Shareholders in Unite (UTG) have had some tough years. Suppliers of student housing have gone from strength to strength, but Unite - once the poster boy - has been held back by its debt. Yet a second distressed rights issue looks increasingly unlikely and, even after a strong year, the shares trade at a sizable discount to book value. There's still plenty of recovery potential left for investors who buy now.
- Strong underlying market
- Tidying up portfolio
- Access to finance
- Big discount to underlying NAV
- Too much debt
- Short-term lettings weakness
True, unlike many property companies, Unite's problems are self-inflicted. It recovered from the property crash with a rights issue in 2009, but its debt levels still look high for a company that has created more bricks-and-mortar than cash. Including its share of joint ventures, in June the loan-to-value ratio was 54 per cent.
However, a landmark deal with Legal & General (LGEN) in May showed it has access to finance. The insurer issued its maiden property loan to the company - £121m for 10 years at a rate of 5.05 per cent - reducing Unite's average cost of debt from 5.7 per cent to 5.5 per cent. The company has also just launched a retail bond, which should bring in £50m-£75m of more flexible debt, albeit probably at a slightly higher rate. The key point is that Unite won't have to tap its shareholders again - and at a big discount - as some feared.
UNITE (UTG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 271p | MARKET VALUE: | £435m | |
| TOUCH: | 270-271p | 12-MONTH HIGH: | 287p | LOW: 150p |
| DIVIDEND YIELD: | 1% | TRADING PROPERTIES: | £359m | |
| DISCOUNT TO NAV: | 3% | |||
| INVESTMENT PROPERTIES: | £640m* | NET DEBT: | 115% | |
| Year to 31 Dec | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 252 | -128.9 | -92.4 | nil |
| 2009 | 229 | -35.7 | -25.9 | nil |
| 2010 | 242 | 24.2 | 12.2 | nil |
| 2011 | 242 | 4.7 | 1.3 | 1.75 |
| 2012† | 278 | 87.1 | 38.4 | 2.75 |
| % change | +15 | – | – | +57 |
Normal market size: 3,000 Matched bargain trading Beta: 1.1 *Includes £182m within joint ventures †Investec Securities estimates | ||||
The company has also been cleaning up its financial profile by selling assets, including properties worth £94m so far this year. A further £42m of disposals are under negotiation. Meanwhile, Unite has transferred its London development pipeline into a joint venture with the Singapore sovereign-wealth fund, releasing cash and allowing it to earn fees on more projects with less of its own capital.
These measures are welcome - Unite's balance sheet looks in much better shape now than 12 months ago. But it's crucial to the investment case that it operates in a strong sector. London student blocks came second only to central London homes in league tables of property performance last year, and the regional market was also robust. With that trend likely to continue, Unite is a rare beacon of rental growth in a recession-stunted market.
That said, the academic year just started - which has been heavily affected by higher tuition fees - will be weaker. Unite reckons student numbers this year are down 55,000 on last year, the main reasons being a reduction in the number of funded places by about 15,000, a low deferral rate last year, and - most importantly - miscalculations by universities, many of which have ended up with fewer students than they wanted. Over half of this fall will probably reverse next year as deferrals normalise and universities recalibrate their systems. But this year Unite has slightly more vacancies than usual, and management has reduced its expectations for rental growth in 2012 from 4 per cent to 3 per cent.
Even so, that growth will be sufficient to push up profits, particularly in combination with falling debt costs. Michael Burt, an analyst at broker Espirito Santo, expects "net portfolio contribution" - Unite's primary profit measure - to be £18.5m this year, up from £11m in 2011. Yet rental growth also increases the value of the portfolio, boosting net asset value (NAV). Here, Unite's high debt level, which exaggerates the impact of revaluations on NAV, comes in handy.
