yes. On occupancy, I think we are ahead. And I think your simplistic analysis is fair. We know that it will be a competitive clearing process. We're seeing -- we're trading ahead of where the market is. So we know that a number of our competitors are clearly behind where we are. So as we've seen in previous cycles, that has led to some sort of quite strong incentivization and discounting from our competitors. So we're probably being suitably cautious. We were surprised through last year's clearing that we didn't see the demand coming from international postgraduates in the second half of September. So I think at this stage, we're saying there is enough uncertainty for us to maintain our overall position on 94% to 96% just given that sort of environment, it is still a changing market. And we are -- we will play all the cards as Karan set out. We're having those conversations. We're ready for it. Hopefully, we can beat it, but we're sticking with that guidance of 94% to 96%.

And then Zach, to your question on valuations. Yes, there's always some differences between valuation movements between funds, so wholly owned LSAV and USAF fundamentally, the trends are the same. We've seen valuers move up yields in pretty much all markets. And I think if you stand back, as you might expect, we've seen the valuation movement on disposals be slightly higher than the valuation movement on the portfolio as an average.

It's Tom Musson at Berenberg. Just a question, just given the valuation decline, LTV now 36%, debt-to-EBITDA 7.5x. How do you see best capital allocation right now with any surplus capital you might have just between buying back more shares, investing in the pipeline or deleveraging?

Yes. So Tom, I think as we set out in our capital allocation framework, it starts with having a strong balance sheet as a foundation. So we'd expect that leverage to come down over time as we make progress on disposals. As you say, we're slightly above the 6x to 7x debt-to-EBITDA range today, but we'd expect that to reduce over the next 12 months. Then as we release excess capital from disposals, there's 2 real uses. One is clearly to fund the development pipeline. We have costs that will continue to go into delivering that over the next 3 to 4 years, but we also expect there to be surplus capital, which we can reinvest. In the first half, some of that's gone to share buybacks. In the future, we'll consider whether that's share buybacks or maybe university partnerships.