Unite Group PLC

LSE:UTG

Earnings Call Transcript 2022-Q2

[Joe Lister, executive]

Good morning.

[Richard Smith, executive]

Good morning, everybody, and welcome to our results presentation. It seems to me that there's always sort of something sort of extra exciting going on when we host results presentation. And obviously, today's -- well, perhaps not a surprise, but today's event is a national rail strike. So I am quite pleased to see so many people in the room because I thought I might just be talking to sort of Joe and Mike and co, which I do quite a lot. So it's a nice opportunity to see some different faces, and I do appreciate, it's been a bit of a challenge to get here. So thank you very much for that.

We're delighted to be presenting a strong set of results and a set of results that I think really demonstrate the continued positive momentum of the business. We recognize, of course, that the external environment is uncertain and volatile, but we do believe the structural drivers, the defensive growth characteristics of our business really will place us well to continue to deliver.

In terms of the headline financial performance for the first half of 2022, earnings and EPS are both up 32% to GBP 96 million and 24p, respectively, sorry. Our dividend at 11p is up 69%, and that reflects a full 80% payout. And we've delivered a first half total accounting return of just above 8%. And these results are really supported by the continued demand from students and the operational strength of the business, giving us confidence that by the end of the sales cycle, we will achieve full occupancy at 97%, and we will deliver rental growth ahead of our sort of long-run average at 3.5% to 4%.

And the strength of the rental growth, particularly in the second half of the sales cycle, it really supports our confidence that we can mitigate, at least in part, the inflationary pressures that we face while ensuring the value proposition and offer that we provide to customers. We're clearly not immune to the impacts of inflation on our cost base or indeed debt. But structurally, we do have protections and we'll cover these in more detail as we progress through the presentation. So the demand drivers supporting the business, the platform we have and the defensive growth characteristics really do support our resilience and our future growth.

Just turning to student demand for '22/'23. The cycle is obviously well advanced now, and we've continued to see record demand both domestically and a near full recovery of international demand. Our reservations now stand at 92%. That's actually ahead of pre-pandemic levels at this stage in the cycle. And we're seeing a much more traditional split between nominations and direct let and also domestic and international students.

We are, of course, looking ahead in the course of the next few weeks, forward to Scottish hires and A-level results. They come in August, and we would expect to see a much more normal distribution of students through results in clearing. And this distribution and the actions universities have already taken really do support that view that we will sell our remaining bedrooms ahead of the start of the next academic year.

In the room here, we've got a few problems with the presentation. You have got the presentation in hard copy in front of you. I don't know, obviously, on the webcast whether we're having similar problems. But if we are having those problems, I do apologize, but you can get the presentation online and follow through. I'm getting a thumbs up at the webcast line, so it's just those in the room that are having difficulties.

Looking sort of slightly further ahead in terms of student demand. Our business is underpinned by the enduring strength of U.K. higher education. Domestic students are attending universities in record numbers with further growth to come, that growth coming through demographic increases, the number of 18-year-olds that will continue to increase through to 2030 and also continuing increases in participation.

And it's worth noting that historically, student demand has increased when the economy has slowed down. And we're also seeing record demand from international students. And that's more than compensating for the drop that we've already seen in EU students post-Brexit. And that drop in EU student numbers is now sort of largely baked in to the overall student population.

And as an indication really of the strength of demand that not just we are expecting, but UCAS, obviously, the organization that everybody applies to go to university through, UCAS have recently stated they expect to see 1 million applications to universities by 2026. That's a 50% increase on where we are today. And I think that level of increase and that -- the applications won't necessarily all translate obviously to students going to university. But that level of appetite, that level of applications, I think, really demonstrates the social value and the societal right that students place on a university education.

But not surprisingly, perhaps, obviously, in higher education, there's not a great deal of news on higher education coming out from the government. We do know 3 things from -- over the course of the last few months or so. Tuition fees for universities will be frozen. For U.K. students, at GBP 9,250. And that freezing, so effectively freezing an important income stream for universities will -- sorry, thank you. That freezing of -- well, I can hear myself now, it's interesting. The freezing of tuition fees at GBP 9,250 will stay now to the '25/'26 academic year.

