LON:UTG | Unite Students - Look To Consolidate The Sector

29th Nov '17 by Maddox

24 comments 7145 reads

Unite (LON:UTG) is already a stalwart core holding within my portfolio (renowned investor Peter Lynch’s term). It has and continues to deliver consistent value growth and more recently good income growth too. However, it’s Unite’s solidity that has great appeal – it owns physical assets in a very stable sector, namely student property. For what is my largest holding this share provides wonderfully predictable performance and peace of mind.

So, whilst Unite isn’t the most exciting story-stock I’m currently looking at a 24% total shareholder return, calendar year 2017 to date, and I’m projecting an average total shareholder return of c. 17% p.a. over the next three years. However, there were some interesting strategic revelations at their recent Capital Markets Day that may make these projections quite conservative.

Significantly, Unite’s Capital Markets Day ^[1] was held at the Aston University Campus. They bought the whole of Aston’s student accommodation, Aston Student Village ^[2] , in Feb 2017 for £227m. This was the first deal of this nature and could be the spark to consolidation of the sector. This is a very large potential opportunity for Unite (LON:UTG) as there is nearly as much student property owned by the university sector (280,000 beds) as in the private sector (300,000 beds). Whether the universities see the need to monetise their assets I have little hard information; but looking for potential drivers I discovered that the universities’ pension fund deficit is a mammoth £17.5bn!

Another key piece of news at the Capital Markets Day was that they ‘have eight opportunities totaling 6,000 – 8,000 under active evaluation’. These deals might be either:

Sale of student property to Unite but with commitments to upgrade and nomination agreements;
On-campus development in partnership with the university; or
Off-campus development in partnership with the university, supported by a nomination agreement.

The theme for the Capital Markets Day was all about Unite's 'university partnerships’. This supported by the fact that 60% of Unite’s purpose built student accommodation is pre-let to universities to house their first-year students under what are called ‘nomination agreements’.

Unite are clearly positioning themselves as the prime candidate for similar deals - for which they are ideally positioned:

The Aston deal reflects Unite’s access to substantial funding…

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Maddox

8th Jun '18

Unite hitting new highs at 865p.

This follows news of planning approval for 928 bed development in the heart of Leeds bringing their Leeds portfolio up to 4,376.

This is bang on Unite's strategy of building scale in locations with high-ranking universities. Leeds is a major university town with a student population of 58,000 with Leeds and Leeds Becket having options on half of Unites' current capacity.

Unite shares have advanced 146p (c.20%) since I flagged up Unite's strong strategic focus on their university relationships last November so very pleased with the progress to date.

Regards Maddox

JohnWigg

Unite (LON:UTG) is the most prominent sector player, but the whole sector is pretty fragmented with, I'd say, four quoted opportunities;

Unite (LON:UTG) itself, as developer and renter;
Watkin Jones (LON:WJG) as 'builder to order' with orders for complete assets coming from institutions such as pension funds, where WJG offers to manage the assets;
GCP Student Living (LON:DIGS), which is based largely in London, is a REIT and has had great success thanks to management ability and geographics;
Empiric Student Property (LON:ESP), also a REIT, which has suffered a rather torrid time slince float. Whether management failings, overpaying or what, I don't know. A recovery plan is in place.

So how would UTG consolidate? One possibility would be to buy the wholde of ESP or some assets with a good fit. It's been suggested that ESP has been looking for a buyer, but no-one seems interested! How do you consolidate a sector where there are no sellers? Or, maybe, universities would be interested in selling owned properties?

PS: @ Maddox - I've just realised we've communicated on 'another place'. I wonder what you think about the sector as getting 'toppy'.

Hi JohnWigg,

There have been many billions of pounds worth of PBSA (purpose built student accommodation) property deals over the last few years. This has been as a result of financial institutions buying into this attractive sector. These buyers are the bluest blue chips like The Welcome Trust and Blackrock. But these have all been commercial sector deals - it's the University-owned student accommodation that is a big opportunity for Unite. It's a sector that's nearly equal in size to the commercial sector and I'm sure universities can find better use for the capital that is tied up in student halls of residence.

Unite are uniquely placed to compete for any deal that come up. They already have strong university relationships and unlike most of the other specialist players - have easier access to capital to fund the deals.

Q. Is the sector getting toppy? It depends on what you are comparing it to - so compared to gilts then no. This sector weathered the last global financial crisis extremely well - and that's a characteristic worth paying for (lower initial yield). Recognising of course, that unlike gilts fixed rate, UTG is growing both assets and yield.

So I expect that this sector will trade at a premium to NAV.

Regards, Maddox

7th Aug '18

Unite is now consistently trading at a premium to EPRA NAV (761p at 30 June) and hitting share price highs.

