Student housing specialist arranges new facilities and plans asset sales, writes Jane Roberts
Keeping gearing under control and extending debt maturities is a priority this year for quoted student accommodation company UNITE, which owns £1.2bn (gross) of assets.
UNITE’s balance-sheet debt rose from £335m to £434m (71% to 84% adjusted gearing) in the year to December 2011, due to spending on developments and the cost of buying out Lehman Brothers’ 49% stake in the UNITE Student Village joint venture.
To control further debt rises, UNITE has postponed for a year a 563-bed scheme in Camden, London – where finance is ready to be drawn with HSBC – and will sell assets.
“Our objective is to maintain the current gearing level, but it is likely to rise in the first half then fall back later in 2012,” UNITE said in its full-year results this month.
In the past 14 months, UNITE has secured £316m with four lenders, in three debt facilities for wholly-owned assets and two for its main fund and a joint venture (see table).
The £38m for refinancing USV replaces Lehman’s original equity and £45m of debt, securitised in 2004, in line with a strategy to tidy up UNITE’s joint ventures and retain a greater share of income-generating assets.
UNITE paid £6.2m for the equity, a 31% discount to net asset value. USV’s sole asset is now a 1,381-bed Sheffield property worth around £60m. “We had to wait for that securitisation to start to burn off to get a good price from the administrator,” says UNITE chief executive Mark Allan.
The £115m extension with Lloyds is for UNITE Student Accommodation Fund (USAF), the UK’s largest student housing fund, owned by around 100 mainly UK corporate and local authority pension fund investors, plus Scandinavian pension fund Alecta. UNITE has a 16% stake.
Allan says margins on the new debt are more expensive: “In the RBS extension, it rises from around 100bps to 250-300bps. But a big fall in swap rates means the overall debt cost has fallen. We know the margin is competitive and where the market is.”
The new facilities have cut overall debt costs from 6.8% to 5.7%. Last year, this, plus a 99% portfolio occupancy rate, a 3.1% like-for-like rise in net operating income growth and adding 1,277 beds, drove a £6.9m leap in operating profit to £11m and an 8% rise in NAV (to £514m adjusted; £405m reported). All of which more than offsets the £21m cost of closing loss-making construc-tion subsidiary UNITE Modular Solutions.
Refinancing is the priority
The next priority is to refinance debt due in 2013 and 2014. Chief financial officer Joe Lister plans to extend debt maturities beyond the current three years and take on non-bank finance to mitigate refinancing risk.
Some of the refinancing goes hand in hand with a review of UNITE’s two joint ventures, set up to generate opportunistic returns from London development: UNITE Capital Cities, owned 30% by UNITE and 70% by GIC; and Oasis Capital Bank, set up in 2009 and owned with five Bahrani investment bank institutional clients. UCC will be extended or wound up next year and OCB in 2014.
Lister hints that one option would be to merge the funds into one big London vehicle. Lister’s team is also identifying a balance sheet portfolio for long-term financing and has spoken to insurers looking to build their property lending exposure, including Legal & General and AIG, “about seven-to-10-year facilities secured against them”.
Some assets will be drawn from a pool of collateral in a £100m facility originally made by Bank of Ireland, which matures in May 2013 and is now owned by Kennedy Wilson, after the bank’s $1.8bn loan sale in December.
Lister says: “I can also see long-term financing extending into USAF, with insurers or a private placement.” Private rival Liberty Living has just raised £100m via a US private placement (see news, p6).
USAF’s largest loan matures in 2014 (see graph). The £285m facility was securitised in a Morgan Stanley-arranged CMBS. “There is a big negative mark to market on the swaps, which discourages us from doing anything too soon,” Lister says. But these assets and facilities are being looked at in the round with balance sheet assets due for refinancing.
Allan believes banks will affect its market in other ways in the next couple of years. “Up to 10% of the £10bn-£11bn of purpose-built UK student accommodation is in the regions, leveraged over 75% and can’t be refinanced.”
Lenders’ approaches to addressing this will result in sales that will push values down, despite strong occupational performance. “There won’t be a massive blowout, but the yield differential between London and the regions is likely to widen,” Allan concludes.