What that will mean is that universities are going to have to react. And they react by, one, cutting their cost bases. But two, importantly, targeting students where the fees aren't capped, and that's international students, and that's post graduates. And they are 2 core markets for us.

In terms of internationals, the government remain committed to growing the number of international students in the U.K. with a particular focus on India and Nigeria and the Middle East. And again, they are very relevant markets for us. So that's a positive demand driver. And the government are continuing to focus on value. And the value, of course, is effectively do students get a return from going to university and they're looking at that really in the economic return, sort of salaries once you leave universities. And through the OfS, there's a consultation going on, looking at exactly that. For us, that focus on perhaps poor value courses is not an issue for our portfolio. We've been very deliberate in aligning ourselves to the best universities. Those universities are the ones that deliver value for students.

Rental growth. I've mentioned the strength of rental growth for the current academic cycle, and we have got a clear track record of delivering sustainable rental growth. And looking ahead, we believe we can continue to do that. And our nominations are the first point that really provide us with a foundation for that confidence. 35% of our total beds are multiyear nomination agreements that are linked to either RPI, CPI or fixed price increases. And that certainty together with the 1-year nomination agreements, which are annually repriced means that we expect to grow our nomination base rent by 4% to 4.5% per annum.

And then the other evidence point is the second half of the current sales cycle. In the first half, we started selling for the current academic year in November last year. We were starting to sell at the point Omicron was emerging. And we took a very conscious decision to target occupancy over rate growth because we frankly weren't sure what Omicron was going to mean. And so if we look at the first half of the sales cycle, our direct let rent increased by about 2% to 2.5%.

More laterally in the cycle, as things have obviously calmed down as we've seen the strength of demand, we've actually delivered rental growth of around 4% to 5%. And we believe that strength of demand and that level of rental growth is sustainable when we look forward.

This year, we've also seen a return to our full summer program of activity. Again, that's something we expect to continue going forward, which once again gives us the opportunity to improve the utilization of the estate. So that combination of our nomination base, the strength of demand we're seeing in the cycle, our value proposition, does give us confidence of the '23/'24 academic year will achieve full occupancy again and drive rental growth in the 4% to 5% range.

But we are obviously very conscious that we need to be focused on delivering value for money and ensuring that our product is affordable. And I think that really is a hallmark of Unite value for money and affordable accommodation. And that is a principle that we will remain committed to. To support this, we'll continue to invest in the service that we offer students and also continue to invest in our estate.

And an example of each, in terms of service, this year, we've invested in 24/7 physical presence at every one of our properties, ensuring that there is always someone there and the level of security that we're providing to the property and obviously then to the students within the property has much increased. And we've materially enhanced our welfare offer that is so important to students, parents and universities.

And over the course of the past 12 months, we've also invested over GBP 100 million in the estate across life cycle, asset management and sort of sustainability improvements. And if you break that back on a per customer basis, that's about a GBP 1,300 per customer investment that we've made over the course of the past 12 months.

And another really important part of our overall offer is our all-inclusive proposition. What we provide, offers students and parents, real certainty around cost. And clearly, there is value in certainty of cost in an environment of increasing costs and cost of living -- the cost of living crisis.

That certainty is actually in stark contrast to the HMO market where rents are increasing much more significantly than our own. And students are exposed to increases in things like energy costs, WiFi and insurance costs when they're not with us. There are close to 1 million students in the U.K. living in houses and multiple occupancy.

And while many do provide good quality home for students, the significant majority do not. And even if you ignore the value of our proposition, the all-inclusive nature of the safety, the service, living with other students as part of a community, if you ignore that, on rents alone, our product is now a genuine competitor to HMO. And that competitiveness, we believe, will improve further as the cost of debt impacts mortgages that perhaps landlords are going to have to pay that, then we pass on to students. And also thinking it look further ahead, EPC compliance, where landlords are going to have to invest in HMOs, that cost will also be passed on to students.

