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Edited Transcript of UTG.L earnings conference call or presentation 26-Feb-20 9:30am GMT

London Mar 14, 2020 (Thomson StreetEvents) — Edited Transcript of Unite Group PLC earnings conference call or presentation Wednesday, February 26, 2020 at 9:30:00am GMT

* Joseph J. Lister

* Richard S. Smith

* Paul J. May

Richard S. Smith, The Unite Group plc – CEO & Director [1]

Hello, and good morning, everybody. Welcome to our university lecture theater to announce our results. And also, we’ve taken sort of student rules and ignored the guidance about drinks and sweets because I know you’ve all had a busy morning, busy morning of results and what seems, in the last few minutes, a busy morning of announcements as well relevant to our sector. But thank you, say, for coming along and — for our results presentation today.

So we’ve delivered another very strong set of results. We’re really pleased with the performance of the business. Earnings growth up 25% to GBP 110.6 million, EPS up 30 — 15% to 39p. Dividend also up, up 14%, just over 33p. LTV at 37%, off the back of the Liberty transaction. And obviously, with a target to return to the mid-30s. And our total accounting return was 11.7%.

As you know, we also completed the transformational acquisition of Liberty. And we’re really pleased with the progress that we made. We completed right at the end of November, so we’ve had the business now for just 3 months. And all the benefits and the opportunities that we expected to see and come with the business are very much in sight. That’s enabled us to actually sort of get on with the integration of the business a little bit quicker than we had originally planned, which means that benefits in 2020 are actually increased to GBP 5 million to GBP 6 million from the GBP 4 million that we flagged at the time of the deal, and benefits in 2021 will remain at GBP 15 million.

Looking ahead, we continue to have a high level of visibility of the earnings growth of the business. 88% of our portfolio is aligned to the strongest universities in the U.K. Universities that continue to do very well. We’re 56% nominated on a combined basis, with an average remaining life of 6 years across those nomination agreements. And our rental growth synergies and the secured development pipeline will add 16p to 20p to our earnings in the medium term.

We also remain confident about the outlook of the business. We expect strong growth in student numbers annually to 2030, driven by both demographics and international students. Our reservation performance for 2021 is in line with record levels, even with the lower proportion of nominations in the Liberty portfolio. And our rental growth forecast of 3% to 3.5% is supported by our valued offer and our utilization. We’ve yet to see any impact or any material impact from coronavirus, but I’ll also come back to that and talk a little bit more about what we’re doing and what we might see a little bit later in the presentation.

So as I’ve said, the business is performing well. At the time of the results, the occupancy is 73%, again, supporting that rental growth forecast of 3% to 3.5%. And our strategy to align to the strongest universities, we believe, remains right. And we are continuing to see a deepening of those relationships. Our development pipeline stands at GBP 681 million, aligned to highly ranked institutions, and 55% of the value of that development pipeline is in London, which remains the most undersupplied student market in the U.K.

Our platform, as you all know, PRISM continues to deliver both efficiencies and, importantly, service enhancements. In the year, we’re delighted that we achieved record customer satisfaction scores, scores that are verified independently of the group for both our university customer base and student customer base. And our MyUnite App, the app that provides sort of hassle-free living experience for students, is really delivering. And a couple of examples, this year, 55% of our students checked in online, so de-stressing the arrival day and the arrival experience for students, but probably as importantly, de-stressing that arrival experience for parents. And 80% of maintenance jobs that are logged are fixed within a day. So giving, say, students, what it is that they want. And these customer enhancements and efficiencies means that we’re confident in achieving our 74% EBIT margin target by the end of ’21.

We take fire safety and safety generally, obviously, very seriously at Unite. And in terms of our broader sort of safety environment, we were delighted to receive the highest rating from the British Safety Council at the end of last year. We achieved a 5-star rating. And that rating comes after the British Safety Council came into the business and conducted a full audit of our processes, our systems, effectively, our health and safety management system and then go out into the business, go out into our properties, go and talk to our teams about how that is implemented across the business and effectively how we operationalize it. So achieving that was a real success.

And within the broader spectrum of health and safety, obviously, fire safety is a key priority for us. As you all know, we acted quickly to remove ACM cladding from the buildings that we needed to, following the tragic events of Grenfell. And we’ll do the same with high-pressure laminate, HPL, cladding across the estate. We’ve got 19 buildings across the combined estate with some form of HPL cladding on them. Tests are ongoing to determine how that cladding will perform in line with the latest guidance that was published on the 20th of January. But importantly, the majority of those buildings have less than 25% of HPL cladding across the coverage of the building. We anticipate costs based on initial assessments to be somewhere in the order of GBP 15 million to GBP 20 million to remove the cladding and replace it. And we’ll undertake that — those works over the next 12 to 24 months. We’ve implemented special operational measures in all of the impacted buildings. And critically, all buildings are verified as safe to operate.

