REG - Unite Group PLC - Final Results <Origin Href="QuoteRef">UTG.L</Origin> - Part 1

UniteAnnouncement

22/02/2017 07:06

RNS Number : 4866X
Unite Group PLC
22 February 2017
PRESS RELEASE
22 February 2017
THE UNITE GROUP PLC
("Unite Students", "Unite", the "Group", or the "Company")
FULL YEAR RESULTS FOR THE YEAR TO 31 DECEMBER 2016
The Unite Group plc, the UK's leading manager and developer of student accommodation, announces its full year results for the year ended 31 December 2016.
HIGHLIGHTS
Continued delivery of strong financial performance driven by operational focus
Adjusted EPRA earnings up 24% to 61.3 million or 27.7p (2015: 49.5 million, 23.1p). Including the yield element of the USAF performance fee, EPRA earnings 62.7 million (2015: 61.3 million)
Profit before tax 201.4 million (2015: 388.4 million), generating basic EPS of 101.3p compared to 164.2p in 2015 due to lower level of revaluation surplus as a result of yield compression in 2015
Increased dividend pay-out ratio to 75% of EPRA earnings (excluding USAF performance fees). Final dividend declared up 26% to 12.0p (2015: 9.5p). Full year dividend of 18.0p (2015: 15.0p)
Like-for-like rental growth of 3.8% for the full year (2015: 3.8%)
EPRA NAV per share up 12% to 646p (2015: 579p) making, together with dividends declared, a total accounting return of 15% for the year
LTV at 34% with net debt at 776 million (2015: 35% and 731 million) and cost of debt reduced to 4.2% (2015: 4.5%)
Earnings growth visibility underpinned by rental growth, sector fundamentals, efficiencies and high quality development programme
Operational portfolio increased to 49,000 beds valued at 4.3 billion; Unite share 2.1billion (2015: 46,000 beds, valued at 3.8 billion; Unite share 1.8 billion)
Student number growth, Unite's operational capability and high quality University relationships support occupancy and rental growth outlook of 3.0-3.5% in 2017
Delivery of PRISM supporting margin improvement to 73.1% and overhead efficiency to 40 basis points (2015: 72.5% and 48 basis points). On track to deliver both targets of 75% and 25-30 basis points of gross asset value by the end of 2017
High quality development portfolio of 7,000 beds with development yield of 8.4%, together with rental growth, could add 15 to 20p to earnings over the next few years
Acquisition of Aston University's 3,100 bed on-campus portfolio for 227 million (113 million on a see-through basis) in February 2017 will contribute to earnings growth and further enhance portfolio quality
Outlook remains positive
Unite's brand, operating system, quality portfolio, University relationships and sector fundamentals underpin future performance
Reservations for 17/18 academic year at 75%, a record level for this time of year (2015: 67%)
University intake continues to grow with record intake in 2016, with high to mid-ranked Universities performing most strongly with acceptances up 3%
EU referendum is not expected to significantly impact student numbers and supports Unite strategy to focus on its relationships with high to mid-ranked Universities
Further opportunities to extend development pipeline and growth through University relationships
Conversion to REIT status on 1 January 2017 supports earnings and dividend growth
Richard Smith, Chief Executive of Unite Group, commented:
"These are another excellent set of results that reflect the quality of our people, properties and service execution that sets us apart in our sector. Looking forward, we will maintain the quality of our portfolio through development and also strategic acquisitions such as our recent purchase of Aston Student Village, our first on-campus. Students and Universities remain our core focus and we will continue to invest in our operational capabilities, providing excellent service and ensuring consistently high satisfaction levels. This strategy, plus the ongoing strength of UK Higher Education, student numbers and the demand for beds means we are confident in further growth." 
PRESENTATION
There will be a presentation for analysts this morning at 10:30. The live webcast will be available at: www.unite-group.co.uk. Please contact Bell Pottinger for further details. Dial-in number for the presentation: 020 3059 8125.
For further information, please contact:
Unite Students
Richard Smith / Joe Lister / Paul Richmond
Tel: +44 117 302 7005
Bell Pottinger
Victoria Geoghegan / Nick Lambert / Elizabeth Snow
Tel: +44 20 3772 2562
CHAIRMAN'S STATEMENT
2016 has been a landmark year for Unite Students for several reasons: celebrating our 25th year, welcoming our 500,000th customer and providing homes for 49,000 students, our largest ever intake in a single year. We also achieved a Gold accreditation in the 'Investors in People' people management standard, placing us in the top tier of businesses. 
Performance has again been strong, with a total accounting return of 15% and growth in Adjusted EPRA earnings to 61.3 million, up 24%. Profit before tax was 201.4 million which includes property revaluations of 136.3 million (2015: 388.4 million and 324.6 million respectively). As a result of this strong performance, we are increasing our dividend pay-out ratio to 75%, a year ahead of schedule and declaring a final dividend of 12.0p. This adds up to a total of 18.0p for the full year, an increase of 20% year on year.
Unite Students is a service brand and the strong performance we have delivered for our customers, University partners and shareholders is only possible because of the talent and hard work of our teams across the business. On behalf of the Board, I would like to thank them for another excellent year.
On 31 May, Mark Allan stepped down as Chief Executive, a role he held since 2006. Mark played a key role in the success of Unite Students and on behalf of the Board and everyone at Unite, I would like to thank him for his service and wish him well for the future.
Richard Smith has taken over as Chief Executive, having been the Managing Director of our Operations business for the last five years, successfully leading the transformation of our service delivery and implementation of our PRISM operating platform.
A core part of our recent success has been our consistent strategy and we will continue to focus on its three main elements: to deliver great service to our students and University partners, to operate brilliant buildings and to maintain high quality earnings and a strong capital structure. As a result of our continuing progress in these areas, we have successfully transitioned to become a REIT, effective from 1 January 2017, and we believe this is consistent with our focus on income and capital discipline.
The outlook for our market remains positive with structural growth being supported by the strength of the world renowned UK Higher Education sector, increasing participation rates, the internationalisation of Higher Education and the shortage of housing in the UK.
The impact of Brexit is starting to become clearer and we do not expect it to have a material impact on student numbers. Our high quality portfolio, University relationships and market-leading operating platform leave us well placed to continue performing strongly in the years to come.
CHIEF EXECUTIVE'S REVIEW
In my first year as Chief Executive, I am pleased to report another strong set of results for the year ending 31 December 2016. We have maintained our focus on delivering sustainable growth in recurring profits and cash flow in the long term, and delivering a Home for Success to all of the students who live with us. We do this by providing great service and operating brilliant buildings that students and Universities choose. We also ensure investment discipline to maintain a strong capital structure and deliver high quality earnings.
Performance in 2016 was driven by another year of strong growth in EPRA earnings, rental growth and development profits, combining to deliver a total accounting return of 15%. Adjusted EPRA earnings (adjusted to exclude the yield related element of the USAF performance fee) increased by 24% to 61.3 million and now represents one-third of the total shareholder return. As a result of the significant growth in earnings and the positive outlook for further earnings growth, we are declaring a final dividend of 12.0p (2015: 9.5p), making a dividend per share of 18.0p for the full year (2015: 15.0p), an increase of 20% year on year.
Financial highlights
2016
2015
EPRA earnings
62.7m 
61.3m
Adjusted EPRA earnings
61.3m
49.5m
Adjusted EPRA EPS
27.7p
23.1p
Profit before tax
201.4m
388.4m
Basic EPS
101.3p
164.2p
Dividend per share
18.0p
15.0p
Total accounting return
15%
37%
Loan to value (LTV)
34%
35%
We are continuing to focus on growing earnings in absolute terms and also as a proportion of our total return. This is driven by our ability to continue growing rental levels on an annual basis, the delivery of cost efficiencies and from the completion of our high quality development pipeline.
Our PRISM operating platform, which became fully operational in 2016, provides us with a unique capability to drive value from our portfolio through scale efficiencies and revenue management, supporting our ongoing income focus.
Since the year end, we have completed two important strategic initiatives with the acquisition of a 3,100-bed, on-campus portfolio at Aston University and also the sale of a regional portfolio, which together improve our portfolio quality and focus on the best Universities.
The business completed its planned conversion to become a REIT on 1 January 2017. This transition supports our continued focus on earnings, capital discipline and commitment to distribute earnings to shareholders. As a result of the strong performance and positive outlook, we have accelerated our increased pay-out ratio to 75% of Adjusted EPRA earnings (excluding USAF performance fees) a year ahead of schedule.
Delivering great service to our students and University partners
We provide a high quality and secure living environment where young people can develop academically and socially and make the most of their time at University. 
For many people, University is where the foundations of their career are laid. We understand that a University education is a significant investment for young people, and believe that no-one should miss out simply because of their personal circumstances. But, for every generation of students, University is more than simply a stepping stone to a job. It moulds them as individuals and provides a critical bridge to adulthood, where they can learn the interpersonal skills they will need for life. We believe that where a student lives has a material impact on their academic and social experience of University and, ultimately, their lives. We therefore aim to create an environment which is caring and supportive, but also allows our students to express their natural desire for independence.
We recognise that affordability of Higher Education is an important consideration and therefore we offer a variety of accommodation at different price points to students with the majority of our accommodation focused at the mid-range price point for purpose-built student accommodation. 65% of our customers are from the UK and we continue to attract growing numbers of second and third-year students, who now make up one-third of our customer base. We will continue to focus on providing our customers with excellent service and an experience that they value.
Our focus on the student experience is completely aligned to the aims of our University partners, for whom student experience is a key measure. With students spending more time in their accommodation than on campus, we can demonstrate to Universities how we can support them and their ambitions. This focus has led to 58% of our accommodation being let to Universities through nominations agreements. With an average remaining life of 6 years, our nominations agreements provide income and rental growth certainty on over half of our revenue. In turn, this provides protection from any potential changes to student numbers, and has helped to deliver average occupancy of 98% and rental growth of 3.5% over the last five years.
Students too, expect more from their accommodation and this year, we maintained customer service satisfaction levels - a key performance indicator for us - at high levels, placing us on a par with some of the best European service companies. We also secured excellent results in our independently assessed employee effectiveness and University trust scores. The delivery of great customer service to students and Universities translates into our strong financial performance, delivering occupancy of 98% and rental growth of 3.8% in 2016 (2015: 98%, 3.8%). With our new operating system, PRISM we have also delivered further improvements to our NOI margin and overhead efficiency measure.
Our people, University relationships, the quality of our portfolio, PRISM and the broader operating platform set us apart from the other operators in the sector and will support the ongoing growth in our portfolio, service levels and financial performance.
Operating brilliant buildings
Our strategy is built around the quality, location and scale of our portfolio. We aim to operate buildings that are located in and around the Universities with the best prospects. We believe that our focus on high quality Universities across the UK is the best strategy to achieve continued high levels of occupancy and rental growth. We generate 82% of our income from customers attending high and mid-ranked Universities, increasing to 86% on completion of our development pipeline.
During 2016, we opened 3,100 new beds, invested 12 million in asset management and refurbishment programmes and sold 114 million of assets (on a see-through basis). Taking into account these activities together with valuation movements, the value of our investment portfolio (including our share of co-investment vehicles) increased by 14% to 2.1 billion as at 31 December 2016 and is valued at an average portfolio yield of 5.45% (2015: 1.8 billion and 5.55% yield).
We also made excellent progress with our development pipeline during the year. We completed five new buildings over the summer and secured an additional four new development schemes, which increases our secured development pipeline to 7,000 beds for delivery over the next three years. Construction of all our 2017 openings is progressing in line with plans, planning consents and build contracts are in place for all of our 2018 deliveries and planning permission is in place for all but one of our 2019 schemes.
We are continuing to see attractive development opportunities in strong University markets and we plan to invest selectively in target markets to enhance portfolio quality and deliver target returns. Whilst demand for student accommodation remains strong in London, the fall in land prices over the last 12 months has not been sufficient, when combined with new planning requirements for affordable student housing provision, to enable us to achieve our target returns. We will continue to monitor the situation for opportunities.
The anticipated yield on cost of our secured pipeline is 8.4% and prospective returns on new schemes remain attractive at 8.0-8.5%. The secured development pipeline is highly accretive and remains a significant component of our future earnings growth and could contribute 12-14 pence per share to EPRA earnings once built out.
We continue to target acquisitions of completed assets and portfolios that enhance the quality of our portfolio and the earnings profile of the business. These acquisitions are targeted through our co-investment vehicles due to their lower cost of capital, allowing us to generate enhanced returns through our asset management and acquisition fees. USAF has acquired two assets under development which will be opened for the 2017 academic year. These 'forward fund' assets represent 404 beds, in Oxford and Edinburgh and were purchased for a combined total of 56 million. Following the year end, LSAV acquired a 227 million portfolio located on the Aston University campus. This exciting development allows us to build a strategic relationship with a high-ranked University and to leverage our PRISM operating system to deliver strong financial returns.
