Unite Students strong start to the 2023/24 sales cycle

Unite Group plc (LON:UTG) Unite Students, the UK’s leading owner, manager and developer of student accommodation, has announced an update on current trading for the Group and quarterly property valuations for the Unite UK Student Accommodation Fund and the London Student Accommodation Joint Venture as at 31 December 2022.

Highlights

·     Guidance reiterated for adjusted EPS at the top end of 40-41p range for FY2022, and a total accounting return of around 8%

·     Strong start to the 2023/24 sales cycle with 70% of beds sold (2022/23: 60%)

·     Targeting rental growth of at least 5% for 2023/24 (previously 4.5-5.0%)

·     Committed development pipeline of two schemes, totalling 1,421 beds and £200m in future capex, fully funded from existing facilities

·     Q4 like-for-like valuation decreases of 1.4% and 2.8% in USAF and LSAV respectively, and increases of 4.6% and 5.6% for FY2022

Richard Smith, Chief Executive of Unite Students, commented:

“We have seen a strong start to the 2023/24 sales cycle, reflecting the appeal of our high-quality portfolio and fixed-price, all-inclusive offer, which provides students with significant savings and certainty on their bills.  Reservations are significantly ahead of recent sales cycles, reflecting strong demand from new and existing students as well as new nomination agreements with universities. We now expect to deliver rental growth of at least 5% for the 2023/24 academic year, which will help offset the cost pressures we are facing through higher utility and staff costs. Growing income also offers support to our property valuations as the market adjusts to an environment of higher funding costs.

“Despite the challenging economic environment, the business remains well positioned thanks to increasing student numbers and growing demand for high-quality, purpose-built student accommodation across our markets. Moreover, our alignment to the strongest universities and the capabilities of our best-in-class operating platform mean we remain confident of continuing to deliver strong operational results.”

Current trading

2022 earnings guidance

As previously guided, higher than expected rental income in term 1 of the 2022/23 academic year has more than offset the impact of higher interest costs in the second half of the financial year. As a result, we reiterate our guidance for adjusted EPS to be at the top end of our 40-41p range for FY2022.

2023/24 reservations

Demand for the Group’s accommodation has been strong in the first part of the sales cycle.

Across the Group’s entire property portfolio, 70% of rooms are now sold for the 2023/24 academic year, significantly ahead of the prior year and pre-pandemic levels (2022/23: 60%). In our strongest markets we have seen an increasing number of students looking to secure accommodation earlier in the sales cycle than previous years. We have also seen increased demand from universities who see quality accommodation as a key part of their proposition to prospective students. Reservations under nomination agreements account for 52% of available beds for 2023/24, up 2ppts versus the same stage in the 2022/23 sales cycle.

As a result of this strong demand and the need to offset cost pressures in our business, we now expect to deliver income growth of at least 5% for 2023/24 (previously 4.5-5.0%).

We recognise the cost-of-living pressures being faced by students and parents and are confident that our fixed price, all-inclusive offer will continue to provide value for money compared to alternative options in the purpose-built student accommodation (PBSA) and houses in multiple occupation (HMO) sectors. Our offer provides important price certainty on utilities and additional product and service features, such as on-hand maintenance teams and 24/7 security, in locations close to campus.

Development pipeline

The Group is committed to two development schemes, Derby Road in Nottingham, completing in 2023, and Jubilee House in Stratford, totalling £200 million in future capital commitments and delivering a blended yield on cost of 6.5% for the PBSA elements.

In December 2022, the Group acquired the land for our Jubilee House scheme for £73 million. The PBSA element of the fully-consented scheme is expected to be delivered in time for the 2026/27 academic year, with construction due to start in the second quarter of 2023. The development will be delivered as a university partnership, with at least half of the available beds let under a nomination agreement. The mixed-use scheme will deliver 65,000 sq ft of academic space, let for an initial 35-year term to the Secretary of State for Levelling Up, Housing and Communities. Following completion and subject to market conditions, we expect to sell the academic space to a third party.

We are reviewing future development starts in our secured pipeline to ensure projects deliver earnings accretion in an environment of higher funding costs. Given the strength of demand from students and universities, we expect to commit to additional development projects during 2023.

Funding

We have observed a slight easing in funding market conditions over the past quarter and lenders remain supportive of the Group and the student accommodation sector. The Group has recently extended its Revolving Credit Facility (RCF) by £150 million to £600 million in total, at terms in line with the existing facility. At year-end, the wholly-owned Group had £397 million of cash and debt headroom, comprising £29 million of cash balances and £368 million of undrawn debt.

The £100 million L&G loan facility in LSAV, which is due to mature in January 2023, will be repaid at maturity from existing reserves within LSAV. We continue to make good progress in refinancing the £380 million June 2023 bond maturities in USAF (Unite share: £108 million), with demand from a range of lenders.

The Group has had its Baa2 (Positive outlook) and BBB (Stable outlook) credit ratings affirmed by Moody’s and Standard & Poor’s respectively.

Quarterly fund valuations

At 31 December 2022, USAF’s property portfolio was independently valued at £2,888 million, reflecting a 1.4% decrease on a like-for-like basis during the quarter. Over the year as a whole, valuations for USAF increased by 4.6% on a like-for-like basis. The valuation decrease in the quarter was driven by an increase in property yields of 13bps to a weighted average of 5.0%, which more than offset the positive impact of rental growth. Over the past 12 months, valuation growth was driven by rental growth and a 7bps reduction in property yields on a like-for-like basis.

LSAV’s property portfolio was independently valued at £1,921 million, reflecting a 2.8% decrease on a like-for-like basis during the quarter. Over the year as a whole, valuations for LSAV increased by 5.6% on a like-for-like basis. The valuation decrease in the quarter was driven by an increase in property yields of 18bps to a weighted average of 4.1%, which more than offset the positive impact of rental growth. Over the past 12 months, valuation growth was driven by rental growth with yields broadly stable.

We expect the valuation of our wholly owned portfolio at 31 December 2022 to reflect an increase in property yields comparable to the USAF portfolio in H2 2022. This is expected to support a total accounting return of around 8% for FY2022.

Founded in 1991 in Bristol, the Unite Group is an award-winning Real Estate Investment Trust (REIT), listed on the London Stock Exchange.