Unite Group
Annual Report 2008

Plain-text annual report

The UK’s leading developer and manager of student accommodation Annual Report & Accounts 2008 NITE Parkway Gate, home to 728 students in Manchester U T h e U K ’ s l e a d i n g d e v e o p e r l a n d m a n a g e r o f s t u d e n t a c c o m m o d a t i o n T h e I U N T E G r o u p p c l A n n u a l R e p o r t & A c c o u n t s 2 0 0 8 The UNITE Group plc The Core 40 St Thomas Street Bristol BS1 6JX Tel: 0117 302 7000 Fax: 0117 302 7400 info@unite-group.co.uk www.unite-group.co.uk www.unite-students.com www.livocity.co.uk This report is printed on Revive 100 Offset, which is 100% recycled paper. Designed and produced by Proteus www.proteus-uk.com We’re number The UK’s leading developer and manager of student accommodation 1 Contents Section 1: Introduction Section 2: Business review Section 3: Business review: Measures and growth Section 4: Reports Section 5: Financial statements Section 6: Further information 2008 Highlights Overview of UNITE Chairman’s statement Executing our strategy The student accommodation market Financial results Investment portfolio valuations Co-investing asset management Development activity Livocity Financing Looking ahead Risks and uncertainties Key performance indicators New properties for 2009 A sustainable business Livocity The Board of Directors Directors’ report Corporate governance Directors’ remuneration report Independent auditors’ report Consolidated income statement Consolidated balance sheet Company balance sheet Statement of changes in shareholder equity Statement of cash flows Notes to the financial statements 5 year financial record Notice of AGM Appendix: Notes of principal changes Glossary Company information and UNITE management 03 05 07 11 12 13 15 19 20 22 22 28 29 30 31 33 36 37 39 42 45 52 53 54 55 56 57 58 89 90 91 93 94 2 Taking stock – financial highlights Against an extremely challenging economic backdrop, UNITE has delivered strong operational performance whilst taking a proactive approach to managing its balance sheet. 99% record occupancy 5% drop in portfolio valuation Record occupancy of 99% achieved for the academic year 2008/09 with year on year rental growth of 9.5%. 65% of rooms already reserved for the forthcoming academic year, indicating rental growth in the range of 7% to 10%. Investment portfolio valuation fell by only 5%, compared to the IPD index average fall of 27%. The outperformance is predominantly attributable to rental growth and rental growth prospects. £12m savings in 2009 £12 million identified savings across the Group’s operations in 2009. 325pence adjusted fully diluted net asset value £531m net debt, reduced from a peak of £862m Adjusted diluted net asset value per share (pence per share) The adjusted fully diluted net asset value per share fell 21% at December 2008 from 410 pence at December 2007. Adjusted net debt reduced from a peak of £862 million in November 2006 to £531 million at 31 December. 2006 2007 2008 425 410 325 In 2008, we were home to some... 303670 , 1 n o i t c e S £57m cash available The Group is in full compliance with all borrowing covenants and has a cash balance of £57 million for general purposes. Coupled with the rental growth, this provides insulation to absorb a further yield expansion of 60bps to 75bps. £325m asset sales in 2008 £154 million of non-core assets sold to third parties during 2008 and a further £171 million of sales made to USAF in December 2008 following a successful £58 million capital raise in October 2008. 1,125 new beds in London for 2010 Scaled back, fully funded, development pipeline scheduled to deliver 1,125 new bed spaces in 2010, all of which will be located in London. Net asset value per share (pence per share) Managed portfolio value 2006 2007 2008 391 364 258 2006 2007 2008 £1,435m £1,723m £1,829m 03670 ...students, and counting. 4 Overview of UNITE UNITE is the UK’s leading developer and manager of student accommodation. Underpinning this is a sound business model, in-depth customer research and a unique online booking system providing a robust platform to drive record occupancy levels and continued rental growth in a challenging economic environment. London, which is home to 21% of all UK students, remains a key focus for UNITE; as such 64% (by value) of the Group’s new bed spaces will be delivered in the Capital in 2009, along with our full pipeline for 2010. Equity investment As an active asset manager, UNITE continually monitors the performance of its portfolio, identifying non-core assets for disposal. The cash generated from this activity, coupled with the sale of assets to the Fund, reduces debt. UNITE UK Student Accommodation Fund (‘The Fund’) The UNITE UK Student Accommodation Fund is in a unique position to acquire properties from the UNITE portfolio. UNITE maintains full operational management of these assets as well as having a significant minority stake in the Fund. UNITE also has other joint venture relationships. Management UNITE conducts in-depth customer research to ensure its products and services are continually evolving in line with customer expectations. As such, UNITE offers dedicated property teams, 24 hour monitored CCTV and have embarked on a new joint venture to service all maintenance enquiries. Co-Invest Develop What we do Stabilise Stabilising new assets Once a new property is opened outside of London, it typically takes 1 year to stabilise. This means that the property is not yet generating its optimal net income. For those properties delivered in London, there is generally no stabilisation period required. Marketing and sales As the only student accommodation provider offering customers the ease of online booking, UNITE is driving occupancy across its portfolio, achieving 99% for the 08/09 academic year. www.unite-students.com Acquisition By understanding where students want to live, and focusing on high growth markets, UNITE’s portfolio is located in prime locations. Planning In 2008, UNITE secured 10 planning consents, 5 of which were in London. By working in partnership with the local councils and conducting thorough public consultations, UNITE continue to contribute towards balanced communities. Project management and off-site modular production Working in partnership with UNITE’s project management team, UNITE Modular Solutions are expert in delivering professional purpose- built accommodation. The key benefits of utilising modular technology are: 1. Faster build time: typically delivering a reduction in build time of 30%-50% vs. traditional methods 2. Reduced waste: UMS is ISO 14001:2004 accredited for its environmental management and reduced waste process. 3. Quality control: ISO 9001:2000 accredited for quality management systems, UMS delivers predictable quality on all products from a controlled environment. Our Market Demand / supply imbalance: 4 3 ,1 9 7 * i m e t l f u l f o r i o n s i c a t i n 2 0 0 8 * t h e U K i g u r e s 1 5 J a n u a r y 2 0 0 9 a c c e p t e d a p p l p l a c e s a c r o s s i s h e d U C A S p u b l f i o n a l t A d d i s t u d e n t * s o u r c e : 5 9 , 2 0 0 * * b e d s p a c e s i n 2 0 0 8 * S a v i * s o u r c e : * n e w s u p p l y o f * l l s N e t Our investment portfolio Market segmentation of portfolio under management by value: 1. London 2. Sheffield 3. Liverpool 4. Manchester 5. Bristol 6. Birmingham 7. Leeds 8. Aberdeen 9. Leicester 10. Glasgow 11. All other markets 1 27% With a continued strong focus on London and the delivery of an additional 1,368 bed spaces in 2008, UNITE is bolstering its leading position in the Capital. 11 18% 10 9 8 4% 4% 5% 5% 5% 7 6 9% 2 8% 7% 8% 3 5 4 How our portfolio is let: 100% Direct let Lease Nominations 74% 51% 0% 2 0 0 2 8 0 0 2 30% 10% 2 0 0 2 8 0 0 2 19% 16% 2 0 0 2 8 0 0 2 “To reach a mature level of provision, London requires AT LEAST another 100,000 student bedrooms.”*** ***source: Knight Frank, London student accommodation review 2009 1 n o i t c e S 6 Chairman’s statement We are acutely aware of the extreme unpredictability in the financial markets and are actively and rigorously managing our assets, balance sheet and cost base. Overview and financial performance For the academic year 2008/09 UNITE has achieved record occupancy across its portfolio of 99% and secured year on year rental growth of 9.5%. This performance is testament to the resilience of student accommodation during a recession and the professionalism of the Group’s operational business, in particular its on-line platform. However, as a business with investment in and management responsibility for a £1.8 billion student accommodation property portfolio, UNITE has not been immune to the severe deterioration in the condition of global capital markets and the resultant impact on valuations across the commercial property market. Values across the Group’s total operational portfolio (including those assets held in co-investment vehicles) fell by 5% during 2008, despite the Group’s success in increasing occupancy and rent levels. The value of the Group’s investment in this portfolio also fell by 5% and expected margins on the Group’s development programme have also fallen, the impact of which has been fully recognised in the independent valuation of the Group’s development portfolio as at 31 December 2008. It is worth noting, however, that this performance is considerably better than the returns achieved on UK commercial property generally, where capital values fell by an average of 27% according to the IPD index. In addition we have taken a provision of £28 million against the value of land held for development. Following the decision to scale back our development commitments in light of the prevailing market conditions, it was necessary to make the provision to ensure that the land is carried at the lower of the cost and net realisable value. There continues to be solid interest from investors interested in purchasing student accommodation investments, particularly for smaller transaction sizes. Investment transaction volumes held up well during 2008, with a total of approximately £550 million of property being bought and sold in the sector. This compares with 2007, when transaction volumes totalled £700 million, and has given a degree of certainty and transparency to pricing not available in other sectors of the market. As a result of the decline in property values, the Group reported a 21% fall in adjusted fully diluted net asset value per share for the year, to 325 pence at December 2008 from 410 pence at December 2007. On an IFRS basis, net assets excluding minority interests fell to £320 million (258 pence per share) from £450 million (364 pence per share) a year earlier. The Group’s adjusted profit for the year to 31 December 2008 reflects the continued shift of the Group towards its developer and co-investing manager model, in particular the dilution of its share in the rental performance of stabilised assets (the majority of which have been sold to USAF, in which UNITE had an average stake of 20% during the year). Adjusted profit for the year shows a loss of £44.8 million compared to a loss of £62.9 million for 2007. The reported loss for the year after minority interests is £115.9 million (2007: £37.5 million) and includes £25.3 million of losses on the revaluation of investment properties and a negative £32.4 million movement in the fair value of ineffective hedges. Excluding one-off costs, primarily relating to the market conditions, the Group’s decision to scale back its development activity and actions taken to reduce the overhead base of the business, adjusted profit shows a loss of £5.7 million for 2008 (2007: £3.6 million loss). This is stated after pre-contract and abortive development costs of £6.3 million (2007: £3.7 million). Strategy Since late 2006 UNITE has pursued a strategy to establish itself as a developer and co-investing manager specialising in student accommodation. The successful execution of this strategy means that the Group has been, and remains in, a stronger position to weather the ongoing economic challenges. Adjusted net debt has been reduced from a peak of £862 million in November 2006 to £531 million at December 2008 and the 7 Group has shifted the focus of its equity investment into stronger markets, particularly London, where it believes it will achieve better long term returns. At 31 December 2008, 40% of the Group’s gross property assets were invested in London, up from 12% at June 2006 and 30% at December 2007. As the economy continued to deteriorate in 2008, particularly in the last quarter, and financing conditions became extremely challenging, the Board took a number of decisive steps to mitigate the potentially significant impact on the Group: • In January 2008 the Group launched a full scale operational change programme, designed to improve customer service whilst also reducing operating costs across the portfolio. Savings of £10 million per annum are being targeted across the entire operational portfolio and the Group is on track to achieve this in 2009. Approximately 70% of these savings will benefit the Group directly, including a £4 million reduction in operating overhead, with the remainder of savings accruing to our co-investment partners. • The Group successfully raised £58 million of new equity into the UNITE UK Student Accommodation Fund (“USAF” / the “Fund”) in October 2008 and subsequently sold a £171 million portfolio to the Fund in December 2008, enabling USAF to increase further the size, quality and diversification of its portfolio whilst allowing the Group to reduce its borrowings. • In addition to asset sales made to USAF, the Group successfully sold £154 million of non- core assets to third parties during the year, well in excess of its original target for the year of £100 million. In total, proceeds from asset sales by the Group of £325 million in the year (including those to USAF) exceeded total cash spent on the development programme of £302 million and the cash released from these sales, after the repayment of associated senior debt, totalled £77 million. • In October 2008, in response to the deepening banking crisis, the Group substantially reduced its development commitments for 2010 and 2011 project deliveries. The Group now intends to deliver 1,125 new bed spaces in 2010, all of which are in London and are fully funded. The total capital expenditure of £155 million on these projects represents a reduction of approximately 50% from the programme that was originally planned. UNITE is unlikely to commit to any new developments for delivery in 2011 and is now more likely to focus on securing attractive opportunities for delivery in 2012 and beyond. • In response to the scaling back of its planned development activity, the Group reduced the number of roles in its development and group support functions by 29% during December 2008. Since the year end, it has also commenced consultation to reduce the number of roles at its modular manufacturing facility by 27%. Taken together with the £4 million operational overhead savings outlined above, these steps will reduce the Group’s total annual overhead costs by approximately £9 million to £36 million. 1 n o i t c e S The Group remains committed to development as a driver of long term growth and the programme of 2010 deliveries is strong, with yields on cost in excess of 8%. However, given the extreme uncertainty in financing markets at this time, the Group is not currently committing to any new development projects and will not do so until markets stabilise. Instead, it is focusing on generating and conserving cash to enable it to manage its balance sheet effectively. We remain confident that, in time, the Group will be able to secure extremely attractive development opportunities for delivery in 2012 and beyond, and we are currently evaluating the most effective way to finance such development activity, including the possibility of investing alongside other parties in a logical extension of our co-investment model. Year on year rental growth of 9.5% achieved for the 2008/09 academic year 8 Chairman’s statement Financial position Given the sharp fall in general commercial property values during 2008 and the recent rights issues by a number of quoted property companies, the financing arrangements of companies have understandably become a key focus for investors and we include full details of UNITE’s debt structure later in this statement. The Board views the current financial instability extremely seriously, but it is important to note the following: • At 31 December 2008 the Group was, and it remains, in full compliance with all of its borrowing covenants and had cash balances of £112 million at the same date, of which £57 million was available for general purposes, after full provision for committed development expenditure. • The Group has continued to successfully raise new debt facilities throughout the latter part of 2008 and into 2009 – a total of £250 million since December 2008. It has two facilities with debt totalling £97 million expiring later in 2009, for which it has already received satisfactory credit approved terms to refinance. The Group has no further material facilities scheduled for repayment before summer 2011. • Following the proactive sharp reduction in the Group’s future development plans, the restructure of its operating business, and in light of the certainty of refinancing outlined above, the Group has sufficient cash resources available to it to meet all of its remaining development commitments, and meet its expected deleveraging requirements over the next 12 months, before recourse to asset sales. Taking into account the cash buffer and the anticipated rental growth performance across the portfolio, we estimate that the Group could withstand an expansion of yields of between 60bps and 75bps without breaching its borrowing covenants and before recourse to asset sales. 9 • Notwithstanding the headroom outlined above, during 2009 the Group intends to continue as planned to sell stabilised investment assets, either to USAF or to third parties, and is seeking to sell approximately £150 million of such assets during the year. This would increase the Group’s yield expansion headroom to a range of 90 bps to 125 bps. Investor demand for smaller investment assets (less than £20 million) remains relatively robust, and it is worth noting that the average value of UNITE’s on balance sheet assets was £14 million at the year end. As at 6 March 2009, asset sales with a value of £15 million had been unconditionally exchanged, at consideration levels supportive of December 2008 values, and a further £30 million of asset sales are in solicitors’ hands. This provides encouraging evidence of continued demand for student accommodation assets, despite the broader economic challenges. The extent to which USAF has capacity to acquire assets from UNITE in 2009 will depend upon yield movements and whether it is able to access cash resources on deposit with Landsbanki, the Icelandic bank that is in a form of administration. Consequently, the Group is not relying on such capacity being available. To the extent that the Board feels the Group would benefit from additional capital in the future it intends at this time that such capital be raised through asset sales and the extension of existing, or creation of new, co-investment vehicles along the lines of USAF or UCC (the Group’s joint venture with GIC Real Estate). The Group has established a strong track record in executing such transactions in recent years and is actively considering a number of options at this time. Dividend In light of the Group’s desire to conserve capital, the Board does not recommend the payment of a final dividend for the year (2007: 1.67 pence per share). This means that the total dividend for the year to 31 December 2008 will be 0.83 pence per share (2007: 2.5 pence per share). Operations A key element of UNITE’s strategy has been to improve the professionalism of the Group’s operating platform. Through its focus on this area, UNITE is seeking to improve the customer experience that it offers whilst enhancing the efficiency with which this service is delivered. During 2008 the primary advance has been the successful integration of the Group’s on-line booking and payment engine, which has emphatically met both the customer service and efficiency objectives. For 2009, and reflecting customer feedback, the Group’s priorities are to build on this success with major improvements to our internet provision and maintenance service, both working with specialist partner providers, and refining our city staffing model to provide a more responsive, yet efficient, service. People Unlike most property companies UNITE has a significant operational business and, even with systems investment and process redesign, the business’ value is fundamentally tied to the quality of services its employees provide to the Group’s customers. Cash balances of £57m available for general purposes During 2008 our ‘Blueprint’ business change programme has provided us with an opportunity to refine our core people processes and provide a more structured approach to learning and development. This is best signified with the opening of our national training academy in Birmingham, which is supported by a range of multi-media training tools, where the Group’s core service standards will be trained. Periods of change are always testing times for employees of an organisation and, with important asset disposals in a number of cities and a large scale operational business change programme well under way, UNITE is certainly undergoing change. It is testament to the commitment and professionalism of our people that the business has been able to perform strongly through this period. Board change As announced at the Group’s preliminary results in March 2008, I will step down as Chairman of the Company at this year’s Annual General Meeting, after almost ten years in the role. In January 2009 the Group announced the appointment of Phil White as an additional Non- Executive Director and Chairman Designate of the Company. He will assume the chairmanship at the AGM. Phil is also Non-Executive Chairman of Kier Group plc, the support services and property development group and Non-Executive Chairman of Lookers plc, the franchised motor dealership group. We are delighted to welcome him to the Board and are confident that we will benefit from his broad range of experience across a number of industries, both in the public and private sector. Outlook The Board expects the outlook for 2009 to remain positive from an operational perspective but challenging from a financing perspective. • According to UCAS statistics released on 16 February 2009, University applications for 2009/2010 have increased by 7.8% year on year. • As at 6 March 2009, reservations had been received for 65% of the Group’s operational portfolio for the forthcoming academic year at rental levels that suggest rental growth in the range of 7% to 10% year on year. This compares to 62% reservations at the same point in 2008, which itself resulted in record occupancy and rental growth. • This strong sales performance, coupled with the annualised impact of the cost savings arising from the restructure in 2008, means that, with effect from 2009 the Group expects to be able to cover all operational and corporate overhead costs out of cash flow arising from operating activities. 