Unite Regulatory News (UTG)

18 Nov 2008 07:00



Embargoed until 7.00am 18 November 2008

The UNITE Group plc

Interim Management Statement for the period to 17 November 2008

The UNITE Group plc ('UNITE') is pleased to release its interim management statement, covering its activities for the period to 17 November 2008.

Commenting, Mark Allan, Chief Executive of UNITE, said:

"The student accommodation sector continues to exhibit resilience to the economic challenges that the UK is facing. The fundamentals of our market are underpinned by a significant supply / demand imbalance, highlighted by the fact that around 40,000 more students entered the University system in 2008/09 than in 2007/08, with the net new supply of purpose built accommodation limited to just 9,000 beds over the same period. 

"As such, we expect the portfolio's occupancy and rental performance to remain strong in a recessionary environment, reflecting both the trend of increasing student numbers and the quality of the Group's portfolio. We are actively monitoring a range of lead indicators, such as enquiry levels, enquiry conversion rates and arrears levels for any signs of deteriorating trading. There are none at this time.

"However, we remain mindful of the uncertainty surrounding future asset valuation and the difficult banking market and, as such, have undertaken a prudent re-assessment of our development pipeline for delivery in 2010 and beyond. We have also begun to implement our cost saving programme and are in line to deliver annual savings of approximately £10 million during 2009."

Highlights

Rental growth for 2008/2009 academic year was very strong at between 8% and 11% across the portfolio on a like-for-like basis; occupancy for the current year is 99%

As at 14 November reservations for 2009/2010, including block bookings from Universities, have been received for 44% of bed spaces (2008/09: 33%)

UNITE will be opening an additional 2,700 bed spaces for 2009/10, bringing its total operating portfolio to approximately 39,000 bed spaces

USAF is scheduled to acquire a portfolio of student accommodation from UNITE during December 2008, expected to be valued at between £165 million and £170 million

The Group has sufficient debt facilities to build out its full secured development pipeline, but is taking a cautious approach to its development commitments for delivery in 2010 and beyond in order to conserve cash and borrowing headroom during 2009. Accordingly, 2010 project deliveries will be scaled back by approximately 50%

UNITE continues to operate well within its debt covenants and has no major facilities expiring before 2011

Cost saving programme on target to deliver £10 million of annual savings in 2009.

Market update

The outlook for tenant demand in student accommodation remains encouraging. According to statistics released by UCAS on 15 October 2008, the number of students entering University for the 2008/09 academic year was 451,871, an increase of 9.7% or approximately 40,000 over 2007/08. Meanwhile, we estimate that net new supply of purpose built accommodation was limited to approximately 9,000 bed spaces over the same period, meaning that the significant demand/supply imbalance continues.

Initial applications for study in 2009/10 are also encouraging, with applications to courses with October 2008 deadlines up 6.5% from the previous year, according to statistics released by UCAS on 28 October 2008. We expect student numbers to continue growing in a recessionary environment.

However, the banking crisis that affected global markets in September and October, and the ongoing severe contraction in credit markets, means that the outlook for valuations of student accommodation more generally is difficult to determine, within the context of the broader commercial property market experiencing further severe valuation declines. Whilst we expect the resilient tenant demand for student accommodation to underpin strong rental growth across our portfolio, the sector will not be immune to the outward movements in yields being experienced across the commercial property sector. This was partly reflected in the 30 September valuation of the UNITE UK Student Accommodation Fund ("USAF") portfolio, reported on 6 October, which showed a small decline of 0.2% over the third quarter. This comprised 0.8% of rental growth and 7 basis points of outward yield movement, and was firmly underpinned by transactional evidence.

Operating and investment portfolio

UNITE is operating approximately 36,300 bed spaces for the current 2008/09 academic year and, as previously reported, occupancy is exceptionally high at 99%. Rental growth is equally strong, at between 8% and 11% across the portfolio on a like-for-like basis compared to 2007/08 rents.

Room sales for the 2009/10 academic year commenced on 20 October, four weeks earlier than in previous years, and initial demand from re-bookers and new customers has been strong. As at 14 November reservations, including block bookings from Universities, had been received for 44% of bed spaces (2008/09: 33%). In addition to its 2008/09 portfolio, UNITE will be opening an additional 2,700 bed spaces for 2009/10, bringing its total operating portfolio to approximately 39,000 bed spaces.

