Interim Management Statement – April 2014 – 30 April 2014
STRONG PERFORMANCE ACROSS THE BUSINESS
The Unite Group plc, the UK’s leading developer and manager of student accommodation, today publishes its first interim management statement for 2014, covering the period to 29 April 2014.
- Strong reservations performance with 73% of rooms already let for the 2014/2015 academic year (30 April 2013: 71%), a positive rental growth outlook and the business on track to perform in line with management expectations for the full year;
- Development pipeline progressing well with planning consents secured for two LSAV developments in London and good progress being made with the regional pipeline;
- Unconditional exchange of contracts to sell the OCB joint venture portfolio for £174 million, with completion scheduled to take place before 30 June and net proceeds to be used to increase the Group’s investment in UCC. UCC on track to be merged with LSAV following this increased investment, reducing the number of co-investment vehicles from four to two;
- Launch of a £40 million two year investment programme (Unite share of investment £20 million) designed to strengthen the Group’s brand and operating platform further and deliver long term sustainable benefits; and
- Successful placing and open offer raised £100 million to be invested into further regional development activity and acquiring additional units in USAF.
Commenting, Mark Allan, Chief Executive of The Unite Group, said:
“The first few months of 2014 have been productive, with a number of important strategic initiatives concluded and the business continuing to perform strongly in all areas. Our market outlook remains positive and we are on track to deliver both our short and long term growth targets.
“With the business performing strongly and a supportive market environment, we believe this is the right time to invest in our brand for the long term, strengthening our competitive advantage further. With the support of our co-investment partners we now have a substantial targeted investment programme for the next two years which we believe will cement Unite’s position as the most trusted brand in the sector.
“Together with our high quality portfolio, new development pipeline and robust financial position we believe this brand investment programme will underpin our growth prospects for the long term.”
Operations – Sales, rental growth and profitability
Occupancy across the portfolio remains at 98% for the current academic year and customer satisfaction has continued to increase year on year in response to a series of service enhancements introduced since the start of the academic year. At the same time costs have been tightly controlled, with the extended use of mobile working technology, in particular, continuing to result in operational efficiencies.
Reservations for 2014/15 are encouraging, with 73% of rooms already reserved compared to 71% at 30 April 2013, and we are experiencing upward pressure on rental pricing in most local markets. As a result we expect rental growth for the full year to be as strong as in 2013.
This strong performance reflects in part the positive market environment, with applications for 2014/15 currently up 3.9% year-on-year (Source: UCAS, April 2014) and an additional 30,000 student places confirmed and allocated by the Higher Education Funding Council for England. As a result of this increase in demand, together with the additional student places, we expect 2014/15 intake to be approximately 520,000, 6.5% up on 2013/14.
Taking into account current occupancy levels, ongoing cost control and reservations performance for the upcoming academic year, we remain confident that profit performance for 2014 will be in line with management expectations.
Brand investment programme
Over the next two years we will be investing approximately £40 million in developing and strengthening the Group’s brand and operating platform further. After taking account of contributions from our co-investment partners, the Group’s share of this investment will be approximately £20 million, of which approximately 90% will be capital expenditure and the remainder of the investment increasing service levels for our customers. We expect a full payback on the investment within five years as a result of clear cost and revenue benefits.
The investment programme is highly targeted and will be focused on delivering the Group’s brand promise of Home for Success; providing environments that help students succeed in their time at University. Each area of investment has already been thoroughly researched and tested in a small number of properties to validate the cost and revenue benefits.
The principal areas of investment will be:
- Re-invigorated reception and common areas, designed to promote a greater sense of community;
- A new, more contemporary and youthful visual identity that positions ‘Unite Students’ as our primary brand;
- The installation of LED lighting throughout the estate, enhancing the environment within buildings while delivering significant cost benefits through reductions in energy consumption and reactive maintenance spend;
- A completely re-designed and more user friendly website, with the first phase to be launched in advance of the 2014/15 academic year and a new, more flexible bespoke booking system to follow in early 2015;
- Continued investment in mobile working technology; and
- A series of significant service level enhancements, such as extended operating hours and a broader range of free cleaning services, to be funded by a proportion of the cost benefits derived from the various investments highlighted above.
