Unite Group PLC (UTG) Earnings Call Transcript & Summary

Good morning, everyone, and thank you all for joining the call. I'm going to take you through a few slides, and then we'll open up for some Q&A. So if you have any questions for me and Mike, please drop them into the webcast. Overall, we are pleased with our progress against the priorities that we shared earlier this year. We've delivered a strong leasing performance in an evolving market, helped by the strength of our best-in-class platform. Our enhanced commercial approach has delivered reservations of 96% at the upper end of the range guided back in July. Whilst and your rents are down a little, this largely reflects a mix towards more undergraduates and resulting in shorter tenancy lengths. We're also especially pleased with the performance of Empiric with occupancy of 92%, meaningfully ahead of last year. Income growth is in our range, and our EPS guidance for '26 is underpinned. Our best assets are performing strongly, and we have confidence in the strongest universities that we are working with. Our portfolio of the future is outperforming the disposal portfolio. and we're making solid progress on disposals. We've sold GBP 200 million so far this year and remain on track to get to our GBP 300 million to GBP 400 million target. The transaction market is being impacted by the challenging macro backdrop but we continue to see good engagement and are working to the targets and time lines that we've previously set out. We remain disciplined to our capital allocation framework, managing leverage, funding our on-site pipeline as shown earlier this year, we will allocate surplus capital to share buybacks. We are moving at pace, and we're making progress. The trends that we've spoken about earlier this year have continued to play out through August and September. More than ever, students are prioritizing the best universities, and we believe that they will continue to do so. And the strongest universities are winning in this environment. They're continuing to attract students to live away from home, and have a greater need for accommodation than the lower-ranked universities. International post graduates are down at all but the very best universities due primarily to the shortening of the post-study work visa from 3 years to 18 months. This is being partially offset by more international undergraduates with China particularly strong. And university is responding by growing their U.K. student numbers and the likes of Manchester, UCL Kings, Liverpool Newcastle are all recruiting strongly. And there's even stories of Extra and Bristol and the news facing a shortage of accommodation for first year students. And these trends support our strategy to increase alignment to the strongest universities where the outlook for accommodation demand and rental growth is the most positive. The Unite platform consistently drives superior performance from PBSA assets, and that means high revenues, income visibility and lower costs. And this is because, firstly, our brand and reputation, we're clearly recognized by the U.K.'s leading universities and the students who attend them, and this gives us an edge across the spectrum from multi-decade university partnerships through to short-term lets. Secondly, the scale of our operation means that we can deliver higher occupancy for a lower cost. We have a deeper and wider sales channel than anyone else with the 24/7 call center, international office, best-in-class technology, and scale being focused on 20 top cities for students brings efficiencies in the cost to market and servicing each bed. These brand and scale benefits are tangible. The chart on the bottom left shows a clear example of how we're outperforming the market for latest rent data and that we're gaining share. In the middle, our nominations are 54% of the portfolio is nominated. Universities need students, students need beds, and this is mission-critical to those universities. And uniquely, we're both large enough and trusted by university to provide long-term accommodation solutions. And finally, our cost to serve is low I think Empiric is a great example of this, where we've reduced the cost base by more than 40%, which is ahead of our under expectations. The typical PBSA bed is more valuable on the Unite platform than anywhere else. And these are significant and enduring advantage of our platform, improving our profitability and creating value. Last November, we set out our leasing strategy for the '26/'27 academic year, and I'm really pleased with how we have delivered. We saw universities become more cautious around committing to nominated rooms where we pivoted and sold 5,000 more beds on a direct let basis to return us winning share from the HMO market. And in response to fewer post graduates, we have shifted to undergraduates. We are front-footed and applied the lessons from last year. We adjusted pricing early rather than waiting for clearing. Our developments are fully let and Nottingham, Bristol and Edinburgh have all come back strongly. We took over Empiric when it was behind and made a material improvement in performance with more to come in our first full year of ownership. And this doesn't just happen. The market is changing, and we are adapting, but it takes a huge amount of work to deliver this performance. from our commercial teams, property teams, technology and city teams have all responded well to the challenge, and this sets us well for the '27-'28 academic year. In the sales cycle, we focus on delivering overall income and price to secure occupancy early. Occupancy is above 95% in all of our stronger cities, where we have seen lower occupancy, this is largely supply-driven. Weekly rates were up modestly supported by