So 1 million students is a huge demand driver. Given the scale of our portfolio and as we've talked before, we've got clear opportunities to segment our estate to appeal to those different customer groups and therefore, offer them greater value. And while [indiscernible] the business.

And as a business, we've had a clear commitment for many years now to doing what's right, and we remain absolutely committed to our sustainability strategy, and it remains a core priority. And in the last period on the environment, we're investing GBP 10 million in energy improvements as we actually pay the energy costs for our buildings directly. That is -- those investments are really supported by a strong business case. And through asset management, we've got the opportunity to upgrade assets as well as enhancing obviously the product for students, and we upgraded 1,600 beds to -- from EPC to be, again, in the first half of the year. And as some of you may have seen, there is -- the government have been looking at EPC and how that's calculated. What they've been looking to do is to try and ensure that EPC ratings are much more closely aligned to sort of the real world energy use of a property.

And from our initial view, we still need to do some more work. And given the very high electricity providing heat and lighting in our properties, we expect there to be a very material positive movement in our overall EPC rating, and we'll update it at the right time.

Our purpose and our values also really support the S in ESG. And we've recently committed to invest 1% of our profits into social initiatives. And two real key initiatives for us within that. Firstly, the Unite Foundation. This year, we've increased the number of students that are getting support through the Unite Foundation, again, to 100 students from a care leaver and a strange background will start at university in September and have a full accommodation bursary for the entire period of their time at university.

And we've also relaunched our Leapskills program. Leapskills is a tool, which helps students better prepare for university. It's an online tool. We've relaunched that in partnership with UCAS. It sits on the UCAS website now. So that is reaching 1 million-plus students and helping, say, prepare them for that transition to university life and something we're really proud.

So now I'll hand over to Joe to take us through the financials in a bit more detail.

[Joe Lister, executive]

Thank you, Richard, and good morning, everyone. Great. So likewise, I'm pleased to report another strong set of financial results for the first half of this year as we continue to see the recovery from the pandemic. Adjusted EPS up 32% to 24p with an EPS yield of 2.7%, dividend up 69% to 11p, total accounting return of 8.3% and LTV at 30%.

The earnings performance has been driven by the higher occupancy during the first half, the rental growth that was delivered for the current academic year and the careful control of costs. The NOI margin has improved to 74% and EBIT margin to 72%. As usual, there is some seasonality in these numbers as we see lower occupancy during the summer months of July and August. This results in around a 2-point reduction in both these margins for the full year.

The earnings bridge shows the key drivers and movements during H1, the recovery to 94% occupancy and the unwind of the COVID impact from last year being the major drivers of that earnings performance. Costs were up in line with the occupancy recovery and finance costs being down reflect the lower level of net debt following the disposals we made in '21 and '22.

We've been working hard to manage the inflationary pressures on our cost base and interest rates through both rents and cost management. Our ability to reprice tenancies annually and flex pricing to reflect costs where possible provides us with a powerful tool. We've made good progress in the second half of this sales cycle, as Richard has outlined, and we're stepping up rental growth expectation for '23/'24 based on this momentum and broader price growth in the sector.

Our 2 biggest cost lines are staffing and utilities, which have been carefully managed during the first half of '22. Our pay reviews at the start of the year saw a 3% increase in salaries. This is supported by us being a real living wage employer and also providing bonuses to all of the staff within our business. We completed a restructure of our operational business in the first half, aligning service delivery around a general manager who's responsible for a building or cluster of buildings and ensuring that staffing hours are aligned to the demand from students and that 24/7 cover that Richard talked about.

Alongside that, we increased pay for our frontline teams and increased staffing levels through nights and weekends to enhance that customer proposition. And savings were delivered through slimming down and removal of management layers within those operational teams. This led to a one-off cost in H1 of GBP 1.5 million, delivering annualized savings of GBP 2 million going forward. And following the restructure and pay changes that we've made, we are seeing the benefit of our total comp and our broader employment offer and our ability to recruit and retain staff and frontline teams.

