Subject: Unite Group UTG, couple of notes
Hi all, some random gossip/news.

There's a scary-sounding headline being circulated Friday in google/yahoo news etc., which I personally feel is misleading.

"Unite Group slumps on discounted share placing"

When I saw the headline I was like 'wtf! they've been buying back shares for months, why would Unite suddenly do a discounted placing without warning! wtf!'

But it's not a placing by Unite, it's a secondary placing by CPPIB, a shareholder that owned a huge amount (originally 20%, recently 14%, now 7%) of Unite since 2019. They sold half (7%) outside of the regular market by placing it with other institutions at roughly 4% discount to prevailing price, which cancelled out a big rally from Thursday. The price on Friday ended up around the level of the open on Thursday.

Unite did not issue new shares or get the funds from this.

It's net neutral I think.

There's a slight positive in that it shows institutions are currently willing to absorb a huge amount of Unite stock (7% all at once) from other institutions without moving the price much.

There's a slight positive in that it removes a kind of large 'overhang' of shares waiting to be sold some day from the market e.g. you can get a situation where the share price never appreciates much because everyone knows that the overhang will result in a huge selloff at some point. CPPIB was originally under a 12 month lockup 2019-2020 but they held the shares long term despite the end of the lockup period.

There's a slight negative in that when a shareholder does something like that, they sometimes place the remaining half in half a year's time or whatever.

There's a slight positive if you're a buyback believer and want the buyback to progress at the lowest possible prices for as long as possible.

Other news:

1) Buybacks proceeding at about 350k shares per day currently. At that rate, the company will buy itself back in less than 6 years if the price stays where it is. I continue to believe that as long as assets can be sold even within 10% of NAV, the share price will mechanically recover to >700p. And I will be surprised if Unite Group takes a hit of even 5% on asset sales; there's vast structural undersupply of PBSA but now no one can afford to build new stuff at current cost of land/debt/construction/regulations.

2) There's a Q2 trading update July 7th and half-year report July 28th. It's possible either of these dates might have info about the asset sale of up to 500m non-core assets along with news of any further continuation of the buyback. There should also be some news about cost-cutting, reservations, synergy savings with Empiric etc.

3) General gossip in PBSA / student accom world is that HMO (individual landlords) are a mess this year, people not following rules or bailing out of HMO houses when they realise the rules. Equally, bookings are running late in general, in past years there was a rush by students to get secure accom early, now it's more steady but later.

4) Re: energy costs, as far as I'm aware, Unite are 100% hedged for this year, and 70% for next year. Re: interest costs, as far as I'm aware, they're fully hedged for the next 4 years. They also have one of the lowest LTVs in the UK REIT sector at the moment.

5) Analyst upgrades by Kepler Cheuvreux (-> Buy, April) and UBS (-> Buy, coverage initiated, 585p target).

Please fact check anything above that is interesting to you, I've done my best to check these claims, but it's always possible I've made a mistake or misinterpreted something.

TRS


PS. I see two avenues for good returns going forward in the next 12 months.

a) share price recovers, leading to gain of (dividend) + (stabilisation/growth/new developments online) + (price gain)

b) share price flat, leading to gain of (dividend) + (stabilisation/growth/new developments online) + (buyback benefit)

The surprising thing is just how effective the buyback is at this price level. I think people are missing one of the easiest plays in the market right now because of narrative and sentiment.

Suppose you sell 400m of assets each year. Suppose you clear the associated debt rather than change your LTV. That's 292m cash left after debt repayment. You buy back stock at £5.00 ish. That's 58 million shares (for a company with 518m shares!). You lose the (net) earnings associated with those 400m assets. Assume they were yielding 6% after financing costs or whatever, that's 400x0.05 = 24m of income. You gain from the buyback of 58 million shares, to the tune of about £264 million (955p-500p)*58m.

And you can keep doing that trick as long as the price is low and as long as assets sell near NAV, or even 5, 10, 15, 20% less than NAV.

An annual 'income' of 264m from asset flip / stock buyback compares quite well against core operating profit (around £230m).

As long as prices stay this level, *and* as long as assets can be sold even remotely near NAV, Unite Group's effective 'income' from NAV gain and operations is effectively doubled from historical norms.

Even if you take a 5% or 10% hit on asset sales, it makes no difference, the maths is simple. There is no activity Unite can do that adds value to the company so efficiently as asset sales and share buybacks. In fact, if they are able to clear a full 500-600m of assets this year even at (NAV-10%) I will be laughing at my good fortune. (NAV-5%? NAV-1%?) even better!

Historical aside:

There's actually an interesting bit of history here, if you look at the US REIT sector around 1998-2000, they went very out of favour as everyone piled into tech, dotcoms etc (sound familiar?) - REITs in the US were on discounts of about 20-30% to NAV. However, individual REITs were able to sell their underlying assets to private buyers at nearly 100% of NAV. They then bought back their own shares with the cash raised.

It took about 18-24 months for the market to realise what was happening, but when they did, everyone piled back into REITs and they ended up trading at a premium to NAV even as the SP500/Nasdaq dotcom bubble collapsed. It set up a long term bull market for REITs.