indexation in multi e-nominations. And the shift to undergraduate students has meant we've sold more shorter tenancies, meaning that overall RevPAR is down by 0.3 percentage points. And we've also seen our overall cost of sale, agent fees and pay-per-click marketing costs up year-on-year. Given the shorting of tenancy lengths, we do see the opportunity to grow utilization through our flexible lettings business. We've already grown this income this year. and see the opportunity to add up to a further 0.5 percentage point to income growth in 2027. We set out our future portfolio at the interims, and we're clear then that these assets have the strongest track record and our conviction that this will continue. Our target portfolio of 55,000 to 60,000 beds is across 20 cities, and these have again outperformed in both occupancy and rental growth, as we'll see from the 2 charts, and we expect this to continue. We're focused on moving as fast as we can to this future portfolio as I'll come back to discuss the disposal progress. A new supply in these cities beyond 2027 is very limited. Viability is incredibly challenging, and there are signs that the renter Rights Act is starting to have an impact on the HMO market. Turning to Empiric and our Hello Student brand, we're really pleased with the performance to date. The brand is clearly benefiting from the power of the Unite platform, driving improved performance right across the portfolio. When we took it over in January, bookings were 13 points behind year-on-year, we applied our understanding of each city to market effectively. We broadened the sales network, introduced our dedicated and international sales team, and this has resulted in both occupancy and income being ahead of last year and expectations. We're in the advanced stages of preparing for our first full sale cycle. The early rebooking window offers opportunity for us to retain more customers at a lower cost and cross-sell from the Unite portfolio and continue to win share from the HMO market as well. We completed the bulk of the integration and will deliver the GBP 18 million synergy target that we've previously discussed. Nominations continue to provide us with income visibility and growth with inflation linkage in multiyear deals and have an average remaining term of 5 years. The strongest universities need more beds, and we are seeing this. So far, we've agreed 4,300 new beds with deals with the universities like UCL, London School of Economics and Bristol, and these have been at a 10% increase to current passing rents, and this supports our trend of our shift towards strong universities and higher-quality nominations. Renewal discussions for single year deals are underway now with universities and typically run through Q4 and into early Q1. And depending on where we end up, our experience shows this year how we have a range of commercial levers to drive a beneficial outcome. The pricing differential between multi and noms and direct let gives us the room to play with. We are already on this and actively managing over the next few months. Moving on to property valuations. We've seen valuations reduced by 3.7% in Q3. This movement largely reflects the higher interest rate environment affecting all assets. Values have also reflected lower income on weaker performing assets. This makes up about 1/3 of the decline, and these assets largely sit in our disposal pool. We continue to focus on bringing leverage back in line with our target of 6x to 7x net debt-to-EBITDA and have allocated recent disposal proceeds to deleverage. As we deliver further disposals, we'll continue to allocate capital according to our existing framework, and that's managing leverage, funding costs to complete our remaining on-site developments. And where we generate surplus capital, share buybacks remain attractive and as we've demonstrated by our purchases of GBP 165 million early this year. We also continue to progress with a number of university partnerships. And as I said, we're making solid progress on the disposal program and remain on track to deliver our target of GBP 300 million to GBP 400 million this year. Last week, we announced the sale of our Kings Place development land, exiting an asset which no longer meets our investment hurdles, bringing the year-to-date total to GBP 200 million. We have a further GBP 225 million of assets under offer. There will be no surprise to you that the market is not straightforward and conditions are continually evolving. Funding costs are increasing. Buyers are weighted to the end of the sales cycle, and then our pricing of passing income rather than an equivalent yield as they have historically done, and clouding diligence is taking 2 to 3 months to complete. We remain pragmatic with disciplined when selling assets. We're not sellers at any price, and we will hold assets for longer if it makes sense for shareholders. And in closing, the strongest universities are still growing, and that supports improved performance on the portfolio of the future. We are responding to the changes in the market. We're being proactive to drive the best commercial performance and to win market share. We're working at pace to increase our alignment to the strongest university to create the portfolio with pricing power and we will continue to use proceeds in line with our capital allocation framework. And we remain focused on delivering the best outcomes for shareholders. So as you can see, there's a lot to do, but we're pleased with the progress to date. So with that, we'll turn to your questions. Thank you for those who've already done so. But if you haven't, please pop any further into the webcast. Mike and I will just now work through those questions typically ones we haven't covered.