1 n o i t c e S • The Group will continue to focus on generating and conserving cash to maintain its balance sheet strength whilst the uncertain financial market conditions remain. Consequently, the Group will retain an extremely cautious stance to new development commitments, and will continue its programme of asset disposals. • The Board recognises that the ongoing deleveraging of the property sector is likely to persist for a number of years and is planning accordingly. To the extent that we feel the Group would benefit from additional capital in the future, in light of this, and also the compelling development opportunities that are likely to emerge in due course, it remains our preference to raise such capital at the asset level, through individual asset sales and by raising new capital through co-investment vehicles. The Board’s immediate priority is to ensure that the Group remains in a position to withstand further deterioration in the wider economic environment. With a clear financing and cash position at the start of 2009, strong operating performance and clear plans to protect the Group’s balance sheet from further falls in property values, the Board believes that this objective is well in hand; and, in due course, the Group will be able to secure a position to benefit from the attractive development opportunities that we expect to emerge. Geoffrey Maddrell Chairman 9 March 2009 10 Business review With 99% occupancy across our portfolio, annual rental growth of 9.5% achieved last year and reservations for the 2009/10 academic year already at 65%, student accommodation performance is clearly standing up well in the face of a severe recession. Executing our strategy Since 2006 UNITE has set out to establish itself as a developer and co-investing manager of student accommodation, based around a scalable financing and operating platform well suited to its resilient core market. The transition to this business model is substantially complete and has enabled the Group to reduce its adjusted net debt considerably, from a peak of £862 million in November 2006 to £531 million as at 31 December 2008, and to focus its capital investment in areas that are expected to deliver higher returns over time, particularly development activity and London. At the beginning of 2007 the Group set itself a very clear growth strategy – to double the net operating income from the UK student portfolio it manages within five years. Two years in, and despite challenging economic circumstances, UNITE remains on track to deliver against that objective, with portfolio net operating income having already grown 29% from £77 million in 2006 to £99 million in the year to December 2008. Taking into account its committed development programme and the rental growth the Group expects to achieve in the coming years, its £150 million net operating income target is firmly in range. The key events in executing this strategy have been: • The successful establishment of the UNITE UK Student Accommodation Fund in December 2006 and subsequent sale of assets to it at that time and also in 2007 and 2008. In total UNITE has sold assets totalling £988 million to USAF since its formation. • Subsequent capital raisings into USAF in April 2007 and October 2008, which have increased third party equity commitments to a total of £428 million and allowed the Group to dilute its own stake down to its intended target of approximately 20%. • The disposal of £183 million of non-core assets to third parties during 2007 and 2008. UNITE share of gross assets • The reinvestment of a proportion of asset sale proceeds into the London market, primarily through new development activity. During 2008, despite the deteriorating economic environment, the Group continued to successfully execute its strategy, raising an additional £58 million of third party equity into USAF, selling a £171 million portfolio of assets to the Fund and disposing of £154 million of further, non-core, assets to third parties. These steps have helped to strengthen the business in the face of broader economic challenges, particularly through the reduction in net debt from the various asset sales and the reinvestment of proceeds into London, the largest and most resilient student market in the UK. The table below summarises the shift in the Group’s investment profile and net debt levels since 30 June 2006 (the last reported balance sheet prior to the formation of USAF): 30 Jun 2006 £m 31 Dec 2007 £m 31 Dec 08 £m 12% 55% 30% 3% 12% 88% 157 727 395 35 1,314 156 1,158 1,314 745 145% 30% 37% 26% 7% 380 460 331 82 1,253 40% 37% 15% 8% 447 422 169 85 1,123 390 863 31% 69% 326 797 29% 71% 1,253 540 106% 1,123 531 131% London Major provincial Other provincial Varsity cities Total Development Investment Adjusted net debt Adjusted gearing (net debt/equity) Portfolio net operating income up 29% in 2 years 11 This market data is clearly positive on a national scale. However, as in earlier years, there will continue to be local variations and a clear understanding of these is vital in forming and developing investment strategy. UNITE’s investment strategy has always been research-led and will remain so in the future. Of particular note is the Group’s continued, successful focus on London as its core market. With over 250,000 full time students, London accounts for approximately 21% of the UK’s total full time student population but has only approximately 50,000 purpose built beds, or 12% of the UK total. This situation has translated into consistently high occupancy and rental growth which we expect to continue for the foreseeable future. 2 n o i t c e S The student accommodation market The market for student accommodation in the UK continues to be characterised by strong and growing demand and a lack of supply of good quality, well located and managed accommodation. For 2008/09 the number of new entrants to Universities increased by 10.4%, equating to 43,197 additional students (source: UCAS 15 January 2009) and taking the total number of full time students living away from home to over 1.2 million for the first time. The net new supply of bed spaces was 9,200 year on year (source: Savills research), leading to a substantial widening of the demand/supply imbalance. This is reflected in high occupancy across the sector and UNITE’s portfolio in particular. This trend looks set to continue, with the latest UCAS statistics indicating that, as at 16 February 2009, University applications were up a further 7.8% year on year. At the same time, the level of new supply will be declining for the next few years as financing constraints impact development feasibility. The latest UCAS application statistics, and our own reservations data, support the notion that student numbers typically increase during a recession. However, it is important to note that UK Higher Education is now less subsidised than in previous downturns, such as the early 1990s, and levels of both student debt and parental support are much higher than previously. We are monitoring all lead indicators of demand very closely and, at this time, all are tracking positively year on year. Whilst we will continue to examine these indicators closely, we attribute the continued positive market outlook to three main factors: • Full time student numbers have more than doubled since the early 1990s, equating to approximately 600,000 additional students. Over the same period, we estimate that purpose built accommodation supply increased by only 45%, or 120,000 bed spaces. The demand/supply imbalance is, and will remain, acute. • The profile of a typical student’s parent is likely to be resilient to the immediate pressures of a recession, in terms of their age, earnings and financial position. This is supported by a detailed customer profiling exercise undertaken on our database of parental guarantors. • Demand for UK Higher Education amongst international students remains high and is likely to be further supported by the relative weakness of sterling. For the 2008/09 academic year the number of new entrants to University increased by: equating to 10.4% 43,197 additional students 12 Business review Financial results Adjusted net asset value The financial performance of each element of the Group’s business model (development and co-investing asset management) is not easily presented under International Financial Reporting Standards (“IFRS”) and, as in previous years, we have provided a detailed segmental analysis within the notes to the consolidated financial statements as well as a thorough commentary within this review. We consider the key measure of the Group’s financial performance to be growth in adjusted fully diluted net asset value per share together with, to a lesser extent, adjusted profit. The adjustments made to the reported IFRS numbers are intended to provide a clearer understanding of the Group’s financial performance and are consistent with the guidelines laid down by The European Public Real Estate Association (“EPRA”). Adjusted, fully diluted net asset value General commercial property values in the UK have fallen dramatically during 2008 (by 27% according to the IPD index). Despite achieving record occupancy levels of 99% and rental growth of 9.5% across its portfolio, the value of the Group’s student accommodation related investments correspondingly fell during the year, by an average of 5%. Primarily as a result of this, the Group’s adjusted net asset value also decreased during 2008. Reported net asset value after minority interests was £320 million (258 pence per share) at 31 December 2008 (2007: £450 million, 364 pence per share). The Group’s adjusted net asset value was £406 million or 325 pence per share on a fully diluted basis, compared to 410 pence per share at 31 December 2007, representing a fall of 21% across the year. The main factors affecting the NAV performance were the outward movement in property valuations yields to an average of 6.2% at 31 December 2008 (2007: 5.8%) and UNITE’s decision to scale back its development pipeline during the year in order to preserve cash and minimise the impact of valuation falls on gearing. The component parts, which are explained later in this statement, of the movement in adjusted, fully diluted net asset value during 2008 are shown in the table below: 6 months to 30 Jun 2008 £m 6 months to 31 Dec 2008 £m Total 2008 £m 6 months to 30 Jun 2008 pps 6 months to 31 Dec 2008 pps Total 2008 pps Land write downs Net valuation gains/(losses) in period - Rental growth - Yield movement Losses on asset sales Impact of valuation reduction Development value recognised in period Share of Landsbanki provision Restructuring costs Adjusted loss before one off items and development asset sales Swap costs and dividends (8) 26 (34) (6) (22) 16 - - (4) (2) Total adjusted, fully diluted NAV movement in period (12) (20) 4 (38) (9) (63) (9) (6) (5) (8) (1) (92) (28) 30 (72) (15) (85) 7 (6) (5) (12) (3) (104) (6) 20 (27) (5) (18) 12 - - (3) (3) (12) (16) 3 (30) (7) (49) (7) (5) (4) (6) (1) (73) (22) 23 (57) (12) (68) 5 (5) (4) (9) (4) (85) Proceeds from asset sales during 2008 totalled £325 million, whilst cash spent on the development programme was £302 million. Primarily as a result of this, the Group’s adjusted net debt fell to £531 million from £540 million at 31 December 2007. Adjusted gearing (adjusted net debt as a percentage of adjusted net assets) increased in the year to 131% (31 December 2007: 106%) as a result of the reduction in asset values during the period. 13 Adjusted loss One off Items - Write down in carrying value of land - Restructuring costs - Provision against Landsbanki cash deposit - Loan break costs and costs written off on refinancing - Interest rate swap cancellation Adjusted loss before one off items Notes Notes 1 2 3 2008 £m (44.8) 27.7 4.8 6.1 0.5 - (5.7) 2007 £m (62.9) - - - 57.4 1.9 (3.6) 2 n o i t c e S 1. 2. 3. As a result of the dramatic deterioration in the economic conditions, particularly in the last quarter of 2008, UNITE took the decision to significantly scale back its development commitments in order to preserve cash. As a result of this decision, several of the Group’s development sites are unlikely to be built out for some time and may be sold. To reflect this uncertainty, and to ensure that the land is carried at the lower of cost and net realisable value, the carrying value of this land was reduced by £27.7 million during the year, to a value of £26.7 million. Restructuring costs of £4.8 million have been incurred as a result of a substantial reorganisation of the Group that is expected to result in annual overhead savings of £12 million. Further detail of these savings is provided later in this statement. Following the sale of assets by USAF in September 2008, £30 million of its cash resources were placed on deposit with Landsbanki for a period of two months. Following the extraordinary events in the global banking sector in late 2008, precipitated by the collapse of Lehman Brothers, Landsbanki was placed into a form of administration on 8 October and, as a result, the funds are currently not accessible. Whilst work is ongoing to recover the cash deposit and initial indications point to substantial recovery, a full provision has been made in USAF until such time as any recovery is made. UNITE’s share of this provision is £6.1 million. Adjusted profit In the year to 31 December 2008, the Group reported a loss excluding minority interests of £115.9 million compared to a loss of £37.5 million in 2007. £71.1 million of this loss was attributable to movements in asset valuations (both properties and financial instruments) and the associated tax impact of these movements. Adjusted profit, which excludes these items, showed a loss of £44.8 million, compared to a loss of £62.9 million in 2007 and is stated after several one off items, primarily relating to market conditions, the Group’s decision to scale back its development activity and actions taken to reduce the overhead base of the business. These items are summarised and explained in the adjacent table: As highlighted in previous years, the Group’s business model involves the sale of revenue generating stabilised investment assets to external parties (most notably USAF) and the reinvestment of proceeds into development activity (non revenue generating). As a result, the Group’s share of revenues from its stabilised investment portfolio has fallen in recent years, although its earnings will grow over time as management fees increase. The following table summarises the impact of this shift in recent years: Total net operating income from managed portfolio UNITE’s share of income UNITE’s net operating income Management fee income Interest costs (including lease costs) Operational and corporate overhead Net portfolio contribution 2006 £m 77.2 90% 69.8 1.1 (53.1) (15.7) 2.1 2007 £m 88.4 64% 56.7 6.9 (44.5) (17.4) 1.7 2008 £m 98.8 53% 52.0 4.9 (42.3) (20.0) (5.4) Net portfolio contribution is an important performance measure for the Group as it represents the net profit to UNITE from managing the entire operational portfolio. In the current economic climate, the Board recognises the importance of ensuring that the Group’s net portfolio contribution is positive such that the business can cover all corporate overhead, regardless of whether it relates to operations or development. Following the restructuring of the business in 2008, and in light of the continuing strong reservations performance, the Board believes that the business is on track to achieve this in 2009. 14 Business review The operating and investment portfolio For the 2008/09 academic year UNITE is operating 36,700 bed spaces across 119 properties. The Group’s ownership stake in these assets varies from the management of sale and leaseback assets to full ownership, depending upon the type of asset and its phase of operation. Assets in which the Group has a minority stake are as follows: • Stabilised direct let assets, other than those in London and Edinburgh, are typically held in USAF. At 31 December 2008 UNITE had a beneficial interest of 18.6% in USAF. • The majority of stabilised direct let assets in London and Edinburgh are held in the UNITE Capital Cities joint venture (“UCC”) with GIC RE. At 31 December 2008 UNITE had a 30% stake in UCC. • One asset remains in the UNITE Student Village joint venture with Lehman Brothers (“USV”) where UNITE has a 51% interest. Lehman Brothers was placed in administration in October 2008 and the administrators are currently marketing their 49% share of the joint venture. Investment assets held wholly on the Group’s balance sheet fall into three principal categories: • Stabilising assets; these are properties that have recently been completed and are not yet generating their optimal net operating income. Historically, the impact of lower initial occupancy and asset mobilisation costs have tended to reduce net operating income by approximately 30% compared to a stabilised asset. However, recent improvements in our sales and operational platforms have significantly improved the performance of these assets. Once these assets stabilise fully, our intention is to sell them to USAF, subject to it having sufficient investment capacity, or to other co-investment vehicles. A total of £171 million of assets were sold to USAF in 2008. • Assets with redevelopment or active asset management potential. • Non-core legacy assets; these are properties which do not fit with the Group’s long term investment strategy, either because of their location or because they are let to universities under long term agreements and deliver lower ongoing returns. Since commencing a disposal programme of these assets in 2007, the Group has completed sales totalling £183 million from its balance sheet. This disposal programme will continue throughout 2009 as the Group completes its business model transition. The following table summarises the Group’s operating and investment portfolio by segment at 31 December 2008: London - Value - Beds Major provincial - Value - Beds Other provincial - Value - Beds Varsity - Value - Beds Total at 31 December 2008 - Value - Beds USAF* UCC* USV* Owned stabilising Other Leased Total £54m 270 £347m 2,427 - - £55m 502 £46m 466 - 260 £502m 3,925 £600m 12,876 £218m 5,128 - - - - £25m 289 £43m 437 £58m 1,383 £137m 2,634 £97m 2,551 - 1,644 £892m 21,088 - - - - - - £129m 3,379 - 1,785 £347m 10,292 £11m 135 £9m 218 - 316 £88m 1,395 £897m 18,563 £390m 2,864 £58m 1,383 £203m 3,271 £281m 6,614 - 4,005 £1,829m 36,700 UNITE investment 19% 30% 51% 100% 100% - - * The value shown represents the gross value (as opposed to UNITE’s share) 15 Extremely strong rental growth was delivered across UNITE’s operating and investment portfolio during 2008 with like for like sales growth of 9.5% achieved for the 2008/09 academic year compared to 6.2% in 2007/08. The average stabilised yield across the portfolio was 6.2% as at 31 December 2008, compared to 6.0% at 30 June 2008 and 5.8% at 31 December 2007. The portfolio is 99% let for the current academic year, compared to 92% in 2007/08. Sales performance for the 2009/10 academic year is very strong across the portfolio. As at 6 March 2009, reservations had been received for 25,285 bed spaces, or 65% of the portfolio, compared to 62% a year earlier. This is summarised in the adjacent table: Sales and rental growth Joint venture - USAF - UCC - USV Wholly owned - Stabilising - Other Leased Total Beds % Reserved 09/10 year % Reserved 08/09 year Like for like rental growth 08/09 18,563 2,864 1,383 22,810 5,972 6,144 12,116 4,005 38,931 59% 50% 56% 58% 44% 92% 68% 98% 65% 55% 68% 28% 55% 57% 81% 69% 94% 62% 2 n o i t c e S 8.9% 6.7% 8.0% 8.6% 16.8% 8.6% 9.0% 6.1% 9.5% Operating costs and overhead Impact of ‘Blueprint’ programme As identified at the end of 2007, over recent years the Group’s operating costs and overheads have grown at a faster rate than revenues, principally reflecting insufficient infrastructure required to cope with nationwide growth and difficulty in delivering sustainable economies of scale. The financial impact of this has been emphasised more recently with the establishment of our developer and co-investing asset manager business model, which distinguishes more effectively between the economics of asset ownership and asset management. The Group began to address this in 2007 with the successful launch of its on-line accommodation management system, which has been further supported through the creation of a national sales framework. The results of this investment are clearly evident in the strong sales performance for academic year 2008/09 and 2009/10, reported in this statement. Since January 2008, we have extended the reach of this programme to encompass a more comprehensive process re-engineering and organisational change exercise – to define and deliver our operational ‘Blueprint’ and in late 2008 we accelerated the implementation of certain elements of the programme to improve the Group’s cash generation. The following table summarises the positive impact of these initiatives on the Group’s cost base: Cost of sales UNITE share Overheads - Development - UMS - Operations and Group Impact on UNITE Profit and Loss Balance Sheet Total 2008 £m Identified savings 2009* £m 45 26 5 8 32 71 51 20 71 6 3 2 2 5 12 6 6 12 *The total cost of the restructure was £4.8 million in 2008 with a further £1.4 million to be incurred in 2009 It is important to note that the objectives of our Blueprint programme extend beyond cost savings. Our detailed feasibility work identified clear opportunities to improve customer service whilst becoming more cost effective and we will continue to progress this in 2009: • Our most significant progress in 2008 related to our on-line accommodation booking and payment engine, which has transformed the way in which students search for and book accommodation. Usage of the www.unite-students.com website has increased dramatically and in January and February 2009, for example, the site recorded 134,000 visits. • Our main priorities in 2009 are to improve the quality of our maintenance service and internet provision, both in response to customer feedback. In both cases we have been working with specialist partners on long term solutions since early 2008 and will launch our revised offering fully for the 2009/10 academic year. • In addition, we are substantially revising our city staffing model for the 2009/10 academic year to provide a more responsive service tailored to the times preferred by our customers. This important step, which will improve both service and efficiency, is only possible as a result of our earlier progress with systems and process development. 16 Business review Investment portfolio valuation The Group’s investment portfolio, including those assets held in co-investment vehicles, has been independently valued at 31 December 2008 by CB Richard Ellis Ltd, Jones Lang LaSalle Ltd and Messrs King Sturge. As expected, we have seen yield expansion across most of the portfolio offset by strong rental growth in our direct let assets. Performance has been weakest in properties subject to long term agreements and strongest in high quality direct let assets (see table below): Investment portfolio movements Leased/nominations assets Direct let assets * London Major provincial Other provincial Varsity cities Total *Includes UNITE’s share of JVs Asset classification changes £m Sales, completions and redevelopment £m Dec 2007 £m Yield shift £m Rental growth £m Dec 2008 £m 317 50 304 172 21 864 (79) 45 24 10 - - (28) 68 13 (98) 15 (30) (21) (12) (27) (9) (3) (72) 9 13 2 5 1 30 198 164 316 80 34 792 This is firmly reflected in our asset sale strategy and it is worth noting that the average value of UNITE’s on balance sheet investment assets is £14 million. Taking this into account, we believe that yield expansion in student accommodation investments will continue to be less pronounced than across the broader property market, with rental growth prospects providing an effective buffer. Nonetheless, we expect values to continue to decline until such time as banking markets stabilise. Typical yields as at 31 December 2008 are set out below: Typical stabilised yield range London Direct let University agreement Major provincial Direct let University agreement Other provincial Direct let University agreement ‘Varsity’ cities Direct let Dec 06 Dec 07 Dec 08 5.5%-6.0% 4.75%-5.25% 5.0%-5.5% 5.0%-5.75% 5.6%-6.0% 5.5%-6.25% 5.6%-6.1% 5.0%-5.5% 5.5%-6.0% 5.5%-6.0% 6.0%-6.75% 6.0%-6.75% 5.65%-6.25% 5.25%-5.75% 5.75%-6.25% 5.5%-6.0% 6.25%-7.0% 6.25%-7.0% 5.5%-6.0% 5.25%-5.75% 5.75%-6.25% Portfolio average IPD All Property benchmark 5.80% 4.55% 5.78% 5.00% 6.20% 6.87% The average net initial yield of the portfolio at 31 December 2008 is 6.20% (2007: 5.78%). The expansion of 42 basis points, representing a 7% movement, has been positively impacted by the increased proportion of London assets, where valuation declines have been less pronounced. The average net initial yield for assets outside London increased by an average of 75 basis points. These yield movements were partially offset by the rental growth of 9.5%. UNITE’s consistent record of delivering rental growth, together with the continued demand/supply imbalance, has been a significant factor in supporting the valuation yields to a greater extent than in other commercial property sectors. Demand for good quality, well-located investment assets remained robust for the majority of 2008, and transactions over the course of the year provided meaningful valuation evidence across all major segments of the portfolio. Looking forward, demand for smaller investment assets (up to £20 million) in the student sector remains solid whereas the market for larger assets is more challenging. 