TIDMUTG
RNS Number : 2061R
Unite Group PLC
27 February 2019
PRESS RELEASE
27 February 2019
THE UNITE GROUP PLC
("Unite Students", "Unite", the "Group" or the "Company")
RESULTS FOR THE YEARED 31 DECEMBER 2018
Richard Smith, Chief Executive of Unite Group, commented:
"2018 was another successful year for Unite. We made good
progress against all of our core objectives and continued to
deliver sustainable growth in our recurring earnings and cash
flows. Our strong results remain underpinned by our brand, our
sector-leading operating platform, the quality of our portfolio,
our deep and valuable University relationships and sector
fundamentals. These qualities set us apart in a sector that remains
undersupplied and, more than ever, has a need for accommodation
that is delivered efficiently and with a focus on value for
money.
"We continue to work in partnership with and align our portfolio
to the strongest Universities in the UK, where student demand is
both sustainable and at its greatest with 90% of our portfolio
located at these Universities. This strategy has led to a further
improvement in the quality and security of our income, with 60% of
beds underpinned by agreements, in line with our target. University
partnerships, alongside our development pipeline, are key drivers
of continued growth and forward visibility of our earnings.
"Looking ahead, we maintain our positive outlook for the
business. Reservations for the 2019/20 academic year are in line
with record levels for this time of year, supporting our
like-for-like rental growth guidance of 3.0-3.5%. Our secured
development and University partnerships pipeline of 6,579 beds
being delivered over the next four years will further improve
operating efficiency and generate significant earnings growth.
"Whilst the backdrop of the ongoing Brexit negotiations and the
impending review into Higher Education funding provide some
uncertainty, our strategy of aligning to the best Universities and
providing good-quality, value-for-money accommodation for resilient
segments of the market reinforces our long-term confidence in the
business. This confidence is reflected in our 28% increase in the
full-year dividend."
Operational delivery drives continued strong financial
performance
Year ended 31 December 2018 31 December 2017 Change
============================== ================= ================= =======
EPRA earnings* GBP88.4m GBP70.5m +25%
EPRA earnings per share* 34.1p 30.3p +13%
Profit before tax GBP245.8m GBP229.4m +7%
Dividend per share 29.0p 22.7p +28%
Total accounting return* 13% 14%
Like-for-like rental growth* 3.2% 3.4%
EBIT margin 71% 68%
As at 31 December 2018 31 December 2017
------------------------------ ----------------- ----------------- -------
EPRA NAV per share* 790p 720p +10%
Net debt* GBP856m GBP803m +7%
Loan to value* 29% 31%
============================== ================= ================= =======
EPRA earnings up 25% to GBP88.4 million, 34.1p per share (2017:
GBP70.5 million and 30.3p)
-- 98% occupancy and like-for-like rental growth of 3.2% (2017: 99% and 3.4%)
-- Increased dividend, up 28% to 29.0p, driven by growing earnings and higher payout
-- Profit before tax up 7% to GBP245.8 million (2017: GBP229.4 million)
-- 13% total accounting return (2017: 14%)
Record level of reservations for 2019/20 academic year supports
rental growth outlook
-- Reservations for 2019/20 academic year at 75% in line with record levels in 2017
-- Rental growth outlook for 2019/20 of 3.0-3.5% on a like-for-like basis
Earnings growth underpinned by operating platform, nomination
agreements and development and
partnerships pipeline
-- Nomination agreements with Universities on 60% of beds (2017:
60%) with proportion benefitting from contractual uplifts up to 76%
from 71%
-- New nominations secured on 50% of the 2018 openings (70%
expected in 2019), including three new agreements with top
25-ranked Universities
-- Secured development and University partnerships pipeline of
6,579 beds for delivery over the next four years, generating an
attractive 7.0% yield on cost
-- Together with rental growth, these new openings net of
disposals could add 13p to 17p to earnings per share on completion
of the pipeline
-- Leveraging operating platform to drive further efficiencies -
2018 targets delivered and set new EBIT margin target of 74% by end
of 2021
High-quality portfolio aligned to the strongest Universities
where intake continues to grow
-- Significant progress with University partnerships - two deals
secured in 2018, one deal secured since the year end and further
pipeline emerging through 10 active discussions
-- Disposal of 3,436 beds for GBP180 million (GBP85 million
Unite share) to support increased focus on high-quality
Universities
-- 90% of Unite's portfolio located at high and mid-ranked Universities
-- Continue to see a number of attractive development and
University partnership opportunities in line with our target
returns and expect to add to the pipeline whilst maintaining
financial discipline
Strong financial position
-- LTV of 29% (2017: 31%), cost of debt reduced to 3.8% (2017: 4.1%)
-- Transition to unsecured borrowing structure following
issuance of GBP275 million unsecured corporate bond, backed by
investment-grade credit rating from Standard & Poor's and
Moody's
* The financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS). These financial
highlights are based on the European Public Real Estate Association
(EPRA) best practice recommendations and these performance measures
are published as they are intended to help users in the
comparability of these results across other listed real estate
companies in Europe. The metrics are also used internally to
measure and manage the business and to align to the performance
related conditions for Directors' remuneration. See glossary for
definitions.
PRESENTATION
There will be a presentation for analysts this morning at 08.15
at the Andaz London Liverpool Street. A live webcast will be
available at:
https://webcasts.unite-group.co.uk/results/2019-full-year. To
register for the event or to receive dial-in details, please
contact unite@powerscourt-group.com.
For further information, please contact:
Unite Students
Richard Smith / Joe Lister / Paul Richmond Tel: +44 117 302
7005
Powerscourt
Justin Griffiths / Alison Watson / Mazar Masud Tel: +44 20 7250
1446
CHAIRMAN'S STATEMENT
The business has continued to make excellent progress in 2018,
delivering across all of our key metrics. Our sector-leading brand
and our positive reputation with customers and Universities, based
around valued customer service, underpins this performance. The
combination of our brand, relationships with high-quality
Universities and property portfolio is difficult to replicate and
is driving sustainable growth in our earnings.
Financial performance has again been strong, with a total
accounting return of 13% and growth in EPRA earnings, up 25% to
GBP88.4 million. Profit before tax was GBP245.8 million, which
includes property revaluations and the impact of disposals of
GBP153.6 million (2017: GBP229.4 million and GBP169.2 million
respectively). As a result of this performance, we are proposing a
final dividend of 19.5p to deliver a total dividend of 29.0p for
the full year, an increase of 28% year-on-year.
Unite Students is a service brand and the strong performance we
have delivered for our customers, University partners and
shareholders is only possible because of the talent and hard work
of our teams across the business. On behalf of the Board, I would
like to thank them for another excellent year. Richard Simpson
stepped down in May as our Group Property Director to take up the
role of Chief Executive Officer of Watkin Jones plc. We have also
taken the opportunity to appoint Richard Akers and Ilaria del Beato
as additional Non-Executive Directors in September and December
respectively.
The recent success of the business is founded on a consistent
strategy and we will continue to focus on delivering its main
objectives: providing great services that our students and
University partners value; delivering quality buildings designed
around student needs; and generating high-quality recurring
earnings and maintaining a strong capital structure.
The outlook for our market remains positive, reflecting the
strength of the world-renowned UK Higher Education sector,
increasing participation rates, the internationalisation of Higher
Education and the shortage of housing in the UK. Whilst the Higher
Education Funding Review, together with the ongoing Brexit
negotiations and political landscape in the UK, present a backdrop
of some uncertainty; the Higher Education sector fundamentals,
together with our high-quality portfolio, University relationships
and market-leading operating platform, provide a resilient platform
for continued growth.
CHIEF EXECUTIVE'S REVIEW
I am pleased to report another strong set of results for the
year ended 31 December 2018. We have maintained our focus on
delivering sustainable growth in recurring profits and cash flows
over the long term, and on delivering a Home for Success for all
the students who live with us. We do this by providing valued
services and operating high-quality buildings, designed
specifically for students. Our investment discipline ensures we
maintain a robust capital structure and deliver sustainable
earnings.
Performance in 2018 resulted in another year of growth in EPRA
earnings, like-for-like rents and development profits. EPRA
earnings increased by 25% to GBP88.4 million and now represent over
one-third of total accounting returns. The security, quality and
visibility of our earnings provides the confidence to maintain our
dividend payout of 85% of EPRA EPS.
Financial highlights
2018 2017
EPRA earnings GBP88.4m GBP70.5m
EPRA EPS 34.1p 30.3p
Profit before tax GBP245.8m GBP229.4m
Basic EPS 90.8p 95.3p
Dividend per share 29.0p 22.7p
Total accounting return 13% 14%
EBIT margin 71% 68%
EPRA NAV per share 790p 720p
Loan to value (LTV) 29% 31%
We will continue to focus on growing earnings, both in absolute
terms and as a proportion of total returns. This is supported by
our operational focus and the delivery of our secured pipeline.
More specifically, the high degree of income visibility (driven by
nominations, re-bookers, international and postgraduate students)
and more effective utilisation of assets underpin our ability to
maintain full occupancy and grow income on an annual basis. With
increasing scale and a consistent focus on cost efficiencies, we
have continued to invest a proportion of savings back into our
service offer and also deliver further margin improvements. We see
further opportunities to sustain improvements in both service and
margins. The progress that we have made developing our University
partnerships, alongside more traditional development activity, will
drive further growth over the next few years and we continue to see
an attractive pipeline of opportunities in both of these areas.
Our PRISM operating platform, coupled with our experienced
management and leadership teams, give us a unique capability to
drive value from our portfolio through further scale efficiencies,
revenue management and utilisation, supporting our ongoing income
focus. These capabilities give us confidence in sustaining rental
growth.
We have actively prioritised improving the quality of our
portfolio by using our customer insight and extensive local
knowledge to align with the top performing Universities and ensure
that we are in the best locations within our markets. This focus on
the best Universities in the UK means that we are well positioned
to maintain full occupancy and rental growth over time.
Delivering for students
A University education can transform lives. We recognise,
however, that it requires a significant financial commitment and
understand that young people are increasingly focussed on getting
value for their investment. Students understand that accommodation
is a key ingredient in this and are demanding increased levels of
service. We are therefore committed to delivering a living
environment that provides students with what matters most to them
and supports their academic, social and personal development. We
believe that the value of a University education goes beyond future
earnings potential and recognise the importance of this to students
and all stakeholders. Our students earn on average 33% more than
national median earnings five years post-graduation, reflecting the
value of their time at University.
We seek to provide a valued service through the consistent
delivery of Home for Success, our insight-based student proposition
that brings together great properties with the services students
want, provided by people who understand students and, importantly,
who care. In recent years, a significant investment in technology
and our digital capability has helped us increase the
differentiation of our offer, improve our students' experience and
drive operating efficiencies.
Our properties are located where students want to live, close to
their University, and are well maintained and regularly
refurbished. We provide a range of room types at different price
points with 92% configured in clusters with ensuite bedrooms and
shared living spaces, which is how our research consistently tells
us most students want to live. We offer different tenancy lengths
to cater to a diverse spectrum of students, totalling 1.5 million
students in need of accommodation. Amongst other things, our rents
include all utilities, service charges, full contents insurance,
rapid maintenance and high-speed Wi-Fi. In addition, our teams are
on hand to support students when they need us; either physically or
digitally. We make sure our dealings with students are
straightforward and fair. Our service is based on providing the
things that students value most: a safe and secure environment,
support getting settled in quickly and help thereafter when they
need it.
This commitment to providing value for students is reflected in
average occupancy of 98% and rental growth of 3.5% p.a. over the
last five years. Growing numbers of second, third year and
postgraduate students are choosing to return to us and now account
for two-thirds of our direct-let bookings. These students
traditionally have lived in the private-rented sector, a sector
that was recently highlighted in the NUS's 'Homes Fit for Study
2019' report for many of its poor practises, including housing
quality, maintenance issues and deposit-related issues. The report
also highlighted a rental level that is comparable to PBSA. These
factors help to explain why more returning students are choosing
PBSA over traditional alternatives. With over 800,000 students
still living in private-rented housing, we continue to see further
opportunity in this area.
Customer service satisfaction levels, a key performance
indicator for us, remain at consistently high levels and place us
on a par with some of the best service companies across Europe. 94%
of our customers are satisfied with their accommodation and, across
the whole PBSA market, 76% of students are happy with their
accommodation (Knight Frank / UCAS); demonstrating the continuing
appeal of our product and service and also more broadly across the
sector.
We are proud to continue our support for the Unite Foundation.
The Foundation provides financial and pastoral support to over 200
students every year in partnership with 27 Universities.
Partner of choice for Universities
Our reputation with partner Universities is another of our key
performance metrics. The results of our latest Higher Education
trust survey show that our reputation with Universities across the
UK is at record levels. This reflects years of sustained investment
in key relationships and represents a key strategic advantage for
Unite, resulting in a growing number of discussions about new
opportunities.
In a highly-competitive environment, Universities are
increasingly recognising the importance of high-quality
accommodation in their ability to attract and retain students and
ensure their satisfaction, a key performance metric under the
government's Teaching Excellence Framework. Like the students who
live with us, Universities are increasingly recognising the value
of our student proposition, Home for Success.
Because of this, almost two-thirds of our estate is now let
under nomination agreements with more than 45 of the UK's best
institutions. Both our city-based managers and our Higher Education
Engagement team work closely with these Universities to help them
meet their short, medium and long-term accommodation needs, as well
as their targets for student satisfaction, experience, welfare and
retention. With an average remaining life of six years, these
agreements provide income and rental growth certainty on 60% of our
student income.
The availability of high-quality accommodation represents a
significant constraint for many Universities, who are increasingly
approaching Unite not as a traditional supplier but as a strategic
partner in their long-term accommodation strategy. During the year,
we secured two further University partnerships and have continued
to make progress with our pipeline. We are in active dialogue with
10 Universities over potential partnerships. The growing appetite
for innovative, long-term University partnership deals is helping
us grow our portfolio of partnerships and drive long-term income
security. Additionally, we have negotiated new agreements with
three top 25-ranked Universities and also increased the proportion
of nominations agreements benefitting from contractual rental
uplifts from 71% to 76%.
Operating quality buildings
The quality, location and scale of our portfolio is a key
component of our business model and long-term strategy. We aim to
operate buildings in and around high-quality Universities where
student demand is highest. We believe that our focus on these
institutions is the best strategy for driving continued high levels
of occupancy and rental growth. We are therefore focussing our
portfolio activity on further improving alignment to high and
mid-ranked Universities and being in the best locations. 90% of our
income is generated by students attending such Universities and we
will ensure that our portfolio remains aligned to the best
Universities in the UK.
During 2018, we opened 3,074 new beds, added 331 beds to our
portfolio through acquisition and sold 3,436 beds. Taking into
account these activities, together with valuation movements, the
value of our investment portfolio (including our share of USAF and
LSAV) is GBP2.7 billion as at 31 December 2018 (2017: GBP2.4
billion).
The purpose-built student accommodation sector continues to
attract a significant level of global institutional capital. Over
GBP3 billion of assets were traded in the year, driving yield
compression across the sector, most notably for the highest-quality
assets. The valuation of our portfolio increased as a result of an
inward yield movement of 15 basis points on a like-for-like basis
and the portfolio is valued at an average portfolio yield of 5.0%
(2017: 5.2%).
Development and partnerships pipeline
We also made excellent progress with our development pipeline
during the year. We delivered seven new buildings over the summer
and secured two additional development schemes, taking our secured
development pipeline for delivery over the next four years to 6,579
beds. The construction of all our 2019 openings is progressing in
line with plans and we expect that around 70% of these beds will be
secured by nominations agreements. Planning consents and build
contracts are in place for all of our 2020 deliveries and we are
finalising our plans for schemes delivering in 2021 and 2022.
Since the year end, we have secured an option to acquire a new
site in Bristol, on a subject-to-panning basis, that is expected to
deliver 650 beds in 2022 and to be delivered as a University
partnership scheme.
The secured development and partnerships pipeline is highly
accretive and remains a significant component of our future
earnings growth and, taken together with rental growth and
disposals, could contribute 13-17 pence per share to EPRA earnings
once built out.
The anticipated yield on cost of our secured development
pipeline is 7.6% and prospective returns on new schemes remain
attractive at around 7.0% in London and 8.0% in the regions. We
have lower hurdle rates for developments that are supported by
Universities or where another developer is undertaking the
higher-risk activities of planning and construction.
