13th Nov 2006 07:02
Unite Group PLC13 November 2006 13 November 2006 The UNITE Group plc FORMATION OF UNITE UK STUDENT ACCOMMODATION FUND The UNITE Group plc ("UNITE"), the UK's leading commercial provider of studentaccommodation, is pleased to announce the formation of, and contribution ofproperties to, the UNITE UK Student Accommodation Fund, a new open-endedproperty fund focussed on owning and acquiring UK direct-let studentaccommodation (the "Fund") (the "Proposed Transaction"). UNITE believes thatthe Fund will be Europe's largest unlisted specialist student accommodationinvestment vehicle. The Proposed Transaction is subject to approval by UNITE'sshareholders and a circular containing further details of the ProposedTransaction will be posted to shareholders shortly. Highlights of the Proposed Transaction include: • Contribution to the Fund of a seed portfolio for £515 million, a £10 million premium to the 30 June 2006 and 31 October 2006 valuations, with consideration to UNITE in a combination of cash and a substantial minority interest in the Fund; • £266 million of equity commitments from leading institutional investors, of which approximately 50% to be used to fund the acquisition of the seed portfolio, with the balance intended to fund the acquisition of future pipeline assets from UNITE; • At least £50 million net cash proceeds to be released through the Proposed Transaction to fund growth through enhanced development activity; • Further third party capital expected to be committed prior to completion of the Proposed Transaction in mid-December resulting in further cash proceeds; and • UNITE to earn management fees from the Fund and to be entitled to receive a performance related participation, dependent upon the Fund's performance. Strategic Benefits The creation of the Fund is in line with UNITE's stated strategy and willdeliver a number of benefits to UNITE, namely it will: (i) immediately release significant capital tied up in mature,stabilised assets for investment, over time, in new, higher added valuedevelopment activity; (ii) provide UNITE with more growth capital in the medium term. The Fundis committed, and has further capital commitments from investors to fund theacquisition from UNITE, subject to certain criteria, of newly and yet to bedeveloped UK direct-let student accommodation properties; (iii)allow UNITE to benefit from the current strong demand for investmentin student accommodation properties, whilst also allowing it to share in anyfuture growth; (iv) reduce gearing and provide UNITE with a more scaleable financingstructure and the further financial flexibility to pursue additional growthopportunities; (v) allow UNITE to maintain long term management of the portfolio throughmanaging the Fund; (vi) diversify UNITE's sources of income by providing a new, valuablerevenue stream arising from management fees from the Fund; (vii)increase recognition in the marketplace of the value of UNITE's brandand management platform; and (viii) further establish student accommodation as an institutionallyrecognised property asset class. Commenting on the proposed transaction, Mark Allan, UNITE's Chief Executive,said: "The formation of the UNITE UK Student Accommodation Fund represents animportant strategic step for UNITE. It will release significant capital forinvestment in new, higher added value development activity and provide moregrowth capital to UNITE in the medium term. At the same time it allows us tomaintain long term management of the assets sold to the Fund through ourposition as fund and asset manager which will also provide a new and valuablemanagement fee stream. "We are delighted to have attracted a group of leading investors to investalongside us in the formation of the Fund. The Fund will enable them to accessthe long term stable investment returns that we expect the asset class todeliver. This transaction unquestionably establishes student accommodation asan institutionally recognised property asset class." Fund Structure The Fund, which is structured as an open-ended, infinite life vehicle, is seededwith a portfolio comprising 31 UK direct-let student accommodation propertiescomprising over 11,000 beds (the "Initial Portfolio") contributed by UNITE tothe Fund for a consideration of £515 million in a combination of cash and aminority stake in the Fund. The Initial Portfolio was valued by CB Richard Ellisas at 31 October 2006 at £505 million. In the twelve months ended 30 June 2006,the net annual rental income from the Initial Portfolio was £25.1 million. Following completion of the Proposed Transaction ("Closing"), the Fund isexpected to have initial capital of £527 million. This will consist of £247million of equity (attributable to both UNITE's and third party investors'interests in the Fund) and £280 million of debt. The proportions of the Fundowned by UNITE and third parties at Closing may vary depending on the proportionof the equity sold to third party investors up to the date of Closing. At the date of this announcement, leading third party investors(1) have agreedto subscribe for £266 million of equity in the Fund. A proportion of thesecommitments will be drawn immediately to fund the acquisition of the InitialPortfolio and the remainder will be drawn in future years to purchase additionalassets. If no further equity subscriptions are received before completion ofthe Proposed Transaction, the Fund would expect to draw approximately 50 percent. of the equity at Closing in connection with the acquisition of the InitialPortfolio with the remaining 50 per cent. available to fund the purchase offuture assets. This would result in investors and UNITE holding initialinterests in the Fund of 55 per cent. and 45 per cent. respectively. UNITEwould receive cash consideration of £404 million and make a £111 millioninvestment for its 45 per cent. interest in the Fund. In that event, estimatednet cash proceeds to UNITE after repayment of existing debt secured on theproperties and payment of expenses