25 August 2009

THE UNITE GROUP PLC

("UNITE" / "Group")

Interim results for the six months to 30 June 2009

STRENGTHENED FINANCIAL POSITION LEAVES UNITE WELL POSITIONED FOR GROWTH

The UNITE Group plc, the UK's leading developer and manager of student accommodation, announces its interim results for the six months to 30 June 2009.

Highlights:

• Recurring profits before tax increased to £3.5 million (30 June 2008: loss of £2.9 million). Adjusted loss of £13.3 million (30 June 2008: £12.2 million) and IFRS loss of £29.7 million principally due to writedowns in the value of the Group's investment and development portfolio and restructuring costs.

• Strong sales and rental growth performance continues with 89% of the Group's beds reserved at the reporting date (2008: 90%); like-for-like rental growth is anticipated to be between 10% and 11% for the next academic year.

• Property investment portfolio outperformance, with a valuation fall of only -1.9%, compared to the industry average decline as measured by IPD of -13.2%, as a result of the Group's robust reservations performance and strong rental growth.  Adjusted fully diluted net asset value per share fell by 12% to 286 pence (31 December 2008: 325 pence).

• Group is on track to exceed its 2009 asset disposal target of £150 million. As at 24 August, asset sales of £136 million completed or exchanged at an average discount to December 2008 valuations of 1.5%. A further £55 million of asset sales are in solicitors' hands.

• £194 million five year joint venture created with Oasis Capital Bank ("OCB") in August 2009 to develop the Group's entire 2010 development pipeline. 

• Adjusted net debt £584 million (31 December 2008: £531 million), reducing to £504 million after adjusting for the development joint venture and asset sales completed since the period end. Net debt has reduced by over £360 million since its peak in November 2006 and the Group has no significant debt maturities before September 2012.
• Delivery of the final phases of the Group's operational change programme, with resulting annualised savings of £12 million from academic year 2009/10. 

• Attractive development opportunities emerging, particularly in London.

Phil White, Chairman of The UNITE Group, commented:

"The student accommodation sector has remained resilient throughout the wider deterioration in UK commercial property values over the past two years and the Group's strong relative performance demonstrates the ongoing attractions of the asset class. Demand for our units has remained high and the rental growth secured by UNITE in each of the two most recent academic years has been exceptional.

"Investment markets are now showing tentative signs of recovery and, with its balance sheet strengthened, UNITE is increasingly focussed on the attractive development opportunities that are beginning to emerge, particularly in London. Management's focus in the months ahead is to ensure that the Group is well positioned to benefit from this shift to create and enhance value for shareholders."

Mark Allan, Chief Executive of The UNITE Group, commented:

"Ongoing rental growth, coupled with the strengthening of our balance sheet through planned disposals, the reduction and renegotiation of our debt and the delivery of significant cost savings through our 'Blueprint' programme, have been significant drivers of our positive performance in 2009. As a result of these activities, UNITE now stands in a strong position, with enhanced cash balances and covenant headroom.

"Looking to the future, clear opportunities are beginning to emerge to acquire development sites at attractive prices, particularly in our major market, London. We have continued to track potential sites closely over the past year and believe that, owing to the pronounced ongoing supply-demand imbalance, there is a clear opportunity to deliver accommodation in the Capital at or above 2009 volumes at very attractive returns from 2012 onwards.

"Having bolstered our balance sheet through a number of proactive steps, the Group is now positioning itself to take advantage of these opportunities and intends to secure sites for 2012 delivery over the next six to nine months. The scale of opportunity is significant and we are actively assessing the best way to capitalise on this and deliver optimum value for shareholders."

Enquiries:

  Overview

The UK commercial property market environment remained challenging throughout the first half of 2009, with both yields and tenant demand continuing to weaken.  However, against this backdrop the student accommodation sector, underpinned by strong market fundamentals, continued to demonstrate considerable resilience and outperformed in relative terms.

Since the start of the year, and in difficult economic conditions, UNITE has delivered against its business plan, with a view to ensuring that its financial position remains secure:

• The Group has made strong progress in its reservations and rental growth performance for the 2009/10 academic year, backed by its enhanced on-line sales and marketing platform. As at 24 August 89% of the Group's portfolio (2008: 90%) had been reserved and like for like rental growth is anticipated to be between 10% and 11% for the next academic year;

• The final phases of the Group's 'Blueprint' change programme have been implemented, delivering cash savings of £5 million in the period and is expected to generate cash savings of £12 million per annum from the 2009/10 academic year;

• The 2009 development programme will be completed on plan and, through various development cost reduction initiatives and the strong reservations performance, the anticipated yield on cost has improved from 6.9% (disclosed with our December 2008 results) to 7.2%;

• The Group is on track to exceed its 2009 asset disposal target of £150 million. As at 24 August sales totalling £136 million have been completed or exchanged at an average discount to December 2008 valuations of 1.5%, of which £88 million related to the sale of three development projects to a newly established joint venture with Oasis Capital Bank ("OCB"). In addition, the Group has a further £55 million of asset sales in solicitors' hands;

• The Group has renegotiated three banking facilities to extend maturities and increase covenant headroom.