We continue to see attractive development and partnership
opportunities both in London and in other strong University
markets. We plan to continue investing selectively in markets to
enhance portfolio quality whilst maintaining discipline around
target returns, and pushing for greater optionality given the
uncertainty created by Brexit. We expect to maintain our run rate
of 1,500-2,500 new beds over the coming few years.
Disposals
Disposals remain an important part of our strategy and we will
continue to recycle assets out of our portfolio to ensure that we
increase our exposure to the UK's best Universities, whilst
generating capital to invest in further development activity and
other investment opportunities. During 2018, we sold 14 properties
for GBP180 million, of which Unite's share is GBP85 million.
Following the disposal, we no longer have a presence in Plymouth or
Huddersfield and have further improved our alignment to our target
Universities, supporting our longer-term rental growth
aspirations.
Our secured development pipeline requires a further GBP486
million of capital expenditure, and we intend to sell a further
GBP100-GBP150 million (Unite share) of assets during 2019 to take
advantage of the ongoing strength in the investment market and to
ensure that we maintain a strong and flexible balance sheet as we
progress our development pipeline. This disciplined approach to
portfolio optimisation underpins our ability to sustain rental
growth over a longer-time horizon.
High-quality earnings and a strong capital structure
We have achieved 98% occupancy across our portfolio and rental
growth of 3.2% for the 2018/19 academic year. With 60% of beds
underpinned by University nomination agreements, we have a high
level of visibility in the ongoing occupancy and rental growth
outlook of the portfolio. The investments that we have made in our
PRISM operating platform differentiate us from our competition and
provide capacity for us to continue growing the portfolio and
delivering efficiencies in the future. This focus on efficiency has
resulted in us delivering our NOI margin target of 75% and our
overhead efficiency target of 30 basis points. As outlined at our
Capital Markets Day, going forward we will combine these two
measures and target an EBIT margin (NOI less overheads and fees as
a percentage of sales). This measure shows the overall efficiency
of the business and significantly aids comparability across the
sector. In 2018, we achieved a sector leading EBIT margin of 71%,
up from 68% in 2017, and are targeting an EBIT margin of 74% by the
end of 2021. This will be delivered by maintaining discipline on
back-office efficiency and ensuring that services delivered to
students are meaningful, relevant and delivered efficiently.
Unite's share of net debt grew by GBP53 million to GBP856
million in 2018. The majority of our property and development
expenditure (Unite share GBP273 million) was funded by our share
placing and disposal programme which, together with asset value
appreciation, resulted in the reduction of LTV to 29% (2017: 31%).
This LTV is at the lower end of our target range and we expect it
to increase back to around the mid-30% level as we build out the
development pipeline. We also monitor our interest cover ratio
which currently stands at 3.4 and net debt to EBITDA ratio which is
at 6.1 (2017: 2.6 and 6.5), both of which are in line with our
target levels.
The Group also made its debut in the listed, unsecured bonds
market, raising GBP275 million of 10-year bonds and has retained
its investment-grade credit rating from Standard and Poor's and
Moody's. The new funding provides additional financing headroom,
greater flexibility and a reduced cost of funding.
Market and strategy
The outlook for the student accommodation sector remains
positive, with structural factors continuing to drive a
demand-supply imbalance in the cities where we operate. The UK
Higher Education sector is recognised globally for the strength of
its Universities and the contribution it makes to research,
innovation, talent development and the UK economy more broadly. The
UK is the second most popular destination for international
students and has 11 out of the world's top 100 Universities and 58
of Europe's top 200 Universities.
Total student numbers again reached record levels at over 1.8
million. The number of applicants and the number of students
accepted into courses in 2018 was at 696,000 and 533,000
respectively (2017: 700,000 and 534,000). Despite a fall in
applications of less than 1%, Universities were able to recruit
from the excess of applications, resulting in intake remaining in
line with the previous year and applicants still outstripping
acceptances by 163,000. The small reduction in applications was
driven principally by the demographic decline in the UK, with
international students once again growing.
The initial applications data for the 2019/20 academic year is
encouraging, with overall applications up by 0.5% with growing
participation rates and increased numbers of international students
more than offsetting the impact of the demographic decline that
continues until 2021.
Going forward, the gap between the number of applicants and
University places could be impacted by some external factors,
including the impact of the UK leaving the EU and the demographic
trend that has seen a 60,000 reduction in the number of
18-year-olds over the past four years. Whilst the impact on student
numbers of the UK leaving the EU is difficult to predict, EU
students only make up around 2,500 of our direct-let customers and
EU student numbers have continued to grow over the last two years.
We are nevertheless forecasting a 20-25% decline in EU
undergraduates by 2023, equating to a fall of around 1% of total
students.
However, participation rates continue to grow as more young
people are choosing University over other alternatives and this,
together with the reversal of the demographic decline, means that
the outlook for UK student numbers looks increasingly positive.
With demand from international students also growing, up 9% this
year, a more positive visa environment and a relatively small
impact from Brexit, we feel equally positive about international
demand.
The Government's review into post-18 education through the Augar
Review is expected to report in the next few weeks. The review is
expected to propose a number of changes to the way Higher Education
is funded. Whilst the outcomes remain unclear, we expect to see the
review recommend some reduction in the fees that students pay and
potentially create some restrictions for Universities or courses
that are assessed to offer lower-quality outcomes. We continue to
focus on higher-quality Universities determined by a variety of
measures such as TEF rankings, league tables, student outcomes,
entry criteria and financial strength. This is demonstrated as less
than 4% of our income is generated from lower financial-strength
Universities and only 3% of our students are at Universities with
entry requirements lower than three Ds at A level. This strategy of
focussing on higher-quality Universities positions us well to
withstand any impact of these changes. Any changes could also put
pressure on University finances and we will continue with our
dialogues with Universities as to how we can best support them
through our partnership activity.
The student accommodation sector has attracted significant
levels of capital investment over the last four years with over
GBP16 billion of investment activity. This increased investment
activity has seen the new supply of accommodation increase and the
total number of purpose-built beds (including University-owned
beds) grow to over 600,000, representing around one-third of the
UK's student population. At this level, there still remains a
shortage of purpose-built accommodation compared to the numbers of
first year and international students, before taking account of the
increasing numbers of second and third-year students who are
choosing this type of accommodation. The outlook suggests that the
rate of new supply will continue at a similar rate of around
20,000-25,000 beds in 2019, before starting to reduce. Supply in
2020 and beyond is currently limited to a further 20,000 beds. A
large proportion of the new supply is focussed in markets where we
do not have a presence and on the premium end of the market where
we believe the competitive threat that it poses to our more
mainstream proposition is limited.
Our exposure to changes in student numbers and increases in
supply is mitigated by our alignment and relationship with
high-quality Universities where student demand remains strongest,
underpinned by nominations agreements. We remain confident that
well-located, mid-range, direct-let student accommodation will
continue to support high levels of occupancy and rental growth.
Outlook
The outlook for the business remains positive. Building on our
consistent performance record and the market fundamentals, the
Group remains well placed to deliver sustainable earnings growth in
the years ahead. Whilst the Augar Review could present some new
challenges for the sector, UK Universities continue to demonstrate
their ability to adapt and respond to a changing landscape and
retain their globally recognised status. Growing participation
rates highlight the very significant value that young adults place
on a University education and the opportunities that it creates.
This trend continues to drive the demand for high-quality Higher
Education amongst both UK and international students as seen by the
latest applications data. Our alignment to and relationships with
the best Universities in the UK means that the impact of any
changes on our business will be manageable.
Our development pipeline, University partnerships and
operational expertise provides good visibility of future rental
growth and increasing recurring earnings. With the increased level
of macro risks, we are maintaining discipline around the allocation
of capital into new opportunities but still expect to invest into
new, value-enhancing activities. We are confident that our strategy
of aligning our operations with the best performing Universities in
the UK, combined with our highly-scalable operating platform,
strong brand and reputation, makes us well positioned to extend our
market-leading position.
OPERATIONS REVIEW
The Group reports on an IFRS basis and presents its performance
in line with best practice recommended by EPRA. The Operations and
Property reviews focus on EPRA measures as these are our key
internal measures and aid comparability across the real estate
sector.
Sales, rental growth and profitability
The key strengths of our operating business are our people, our
PRISM operating platform, our brand and the strength of our
relationships with Universities. We have continued to build on
these throughout 2018, resulting in a 28% increase in EPRA earnings
to GBP88.4 million (2017: GBP70.5 million). This growth has again
been driven by high occupancy, rental growth and the impact of
capital recycling, as well as further operational efficiencies and
ongoing cost discipline.
Summary EPRA income statement
2018 2017
GBPm GBPm
-------------------------------------- -------- -------
Rental income 188.3 170.8
Property operating expenses (48.0) (44.3)
-------- -------
Net operating income (NOI) 140.3 126.5
-------- -------
NOI margin 75% 74%
Management fees 15.6 14.1
Operating expenses (21.7) (24.6)
Finance costs (40.0) (45.2)
Acquisition and net performance fees - 4.3
Development and other costs (5.8) (4.6)
-------- -------
EPRA earnings 88.4 70.5
-------- -------
EPRA EPS 34.1p 30.3p
-------- -------
EBIT margin 71% 68%
A full reconciliation of Profit before tax to EPRA earnings is
set out in note 2.2 of the financial statements
Rental income has increased by GBP17.5 million, up 10%, as a
result of new openings and sustained rental growth, offset by the
impact of disposals made in the year.
The efficiency programme we implemented in 2017 has delivered
our targeted cost savings of GBP5 million by streamlining processes
and procedures as a result of our student insight, PRISM and scale
efficiencies. These savings have ensured that we delivered our NOI
margin and overhead efficiency target in 2018 whilst enhancing
service. Management fee income from joint ventures was GBP15.6
million (2017: GBP18.4 million), as a result of recurring
management fees of GBP13.2 million and one-off fees of GBP2.4
million (2017: GBP14.1 million and GBP4.3 million). We have
introduced a new target to achieve an EBIT margin of 74% by the end
of 2021. This target replaces previous efficiency targets and the
improvement from the current level of 71% will be driven by tight
cost control whilst growing the scale of the portfolio.
Finance costs decreased to GBP40.0 million (2017: GBP45.2
million). An increase in net debt at the end of the year of GBP53
million to GBP856 million (2017: GBP803 million) was offset by a
lower average cost of finance of 3.8% (2017: 4.1%) as we have added
new debt facilities at lower average rates, taking advantage of the
historically low cost of debt. The increase in net debt was skewed
towards the end of the year, driven largely by spend on development
activities which has, in turn, led to an increase to GBP10.5
million in the amount of interest that is capitalised into
development schemes, up from GBP7.4 million in 2017. We expect the
level of interest capitalisation to remain at around this level
given the ongoing level of development activity in 2019 and 2020.
Development (pre-contract) and other costs grew to GBP5.8 million
(2017: GBP4.6 million), reflecting the levels of site acquisition,
the earnings impact of share based incentives and our contribution
to our charitable trust, the Unite Foundation.
Occupancy, reservations and rental growth
Occupancy across Unite's portfolio for the 2018/19 academic year
stands at 98% and like-for-like rental growth of 3.2% was achieved
on our portfolio. We have maintained the proportion of beds let to
Universities, with 60% of rooms under nominations agreements
(2017/18: 60%).
76% of these agreements, by income, are now multi-year and
therefore benefit from annual RPI-linked uplifts, up from 71% in
2017. The remaining agreements are single year and we again
achieved a renewal rate of over 95% on these agreements. By
improving the length and quality of these agreements, income from
nominations agreements has grown by 5.3% year-on-year as a result
of improvements in mix and geographical location, and gives us
increasing confidence over our rental growth outlook. Enhanced
service levels and our extensive understanding of student needs
have driven the longer-term nature and more robust partnerships
with Universities. The unexpired term of the agreements is six
years, in line with 2017.
We expect the proportion of beds let to Universities to remain
at or around this level in the future. This balance of nominations
and direct-let beds provides the benefit of having income secured
by Universities, as well as the ability to offer rooms to returning
students and to determine market pricing on an annual basis.
2018/19 2017/18
Agreement length Beds income income
------------------ ------- -------- --------
Single year 7,543 24% 29%
2-10 years 13,437 49% 44%
11-20 years 4,026 14% 14%
20+ years 4,099 13% 13%
Total 29,105 100 100
Reservations for the 2019/20 academic year are encouraging, at
75%, in line with the same point last year, as a result of our
continued focus of working alongside the UK's best Universities,
the success of our online marketing strategy and further progress
through our local marketing operation in China.
We have good visibility over rental growth for the 2019/20
academic year with the nominations agreements in place, locking in
to an uplift of 3-4%. In addition to this, our re-bookers, non-EU
international and postgraduate students, who have more predictable
booking patterns and are less affected by UK Government funding,
make up a further 30% of our income. Through our utilisation
activity, we can generate a further 3% of income with a high degree
of confidence. This leaves only 9% of our income and rental growth
exposed to less predictable first-time UK and EU undergraduate
customers.
Our strategy of working alongside the UK's best Universities,
together with our operational and sales focus, provides us with
confidence of again delivering rental growth in 2019/20, in the
region of 3.0-3.5%.
Home for Success
With the value of Higher Education increasingly under scrutiny,
the role of accommodation in shaping students' University
experience is increasingly recognised. Against this backdrop,
during 2018 we continued to drive student advocacy and our
reputation with Universities through sustained but disciplined
investment in our purpose, Home for Success. Our success was
reflected in record results in our annual surveys of student
satisfaction and University reputation respectively.
In building Home for Success, we successfully harnessed the
power of our PRISM operating system and other proprietary digital
platforms to simultaneously improve our students' experience and
drive operational efficiencies. We aim to offer a mid-range price
point compared to other providers of purpose-built student
accommodation and a high-quality service offering.
Our student proposition brings together properties designed for
today's student with the services they want. Both are delivered by
1,500 highly-committed employees with a passion for looking after
students. Our status as a Living Wage Employer and the prestigious
Investors in People Gold Standard accreditation reflects a
sustained focus on recruiting, retaining and developing the very
best people. Their experience, combined with our long-standing
investment in research, provides a granular understanding of what
matters most to students and helps us deliver a living environment
that enables all students to get the best out of University.
As part of this commitment, during 2018 we continued to invest
in our market-leading student welfare services. In particular, we
focussed on making the sometimes challenging transition to
University as smooth as possible. Our uChat feature of the MyUnite
app was used by the majority of users of the app, allowing them to
meet their future flatmates before arriving at University; helping
to alleviate one of the most common sources of pre-arrival anxiety.
Our new online check-in made the sometimes fraught experience of
arriving and moving in as hassle-free as possible and, as our
record customer satisfaction score shows, helped ensure our
students feel welcome. Once students do arrive, we have teams of
student ambassadors, usually second or third-year students, on hand
to answer questions, show new arrivals their rooms and provide
valuable peer-to-peer support at critical points in their journey
through University. Our comprehensive welcome communications direct
students to information about their new home, including local
amenities and entertainment, as well as our online Common Room
where our teams of student writers give peer-to-peer advice such as
tips on budgeting, living with friends, wellbeing information and
other topics our students have highlighted as being useful. The
digital welfare guides delivered through the Common Room were
viewed by 84% of our students.
A recent report by the NUS vividly illustrates the potential
impact of accommodation on students' welfare and wellbeing. In a
year when mental health came under the spotlight, we continued
working to ensure both our properties and services are designed to
help students navigate successfully the challenges that University
life can bring. Our research consistently confirms the importance
of social interaction and integration. Therefore, using a property
in Leeds as a test bed, we have piloted numerous design innovations
to help make social interaction as easy as possible for all
students. 1,000 members of our teams have received training in
mental health awareness and active listening. Dedicated welfare
leads in all our cities and a central team of specialists mean that
we are able to work closely with our University partners to
identify students who may be struggling and ensure they get the
support they need as quickly as possible. As well as our 24/7
emergency contact centre, we provide links to third-party wellbeing
and mental health services, such as Nightline.
A range of digital and more traditional sales channels now
enables UK and international students alike to reserve their room
in the way that suits them best, dramatically reducing the average
time from booking to completion and making short-term bookings
easier. The My Unite app, which is now used by 89% of our students,
delivers a wide range of useful pre-arrival information and has
helped reduce arrival-related calls to our customer care centre by
some 39%. A new app-based check-in feature makes the experience of
arriving at University smoother and more efficient for both
students and our people. Last October, it was used by 53% of our
students as they arrived for the start of a new academic year and
we aim to roll it out further in 2019.