Disposals remain an important part of our strategy and we will continue to recycle assets out of our portfolio to ensure that we increase exposure to the best Universities in the UK, and also to generate capital to invest in further development activity and exciting opportunities such as the Aston Student Village acquisition. During 2016, we sold 114 million of assets (on a see-through basis) including the sale of two assets to USAF. These assets were sold in line with book valuations. We intend to sell 150-200 million (Unite share) of assets during 2017 to take advantage of the ongoing strength in the investment market and to ensure that we maintain a strong and flexible balance sheet as we progress our development pipeline. We have made good progress already in 2017, having completed the sale of a 4,175-bed regional portfolio in February for 295 million (Unite share 102 million) in line with book value.
Maintaining high quality earnings and a strong capital structure
We have maintained full occupancy across our portfolio (98%) with rental growth of 3.8%. With 58% of this income underpinned by nominations agreements, we have a high level of visibility in the ongoing occupancy and rental growth outlook of the portfolio. In addition to revenue growth, a focus on efficiency has resulted in further improvements in our NOI margin up to 73.1% (2015: 72.5%), and in our overhead efficiency revenue which shows that our overheads, net of management fees, now represents 40 basis points of gross asset value (2015: 48 basis points). We remain confident about our ability to make further efficiency gains and to deliver our targets of 75% and 25-30 basis points by the end of 2017.
Unite's share of net debt grew by 45 million to 776 million in 2016. Our capital expenditure programme (Unite share 146 million) was majority funded by our disposal programme and retained earnings. We maintained our LTV within our target range in the mid-30% level at 34% (2015: 35%) as development profits and rental growth outstripped the increase in net debt. Our net debt to EBITDA ratio is 6.5 (2015: 6.9), again within our target level which we intend to maintain.
Interest rates have remained at low levels throughout 2016, and we have continued to take advantage of these historically low rates both on new debt facilities and through entering into forward starting interest rate swaps in respect of future borrowing requirements of our secured development pipeline. As a result of these activities, our average cost of debt has fallen to 4.2% from 4.5%. We expect it to fall a little further over the next few years as forward starting swaps becomes effective. At these levels, the spread to ungeared development yields and investment yields remains significant.
The Group's conversion to REIT status reflects the consistency and quality of the earnings profile and its conservative financing strategy. The Group will ensure that the balance of business, gearing ratios and dividend pay-out levels remain within the guidelines set out within the REIT regime.
Market and strategy
The outlook for the student accommodation sector remains positive, with structural factors continuing to drive the demand:supply imbalance in the University markets in which we operate. The UK Higher Education sector is recognised globally for the strength of its Universities and contribution that it makes to research, innovation, talent development and the UK economy more broadly. The UK is the second most popular destination for international students and has 18 out of the world's top 100 Universities and 47 of Europe's top 200 Universities. We expect the UK Higher Education sector to maintain its global standing and reputation.
The number of applicants and the number of students accepted into courses in 2016 was again at record levels at 725,000 and 540,000 respectively (2015: 710,000 and 530,000), driven by growth in demand from both UK and international students. With applicants outstripping the places offered by Universities by 185,000, the sector is well placed to withstand any potential reductions from UK demographics or the impact of the UK leaving the EU.
Following the removal of the student number cap in 2015, the Higher Education sector is facing further change with the introduction of the Teaching Excellence Framework (TEF) in May 2017. This will provide students with greater visibility of the quality of teaching at Universities and also allow Universities to increase fees in line with inflation if they meet certain criteria. We expect the TEF to have a significant impact on the attractiveness of Universities, particularly to UK students, and we are well placed to respond to changes resulting from this new information.
The gap between the number of applicants and the number of University places could be reduced by external factors, including the potential impact of the EU referendum on student numbers. Since 2015, a demographic trend has seen a reduction in the number of 18-21 year olds, affecting the next four years. Early applications data in January 2017 shows a 5% reduction in applicants for the 2017/18 academic year. However, we expect that the 185,000 surplus of applicants over places and the removal of the cap means the number of students accepted onto courses will not be materially impacted, and we expect the high and mid-ranked Universities to recruit more students than those at the lower end of the league tables.
The qualities of the student accommodation sector have attracted significant levels of capital investment over the last three years with over 11 billion of investment activity. This increased investment activity has also seen the level of new supply increase and the total number of purpose-built beds to increase to 250,000 beds (14% of the UK's student population). The outlook for new supply suggests that the rate of new supply will continue at a similar rate of around 20,000-25,000 over the next two years. However, a significant proportion of the new beds are focused on the upper end of the price range which will have a minimal impact on our type of accommodation.
Furthermore, our exposure to changes in student numbers is mitigated by our high quality University relationships and nominations agreements and therefore we remain confident that well-located, mid-range, direct-let student accommodation will be able to maintain high levels of occupancy and rental growth.
Outlook
Building on a period of consistent strong performance, and supportive market fundamentals, the Group remains well placed to deliver sustainable earnings growth in the years ahead. Our development pipeline and operational expertise provides good visibility over the future rental growth and increasing recurring earnings. Our portfolio is focused on stronger Universities, plus our highly scalable operating platform and strong brand leaves us well placed to extend our market leading position.
Despite the broader macro uncertainties created by the EU referendum, the demand:supply outlook for student accommodation remains in our favour, and we will look to benefit from opportunities to extend our development pipeline, grow on-campus accommodation and strengthen University relationships. With this backdrop, a strong balance sheet and our new REIT status, we are confident that the business remains well placed to deliver highly attractive shareholder returns.
OPERATIONS REVIEW
The Group continues to report on an IFRS basis and to also present its performance in line with best practice recommended by EPRA. The Operations and Property reviews focus on EPRA measures as these are our key internal measures and aid comparability across the real estate sector.
Sales, rental growth and profitability
The key strengths of our operating business are our people, our PRISM operating platform, the strength of our brand and the strength of our relationships with Universities. We have continued to build on these strengths throughout 2016, resulting in a 11.8 million, 24% increase in Adjusted EPRA earnings to 61.3 million compared to last year (2015: 49.5 million). This growth has again been driven by high occupancy, rental growth and the impact of portfolio movements as well as further operational efficiencies and ongoing cost discipline.
Summary EPRA income statement
 2016
m
 2015
m
Unite's share of rental income
159.1
144.3
Unite's share of property operating expenses
(42.8)
(39.8)
Net operating income (NOI)
116.3
104.5
NOI margin
73.1%
72.5%
Management fees
14.0
12.0
Operating expenses
(23.1)
(21.9)
Finance costs
(45.9)
(48.1)
USAF acquisition and net performance fee
6.9
22.0
Development and other costs
(5.5)
(7.2)
EPRA earnings
62.7
61.3
Yield related element of performance fee
(1.4)
(11.8)
Adjusted EPRA earnings
61.3
49.5
Adjusted EPRA EPS
27.7p
23.1p
* A full reconciliation of Profit before tax to EPRA earnings is set out in note 2.2 of the financial statements
The Group's share of rental income has increased by 14.8 million, up 10%, as a result of new openings and sustained rental growth. NOI margin improved to 73.1% (December 2015: 72.5%), reflecting further operating efficiencies that were driven by the implementation of our new PRISM operating platform during 2016. PRISM provides us with the ability to differentiate ourselves from others, driving efficiencies through the use of technology which enables us to provide enhanced levels of service to our customers. We maintain our expectation that NOI margins will improve towards 75%, although balancing margin growth and service level enhancement will remain our overriding priority.
We are now managing 49,000 beds compared to 46,000 at 31 December 2015. Alongside this increase in beds there has been a growth in overheads of 1.2 million, driven mainly by depreciation costs associated with the new PRISM system, and we expect a further small increase of depreciation costs in 2017. Recurring management fee income from joint ventures increased by 2.0 million to 14.0 million (2015: 12.0 million), as a result of the growth of assets under management in USAF and LSAV. In addition to the recurring asset management fees, a further 6.9 million of net USAF performance and acquisition fees were generated (2015: 22.0 million). Our key overhead efficiency measure (total operating expenses less management fees as a proportion of Unite's share of property value) continues to improve and now stands at 40bps (December 2015: 48bps), and we remain focused on our target of 25-30bps by the end of 2017 based on current yields.
The 6.5 million USAF net performance fee is payable in units and is based on USAF's cumulative total return at 31 December 2016. The component of the fee that relates to yield movement has been excluded from Adjusted EPRA earnings purposes to reflect a normalised level of earnings. The operational element of the performance fee is driven by USAF's income and rental growth performance and is not expected to significantly add to our earnings performance going forward given the current valuation yields, gearing levels and rental growth outlook.
Finance costs decreased to 45.9 million (2015: 48.1 million). An increase in net debt of 45 million to 776 million (2015: 731 million) was offset by a lower average cost of finance of 4.2% (2015: 4.5%) as we have added new debt facilities at lower average rates, taking advantage of the historically low cost of debt. In addition, the increase in net debt has been driven largely by spend on development activities which has in turn lead to an increase in the amount of interest that is capitalised into development schemes to 5.9 million, up from 2.7 million in 2015. We expect the level of interest capitalisation to remain at around this level given the ongoing level of development activity in 2017. Development (pre-contract) and other costs fell to 5.5 million (2015: 7.2 million), reflecting the levels of site acquisition in the business, the earnings impact of share based incentives and our contribution to our charitable trust, the Unite Foundation.
Occupancy, reservations and rental growth
Occupancy across Unite's portfolio for the 2016/17 academic year stands at 98% and like-for-like rental growth of 3.8% was achieved on our stabilised portfolio. We have continued to grow the proportion of beds let to Universities with 58% of rooms under nominations agreements, up by 5,000 beds over the last three years. Enhanced service levels and our deep understanding of student needs have resulted in longer term and more robust partnerships with Universities.
We expect the proportion of beds let to Universities to remain at or around this level in the future. This balance of nominations and direct-let beds provides the benefit of having income secured by Universities, as well as the ability to offer rooms to returning students and to determine market pricing on an annual basis. On average, rents on nominations rooms are c.5% below direct let equivalents and, based on our recent experience with new agreements, there is an opportunity to close this discount in the coming years.
Reservations for the 2017/18 academic year are encouraging, at 73% (67% at the same point last year) as a result of our continued focus of working alongside the UK's best Universities as well as our local presence in China building relationships with Chinese Universities. This structural growth within the cities we operate, together with our differentiated service offering, provides us with further confidence in occupancy and rental growth for the 2017/18 academic year which we expect to be in the region of 3.0-3.5%.
Home for Success
Our Home for Success investment programme provides us with a real point of differentiation to other providers of student accommodation. The programme, which was initiated in 2014, generated significant enhancements in our operating platform, the establishment of communal study and relaxation spaces that our customers have told us that they want and the development of a sense of home within our properties. These factors, together with our service levels, student insight, prime locations and mid-market price points, make us stand out for students and Universities.
Investment in people, technology and relationships
Satisfaction with service and the strength of our relationships with Universities has been maintained at high levels as both students and Universities benefit from the investments that we are making. The final elements of PRISM were delivered in 2016, providing full online viewing and booking functionality alongside enhanced maintenance service levels and revenue management functionality. We will continue to invest in and evolve this platform to maintain our sector leading advantage in this area.
We have continued to invest in our digital capabilities, focusing on the student experience. In 2016, this has seen us deliver further enhancements to our student-focused apps and our website, a portfolio-wide communications portal to drive engagement and to help students access the information they need to support them during the course of the academic year. Our apps and digital platforms provide students with a hassle free solution to every day concerns, provide them with the support they need and so allow them to focus on their studies and time at University.
Developing our teams remains a priority for us and we have implemented new leadership programmes across the whole organisation over the past two years. These programmes ensure that we are providing our teams with the training required to deliver excellent customer service as well as developing their careers, and they have been an integral part of our successful attainment of Investors in People Gold status in 2016.
We also continue to invest meaningfully in our Higher Education sector relationships. Our Universities Partnerships and Engagement team is dedicated to building strong working relationships with key University partners, and this approach has seen us incorporate University requirements into new developments and driven the growth in the number of beds under nominations agreements..
In China, our marketing office is now fully operational and our local online presence has been established. We have also started to create meaningful relationships with both local and British Universities in China, as well as providing important support to our Chinese customers before they travel to the UK and to their parents while their children are overseas. We are confident that this investment will deliver long-term benefit to the business as well as to Chinese students and UK Universities.