These actions have had a positive impact on UNITE's financial position and results for the six months to 30 June 2009:

• Rental income increased by 17% across the Group's operational portfolio from £72.9 million to £85.3 million, of which £41.9 million is attributable to the Group;

• Recurring profits before tax increased to £3.5 million from a loss of £2.9 million in the first half of 2008. Taking into account non-recurring costs relating to losses on the sale of development sites, write-downs in the value of the Group's development portfolio recognised through the income statement and restructuring costs the Group has reported an adjusted loss (consistent with The European Public Real Estate Association ("EPRA") guidelines) of £13.3 million for the period, compared to a loss of £12.2 million for the period to 30 June 2008. Reported loss on an IFRS basis was 29.7 million in the period (30 June 2008: 12.8 million loss);

• Adjusted fully diluted net asset value per share, whilst down, fell less markedly than in many other sectors - down 12% over the six months to 286 pence (31 December 2008: 325 pence). Basic net asset value per share fell 9% from 258 pence at 31 December 2008 to 234 pence. Investment asset valuations fell by 1.9% in the six months, compared to the IPD index which recorded a fall of 13.2% over the same period;

• The Group has maintained a healthy cash position during the period. As at 30 June 2009 the Group's cash balance was £54 million, which increases to £75 million after accounting for the completion of the joint venture with OCB. If the asset sales in solicitors' hands, referred to above, complete as planned the Group's cash balance will increase by a further £19 million;

• The loan to value ("LTV") covenant headroom has increased to 125-145 bps at 24 August, up from 60-75 bps at 31 December 2008. This is sufficient to withstand a 20% fall in asset valuations. As a result of this improvement in the loan to value headroom, Minimum Net Worth covenants, where they are in place, now represent the Group's tightest covenants, albeit with headroom sufficient to withstand a fall of 15% in asset valuations;

• Following completion of the Group's 2009 development programme the Group has no further development capital expenditure obligations and therefore no committed increases to its net debt;

• Taking into account newly arranged bank facilities and further amendments referred to in this statement, the Group has no significant debt maturities before September 2012 and has unutilised debt capacity of £120 million.

In recent months, clear signs have begun to emerge that the outlook for the UK commercial property investment market is improving; transaction volumes have increased, the rate of decline in values has slowed significantly and, in some specific cases, begun to reverse. The Group's progress in its asset sale programme, and in establishing its new OCB joint venture, demonstrates both the continued investor demand for high quality student accommodation assets and the Group's ability to raise capital for growth.

Looking to the future, clear opportunities are beginning to emerge to acquire development sites at attractive prices, particularly in London. Having strengthened its balance sheet through the proactive steps outlined above, the Group is now positioning itself to take advantage of these opportunities and intends to secure sites for 2012 delivery over the next six to nine months.  The scale of opportunity is significant and we are actively assessing the best way to capitalise on this and deliver optimum value for shareholders.

The UK Higher Education market

The number of students studying in UK Higher Education continues to grow and this, coupled with the ongoing shortage of good quality purpose-built accommodation, continues to underpin UNITE's current performance and prospects.  Although there is some uncertainty as to the longer term impact of the inevitable pressure on funding for Higher Education, we do not believe this is likely to materially impact UNITE's prospects while the current supply-demand imbalance remains.

In 2007/08 there were 2.4 million students studying in the UK, and there was an increase of 43,000 in the number of students accepted for the 2008/09 academic year.  This trend looks set to continue with the number of applications for the 2009/10 academic year up a further 10.1% year on year (source: UCAS 20 August 2009) and the Government confirming funding for an increase of a further 10,000 places in the 2009/10 intake. In addition, the number of overseas applicants has again grown this year, by 9.9% compared to the same point in 2008, and funding pressures are encouraging Universities to increase overseas intake still further.

The supply of good quality, well-located student accommodation continues to lag behind demand. Across the UK, there is only sufficient purpose-built accommodation to house two out of three first year or overseas students. The shortage of accommodation is even more marked in London where there is only one bed space for every three students from these groups.

Whilst the level of demand to study at University continues to grow, conversely the rate of supply of new purpose-built beds is slowing sharply and we estimate the level of net new supply being delivered for 2009 and 2010 will be only approximately 6,500 beds and 4,000 beds respectively, compared to 9,200 beds delivered in 2008. This drop is almost entirely attributable to the sharp contraction in finance available to all developer/operators in the sector.