17 During 2008, UNITE sold a total of £325 million of investment properties at an average yield of 5.9%, of which £171 million were sold to USAF and the remainder to external parties. In addition to this £63 millon of investment assets were sold by USAF during the year at an average yield of 5.7%. Particulars relating to these disposals were as follows: UNITE sales Sale and Leaseback transactions Non-core sales Sales to USAF - Investment assets - Assets held at cost Valuation £m* Gross proceeds £m Profit/ (loss) investment assets £m Profit/ (loss) on disposal assets held at cost £m Average yield £m 51.0 106.2 111.9 n/a 47.5 106.5 106.8 64.5 325.3 (4.4) (0.8) (7.2) - (12.4) - - - 13.1 13.1 2 n o i t c e S 5.7% 5.8% 6.2% 6.2% 5.9% USAF sales 62.4 62.9 (0.2) - 5.7% * Valuation figures represent last balance sheet valuation prior to sale i.e. 31 December 2007 or 30 June 2008 Asset sales have been an integral part of UNITE’s business strategy in recent years and the graph below illustrates the level of sales achieved and the pricing of those transactions: Asset sales track record m £ s d e e c o r p l s e a S 600 500 400 300 200 100 0 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 3rd party JVs/Funds NOI yield sales NOI yield UNITE balance sheet 18 The performance of USAF during the period was sound on a sector relative basis, generating a total return of -22% in the period compared with an IPD UK Pooled Property Funds Index average of -32%. The total return includes -8.0% from the impact of the mark to market of interest rate swaps in the year. Given the reduction in property valuations and the mark to market impact of interest rate swaps, USAF did not generate any performance fees in the period, as the Fund’s absolute performance was below the level at which such fees become payable. UCC and USV are closed funds and any performance fees only become payable and recognisable on exit. Net asset value movements (reported on an IFRS basis) and returns in USAF and UCC during 2008 were as follows: Net asset value movements and returns Fund consolidated net assets at 31 December 2007 Revaluation of investment portfolio Development profits recognised Earnings less distributions Equity issued less costs Other reserve movements* Fund consolidated net assets at 31 December 2008 UNITE share Return on NAV Capital Income Total UCC £m 125.1 3.6 7.4 2.0 - (23.5) 114.6 30% 8.7% 1.8% 10.5% USAF £m 446.1 (54.3) - - 58.9 (38.0) 412.7 18.6% (26.8%) 5.2% (21.6%) *includes non-cash items, market value movements in ineffective hedges & other movements. Further details of the financial performance and position of USAF and UCC is provided in notes 2 and 9 to the consolidated financial statements. Business review Co-investing asset management UNITE acts 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 (“UCC”). In addition, one asset remains in the UNITE Student Village joint venture (“USV”) with Lehman Brothers. USAF was established in December 2006 to invest in direct let student accommodation across the UK. It is a semi open-ended, infinite life vehicle with a carefully structured redemption mechanism designed to protect the interests of non-redeeming investors. Redemptions are not permissible before December 2009. Any redemption requests received will be met by either cash or increased gearing in the first instance and then through the proceeds from asset sales, although these are limited to 10% of gross asset value per annum. The main reason for adopting an open-ended structure was to allow the Fund to increase in size through further injections of capital. Upon establishment, USAF acquired a £515 million portfolio of direct let accommodation from UNITE, and during 2007 and 2008 it acquired a further £425 million of assets from the Group. UCC was established in March 2005 as a joint venture between UNITE and GIC RE. It is a closed-ended fund due to mature in 2013 and was established by UNITE to develop and operate student accommodation in London and Edinburgh, markets in which UNITE’s growth was capital constrained at that time. Following an intensive period of acquisition and development activity, UCC equity is now fully invested and all development projects have been completed. During the year to December 2008, the Group received fees from USAF, UCC and USV as follows: Managements fees received Management fees £m 2008 Performance fees £m 2.7 2.5 - 5.2 - - - - Total fees £m 2.7 2.5 - 5.2 Management fees £m 2007 Performance fees £m 2.3 1.8 - 4.1 1.5 - 1.5 3.0 Total fees £m 3.8 1.8 1.5 7.1 USAF UCC USV Total 19 UNITE UK Student Accommodation Fund UNITE Student Village Joint Venture Development activity USV owns one building located in Sheffield which was independently valued at £58.1 million as at 31 December 2008 resulting in USV having net assets of £9.4 million at 31 December 2008 (2007: £15.7 million). The reduction in property valuations resulted in a total return of -44% in the year. Lehman Brothers, which owns a 49% stake in USV, was placed into administration in October 2008 and the administrators have informed UNITE that they are currently marketing the 49% stake. UNITE has certain pre-emptive rights within the joint venture agreement and is currently considering its options in this regard. In October 2008, in response to the deepening banking crisis, the Group decided to reduce substantially its development commitments for 2010 and 2011 project deliveries. The Group now intends to deliver 1,125 new bed spaces in 2010, all of which are fully funded. The total capital expenditure of £155 million on these projects represents a reduction of approximately 50% relative to the programme that was originally planned. UNITE is yet to commit to any new developments for delivery in 2011 and is now more likely to focus on securing attractive opportunities for delivery in 2012 and beyond. It is anticipated that a number of favourable opportunities will arise, in light of the widespread re-pricing of assets. The Group’s development commitments at 31 December 2008 are summarised below: 2 n o i t c e S Development pipeline Bed spaces Total development cost £m Capex remaining £m Equity total £m Equity remaining £m 2009 deliveries 2010 deliveries 2,701 1,125 3,826 249 155 404 92 80 172 49 29 78 - 8 8 As at 31 December 2008, USAF’s investment portfolio comprised 53 properties in 17 cities with a total of 18,563 bed spaces. The portfolio was independently valued by CBRE at £897 million, resulting in the Fund having net assets (on an IFRS basis) as at that date of £412.7 million as shown in the table opposite. The Group successfully raised £58 million of new equity into USAF in October, in what proved to be extremely challenging and deteriorating markets. The first signs of a secondary market in the units also began to emerge with £40 million of units trading at the same time at a small discount to net asset value. Across the course of the year, USAF delivered asset sales of £63 million at an average yield of 5.7% and subsequently acquired a portfolio of £171 million of assets from UNITE. This asset management activity is in line with USAF’s strategy of focusing on markets that demonstrate the greatest prospects for capital and income growth. Having been at around 20% throughout the year, the Group’s stake in USAF was 18.6% at the year end, following the most recent portfolio sale and is likely to remain at around this level for the foreseeable future. Following the sale of assets by USAF in August 2008, a deposit of £30 million was placed with Landsbanki Islands hf. (“Landsbanki”). Landsbanki was placed into administration under emergency legislation in October 2008 and the funds are currently not accessible. The first public creditors meeting was held on 20 February 2009 where it was confirmed that depositors will be treated as priority creditors. A statement of recoverable assets and liabilities was presented at the meeting, indicating that a substantial recovery of the deposit should be achievable. The timing of recovery, and any legal challenge to the priority status afforded to creditors, remain as the main areas of uncertainty. Whilst work is ongoing to recover the deposit, a full provision has been made in the accounts of USAF and UNITE. The UNITE Capital Cities Joint Venture As at 31 December 2008, all of UCC’s development projects have been completed and UCC’s investment portfolio now comprises 16 properties in London and Edinburgh. The portfolio was independently valued at 31 December 2008 at £389.7 million resulting in UCC having net assets at 31 December of £114.6 million (reported on an IFRS basis). Strong rental growth performance and completion of the final development schemes have ensured a further year of strong returns for UCC, with a total return of 11% in the year. 20 Business review In determining which of its developments to proceed with for 2010 delivery, the Group has prioritised those with the highest anticipated returns and greatest resilience to ongoing adverse economic conditions. As a result of this review, the Group’s pipeline of developments for delivery in 2010 is located entirely in London, where demand and rental growth prospects are strongest, and is expected to deliver an initial yield on cost of 8.0%. The programme of 2009 deliveries is expected to show an initial yield on cost of 6.9%. The outlook for development margins on our secured development pipeline is, of course, more challenging than has historically been the case, and we are actively managing our exposure in this area, as evidenced by the deferral or cancellation of certain projects. However, the outlook for occupier demand in our sector, the prime positioning of our developments and clear signs of easing build cost inflationary pressure all help to offset the principal downside risk concerning the level of future investment yields. Notwithstanding the significant reduction in future development commitments outlined above, the Group continues to manage the delivery of its current pipeline projects effectively. During the year, UNITE completed its development pipeline of 3,774 beds for the 2008/09 academic year and is also well progressed on the delivery of its 2009 pipeline of 2,701 beds. UNITE, including where appropriate its joint venture partners, invested a total of £275 million of capital expenditure as follows: Development expenditure 2008 completions - UNITE - Joint ventures 2009 completions - UNITE 2010 and later completions - UNITE Total Gross £m UNITE’s share £m 80 34 102 59 275 80 10 102 59 251 The decision to scale back the development programme has had a significant impact on the secured pipeline as follows: Committed future developments 31 Dec 07 beds Secured beds Strategic review & scheme revision of beds 31 Dec 08 beds Completed value £m Development yield 2009 completions 2010 completions Total beds 3,931 2,326 6,257 - 1,183 1,183 (1,203) (2,384) (3,587) 2,701 1,125 3,826 288 207 495 6.9% 8.0% 7.3% 2,701new bed spaces scheduled for delivery in 2009. 21 Following the establishment of USAF, and in accordance with IFRS, certain of the Group’s development assets are now classified as current assets and are held at cost, 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 31 December 2008 and is summarised in the adjacent table: In total, the Group has recognised £7 million of revaluation gains on developments during the year in the calculation of its adjusted net asset value. The investment yields applied in arriving at a valuation of the development portfolio are typically 25 bps higher than those applied to completed properties, reflecting the particular challenges of development at this time. This differential will be reversed upon completion. In addition to the above portfolio, the Group had £26.7 million of land at 31 December 2008 (2007: £91.3 million) which is carried at the lower of cost and net realisable value. Given the Group’s decision to scale back its development pipeline as outlined above, together with the dramatic falls in land values, the value of the land has been written down by £27.7 million during the year. With the exception of one site, valued at £3.0 million, all land held for development has planning consent for development as student accommodation. The Group will be reviewing its options for these sites over the next six months. Not surprisingly, the sharp reduction in planned development activity has resulted in a significant contraction in the size of the Group’s development team. During 2008 we reduced the number of employees engaged in development activity by 23 to 25 at the year end and moved the team’s base to London. Annualised development overhead, taking into account these and other savings, has reduced by 40%. Development portfolio valuation 31 Dec 2008 £m 31 Dec 2007 £m Investment property under development Property under development Share of joint ventures investment property under development Total Valuation gain not recognised on property held at cost Value at end of period 53 249 - 302 24 326 102 122 36 260 39 299 2 n o i t c e S UNITE Modular Solutions Financing The financing of the business and the ongoing strength of the Group’s balance sheet remain a primary focus. Despite the dramatic deterioration in the global financial markets, UNITE has made solid progress in extending its re-financing horizon, ensuring all borrowing covenants are met and reducing net debt in the period. The Group (including co-investment vehicles’) primary bank facilities are arranged through a small number of key banks and it has enjoyed continued and fresh support from these lenders. This support is confirmed by new facilities totalling £485 million being arranged since January 2008, of which £250 million has been arranged since December 2008 (£100 million requires final documentation to be signed). This ongoing support from our lenders provides confirmation of the resilient nature of the asset class and the underlying cashflows that the assets generate. The Group’s modular manufacturing facility remains a key element in the Group’s development philosophy. During 2008 it formed a key part of the change programme designed to improve the efficiency of developments being delivered 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. However, the Group’s reduced development pipeline has significant implications for manufacturing volumes at the plant. In response to this, management has recently concluded a consultation with the plant’s workforce that will lead to a reduction in the number of roles at the facility of approximately 27% from March 2009. Longer term, we are more actively considering our strategy for the numerous approaches received regarding module manufacture for third parties. Livocity – accommodation for graduates and young career professionals The Group currently operates one project under its ‘Livocity’ concept (62 beds near Regent’s Park, London), providing accommodation for graduates and young career professionals. This project remains fully let and has delivered encouraging rental growth during 2008. Two further properties will be opening during March 2009, located in Fulham and Camden. Customer demand for these properties is also healthy and our focus for Livocity in 2009 is to ensure that all three assets reach a stable level of occupancy and rental levels in good time. No further developments are planned under the Livocity brand at this time. 22 Business review Key debt ratios for UNITE Group Adjusted gearing Net debt to assets Weighted average debt maturity Weighted average cost of investment debt Proportion of investment debt hedged Cash position 31 Dec 2008 31 Dec 2007 131% 65% 4 years 6.2% 87% 106% 57% 4 years 6.6% 89% UNITE has a cash balance of £111.8 million at 31 December 2008. An analysis of the cash that is available for managing the Group’s debt facilities in the event that property valuations fall and banks seek to enforce repayment through the use of LTV covenants is provided in the following table: Cash balance at 31 December Held for re-financing Restricted for debt servicing Development equity remaining on committed schemes Cash available for general purposes £m 111.8 (30.8) (16.3) (7.8) 56.9 We anticipate that the strong rental growth performance together with the cost savings as a result of the restructure will mean that the cashflow from operations is sufficient to cover all overheads during 2009. Therefore the available cash outlined above can be used to manage the Group’s debt facilities in the event that property valuations continue to fall. The group successfully raised £58m of new equity into USAF in October 2008 Overview of debt facilities The majority of the Group’s debt is arranged on an asset specific basis within committed facilities. The facilities are structured as either investment facilities, development / investment facilities whereby an asset transfers to the investment vehicle upon completion and a small proportion of land facilities. In addition, UNITE has working capital facilities of £49 million including a £20 million overdraft facility. In accordance with the terms of the loan agreements, the Group is required to comply with certain financial covenants. UNITE’s facilities typically have interest cover ratio covenants, and more recently loan to value covenants have been introduced to new facilities. Where loan to value covenants are in place, these are based upon a valuation performed upon instruction by the lending bank. UNITE also has four facilities with minimum net worth covenants. All of the Group’s major covenants are outlined below. Compliance with financial covenants is constantly monitored. Potential breaches can be discussed with lenders which could result in a re-negotiation or a possible waiving of the covenants. Actual covenant breaches can be rectified by a number of remedies, primarily the repayment of debt either on a temporary or a permanent basis, before an event of default occurs. The principal areas of focus associated with UNITE’s financing are as follows: • Maintaining covenant compliance, primarily loan to value (‘LTV’) covenants in the event that property values continue to fall and, to a much lesser extent, the risk of breaching minimum net worth and interest cover ratios (‘ICR’) covenants. • Refinancing facilities that expire in 2009. • Refinancing development schemes upon completion within existing facilities and ensuring facilities are in place for the 2009 and 2010 development programme. • Managing gearing levels in an environment of falling asset values. 23 Financial covenants As at 31 December 2008, the Group was in full compliance with all of its financial covenants. 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. The following table uses the independent valuations at 31 December 2008: Total facility £m Investment debt drawn £m Development debt drawn £m Total drawn £m Weighted LTV covenant Weighted LTV at 31 Dec Facilities with LTV covenants Facilities with no LTV covenants Working capital facilities Total debt Cash Adjusted net debt 773.1 364.1 1,137.2 288.9* 113.7 402.6 78.8 135.5 214.3 75.7% - 70.6% - 367.7 249.2 616.9 25.4 642.3 (111.8) 530.5 * The £288.9 million includes £30.8 million of debt drawn held as cash pending re-financing of an asset. 2 n o i t c e S Interest cover covenants Investment facilities are subject to interest cover covenants. The covenants are measured on a portfolio basis 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 135% and we would expect rental growth to improve this headroom further in the future. 24 Business review Minimum net worth covenants UNITE debt maturity profile 350 300 250 200 150 100 50 0 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 + 5 1 0 2 Facilities at 31 December Facilities including new £100 million facility Given the positive sales performance, the principal risk is the level of yield expansion prior to the assets transferring to the investment facility in the third quarter of 2008. We have taken this into account in our calculation of covenant headroom opposite. UNITE has signed, committed development debt facilities in place to complete all of its 2009 and 2010 development programme. In total UNITE had unutilised debt capacity of £520 million as at 31 December 2008. Of this amount, £160 million is committed to the development programme, leaving £360 million of surplus capacity, of which Anglo Irish Bank is currently providing £260 million. Following the recent nationalisation and subsequent concerns surrounding the bank, UNITE considers this facility to be unavailable and is in no way reliant upon it. Covenant headroom The group was in full compliance with all of its borrowing covenants at 31 December 2008 and remains so at this time. In considering the likelihood of the Group breaching any covenants during 2009, the Board believes that the greatest risk relates to a continued outward movement in yields resulting in a potential breach of LTV covenants and/or a refinancing shortfall in relation to the Group’s 2009 development programme. The Group has three main mitigants in addressing this risk: • Continued strong rental growth in the portfolio will help offset outward yield movements; • The Group’s available cash resources can be used to prepay facilities to avoid LTV covenant breaches or to meet a refinancing shortfall with respect to the 2009 development programme; • Ongoing asset sales will reduce investment net debt and release further cash for general purposes. The Group is targeting gross proceeds from sales, including those to USAF, of £150 million which it would expect to release between £25 million and £40 million of net cash proceeds. UNITE has four facilities with minimum net worth covenants. The highest of the covenants is set at £250 million based on adjusted net assets. This compares to the reported position at 31 December 2008 of £406 million. Two of the facilities with minimum net worth covenants expire in 2009 and will be refinanced at that time. UNITE debt maturity profile UNITE has two investment facilities that expire in the fourth quarter of 2009. The total amount drawn under these facilities at 31 December was £96.8 million. The Group has sought to proactively manage this refinancing risk by: • Creating capacity in an existing facility for approximately £60 million of the debt. Approval has been secured for the transfer of these assets into this facility. • Arranging a new £100 million investment facility to create capacity for the remaining debt and also to provide further debt headroom. Full credit approval for this facility was obtained in February 2009 and it is currently being documented for anticipated completion in April. The next major refinancing event occurs in May 2011 when a £116 million facility with Bank of Ireland expires. UNITE also has three small development facilities that expire in 2009 with drawn debt of £12.7 million. This debt all relates to land that will not be built and is likely to be sold in the year. All three sites are currently under offer at levels in excess of the drawn debt. Development debt capacity and refinancing requirements The development debt is not subject to LTV covenants during the development phase. However, upon completion of a development, an updated valuation is required. This event will result in either a release of cash to UNITE or, if values fall beyond a certain level, for UNITE to repay an element of the debt secured against that asset. 25 Taking into account these risks, the Group believes that it can withstand future yield expansion as follows: NOI yield movement (bps) Rental growth in 2009/2010 (7%-10%) Cash resources to avoid LTV covenant breaches and meet refinancing shortfalls NOI yield headroom before asset sales Impact of targeted asset sales Total NOI yield headroom including asset sales 40-50 20-25 60-75 30-50 90-125 The above NOI yield expansion headroom, quoted after full provision has been made to fund the commited development pipeline, compares to a total of 42 basis points expansion in 2008, of which approximately 25 basis points occurred in the last quarter. The Board is satisfied that this headroom is adequate for the time being, and that the rental growth and asset sale assumptions in particular, are appropriate. However, until such time as the actual delivery of these items can be viewed with more certainty, the Board believes that an extremely cautious stance remains appropriate. Gearing and net debt The Group has reduced the adjusted net debt position at 31 December 2008 to £531 million (2007: £540 million). This reduction has been delivered through its focus on asset sales during the year. Reduction in net debt Net debt at 31 December 2007 Asset sales Cash spent on development programme Operational cash / inc dividends and tax Net debt at 31 December 2008 £m 540 (325) 302 14 531 2 n o i t c e S Adjusted gearing was 131% (2007: 106%) and debt as a percentage of gross assets value was 65% (2007: 57%). UNITE will maintain its focus on gearing levels and intends to sell assets to at least the same value as the level of expenditure on development activity going forward. The Group will continue to follow its strategy of generating cash from asset sales both to USAF and third parties in order to strengthen the balance sheet and also to provide resources to take advantage of the development opportunities when the banking market starts to ease. Interest rate hedging During the first half of 2008 interest rates gradually increased with 5 year swap rates rising from around 5% to peak at 6% in June. In the third quarter of 2008, long term interest rates receded towards levels at the start of the year. As markets responded to the crisis in the Banking sector and the resultant government support for banks, a rapid downward shift in market interest rates occurred. The 5 year swaps rate fell to around 3% at 31 December 2008. The Group seeks to minimise its exposure to interest rate fluctuations and therefore seeks to hedge at least 80% of its investment debt. Whilst interest rates swaps offer protection from higher interest rates and provide a high degree of predictability on future cashflows, they provide no opportunity to gain when interest rates fall. Furthermore, the movement in revaluation of interest rate swaps affects the Group’s income statement. For the year to 31 December 2008 a deficit of £32.4 million was recorded (2007: £7.5 million). The Group seeks to minimise its cost of debt finance and has reduced the cost of investment debt from 6.6% in 2007 to 6.2% in 2008. 