As I already said, the integration is going well, and we’ve been impressed with the Liberty business. And I would just like to thank all the Liberty staff for their positivity and support as they’ve come across and joined the broader Unite business. And the early progress we’ve made, as I’ve said, has enabled us to accelerate benefits in 2020 and increased our confidence in securing the GBP 15 million worth of synergies that we’ll deliver in 2021.

And as we said before, we expect to see additional opportunities in areas like procurement, in energy efficiency and also the benefits from combining the 2 estates. The combined portfolio really does present some interesting opportunities to segment our offer to students. The graph on the page there shows that around 66% of our beds, that’s beds outside London, are priced an affordable point of less than GBP 150 a week with an average of GBP 138 a week for an all-inclusive experience. And we believe that, through segmenting our product and a more targeted marketing through our sort of various channels, we have the ability to offer undergraduates, postgraduates and, indeed, international students a more tailored offer as we move forward. And that’s an offer we can deliver efficiently, and that’s an offer that we will be able to drive value from over time.

I hope many of you in the room will be pleased to see the return of the earnings bridge. The smiles on people’s faces suggest that is the case. Actually, we thought you’d like to see it. So it’s in the pack twice this time around, just in there twice for once, but got the earnings bridge there. Joe will talk through it in a little bit more detail in a minute. But I think what that does show is that through delivery of our secured development pipeline, which stretches out to 2023, many of those developments, as you know, supported by nomination agreements through deliverable cost synergies, as I mentioned, from Liberty and also deliverable NOI growth in line with our stated targets. And post disposals, our earnings could grow from 39p currently to 55p to 59p over that time period. So that’s growth of sort of 40% to 50%, which I think is very positive.

So now I’d like to hand over to Joe to take you through the financials in more detail and, indeed, come back to the earnings bridge.


Joseph J. Lister, The Unite Group plc – CFO & Director [2]


Thank you, Richard, and good morning, everybody. Yes, I’m delighted to once again be announcing a very strong set of results across the board.

EPRA EPS, up 15%, and a corresponding increase in dividend per share. EPRA NAV, up 8%. And LTV at 37% at the year-end, and that’s down from the 39% at the time of the acquisition as we made good progress with our disposal activity in the second half of last year. And overall, a strong total accounting return at 11.7%, with an EPS yield of 4.9%, which continues to grow in absolute terms and also relative to the proportion of total accounting return.

Overall, we’ve seen a 25% increase in earnings during the year, and that has been driven by positive performance across all components of the earnings statement. Occupancy at 98% throughout the course of 2019, delivering rental growth of 3.4%, delivering over 2,000 new beds, offset by some of those disposals I mentioned and continuing to maintaining tight discipline around our costs and performance against our interest line. And we also have had the benefit of some additional management fees this year and also 1 month of Liberty Living trading performance in the earnings performance.

We continue to make good progress against both NOI margin and EBIT margins, 75.2% and 71.7%, respectively. And as Richard mentioned, we’re maintaining our target of delivering 74% EBIT margin by the end of 2021 through the delivery of those Liberty Living synergies and also by maintaining that tight cost control as the business continues to grow.

Finance costs have increased to GBP 43.9 million really as the portfolio continues to grow, supported by a higher level of net debt. We have seen a slightly lower level of interest capitalized at GBP 9.1 million versus GBP 10.5 million the year before, but we also have seen some benefits from the reduced cost of finance.

The fees from joint ventures, these come across both management, acquisition fees and also performance fees. They are up at GBP 21.2 million combined versus GBP 15.6 million last year. And the biggest mover of that is the recognition of GBP 4.6 million of performance fees related to the LSAV joint venture, and I’ll come back to explain how that’s calculated and the impact that that’s had going forward.

So looking forward to 2020, we are expecting to maintain full occupancy around 97% to 98%, as we have done over the last 5 years. Deliver rental growth, 3% to 3.5%. Seeing finance costs of 3.3% for the coming year and expect to see capitalized interest in line with levels we saw in the last couple of years at GBP 9 million to GBP 10 million. Delivering those synergies, GBP 5 million to GBP 6 million, and continuing to make progress towards our EBIT target of 74%.

So when you get the chance to run those all through your models, we’d expect you to see EPRA earnings coming out in the range of 44p to 45p for 2020. That is before any impact of further recognition of LSAV performance fees. And that level will represent an EPRA EPS yield well in excess of 5%.