Our utilities are fully hedged for the '22 and '23 financial years and around 50% for '24. This is when we actually start to see the price curve returning to more normalized levels into '24 and beyond. This hedging has delivered substantial savings compared to spot rates in '22 and '23 and provided price certainty to our customers.

The year-on-year increase in cost per bed from utilities equates to around 0.5% to 1% of rental growth in both '22 and '23. So allowing for the seasonality that I talked about, we expect the EBIT margin to be at 70% for the full year and to see steady improvements to 72% by the end of '24, driven by the stronger rental growth, ongoing cost control through hedging and platform efficiencies that we're able to deliver.

We're updating our full year guidance to 40p to 41p, primarily as a result of the higher interest rates that we're seeing. The increased floating rates on the unhedged elements of our debt, together with new debt that's been secured this year has had a 2p impact on our '22 outlook.

We are maintaining our guidance for dividend payout of 80% of adjusted EPS for 2022. That increased cost of debt means that our full year debt costs will increase from 3% to 3.4%, and we are expecting further increases in '23 and '24. These illustrative rates on the chart are based on our fixed rate debt that we currently have in place and the current interest rate curves are both floating rates and the 10-year swaps.

75% of our debt is currently hedged with a further 10% of the debt covered through caps. And we have a further GBP 300 million of pre-hedges in place below market rates, current market rates to support the next debt issuance that we expect to happen later this year or early next. The curves are still moving around, as I'm sure you're all aware, and we'll look to outperform these levels where we can.

At this level of interest cost, we still see a healthy spread to the average portfolio yield. The strong rental growth expected over the next few years delivers a healthy total property return, which is supporting the valuations across the sector. The debt reprofile -- the debt maturity schedule, you can see at the top of the chart, is spread across the next 10 years. We've already refinanced GBP 400 million in LSAF in H1, and have a further GBP 100 million with credit approved terms agreed, demonstrating that debt markets are open. And the margins on both those facilities have been in line with historic levels.

As with the other inflationary pressures, our ability to drive rental growth gives us the opportunity to offset some of these pressures. As an illustration, a 20 basis points increase of the cost of debt will be offset in the P&L by a 1% increase in rents.

Looking forward to next year. We are expecting to achieve a 97% occupancy in both '22/'23 and '24 -- '23/'24. And we're expecting that higher rental growth of 3.5% to 4% for '22/'23 and 4% to 5% in '23/'24. Our cost control measures mean that we are targeting a 1 point improvement in EBIT margin to 71%. And whilst interest rates are obviously harder to provide concrete guidance on, but based on the current base of the current curve, the times of new debt, we expect this to increase to around 3.6%. And our ability to drive and deliver this operational performance supports further progress in earnings growth into 2023.

We've delivered a 7% uplift in NAV. Rental growth has been above our initial guidance of 3.5% to 4% and development profits delivered through the ongoing progress at Hayloft and Campbell House, together with planning consent achieved in London and Bristol. The Travis Perkins site is now expected to be achieved -- planning is expected to be achieved in 2023.

The big shift this year was provided by the yield compression of 15 basis points that were seen following the completion of the Student Roost sale to GIC and also a few other transactions in the first half, which Nick will cover shortly.

We've added a further provision of 2p for cladding. This is for one additional scheme and also additional costs on existing schemes as we finalize design and cost plans, and we will continue to ensure that our buildings remain safe to occupy and in line with all the existing and new regulations. We are making good progress with claims against contractors, albeit this is a time-consuming process.

As we outlined at our Capital Markets Day at the back end of last year, we continue to target a total return of 8.5% to 9%. This is before yield movements and allows for a higher level of CapEx into the estate over the next few years. This year, we expect to be at around 8.5% to 9% before yield movements driven through that operational performance, rental growth and development activity. And the yield movement recorded in H1 has boosted that total account return by 4 percentage points which we do expect to flow through to the full year, supporting what should be a strong financial performance for the full year.

