Unite Students - look to consolidate the sector

Wednesday, Nov 29 2017 by
6

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 yearsHowever, 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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The Unite Group plc is a United Kingdom-based developer and operator of student accommodation. The Company provides a home for over 50,000 students in approximately 140 properties in over 28 of England and Scotland’s University towns and cities. It operates through two segments: Operations and Property. The Operations segment is responsible for the Company's approximately 140 properties, including those owned by its co-investment vehicles. The Property segment is responsible for its development and asset management strategy, and oversees its two co-investment vehicles. The Company rents its rooms both directly to students and to approximately 60 Universities across the United Kingdom. Its properties provide accommodation close to University campuses, transport and local amenities. It offers study bedroom, insurance, round the clock security, cleaning services and Wireless-Fidelity throughout its buildings. It also operates and runs approximately three funds and joint ventures. more »

LSE Price
970.5p
Change
0.4%
Mkt Cap (£m)
2,552
P/E (fwd)
24.0
Yield (fwd)
3.6



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17 Posts on this Thread show/hide all

Geomarker 7th Dec '17 1 of 17
2

Good post, but would be interested to know has Maddox arrived at a 17% pa return over the next three years?

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Maddox 8th Dec '17 2 of 17

Hi Geomarker,

I don't normally reveal my projections - just too risky, invariably they are going to be wrong. But I find that working up some projections is a good test of understanding of the business and potential returns - good or poor. However, UTG has wonderful visibility as to future asset growth as their development pipeline is secured three years ahead and their rental yield growth is also consistent.

I've thus based my calculations on UTG's stated projected EPRA earnings growth through to 2020; of which, now as a REIT 75% will be paid out as dividends. Assuming that Mr Market's yield expectations remain at c.3.4% percent I've then projected the share price gain. Clearly, this is highly subjective and the future is uncertain so of illustrative value only.
regards, Maddox

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Maddox 9th Dec '17 3 of 17

Just want to highlight that I think this (RNS 8 Dec 17) is one of the eight University deals that Unite had under evaluation:

'UNITE EXTENDS UNIVERSITY PARTNERSHIPS WITH OXFORD ACQUISITION

Unite Students, the UK's leading manager and developer of student accommodation, has exchanged contracts on a development site in Oxford. It has, in parallel, agreed commercial terms with Oxford Brookes University for a 25-year nominations agreement covering the site, which will extend its partnership with Unite to 1,350 beds. Planning consent for the development has been granted subsequent to exchange.

The new development is expected to provide 885 new beds and will be delivered for the 2019/20 academic year with total development costs expected to be around £75 million. Anticipated returns are in line with our stated targets for University Partnerships.'

Mr Market appears to like this news with Unite up 21.5p (+2.93%) at 756.50p.

Regards Maddox

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Maddox 9th Jan '18 4 of 17

Unite have issued a strong trading update and positive outlook statement today that supports the recent momentum we’ve seen in the share price. The full year results to 31st Dec 2017 will be out 21st Feb.
As well as Unite’s wholly owned student digs Unite runs two student property funds of which they own a percentage. Today’s RNS also provides the independent Quarterly Fund Valuation Report for these funds’ performance for the year to 31st Dec 2017.
The two funds are:
USAF – Unite own 23% - like-for-like asset value growth of 5.6% for the year; and
LSAV – Unite own 50% - like-for-like asset value growth of 9.2% for the year, I presume benefitting from the Aston deal.
As a result of this Unite expects to receive an additional performance bonus of c.£3m. So it’s safe to say the full results are going to be strong in February. This will also be Unite’s first year as a REIT and will now have to pay-out 75% of EPRA earnings (bonus excluded) as dividends. I’m thus expecting to see a nice uplift in the 2H dividend - target 23p for the year up 25%+ on the previous year.

Since I started this thread on 29th Nov the share price is up +76p 10.3% to 811p. Nevertheless, there are good prospects for more to come. The base investment case is underpinned by the pipeline of 7,500 new beds to be delivered by 2020.

On top of this is there is potential for accelerated growth through University deals, like Aston and Oxford Brooks, as I highlight in my article. The impact of a good deal can I think be seen in the heightened performance of the LSAV fund over that of the USAF in the figures above.

With a loan to value below 32% currently, a new £500m loan and with their fund support they have plenty of capacity to do similar deals.

Regards, Maddox

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Maddox 8th Jun '18 5 of 17

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

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JohnWigg 8th Jun '18 6 of 17
1

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'.

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Maddox 8th Jun '18 7 of 17
1

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

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Maddox 7th Aug '18 8 of 17

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

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JohnWigg 7th Aug '18 9 of 17

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.]

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Maddox 7th Aug '18 10 of 17

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

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Maddox 10th Sep '18 11 of 17
1

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

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andrewdb 10th Sep '18 12 of 17
1

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

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mmarkkj777 10th Sep '18 13 of 17
1

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 :-)

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Maddox 10th Sep '18 14 of 17

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

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Maddox 20th Dec '18 15 of 17
1

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

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Maddox 29th Jan 16 of 17

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

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Maddox 3rd Mar 17 of 17
1

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

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