No. of Recommendations: 13
Hello board.
This post relates to this year's REIT thread, but I think merits its own thread. Please note: no AI has been used (or harmed) in researching and writing* this short essay, it is 100% human in origin.
In the last two weeks, one of the largest REITs in the UK, Unite Group, has fallen from 730p (start of October) to 550p (this week)**. This is a drop of around -25%. Personally, I do not believe this relative valuation gap with other UK REITs is justifiable and so I have flipped part of my portfolio into Unite Group. So, please be aware, I'm potentially talking my own book here. Also, please check every claim I make here if you are taking this idea seriously, as this is not advice nor a recommendation to buy or sell. I take no responsibility, DYOR, you are on your own, etc.
Well then, what is Unite Group? They operate student accommodation, mostly at 'top' universities in the UK, e.g. Russell Group. Some rooms they let directly, others they have medium or long-term inflation-linked agreements with various universities. Occupancy is generally quite high (97%) as there is a shortage of accommodation in most UK cities. They have prospered from the growth of UK higher education along with the high number of foreign students coming to the UK.
They're one of the oldest REITs in the UK, founded in 1991. They have a quite good long term record of growth - both asset value & earnings - without diminishing shareholder equity, though 2008 was 'a bit rough'.
For every share currently priced at 560p, you can get around 990p of net assets per share depending on your preferred measure. That's a discount to NAV of 43%. I think that's quite good. Indeed it is rarely heard of for a large, still-growing REIT in the UK, holding useful/highly occupied property in popular cities rather than empty office blocks in Skegness. As well as operating properties, they have also developed new properties in areas of high demand in cooperation with universities.
Interestingly, to rebuild this REIT from scratch, even ignoring all the challenges of setting up arrangements and agreements with universities, establishing a reputation for good quality accommodation with students and community, finding well positioned large properties in university towns - would require around 1069p per share, per the accounts***. Today's closing price was a discount to NRV/share of around 48%.
Unlike e.g. LAND/BLND, they are not being crushed by low occupancy, crap yields, or large levels of debt.
Very much the opposite. Their debt level per the last full results was 24% relative to assets and the cost of that debt was 4.1% (3.6% in 2024). And thankfully, there is no debt maturity tsunami about to crash down upon them, maturities are stretched out fairly equally over the next 8 years or so, averaging about 4 years, hedged to give a predictable fixed rate.
Indeed, this particular company has usually been so well regarded in terms of returns, safety and brand, that they have often traded at a good premium to asset value. In 2021 and 2022, they traded over 1200p per share versus this week's 550p low.
Very intriguing. So, what's the catch? Particularly, A) Why did they get cheaper after 2022? B) Why are they suddenly remarkably cheaper still in the last 2 weeks?
A) After 2022, essentially every UK REIT got cheaper, and rising interest costs on debt seems to be the primary reason. Changes to UK visa policy in 2023 and a reduction in student visas by 14% for 2024 were feared to trigger a decline in student intake from overseas, but occupancy in 2024 ended up around 99% by the end of the term that year. Notably, the Russell group universities saw a decline of only 5% in visa grants; so this is was more of an issue for lower ranked universities, where Unite generally doesn't operate.
B) This year Unite decided to buy out their only listed university accommodation competitor in the UK, Empiric, which was about 1/10th of their size measured by beds and historical market cap. Although this does not give Unite a monopoly on university accommodation, it will make Unite the only listed university property group in the UK. Empiric, judging by their accounts, was not so efficiently run as Unite and there are likely to be quite nice benefits of scale and efficiency. The bid was a mix of cash and stock, leading to a modest increase in debt for Unite going forward, but not outrageously so. You can read about the economic logic of the bid here at the reference**** below. It boils down to: it would cost a lot more money for Unite to build the same buildings as a developer (by about 20%). And the REIT market is fairly trashed. So why not just buy all those buildings at once, while Unite's debt is low and Empiric's price is low? And thus save rather a lot of time, energy and money, essentially bringing forward the next 10 years of growth and expansion early, and at a substantial discount. The bid is expected to be accretive to earnings for Empiric holders in the first year and Unite holders in the second year.
Now, personally, I am not sure it's a superb idea but it's not bad? It makes economic sense, it essentially trades off extra business risk today to lock in a bunch of growth cheaply, when Unite is quite well placed to take on the extra risk. It also reduces risk in other ways, because the attractiveness/occupancy/price of these buildings for students is a known factor, which can't be said of a new development.