I'll now hand you over to Nick to take you through the property update.

[Nick Hayes, executive]

Thanks, Joe. Good morning, everybody. What a strong first half of the year has been for the student sector. Significant volume of capital coming into the sector, which demonstrates the strong fundamentals and the defensive nature. GBP 5.5 billion has been transacted already in the half year with the first GBP 1.5 billion to GBP 2 billion currently in the market or under offer. And that compares to the average annual run rate of around GBP 4 billion per annum. So a fantastic year so far from an investment perspective.

Clearly, in terms of transactions, the market has been dominated this year by the Roost acquisition by GIC and Greystar, which has set a new sector benchmark for yields. Those yields are not fully reflected in our valuations for 2 reasons. First of all, the purchaser have paid a premium for the scale of the portfolio. And secondly, a premium for the platform, which gives them an ability to continue to grow into the sector. So it doesn't necessarily read through at property level, at asset level, valuations.

Having said that, the portfolio yield has moved in reflecting of the transactions that have taken place in the market this year by 15 basis points, which gives us an average yield of 4.7%. I think this yield remains good value given the favorable rental growth outlook for this sector in the medium term.

As we discussed, the near-term outlook for rental growth looks really optimistic. I would caution though that before you plug it all into your numbers, we will have -- it will be partially offset by cost growth as well in the operating business.

We continue to improve portfolio quality through a combination of asset disposals, acquisitions, development and asset management. And I'll take each in turn. We are close to completing the disposal of our Oak portfolio, which is GBP 306 million, which will complete at the end of next month. And this enables us to have more flexibility around disposals in the future, which means we'll be more selective over what we sell and albeit to a limited number of properties of provincial assets.

We'll remain active in the investment market through both standing investments and forward funds, albeit given the capital that's trying to get into the sector, it is becoming more challenging to find investments that meet our overall total return criteria. So we are being cautious in our approach there. But there is a growing opportunity equally to invest into our portfolio, as you've heard, to ensure that it remains modern fit-for-purpose whilst also driving rental growth.

Asset management projects in Manchester have totaled GBP 42 million -- GBP 43 million, sorry, this year at a yield on cost that's 7% and all of those yields are fully let and delivered to budget, which is testament to the team that have worked through a number of complex projects there. Asset management for us really constitutes refurbishments and extensions. They're generally lower risk than, say, development because we're not having to deal with a vendor. We own the assets clearly already. Often, projects don't require planning consent for refurbishments. And where they do for extensions, the planning process is less complex than it is in new developments. And equally, the projects themselves are less complex. And therefore, costs are easier to predict moving forward.

Refurbishments really enable us to reposition a building to a specific customer segment and that results in improved facilities, enhancing customer experience and it also delivers an attractive risk-adjusted return while simultaneously improving our offer to customers. And we expect to build momentum in this area over the next few years and roll out between GBP 50 million to GBP 100 million of asset management projects year-on-year at gross level.

USAF remains an important part of our balance sheet and is a high-quality portfolio with assets located in core growth markets for us. We redeployed our disposal proceeds into USAF and this increased our ownership to just over 28% at a very attractive entry price, particularly in comparison to pricing that's being achieved in direct investment in the sector at the moment. Increasing our ownership in USAF makes strategic sense. The portfolio is high quality. We have a deep knowledge of the assets and operational understanding of the buildings and the low frictional costs also make the returns incredibly attractive particularly with the effective yield of just over 5%.

We also have a significant opportunity in USAF to invest into the properties through asset management and energy initiatives moving forward, which will also help boost returns in the fund further. And clearly, we'll continue to monitor opportunities to grow our ownership in the fund as we move forward.

In terms of development, the pipeline stands at GBP 1 billion in total cost, delivering a yield on cost of 6%. It's a really high-quality pipeline of 70%, of which is weighted towards London by value. We are completing 2 buildings this year, both a fully let nominations agreements with an average term of 9 years. Both projects have been completed on program and on budget, which is a fantastic result given the complexities the team has faced over the past 18 months in the inflationary environment and also through supply chain disruption as a result of the pandemic.

