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Edited Transcript of UTG.L earnings conference call or presentation 22-Feb-17 10:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Unite Group PLC Earnings Call

London Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Unite Group PLC earnings conference call or presentation Wednesday, February 22, 2017 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Richard Smith

Unite Group plc - CEO

* Joe Lister

Unite Group plc - CFO

* Richard Simpson

Unite Group plc - MD, Property

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Conference Call Participants

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* David Brockton

Liberum - Analyst

* Remco Simon

Kempen & Co - Analyst

* Ollie Creasey

Green Street Advisors - Analyst

* Robbie Duncan

Numis Securities - Analyst

* Keith Crawford

Peel Hunt - Analyst

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Presentation

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Richard Smith, Unite Group plc - CEO [1]

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Well, good morning, everybody, and good morning to those that we've also got on the conference line. I know for some of you, it's been a busy morning already, second set of results. It is getting to be a little bit of a habit having Capco on our undercard. I can only assume they're doing it to phase in the halo of the great results that I'm just about to take you through.

But, as I say, welcome, and no starbursts this time either unfortunately, but I am delighted to be able to present another strong set of results, continuing the performance that we've consistently delivered over the last few years.

Just looking at the final headlines: our earnings growth, up 24% to GBP61 million; our NAV, up 12% to 646p; and our full-year dividend, we've accelerated the payout on our dividend and our dividend is up 20% to 18p. So I think very strong set of financial results, particularly in the market that we all experienced in 2016.

We've also made some excellent progress against our strategic objectives. Really delighted to be able to say that we have completed our first on-campus acquisition with the acquisition of Aston Student Village supporting the students at Aston University, right in the middle of Birmingham, a top 30 institution. And I think really demonstrating how the investment that we've made in the business over the last few years in our partnerships and our relationships with the universities is now really beginning to add value.

And also the value of our platform, PRISM, we're able to acquire Aston and drive real value both in terms of cost, efficiencies, scale, synergies but also through our revenue platform to drive additional revenue opportunities.

And with on-campus, Aston is 3,100 beds, something like that, universities own and operate still today something like 300,000 beds across the rest of the universities in the UK. So I think that does clearly point to further opportunities for us.

And we also completed our planned portfolio sale. There's a clear strategic rationale for each of the assets we disposed and the reasons behind those cities that we've reduced our presence in, and Richard will outline that on a city-by-city basis for you in a moment.

But really, why are we doing that? Well, we're doing it to continue to grow the overall size of our portfolio but also to improve the quality of our portfolio to ensure that it's the product that we want in the locations that we want, the price points that we want, but aligned to the best universities.

And then also today, we've announced another acquisition, deepening our development pipeline further into Manchester. Manchester is a great university town, the second-largest university town or city in the UK.

The acquisition on a subject-to-planning basis is a well located cluster-led scheme, something around 450 beds that would support both the University of Manchester and Manchester Met.

And the disposal will obviously help us to continue to fund that development pipeline into 2020 and to make that development pipeline self-financing, as well as obviously supporting our investment on campus.

So a great strategic progress over the last year and the early part of 2017, but also, I think we can have real confidence in the fundamentals supporting our market as evidenced by our operational performance.

For the current academic year, for 2016/2017, we're fully occupied at 98% occupancy, delivering rental growth of 3.8%. And for the 2017/2018 academic year, so the year that will start in September, we're well ahead of prior year.

I think apologies; there is an inconsistency in the numbers that we've published today. We've got 73% and 75%, but, to confirm, we are at 73% occupancy as we sit here today, which is a full 6% ahead of last year. It's the strongest occupancy we've ever had at this time of year, and I think really does support our 3% to 3.5% rental guidance for the forthcoming academic year.

So, overall, the student number outlook remains positive for us, as I say as evidenced by that operational performance. So we can be confident I think that the earnings growth prospects that we've talked about previously, and Joe will take you through in a minute, are deliverable and I think, really importantly, are in our control.

So, as already said, the fundamentals that support the market remain strong. UK higher education sector is world class and I do think that is clearly recognized by both students, students here in the UK, so domestic students, and international students, and I do think it is clearly recognized by government as well.

And acceptances for the 2016/2017 year supported that at record levels, and those best universities, the universities that are our partners growing most meaningfully.

Brexit, here it comes, the Brexit comment. Brexit, I think for our sector is becoming clearer. I don't think it's necessarily clear, but it is becoming clearer. And we are not expecting it to have a material impact on student numbers in our cities, as we look into the medium term.

You will all have seen the UCAS applications data that was published in very early February, which showed a 5% decline in applications. I do think it's important to put that into the context of applications versus acceptances. Even post that decline, there will still be 150,000 more applicants than there are acceptances at universities.

