Coronavirus update – 25 March 2020
The Company today provides an update on the potential impact of Coronavirus on the business and the measures it is taking to mitigate the resulting risks.
- The Company is well positioned to withstand the impact of the Coronavirus until trading conditions normalise.
- Our balance sheet and liquidity position is robust with significant headroom against debt covenants. The Company has £291 million of cash and undrawn debt facilities available.
- In order to protect the long-term reputation of the business and despite a strong contractual position, the Company will offer to forgo rent for students who choose to return home for the remainder of the 2019/20 academic year. This implies a reduction in Group cashflow of £90-125 million in 2020.
- We are working closely with our University partners and will continue to provide accommodation through our nomination agreements.
- We are implementing a number of actions to mitigate this cash shortfall, including deferring development and non-essential operational capex and cost savings, which would retain an additional £95-105 million of cash in the business in 2020. We will continue to review the cost base of the business and have the ability to make further savings if required.
- In addition, the Board has decided to cancel the final dividend for 2019 and suspend further distributions by the Company until market conditions stabilise. This would retain an additional £124 million in cash during 2020 if no dividend payments are made.
- The combination of these measures will ensure the Company retains cash headroom through the remainder of 2020.
- At this stage, we expect the 2020/21 academic year to commence according to its usual timetable in September. This reflects the Government’s decision to cancel A-Level exams and award grades to students using alternative assessment methods. Latest reservations for 2020/21 are 78%, in line with the prior year (2019/20: 78%).
The safety and wellbeing of the students who live with us and our employees remains our top priority. The Company continues to operate all of its properties based on guidance from Public Health England and the World Health Organisation (‘WHO’). This includes recent guidance from the Department for Education (‘DfE’) on students in residential settings, which emphasises that University halls of residence and privately owned student accommodation should remain available to students whether isolating or not.
Our accommodation is a person’s home and often students do not have alternative accommodation. This is particularly important for international students who may not be able to return home, as well as care leavers and estranged students. Therefore, it is our intention to keep all of our buildings open for students who wish to remain in their homes at this challenging time. Over half of our beds are still occupied, which is consistent with normal trends in the weeks leading up to Easter.
2019/20 academic year
Unite will not charge any student who wishes to leave their accommodation for the final semester of 2019/20, with effect from mid-April. We will continue to work closely with our University partners through our nominations agreements to meet any additional short-term requirements.
In addition, for international students who are unable to return home at the end of their tenancies, we will provide accommodation over the summer months at no further charge. We have already freed up capacity to do this through a reduced programme of summer business.
We have implemented a cash saving programme, reducing variable operating costs and suspending all non-essential operational capital expenditure leading to cash savings of £20-30 million in 2020.
As previously announced, we will operate a significantly reduced programme of summer business in 2020 given the risk of disruption to bookings. The removal of variable costs associated with our summer business will help to mitigate the impact on earnings. Summer business accounted for 3% of rental income in 2019.
2020/21 academic year
There has been little impact to date on Unite’s sales performance for the 2020/21 academic year with reservations currently at 78% and in line with the same time last year (78%). We have seen a reduced number of new offers to customers in the past week, but the level of cancellations and expired bookings has remained in line with prior years.
The UK Government’s decision to cancel A-Level exams in the current year, while disruptive to school leavers, should ensure that Universities are able to make offers to students in time for the usual start of the academic year in September. Universities Minister, Michele Donelan, has stated that there is no reason for the usual admissions cycle to be disrupted. A-Level grades will be awarded on the basis of predicted grades, based on mock exams, non-exam assessment and prior attainment.
Our PRISM operating platform provides us with the flexibility to rapidly implement new marketing strategies in changing market conditions. There is an obvious risk that travel restrictions imposed to combat Coronavirus result in a reduced intake of international students for 2020/21. In the 2019/20 academic year there was a 165,000 surplus of applications to acceptances to UK Universities, of which over 60% came from the UK. We would expect UK Universities to recruit additional UK domestic students to counter any reduction in demand from international students.
We are ready to shift the emphasis of our marketing to target domestic students who may otherwise stay in houses of multiple occupancy (HMOs) and international students already in the UK in the event of any weakness in sales to students outside the UK. However, there remains a risk of lower occupancy and rental rates for 2020/21 than previously anticipated.
We are a strategic partner to Universities and have a high degree of income visibility through our nominations agreements, the majority of which are multi-year. We will maintain a close dialogue with them as their accommodation requirements for 2020/21 become clearer.