You'll see from the total pipeline that the yield on cost is now at 6%, which is broadly 20 basis points lower than our last update, but in line with previous updates that we provided. The rebased pipeline still produces a very attractive return, I think. And also at asset level, it's still generating around 35% profit on cost per project. And that provides a healthy spread to our marginal funding cost. However, we will continue to keep each scheme under review given the uncertain funding and inflationary environment.

In the half year, we've secured new schemes in London, Bristol and Nottingham, and we've also secured 2 planning consents in East London and Feeder Road in Bristol. And as you may be aware that the Paddington planning application was refused earlier on this year. Unfortunately, the application was caught up in the local elections. We have since had some positive meetings with Westminster, where we have agreed the principles of a way forward with them, and we are moving forward to submitting a planning application towards the back end of this year and the start of next.

In terms of overall timing and returns, we have experienced delays in securing planning consents as local authorities have struggled to deal with the backlog of applications and staffing shortages following the pandemic. This has led to an increase in development phasing in 2025 and 2026 and a reduction in 2024. Total development costs on the whole have increased by 10%, reflecting delays and continued disruption in the supply chain and the wider inflationary environment we find ourselves in. We expect this to start to normalize over the course of next year. And of course, all of our 2022 and 2023 projects are protected through fixed price contracts with our supply chain.

Given the increase in build costs, we're likely to see the run rate of new supplies fall across the PBSA sector. I think that this will help with some of the provincial markets, which have struggled more recently with high levels of supply coming through. So we should start to see occupancy and rental growth recovery in markets such as Sheffield and Liverpool moving forward. So there will be some upside as a result of this.

For new projects, we are increasing our return requirements to reflect a disciplined approach to capital, given increased risk in build costs and the inflation and funding markets that we're seeing. And we are seeing signs of asking prices starting to soften and I therefore remain confident in our ability to deliver the pipeline and also secure new opportunities at attractive returns to investors.

So with that, I'll pass it over to Richard, who's going to wrap up and take questions.

[Richard Smith, executive]

Thank you. Thank you, Nick. And as Nick said, just to conclude before opening up for questions, we do recognize that we are in an uncertain environment. And as such, we'll continue to exercise sort of appropriate discipline, but we do remain confident in our growth outlook. And our continued momentum is supported by the growing demand for higher education and also our alignment to the strongest universities, our relative protections from inflation and the ability to reprice our rents, the proven capability of PRISM, our operating platform, and the efficiencies that we can drive from it. And the value for money that we offer and the price certainty, which is so incredibly important at the moment. And we will continue to make enhancements, both to our service, our product and continue to invest in sustainability.

We will remain disciplined in our approach to growth. But growth opportunities absolutely do exist. Nick just talked you through our high-quality development pipeline. We'll continue to target investment acquisitions in PBSA. And for those of you who've read the statement in fall, we do have an asset in Stratford under offer, which would be our first young professional asset and that pilot investment in that asset will give us an opportunity to really test our operational capabilities in what, in the medium term could be an exciting market. And we'll still continue to grow through university partnerships and obviously, that demand driver from houses multiple occupancy that I talked about.

So as we move ahead and as we look forward, we will continue to deliver sustainable rental growth. We'll continue to provide a proposition and a product that our customers, both students, universities and parents really value and target delivery before yield of that total accounting return of 8.5% to 10% that Joe referenced.

So at that point, I think we'll probably take questions in the room first and then any questions on the sort of audio webcast. If you've got a question, Kieran, you've got the first question, if you just wait for the mic so everyone can hear you.

[Kieran Lee, analyst]

Kieran Lee from Berenberg. Actually, a couple of questions from me, if that's all right. You mentioned the sustainability of rental growth of 4% to 5%. What sort of time frame is that on? And if the current inflationary environment drops back, do you see that returning back to where it was before?