PROPERTY REVIEW
EPRA NAV growth
EPRA NAV per share increased by 12% to 646 pence at 31 December 2016, up from 579 pence at 31 December 2015. In total, EPRA net assets were 1,557 million at 31 December 2016, up from 1,394 million a year earlier.
The main factors behind the 67 pence per share growth in EPRA NAV per share were:
The growth in the value of the Group's share of investment assets (+34 pence), as a result of rental growth (+26 pence) and yield compression (+8 pence)
The value added to the development portfolio (+21 pence)
EPRA earnings for the period (+25 pence)
Dividends paid of 14 pence reduced NAV
Looking forward, our portfolio is well placed to deliver continued value growth. Our focus on the strongest University locations underpins rental growth prospects and we will continue to deliver meaningful upside from our development activity. In total, our secured pipeline is expected to deliver 43 pence per share of NAV uplift and 13 pence of earnings per share once completed.
Property portfolio
The valuation of our property portfolio at 31 December 2016, including our share of gross assets held in USAF and joint ventures, was 2,277 million (31 December 2015: 2,065 million). The 212 million increase in portfolio value (Unite share) was attributable to:
Capital expenditure on developments of 146 million and 12 million on investment assets relating to refurbishment and LED installations
Disposals of 114 million
Valuation increases of 136 million on the investment and development portfolios, with like-for-like rental growth of 3.8% being generated on the stabilised portfolio
Increased share of USAF of 32 million, as a result of the performance fee earned in 2015
Summary balance sheet
2016 m
2015 m
Wholly owned m
Share of Fund/JV m
Total
m
Wholly owned m
Share of Fund/JV m
Total
m
Rental properties
1,062
1,023
2,085
1,024
811
1,835
Properties under development
185
7
192
150
80
230
1,247
1,030
2,277
1,174
891
2,065
Adjusted net debt
(432)
(344)
(776)
(448)
(283)
(731)
Other assets/(liabilities)
(15)
(14)
(29)
(5)
(18)
(23)
Convertible bond
85
-
85
83
-
83
EPRA net assets
885
672
1,557
804
590
1,394
* A reconciliation of the IFRS balance sheet to EPRA net assets is set out in section 2.2 of the financial statements
The proportion of our property portfolio that is income generating is 92%, up from 89% at December 2015, with 8% now under development. With the completion of the LSAV development pipeline, the majority of development activity relates to wholly-owned assets. We will continue to manage the development weighting of our balance sheet and expect it to remain at around these levels, well within our internal cap of 20% going forward.
Unite investment portfolio analysis at 31 December 2016
USAF
LSAV
Wholly owned
Lease
Total
Unite share
London
Value (m)
351
965
425
-
1,741
988
Beds
2,014
5,861
1,989
260
10,124
47%
Major provincial
Value (m)
1,584
44
440
-
2,068
826
Beds
20,656
331
5,914
2,577
29,478
40%
Provincial
Value (m)
322
-
197
-
519
271
Beds
4,804
-
3,253
1,059
9,116
13%
Total
Value (m)
2,257
1,009
1,061
-
4,327
2,085
Beds
27,474
6,192
11,156
3,896
48,718
100%
Unite ownership share
23%
50%
100%
-
Unite ownership (m)
519
505
1,061
-
2,085
The investment portfolio (see through) is split between London (47%) and the rest of the UK (53%), broadly in line with previous years. The regional focus of our development pipeline means that the London weighting is likely to fall to around 35% as the portfolio is built out.
Student accommodation yields
The level of transactions in the student accommodation sector has remained high in 2016 following the unprecedented levels seen in 2015, with over 3 billion of assets trading during the year. The majority of buyers have been supported by global institutional capital. An element of uncertainty in the few months following the EU referendum in June was replaced with confidence in the market with a high volume of portfolios and assets trading in the second half of the year.
As a result of the investor appetite and subsequent transactions, there has been a modest level of yield compression across the sector. This yield compression has been reflected in our portfolio and the average yield (on a see-through basis) at 31 December 2016 was 5.45%, an inward movement of nine basis points over the year.
Indicative valuation yields
31 December 2016
31 December 2015
London
4.5 - 5.0%
4.5 - 5.25%
Prime provincial
5.25 - 5.75%
5.35 - 5.8%
Provincial
6.0 - 6.5%
6.0 - 6.5%
Development activity
Development activity continues to be a significant driver of growth in NAV and future earnings. We are continuing to see opportunities to selectively secure sites for delivery in 2019 and 2020 in strong regional locations alongside high quality Universities within our target range of 8.0-8.5% yield on cost. Returns on potential new projects in London still remain below our hurdle rate of 7.0% due principally to higher alternative use values for prospective sites and planning levies, and we have not seen the correction in land prices that were anticipated following the EU referendum.
2016 and 2017 completions
We completed five schemes during 2016 in line with budget and programme. Over 70% of these beds are let to Universities under nominations agreements for the 2016/17 academic year, with an average duration of 10 years.
The 2017 pipeline is progressing well. We are on track to deliver three wholly-owned schemes in Edinburgh, Liverpool and Coventry and, in USAF, two forward funded developments in Oxford and Edinburgh, adding a total of 2,200 beds. We expect all of the schemes to be fully let for the 2017/18 academic year.
Regional development pipeline
During the year, we have continued to grow our 2018 and 2019 regional pipeline and have now secured a total of eight schemes which are expected to deliver approximately 4,800 beds in addition to our ongoing 2017 projects. All new regional developments are being undertaken wholly on balance sheet and prospective returns for the secured pipeline are very attractive at an average 8.5% yield on cost.
Planning is now in place on all but one of the schemes in the pipeline. During the year, we have reorganised the phasing of deliveries in 2018 and 2019, with Aberdeen and Bristol being pushed back to 2019 and Birmingham and Sheffield accelerated to 2018. This will ensure a balanced level of activity across the two years.
Secured development pipeline (wholly owned)
Secured beds
Total completed value
Total development costs
Capex in period
Capex remaining
Forecast NAV remaining
Forecast yield on cost
No.
m
m
m
m
m
%
2017 completions
St Leonards
Edinburgh
581
64
41
15
13
9
9.5%
Millennium Point
Coventry
391
34
24
12
12
4
8.8%
Tara House
Liverpool
776
65
46
24
13
6
9.3%
2018 completions
Newgate Street
Newcastle
575
46
37
7
29
8
8.5%
Brunel House
Bristol
232
28
21
1
10
5
8.5%
Chaucer House
Portsmouth
484
41
33
6
26
6
8.0%
St Vincent's
Sheffield
545
46
36
1
35
10
8.2%
International House
Birmingham
586
48
38
1
37
11
8.0%
2019 completions
Skelhorne
Liverpool
1,085
92
73
14
60
16
8.0%
Old BRI1
Bristol
706
93
74
2
58
20
8.4%
Constitution Street
Aberdeen
600
54
40
0
33
7
8.4%
Total (wholly owned)
6,561
611
462
83
326
102
8.5%
1 Subject to obtaining planning consent
Secured forward fund pipeline (USAF)
USAF has secured two assets on a forward fund basis in Oxford and Edinburgh. These acquisitions are consistent with its strategy to increase exposure to high quality Universities and to expand its presence in markets to take advantage of scale.
Whilst USAF has fully deployed its equity, USAF is making good progress with a small number of further acquisitions and could expect to deploy more capital, released from portfolio recycling activities into these opportunities.
Secured beds
Total completed value
Total development costs
Capex in period
Capex remaining
Forecast NAV remaining
Forecast yield on cost
No.
m
m
m
m
m
%
USAF
2017 completions
Beech House
Oxford
167
23
18
11
8
3
6.3%
Lutton Court
Edinburgh
237
33
29
18
9
4
6.0%
Total USAF
404
56
47
29
17
7
6.1%
Unite share of USAF
n/a
13
11
7
4
2
6.1%
Our development pipeline remains a source of significant future value and earnings growth and the table below summarises its potential impact on future NAV and earnings per share:
Illustrative returns (by 2019)
Future NAVps
Future EPS
Secured regional projects (wholly owned)
42
13
Secured USAF projects
1
-
Total secured pipeline
43
13
Asset disposals
During 2016, 52 million of assets were sold in third-party transactions (Unite share: 46 million). In addition, Unite sold two wholly-owned assets in Portsmouth and Coventry to USAF for a combined total of 88 million, taking total disposals on a see-through basis to 114 million. All of the assets were sold in line with book value.
Asset disposals remain an important part of our strategy going forward to ensure that we align our portfolio with our strategy to work with high and mid-ranked Universities. Disposals also provide the capital to fund further growth in our development pipeline in 2019 and 2020. We remain focused on our capital discipline to balance further growth opportunities with our leverage targets and expect to make around 150-200 million (Unite share) of disposals in 2017. In February 2017, we exchanged contracts to sell a regional portfolio of 4,175 beds for 295 million (Unite share 102 million) in line with book value.
FINANCIAL REVIEW
Income statement and profit measures
A full reconciliation of Profit before tax to EPRA earnings measures is set out in summary below and in full in section 2 of the financial statements.
2016
m
2015
m
Adjusted EPRA earnings
61.3
49.5
EPRA earnings
62.7
61.3
Valuation gains and profit/loss on disposal
136.3
324.6
Changes in valuation of interest rate swaps and debt break costs
(1.0)
0.3
Minority interest and tax included in EPRA earnings
3.4
2.2
Profit before tax
201.4
388.4
Adjusted EPRA earnings per share
27.7p
23.1p
Basic earnings per share
101.3p
164.2p
EPRA earnings of 62.7 million to 31 December 2016 (2015: 61.3 million) is stated after deducting tax charges, share option costs and abortive / pre-contract development spend of 5.5 million. The significant reduction in profit before tax is primarily the result of a lower level of unrealised valuation gains of 136.3 million being recognised in 2016 compared with the 324.6 million recognised in 2015.
Cash flow and net debt
The Operations business generated 61.3 million of net cash in 2016 (2015: 40.8 million) and see-through net debt increased marginally to 776 million (2015: 731 million). The key components of the movement in see-through net debt were the operational cash flow and the disposal programme (generating total inflows of 175 million) offset by total capital expenditure of 158 million and dividends paid of 34 million. In 2017, we expect net debt to increase by a similar level as capital expenditure on investment and development activity will exceed anticipated asset disposals.
Dividend
We are increasing our dividend pay-out level to 75% of EPRA earnings (excluding USAF performance fees) and are recommending a fully covered final dividend payment of 12.0 pence per share (2015: 9.5 pence), making 18.0 pence for the full year (2015: 15.0 pence). Subject to approval at Unite's Annual General Meeting on 11 May 2017, the dividend will be paid on 19 May 2017 to shareholders on the register at close of business on 21 April 2017.
Tax and REIT conversion
During the year, the Group elected to convert to REIT status with effect from 1 January 2017.This has resulted in the release of the provision for deferred tax on property business assets totalling 41.1 million as disposals of investment property, as a REIT, will be exempt from tax.The remaining deferred tax liability relating to unrealised gains on joint venture investments of 17.2 million, which are not exempt from tax, exceeds the deferred tax asset relating to tax adjusted losses carried forward of 11.8 million. As the losses can be set against gains as they arise, the deferred tax asset relating to the losses can be recognised in full against deferred tax liabilities.
Certain activities, primarily the investment management of joint ventures, whilst expected to fall within the limits of the balance of business tests, will incur a tax charge which we expect to be in the region of 2-3 million per annum.
Debt financing
During the period, we have maintained our focus on controlling gearing levels, extending debt maturities and minimising financing costs:
Key debt statistics (see-through basis)
2016
2015
Net debt
776m
731m
LTV
34% 
35% 
Net debt:EBITDA ratio
6.5
6.9
Average debt maturity
4.9 years
5.6 years
Average cost of debt
4.2%
4.5%
Proportion of investment debt at fixed rate
100%
90%
The Group's see-through LTV improved to 34% at 31 December 2016, from 35% at the end of 2015 as a result of the value growth of the portfolio exceeding the increase in net debt. We will continue to manage our gearing proactively and intend to maintain our LTV around the mid-30% level going forward, assuming current yields. With greater focus on the earnings profile of the business, we are also now monitoring our net debt to EBITDA ratio, which was 6.5 times in 2016 and we plan to keep this in line with current levels going forward.
Interest rate hedging arrangements and cost of debt
Our see-through cost of debt has reduced to 4.2% (2015: 4.5%) as we have secured additional debt on our recent completions and refinancing in USAF at historically low levels. The Group has 100% of its see-through investment debt subject to a fixed interest rate (2015: 90%) for an average term of 4.9 years.