So I think that really does point to a real depth of unmet demand that universities can access, should they want to. And I think we expect our applications, within the overall application data, for our universities to be at least flat. So offsetting that overall decline.

Looking at the application numbers in a little bit more detail, there are a number of things that are going on within there. There is a decline in nursing and medical studies. Those courses, the students that would study on those courses, have no impact on Unite; they don't live in our type of accommodation.

And I think it's also fair to say that the demographic decline that has been going on for the past three years and continues for another four years, is having very little impact at the moment, because it's being offset by improving participation rates overall at universities.

And I think, really pleasingly, from a diversity viewpoint, much improved applications and acceptances from female students, who really see university education as a real option going forward.

But as we've previously stated, we do think Brexit is going to have an impact on EU student numbers. We've previously stated a 25% decline. I think we would still stand by that guidance of 20% to 25% decline.

But overall, the same position is true that Unite and the sector has very limited exposure to EU students. We actually have less than 3,000 EU direct let customers within our beds. So something like 6% of our portfolio, so a 25% decline, 750 students. But I would have real confidence in our ability to fill those beds.

Firstly, I've talked about the unmet demand from the UK in applications versus acceptances. There is the reality that non-EU international students, they also come into the market very late, because of the way in which they get their visas granted or they get their qualifications secured in their country of origin.

They potentially could now come into the market and have the option to stay in PBSA, whereas, generally, that PBSA market is full and, certainly, university accommodation is full.

And I'd also be very confident that our sales capability, our brand, our knowledge of the cities in which we're operating and, effectively, our capability to sell, means that the unmet demand will come and live with us. So I'm very confident that we will hold our occupancy at the full level of 98%, once the impact of Brexit has unwound.

So I think, overall, we can be really confident about the demand outlook for the cities in which we are operating.

Supply, just very briefly from me, because, again, Richard will cover supply in a little bit more detail. I think it is fair to say that the demand/supply imbalance is becoming much more balanced.

We understand that really well in the cities in which we're operating and the cities in which we're looking to still invest, through development, through forward funds, as set out in a document.

So we still see something like 10 cities or so that we would want to continue to develop in, if we had the opportunity. But that demand/supply imbalance is becoming more balanced. But the rate of supply is beginning to slow, which I think is positive.

So our strategy remains consistent, but our strategy is underpinned by our platform, by the partnerships that we've developed and by our properties.

Our platform, PRISM, is really now delivering for the business. It's delivering for the core business in terms of service enhancements, in terms of efficiencies and cost savings, as evidenced by our margin improvement, but also by the improvement in our overhead position. And, indeed, in revenue management, the revenue management capability we've got, supporting rental growth, which I think is right up there at 3.8% currently.

Our partnerships. As I've already said, we've invested an awful lot of time in our partnerships. They are genuine deep partnerships with the universities we work with. 58% of our revenue is now supported by nominations agreements, with a remaining tenure of around six years across those agreements.

And as we've been targeting and as supported by our active portfolio management, we're currently at 82% of our revenue aligned to the best universities.

With the disposal that's completed and with the acquisition of ASV, that alignment will increase to 86% of our revenue being supported by the best universities.

And then, our properties, incredibly important. Students want to stay in the right location. They don't tend to want to have to walk too far or use transport for too long. They want the right product.

That's not just about the bedroom. That's about everything that the building provides, supporting their life while at university. And it's about having the right price points and a range of price points, so we're attractive to all students. So that active management of our portfolio is incredibly important.

So our platform then, our partnerships and our properties is then underpinned by our service delivery; our service delivery to the end customer, the student, but also the service delivery to universities.

And I think we can also evidence that our customers, both universities and students are actively picking us to work with. 58% nominations, I think that's very clear evidence that universities want to work with us. But also, that 35% of our customer base, as we stand here today, is non-first year, second and third years, I think really pointing to the broad appeal of PBSA to the wider student market, and the fact that our product is absolutely aligned to what it is that they want to get out of their university experience.

So our strategy will continue to focus on earnings, and continue to focus on growth. We're delivering high levels of both. We delivered a total return of 15%. And the pie chart on the screen there, clearly demonstrates that a good proportion, 90% of that total return is within our control, through rental growth, through delivery of our retained profits and, obviously, through the delivery of our development pipeline. And I think our track record there speaks highly to the fact that we can deliver that development pipeline.

And we've also got excellent visibility of our earnings progression. We've got real confidence in the development pipeline, strengthened and deepened further into 2020, with the acquisition of the Manchester site today, that we've announced today; and the quality of our portfolio and the underlying service that supports it.