Financial results

Income statement 

In the six months to 30 June 2009 recurring profits increased markedly, to £3.5 million from a loss of £2.9 million in the first half of 2008.  On an IFRS basis, the Group reported a loss of £29.7 million, compared to a loss of £12.8 million for the six months to 30 June 2008. On an adjusted basis (consistent with EPRA guidelines) the loss for the six months was £13.3 million (2008: £12.2 million loss) after taking into account £15.9 million of costs associated with the sale of land and write-downs on land and certain property under development (2008: £8.4 million).  

The Group's income statement is summarised below and a detailed segmental analysis is provided in note 3 to the consolidated interim financial statements.

Investment segment and recurring profit

The significant improvement in net portfolio contribution and recurring profit year on year is explained primarily by the following items:

• The record occupancy of 99% together with 9.5% like-for-like rental growth delivered for the 2008/2009 academic year has increased rental income across the Group's operational portfolio by 17% from £72.9 million for the first half of 2008 to £85.3 million, of which £41.9 million is attributable to the Group and the remainder to third party investors in the Group's co-investment vehicles. This growth is despite the portfolio under management reducing by 900 beds as a result of asset sales to third parties exceeding new deliveries in summer 2008;

• The 'Blueprint' programme to reengineer core processes, reduce operating costs and improve service quality has resulted in a reduction of £2 million of direct costs and £3 million of overheads during the period. This has offset the increase in the proportion of the Group's overhead being expensed through the income statement as the level of development activity (and therefore overhead capitalisation into projects) has declined;

• Finance cost savings of £1.3 million have been made as surplus cash, predominantly arising from asset sales, has been used to reduce borrowings and the average cost of debt has been reduced to 6.0% at 30 June 2009 from 6.6% at 30 June 2008. 

Development segment

During the six months under review the Group sold, or exchanged contracts to sell, a number of development sites outside of London that it no longer intends to build out. These disposals incurred an aggregate loss of £4.3 million and, in addition, the Group has further written down the value of its remaining undeveloped sites by £5.6 million. Following these disposals and write-downs, the Group's remaining undeveloped sites are carried at a combined value of £17.5 million at 30 June 2009.

A further £18.3 million of unrealised losses were incurred on development assets of which £4.4 million was not recognised in the income statement. 

Total development write-downs and losses

Other income statement items

The following items comprise the remaining significant factors in the Group's income statement:

• Negative revaluation movements on the Group's investment portfolio, including its share of joint ventures, were £15.1 million in the six months to 30 June 2009 (30 June 2008: loss of £8.6 million), comprising negative yield movements of £79.1 million offset by rental appreciation of £64.0 million;

• The Group incurred losses on disposal of £2.4 million on investment property sold in the period (30 June 2008: loss of £5.8 million); 

• Movements relating to the Group's interest rate swaps, treated as ineffective hedges and therefore recognised through the income statement, resulted in a gain of £9.7 million for the period (30 June 2008: gain of £14.5 million).

Balance Sheet

The dramatic falls in commercial property values during 2008 continued into 2009, with the IPD Index showing that UK commercial property values fell by an average of 13.2% in the six months to June 2009. However, as a result of the Group's strong reservations performance and the levels of rental growth it has secured, the Group's student accommodation investments fell by a much smaller amount, an average of 1.9% over the same period. This was the primary driver of the reduction in net assets during the six months.

Reported net asset value attributable to UNITE shareholders was £296 million (234 pence per share) at 30 June 2009 (31 December 2008: £320 million or 258 pence per share). On an adjusted fully diluted basis, net asset value per share fell by 12% in the six months to 286 pence (31 December 2008: 325 pence). These figures reflect both the impact of challenging market conditions and UNITE's strong performance relative to the broader property sector. The key elements of this movement, as explained in more detail later in this statement, are as follows:

Gearing and net debt

As expected, the Group's adjusted gearing (net debt as a percentage of adjusted net assets) increased in the six months, as a result of falls in asset values and also because capital expenditure in the Group's development programme exceeded proceeds from asset disposals. At 30 June 2009, adjusted gearing stood at 161% compared to 131% at 31 December 2008 and net debt stood at £584 million (31 December 2008: £531 million). However, adjusting for the impact of the joint venture and asset disposals completed since the period end, gearing reduces to 139% and net debt falls to £504 million:

Importantly, following the completion of the joint venture with OCB, the Group has no development capital expenditure commitments on its balance sheet beyond its 2009 programme, which will have been delivered by September this year, and therefore no committed increases to its net debt.  

Cash flows 

At 30 June 2009 the Group's cash balances stood at £54 million and the net outflow in cash and cash equivalents during the period, as set out in the consolidated statement of cash flows, was £46 million. The principal cash movements during the period were as follows:

• £93 million was invested in the Group's ongoing development programme, of which £72 million was funded through debt and working capital;

• £28 million proceeds were received from asset sales, all of which was applied to reduce debt;

• A further £21 million of cash was applied to deleverage bank facilities;

• Cash inflow from operating activities, excluding development expenditure and land sales, was £2 million with a further £5 million outflow on other capital expenditure, swap and facility costs.