[Richard Smith, executive]

Yes. I think so. I mean sort of slightly crystal ball gazing as to how long the sort of cost of living increases can continue and where inflation will get to. But for '22/'23, we have updated guidance for '23/'24, I see rental growth at that level possible for a little bit beyond that. I think then demonstrating a value-for-money product will be important, clearly. So I think rental growth then dropping back to more historic levels would be our prediction. But we'll obviously keep that very much under review.

[Kieran Lee, analyst]

So the second one is just on sort of future opportunities. So we heard at the Capital Markets Day potential for some of these partnership opportunities. As I mentioned, just on the outlook side, but that was pretty much it throughout the presentation. Do you still see opportunities here and over what time frame? And secondly was actually on USAF. We saw you increase your stake. Where would you like to get to for that joint venture?

[Richard Smith, executive]

Yes. I mean on the first one, university partnership still very central. University partnerships come in a number of guises. Obviously, we've added to the development pipeline. A number of those additions are university partnerships. Certainly in London, you need that. Nomination is in order to be able to comply with the London plan. In the more detailed pack, we have just this year, secured a 30-year agreement with The Russell Group University in the Northeast. So again, demonstrating not that is, but you can probably work it out. Again, demonstrating universities' willingness to commit to us for the long term.

And we do have a couple of sort of larger scale university partnership opportunities that we're working through, and we'd expect to see some progress over the next 12 months. As I've said, they're quite complex transactions, universities are very much focused on the start of the next academic year. I'd expect post September, those conversations to kick off in earnest again. But absolutely still see that as an opportunity.

In terms of USAF, the returns that USAF provides are attractive. As Nick said, it's a portfolio, clearly, that we know very well. There's opportunities to add to it. We will look at it on a selective basis, look at it against the other opportunities that have available to us. But we have no particular target as to what we would like to own. But if opportunities exist, we would invest further.

[Hemant Kotak, analyst]

Hemant Kotak from Kolytics. So just a couple of questions on the CPI. So obviously, CPI is elevated at the moment. Within what you have in the nomination agreements, is there a catch-up because you obviously capped out?

[Richard Smith, executive]

No, there isn't. Generally, it is a year-by-year straight cap or collar. Actually, the collar has been benefiting us for a number of years, and we've been seeing 2, 2.5 where RPI or CPI has been sort of south of that. But it's a firm cap within those agreements.

[Joe Lister, executive]

But obviously, it's then the opportunity of reversion once we get to the end of life and you then renegotiate or switch back to direct let, and that sort of gets the opportunity to rebase at market levels. And with a 7-year average term, it's not that far away that we'll be able to access that reversion.

[Hemant Kotak, analyst]

Yes. And obviously, the terms are getting longer, you're sort of pointing to about 9 years, I think, on some of the developments and even a 30-year, I think you mentioned. So what changes are you seeing there based on -- obviously, we've had a bit of a reset in our thinking about inflation, right, 40 years of no inflation really or low inflation and now that's changed.

[Joe Lister, executive]

Yes. So in that agreement that Richard mentioned, we have actually got that catch-up mechanism. So there's a cap. But then if we're over that cap, then we can recover that over the near term, particularly where it's a long 30-year dated agreement, and we have added that protection.

[Hemant Kotak, analyst]

And then a question on the utility hedging that you have. So you're obviously hedged for a period of time in the near future. How do you think about it beyond that? Because obviously, if you look at commodity pricing and what's happening and if you about the prospects of a recession at some point, the question is, do you hedge? What don't you hedge based on expectations 18 months and beyond?

[Joe Lister, executive]

What we try to do and our hedging policy is aligned to our setting of rent so that we'll look forward to -- at this stage, we're setting our rent for '23/'24. And what we want to know is we've got certainty of what the cost of utilities will be for that full '23/'24 academic year. And so principally, we were trying to lock in for that period.

We may go slightly beyond or slightly shortage at the margins. But the principle, as you know, therefore, what your margin is going to be at least for that forthcoming academic year and you can pass cost on and price accordingly to what the utility costs are going to be.