And we're also seeing excellent growth opportunities. I've already talked about a couple of them, but we will continue to selectively develop and grow and we are looking at a number of cities as we speak.

On campus, ASV is the first step. I would want there to be more steps, and we're talking to a number of universities about potential strategic partnerships with them across a whole range of different bases, but I think a real opportunity.

And I do think this growing second and third year opportunity of PBSA is more than a first-year product. It's recognized as supporting the needs that students have. Universities value the offer.

And I do think, when the TEF, the Teaching Excellence Framework, comes in, formally in May or is published in May, the value of student accommodation, the value of experience is only going to go up the agenda for universities even more.

So I think universities are really going to value what it is that we offer. And then we know that internationals value PBSA because it's a safe, secure environment in which to come and live your first time away from home.

So, overall, I think a very positive story, a positive set of results, and a positive forward trajectory.

So I'll just hand over to Joe now to take us through the financials.

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Joe Lister, Unite Group plc - CFO [2]

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Thank you, Richard, and good morning, everybody. I too am really pleased to be able to stand here and talk through another excellent set of results, particularly in a year of the unexpected from 2016, really driven by that very strong performance in adjusted EPS, up 20% to 27.7p. That is slightly ahead of our previous guidance and consensus, I guess, driven by the USAF performance fee, of which about 2p has been included in that adjusted EPS number.

And just for the avoidance of doubt, we haven't included the yield element of that performance fee in consistent treatment as we had last year.

That strong earnings performance has allowed us to increase the dividend up 20% to 18p, and that's calculated off 75% of our recurring EPS number, so, effectively, the EPS which excludes any of the USAF performance fee.

And really, the good growth that we've seen in operations cash has allowed us or means that dividend is covered 1.5x by that operating cash flow.

We've also delivered NAV growth of 12%, which, together with a dividend yield of 3%, creates a total return of 15% for the year.

The strong earnings performance really all starts at the top line with the NOI growth, driven by the service that we are delivering to our students. And ultimately, what sits behind that is the new openings, the high levels of occupancy that we've maintained, the rental growth and the continued focus on cost control. And we expect all of those things to continue into 2017 and even beyond.

We continue to make good progress on our efficiency metrics. The margin has improved to 73.1%, and our overhead efficiency target is now at 40 basis points. And we're on track to hit our targets of the 75% margin and the 25 basis points to 30 basis points efficiency target as an exit rate at the end of this year.

Finance costs have come down to GBP45.9 million, and that's the product of us being able to reduce our average cost of finance, because we've put new funding in place, both in USAF and to fund our completed development activity. That's now down at 4.2%.

And the USAF performance fee, I've talked about briefly. I think when we spoke about it last year, we told how it is very sensitive to yields and the yield performance. So the 9 basis points yield compression that we saw in USAF, effectively, moved us into positive USAF performance territory.

But the GBP5.1 million that's included in our adjusted EPS is really the result of the operational performance, the rental growth and the earnings that have delivered through USAF.

However, given the outlook for yields and flat yields for 2017 and the higher level of NAV, we're not expecting to see USAF performance repeat again into 2017.

And looking forward into 2017 in totality, we are expecting the EPS to be around 29p to 29.5p. That's slightly lower than consensus at the moment, but is a result of the fact that we are guiding to a higher level of disposals in 2017, which I will come on to talk about shortly.

Continue to have good visibility over the building blocks of our earnings growth, really driven by the new openings and the ASV acquisition that are already in play, the secure development pipeline of 7,000 beds delivering the 12p to 14p. Rental growth we've modeled here at 2% to 4% again, delivering a further 3p to 7p. And then that being offset by the higher level of disposals, both in 2017, 2018 and 2019, getting us back to that broad target of around 39p to 44p once that 2019 pipeline has all been delivered.

So still seeing a really good visibility and opportunity to continue growing earnings.

And assuming the 75% payout ratio is in place, that will see the annual dividend growth in the high teens over this period and will lead to a dividend yield of around 4.5% to 5% based on today's NAV.

As Richard mentioned, total accounting return of 15%. That's largely being driven by our internally generated activities: rental growth; earnings; and development activities, broadly in equal measure.

Looking forward, we are expecting to see the earnings component of that continue growing as the overall share, and could get towards 50% over the next few years.

So, on the balance sheet in 2017, we're reiterating guidance around rental growth at 3% to 3.5% and development profit to be around the GBP50 million mark, which is about half of the remaining NAV to be booked on that 7,000 bed pipeline.

