Unite Group (LSE:UTG) Q3 2026 Earnings Call

0:00 Good morning everyone and thank you all for joining the call. I'm going to take you through a few slides and then we'll open up for some Q&A so if you have any questions for me and Mike please drop them into the webcast. Overall we're pleased with our progress against priorities that we shared earlier this year. We've delivered a strong leasing performance in an evolving market helped by the strength of our best-in-class platform. Our enhanced commercial approach has delivered reservations of 96% at the upper end of the range guided back in July. Whilst annual rents are down a little, this largely reflects a mix towards more undergraduates and resulting shorter tenancy lengths. We're also especially pleased with the performance of Empiric with occupancy of 92% meaningfully ahead of last year. Income growth is in our range and our EPS guidance for 26 is underpinned.

0:56 Our best assets are performing strongly and we have confidence in the strongest universities that we are working with. Our portfolio of the future is outperforming the disposal portfolio and we're making solid progress on disposals. We've sold 200 million so far this year and remain on track to get to our three to 400 million targets. The transaction market is being impacted by the challenging macro backdrop, but we continue to see good engagement and are working to the targets and timelines that we previously set out. We remain disciplined to our capital allocation framework, managing leverage, funding our on-site pipeline, and as shown earlier this year, we will allocate surplus capital to share buybacks. We are moving at pace and we are making progress. The trends that we've spoken about earlier this year have continued to play out through August and September. More than ever, students are prioritising the best universities and we believe that they will continue to do so.

1:53 And the strongest universities are winning in this environment. They're continuing to attract students to live away from home and have a greater need for accommodation than the lower ranked universities. International post graduates are down at all but the very best universities due primarily to the shortening of the post study work visa from three years to 18 months. This is being partially offset by more international undergraduates with China particularly strong. And universities responding by growing their UK student numbers and the likes of Manchester, UCL, Kings, Liverpool, Newcastle are all recruiting strongly. And there's even stories of extra in Bristol in the news facing a shortage of accommodation for first year students. And these trends support our strategy to increase alignment to the strongest universities where the outlook for accommodation demand and mental growth is the most positive.

2:46 The Unite platform consistently drives superior performance from PBSA assets, and that means high revenues, income visibility and lower costs. And this is because firstly, our brand and reputation, we're clearly recognised by the UK's leading universities and the students who attend them. And this gives us an edge across the spectrum from multi decade university partnerships, through to short term lads. Secondly, the scale of our operation means that we can deliver higher occupancy for a lower cost. We have a deeper and wider sales channel than anyone else with the 24-7 call centre, international office, best-in-class technology and scale. Being focused on 20 top cities for students brings efficiencies in the cost to market and servicing each bed. These brand and scale benefits are tangible.

3:33 The chart on the bottom left shows a clear example of how we're outperforming the market from the latest student's data and that we're gaining share. In the middle, our nominations of 54% of the portfolio is nominated. Universities need students, students need beds, and this is mission critical to those universities. And uniquely, we're both large enough and trusted by universities to provide long-term accommodation solutions. and finally our cost to serve is low. I think Empiric is a great example of this where we've reduced the cost base by more than 40% which is ahead of our underwrite expectations. The typical PBSA bed is more valuable on the Unite platform than anywhere else and these are significant and enduring advantages of our platform improving our profitability and creating value.

4:21 Last November we set out our leasing strategy for the 26-27 academic year and I'm really pleased with how we have delivered. We saw universities become more cautious around committing to nominated rooms, where we pivoted and sold 5,000 more beds on a direct let basis to returners, winning share from the HMO market. and in response to fewer postgraduates we have shifted to undergraduates. We have front-footed and applied the lessons from last year, we adjusted pricing early rather than waiting for clearing, our developments are fully let and Nottingham, Bristol and Edinburgh have all come back strongly. We took over Empiric when it was behind and made a material improvement performance with more to come in our first full year of ownership. This doesn't just happen, the market is changing and we are adapting but it takes a huge amount of work to deliver this performance from our commercial teams, property teams, technology and city teams have all responded well to the challenge and this sets us well for the 27-28 academic year.

