Unite Group H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2025

Key Takeaways

  • 2024 results: Adjusted EPS rose 5% and ROE was just under 10%, reflecting resilient performance and enabling a strong balance sheet.
  • Operational outperformance: 97.5% occupancy and 8% rental growth drove a 5% dividend increase amid sector challenges.
  • Supportive market trends: Rising UK student demographics, recovering international applications, and limited new supply underpin >97% occupancy and 4–5% rental growth guidance.
  • Strong capital position: Net debt/EBITDA of 5.5x after £1.5 bn fundraising and a £1.2 bn committed development pipeline provide flexibility to fund growth and leverage easing.
  • Cost headwinds: Rising staff, utilities, technology upgrade and financing costs, plus fire remediation expenses, weigh on margins despite efficiency initiatives.
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Earnings Conference Call
Unite Group H2 2024
00:00 / 00:00

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Joe Lister
Joe Lister
CEO at Unite Group

Delighted to be announcing another strong set of results for 2024: a 5% EPS growth, Return on equity of just under 10%, and the balance sheet is in good place, providing us with capacity for growth. And this performance, to me, really demonstrates the strength and resilience of our model in a year when the sector faced some challenges. And that resilience comes from three key factors. The first is our alignment to the strongest universities. The second is our price point, product, and platform, which allows us to play into the sweet spot of where the demand is. And the third is our unrivaled relationships and nominations with the strongest universities in the U.K,, which, importantly, is also opening up that exciting new growth opportunities.

Joe Lister
Joe Lister
CEO at Unite Group

In a year that has seen a decline in international students, where there has been some uncertainty about university finances, and there's been cost and funding cost growth, we have outperformed our competition. We've delivered rental growth, and we've absorbed those cost pressures to deliver earnings growth and a strong return on equity. Looking forward, the structural growth in our market continues to support a sustainable rental growth outlook. On the demand side, we expect that there will be more students this year than there was last year. The U.K. demographics are still supportive, and the recovery of international student applications is starting to come through, and we have a more supportive policy backdrop again, which is encouraging both U.K. and international students.

Joe Lister
Joe Lister
CEO at Unite Group

On the supply side, new supply is significantly down, and that's really being driven by the development viability challenges, and we're continuing to see HMO landlords leaving the market. This supports our rental growth outlook, and we have a well-funded growth pipeline and a balance sheet which is able to flex. Our leverage levels mean that we have capacity to fund our pipeline, and that will accelerate our earnings growth, and we have further capacity to push leverage if rates do start to ease. The earnings growth has been driven by a strong operational performance, delivering that 8% rental growth and 97.5% occupancy, and that supports our 5% increase in dividend. We're currently 70% sold for the next academic year, and whilst reservations are tracking behind the exceptional performance over the last two years, we are in line with historic levels.

Joe Lister
Joe Lister
CEO at Unite Group

We are seeing a bit of a delay in students' booking, and that's because we saw some late discounting by some of our competitors at the end of the sales cycle last year. But importantly, we've had a strong underpin from our nominations agreements, giving us real confidence in the university recruitment for next academic year. And as I say, we expect overall student numbers to be ahead of last year, both U.K. and international, and that's what supports our guidance of occupancy of 97% plus and 4% to 5% rental growth. Our return on equity of 9.6% was driven by an earnings yield of just over 5%, a property valuation growth of just under 5%, and we've had good progress during the year of continuing to build our pipeline as well as our university joint ventures.

Joe Lister
Joe Lister
CEO at Unite Group

On the demand side, the overall data for 2024-25 intake is supportive of that growth. UCAS data is showing growth from our core cohort of 18-year-olds from the U.K. and also, internationally, importantly, from China as well. This builds on some encouraging visa data that came through in January, again showing that there is starting to build momentum on international students. On domestic students, the demographics continue to provide a helpful tailwind over the medium term. We're expecting to see further double-digit growth over the next five years, which equates to around 100,000 additional 18-year-olds by 2030. Universities are playing into this trend. We saw last year that universities recruited heavily with a U.K. intake. That was up 4% with high and mid-tariff universities, and again shows how important our alignment to those strongest universities is into our performance.

Joe Lister
Joe Lister
CEO at Unite Group

We're well positioned to address the affordability concerns through our mid-market price point. We're well below much of the premium end stock in the market price. A recent Knight Frank report showed that PBSA is seen as better value for money than both HMO and university stock. Increasingly, we're seeing universities choose more affordable products rather than the high price point, high amenity for their nominations agreements, and these factors really support our occupancy in both 2024, 2025, and beyond. Now, there's been a lot of talk about university finances over the last 12 months, and it is clear that they are having to look at their cost structures in response to frozen fee levels and a fall in international recruitment this year. And these are generally high profile, and they're not great for their reputations, but these are institutions which have been around for a long time.

Joe Lister
Joe Lister
CEO at Unite Group

They are asset-rich with low levels of leverage, and they have cost structures that can be made more efficient. And we will look to support those universities wherever and however we can, and actually, that could present some opportunities for us as well. International students make up 28% of our customers, and the unexpected shock last year to international recruitment came as a result of changes to the visa system, but we were actually able to maintain our sales flat year over year despite these falls. We're encouraged by a more welcoming tone from the government and successive announcements from ministers, and we're expecting to see an international education strategy later on this year, which again expects to be supportive of international students.