Dividend

In light of market conditions and the growing opportunity to invest in attractive development opportunities in the coming months, the Board continues to believe it appropriate to conserve the Group's capital. Consequently the Board does not recommend the payment of an interim dividend (2008 interim: 0.83 pence).

Reservations performance and rental growth

Sales performance for the 2009/10 academic year is again strong across the portfolio.  As at 24 August 2009, reservations had been received for 89% of the portfolio compared with 90% of the portfolio at the same time last year. The slightly lower reservations percentage is predominantly attributable to the increased proportion of the Group's portfolio located in London for 2009/10 (following the opening of 1,528 additional bed spaces), where room sales commence later in the year and continue until early October as a result of the proportionally higher intake of overseas students.

This sales performance underpins strong anticipated rental growth, with like-for-like revenue expected to be up by between 10% and 11%.  The following table summarises reservations performance and anticipated like-for-like rental growth by portfolio segment: 

*Reservations based on position at 24 August 2009 and 2008

Operating cost and overhead

As detailed in its interim statement in August 2008, the Group has been focused on delivering a programme to improve service quality and reduce its operating costs and overhead. This programme is now substantially complete and the first full year of benefit will be recognised in the 2009/10 academic year. The programme is on track to deliver £12 million of annualised cash savings to UNITE, of which approximately £6 million will be reflected in the Group's income statement with the remaining £6 million, relating to capitalised development expenditure, benefiting the balance sheet. 

A total of £5 million of cash savings have been realised in the six months to June 2009, of which £2 million is recognised in the income statement for the period.  These savings have offset an increase in the proportion of the Group's overhead costs being expensed through the income statement as the level of development activity (and therefore central overhead capitalised into development project costs) has reduced.

Operating and investment portfolio valuation

The Group's total portfolio, including assets held in co-investment vehicles, was independently valued at 30 June 2009. Valuation movements across the total portfolio over the six months are summarised in the following table:

Portfolio valuation by vehicle 

As expected, over the period we have seen significant yield expansion substantially offset by strong rental growth. As at 30 June 2009 the average NOI yield across the Group's total portfolio was 6.8%, representing 55bps of expansion in the previous six months and 80bps since 30 June 2008.  UNITE's ability to deliver rental growth, together with the continued supply/demand imbalance in the student accommodation sector, has been a significant factor in supporting yields to a greater extent than in other commercial property sectors, as shown in the following graph:

To view the UNITE Vs IPD All Property Net Initial Yield Graph, please follow the link below;

http://www.rns-pdf.londonstockexchange.com/rns/9435X_1-2009-8-25.pdf

Geographic split

UNITE will be operating 38,464 bed spaces in 23 towns/cities for the 2009/10 academic year taking into account new project deliveries and asset sales to third parties.  31% of these bed spaces (by value) are located in the strategically important London market, where we continue to expect valuations to remain the most resilient. The following table summarises the geographic weighting by value of the Group's portfolio by vehicle for the 2009/10 academic year:

To view the GEOGRAPHIC WEIGHTING BY VALUE OF GROUPS PORTFOLIO Graph, please follow the link below;

http://www.rns-pdf.londonstockexchange.com/rns/9435X_2-2009-8-25.pdf

Taking into account UNITE's share of assets in the joint venture with OCB, 38% of the Group's gross assets are invested in London as at 30 June 2009.

Development portfolio

Following the Group's decision in 2008 to significantly reduce its forward development pipeline commitments, the Group has focused on the delivery of its 2009 programme and the timely commencement of works on its remaining 2010 projects. The Group is on track to deliver 2,856 beds across 14 properties for letting in the 2009/10 academic year, of which 1,528 beds are in London. Work has now commenced on the construction of 1,119 beds for occupation in September 2010, all of which are in London and have now been sold to the OCB joint venture. 

During the six months to 30 June 2009 the Group invested a total of £93 million of capital expenditure into its development pipeline as follows: 

The anticipated development yields on the 2009 and 2010 openings have both improved by 30bps over the six months as a result of proactive steps taken to reduce construction costs on the schemes and increase rents.

Joint venture with OCB

On 12 August 2009 the Group announced that it had established a five year joint venture with Oasis Capital Bank, a Bahrain-based investor, to develop three student accommodation properties in London with an estimated value on completion of £194 million. UNITE has a 25% stake in the vehicle with OCB holding the remaining 75%, having invested £39 million.

The three properties to be developed in the joint venture, amounting to 1,119 bed spaces, represent the Group's entire 2010 development programme as disclosed in the above table. The joint venture acquired the three projects for a consideration of £88 million, reflecting an anticipated development yield of approximately 8%, and will fund the remaining costs to complete them, anticipated at £69 million as at the transaction date. As part of the financing of the transaction, UNITE's existing banking facilities relating to each property were reduced by an aggregate of £14 million and transferred to the joint venture. As a result, the joint venture will have access to total debt facilities of £109 million, of which £51 million is currently drawn. The Group will record a loss of £0.4 million on the sale compared to the 31 December 2008 book value of the assets.  