5:22 In this sales cycle, we focused on delivering overall income and price to secure occupancy early. Occupancy is above 95% in all of our strongest cities. Where we have seen lower occupancy, this is largely supply driven. Weekly rates are up modestly, supported by indexation and multi-year nominations, and the shift to undergraduate students has meant we've sold more shorter tenancies, meaning that overall rev pour is down by 0.3 percentage points. and we've also seen our overall cost of sale, agent fees and pay per click marketing costs up year on year. Given the shortening of tenancy lengths, we do see the opportunity to grow utilization through our flexible lettings business. We've already grown this income this year and see the opportunity to add up to a further half percentage point to income growth in 2027.

6:11 We set out our future portfolio at the interims and we're clear then that these assets have the strongest track record and our conviction that this will continue. Our target portfolio of 55,000 to 60,000 beds is across 20 cities and these have again outperformed in both occupancy and rental growth as we'll see from the two charts and we expect this to continue. We're focused on moving as fast as we can to this future portfolio as I'll come back to discuss the disposal progress. A new supply in these cities beyond 2027 is very limited. Viability is incredibly challenging and there are signs that the Renters Rights Act is starting to have an impact on the HMO market. Turning to Empiric and our Hello Student brand, we're really pleased with the performance to date. The brand is clearly benefiting from the power of the Unite platform, driving improved performance right across the portfolio.

7:02 When we took it over in January, bookings were 13 points behind year on year. We applied our understanding of each city to market effectively. We broadened the sales network, introduced our dedicated international sales team, and this has resulted in both occupancy and income being ahead of last year and expectations. We're in the advanced stages of preparing for our first full sales cycle. The early rebooking window offers opportunity for us to retain more customers at a lower cost and cross-sell from the Unite portfolio and continue to win share from the HMO market as well. We completed the bulk of the integration and will deliver the 18 million synergy target that we've previously discussed. Nominations continue to provide us with income visibility and growth with inflation linkage in multi-year deals and have an average remaining term of five years.

7:51 The strongest universities need more beds and we are seeing this. So far we've agreed 4,300 new beds with deals with the universities like UCL, London School of Economics and Bristol and these have been at a 10% increase to current passing rents and this supports our trend of our shift towards strong universities and higher quality nominations. Renewal discussions for single year deals are underway now with universities, typically run through Q4 and into early Q1. Depending on where we end up, our experience shows this year how we have a range of commercial levers to drive a beneficial outcome. The pricing differential between multi year NOMs and direct lets gives us a room to play with. We are already on this and actively managing over the next few months.

8:37 Moving on to property valuations, we've seen valuations reduced by 3.7% in Q3. This movement largely reflects the higher interest rate environment affecting all assets. Values have also reflected lower income on weaker performing assets. This makes up about a third of the decline and these assets largely sit in our disposal pool. We continue to focus on bringing leverage back in line with our target of six to seven times net debt to EBITDA and have allocated recent disposal proceeds to deleverage. As we deliver further disposals, we'll continue to allocate capital according to our existing framework, and that's managing leverage, funding costs to complete our remaining onsite developments, and where we generate surplus capital share buybacks remain attractive and as we've demonstrated by our purchases of 165 million earlier this year we also continue to progress with a number of university partnerships.

9:34 And as I said, we're making solid progress on a disposal programme and remain on track to deliver our target of three to 400 million this year. Last week, we announced the sale of our King's Place development land, exiting an asset which no longer meets our investment hurdles, bringing the year to date total to 200 million. We have a further 225 million of assets under offer. It'll be no surprise to you that the market is not straightforward and conditions are continually evolving. Funding costs are increasing, buyers have waited to the end of the sales cycle and they're now pricing off passing income rather than an equivalent yield as they have historically done. The cladding diligence is taking two to three months to complete. We remain pragmatic but disciplined when selling assets. We're not sellers at any price and we will hold assets for longer if it makes sense for shareholders.

10:25 And in closing, the strongest universities are still growing and that supports improved performance on the portfolio of the future. We're responding to the changes in the market. We're being proactive to drive the best commercial performance and to win market share. We're working at pace to increase our alignment to the strongest universities to create a portfolio with pricing power. And we will continue to use proceeds in line with our capital allocation framework. And we remain focused on delivering the best outcomes for shareholders. So as you can see, there's a lot to do, but we're pleased with the progress to date. So with that, we'll turn to your questions. Thank you for those you've already done so, but if you haven't, please pop any further into the webcast. Mike and I will just now work through those questions, particularly ones we haven't covered.