Joe Lister
Joe Lister
CEO at Unite Group

Immigration controls are being introduced by some of the other major destinations for international students in both Australia and Canada, and the British Council suggests that they will see fewer students going to those destinations, as well as seeing an expectation that U.S. international recruitment could fall, as was the case in Trump's first administration, so we've demonstrated that our international demand and offer is robust, and we can flex even when there is a year of change, so we expect 2024 to be a low point for international recruitment and gives us a really good platform to build from this position. On the supply side, we're continuing to see limited additional new beds coming through, with only 11,000 beds delivered in 2024. That represents less than 1% increase in the total number of beds which are available.

Joe Lister
Joe Lister
CEO at Unite Group

As I say, that's down primarily to the viability changes, challenges with rents having to pay GBP 200-GBP 220 a week just to justify building, given the current cost of capital. Development is taking longer due to planning and regulation, and what is being built tends to be studio-dominated, so very high price points, and it's not meeting the needs of U.K. students or the universities for their nominations agreements. University stock is becoming older and more obsolescent. We're seeing beds leave the market every year, and as I mentioned, HMO landlords are continuing to leave the market. We've seen around 8% leave already, and 30% of HMO landlords have indicated they're planning to sell up, given that continuing pressure around licensing, regulation, environmental compliance, and funding.

Joe Lister
Joe Lister
CEO at Unite Group

And the Renters' Rights Act, which we expect to see later this year, further shifts the dial towards the students and continues to raise standards. But given the structure and the type of accommodation that we offer, PBSA is expected to be exempted from that Renters' Rights Act, and that, again, places PBSA in a relative position of strength versus HMO. So overall, we still feel that our supply and demand characteristics support rental and earnings growth and really give us the confidence to continue to invest in our marketplace. And I'll come back to that after Karan and Mike take you through their slides.

Michael Burt
Michael Burt
CFO at Unite Group

Thanks, Joe. Good morning, everyone. I'm pleased to update you on a strong financial performance in 2024. The business delivered 5% growth in Adjusted Earnings Per Share, underpinned by the strength of our operating performance. This also supports a 5% increase in our dividend. Net Tangible Assets per share increased by 6%, with growth driven by our strong leasing performance for the 24-25 academic year. This, together with the underpin of our growing earnings, supported total accounting returns of 9.6%. Our balance sheet's in excellent shape, with the capacity to invest for growth. Following our equity raise, net debt EBITDA reduced to 5.5 times. We delivered a robust operating performance in the year, with net operating income increasing by 8% for our like-for-like properties. This reflected the high occupancy and rental growth carried forward from the 23-24 academic year and the rental growth secured for 24-25.

Michael Burt
Michael Burt
CFO at Unite Group

Property activity contributed an additional GBP 4 million in rental income, with acquisitions and development completions more than offsetting the impact of our disposals. Operating costs increased by 6% on a like-for-like basis. This reflected increases in our staff costs linked to the Real Living Wage and the impact of higher utility prices following expiry of our cheaper historical hedges. These changes resulted in our EBIT margin increasing marginally to 68.1%. This was slightly below our expectations due to marginally lower occupancy than anticipated for 2024-25 and cost increases for estates work and our central teams. Looking ahead, we see EBIT margins improving by around half a percentage point in 2025 through rental growth, lower underlying cost increases, and efficiencies. Our operating performance was the key driver of the 5% growth in our adjusted EPS in 2024.

Michael Burt
Michael Burt
CFO at Unite Group

Overheads net of our management fees were flat on an underlying basis in the year. We also incurred GBP 12 million of implementation costs in relation to the upgrade of our technology platforms and expect to recognize a similar level of costs in 2025. We saw funding costs increase in the year, reflecting a higher cost of debt on refinancing activity and the increased share count following our equity raises in 2023 and 2024. Together, this resulted in adjusted EPS of 46.6p. The business delivered another strong year of Return on Equity in 2024. NTA per share increased by 6% to 972p. This was underpinned by a 4.8% increase in property valuations on a like-for-like basis. Valuations increased on the back of the rental growth secured for the 24-25 academic year.

Michael Burt
Michael Burt
CFO at Unite Group

This more than offset the impact of a 10 basis points increase in property yields and the loss of Multiple Dwellings Relief in the first half. Development and asset management activity added 4p to NTA as we made progress with planning and construction activity. We expect development to make a higher contribution to NTA growth in 2025 as we accelerate our activity on site. The NTA movement in the second half reflects 9p of initial dilution from our equity issue and the reinvestment of a 10p gain on interest rate swaps from the first half. We continue to make good progress with our fire safety remediation program. Our year-end balance sheet reflects the additional costs of planned work in 2025 and 2026. These costs have been partially offset by a further GBP 32 million of successful claims in the year.

Michael Burt
Michael Burt
CFO at Unite Group

Overall, cladding costs net of claims resulted in a GBP 0.03 reduction to NAV in the year. We expect cladding costs equivalent to around 1% of NAV in 2025 and then reducing from 2026 onwards. For 2025, we expect to deliver total accounting returns of 8%-10% before yield movements. This is underpinned by our recurring earnings and rental growth. Over the medium term, we expect total accounting returns to increase to around 10% as development activity accelerates and cladding costs reduce. The business has significant opportunities for new investment, and we have the balance sheet capacity to deliver this growth. The group raised GBP 1.5 billion in funding in 2024 through a combination of equity, debt, and disposals. This provides funding for delivery of our development pipeline through to 2028.

