Unite Group PLC (LON:UTG)_ has announced its full year results for the year ended 31st December 2023.
Joe Lister, Chief Executive of Unite Students, commented:
“This is a strong set of results, driven by full occupancy, rental growth and substantial investment into our platform and portfolio. Our pipeline of developments, asset management projects and our new university partnership present a substantial growth opportunity for the business.
“The supply-demand imbalance of student accommodation is acute and continues to intensify. We play a leading role in tackling this shortage, easing pressure on the wider housing market and freeing up homes for families. Our development and asset management pipeline stands at a record £1.3 billion and we are taking an innovative approach to delivering more homes for students. University partnerships provide a compelling opportunity to deliver new, high-quality accommodation and our first joint venture with Newcastle University is only possible for a business of our reputation, scale and development expertise.
“We are trusted by students, parents and universities to deliver high-quality, safe and affordable accommodation where it is needed the most. Our strong leasing performance supports continued earnings growth in 2024 and we are confident that our all-inclusive offer, student support programmes and balanced approach to rental increases will continue to provide real value for money.”
| Year ended | 31 December 2023 | 31 December 2022 | Change |
| Adjusted earnings1,3 | £184.3m | £163.4m | 13% |
| Adjusted EPS1,3 | 44.3p | 40.9p | 8% |
| IFRS profit before tax | £102.5m | £350.5m | (71)% |
| IFRS diluted EPS | 24.6p | 87.6p | (72)% |
| Dividend per share | 35.4p | 32.7p | 8% |
| Total accounting return1 | 2.9% | 8.1% | |
| As at | 31 December 2023 | 31 December 2022 | Change |
| EPRA NTA per share1 | 920p | 927p | (1%) |
| IFRS net assets per share | 931p | 944p | (1%) |
| Net debt: EBITDA | 6.1x | 7.3x | (1.2x) |
| Loan to value2 | 28% | 31% | (3)ppts |
HIGHLIGHTS
Full occupancy in 2023/24, strong demand for 2024/25
· 99.8% occupancy and 7.4% rental growth for the 2023/24 academic year (2022/23: 99.3% and 3.5%)
· Strong reservations for 2024/25 80% (2023/24: 83%)
· 44.3p adjusted EPS in 2023, +8% YoY (2022: 40.9p)
Sustained earnings growth from our best-in-class platform
· Confident in delivering rental growth of at least 6% for 2024/25 (previously at least 5%)
· Guidance for 3-5% growth in adjusted EPS in 2024 to 45.5-46.5p
· Targeting 10-12% Total Accounting Return (TAR) in 2024, before yield movement
· Earnings growth to accelerate from 2026 as development completions increase
· £26 million technology upgrade to enhance customer experience and EBIT margins from 2025
Housing supply unable to meet student demand
· Significant need for high-quality, affordable student homes
· New PBSA supply 60% below pre-pandemic levels and over 100,000 reduction in HMO beds available
Investment activity aligned to the strongest universities
· Delivery of £60 million Morriss House development in Nottingham at 8.5% yield on cost
· Rental portfolio enhanced through £24 million of refurbishments at a 9% yield on cost
· £197 million of disposals held for sale to improve portfolio quality (Unite share: £79 million)
Record £1.3 billion development pipeline in the strongest markets
· £569 million committed pipeline in Russell Group cities at 6.5% yield on cost
· £250 million joint venture agreed with Newcastle University announced in February
· Future development pipeline of £452 million at 6.7% yield on cost in cities with tightest supply
· New London scheme added to future pipeline for delivery in 2028
· Targeting £50-75 million p.a. of refurbishment projects at 8%+ yield on cost
Strong balance sheet underpinned by resilient valuations
· £5,510 million portfolio valuation (Unite share), up 1.2% on a like-for-like basis (2022: £5,397 million)
· 7.4% rental growth offsetting 31bps yield expansion
· TAR of 2.9% (2022: 8.1%), reflecting 1% reduction in NTA to 920p (2022: 927p)
· Continued investment in fire safety, resulting in 9p of new commitments net of claims
· Net debt: EBITDA reduced to 6.1x (2022: 7.3x), with LTV of 28% (2022: 31%)
Delivering on sustainability targets
· Significant improvement in EPC ratings, over 99% of portfolio now A-C rated (2022: 80%)
1. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). These financial highlights are based on the European Public Real Estate Association (EPRA) best practice recommendations and these performance measures are published as they are intended to help users in the comparability of these results across other listed real estate companies in Europe. The metrics are also used internally to measure and manage the business and to align to the performance related conditions for Directors’ remuneration. See glossary for definitions.