26 Business review Financing within co-investment vehicles The debt facilities within co-investment vehicles are structured broadly in line with the Group’s wholly owned debt. As at 31 December 2008 each of the co-investment vehicles was in full compliance with all of the respective covenants. The following table outlines the principal covenants on these facilities. Total facility £m Drawn £m LTV covenant LTV at 31 Dec ICR covenant ICR at 31 Dec USV UCC USAF - With LTV covenants - No LTV covenants 46.1 300.0 235.0 280.0 46.1 248.8 200.6 280.0 84% - 62% - 81% - 53% - 1.24 1.00 1.30 1.40 1.33 1.40 2.1 2.0 The facilities are structured so there is no recourse to the Group with the exception of the UCC facility which is limited recourse. There is £35 million headroom in USAF’s banking facilities to fund further acquisitions and £51 million of capacity in UCC facilities. 27 Dividend In light of the Group’s desire to conserve capital, the Board does not recommend the payment of a final dividend for the year (2007: 1.67 pence per share). This means that the total dividend for the year to 31 December 2008 will be 0.83 pence per share (2007: 2.5 pence per share). People and organisation UNITE’s achievements are underpinned by a culture which, together with our success in pioneering a new sector and first class people practice, make our organisation a place to achieve a challenging, rewarding and meaningful career. The role of our people in delivering the strategic priorities of the business is clearly recognised through our approach to talent management and development. Throughout 2008 we focused our organisational development approach around ensuring our people were effectively executing our strategy and managing transformational change. Key initiatives in 2008 included: • Organisation structure - we organised our core business operations to align with our business model. We restructured to four key business units: Development, Modular Solutions, Operations and Fund & Asset Management. We also restructured our key support functions (Finance, HR, Procurement, IT) to ensure lean, value add support service delivery aligned to the goals of our core business units. • Values / competency model – we defined and developed a core competency framework (Job Fitness Model) aligned to our values, for our operations and support functions. 2 n o i t c e S • Aligning our talent strategy to our business strategy to ensure that we have the right mix of people in the right roles to execute effectively. We are focused on ensuring that the positions that exert the greatest degree of influence on company performance are filled with top talent and that we have tailored development plans for potential successors. We have added four new roles to our Leadership Executive to ensure we are developing leaders who understand our business challenges at a global level whilst delivering in their specific business areas. • Driving our performance culture to ensure our people are engaged and motivated to deliver results from a combination of understanding what motivates our workforce, effective leadership, clarity of purpose, accountability for results and rewards that are commensurate with performance and contribution. We will continue to drive our performance by living our values and our approach to customers, people and shareholders. Looking ahead The Board expects the outlook for 2009 to remain positive from an operational perspective but challenging from a financing perspective. Accordingly, the Board’s immediate priority is to ensure that the Group remains in a position to withstand further deterioration in the wider economic environment. With a resilient market, sound financing and cash position, strong operating performance and clear plans to protect the Group’s balance sheet from further falls in property values, the Board believes that this objective is well in hand; and in due course, the Group will be able to secure a position to benefit from the attractive development opportunities that we expect to emerge. • Change management - through the delivery of our operational and development change programmes we embedded effective change management skills into our business. These core skills will stand us in good stead as we continue with the implementation of change through 2009. • Learning and development - we opened our Operations Training Academy in Birmingham. A purpose built facility, within our flagship student accommodation, designed for inducting and training our frontline teams in the consistent delivery of our customer service standards. • Leadership development - we designed and delivered a new programme to our senior managers around effective execution of strategy. We continued the roll-out of our core Leadership and Mentoring programmes ensuring key successors to develop their leadership practice. • Performance management and reward – through our Performance Development Programme (PDP) we developed a consistent approach to performance measurement and management and clearly linked our reward structures to the performance of our key strategic priorities. • Employee engagement – we embedded an online employee survey and our organisation was benchmarked within the top 30% of UK companies. UNITE also featured in the Guardian Britain’s Top Employers 2008 for Best Examples of HR Management. Looking forward to 2009, we are focused on three critical areas to align our people strategy with our business strategy: • Ensuring our strategy is clear from the boardroom to the front line. We have embedded a high quality business planning process to allow individual employees to have line of sight to our strategic goals. Our framework ensures that we have an aligned set of goals, clear performance measures, with a more integrated risk and resource planning process. 28 Risks and uncertainties The assessment and management of risk is designed into the way we operate our business. A summary of major operational and strategic risks and mitigating actions is set out below: Risk description General risks People Impact Mitigation • Ability to attract, retain and motivate the best people • Critical to delivering business strategy Reputational risk • Inability to grow and protect UNITE’s brand • Reduced lettings • Difficult to attract the best people • Weaker relationships with university clients, planners and other stakeholders • UNITE is a values based organisation. This means we recruit to a clear set of values and seek to develop our people to their full potential • We measure employee satisfaction through regular surveys and act on employee feedback • Experienced brand, sales and marketing teams • Measurement of customer satisfaction and response to customer feedback • Strong focus on delivering the service our customers want • Strong focus on safety of our customers and staff with regular audits Property investment risks Market cycles • Property markets are cyclical Portfolio risk • Concentration of assets in student market Letting risk • Risk arising from short term nature of tenancies • Under/over performance of investment portfolio • Clear and active asset management strategy • Reduced student numbers impacting financial performance • Geographical diversification • Long term growth for student accommodation underpinned by government policy • In-depth market intelligence • Revenues are uncertain • Reduced lettings as a result of economic downturn • Geographical diversification • Long term growth for student accommodation underpinned by government policy • Supply/demand imbalance Finance Funding • Lack of available funds • Movement in valuations leads to covenant breach • Unable to progress development opportunities • Inability to refinance investment debt • Requirement to repay debt • Creation of UNITE UK Student Accommodation Fund as a means of raising equity • Proactive management of debt with significant long term debt and early renewal of expiring facilities • Strong relationships with our banking partners • Ability to sell assets • Significant cash balance • Increased borrowing costs • UNITE hedges 70% – 90% of its investment debt Interest • Interest rates rise Property development risks Planning risk • Development projects do not achieve sufficient support to achieve planning consent • Unable to progress developments in line with plans Construction risk • Construction projects are delivered late or over budget • Returns are reduced and cash tied up Our process for managing risk is set out in more detail on page 44 of the Corporate Governance section of this Annual report. with appropriate risk sharing 29 Development expertise including: • Strong and open relationships with key stakeholders • Skilled development teams with a good understanding of the sector • Strong reputation • Strong organisational focus on project delivery • Use of UNITEs unique modular technology and off site manufacturing reducing delivery and cost risk • Strong relationships with key construction partners Key performance indicators Objective Measure Performance To maintain a strong and profitable development pipeline (see pages 20 to 22 of the business review ) Development NAV per share (pence per share) This measure indicates how much value our development activities have added in the year. Secured pipeline (£m) This measures the value of our future secured development pipeline. Planning permissions secured This measure indicates how successful we have been obtaining planning consents on our secured schemes and is a key driver of value. To maximise the returns from our co-investing funds (see pages 19 to 20 of the business review) Return on NAV This measure indicates the combined capital and revenue returns from our major co-investing funds. To manage our assets effectively (see pages 11 to 18 of the business review) USAF (%) UNITE Capital Cities (%) Adjusted fully diluted NAV per share added (pence per share) This measures how much value has been added in the year to our balance sheet before one off items. Assets sales in period (£m) This measures how successful we have been in selling assets in the period including assets sold from our co-investing vehicles. Net portfolio contribution (£m) This measures the contribution of our investment and stabilising properties to the business. To manage the strength of our balance sheet (see pages 22 to 26 of the business review) Adjusted net debt (£m) This measures the net indebtedness of the business and our ability to generate cash and control expenditure. Adjusted gearing (%) This measures the net indebtedness of the business as a proportion of adjusted net asset value. Deliver consistent and high levels of customer satisfaction (see page 16 of the business review) Customer satisfaction We regular survey our 36,700 customers using an independent agency to understand how we our performing from a customers perspective. To develop and retain high performing people, teams and leaders that live UNITE’s values. (see page 28 of the business review) Employee satisfaction Regular reviews carried out by independent agency to understand engagement. 2008 5 495 10 (21.6) 10.5 (54) 388 (5.4) 531 131 52 63 2007 40 1,028 16 12.7 33.9 32 327 1.7 540 106 55 67 3 n o i t c e S 308 New properties opening in 2009 UNITE is on target to deliver an additional 2,701 purpose-built student beds during 2009, of which 64% (by value) will be located in London (2008: 23%). This supports UNITE’s strategy to focus on the Capital, where supply / demand characteristics are most acute and the outlook for student accommodation values remains the most robust. Quantum Court, London – 132 Beds Newington Court, London – 87 Beds Blithehale Court, London – 306 Beds Bartholomew Road, London – 54 Beds Ferry Lane, London – 687 Beds 31 Property Overview Quantum Court offers customers a range of cluster flats, 1 bed duplex flats (flats split over 2 floors) and studios all with Internet and onsite laundry facilities. The property includes a student lounge, private outdoor space and communal roof terrace. Quantum Court is only 5 minutes walk from Shadwell DLR, taking just 10 minutes to get to Bank station. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 132 112 20 From £188 – £290 Direct Let Property Overview Located a short 10 minute walk away from the cafes, bars and restaurants of Angel Islington, Newington Court offers a range of cluster flats and studios ideally situated for many London universities with onsite laundry facilities, terraced garden, student lounge, bike storage and Internet. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 87 40 47 From £185 – £290 Direct Let Property Overview Blithehale Court is less than 5 minutes walk from Bethnal Green tube station (central line) meaning easy access to Queen Mary, University of London, London Metropolitan University and London School of Economics. The property comprises of a selection of 5 and 6 bedroom cluster flats and studios, onsite laundry, bike storage, common room and a large garden terrace with stunning views of the City. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 306 243 63 From £196 – £305 Direct Let Property Overview Bartholomew Road is located on a quiet residential street and provides a further choice of accommodation for students across London. Made up of 54 studios and 1 bed flats, it is a 5 minute walk from Kentish Town Road and Camden Town with their stylish cafes, bars and restaurants. This smaller property provides onsite laundry, bike storage, Internet and an outdoor courtyard. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 54 0 54 From £310 – £378 Direct Let Property Overview UNITE’s largest development in the Capital, Ferry Lane will be the first scheme to complete on the wider Hale Village regeneration programme. Delivering 687 bed spaces, Ferry Lane has excellent transport links direct into central London, a large central courtyard and rents starting from £141 per week including utilities and Internet. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 687 645 42 From £141 – £145 Nominations Elisabeth Croll House, London – 102 Beds Charlton Court, Bath – 327 Beds Chalmers Street, Edinburgh – 253 Beds Exeter Trust House, Exeter – 124 Beds Sky Plaza, Leeds – 535 Beds Gibson Street, Glasgow – 94 Beds *2009 / 2010 guide price Property Overview Ideally located for University of London SOAS students, Elisabeth Croll House is situated on campus and only a 10 minute walk from Kings Cross St. Pancras Station. The property offers customers a choice of flat sizes and premium studios, along with Internet, bike storage, laundry facilities, a common room and a landscaped garden. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 102 12 90 From £240 – £253 Nominations Property Overview Located in the most popular student area in Bath, Oldfield Park, Charlton Court provides a range of cluster flats and studios exclusively to first year students studying at Bath Spa University. This latest development offers views over the river Avon, a landscaped garden along with student essentials such as Internet, bike storage, onsite laundry facilities and a large common room. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 327 291 36 From £117 – £173 Direct Let 3 n o i t c e S Property Overview With the University of Edinburgh and Edinburgh College of Arts just a short 5 minute walk away and Princes Street a 10 minute walk, Chalmers Street is ideally situated at the heart of the Scottish Capital. The property offers customers a choice of 3-5 bedroom cluster flats and studios, along with Internet, bike storage, laundry facilities, a common room and landscaped garden. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 253 218 35 From £145 – £210 Direct Let *2009 / 2010 guide price Property Overview Only a 2 minute walk to the city centre, Exeter Trust House is conveniently located for the city’s bars, clubs and shops. Offering a choice of flat sizes and studios, this latest development is just a 15 minute walk from the University of Exeter’s Streatham Campus. Other features at the property include a terraced garden, bike storage, Internet and onsite laundry facilities. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 124 113 11 From £125 – £215 Direct Let Property Overview Sky Plaza is the second phase of this UNITE development in the heart of Leeds city centre, offering accommodation for some 1,500 students in total. Located within walking distance to Leeds Metropolitan University, University of Leeds, Leeds Technology College and Leeds College of Music, Sky Plaza offers a range of room types including premium rooms from the 19th to the 37th floor, with stunning views and luxury fixtures. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 535 424 111 From £113 – £199 Direct Let Property Overview With its fantastic location in the west end of Glasgow, amongst an abundance of bars and restaurants, Gibson Street is within a 1 minute walk of the University of Glasgow. Customers have a choice of 3-6 bedroom cluster flats as well studios. Features at this property include Internet, riverside views and balconies. Total Number of Beds En-suite Studios Rent (£/per week)* Lease Type 94 76 18 From £109 – £195 Direct Let 32 A sustainable business The Group made significant strides towards creating a more sustainable business throughout 2008. Working in conjunction with The Carbon Trust, UNITE implemented a Carbon Management programme to drive reductions in the Group’s carbon footprint. Following through on this initial impetus, the Group is committed to embed good practice within its core processes through its ‘Blueprint’ change programme. Highlights • Launch of UNITE’s pilot ‘Sustainable Living Campaign’ • New properties secure “Very Good” BREEAM certification • UNITE Modular Solutions achieves ISO 14001:2004 accreditation • CO2 associated with Internal Operations reduced by 19% • CO2 associated with business travel reduced by 21% The initiatives identified during 2007 have begun to be implemented across the portfolio during 2008. The focus of the project has been on those areas of the Group’s activities that would yield the best carbon abatement opportunities. The intention is that these and other measures will continue to be rolled out during 2009: • Improving existing built portfolio; • Incorporating sustainable design in the development of new properties; and • Introducing sustainable living to our customers through an extensive awareness campaign. Carbon emissions UNITE is committed to reporting on all material emissions associated with its operations (see figure 1). The Group follows the principles set out in the Green House Gas (“GHG”) protocol. The latest DEFRA guidance regarding conversion factors, released in April 2008, has been used as outlined in figure 2. The Group’s 2008 reporting period is the calendar year 1 January 2008 to 31 December 2008. Carbon emission summary 2008 (figure 1) Residential operations Residences Gas Residences Electricity Internal operations Offices Gas Offices Electricity Manufacturing Gas Manufacturing Electricity Business travel Company Cars Commercial Vehicles Private Cars GHG scope 1 2 GHG scope 1 2 1 2 GHG scope 1 1 1 Energy kWh 13,862,913 108,179,807 122,042,720 Energy kWh 76,093 345,565 1,768,305 1,237,509 3,427,472 Distance km 1,267,738 294,332 563,610 2,125,680 2008 Total C02 tonnes 2,856 58,095 60,950 Total C02 tonnes 16 186 364 665 1,230 Percent of total 4.6% 92.9% 97.5% Percent of total 0.0% 0.3% 0.6% 1.1% 2.0% % Change in C02 compared to 2007* 10.7% % Change -18.6% Total C02 tonnes Percent of total % Change 194 48 86 329 0.3% 0.1% 0.1% 0.5% Total carbon emissions 62,509 100.0% * Comparison CO2 is based on a like for like comparison between 2007 and 2008 emissions. Key GHG Scope 1 – refers to direct emissions which must be reported to comply with the GHG protocol GHG Scope 2 – refers to indirect emissions which must be reported to comply with the GHG protocol Conversion factors comparison (figure 2) Electricity: Gas: 2008 2007 Conversion factors 0.537 0.206 0.523 0.206 Company car average emission ** 164 153 -20.7% 9.7% kg/kWh kg/kWh g/km 33 ** Company car emission rates are taken as the average of the fleet each year. This average emission rate is also applied to business journeys made in private vehicles. Drivers of carbon emissions KPI table (figure 3) The main driver of the Group’s carbon footprint at 98% remains its customers’ use of their residential properties. UNITE CO2 Emmissions 2008 2 4.6% 1 92.9% 3 2.0% 4 0.5% Element 2008 Measures 2008 Kg C02 Residential CO2 / Bed Manufacturing C02 / Module Business Travel C02 / 000 km 36,992 1,723 2,126 60,950,480 1,028,838 328,671 2008 KPI 1,648 597 155 % Change in CO2 Compared to 2007* 4.4% 13.4% -4.7% * Comparison CO2 is based on a like for like comparison between 2007 and 2008 emissions. 1 3 Residences electricity Offices & factory energy 2 4 Residences gas Travel & haulage Key performance indicators The Group’s level of residential CO2 emissions has increased by 11% compared to the equivalent 2007 value. The number of beds operated by UNITE has increased during the same period by 6%. This would indicate that the carbon intensity of the residential operations has increased by 4.4% per bedspace (see figure 3), however, for 2008, a new method has been used to calculate the number of bedspaces. This now includes an adjustment for beds which UNITE operated for only part of the year (i.e. which were purchased or sold during the year). The new calculation method represents a move to more robust reporting. The Group’s second KPI is related to the manufacture of modular units, and here there has been an increase of 13% in CO2 per module (see figure 3). This is based on a reduction in the number of modules produced during the year, and the fact that a proportion of the CO2 emissions from its manufacturing facility are fixed. Finally, the Group’s internal measure which gauges the CO2 intensity of company travel and module haulage has decreased by 5% over the year (see figure 3). This is largely due to the significant improvement in the fuel efficiency of the car fleet. 3 n o i t c e S Existing built portfolio Sustainable living campaign As part of the Carbon Management Programme, the Group has highlighted a number of potential investment opportunities in the existing building portfolio to improve energy efficiency. Three key investments were made during 2008: 1. Voltage reduction: Reducing the incoming supply voltages at seven of its larger properties resulted in energy and CO2 savings ranging between 2% and 7% in these buildings, as well as a likely reduction in reactive maintenance as equipment is subjected to lower stresses. 2. Aerating shower heads and taps: Installation of over 3,750 new showerheads and tap aerators across 12 properties will significantly reduce water consumption and electricity consumption associated with hot water use. With a current customer base of 36,700 students and an on-site management presence, UNITE is in a unique position to engage with its customers and implement measures to help foster more responsible attitudes in those that will one day lead and inspire others as graduates and young professionals. In 2008, the Group initiated a pilot scheme across six cities, targeting over 9,000 customers. The Sustainable Living Campaigns’ key objectives were: • To emphasise the impact of individual customer behaviour in driving our carbon footprint; • To encourage behavioural change by recognising, rewarding and publicising the efforts of those customers who actively seek to meet campaign goals; and 3. Piloting the use of new heating controls at a • To reduced CO2 output per bed. property in Manchester: Initial studies suggest that by improving control systems for space heating in the Group’s properties, electricity consumption could be reduced by up to 15%. The design of the scheme recognised customers’ views on environmental issues, including having a provision for recycling and rewards for reducing energy use, and benefited from consultation from behavioural change specialists. UNITE’s sustainable living campaign Customers are being challenged to reduce their electricity and water consumption via a communications campaign providing information and energy saving tips. The most successful customers are awarded high street vouchers as a recognition and reward. The campaign will run for six months in 27 properties with a target energy reduction of 10%. Through close collaboration with local charities, we should also be able to divert unwanted items (books, CD’s, TV’s, DVD’s, bedding, clothes etc) from landfill. 