During the year, we also launched a series of activities
designed to raise awareness and understanding of University life
amongst sixth-formers and their parents. These included a series of
branded PR campaigns which used a combination of digital and
traditional media channels to help young people prepare for
University and the pilot of Leap Skills, a carefully designed
training programme to instil valuable life skills and emotional
resilience. By the end of the year, we delivered this programme to
1,000 students in over 40 schools. We are currently exploring a
wider roll-out of the programme with the development of a digital
variant of the training.
Our investment in technology is also helping ensure that we are
on hand to help when students need us. In these situations too,
technology has helped deliver a virtuous circle of improved service
and greater efficiency. For example, during the year we conducted,
in many cases via our network of Student Ambassadors, over 100,000
webchats, driving in the process a 39% reduction in calls to our
customer service centre and a satisfaction rating of 95%. Our
recently introduced digital platform for the booking, scheduling
and monitoring of maintenance requests helped our Estates team
deliver a first-time fix in 84% of cases.
Home for Success and our commitment to students extends to life
beyond University. Our research confirms that employability remains
a key driver of student satisfaction as such during 2018, we
stepped up our investment in Placer, a new work experience and
job-finding app which has been developed as a joint-venture
partnership with the National Centre for Universities and Business
and digital education specialists, Jisc. To date, some 230
employers, including some of the UK's largest businesses, have
signed up to the platform, offering over 17,000 work experience and
graduate roles.
Home for Success is about helping all young people unlock the
opportunities that Higher Education offers, regardless of their
background. During 2018, we therefore continued to support
IntoUniversity, a national non-profit organisation focussed on
helping young people from disadvantaged backgrounds gain access to
Universities; and the Unite Foundation, a well-funded charitable
scholarship scheme for care leavers and young people estranged from
their families. The Foundation works in partnership with 27
Universities, for whom it forms an important part of their efforts
to widen participation, and in this academic year is providing
support for over 200 students. These social investments complement
a wide range of grass-roots charitable activity, community
engagement and employee volunteering initiatives. Together with
programmes to drive deeper levels of diversity and inclusion and
reduce waste and energy use across our organisation, they form a
key cornerstone of our Up to uS responsible business programme.
PROPERTY REVIEW
EPRA NAV growth
EPRA NAV per share increased by 10% to 790 pence at 31 December
2018, up from 720 pence at 31 December 2017. In total, EPRA net
assets were GBP2,085 million at 31 December 2018, up from GBP1,740
million a year earlier.
The main factors behind the 70 pence per share growth in EPRA
NAV per share were:
-- The growth in the value of the Group's share of investment
assets (+45 pence), as a result of rental growth (+20 pence) and
yield compression (+25 pence)
-- The value added to the development portfolio (+13 pence)
-- The positive impact of retained profits after dividends paid (+10 pence)
-- The impact of the share placing (+3 pence)
Looking forward, our portfolio is well placed to deliver
continued value growth. Our focus on the strongest University
locations underpins rental growth prospects and we will continue to
deliver meaningful upside from our development activity. In total,
our secured pipeline is expected to deliver around 45 to 55 pence
per share of NAV uplift and, together with future rental growth and
planned disposals, 13 to 17 pence of earnings per share once
completed.
Property portfolio
The valuation of our property portfolio at 31 December 2018,
including our share of gross assets held in USAF and LSAV, was
GBP2,967 million (31 December 2017: GBP2,595 million). The GBP372
million increase in portfolio value (Unite share) was attributable
to:
-- Valuation increases of GBP163 million on the investment and
development portfolios, with like-for-like rental growth of 3.2%
and yield compression of 15 basis points
-- Capital expenditure on developments of GBP248 million and
GBP25 million on investment assets relating to refurbishment
-- Acquisitions of GBP6 million and disposals of GBP85 million
-- Increased share of USAF of GBP15 million, as a result of the
performance fee earned in 2017 and acquisitions of units purchased
in the secondary market
Summary balance sheet
2018 GBPm 2017 GBPm
Wholly Share Wholly Share
owned of Fund/JV Total owned of Fund/JV Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------- ------------ -------- ------- ------------ --------
Rental properties 1,497 1,188 2,685 1,261 1,118 2,379
Properties under development 279 3 282 206 10 216
------- ------------ -------- ------- ------------ --------
1,776 1,191 2,967 1,467 1,128 2,595
Adjusted net debt (471) (385) (856) (462) (341) (803)
Other assets/(liabilities) (14) (12) (26) (35) (17) (52)
EPRA net assets 1,291 794 2,085 970 770 1,740
------------------------------- ------- ------------ -------- ------- ------------ --------
* A reconciliation of the IFRS balance sheet to EPRA net assets
is set out in section 2.3 of the financial statements
The proportion of our property portfolio that is income
generating is 90%, in line with December 2017, with 10% under
development. We will continue to manage the development weighting
of our balance sheet and expect it to remain at around these
levels, well within our internal cap of 20% going forward.
Unite investment portfolio analysis at 31 December 2018
Wholly Unite
USAF LSAV owned Lease Total share
London Value (GBPm) 369 977 500 - 1,846 1,082
Beds 1,870 5,283 1,993 260 9,406 40%
Properties 6 12 6 1 25
Prime provincial Value (GBPm) 598 - 298 - 896 449
Beds 5,344 - 2,678 618 8,640 17%
Properties 18 - 7 2 27
Major provincial Value (GBPm) 1,062 266 409 - 1,737 811
Beds 13,597 3,067 5,329 1,210 23,203 30%
Properties 34 1 10 4 49
Provincial Value (GBPm) 212 - 290 - 502 343
Beds 2,688 - 3,819 1,059 7,566 13%
Properties 8 - 10 3 21
Total Value (GBPm) 2,241 1,242 1,497 - 4,981 2,685
Beds 23,499 8,350 13,819 3,147 48,815 100%
Properties 66 13 33 10 122
Unite ownership (GBPm) 567 621 1,497 - 2,685
------- ------- ------- ------ -------
Student accommodation investment market
The overall market for purpose-built student accommodation is
estimated to be over GBP50 billion. Around half of this value is
owned by Universities and the remainder by private operators.
Whilst investor demand for high-quality, well-located student
accommodation remains high, the level of transactions in the
student accommodation sector in 2018 has reduced slightly from the
record levels in 2016 and 2017. However, with over GBP3 billion of
assets trading during the year, there are continuing levels of high
demand for good-quality assets and portfolios and the reduction is
largely the product of less stock coming to market after a few
years of unusually high levels of activity.
As a result of ongoing investor appetite and subsequent
transactions, there has been a modest level of yield compression
across the sector. This movement has been most notable in London
and a small number of markets aligned to the highest-ranking
Universities, where there has been the strongest level of demand
for assets. The buyers of assets are generally international and
are either adding to existing platforms or are new to the sector.
We are still seeing high levels of interest for any assets that are
brought to market.
This market activity has resulted in yield compression that has
been reflected in our portfolio and the average yield at 31
December 2018 was 5.0%, an inward movement of 15 basis points on a
like-for-like basis over the year.
Indicative valuation yields
31 December 2018 31 December 2017
London 4.0-4.25% 4.25-4.5%
Prime provincial 4.5-5.0% 4.75-5.25%
Major provincial 5.0-5.5% 5.0-5.5%
Provincial 6.0-6.5% 6.0-6.5%
Buildings designed for students
The focus of our property activity is to provide buildings
designed specifically around the needs of today's student, in the
best locations alongside high-performing Universities. We involve
our University partners in the design and planning process to
ensure that we are delivering buildings that meet the requirements
of their students. We also aim to provide value-for-money
accommodation and look to continually enhance the specification of
our estate, using technology to enhance customer service and drive
efficiency savings through energy and water savings, enhanced Wi-Fi
speeds and new features to improve the living experience. The
location within cities is critically important and this is one of
the key factors in our investment / divestment decision-making
process. This was evidenced by the sale of 3,400 beds in 2018 that
resulted in us exiting two markets and repositioning our portfolio
in four other cities to reduce our concentration in these
locations. Our development and portfolio activity is designed to
support this strategic approach to ensure that the portfolio is
best placed to drive full occupancy and rental growth in the medium
term.
Pipeline activity
We have expanded our pipeline activity throughout 2018 and this
activity continues to be a significant driver of growth in future
earnings and NAV. Alongside our core development activity, we are
increasingly focussing on University partnerships and forward-fund
developments, adding two significant new schemes in London during
the year. The first of these schemes is a 960-bed University
partnership scheme close to the City of London and the second a
678-bed forward-funded development in Wembley.
The development market continues to present interesting
opportunities to us and we are tracking a range of schemes that
deliver our target returns in both London and in the regions. We
are taking a disciplined approach whilst the uncertainty around
Brexit remains and are, where possible, looking to de-risk schemes
by either utilising option agreements, passing on development risk
or underwriting occupancy through University guarantees. We expect
to add to our pipeline during 2019 and maintain a run rate of
1,500-2,500 new beds per annum.
We have contractually fixed our exposure to construction costs
on all schemes completing in 2019 and 2020 and have brought forward
the procurement of all critical items supplied from European
countries on our 2019 completions.
2018 and 2019 completions
We completed 3,074 beds across seven new schemes during 2018 in
line with budget and programme, achieving 98% occupancy in the
first year of operation. Over 50% of these beds are let to
Universities under nominations agreements for the 2018/19 academic
year, with an average duration of 10 years, showing the strength of
our relationships with our partner Universities.
The 2019 pipeline is progressing well. We are on track to
deliver two wholly-owned schemes in Oxford and Liverpool and, in
USAF, a forward-funded development in Birmingham, adding a total of
2,390 beds. We expect all of the schemes to be fully let for the
2019/20 academic year with around 70% of the beds let under
long-term University agreements with high-quality Universities.
Development pipeline
During the year, we have continued to add to our pipeline and
have a total of three schemes secured, which are expected to
deliver approximately 2,209 beds in addition to our ongoing 2019
projects. One of these schemes is a 678-bed development in Wembley
on a forward-funded basis. This scheme will be delivered in 2020
and will add to our existing building in Wembley to create an
efficient operating hub in this area, providing over 1,000 beds at
more affordable rents. We have also added a further 50 beds to the
scheme in Leeds through our positive relationship with the local
planning authority. All new regional developments are being
undertaken on a wholly-owned basis and prospective returns for the
secured pipeline remain in line with our target returns.
We have continued to encounter challenges to secure a planning
consent for our Old BRI site in Bristol. Following consultation
with the local authority, we expect to submit an application to
build around 370 beds, with the remainder of land being sold for
residential development. As a result of ongoing discussions with
the University of Bristol, we now expect to deliver this as a
University partnership scheme and for it to deliver returns of
around 6.2%.
Secured forward-fund pipeline (USAF)
USAF completed two forward-fund assets in Durham in 2018,
creating operational scale in the city and enabling us to start
building our relationship with Durham University. The remaining
scheme in Birmingham is on track for delivery in the summer of
2019, and we expect to secure a nominations agreement on this
building in due course. Following the disposals in 2018, USAF has
around GBP100 million of acquisition capacity which it intends to
invest in 2019.
University partnerships
In addition to growing the number of beds and the value of
income underpinned by University-backed nomination agreements, we
have made further progress with our strategy of delivering ongoing
growth through partnerships with Universities. Following our first
on-campus acquisition of the entire Aston University accommodation
in 2017, we secured two further University partnership schemes in
2018.
First, we acquired the former Cowley Barracks in Oxford. Working
with Oxford Brookes University, we secured planning permission to
build 887 beds and agreed terms for a 25-year nominations agreement
with the University, taking our partnership with them to over 1,250
beds. The scheme is progressing well and is on track to be opened
in the summer.
We continue to make good progress with our new scheme in
Middlesex Street, E1. Working with King's College London, we will
submit a planning application to build around 960 beds of
cluster-flat accommodation in the next few months.
Since the year end, we have exchanged contracts, providing us
with an option to acquire a plot of land in Bristol, close to the
University of Bristol. This scheme is expected to be developed as a
University partnership scheme given its proximity to the University
of Bristol. We will submit planning later this year and expect to
deliver 650 beds in 2022.
Through our Higher Education Engagement team, we are continuing
to hold active discussions with around 10 Universities, exploring a
range of different options including further off-campus
developments, stock transfer and third-party management
arrangements. We expect to add one or two new deals per year as
previously outlined.
Secured Total Total Capex in Capex Forecast Forecast
beds completed development period remaining NAV yield on
value costs remaining cost
No. GBPm GBPm GBPm GBPm GBPm %
------------- ------------ ----------- ----------- ------------ ----------- ----------- ---------- -----------
Wholly owned
2019
completions
Skelhorne
Street Liverpool 1,085 95 74 30 19 8 8.0%
2020
completions
Tower North Leeds 928 104 81 23 58 16 8.0%
First Way London 678 122 102 39 63 10 6.0%
New
Wakefield
Street Manchester 603 81 56 8 36 13 8.2%
Total wholly owned 3,294 402 313 100 176 47 7.6%
University partnerships
2019
completions
Cowley
Barracks Oxford 887 98 73 57 15 4 6.5%
2021
completions
Old BRI(1) Bristol 370 52 39 2 25 12 6.2%
Middlesex
Street(1) London 960 250 193 7 186 57 6.3%
2022
completions
Temple
Quay(1) Bristol 650 95 77 - 77 18 6.2%
----------- ----------- ------------ ----------- ----------- ---------- -----------
Total University
partnerships 2,867 495 382 66 303 91 6.3%
USAF
2019
completions
Battery Park Birmingham 418 43 38 - 29 2 6.3%
----------- ----------- ------------ ----------- ----------- ---------- -----------
Total USAF 418 43 38 - 29 2 6.3%
Unite share of USAF 418 11 10 - 10 1 6.3%
Total pipeline (Unite
share) 6,579 908 705 166 486 139 7.0%
=========== =========== ============ =========== =========== ========== ===========
(1) Subject to obtaining planning consent
Asset disposals
Focussing our portfolio alongside high-quality Universities
remains an important part of our strategy. Our ongoing disposal
programme supports our development and acquisition activity to
achieve this aim. During the year, we sold a portfolio of 14
properties, comprising 3,436 beds for GBP180 million, of which
Unite's share is GBP85 million. The portfolio was made up of assets
located in Plymouth, Huddersfield, Sheffield, Birmingham, Bristol
and London. As a result of the disposal, we no longer have a
presence in Plymouth and Huddersfield, enhancing longer-term rental
growth prospects and the efficiency of the portfolio.
We will continue to recycle assets in the portfolio to maintain
our focus on quality and to maintain capital discipline as we
pursue further growth opportunities. The Group's committed
development pipeline requires further capital expenditure of GBP486
million. In order to fund this expenditure and manage leverage and
headroom for further opportunities, the Group intends to sell
assets of around GBP100-GBP150 million in 2019 (Unite share). This
will allow us to maintain leverage at around 35%, net debt:EBITDA
ratio at between 6 to 7 and an interest cover ratio in excess of 3
times.
A sustainable business
We continue to invest in the portfolio to maintain our buildings
to a high standard and to take advantage of asset management
opportunities. As part of this activity, we see opportunities to
enhance the efficiency of our buildings through energy-saving
initiatives. Over the course of the last five years, we have
invested GBP30 million into energy saving initiatives such as LED
lighting, smart building controls, solar panels and air source heat
pumps, with payback of under five years on these investments. We
have developed an award-winning customer engagement programme,
working closely with the National Union of Students, to encourage
students to act in an environmentally-friendly manner. We also
purchase 100% renewable energy. The energy, water and carbon
reductions from these initiatives have delivered significant
savings that support our margin improvements.
Alongside our focus on our environmental impact, we believe
strongly in supporting Universities to widen participation into
Higher Education. The Unite Foundation works in partnership with 27
Universities to provide support to students from challenging
backgrounds.
These improvements, along with other aspects of our Up to uS
Responsible Business Strategy, have helped us maintain GRESB Green
Star status and a 4-star rating and are reflected in other ESG
assessments, including an 'AA' rating from MSCI ESG and listings on
the FTSE4Good index and the GPR IPCM LFFS Sustainable GRES
index.
FINANCIAL REVIEW
Income statement and profit measures
A full reconciliation of Profit before tax to EPRA earnings
measures is set out in summary below and expanded in section 2 of
the financial statements.