2. Excludes IFRS 16 related balances recognised in respect of leased properties. See glossary for definitions.
3. Adjusted earnings and adjusted EPS remove the impact of SaaS implementation costs and abortive acquisition costs from EPRA earnings and EPRA EPS. See glossary for definitions and note 7 for calculations and reconciliations.
PRESENTATION
A live webcast of the presentation including Q&A will be held today at 8:30am GMT for investors and analysts and will be available via our website at https://www.unitegroup.com/ or on https://brrmedia.news/UTG_FY23. This will be available for playback after the event.
To register for the event or to receive dial-in details, please contact [email protected].
CHIEF EXECUTIVE’S REVIEW
The business has performed strongly in 2023, delivering record earnings and dividends. This reflects the strength of our best-in-class operating platform, the commitment of our teams and the ongoing appeal of our value-for-money proposition. We operate in a structurally growing sector, underpinned by the attractiveness of the UK’s Higher Education sector to domestic and international students. The growing shortage of accommodation to meet this demand supports sustainable rental growth and our standing in the sector creates compelling investment opportunities for the business.
Record earnings and dividend
We delivered record occupancy during the year, supporting growth in adjusted earnings to £184.3 million and adjusted EPS of 44.3p, up 13% and 8% respectively year-on-year. The impact of rental growth, development completions and lower interest costs more than offset increases in operational costs during the year. The growth in adjusted EPS also reflects the increased share count following our capital raise in July 2023. IFRS profit before tax of £102.5 million and EPS of 24.6p (2022: £350.5 million and 87.6p) also reflect the valuation change of our property portfolio during the year. We have proposed a final dividend of 23.6p which, if approved, totals 35.4p for the full year, representing a payout ratio of 80% of adjusted EPS.
Total accounting returns for the year were 2.9%, with adjusted earnings offsetting a 1% decrease in EPRA NTA per share to 920p. Our LTV ratio reduced to 28% during the year, reflecting lower net debt following the capital raise in July and broadly stable property valuations. Net debt: EBITDA and ICR also improved to 6.1x and 4.6x respectively (2022: 7.3x and 3.7x). Our robust balance sheet provides the financial headroom to deliver our committed development pipeline and pursue new growth opportunities.
Our key financial performance indicators are set out below:
| Financial highlights1 | 2023 | 2022 |
| Adjusted earnings | £184.3m | £163.4m |
| Adjusted EPS | 44.3p | 40.9p |
| IFRS profit before tax | £102.5m | £350.5m |
| IFRS diluted EPS | 24.6p | 87.6p |
| Dividend per share | 35.4p | 32.7p |
| Adjusted EPS yield | 4.8% | 4.6% |
| Total accounting return | 2.9% | 8.1% |
| EPRA NTA per share | 920p | 927p |
| IFRS net assets per share | 931p | 944p |
| Loan to value | 28% | 31% |
1. See glossary for definitions and note 7 for alternative performance measure calculations and reconciliations. A reconciliation of profit before tax to EPRA earnings and adjusted earnings is set out in note 7 of the financial statements.
Positive outlook for 2024/25
We continue to see strong demand for our well-located, value-for-money student accommodation at a time of declining numbers of Houses in Multiple Occupancy (HMOs), obsolescence in older university stock and lower levels of new supply. This is reflected in our strong progress with reservations for the 2024/25 academic year. Across the Group’s entire property portfolio, 80% of rooms are now sold for the 2024/25 academic year, ahead of our typical leasing pace and slightly below the record reservation rates last year (2023/24: 83%).
We have seen increased demand from universities as they look to secure accommodation earlier in the sales cycle, resulting in nomination agreements for an additional 1% of beds for 2024/25 compared to the same stage of the 2023/24 sales cycle. These agreements deepen our relationships with universities and provide income security at rental levels comparable with direct-let sales.
Direct-let sales have also started well, with customers looking to secure accommodation early in the sales cycle. We have continued to see strong demand from UK students as our product grows in popularity with second- and third-year students who recognise the value of our all-inclusive product. As a result of this strong demand and the need to offset cost pressures in our business, we now expect to deliver rental growth of at least 6% for 2024/25 (previously at least 5%).
Providing value for money
We are committed to delivering value-for-money to our customers and increasing rents at a responsible and sustainable pace. We recognise the cost-of-living pressures faced by students and parents and are confident that our fixed price, all-inclusive offer will continue to provide value-for-money.
Our rents are 7% more affordable in real terms than 2019 (based on CPI) and have grown in line with the student maintenance loan over the same period. Rental increases are a response to higher operating costs, particularly for utilities and staff, as well as our commitment to being a Real Living Wage employer.