11:14 Thanks Joe. Morning everyone, it's Mike here. I'll start to run through the questions on the webcast, starting with Anna Escalante at Morgan Stanley. Firstly, could you provide more colour on the half a percentage point potential increase in income from short term rentals? Yeah, so short term rentals for us is made up of two or three elements. We have semester lets where we're seeing demand for students for the first and the second semesters. We also see it then in our summer business, which has always been part of our offer. And then also a short term letting cycle, particularly over the summer months as well. We've grown the proportion of our income from this pool of revenue to about 2%, and that's up by about 50 basis points this year.

12:02 And given the increased availability, particularly in the stronger markets like London, Manchester and Edinburgh, where we have seen some of that shortening of tenancies, because they were the ones primarily with the 51 week tenancies that gives us greater opportunity to drive further income over that summer period and that's what is really working through the availability at the current pricing the cost to deliver that which gives us the opportunity to drive that additional half percentage point through 27. Anna's second question is on capital allocation. Could you please help us understand how to think about surplus capital and how to think about the use of disposal proceeds? Are you still targeting one university partnership per year and how are you thinking about loan to value at the moment?

12:51 Yeah, on surplus capital, I think, as I set out, we are clearly focused on managing our leverage and the six to seven times net debt to EBITDA target that we've been running to. We are currently slightly above that, and that's because of the acquisition of Empiric, as we knew about. We brought that down slightly. through the allocation of proceeds from disposals and we will continue to work towards that. Similarly, as we've previously outlined, we have our remaining on-site deliveries in Glasgow this year and then the two development JVs and we've always felt that around 50% of the disposal proceeds would be needed to allocate it to those schemes over 26, 27 and 28.

13:38 I think then as we generate further surplus capital we see share buybacks as the most attractive use of capital in this environment and where our shares are currently trading so we continue to step to that framework that we've previously outlined. On university partnerships I think what is interesting in this current environment is that universities are Clearly thinking about their own balance sheets and their needs for accommodation very deeply at the moment. And that is opening up some really good conversations with universities. Now, most of the universities who we were talking to in this space, they are the strong universities. They are saying that they do see a need for more accommodation over the next five years, which is encouraging.

14:23 but like us they are seeing it is incredibly difficult to develop viably. We think that you need to be charging £12,000 to £13,000 per annum to justify doing a development scheme at the moment and there's very few if any cities out other than London that you can generate that type of rent. The conversations of the universities continue and probably are shifting slightly more to stock transfers and the release of capital from existing assets rather than development of new. But as I say, we're really encouraged by those conversations. They are ongoing and we still believe that The next question is from Tom Moosen of Berenberg. Can you give some colour on capital growth in the quarter between the assets you want to own long term and the non-core assets to be sold?

15:27 I'm happy to pick that one up, Tom. So what we've seen, as Joe discussed, is an outward move in yields this quarter. I think it's fair to say that's impacted pretty much all assets, both what we see as the future portfolio and those assets we're planning to sell. However, where we have seen those rental growth deductions, they have primarily focused on those disposal assets. and that's because those are the properties that are operating at lower levels of occupancy and that's where the valuers have made an adjustment in the period. So they have seen a slightly weaker valuation performance than the averages that we're reporting for the two things. Next, moving on to Chris Millington at Deutsche Bank. What trends are you seeing in the international postgraduate market given that the visa data looks weak? Yeah so as I mentioned the decline in international postgraduates we've seen over the previous two cycles again continued into this 26-27 academic year and that is it really is linked closely to the quality of universities and the QS global rankings. You see quite a high correlation in performance related to those universities.

16:37 probably the big policy change that has impacted that this year is the shortening of the post-study work visa from three years to 18 months so those students who seek to come to the UK to get a good postgraduate degree and potentially to work here for three years to help to fund some of the cost of that investment are sort of taking a different economic decision and thinking about alternatives and that probably Given some of the pressure that we're seeing in the US, Australia around student visas and they are also seeing this decline, I've seen a spreading of postgraduates going to broader international markets. I think the overall global demand for higher education continues to rise, so the number of global students is rising and is expected to continue rising.