2018 2017
GBPm GBPm
------------------------------------------------------------------ ------ -------
EPRA earnings 88.4 70.5
Valuation gains and profit on disposal 153.6 169.2
Changes in valuation of interest rate swaps and debt break costs (0.1) (12.3)
Minority interest and tax included in EPRA earnings 3.9 2.0
------ -------
Profit before tax 245.8 229.4
------ -------
EPRA earnings per share 34.1p 30.3p
Basic earnings per share 90.8p 95.3p
The increase in profit before tax is primarily the result of a
higher level of EPRA earnings of GBP88.4 million being recognised
in 2018 compared with the GBP70.5 million recognised in 2017 and a
lower valuation uplift in 2018 compared to 2017.
Cash flow, net debt and leverage
The Operations business generated GBP81.2 million of net cash in
2018 (2017: GBP63.2 million) and net debt increased to GBP856
million (2017: GBP803 million). The key components of the movement
in net debt were the operational cash flow, the share placing and
the disposal programme (generating total inflows of GBP275 million)
offset by total capital expenditure of GBP252 million and dividends
paid of GBP63 million. In 2019, we expect net debt to increase as
capital expenditure on investment and development activity will
exceed anticipated asset disposals.
Dividend
We are proposing a fully covered final dividend payment of 19.5
pence per share (2017: 15.4 pence), making 29.0 pence for the full
year (2017: 22.7 pence). The final dividend will comprise a
Property Income Distribution (PID) of 16.0 pence and a non-PID
element of 3.5 pence.
Subject to approval at Unite's Annual General Meeting on 9 May
2019, the dividend will be paid in either cash or new ordinary
shares (a "scrip dividend alternative") on 17 May 2019 to
shareholders on the register at close of business on 12 April 2019.
The last date for receipt of scrip elections will be 25 April
2019.
Further details of the scrip scheme, the terms and conditions
and the process for election to the scrip scheme are available on
the company's website.
As a result of the quality, predictable earnings outlook for the
business, we are planning to maintain our dividend payout at 85% of
EPRA earnings.
Tax
As a REIT, the Group is exempt from UK corporation tax on its
property rental business. Despite being a REIT, we are subject to a
number of other taxes in the same way as non-REIT companies. During
the year, we incurred GBP3.9 million of corporation tax relating
primarily to profits on our property management activities (2017:
GBP1.5 million).
A deferred tax asset relating to tax adjusted losses carried
forward of GBP1.3 million is being recognised against future
profits arising to the Group. The deferred tax liability relating
to unrealised gains on joint venture investments of GBP24.4
million, which are not exempt from tax, exceeds the remaining
deferred tax asset relating to tax adjusted losses carried forward
of GBP9.9 million. As the losses can be set against gains as they
arise, the deferred tax asset relating to the losses can be
recognised in full against deferred tax liabilities.
The Finance Act 2019 will result in the reversal of the deferred
tax liability of GBP24.4 million on investments in units and
corresponding deferred tax asset of GBP9.9 million on losses,
resulting in a GBP14.5 million increase in net asset value.
Share placing
We completed a placing of 22.2 million new ordinary shares in
February 2018 at a price of 765 pence per share, raising gross
proceeds of GBP170 million. The proceeds were used to invest in two
new University partnership schemes, located in Oxford and
London.
Debt financing
The Group has continued to maintain a disciplined approach to
managing leverage, with LTV of 29% at 31 December 2018 at the lower
end of our target range. The Unite Group plc has maintained an
investment grade corporate rating of BBB from Standard & Poor's
and Baa2 from Moody's, reflecting the strength of Unite's capital
position, cash flows and track record. The credit rating
underpinned a GBP275 million issue of unsecured 10-year bonds that
will reduce the average cost of debt to 3.6% when fully drawn.
Key debt statistics (Unite share basis)
2018 2017
--------------------------------------------- ---------- ----------
Net debt GBP856m GBP803m
LTV 29% 31%
Net debt:EBITDA ratio 6.1 6.5
Interest cover ratio 3.4 2.6
Average debt maturity 5.8 years 5.3 years
Average cost of debt 3.8% 4.1%
Proportion of investment debt at fixed rate 99% 80%
LTV improved to 29% at 31 December 2018, from 31% at the end of
2017 as a result of the value growth of the portfolio exceeding the
increase in net debt. We will continue to manage our gearing
proactively and intend to maintain our LTV around the mid-30% level
going forward, assuming current yields. With the greater focus on
earnings, we are also monitoring our interest cover ratio which is
3.4 times covered, having increased from 2.6 times covered in 2017.
Our net debt to EBITDA ratio remained within our target range of
between 6 and 7 in 2018.
Interest rate hedging arrangements and cost of debt
Our cost of debt has come down to 3.8% (2017: 4.1%). Following
the shift to an unsecured structure, there is an opportunity to
further reduce the cost of debt over time as we add new debt to
build out the development pipeline, replacing expensive legacy
facilities. The Group has 99% of its share of investment debt
subject to a fixed interest rate (2017: 80%) for an average term of
5.8 years (2017: 5.3 years).
Amendments to IFRS
A number of new standards and amendments to standards have been
issued but are not effective as at 31 December 2018. The most
significant of these is IFRS 16 Leases (effective from 1 January
2019). The new standard will create a right-of-use asset and a
liability for the future minimum lease payments. This standard will
have the biggest impact on our sale and leaseback portfolio which
comprises 3,147 beds across 10 properties. These properties were
sold by the Group between 2004 and 2009 to institutional investors
and simultaneously leased back by the Group. The properties have
income secured by nominations agreements to offset the lease
payment to the institutional owners.
On transition, net asset value is expected to increase by
GBP10-GBP15 million. More detailed explanation is included in note
1.
Funds and joint ventures
The table below summarises the key financials for each
vehicle:
Property Net debt Other assets Net assets Unite share Total return Maturity Unite share
assets GBPm GBPm GBPm of NAV
GBPm GBPm
--------- ------------- --------- ------------- ----------- ------------ ------------- ---------- ------------
Vehicle
USAF 2,253 (562) (31) 1,660 423 7.5% Infinite 25%
LSAV 1,242 (486) (14) 741 371 17.9% 2022/2027 50%
USAF and LSAV have continued to perform well in 2018. LSAV's
higher total return is driven by stronger yield compression in
London. USAF has around GBP100 million of acquisition capacity and
will continue to monitor acquisition opportunities. The secondary
market for USAF units continues to operate effectively with GBP48
million of units trading in 2018 at a small premium to NAV.
There have been no redemption requests from investors and Unite
owns 25% of the fund.
Fees
During the year, the Group recognised net fees of GBP15.6
million (2017: GBP18.4 million) from its fund and asset management
activities as follows:
31 December 2018 31 December 2017
GBPm GBPm
------------------------------------------------------ ----------------- -----------------
USAF
Asset management fee 10.2 10.1
Acquisition fee - 0.4
Net performance fee - 3.4
LSAV
Asset and property management fee 3.0 4.0
Acquisition fee - 0.5
Unite
Third-party short-term management of disposal assets 2.4 -
Total fees 15.6 18.4
----------------- -----------------
The recurring asset management fees from USAF and LSAV have
reduced as a result of disposal activity in 2017 and 2018,
outstripping the valuation growth in the portfolios under
management.
Responsibility statement of the directors in respect of the
annual financial report
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the company and the undertakings included in the consolidation
taken as a whole
-- The strategic report includes a fair review of the
development and performance of the business and the position of the
issuer and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face
-- We consider the annual report and accounts, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the group's position and
performance, business model and strategy.
Richard Smith Joe Lister
Chief Executive Officer Chief Financial Officer
27 February 2019
Forward-looking statements
The preceding preliminary statement has been prepared for the
shareholders of the Company, as a body, and for no other persons.
Its purpose is to assist shareholders of the Company to assess the
strategies adopted by the Company and the potential for those
strategies to succeed and for no other purpose. The statement
contains forward-looking statements that are subject to risk
factors associated with, amongst other things, the economic,
regulatory and business circumstances occurring from time to time
in the sectors and markets in which the Group operates. It is
believed that the expectations reflected in these statements are
reasonable but they may be affected by a wide range of variables
that could cause actual results to differ materially from those
currently anticipated. No assurances can be given that the
forward-looking statements will be realised. The forward-looking
statements reflect the knowledge and information available at the
date of preparation. Nothing in the preliminary statement should be
considered or construed as a profit forecast for the Group. Except
as required by law, the Group has no obligation to update
forward-looking statements or to correct any inaccuracies
therein
Introduction and table of contents
These financial statements are prepared in accordance
with IFRS. The Board of Directors also
presents the Group's performance on the basis recommended
for real estate companies by the
European Public Real Estate Association (EPRA). The
reconciliation between IFRS performance
measures and EPRA performance measures can be found in
section 2.2 a) for EPRA earnings and
2.3 c) for EPRA net asset value (NAV). The adjustments to
the IFRS results are intended to
help users in the comparability of these results across
other listed real estate companies
in Europe and reflect how the Directors monitor the
business.
We have grouped the notes to the financial statements
under six main headings:
* Results for the year, including segmental informati
on,
EPRA earnings and EPRA NAV
* Asset management
* Funding
* Working capital
Each section sets out the relevant accounting policies
applied in these financial statements
together with the key judgements and estimates used.
Primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in shareholders'
equity
Statements of cash flows
Section 1: Basis of preparation
Section 2: Results for the year
2.1 Segmental information
2.2 Earnings
2.3 Net assets
2.4 Revenue and costs
2.5 Tax
Section 3: Asset management
3.1 Wholly owned property assets
3.2 Inventories
3.3 Investments in joint ventures
Section 4: Funding
4.1 Borrowings
4.2 Interest rate swaps
4.3 Net financing costs
4.4 Gearing
4.5 Equity
4.6 Dividends
Section 5: Working capital
5.1 Cash and cash equivalents
5.2 Credit risk
CONSOLIDATED Income statement
For the year ended 31 December 2018
2018 2017
Note GBPm GBPm
--------------------------------------- ---- ------ ------
Rental income 2.4 112.7 99.7
Other income 15.6 19.6
--------------------------------------- ---- ------ ------
Total revenue 2.4 128.3 119.3
Cost of sales (40.2) (41.1)
Operating expenses (23.6) (26.9)
--------------------------------------- ---- ------ ------
Results from operating activities 64.5 51.3
(Loss)/profit on disposal of property (6.8) 0.6
Net valuation gains on property 3.1 105.8 103.1
--------------------------------------- ---- ------ ------
Profit before net financing costs 163.5 155.0
--------------------------------------- ---- ------ ------
Loan interest and similar charges 4.3 (14.3) (17.3)
Swap cancellation and loan break costs 4.3 (0.1) (11.5)
--------------------------------------- ---- ------ ------
Finance costs 4.3 (14.4) (28.8)
Finance income 4.3 0.9 0.1
--------------------------------------- ---- ------ ------
Net financing costs 4.3 (13.5) (28.7)
--------------------------------------- ---- ------ ------
Share of joint venture profit 3.3b 95.8 103.1
--------------------------------------- ---- ------ ------
Profit before tax 245.8 229.4
Current tax 2.5 (4.1) (1.7)
Deferred tax 2.5 (4.4) (3.9)
--------------------------------------- ---- ------ ------
Profit for the year 237.3 223.8
Profit for the year attributable to
Owners of the parent company 2.2c 235.7 221.6
Minority interest 1.6 2.2
--------------------------------------- ---- ------ ------
237.3 223.8
--------------------------------------- ---- ------ ------
Earnings per share
Basic 2.2c 90.8p 95.3p
--------------------------------------- ---- ------ ------
Diluted 2.2c 90.6p 93.6p
--------------------------------------- ---- ------ ------
All results are derived from continuing activities.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018
2018 2017
Note GBPm GBPm
----------------------------------------------------- ---- ------ -----
Profit for the year 237.3 223.8
Movements in effective hedges 4.2 0.6 10.8
Share of joint venture movements in effective hedges 3.3b 1.2 2.1
----------------------------------------------------- ---- ------ -----
Other comprehensive income for the year 1.8 12.9
----------------------------------------------------- ---- ------ -----
Total comprehensive income for the year 239.1 236.7
----------------------------------------------------- ---- ------ -----
Attributable to
Owners of the parent company 237.5 234.5
Minority interest 1.6 2.2
----------------------------------------------------- ---- ------ -----
239.1 236.7
----------------------------------------------------- ---- ------ -----
All other comprehensive income may be classified as profit and
loss in the future.
CONSOLIDATED BALANCE SHEET
At 31 December 2018
2018 2017
Note GBPm GBPm
-------------------------------------------------------- ---- -------- -------
Assets
Investment property 3.1 1,497.1 1,261.4
Investment property under development 3.1 278.9 205.7
Investment in joint ventures 3.3b 819.7 793.5
Other non-current assets 33.0 32.4
-------------------------------------------------------- ---- -------- -------
Total non-current assets 2,628.7 2,293.0
-------------------------------------------------------- ---- -------- -------
Inventories 3.2 9.1 4.5
Trade and other receivables 88.1 82.9
Cash and cash equivalents 5.1 123.6 51.2
-------------------------------------------------------- ---- -------- -------
Total current assets 220.8 138.6
-------------------------------------------------------- ---- -------- -------
Total assets 2,849.5 2,431.6
-------------------------------------------------------- ---- -------- -------
Liabilities
Borrowings 4.1 (1.3) (1.3)
Trade and other payables (141.5) (152.1)
Current tax liability (4.6) (4.1)
-------------------------------------------------------- ---- -------- -------
Total current liabilities (147.4) (157.5)
-------------------------------------------------------- ---- -------- -------
Borrowings 4.1 (591.3) (511.5)
Interest rate swaps 4.2 (0.1) (0.8)
Deferred tax liability 2.5d (11.9) (7.6)
-------------------------------------------------------- ---- -------- -------
Total non-current liabilities (603.3) (519.9)
-------------------------------------------------------- ---- -------- -------
Total liabilities (750.7) (677.4)
-------------------------------------------------------- ---- -------- -------
Net assets 2,098.8 1,754.2
-------------------------------------------------------- ---- -------- -------
Equity
Issued share capital 4.6 65.9 60.2
Share premium 4.6 740.5 579.5
Merger reserve 40.2 40.2
Retained earnings 1,224.4 1,051.2
Hedging reserve 2.0 (2.1)
-------------------------------------------------------- ---- -------- -------
Equity attributable to the owners of the parent company 2,073.0 1,729.0
Minority interest 25.8 25.2
-------------------------------------------------------- ---- -------- -------
Total equity 2,098.8 1,754.2
-------------------------------------------------------- ---- -------- -------
The financial statements of The Unite Group plc, registered
number 03199160, were approved and authorised for issue by the
Board of Directors on 27 February 2019 and were signed on its
behalf by:
R S Smith J J Lister
Director Director
CONSOLIDATED statement of changes in shareholders' equitY
For the year ended 31 December 2018
Equity
Issued portion of Attributable
share Share Merger Retained Hedging convertible to owners of Minority
capital premium reserve earnings reserve instrument the parent interest Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
At 1 January
2018 60.2 579.5 40.2 1,051.2 (2.1) - 1,729.0 25.2 1,754.2
Profit for the
year - - - 235.7 - - 235.7 1.6 237.3
Other
comprehensive
income for
the year - - - - 1.8 - 1.8 - 1.8
---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
Total
comprehensive
income for
the year - - - 235.7 1.8 - 237.5 1.6 239.1
Shares issued 5.7 161.0 - - - - 166.7 - 166.7
Deferred tax
on
share-based
payments - - - 0.3 - - 0.3 - 0.3
Fair value of
share-based
payments - - - 1.1 - - 1.1 - 1.1
Own shares
acquired - - - (1.4) - - (1.4) - (1.4)
Realised swap
gain - - - - 2.3 - 2.3 - 2.3
Dividends paid
to owners of
the parent
company - - - (62.5) - - (62.5) - (62.5)
Dividends to
minority
interest - - - - - - - (1.0) (1.0)
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
At 31 December
2018 65.9 740.5 40.2 1,224.4 2.0 - 2,073.0 25.8 2,098.8
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
Equity
Issued portion of Attributable
share Share Merger Retained Hedging convertible to owners of Minority
capital premium reserve earnings reserve instrument the parent interest Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
At 1 January
2017 55.5 493.6 40.2 867.9 (15.0) 9.4 1,451.6 23.9 1,475.5
Profit for the
year - - - 221.6 - - 221.6 2.2 223.8
Other
comprehensive
income for
the year - - - - 12.9 - 12.9 - 12.9
---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
Total
comprehensive
income for
the year - - - 221.6 12.9 - 234.5 2.2 236.7
Shares issued 4.7 83.0 - - - - 87.7 - 87.7
Deferred tax
on
share-based
payments - - - 0.7 - - 0.7 - 0.7
Fair value of
share-based
payments - - - 1.5 - - 1.5 - 1.5
Redemption of
convertible
bond - 2.9 - 5.8 - (9.4) (0.7) - (0.7)
Own shares
acquired - - - (1.9) - - (1.9) - (1.9)
Dividends paid
to owners of
the parent
company - - - (44.4) - - (44.4) - (44.4)
Dividends to
minority
interest - - - - - - - (0.9) (0.9)
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
At 31 December
2017 60.2 579.5 40.2 1,051.2 (2.1) - 1,729.0 25.2 1,754.2
-------------- ---------- -------- -------- ---------- ----------- ----------- ------------ --------- -------
STATEMENTS OF CASH FLOWS
For the year ended 31 December 2018
Group
----------------------------------------------------- ----------------
2018 2017
Note GBPm GBPm
----------------------------------------------------- ---- ------- -------
Cash flows from operating activities 5.1 63.5 58.4
Cash flows from taxation (3.8) (2.1)
Investing activities
Proceeds from sale of investment property 38.0 30.8
Payments to/on behalf of subsidiaries - -
Payments from subsidiaries - -
Dividends received 37.5 31.6
Interest received 0.9 0.1
Redemption of units / (investment in joint ventures) 30.9 (27.0)
Acquisition of intangible assets (6.6) (5.7)
Acquisition of property (247.9) (116.4)
Acquisition of plant and equipment (1.3) (4.4)
----------------------------------------------------- ---- ------- -------
Cash flows from investing activities (148.5) (91.0)
----------------------------------------------------- ---- ------- -------
Financing activities
Interest paid in respect of financing activities (21.1) (23.2)
Swap cancellation costs (0.1) (9.5)
Proceeds from the issue of share capital 166.7 0.6
Payments to acquire own shares (1.4) (1.9)
Proceeds from non-current borrowings 375.8 254.0
Repayment of borrowings (295.4) (133.6)
Dividends paid to the owners of the parent company (62.3) (42.3)
Dividends paid to minority interest (1.0) (0.9)
----------------------------------------------------- ---- ------- -------
Cash flows from financing activities 161.2 43.2
----------------------------------------------------- ---- ------- -------
Net increase in cash and cash equivalents 72.4 8.5
Cash and cash equivalents at start of year 51.2 42.7
----------------------------------------------------- ---- ------- -------
Cash and cash equivalents at end of year 5.1 123.6 51.2
----------------------------------------------------- ---- ------- -------
NOTES TO THE FINANCIAL STATEMENTS
Section 1: Basis of preparation
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 December 2018
or 2017 but is derived from those accounts. Statutory accounts for
2017 have been delivered to the Registrar of Companies, and those
for 2018 will be delivered in due course. The auditors have
reported on those accounts; their reports were (i) unqualified (ii)
did not include a reference to any matters to which the auditors
drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under section 498 (2) or (3)
of the Companies Act 2006 in respect of the accounts for 2017 or
2018.