Our pricing is comparable in cost to HMOs once bills are included. This is before allowing for the high-quality of our product and price certainty we provide on utilities and the additional product and service features we offer, such as on-hand maintenance teams and 24/7 security, high-speed Wi-Fi and contents insurance. Our rents have also grown by less than the wider private rental sector, which rose 10% in 2023 (source: Zoopla), and at a comparable rate to university owned accommodation (source: Cushman & Wakefield).
We also continue to make significant capital investment into our operating model and estate to improve the customer experience, as well as the safety and sustainability of our buildings. During 2023, we continued to enhance the service we offer to students through the embedding of our 24/7 operating model, the expansion of our Support to Stay programme for student wellbeing and the launch of a 24/7 mental health and wellbeing helpline in partnership with Endsleigh and Health Assured.
Growing shortage of high-quality student homes
Structural factors continue to drive a growing supply/demand imbalance for student accommodation. Demographic growth will see the population of UK 18-year-olds increase by 124,000 (16%) by 2030, supporting growing demand for UK Higher Education. Demand from international students also remains high, as reflected in the 23% growth in overseas students since 2019/20 (source: HESA).
Many university cities are facing housing shortages and our investment activity is focused on those markets with the most acute need. Since 2021, there has been an 8% reduction in the number of HMOs in England (source: Department for Levelling Up), equivalent to 100,000-150,000 fewer beds available for students to rent. Private landlords are choosing to leave the sector in response to rising mortgage costs and increasing regulation. New supply of PBSA is also down 60% on pre-pandemic levels, reflecting planning backlogs and viability challenges created by higher costs of construction and funding. Obsolescence of older university accommodation is also expected to increase due to building age and the need to operate buildings more sustainably. In many cities, property valuations are below replacement costs, further constraining new supply.
The combination of these factors has significantly increased demand for our accommodation in many cities and we expect this supply challenge to continue for a number of years.
Strategic overview
Our purpose is to deliver a Home for Success to allow students to make the most of their time at university. We also support the growth of the UK’s Higher Education sector by delivering new high-quality homes that are affordable and sustainable. We achieve this by partnering with universities to deliver long-term growth and attractive returns for our shareholders.
Our strategy is focused on three key objectives to deliver our purpose:
· Delivering for our customers and universities
· Attractive returns for shareholders
· Being a responsible and resilient business
Delivering for our customers and universities
We have a best-in-class 24/7/365 operating platform in the student accommodation sector, underpinned by our PRISM technology platform, passionate customer-facing teams and sector–leading student support. We are currently in the process of a £26 million upgrade to our PRISM platform to enhance customer experience and deliver operational efficiencies, which will start to deliver in 2024 with the remainder in 2025.
The impact of our customer initiatives is reflected in an increase in our Net Promoter Scores to +42 for students at check-in (2022: +38) and +32 (2022: +7) with university partners. We are targeting further improvements in our customer experience during 2024. We have also seen an increase in our retention of direct-let customers for 2023/24 and the proportion of beds under nomination agreements rose to 53% (2022/23: 52%).
Our long-term university relationships remain a key differentiator for Unite and a significant source of potential growth opportunities. This is reflected in over 90% of our development pipeline by cost being underpinned by university partnerships, either through long-term nomination agreements or a joint venture in the case of our strategic partnership with Newcastle University.
Attractive returns for shareholders
We delivered full occupancy for the 2023/24 academic year and rental growth of 7.4%, reflecting improving market conditions. Total accounting returns were 2.9% for the year, reflecting adjusted earnings and broadly stable property valuations (2022: 8.1%). Strong rental growth offset the valuation impact of increases in property yields as the market adjusted to an environment of higher interest rates.
The quality and scale of our portfolio is key to delivering attractive, sustainable returns for our shareholders. We successfully delivered £84 million in development and major asset management projects in the year at a blended yield on cost of 9%. We continue to recycle capital with a focus on increasing alignment to the strongest universities and expect to complete the disposal of a £197 million portfolio in the first half of 2024 (Unite share: £79 million).
In July 2023, we raised £300 million in equity to accelerate our investment activity into development and asset management. We have fully allocated the proceeds and expect the transaction to enhance earnings and total returns as projects are delivered between 2024 and 2027. We are tracking further opportunities in London and strong regional markets at attractive returns and expect to add to our pipeline in 2024.
Being a responsible and resilient business
Our sustainability strategy is focused on delivering a positive impact for our stakeholders. This is driven by the social contribution we make to the students who live with us, our employees and local communities as well as our progress in minimising our impact on the environment. We are proud to be a Real Living Wage employer and have honoured the recommended 10% increase for 2024 for our relevant employees.