Michael Burt
Michael Burt
CFO at Unite Group

We remain committed to maintaining a high-quality balance sheet and net debt to EBITDA reduced to under 6 times following our equity issue. We expect this to increase back towards its 6 to 7 times target level as we deliver development projects. Our cost of debt increased by 30 basis points in the year to 3.6%, and we expect it to rise to 4.1% in 2025 as a result of refinancing activity and drawing new debt at higher marginal rates. Disposals remain an important part of our capital discipline, helping to make funding available for new investment and ensuring our portfolio is aligned to the strongest universities. We anticipate a further GBP 100-150 million of disposals in 2025. We're confident of delivering another year of growth in earnings and dividends in 2025.

Michael Burt
Michael Burt
CFO at Unite Group

This reflects the income visibility from our sales performance for the 24-25 academic year and the progress on reservations for 25-26, where we expect to achieve rental growth of 4% to 5%. As I mentioned earlier, we expect this rental growth to deliver an improvement in our EBIT margin of around half a percentage point to 68.5%. While underlying cost inflation is slowing, we will be impacted by the increase in employers' National Insurance contributions with effect from April 2025. Completions of development and asset management initiatives will accelerate this year with delivery of GBP 200 million of projects, which will offset the expected impact of disposals. After reflecting the expected increase in our cost of debt, this translates to 2% to 4% growth in our adjusted EPS. As in previous years, we'll provide more visibility on earnings as we make progress with direct-let sales for the upcoming academic year.

Michael Burt
Michael Burt
CFO at Unite Group

Next, I'll take us through the business's property activity. 2024 was a busy year for our teams, who delivered around GBP 600 million of investment activity across development, acquisitions, and asset management. Our investment strategy is focused on enhancing the quality of our portfolio to support sustainable long-term rental growth. 93% by value of our portfolio is aligned to Russell Group cities, which have delivered long-term outperformance, and we see our exposure to these markets increasing further as we deliver our pipeline. We've already deployed half of the proceeds of our recent equity raise and will accelerate development activity in 2025. 2024 was also the year in which the business secured its first university partnership with Newcastle University, and we're confident of announcing our second university JV in the coming months.

Michael Burt
Michael Burt
CFO at Unite Group

We've increased our development activity in the past 12 months through a combination of new site acquisitions, planning milestones, and construction activity. Committed development activity now totals just under GBP 1.2 billion, and this follows planning approvals for 2,400 beds in London, Bristol, and Glasgow during the year. We delivered our newest building in Nottingham in 2024, and the project delivers our latest design concepts in a smaller scheme targeting postgraduates and returning students. We'll deliver two projects in 2025 in Bristol and Edinburgh with a total development cost of GBP 142 million. At Avon Point in Bristol, we've secured a nominations agreement with the University of Bristol for half the beds, and this supports a target yield on cost of 7.2% for this year's deliveries. The proceeds of our 2024 equity raise helped to fund the acquisition of our newest London scheme at Kings Place in Borough.

Michael Burt
Michael Burt
CFO at Unite Group

The consented scheme is targeted for delivery in 2027. At our Travis Perkins scheme in Paddington, we're reviewing our options following a disappointing refusal at planning committee last month. The decision underlines the difficulties in delivering new supply in our strongest markets. Development is taking longer to deliver and will be disciplined over our future starts to ensure we're delivering the best risk-adjusted returns for shareholders. For our university partners, high-quality and affordable accommodation is key to enabling their growth ambitions. Our local communities also have a clear need for new purpose-built student accommodation to help free up much-needed family housing. Our university partnership model helps to achieve both of these outcomes by using university land and our expertise to accelerate the delivery of new homes.

Michael Burt
Michael Burt
CFO at Unite Group

We secured our first university joint venture in 2024 with Newcastle University for the development of 2,000 new beds on university land at Castle Leazes. We expect to achieve planning approval in Q2, which will support a phased delivery of the project in 2028 and 2029. The existing halls are now closed, and Unite is providing the university with 1,600 beds during the redevelopment. I'm also pleased to say we're close to securing our second university joint venture. Many of you will have seen that we've begun local consultation with Manchester Metropolitan University for a 2,300-bed development in Manchester city centre. We're excited by the opportunity to work with one of the U.K.'s most successful modern universities and will provide further detail in the coming months. Looking further ahead, we see a significant opportunity for more university partnerships.

Michael Burt
Michael Burt
CFO at Unite Group

Based on the requirements we're seeing from our universities, it's likely that future deals may also include an element of stock transfer and refurbishment of existing accommodation, and this is something where we're well-versed from experience with our own portfolio. Our combined pipeline of traditional development and university partnership now totals just under 8,000 beds, of which over half by value is located in London. This will add just under 30% to the value of our portfolio once delivered. GBP 1.2 billion of this pipeline is already committed and fully funded. These schemes will be delivered between now and 2029, adding GBP 71 million to our Net Operating Income. The timing of development deliveries has been impacted by the recent introduction of Building Safety Act Gateways for high-rise residential buildings. We're in the early days of these new regulations and have experienced delays in securing pre-construction approvals.