We expect the portfolio's occupancy and rental performance to remain strong in a recessionary environment, reflecting both the general trend of increasing student numbers but also the quality of the Group's portfolio in terms of location. Through our on-line booking and accommodation management system, we are actively monitoring a range of lead indicators, such as enquiry levels, enquiry conversion rates and arrears levels for any signs of deteriorating trading. There are none at this time.

Development activity

The Group remains on track to deliver an additional 2,700 bed spaces across 13 properties for occupation in 2009/10, of which 69% by value is located in London, the Group's largest market and primary focus for investment. The outlook for student accommodation values in London is the most robust in the UK, as a result of the extreme shortage of purpose-built student accommodation in the capital and London's particular attraction to overseas students.

The Group is taking a very cautious approach to its development commitments for delivery in 2010 and beyond, as a result of the uncertainty surrounding future asset valuations and the difficult banking market. Whilst the Group has secured developments that would allow it to deliver approximately 2,800 bed spaces for 2010 occupation, a level broadly in line with its 2009 programme, it is now likely that the Group will commit to less than half of these projects in order to conserve cash and borrowing headroom during 2009. The Group's focus on London as its primary market for development will remain.

The UNITE UK Student Accommodation Fund ("USAF")

The Group provided a full update regarding USAF on 21 October, following the recent £58 million equity fundraising in that vehicle. Further to that update, drawdown notices have now been issued to investors that subscribed in the most recent fundraising. The new equity will be used, together with cash resources and committed bank facilities within the Fund, to acquire a portfolio of student accommodation from UNITE during December 2008. This portfolio is expected to be valued at between £165 million and £170 million.

Financing and asset sales

UNITE has sold approximately £145 million of assets to third parties so far in 2008 and, at the time of the Group's interims in August, confirmed its intention to sell further assets valued at approximately £75 million before the end of the year. This sale programme has been continuing but, given the ongoing turmoil in banking markets, it is now unlikely that further asset sales, other than those to USAF mentioned above, will be completed before the end of the financial year.

From a debt finance perspective, UNITE continues to have facilities available to it with sufficient headroom to fund the build out of the Group's secured development pipeline. As a result of the Group's decision to reduce its development commitments for 2010, projected headroom in these facilities will now increase and gearing on the Group's implied built out balance sheet will reduce. The Group continues to focus on maximising balance sheet strength, is operating well within its covenants and has no major facilities expiring before 2011.

Operating efficiencies and cost savings

At the time of its interims, the Group confirmed plans to introduce a series of efficiencies to its operating business that were expected to result in cost savings of approximately £10 million per annum, £5 million from the Group's overhead and £5 million from direct property costs. The Group has now implemented the first major steps of this change programme, including entering into consultation with staff over potential redundancies, and is on track to deliver its annual savings target from early 2009. In addition, the Group is likely to reduce its in-house development resource as a result of the decision to scale back its development commitments for 2010 and beyond.

For further information, please contact:

About UNITE Group

UNITE Group is the UK's largest manager of branded student accommodation, with a business model that focuses on being a developer and co-investing asset manager. In the 2008/09 academic year, UNITE Group will operate accommodation for some 36,000 customers throughout 23 key university towns and cities across England, Wales and Scotland. UNITE Group undertakes the planning, development and management of sites, often working closely with the universities and colleges, in order to deliver high quality, well-located student accommodation at affordable prices in strong higher education markets.

Together with its development pipeline, UNITE Group manages a property portfolio valued at c. £2.9 billion on completion. UNITE Group's strategy, set out at the beginning of 2007, aims to double the size of its UK business by 2012.

With student rents resilient to economic cycles, and the continued growth in student numbers, especially from overseas, UNITE Group developments typically show high occupancy levels in a market where there is a general shortage of quality supply.

Founded in 1991, UNITE Group is listed on the London Stock Exchange (UTG) and is a FTSE 250 company.

UNITE UK Student Accommodation Fund

UNITE Group established the UNITE UK Student Accommodation Fund ("USAF" / the "Fund") at the end of 2006. The Fund was initiated with the principal objectives:

to release capital that is tied up in mature, stabilised investment assets for investment into higher added value development activity;

to provide UNITE Group with more growth capital in the medium term;

to diversify UNITE Group's sources of income by providing a new, valuable revenue stream arising from management fees from the Fund; and

to provide financial returns to investors in the Fund.

The Fund helped transform UNITE Group's business model to that of a developer of new purpose-built student accommodation and manager of funds which own student accommodation properties operated by UNITE Group and in which the Company has a significant minority stake.

See our websites:

Investors and corporate: www.unite-group.co.uk

Students: www.unite-students.com

Graduates: www.livocity.com

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