This is justified IMHO by the growth trajectory unite is on. They signed three University deals in the last period, namely Aston Student Village, Oxford Brooks and Kings in London. However, they are in discussion on a further six deals (totaling c, 4000 - 6000 beds). This in addition to the current development pipeline, addition of 3074 beds opening Sept 2018, and further (c. 6000 beds and growing) for 2019 - 2021.

So Unite gives a wonderful forward view of its base growth with the potential for more University partnership deals on top.

Cheers Maddox

Hi Maddox.
Interesting suggestion there. One sector player, Empiric Student Property (LON:ESP) has been a poor performer, and there were rumours last year that they were looking for a buyer.
UTG could well use equity (issued at a premium) to buy them, rather than debt. Alternatively, a lot of ESP's assets could be rubbish.
[I hold DIGS and WJG in this sector.]

Hi JohnWigg,
Yes an interesting thought - I dare say a deal could be done dependent upon the price. However, Unite are setting great emphasis on the quality of the assets they are holding and have been disposing and buying assets to make improvements. The intention is to have a critical mass of beds around the top universities.

If ESP sell it'll probably be to the highest bidder - probably a large Institution, about £2bn has been traded in H1. Whereas, Unite's differentiator and advantage is their University partnerships track record. Where a Uni looks to out-source or sell its student accommodation there will be a continuing relationship. So this probably gives Unite scope to negotiate a win/win deal - rather than have to pay top price.

Whilst, their share equity is currently cheaper than their debt - the two are moving in opposite directions. The debt cost will fall as they deploy newly agreed facilities whereas the dividend is increasing so I would expect them to use debt and move up the very conservative 27% loan-to-value ratio to finance any large deal. They have unsecured facilities already in place.

Regards, Maddox

10th Sep '18

Unite (LON:UTG) have sold 14 properties, 3436 beds, a combination of wholly owned, and from the two funds they manage (USAF and LSAV). The properties located in Plymouth, Huddersfield, Sheffield, Birmingham, Bristol and London. As a result of the disposal, Unite no longer has a presence in Plymouth or Huddersfield.

This disposal is in-line with their stated strategy to focus on building critical mass in key university towns and as a result their cost efficiency and quality of the portfolio has been enhanced. Raised £180.5m (UTG share £84.7m) and LTV now 25% (was 27%). Purchase yield 6.3% sold just below book value.

What is more significant is the further capacity this provides for University deals - I'm looking forward to see how this capital gets re-deployed.

Regards, Maddox

andrewdb

Held since '11.
I think " focus on building critical mass " == " building an economic moat " which sounds good to me.

mmarkkj777

Hi Maddox,

I came across Unite (LON:UTG) about 18 months ago. I really liked the business model but I have not yest invested in them, as I put them into the 'could be good in an otherwise stormy market' category.

Might be time to dust off my notes and have another look :-)

Hi Mark,

To respond to your turbulent market point, in the last Global Economic Crisis - student accommodation was the best performing real estate asset class - and you might like to read this article in Citiwire:

'Brexit won’t bother investors in student property, says GCP'

By Michelle McGagh 07 Sep, 2018

http://citywire.co.uk/investment-trust-insider/news/brexit-won-t-bother-investors-in-student-property-says-gcp/a1152526

Whilst featuring GCP the arguments apply equally well to Unite.

Many blue chip institutions have invested substantially in the sector such as the Welcome Trust and Black Rock. A feature that they particularly like is that it is uncorrelated to other sectors that whilst being different are all subject to the same market risk.

For example, in the event of a hard brexit sterling will decline making the UK a more attractive destination for foreign students; if the job market is difficult - get yourself better qualified; commercial property slumps - land becomes cheaper for other uses.

Now having said that, on the result of the Brexit vote Mr Market didn't appreciate these arguments and whacked Unite (LON:UTG) down alongside Commercial Property - you can see the blip in the chart.

Regards Maddox

20th Dec '18

At very long last Sajid Javid, The Home Secretary has published the White Paper proposals for the post-Brexit Immigration System. Obviously the more controversial proposals have taken the headlines, such as the £30k salary threshold debate, however there are some welcome proposals for UK Universities catering to foreign students:

"The White Paper proposals will also ensure there is no limit on the number of genuine international students, who can come to the UK to study. Proposals extend the time they can stay post-study to find employment to six months for those who have completed a bachelor’s or master’s degree and 12 months for those who have completed a PhD."

https://www.gov.uk/government/news/home-secretary-announces-new-skills-based-immigration-system

The UK has been taking a very hard line on foreign students by not allowing them, as other counties do, to stay on for a period to gain work experience after graduating. Essentially, they are a soft target towards reducing UK immigration numbers.

However, a The Home Office paper published last year on “exit checks” data – a proper count of all people who are actually known to have left the UK – found 176,317 – 97.4% – of 181, 024 international students from outside the EEA left on time. This itself is probably an underestimate as others in the remaining 2.6% might have also left but via routes not subject to exit checks, such as via Northern Ireland.

