Subject: Re: Unite Group (UTG), UK, falling knife.
Hi Jim

Thank you for your post. I absolutely agree with this particular point as a general concern, and I'm familiar with both the logic and also the reality of it playing out.

I think anyone who survived the 2007-2009 crisis, while holding banks or property, will know there can be a big gap between assessed values and reality, which might not be noticed till it's too late.

And even the most well-intentioned, honest CEOs can convince themselves everything is alright, that *their* company's assets are *valuable* and *marketable*, till one day... disaster.

The point of my post was simply that this issue should be mentioned, discussed, but perhaps not hammered *again and again* when there's absolutely no evidence of it occuring, and some reasonable evidence it is not occuring and does not apply here, for fairly obvious reasons (they are a profitable company with no need to sell).

I mean, what if Buffett has been defrauding Berkshire all this time? It's useful to entertain the notion once, but if it gets mentioned three times in a post, without any evidence or reasoning that points clearly to it, that feels odd? To me anyway.

--- aside ---

You might think the comparison with Buffett/Berkshire isn't reasonable or valid, because Berkshire is special and has an almost unique track record of honesty, candor and accuracy.

But Unite is Britain's Berkshire, in that regard. Throughout the last 15 years or so, UK analysts were said to have joked about Unite because there wasn't anything to analyse: 'it's a bond, not a share'. Unite was famous for hitting forecast numbers to the penny again and again. It was famous for getting its forecasts accurate, and telegraphing them clearly and repeatedly well in advance. I've tried to come up with specific direct quotes from ancient analyst notes to back this up (I even resorted to AI/Gemini - ugh!). I'll post what I have in a second post.

That's perhaps why the share is being punished so hard lately. The forecast for a DROP in earnings on Unite is super strange, even if in this case, it's because they bought a broken company to fix and took on those numbers for the coming year.

--- /aside ---

The most important question is whether sales are *necessary* to meet cashflow commitments & survival, or whether sales are being done to generate surplus for opportunism / convenience.

Here, to the best of my ability to tell, sales are not *needed*. This is raw opportunism mixed with pragmatism about ongoing expansion in the current environment.

Unite spelled out the game plan in the November presentation last year:

- Planning? -> forget it, building new is no longer worth it at these interest rates, land costs, building costs, regulatory constraints etc. Triply so when buybacks are so compelling and easy.

- Land acquired? -> sell it or redesign to make it profitable in the current environment. Again, since cheap buybacks are an option, raise the hurdle really, really high.

- Building underway? -> complete it.

However, they also haven't totally backed away from new projects, i.e. where they can get a yield of 7% on build, debt at 5.5%, plus the university *guarantees* renting the rooms on long-term inflation-linked contracts signed pre-build, AND they pick up management income on the university owned % share of the build - then they're willing to go ahead with it. Fair enough.

--- purpose of raised cash ---

Another important question is: when cash is raised, what is it used for? 'Buybacks at almost 50% of NAV' is a great reason. 'debt is getting a bit expensive to renew, so let's not do that' is a good reason. Whereas 'it looks super cool to report a huge profit by selling an ancient building at a modern price', or 'we need cash to try to survive' or 'uhh, I guess we just like trading stuff? lol' are all bad reasons.

Here, most of their properties are running at 98-100% occupancy and there's a small number of trouble spots that take a lot of time/energy/money to manage back to health. This is not a survival or 'looking cool' exercise. It's about reluctance to commit to long term debt at current long term debt prices, reluctance to expand where demand isn't guaranteed, and exploiting the hell out of a market misprice on their stock. And they straight up tell you that in the recent trading updates, presentations and annual report.

--- rambling follows ---

Ahout trouble spots.

There are actually entire PhD theses looking at the dynamics of student property markets and PBSA in an individual city (e.g. Sheffield).

It seems that in certain cities in the UK recently, the local council threw new PBSA licenses around like confetti, perhaps to try and relieve stress on the regular housing sector which was converting to student BTL just a bit too much.

Money was still quite easy to access cheaply in 2022-2023 ish, PBSA was 'hot' becaues of high demand nationally, so many companies picked up PBSA development licenses and started to build.