The integration of Liberty Living is continuing as planned. Over the coming weeks, all Liberty Living employees and properties will be moved across to the Unite platform. Positive early progress on integration has increased 2020 cost synergies to £5-6 million. Liberty Living beds will be fully integrated into PRISM, delivering £15 million of annual cost synergies from 2021.
The Company is currently on site with five development schemes totalling 3,586 beds for delivery over the next two years. There is £68 million of remaining cash to spend on 2020 deliveries and £115 million for 2021 deliveries.
To date, we have not seen any disruption to activity levels on our developments, although extra precautions are being taken for people working on site. However, there is a risk that restrictions on working practices made by the Government could lead to the delay of project deliveries, beyond scheduled move-in dates for students.
Our 2020 deliveries are progressing well. Due to early procurement of materials in 2019 to mitigate risks around Brexit, the vast majority of materials are already in the country, but additional workforce restrictions or sustained absences present a risk to delivery. We are proactively engaging with our University partners to highlight these risks and will continue to monitor the situation over the coming weeks.
For our 2021 projects, the disruption to supply chains will undoubtedly have an impact on the availability of materials and we face near-term risks around labour availability. Given these risks and the priority of conserving cash while income uncertainties remain, we are planning to defer the delivery of the two 2021 completions into 2022. This will lead to a cash saving of £72 million during 2020.
We will continue to work through the planning applications for the remainder of our committed development pipeline but will not start on site with any new developments until we have greater clarity on the outcome of the Coronavirus crisis.
Given risks to our rental income as a result of Coronavirus, we are suspending guidance for like-for-like rental growth and EPRA EPS for 2020.
The quarterly valuation update for USAF and LSAV is scheduled for 8 April. Our valuers have informed us that their valuation reports as at 31 March 2020 will include a statement highlighting material uncertainty given the current environment.
In addition to its focus on the safety of our students and employees, the Board’s primary objective in the near-term is to ensure the liquidity of the Group’s balance sheet in a period of highly uncertain trading conditions. As a result, the Board has taken the decision to cancel the 2019 final dividend given the desire to retain cash in the business. The 2019 final dividend will therefore not be proposed at the AGM scheduled to be held on 7 May 2020.
As a REIT focused on delivering sustainable growth in earnings and cashflow, the Board intends to reinstate dividend payments as soon as possible once market conditions stabilise. The Group is able to maintain compliance with the REIT regime without the payment of further dividends in the year.
The Group has £1,857 million of current debt facilities with no maturities before April 2022. As of 24th March, the Company had £141 million of cash reserves and £150 million of undrawn revolving credit facilities, providing available liquidity of £291 million. We have recently drawn £100 million from our revolving credit facilities and will draw the remaining £150 million over the coming few days.
In addition, we are in discussions with our banks around our future funding requirements and are considering a £100 million extension of our Group revolving credit facility.
As an investment grade borrower, rated BBB by S&P and Baa2 by Moody’s, Unite is also eligible for the joint HM Treasury and Bank of England Covid Corporate Financing Facility (CCFF). We are exploring this as an option for additional liquidity to the extent required.
Banking relationships and debt covenants
We continue to monitor our banking covenants, which vary between facilities but are principally based on LTV and interest cover ratios (ICRs). Our Group LTV was 37% as at 31 December 2019 and our interest cover ratio for 2019 was 3.5 times.
The Group covenants have a significant level of headroom, allowing for a 45% decline in pre-interest cashflow under the tightest ICR covenant and a 40% decline in GAV on the tightest LTV covenant.
Unite remains a financially sound, sector-leading business which provides high-quality, affordable homes to nearly 75,000 students in the UK’s globally recognised Higher Education sector. We will continue to deliver a ‘Home for Success’ for the students who live with us, thanks to our 1,900 highly committed people, best-in-class operating platform and quality buildings designed around student needs. This combination creates a resilience in our business that will support us through this challenging period.
We remain committed to delivering sustainable long-term growth in earnings and cashflow for our shareholders, supported by a robust balance sheet. This includes a commitment to return to dividend distributions as soon as possible once market conditions stabilise.
The medium to long-term outlook for the business remains positive thanks to demographic growth in the UK, rising participation rates for Higher Education and supportive Government policy to grow international student numbers over the next decade. This creates significant opportunities for new development and university partnerships, building on the strength of our brand in the sector. We aim to emerge from this uniquely challenging time with our reputation with students and Universities, not only protected but enhanced.
For further information, please contact:
Richard Smith / Joe Lister / Michael Burt
Tel: +44 (0)117 302 7005
Justin Griffiths / Victoria Heslop
Tel: +44 (0)20 7250 1446