And on yields, I mentioned assuming flat yields for the year. Again, given the positive investor market, which Richard will talk about, is obviously helping our outlook for yields. But the broader concerns and uncertainties in the macroeconomic and the broader property market, mean that it's difficult for us to be much more confident than flat yields at the moment. But we'll obviously update through the year of any transactions and through our quarterly valuation reports.

The balance sheet remains in good shape with a good spread of debt maturities, no near-term refinancing requirements and LTV remaining in the mid-30s%.

As I mentioned, our average cost of debt has been reduced by 30 basis points down to 4.2%. We'd expect it to stay around that level in 2017, but there is the opportunity for us to bring it down further, maybe by 10 basis points to 20 basis points over the next couple of years.

From a leverage level, we are aiming to keep in line with our current targets of LTV in the mid-30s% and net debt to EBITDA in the range of 6x to 7x. And we do that by managing the CapEx on our development programs and investment activity with disposals.

We sold GBP114 million of assets in 2016 and, as I'd mentioned a while ago, we are intending to sell a slightly higher level in 2017, between GBP150 million and GBP200 million, really to take advantage of the strong investment market that is in place at the moment and also, to ensure that we can self-fund our 2019 and emerging 2020 development pipeline.

We obviously made a good start to that disposal activity with the announcement from last week.

USAF and LSAV continue to perform well and they remain a very important part of our overall balance sheet and return profile. We will continue to and have continued to use those funds to invest in investment assets, primarily because of the lower cost of capital in those two vehicles and because of our ability to generate enhanced returns through fees.

We've seen, therefore, in USAF, USAF acquiring two forward-fund assets, one in Oxford and one in Durham to increase the exposure to those two strong markets.

We'd expect to see more of those types of deals through 2017 going forward, particularly now that USAF's got some capital from the recycling of the portfolio from the disposals last week.

Similarly, within LSAV, we used LSAV to acquire the ASV portfolio. It didn't meet the USAF return criteria, but it was great to be able to go to a longstanding partner and supportive partner such as GIC to really back our move on campus, and it was their first move outside of London and Edinburgh.

So I think the co-investment vehicles are in good shape. Our partners continue to support us. We've seen a decent level of trading in the secondary market for USAF units; about 10% of the units have traded during the course of the year. That's a pretty tight margin to NAV.

We saw that drop down to about 4% discount immediately post-Brexit, but we're now back into those units trading in a small premium to NAV. No redemptions in the fund still, and I think that's a great performance over the 11-year life of the fund. And GIC, obviously, showing their commitment to us and the sector through their investment into ASV.

And then the REIT conversion which has been pretty well flagged at the last few of these get-togethers. Really pleased to say that the transition has gone very smoothly, and we effectively became a REIT from January 1 of this year, very much in line with our plans.

We are still expecting to see a tax charge on our fund management activities of around GBP2 million to GBP3 million; that is slightly lower than we originally guided to at this time last year. But so far, so good, and we're well on the way in our journey as a REIT.

On that basis, I'll hand on to Richard.

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Richard Simpson, Unite Group plc - MD, Property [3]

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Thank you, Joe. Good morning, all. As part of my property review, I'm going to look at four areas, first is just to recap on the investment market for purpose-built student accommodation across 2016, and also to bring ourselves up to date into Q1 2017.

I'm then going to have a look at how our development pipeline is progressing, and just recap on the positive momentum which we are keeping in that regard.

And then for the last two items, I thought it might be quite useful just to have a closer look at the activity of the last few weeks, namely the Aston Student Village acquisition, and then also the disposal of the portfolio to Brookfield just a few days ago.

So firstly then, in terms of the investment market, robust investment market for PBSA through 2016 I think is a good way to characterize it. GBP3.2 billion worth of stock did, in fact, transact, and that is second only to 2015 where GBP5.7 billion was sold.

The split was roughly 50/50 pre- and post-referendum, which I think is quite telling. Apart from a short lull in July and August, investor appetite remains strong.

Of course, the robust fundamentals and defensive characteristics continue to drive investment and positive sentiment in this regard. 70% of second-half transactions were to institutional investors, mostly overseas. And appetite for portfolio sales drove and continued to sustain a 5% to 10% premium. 40% of post-referendum transactions were single assets, and those are and were supportive of carrying values.

The overall net initial yield compressed by 9 basis points within the year, and valuations are well supported through transactional evidence.

Bringing us up to date then, Jones Lang LaSalle have identified circa GBP4 billion worth of current investor appetite for UK PBSA, and this underlines continued strength in the sector. JLL consider this level of demand will sustain 2016 volumes to full-year 2017.

Knight Frank have tracked transactions to date, and they assess that GBP1.2 billion has either exchange or completed, and I think the most notable one being CPPIB's acquisition onto their Liberty Living platform of the former Victoria Hall portfolio purchased from Blackstone for an assessed GBP465 million.