The transaction, completed in a very challenging market environment, clearly demonstrates both UNITE's ability to attract co-investment and grow its management business, building on the previous successes of UCC and USAF and the relative resilience of the student accommodation market versus the wider commercial market. The Group has been retained by the joint venture, and will receive fees, both as development manager for the duration of construction (a fee equivalent to 5% of build costs) and property and asset manager thereafter (70bps of gross asset value). A performance fee of up to £2.5 million is also payable at exit.

The completion of the joint venture has had a significant immediate positive impact on UNITE's balance sheet:

• The Group's net debt was reduced by £75 million (being the £88 million proceeds received from the joint venture, less UNITE's £13 million reinvestment for a 25% stake);

• Committed net debt (taking into account costs to complete) has fallen by £144 million and, following completion of its 2009 programme, the Group will have no development capital expenditure commitments on balance sheet;

• £21 million of cash was released to the Company arising from OCB's £39 million investment into the joint venture, less £14 million applied in deleveraging and £4 million of working capital, establishment and other costs.

The pro forma impact of the joint venture transaction on the Group's 30 June 2009 adjusted balance sheet is as follows:

Development portfolio valuation

Following the establishment of USAF, and in accordance with IFRS, certain of the Group's development assets are classified as current assets and are held at the lower of cost and net realisable value, whilst certain others continue to be held at open market value. However, in recognising the full value of the Group's development pipeline, we consider it appropriate that all development properties, regardless of accounting classification, are independently valued. A full valuation of the Group's development portfolio has been carried out as at 30 June 2009 and is summarised below:  

With the 2009 development programme completing shortly, and the 2010 programme now being developed in the OCB joint venture, we anticipate further development profits of £12 million accruing to the Group.  More importantly, as a result of its proactive steps over the past year, the Group is now actively considering taking advantage of attractive new development opportunities, particularly in London.

Future development plans

In light of the dramatic contraction in capital markets in 2008 and the uncertain outlook for asset valuations, the Group decided to reduce its planned future development activity significantly. Since that time, as set out above, the Group has sold a number of development sites outside of London together with a number of investment assets (total proceeds £47 million), has a further £55 million of asset sales in solicitors' hands and has formed its joint venture with OCB (proceeds £88 million).

These steps have served to strengthen the Group's balance sheet substantially:

• At 30 June 2009 the Group's cash balances stood at £54 million and, adjusting for the impact of the JV announced after the period end, this increases further to £75 million. Asset sales in solicitors' hands, if completed, would increase cash by a further £19 million;

• Headroom on the Group's banking covenants has improved since 31 December 2008 despite the further decline in valuations over that time.  Taking into account the new joint venture and asset sales in solicitors' hands, headroom in loan to value covenants have increased to a level where the Group could withstand a further 20% fall in asset values and Minimum Net Worth covenants can withstand valuation declines of 15%;

• Following the imminent completion of the 2009 programme the Group will have no further development capital expenditure commitments;

• The Group has headroom in committed debt facilities of £120 million;

• The Group has no major debt maturities before September 2012.

Whilst it is appropriate to maintain meaningful cash balances in the event of covenant headroom declining from current levels, the Group now has sufficient financial resources available to recommence a certain level of development activity, focusing on compelling opportunities in London for delivery in 2012 onwards.

The scale of opportunity to acquire London development sites at attractive prices is likely to be significant between now and early 2011. We have continued to track potential sites closely over the past year and believe that there is opportunity to deliver accommodation in London at or above 2009 annual volumes (c.1,500 bed spaces) at compelling returns from 2012 onwards. Having strengthened the Group's financial position, and demonstrated our ability to source co-investment capital if appropriate, we are considering the best way to capitalise on this opportunity in a way that maximises value for shareholders.

Asset disposal activity

At the time of announcing its 2008 results, the Group confirmed its intention to dispose of approximately £150 million of assets during the year, in order to protect and strengthen its financial position in light of a challenging economic outlook. Through a range of transactions the Group is on track to exceed this target as at the date of this announcement, as follows:

* Loss on sale of assets post 30 June 2009 reflects spend on development assets post that date

In addition to the transactions outlined above, the Group has £55 million of investment asset sales in solicitors' hands. Interest in investment assets has been healthy and if these transactions are concluded in line with current offers, the Group's cash balances will increase by a further £19 million. In aggregate, the offers are 4% below 31 December 2008 valuations.

UNITE Modular Solutions ("UMS")

The Group's modular manufacturing facility remains an important part of the Group's development philosophy and, during 2008 and 2009, it has formed a key part of the change programme to improve the efficiency of developments for delivery in 2009 and 2010. The modular content of each project has been increased and this, together with a number of supply chain initiatives, is expected to contribute to meaningful build cost savings, particularly in the 2010 programme.  

