Hello, and welcome to the Unite third quarter trading update call. My name is Laura, and I will be your coordinator for today's event. Please note that your lines will be on listen- only. However, you will have the opportunity to ask questions at the end or throughout the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Richard Smith, to begin today's conference. Thank you.
Thank you very much. Thank you everyone for joining the trading and valuation update call this morning. I know it's a busy morning for many of you. Getting straight to it, our operational performance has been very strong, and we expect 2022 earnings at the top end of our guidance. Our occupancy stands at 99% and rental growth has been strong, and we believe that rental growth is sustainably strong. Our cost base is well protected from inflation. Looking at the valuations, they have increased on the back of the occupancy and rental growth I've just referenced. For the academic year that's just completed, rental growth was 3.5%. However, on a like-for-like basis, this increases to 4.5%.
This like for like adjustment is simply that we have sold additional beds over last year in our lower priced markets such as Sheffield and Leicester. This strong overall performance across all markets supports increased rental growth guidance for the 2023/2024 academic year of 4.5%-5%. Our confidence in this growth is underpinned by the demand drivers that we have talked about previously, demographic growth, increasing participation and a return of international students to the U.K. and a continuing attraction of the U.K. to international students. Also to newer but no less valuable, drivers. Firstly, in terms of supply, the supply of new purpose-built beds is slowing. Pre the pandemic, roughly around 30,000 new purpose-built beds were opening each year. That slowed to 15,000-20,000 beds during the pandemic.
This year we expect new supply at around 10,000 beds. That level of new supply is where we see things obviously not a perfect environment looking through planning, et cetera, but only around 10,000 new beds per year in terms of new supply. You then look at the HMO market, so the student digs. A market that's got a million or so students in it. That market is actually declining as buy-to-let landlords are selling or not renting to students. Therefore, over the course of the next two to three years, we actually expect a net reduction in the total number of beds available for students to rent at university. A positive support there in terms of supply and also in the current environment and the cost of living crisis that is impacting all of us.
Our all inclusive offer provides real price certainty to parents and to students. We believe that is making us even more attractive to all types of students, not just first years, but second years, mature students, postgraduates, to come and live in purpose-built student accommodation. We therefore believe that rental growth at the level at which we're guiding, the 4.5%-5%, that continues to represent value for money and is sustainable, as I said. This rental growth, combined with the inflation protections that we have within our cost base, means that we're well placed to continue to deliver strong operational performance. On costs, very briefly, we are well protected. On energy, we're fully hedged for 2022, 2023 and through the summer of 2024.
We'll therefore hedge the remainder of 2024 and 2025 energy requirements by this time next year. On staff costs, we took the opportunity in the first half of the year to completely restructure our operational business. That restructuring has led to additional pay awards above the normal annual increment that we pay in January to all of our operational teams, and also generated GBP 2 million of annualized savings. Our operating platform, PRISM, continues to support us in driving further cost efficiencies. I'll now hand over to Joe to take us through financing and the balance sheet more generally.
Thank you, Richard, and good morning, everyone. Given the volatility and macro events of the last few weeks, understandably, much attention has turned to balance sheets and funding. Having recently completed the previously announced disposals on a small portfolio in Aberdeen, our pro forma LTV is currently at 29% and net debt to EBITDA is in our target range of 6x-7x , and we have cash headroom of GBP 350 million at the current moment. We're well protected in the near term from rate increases with 93% of our current debt hedged at a cost of 3.4%, with an average debt maturity of just under four and a half years and less than 10% of our see-through debt maturing in the next two years. The debt markets are open.