One of the really positives around our business is this high level of visibility on our income, and that really comes through from the high proportion of nominations agreement, 53%, and continuing and regular support from our existing customers who rebook with us. And both those things are supported by those high levels of satisfaction, which Richard mentioned.

And we’re really pleased that we’re continuing to be able to pull more second, third years and postgraduates out of that more traditional HMO sector to come and live in the purpose-built model. We now have 3/4 of our direct-let beds filled by returning students, and that’s up from around 2/3, only a couple of years ago. We see this not only as a real growth opportunity, but also provides us with some occupancy protection in the event that we see a supply or a demand shock in any of our local markets.

In addition to that, we’re still seeing continuing growth for higher education coming from international students and postgraduates. And both of those groups do find our accommodation attractive. And as, again, Richard mentioned, providing us with some more opportunities to segment the portfolio going forward.

We talked about utilization for the last couple of periods. I’m pleased to say that we’ve reported, again, good progress against improving the utilization of the estate. Our summer income was actually up 46% in 2019, up to GBP 12 million, a relatively low base, however, showing that a number of the initiatives that we’ve put in place are driving that additional income. And we’re continuing to see for the 2020 academic year strong demand for 51-week tenancies from a range of customers, but primarily from international students. And this will continue to drive utilization, and we see that getting to 90%-plus over the next couple of years is indeed within sight. And utilization will contribute around 1/3 of our target rental growth of 3% to 3.5%.

So here it is, back by popular demand. The earnings growth outlook chart shows those building blocks of growth and supports the 16p to 20p earnings per share growth once that development pipeline has been completed and we’ll take earnings per share up to the mid- to high 50p levels.

So just a couple of things in more detail. This does assume full integration of Liberty onto our PRISM platform and into our business and delivering those synergies that we’ve talked about. It does assume that we deliver our full secured pipeline. The bulk of that is over the next 3 years with one scheme out into 2023 and assumes that, that debt is raised at our current marginal cost of debt of 2.5%. Whilst we do that development, we’re also focused on bringing LTV down to 35%, and we do that by making disposals of GBP 300 million to GBP 400 million, as previously guided, on top of those that we made during 2019. And we continue to assume for the purposes of this model that we are able to deliver NOI growth between 2.5% to 3.5% for a 2-year period.

Moving on to NAV. As I mentioned, we’ve seen 8% growth in NAV to 853p. That was being driven by that 3.4% rental growth and 11 basis points of yield compression, primarily in London and also in some of our prime provincial markets. We have also seen a significant uplift on the development portfolio, GBP 87 million, with about half of that coming through from our large scheme in Middlesex Street, about half of that through the planning gains that we’ve made this year. And we’d expect in 2020 for those development gains to be at a more normalized level of around GBP 50 million to GBP 60 million.

The acquisition of Liberty did have a number of impacts on the balance sheet. The share issuance raising has contributed 13p to NAV, offset to some extent by the cost of the transaction at 7p. On the IFRS balance sheet, you will have seen there’s a large goodwill balance of GBP 384 million, which has been written off. That goodwill arose as a result of the acquisition and the fact that we agreed the transaction based on an NAV-for-NAV basis, and that was calculated based on the March NAVs. And given the significant growth in share price between that date, the announcement in July and then the ultimate completion in the end of November has created the — that balance of goodwill. We took the decision to write that off in full to ensure that we keep a clean balance sheet going forward.

I’ll also mention that, as we stated at the interim, we’ve adopted IFRS 16 in its entirety. This means that we’re recognizing a right-of-use asset for our sale and leaseback portfolio, about 2,700 beds and the corresponding lease liability. There has been a small benefit to NAV and EPS as a result of that change, and we are stripping out, as we did at the half year, that lease liability from our LTV calculations, and we’ll continue to do so.

We have seen a significant increase in net debt, up to GBP 1.9 billion through the year, primarily driven by the Liberty Living acquisition. But as I mentioned, year-end LTV at 37% is down from the 39% at the time of the acquisition, having made GBP 250 million of disposals on a see-through basis. And we’re continuing to target that 35%. We do plan to sell between GBP 150 million to GBP 200 million of assets this year, and that’s from both the Liberty and the United portfolios. And then looking to LTV at the end of next year, we do have quite a big year of CapEx on our development program, be around GBP 250 million. We could see LTV flat over the course of the year and potentially even slightly higher at the half year, depending on the timing of those disposals.

Our cost of debt for this year is expected to be around 3.3%, and we have benefited from the adoption of the Liberty Living debt. And also, we repaid the retail bond at the end of last year, which has helped bring that cost of debt down. And we expect that trajectory to continue towards 3% as we’re able to raise debt today at a marginal cost of 2.5%. And we are seeing refinancing events coming up in 2022 and beyond.