Going concern
The Group's business activities, together with the factors
likely to affect its future development and position are set out in
the Strategic report, which will be published in the 2018 Annual
Report and Accounts. Section 4 of these Notes to the financial
statements includes the Group's objectives, policies and processes
for managing its capital; details of its borrowings and interest
rate swaps; and in note 5.2 its exposure to credit risk. The Board
has considered the risks that could arise as a result of potential
outcomes of Brexit and have identified people risk, procurement
risks and demand risks. These risks have been factored into our
forecasts and projections.
The Group has prepared cash flow projections 18 months forward
to June 2020 and the Group has sufficient headroom to meet all its
commitments. The Group issued GBP275 million of unsecured
investment grade 10-year bonds in October 2018 and this together
with existing facilities will be sufficient to fund the Group's
commitments over the next 18 months. The Group maintains positive
relationships with its lending banks and has historically secured
new facilities before maturity dates and remained within its
covenant levels. The Group is in full compliance with its covenants
at 31 December 2018 and expects to remain so. Our debt facilities
include loan-to-value, interest cover and asset class ratios, all
of which have a high level of headroom. In order to manage future
financial commitments, the Group operates a formal approval
process, through its Major Investment Approvals committee, to
ensure appropriate review is undertaken before any transactions are
agreed.
The Directors consider that the Group has adequate capital
resources to continue in operational existence for the foreseeable
future.
Impact of accounting standards in issue but not yet
effective
At the balance sheet date there are a number of new standards
and amendments to existing standards in issue but not yet
effective. The Group has not early adopted the new or amended
standards in preparing these financial statements.
IFRS 16 Leases - effective for periods beginning on or after 1
January 2019
General impact of application of IFRS 16 Leases
IFRS 16 provides a comprehensive model for the identification of
lease arrangements and their treatment in the financial statements
for both lessors and lessees. IFRS 16 will supersede the current
lease guidance including IAS 17 Leases and the related
interpretations when it becomes effective for accounting periods
beginning on or after 1 January 2019. The date of initial
application of IFRS 16 for the Group will be 1 January 2019. On
transition, the Group has chosen to adopt the cumulative catch-up
approach.
In preparation for the first-time adoption of IFRS 16, the Group
has carried out an implementation project. IFRS 16 will have a
material impact on the sale and leaseback portfolio which is
comprised of 3,150 beds across 10 properties. These properties were
sold by the Group between 2004 and 2009 to institutional investors
and simultaneously leased back by the Group. We do not expect IFRS
16 to have a material impact on other leases (rental of office
space, vehicles, equipment).
In contrast to lessee accounting, IFRS 16 substantially carries
forward the lessor accounting requirements from IAS 17.
Impact of the new definition of a lease
IFRS 16 sets out a new definition of a lease, however our
assessment has shown that this does not impact the Group.
Impact on Lessee Accounting
Operating leases
IFRS 16 will change how the Group accounts for leases previously
classified as operating leases under IAS 17, which were off-balance
sheet.
On initial application of IFRS 16, for all sale and leaseback
leases, the Group will:
a) Recognise sale and leaseback right-of-use assets in the
consolidated balance sheet, initially measured at fair value using
a discounted cash flow model;
b) Recognise lease liabilities in the consolidated balance
sheet, initially measured at the present value of the future
minimum lease payments;
c) Reclassify leasehold improvements which were previously
treated at items of PPE (and depreciated on a straight line basis)
to sale and leaseback right of use assets.
Subsequent treatment will be as follows:
a) Hold the sale and leaseback right of use asset as investment
property at fair value and revalue at the end of each financial
reporting period, with any change in value going to the
consolidated income statement as revaluation gain/loss on
investment property ;
b) The lease liability will be unwound each year, with the
discount unwind going through the consolidated income
statement;
c) Separate the total amount of cash paid into a principal
portion (presented within financing activities) and interest
(presented within operating activities) in the consolidated cash
flow statement.
On initial application of IFRS 16, for all other leases, the
Group will:
a) Recognise right-of-use assets in the consolidated balance
sheet, initially measured at the present value of the future
minimum lease payments;
b) Recognise lease liabilities in the consolidated balance
sheet, initially measured at the present value of the future
minimum lease payments;
Subsequent treatment will be as follows:
a) Recognise deprecation of right-of-use assets in the consolidated income statement;
b) The lease liability will be unwound each year, with the
discount unwind going through the consolidated income
statement;
c) Separate the total amount of cash paid into a principal
portion (presented within financing activities) and interest
(presented within operating activities) in the consolidated cash
flow statement.
For short term leases (lease term of 12 months or less) and
leases of low-value assets, the Group will opt to recognise a lease
expense on a straight-line basis as permitted by IFRS 16.
As at 31 December 2018, the Group has non-cancellable operating
lease commitments of GBP215m, being the sum of undiscounted future
minimum lease payments. Our assessment indicates that on transition
on 1 January 2019, the Group will recognise a right of use asset of
GBP130 - GBP135 million and a lease liability of GBP120 - GBP125
million.
Impact on Lessor Accounting
IFRS 16 does not change substantially how a lessor accounts for
leases. Under IFRS 16, a lessor continues to classify leases as
either finance leases or operating leases and account for those two
types of leases differently.
Section 2: Results for the year
Performance measures
Note 2018 2017
----------------------------------- ---- ----------- -----------
Earnings basic 2.2b GBP235.7m GBP221.6m
Earnings diluted 2.2c GBP235.7m GBP223.0m
Basic earnings per share (pence) 2.2c 90.8p 95.3p
Diluted earnings per share (pence) 2.2c 90.6p 93.6p
Net assets basic 2.3c GBP2,073.0m GBP1,729.0m
Basic NAV per share (pence) 2.3d 787p 717p
----------------------------------- ---- ----------- -----------
EPRA performance measures
Note 2018 2017
-------------------------------- ---- ----------- -----------
EPRA earnings 2.2a GBP88.4m GBP70.5m
EPRA earnings per share (pence) 2.2c 34.1p 30.3p
EPRA NAV 2.3a GBP2,085.4m GBP1,740.4m
EPRA NAV per share (pence) 2.3d 790p 720p
EPRA NNNAV 2.3c GBP2,032.7m GBP1,673.9m
EPRA NNNAV per share (pence) 2.3d 770p 692p
-------------------------------- ---- ----------- -----------
2.1 Segmental information
The Board of Directors monitors the business along two activity
lines, Operations and Property. The reportable segments for the
years ended 31 December 2018 and 31 December 2017 are Operations
and Property.
The Group undertakes its Operations and Property activities
directly and through joint ventures with third parties. The joint
ventures are an integral part of each segment and are included in
the information used by the Board to monitor the business.
The Group's properties are located exclusively in the United
Kingdom. The Group therefore has one geographical segment.
2.2 Earnings
EPRA earnings amends IFRS measures by removing principally the
unrealised investment property valuation gains and losses such that
users of the financials are able to see the extent to which
dividend payments (dividend per share) are underpinned by earnings
arising from purely operational activity. The reconciliation
between Profit attributable to owners of the parent company and
EPRA earnings is available in note 2.2 (b).
The Operations segment manages rental properties, owned directly
by the Group or by joint ventures. Its revenues are derived from
rental income and asset management fees earned from joint ventures.
The Operations segment is the main contributor to EPRA earnings and
EPRA EPS and these are therefore the key indicators which are used
by the Board to monitor the Operations business.
The Board does not manage or monitor the Operations segment
through the balance sheet and therefore no segmental information
for assets and liabilities is provided for the Operations
segment.
a) EPRA earnings
2018
Share of joint ventures
---------------------------- ------ ---------------------------
Group
on
UNITE EPRA basis
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- ------ --------- ------ --------
Rental income 112.7 39.0 36.6 75.6 188.3
Property operating expenses (28.6) (11.5) (7.9) (19.4) (48.0)
---------------------------- ------ --------- ------ -------- -----------
Net operating income 84.1 27.5 28.7 56.2 140.3
Management fees 21.8 (3.2) (3.0) (6.2) 15.6
Operating expenses (20.9) (0.3) (0.5) (0.8) (21.7)
---------------------------- ------ --------- ------ -------- -----------
Operating lease rentals* (11.5) - - - (11.5)
Net financing costs (13.4) (6.2) (8.9) (15.1) (28.5)
---------------------------- ------ --------- ------ -------- -----------
Operations segment result 60.1 17.8 16.3 34.1 94.2
---------------------------- ------ --------- ------ -------- -----------
Property segment result (1.1) - - - (1.1)
---------------------------- ------ --------- ------ -------- -----------
Unallocated to segments (4.3) (0.2) (0.2) (0.4) (4.7)
---------------------------- ------ --------- ------ -------- -----------
EPRA earnings 54.7 17.6 16.1 33.7 88.4
---------------------------- ------ --------- ------ -------- -----------
* Operating lease rentals arise from properties which the Group
has sold and is now leasing back. These properties were sold to
generate financing and they now contribute to the Group's rental
income and incur property operating expenses. Therefore, the Group
considers these lease costs to be a form of financing.
Included in the above is rental income of GBP18.6 million and
property operating expenses of GBP7.0 million relating to sale and
leaseback properties.
The unallocated to segments balance includes the fair value of
share-based payments of (GBP1.1 million), UNITE Foundation of
(GBP0.9 million), deferred tax of GBP1.2 million and current tax
charges of (GBP3.9 million).
2017
Share of joint ventures
---------------------------- ------ --------------------------- -----------
Group
on
UNITE EPRA basis
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------- ------ --------- ------ -------- -----------
Rental income 99.7 36.9 34.2 71.1 170.8
Property operating expenses (28.4) (10.2) (5.7) (15.9) (44.3)
---------------------------- ------ --------- ------ -------- -----------
Net operating income 71.3 26.7 28.5 55.2 126.5
Management fees 21.0 (2.9) (4.0) (6.9) 14.1
Operating expenses (23.9) (0.3) (0.4) (0.7) (24.6)
---------------------------- ------ --------- ------ -------- -----------
Operating lease rentals* (12.6) - - - (12.6)
Net financing costs (17.2) (5.7) (9.7) (15.4) (32.6)
---------------------------- ------ --------- ------ -------- -----------
Operations segment result 38.6 17.8 14.4 32.2 70.8
---------------------------- ------ --------- ------ -------- -----------
Property segment result (1.5) - - - (1.5)
---------------------------- ------ --------- ------ -------- -----------
Unallocated to segments 2.4 (0.8) (0.4) (1.2) 1.2
---------------------------- ------ --------- ------ -------- -----------
EPRA earnings 39.5 17.0 14.0 31.0 70.5
---------------------------- ------ --------- ------ -------- -----------
* Operating lease rentals arise from properties which the Group
has sold and is now leasing back. These properties were sold to
generate financing and they now contribute to the Group's rental
income and incur property operating expenses. Therefore, the Group
considers these lease costs to be a form of financing.
Included in the above is rental income of GBP19.9 million and
property operating expenses of GBP7.5 million relating to sale and
leaseback properties.
The unallocated to segments balance includes the fair value of
share-based payments of (GBP1.5 million), UNITE Foundation of
(GBP0.7 million), fees received from USAF relating to acquisitions
of GBP0.9 million, USAF performance fee of GBP3.4 million (net of
adjustment related to trading with joint ventures), deferred tax of
GBP0.6 million and current tax charges of (GBP1.5 million).
b) IFRS reconciliation to EPRA earnings
EPRA earnings excludes movements relating to changes in values
of investment properties and interest rate swaps, profits from the
disposal of properties and property impairments, which are included
in the profit reported under IFRS. EPRA earnings reconcile to the
profit attributable to owners of the parent company as follows:
2018 2017
Note GBPm GBPm
---------------------------------------------------------- ---- ----- ------
EPRA earnings 2.2a 88.4 70.5
Net valuation gains on investment property 3.1 105.8 103.1
Property disposals (6.8) 0.6
Share of joint venture gains on investment property 3.3b 58.1 65.0
Share of joint venture property disposals and write downs (3.5) 0.5
Swap cancellation and loan break costs (0.1) (11.5)
Share of joint venture swap cancellation costs 3.3b - (0.8)
Deferred tax relating to properties 2.5d (5.5) (4.5)
Minority interest share of reconciling items* (0.7) (1.3)
---------------------------------------------------------- ---- ----- ------
Profit attributable to owners of the parent company 235.7 221.6
========================================================== ==== ===== ======
* The minority interest share, or non-controlling interest,
arises as a result of the Company not owning 100% of the share
capital of one of its subsidiaries, USAF (Feeder) Guernsey Limited.
More detail is provided in note 3.3.
c) Earnings per share
The Basic EPS calculation is based on the earnings attributable
to the equity shareholders of The Unite Group plc and the weighted
average number of shares which have been in issue during the year.
Basic EPS is adjusted in line with EPRA guidelines in order to
allow users to compare the business performance of the Group with
other listed real estate companies in a consistent manner and to
reflect how the business is managed and measured on a day to day
basis.
The calculations of basic and EPRA EPS for the year ended 31
December 2018 and 2017 are as follows:
2018 2017
Note GBPm GBPm
--------------------------------------------------- ---- ------- -------
Earnings
Basic 235.7 221.6
Diluted 235.7 223.0
EPRA 2.2a 88.4 70.5
Weighted average number of shares (thousands)
Basic 259,466 232,503
Dilutive potential ordinary shares (share options) 828 5,627
--------------------------------------------------- ---- ------- -------
Diluted 260,294 238,130
--------------------------------------------------- ---- ------- -------
Earnings per share (pence)
Basic 90.8p 95.3p
--------------------------------------------------- ---- ------- -------
Diluted 90.6p 93.6p
--------------------------------------------------- ---- ------- -------
EPRA EPS 34.1p 30.3p
=================================================== ==== ======= =======
Movements in the weighted average number of shares have resulted
from the issue of shares arising from the employee share-based
payment schemes and the equity raise.