A word on new supply through developments. As Richard has already mentioned, the rate of new supply for now appears to have peaked, and we are seeing between 20,000 to 25,000 new bed spaces come in online certainly for this academic year, and for the next academic year.

However, some markets are showing signs of maturity and, as Richard has already mentioned, therefore, our strategy is to focus on the right assets at the right price points in the right towns and cities to focus on those quality university institutions who will have the capacity to grow going forward.

We are noticing, of course, that service is becoming increasingly important in providing a competitive edge. And, of course, in this regards, we feel we are well placed.

Turning to development, good momentum I think is the way to sum up our development, and we now have 7,000 beds secured for delivery between 2017 and 2019.

I think the main themes, when we're thinking about development, are clearly availability of the right locations to generate the sorts of returns we want to keep generating. And today, we have good confidence in our ability to continue to do that, and make good on our growth and deepening of our pipeline at our targeted returns, which is the 8% to 8.5% yield on cost.

Clearly, the announcement this morning is evidence of that continuing confidence with the acquisition in Manchester as Richard has already outlined.

Unlocking the planning consents, the planning environment is not straightforward as you well know, but we have got a good track record of delivering our planning consents in line with our program requirements for our run rate of annual deliveries.

And there is no reason to think that the continuing to grow expertise within our planning team will not support our ambitions going forward.

And then construction, there is, of course, build cost inflation. There's some interesting dynamics currently within the market, but I think the key thing here is where we're building on our longstanding relationships, both with main contractors, but equally, we own and hold direct most of the relationships with our supply chain who are providing the specification we need to fit out our buildings.

And that gives us good confidence in deliverability and managing build cost inflation within what we currently assume and have budgeted within our programs.

And again, Richard's flagged it, continuing to see some interesting opportunities for forward-fund purchases from third-party developers, where they meet our strategic ambitions to grow presence in certain key towns and cities, and we will look to continue to make good on some of those acquisitions.

So looking a little bit more granularly, 2016, clearly successfully completed five schemes.

2017, this year, we've got three developments which proceed really well on track and, in fact, we've got university agreements are very likely to be in place to underpin the income which we underwrote the project plans on, and those are likely to be concluded over the next few months.

And then we have our two forward funds into USAF. We have the one in Edinburgh, which is immediately adjacent to our development site in Edinburgh and, of course, therefore, there is strong marriage value for those two assets.

And then one in Oxford, which builds on our growing presence in Oxford, but again, that is underpinned by a five-year occupational agreement with Oxford Brookes University, which makes that a very attractive acquisition indeed.

2018 is on track. We have secured all the land, we have secured the planning consents and we have let the build contracts in line with the numbers we assume when we underwrote the project a couple of years ago, so that proceeds well.

We have taken the opportunity to accelerate two schemes from 2019, International House in Birmingham, and St Vincent's in Sheffield into 2018 to balance and smooth the delivery of our pipeline going forward, whilst we are experiencing a slight delay in planning on our scheme in Bristol with the BRI.

And then 2019, looking out some of our future pipeline: we have three schemes currently secured, two have already the benefit of planning, and the one that doesn't is, of course, the one I've just mentioned, BRI, but we are making good progress in that regard.

And then 2020, we are now building our pipeline. It is appropriate for us to be doing that over the next few months, already flagged the first acquisition in that regard.

We are tracking a further 500 to 1,000 beds in really interesting locations around the UK, and I guess more to follow in due course on that.

London development, again, as Richard has mentioned, the last two schemes that we developed completed in 2016. We have no further pipeline currently secured, but we would like to re-enter the market for the reasons cited earlier.

And whilst it's true that the land market fell steadily across 2016, it hasn't yet fallen far enough, and it does look like the land market has for now at least stabilized.

We are about 10% off where we need to be on a residual basis or where we would like to be to deliver our targeted hurdle rates. Having said that, there are a couple of opportunities which we're currently exploring where, potentially, our scale in London and expertise may help unlock those.

So having a slightly closer look to Aston Student Villages, and then finally, have a look at the portfolio disposal.

So we acquired ASV: 3,100 beds on Aston University's Birmingham city center campus for a consideration of GBP227 million. We feel that the on-campus nature makes the high-quality income which can be grown towards 6% yield, through the implementation of the Unite students' operating platform, highly attractive on a risk-adjusted basis.

Aston University are a strong university, they number about 11,000 students, and ASV represents their entire on-campus accommodation.

First years and international students for that university number 3,800, and therefore, you can see the supply/demand mismatch relative to the provision of bed spaces with ASV. This leads to very, very high rebooking rates.