17:27 We have seen a growth in undergraduates coming to the UK from around the globe. As I mentioned, China is up strongly this year and it seems that students are saying, if I'm coming for three years, I'm making an investment to come study here as an undergraduate and that's less linked to that post-study work visa. I think one thing just to sort of touch on is the policy environment. We obviously got a new leadership, new government, and certainly Andy Burnham's talked very positively about universities, and I think he's seen the impact universities can have on a regional city like Manchester, both on supporting regeneration, bringing growth to the local economy, and certainly we are expecting a more stable policy environment and no further changes to certainly migration policy around international students going forward, which hopefully will lead to stabilization of that postgraduate market.

18:34 Second question is a follow-up from Chris at Deutsche. On disposals, what cohort of buyers are showing the most interest? Also, please could you comment on what proportion of planned disposals could be non-PBSA or development land? Yeah, so I think in this first round of disposals, Chris, we've focused on sort of a portion of the portfolio which we think is we need to move through relatively quickly and the value-add buyers have been the most interested group in those assets. We are selling these assets well below replacement costs and those buyers see an opportunity to enhance the NOI both from growing the occupancy and also reducing costs and that allows them to drive relatively attractive IRRs that meet their models.

19:27 In terms of the 200 million of assets we've sold so far this year, so there's been a couple of development sites within that and we've got a few further development sites and are built around asset which is on the market. So of the three to 400 million, we probably is around a third to a quarter of that is non-student. I think we're then into the bulk of those going forward will be student assets. The next couple of questions from Andres Toome at Green Street. First one is, what is your marginal cost of debt and how does paying down debt compare to other potential uses of sales proceeds? I'm happy to say that one Andres so our marginal cost of debt today clearly it's fluctuating in the current market but but we would say it's between six to six and a half percent I think as we've seen the cost of funding go up it's given us greater conviction on the desire to bring down that leverage as Joe said as we think about the progress we make with disposals we are looking to bring leverage down to target as we get to lower levels of leverage it will free up some surplus capital and we'll then have a choice in terms of what we do with that as Joe discussed Second part of Andres's question is which cities are in the under offer portfolio and at what yields are these now marked?

20:46 Again, I'm happy to take that one, Andrés. I think it's probably helpful to go back to the slide Jo touched on earlier, showing the range of occupancy performance across the different cities. For the 22 cities in which we operate, as Jo said, the vast majority are operating at higher stabilised levels of occupancy. However, we're seeing a number of cities which are operating at 95% occupancy or below, and generally our disposal portfolio is over-indexing to those lower occupancy cities. In terms of where we expect to trade on those, as Joe said, we're expecting yields on in-place income to be around 6% to 7.5% on those disposal assets. And that's based off the sales performance we've achieved for the 26-27 academic year.

21:36 Next question is from Rebecca Parker at Goldman Sachs. Could you provide more colour on the investment and transaction market liquidity for UK PBSA? Yeah, so the overall market is not straightforward and I think that largely is down to the macro factors we're seeing and the higher funding costs and also I think buyers trying to get their heads around what is happening in the operational and lettings market. So we've seen buyers wanting to and putting much greater focus on the 26-27 letting cycle and as Mike mentioned using passing income The level of transactions in this financial year has actually been significantly lower as buyers have been trying to come to terms with that.

22:37 Having said that, I think we are seeing a very high level of engagement. We're seeing lots of parties looking at the sector. And I think we are expecting, now that we're through this end of the sales cycle, that we'll see more trades happen as we go through to the back end of this year and early into next year, albeit, as I say, the fire diligence is something which does add an added layer of complexity into the student market. Rebecca's second question is on nomination agreements. Please could you walk us through the expiry schedule into next year, comment on your partner attention as well as the appetite for long-term agreements. How are you thinking about pricing on renewals versus direct let channels?