In 2019, I think we, again, saw the benefit of our co-investment vehicles, really, through USAF this year. They were supportive of raising further equity into that vehicle with GBP 250 million raised from existing unitholders, and that was really to fund additional acquisition capacity into USAF. We didn’t participate in the equity raise, given the Liberty acquisition going on at the time, which has seen our stake reduced from 25% to 22%. But that capacity did support the acquisition of the Liberty portfolio, with USAF acquiring the entire Cardiff estate. And as also, USAF has been acquiring some assets from Unite during the course of 2019, again, supporting our LTV position post the Liberty transaction.

As I mentioned earlier, we have recognized a fee from the LSAV performance based on the LSAV performance of GBP 4.6 million. That fee is payable to us at the end of the life of that vehicle. And now that we’re over 7 years through a 10-year life of that vehicle, and the strong performance of that vehicle means there’s been a significant buildup in value in that performance fee, so we recognized around 20% to 25% of that total fee; and that’s based on a — requires yields not to move out significantly from the 3-year historic average and also us to reach a satisfactory conclusion with GIC regarding the ongoing life or what comes next after that JV.

We have started these discussions with them, and a whole range of options remain on the table with GIC, and we’d expect it to take around 12 to 18 months to bring that to conclusion from where we are today. And we do expect around — in that calculation, a further GBP 15 million to GBP 20 million of performance fee to be recognized between now and the end of the life of that vehicle.

On that basis, I’ll hand over to Nick on the property.


Nick Hayes, The Unite Group plc – Group Property Director [3]


Thanks, Joe. Good morning, everybody. I think it’s fair to say that 2019 was somewhat of a turbulent year, politically at least, and that weighed on the real estate sector. Transaction volumes, as a whole, were down 25% year-on-year. But actually, the student markets maintained transaction volumes at a relatively good level. It was up on 2018, excluding the Liberty transaction. And if we include Liberty, it was the second-highest year on record. I think 2019 was characterized very much by flight to quality for investors, and we saw that in yields across student accommodation. There’s 25 basis points of compression in London last year. And conversely, 25 basis points of expansion in secondary provincial markets. That now means the spread between prime and provincial now sits at 300 basis points, which I think means that asset prices are well supported across the spectrum.

In terms of Unite, we saw 11 basis points of yield shift in the year. And just thinking about the sentiment now for 2020, I think, following the outcome of the general election, I think we’re seeing improved investor sentiment in the market. I think that’s driven by strong market fundamentals, relatively weak currency and attractive relative returns and a stabilizing political environment. And I think that, that sense of optimism is flowing through to the market. Jones Lang LaSalle forecasting GBP 8 billion of transactions in the student sector this year, albeit given the news on iQ this morning, that might be slightly higher. And it’s also worth to caveat that iQ accounts for approximately half of that. So a bit of a caveat there, but nevertheless, sentiment seems to be improving in the market.

Rental growth remained strong throughout the portfolio, with London showing the best performance. All 3 funds outperformed rental growth of the wider market, underpinning our portfolio strategy. We’re mindful of affordability. We aren’t simply growing core income, but also enhancing utilization and driving our summer business. And moving forward, as Richard outlined, we see opportunity in tapping into growing demand from returner and postgraduate markets as well.

We’ve continued to improve our quality of our portfolio through a combination of development, disposals, acquisitions and asset management. We opened just under 2,500 beds in 2019, all in line with program and budget. 70% of those rooms were on nominations with a WAULT of 16 years. The Liberty Living acquisition formed a new chapter for us, really strong compatibility with our existing portfolio, overlap in 14 markets, adding scale to core cities such as London, Manchester, Birmingham and Leeds. And the portfolio price point, as Richard touched on, 5% lower than the Unite portfolio, which has helped broaden our offer and ensuring we remain an affordable choice for students.

In 2019, we saw GBP 300 million of disposals, gross GBP 250 million see-through. We are reiterating our forecast of GBP 150 million to GBP 200 million of disposals this year. However, if the market sentiment does translate to investor interest, then we may choose to accelerate some of those disposals. And we see also good opportunities for further investment into USAF. And as Joe highlighted, we have around GBP 200 million of capacity in that fund.

Again, as Richard highlighted, we are a responsible investor. We moved quickly on the Grenfell — response to the Grenfell tragedy. We are working through the proposals on HPL and making suitable plans for remediating any buildings that need to be — where cladding needs to be removed. We are able to lean on our development supply chain to help with that process, which means that we reduce the impact on students and reduce the financial impact to the business as well. We’ve also invested into our estate through asset management activities, refurbishments, extensions. But also, we are also investing into our specification for our new builds with new common room specifications which are providing a Home for Success for our new students.