We believe that this investment programme will consolidate Unite Students’ position as the most trusted brand in our sector. As a result we expect the Group’s competitive advantage to be strengthened further over the coming years, underpinning long term performance prospects.
Our London Student Accommodation Venture (LSAV) developments are progressing in line with plan. Work has commenced on site at Angel Lane, Stratford for 2015 delivery and we obtained planning approval for Stapleton House, Islington and Olympic Way, Wembley in March and April respectively meaning that all LSAV development projects now have planning approvals in place. We expect the latter two projects to start on site later this year for 2016 delivery.
Competition for development sites in London remains high and as anticipated we have not secured any further opportunities beyond the current LSAV pipeline. Unless there is a correction in land values it is unlikely that we will secure any further London development projects this year.
Our two 2014 London completions (Stratford One and St Pancras Way, Camden) are both on track. Both developments are wholly owned although we expect Stratford One to be sold to LSAV following completion, in accordance with the forward sale and purchase contract agreed in 2012.
We are also continuing to make good progress with our highly targeted regional development programme and, as previously announced, have secured sites at attractive returns in strong central locations in Aberdeen, Edinburgh and Newcastle comprising a total of 1,555 beds for planned 2016 delivery. A fourth site, of similar quality, is also close to being secured for 2016 completion.
Regional markets continue to offer excellent development opportunities and following our successful placing and open offer we are now focused on securing additional projects for 2017 delivery. The development pipeline is encouraging and we expect to have a full pipeline of projects secured by the end of 2014 in line with our target returns of 9.5%-10% yield on cost.
Our on-site regional developments in Huddersfield (2014 delivery) and Bristol (2015 delivery) are proceeding in line with plan.
We have continued to make good progress in simplifying our co-investment vehicle structure. In early April we exchanged contracts unconditionally (alongside our partner OCB) to sell our OCB joint venture portfolio, comprising three London properties, for £174 million. Completion is expected to occur before 30 June, following which Unite will have no ongoing operational involvement in the properties. The disposal price is supportive of book value and demonstrates the continued investor appetite for the student accommodation sector, which we expect to persist throughout 2014.
Unite’s share of proceeds, after repayment of senior debt, will be approximately £18 million and this will be invested in acquiring additional units in the Group’s UCC joint venture, as previously disclosed. At the same time, the Group plans to invest a further £8 million to take its stake in UCC to 50% and satisfy the preconditions of a merger of UCC into LSAV, its other 50/50 joint venture with GIC. Once the UCC/LSAV merger has been completed the number of co-investment vehicles operated by the Group will fall to two, LSAV and USAF.
USAF raised £106 million of new equity in the period, of which Unite accounted for £55 million funded primarily from the proceeds of the Group’s placing and open offer, taking the Group’s USAF stake to 21%. The proceeds of this capital raise have initially been used to repay borrowings in the Fund although USAF is actively considering acquisition opportunities at the current time.
Summary and outlook
We have three clear strategic priorities; to consolidate our position as the most trusted brand in our sector; to own and operate the highest quality property portfolio in our sector; and to maintain the strongest capital structure in our sector. Successful delivery against these objectives will drive our primary financial goal of growing recurring earnings and cashflow sustainably for the long term.
Demand for student accommodation remains strong, supported by further increases in application numbers and expansive Government policy. At the same time, conditions for development are supportive, particularly in the regions. Our clear plans to invest in our brand and operating platform; to grow our portfolio through highly selective, highly accretive development activity and to maintain a strong, flexible capital structure mean that Unite remains well positioned for continued strong performance and growth.