associated with the formation of the Fundwould be approximately £17 million. This is in addition to £33 million UNITEhas previously released through a bridge financing undertaken in order to effecta restructuring in connection with the Proposed Transaction. This restructuringand associated financing involved repayment and refinancing of the debt securedat that time on the properties comprising the Initial Portfolio so that theycould be transferred into the entities through which the Fund will own them. Atthe time of refinancing an additional £33 million of debt was raised which willbe repaid out of the proceeds of the Proposed Transaction. UNITE is also in advanced discussions with other investors who have madenon-binding indications of interest to commit additional equity to the Fund.UNITE expects to reach agreement with some of these investors before Closing toinvest in the Fund and this may, depending on the level of such additionalsubscriptions, have the effect of reducing UNITE's interest. UNITE, however,intends to retain a significant minority interest in the Fund, which will be notless than 30 per cent. at Closing. Were UNITE's interest reduced to 30 percent., the net cash proceeds to UNITE would be approximately £54 million inaddition to the £33 million released previously by the bridge financing. As referred to above, the balance of equity committed to the Fund by investorsand not drawn at Closing to fund the acquisition of the Initial Portfolio willbe drawn in future years to fund, together with further debt, the purchase ofadditional UK direct-let student accommodation properties. It is expected thatthese will be properties already completed by UNITE and in the process ofstabilisation as well as properties to be developed by UNITE following theformation of the Fund. The Fund will have exclusivity (subject to certainexceptions) and the obligation to acquire all UK direct-let studentaccommodation properties developed by UNITE for so long as the Fund hasavailable capital raised through the Proposed Transaction. The capacity of the Fund to acquire additional properties from UNITE will dependupon the level of equity commitments received from investors as well as UNITE'sdecision at the time of selling such properties to the Fund on whether tomaintain or dilute its percentage ownership interest in the Fund. The Fund alsohas the ability to acquire properties from third parties. Borrowings of the Fund are limited to 60 per cent. of the aggregate market valueof the Fund's investment properties at the time they are acquired and the Fundwill target an average loan to value of 55 per cent. The Fund is expected todeliver an initial cash yield of not less than five per cent. Wholly-owned subsidiaries of UNITE will manage and conduct the affairs of theFund for and on behalf of Fund investors and act as property manager, providingproperty and asset management services to the Fund. The Fund will meet all thedirect costs associated with the operations of the properties held by the Fund.UNITE will receive an asset management fee, equivalent to 0.60 per cent. perannum of the proportion of the market value of the properties owned by the Fundand attributable to third party investors. The asset management fee will besubordinated to the extent the cash yield to investors in the Fund wouldotherwise be less than 5 per cent. per annum during the first three years afterClosing. In addition, UNITE will be entitled to receive a performance relatedparticipation in the Fund, calculated as 20 per cent. (or 25 per cent. where noSDLT is payable on the acquisition by the Fund of the Initial Portfolio) of theoutperformance of the Fund over and above an annual 9 per cent. hurdle internalrate of return. Units in the Fund will be freely transferable and, after the third anniversaryfrom Closing, a redemption mechanism for units will be in place to provideliquidity to Fund investors. Note 1: Equity commitments to the Fund have been received from leading institutionalinvestors, investing either on their own behalf or on behalf of their clients,including, Henderson UK Property Fund, ING Real Estate Investment Management (UKFunds) Limited, Morley Fund Management, Schroders Property Investment ManagementLtd, Trafalgar House Pension Trust, Universities Superannuation Scheme Limited,CBRE Investors Global Multi Manager, Cushman & Wakefield Investors and DTZInvestment Management. Financial Effects The Proposed Transaction is expected to result in a pre-tax charge to UNITE inthe year ending 31 December 2006 of approximately £14.5 million as a result ofthe costs and fees payable as a result of prepaying existing debt and breakingassociated interest rate swaps, as well as professional fees and other costs,partially offset by the premium at which the Initial Portfolio will becontributed to the Fund. UNITE will also release £26.4 million of its existingdeferred tax provision resulting in an expected after tax gain of £11.9 million. On a pro forma basis as at 30 June 2006, the Group's net asset value per sharewould have increased by 2.7 per cent. from 365 pence to 375 pence. The Group'sfully diluted adjusted net asset value per share, which excludes the effect ofmovements in deferred tax provisions, would have reduced by 3.4 per cent. from416 pence to 402 pence. The Group's pro forma adjusted gearing as at 30 June 2006 is expected to reducefrom 144 per cent. to 73 per cent. If UNITE's share of debt in existing jointventures and in the Fund of £177 million were taken into account, this wouldincrease UNITE's adjusted gearing from 73 per cent. to 108 per cent. If no further equity subscriptions are received before completion of theProposed Transaction, this would result in investors and UNITE holding initialinterests in the Fund of 55 per cent. and 45 per cent. respectively. In thatevent, net cash proceeds to UNITE after repayment of existing debt secured onthe properties and payment of expenses associated with the formation of the Fundwould be approximately £17 million