The market remains very much undersupplied. And clearly, a supply/demand imbalance drives rental growth. 240,000 first year international students were unable to access purpose-built student accommodation in the U.K. The national picture is, therefore, supportive. But in the strongest markets, the imbalance is more pronounced as barriers to entry such as land availability and planning risk has meant that new supply has not kept up with the growing university demand. In terms of new supply, 32,000 new beds were delivered in 2019, of which 24,000 were in Unite cities. However, 9,000 of those beds were studios, so fairly limited element of new beds coming to the market that we’re directly competing with our own stock. We do think the pipeline will slow moving forward, albeit it is difficult to forecast much beyond next summer.

Moving on to our development pipeline. We have just over 5,000 beds secured, having delivered just under 2,500 beds last year. We’ve got 2,200 beds being delivered this summer, all are on track, on program and on budget. In terms of 2021, we’re also just looking forward to trying to mitigate the risk on future projects through the possibility of a no-deal at the end of the transition period. So we’re looking to accelerate the supply of any materials from the EU ahead of the end of the year to try and protect the programs for those projects as well.

In terms of milestones this year, a major planning consent obtained at Middlesex Street in London. It’s our first major London planning consent since 2013. We are seeing more opportunity to develop in London. Primarily, this is driven by a softening of land values as residential values have been in decline. We do anticipate to see other sectors be more active in London, in particular, the office sector. But nevertheless, we believe there is an opportunity to invest more capital into London development. The London plan, the mayor’s plan, is in its final stages of drafting, and there’s likely to be a requirement for student accommodation developers to have not only university support, but also long-term university nomination agreements. And I believe that we are uniquely placed to use our university partnerships and our development capability and strong capital structure to capitalize on a London opportunity.

That opportunity, as it stands at the minute, translates to 2 development sites that we have under offer. And we have a high-quality forward-look pipeline of new opportunities the team working hard on to secure. The strength of our university partnership continues to provide opportunity for us in facilitating new pipeline growth. We’re still seeing good opportunity regionally and continue to focus on 8 to 10 high-quality regional markets. So if I was to summarize where we are from a pipeline perspective, on the whole, we remain on track for delivery in line with our plans. We remain on program, on budget. The quality is looking strong. We’ve got a long track record of delivering our schemes. I think the quality of our new buildings are exceptional. Our specification is market-leading. I’m very much looking forward to the future with optimism.

So I’m just going to pass you over to Richard, who’s going to take you through the operations review and wrap up.


Richard S. Smith, The Unite Group plc – CEO & Director [4]


Thanks, Nick. So just continuing where Nick just left off in terms of university partnerships. I think our approach of developing sort of deep relationships with universities, starting with nominations, extending the length of those nominations, working on development projects, it’s really starting to pay off. And we’re really starting to see, I think, a widening of the benefit of the — of those partnerships with universities. 56% has already been mentioned about beds are secured under nomination agreements now. Of those, over 26,000 beds, representing about 65% of our total nominations income, are secured on long-term agreements, 6-year average remaining life. And those agreements, as you know, have sort of index-linked rental growth in — built in, which at current RPI level is sort of rental growth of around 3%.

Our focus going forward will be on improving the quality of our nominations, rather necessarily than the quantum, although we will continue to do the right university deals, but with a particular focus on the duration of the agreements. Universities are clearly signaling to us they are willing to commit to us for longer because we’re providing them with the product and service that their students want.

During the year, we are delighted to complete 2 university partnerships, a 15-year city-wide deal covering 3,000 beds, incorporating 2 new developments in Bristol with the University of Bristol. And those city-wide deals where we take perhaps existing buildings, existing nominations, say, perhaps, in this case, the development, and wrap that up into a single long-term agreement is a new area of focus for us and something that I think you will see us doing more of going forward.

And also, a 30-year nomination with the University of Leeds, covering 559 beds, again in a new development. And at 30 years, that gives you an idea that we’re the right partner. That’s the kind of commitment that universities are willing to make.

We’ve got an attractive pipeline of partnership opportunities, just under 24,000 beds. And those opportunities are broadly broken into 3 core areas: improving existing relationships, so active discussions going on, some similar to those sort of city-wide deals covering about 10,000 beds; development opportunities, both on and off campus, covering a further 9,000 beds; and stock transfer, outsourcing opportunities of around 4,000 beds. But we do accept and should say that those outsourcing and stock transfer opportunities are the most complicated and time-consuming to get over the line with universities. So perhaps a potentially lower and longer-term conversion rate on those kind of opportunities.