Convertible bond
The Group's 90 million convertible bond is due to mature in October 2018. Under the terms of the bond, early conversion of the debt into equity could be triggered by us from October 2016 onwards if the share price trades over 1.3 times the conversion price for a period of time. The initial conversion price of 5.10 has reduced to 4.88 following share placings and dividend payments and therefore EPRA NAV has been prepared on the basis that the bond will convert in the future. This has resulted in NAV dilution of 15 pence per share as at 31 December 2016. Conversion would result in around a 4% point reduction in LTV.
Funds and joint ventures
The table below summarises the key financials for each vehicle:
Property assets
m
Net debt
m
Other assets
m
Net assets
m
Unite share of NAV
m
Total return 
Maturity
Unite share
Vehicle
USAF
2,288
(714)
(51)
1,523 
352
11%
Infinite
23%
LSAV
1,009
(354)
(15)
640
320
15%
2022
50%
USAF and LSAV have continued to perform well in 2016. LSAV's total return is driven by stronger capital growth from development returns. USAF currently does not have any acquisition capacity following the forward fund acquisitions and acquisitions from Unite made in the year, but will continue to monitor acquisition opportunities funded by capital recycling.
Fees
During the year, the Group recognised net fees of 21.9 million (2015: 35.9 million) from its fund and asset management activities as follows:
31 December 2016
m
31 December 2015
m
USAF
Asset management fee
10.0
8.7
Acquisition fee
0.4
1.8
Net performance fee
6.5
20.2
LSAV
Asset and property management fee
4.0
3.3
Development management fee
1.0
1.9
Total fees
21.9
35.9
* A full breakdown of the net performance fee is in note 3.4(c) of the notes to the financial statements
The asset management fees from both USAF and LSAV have increased as a result of the growth in the portfolios under management during the year generated by acquisitions and valuation growth.
A total performance fee of 8.1 million was earned and will be paid in units during the first quarter of 2017. The net fee recognised of 6.5 million is after deducting 1.1 million, which represents the Group's share of the performance fee paid by USAF and after advisory costs of 0.5 million. The level of the fee is sensitive to movements in property valuations and is therefore significantly lower than in 2015 due to the high level of yield compression in 2015. After payment of the fee, our stake in USAF will remain at 23%.
Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole
The strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.
Richard Smith
Joe Lister
Chief Executive Officer 
Chief Financial Officer
22 February 2017
Introduction and table of contents
These financial statements are prepared in accordance with IFRS. The Board of Directors also present the Group's performance on the basis recommended for real estate companies by the European Public Real Estate Association (EPRA). The reconciliation between IFRS performance measures and EPRA performance measures can be found in Section 2.2 b) for EPRA earnings and 2.3 c) for EPRA net asset value (NAV). The adjustments to the IFRS results are intended to help users in the comparability of these results across other listed real estate companies in Europe and reflect how the directors monitor the business.
We have grouped the notes to the financial statements under six main headings:
> Results for the year, including segmental information, EPRA earnings and EPRA NAV
> Asset management
> Funding
> Working capital
> Key management and employee benefits
> Company subsidiaries and joint ventures
Each section sets out the relevant accounting policies applied in these financial statements together with the key judgements and estimates used.
Primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Company balance sheet
Consolidated statement of changes in shareholders' equity
Company statement of changes in shareholders' equity
Statements of cash flows
Section 1: Basis of preparation
Section 2: Results for the year
 2.1 Segmental information
 2.2 Earnings
 2.3 Net assets
 2.4 Revenue and costs
 2.5 Tax
Section 3: Asset management
 3.1 Wholly owned property assets
 3.2 Inventories
 3.3 Investments in joint ventures
Section 4: Funding
 4.1 Borrowings
 4.2 Interest rate swaps
 4.3 Net financing costs
 4.4 Gearing
 4.5 Covenant compliance
 4.6 Equity
 4.7 Dividends
Section 5: Working capital
 5.1 Cash and cash equivalents
 5.2 Credit risk
Consolidated income statement
For the year ended 31 December 2016
Note
2016
m
2015
m
Rental income
2.4
97.1
93.0
Property sales and other income
2.4
23.6
115.8
Total revenue
120.7
208.8
Cost of sales
2.4
(44.9)
(114.9)
Operating expenses
(25.0)
(28.5)
Results from operating activities
50.8
65.4
Profit / (Loss) on disposal of property
0.4
(0.6)
Net valuation gains on property
3.1
77.2
164.8
Profit before net financing costs
128.4
229.6
Loan interest and similar charges
4.3
(20.9)
(22.6)
Mark to market changes in interest rate swaps
4.3
-
(0.6)
Swap cancellation costs
4.3
(1.0)
-
Finance costs
4.3
(21.9)
(23.2)
Finance income
4.3
0.1
0.2
Net financing costs
4.3
(21.8)
(23.0)
Share of joint venture profit
3.3b
94.8
181.8
Profit before tax
201.4
388.4
Current tax
2.5
(2.3)
(1.6)
Deferred tax
2.5
27.3
(31.1)
Profit for the year
226.4
355.7
Profit for the year attributable to
Owners of the parent company
2.2c
224.0
351.9
Minority interest
2.4
3.8
226.4
355.7
Earnings per share
Basic
2.2c
101.3p
164.2p
Diluted
2.2c
94.7p
150.3p
All results are derived from continuing activities.
Consolidated statement of comprehensive income
For the year ended 31 December 2016
Note
2016
m
2015
m
Profit for the year
226.4
355.7
Movements in effective hedges
4.2
(9.2)
(1.9)
- Deferred tax in relation to movements in effective hedges
2.5d
(1.1)
1.0
Gains on hedging instruments transferred to income statement within mark to market changes in interest rate swaps
-
0.3
- Deferred tax in relation to hedging instruments transferred to income statement
-
(0.1)
Share of joint venture movements in effective hedges
3.3b
(1.4)
0.6
- Deferred tax in relation to share of joint venture movements in effective hedges
2.5d
(0.5)
(0.1)
Other comprehensive income for the year
(12.2)
(0.2)
Total comprehensive income for the year
214.2
355.5
Attributable to
Owners of the parent company
211.8
351.6
Minority interest
2.4
3.9
214.2
355.5
All other comprehensive income may be classified as profit and loss inthefuture.
Consolidated balance sheet
At 31 December 2016
Note
2016
m
2015
m
Assets
Investment property
3.1
1,061.6
1,024.4
Investment property under development
3.1
184.6
149.8
Investment in joint ventures
3.3b
692.9
610.6
Other non-current assets
29.8
24.5
Deferred tax asset
2.5d
-
1.0
Total non-current assets
1,968.9
1,810.3
Inventories
3.2
2.9
3.6
Trade and other receivables
77.9
83.0
Cash and cash equivalents
5.1
42.7
27.0
Total current assets
123.5
113.6
Total assets
2,092.4
1,923.9
Liabilities
Borrowings
4.1
(1.3)
(31.3)
Trade and other payables
(123.7)
(115.5)
Current tax liability
(2.4)
(2.3)
Total current liabilities
(127.4)
(149.1)
Borrowings
4.1
(473.5)
(443.8)
Interest rate swaps
4.2
(11.6)
(2.3)
Deferred tax liability
2.5d
(4.4)
(31.0)
Total non-current liabilities
(489.5)
(477.1)
Total liabilities
(616.9)
(626.2)
Net assets
1,475.5
1,297.7
Equity
Issued share capital
4.6
55.5
55.5
Share premium
4.6
493.6
493.3
Merger reserve
40.2
40.2
Retained earnings
867.9
679.5
Hedging reserve
(15.0)
(2.8)
Equity portion of convertible instrument
4.1
9.4
9.4
Equity attributable to the owners of the parent company
1,451.6
1,275.1
Minority interest
23.9
22.6
Total equity
1,475.5
1,297.7
These financial statements of The Unite Group plc, registered number 3199160 were approved by the Board of Directors on 22February 2017 and were signed on its behalf by:
R S Smith
J J Lister
Director
Director
Consolidated statement of changes in shareholders' equity
For the year ended 31 December 2016
Issued
share capital
m
Share
premium
m
Merger
reserve
m
Retained earnings
m
Hedging
reserve
m
Equity portion of convertible instrument
m
Attributable
to owners
of the parent
m
Minority
interest
m
Total
m
At 1 January 2016
55.5
493.3
40.2
679.5
(2.8)
9.4
1,275.1
22.6
1,297.7
Profit for the year
-
-
-
224.0
-
-
224.0
2.4
226.4
Movements in effective hedges (net of associated deferred tax)
-
-
-
-
(12.2)
-
(12.2)
-
(12.2)
Total comprehensive income for the year
-
-
-
224.0
(12.2)
-
211.8
2.4
214.2
Shares issued
-
0.3
-
-
-
0.3
-
0.3
Deferred tax on share based payments
-
-
-
(0.1)
-
-
(0.1)
-
(0.1)
Fair value of share based payments
-
-
-
1.2
-
-
1.2
-
1.2
Own shares acquired
-
-
-
(2.5)
-
-
(2.5)
-
(2.5)
Dividends paid to owners of the parent company
-
-
-
(34.2)
-
-
(34.2)
-
(34.2)
Dividends to minority interest
-
-
-
-
-
-
-
(1.1)
(1.1)
At 31 December 2016
55.5
493.6
40.2
867.9
(15.0)
9.4
1,451.6
23.9
1,475.5
Issued
share capital
m
Share
premium
m
Merger
reserve
m
Retained earnings
m
Hedging
reserve
m
Equity portion of convertible instrument
m
Attributable
to owners
of the parent
m
Minority
interest
m
Total
m
At 1 January 2015
50.4
385.8
40.2
359.2
(2.5)
9.4
842.5
19.8
862.3
Profit for the year
-
-
-
351.9
-
-
351.9
3.8
355.7
Other comprehensive income for the year
-
-
-
-
(0.3)
-
(0.3)
0.1
(0.2)
Total comprehensive income for the year
-
-
-
351.9
(0.3)
-
351.6
3.9
355.5
Shares issued
5.1
107.5
-
-
-
-
112.6
-
112.6
Deferred tax on share based payments
-
-
-
0.8
-
-
0.8
-
0.8
Fair value of share based payments
-
-
-
2.9
-
-
2.9
-
2.9
Own shares acquired
-
-
-
(3.4)
-
-
(3.4)
-
(3.4)
Dividends paid to owners of the parent company
-
-
-
(31.9)
-
-
(31.9)
-
(31.9)
Dividends to minority interest
-
-
-
-
-
-
-
(1.1)
(1.1)
At 31 December 2015
55.5
493.3
40.2
679.5
(2.8)
9.4
1,275.1
22.6
1,297.7
Statements of cash flows
For the year ended 31 December 2016
Group
Note
2016
m
2015
m
Cash flows from operating activities
5.1
70.3
120.8
Cash flows from taxation
(2.2)
(0.3)
Investing activities
Proceeds from sale of investment property
126.1
(0.6)
Payments to/on behalf of subsidiaries
-
-
Payments from subsidiaries
-
-
Repayment received of joint venture investment loan
-
-
Loan to joint ventures
-
(30.5)
Dividends received
29.2
22.9
Interest received
0.1
0.2
Investment in joint ventures
-
(52.4)
Acquisition of intangible assets
(8.2)
(7.7)
Acquisition of property
(131.0)
(96.3)
Acquisition of plant and equipment
(3.1)
(4.1)
Cash flows from investing activities
13.1
(168.5)
Financing activities
Interest paid in respect of financing activities
(23.7)
(21.8)
Ineffective swap payments
-
(2.3)
Swap cancellation costs
(1.0)
-
Proceeds from the issue of share capital
0.3
112.6
Payments to acquire own shares
(2.5)
(3.4)
Proceeds from non-current borrowings
99.0
17.6
Repayment of borrowings
(102.3)
(36.1)
Dividends paid to the owners of the parent company
(34.2)
(31.9)
Dividends paid to minority interest
(1.1)
(1.1)
Cash flows from financing activities
(65.5)
33.6
Net (decrease)/increase in cash and cash equivalents
15.7
(14.4)
Cash and cash equivalents at start of year
27.0
41.4
Cash and cash equivalents at end of year
5.1
42.7
27.0
Notes to the FINANCIAL STATEMENTS
Section 1: Basis of preparation
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2016 or 2015 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies, and those for 2016 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for 2015 or 2016.
Going concern
The Group's business activities, together with the factors likely to affect its future development and position are set out in theStrategic Report. In addition, section 4 of these Notes to the financial statements includes the Group's objectives, policies and processes for managing its capital; details of its borrowings and interest rate swaps; and in note 5.2 its exposure to credit risk.