which will be used to fund additional siteacquisitions and development activity. This is in addition to £33 million UNITEhas previously released through a bridge financing undertaken to effect arestructuring in connection with the Proposed Transaction. Were UNITE's interestin the Fund reduced to 30 per cent., the net cash proceeds to UNITE would beincreased to approximately £54 million in addition to the £33 million releasedpreviously by the bridge financing. UNITE expects that the increased financial resources and flexibility it willgain through the Proposed Transaction will allow it to pursue additionalincremental growth opportunities over time, and specifically in London where theGroup intends to commit greater amounts of development capital after the fundscommitted to the Capital Cities Joint Venture with GIC have been fully invested,which is expected to occur during 2007. Future Trading Prospects The Board is confident in the enhanced prospects for UNITE following completionof the Proposed Transaction. As the UK's largest commercial owner, operator anddeveloper of student accommodation, the Group, following Closing, will have theadditional financial flexibility, along with its existing development expertise,operating systems and brand to capture the opportunities presented by continuedgrowth in demand amongst the UK student population for high quality, welllocated modern accommodation. Accounting and Tax Impact Following completion of the Proposed Transaction, it is expected that UNITE willbe required, for accounting purposes, to treat properties acquired by it aftercompletion of the Proposed Transaction and which are intended to be sold to theFund as trading properties in its financial statements. The principal consequences of this change will be that no revaluation gains onthose properties will be recognised and, instead, profits over historic costswill be recognised when those properties are acquired by the Fund. In addition, UNITE may no longer be able to claim capital allowances on assetsidentified for potential sale to the Fund after completion of the ProposedTransaction. This may result in the Group recognising marginally higher levelsof tax charge during the periods in which UNITE makes further disposals ofproperties to the Fund. Once those properties are contributed to the Fund, theGroup will benefit from its proportionate share of the foregone capitalallowances. Properties currently under development will continue to be accounted for asfixed assets in UNITE's financial statements and revalued to market value inaccordance with the Group's existing accounting policy. UNITE intends to continue to prepare and disclose market valuations of assetswhich are classified as trading properties, so that investors will continue tobe provided with comprehensive information regarding the value of the Company'sassets. Revaluations of investment properties not held through the Fund willcontinue to be reflected in the Group's accounts, as before. Shareholder Approval In view of the size of the Initial Portfolio relative to UNITE and as requiredby the Listing Rules, the Proposed Transaction requires the approval of UNITE'sshareholders. A circular containing detailed information regarding the ProposedTransaction and convening an Extraordinary General Meeting at which UNITE'sshareholders will be asked to vote to approve the transaction, will be sent toUNITE's shareholders shortly. Morgan Stanley & Co. Limited is acting as the financial adviser and sponsor toUNITE with respect to the Proposed Transaction. Macquarie Capital PartnersLimited is acting as financial adviser and lead placement agent, and MorganStanley & Co. Limited is acting as co-placement agent, to UNITE in connectionwith the structuring of and placement of equity in the Fund. UBS Limited isacting as broker to UNITE. ENDS ENQUIRIES The UNITE Group plc Telephone: 011 7302 7000 Mark Allan/Tabitha Birchall Financial Dynamics Telephone: 020 7831 3113 Stephanie Highett/Dido Laurimore Morgan Stanley & Co. Limited is acting exclusively for the Company and no otherparty in connection with the Proposed Transaction, and will not be responsibleto anyone other than the Company for providing the protections afforded toclients of Morgan Stanley & Co. Limited, or for providing advice in relation tothe Proposed Transaction. Macquarie Capital Partners Limited is acting exclusively for the Company and noother party in connection with the Proposed Transaction, and will not beresponsible to anyone other than the Company for providing the protectionsafforded to clients of Macquarie Capital Partners Limited, or for providingadvice in relation to the Proposed Transaction. UBS Limited is acting exclusively for the Company and no other party inconnection with the Proposed Transaction, and will not be responsible to anyoneother than the Company for providing the protections afforded to clients of UBSLimited, or for providing advice in relation to the Proposed Transaction. Notes to Editors: UNITE is the UK's leading student hospitality company. Listed in the FTSE 250index of the London Stock Exchange, the Group focuses on the provision andmanagement of high quality, well-located student accommodation and hospitalityservices in strong higher education markets. UNITE delivers the real student experience, whilst at the same time helping toregenerate cities as part of the community and contributing to the improvementof the country's housing. It undertakes the planning, development andmanagement of sites, often working closely with the universities and colleges,to deliver accommodation for students across all ages and nationalities. UNITEdevelopments typically show high occupancy levels and robust rental growth asdemand continues to rise for places in UK Higher Education and for safe, highquality accommodation for students. Further information on UNITE is available at www.unite-group.co.uk. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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