The deep relationships that we have with universities in a way is bringing forward, I think, new and interesting opportunities such as those city-wide deals, but it also really is, as Nick has already said, supporting our development pipeline and our confidence to continue to develop in those sort of 8 to 10 markets across the U.K. And as we’ve consistently said, in terms of university partnerships, we’d expect to convert 1 to 2 significantly sized partnership opportunities per year.

The fundamentals of the U.K. higher education sector, obviously, rate remain robust for ’19/’20. Student numbers are up about 1.5% to just over 540,000 students starting at university. Applications for the ’20/’21 academic year are also up despite the demographic decline that we’ve been in, and that demographic decline now really does start to reverse quite rapidly from 2021. All things being equal, seeing really good sustained potential growth from domestic students. High-tariff universities, many of which are our partners, remain the universities the students want to go to. Applications to high-tariff universities are up 4%. And really positive government policy around international students. The government have said they want to grow the number of international students in the U.K. from 470,000 to 600,000 students by 2030. And they back that up with a change from 2021 in the post-study visas, which means students will be able to stay in the U.K. for 2 years at the end of their studies. That’s on par with the best post-study visa arrangements anywhere in the world. So we see that as a real positive.

And as Joe said, outside of undergraduates and international graduates, we’re really starting to see a shift in the mindset of students. Older students, you’re really seeing the benefit of either staying in purpose-built student accommodation or indeed returning to purpose-built student accommodation, perhaps in their final year, once they’ve had fund out in the HMO sector, only to come back in and really settle down in an environment that suits them and means that they can get the most from their final year of studies.

I said I’d come back to coronavirus. And obviously, it’s something we are watching very closely and developing our contingency plans. Chinese students represent about 15% of our student base. Importantly, about half of those students are already in the U.K. So the students that are either going on to do second, third year; the students that, say, are here and not likely to go home. That obviously does still leave an expectation around half those 15,000 students we would expect to be coming into the U.K. in September. As yet, we are seeing no impact on our 2021 bookings or, indeed, 2021 inquiries coming through China and coming through our agents. The most immediate potential impact for us would be summer income. Obviously, that’s an area of focus for us. Within our summer income target, about GBP 2 million worth of gross revenue is expected to come from Chinese students coming to the U.K. to do pre-sessional courses or coming to the U.K. early for whatever purpose. So should restrictions on travel, should restriction on being able to do sort of English language courses in China physically continue for the next couple of months, there is, I guess, a slight risk to that income. But what is very positive, the number of U.K. universities have already said that they will accept online English language courses rather than sort of the more traditional English language courses to facilitate students being able to come.

We have a range of mitigation options ready to go should we need to. They would include switching our sort of sales strategy to domestic markets. It would include targeting those Chinese students who are already here, not just really our Chinese students, but Chinese students generally. But also very positively, as a mitigant, about 85% of our Chinese students studying are studying in Russell Group cities. And they are the universities and they are the cities with the highest demand even ex international students. So I say, at the moment, no impact, but should the virus continue and should it develop, it could impact our 2021 reservations. And if that were to happen, we would, of course, update you all.

And we’re also awaiting the outcome of the government’s response to the funding review, also called the Augar Review. That was laid before sort of government back in May of last year. We expect there to be a response later in the year and probably in the autumn. And to be honest, it’s not clear what direction the government are going to go in. It’s not necessarily that high up their priority list perhaps, but we do expect there to be an increased focus on value for money and demonstrating value for money for students and that universities will be encouraged to partner with quality providers. And I think both of those areas of focus clearly align to our strategy, and I think we will be able to demonstrate both the value and the quality partnerships that we have. As part of our offer, we really have focused over the last few years on value for money. It’s been a consistent part of our strategy whether that be disposing of studios, whether that be focus on value-driven price increases, whether that be through focusing rental increases through utilization, but students and universities really are driven by value. And they have very clear expectations. But really, importantly, if you reward them and deliver against those expectations, they will give you something back. So on a comparable basis, and it’s not something we’ve done before, here, just looking at our average price point, GBP 136 a week, excluding London for Unite accommodation, that is GBP 136 all-in. Comparing it to the HMO sector, so comparable locations, rent, including bills, and we’ve included an assumption on bills there, is GBP 126 a week. So that’s a differential between our products and everything we offer of GBP 10 or less than 8%.