Finally, we reach what I consider to be 'the catch'. Not all shareholders agreed this plan is a good idea*****. On Monday October 6th, an AGM/court meeting resulted in only 71% approval. And so for the following two weeks there appears to be (*in my opinion*) an overhang of sellers, which in turn has set up a kind of negative momentum/sour sentiment around the stock, at a time when other REITs are sexy and racing ahead.
(I think also there's a strange sentiment in the air that universities will no longer matter going forward because people have chatbots to do everything for them. I don't think that will be a big issue for the set of universities and cities where Unite/Empiric operate, in fact I think the idea is fairly silly.)
What else might be 'the catch'? At the October 6th meeting, Unite noted that room sales for the year are slightly below previous years at this point******. But this is not 'news'. They projected exactly this throughout the year. 95.2% occupancy when in previous years it would be 97% at this time. This has led to rental growth of 4% (as they projected) when previous year's results recently had been around 7-8%.
The company has affirmed that earnings are exactly on course as expected with full year guidance unchanged at 47.5-48.25p. So I don't think that is 'the catch'.
What else then? The Empiric bid is not fully complete. Although shareholders of both companies have formally approved it, there's an investigation by the UK competition watchdog******* that I think will finish in a few months. I assume that Unite and Empiric have foreseen this and planned accordingly, and that the scheduled property disposals within the bid play some role in reducing concerns.
Overall, to my mind the current price of Unite Group relative to value is simply a mistake, a mispricing, and an opportunity to turn around either a very quick 30-35% gain, or a very long term 100% gain, while being paid a 7% dividend as you wait, less 20% WHT for those without a UK tax wrapper such as ISA or SIPP. (It might be useful to mention here that most of Unite's dividend is PID subject to a REIT 20% withholding tax outside of tax wrappers, but part of the dividend is sometimes just an ordinary dividend with no withholding. This may slightly increase the income value for non-UK investors.)
I believe any good value opportunity should have most/all of the following qualities:
1 - Low debt - as debt does tend to create the most problems. Here, debt is relatively low/manageable, and low cost, compared to the sector. Maturity dates/balance are not an issue. The amount of debt used for the offer seems reasonable.
2 - There should be an OUTRAGEOUS discount to intrinsic value. Which I think we have here, at roughly 50% discount to recently updated valuations on book and >50% discount to peak pricing in recent years.
3 - Something to 'out' the value - here, we are seeing a ongoing rally in many other REIT prices. Hopefully, any overhang of unenthusiastic institutions bailing out will soon come to an end. Together, this could produce positive momentum.
4 - Good assets, to establish a foundation for the intrinsic value of the stock - here, they own heaps of property in high-demand areas of the UK at a time when there's a massive shortage of property in the UK. If every university closed tomorrow, all the assets would still be very high value and in high demand.
5 - Something to change the narrative completely - this is linked to outing the value, but longer term. Perhaps I can explore this with a simple question. Suppose you were a rich parent somewhere in Asia, who was sending off family to a fancy university in either the US (number 1 destination of the past) or the UK (number 2). Perhaps with the hope of them acquiring PR/citizenship later. Which of these two destinations would you encourage them towards in 2025, and why? (Come to think of it, consider the same question, asked to a wealthy US parent...).
6 - There should be some sign the falling knife might have stopped falling. To my eye, it seems the price movement might have flattened in the last few days of trading. Hence I am finally motivated to write this essay, in case it isn't worth writing at all next month.
7 - Ongoing earnings & asset value growth in the background are always nice to see, to help build up the 'value pressure' underneath the price. Very much present, here.
At 730p, 2 weeks ago, Unite seemed good value to me.
At 560p, close of market today? It seems like a bargain.
So I have purchased some at 630p, 600p and 570p in roughly equal amounts. I will probably not buy any more due to my own position size limits.
I hope this has been interesting or useful for someone.
Thank you for reading and for any feedback/thoughts you would like to share.
TRS
NOTES
* 'reiting', perhaps
** a few numbers are slightly rounded for elegance - if you care about everything after the decimal point, it's best to double check.
***
https://www.unitegroup.com/articles/interim-result...****
https://www.unitegroup.com/wp-content/uploads/2025...*****
https://www.ajbell.co.uk/news/articles/unite-group...******
https://www.investegate.co.uk/announcement/rns/uni...*******
https://www.insidehousing.co.uk/news/competition-w... 