Michael Burt
Michael Burt
CFO at Unite Group

As a result, we've taken the decision to move back the delivery of our Freestone Island project in Bristol by 12 months to 2027. We do expect the BSA approval process to become more efficient on future schemes, and we've taken action to mitigate potential delays on other 2027 and 2028 projects. Our acquisition and disposal activity is focused on improving the quality of our portfolio. This ensures we're aligned to the strongest universities. Over time, we see our alignment to high and mid-tariff universities continuing to grow alongside our exposure to London, which remains acutely supply constrained. During the year, we disposed of just over GBP 300 million of properties to recycle capital for reinvestment and exit assets with lower rental growth prospects. Going forward, we expect to maintain a run rate of disposals of around 2%-3% of our portfolio each year.

Michael Burt
Michael Burt
CFO at Unite Group

We acquired eight properties in the year for a total of GBP 281 million in Liverpool, Bristol, Cardiff, and London. All of these properties were already managed by the group and provide opportunities to accelerate value-add initiatives under full Unite ownership. We also continue to invest in the improvement of our properties and delivered GBP 48 million of asset management initiatives in the period, achieving a 10% yield on cost through a combination of rental uplifts and utility cost savings. And with that, I'll hand you over to Karan.

Karan Khanna
Karan Khanna
COO at Unite Group

Thanks, Mike. As Joe and Mike shared earlier, we've had another strong year and once again highlights the strength and resilience of our industry-leading operating platform.

Karan Khanna
Karan Khanna
COO at Unite Group

It all starts with the relationships that we have with leading U.K, universities, which offers us a high level of income protection even when there are demand changes, as we saw with international demand not coming in as strongly at the end of the cycle. These relationships also open doors to new growth opportunities, as we've seen in Newcastle and in Manchester. We then have our passionate teams who deliver for students every single day, offering them a real home across our affordable portfolio, in which we continue to invest capital to make sure we are delivering value for money. Our focus on student support and welfare means parents and HE partners know we are there if needed. And finally, we have our proprietary technology platform, which last year saw the first of the major upgrades that we've got planned to make sure it stays industry-leading.

Karan Khanna
Karan Khanna
COO at Unite Group

Taken together, these capabilities help us deliver a great place to live for our students and strong return for our investors. Joe shared at the start our top-line performance, and I wanted to add a little bit of color around what drove this performance. We have been very, very focused on total revenue and drove like-for-like rental growth of 8.2%, beating even the excellent performance we delivered last year. Our occupancy of 97.5% was in line with historical averages, but ahead of the market, which was at about 94%. This outperformance was built first and foremost on the strength of our university partnerships and the nominations that we have with them. Nominations grew 4% this year and are now 57% of our total sales. Our focus on being aligned to the strongest universities was key again.

Karan Khanna
Karan Khanna
COO at Unite Group

These universities took more beds with us as they benefited from the flight to quality that accelerated last year. We also renewed about 80% of these agreements and have taken a balanced but robust view both on the rates that we sell them at, but also the quality of the terms. Another driver of our performance has been the strong revenue management capabilities we now have at Unite. This allowed us to adapt our commercial strategies, securing more domestic noms when we started to see direct-let softness in some markets. It helped us shift out of some other international markets into the ones that were growing, and we focused a lot on retention of our existing residents.

Karan Khanna
Karan Khanna
COO at Unite Group

These changes, together with the mid-tier price points that we have, helped us get to our rental growth target without having to rely on the discounting that Joe mentioned that a lot of our competitors had to do as they were overexposed late in the cycle with a lot of higher-end, internationally focused studio-based rooms. Overall, now 72% of our rooms are with U.K. domestic students, which I believe provides us with a strong and stable foundation for the business. Looking ahead, we are currently 70% sold versus 79% at the same time last year. A few factors are driving this difference. Firstly, after two years of exceptional growth, we are adjusting back to the long-run booking patterns for the sector. Secondly, some of the early panic buying that Joe mentioned has given way to more rational consumer behavior.

Karan Khanna
Karan Khanna
COO at Unite Group

Students who saw discounting at the end of the last cycle from our competitors are understandably just waiting to see if they could get a better deal if they wait just that little bit longer. But we are encouraged by what we can see in the lead indicators and have today reiterated our guidance for 4%-5% rental growth for the academic year 2025-26. So what's driving our belief? Firstly, in the undergraduate space, applications are up 4.3% for high-tariff universities, and two-thirds of our properties are against these universities. This has resulted in continued strong demand for our core first-year nominations-focused offer where secured rents support our rental growth guidance. Secondly, we know that our breadth of all-inclusive offers at affordable price points makes us relevant to more students looking for accommodation.

Karan Khanna
Karan Khanna
COO at Unite Group

As you can see over here, we are very competitive against all forms of other accommodation, from corporate PBSA, which has focused a lot on the higher-end, higher-priced studios filled by international students, but also now to HMOs as well when you look at the total cost of accommodation. Finally, international student applications are up 3% year on year. I'll come on to that in just a second. So we believe we're actually well-positioned to deliver our rental growth guidance of 4%-5%. Just as an example, if you look at the 2022-2023 cycle, we ended that year on 99% occupancy, but we were 67% sold at the same time, and we are 70% sold right now. The key will, of course, be a strong clearing and the recovery in international demand to come through fully. We'll keep you updated on progress as the year goes on.