In 2018, there were 10,357 options excluded from the potential
dilutive shares that did not affect the diluted weighted average
number of shares. In 2017, there were no options excluded from the
potential dilutive shares.
2.3 Net assets
EPRA net asset value per share makes adjustments to IFRS
measures by principally removing some items that are not expected
to materialise in normal circumstances such as items of deferred
tax and the fair value of financial derivatives. The reconciliation
between IFRS NAV and EPRA NAV is available in note 2.3 (c).
The Group's Property business undertakes the acquisition and
development of properties. The Property segment's revenue comprises
revenue from development management fees earned from joint
ventures.
a) EPRA net assets
2018
Group
on
EPRA
UNITE Share of joint ventures basis
---------------------------------------- ------- --------------------------- ---------
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- -------- -------- ------- ---------
Investment properties 1,497.1 567.1 621.7 1,188.8 2,685.9
Investment properties under development 278.9 3.2 - 3.2 282.1
---------------------------------------- ------- -------- -------- ------- ---------
Total property portfolio 1,776.0 570.3 621.7 1,192.0 2,968.0
---------------------------------------- ------- -------- -------- ------- ---------
Debt on properties (594.8) (174.6) (267.0) (441.6) (1,036.4)
Cash 123.6 32.4 23.9 56.3 179.9
---------------------------------------- ------- -------- -------- ------- ---------
Net debt (471.2) (142.2) (243.1) (385.3) (856.5)
---------------------------------------- ------- -------- -------- ------- ---------
Other assets and (liabilities) (13.3) (4.9) (7.9) (12.8) (26.1)
EPRA net assets 1,291.5 423.2 370.7 793.9 2,085.4
---------------------------------------- ------- -------- -------- ------- ---------
Loan to value 27% 25% 39% 32% 29%
======================================== ======= ======== ======== ======= =========
2017
Group
on
EPRA
UNITE Share of joint ventures basis
---------------------------------------- ------- --------------------------- -------
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- -------- -------- ------- -------
Investment properties 1,261.4 538.7 579.3 1,118.0 2,379.4
Investment properties under development 205.7 10.2 - 10.2 215.9
---------------------------------------- ------- -------- -------- ------- -------
Total property portfolio 1,467.1 548.9 579.3 1,128.2 2,595.3
---------------------------------------- ------- -------- -------- ------- -------
Debt on properties (512.9) (169.5) (212.3) (381.8) (894.7)
Cash 51.2 25.0 15.6 40.6 91.8
---------------------------------------- ------- -------- -------- ------- -------
Net debt (461.7) (144.5) (196.7) (341.2) (802.9)
---------------------------------------- ------- -------- -------- ------- -------
Other assets and (liabilities) (34.7) (5.2) (12.1) (17.3) (52.0)
EPRA net assets 970.7 399.2 370.5 769.7 1,740.4
---------------------------------------- ------- -------- -------- ------- -------
Loan to value 31% 26% 34% 30% 31%
======================================== ======= ======== ======== ======= =======
b) Movement in EPRA NAV during the year
Contributions to EPRA NAV by each segment during the year is as
follows:
2018
Share of joint ventures
--------------------------------------- ------- --------------------------- -------
Group
on
EPRA
UNITE basis
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ------- ------- -------- -------- -------
Operations
Operations segment result 60.1 17.8 16.3 34.1 94.2
Property
Rental growth 38.8 6.4 19.8 26.2 65.0
Yield movement 37.4 7.9 22.3 30.2 67.6
Disposals and acquisition gains (6.8) (3.4) 0.1 (3.3) (10.1)
--------------------------------------- ------- ------- -------- -------- -------
Investment property gains 69.4 10.9 42.2 53.1 122.5
Development property gains 29.6 0.8 - 0.8 30.4
Pre-contract/other development costs (1.1) - - - (1.1)
--------------------------------------- ------- ------- -------- -------- -------
Total property 97.9 11.7 42.2 53.9 151.8
--------------------------------------- ------- ------- -------- -------- -------
Unallocated
Shares issued 166.7 - - - 166.7
Investment in joint ventures 63.4 (5.3) (58.1) (63.4) -
Dividends paid (62.5) - - - (62.5)
USAF performance fee - - - - -
JV property acquisition fee - - - - -
Swap cancellation and debt break costs (0.1) - - - (0.1)
Other (4.7) (0.2) (0.2) (0.4) (5.1)
--------------------------------------- ------- ------- -------- -------- -------
Total unallocated 162.8 (5.5) (58.3) (63.8) 99.0
--------------------------------------- ------- ------- -------- -------- -------
Total EPRA NAV movement in the year 320.8 24.0 0.2 24.2 345.0
--------------------------------------- ------- ------- -------- -------- -------
Total EPRA NAV brought forward 970.7 399.2 370.5 769.7 1,740.4
--------------------------------------- ------- ------- -------- -------- -------
Total EPRA NAV carried forward 1,291.5 423.2 370.7 793.9 2,085.4
--------------------------------------- ------- ------- -------- -------- -------
The GBP5.1 million charge that comprises the other balance
within the unallocated segment includes a tax charge of GBP2.7
million, fair value of share options charge of GBP1.1 million,
purchase of own shares of GBP0.4 million and GBP0.9 million for the
UNITE Foundation.
2017
Share of joint ventures
------------------------------------- ------ --------------------------- -----------
Group
on
UNITE EPRA basis
Total USAF LSAV Total Total
GBPm GBPm GBPm GBPm GBPm
------------------------------------- ------ -------- -------- ------- -----------
Operations
Operations segment result 38.6 17.8 14.4 32.2 70.8
Property
Rental growth 41.0 10.3 10.0 20.3 61.3
Yield movement 23.6 11.8 30.8 42.6 66.2
Disposals and acquisition gains 0.6 (1.2) 1.8 0.6 1.2
------------------------------------- ------ -------- -------- ------- -----------
Investment property gains 65.2 20.9 42.6 63.5 128.7
Development property gains 38.5 0.6 - 0.6 39.1
Pre-contract/other development costs (1.5) - - - (1.5)
------------------------------------- ------ -------- -------- ------- -----------
Total property 102.2 21.5 42.6 64.1 166.3
------------------------------------- ------ -------- -------- ------- -----------
Unallocated
Shares issued 87.7 - - - 87.7
Investment in joint ventures (3.7) 8.8 (5.1) 3.7 -
Convertible bond (85.4) - - - (85.4)
Dividends paid (44.4) - - - (44.4)
USAF performance fee 4.0 (0.6) - (0.6) 3.4
USAF property acquisition fee 1.6 (0.2) (0.5) (0.7) 0.9
Swap cancellation costs (11.5) - (0.8) (0.8) (12.3)
Other (3.3) (0.2) (0.4) (0.6) (3.9)
------------------------------------- ------ -------- -------- ------- -----------
Total unallocated (55.0) 7.8 (6.8) 1.0 (54.0)
------------------------------------- ------ -------- -------- ------- -----------
Total EPRA NAV movement in the year 85.8 47.1 50.2 97.3 183.1
------------------------------------- ------ -------- -------- ------- -----------
Total EPRA NAV brought forward 884.9 352.1 320.3 672.4 1,557.3
------------------------------------- ------ -------- -------- ------- -----------
Total EPRA NAV carried forward 970.7 399.2 370.5 769.7 1,740.4
------------------------------------- ------ -------- -------- ------- -----------
The GBP3.9 million charge that comprises the other balance
within the unallocated segment includes a tax charge of GBP0.9
million, fair value of share options charge of GBP1.4 million,
GBP0.7 million relating to the redemption of convertible bond,
purchase of own shares of GBP0.3 million and GBP0.7 million for the
UNITE Foundation.
c) Reconciliation to IFRS
To determine EPRA NAV, net assets reported under IFRS are
amended to exclude the mark to market valuation of swaps, deferred
tax liabilities and to recognise all properties at market
value.
The Group also manages NAV using EPRA NNNAV, which adjusts EPRA
NAV to include the fair value of swaps and debt. Under EPRA best
practice guidelines this is considered to give stakeholders the
most relevant comparable information on the current fair value of
all the assets and liabilities in the Group.
The net assets reported under IFRS reconcile to EPRA NAV and
EPRA NNNAV as follows:
2018 2017
Note GBPm GBPm
------------------------------------ ---- ------- -------
Net asset value reported under IFRS 2,073.0 1,729.0
Mark to market interest rate swaps 0.2 2.1
Realised swap gain (2.3) -
------------------------------------ ---- ------- -------
Deferred tax 14.5 9.3
------------------------------------ ---- ------- -------
EPRA NAV 2.3a 2,085.4 1,740.4
Mark to market of fixed rate debt (38.0) (55.1)
Mark to market interest rate swaps (0.2) (2.1)
Deferred tax (14.5) (9.3)
------------------------------------ ---- ------- -------
EPRA NNNAV 2,032.7 1,673.9
------------------------------------ ---- ------- -------
d) NAV per share
Basic NAV is based on the net assets attributable to the equity
shareholders of The Unite Group plc and the number of shares in
issue at the end of the year. The Board uses EPRA NAV and EPRA
NNNAV to monitor the performance of the Property segment on a day
to day basis.
2018 2017
Note GBPm GBPm
---------------------------------- ---- ------- -------
Net assets
Basic 2.3c 2,073.0 1,729.0
---------------------------------- ---- ------- -------
EPRA 2.3a 2,085.4 1,740.4
---------------------------------- ---- ------- -------
EPRA diluted 2,088.7 1,743.0
---------------------------------- ---- ------- -------
EPRA NNNAV (diluted) 2,036.0 1,676.5
---------------------------------- ---- ------- -------
Number of shares (thousands)
Basic 263,541 241,279
Outstanding share options 917 919
---------------------------------- ---- ------- -------
Diluted 264,458 242,198
---------------------------------- ---- ------- -------
Net asset value per share (pence)
Basic 787p 717p
---------------------------------- ---- ------- -------
EPRA 791p 721p
---------------------------------- ---- ------- -------
EPRA (fully diluted) 790p 720p
---------------------------------- ---- ------- -------
EPRA NNNAV (fully diluted) 770p 692p
---------------------------------- ---- ------- -------
2.4. Revenue and costs
The Group earns revenue from the following activities:
2018 2017
Note GBPm GBPm
---------------------------- ------------------- ---- ----- -----
Rental income Operations segment 2.2a 112.7 99.7
Management fees Operations segment 15.8 16.5
USAF performance fee Unallocated - 3.4
---------------------------- ------------------- ---- ----- -----
128.5 119.6
Impact of minority interest
on management fees (0.2) (0.3)
------------------------------------------------- ---- ----- -----
Total revenue 128.3 119.3
================================================= ==== ===== =====
The cost of sales included in the consolidated income statement
includes property operating expenses of GBP28.7 million (2017:
GBP28.5 million), operating lease rentals of GBP11.5 million (2017:
GBP12.6 million).
2.5 Tax
As a REIT, rental profits and gains on disposal of investment
properties are exempt from corporation tax. The Group pays UK
corporation tax on the profits from its residual business,
including profits arising on construction operations and management
fees received from joint ventures, together with UK income tax on
rental income that arises from investments held by offshore
subsidiaries in which the Group holds a minority interest.
a) Tax - income statement
The total taxation charge/(credit) in the income statement is
analysed as follows:
2018 2017
GBPm GBPm
-------------------------------------------------------------------- ----- -----
Corporation tax on residual business income arising in UK companies 3.7 1.7
Income tax on UK rental income arising in non-UK companies 0.4 -
-------------------------------------------------------------------- ----- -----
Current tax charge 4.1 1.7
Origination and reversal of temporary differences 4.4 4.5
Effect of change in tax rate - (0.6)
-------------------------------------------------------------------- ----- -----
Deferred tax charge 4.4 3.9
Total tax charge in income statement 8.5 5.6
-------------------------------------------------------------------- ----- -----
The movement in deferred tax provided is shown in more detail in
note 2.5 d.
In the income statement, a tax charge of GBP8.5 million arises
on a profit before tax of GBP245.8 million. The taxation charge
that would arise at the standard rate of UK corporation tax is
reconciled to the actual tax charge as follows:
2018 2017
GBPm GBPm
------------------------------------------------------------------- ------ ------
Profit before tax 245.8 229.4
------------------------------------------------------------------- ------ ------
Income tax using the UK corporation tax rate of 19% (2017: 19.25%) 46.7 44.2
Property rental business profits exempt from tax in the REIT Group (13.5) (11.2)
Property revaluations not subject to tax (24.9) (25.0)
Effect of indexation on investments - (1.1)
Effect of statutory tax reliefs (0.2) (0.6)
Effect of tax deduction transferred to equity on share schemes 0.3 0.5
Rate difference on deferred tax - (0.5)
Prior year adjustments 0.1 (0.7)
------------------------------------------------------------------- ------ ------
Total tax charge in income statement 8.5 5.6
=================================================================== ====== ======
As a UK REIT, the Group is exempt from UK corporation tax on the
profits from its property rental business. Accordingly, the element
of the Group's profit before tax relating to its property rental
business has been separately identified in the reconciliation
above.
Although the Group does not pay UK corporation tax on the
profits from its property rental business, it is required to
distribute 90% of the profits from its property rental business
after accounting for tax adjustments as a Property Income
Distribution (PID). PIDs are charged to tax in the same way as
property income in the hands of the recipient. For the year ended
31 December 2018, the required PID is expected to be GBP58.2
million of which GBP55.9 million has been distributed at the year
end, with the remainder to be distributed in May 2019.
b) Tax - other comprehensive income
Within other comprehensive income a tax charge totalling GBPnil
(2017: GBPnil) has been recognised representing deferred tax.
c) Tax - statement of changes in equity
Within the statement of changes in equity a tax credit totalling
GBP0.1 million (2017: GBP0.7 million credit) has been recognised
representing deferred tax.
d) Tax - balance sheet
The table below outlines the deferred tax liabilities/(assets)
that are recognised in the balance sheet, together with their
movements in the year:
2018
At 31 Charged/ Charged/ At 31
December (credited) (credited) December
2017 in income in equity 2018
GBPm GBPm GBPm GBPm
----------------------------------------------- --------- ----------- ----------- ---------
Investments 20.6 3.8 - 24.4
Property, plant and machinery (0.8) 0.1 - (0.7)
Share schemes (0.9) 0.1 0.2 (0.6)
Tax value of carried forward losses recognised (11.3) 0.4 (0.3) (11.2)
----------------------------------------------- --------- ----------- ----------- ---------
Net tax liabilities/(assets) 7.6 4.4* (0.1) 11.9
----------------------------------------------- --------- ----------- ----------- ---------
* The GBP4.4 million balance (above) includes two tax movements
(Property, plant and machinery and Share schemes) which are
included in EPRA, which is why they are not included in the IFRS
reconciliation in note 2.2 b); removing them results in achieving
the GBP5.5 million movement which is excluded as per EPRA's best
practice recommendations.
2017
At 31 Charged/ Charged/ At 31
December (credited) (credited) December
2016 in income in equity 2017
GBPm GBPm GBPm GBPm
----------------------------------------------- --------- ----------- ----------- ---------
Investments 17.2 3.4 - 20.6
Property, plant and machinery (0.1) (0.7) - (0.8)
Share schemes (0.9) 0.1 (0.1) (0.9)
Tax value of carried forward losses recognised (11.8) 1.1 (0.6) (11.3)
----------------------------------------------- --------- ----------- ----------- ---------
Net tax liabilities/(assets) 4.4 3.9* (0.7) 7.6
----------------------------------------------- --------- ----------- ----------- ---------
* The GBP3.9 million balance (above) includes two tax movements
(Property, plant and machinery and Share schemes) which are
included in EPRA, which is why they are not included in the IFRS
reconciliation in note 2.2 b); removing them results in achieving
the GBP4.5 million movement which is excluded as per EPRA's best
practice recommendations.
The UK corporation tax rate will reduce from 19% to 17% with
effect from 1 April 2020. This will reduce the Group's future
current tax charge accordingly. The deferred tax liability at 31
December 2018 has been calculated based on the rate at which it is
expected to reverse.