[Hemant Kotak, analyst]

Okay. Great. And one last question, please, if I may. You've obviously had some yield compression based on the Student Roost portfolio deal. How much, if any, is left in H2? I think maybe one of the slides that you had alluded to the fact that you're not really sort of baking much in, but -- and then on the other side, I think you alluded to the fact that it's not fully reflecting the fact that your portfolio has scale and its platform benefits as well.

[Joe Lister, executive]

Yes. So the Roost transaction, obviously, is a very large transaction and it provides meaningful valuation evidence for the sector. We brought that back to around 4.3% net initial yield on what they paid. As Nick mentioned, there's probably around -- the values are thinking around a 10% to 15% portfolio premium for the scale for the platform, but that's a judgment. But even after that, there's probably around 30 basis points of yield compression from that transaction.

So the valuers have adopted about half of that in the half year, just mindful that it was a big one-off transaction. They want to see other transactions complete, see what happens. Clearly, mindful as well of where interest rates are moving and not sort of wanting to take all of that benefit. So again, we generally find it very difficult to provide guidance on where yields are going to go, but there's kind of -- there are arguments either way at the moment. And...

[Richard Smith, executive]

I think we ran out of questions in the room. I don't know if we've got any in the webcast.

[Unknown Executive]

So we have 4 questions on the webcast. The first is from Paul May of Barclays. "You mentioned comfort with the spread between property yields and your weighted average cost of debt, but the spread is much tighter versus your marginal cost of debt. What gives you comfort that property yields won't expand alongside rising cost of capital? Appreciate transactions in the first half were strong, but these are backward looking."

[Joe Lister, executive]

Yes, I think that the marginal cost of debt today is depending where you've set your pricing curve. But on a 10-year gilt it's probably 4% would be a marginal cost of debt. So we've got a spread of 70 basis points. That is, I think, also protected by the rental growth outlook that we see in the portfolio. So as I mentioned, that's a total property return of in excess of 8%. I think gives us some comfort there's protection.

Now if those marginal cost of rates continue to move out, then clearly, there could be a risk on valuations. But as we just sort of mentioned, we think there's sort of enough comfort at this stage that we're not expecting to see that sort of materialize in the near term.

[Unknown Executive]

Next question is from [ Varnik Nitin ] at Kempen. "You mentioned you want to slow down disposals, but isn't this the time to divest some low-yielding assets and lower your outstanding debt?"

[Nick Hayes, executive]

More about portfolio quality and retaining portfolio quality. And if we under less pressure to sell assets, then I don't think this is the time for us to be accelerating that program.

[Unknown Executive]

Next question is from [ Deepan Thacker ] at DWS. "Can you provide some color in relation to development costs. Yield on cost has come down to 6%. Where do you see this going as construction costs rise? Are your projects on fixed contracts, including the 2026 schemes? Would you pause on developments if costs were getting out of control?"

[Nick Hayes, executive]

So 2022 and 2023 projects are fixed price. So they're locked in with contractors. All other schemes are subject to market pricing. Within our projects, we have now allowed for the inflation that we have seen to date within the industry. And we then allow 4% inflation up to the point of PC on an annualized basis, say, through to 2026 for those projects. And obviously, we will continue to take each project on a case-by-case basis. And if things change, we'll kind of adopt our approach accordingly.

[Unknown Executive]

Final question from the webcast is from Neeraj Kumar at Barclays. "Can you please provide more color on the unsecured borrowing structure in regards to the refinancing of the USAF bonds?"

[Joe Lister, executive]

Within the USAF bonds, they're currently secured. So the USAF bonds are all secured. The first tranche of that matures in June '23 and the second tranche in September '25. So we are in the process of starting to develop a funding strategy for that USAF refinancing. We'd expect that to take place either back end of this year or early into next.

[Richard Smith, executive]

Great. I don't think there are any more questions on the webcast or any more questions in the room. So just to say thanks very much, everybody, for coming here today. Thanks, everybody, for listening. Apologies for sort of some of the technical gremlins, but I think we got through it okay. So enjoy the rest of your day, everybody. Thank you.