Karan Khanna
Karan Khanna
COO at Unite Group

Just a few words on international demand, which I'm sure is top of mind for everybody. As Joe mentioned, the last cycle did see fewer international students than expected, and that was predominantly in the postgraduate space, but as the government narrative has changed, we have seen this reflected in visa application data, which was starting to trend back up and saw a 14-point increase year on year this January. Applications with China, which is a key market for universities, is up 9% year on year as well, and we can start to see that in our sales data as well in February, where things have started to tick up versus January.

Karan Khanna
Karan Khanna
COO at Unite Group

We also expect the international education strategy due this year to continue to highlight the value international students have and add to our HE sector and create the right environment for the U.K. to be seen as a preferred destination of choice for these international students. I think sometimes we tend to forget just how good our U.K. HE institutions are. We're 27 in the top 200 in the global rankings, that's second only to the U.S., which brings me on to my last message, the fantastic feedback that we continue to receive from our students and from our HE partners. This year, we delivered the highest ever NPS in Unite's history with a score of plus 50. That's an increase of eight points year on year.

Karan Khanna
Karan Khanna
COO at Unite Group

Our HE partners also scored us plus 37, which is 5% higher than last year, which was the highest that we ever had at Unite. This clearly shows that what we're doing in our properties at the front line and back through our central teams is working really well. I have in the past talked about Support to Stay and our wider service programs before, and they remain fundamental to our success. Additionally, we have increased our investment in our existing estate, where we have upgraded over 5,000 rooms and just launched our next-gen designs. Hopefully, some of you got to see that at Stapleton House last year when we had the Capital Markets Update in London. Another huge step forward has been the upgrade to our digital platforms through a new student app and website, which will be the first part of the Prism upgrade.

Karan Khanna
Karan Khanna
COO at Unite Group

Since the launch of the student website, we've had nearly five million views, and over 400,000 students have used our new property search tool. Our student app has also allowed us to drive more self-service, which has helped us reduce calls to our contact center by 14%. This year, we will introduce a new resident experience platform, a new facilities management tool, as well as a new finance system. And next year, we will launch a new booking engine and a property management system. These investments are critical for us not only to sustain the high levels of satisfaction, but also drive further margin improvement. And on that note, I'll hand back to Joe.

Joe Lister
Joe Lister
CEO at Unite Group

Thank you, Karan. Thank you, Mike. So one year into my new role, I'm delighted with where we are as a business.

Joe Lister
Joe Lister
CEO at Unite Group

Last year, I talked about the real strength and quality of our business and that we wanted to focus on creating a great place to live, a great place to work, and a great place to invest and to accelerate our growth over the next five years. And I think we've made a really good step forward over the last 12 months against all of those ambitions. We've delivered a great set of results in conditions that were not straightforward. And this was down to the attributes that we've built over many years, which have stood us in good stead looking back, but also we can really build on going forward. We've got the best operating platform in the sector that drives customer service at affordable rents. Our market-leading scale allows us to invest, to continue to enhance that customer service and also our efficiencies.

Joe Lister
Joe Lister
CEO at Unite Group

And our relationships and alignment to the strongest universities, together with that right product that we've talked about, means that we have a very strong underpin to our performance and we're protected from any demand shocks. Those relationships go back many years, and universities consistently renew nominations agreements with us. And importantly, they are opening up those new growth opportunities that we've been talking about. We continue to drive the quality and alignment of our portfolio through the active portfolio recycling that Mike talked about and focusing our development and acquisitions on the strongest university cities in the U.K. And we've got a great development capability and a pipeline of 8,000 beds, which is heavily focused on London and nominations agreements, which will further enhance that quality and alignment.

Joe Lister
Joe Lister
CEO at Unite Group

We're operating a sector which shows those structural demand drivers, which continues to support our ongoing rental and earnings growth going forward and provide us the confidence to keep investing in our business. Looking at that investment outlook, we are looking at a wider set of investment opportunities going forward. We raised around GBP 1 billion of capital last year, and we've got a clear path to deploy that. The capital environment does remain challenging. The cost of capital has increased. Development is getting harder, and we continue to recycle capital into that market to make sure we maintain that alignment and reinvestment capability. We need to remain disciplined around how we and where we deploy that capital. We've increased our target development yields to 7% in London and 8% in the regions.

Joe Lister
Joe Lister
CEO at Unite Group

Now, we will be flexible on that if the schemes come forward with planning or with nominations agreements in place. And we're also targeting more option agreements in our development activity. Clearly, income-producing assets have the benefit of immediate income. And so we have been spending more time looking at those acquisition opportunities with a focus on older first-generation assets, where we feel we've got an opportunity to reposition those to drive higher earnings yields, as we showed with the USAF and the London acquisition that we did late last year. Asset management investment continues to offer really attractive returns, but these are granular schemes. They are high on resource, and it really caps our deployment at around 50-75 million GBP each year, but we will continue to invest and roll out that into our existing portfolio.

Joe Lister
Joe Lister
CEO at Unite Group

And as Mike touched on, university joint ventures offer us a really meaningful and exciting medium-term growth opportunity. We're making great progress on our second deal with Manchester, and we expect to be able to announce a closure of that deal within the next three months. But I'm having lots of conversations with the vice chancellors right now about how they can address the challenge and the need to provide more better affordable accommodation. And it's exciting to see a number of those discussions move into include income-generating assets as well. So we will deploy our capital into a wider set of opportunities going forward, and that investment will build on our core returns from the operational side of our business. We have really good visibility of our medium-term investment horizon, and that drives the mid-single EPS growth and TAR of around 10%.

