No. of Recommendations: 4
Hello Indefensible, thanks for sharing your thoughts.
Five quick responses:
1. Whether prestigious universities continue to exist, and whether assets like halls of residence in town centers can be repurposed if necessary to other forms of accomodation or usage, are valid questions.
But why would these questions trigger such a massive, rapid gap in relative valuation (vs peers) specifically starting on the day of an AGM/court vote about a buyout bid?
I linked to a graph earlier showing UTG and LAND/BLND. The gap in valuation against those REITS that has suddenly opened up in the last 2-3 weeks is about 40%. That's a spectacular relative valuation gap. UK REITs generally trade together and move as a flock. Thus I think it's much more likely that this is a short-term price gap caused by temporary supply/demand imbalance rather than a long-term change in intrinsic value.
I do believe UTG is an interesting long term investment, and I do think long term questions are valid and interesting, but the reason I took time to write my original essay is simply because of the potential as a very short term 'compressed value' play that I think isn't very likely to turn into a value trap.
2. About "if the asset values are fairly accurate". With niche REITs that hold peculiar assets it can be tricky to estimate the value. However, this is not a niche REIT, and there are established accounting approaches to put conservative prices on the assets. Two common methods are a) sum of discounted future rental incomes (for unusual situations) and b) recently achieved market prices (where the assets are openly traded).
EPRA lay out standards for reporting on asset value, and the accounts of UK and EU REITS comply with those standards. However, they are only accurate at a point in time - discounted cashflows depend on the prevailing discount, and market prices depend on what's currently happening in the market. The safest way to approach this is to look at examples of a few years of NAV values, look at reported asset sales/purchases by the company and peer companies and their NAVs, to make sure they are all being suitably conservative, consistent, and not up to shenanigans.
3. Here's an example of a quick sanity check for asset value per share for Unite.
In 2018's report, assets were reported at 790p/share. (I picked 2018 randomly because 2020 was 'covid' which messed up asset valuations for a while; you might prefer to pick another year). Loan to value 29% then, similar to today, very slightly higher. There has been inflation and there has been about 20% of earnings retained each year (let's call that 1% reinvested and 4% divi, as the earnings/dividend yield was much lower in the past). Let's take 790p and inflate using the Bank of England inflation calculator, and then add 1.01^6 for 6 years of reinvested spare earnings, and see what comes out.
790p * inflation 2018-2014 = 998p in 2024. Add reinvested earnings: 998 * 1.01^6 = 1059p predicted NAV/share.
For curiosity's sake, let's also try with 2017's full year report, in case I picked a strange year by accident.
720p * inflation 2017-2024 * 1.01^7 = 999p predicted NAV/share.
Actual NAV/share for 2024 year end was 972p.
These are 5-10% higher estimates than the actual NAV we ended up with. That's understandable because besides general friction in business, we can see interest rates have risen, covid was not kind to university related businesses, and so on. There are also issues relating to 'tax stuff' e.g. stamp duty on newly purchased buildings that affect the efficiency of reinvested earnings. If you're curious about the 'tax stuff', EPRA lay out standards for how that is handled in valuations. The standard is that you get 3 separate NAV figures from the company accountants that represent different tax assumptions e.g. 'rebuild company from scratch today' vs 'sell everything tomorrow in a fire sale and pay all taxes immediately'.
I think the asset values are probably quite accurate, as they are being estimated by both discounted future rents, and from prices actually achieved in market disposals, and because they're very consistent over long periods and economic environments with what we'd expect to see. Allowing for slight variation over the course of a decade and different economic environment, of course.
4. But if you mean e.g. 'will the asset values hold up *at all* if there are simply no universities ever again, starting tomorrow'... well, that would be a somewhat conservative basis for valuation I suppose. It's probably worth looking at how the UK has been using hotels and social housing at great expense to try to house new arrivals where they have a legal obligation to provide housing assistance. Even if every university closes tomorrow, I think asset values will hold up well simply from the insatiable demand for 'rooms' in UK cities.
5. Keep in mind that some universities in the Russell Group were around for hundreds of years before the USA was founded ... they are the honey badgers of human society, persisting against all kinds of economies, wars, technological changes, social changes and politics. I don't think they'll be gone tomorrow.
TRS