34 GHG Scope 1 – refers to direct emissions which must be reported to comply with the GHG protocol GHG Scope 2 – refers to indirect emissions which must be reported to comply with the GHG protocol Developments to be delivered in 2009 will incorporate combined heat and power units. As part of this strategy, the way in which the Group procures its energy has been developed over the last twelve months, and it is now in a position to manage energy costs much more effectively by accessing the wholesale markets through flexible procurement contracts for gas and electricity. Mr M C Allan, Chief Executive of the Group, has responsibility for ensuring that the policies described above are observed. The Board, as a whole, regularly reviews implementation of such policies and considers any amendments thought necessary or desirable. A sustainable business New properties BREEAM assessments The Group’s development objectives are to provide high standards of accommodation to its customers, to comply fully with new standards of sustainability, and to minimise disruption during the construction process. The process of improving the sustainability of the Group’s buildings has become embedded within the culture of UNITE and new solutions are incorporated at the earliest design phase for each new project. UNITE remain committed to building on brownfield sites in urban locations, and during 2008, 85% of our new buildings were built on such land, allowing redevelopment of some 3.14 hectares of brownfield sites. The Group makes highly intensive use of the sites it develops. In 2008 it achieved an average of 1,039 habitable rooms per hectare in its new properties, compared with density of around 200 habitable rooms per hectare indicated in supplementary planning guidance on high density housing. UNITE Modular Solutions were certified during 2008 with the recognised standard for the environmental management of business, ISO 14001:2004, looking at ways to minimise waste, dispose of it more effectively and implement practices on using energy more effectively. During 2008 five of the Group’s new developments undertook BREEAM assessments (BREEAM is the world’s most widely used environmental assessment method for buildings). All of these achieved a ‘Very Good’ rating which confirms a thoughtful and progressive approach to sustainable design. Specific examples of measures that have been incorporated within the developments include high degrees of thermal insulation, rainwater harvesting, green roofs, biomass boilers, solar thermal collectors, detailed travel plans and enhanced lighting designs. Future proofing UNITE are currently devising the best response to the forthcoming Carbon Reduction Commitment by looking at further infrastructure investment and talking to its energy suppliers about smart metering. The Group’s specification is evolving to ensure that its developments are sensibly future proofed and adapted to the challenges of climate change. By incorporating energy efficiency improvements and a measure of on-site energy generation, UNITE are able to hedge its exposure to increasingly volatile energy markets. Modular construction Modular techniques reduce build time by up to half when compared with traditional building, bringing less disruption to the immediate site environment and surrounding community. Advanced manufacturing processes mean that both factory production and on-site assembly are simplified, thereby decreasing overall energy consumption and the amount of waste generated during construction. 35 2008 has been a busy and successful year for Livocity. Following its opening in 2007, Livocity’s pilot project Devonshire Street has been fully let throughout 2008 and two new sites have undergone development to open this year in Fulham and Camden increasing its total bed spaces to 134. Alongside this the operational platform has been streamlined with the launch, at the beginning of 2009, of an online booking and management system complete with interactive customer homepages to drive operational efficiency and customer service. Livocity has continued to attract its customers exclusively through its online platform and has been successful in driving rental growth at Devonshire Street through its focus on providing shorter term lets and additional services inclusive in its rents. With the launch of the new online system, Livocity is positioned to further drive performance at Devonshire Street and its new openings at Camden Road and Fulham Road. The system delivers online bookings; tenancy acceptance; automatic card payments and customer homepages to efficiently deliver excellent customer service supported by a streamlined City Living Support Team on hand when customers need them. The appeal of all-inclusive rental packages and flexible tenancy terms has been proven by the success at Devonshire Street. As a result, Livocity continues to develop its unique approach to rental accommodation offering recent graduates and young professionals a real alternative to the traditional rented accommodation and serviced accommodation sectors. The Livocity portfolio: Devonshire Street Fullham Road Camden Road In a fantastic Central London location, just off Great Portland Street, Devonshire Street has continued to attract new and returning customers throughout 2008, with a high proportion of customers choosing to extend their stay. Offering a premium location and service, Devonshire Street has proven to be a great success on which to build the Livocity brand, delivering rental growth of 11% in the last 16 months. Total Number of Beds: Rent (£/per week): Tenancy Length: Additional Features: 62 £325 - £450 1 week – 1 year Communal lounge Broadband and internet TV Due for completion in March 2009, Fulham Road offers a selection of refurbished studios, one bed flats and two and three bed flat shares in a vibrant West London location. The Fulham Road property offers a more affordable option through flat shares, whilst retaining the other aspects of Livocity’s unique living experience. Total Number of Beds: Rent (£/per week): Tenancy Length: Additional Features: 34 £230 - £455 1 week – 1 year Broadband and internet TV Following a successful 8 month build programme, Camden Road is due to open its doors in March 2009 offering 38 brand new studios delivered to a high specification using innovative modular construction. The first non-student scheme to be delivered by UNITE Modular Solutions, Camden Road has pioneered many new technologies resulting in a collection of studios providing the best in modern studio living only 10 minutes from King’s Cross. Total Number of Beds: Rent (£/per week): Tenancy Length: Additional Features: 38 £285 - £450 1 week – 1 year Communal garden Broadband and internet TV 3 n o i t c e S 368 The Board of Directors 1 4 7 2 5 8 3 6 9 37 1 Geoffrey Maddrell Chairman 2 Mark Allan Chief Executive 3 Joe Lister Chief Financial Officer Aged 72, Geoffrey, in addition to being Chairman of UNITE, is also Chairman of BuildStore Limited, F&C UK Select Trust plc and of Economic Lifestyle Property Development Company Limited. He is also the founding Chairman of Research Autism. Geoffrey has a long- standing and successful involvement in the strategic direction and expansion of businesses, with a particular interest in building related activities. His continued chairmanship of the Board until the 2009 Annual General Meeting of the Company will be of considerable benefit to the Group. Mark, 36, was appointed to the role of Chief Executive in September 2006, having previously served as Chief Financial Officer for three years. Mark held a variety of other roles in the business prior to that, having joined the Group in 1999. As Chief Executive he chairs the Group’s Leadership Executive and has overall responsibility for the Group’s performance against its business plan targets, whilst continuing to develop UNITE’s growth strategy. Joe, 37, joined UNITE in 2002 from PricewaterhouseCoopers where he worked in the Corporate Finance practise. Joe has held a variety of roles at UNITE, including Corporate Finance and Investment Director and in 2007 as the Managing Director of Livocity, UNITE’s graduate housing business before being appointed as CFO in January 2008. As such, Joe has in-depth knowledge of the Group’s finances and investment strategy, for which, as CFO, he now has overall responsibility, as well as being responsible for the Finance and Company Secretarial functions. Joe also acts as Chairman of UNITE’s Project Approval Meetings. 4 John Tonkiss Chief Operating Officer 5 Nicholas Porter Non-Executive Deputy Chairman 6 Nigel Hall Non-Executive Director, Senior Independent John, 41, joined UNITE in 2001 as General Manager of the Group’s off-site manufacturing facility. John joined UNITE’s Leadership Support Board in 2002 and subsequently was promoted to the role of Group Development Director in 2004. In 2006, John was appointed Managing Director of UNITE’s Student Hospitality UK Business and, in 2007, was made UNITE’s Chief Operating Officer to reflect his responsibility for strategic and tactical business operations throughout the Group. Aged 39, Nicholas Porter founded UNITE in 1991 and held the position of Chief Executive Officer until September 2006. Under his leadership UNITE developed a proven and sustainable business model and set the benchmark for student community living. Nicholas has subsequently founded The Capital Values Group and continues to provide focused support to the Company in his role of Non-Executive Deputy Chairman. 4 n o i t c e S Director and Chairman of the Audit Committee Aged 53, Nigel, who qualified as a Chartered Accountant in 1980 with Price Waterhouse, was Group Finance Director of Arcadia Group plc (formerly The Burton Group plc) until February 2003. He joined the Burton Group in 1984 and was appointed to its Board in 1997, becoming Group Finance Director in November of that year. Nigel is also Chairman of Countrywide Farmers plc and a Non-Executive Director of Pinewood Shepperton plc and C&J Clark Limited. With his considerable experience of finance and operations in multi-site businesses, Nigel provides strong leadership of the Audit Committee. 7 Stuart Beevor Non-Executive Director and Chairman 8 Richard Walker Non-Executive Director 9 Phil White CBE Non-Executive Director of the Remuneration Committee Aged 52, Stuart is Managing Director of Grosvenor Fund Management Limited and a member of the Board of Grosvenor Group Limited, the international property group, which he joined in 2002. Prior to joining Grosvenor, Stuart was Managing Director at Legal and General Property Limited, having previously held a number of roles dealing with development, investment, property management and unitised funds at Norwich Union. Stuart brings a knowledge of property investment, property funds and investor demand that uniquely supports the Board and the business in its role as a Co-investing Asset Manager. Aged 42, Richard is Senior Director at Talk Talk (Telco Arm of Carphone Warehouse Group) and is responsible for the customer experience change programme. Prior to this role, Richard was Chief Operating Officer of Carphone Warehouse UK, with responsibility for the Group’s 750 UK stores, websites, direct sales and insurance services. Richard was previously Managing Director of Carphone Warehouse’s European retail business, operating in 14 countries, and UK Sales Director. He holds a law degree from Nottingham University and trained as an accountant with Coopers and Lybrand. His main supporting strengths are built around his operational expertise and 18 years of experience of having the customer at the heart of every decision made. and Chairman Designate Phil, 59, was appointed Non-Executive Director and Chairman Designate of the Group in January 2009. The majority of Phil’s executive career was spent in the public transport sector, during an exciting period of deregulation and privatisation. He was Chief Executive of National Express Group plc from 1997 to 2006, leading the business through a period of considerable growth both in the UK and overseas. Phil is currently Non-Executive Chairman of Kier Group plc and Non- Executive Chairman of Lookers plc. His experience gained in leading customer focused businesses, both in an executive and non-executive capacity, will be invaluable to the Group. 38 Directors’ report The Directors present their annual report and audited financial statements for the year ended 31 December 2008. Mr White offers himself for re-election at the Annual General Meeting, as do each of Messrs S R H Beevor, N A Porter and N P Hall who retire by rotation. Brief biographies of all the Directors, including those standing for re-election, are set out on page 38. Those biographies describe the reasons why those of the Directors standing for re-election should be re-elected. Directors’ interests The interests of the Directors and their families in the ordinary shares of the Company are set out below. Details of Directors’ share options are set out in the Directors’ Remuneration Report. Directors M C Allan 1 J Tonkiss 2 J J Lister 3 G K Maddrell 4 N A Porter 5 N P Hall S R H Beevor R Walker Ordinary Shares of 25p each 31 December 2008 Ordinary Shares of 25p each 31 December 2007 363,606 148,832 87,121 262,541 1,512,630 9,849 - - 239,312 81,036 17,702 262,541 3,006,685 9,849 - - 1 Mr Allan’s interests include 259,584 ordinary shares conditionally awarded to him pursuant to the terms of the Company’s Long Term Incentive Plan (the “LTIP”). The number of such shares that will unconditionally vest in Mr Allan pursuant to those awards will be determined following the end of the relevant three year measurement periods. 2 Mr Tonkiss’s interests include 130,016 ordinary shares conditionally awarded to him pursuant to the LTIP. The number of such shares that will unconditionally vest in Mr Tonkiss pursuant to those awards will be determined following the end of the relevant three year measurement periods. 3 Mr Lister’s interests include 82,270 ordinary shares conditionally awarded to him pursuant to the LTIP. The number of such shares that will unconditionally vest in Mr Lister pursuant to those awards will be determined following the end of the relevant three year measurement periods. 4 Mr Maddrell’s interests include his interest in 12,250 ordinary shares held by his wife, Winifred Maddrell, and 170,291 ordinary shares held by the trustees of the Geoffrey Maddrell Jersey Trust, the beneficiaries of which include himself, his wife and his three children. 5 Mr Porter’s interests include his interest in (a) 866,000 ordinary shares held by the trustees of The Porter Family Discretionary Trust, the beneficiaries of which are Mr Porter’s children; (b) 142,340 ordinary shares held by the trustees of the Jane Louise Discretionary Settlement Trust, the beneficiaries of which are certain of Mr Porter’s children; and (c) 151,882 ordinary shares held by the trustees of The Red Shoes Charitable Trust, one of whom is Heather Porter (Mr Porter’s wife). None of the Directors has a beneficial interest in the shares of any other Group company. Since 31 December 2008, there have been no changes in the Directors’ interests in shares. Principal activities The principal activities of the Group during the year were the development and management of student residential accommodation in the United Kingdom. Details of the Company’s principal subsidiaries are set out on page 76. Operating and financial reviews The information that fulfils the requirements of the Business Review can be found in the following sections, which are incorporated into this report by reference: • Financial performance (pages 13 and 14); • Key performance indicators (page 30); • Risks and uncertainties (page 29). Further information on the Group’s operations and financial affairs that are in addition to the requirements of the Business Review are set out on pages 3 to 38 of this report. Profit and dividends The Group loss for the year attributable to shareholders amounted to £115.9 million (2007: £37.5 million). The Directors do not recommend payment of a final dividend for the year (2007: 1.67p per ordinary share), making a total dividend for the year of 0.83p per share (2007: 2.50p per share). Directors Each of Messrs G K Maddrell, N A Porter, N P Hall, S R H Beevor, R Walker, M C Allan and J M Tonkiss served as Directors throughout the year. Mr Maddrell acted as Chairman of the Board throughout the period. On 2 January 2008, Mr A C Harris resigned from the Board, on which date Mr J J Lister was appointed to the Board in his place as Chief Financial Officer. On 21 January 2009, Mr P M White was appointed to the Board, as an additional Non-Executive of the Company and as Chairman Designate. At the Annual General Meeting, Mr G K Maddrell will, as planned and after 10 years, step down from the Board and from being Chairman of the Company. 39 Changes in Share Capital Donations During the year, a total of 24,508 ordinary shares of 25p each were allotted and issued pursuant to the exercise of options granted under The UNITE Group plc Savings Related Share Option Scheme (10,801 at 131p per share; 13,199 at 188p per share; and 508 at 249p per share). In addition, a total of 46,593 ordinary shares were allotted and issued pursuant to the exercise of options granted under The UNITE Group plc Approved Company Share Option Scheme 1999 (8,986 at a price of 158.5p per share; 10,204 at a price of 191p per share; 12,903 at a price of 232.5p per share; 12,500 at a price of 240p per share; and 2,000 at a price of 300p per share). A further 41,886 shares were allotted and issued pursuant to the exercise of options granted under The UNITE Group plc Unapproved Share Option Scheme (10,338 at a price of 129p per share; 11,501 at a price of 191p per share; and 19,997 at a price of 232.5p per share). On 15 April 2008, the Company also allotted and issued 707,612 ordinary shares of 25p each at a price of 309.75p per share pursuant to the Group’s LTIP. Substantial interests in the share capital of the Company As at 9 February 2009, those shareholders, other than Directors, who had notified the Company of a disclosable interest amounting to 3% or more of the total voting rights in the Company were as follows: Shareholder Deutsche Bank AG Perennial Investment Partners (Australia) Limited Lloyds TSB Group Plc FMR LLL AXA S.A. Morgan Stanley Investment Management Limited Standard Life Investments Ltd Legal & General Group Plc Allianz S.E. The Company made no political donations during the course of the year but made charitable donations of £15,000 to Uniaid Foundation (2007: £25,000) and £5,000 to Student In Free Enterprise (SIFE). The Company also donated 55 accommodation bursaries for 2007/08 to Uniaid Foundation across the UK equating to £247,500 (2007: £175,000). In addition, the Company made donations to a number of charities through its “matched funding” policy. Pursuant to that policy, the Company agrees, subject to certain conditions and limits, to match the donations made to charities by employees through fund raising activities of their own. During the year, those “matched funding” donations of the Company amounted in aggregate to £6,206 (2007: £8,604). Policy and practice on payment of creditors During the year the Company maintained its policy of agreeing and abiding by supplier payment terms. The Group has not followed any recognised code for payment practice. As at 31 December 2008 the Group’s trade creditors were equivalent to 32 days’ purchases (2007: 32 days). The Company does not have any trade creditors (2007: nil). Health and safety The Group’s policy is to provide and maintain safe and healthy working conditions, equipment and systems of work for all its employees and to provide such information, training and supervision as they need for this purpose. Percentage of Share Capital 7.03% 5.01% 4.98% 4.96% 4.92% 4.87% 4.13% 3.98% 3.27% The Group continues to advance its development of a transparent, scalable and robust safety management system. External consultants have reviewed the Group’s fire risk management responsibilities, whilst in April 2008, the Group entered into a Local Authority Partnership with Avon Fire and Rescue Service. UNITE is the only student accommodation operator to have entered into such a partnership. Employment Policies The Company encourages employee involvement and consultation and places emphasis on keeping its employees informed of the Group’s activities and financial performance. To that end, the UNITE Employee Forum has been established, consisting of elected representatives from throughout the business. The UNITE Code of Ethics (the full text of which can be found on the Company’s website), confirms that the Group seeks at all times to conduct its business in accordance with, and to ensure that each of its employees and directors adheres to, the highest standards of business and personal ethics. An independent “whistle-blowing” channel also enables employees to report any incidents of improper or illegal conduct of which they may become aware whilst, if they wish, maintaining their anonymity. The UNITE Group plc Approved Company Share Option Scheme, The UNITE Group plc Unapproved Share Option Scheme and The UNITE Group plc Savings Related Share Option Scheme are intended to help develop employees’ interest in the Company’s performance. In addition, The UNITE Group plc Long Term Incentive Plan was introduced with the aim of being better able to structure remuneration packages so as to retain, motivate and reward selected Executive Directors and Senior Managers. The Company operates a non-discriminatory employment policy. Full and fair consideration is given to applicants for employment from the disabled where they have the appropriate skills and abilities and to the continued employment of staff who become disabled. The Company places particular emphasis on and encourages the continuous development and training of its employees and the provision of equal opportunities for the training and career development of disabled employees. 4 n o i t c e S 40 Directors’ report Auditors A resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. Disclosure of information to auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each Director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Annual General Meeting The Annual General Meeting of the Company will be held at The Core, 40 St Thomas Street, Bristol BS1 6JX at 9.30 a.m. on 15 May 2009. Formal notice of the meeting is given on pages 90 to 92. In addition to the ordinary business of the meeting, an ordinary resolution will be proposed to authorise the Directors to allot up to £10,359,653 in nominal value of the authorised but unissued share capital of the Company (representing one third of the issued share capital of the Company as at 9 March 2009). In accordance with guidelines issued by the Association of British Insurers, this resolution also grants the Directors authority to allot further equity securities up to an aggregate nominal value of £10,359,653, again representing one third of the nominal value of the issued ordinary share capital of the Company as at 9 March 2009. This additional authority may only be applied to fully pre- emptive rights issues. A special resolution will also be proposed to dis- apply statutory pre-emption rights in respect of the allotment of shares in connection with any rights issue or other issue by way of rights and otherwise up to an aggregate nominal amount of £1,553,948 (representing five per cent of the issued share capital of the Company as at 9 March 2009). The Board has no current intention of exercising either of the authorities conferred by the above resolutions. Unless revoked, varied or extended, those authorities will expire at the conclusion of the next Annual General Meeting of the Company or the date falling 15 months from the passing of the resolutions, whichever is the earlier. 