We recently extended our GBP 450 million RCF by 12 months into 2026, and that was at current pricing. On the development side, we've completed Hayloft Point in London and Campbell House in Bristol and the three asset management schemes in Manchester, which many of you saw at our Capital Markets Day last year. These are all fully let and all delivered strong returns. We're on site with one further project at Derby Road in Nottingham, where we have about GBP 35 million of remaining CapEx. The build costs are fixed, and we're working with a long-established partner contractor on that scheme. Given the increase in funding costs and the moving picture on build costs and increasing rents, we will review further investment plans to ensure that they deliver earnings accretion, attractive total returns, whilst also maintaining a robust balance sheet.
The investment market has remained positive over the last quarter, over a quarter billion GBP of transactions in Q3, with buyers including family offices, private equity, and U.K. institutions. The uplift in new USAF and LSAV valuations, have been driven by rental growth, stable yields, and the positive lettings performance that Richard mentioned, and the offset of some of those cost increases. As we've seen in previous cycles, student yields should be more robust, helped by the supply and demand characteristics that Richard outlined, the counter-cyclical demand drivers, and the fact that we're starting from a 5% net initial yield and rental growth should be possible, in order to offset those cost pressures. Clearly we will be impacted by increased funding costs and any wider market repricing.
Given the strong lettings performance, we have restated guidance for 2022 at 40-41p, and expect this to be at the upper end of that range, with the additional rents more than offsetting the cost and interest pressures. Looking forward to 2023, we are focused on capital discipline, maintaining a robust balance sheet, as well as growing rents and maintaining cost control in order to manage the upward pressure on costs and interests. We'll provide further guidance in February alongside our results for the 2023 outturn.
Thank you, Joe. Just to conclude then, stating the obvious, you know, the economic environment is challenging and uncertain, but as Joe says, we will remain disciplined, and we're focused on controlling the controllable. The operational performance of the business will remain strong and deliver real value. Our product is perhaps its greatest appeal to students given what's going on in the wider market. That widening appeal and the operational strength we have has led us to acquire our first BTR trial asset in Stratford. As we previously mentioned, we believe there's an exciting opportunity for us at the right point to grow our platform to support young professionals. 180 Stratford provides the perfect opportunity to test this, given its location, given its valuable price point, and also the product specification opportunity.
As I say, in Stratford, we have a significant presence there, and the assets fits nicely within our operating platform and our operating capability. Looking forward, the structural tailwinds supporting our business remain strong. Our alignment to the strongest universities in the U.K., those that are growing, is still very much a core focus for ours. Our operating platform will ensure that we can continue to deliver. All in all, it supports our confidence of continuing to deliver strong operational results. I'll now hand back to Laura to take us through the Q&A. Thanks, Laura.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. Thank you. We'll now take our first question from Paul of Barclays. Your line is open. Please go ahead.
Hi, guys. Thanks very much for the statement and the call. Just couple from me. First one's on the build-to-rent scheme. I think in your statement you mentioned focusing on future investment opportunities given the change in financing costs. My understanding is your developments always usually give a better return than this build-to-rent scheme. Just wondering why you've acquired it at a 4.3 yield and almost sort of, is this something that was agreed pre all the changes? It just doesn't quite fit with the comments around sort of future investment opportunities. And then also linked to that, is that included in the pro forma LTV, the acquisition of that asset? Then I'll have a couple of questions on the operational side, once we've gone through those things.
Yeah, Paul, I think that was a very much a strategic decision that we've taken over the last 12 months as a business that we want to expand into the build-to-rent arena. The price has been renegotiated on that site. It was something that was committed to prior to two weeks ago. We have, you know, committed to that. Would we have carried on with it anyway? Yes, I think probably would, given the strategic importance of that site, the operational learnings and the longer term growth opportunities that it will present. Very much seeing that as a long-term strategic opportunity in the business and signaling our intent that we do intend to continue growing.
The numbers are included in the pro forma LTV in terms of the acquisition, so and the free cash flow numbers are after having committed to that.