The Group has prepared cash flow projections three years forward to December 2019 and the Group has sufficient headroom tomeet all its commitments. The Group added 100m to an existing facility during 2016 and this together with existing facilities will be sufficient to fund the Group's commitments over the next three years. The Group maintains positive relationships with its lending banks and has historically secured new facilities before maturity dates and remained within its covenant levels. The Group is in full compliance with its covenants at 31 December 2016. Ourdebt facilities include loan-to-value, interest cover and minimum net worth covenants, all of which have a high level of headroom. In order to manage future financial commitments, the Group operate a formal approval process, through its Major Investment Approvals committee, to ensure appropriate review is undertaken before any transactions are agreed.
The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future.
Section 2: Results for the year
Performance measures
Note
2016
2015
Earnings basic
Earnings diluted
Basic earnings per share (pence)
Diluted earnings per share (pence)
2.2c
2.2c
2.2c
2.2c
224.0m
227.7m
101.3p
94.7p
351.9m
351.9m
164.2p
150.3p
Net assets Basic
Basic NAV per share (pence)
2.3c
2.3d
1,451.6m
653p
1,275.1m
574p
EPRA performance measures
Note
2016
2015
EPRA earnings
EPRA earnings per share (pence)
2.2a
2.2c
62.7m
28.4p
61.3m
28.6p
Adjusted EPRA earnings
Adjusted EPRA earnings per share (pence)
2.2a
2.2c
61.3m
27.7p
49.5m
23.1p
EPRA NAV
EPRA NAV per share (pence)
2.3a
2.3d
1,557.3m
646p
1,394.4m
579p
EPRA NNNAV
2.3c
1,517.3m
1,330.2m
EPRA NNNAV per share (pence)
2.3d
630p
552p
2.1 Segmental information
The Board of Directors monitor the business along two activity lines, Operations and Property. The reportable segments for the years ended 31 December 2016 and 31 December 2015 are Operations and Property.
The Group undertakes its Operations and Property activities directly and through joint ventures with third parties. The joint ventures
are an integral part of each segment and are included in the information used by the Board to monitor the business.
The Group's properties are located exclusively in the United Kingdom. The Group therefore has one geographical segment.
2.2 Earnings
EPRA earnings amends IFRS measures by removing principally the unrealised investment property valuation gains and losses such that users of the financials are able to see the extent to which dividend payments (dividend per share) are underpinned by earnings arising from purely operational activity. The reconciliation between Profit attributable to owners of the parent company and EPRA earnings is available in note 2.2 (b).
The Operations segment manages rental properties, owned directly by the Group or by joint ventures. Its revenues are derivedfrom rental income and asset management fees earned from joint ventures.. The Operations segment is the main contributor toEPRA earnings and EPRA EPS and these are therefore the key indicators which are used by the Board to monitor the Operations business.
The Board does not manage or monitor the Operations segment through the balance sheet and therefore no segmental information for assets and liabilities is provided for the Operations segment.
a) EPRA earnings
2016
UNITE
Share of joint ventures
Group on
EPRA
basis
Total
m
USAF
m
LSAV
m
Total
m
Total
m
Rental income
97.1
36.9
25.1
62.0
159.1
Property operating expenses
(29.3)
(10.7)
(2.8)
(13.5)
(42.8)
Net operating income
67.8
26.2
22.3
48.5
116.3
Management fees
20.8
(2.8)
(4.0)
(6.8)
14.0
Operating expenses
(22.4)
(0.4)
(0.3)
(0.7)
(23.1)
Operating lease rentals*
(13.5)
-
-
-
(13.5)
Net financing costs
(20.8)
(5.7)
(5.9)
(11.6)
(32.4)
Operations segment result
31.9
17.3
12.1
29.4
61.3
Property segment result
(1.0)
-
-
-
(1.0)
Unallocated to segments
2.4
-
-
-
2.4
EPRA earnings
33.3
17.3
12.1
29.4
62.7
Yield related USAF performance fees
(1.4)
-
-
-
(1.4)
Adjusted EPRA earnings
31.9
17.3
12.1
29.4
61.3
* Operating lease rentals arise from properties which the Group has sold and is now leasing back. These properties were sold to generate financing and they now contribute to the Group's rental income and incur property operating expenses. Therefore the Group consider these lease costs to be a form of financing.
Included in the above is rental income of 18.5 million and property operating expenses of 5.9 million relating to sale and leasebackproperties.
The unallocated to segments balance includes the fair value of share based payments of (1.2 million), UNITE Foundation of (1.0million), fees received from USAF relating to acquisitions 0.4 million, net USAF performance fee of 6.5 million, deferred tax of(0.3 million) and current tax charges of (2.0 million).
2015
UNITE
Share of joint ventures
Group on
EPRA
basis
Total
m
USAF
m
LSAV
m
Total
m
Total
m
Rental income
93.0
31.6
19.7
51.3
144.3
Property operating expenses
(28.2)
(9.3)
(2.3)
(11.6)
(39.8)
Net operating income
64.8
22.3
17.4
39.7
104.5
Management fees
17.5
(2.2)
(3.3)
(5.5)
12.0
Operating expenses
(21.3)
(0.3)
(0.3)
(0.6)
(21.9)
61.0
19.8
13.8
33.6
94.6
Operating lease rentals*
(14.5)
-
-
-
(14.5)
Net financing costs
(23.6)
(5.6)
(4.4)
(10.0)
(33.6)
Operations segment result
22.9
14.2
9.4
23.6
46.5
Property segment result
(1.8)
-
-
-
(1.8)
Unallocated to segments
16.6
-
-
-
16.6
EPRA earnings
37.7
14.2
9.4
23.6
61.3
Yield related USAF performance fees
(11.8)
-
-
-
(11.8)
Adjusted EPRA earnings
25.9
14.2
9.4
23.6
49.5
* Operating lease rentals arise from properties which the Group has sold and is now leasing back. These properties were sold to generate financing and they now contribute to the Group's rental income and incur property operating expenses. Therefore the Group consider these lease costs to be a form of financing.
Included in the above is rental income of 20.3 million and property operating expenses of 6.6 million relating to sale and leasebackproperties.
The unallocated to segments balance includes the fair value of share based payments of (2.9 million), UNITE Foundation of (1.0million), fees received from USAF relating to acquisitions 1.8 million, net USAF performance fee of 20.2 million, deferred tax of(0.1 million) and current tax charges of (1.4 million).
b) IFRS reconciliation to EPRA earnings
EPRA earnings excludes movements relating to changes in values of investment properties and interest rate swaps, profits from the disposal of properties and property impairments, which are included in the profit reported under IFRS. EPRA earnings reconcile tothe profit attributable to owners of the parent company as follows:
Note
2016
m
2015
m
EPRA earnings
2.2a
62.7
61.3
Net valuation gains on investment property
3.1
77.2
164.8
Property disposals and write downs
0.3
6.8
Share of joint venture gains on investment property
3.3b
58.8
152.7
Share of joint venture property disposals and write downs
-
0.3
Mark to market changes in interest rate swaps*
4.3
-
(0.6)
Interest rate swap payments on ineffective hedges*
-
1.2
Swap cancellation costs
(1.0)
-
Share of joint venture swap cancellation costs
3.3b
-
(0.3)
Deferred tax relating to interest rate swap movement
-
(0.2)
Deferred tax relating to properties
27.6
(30.9)
Minority interest share of reconciling items**
(1.6)
(3.2)
Profit attributable to owners of the parent company
224.0
351.9
* Swaps are designated as hedging instruments within hedge relationships concluded to be effective for the year ended 31 December 2016 and so are reported within Other comprehensive income for the year. In the prior year certain hedging relationships were concluded to be ineffective and hence fair value movement of the swaps designated as hedging instruments in those relationships were recorded within the Income statement rather than Other comprehensive income.
** The minority interest share, or non-controlling interest, arises as a result of the Company not owning 100% of the share capital of one of its subsidiaries, USAF (Feeder) Guernsey Ltd. More detail is provided in note 3.3.
c) Earnings per share
The Basic EPS calculation is based on the earnings attributable to the equity shareholders of The Unite Group plc and the weighted average number of shares which have been in issue during the year. Basic EPS is adjusted in line with EPRA guidelines in ordertoallow users to compare the business performance of the Group with other listed real estate companies in a consistent manner and to reflect how the business ismanaged and measured on a day to day basis. EPRA EPS and EPRA EPS pre yield related USAF performance fee are calculated using EPRAearnings.
The calculations of basic and EPRA EPS for the year ended 31 December 2016 is as follows:
Note
2016
m
2015
m
Earnings
Basic
224.0
351.9
Diluted
227.7
351.9
EPRA
2.2a
62.7
61.3
Adjusted EPRA (excluding yield related USAF performance fee)
2.2a
61.3
49.5
Weighted average number of shares (thousands)
Basic
221,013
214,304
Dilutive potential ordinary shares (convertible bond and share options)
19,315
19,877
Diluted
240,328
234,181
Earnings per share (pence)
Basic
101.3p
164.2p
Diluted
94.7p
150.3p
EPRA EPS
28.4p
28.6p
Adjusted EPRA EPS (excluding yield related USAF performance fee)
27.7p
23.1p
Movements in the weighted average number of shares have resulted from the issue of shares arising from the employee share based payment schemes.
Excluded from the potential dilutive shares (share options), in 2016, are 16,838 (2015: 191,000) options which do not affect thediluted weighted average number of shares.
2.3 Net assets
EPRA Net Asset Value per share makes adjustments to IFRS measures by principally removing some items that are not expected to materialise in normal circumstances like items of deferred tax and the fair value of financial derivatives. The reconciliation between IFRS NAV and EPRA NAV is available in note 2.3 (c).
The Group's Property business undertakes the acquisition and development of properties. The Property segment's revenue comprises revenue from development management fees earned from joint ventures.
a) EPRA net assets
2016
2015
Wholly owned
m
Share of JVs
m
Total
m
Wholly owned
m
Share of JVs
m
Total
m
Investment properties
1,061.6
1,023.2
2,084.8
1,024.4
810.8
1,835.2
Investment properties under development
184.6
7.2
191.8
149.8
80.2
230.0
Total property portfolio
1,246.2
1,030.4
2,276.6
1,174.2
891.0
2,065.2
Debt on properties
(474.8)
(366.8)
(841.6)
(475.1)
(304.6)
(779.7)
Cash
42.7
23.1
65.8
27.0
22.0
49.0
Net debt
(432.1)
(343.7)
(775.8)
(448.1)
(282.6)
(730.7)
Other assets/(liabilities)
(14.6)
(14.3)
(28.9)
(4.9)
(18.3)
(23.2)
EPRA net assets (pre convertible)
799.5
672.4
1,471.9
721.2
590.1
1,311.3
Convertible bond*
85.4
-
85.4
83.1
-
83.1
EPRA net assets
884.9
672.4
1,557.3
804.3
590.1
1,394.4
Loan to value
35%
33%
34%
38%
32%
35%
*  Under the terms of the Convertible Bond, early conversion of the debt into equity can be triggered if the share price trades over 1.3 times the conversion price for a period of time.
b) Movement in EPRA NAV during the year
Contributions to EPRA NAV by each segment during the year is as follows:
2016
UNITE
Share of joint ventures
Group on
EPRA
basis
Total
m
USAF
m
LSAV
m
Total
m
Total
m
Operations
Operations segment result
31.9
17.3
12.1
29.4
61.3
Property
Rental growth
35.8
14.8
12.0
26.8
62.6
Yield movement
4.9
7.2
7.5
14.7
19.6
Disposals and acquisition gains
1.0
-
-
-
1.0
Investment property gains
41.7
22.0
19.5
41.5
83.2
Development property gains
36.5
0.4
14.5
14.9
51.4
Pre-contract/other development costs
(1.0)
-
-
-
(1.0)
Total property
77.2
22.4
34.0
56.4
133.6
Unallocated
Shares issued
0.3
0.3
Investment in joint ventures
3.3
7.3
(10.6)
(3.3)
-
Convertible bond
2.3
-
-
-
2.3
Dividends paid
(34.2)
-
-
-
(34.2)
USAF performance fee
6.5
-
-
-
6.5
USAF property acquisition fee
0.4
-
-
-
0.4
Swap cancellation costs
(1.0)
-
-
-
(1.0)
Other
(6.3)
-
-
-
(6.3)
Total unallocated
(28.7)
7.3
(10.6)
(3.3)
(32.0)
Total EPRA NAV movement in the year
80.6
46.8
35.5
82.3
162.9
Total EPRA NAV brought forward
804.3
305.3
284.8
590.1
1,394.4
Total EPRA NAV carried forward
884.9
352.1
320.3
672.4
1,557.3
The 6.3 million charge that comprises the other balance within the unallocated segment includes a tax charge of 2.3 million, fairvalue of share options charge of 3.0 million and 1.0 million for the UNITE Foundation.