41 Disclosures The Company’s share capital is made up of one class of ordinary shares, which carry no restrictions on transfer or voting rights (other than as set out in the Company’s Articles of Association). Details of those persons who have significant holdings of shares in the Company are set out on page 40 under the heading “Substantial Interests in the Share Capital of the Company”. No holder of shares in the Company has any special rights with regard to the control of the Company, nor does the Company have an employee share scheme, shares in relation to which have rights with regard to the control of the Company. There are no agreements known to the Company between holders of shares in the Company which may result in restrictions on the transfer of shares or on voting rights in relation to the Company. The Company has no rules regarding the appointment and replacement of Directors or regarding the amendment to the Company’s Articles of Association, save as set out in the Company’s Articles of Association. Other than certain of the Group’s banking facilities, there are no significant agreements to which the Company is a party that effect, alter or terminate upon a change of control of the Company following a takeover bid. Nor are there any agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Details of proposals to be put to the AGM in relation to the power of Directors to issue shares in the Company are set out above under the heading “Annual General Meeting”. The Directors have no authority to buy-back the Company’s shares. By order of the Board A D Reid Secretary 9 March 2009 In addition to the share allotment authorities referred to above, two further items of special business will be proposed at the Annual General Meeting. The first is the proposal of a special resolution to adopt new articles of association (the “New Articles”), primarily to take account of changes in English company law brought about by those provisions of the Companies Act 2006 which have come into force since the Company’s articles were last amended in 2003. An explanation of the main changes between the New Articles and the existing articles is set out in the appendix to the notice of Annual General Meeting. Due to the phased nature of implementation of the Companies Act 2006 it is likely that, in common with other companies, further related changes to the Company’s articles will be proposed at a future Annual General Meeting. In line with the Companies Act 2006, the New Articles provide that all general meetings, other than Annual General Meetings, can be held on 14 clear days’ notice. Under the EU Shareholder Rights Directive, which is due to be implemented into English law on 3 August 2009 by the Companies (Shareholders’ Rights) Regulations 2009 (the “Regulations”), prior sanction of shareholders at a company’s Annual General Meeting is required to enable subsequent general meetings to be held on less than 21 clear days’ notice. Therefore the second of the two further items of special business comprises a special resolution to enable the Company to hold general meetings (other than the Company’s Annual General Meeting) on 14 clear days’ notice, conditional upon the adoption of the New Articles. This enabling resolution is being proposed in accordance with the recommendations given by the Institute of Chartered Secretaries and Administrators and the Department for Business, Enterprise and Regulatory Reform in advance of the implementation of the Regulations to enable such meetings to be held on 14 clear days’ notice. General meetings will only be held on 14 clear days’ notice where appropriate electronic voting facilities are made available to shareholders as prescribed by the Regulations. In accordance with the Regulations, this resolution, which is proposed as a special resolution, will not be passed on a show of hands if any votes are taken against it. In such event, the chairman of the meeting will exercise his right to call for a poll vote (requiring a 75 per cent majority). Corporate governance During the course of the year, the Company complied (except as specifically set out below), with the principles of best practice set out in the Combined Code issued by the Financial Reporting Council in June 2006 and as subsequently amended (the “Combined Code”). Board of Directors The Company’s corporate governance procedures provide that the full Board of Directors shall meet at least six times a year. During 2008, there were 10 meetings of the full Board, all of which were attended by each of the Directors then appointed, other than one, which Mr S R H Beevor was unable to attend. The Board receives regular reports from each of the Group’s business units, but itself retains full and effective control of the Group’s activities, with a formal schedule of matters specifically reserved for decision by the full Board. In particular, the full Board sets the strategic objectives, business plan and annual budgets for the Group, with major investment decisions also requiring Board approval. Operational responsibility is delegated to the Group’s Leadership Executive. Terms of reference have been set by the Board for its various committees and for the Chairman and the Chief Executive. The terms of reference for the Chairman and the Chief Executive are such as to clearly establish the division of responsibility between the two roles. In addition, all Directors have access to the advice and services of the Company Secretary, whilst procedures are in place allowing for individual Directors to take independent legal advice. A programme for the training of Directors has been put in place. The current Board consists of three Executive Directors, namely Mr M C Allan (Chief Executive); Mr J M Tonkiss (Chief Operating Officer); and Mr J J Lister (Chief Financial Officer); as well as Mr G K Maddrell (Chairman), Mr N A Porter (Non-Executive Deputy Chairman), Mr N P Hall (Senior Independent Non-Executive Director) and three other Non- Executive Directors (Messrs S R H Beevor, R Walker and P M White). Mr Maddrell will, as planned and after 10 years, step down from the Board and as Chairman at the Annual General Meeting, on which date Mr P M White will take on the role of Chairman. Each of the Non-Executive Directors, other than Mr N A Porter, is considered by the Board to be independent of management and free from any personal, business or other relationship with the Group, save for the receipt of Directors’ fees and interests in shares of the Company. As Mr Porter was, until 14 September 2006, Chief Executive Officer of the Company, he is not considered to be independent. Consequently, whilst the Company was a member of the FTSE 350, the Company did not meet the requirement of the Combined Code that at least half of its Board, excluding the Chairman, be made up of independent Non- Executive Directors. However, in December 2008, the Company ceased to be a member of the FTSE 350, in which case the requirement that at least half its Board (excluding the Chairman), be made up of independent Non-Executives does not currently apply to the Company. Each of the Executive Directors has a written service contract, whilst each of the Non-Executive Directors has a formal letter of engagement. Executive Directors have rolling contracts of employment with twelve months notice periods, whilst Non- Executive Directors are appointed by the full Board for a term not exceeding three years. The letters of appointment relating to the Non-Executive Directors are available for inspection at the Company’s registered office during normal business hours and for the 15 minutes prior to and during the Annual General Meeting. The Board has appointed an Audit Committee, a Remuneration Committee and a Nominations Committee. The terms of reference for each such committee (which are published on the Company’s website) are reviewed annually by the relevant committee, as is the effectiveness of each such committee. Set out below are sections describing the work of the committees in discharging their respective responsibilities. Audit Committee During the year, the Audit Committee comprised Mr N P Hall (who chaired the Committee through the year), Mr S R H Beevor and Mr R Walker, all being independent Non-Executive Directors. Mr Hall is a Chartered Accountant and was, until February 2003, finance director of Arcadia Group plc (formerly The Burton Group plc). During the year, the Audit Committee met on four occasions, each of which meetings was attended by all members of the Committee. 4 n o i t c e S The Audit Committee meets with the Chief Financial Officer and with the external auditors and reviews the annual accounts and the preliminary and interim financial results announcements prior to submission to the Board. The Audit Committee also reviews compliance with accounting standards, the scope and extent of the external audit programme and the appointment, independence and remuneration of the auditors. The chairman of the Audit Committee reports to the Board on matters discussed at meetings of the Audit Committee. During the course of the year, the Audit Committee reviewed the need for an internal audit function within the Group. The conclusion of that review was that, in view of the existing controls in place (including an operational compliance audit regime), and the size of the Group, a Group internal audit function was not required. However, the position is being kept under review. The Audit Committee has established a formal policy with regard to the Company’s appointment of the external audit firm for the supply of non- audit services. In addition, the Audit Committee reviews any potential threat to the objectivity and independence of the external auditor, including, in particular, those potential threats identified by the Auditing Practices Board in its independence guidelines. The Committee determines and then reports to the Board, whether or not it is satisfied that the independence of the external auditor is not jeopardised, taking into account the external auditor’s own submissions to the Committee and/ or the Board. During the course of the year, the non-audit services provided to the Group related to tax advisory and compliance matters and the review of management accounts of certain subsidiaries as part of a bank lending due diligence process. Remuneration Committee During the year, the Remuneration Committee comprised Mr S R H Beevor (who chaired the Committee throughout the year), Mr N P Hall and Mr R Walker (all being independent Non-Executive Directors), together with Mr G K Maddrell. As Mr Maddrell, being Chairman of the Company, was considered independent on his appointment to that role, his membership of the Remuneration 42 Corporate governance Committee is in accordance with the provisions of the Combined Code, as amended in June 2006. The Committee determines remuneration policy and advises the Board accordingly. In particular, the Committee makes recommendations regarding the terms of employment of executive directors and senior managers, including terms of remuneration, the award of share options, long term incentive plan awards and other incentives. Mr M C Allan is invited to attend meetings of the Remuneration Committee but takes no part in the discussions concerning his own remuneration and does not attend those parts of the meetings of the Committee that consider that issue. The Directors’ Remuneration Report is set out on pages 45 to 51. During the course of 2008, the Remuneration Committee met on four occasions, each of which meetings was attended by all members of the Committee. Nominations Committee During the year, the Nominations Committee was chaired by Mr G K Maddrell (other than for meetings where the appointment of a new Chairman to the Board was being considered, in which cases Mr N A Porter, as Non-Executive Deputy Chairman, chaired the Committee). The exact composition of the Committee is variable, provided that each meeting has a majority represented by independent Non- Executive Directors. During the course of 2008, five meetings of the Nominations Committee were held, one of which was attended by Messrs G K Maddrell, N P Hall and S R H Beevor, with the other four (concerning the appointment of a new Chairman to the Board), being attended by Messrs N A Porter, N P Hall, S R H Beevor, R Walker and M C Allan. The Committee is responsible for making recommendations to the Board on any appointment or re-appointment to the Board and at senior executive level. It is also responsible for ensuring that plans are in place for an orderly succession of appointments to the Board and at senior management level, so as to maintain an appropriate balance of skills and experience within the Company and on the Board. Following determination by the Board that a new Non-Executive Director should be appointed, the Nominations Committee draws-up a personal and professional profile of the ideal candidate it would like to see appointed in order that a recruitment and selection process can be undertaken. The Committee then appoints an independent search and selection agency to approach potential candidates who it identifies as meeting the specification supplied by the 43 Nominations Committee. Initial interviews are conducted by the search agency, which then compiles a short list of appropriate candidates to be interviewed by the Nominations Committee. A recommendation of a proposed candidate is then made following those second round interviews. Following a recommendation from the Committee for the appointment of a candidate to the Board, the Chairman (or the Deputy Chairman, in the case of the proposed appointment of a new Chairman to the Board), may be requested by the Board to approach the nominated candidate to agree terms for the appointment according to the criteria set out in the Group’s remuneration policies. Consideration of the appointment of an internal candidate to the position of Executive Director will follow a request from the Chief Executive to the Nominations Committee that the appropriate candidate be considered for nomination. This will only follow a record of successful achievement in the candidate’s current role and the gathering of data from an independent external assessment centre that the candidate will have been asked to attend. At that centre, the proposed candidate is assessed in the areas of commercial and strategic ability; leadership; technical ability; ability to build peer relations; values and behaviours. The results of those assessments are compared against a global norm group of highly performing directors and senior managers. After gathering the assessment data, the Nominations Committee interviews the proposed candidate, following which it may recommend his or her appointment to the Board. If the Board accepts the recommendation of the Committee, it will, through the Chairman and Chief Executive, invite the proposed candidate to join the Board according to terms and conditions of service agreed by the Remuneration Committee. That follows an external benchmarking of remuneration for the role. For the appointment of external candidates to the role of Executive Director, the process outlined above in relation to Non-Executive Directors is followed, with the addition that such external candidates are, as is the case with internal candidates, required to attend an external assessment centre prior to final interviews by the Nominations Committee. The process for evaluating the performance of the Executive Directors flows from the setting of the overall business strategy for the Group. Once agreed by the Board, the Executive Directors produce business unit strategies and milestone action plans designed to deliver the agreed overall strategy. Such strategies and plans, which are challenged and may be revised prior to being ratified by the Board, then form the basis of personal objectives that are set for each of the Executive Directors. The personal objectives of the Chief Executive are agreed between him and the Chairman as part of the annual Performance Development Programme (“PDP”) cycle. The other Executive Directors agree their objectives with the Chief Executive, again as part of the PDP process. Progress in achieving objectives is monitored at least monthly through one to one meetings between the Chairman and the Chief Executive and between the Chief Executive and the other Executive Directors. Progress reviews are also carried out at Board level through the review of key performance indicators. Formal performance measurement is undertaken through half-year reviews of progress made against milestones, key performance indicators and other personal objectives. The annual PDP review of performance takes place shortly after the year-end. That review considers performance against objectives, including key performance indicators, and the Group’s values and behaviours. The key performance indicators, which include financial performance and customer and employee satisfaction, also form the basis of the bonus formulae as set out in the Remuneration Report. The performance of the Non-Executive Directors is reviewed annually by the Chairman, whilst the performance of the Chairman is considered annually by the Non-Executive Directors (in the absence of the Chairman), in both cases taking account of the views of the Executive Directors. The Chairman and the Non-Executive Directors (also on an annual basis) meet to consider the overall effectiveness of the Board and its Committees. Those meetings are then followed by full Board review meetings, which are attended by all members of the Board. Internal control The Board has overall responsibility for the Group’s system of internal control. However, such a system is designed to achieve business objectives and can only provide reasonable and not absolute assurance against material mis-statement. The provisions of the Combined Code in respect of internal controls require that directors review all controls including operational, compliance and risk management, as well as financial control. Through reports from the Group’s Leadership Executive, the Board has reviewed the effectiveness of the Group’s system of internal controls for the period covered by the annual report and accounts. The Company has an established framework of internal controls which, amongst other things, includes the following: Financial reporting Investor relations The Group has a comprehensive budgeting system with an annual business plan approved by the Board. Operating results and cash flows are reported on monthly and compared against budget. Forecasts are reviewed throughout the year and revised as necessary. The Company reports to shareholders on a half-yearly basis. Investment appraisal The Company has clearly defined guidelines for capital expenditure. These include annual budgets, detailed appraisal and review procedures, levels of authority and due diligence requirements where investment or development properties are being acquired. Post-investment appraisals are performed for major investments. Business risk assessment The Group has developed a comprehensive risk management system whereby strategic threats to the business are identified and the management and control of those threats prioritised. As a result of this system, the Board is satisfied with the high level controls in place, although all areas of the business are kept under review and new controls introduced as appropriate. An analysis of the more important risks and uncertainties faced by the Group is set out on page 29. The Group’s objectives and policies with regard to the management of financial risks are set out in note 20 to the Financial Statements. Social responsibility The Company has formal procedures for considering the significance to its business of social, environmental and ethical (SEE) matters, which are considered as part of the Group’s risk management system (referred to above in relation to Business Risk Assessment). The results of the benchmarking reviews which form part of that system (which are carried out by the Group’s Leadership Executive), are reported to and considered by the full Board on a six monthly basis. Details of the risks and uncertainties that are considered most significant to the Group are set out on page 29. In light of the above, the Board believes that it has in place appropriate procedures to identify and assess the significant risks to the Company’s short and long term value arising from SEE matters, as well as opportunities to enhance value that may arise from an appropriate response. In that respect, the Board considers that it receives adequate information to make those assessments and that the Company has in place effective measures for managing significant risks. Account is taken of SEE matters in relation to the training of Directors. The Executive Directors have a programme of meetings with institutional shareholders and analysts. Feedback from such meetings regarding shareholder opinion is provided to the Board as a whole. In addition, the Senior Independent Non- Executive Director is available to meet with major shareholders if requested. The Company’s Annual General Meeting provides an opportunity, which the Board encourages, for private investors to communicate with the Company. Going concern After making enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and Accounts and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. The Group and parent company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position of the Group and the parent company and the performance for that period; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and • the Directors’ report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. MC Allan Director 9 March 2009 JJ Lister Director 4 n o i t c e S 44 Directors’ remuneration report Introduction Remuneration Committee The Board reports to shareholders on Directors’ remuneration as set out below. In preparing this report, the Remuneration Committee of the Board (the “Committee”) has complied with the Directors’ Remuneration Report Regulations 2002 (the “Regulations”). The Report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance in relation to directors’ remuneration. A resolution to approve the Report will be proposed at the forthcoming Annual General Meeting. The Regulations require the auditors to report to the Company’s members on the “auditable part” of the Remuneration Report and to state whether, in their opinion, that part of the Report has been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The Report has therefore been divided into separate sections for the unaudited and audited information. Within the unaudited section, the report deals with the remuneration policy that is to be followed in 2009, summarises the results of remuneration surveys that have been undertaken and describes arrangements which applied during 2008. During the year, the Remuneration Committee of the Board consisted Mr S R H Beevor (who chaired the Committee), Mr G K Maddrell, Mr N P Hall and Mr R Walker. Mr M C Allan is invited to attend meetings of the Committee. The Committee is required annually to consider and review all aspects of the Executive Directors’ employment, performance and remuneration and the Group’s policies on those matters. Mr Allan takes no part in the discussions concerning his own remuneration, nor does he attend those parts of the meetings of the Committee which discuss that issue. The Committee is able to obtain independent professional advice from remuneration and other consultants in order to carry out its duties. During the year, such advice was received from Hewitt New Bridge Street, which did not provide any other services to the Company during the course of the year. In addition, Mr S Spiers, the Group HR Director, provided advice and services to the Committee during the course of the year. The members of the Committee attend the Company’s Annual General Meeting and are available to answer shareholders’ questions about the Directors’ remuneration. The terms of reference of the Remuneration Committee are available on the Company’s website. Policy on remuneration of Executive Directors and Senior Executives The policy in respect of Directors’ remuneration for the following and subsequent years is to ensure that the remuneration packages it offers are competitive and designed to attract, retain and motivate executive directors and senior executives of an appropriate calibre. Performance-related reward policies are operated which are designed to provide a significant element of “at risk” pay, which is only available when good results are achieved. Remuneration packages are designed to promote long term sustainable performance and to promote alignment between the interests of senior executives and the Company’s shareholders. During 2008, a review of the current market positioning of the Group’s executive remuneration was undertaken on behalf of the Committee by Hewitt New Bridge Street using a comparator of other Real Estate companies and a pan sector of companies of similar size to the Company. That review, which compared all elements of remuneration for companies of a similar size, indicated that the base salary and total remuneration of Mr M C Allan was broadly at the market median, whilst the remuneration of the other Executive Directors was positioned below market levels. Over time, it is anticipated that the salaries of those Executives will progress to a broadly market median position, depending on experience and performance. 