So what do you get for that premium? Well, you get the hassle-free services that we offer. And critically, they’re the services that students have told us they want. So they want all of their bills included, they want their WiFi, and they want the physical and digital service options that we provide. They want help when they need it, and that’s 24/7. And that’s either, again, physically or digitally. And they want buildings that really are designed to meet their needs, with study spaces, with social spaces, with comfortable environments where they can be themselves. So I really do think that shows the comparability of our product, why we are seeing students coming out of that HMO market back into purpose-built. And remember that HMO market’s got something like 900,000 students living in it today.

If you put GBP 10 in context, and perhaps it’s a little bit cheeky, GBP 10 doesn’t buy you too many cups of coffee certainly in this part of town. But even on campus, GBP 10 wouldn’t buy you a cup of free tea and coffee every day. But one of the things that we do in every one of our properties every day is provide our students with access to free tea and coffee in our common rooms. So it really does, I think, demonstrate the value that we offer, and we will continue to ensure that we deliver value for our students. And I think it’s value that they should rightly expect given the investment they’re making in their own futures.

So providing sort of affordable homes and sort of a quality experience for students is just part of our commitment to being a responsible business. I really do believe Unite is a responsibility — a responsible business. It’s in our DNA. Home for Success is about responsibility. And as this slide shows, we take everything that we do very seriously. We are a Real Living Wage Employer right through our supply chain, and we’re also Investors in People Gold employer. We have over 1,000 team members who are trained in mental health and active listening, providing direct support to our customer base. We employ 160 ambassadors. These are mature students who provide peer to peer support for other students and also provides really valuable work experience for those ambassadors. We’ve developed Leapskills. Leapskills is a program that we roll out in schools — to upcoming school leavers to better prepare them for the leap, the change in their lives from moving to home or where they live at the moment to their new home at university. And also Placer, at the other end of a student’s life, an employability app helping students find really relevant employability opportunities. And our foundation is currently supporting 189 care leavers who otherwise simply wouldn’t be at university. And we’re also focused on our sort of environmental impact. We have proactively invested in a whole range of environmental initiatives across the business since 2014, including proactive retrofit of lighting across the entire estate, photovoltaic and solar on our buildings, as well as student engagement activities supported by the NUS. And this has contributed to a 52% reduction in our location-based energy use on a per-bed basis since 2014. And in addition to that, we also procure all of our energy through renewable energy guarantee.

But there is more to do and more that we will do. So in 2020, we intend to adopt TCFD recommendations around financial disclosure. We will set stretching energy and broader ESG targets, and that will come alongside our intention later in the year or probably after the summer of publishing a stand-alone sustainability report. One of our values as a business is to do what’s right, and we intend to deliver on that value.

So just to conclude, before we hand over for questions, I think we can look ahead with real confidence. We are well positioned for sustainable and meaningful growth in our earnings. As I’ve said, the demand picture is positive. Obviously, there is the risk of coronavirus, but no impact, as I said, as yet. Our focus on delivering high-quality, affordable homes for the best university — best universities in the U.K. is the right strategy. And our brand and platform and, indeed, capital structure, I think, does provide us with a platform for future growth. We do see significant development opportunities. We do see new partnership opportunities. And I think we do have the opportunity to further enhance our offer to both universities and critically to students through segmentation, as we talked about.

So thank you very much for listening. I think if we’re taking questions in the room first. I think rather than the little mics on your seats, I think we’ve got some hand mics, if you could just wait for that before you ask your question, please. Paul?


Questions and Answers


Paul J. May, Barclays Bank PLC, Research Division – Analyst [1]


Paul May from Barclays. Just a couple of questions from me. Post the Liberty deal, your proportion of developments from the overall portfolio has decreased. Do you anticipate that will come back? And will that be more driven by university partnerships as you mentioned in the presentation? Do you want to answer it or I — do you want me to carry on? What’s easiest?


Richard S. Smith, The Unite Group plc – CEO & Director [2]


I think we can answer that one.


Joseph J. Lister, The Unite Group plc – CFO & Director [3]


Yes. So I think we flagged at the time of the acquisition that we would expect the growth in the overall size of the balance sheet for the proportion twofold. So we’re not signaling today that we’re going to take that back up to previous levels. We will continue to spend GBP 150 million to GBP 200 million per annum on CapEx, and that will be a rolling cycle that we will look to maintain going forward.


Paul J. May, Barclays Bank PLC, Research Division – Analyst [4]


Rental growth, I think you mentioned that the 3% to 3.5% includes 1/3 coming from an improvement in summer efficiency. So 2% to 2.5% roughly for the underlying portfolio. Once you’ve executed on everything in the summer, do you anticipate the rest of the portfolio moving back to 3% to 3.5%? As in, has there been a conscious decision to not push rents in the underlying portfolio given that affordability and value for money proposition?