Foreign Students are estimated to contribute £25bn to the UK economy and play an important role in supporting the UK University Sector through the high fees they pay. Other countries' more welcoming attitude towards foreign students means that they are growing their numbers far more strongly than the UK. Hopefully, this White Paper's proposals will make the UK more attractive once more .

Regards Maddox

29th Jan '19

Unite provide additional updates on the progress of the two student property funds that they run.

The recent 9 Jan RNS provides the independent Quarterly Fund Valuation Report for these funds’ performance for the year to 31st Dec 2018.

The two funds are:
USAF – Unite own 25% - like-for-like asset value growth of 5.0% for the year; and
LSAV – Unite own 50% - like-for-like asset value growth of 8.4% for the year.

So, an excellent performance for the year, and obviously a very encouraging read-across to Unite's full year results to be reported on 27 February.

The current year trading has also "started strongly" with 67% rooms sold for the 2019/20 academic year that starts Autumn 2019.

With Brexit-deal, or no-Brexit deal Unite's investment case is looking compelling. I find Unite a very reassuring place to have one's money against a backdrop of economic and political uncertainty.

Regards, Maddox

3rd Mar '19

The full year 2018 results are as strong as expected. The highlight for me being the uplift in the dividend by 28% year-on-year to 29p. With the share price closing at 916p as I write the yield is 3.71% which is in its range of 3 - 4%. However, the advantage of buying into a share like Unite that is growing its income year after year and increasing the dividend pay-out is that on my historic cost of purchase I'm now getting an equivalent yield of over 15%. The much used description of a share like Unite as being a 'bond proxy' couldn't be more wrong in my opinion: It ignores the key attribute that these shares tend to have of increasing their payout whereas bonds don't.

Other key highlights:

EPRA earnings - +25%

EPRA eps - +13% (less due to share issue to buy properties)

EPRA NAV - +10% (following some disposals for cash re-investment)

The LTV is a highly conservative 29% with the cost of debt falling to 3.8% (4.1% - 2017) and destined to fall to 3.6% as they increase the debt to build-out their current forward development pipeline of 6,579 beds.

When this current pipeline (further additions will be made to it) Unite forecast an EPRA eps of 47p - 51p so a circa 38% - 50% uplift. As 85% of these earnings will be paid-out as dividends we are looking at 39.95p - 43.35p in divs and thus a projected share price of 1077p - 1168p (based on the current yield). On top of this there are prospective Unite's university partnership deals - that are taking longer to come to fruition than I had hoped.

I'd recommend anyone interested in Unite to look at their H2 Results presentation:

http://www.unite-group.co.uk/investors/reports

that gives excellent background information on the market. There is still a large under capacity of student accommodation, numbers are rising and supply is falling. All this underpins an optimistic outlook despite Brexit or further economic travails.

Regards Maddox

29th Jun '19

As I thought a large deal was in prospect - I didn't however think it was going to be this big! The news that Unite is in the late stages of taking over Liberty Life for c. £1.4bn is clearly a very significant deal.

We don't know the details but a few points to reflect upon:

aa) The price paid will around LL's NAV so no premium;

bb) This significantly scales up the student property management arm of Unite; and

cc) Unite's unique structure gives it substantial financial deal capacity.

On this last point Unite's structure of a property development and management company supported by two own managed property funds distinguishes it strategically from it's competitors, the funds are:

USAF £2.26bn – Unite own c.23%; and
LSAV £1.26bn – Unite own 50%.

The financial firepower that this structure provides is a key strategic advantage in what is likely to be a consolidating sector.

Regards, Maddox

11th Jul '19

A few select quotes from the Guardian today.....

'Applications from Chinese students to study at UK universities have gone up 30% since last year'

'The Ucas figures also revealed an increase in the number of British 18-year-olds applying for places, up 1% on last year to 275,520 despite a 1.9% fall in the overall 18-year-old population of the UK. EU applicants have also risen 1%, to 50,650 despite the Brexit uncertainty, and Ucas reported a record number of applicants from outside the EU at 81,340, an increase of 8%.'

hTTps://www.theguardian.com/education/2019/jul/11/chinese-students-applications-to-uk-universities-up-by-30

Market fundamentals appear strong, and this also highlights the defensive nature of this sub-sector of the property market.

Regards Maddox

9th Nov '19

I've been waiting for the CMA to sign-off on the takeover of Liberty Living. Now received, this is a huge step forward for Unite - the number one in the market taking over the number three. It consolidates Unite's position as the market leader and delivers a significant operational scale-up and with it the prospects of efficiency gains.