Joe Lister
Joe Lister
CEO at Unite Group

And the visibility on that comes from the building blocks that we've talked through this morning, the market fundamentals and platform driving our rental growth. This remains core to our value creation. We are seeing our rental growth outlook returning to more normalized levels of around CPI plus 50-100 basis points as inflation moderates. Our margin improvements will come through that technology-driven efficiencies and also softening cost pressures. Our deployment of capital is clear, funded, and accretive. So those wider opportunities that we are talking about, we must remain disciplined around how we allocate those to ensure that that capital deployment will continue to drive and focus on the earnings growth that is so important to us. And we'll continue to manage net debt and LTV at our target levels. But as I mentioned, we see upside opportunity that if rates do start to ease.

Joe Lister
Joe Lister
CEO at Unite Group

Wrapping that all together, I think we've delivered a really strong performance in 2024, demonstrating the resilience of our model and the quality of our portfolio, alignment to universities, that mid-market price point, and the strength of our nominations agreements. Our earnings outlook for 2025 is 2%-4% increasing to mid-single digits over the medium term, really driven by that structural demand supporting ongoing rental growth from the wider range of investment opportunities, including the growing momentum in university partnerships and the capacity that we have on our balance sheet to continue that investment path. On that note, I will open up to some questions. If we start in the room, we've got one down at the front with Sam. We've got a mic somewhere. Melissa's running around. Just here.

Sam King
Vice President of Real Estate Equity Research at BNP Exane

Hi, morning. It's Sam King from BNP Exane. A couple of questions, please. The first one on the Paddington development project. I understand that you hold the land for that under option, but you've now had planning rejected twice, essentially for the scheme being too big, where you originally went from 800 beds down to 600 beds for the second time. What's the plan moving forward? Are you now essentially in a game of planning ping pong with the Westminster City Council, where the scheme just gets smaller and smaller until they say yes? And I suppose linked to that, the yield on cost for the first iteration was the same as the second iteration. So at what point does the marginal reduction in beds start to impact the yield on cost for the scheme?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, it's incredibly frustrating that when you have a recommendation for approval and it gets turned down by a committee for the second time, and we'd worked really hard with the vendor to renegotiate the land price to reflect that lower density of the scheme. We've got options whether we ask for that scheme to get called in by the mayor or we appeal, or whether we just feel it's time not to proceed with that scheme if we think the time and commitment to that and the returns don't stack up, then we won't proceed with that scheme. I think we've shown that we can replace those developments with other opportunities if they come forward, but we are working through to get the optimum output, but it's got to meet our target returns if we're going to take it forward.

Sam King
Vice President of Real Estate Equity Research at BNP Exane

Should we think of that as a minimum yield on cost of 7% for London projects?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, I think we're targeting seven. As I say, we'll be slightly flexible on kind of location scheme specifics, but that's what we're aiming at, sort of seven or around there for London development schemes.

Sam King
Vice President of Real Estate Equity Research at BNP Exane

Okay, thanks. And then just on reservations and momentum, that looks like it's slowed slightly. If I look at the January trading update, you're at 66%. That was 4% behind last year, and you're now at 70%, which is 9% behind last year. I appreciate that's in line with a long-term average, but what impact does that have on your ability to drive rents if you become more reliant on clearing? And I suppose also, does that change in student habits of looking to catch late-cycle discounts reflect something structural in the market?

Joe Lister
Joe Lister
CEO at Unite Group

Karan, do you want to take that one?

Karan Khanna
Karan Khanna
COO at Unite Group

Yeah, so if I start with the second question first, so I think in terms of student behavior, I don't think it fundamentally changes how they think about sort of accommodation sales. I think given the extent of discounting that happened sort of last year, especially when it comes to internationally focused product, the agents who often advise a lot of the international students have played a role in that as well, and I think as they recognize that the pricing has been set appropriately and there's a steady flow and there isn't any deep discounting, we don't expect it to happen this year. I think you will start to see students buying at the time when they get the offer done, when they've got that secure or when they've got the visa secure.

Karan Khanna
Karan Khanna
COO at Unite Group

Those are probably the two key moments when the application is approved by the university and they get an offer, and when they secure a visa, depending on which market you're from. So I do believe we will get back to sort of normal sort of standard patterns of booking behavior. And certainly from our point, our commercial strategy does not rely on deep discounting. We have a very strong nomination space. We have the right sort of price points, so we're not going after that sort of customer. I think in terms of if first, in terms of sort of where we are with momentum, I think again, it's going back to where it used to be.

Karan Khanna
Karan Khanna
COO at Unite Group

I think when we look at our sort of forward indicators, like I said, we are seeing, coming out of Chinese New Year, coming out of universities starting to make the offer, students are much more engaged in the process, and the feedback that we're getting from our international agents certainly is that students are interested in the U.K, more than they were last year, and therefore, you should start to see an uptake in sales, which we've already started to sort of see in the last couple of weeks, so March and April will be key months to see how strong the recovery will be, and that will influence as we go forward our guidance.

Sam King
Vice President of Real Estate Equity Research at BNP Exane

Great. Thank you.