Richard S. Smith, The Unite Group plc – CEO & Director [5]


I think yes, it’s a combination of all those things. Yes, we’ve driven — we’ve really focused on value-driven rental increases. So where we have improved service, we’ve really focused on improving rents there. Our nomination agreements, obviously, have that — has a good degree of rental growth linked in across a significant proportion of the estate. But then yes, we have been sensible and prudent around sustainable rental growth, really focus on giving students what they want and continuing that. I think getting to the 90-something percent, I think that’s going to take us 2 or 3 more academic years. By the time they get there, that’s where I would expect segmentation to really start supporting our rental growth as well. So we obviously don’t provide guidance as far out as that, but I think there is sustainable rental growth for this business as we look forward.


Paul J. May, Barclays Bank PLC, Research Division – Analyst [6]


Okay. And just a final one on the LSAV situation. Do Unite have a first right of refusal if it gets to the end of the period and you want to buy the portfolio? Do you have a first right of refusal? And particularly given where you’re trading relative to your asset value, it would make a lot of economic sense to pursue that as an execution strategy in the first instance. Or what are your thoughts around that?


Richard S. Smith, The Unite Group plc – CEO & Director [7]


Yes. We don’t have a sort of first right of refusal. I think our conversations with GIC, I think, simply, they would like to continue with the vehicle. I think there would be a desire from them to actually grow the size of the vehicle. So I guess the most likely outcome, perhaps, is that the vehicle is extended in some way sort of shape or form. But if it came to it, and clearly, they are — there would be assets that we will be very interested in acquiring.


Matthew Saperia, Peel Hunt LLP, Research Division – Analyst [8]


It’s Matt Saperia from Peel Hunt. You mentioned a couple of times, I’m quite interested to hear more about the opportunity to segment, particularly what kind of initiatives you’re currently thinking about. And I guess, looking forward, the quantum and potentially the upside that you might derive from doing that?


Richard S. Smith, The Unite Group plc – CEO & Director [9]


I don’t think we’re sort of quite there on what the quantum of the upside might be, but I think, if you segment properly and we use the estate to provide both the service and the product that different customer groups want, there is an opportunity to potentially reduce operating costs.

Let’s just take an example of postgraduates. They probably don’t need the same level of operational intensity, customer service support as an undergraduate might. There will be hallmarks of the Unite service offer that we just won’t, we won’t compromise on no matter what we offer. And then, obviously, if you provide that more tailored product, postgraduates tend to want longer-term tenancies, say, 51 weeks, so that’s an opportunity to enhance utilization. But really, it’s about making sure that the product, the location, the price point is really meeting those differing customer needs for international students, undergraduates and postgraduates. Yes, they’re all students, but they have different needs. So if we can tailor our product and our service to them, then I think there’s value to be generated.


Christopher Richard Fremantle, Morgan Stanley, Research Division – Executive Director [10]


Chris Fremantle from Morgan Stanley. Just a quick question on CapEx. I know that’s going to become as part of the — per disclosure, there’s a few more requirements there in terms of maintenance CapEx or CapEx on current space. Can you just remind us what the sort of maintenance CapEx is? And if possible, just split again between what’s earnings enhancing and what is simply cash leaving your bank account, so to speak?


Joseph J. Lister, The Unite Group plc – CFO & Director [11]


Yes. So the life-cycle CapEx, that we’ve called it, is just to maintain the estate at effective current levels and enhance the overall look, feel of the buildings. That’s running at between GBP 200 and GBP 250 per bed per annum. So as a run rate, we’d expect that to maintain at that sort of level. We then will make asset management expenditure where we see opportunities to drive value. That could either be through reformatting the shape of a room, putting in a larger bed into a room or adding a few rooms onto a building, repurposing space. That is a variable spend. We typically spend around GBP 10 million to GBP 15 million a year on those. But again, we would use similar return criteria that we would for our development activities for any of that spend. We will then have some one-off spends like cladding, which Richard has mentioned. So that would be in addition to those numbers, and we make consistent spend into our IT platform of between GBP 1 million to GBP 5 million a year to make sure that we’re continually enhancing that overall IT platform. So those will be the sort of key components of our CapEx and sort of overall would be the way that we think about CapEx this year and going forward.


Richard S. Smith, The Unite Group plc – CEO & Director [12]


I don’t think there are any other questions in the room. I don’t know if we can take questions on the line.


Operator [13]


(Operator Instructions) There are no questions at this time.


Richard S. Smith, The Unite Group plc – CEO & Director [14]


Great. Thank you. If there are no further questions, then I’m sure you’ve got busy days ahead. So thank you very much for coming along. Great to see you all again. Thank you.

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