What I was somewhat surprised by was the quality of the Liberty Living property portfolio, focused similarly to Unite, on top-flight universities and how good the fit is with Unite's own portfolio. There is certainly no drop in quality as a result of this takeover.

One aspect where Liberty were performing better than Unite is half-term lets - filling vacant rooms when the students are at home or on holiday. So there may be a few learning points to be taken on board along with the portfolio.

The deal also brings Liberty's owner, Canada Pension Plan Investment Board ("CPPIB"), on-board as an investor. It is having deep-pocketed long-term strategic investors that gives Unite the fire-power for similar large deals. This is a huge differentiator from the other purpose-built student accommodation (PBSA)specialist developers and managers.

So a fantastic deal in a market that still exhibits positive demand and rental growth. This set against an increasingly worrying macro-economic back-drop. The un-correlated nature of this sector of the property market is a highly attractive characteristic. If, as seems possible, the Treasury feels the need to drop interest rates - our asset-backed cash machine will look ever more a safe haven for financial institutions' money.

Needless to say my Dec 2020 share price target of 1035p has been passed a year early (1135p as I post). So congratulations to all holders and I'm looking forwards to see how the portfolio integration proceeds and additional value is generated.

Regards Maddox

19th Feb '20

With the completion of the takeover of Liberty Living on 29 Nov an additional 72,6 million Unite shares were admitted to the stock market. This has thus lifted the market capitalisation significantly (Mkt cap on 16 Nov19 was £3.41bn (sp 1176p) on 7 Dec 19 mkt cap £4.49bn (sp 1234p).

This together with the subsequent share price appreciation has led Unite's market capitalisation to rise to £4,84bn currently - where it is knocking on the door of the FT100 index.

The next quarterly review of the FT100 constituents will take place on the 11 March - so just three weeks away. As things currently stand Unite is larger than the bottom nine firms in the FT100 but ranks 6^th from the top of the FTSE 250 index. So promotion is far from certain and Unite may just fall short and end up on the FT100 Reserve List.

On the other hand we may see a run-up in the share price as Financial Institutions position themselves to take advantage ahead of the Tracker Funds.

Anyway nice to have a nag in this derby!

Regards, Maddox

Andrew niven

i have been looking at this share , so thank you for your imput

4th Mar '20

Well it’s been a long couple of weeks in the market, so thought I'd better revisit my last post on 'UTG knocking on the door of the FT100'. When I wrote that post UTG's sp was 1336p and mkt cap £4.84bn. Now the sp is 1160p (down 13%) and mkt cap £4.2bn and UTG's chances of making the draft are looking far less likely.

UTG are now in ninth place from the top of the FT250 and now only larger than the bottom four firms in the FT100. So it appears that UTG have dropped disproportionately in this market correction triggered by Covid-19 virus fears.

Regards Maddox

25th Jun '20

Very interesting trading update and fundraising announced after market close last night. The timing of the release is usually an alarm signal. However, the trading update is highly positive in the circumstances:

'UK student demand is expected to be robust, reflecting the clear desire of young people to attend University, weaker employment prospects and fewer gap year opportunities for school leavers. The Company has growing visibility over 2020/21 income through 80% of beds either contracted or reserved. The Company is targeting occupancy of 90% for 2020/21, supported by nomination agreements expected on over 50% of beds.'

'We have seen an encouraging improvement in international reservations in recent weeks after a period of subdued sales. 2^nd and 3rd year students account for just under half of international sales, providing greater certainty over income.'

'We anticipate a c.15% reduction in income for the 2019/20 academic year, reflecting our decision to forgo rents for students who have chosen to return home for the summer term. Unite was the first corporate PBSA provider to offer students refunds on their summer term rents, reflecting our core value of doing the right thing for our customers, people and other stakeholders.'

'Overall, we expect 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).'

And every cloud has a silver lining, the £300m funds to be raised will be used to take advantage of opportunities created by Covid - and with enhanced returns.

'The Net Proceeds will allow the Company to pursue three additional schemes in central London and prime provincial cities for 2023/2024 delivery at a total development cost of approximately £250 million. They consist of two developments and one forward funded acquisition, which are currently under offer at yields on cost 50-75bps above pre-Covid-19 levels. The Company is targeting enhanced returns on new developments with yields on cost of 7.5% in London and 8.5% in provincial markets and 100 basis points lower for University partnerships. This reflects the Company's expectations for reductions in land and construction prices.'

No doubt, the sp fall yesterday will have been driven by FIs selling to raise funds to purchase new shares in the book-building. They have picked up shares at a bargain 870p a c.3.1% discount to the closing price that had fallen 37% on the day. It is a positive to see the eight Directors making purchases, with £50k investments by the CEO Richard Smith and CFO Joe Lister.

It would appear that Unite are going to emerge from this Covid Crisis stronger than they entered it.

Unite Students - look to consolidate the sector

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Maddox

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