Thanks, Joe. Good morning, everyone. It's Michael here. I'll start to run through the questions on the webcast, starting with Ana Escalante at Morgan Stanley. Firstly, could you provide more color on the 0.5 percentage point potential increase in income from short-term rentals?

Yes. So short-term rentals for us is made up of two or three elements. We have a semester lets where we're seeing demand for students for the first and the second semesters. We also see it then in our summer business, which has always been part of our offer and then also a short-term letting cycle, particularly over the summer months as well. We've grown the proportion of our income from this pool of revenue to about 2%, and that's up by about 50 basis points this year. And given the increased availability, particularly in the stronger markets like London, Manchester and Edinburgh, where we have seen some of that shortening of tenancies because they were the ones primarily with a 51-week tenancies that gives us greater opportunity to drive further income over that summer period. And that's what is really working through the availability at the current pricing, the cost to deliver that, which gives us the opportunity to drive that additional 0.5 percentage point through '27.

And the second question is on capital allocation. Could you please help us understand how to think about surplus capital? How to think about the use of disposal proceeds? Are you still targeting one university partnership per year? And how are you thinking about loan to value at the moment?

Yes. On surplus capital, I think, as I set out, we are clearly focused on managing our leverage and the 6x to 7x net debt-to-EBITDA target that we've been running to. We are currently slightly above that, and that's because of the acquisition of Emperica as we knew about. We brought that down slightly through the allocation of proceeds from disposals, and we will continue to work towards that. Similarly, as we've previously outlined, we have our remaining on-site deliveries in Glasgow this year and then the two development JVs. And we've always felt that around 50% of the disposal proceeds would be needed to allocate it to those schemes over '26, '27 and '28. I think then as we generate further surplus capital, we see share buybacks as the most attractive use of capital in this environment and where our shares are currently trading. So we continue to step to that framework that we've previously outlined. On the university partnerships, I think what is interesting in this current environment is that universities are clearly thinking about their own balance sheets and their needs for accommodation very deeply at the moment. And that is opening up some really good conversations with universities. Now most of the universities that we are talking to in this space, they are the strong universities. They are saying that they do see a need for more accommodation over the next 5 years, which is encouraging. But like us, they are seeing it is incredibly difficult to develop viably. We think that you need to be charging GBP 12,000 to GBP 13,000 per annum to justify doing a development scheme at the moment. And there's very few if any cities other than London that you can generate that type of rent. So the conversations with universities continue and probably are shifting slightly more to stock transfers and the release of capital from existing assets rather than development of new. But I say, we're really encouraged by those conversations. They are ongoing, and we still believe that doing one a year is certainly possible. I don't think we'll do anything. We certainly won't be announcing anything this year, but we have a number in the pipeline, which are providing us with real opportunities into '27 and beyond.

The next question is from Tom Musson of Berenberg. Can you give some color on capital growth in the quarter between the assets you want to own long term and the noncore assets to be sold? I'm happy to pick that one up, Tom. So what we've seen, as Joe discussed, is an outward move in yields this quarter. I think it's fair to say that that's impacted pretty much all assets, both what we see as the future portfolio and those assets we're planning to sell. However, where we have seen those rental growth deductions, they are primarily focused on those disposal assets, and that's because those are the properties that are operating at lower levels of occupancy and that's where the valuers have made an adjustment in the period. So they have seen a slightly weaker valuation performance than the averages that we're reporting for the two. Next, moving on to Chris Millington at Deutsche Bank. What trends are you seeing in the international postgraduate market given the Visa data looks to weak?