We continue to make good progress towards our objective of becoming a net zero carbon business by 2030. During the year, we invested £8 million in energy initiatives to reduce consumption, save carbon and ensure ongoing compliance with regulations. This contributed to a further improvement in the EPC ratings of our portfolio during the year, with over 99% of the portfolio now A-C rated (2022: 80%). We have now reduced the energy intensity of our estate by 8% compared to our 2019 baseline. We also published our sustainable construction framework, setting out our approach to reducing the embodied carbon and whole life impact of our development pipeline by around half by 2030. Our most recent development completions demonstrate that we are on track to deliver this improvement by 2030.
Higher Education and housing policy
Higher Education is one of the UK’s leading sectors, contributing £130 billion to the economy, delivering world class research and supporting employment of more than 750,000 people. Our universities attract young people from around the world for the quality of learning and life experience the UK offers.
International students are fundamental to the sector’s health and contribute £42 billion to the UK economy. The Government recently reiterated its commitment to hosting 600,000 international students each year, with a focus on attracting the best and brightest. Changes to UK visa rules mean that from January 2024, postgraduate taught students can no longer be accompanied by their family members. We expect this change to particularly impact postgraduate student numbers from India and Nigeria, who are more likely to bring dependents, with a disproportionate impact on lower-ranked universities. Postgraduates from India and Nigeria accounted for less than 3% of our bookings for 2023/24. Moreover, our product offering is focused on single occupancy rooms, meaning we expect limited direct impact from the change.
The Renters Reform bill is expected to be introduced in late 2024 and will further increase regulatory requirements for HMO landlords. We expect the change to further reduce the availability of HMOs as more landlords will choose to leave the sector, increasing demand for the professionally managed, sustainable accommodation we provide. Purpose-built student accommodation is recognised as being different to traditional rental accommodation, with students seeking accommodation for one academic year, and has been excluded from the Bill’s scope.
We are confident that our alignment to the strongest universities, high-quality portfolio and responsible approach to rent setting position us well to navigate potential changes in policy.
Management succession
I would like to extend my thanks to Richard Smith and acknowledge his significant achievements over the last eight years as CEO. He has been a driving force behind our successful strategy of aligning to the best universities and building Unite Group into a purpose-led, responsible business. I am excited to take over as CEO after 22 years with the business and look forward to working with the leadership team and all our colleagues to deliver the next stage of Unite’s growth.
Opportunities for growth
We now have our largest ever development pipeline at £1.3 billion, focused on delivering new homes in the most supply constrained markets and aligned to the UK’s strongest universities. It will deliver significant earnings and NTA growth over the next four years. The outlook for development is strong and we are tracking a number of further opportunities at attractive returns, which we will look to secure over the next 6-12 months.
Universities increasingly see access to high-quality and value-for-money accommodation as a barrier to growth. Funding challenges and competing priorities for capital are encouraging universities to partner with Unite to deliver new accommodation. This has become more pressing due to acute housing shortages post-pandemic and growing obsolescence in university estates. In February we announced our first joint venture with a university, to redevelop existing accommodation in partnership with Newcastle University. The agreement to deliver 2,000 new beds on the University’s land highlights how Unite is uniquely positioned to address housing shortages.
We believe that there is also an exciting opportunity to grow our platform in the wider living sector by catering to the growing number of young professional renters living in major UK cities. Our pilot asset in Stratford has performed well during our first full year of ownership and is now fully integrated into our operational platform. We are exploring opportunities to grow our operational platform by partnering with co-investors.
Positive outlook for growth
We are confident in the outlook for the business. Student accommodation is structurally supported by growing demand for Higher Education and constrained supply, which supports long-term sustainable rental growth and creates significant investment opportunities to deliver new homes.
The strength of our relationships with universities, combined with our best-in-class operating platform, strong balance sheet and development expertise creates unrivalled opportunities for university partnerships both on- and off-campus. We are the provider of choice for universities seeking nominations agreements, which underpins over half of our letting activity each year and underwrites over 90% of our development pipeline. Our first joint venture with Newcastle University underlines these qualities and we are confident there is more to come as we help universities unlock potential housing supply on their campuses.
Strong reservations support rental growth of least 6% for the 2024/25 academic year. Despite ongoing cost pressures, this supports an improvement in our EBIT margin and 3-5% growth in adjusted EPS in 2024. We expect earnings growth to accelerate from 2026 as development completions increase.
Rental growth together with value creation through planning milestones, development and asset management supports total accounting returns of 10-12% in 2024, prior to yield movements.