2015
UNITE
Share of joint ventures
Group on
EPRA
basis
Total
m
USAF
m
LSAV
m
Total
m
Total
m
Operations
Operations segment result
22.9
14.2
9.4
23.6
46.5
Property
Rental growth
21.6
5.8
22.2
28.0
49.6
Yield movement
97.6
37.0
41.1
78.1
175.7
Disposals and acquisition costs
(17.3)
0.1
0.2
0.3
(17.0)
Investment property gains
101.9
42.9
63.5
106.4
208.3
Development property gains
45.7
-
36.1
36.1
81.8
Pre-contract/other development costs
(1.8)
-
-
-
(1.8)
Total property
145.8
42.9
99.6
142.5
288.3
Unallocated
Shares issued
112.6
-
-
-
112.6
Investment in joint ventures
(57.8)
41.6
16.2
57.8
-
Convertible bond
83.1
-
-
-
83.1
Dividends paid
(31.9)
-
-
-
(31.9)
USAF performance fee
19.8
-
-
-
19.8
USAF property acquisition fee
1.7
-
-
-
1.7
Swap losses and debt exit costs
(1.1)
(0.3)
-
(0.3)
(1.4)
Other
(5.4)
-
-
-
(5.4)
Total unallocated
121.0
41.3
16.2
57.5
178.5
Total EPRA NAV movement in the year
289.7
98.4
125.2
223.6
513.3
Total EPRA NAV brought forward
514.6
206.9
159.6
366.5
881.1
Total EPRA NAV carried forward
804.3
305.3
284.8
590.1
1,394.4
The 5.4 million charge that comprises the other balance within the unallocated segment includes a tax charge of 1.5 million, fairvalue of share options charge of 2.9 million and 1.0 million for the UNITE Foundation.
c) Reconciliation to IFRS
To determine EPRA NAV net assets reported under IFRS are amended to exclude the mark to market valuation of swaps, deferred tax liabilities and to recognise all properties at market value.
The Group also manages NAV using EPRA NNNAV, which adjusts EPRA NAV to include the fair value of swaps and debt. Under EPRA best practice guidelines this is considered to give stakeholders the most relevant comparable information on the current fair value of all the assets and liabilities in the Group.
The Net Assets reported under IFRS reconcile to EPRA NAV and EPRA NNNAV as follows:
Note
2016
m
2015
m
Net asset value reported under IFRS
1,451.6
1,275.1
Mark to market interest rate swaps
14.9
4.3
Deferred tax
5.4
31.9
EPRA NAV (pre convertible)
2.3a
1,471.9
1,311.3
Convertible bond
85.4
83.1
EPRA NAV
1,557.3
1,394.4
Mark to market of fixed rate debt
(19.7)
(28.0)
Mark to market interest rate swaps
(14.9)
(4.3)
Deferred tax
(5.4)
(31.9)
EPRA NNNAV
1,517.3
1,330.2
d) NAV per share
Basic NAV is based on the net assets attributable to the equity shareholders of The Unite Group plc and the number of shares in issue at theend of the year. The Board uses EPRA NAV and EPRA NNNAV to monitor the performance of the Property segment on a day today basis.
Note
2016
m
2015
m
Net assets
Basic
2.3c
1,451.6
1,275.1
EPRA
2.3a
1,557.3
1,394.4
EPRA diluted
1,559.9
1,396.7
EPRA NNNAV (diluted)
1,520.0
1,332.5
Number of shares (thousands)
Basic
222,268
222,051
Convertible bond shares
18,426
18,124
Outstanding share options
762
1,027
Diluted
241,456
241,202
Net asset value per share (pence)
Basic
653p
574p
EPRA
647p
581p
EPRA (fully diluted)
646p
579p
EPRA NNNAV (fully diluted)
630p
552p
2.4. Revenue and costs
The Group earns revenue from the following activities:
Note
2016
m
2015
m
Rental income
Operations segment
2.2a
97.1
93.0
Management fees
Operations segment
16.0
15.2
Development fees
Property segment
1.0
1.9
Property sales
Unallocated
-
77.0
USAF performance fee
Unallocated
7.0
22.4
121.1
209.5
Impact of minority interest on management fees
(0.4)
(0.7)
Total revenue
120.7
208.8
The cost of sales included in the consolidated income statement includes property operating expenses of 30.3 million (2015: 28.9million), operating lease rentals of 13.5 million (2015: 14.5 million), costs associated with development fees of1.1million (2015:1.9 million) and the carrying value of property sales of nil (2015: 69.6 million).
There were no disposals of properties held as trading properties during 2016 and therefore no revenue was recognised. During 2015, Stratford One, a trading asset, was sold to LSAV resulting in 77.0m of revenue.
2.5 Tax
The Group has not paid any corporation tax in the recent past due to the availability of capital allowances, indexation and brought forward losses. However, it does pay UK income tax on rental income that arises from investments held by offshore subsidiaries.
a) Tax - income statement
The total taxation charge/(credit) in the income statement is analysed as follows:
2016
m
2015
m
Income tax on UK rental income arising in non-UK companies
2.3
1.6
Current tax charge
2.3
1.6
Reversal of deferred tax provision in respect of REIT property business assets
(39.8)
-
Origination and reversal of temporary differences
13.7
27.2
Effect of change in tax rate
(1.2)
(4.1)
Recognition of previously unrecognised asset
-
8.0
Deferred tax charge/(credit)
(27.3)
31.1
Total tax (credit)/charge in income statement
(25.0)
32.7
During the year, the Group elected to be taxed as a REIT with effect from 1 January 2017. As a result of this, the Group's investment properties are exempt from tax and no deferred tax is required on the balance sheet. Accordingly the Group's deferred tax now only relates to non-property investments (being primarily its interests in joint ventures) and historic tax losses. The removal of the deferred tax provision in respect of REIT property business assets is comprised of credits of 29.2m in relation to investment properties and 11.3m in relation to accelerated capital allowances, and a debit of 0.7m for tax adjusted losses extinguished on conversion.
The movement in deferred tax provided is shown in more detail in note 2.5 d) below.
In the income statement, a tax credit of 25.0 million arises on a profit before tax of 201.3 million, the taxation charge that would arise at the standard rate of UK corporation tax is reconciled to the actual tax charge as follows:
2016
m
2015
m
Profit before tax
201.4
388.4
Income tax using the UK corporation tax rate of 20% (2015: 20.25%)
40.3
78.7
Release of deferred tax balances due to REIT conversion
(39.8)
-
Property revaluations not subject to tax
(20.4)
(28.4)
Effect of indexation on investments
(2.1)
(3.4)
Effect of statutory tax reliefs
(1.5)
(2.9)
Income due to Unite Foundation
(1.0)
-
Effect of tax deduction transferred to equity on share schemes
0.4
1.1
Rate difference on deferred tax
(1.2)
(4.1)
Movement on unprovided deferred tax asset
-
(0.6)
Recognition of previously un-recognised deferred tax asset
-
(7.4)
Prior years adjustments
0.3
(0.3)
Total tax charge in income statement
(25.0)
32.7
The main rate of corporation tax reduced from 21% to 20% with effect from 1 April 2015. Accordingly, the reconciliation above has been calculated at a rate of 20% (2015: 20.25%).
Following the Group's election to become a REIT (effective 1 January 2017), deferred tax on its REIT property business assets is no longer required. Accordingly, the Group has recognised a credit of 39.8m in the Income Statement reversing the provision for deferred tax liabilities and assets recognised at 31 December 2015 relating to the revaluation of investment property, accelerated capital allowances, and property business tax losses.
Deferred tax is an accounting adjustment intended to reflect tax that the Group may have to pay in the future if certain events occur, and is distinct from the Group's current tax charge (the latter being the tax actually payable to HM Revenue & Customs for the year). Accordingly, the release of the deferred tax provision is an accounting only adjustment, and does not result in the Group receiving a tax credit or refund. The current tax charge for the year ended 31 December 2016 is unaffected by the election to become a REIT.
b) Tax - other comprehensive income
Within other comprehensive income a tax charge totalling 1.6 million (2015: 0.8 million credit) has been recognised representing deferred tax. An analysis of this is included in the deferred tax movement in note 2.5 d).
c) Tax - statement of changes in equity
Within the statement of changes in equity a tax charge totalling 0.1 million (2015: 0.8 million credit) has been recognised representing deferred tax. An analysis of this is included in the deferred tax movement in note 2.5 d).
d) Tax - balance sheet
The table below outlines the deferred tax liabilities/(assets) that are recognised in the balance sheet, together with their movements in the year:
2016
At 31 December
2015
m
Transfers
m
(Credited)
in income
m
Charged
in equity
m
At 31 December
2016
m
Investments
14.7
-
2.5
-
17.2
Investment property (REIT property business assets)
41.1
-
(41.1)
-
-
Property, plant and machinery
(0.3)
-
0.2
-
(0.1)
Share schemes
(1.6)
-
0.1
0.5
(0.9)
Interest rate swaps
(1.1)
-
1.1
-
Interest rate swaps relating to joint ventures
(0.5)
-
0.5
-
Tax value of carried forward losses recognised
(22.3)
-
11.0
(0.4)
(11.8)
Net tax (assets)/liabilities
30.0
-
(27.3)
1.7
4.4
2015
At 31 December
2014
m
Transfers
m
(Credited)
in income
m
Charged
in equity
m
At 31 December
2015
m
Investment property
17.3
-
16.7
-
34.0
Property, plant and machinery
(0.6)
-
0.3
-
(0.3)
Investments in joint ventures
10.7
-
11.1
-
21.8
Share options
(1.5)
-
(0.2)
0.1
(1.6)
Interest rate swaps
(0.3)
-
0.2
(1.0)
(1.1)
Interest rate swaps relating to joint ventures
(0.6)
-
-
0.1
(0.5)
Tax value of carried forward losses recognised
(24.4)
-
3.0
(0.9)
(22.3)
Net tax (assets)/liabilities
0.6
-
31.1
(1.7)
30.0
A reduction in the UK corporation tax rate from 19% to 17% (effective 1 April 2020) wassubstantively enacted on 26 September 2016. This will reduce the Group's future current tax charge accordingly. The deferred tax liability at31December 2016 has been calculated based on the rate at which it is expected to reverse.
Following the Group's election to become a REIT, disposals of investment property will be exempt from tax and as a result no deferred tax liability has been recognised in relation to these assets. The movement of 41.1m in the year is made up of a combination of in year movement and reversal of the remaining provision. The Group's investments in property unit trusts (being primarily its interests injoint ventures) are not exempt from tax as a REIT. Where the interest in joint ventures remains subject to tax, a deferred tax liability has been recognised on the excess of the market value of these assets over their historic tax base cost. At 31 December 2016 the deferred tax liability in relation to these investments was 17.2m.
Section 3: Asset management
3.1 Wholly owned property assets
The Group's wholly owned property portfolio is held in two groups on the balance sheet at the carrying values detailed below. IntheGroup's EPRA NAV, all these groups are shown at market value.
i) Investment property (fixed assets)
These are assets that the Group intends to hold for a long period to earn rental income or capital appreciation. The assets are held atfair value in the balance sheet with changes in fair value taken to the income statement.
ii) Investment property under development (fixed assets)
These are assets which are currently in the course of construction and which will be transferred to 'Investment property' oncompletion. The assets are held at fair value in the balance sheet with changes in fair value taken to the income statement.
Valuation process
The valuations of the properties are performed twice a year on the basis of valuation reports prepared by external, independent valuers, having an appropriate recognised professional qualification. The fair values are based on market values as defined in theRICS Appraisal and Valuation Manual, issued by the Royal Institution of Chartered Surveyors. CB Richard Ellis Ltd, Jones Lang LaSalle Ltd and Messrs Knight Frank, Chartered Surveyors were the valuers in the years ending 31 December 2016 and 2015.
The valuations are based on both:
> Information provided by the Group such as current rents, occupancy, operating costs, terms and conditions of leases and nomination agreements, capital expenditure, etc. This information is derived from the Group's financial systems and is subject to the Group's overall control environment.
> Assumptions and valuation models used by the valuers - the assumptions are typically market related, such as yield and discount rates. These are based on their professional judgement and market observation.
The information provided to the valuers - and the assumptions and the valuation models used by the valuers - are reviewed bythe Property Board and the CFO. This includes a review of the fair value movements over the year.