23:23 Yeah so universities have been more cautious on nominations agreements this year as we've previously discussed, particularly at those universities who've got less confidence in their ability to predict and secure students. We were encouraged by the fact that we saw an additional 450 beds come through clearing, again from some of our stronger partners. and that we've been able to renew just over 4,000 beds from those universities I mentioned earlier. And I think this plays into our overall strategy of focusing on sort of stronger universities and actually an opportunity to improve the overall quality of our nomination agreements over the next few years, particularly as we move through to that portfolio of the future. So our target of 50 to 60% We have 9% of those multi-year agreements mature this year. We've renewed effectively 7% of that nine already.

24:36 and we're now into the phase of renewing and having the discussions around those single year deals that typically runs through Q4 and into early Q1 and you know we look at the overall net income that we can generate from those nominations agreements especially after all marketing and sales costs and that does give us some flexibility on pricing and it really is down to a city level, city performance and we will drive that thinking around nominations agreements into our overall sales plan as I say with a view on driving the best and optimising income across the portfolio. Thanks Joe. Next question is from Akanksha Anand City Group, the first of two actually.

25:24 What was the rent growth for nomination agreements and direct lets? So we reported that the 0.3% reduction in revenue per occupied room, which is how we talk about rental growth, that we have seen stronger growth in the multi-year nomination agreements. They've seen growth of just over 3.5%. Where we have let beds new this year, so either direct lets or new agreements, they have seen rents reduced by just over 2%, which gets you to the 0.3% as a blend. And as Jo said, that is a function of that shift to slightly shorter tenancies and a shift in favour of undergrads and slightly fewer postgrad bookings in the mix. The second question is, with current visibility, when can we expect to see a return to EPS and dividend growth?

26:14 Yeah, so I think we've effectively seen the occupancy and the academic year income coming through. We've decided that we will update the market around 27 earnings guidance. Into 27 we've got more visibility on that nominations, renewal performance and our really important earnings rebookers campaign that we're about to launch. We are seeing the stabilisation in the overall demand. We have got some headwinds coming in from funding costs and we'll provide an update on the earnings guidance early in 27. Next question is from Matt Superior at Peel Hunt. He's interested to understand the type of buyers we've sold to are under offer to.

27:01 Are they seeking value add opportunities or alternative uses or just attractively priced opportunities? Yeah, I think at the moment it's value add, Matt, as I mentioned, that people are seeing this is a time when yields have moved out on those weaker assets. They are generally lower occupied or lower rented, and they think that they can bring in a different operating cost model to drive better NOI. The bulk of people are still seeing an opportunity to drive attractive IRRs, probably mid-teens IRRs from those purchases. As I say, there's still capital and plenty of capital if there are business plans to support that type of return.

27:46 I think the only thing to add to that, Matt, is we had the earlier question on non-PBSA assets. I think the bi-pool is slightly different there. So for the built-to-rent asset that Jo mentioned, we're still seeing core-style capital that wants to allocate to the residential sector, and where we've got our sort of long-income asset we're selling, which is an academy school, that to the government, again, there's a pretty active long-income market that's still out there, in addition to that value-add capital for PBSA assets. Our next question then is from Mark Mozzie at Bank of America. You touched on the opportunities for university partnerships. Do you still want to build for universities given the cost of building now and movements we're seeing in valuations? Yeah, I think that we won't build at full universities if the returns on them don't stack up versus the alternative uses of capital.

28:38 And as I say, it's very difficult to justify building at current costs and at current rents. Where we are seeing opportunities with universities is more on their existing estate. and potentially if they do want to build new then there is effectively an element of subsidy that would be required from the university either through a reduced land price or even effectively a subsidy if the university is seeing new accommodation is fundamental to their strategy. and you know there are certain cities where universities aren't able to grow without new beds and so that is something which universities are starting to think about how they can release value from existing student accommodation assets potentially to support the growth of new but to say our primary focus at the moment is more on university partnerships where there are existing beds and universities are seeking ways to reduce capital either to refurbish and modernize those beds or to allocate into other parts of their academic infrastructure that they will need to meet the demands of a growing student population.

29:46 Thanks for all the questions guys, I think that brings us to the end of them. Great, thank you all and thanks all again for joining the call. Hopefully you've heard that we're making progress against the priorities that we shared with you earlier in the year, that our platform and our enhanced commercial approach is delivering results and helping us gain share. We're on track with our disposal target for this year and we continue to move at pace towards the portfolio of the future that will maximise shareholder value. So thank you all and look forward to speaking soon.