Unsurprisingly, the scaling back of UNITE's development programme has had a significant impact on the productivity and efficiency of the modular facility during 2009. Whilst all three 2010 development projects include considerable modular elements, the plant will still be operating below full capacity and, based on UNITE demand alone, this position is unlikely to improve before 2011.

To counter the impact of this, UMS has been actively pursuing a number of external contracts and has strengthened its commercial resource accordingly, confident in the viability of its offering. The Group is actively involved in discussions regarding a number of opportunities at this time.

Livocity - accommodation for graduates

In March 2007 the Group stated its intention to pilot a new business, providing professionally managed rental accommodation for young professionals in London under the brand name 'Livocity'. Three projects, comprising 130 bed spaces, have since been completed and lettings have progressed well. However, taking into account the severe contraction in available financing over the past year, the likely continued rationing of capital for the foreseeable future and the impact of the economic downturn on graduate recruitment, the Group has decided not to extend this pilot programme further.  

The three Livocity assets will now be managed as an integral part of the London student portfolio and, as such, we do not anticipate any significant impact on earnings or net asset value as a result.

Co-investment vehicles

During the period UNITE continued to act as co-investing manager of two significant specialist student accommodation investment vehicles which it established: The UNITE UK Student Accommodation Fund ("USAF") and the UNITE Capital Cities joint venture with GIC RE ("UCC"). In addition, one asset remains in the UNITE Student Village joint venture with Lehman Brothers ("USV") and, as outlined above, since the period end the Group has established a further strategically important joint venture with OCB to develop and operate three student accommodation properties in London. 

Net asset value movements (reported on an IFRS basis) and returns in USAF and UCC during the six months to 30 June 2009 were as follows:

Details of the independent valuations of assets held in USAF, UCC and USV are provided earlier in this statement. Other salient points relating to co-investment vehicles are set out below.

Debt facilities in co-investment vehicles

As at 30 June 2009 each of the co-investment vehicles were in compliance with all banking covenants. Notwithstanding this, during the period the Group secured amendments to two important facilities within co-investment vehicles as follows:

• The £115 million Lloyds facility in USAF, was amended to increase its LTV covenant from 60% to 70%, in exchange for an increase in lending margin of 30bps to 90bps;

• The £11 million Natixis facility in USV was amended to waive its LTV covenant at a cost of £0.1 million.

These changes have further increased covenant headroom within those co-investment vehicles and are reflected in the following table outlining the principal covenants in each vehicle:

All co-investment facilities are structured so there is no recourse to the Group with the exception of the UCC facility, which is limited recourse.  As at 30 June 2009 there was £34 million headroom in USAF's banking facilities to fund further acquisitions and £47 million of capacity in UCC facilities.

USAF Landsbanki deposit

As previously reported, following the sale of assets by USAF in August 2008, a deposit of £30 million was placed with Landsbanki Islands hf. ("Landsbanki"). Landsbanki was subsequently placed into administration under emergency legislation in October 2008 and the funds are currently not accessible. 

The Resolution Committee which is responsible for running Landsbanki in administration announced on 22 June 2009 that, following their latest assessment of the recoverability of assets, they estimate a recovery of 83% of the deposits, payable in mid 2010. This indication is predicated on depositors ranking as priority creditors, which may be subject to challenge, and is also subject to exchange rate movements and a number of other assumptions.  

Notwithstanding this position, whilst work is ongoing to recover the deposit, a full provision was made in the accounts of USAF and UNITE in 2008.

USV status

USV owns one building located in Sheffield which was independently valued at £58 million as at 30 June 2009, resulting in USV having adjusted net assets of £13.4 million at 30 June 2009 (30 June 2008: £15.4 million). Lehman Brothers, which owns a 49% stake in USV, was placed in administration in October 2008 and the administrators have informed UNITE that having marketed the 49% stake, they are now likely to retain the investment for the foreseeable future. UNITE has certain pre-emptive rights within the joint venture agreement. 

Debt financing

The Group has delivered the following improvements in its debt funding position since December 2008:-

• A new £100 million investment facility with Nationwide to provide re-finance for two facilities that expire at the end of 2009;

• A new £35 million development facility with Barclays to fund the development of a 2010 development scheme that will now be completed in the OCB joint venture;

• The renewal of a £20 million overdraft and £3 million stock facility with RBS for working capital purposes;

• Extending the maturity of its Bank of Ireland £100 million facility from 2011 to 2013 and amending the structure from a term facility to a revolving facility to allow greater financing flexibility. The LTV covenant was also increased from 70% to 75%;

• Three existing development facilities with RBS, HSH Nordbank and Barclays were restructured and transferred into the OCB joint venture;

• Facilities in USAF and USV were varied to increase covenant headroom.