The movements in the carrying value of the Group's wholly owned property portfolio during the year ended 31 December 2016 areshown in the table below. While completed property is held at cost on the balance sheet, the Group manages the assets basedontheir market value (fair value). These properties are included in EPRA NAV at theirfair value, valued on the same basis asforinvestment property and investment property under development, by external valuers. The fair value of the Group's wholly owned properties at the year ended 31 December 2016 are also shown below.
2016
Investment property
m
Investment property under development
m
Completed property
m
Total
m
At 1 January 2016
1,024.4
149.8
-
1,174.2
Cost capitalised
7.6
101.7
-
109.3
Interest capitalised
-
5.9
-
5.9
Transfer from investment property under development
36.6
(36.6)
-
-
Transfer from work in progress
-
8.0
-
8.0
Disposals
(44.0)
(84.4)
-
(128.4)
Valuation gains
44.9
41.2
-
86.1
Valuation losses
(7.9)
(1.0)
-
(8.9)
Net valuation gains
37.0
40.2
-
77.2
Carrying value at 31 December 2016
1,061.6
184.6
-
1,246.2
Valuation gains not recognised under IFRS but included in EPRA NAV
-
-
-
-
Brought forward
-
-
-
-
-
-
-
-
Market value at 31 December 2016
1,061.6
184.6
-
1,246.2
The movements in the carrying value of the Group's wholly owned property portfolio during the year ended 31 December 2015 and the fair value of the Group's wholly owned property portfolio at the year ended 31 December 2015 is as follows:
2015
Investment
property
m
Investment
property under
development
m
Completed
property
m
Total
m
At 1 January 2015
850.5
49.2
70.1
969.8
Cost capitalised
8.6
97.4
-
106.0
Interest capitalised
-
2.7
-
2.7
Transfer from investment property under development
41.2
(41.2)
-
-
Transfer from work in progress
-
1.0
-
1.0
Disposals
-
-
(70.1)
(70.1)
Valuation gains
126.4
41.0
-
167.4
Valuation losses
(2.3)
(0.3)
-
(2.6)
Net valuation gains
124.1
40.7
-
164.8
Carrying value at 31 December 2015
1,024.4
149.8
-
1,174.2
Valuation gains not recognised under IFRS but included in EPRA NAV
Brought forward
-
-
31.2
31.2
Disposals
-
-
(31.2)
(31.2)
-
-
-
-
Market value at 31 December 2015
1,024.4
149.8
-
1,174.2
Included within investment properties at 31 December 2016 are 31.5 million (2015: 41.6 million) of assets held under a long leasehold and 8.9 million (2015: 10.5 million) of assets held under short leasehold.
Total interest capitalised in investment and development properties at 31 December 2016 was 34.9 million (2015: 35.4 million)
on a cumulative basis. Total internal costs relating to construction and development costs of Group properties amount to 51.1million at 31 December 2016 (2015: 49.6 million) on a cumulative basis.
Recurring fair value measurement
All investment and development properties are classified as Level 3 in the fair value hierarchy. While completed property andproperty under development are held at cost in the balance sheet, the Group discloses the fair value of these assets andincludes them at fair value in EPRA NAV. Completed property and property under development fair value measurements arecategorised as Level 3 in the fair value hierarchy and their fair value is measured using the same techniques as for investmentproperties and investment properties under development.
Class of asset
2016
m
2015
m
London - Rental properties
424.9
409.4
Major provincial - Rental properties
440.2
431.1
Other provincial - Rental properties
196.5
183.9
Major provincial - Development properties
158.4
94.2
Other provincial - Development properties
26.2
55.6
Market value
1,246.2
1,174.2
The valuation technique for investment properties is a discounted cash flow using the following inputs: net rental income, estimated future costs, occupancy and property management costs.
Where the asset is leased to a university, the valuations also reflect the length of the lease, the allocation of maintenance andinsurance responsibilities between the Group and the lessee, and the market's general perception of the lessee's creditworthiness.
The resulting valuations are cross-checked against the initial yields and the capital value per bed derived from actual markettransactions.
For development properties, the fair value is usually calculated by estimating the fair value of the completed property (usingthediscounted cash flow method) less estimated costs to completion.
Fair value using unobservable inputs (Level 3)
2016
m
2015
m
Opening fair value
1,174.2
1,001.0
Gains and losses recognised in income statement
77.2
164.8
Gains and losses not recognised on properties under development
-
-
Acquisitions
-
-
Capital expenditure
124.1
109.7
Disposals
(129.3)
(101.3)
Closing fair value
1,246.2
1,174.2
Quantitative information about fair value measurements using unobservable inputs (Level 3)
2016
Fair value
m
Valuation technique
Unobservable inputs
Range
Weighted average
London
Discounted
cash flows
Net rental income ( per week)
179 - 327
249
- rental properties
424.9
Estimated future rent (%)
1% - 6%
4%
Discount rate (yield) (%)
4.5% - 5.2%
4.7%
Major provincial
Discounted
cash flows
Net rental income ( per week)
105 - 162
129
- rental properties
440.2
Estimated future rent (%)
1% - 7%
4%
Discount rate (yield) (%)
5.2% - 7.0%
5.7%
Other provincial
Discounted
cash flows
Net rental income ( per week)
95 - 153
126
- rental properties
196.5
Estimated future rent (%)
2% - 8%
3%
Discount rate (yield) (%)
5.5% - 12.0%
6.2%
Major provincial
Discounted
cash flows
Estimated cost to complete (m)
10.5m - 59.5m
36.1m
- development properties
158.4
Estimated future rent (%)
3%
3%
Discount rate (yield) (%)
4.8% - 5.9%
5.6%
Other provincial
Discounted
cash flows
Estimated cost to complete (m)
12.3m - 26.5m
20.1m
- development properties
26.2
Estimated future rent (%)
3%
3%
Discount rate (yield) (%)
5.7% - 5.8%
5.7%
Fair value at 31 December 2016
1,246.2
2015
Fair value
m
Valuation technique
Unobservable inputs
Range
Weighted average
London
Discounted
cash flows
Net rental income ( per week)
190 - 326
244
- rental properties
409.4
Estimated future rent (%)
2% - 4%
3%
Discount rate (yield) (%)
4.6% - 5.2%
4.8%
Major provincial
Discounted
cash flows
Net rental income ( per week)
95 - 146
120
- rental properties
431.1
Estimated future rent (%)
1% - 6%
4%
Discount rate (yield) (%)
5.2% - 7.0%
5.8%
Other provincial
Discounted
cash flows
Net rental income ( per week)
77 - 135
117
- rental properties
183.9
Estimated future rent (%)
2% - 6%
4%
Discount rate (yield) (%)
5.8% - 9.4%
6.3%
Major provincial
Discounted
cash flows
Estimated cost to complete (m)
9.4m - 47.6m
31.6m
- development properties
94.2
Estimated future rent (%)
3%
3%
Discount rate (yield) (%)
5.2% - 5.8%
5.6%
Other provincial
Discounted
cash flows
Estimated cost to complete (m)
8.9m - 10.5m
10.1m
- development properties
55.6
Estimated future rent (%)
3%
3%
Discount rate (yield) (%)
5.8% - 5.9%
5.9%
Fair value at 31 December 2015
1,174.2
A decrease in net rental income, estimated future rents or occupancy will result in a decrease in the fair value, whereas adecrease in the discount rate (yield) or the estimated costs to complete will result in an increase in fair value. There are interrelationships between these rates as they are partially determined by market rate conditions.
3.2 Inventories
2016
m
2015
m
Interests in land
0.8
0.9
Other stocks
2.1
2.7
Inventories
2.9
3.6
At both 31 December 2016 and 31 December 2015 the Group only has interests in one piece of land.
3.3 Investments in joint ventures (Group)
The Group has two joint ventures:
Joint venture
Group's share
ofassets/results 2016(2015)
Objective
Partner
Legal entity in which
Group has interest
The UNITE UK Student Accommodation Fund (USAF)
24.6%* (23.0%)
Invest and operate
student accommodation throughout the UK
Consortium of investors
UNITE UK Student Accommodation Fund,
a Jersey Unit Trust
London Student Accommodation Venture (LSAV)
50% (50%)
Develop and operate student accommodation in London
GIC Real Estate Pte, Ltd
Real estate
investment vehicle
of the Government
of Singapore
LSAV Unit Trust, a Jersey Unit Trust and LSAV (Holdings) Ltd, incorporated in Jersey
*  Part of the Group's interest is held through a subsidiary, USAF (Feeder) Guernsey Ltd, in which there is an external investor. A minority interest therefore occurs on consolidation of the Group's results representing the external investor's share of profits and assets relating to its investment inUSAF. Theordinary shareholders of The Unite Group plc are beneficially interested in 23.0% (2015: 21.4%) of USAF.
a) Net assets and results of the joint ventures
The summarised balance sheets and results for the year, and the Group's share of these joint ventures are as follows:
2016
USAF
m
LSAV
m
Total
m
Gross
Share
Gross
Share
Gross
Share
Investment property
2,287.9
562.1
1,009
504.5
3,296.9
1,066.6
Cash
41.8
10.3
27.0
13.5
68.8
23.8
Debt
(755.5)
(185.6)
(381.4)
(190.7)
(1,136.9)
(376.3)
Swap liabilities
0.7
0.2
(7.1)
(3.5)
(6.4)
(3.3)
Other current assets
3.5
0.8
0.8
0.4
4.3
1.2
Other current liabilities
(55.3)
(11.7)
(14.8)
(7.4)
(70.1)
(19.1)
Net assets
1,523.1
376.1
633.5
316.8
2,156.6
692.9
Profit/(loss) for the year
164.7
46.3
97.0
48.5
261.7
94.8
EPRA net assets
1,567.1
352.1
640.6
320.3
2,207.7
672.4
2015
USAF
m
LSAV
m
Total
m
Gross
Share
Gross
Share
Gross
Share
Investment property
2,074.2
477.4
894.4
447.2
2,968.6
924.6
Cash
36.6
8.4
28.4
14.2
65.0
22.6
Debt
(638.3)
(146.9)
(336.0)
(168.0)
(974.3)
(314.9)
Swap liabilities
-
-
(3.9)
(2.0)
(3.9)
(2.0)
Other current assets
1.9
0.5
1.0
0.5
2.9
1.0
Other current liabilities
(66.2)
(11.6)
(18.2)
(9.1)
(84.4)
(20.7)
Net assets
1,408.2
327.8
565.7
282.8
1,973.9
610.6
Profit/(loss) for the year
234.3
63.7
236.1
118.1
470.4
181.8
EPRA net assets
1,408.2
305.3
569.6
284.8
1,977.8
590.1
Net assets and profit for the year above include the minority interest, whereas EPRA net assets exclude the minority interest.
b) Movement in carrying value of the Group's investments in joint ventures
The carrying value of the Group's investment in joint ventures has increased by 82.3 million during the year ended 31December 2016 (2015: 226.8 million), resulting in an overall carrying value of 692.9 million (2015: 610.6 million). Thefollowingtable shows how the increase has been achieved.
2016
m
2015
m
Recognised in the income statement:
Operations segment result
29.4
23.6
Minority interest share of Operations segment result
1.2
1.2
Management fee adjustment related to trading with joint venture
5.4
4.1
Net revaluation gains
58.8
152.7
Debt exit costs
-
-
Loss on cancellation of interest rateswaps
-
(0.3)
Loss on disposal of properties
-
0.3
Other
-
0.2
94.8
181.8
Recognised in equity:
Movement in effective hedges
(1.4)
0.6
Other adjustments to the carrying value:
Profit adjustment related to trading with joint venture
(6.3)
(11.9)
Increase in loan to USAF
-
30.5
Additional capital invested inUSAF
-
29.1
Performance fee units issued in USAF
25.6
-
Additional capital invested inLSAV
-
23.3
USAF performance fee
(1.2)
(3.7)
Distributions received
(29.2)
(22.9)
Increase/(decrease) in carryingvalue
82.3
226.8
Carrying value at 1 January
610.6
383.8
Carrying value at 31 December
692.9
610.6
In addition to its equity shares, the Group has also provided interest free investment loans to some of the joint ventures. These were primarily provided on the setting up of the joint venture to provide capital to acquire investment properties. As a result of being provided interest free, the loans were discounted on recognition to reflect the fair value, the unwinding of the discount is reflected inthe Group's finance income.
c) Transactions with joint ventures
The Group acts as asset and property manager for the joint ventures and receives management fees in relation to these services.
In addition, the Group is entitled to performance fees from USAF and LSAV if the joint ventures outperform certain benchmarks. TheGroup receives an enhanced equity interest in the joint ventures as consideration for the performance fee. The Group has recognised thefollowing fees in its results for the year.