2-3 years later, crisis, in those places.

However, nothing happens in a vacuum. HMO (buy to let, houses with multiple occasion) in these areas are now finding there's too much regulation, too much tax, and fierce competition from the PBSA supply, so some traditional student digs are leaving the market, converting back to owned homes. In the transition period, it sucks for both the landlords and the PBSA operators. In my experience, landlords are fairly reluctant to sell up their rented properties till they feel they have to. There's an emotional attachment thing going on.

Nationally, it's also quite interesting. 19% of students stay in university owned halls, 25% in PBSA, and about 56% in HMO / private buy to let. So the ongoing big swing away from HMO / BTL in the UK *ought* to present an amazing opportunity for PBSA builds. But getting the licenses, building it cheaply, accessing debt at the right price... in practice, it's not happening.

There's actually a huge national shortage of student beds, ancient university halls that are falling apart and need replaced - but some places are swamped with PBSA and some are totalling lacking. Feast and famine across the country. Hence, for Unite, the opportunity to lock in years of 'feast'-oriented accomodation at a low price is a quite good deal.

https://www.unitegroup.com/wp-... (slide 4)

https://www.charlesrussellspee...

'shortfall of 620000 beds in 2026'

That is a HUGE shortfall of beds that ought to be met by PBSA. But won't be, now, or in years to come. Because building is expensive now, and more slow and complex than ever (which adds a lot to costs), interest rates have gone up (which means only certain levels of rent are viable), and the places that easily give out licenses to build are already oversupplied.

That's why a) Unite are sitting at 100% occupancy in so many places b) Unite 'fixing' Empiric in those locations where accom/demand exist but are not matched well, makes a lot of sense.

Whereas, building it themselves - where they can get licenses - using debt at 5.6%+ for projects returning perhaps 6% - doesn't make sense at all.

As far as exiting markets go, a lot of PBSA recently has been designed for easy conversion / mixed use deliberately as a plan B. And it might not be Unite that rushes to exit - newer PBSA companies may throw in the towel in the trouble spots first, convert to residential, and problem solved.

Indeed there are signs that Unite is going to encourage that, by dropping rents to the lowest they can to achieve better occupancy (which will have the effect of driving HMO and other PBSA out of the market). IIRC this is referred to in the presentation above or the November presentation, can't remember the slide number.

--- /end rambling ---

Back to the *hypothetical* 'selling the crown jewels at NAV or selling at a loss in desperation'.

This is an interesting topic to math out as a plan B, in case I'm an idiot, or in case we're all idiots.

Let's run the math on Unite assuming that 'the externally assessed book values are totally fake and the average Unite property *including all the ones running at 100% occupancy and all the land sites* could only be sold off at 90% of book value, even if sold off in an unhurried manner'.

Naturally, the corresponding debt would have to be repaid in full despite that.

So what would be the consequence if everything was just... sold off? You still get a number comfortably far ahead of the share price.

Crudely, 1310p assets per share, 355p debt per share, 955p net assets per share.

Take 10% off 1310p => 1180, subtract 355p debt (it doesn't get reduced by 10%!), and you get 825p net assets per share.

OK, let's take 20% off the entire portfolio 1310 => 1180 subtract 355p debt you get 700p net assets per share. Plus the residual business.

Heck, let's take *30%* off the entire portfolio 1310 => 917 - 355 => 562p net assets per share. Plus the residual business.

They could literally dump their entire portfolio overnight at 20% discount average (including land sites, 100% occupancy), pay out a special dividend of 650p a share, and the residual business would be a net cash and very profitable buildings management & property development company, with their contracts pre-secured for a decade to come.

And that is why I hold rather a lot of Unite Group at 500-600p.

I planned out this post over the weekend... and in doing so, convinced myself to buy some more Unite Group this morning at 486p (or 465p, ish, less imminent dividend cashback).

---

If you have questions or doubts about the above, please ask, I will try to point you towards information if I can. After all, I owe you, for all your wonderful posts over the years here & on old TMF!

TRS