The UNITE Group plc, the UK's leading developer and manager of student accommodation, today published its first interim management statement for 2013, covering its activities between the Company's final results announcement on 6 March 2013 and 13 May 2013.
•Strong reservations performance with 75% of rooms already let for the 2013/2014 academic year (62% at the beginning of March 2013) and 72% at the same point in 2012. This underpins continued confidence in our rental growth guidance of 3% for the full year.
•UNITE development programme enhanced with the acquisition of a £13.9 million 378-bed development in Huddersfield, with planning consent already granted, for 2014 delivery. The asset is expected to add £4.4 million to NAV over the next two years and achieve a 10% yield on cost.
•LSAV development pipeline progressing well. Planning secured for 759 beds at Angel Lane, Stratford and a further 950 bed project expected to be secured in the near future.
•Asset disposal programme on track with £11 million of sales completed at prices supportive of book value and a further £32 million under offer. The majority of these disposals relate to wholly owned assets.
•Good progress with planned refinancing of USAF senior debt, on track for conclusion in the third quarter.
Commenting, Mark Allan, Chief Executive of The UNITE Group, said:
"Building on our strong performance in 2012, the business continues to display positive momentum.
"High occupancy, firm cost control, deepening University relationships and positive rental growth prospects underpin our view that we are on track to grow earnings in line with management expectations this year, while further progress with our development pipeline provides good additional support for our medium term growth targets.
"Meanwhile, steady progress with asset disposals and our refinancing objectives mean that we are continuing to strengthen our financial position further."
Operations - Sales, rental growth and profitability
Occupancy across the portfolio has been maintained at 96% for the current academic year and costs have been tightly controlled, with the positive financial impact of cost saving initiatives undertaken in 2012 beginning to flow through. As a consequence, UNITE expect to deliver a strong set of interim financial results for the first half of 2013.
The outlook for full year earnings is encouraging, with 75% of rooms already reserved for the 2013/14 academic year compared to 72% in 2012. This performance, together with a wider 2.5% increase in University applications year on year (Source: UCAS, April 2013) reinforces the view that rental growth will be approximately 3% for the full year and recurring earnings will increase in line with the Board's expectations.
UNITE is making good progress with its LSAV development pipeline, in which it has a 50% stake. In April, it secured a planning consent for the joint venture's first development project, Angel Lane, Stratford, where the group will complete a 759 bed scheme for the 2015/16 academic year. The Company expects to secure a further 950 bed development site in the near future. Taken together, these two projects will represent approximately 40% of LSAV's target development pipeline and are on track to have the full pipeline secured by late 2014.
Based on the strength of current market activity, returns are expected from the London development activity to moderate from 2014 onwards as increasing competition translates into higher land and build costs.
The Huddersfield acquisition represents an attractive opportunity. It is a strong University with a rapidly growing reputation and there is a significant shortage of purpose built accommodation in the town centre. Low development costs (equivalent to approximately £37,000 per bed) and the strong demand/supply dynamics mean that UNITE is confident of achieving a 10% yield on cost at rental levels that are undemanding. Similar opportunities are emerging in a select number of other regional locations with strong market fundamentals and UNITE will endeavour to examine these on a highly selective basis.
Yields and asset disposals
Yields for student accommodation investments appear stable although there are signs of broadening investor interest in the sector which could have a positive impact later in the year. Transaction levels in 2013 total over £700 million in the year to date and sizeable potential transactions, such as the Opal portfolio (now in administration), are likely to mean that investment activity in the sector will remain strong.
UNITE’s non-core asset disposal activity is progressing in line with expectations. We have a full year target of sales totalling approximately £100 million of which, to date, £11 million has been completed (of which £7 million was on behalf of USAF). The Group has accepted offers on a further £32 million of assets (all wholly owned) and these transactions are currently in the hands of solicitors.
Our primary financing priorities for 2013 relate to the refinancing of senior debt facilities in our co-investment vehicles, most notably the £280 million CMBS in USAF which matures in April 2014. This refinancing activity is progressing well and is expected to conclude during the third quarter. As previously advised, this will lead to a swap break cost being incurred, relating to the unexpired period of around nine months on the associated interest rate swap. It does, however, provide an opportunity to lock into historically low longer term rates.
Summary and outlook
The Group’s focus will continue to be on its three clear strategic priorities; to continue growing recurring profit and cash flow through the delivery of rental growth, portfolio activity and cost savings; to establish a sustainable capital structure; and to enhance our portfolio quality further through our highly selective development activity and non-core asset disposal programme.
The demand outlook for student accommodation is robust and there are clear signs of enhanced investor appetite in the sector which should underpin investment yields. The outlook for development activity remains compelling and, although the London development market place is increasingly competitive, there is an emergence of a small number of specific regional locations offering appealing opportunities on a highly selective basis.
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