Financial covenants and covenant headroom

Compliance with financial covenants is constantly monitored and, as at 30 June 2009, the Group was not only in full compliance with all of its financial covenants but had also improved its covenant headroom. Having made considerable progress with its asset sale programme, including the execution of the joint venture with OCB, and the renegotiation of certain banking covenants, the Group has built up a greater level of headroom in the level of outward yield movement that would lead to a breach in LTV covenants as follows: -

LTV covenant headroom

The headroom of 125-145 bps is sufficient to withstand a 20% fall in values.

As a result of the significant improvement in LTV covenant headroom, the Group's Minimum Net Worth covenants, where they are in place, have become tighter as the net assets of the Group have fallen as asset values have declined. However, even after valuation declines during 2009, the headroom of the tightest MNW covenant is still such that a 15% decline in values would be required to trigger a breach.  

Loan to value covenants

Where loan to value covenants are in place, these are tested using the latest valuation prepared for the bank, rather than using UNITE's balance sheet valuations. In the event of a breach or a potential breach, UNITE has the ability to avoid or rectify the breach by repaying debt to ensure compliance.  Prudently, UNITE monitors its covenant compliance using latest asset valuations rather than the bank's last valuations:

* The weighted LTV at 30 June 2009 assumes that available cash would be used to repay debt

Interest cover covenants

Investment facilities are subject to interest cover covenants. The covenants are measured separately for each facility and vary by facility. The covenant, on a weighted average basis is 110%. The actual performance on a look forward basis, as reported to the banks, is currently 146% and we would expect rental growth to improve this headroom further in the future.

Minimum net worth covenants

UNITE has four facilities with MNW covenants, although this will have reduced to two by the end of 2009 as facilities expire.  As a result of the reduction in net assets of the Group, the headroom on these covenants has reduced.  The tightest of the covenants is set at £200 million net worth, compared to a reported position at 30 June 2009 of £312 million. This provides headroom for asset values to fall by a further 15% before a breach would occur. In order to complete its remaining pipeline and finance its existing investment portfolio, we forecast that the Group will have drawn no more than £100 million of facilities with MNW covenants. 

Debt maturity and capacity

Having arranged and restructured certain facilities, and taking into account the expiry of facilities later this year, the Group will have headroom within its committed facilities of £120 million following completion of the 2009 development programme. The Group has no major debt maturities before September 2012, as summarised below:

To view the UNITE DEBT MATURITY PROFILE Graph, please follow the link below;

http://www.rns-pdf.londonstockexchange.com/rns/9435X_3-2009-8-25.pdf

Key debt ratios for UNITE Group

* After completion of the joint venture adjusted gearing reduced to 139%

Outlook

The student accommodation sector has remained resilient throughout the wider deterioration in UK commercial property values over the past two years. Demand has remained high and the rental growth secured by UNITE in each of the two most recent academic years has been exceptional.

Investment markets are now showing tentative signs of recovery and, with its balance sheet strengthened, UNITE is increasingly focussed on the attractive development opportunities that are beginning to emerge, particularly in London. Management's focus in the months ahead is to ensure that the Group is well positioned to benefit from this shift and deliver value for shareholders.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Mark Allan                       Joe Lister

Chief Executive                Chief Financial Officer

25 August 2009

  Consolidated Income Statement

For the 6 months to 30 June 2009

Consolidated Statement of Comprehensive Income

For the 6 months to 30 June 2009

Consolidated Balance Sheet

At 30 June 2009

Consolidated Statement of Changes in Shareholders' Equity

For the 6 months to 30 June 2009

	Issued share capital £’000	Share premium £’000	Merger reserve £’000	Retained earnings £’000	Revaluation reserve £’000	Hedging reserve £’000	Minority Interest £’000	Total £’000
At 1 January 2009	31,079	176,541	40,177	85,699	1,805	(15,135)	15,200	335,366
Loss for the period	-	-	-	(29,734)	-	-	(596)	(30,330)
Other comprehensive income for the period	-	-	-	-	-	5,191	84	5,275
Transfer (see note 1)	-	-	-	1,805	(1,805)	-	-	-
Shares issued	510	1,383	-	-	-	-	-	1,893
Fair value of share based payments	-	-	-	335	-	-	-	335
Own shares acquired	-	-	-	(1,894)	-	-	-	(1,894)
Dividends to minority interest	-	-	-	-	-	-	(285)	(285)
At 30 June 2009	31,589	177,924	40,177	56,211	-	(9,944)	14,403	310,360