Andrew Stollman
Andrew Stollman
Analyst at Green Street

Andrew Stollman from Green Street. So a couple of questions. I guess firstly on just your profit margins on EBIT. So you have guidance for about 50 basis points increase for this financial year. And there's obviously a range. So maybe you can give a bit more color in terms of what does that hinge on, the outcome, obviously the top line, how you progressed through the leasing cycle, but is there anything on the cost side as well which you can give a bit more clarity on?

Michael Burt
Michael Burt
CFO at Unite Group

Yeah, you're right, Andrew. So we've guided that we expect to improve the EBIT margin by around half a percentage point this year. That's a function really of the rental growth we've already locked in for the academic year underway and the rental growth we expect to deliver for the next academic year. That range in earnings outcomes, the sort of difference between 2% growth at the bottom end and 4% growth at the top end is really principally driven by where we end up on the strength of rental growth and occupancy for the next academic year. And that also has a flow-through impact on margin as well. So assuming we get to around the midpoint of that 97%-98% on occupancy and 4%-5% on rental growth, that will leave us in that range on earnings.

Andrew Stollman
Andrew Stollman
Analyst at Green Street

And then more on the cost side, I guess energy costs have gone up a lot, right? And maybe even going beyond this financial year. How is the hedging strategy looking and how do you sort of expect to play that out?

Michael Burt
Michael Burt
CFO at Unite Group

Yeah, our hedging strategy on utilities hasn't really changed and it's served us very well since the spike in utility costs. So to sort of give you a reminder, we generally hedge sort of 18 to 24 months forward. And the benefit of that is when we come to set prices for the next academic year, we know the cost of utilities will be providing to those customers. So for this financial year, we're already fully hedged on utility costs. For next financial year, we're just under half hedged on utility costs. In 2024, we actually saw utilities step up by a double-digit amount and that was the roll-off of some of the better, cheaper hedges we'd had in the past. We actually don't see as much of an impact in 2025, so we're looking at more like a low single-digit cost increase in 2025 utilities.

Andrew Stollman
Andrew Stollman
Analyst at Green Street

So I guess for 2026, it could be quite material then seeing that spot prices have gone up quite a lot.

Michael Burt
Michael Burt
CFO at Unite Group

There's a bit, I think there's a few factors as well in there, Andrew. So we've already locked some of that in, so that mitigates some of the sort of near-term price pressure you're seeing. I think one of the other things to highlight is within that asset management investment that I talked about, typically there's around GBP 10 million-GBP 15 million each year of energy investments. And what they do is generally reduce our energy use by, we target 2%-3% sort of underlying reduction in energy use through CapEx. That slightly offsets the price pressures we're seeing as well.

Andrew Stollman
Andrew Stollman
Analyst at Green Street

Perfect. And then my final question on replacement costs and on the development economics. You sort of mentioned hurdles are going up, so I guess you're not seeing strong cost inflation on the development side anymore, or is it more a function of just your rental underwriting being a bit more bullish on that front?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, we've definitely seen construction costs inflation moderate, but it's still running at 2%-3%, so it's not coming down. So the pressure on development returns is really flowing through into design and land price that we have to be able to generate savings there in order to hit those revised development hurdle rates.

Andrew Stollman
Andrew Stollman
Analyst at Green Street

Thank you.

Max Nimmo
Research Analyst at Deutsche Numis

Hi, Max Nimmo at Deutsche Numis. Just picking up on the kind of capital allocation point you discussed earlier and talking about looking potentially at more acquisitions, just trying to get a bit of an idea in terms of what you would be looking for in terms of running income that you're looking to buy at and what the yield pickup would be on asset management on top of that, just to thinking about the earnings profile going forward of those things.

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, I think that the acquisitions that we made last year give you a good indication that we're buying assets probably at a 5.5%-6% yield on day one, but with the opportunity then to grow that by a further 50 to 100 basis points through the repositioning work that we do, and we do think that that immediate income that we generate, and we can generally do those works over the summer or in occupation, so we're not losing a year of income in order to do that asset enhancement work, so I think it's just a nice kind of addition to our opportunity to deploy capital when that development perspective is getting a little harder, and it really supports that key driver of earnings growth that we're seeking to generate.

Max Nimmo
Research Analyst at Deutsche Numis

Thanks.

Joe Lister
Joe Lister
CEO at Unite Group

So we may have run out in the room. Have you got any, Mike, that have come through on the?

Michael Burt
Michael Burt
CFO at Unite Group

Yeah, we've got a few on the webcast. So the first one is from Veronique Meertens at Van Lanschot Kempen. You mentioned you see a lot of opportunities for collaborations with the universities, but do you also see other acquisition opportunities of yielding assets in the market as well?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, it sort of builds on Max's point that we are seeing those opportunities. And what's interesting is that a number of them are below replacement costs as well, and that's particularly attractive to us. So I mentioned some of those older first-generation assets. And so I think we will see quite a few portfolios trading or coming to the market this year. Now, they won't all be for us, but we will look at them, we'll assess it, and particularly where we think we've got an angle to enhance that day one income is where we'll be deploying and looking to deploy capital.