Yes. So as I mentioned, the decline in international post graduates, we've seen over the previous 2 cycles, again, continued into this '26/'27 academic year. And that is -- it really is linked closely to the quality of universities in the QS global rankings. You see quite a high correlation in performance related to those universities. Probably the big policy change that has impacted that this year is the shortening of the post-study work visa from 3 years to 18 months. So those students who seek to come to the U.K. to get a good post-graduate degree and potentially to work here for 3 years to help to fund some of the cost of that investment, are sort of taking a different economic decision and thinking about alternatives. And that probably, given some of the pressure that we're seeing in the U.S., Australia, around student visas and they are also seeing this decline, a seen a spreading of post graduates going to broader international markets. I think the overall global demand for high education continues to rise at the number of global students, is rising and is expected to continue rising. We have seen a growth in undergraduates coming to the U.K. from around the globe. As I mentioned, China is up strongly this year. And it seems that students are saying, if I'm coming for 3 years on making an investment to come study here as an undergraduate and that's less linked to that post-study work visa. I think one thing just to sort of touch on is the policy environment. We've obviously got a new leadership, new government. And certainly, Andy Bernard has talked very positively about universities. And I think you've seen the impact that universities can have on a regional city like Manchester both on sort of supporting regeneration, bringing growth to the local economy. And certainly, we are expecting a more stable policy environment and no further changes to certainly migration policy around international students going forward, which hopefully will lead to stabilization of that postgraduate market.

Second question is a follow-up from Chris, Deutsche. On disposals, what cohort of buyers are showing most interest Also, please could you comment on what proportion of planned disposals could be non-PBSA or development land?

Yes. So I think in this first round of disposals, Chris, we've focused on sort of the a proportion of the portfolio, which we think is, we need to move through relatively quickly. And the value-add buyers have been the most interested group in those assets. We are selling these assets well below replacement costs. And those buyers see an opportunity to enhance the NOI, both from growing the occupancy and also reducing costs, and that allows them to drive relatively attractive IRRs that meet their models. In terms of the GBP 200 million of assets we've sold so far this year, so there's been a couple of development sites within that. And we've got a few further development sites and our build-to-rent asset, which is on the market. So of the GBP 300 million to GBP 400 million, probably is around 1/3 to 1/4 of that is, is non-student. I think we're then into the bulk of those going forward and will be student assets.

The next couple of questions from Andres Toome, Green Street. First one is, what is your marginal cost of debt? And how does paying down debt compared to other potential uses of sales proceeds? I'm happy to take that one, Andres. So our marginal cost of debt today, clearly, it's fluctuating in the current market, but we would say it's between 6% to 6.5%. I think as we've seen the cost of funding go up, it's given us greater conviction on the desire to bring down that leverage. As Joe said, as we think about the progress we made with disposals, we are looking to bring the leverage down to target as we get to lower levels of leverage, it will free up to surplus capital, and we'll then have a choice in terms of what we do with that, as Joe discussed. Second part of Andres' question is, which ties are in the under offer portfolio and at what yields are these now marked? Again, I have to say that one, Andres. I think it's probably helpful to go back to the slide Joe touched on earlier, showing the range of occupancy performance across the different cities for the 22 cities in which we operate. As Joe said, the vast majority are operating at higher stabilized levels of occupancy. However, we're seeing a number of cities, which are operating at 95% occupancy or below. And generally, our disposal portfolio is overindexing to those lower occupancy cities. In terms of where the -- where we expect to trade on those, as Joe said, we're expecting yields on in-place income to be at around 6% to 7.5% on those disposal assets. and that's based on the sales performance we've achieved for the '26/'27 accident year. Next question is from Rebecca Parker at Goldman Sachs. Could you provide more color on the investment and transaction market liquidity for U.K. PBSA?

Yes. So say the overall market is not straightforward. And I think that largely is down to the macro factors we're seeing and the higher funding costs. And also, I think buyers trying to get their heads around what is happening in the operational and lettings market. So we've seen buyers wanting to and putting much greater focus on the '26/'27 letting cycle. And as Mike mentioned, using passing income to price assets, whereas historically, they may be more prepared to use equivalent yields to do that. And so the level of transactions in this financial year has actually been significantly lower, I think as buyers have been trying to come to terms with that. Having said that, I think we are seeing a very high level of engagement. We're seeing lots of parties looking at the sector here. And I think we are expecting now that we're through this end of the sales cycle that we'll see more trades happen as we go through to the back end of this year and early into next year, albeit say, the fire diligence is something which does add an added layer of complexity into the student market.