As a REIT, disposals of investment property are exempt from tax
and as a result no deferred tax liability has been recognised in
relation to these assets. At the balance sheet date, the Group's
investments in property unit trusts (being primarily its interests
in joint ventures) were not exempt from tax as a REIT. Where they
remain within the charge to tax, a deferred tax liability has been
recognised on the excess of the market value of these assets over
their historic tax base cost. At 31 December 2018, the deferred tax
liability in relation to these investments was GBP24.4 million.
The unit trusts in which the Group invests derive their value
from UK land. On 8 January, the Finance Act 2019 was substantively
enacted, which contains provisions that will exempt capital gains
on such units from the charge to UK tax to the extent they derive
their value from UK property. As these provisions had not been
substantively enacted at the balance sheet date, the Group is
recognising a deferred tax liability in respect of its investments.
However, the Group will reverse this deferred tax liability during
2019, resulting in a credit to the income statement. The deferred
tax asset in respect of losses will also be reversed, to the extent
that it has been recognised against the liability on investments.
The expected impact of the reversal of these deferred tax items is
shown in the table below.
Impact of Finance Act 2019
Deferred
At 31 Charged/ Charged/ tax (asset)/liability
December (credited) (credited) after
2018 in income in equity release
GBPm GBPm GBPm GBPm
----------------------------------------------- --------- ----------- ----------- ----------------------
Investments 24.4 (24.4) - -
Property, plant and machinery (0.7) - - (0.7)
Share schemes (0.6) - - (0.6)
Tax value of carried forward losses recognised (11.2) 9.9 - (1.3)
----------------------------------------------- --------- ----------- ----------- ----------------------
Net tax (assets)/liabilities 11.9 (14.5) - (2.6)
----------------------------------------------- --------- ----------- ----------- ----------------------
Deferred tax is an accounting adjustment intended to reflect tax
that the Group may have to pay in the future if certain events
occur, and is distinct from the Group's current tax charge (the
latter being the tax actually payable to HM Revenue & Customs
for the year). Accordingly, a reversal of the deferred tax
provision is an accounting only adjustment, and does not result in
the Group receiving a tax credit or refund.
Section 3: Asset management
3.1 Wholly owned property assets
The Group's wholly owned property portfolio is held in two
groups on the balance sheet at the carrying values detailed
below.
In the Group's EPRA NAV, all these groups are shown at market
value.
i) Investment property (fixed assets)
These are assets that the Group intends to hold for a long
period to earn rental income or capital appreciation. The assets
are held at fair value in the balance sheet with changes in fair
value taken to the income statement.
ii) Investment property under development (fixed assets)
These are assets which are currently in the course of
construction and which will be transferred to Investment property
on completion. The assets are held at fair value in the balance
sheet with changes in fair value taken to the income statement.
Valuation process
The valuations of the properties are performed twice a year on
the basis of valuation reports prepared by external, independent
valuers, having an appropriate recognised professional
qualification. The fair values are based on market values as
defined in the RICS Appraisal and Valuation Manual, issued by the
Royal Institution of Chartered Surveyors. CB Richard Ellis Ltd,
Jones Lang LaSalle Ltd and Messrs Knight Frank, Chartered Surveyors
were the valuers in the years ended 31 December 2018 and 2017.
The valuations are based on:
> Information provided by the Group such as current rents,
occupancy, operating costs, terms and conditions of leases and
nomination agreements, capital expenditure, etc. This information
is derived from the Group's financial systems and is subject to the
Group's overall control environment.
> Assumptions and valuation models used by the valuers - the
assumptions are typically market related, such as yield and
discount rates. These are based on their professional judgement and
market observation.
The information provided to the valuers - and the assumptions
and the valuation models used by the valuers - are reviewed by the
Property Board and the CFO. This includes a review of the fair
value movements over the year.
The movements in the carrying value of the Group's wholly owned
property portfolio during the year ended 31 December 2018 are shown
in the table below. The fair value of the Group's wholly owned
properties at the year ended 31 December 2018 is also shown
below.
2018
Investment
property
Investment under
property development Total
GBPm GBPm GBPm
---------------------------------------------------- ---------- ------------ -------
At 1 January 2018 1,261.4 205.7 1,467.1
Cost capitalised 10.5 230.7 241.2
Interest capitalised - 10.5 10.5
Transfer from investment property under development 204.5 (204.5) -
Transfer from work in progress - 0.9 0.9
Disposals (49.5) - (49.5)
---------- ------------ -------
Valuation gains 75.6 47.4 123.0
Valuation losses (5.4) (11.8) (17.2)
---------- ------------ -------
Net valuation gains 70.2 35.6 105.8
---------------------------------------------------- ---------- ------------ -------
Carrying and market value at 31 December 2018 1,497.1 278.9 1,776.0
---------------------------------------------------- ---------- ------------ -------
The movements in the carrying value of the Group's wholly owned
property portfolio during the year ended 31 December 2017 are shown
in the table below. The fair value of the Group's wholly owned
property portfolio at the year ended 31 December 2017 is also shown
below:
2017
Investment
property
Investment under
property development Total
GBPm GBPm GBPm
---------------------------------------------------- ---------- ------------ -------
At 1 January 2017 1,061.6 184.6 1,246.2
Cost capitalised 7.6 130.7 138.3
Interest capitalised - 7.4 7.4
Transfer from investment property under development 156.3 (156.3) -
Transfer from work in progress - 0.8 0.8
Disposals (28.7) - (28.7)
---------- ------------ -------
Valuation gains 78.6 43.6 122.2
Valuation losses (14.0) (5.1) (19.1)
---------- ------------ -------
Net valuation gains 64.6 38.5 103.1
---------------------------------------------------- ---------- ------------ -------
Carrying and market value at 31 December 2017 1,261.4 205.7 1,467.1
---------------------------------------------------- ---------- ------------ -------
Included within investment properties at 31 December 2018 are
GBP29.9 million (2017: GBP30.5 million) of assets held under a long
leasehold and GBP0.1 million (2017: GBP9.0 million) of assets held
under short leasehold.
Total interest capitalised in investment and development
properties at 31 December 2018 was GBP49.8 million (2017: GBP41.5
million) on a cumulative basis. Total internal costs relating to
construction and development costs of Group properties amount to
GBP59.6 million at 31 December 2018 (2017: GBP54.6 million) on a
cumulative basis.
Recurring fair value measurement
All investment and development properties are classified as
Level 3 in the fair value hierarchy.
2018 2017
Class of asset GBPm GBPm
------------------------------------------ ------- -------
London - rental properties 499.8 465.9
Prime provincial - rental properties 298.3 266.3
Major provincial - rental properties 409.4 300.4
Other provincial - rental properties 289.6 228.8
London - development properties 49.1 -
Prime provincial - development properties 125.4 57.9
Major provincial - development properties 104.4 120.8
Other provincial - development properties - 27.0
------------------------------------------ ------- -------
Market value 1,776.0 1,467.1
------------------------------------------ ------- -------
The valuation technique for investment properties is a
discounted cash flow using the following inputs: net rental income,
estimated future costs, occupancy and property management
costs.
Where the asset is leased to a University, the valuations also
reflect the length of the lease, the allocation of maintenance and
insurance responsibilities between the Group and the lessee, and
the market's general perception of the lessee's
creditworthiness.
The resulting valuations are cross-checked against the initial
yields and the capital value per bed derived from actual market
transactions.
For development properties, the fair value is usually calculated
by estimating the fair value of the completed property (using the
discounted cash flow method) less estimated costs to
completion.
Fair value using unobservable inputs (Level 3)
2018 2017
GBPm GBPm
------------------------------------------------ ------- -------
Opening fair value 1,467.1 1,246.2
Gains and losses recognised in income statement 105.8 103.1
Capital expenditure 252.6 146.5
Disposals (49.5) (28.7)
------------------------------------------------ ------- -------
Closing fair value 1,776.0 1,467.1
------------------------------------------------ ------- -------
Quantitative information about fair value measurements using
unobservable inputs (Level 3)
2018
Fair
value Valuation Weighted
GBPm technique Unobservable inputs Range average
------------------------------- ------- ------------ -------------------------- ------------ ---------
London - rental properties 499.8 Discounted Net rental income (GBP GBP184 GBP267
per week) - GBP355
cash flows Estimated future rent 2% - 7% 3%
(%)
Discount rate (yield) 4% - 5% 4.2%
(%)
------------------------------- ------- ------------ -------------------------- ------------ ---------
Prime provincial - rental 298.3 Discounted Net rental income (GBP GBP139 GBP153
properties per week) - GBP166
cash flows Estimated future rent 2% - 6% 3%
(%)
Discount rate (yield) 4.5% - 5.1%
(%) 6.0%
------------------------------- ------- ------------ -------------------------- ------------ ---------
Major provincial - rental 409.4 Discounted Net rental income (GBP GBP99 - GBP135
properties per week) GBP149
cash flows Estimated future rent 1% - 5% 2%
(%)
Discount rate (yield) 4.8% - 5.6%
(%) 6.1%
------------------------------- ------- ------------ -------------------------- ------------ ---------
Other provincial - rental 289.6 Discounted Net rental income (GBP GBP100 GBP138
properties per week) - GBP174
cash flows Estimated future rent 2% - 7% 4%
(%)
Discount rate (yield) 4.9% - 5.8%
(%) 15%
------------------------------- ------- ------------ -------------------------- ------------ ---------
London - development 49.1 Discounted Estimated cost to complete GBP63.3m GBP135.4m
properties (GBPm)
cash flows Estimated future rent - GBP186.3m 3%
(%)
Discount rate (yield) 3% 4.3%
(%)
4.3%
------------------------------- ------- ------------ -------------------------- ------------ ---------
Major provincial - development 229.8 Discounted Estimated cost to complete GBP15m GBP36.3m
properties (GBPm) - GBP59.4m
cash flows Estimated future rent 3% 3%
(%)
Discount rate (yield) 4.5% - 5.2%
(%) 5.5%
------------------------------- ------- ------------ -------------------------- ------------ ---------
Fair value at 31 December
2018 1,776.0
=============================== ======= ============ ========================== ============ =========
2017
Fair
value Valuation Weighted
GBPm technique Unobservable inputs Range average
------------------------------- ------- ----------- -------------------------- ----------- --------
London - rental properties 465.9 Discounted Net rental income (GBP GBP183 GBP255
cash flows per week) - GBP345
Estimated future rent 1% - 6% 3%
(%)
Discount rate (yield) 4.2% - 4.5%
(%) 5.0%
------------------------------- ------- ----------- -------------------------- ----------- --------
Prime provincial - rental 266.3 Discounted Net rental income (GBP GBP135 GBP146
properties cash flows per week) - GBP156
Estimated future rent 1% - 6% 4%
(%)
Discount rate (yield) 4.5% - 5.3%
(%) 7.0%
------------------------------- ------- ----------- -------------------------- ----------- --------
Major provincial - rental 300.4 Discounted Net rental income (GBP GBP100 GBP127
properties cash flows per week) - GBP157
Estimated future rent 1% - 4% 3%
(%)
Discount rate (yield) 4.5% - 5.7%
(%) 6.1%
------------------------------- ------- ----------- -------------------------- ----------- --------
Other provincial - rental 228.8 Discounted Net rental income (GBP GBP94 - GBP134
properties cash flows per week) GBP164
Estimated future rent 2% - 8% 4%
(%)
Discount rate (yield) 5.2% - 6.0%
(%) 13.5%
------------------------------- ------- ----------- -------------------------- ----------- --------
Prime provincial - development 57.9 Discounted Estimated cost to complete GBP8.1m GBP55.4m
cash flows (GBPm) - GBP72.0m
properties Estimated future rent 3% 3%
(%)
Discount rate (yield) 5.3% - 5.5%
(%) 5.8%
------------------------------- ------- ----------- -------------------------- ----------- --------
Major provincial - development 120.8 Discounted Estimated cost to complete GBP13.9m GBP42.3m
properties cash flows (GBPm) - GBP81.9m
Estimated future rent 3% 3%
(%)
Discount rate (yield) 5.5% - 5.7%
(%) 6.0%
------------------------------- ------- ----------- -------------------------- ----------- --------
Other provincial - development 27.0 Discounted Estimated cost to complete GBP11.4m GBP11.4m
properties cash flows (GBPm)
Estimated future rent 3% 3%
(%)
Discount rate (yield) 5.7% 5.7%
(%)
------------------------------- ------- ----------- -------------------------- ----------- --------
Fair value at 31 December
2017 1,467.1
------------------------------- ------- ----------- -------------------------- ----------- --------
A decrease in net rental income, estimated future rents or
occupancy will result in a decrease in the fair value, whereas a
decrease in the discount rate (yield) or the estimated costs to
complete will result in an increase in fair value. There are
inter-relationships between these rates as they are partially
determined by market rate conditions.
3.2 Inventories
2018 2017
GBPm GBPm
------------------ ----- -----
Interests in land 6.8 0.9
Other stocks 2.3 3.6
------------------ ----- -----
Inventories 9.1 4.5
------------------ ----- -----
At 31 December 2018, the Group had interests in one piece of
land (2017: one piece of land).
3.3 Investments in joint ventures (Group)
The Group has two joint ventures:
Group's share Legal entity in
of assets/results which
Joint venture 2018 (2017) Objective Partner Group has interest
--------------------------- ------------------ ---------------------- ----------------------- --------------------
The UNITE UK Student 26.9%* (26.2%) Invest and operate Consortium of investors UNITE UK Student
Accommodation Fund student accommodation Accommodation Fund,
(USAF) throughout the a
UK Jersey Unit Trust
--------------------------- ------------------ ---------------------- ----------------------- --------------------
London Student 50% (50%) Operate student GIC Real Estate LSAV Unit Trust,
Accommodation accommodation Pte, Ltd Real estate a Jersey
Venture (LSAV) in London investment vehicle Unit Trust and
of the Government LSAV
of Singapore (Holdings) Ltd,
incorporated in
Jersey
--------------------------- ------------------ ---------------------- ----------------------- --------------------
* Part of the Group's interest is held through a subsidiary,
USAF (Feeder) Guernsey Limited, in which there is an external
investor. A minority interest therefore occurs on consolidation of
the Group's results representing the external investor's share of
profits and assets relating to its investment in USAF. The ordinary
shareholders of The Unite Group plc are beneficially interested in
25.3 % (2017: 24.6%) of USAF.
a) Net assets and results of the joint ventures
The summarised balance sheets and results for the year, and the
Group's share of these joint ventures are as follows:
2018
USAF LSAV Total
GBPm GBPm GBPm
-------------------------- ------------------------ ---------------- ------------------
Gross MI Share Gross Share Gross Share
-------------------------- ------- ------ ------- ------- ------- --------- -------
Investment property 2,253.7 35.4 570.2 1,243.4 621.7 3,497.1 1,227.3
Cash 127.9 2.0 32.4 47.7 23.9 175.6 58.3
Debt (690.0) (10.8) (174.6) (534.0) (267.0) (1,224.0) (452.4)
Swap liabilities 0.4 - 0.1 (0.3) (0.2) 0.1 (0.1)
Other current assets 27.2 0.4 6.9 0.4 0.2 27.6 7.5
Other current liabilities (57.9) (1.1) (11.7) (16.1) (8.1) (74.0) (20.9)
-------------------------- ------- ------ ------- ------- ------- --------- -------
Net assets 1,661.3 25.9 423.3 741.1 370.5 2,402.4 819.7
-------------------------- ------- ------ ------- ------- ------- --------- -------
Minority interest - (25.9) - - - - (25.9)
Swap liabilities (0.4) - (0.1) 0.3 0.2 (0.1) 0.1
-------------------------- ------- ------ ------- ------- ------- --------- -------
EPRA net assets 1,660.9 - 423.2 741.4 370.7 2,402.3 793.9
-------------------------- ------- ------ ------- ------- ------- --------- -------
Profit for the year 124.1 1.8 32.7 122.6 61.3 246.7 95.8
-------------------------- ------- ------ ------- ------- ------- --------- -------
2017
USAF LSAV Total
GBPm GBPm GBPm
-------------------------- ------------------------ ---------------- ------------------
Gross MI Share Gross Share Gross Share
-------------------------- ------- ------ ------- ------- ------- --------- -------
Investment property 2,232.7 35.2 548.9 1,158.6 579.3 3,391.3 1,163.4
Cash 101.5 1.6 25.0 31.1 15.6 132.6 42.2
Debt (689.3) (10.9) (169.5) (424.6) (212.3) (1,113.9) (392.7)
Swap liabilities 0.4 - 0.1 (2.8) (1.4) (2.4) (1.3)
Other current assets 28.5 0.4 7.0 1.5 0.7 30.0 8.1
Other current liabilities (61.6) (1.2) (12.2) (25.5) (12.8) (87.1) (26.2)
-------------------------- ------- ------ ------- ------- ------- --------- -------
Net assets 1,612.2 25.1 399.3 738.3 369.1 2,350.5 793.5
-------------------------- ------- ------ ------- ------- ------- --------- -------
Minority interest - (25.1) - - - - (25.1)
Swap liabilities (0.4) - (0.1) 2.8 1.4 2.4 1.3
-------------------------- ------- ------ ------- ------- ------- --------- -------
EPRA net assets 1,611.8 - 399.2 741.1 370.5 2,352.9 769.7
-------------------------- ------- ------ ------- ------- ------- --------- -------
Profit for the year 163.7 2.5 42.1 117.1 58.5 280.8 103.1
-------------------------- ------- ------ ------- ------- ------- --------- -------
Net assets and profit for the year above include the minority
interest, whereas EPRA net assets exclude the minority
interest.
b) Movement in carrying value of the Group's investments in
joint ventures
The carrying value of the Group's investment in joint ventures
increased by GBP26.2 million during the year ended 31 December 2018
(2017: GBP100.6 million), resulting in an overall carrying value of
GBP819.7 million (2017: GBP793.5 million). The following table
shows how the increase has been achieved.