Michael Burt
Michael Burt
CFO at Unite Group

Got another one here on university partnerships from Tom Furlong at CCLA. Please, could you explain why you're comfortable partnering with Manchester Metropolitan given it is a lower-ranked university?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, Manchester Metropolitan University is a great university. It's had very strong student recruitment. It is a modern university. It's mid-ranked. It's mid-tariff. It's got an operating surplus and it doesn't have any debt. So when it goes through the filters and we understand their plans, what they've done historically and are going to do going forward, we do see a long-term opportunity to partner with universities like that going forward.

Michael Burt
Michael Burt
CFO at Unite Group

Great. The next one is from Cameron Futter at Northern Trust, and this is on Build-to-rent. Can you update where you are with your investment in your Build-to-rent site and what your aspirations are on the sector going forward?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, so our 180 Stratford site continues to perform well from an operational perspective. We've got a plan to invest around GBP 15 million of capital into the communal spaces and do a rolling refurbishment of those assets. As we stated, last set of results, we still like that asset. We're generating kind of good data on how we run Build-to-rent, but the growth into that market will be using co-investment capital. And we just feel that the market to extend that program right now isn't the right place to deploy capital, just given the other exciting opportunities that we've got in front of us. So we'll continue to run that and to learn from it. We've got a small addition to our Edinburgh scheme, which has got about 100 beds, which are available for Build-to-rent.

Joe Lister
Joe Lister
CEO at Unite Group

So again, that will further extend the trial, but it's relatively low level in terms of new capital that we'll put into that scheme going forward.

Michael Burt
Michael Burt
CFO at Unite Group

Great. The next one is from Jonathan Kownator at Goldman Sachs. Your renewal rate on one-year nomination agreements is lower this year. Can you please provide color as to why?

Karan Khanna
Karan Khanna
COO at Unite Group

I can take that. So the first reason for that is, so while we love nominations and we sort of see that as the bedrock for our business, it is not nominations at sort of any sort of rate. So we are quite clear and there's sort of three core principles. The first is we need a strong level of guarantee in those rents. Second is we want them to be multi-year. And third, we want the terms, especially around caps and collars and catch-up mechanisms, to be right. And we have been very, very commercial in our thinking around these sort of agreements. So in that process, we have decided not to renew certain schemes. They tend to be with smaller providers. They tend to be with sort of secondary institutions. And we have repurposed those rooms towards our larger sort of more mid- to higher-tariff universities as well.

Karan Khanna
Karan Khanna
COO at Unite Group

The other place where we have taken some rooms out is we normally would have nominations with some distribution partners. Because we have grown our own direct-let capability, we feel we can actually now market those ourselves, which we have successfully done in the last few sales cycles. So again, we have come out of those distribution agreements and put them back on DL. The third reason is we have taken some properties back because we wanted to refurbish them and reposition them. Bridge House in Edinburgh is an example. It was nominated. We took it out direct-let. Oddly enough, that is now on a multi-year nominations with the University of Edinburgh. So those are the three key reasons for a lower renewal rate.

Michael Burt
Michael Burt
CFO at Unite Group

Great. One more on the webcast from Zema Nkabinde at Catalyst Fund Managers. How should investors think about spreads for incremental debt funding in the year? I'm happy to take that one. So I think we've generally seen a trend of spreads coming in quite strongly over the past year. What that's helped to do is slightly offset the obvious increase we've seen in interest rates. It looks at the moment like spreads for businesses like ours are probably in the range of 125 to 150 basis points for unsecured lending. And we'd hope to be towards the lower end of that.

Joe Lister
Joe Lister
CEO at Unite Group

Great. Thank you all for the questions, both from the webcast and in the room. Just looking around, not seeing anyone waving. Is there any recall? Anyone on the call? It's all right.

Operator

As a brief reminder to ask a question on the conference call, please signal by pressing star one. There appears to be no conference call questions at the moment.

Joe Lister
Joe Lister
CEO at Unite Group

All right. One more has just come in real time.

Michael Burt
Michael Burt
CFO at Unite Group

Sorry, two more. Making you work. So Veronique again from Kempen. Given the more difficult development environment in the U.K, and the proven solid platform of Unite, is it a possibility to look for opportunities outside of the U.K,?

Joe Lister
Joe Lister
CEO at Unite Group

The question or the answer is the same as it's always been. We still see enough opportunity to go in the U.K,, so we're not looking outside at the moment.

Michael Burt
Michael Burt
CFO at Unite Group

And then one final question from Mike King at Cohen & Steers. To what extent can the market absorb the new supply, which looks very high in some cities such as London, Bristol, and Edinburgh?

Joe Lister
Joe Lister
CEO at Unite Group

Yeah, I think the overall levels of supply remain low, and I'd say 60% below historic levels. There are some cities where we've got higher levels coming into the marketplace. We've seen this over time where certain cities have an influx of two or three new buildings each year, maybe a couple of thousand rooms, and very confident in those strongest markets that the demand will be able to absorb that supply.

Joe Lister
Joe Lister
CEO at Unite Group

Very good. Thank you all for coming. Really appreciate and look forward to seeing you round and about. Thank you.

Executives
    • Michael Burt
      Michael Burt
      CFO
    • Karan Khanna
      Karan Khanna
      COO
    • Joe Lister
      Joe Lister
      CEO
Analysts
    • Sam King
      Vice President of Real Estate Equity Research at BNP Exane
    • Max Nimmo
      Research Analyst at Deutsche Numis
    • Andrew Stollman
      Analyst at Green Street
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