2016
m
2015
m
USAF
12.8
8.5
LSAV
8.0
4.7
Asset and property management fees*
20.8
13.2
LSAV
1.0
1.4
Development management fees
1.0
1.4
USAF performance fee
8.1
25.6
USAF acquisition fee
0.5
2.1
Investment management fees**
8.6
27.7
Total fees
30.3
42.3
* 2016 Asset and property management fees are shown gross. 2015 Asset and property management fees are shown as reported, net of trading with joint ventures. The equivalent gross figures in 2015 were 10.7m for USAF and 6.6m for LSAV.
**  Included in the movement in EPRA NAV is a USAF performance fee of 6.5 million (2015: 20.2 million). This is the gross fee of 8.1 million (2015: 25.6million) paid by USAF net of advisory fee costs of 0.5 million (2015: 2.2 million) and a 1.1 million (2015: 3.2 million) adjustment related to tradingwith joint ventures. The USAF performance fee will be settled in units in The UNITE UK Student Accommodation Fund rather than cash.
Included in share of joint venture profit in the income statement is a share of joint venture property management fee costs of 1.6million (2015: 1.4 million). On an EPRA basis these costs are deducted from the property management fees shown above, plus anadjustment for the minority interest of 0.4 million (2015: 0.2 million). This results in the net fees included in the Operating Segment result (note 2.2a) of 14.0 million (2015: 12.0 million). Development management fees are included in the Property Segment result (note 2.2a). Investment management fees are included within the unallocated to segments (note 2.2a).
Included in the movement in EPRA NAV is a USAF property acquisition fee of 0.4 million (2015: 1.7 million). This is the gross feeof0.5million (2015: 2.1million) paid by USAF net of a 0.1 million (2015: 0.4 million) adjustment related to trading with jointventures.
During the year the Group has paid operating lease rentals to USAF relating to two properties under a sale and leaseback agreement amounting to 2.2 million (2015: 2.7 million).
During the year the Group sold two properties to USAF for 88.4 million. Both properties were held on the balance sheet as investment property under development within non-current assets, the proceeds and carrying value of the property are therefore recognised in profit on disposal of property and the cash flows in investing activities. One property was sold to LSAV in 2015. The profits relating to sales and associated disposal costs and related cash flows are set out below:
Profit and loss
2016
Profit and loss
2015
LSAV
m
LSAV
m
Included in property sales and other income (net of joint venture trading adjustment)
-
77.2
Included in cost of sales
-
(70.1)
Profit on disposal of property
-
7.1
Profit and loss
2016
Profit and loss
2015
USAF
m
USAF
m
Included in profit on disposal of property (net of joint venture trading adjustment)
3.2
-
Profit on disposal of property
3.2
-
Cash flow
2016
Cash flow
2015
LSAV
m
LSAV
m
Proceeds
-
84.3
Net cash flows included in cash flows from operating activities
-
84.3
Cash flow
2016
Cash flow
2015
USAF
m
USAF
m
Gross proceeds
88.4
-
Net cash flows included in cash flows from investing activities
88.4
-
Section 4: Funding
4.1 Borrowings
The table below analyses the Group's borrowings which comprise bank and other loans by when they fall due for payment:
Group
Company
2016
2015
2016
2015
Carrying value
m
Fair value
m
Carrying value
m
Fair value
m
Carrying value
m
Carrying value
m
Current
In one year or less, or on demand
1.3
1.2
31.3
31.2
0.1
1.4
Non-current
In more than one year but not more than two years
108.1
132.2
1.5
1.4
85.3
-
In more than two years but not more than five years
126.3
125.8
202.2
240.4
90.0
83.0
In more than five years
239.1
223.0
240.1
225.5
-
90.0
473.5
481.0
443.8
467.3
175.3
173.0
Total borrowings
474.8
482.2
475.1
498.5
175.4
174.4
In addition to the borrowings currently drawn as shown above, the Group has available undrawn facilities of 245.0 million (2015:174.0million). A further overdraft facility of 10.0 million (2015: 10.0 million) is also available.
The carrying value of borrowings is considered to be approximate to fair value, except for the Group's fixed rate loans carried at330.3million (2015: 331.4 million) and the convertible bond carried at 86.2 million (2015: 84.3 million). The convertible bond and 90.0 million (2015: 90.0 million) of the fixed rate loans are classified as Level 1 in the IFRS 13 fair value hierarchy and have a fair value of 212.5 million (2015: 218.4 million). The IFRS 13 Level categorisation relates to the extent the fair value can be determined by reference to comparable market values. The classifications range from Level 1 where instruments are quoted on an active market through to Level 3 where the assumptions used to arrive at fair value do not have comparable market data.
The remaining 240.3 million (2015: 241.4 million) of the fixed rate loans are classified as Level 2 in the IFRS 13 fair value hierarchy. Thefair value of these fixed rate loans has been calculated by a third party expert discounting estimated future cash flows on thebasis of market expectations of future interest rates. The fair value of these loans is 215.1 million (2015: 226.4 million).
Properties with a carrying value of 998.0 million (2015: 993.6 million) have been pledged as security against the Group's drawn downborrowings.
4.2 Interest rate swaps
The Group uses interest rate swaps to manage the Group's exposure to interest rate fluctuations. In accordance with the Group'streasury policy, the Group does not hold or issue interest rate swaps for trading purposes and only holds swaps which areconsidered to be commercially effective.
The following table shows the fair value of interest rate swaps:
2016
m
2015
m
Current
-
-
Non-current
11.6
2.3
Fair value of interest rate swaps
11.6
2.3
The fair values of interest rate swaps have been calculated by a third party expert, discounting estimated future cash flows on the basis of market expectations of future interest rates, representing Level 2 in the IFRS 13 fair value hierarchy.
4.3 Net financing costs
Recognised in the income statement:
2016
m
2015
m
Finance income
- Interest income on deposit
(0.1)
(0.2)
Finance income
(0.1)
(0.2)
Gross interest expense on loans
26.8
25.3
Interest capitalised
(5.9)
(2.7)
Loan interest and similar charges
20.9
22.6
Changes in mark to market of interest rate swaps not accounted for as hedges
-
0.6
Swap cancellation costs
1.0
-
Finance costs
21.9
23.2
Net financing costs
21.8
23.0
The average cost of the Group's wholly owned investment debt at 31 December 2016 is 4.4% (2015: 4.7%). The overall average cost ofinvestment debt on an EPRA basis is 4.2% (2015:4.5%).
4.4 Gearing
The Group's adjusted gearing ratio is a key indicator that the Group uses to manage its indebtedness. EPRA net asset value (NAV) and adjusted net debt are used to calculate adjusted gearing. Adjusted net debt excludes mark to market of interest rate swaps as shown below.
The Group's gearing ratios are calculated as follows:
Note
2016
m
2015
m
Cash and cash equivalents
5.1
42.7
27.0
Current borrowings
4.1
(1.3)
(31.3)
Non-current borrowings
4.1
(473.5)
(443.8)
Interest rate swaps liabilities
4.2
(11.6)
(2.3)
Net debt per balance sheet
(443.7)
(450.4)
Mark to market of interest rate swaps
11.6
2.3
Adjusted net debt
(432.1)
(448.1)
Reported net asset value (attributable to owners of the parent company)
2.3c
1,451.6
1,275.1
EPRA net asset value
2.3c
1,557.3
1,394.4
Gearing
Basic (Net debt/Reported net asset value)
31%
35%
Adjusted gearing (Adjusted net debt/EPRA net asset value)
28%
32%
Gearing (EPRA net debt/EPRA net asset value)
2.3a
50%
52%
Loan to value (EPRA net debt/Total property portfolio)
2.3a
34%
35%
4.5 Covenant compliance
Many of the Group's funding facilities carry covenants. The Group monitors its covenant position and the headroom available onan ongoing basis. At 31 December 2016, the Group was in full compliance with all of its borrowing covenants. The Group is able to use available cash to reduce debt to increase headroom on its loan to value (LTV) covenants. The covenant headroom position is outlined below and assumes that the Group is able to use a mixture of available cash and add additional property tobanks' securitypools.
31 December 2016
31 December 2015
Weighted covenant
Weighted
actual
Weighted covenant
Weighted
actual
Loan to value
74%
15%*
74%
29%*
Interest cover
1.5
4.04
1.47
4.47
Minimum net worth
-
-
250m
1,394
* Calculated on the basis that available cash is used to reduce debt and available property can be used as additional security.
4.6 Equity
The Company's issued share capital has increased during the year as follows:
2016
2015
Called up, allotted and fully paid ordinary shares of 0.25p each
No. of shares
Ordinary shares
m
Share Premium
m
No. of shares
Ordinary shares
m
Share Premium
m
At start of year
221,930,911
55.5
493.3
201,541,803
50.4
385.8
Share placing
-
-
-
20,137,326
5.0
107.3
Share options exercised
116,905
-
0.3
251,782
0.1
0.2
At end of year
222,047,816
55.5
493.6
221,930,911
55.5
493.3
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote pershare at meetings of the Company. All shares rank equally with regard to the Company's residual assets.
4.7 Dividends
During the year, the Company declared and paid an interim dividend of 13.2 million - 6.0p per share (2015: 12.1 million - 5.5p per share) and paid a 21.0 million final dividend - 9.5p per share relating to the year ended 31 December 2015 (2014: 19.8 million - 9.0p per share).
After the year end, the Directors proposed a final dividend per share of 12.0p (2015: 9.5p), bringing the total dividend per share forthe year to 18.0p (2015: 15.0p). No provision has been made in relation to this dividend.
Section 5: Working capital
5.1 Cash and cash equivalents
The Group's cash position at 31 December 2016 was 42.7 million (2015: 27.0 million).
At 31 December 2016 the Company had an overdraft of 0.1 million (2015: overdraft 1.4 million).
The Group's cash balances include 13.4 million (2015: 8.5 million) whose use at the balance sheet date is restricted by funding agreements to pay operating costs and loan interest relating to specific properties.
The Group generates cash from its operating activities as follows:
Group
Note
2016
m
2015
m
Profit/(loss) for the year
226.4
355.7
Adjustments for:
 Depreciation and amortisation
4.4
2.6
 Fair value of share based payments
1.2
2.9
 Dividends received
-
-
 Change in value of investment property
3.1
(77.2)
(164.8)
 Net finance costs
4.3
21.8
23.0
 (Profit)/loss on disposal of investment property
(0.4)
0.6
 Share of joint venture profit
3.3b
(94.8)
(181.8)
 Trading with joint venture adjustment
7.5
15.5
 Tax charge/(credit)
2.5a
(25.0)
32.7
Cash flows from operating activities before
changes in working capital
63.9
86.4
(Increase)/decrease in trade and other receivables
(20.4)
(39.6)
Decrease/(increase) in completed property and property under development
-
70.1
Decrease/(increase) in inventories
0.7
0.3
Increase/(decrease) in trade and other payables
26.1
3.6
Cash flows from operating activities
70.3
120.8
25.6 million of the brought forward trade and other receivables was settled in units in the USAF rather than cash.
Cash flows consist of the following segmental cash inflows/(outflows): Operations 61.3 million (2015: 40.8 million), property
(6.0 million) (2015: (48.3 million)) and unallocated (39.6 million) (2015: 6.9 million). The unallocated amount includes Group dividends (34.2 million) (2015: (31.9 million)), tax payable of (2.2 million) (2015: (0.3million)), investment in joint ventures (nil) (2015:(52.4 million)), contributions to UNITE Foundation (1.0 million) (2015: (1.0million)) and amounts received from shares issued 0.3million (2015: 112.6 million).
5.2 Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. It arises principally from the Group's cash balances, the Group's receivables from customers and jointventures and loans provided to the Group's joint ventures.
At the year end, the Group's exposure to credit risk was as follows:
Note
2016
m
2015
m
Cash
5.1
42.7
27.0
Trade receivables
5.2
17.8
2.3
Amounts due from joint ventures (excluding loans that are capital in nature)
5.2
36.3
41.7
96.8
71.0
a) Cash
The Group operates investment guidelines with respect to surplus cash. Counterparty limits for cash deposits are largely based upon long-term ratings published by credit rating agencies and credit default swap rates.
b) Trade receivables
The Group's customers can be split into two groups - (i) students (individuals) and (ii) commercial organisations including Universities. The Group's exposure to credit risk is influenced by the characteristics of each customer. The Group holds tenant deposits of 8.5million (2015: 7.8 million) as collateral against individual customers. Based on the Group's experience and historical low level ofbad debt the Group views these receivables as recoverable balances with a low risk of default.
c) Joint ventures
Amounts receivable from joint ventures fall into two categories - working capital balances and investment loans. The Group has strong working relationships with its joint venture partners therefore view this as a low credit risk balance.

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