A short-term nominations agreement is likely to be agreed with Aston University, which could pave the way for a longer-term re-gear, and that is likely to be agreed in relative short order.

And then we think there are three principal ways that we can reposition this asset to drive it closer to the 6% yield over the 5% acquisition yield. And I'm just going to briefly outline those three things.

The first, clearly, is the adoption of the Unite students' operating platform, will certainly enhance the student experience. Alongside that, we will look to invest GBP4 million in bringing the spec look and feel and use of the communal space up to our current specification, which again, will further reinforce the improvement within that student experience. And also, we'll leverage the margin improvements, which is much discussed through the implementation of PRISM.

Second is benefits of scale. We now own and operate 4,800 beds within Birmingham. There is significant leverage to that, in terms of economies.

And then higher utilization; we can access the current existing reversion, which sits at somewhere between 10% to 15% relative to direct let PBSA in a similar vicinity.

We probably wouldn't look to access all of that reversion, but nonetheless, there is some there which can be utilized through the repositioning of the assets in terms of quality, spec and proposition. And we could also just increase the occupancy throughout the year, which would generate higher revenue.

As Richard has mentioned, there is certainly scope for further on-campus acquisition opportunities, and where that's scope to reposition through the implementation and integration of our platforms, would enhance income and earnings.

Then finally, looking at the portfolio disposal. That is due to complete in Q2 this year. So it's exchanged unconditionally and is due to complete in the second quarter.

Of course, it's part of the ongoing strategy to recycle capital into our investments in higher-ranking universities, and accretive development pipeline. But just to give you a little bit of the detail behind it, so you can feel the rationale of how we're going about it.

We sold four assets in Liverpool. Liverpool is a core city but, of course, we have 1,850 beds under development in the city center. And therefore, we're recycling from those assets, into our development in Liverpool.

We sold two assets in Glasgow, again, a core city for us. For some years, we've been developing in the West End of the city for University of Glasgow, and this disposal underlines our transition from the city center, to University of Glasgow in the West End.

We sold an asset in Birmingham, again, very much a core city for us and that asset is being recycled into our 2018 development exposure that we have with our Birmingham development, and equally, is beginning to contribute towards the ASV acquisition too.

Sold an asset in Aberdeen. We completed a development in the autumn, in Aberdeen last year, and again, this is recycling that capital within the city, maintaining discipline.

Edinburgh, we've sold three assets. Again, we've got two developments completing this summer, so you can see that recycling going on, recycling from a drier net initial yield into a much higher yield on cost on development in this regard.

And also, two of the assets of the three were smaller studio schemes, and we have flagged for some time our intent to dispose of those types of property from our balance sheet.

Then we have York. Good asset in York. We acquired it as part of a portfolio, but we're not looking to grow scale in York and, therefore, disposal is logical.

And then finally, Poole, one asset we've sold; looking to recycle into higher-quality universities in that regard too.

So as Joe has mentioned, you can feels those themes in terms of how we're approaching disposals and what we're doing with the proceeds. Probably we'll be looking another GBP50 million to GBP100 million Unite's share of disposals over the course of the remainder of 2017.

So, on that note, I'm going to hand back to Richard, to sum up.

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Richard Simpson, Unite Group plc - MD, Property [4]

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So I think by any measure, we've delivered a strong set of results, but I think also the enhancing of our successful and consistent strategy with the portfolio moves that we've done. Enhancing the quality, the move on campus, the proactive portfolio management, something we want to do more of really, positions us very well.

So the structural fundamentals, therefore, of our business, of the student accommodation market, of the wider HE sector in the UK, all remain strong. And I think we are incredibly well positioned to continue to grow, and to deliver on the earnings and dividend projections that we've talked about.

So, on that point, draw it to close. There's an opportunity now I think for questions in the room first, and then questions on the line, if there will be any questions on the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions).

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David Brockton, Liberum - Analyst [2]

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David Brockton, Liberum. Can I ask two please? Firstly, just looking at your deployment of capital, as you choose between on-campus and new developments, can you just explore and, I guess, elaborate on the tradeoff between risk and return and whether you're indifferent between capital deployment between those two options, first? I'll do the second after.

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Richard Smith, Unite Group plc - CEO [3]

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Okay, I certainly don't think we're indifferent. We will look at the returns that we can secure from selective development, from the forward funds then and also, from on-campus.

Clearly, with development, there is a risk-adjusted return to consider. We deploy the -- the capital is tied up for a couple of years. So we will very much look at it on a case-by-case basis and I think you could expect us to see investing our capital in all three of the potential of markets going forward.