45 Directors’ remuneration report The Committee confirmed its policy to pay base salaries at or around the median level for companies of a similar size (taking account of individual experience and performance), and to provide the opportunity for Executives to achieve total remuneration at the upper quartile level when justified by very strong performance against clearly identified measures. In determining the remuneration of Executive Directors and other senior executives, the Committee also takes into account the level of remuneration and pay awards generally to employees of the Group. The main components of the Directors’ remuneration packages are: Basic salary The basic salary of each Executive Director is reviewed each year. Basic salaries are determined taking account of advice received from independent sources on the rates of salary for similar roles in selected groups of comparable companies and the individual performance and experience of each Executive. As stated above, the Company has agreed the principle that base salaries should be set broadly in line with the market median. However, due to a challenging market currently, the Committee has confirmed that there will be no increases to the base salaries of Executive Directors in 2009. Benefits in kind include a company car or car allowance and private health insurance. Only basic salary is pensionable. Performance related bonus The Group operates an annual performance related bonus scheme which is designed to reward contributions and encourage the achievement of targeted levels of performance over the short term. For 2008, a new bonus structure was put in place for Executive Directors, under which Executive Directors’ basic bonus entitlements have been calculated by reference to performance targets set in relation to profitability and increases in net asset value (each accounting for 30% of the scheme); and customer satisfaction and employee satisfaction (each accounting for 20% of the scheme). Subject to minimum targets being achieved in relation to those performance criteria, basic bonus entitlements have been calculated on a sliding scale of amounts equivalent to between 50% and 120% of base salary, in accordance with which “on target” performance would have resulted in a basic bonus entitlement of an amount equivalent to 75% of base salary. In 2007, “on target” performance would have resulted in a bonus entitlement equivalent to 80% of base salary and, prior to that, the entitlement was to an amount equivalent to 100% of base salary. The performance related bonus is not pensionable and Non-Executive Directors do not participate in the scheme. To determine the actual bonus payment of an Executive Director, a multiplier, ranging between 0.5 and 1.2 was applied against the basic bonus entitlement of the relevant Executive Director. That multiplier was determined following the Performance Development Programme (“PDP”) review of the Executive Director (which is carried out at the start of each year) and reflects the strength of that Director’s individual performance over the course of the year. As a result of the above, 2008 bonus payments for Executive Directors could have ranged in amounts equivalent to between 25% and 144% of base salary. However, bonus payments at the higher end of that range would only have been made subject to the achievement of extremely stretching performance targets by the Company and exceptional individual performance by the relevant Director. The performance related bonuses awarded in respect of the year ended 31 December 2008, reflect a basic bonus entitlement (calculated in accordance with the sliding scale referred to above), of 40% of basic salary. That 40% basic bonus entitlement was arrived at as a result of the Group having achieved its “stretch” target in relation to profitability (by reference to its annualised net portfolio contribution for the 2008/2009 academic year), leading to the full 30% attributable to profitability being brought into the basic bonus entitlement. In addition, 50% of that element of the bonus referable to employee satisfaction (i.e. 10%) has been included in the basic bonus entitlement as a result of the Group having partly achieved its target in that area. Targets in relation to increases in net asset value and customer satisfaction were not met. After application of the individual performance multiplier, the above has resulted in the actual performance related bonus payments awarded to Messrs M C Allan, J M Tonkiss and J J Lister ranging between 34% and 43% of their respective base salaries. In 2007, bonus payments to the Executive Directors ranged in amounts equivalent to between 65% and 70% of base salary. Although the Company’s Guidance for Executive Directors’ Shareholdings (see below), provides that 50% of an Executive Director’s bonus will be satisfied by an allocation of shares in the Company until the required shareholding level has been acquired, it has been agreed (in view of the current economic environment), that 75% of such bonuses for 2008 will be satisfied by an allocation of shares in the Company, held in an Employee Share Ownership Trust for three years. The remaining 25% of such bonuses will be paid in cash. For 2009, the bonus structure has been amended such that greater emphasis is placed on the achievement of financial targets, which will represent 75% of the basic bonus entitlement, as opposed to 60%, which was the case for 2008. Otherwise, the basic structure of the bonus scheme for 2009 will remain the same. 4 n o i t c e S 46 Directors’ remuneration report Long term incentives The Group seeks to encourage and reward long term performance by providing incentives linked to the long term performance of the Company’s shares. These incentives were, prior to the adoption of The UNITE Group plc Long Term Incentive Plan (“LTIP”), provided in the form of share options and details of all options awarded to the Directors are set out in the “auditable part” of this Report. Under the LTIP, Executive Directors and senior managers may receive a conditional award of shares in the Company each year, which vest dependent on the extent to which performance conditions selected by the Remuneration Committee are satisfied over a three year measurement period. The maximum limit for individual awards is 100% of base salary per annum. For awards in 2009, it is intended that performance conditions will be based on growth in net asset value and total shareholder return performance of the Company, each applying to 50 per cent of an award. For that element of an award based on growth in net asset value, a target net asset value for the end of the three year measurement period will be set by the Remuneration Committee and lodged with the Company’s auditors. However, for reasons of commercial sensitivity, the target is not publicly disclosed. At the end of the measurement period, if the actual net asset value is less than 80 per cent of the target value, none of the shares the subject of that element of the award will vest. If the actual net asset value is 116 per cent or more of the target value, then all the shares the subject of that element of the award will vest. If the actual net asset value is equal to or greater than 80 per cent of the target value, but less than 116 per cent, then the number of shares that will vest will be calculated on a straight line basis. Under previous awards, 45 per cent of the total number of shares the subject of that element of the award would vest if the actual net asset value was 80 per cent of the target value, with 100 per cent of such shares vesting if the actual value was 116 per cent or more of the target value. However, it has now been agreed that it would be more appropriate for only 30 per cent of an award to vest if 80 per cent of the target value is achieved. That amendment to the sliding scale of vesting will appear in the LTIP awards to be made in 2009 and in subsequent years. In relation to that element of an award referable to total shareholder return, the performance of the Company will be measured, over the three year measurement period, against the performance of a comparator group of companies. For awards made in 2009, the comparator group of companies will be those companies comprising the FTSE All Share Real Estate Index at the beginning of the measurement period and which are still quoted at the end of that period. The Remuneration Committee believes that the constituents of the comparator group provide an appropriate comparison external benchmark for the Company’s performance. For the achievement of median ranked performance 33 per cent of that part of the award vests. If the Company is ranked in the top 25 per cent of the comparator group, then all the shares the subject of that element of the award will vest, whilst no such shares will vest if it is in the lower half. If the Company is ranked in the upper half, but not the top 25 per cent, then the number of shares that will vest will be between 33 per cent and 100 per cent of the total number of shares the subject of that element of the award, calculated on a straight-line basis. Irrespective of the net asset value and total shareholder return performance, no shares will vest under either element of an award unless the Remuneration Committee is satisfied that the underlying financial performance of the Company over the performance period is satisfactory. No element of the LTIP awards made in 2006 will vest and it is considered unlikely that any element of the LTIP awards made in 2007 will vest. 47 Service contracts and notice periods In accordance with general market practice, each of the Executive Directors has a rolling service contract requiring twelve months’ notice of termination on either side. Such contracts contain no specific provision for compensation for loss of office, other than an obligation to pay for any notice period waived by the Company. The dates of the current Executive Directors’ service contracts are as follows: M C Allan J M Tonkiss J J Lister 31 October 1999 22 June 2001 28 March 2002 Each of the Non-Executive Directors has a specific letter of engagement, the dates of which are set out below: G K Maddrell N P Hall S R H Beevor R Walker N A Porter P M White 13 August 1999 6 March 2003 20 February 2004 3 November 2005 21 March 2006 10 January 2009 Non-Executive Directors are appointed for an initial term of three years, subject to normal provisions as to retirement by rotation. Subsequent terms of three years may be awarded. Current appointments will expire at the annual general meeting in 2009 in the case of Mr G K Maddrell (who will, as planned, after 10 years, step down from the Board); on 14 September 2009 in the case of Mr N A Porter; at the annual general meeting in 2010 in the case of Mr S R H Beevor; at the annual general meeting in 2011 in the case of Mr R Walker and at the annual general meeting in 2012 in the case of Messrs N P Hall and P M White. The appointment and re-appointment and the remuneration of Non- Executive Directors are matters reserved for the full Board. Total shareholder return The following graph charts the total shareholder return of the Company and the FTSE Real Estate Index over the five year period from 1 January 2004 to 31 December 2008. 350 300 250 200 150 100 50 0 J a n A p ril J uly O ct 2 J a n 2 0 0 4 2 0 0 4 2 0 0 4 0 0 4 2 0 0 5 A p ril J uly 2 O ct 2 0 0 5 0 0 5 J a n A p ril 2 J uly 2 0 0 5 2 0 0 6 2 0 0 6 0 0 6 O ct J a n 2 0 0 6 2 0 0 7 A p ril J uly O J ct 2 0 a n 2 2 0 0 7 2 0 0 7 0 7 0 0 8 A p ril J uly 2 0 2 0 O ct 2 0 8 0 8 0 0 8 4 n o i t c e S UNITE Real Estate Index Whilst there is no comparator index or group of companies which truly reflects the activities of the Group, the FTSE Real Estate Index (the constituent members of which are all property holding and/or development companies within the UK), was chosen as it reflects trends within the UK property market generally and tends to be the index against which analysts judge the performance of the Company. Executive Director shareholding guidelines The Group’s policy in relation to shareholdings in the Company by Executive Directors is for the Chief Executive to acquire a holding (excluding shares held conditionally pursuant to LTIP awards), equivalent in value to twice basic salary. For other Executive Directors, the policy is for them to accumulate a holding (again excluding shares held conditionally pursuant to LTIP awards), equivalent in value to one times basic salary. The valuation of the respective holdings is made by reference to the closing mid-market price of the Company’s shares on the day following the preliminary announcement of the Company’s year-end results. If on that date the valuation of the relevant Director’s holding is below the guideline level, then, ordinarily, 50 per cent of the bonus payable to that Director in respect of the previous financial year is satisfied by an allocation of shares in the Company held in the Company’s Employee Share Ownership Trust. Subject to the Director’s continued employment within the Group, such shares are transferred to the Director on or around the third anniversary of the original allocation. As referred to above, in view of the current economic environment, it has been agreed that the Executive Directors will receive 75% of their 2008 bonuses in the form of share allocations. It is considered that the above guidelines promote strong alignment of the interests of Executives and shareholders; adds a strong retention element to the remuneration package; and enables Executives to build a significant shareholding in the Company. 48 Directors’ remuneration report Audited Information – Remuneration Summary Fees £’s Basic salaries £’s Performance bonus * £’s Deferred bonus ** £’s Other benefits *** £’s Total remuneration 2008 £’s Total remuneration 2007 £’s Executive Directors M C Allan J M Tonkiss A C Harris 1 JJ Lister 2 - - - - 380,833 210,000 1,022 198,907 41,195 22,470 - 123,585 67,410 - 19,961 12,561 54 17,400 52,200 14,637 Non Executive Directors G K Maddrell 117,500 N A Porter 3 N P Hall S R H Beevor 4 R Walker 50,000 46,500 43,475 35,000 - - - - - - - - - - - - - - - - - - - - 565,574 312,441 1,076 283,144 603,676 295,506 175,340 - 117,500 107,083 50,000 46,500 43,475 35,000 90,582 41,917 37,000 31,667 * Payable in cash. ** Satisfied by an allocation of shares in the Company held in an Employee Share Ownership Trust. *** Benefits receivable consist primarily of company car or car allowance and private health care insurance. 1 Payments in relation to Mr A C Harris for 2008 relate only to his normal salary for the period to 2 January 2008, on which date Mr Harris resigned from the Board. In addition, Mr Harris received an amount of £103,281 representing payment in lieu of notice following his resignation together with a termination payment of £61,160. 2 Payments in relation to Mr J J Lister relate to the period from 2 January 2008, on which date he was appointed to the Board. 3 The 2007 comparative figures for Mr N A Porter only reflect the fees he received as Non-Executive Deputy Chairman. In addition to those fees, Mr Porter received an amount of £49,064 in 2007, representing payment in lieu of notice (following his stepping-down on 14 September 2006 as Chief Executive Officer), and £3,603 in respect of other benefits for the period 1 January 2007 to 16 March 2007. 4 The fees paid in respect of Mr S R H Beevor were paid to Grosvenor Investments Limited, which company made available the services of Mr Beevor. During the year Mr J M Tonkiss, Mr A C Harris and Mr J J Lister participated in The UNITE Group Personal Pension Scheme, which is a money purchase scheme, in relation to whom the Company contributed respectively the sums of £26,250, £9,592 and £25,951 in the year. The Company also made contributions of £38,052 to a personal pension scheme of Mr M C Allan. 49 Share options Director M C Allan J M Tonkiss J J Lister A C Harris** G K Maddrell N A Porter N P Hall S R H Beevor R Walker As at 31.12.07 Granted during the year Exercised during the year* As at 31.12.08** Exercise price Normal exercise dates 11,823 10,388 60,733 1,545 5,235 50,000 8,255 3,154 5,235 58,662 - - 393,706 - - - - - - - - - - - - - - - - - - - - 10,388 6,000 - - - - - - - - - - - - - 11,823 - 54,733 1,545 5,235 50,000 8,255 3,154 5,235 58,662 - - 323.5p 129p 191p 323.5p 191p 232.5p 129p 158.5p 191p 232.5p - - 21.03.2005 – 20.03.2012 11.10.2005 – 10.10.2012 04.05.2007 – 03.05.2014 21.03.2005 – 20.03.2012 04.05.2007 – 03.05.2014 16.09.2007 – 15.09.2014 11.10.2005 – 10.10.2012 25.09.2006 – 24.09.2013 04.05.2007 – 03.05.2014 16.09.2007 – 15.09.2014 - - 393,706 146.5p 22.10.2005 – 21.10.2012 - - - - - - - - - 4 n o i t c e S *The closing mid-market price on the day of exercise was 341p per share. Gains made by Mr Allan equate to £30,858.68. ** The closing position for Mr A C Harris relates to 2 January 2008 when he resigned from the Board, and not 31 December 2008. Of the above, 20,477 of the options awarded to Mr N A Porter were awarded pursuant to The UNITE Group plc Approved Company Share Option Scheme (the “Approved Scheme”). All other options were granted pursuant to The UNITE Group plc Unapproved Share Option Scheme (the “Unapproved Scheme”). All options have been granted for no consideration. Options granted under the Approved Scheme have not been made subject to performance conditions, which is considered appropriate in view of the relatively small number of options that may be granted to individuals under such schemes (i.e. options over shares with an aggregate market value, as at the date of grant, of no more than £30,000). Options granted to Directors prior to 2004 under the Unapproved Scheme are exercisable as to 50 per cent provided the total shareholder return for the Company is such that it is equal to or exceeds the median total shareholder return of companies included in the FTSE Small Companies Index (excluding investment trusts) over the three year period from the date of grant. The remaining 50 per cent are exercisable provided the Company’s net asset growth exceeds the average net asset growth of companies included in the FTSE Small Companies Index (excluding investment trusts) over the three year period from the date of grant. Such performance criteria were agreed with institutional shareholders at the time the Unapproved Scheme was adopted. However, options granted under the Unapproved Scheme after 1 January 2004 are subject to revised performance criteria based solely on total shareholder return, such that options will be exercisable only as to 50 per cent if the total shareholder return for the Company, over the three year period from the date of grant, is such that it is equal to the median total shareholder return of companies included in the FTSE Small Companies Index (excluding investment trusts) over that period. If the Company’s performance would put it in the upper quartile (upon the basis described above), 100 per cent of the options awarded will be exercisable. Between median and upper quartile performance, the number of options which may be exercised will be calculated on a straight line basis. 50 LTIP awards Director M C Allan J M Tonkiss J J Lister A C Harris* G K Maddrell N A Porter N P Hall S R H Beevor R Walker Interests held at 01.01.08 Interests awarded during year (ordinary shares of 25p each in the Company) Market price per share when awarded Interests held at 31.12.08 (ordinary shares of 25p each in the Company) Period of qualifying conditions Interests vested during year 80,194 55,096 - 29,162 33,058 - 4,860 12,842 - 34,894 - - - - - - - 124,294 - - 67,796 - - 64,568 - - - - - - 411.5p 544.5p 309.75p 411.5p 544.5p 309.75p 411.5p 544.5p 309.75p 544.5p - - - - - 80,194 55,096 124,294 29,162 33,058 67,796 4,860 12,842 64,568 - - - - - - 11.04.2006 – 11.04.2009 11.04.2007 – 11.04.2010 15.04.2008 – 15.04.2011 11.04.2006 – 11.04.2009 11.04.2007 – 11.04.2010 15.04.2008 – 15.04.2011 11.04.2006 – 11.04.2009 11.04.2007 – 11.04.2010 15.04.2008 – 15.04.2011 11.04.2007 – 11.04.2010 - - - - - - - - - - - - - - - - - - - - * The interests Mr A C Harris lapsed on his leaving the employment of the Company on 31 January 2008. Details of the qualifying performance conditions in relation to the above referred to awards are set out above under the heading “Long Term Incentives”. Those details should also be taken as forming part of the “auditable part” of this Report. No variations have been made to the terms or conditions of any awards. The fair value in respect of Directors’ share options and LTIP awards recognised in the Income Statement is as follows: M C Allan J M Tonkiss J J Lister A C Harris 2008 £ 118,217 61,654 41,205 - 221,076 2007 £ 114,762 60,478 - 30,458 205,698 As at 31 December 2008, the middle market price for ordinary shares in the Company was 146.25p per share. During the course of the year, the market price of the Company’s shares ranged from 360.25p to 65p per ordinary share. By order of the Board S R H Beevor Chairman of the Remuneration Committee 9 March 2009 51 Independent Auditors’ Report to the members of The UNITE Group plc We have audited the group and parent company financial statements (the ‘‘financial statements’’) of The UNITE Group plc for the year ended 31 December 2008 which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Group and Company Statements of Changes in Shareholder Equity, the Group and Company Statements of Cash Flows and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report and Accounts, Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU, are set out in the Statement of Directors’ Responsibilities on page 44. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Business Review that is cross referred from the Business Review section of the Directors’ Report. