No. of Recommendations: 6
I looked into Unite yesterday again. I don’t think it is as clear cut as I might originally have thought and certainly not without risk. This might be a bit repetitive but writing it out helped me understand it by think.
The lower tariff university cities have been hit by a double whammy of U.K. students who can’t afford to travel and are living at home and Chinese students desire to only attend high tariff universities.
Unite are urgently trying to pivot away from lower tariff cities. They need to sell properties. The property sale they recently announced, was a trophy London asset at book value. It does not follow that they will be able to sell properties in the weaker areas at book value. There are very serious regulatory hurdles that make this challenging. It seems more likely they would sell at discounted prices.
The pre Empiric acquisition Unite portfolio was concentrated in high tier cities and they enjoyed high occupancy. The acquisition of Unite has exposed the group to the Chinese students avoiding lower tier universities. These students stay in halls for multiple years. While the Hello student Empiric brand does have a high concentration in high tier cities, the collapsing demand from Chinese students in their lower tier markets has had a major impact on occupancy. That makes those properties a lot less valuable.
These down trends in lower tier cities are structural rather than cyclical. And there is further pain to come. Consider that there is a new levy of £925 per international student coming in 2028/29.
The integration of the Hello Student Empiric brand is a very clear opportunity for the group and I see no reason it will not be successful in driving occupancy.
Selling properties and integrating Empiric is going to take a couple of years. There may be issues with asset disposal prices.
Turning to valuation and risk. Here are some numbers.
At the time of writing, Unite is at 508p per share and market capitalisation £2.730 Billion.
Earning yield 8.5%.
Earnings/EPRA net tangible assets 5%.
Forward PE ratio based on management EPS guidance 11.8x to 12.2x.
Price to EPRA NTA 53.2%.
Dividend yield 7.42% with a 79% payout.
LTV 26%
Average cost of debt 3.9% (2025) and gradually rising to 4.7% (2028).
Average debt maturity 4 years and 100% fixed rate. Shame they didn’t lock in some long term fixed rates during covid.
UK base rate is 3.75%.
Cap Rate - defined as Net Operating Income (earnings excluding interest) as a percentage of the EPRA book value of the properties is 4.2%.
The stock market implied Cap Rate is 8.5%.
What does this mean? I originally thought I am picking up these properties at 53% of what they are worth. I earn 7.4% dividend while I await the market cap recovery to closer to book value. Low risk LTV. Sounds great and that is the bull case.
The stock market is challenging that outcome. First of all, it takes no account of the tail risk, however small, of an equity wipe out, caused by higher interest rates. Yes LTV is low, rates are fixed for 4 years but higher interest rates for a sustained period would be a major problem. That doesn’t appear to be likely as things stand. But it’s still a risk. It partly explains the stock market implied cap rate of 8.5% versus the risk free rate of 3.75%.
Settings aside interest rate risk, the more likely issue is selling off the low occupancy properties at book value.
Then you consider the average cost of debt rising to 4.7% in 2028, compared to 5% yield (earnings on ERPA NTA) does not look like a particularly good money maker. Unite are in a race to get rid of property at book (unlikely) and drive occupancy at Hello Students (likely).
It seems to me they need two bits of luck for this to work out: low interest rates and good sale prices for low occupancy student property.
It feels like a company to hold for two or three years and watch the management pivot and recovery and keep a close eye on the U.K. economy, inflation and interest rates. Manage risk with allocation size.
A list of the properties and their occupancy would be helpful to understand the scale of the exposure to low occupancy. Perhaps not as bad as the stock market is pricing in. I can see why investors are not rushing in to buy as the catalysts are not on the immediate horizon.
There are plenty of positive market dynamics as well. Not least supply has stalled. The 18 year old demographic is growing out to 2030. Attending top tier U.K. universities is not going to decline and students have to move to those locations and will need accommodation.