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David Brockton, Liberum - Analyst [4]

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And then as you look at the level of reservations for the forthcoming year, the notable increase there, any views from your side in terms of what's driving that? Is that a function of your changing portfolio mix or demand? Could you -- just anything in relation --?

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Richard Smith, Unite Group plc - CEO [5]

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I think it's a combination of factors. There is a proportion of that which is the change in the portfolio mix, the assets that we sold, replaced with Aston, there is a clear differentiation in the quality. And Aston is well ahead in terms of its rebooking.

But then there is this increasing demand from second and third years. We are using our revenue management system to really understand the market, to understand the price point that we need to go in at to secure those early bookings and then to move through the cycle. So I think it's self-help through revenue management, but then there also is an element of it which is the improved quality portfolio.

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David Brockton, Liberum - Analyst [6]

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So, in theory, that should be sustainable.

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Richard Smith, Unite Group plc - CEO [7]

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Yes.

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David Brockton, Liberum - Analyst [8]

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Thank you.

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Ollie Creasey, Green Street Advisors - Analyst [9]

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Ollie Creasey, Green Street Advisors. A couple of questions from me on the recent acquisitions, please. First of all, just looking at Manchester this morning, I wonder if you can give any more color on maybe the specific location of the asset and which students you'll be targeting with that. And perhaps, specifically, how the price you pay would relate to the prime values in the city today.

And then looking at the Aston acquisition, I'm just curious if that on-campus type of transaction if this is one of the first you've maybe looked at? Or if it's just one of the first that's added up economically?

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Richard Smith, Unite Group plc - CEO [10]

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I'll take the Aston first and then maybe, Richard, if you take the Manchester question. It's not the first we've looked at. But a number of the on-campus deals that have occurred to date, for example, UPP-type deals, they tend to be vehicles that are very highly geared looking for a capital return. And frankly, it didn't fit our capital structure. We weren't able to drive a return.

The Aston deal, I think is an example of where the university wants to do something a little bit different. We've got control of the assets. We can bring our operating platform in to drive the enhanced value that Richard has talked about.

But I do think universities are thinking about their accommodation in a way that is much more consistent with the way that Aston is structured than perhaps the university deals of the past. So I think there will be further opportunities.

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Richard Simpson, Unite Group plc - MD, Property [11]

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In terms of Manchester, the site itself is immediately west of the University of Manchester's main campus, just to the west of the Oxford Road.

We're targeting University of Manchester and we would be looking to target Manchester Uni's first years and international students in doing that.

In terms of how we underwrote it, able -- a very slight discount to prevailing market rent within PBSA in that vicinity.

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Richard Smith, Unite Group plc - CEO [12]

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Remco, do you want to go first?

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Remco Simon, Kempen & Co - Analyst [13]

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Remco Simon, Kempen. To your point of the improving quality of the portfolio, which is, as you said, reflected in the higher level of reservations, what should we read into the slightly lower rental growth guidance for this year than last year?

You would expect that with a better quality portfolio and with reservations ahead of last year, that would improve a little bit. Is that a function of the slight saturation in the market in terms of supply? Or is that too much to read into that?

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Richard Simpson, Unite Group plc - MD, Property [14]

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I think it's a perhaps a little too much to read into that. The market is maturing. There are some wider macroeconomic factors at play.

I think 3% to 3.5% rental growth, if we were to deliver that and clearly, we're targeting the top end of that range, would be consistent with the average that we've delivered over the last five years. So I think we're confident in that. Clearly, we'll try and do a little bit better, but I think it's just in recognition of the wider market.

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Robbie Duncan, Numis Securities - Analyst [15]

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Robbie Duncan, Numis. A question from me around concentration of nomination agreements versus direct lets. Are you finding you're getting pockets of concentration say in a certain city that one city will be specifically more direct-let focused than nomination agreements and, therefore, higher ratios of second and third years, whereas others are more nomination agreements? I'm just trying to get a flavor of how that stacks. Or is it more broadly spread across the wider portfolio?

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Richard Smith, Unite Group plc - CEO [16]

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I think it's slightly more broadly spread. And it does largely depend on the individual institutions and, for example, whether they have accommodation of their own would be a key driver of the level of nominations that would be awarded to us or other operators.

In the cities, I think over all of the towns and cities that we're operating, we're looking to build more nominations. And I think, as Richard's mentioned, what we're opening next year, we expect to have nominations across all three of those assets, the assets that we opened in 2016.

Again, the vast majority of those, around 70% of 3,000 plus beds, had nominations allocated to them. So I think you look at it on a city by city basis. But there are certain cities, for example London, where there just isn't the accommodation where nominations is really something the universities are looking for.