2018 2017
GBPm GBPm
---------------------------------------------------------------- ------ ------
Recognised in the income statement:
Operations segment result 34.1 32.2
Minority interest share of Operations segment result 1.1 1.1
Management fee adjustment related to trading with joint venture 6.4 5.7
Net revaluation gains 58.1 65.0
Loss on cancellation of interest rate swaps - (0.8)
(Loss)/profit on disposal of properties (3.5) 0.5
Other (0.4) (0.6)
---------------------------------------------------------------- ------ ------
95.8 103.1
Recognised in equity:
Movement in effective hedges 1.2 2.1
Other adjustments to the carrying value:
Profit adjustment related to trading with joint venture (6.4) (7.4)
Additional capital invested in USAF 8.6 18.5
Performance fee units issued in USAF 4.0 8.1
(Redemption of units)/additional capital invested in LSAV (39.5) 8.5
USAF performance fee - (0.7)
Distributions received (37.5) (31.6)
---------------------------------------------------------------- ------ ------
Increase in carrying value 26.2 100.6
Carrying value at 1 January 793.5 692.9
---------------------------------------------------------------- ------ ------
Carrying value at 31 December 819.7 793.5
---------------------------------------------------------------- ------ ------
b) Movement in carrying value of the Group's investments in
joint ventures continued
In addition to its equity shares, the Group has also provided
interest free investment loans to some of the joint ventures. These
were primarily provided on the setting up of the joint venture to
provide capital to acquire investment properties. As a result of
being provided interest free, the loans were discounted on
recognition to reflect the fair value, the unwinding of the
discount is reflected in the Group's finance income.
c) Transactions with joint ventures
The Group acts as asset and property manager for the joint
ventures and receives management fees in relation to these
services.
In addition, the Group is entitled to performance fees from USAF
and LSAV if the joint ventures outperform certain benchmarks. The
Group receives cash or an enhanced equity interest in the joint
ventures as consideration for the performance fee. The Group has
recognised the following fees in its results for the year.
2018 2017
GBPm GBPm
----------------------------------- ----- -----
USAF 13.5 13.1
LSAV 5.9 7.9
----------------------------------- ----- -----
Asset and property management fees 19.4 21.0
USAF performance fee - 4.0
USAF acquisition fee - 0.7
LSAV acquisition fee - 1.0
----------------------------------- ----- -----
Investment management fees* - 5.7
Total fees 19.4 26.7
----------------------------------- ----- -----
* Included in the movement in EPRA NAV is a USAF performance fee
of GBPnil million (2017: GBP3.4 million). This is the gross fee of
GBPnil million (2017: GBP4.0 million) paid by USAF net of a GBPnil
million (2017: GBP0.6 million) adjustment related to trading with
joint ventures. In 2018, the 2017 USAF performance fee was settled
in units in The UNITE UK Student Accommodation Fund rather than
cash.
Included in share of joint venture profit in the income
statement is a share of joint venture property management fee costs
of GBPnil (2017: GBP1.2 million). On an EPRA basis these costs are
deducted from the property management fees shown above, and there
is an adjustment for the minority interest of GBP0.2 million (2017:
GBP0.2 million). This results in the net fees included in the
Operating segment result (note 2.2a) of GBP15.6 million (2017:
GBP14.1 million). Development management fees are included in the
Property segment result (note 2.2a). Investment management fees are
included within the unallocated to segments section (note
2.2a).
c) Transactions with joint ventures continued
During 2017, the Group recognised additional proceeds of GBP2
million in relation to the sale of a property to LSAV in 2015 under
the terms of the original sale agreement. At 31 December 2017, the
proceeds had not been settled and therefore no cash flows were
disclosed in 2017. The proceeds were settled in cash in 2018. The
profits relating to sales and associated disposal costs and related
cash flows are set out below:
Profit Profit
and loss and loss
2018 2017
-----------------------------------------------------------------
LSAV LSAV
GBPm GBPm
----------------------------------------------------------------- --------- ---------
Included in profit on disposal of property (net of joint venture
trading adjustment) - 1.0
----------------------------------------------------------------- --------- ---------
Profit on disposal of property - 1.0
----------------------------------------------------------------- --------- ---------
Cash flow Cash flow
2018 2017
----------------------------------------------------------------
LSAV LSAV
GBPm GBPm
---------------------------------------------------------------- --------- ---------
Gross proceeds 1.0 -
---------------------------------------------------------------- --------- ---------
Net cash flows included in cash flows from investing activities 1.0 -
---------------------------------------------------------------- --------- ---------
Section 4: Funding
4.1 Borrowings
The table below analyses the Group's borrowings which comprise
bank and other loans by when they fall due for payment:
Group
---------------------------------------------------- ------------------------------
2018 2017
Carrying value Carrying value
GBPm GBPm
---------------------------------------------------- -------------- --------------
Current
In one year or less, or on demand 1.3 1.3
Non-current
In more than one year but not more than two years 85.6 1.4
In more than two years but not more than five years 110.3 379.4
In more than five years 395.4 130.7
---------------------------------------------------- -------------- --------------
591.3 511.5
Total borrowings 592.6 512.8
==================================================== ============== ==============
In addition to the borrowings currently drawn as shown above,
the Group has available undrawn facilities of GBP350.0 million
(2017: GBP327.0 million). A further overdraft facility of GBP10.0
million (2017: GBP10.0 million) is also available.
Properties with a carrying value of GBP638.1 million (2017:
GBP609.1 million) have been pledged as security against the Group's
drawn down borrowings.
The carrying value of borrowings is considered to be approximate
to fair value, except for the Group's fixed rate loans as analysed
below:
2018 2017
---------------------------------- -------------------- --------------------
Carrying Carrying
value Fair value value Fair value
GBPm GBPm GBPm GBPm
---------------------------------- -------- ---------- -------- ----------
Level 1 IFRS fair value hierarchy 365.0 373.5 90.0 96.1
Level 2 IFRS fair value hierarchy 237.8 251.2 239.1 263.8
Other loans (10.2) (10.2) 183.7 183.7
Total borrowings 592.6 614.5 512.8 543.6
---------------------------------- -------- ---------- -------- ----------
The fair value of loans classified as Level 1 in the IFRS fair
value hierarchy is determined using quoted prices in active markets
for identical liabilities.
The fair value of loans classified as Level 2 in the IFRS fair
value hierarchy has been calculated by a third party expert
discounting estimated future cash flows on the basis of market
expectation of future interest rates.
4.2 Interest rate swaps
The Group uses interest rate swaps to manage the Group's
exposure to interest rate fluctuations. In accordance with the
Group's treasury policy, the Group does not hold or issue interest
rate swaps for trading purposes and only holds swaps which are
considered to be commercially effective.
The following table shows the fair value of interest rate
swaps:
2018 2017
GBPm GBPm
---------------------------------- ----- -----
Current - -
Non-current 0.1 0.8
Fair value of interest rate swaps 0.1 0.8
================================== ===== =====
The fair values of interest rate swaps have been calculated by a
third party expert, discounting estimated future cash flows on the
basis of market expectations of future interest rates, representing
Level 2 in the IFRS 13 fair value hierarchy.
4.3 Net financing costs
2018 2017
Recognised in the income statement: GBPm GBPm
--------------------------------------- ------ -----
Finance income
- Interest income on deposit (0.9) (0.1)
--------------------------------------- ------ -----
Finance income (0.9) (0.1)
--------------------------------------- ------ -----
Gross interest expense on loans 24.8 24.7
Interest capitalised (10.5) (7.4)
--------------------------------------- ------ -----
Loan interest and similar charges 14.3 17.3
Swap cancellation and loan break costs 0.1 11.5
--------------------------------------- ------ -----
Finance costs 14.4 28.8
--------------------------------------- ------ -----
Net financing costs 13.5 28.7
--------------------------------------- ------ -----
The average cost of the Group's wholly owned investment debt at
31 December 2018 is 3.8% (2017: 4.3%). The overall average cost of
investment debt on an EPRA basis is 3.8% (2017: 4.1%).
4.4 Gearing
The Group's adjusted gearing ratio is a key indicator that the
Group uses to manage its indebtedness. EPRA net asset value (NAV)
and adjusted net debt are used to calculate adjusted gearing.
Adjusted net debt excludes mark to market of interest rate swaps as
shown below.
The Group's gearing ratios are calculated as follows:
2018 2017
Note GBPm GBPm
--------------------------------------------------------------- ---- ------- -------
Cash and cash equivalents 5.1 123.6 51.2
Current borrowings 4.1 (1.3) (1.3)
Non-current borrowings 4.1 (591.3) (511.5)
Interest rate swaps liabilities 4.2 (0.1) (0.8)
--------------------------------------------------------------- ---- ------- -------
Net debt per balance sheet (469.1) (462.4)
Mark to market of interest rate swaps 0.1 0.8
Adjusted net debt (469.0) (461.6)
--------------------------------------------------------------- ---- ------- -------
Reported net asset value (attributable to owners of the parent
company) 2.3c 2,073.0 1,729.0
EPRA net asset value 2.3c 2,085.4 1,740.4
Gearing
Basic (net debt/reported net asset value) 23% 27%
--------------------------------------------------------------- ---- ------- -------
Adjusted gearing (adjusted net debt/EPRA net asset value) 22% 27%
--------------------------------------------------------------- ---- ------- -------
Gearing (EPRA net debt/EPRA net asset value) 2.3a 41% 46%
--------------------------------------------------------------- ---- ------- -------
Loan to value (EPRA net debt/total property portfolio) 2.3a 29% 31%
--------------------------------------------------------------- ---- ------- -------
4.5 Equity
The Company's issued share capital has increased during the year
as follows:
2018 2017
---------------------------------- ------------------------------- -------------------------------
Called up, allotted and fully Ordinary Share Ordinary Share
paid ordinary shares of GBP0.25p No. of shares Premium No. of shares Premium
each shares GBPm GBPm shares GBPm GBPm
---------------------------------- ----------- -------- -------- ----------- -------- --------
At start of year 240,830,281 60.2 579.5 222,047,816 55.5 493.6
Share placing 22,206,872 5.6 160.6 - - -
Shares issued from Convertible
Bond - - - 18,593,589 4.7 85.3
Share options exercised 477,998 0.1 0.4 188,876 0.0 0.6
---------------------------------- ----------- -------- -------- ----------- -------- --------
At end of year 263,515,151 65.9 740.5 240,830,281 60.2 579.5
---------------------------------- ----------- -------- -------- ----------- -------- --------
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled to one vote per
share at meetings of the Company. All shares rank equally with
regard to the Company's residual assets.
4.6 Dividends
During the year, the Company declared and paid an interim
dividend of GBP24.3 million - 9.5p per share (2017: GBP17.7 million
- 7.3p per share) and paid a GBP38.2 million final dividend - 15.4p
per share relating to the year ended 31 December 2017 (2016:
GBP26.7 million - 12.0p per share).
After the year end, the Directors proposed a final dividend per
share of 19.5p (2017: 15.4p), bringing the total dividend per share
for the year to 29.0p (2017: 22.7p). No provision has been made in
relation to this dividend.
The Group has modelled tax adjusted property business profits
for five years and declared PIDs in respect of the May 2018 and
November 2018 distributions to ensure that the PID requirement will
be satisfied. The combined PID from the distributions made during
2018 comprise 86% of the Group's forecast tax exempt property
rental business profit, leaving a small amount that can be paid as
part of the May 2019 distribution.
Section 5: Working capital
5.1 Cash and cash equivalents
The Group's cash position at 31 December 2018 was GBP123.6
million (2017: GBP51.2 million).
The Group's cash balances include GBP2.4 million (2017: GBP3.1
million) whose use at the balance sheet date is restricted by
funding agreements to pay operating costs and loan interest
relating to specific properties.
The Group generates cash from its operating activities as
follows:
Group
----------------------------------------------------------------------- ---- ----------------
2018 2017
Note GBPm GBPm
----------------------------------------------------------------------- ---- ------- -------
Profit/(loss) for the year 237.3 223.8
Adjustments for:
Depreciation and amortisation 7.3 7.0
Fair value of share-based payments 1.1 1.5
Dividends received - -
Change in value of investment property 3.1 (105.8) (103.1)
Change in value of investments - -
Net finance costs 4.3 13.5 28.7
Loss/(profit) on disposal of investment property 6.8 (0.6)
Share of joint venture profit 3.3b (95.8) (103.1)
Trading with joint venture adjustment 6.4 7.2
Tax charge/(credit) 2.5a 8.5 5.6
----------------------------------------------------------------------- ---- ------- -------
Cash flows from operating activities before changes in working capital 79.3 67.0
Decrease in trade and other receivables (4.5) (13.2)
Increase in inventories (5.5) (2.3)
(Decrease)/Increase in trade and other payables (5.8) 6.9
----------------------------------------------------------------------- ---- ------- -------
Cash flows from operating activities 63.5 58.4
----------------------------------------------------------------------- ---- ------- -------
In 2018, GBP4.0 million of the brought forward trade and other
receivables was settled in units in USAF rather than cash (2017:
GBP8.1 million).
Cash flows consist of the following segmental cash
inflows/(outflows): Operations GBP81.2 million (2017: GBP63.2
million), property (GBP138.3 million) (2017: (GBP27.7 million)) and
unallocated GBP129.5 million (2017: (GBP82.4 million)). The
unallocated amount includes Group dividends (GBP62.5 million)
(2017: (GBP42.3 million)), tax payable (GBP3.8 million) (2017:
(GBP2.1 million)), investment in joint ventures GBP30.9 million
(2017: (GBP27.0 million)), contributions to the UNITE Foundation
(GBP0.5 million) (2017: (GBP0.1 million)), purchase of own shares
(GBP1.4 million) (2017: (GBP1.9 million)) and amounts received from
shares issued GBP166.7 million (2017: GBP0.6 million).
5.2 Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations. It arises principally from the Group's
cash balances, the Group's receivables from customers and joint
ventures and loans provided to the Group's joint ventures.
At the year end, the Group's maximum exposure to credit risk was
as follows:
2018 2017
Note GBPm GBPm
---------------------------------------------------------- ---- ----- -----
Cash 5.1 123.6 51.2
Trade receivables 22.8 19.4
Amounts due from joint ventures (excluding loans that are
capital in nature) 36.7 41.8
---------------------------------------------------------- ---- ----- -----
183.1 112.4
---------------------------------------------------------- ---- ----- -----
a) Cash
The Group operates investment guidelines with respect to surplus
cash. Counterparty limits for cash deposits are largely based upon
long-term ratings published by credit rating agencies and credit
default swap rates.
b) Trade receivables
The Group's customers can be split into two groups - (i)
students (individuals) and (ii) commercial organisations including
Universities. The Group's exposure to credit risk is influenced by
the characteristics of each customer. The Group holds tenant
deposits of GBP0.9 million (2017: GBP9.0 million) as collateral
against individual customers.
c) Joint ventures
Amounts receivable from joint ventures fall into two categories
- working capital balances and investment loans. The Group has
strong working relationships with its joint venture partners and
therefore views this as a low credit risk balance.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR PGUAPPUPBPPQ
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