Trading update and Q3 fund valuations – 08 October 2020
8 October 2020
The Unite Group plc, the UK’s leading owner, manager and developer of student accommodation, today announces an update on current trading, dividend and quarterly property valuations for the Unite UK Student Accommodation Fund (‘USAF’) and the London Student Accommodation Joint Venture (‘LSAV’) as at 30 September 2020.
All of our buildings are open and providing homes for students who are starting the 2020/21 academic year. The majority of our customers have now arrived and are settling into their accommodation. We are working closely with students, Universities and in line with Government guidance to ensure that we keep our customers, employees and the communities in which we operate safe. We have implemented a series of measures to be Covid-secure (accredited by the British Safety Council) and are assisting students who need support.
We are grateful to our operational teams who have been and continue to work in challenging circumstances to support our customers.
UCAS data shows a 4% increase in the number of placed applicants to UK Universities for the 2020/21 academic year. UK acceptances have increased by 4%, driven by a record 36.4% participation rate for 18-year-olds (2019/20: 33.8%). International acceptances also rose by 4%, reflecting a 9% increase for non-EU students and a 2% decline in EU acceptances. There has been an ongoing flight to quality by students, with Higher tariff Universities increasing acceptances by 12% compared to +1% and 0% for Medium and Lower tariff Universities respectively.
As we enter the final stages of the lettings cycle for the 2020/21 academic year, we have achieved a strong performance with 88% of bed spaces let across the whole portfolio (2019/20: 98%). We have seen healthy letting activity since A-Level results on 13 August, with new lettings partially offset by a higher than usual volume of cancellations, particularly following the recent increase in UK cases of Covid-19. This resulted in completed lettings falling marginally short of our 90% occupancy target. However, we are targeting additional sales from January 2021 starts from direct let customers as well as Universities, where a number of discussions are already underway.
Nomination agreements account for 57% of 2020/21 bookings (2019/20: 56%), with the remaining 43% sold on a direct-let basis. UK students account for a 45% share of direct-let bookings, up from 38% in 2019/20, reflecting our increased focus on capturing market share from Houses of Multiple Occupancy (HMOs) and the strength of domestic demand.
We have offered students the flexibility to delay their start dates to align to changes in their University term dates. Around 10% of students have taken up this offer, contributing to a modest shortening in average tenancy lengths to 43 weeks for 2020/21 (2019/20: 44 weeks).
We have high visibility over income for 79% of our bookings, reflecting those students who have now checked-in to their accommodation and nomination agreements where Unite receives rent directly from Universities. A further 21% of bookings are still to check-in, either this month or in January, which compares to 4% at the same stage last year. Many of these later starts reflect our flexible approach to tenancies this year, given later University course start dates.
Weekly prices have increased by 1.1% YoY on a like-for-like basis, reflecting contractual growth of 2.8% for multi-year nomination agreements partially offset by weaker growth in single-year nomination agreements and direct-let beds (together +0.1%) where discounting has been required in certain markets later in the sales cycle to drive occupancy.
Overall, this translates to a 10-20% reduction in rental income for 2020/21 compared to 2019/20 (prior to the impact of cancellations in 2019/20 due to Covid-19), in line with the expectation set out in our half year results. The better end of the range assumes a high completion rate for upcoming check-ins, while a 20% reduction allows for a higher level of cancellations.
We have achieved the £12-15 million of targeted cost savings for 2020, principally through insourcing of work over the summer and savings made to utility and broadband costs. These savings are inclusive of the costs of delivering our new Covid-secure operating model for 2020/21, including increased staffing levels since check-in, enhanced cleaning, physical and social distancing measures and greater use of technology in our buildings to help manage interactions with students.
We retain our guidance for EPRA EPS of 22-25 pence for FY2020, albeit subject to Universities remaining open as well as our anticipated check-in performance and rent collection over the remainder of the year.
Debt financing and covenants
We continue to monitor our banking covenants. Given the disruption to income caused by Covid-19, our principal focus is on our ICR covenants, which vary between 1.5-2.0x depending on the facility.