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Robbie Duncan, Numis Securities - Analyst [17]

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Next question relates to your capacity. Obviously, you've flagged the increase in disposals, GBP150 million to GBP200 million your share in the current year, partly obviously, because you've got the ASV in there and you're pushing out 2019 and 2020 developments. What sort of capacity do you think you've got for on-campus type deals?

Now I appreciate, there may be others, so not just on-campus acquisitions, but more broadly for the acquisition piece versus developments, please?

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Richard Smith, Unite Group plc - CEO [18]

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Joe, do you want to?

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Joe Lister, Unite Group plc - CFO [19]

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Yes, I think what we've been making sure that we've got is that flexibility to flex leverage in the short term and balance that with disposals in relatively short order, which we've been able to show that we did with the ASV portfolio.

I think if there was another big Aston Student Village scheme, then we would have to be planning some more disposals to match that.

So the GBP150 million to GBP200 million doesn't give us capacity to do another on-campus deal. It gives us the capacity to do the 2019 pipeline and start committing to 2020. Any future on-campus deals, we would have to source that equity from further disposals.

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Keith Crawford, Peel Hunt - Analyst [20]

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Keith Crawford, Peel Hunt. I understand this Company has an extremely focused clear direction of swimming through waters which change over the years as I can understand it. These properties that you've been selling, not the peripheral little places, but the bigger ones, is there speculative construct -- let's keep London out of it of course, but the other major city locations, is there speculative development appearing in the wrong places whilst you do all this? Is there an element of that, just people who are getting consents, because it's a bit easier than (multiple speakers)?

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Richard Smith, Unite Group plc - CEO [21]

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I think if you look across the 20,000 to 25,000 beds that are being developed, I think we would say certainly a proportion of those are not the product we would build. So they are studio-led schemes and studios, certainly in terms of the spreadsheet economics of the development appraisal looks better. I don't believe that's where the depth of student demand is for studios at that price point.

And then I think we have a very deep understanding of universities and students and what students do and don't want and what students are prepared to do in terms of what they want in a building, the amenity they want and how far actually they are willing to walk very simply. And again, there will be a proportion of the new development that I think is probably misplaced.

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Keith Crawford, Peel Hunt - Analyst [22]

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Awkward, okay. And this second and third year accommodation aspect, did you say 38% of the total of your --

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Richard Smith, Unite Group plc - CEO [23]

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35%

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Keith Crawford, Peel Hunt - Analyst [24]

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35%. And that can be grown?

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Richard Smith, Unite Group plc - CEO [25]

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I think it can be grown. There's obviously a tradeoff with their nominations, which is primarily first year, great to be able to sell the same bedroom and twin-up, but we're not America, we're not quite there yet with that.

But I think it can be grown. There is demand for it and I think there's probably more we can look to do operationally to support that demand because there's potential operating efficiencies in supporting non-first years.

They perhaps don't need the same level, intensive customer service and management that sometimes some of our first years do need, so we will look at it.

Nominations are a really important part of our business. We need to retain those relationships with the universities, but I think we now have the option to look at our estate, look at assets and decide where we want to take it.

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Keith Crawford, Peel Hunt - Analyst [26]

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My other question was really, just to try and get some picture in my mind, about the student effective numbers in these effective locations in five years' time. Is the drive of foreign students or is the driver -- international or across the broader base, is it science, technology and math, is that where the driver is?

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Richard Smith, Unite Group plc - CEO [27]

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I think there's a whole number of drivers and I think probably without commenting too deeply on government policy, there is this whole mismatch between perhaps what they want to do in driving students into maybe some of the stem subjects versus what's actually happening.

I think for us, it's very much looking at the attractiveness of institutions within cities and is that where we believe students are going to go and want to study, and that is all about the quality of that institution and what they are offering to students and very clearly, obviously, to parents, which is why I think the TEF, the Teaching Excellence Framework, I think will become really relevant.

I think I have a personal view that it will, in time, become similar to Ofsted rankings, primary and secondary schools, in terms of determining where you want your child to go to school or your child to go to university.

So I think it's very much more about the quality and quality institutions will attract domestic students and they will attract international students.

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Keith Crawford, Peel Hunt - Analyst [28]

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Right, thanks.

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Operator [29]

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(Operator Instructions).

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Richard Smith, Unite Group plc - CEO [30]

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It doesn't appear that there's any more questions in the room. I don't know if we have any on the conference line.

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Operator [31]

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We currently have no questions on the phone lines.

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Richard Smith, Unite Group plc - CEO [32]

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No questions. Okay, well I'll bring it to a close then. Thank you very much, everybody. Thank you for coming.

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Operator [33]

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Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines and have a lovely day.