	Issued share capital £’000	Share premium £’000	Merger reserve £’000	Retained earnings £’000	Revaluation reserve £’000	Hedging reserve £’000	Minority Interest £’000	Total £’000
At 1 January 2008	30,874	174,333	40,177	187,957	17,644	(892)	-	450,093
Loss for the period	-	-	-	(12,799)	-	-	-	(12,799)
Other comprehensive income for the period	-	-	-	-	160	5,146	-	5,306
Transfer on completion or disposal of investment property	-	-	-	5,892	(5,892)	-	-	-
Shares issued	204	2,203	-	-	-	-	-	2,407
Fair value of share based payments	-	-	-	253	-	-	-	253
Own shares acquired	-	-	-	(2,192)	-	-	-	(2,192)
Dividends to shareholders	-	-	-	(2,061)	-	-	-	(2,061)
At 30 June 2008	31,078	176,536	40,177	177,050	11,912	4,254	-	441,007

	Issued share capital £’000	Share premium £’000	Merger reserve £’000	Retained earnings £’000	Revaluation reserve £’000	Hedging reserve £’000	Minority Interest £’000	Total £’000
At 1 January 2008	30,874	174,333	40,177	187,957	17,644	(892)	-	450,093
Loss for the year	-	-	-	(115,942)	-	-	(400)	(116,342)
Other comprehensive income for the year	-	-	-	-	2,819	(14,243)	(400)	(11,824)
Investment received from minority interest	-	-	-	-	-	-	16,000	16,000
Transfer on completion or disposal of investment property	-	-	-	18,658	(18,658)	-	-	-
Shares issued	205	2,208	-	-	-	-	-	2,413
Fair value of share based payments	-	-	-	308	-	-	-	308
Own shares acquired	-	-	-	(2,192)	-	-	-	(2,192)
Dividends to shareholders	-	-	-	(3,090)	-	-	-	(3,090)
At 31 December 2008	31,079	176,541	40,177	85,699	1,805	(15,135)	15,200	335,366

  Consolidated Statement of Cash Flows

For the 6 months to 30 June 2009

Cash and cash equivalents are stated net of operational overdrafts which are disclosed in note 9.

  Notes to the Consolidated Interim Financial Statements

The UNITE Group plc (the "Company") is a company domiciled in The United Kingdom. These condensed consolidated interim financial statements for the 6 months ended 30 June 2009 comprise the company and its subsidiaries (together referred to as the "Group") and the Group's interest in jointly controlled entities.

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and on the basis of the accounting policies disclosed in the financial statements for the year ending 31 December 2008, with the exception that the Group has adopted the IASB's Annual Improvements to IFRSs as they relate to development properties and IAS 1 "Presentation of Financial Statements" (revised 2007). These interim financial statements do not constitute statutory accounts of the Group within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2008 have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under Section 237 of the Companies Act 1985.

Included within the IASB's Annual Improvement programme is a change in the accounting treatment for investment properties under development. These properties are now accounted for under IAS 40, therefore revaluation surpluses and deficits on investment properties under development are recognised in the income statement rather than equity. An impact of the transition is that the opening balance on the revaluation reserve has been transferred, on 1 January 2009, to retained earnings.

IAS 1 (revised) requires the presentation of a more detailed statement of changes in equity and statement of comprehensive income as primary statements, separate from the income statement. As a result, a consolidated statement of comprehensive income and a consolidated statement of changes in equity, showing changes in each component of equity for each period presented, have been included in the primary statements.

Going Concern

The Interim Report has been prepared on a going concern basis, which assumes the Group will be able to meet its liabilities as they fall due, for the foreseeable future. The Directors have prepared cash flow forecasts, which incorporate the outcomes of various down-side scenarios. The principle areas of risk and uncertainty are: the impact of further falls in property valuations resulting in breaches of covenants that cannot be avoided by payments from cash resources (see financial covenant and covenant headroom section of Business Review); the Group's ability to continue raising capital through sale of assets; and the achievement of operating targets, in particular projected occupancy levels and rental increases. On the basis of these forecasts and taking into account the factors mentioned above, the Directors have a reasonable expectation that the company will continue as a going concern.

The results of the Group's investment division, a separate business segment (see note 3), are closely linked to the level of occupancy achieved in its portfolio of property. Occupancy typically falls over the summer months (particularly July and August) as students leave for the summer holidays. The Group attempts to minimise the seasonal impact by the use of short-term summer tenancies. However the second half-year typically has lower revenues for the existing portfolio.

Conversely, the Group's build cycle for new investment property is planned to complete construction shortly before the start of the academic year in September each year. The addition of these properties to the investment division in the second half increases the division's revenues in that period.

Segment information is presented in respect of the Group's business segments based on the Group's management and internal reporting structure. The Directors do not consider that the Group has meaningful geographical segments as it operated exclusively in the United Kingdom in the year.

Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

The Group undertakes the acquisition and development of properties and then manages the completed assets, generating both rental income and management fees. Many of the Group's properties are acquired with a view to selling them to the UNITE UK Student Accommodation Fund when they are complete and appropriate levels of rental income have been achieved.

The operation of the completed properties is managed as a separate activity and is reported below as the investment segment. The acquisition and development activities comprise the Group's development segment below and therefore include the sales proceeds of properties sold to the UNITE UK Student Accommodation Fund in revenue.