There is headroom for occupancy to fall to c.55% for the 2020/21 academic year before a breach of our tightest ICR covenant. Based on our letting performance and progress to date around check-ins, we expect to maintain compliance with all ICR covenants.
Update on dividends
Despite the significant and ongoing disruption caused by Covid-19, the business has delivered a strong performance for 2020/21. Universities are open, having put in place Covid-secure operating measures and established plans to adapt teaching content in response to local outbreaks. However, the resurgence of Covid-19 cases and changing nature of lockdown measures means that we have lower visibility over income than in a typical year due to delayed term start dates, extended check-in periods for students and an increased risk of cancellations.
Given current uncertainty, it is too early to commit to the reinstatement of dividends. However, the Board will keep this decision under review during the first term of the 2020/21 academic year.
We see a positive outlook for student demand for 2021/22 and beyond supported by a record share of UK 18-year-olds choosing to enter University, positive demographic growth and our expectations for a strong recovery in international student numbers, backed by supportive Government policy.
As a REIT, our PID requirement is typically equivalent to c.70-75% of our EPRA earnings and our dividend payout ratio will at least meet this level over time, increasing as earnings visibility improves.
There is no further PID to be paid by the Company in respect of the 2019 financial year. The Company will meet its PID requirement for the 2020 financial year, through future dividend payments in the period up to 31 December 2021.
Quarterly fund valuations
At 30 September 2020, USAF’s property portfolio was independently valued at £2,808 million, representing a like-for-like increase of 0.7% during the quarter. The portfolio comprises 30,209 beds in 79 properties across 22 University towns and cities in the UK.
LSAV’s investment portfolio was independently valued at £1,325 million, up 0.7% in the quarter on a like-for-like basis. LSAV’s investment portfolio comprises 8,354 beds across 12 properties in London and Aston Student Village in Birmingham.
The valuation increase is principally driven by the temporary reduction in stamp duty for residential properties, which is due to come to an end on 31 March 2021. Removing this impact, valuations were flat over the quarter for both USAF and LSAV, reflecting a sales performance for 2020/21 in line with the valuers’ assumptions in the Q2 valuations. The Q3 valuations fully reflect the income shortfall resulting from a disrupted booking cycle for 2020/21.
Overall, the USAF portfolio is valued at an average yield of 5.3% while the LSAV portfolio is valued at an average yield of 4.4%, both of which were stable over the quarter.
Following recent valuation guidance from the RICS on student accommodation, the material uncertainty clause has been removed from the valuations.
Richard Smith, Unite Students Chief Executive Officer, commented:
“We are very aware of the challenges currently faced by students and are doing all we can to help keep them and our staff safe throughout this difficult period. While recognising that this is an evolving situation, all of our buildings remain open with a range of independently assessed Covid-secure measures in place. We are also working closely with our University partners to ensure a coordinated response and will not hesitate to adapt our approach, if needed.
“A University experience is not just about academic achievement; it also serves as an important life event for hundreds of thousands of young people every year. This experience helps transform lives for the better. We are therefore encouraged by recent assurances from Government that it is committed to keeping schools and Universities open, recognising their absolute importance for our younger generations and the UK economy.
“Despite the challenging backdrop, we have delivered a robust performance which is a real credit to the hard work of all our people across the UK. We remain confident in the outlook for the Higher Education sector in the UK and I am pleased with our early success in attracting more of the 855,000 students currently living in Houses of Multiple Occupancy.
“Overall, we are well-positioned for future growth through our market-leading platform, our valuable development pipeline, our long-term and trusted University partnerships and our strategic alignment to those Universities where demand is strongest.”
There will be a conference call for analysts and investors this morning at 8:30 a.m BST. To receive dial-in details, please contact firstname.lastname@example.org.
For further information, please contact:
Richard Smith / Joe Lister / Michael Burt
Tel: +44 117 302 7005
Unite press office
Tel: +44 7754 749 301
Justin Griffiths / Victoria Heslop
Tel: +44 20 7250 1446