Cool. Thank you very much. Just on the operational side, obviously appreciate you give detailed guidance at the full year results. We've got the two, I suppose, factors, cost increases versus the better operational performance and stronger operational performance moving forward. On that operational side, you mentioned the supply constraints in the market. Are you getting more confident over, I suppose, higher levels of rental growth moving forward? Appreciate you've increased next year to 4.5%-5%. Is that more of a level that we should expect moving forward and therefore, you know, working to offset utility cost increases in 2024 and thereafter? Just to get a feel for that. Thank you.
Yeah, I mean, you know, we're providing guidance out through sort of 2023 and 2024. You know, we always look a little bit further on. I do believe that level of rental growth is sustainable if the current set of circumstances that we find ourselves in do persist. You know, rental growth in alternatives, I think will be, you know, at least at that level. You know, without providing definitive guidance beyond 2023, 2024, I do believe rental growth at that level is sustainable for a period of time.
Perfect. Thank you very much. Thank you. We'll now take our next question from Véronique of Kempen. Your line is open, please go ahead.
Thank you all for your updates and call. I was just wondering, you mentioned that you're investigating the future investment plans. During the half year figures you mentioned a 20 basis point increase or expected increase in yield on costs for the 2024, 2025 schemes. Do you perhaps have an update on that, and is it fair to assume that those kind of schemes are now also being investigated?
The update that we provided in June was factoring in our sort of current view on build costs at that time, and sort of was based on the market data we're getting from our build contractor partners. The build cost movement over the last quarter has been in line with the anticipated position at June. From a pure build cost perspective, we wouldn't see any change in that 2024-2025 yield on costs. Probably the bigger impact has been on that longer term rental growth, but also funding costs.
The bit that we will work through over the next quarter before we commit to those 2024 and 2025 deliveries will be what the total returns are, what our cost of capital will be, and as I say, we will ensure that we can deliver earnings accretion and, you know, meaningful total returns, and keeping the balance sheet in a place we want it to be in. We can't give any definitive update on that today, but we will look at each of those schemes on its merits before we commit to it.
Okay, that's clear. Thank you.
We'll now take our next question from Neeraj of Barclays. Your line is open. Please go ahead.
Hi team. Thank you for taking my question. During H1 you mentioned that you are working on a new structure to refinance the issue of 2023 secured bond through unsecured means. Can you please provide any update on that, if you have any?
Yeah. We're looking at a variety of options on that refinancing. Potentially reducing the overall amount that we need to refinance, looking at both secured and unsecured, and a range of different providers. No kind of substantive update on that. We'd expect that to meaningfully progress in the first quarter of next year.
Thank you.
Thank you. I don't see any questions in queue. Once again, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. Okay, we'll go on with our next question from Paul of Citi. Your line is open. Please go ahead.
Hi, guys. Thanks. Just a very quick one to understand the moving parts. Simplistically, you've moved forward the rental growth expectation by 1% for 2023. I think previously you gave a kind of proxy saying every 20 basis points of cost of debt, you know, was equivalent to 1% of rental growth. With the new expectation now 40 basis points higher than previously, you know, I'm taking it that effectively that cost of debt moving forward has offset the rental growth by around 1%. It's, you know, there's a positive part and a negative part, but the overall kind of impact would be minus 1%. Is that kind of fair as a sort of simplistic take?
Yeah, I think that's fair, Paul.
Okay. Okay, that's clear. Thanks, Joe.
We'll now take our next question from Christopher of Morgan Stanley. Your line is open. Please go ahead.
Yeah. Hi, good morning. I just wanted to ask a bit more about the BTR investment, and specifically the yield that I think Paul was talking about. I appreciate what you say about it being strategic, and therefore perhaps the yield is less relevant in this context. Are you going to be measuring your BTR investments via a different IRR hurdle? Because clearly if you are investing at those sorts of yields on cost, even if it's anywhere in the fours, that is going to be potentially dilutive to your overall return on capital. Can I ask you to just go a little bit further on how you think about the lower yields available in BTR versus in Unite in student accommodation, please?
Just reflect on, you know, why that might be a good use of marginal capital. Thanks.
As I say, we're looking at this on a strategic basis. We think that we'll provide longer term growth opportunities, and we will determine where our, you know, cost of capital settles down, as to where we will set those hurdle rates.
I think the bit that we believe in is that there could be cost efficiencies, and there could be higher rental growth coming through from assets like the one that we've just acquired in Stratford. I think we've taken a relatively cautious approach on both of those things in determining that initial, net initial yield. On a total returns perspective, we do believe that it stacks up. It may be marginally lower than student in that location, but it's, we think it's a relatively low risk way for us to pilot and to test a number of those areas, such as what rental growth and our costs could be. If it proves that, you know, there are much more attractive returns from student over the long run, then we won't be allocating that marginal capital to build-to-rent.
You know, I think we are seeing this as a pilot. It's a way that we can learn, and we can demonstrate what the real returns and what we can deliver over the longer term will be.
Okay, thank you.
We'll take our next question from Andre of Green Street. Your line is open. Please go ahead.
Hi. Good morning. I was just wondering and trying to understand once more the strategic impetus of you know going into the build-to-rent space. In that respect, what synergies are you seeing there beyond sort of the streamlined move over from PBSA to BTR for students post-graduation? Do you think you are going to be a better BTR operator, and why is that, if that's the case? Do you think you can achieve higher occupancies margins, et cetera?
I think there is a number of things that we can bring to the space, and you know, this is all in the context of, you know, very much a small trial. You know, we have an existing relationship with many thousands of arguably already sort of young professional students who are looking to move on. There's a lifetime value of living with us as students and then on as young professionals, which you know, potentially could be attractive. If you look at our operating platform, PRISM, it's incredibly well developed, mature as a platform that operates complex residential assets, whether that's build BTR or whether that's student. I'd put it up against anyone's in terms of its efficiency.
Yes, I do think we can deliver it more efficiently. Also, you know, increasingly conversations that we have with some of our university partners, they're looking for a different type of accommodation provision for, you know, academics, traveling lecturers, research fellows, and that provides a potentially interesting opportunity as well. Yeah, I do think we can drive strong rental growth. I do think we have a relationship with the types of customers that want to live in this, and I do think our operating platform is there. You know, what quite that combination of factors combines to Joe's point earlier as to, you know, whether it's something that in the medium to long term, we will start to allocate more capital to, we need to answer that question.
The strategic opportunity to test it in a location that we know and like hugely, you know, I think was something we felt was the right thing to do.
What is the sort of medium to longer term ambition with the build-to-rent if this pilot truly turns out to be successful?
Again, you know, I guess an open question, but, you know, we believe that there's still lots of opportunity for us to continue to grow within student. Clearly, we've got questions to answer at the moment as to how we fund any growth. I wouldn't see in a future point, let's assume for a moment that the BTR opportunity works and we demonstrate, you know, real growth potential in sort of young professional BTR, then I would see it as being additive to Unite's growth in the future, not as an alternative.
In terms of sort of portfolio exposure, would it be maybe 10%-20% of total portfolio?
I think it's too early for us to know. You know, it's a very significant market, but we need to prove, and Stratford is an opportunity for us to do that.
Appreciate it. Then coming back to the pricing point of the BTR, you did mention that there was some sort of renegotiation involved. Are we talking about here five to sort of 10% drawdown in the pricing over the few weeks as we've seen the funding market sort of deteriorate?
Yeah. It's in that sort of range.
Thanks very much.
There are no further questions, so I will hand it back to you to conclude today's conference. Thank you.
Great. Well, thanks very much, everybody for dialing and listening. As ever, if you've got any other questions then, you know, please, fire them through, to myself, Joe, or Mike. Enjoy your rest of your days. Thank you very much, and thank you to you, Laura.
Thank you. My pleasure. Thank you for joining today's call. Take care and stay safe. You may now disconnect.