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ Remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2006 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • • • the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the group’s affairs as at 31 December 2008 and of its loss for the year then ended; 4 n o i t c e S the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2008; the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and • the information given in the Directors’ Report is consistent with the financial statements KPMG Audit Plc Chartered Accountants Registered Auditor 9 March 2009 PO Box 695 8 Salisbury Square London EC4Y 8BB 52 Note 2008 £’000 2007 £’000 2 2 2 5 5 5 5 9 6 9 133,594 72,140 (121,765) (29,974) (31,115) (19,286) (12,396) (2,464) (25,342) (21,082) 21,084 (4,205) 1,803 (2,733) (59,488) 15,949 (28,365) (32,414) (478) (61,257) 1,877 (59,380) (9,985) (128,853) 12,511 (116,342) (115,942) (400) (116,342) (30,953) (7,472) (57,392) (95,817) 1,763 (94,054) 10,978 (67,127) 29,652 (37,475) (37,475) - (37,475) 18 18 (93.4p) (93.4p) (30.4p) (30.4p) Consolidated Income Statement For the year ended 31 December 2008 Revenue Cost of sales Administrative expenses Loss on disposal of property (Loss) / profit on part disposal of joint venture Net valuation losses on investment property (Loss) / profit before net financing costs Loan interest and similar charges Changes in fair value of interest rate swaps Bond and loan redemption costs Finance costs Finance income Net financing costs Share of joint venture (loss) / profit Loss before tax Tax Loss for the year Loss for the year attributable to Owners of the parent company Minority interest Earnings per share Basic Diluted 53 Consolidated Balance Sheet At 31 December 2008 Assets Investment property Investment property under development Property, plant and equipment Investments in joint ventures Intangible assets Other receivables Total non-current assets Completed property Property under development Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Borrowings and financial derivatives Trade and other payables Total current liabilities Borrowings and financial derivatives Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued share capital Share premium Merger reserve Retained earnings Revaluation reserve Hedging reserve Minority interest Total equity These financial statements were approved by the Board of Directors on 9 March 2009 and were signed on its behalf by: MC Allan JJ Lister Director Director Note 2008 £’000 2007 £’000 7 7 8 9 10 12 7 7 11 12 13 15 14 15 16 17 17 17 17 17 17 9 403,700 52,989 8,030 75,519 7,219 3,667 551,124 75,214 249,124 10,311 107,308 111,845 553,802 1,104,926 (136,876) (80,544) (217,420) (552,140) - (552,140) (769,560) 597,747 102,180 9,094 86,013 8,089 4,770 807,893 - 121,936 104,557 94,019 56,316 376,828 1,184,721 (240,234) (117,801) (358,035) (363,720) (12,873) (376,593) (734,628) 335,366 450,093 31,079 176,541 40,177 85,699 1,805 (15,135) 320,166 15,200 335,366 30,874 174,333 40,177 187,957 17,644 (892) 450,093 - 450,093 5 n o i t c e S 54 Company Balance Sheet At 31 December 2008 Assets Investments in subsidiaries Investments in joint ventures Total investments Other receivables Total non-current assets Trade and other receivables Total current assets Total assets Liabilities Borrowings and financial derivatives Trade and other payables Total liabilities Net assets Equity Issued share capital Share premium Merger reserve Retained earnings Total equity Total equity is wholly attributable to equity holders of The UNITE Group plc. These financial statements were approved by the Board of Directors on 9 March 2009 and were signed on its behalf by: MC Allan JJ Lister Director Director Note 2008 £’000 2007 £’000 9 9 12 12 15 14 17 17 17 17 115,810 558 116,368 3,667 120,035 253,270 253,270 373,305 (1,730) (40,573) (42,303) 238,195 3,912 242,107 3,667 245,774 257,125 257,125 502,899 (648) (42,239) (42,887) 331,002 460,012 31,079 176,541 40,177 83,205 331,002 30,874 174,333 40,177 214,628 460,012 55 Statements of Changes in Shareholder Equity For the year ended 31 December 2008 Note Group Company 2008 £’000 2007 £’000 2008 £’000 2007 £’000 Investment property under development: Other property Effective hedges - revaluation - deferred tax - revaluation - deferred tax - movements - deferred tax Losses / (gains) on hedging instruments transferred to income statement Deferred tax on losses / (gains) transferred Revaluation of investment in subsidiaries and joint ventures Share of joint venture valuation gain on investment property under development (net of related tax) Share of joint venture movements in effective hedges (net of related tax) Net (losses) / profit recognised directly in equity Loss for the year Total recognised income and expense for the year Dividends paid Own shares acquired Shares issued Fair value of share based payments Minority interest Equity at start of year Equity at end of year 16 16 5 17 17 17 2,097 (587) - - (7,604) 1,779 1,586 (444) - 1,309 (9,960) 7,368 (1,591) 159 - (1,280) 384 (101) 30 - 4,810 (1,076) - - - - - - - - (125,739) - - - - - - - - - - (29,210) - - (11,824) 8,703 (125,739) (29,210) (116,342) (128,166) (3,090) (2,192) 2,413 308 (130,727) (37,475) (28,772) (3,073) (1,096) 1,436 411 (31,094) (2,594) (128,333) (3,090) - 2,413 - (129,010) (2,440) (31,650) (3,073) - 1,436 - (33,287) 9 800 - - - 450,093 481,187 460,012 493,299 320,166 450,093 331,002 460,012 5 n o i t c e S 56 Statements of Cash Flows For the year ended 31 December 2008 Operating activities Loss for the year Adjustments for: Depreciation and amortisation Fair value of share based payments Change in value of investment property Net finance costs Loss on disposal of investment property Profit on part disposal of joint venture Share of joint venture profit Trading with joint venture adjustment Tax credit Cash flows from operating activities before changes in working capital Increase in trade and other receivables Increase in property under development Decrease / (increase) in inventories (Decrease) / increase in trade and other payables Cash flows from operating activities Note Group Company 2008 £’000 2007 £’000 2008 £’000 2007 £’000 (116,342) (37,475) (2,594) (2,440) 4 5 9 9 6 3,356 308 25,342 59,380 12,396 2,464 9,985 2,402 (12,511) (13,220) (9,653) (202,402) 94,246 (27,375) (158,404) 2,094 411 2,733 94,054 4,205 (1,803) (10,978) 3,220 (29,652) 26,809 (13,673) (103,902) (81,575) 43,615 (128,726) - - - 35 - - - - - (2,559) 139 - - (1,852) (4,272) Cash flows from taxation (396) - - Investing activities Proceeds from sale of investment property Proceeds from part disposal of joint venture Payments to / on behalf of subsidiaries Payments from subsidiaries Equity invested in joint ventures Dividends received Interest received Acquisition of intangible assets Acquisition of property, plant and equipment Acquisition and construction of investment property Cash flows from investing activities Financing activities Interest paid Bond and loan redemption costs Proceeds from the issue of share capital Payments to acquire own shares Proceeds from non-current borrowings Repayment of borrowings Payment of finance lease liabilities Investment received from minority interest Dividends paid Cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year 57 251,553 - - - (16,117) 5,258 1,877 (1,182) (766) (53,371) 187,252 (34,922) (478) 2,413 (2,192) 347,865 (320,762) (35) 16,000 (3,090) 4,799 33,251 53,517 86,768 270,702 21,078 - - (2,135) 10,314 1,763 (3,986) (993) (195,480) 101,263 (38,413) (49,846) 1,436 (1,096) 713,267 (591,319) (419) - (3,073) 30,537 3,074 50,443 53,517 13 - - (1,843) 5,745 - - - - - - 3,902 (35) - 2,413 - - - - - (3,090) (712) (1,082) (648) (1,730) - - - 33 - - - - - (2,407) 157 - - 2,323 73 - - - (17,935) 19,957 - - - - - - 2,022 (33) - 1,436 - - - - - (3,073) (1,670) 425 (1,073) (648) Notes to the Financial Statements 1. Significant accounting policies The UNITE Group plc (the “Company”) is a company domiciled in The United Kingdom. (a) Basis of preparation The group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”) and equity account the Group’s interest in jointly controlled entities. The parent company financial statements present information about the Company as a separate entity and not about its group. Both the parent company financial statements and the group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRS”). On publishing the parent company financial statements here together with the group financial statements, the Company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. Going concern The Annual 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 on the basis of which they have a reasonable expectation that the Group will continue as a going concern. In preparing those forecasts, including incorporating the outcomes of various down-side scenarios, the Directors have taken into account various risks and uncertainties as outlined here and in more detail in the Chairman’s Statement and Business Review. The principal 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 (pages 25 and 26); finalisation of the documentation of the approved new banking facilities (page 25); the Group’s ability to continue raising capital through the sale of assets, some of which are included within the down-side scenarios, (note 20); and the achievement of operating targets, in particular projected occupancy levels and rental increases. These risks and uncertainties are discussed in more detail in the Chairman’s Statement and Business Review. In addition to these risks and uncertainties, the financial and operational risks that impact upon the group’s performance and their mitigation are outlined on page 29 and financial risks including interest rate risk, liquidity risk, market risk and credit risk are outlined in note 20 to the consolidated financial statements. The sections of the business review headed “UNITE debt maturity profile” on page 25 and “Covenant Headroom” on pages 25 and 26 form part of the audited financial statements. Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: • • • • Investment property Investment property under development Interest rate swaps Land and buildings included in property, plant and equipment Accounting standards adopted IFRIC 11 IFRS 2 ‘Group and Treasury Share Transactions’ requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 11 requires retrospective application, however it has not had any impact on the comparatives within the consolidated financial statements. Accounting standards and interpretations issued but not adopted Revised IAS 23 ‘Borrowing Costs’ removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as a part of the cost of that asset. Although revised IAS 23 will be mandatory for the Group’s 2009 financial statements it will not constitute a change in accounting policy for the Group. The majority of amendments made as part of the IASB’s Annual Improvement programme affect accounting periods beginning on or after 1 January 2009. Included within the amendments is a change in the accounting treatment for investment properties under development. Currently, such properties are accounted for under IAS 16, but they will in future be 5 n o i t c e S accounted for under IAS 40. This change will mean that revaluation surpluses and deficits on investment properties under development will in future be recognised in the income statement rather than equity. However, completed property and property under development will continue to be accounted for under IAS 2 (see section (i) below). Significant judgements and estimates The preparation of financial statements in conformity with Adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The accounting policy descriptions set out the areas where judgement needs exercising, the most significant of which are as follows: Valuation of investment property and investment property under development • The Group uses the valuation performed by its independent valuers as the fair value of its investment properties. The valuation is based upon assumptions including future rental income, anticipated maintenance costs and the appropriate discount rate. The valuers also make reference to market evidence of transaction prices for similar properties. Valuations and current market conditions are discussed further in the Business Review. Completed property, properties under development and inventories • Completed property, properties under development and inventories are carried at the lower of cost and net realisable value. However the valuation of properties under development is disclosed in the notes to the financial statements and the same factors affecting investment properties as described above apply. These properties are also valued by the independent valuers. Trade and other receivables • The Group is required to judge when there is sufficient objective evidence to require the impairment of individual trade and other receivables 58 1. Significant accounting policies (continued) Classification of properties acquired • All properties acquired that are intended for development as student accommodation have been classified as in current assets as, in accordance with the Group’s business model, it is intended to sell these assets when completed and stabilised to UNITE UK Student Accommodation Fund or another co-investment vehicle. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. (b) Basis of consolidation (i) Subsidiaries Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Joint ventures Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include joint ventures initially at cost subsequently increased or decreased by the Group’s share of total recognised gains and losses of joint ventures on an equity accounted basis. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains and losses arising from intra- group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with joint ventures are eliminated to the extent of the Group’s retained interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains except where the loss provides evidence of a reduction in the net realisable value of current assets or an impairment in value of fixed assets. 59 (iv) Goodwill Goodwill represents the difference between the cost of an acquisition and the fair value of the Group’s share of the identifiable net assets and contingent liabilities of the acquired subsidiary at the effective date of acquisition. Goodwill on acquisitions is reported in the balance sheet as an intangible asset and is impairment tested annually. The carrying amount of goodwill is assessed annually and written down to its recoverable amount. The profit or loss on disposal of assets is calculated by reference to the carrying value at the date of disposal, including the attributable amount of goodwill which remains unimpaired. (c) Financial instruments (i) Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from operational, financing and investment activities. Derivative financial instruments are recognised initially and subsequently at fair value, with movements recognised in the income statement except where cash flow hedge accounting is applied (see below). The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current credit worthiness of the swap counterparties. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. (ii) Hedge accounting for interest rate swaps Where an interest rate swap is designated as a hedge of the variability in cash flows of an existing or a highly probable forecast loan interest payment, the effective part of any gain or loss on the swap instrument is recognised directly in equity in the hedging reserve. The cumulative gain or loss is removed from equity and recognised in the income statement at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the income statement immediately. When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately. (d) Investment property Investment properties are those held to earn rental income or for capital appreciation or both. Investment properties are stated at fair value. External, independent valuers, having an appropriate recognised professional qualification, value the portfolio every six months. The fair values are based on the market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction where the parties had each acted knowledgeably, prudently and without compulsion. The valuations are prepared by considering the aggregate of the net annual rents receivable from the properties and where relevant, associated costs. Valuations reflect, where appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting of vacant accommodation and the market’s general perception of their credit worthiness; the allocation of maintenance and insurance responsibilities between lessor and lessee; and the remaining economic life of the property. It has been assumed that whenever rent reviews or lease renewals are pending with anticipated reversionary increases, all notices and where appropriate counter notices have been served validly and within the appropriate time. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income is accounted for as described in accounting policy (n). (e) Investment property under development Property that is being constructed or developed for future use as investment property is classified as investment property under development, whereas properties purchased with the intention of selling them to the UNITE UK Student Accommodation Fund are classified as property under development (see (i) below). Investment property under development is stated at fair value. External, independent valuers, having an appropriate recognised professional qualification, value the portfolio every six months. The fair values are on the same basis as those used for investment properties but including adjustments to remove the fair value of construction, which has yet to take place and making reasonable assumptions regarding expected rentals and costs. Gains arising from changes in fair value are recognised directly in equity (in the revaluation reserve) as are losses to the extent that they reverse amounts previously credited directly to equity. Revaluation losses in excess of amounts previously credited to equity are recognised in the income statement. When construction or development is complete, the property is reclassified and subsequently accounted for as investment property. At the date of transfer, the difference between fair value and the previous carrying amount is recognised in the consolidated income statement and a transfer is made from revaluation reserve to retained earnings for valuations and related deferred tax previously recognised in relation to that property. All costs directly associated with the purchase and construction of a property, and all subsequent qualifying expenditure is capitalised. Borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalisation of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalisation of borrowing costs continues until the assets are substantially ready for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. The capitalisation rate is arrived at by reference to the actual rate payable on borrowings for development purposes or, with regard to that part of the development cost financed out of general borrowings, to the average rate. (f) Property, plant and equipment (i) Owned assets Other than land and buildings, property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. The cost of self constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Land and buildings held in property, plant and equipment are stated at fair value. The valuation has been carried out by an external, independent valuer, having an appropriate recognised professional qualification. The fair values are based on the market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction where the parties had each acted knowledgeably, prudently and without compulsion. (ii) Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Property held under finance leases and leased out under operating leases is classified as investment property and carried at fair value (see accounting policy (d)). (iii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment. Freehold land is not depreciated. The estimated useful lives are as follows: • Freehold buildings • Leasehold improvements • Fixtures and fittings • Motor vehicles • Plant & equipment 50 years Shorter of life of lease and economic life 4 years 4 years 4-20 years Assets held under finance leases which do not transfer title of the assets to the Group at the end of the lease, are depreciated over the shorter of the estimated useful lives shown above and the term of the lease. The residual value, if not insignificant, is reassessed annually. (g) Investments in subsidiaries and joint ventures The treatment of these investments in the Group’s consolidated financial statements is set out in the “basis of preparation” section above. In the financial statements of the Company, investments in subsidiaries and joint ventures are carried at fair value with movements in fair value being recognised directly in equity. (h) Intangible assets Expenditure on research activities is recognised in the income statement as an expense as incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill is systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use over the following periods: • Development cost • Computer software 4-5 years 4-5 years (i) Completed property, property under development and inventories Completed properties and properties under development are properties purchased with the intention of selling them to the UNITE UK Student Accommodation Fund following completion. These properties and inventories are shown at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses. Costs are arrived at in the same way as used for investment property under development (see note (e) above). Inventories include land held for development, which are sites, purchased without planning permission. Once planning permission is obtained the assets transfer to either property under development or investment property under development. 5 n o i t c e S 60 1. Significant accounting policies (continued) (j) Trade receivables and payables Trade receivables and payables are initially recognised at fair value and subsequently measured at amortised cost and discounted as appropriate. share options that are expected to vest except where forfeiture is only due to share prices not achieving the threshold for vesting. When the options are exercised, equity is increased by the amount of the proceeds received. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (l) Share capital (i) Ordinary share capital Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction, net of tax, in equity from the proceeds. Share issue costs incurred directly in connection with a business combination are deducted from the proceeds of the issue. (ii) Dividends Dividends are recognised as a liability in the year in which they are approved. (m) Interest bearing borrowings Interest bearing borrowings are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. (n) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. (ii) Share based payment transactions The Group’s share option schemes allow employees to acquire shares of the Company. The fair value is measured at grant date and spread over the period during which employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the number of 61 The Group funds the purchase of its own shares by the “Employee share ownership trust” to meet the obligations of the Long term incentive plan (LTIP) and executive bonus scheme. These purchases are shown as “Own shares acquired” in the retained earnings in note 17. (o) Revenue (i) Rental income Rental income from investment property leased out under operating leases is recognised in the income statement on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income and spread over the period to the first break clause or over the term of the lease where no break clause exists. (ii) Management and promote fees Management and promote fees are recognised, in line with the property management contracts, in the period to which they relate. The Group earns promote fees relative to criteria specified in the joint venture agreements. (iii) Development income In addition to development management fees, detailed above, income relating to the sale of trading properties is recognised once contracts for sale have been unconditionally exchanged. (iv) Goods sold and services rendered Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. (p) Expenses (i) Lease payments Payments made under operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Where the property interest under an operating lease is classified as an investment property, the property interest is accounted for as if it were a finance lease and the fair value model is used for the asset recognised. (ii) Net financing costs Net financing costs comprise interest payable on borrowings less interest receivable on funds invested (both calculated using the effective interest rate method) and gains and losses on hedging instruments that are recognised in the income statement (refer accounting policy ( c )). (q) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries and joint ventures to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. The deferred tax provision in respect of property assets is calculated on the basis that assets will not be held indefinitely and therefore takes account of available indexation. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 2. Segment reporting 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. (a) Segment revenues and costs 31 December 2008 Revenue Cost of sales Write down of land held for development and property under development Total cost of sales Administrative expenses Loan interest and similar charges Interest rate swap receipts Finance income Share of joint venture investment segment result Segment result / corporate costs 31 December 2007 Revenue Cost of sales Administrative expenses Loan interest and similar charges Finance income Share of joint venture investment segment result Segment result / corporate costs Note Investment segment £’000 Development segment £’000 Unallocated corporate costs £’000 63,080 (30,028) - (30,028) (13,680) 19,372 (28,365) 1,409 1,877 6,654 947 69,945 (27,613) (11,548) 30,784 (30,953) 1,763 5,921 7,515 70,514 (60,248) (31,489) (91,737) (6,300) (27,523) - - - - (27,523) 2,195 (2,361) (3,656) (3,822) - - - (3,822) - - - - (11,135) (11,135) - - - - (11,135) - - (5,878) (5,878) - - - (5,878) 2 (b) 2 (b) Total £’000 133,594 (90,276) (31,489) (121,765) (31,115) (19,286) (28,365) 1,409 1,877 6,654 (37,711) 72,140 (29,974) (21,082) 21,084 (30,953) 1,763 5,921 (2,185) 5 n o i t c e S 62 2. Segment reporting (continued) (b) Segment results and adjusted profit Investment segment result Development segment result Other unallocated items Corporate costs Restructuring costs Share of joint venture overheads Share of joint venture Landsbanki provision Loan break costs and costs written off on refinancing Share of joint venture loan break costs Swap loss realised on cancellation Share of joint venture swap gain Current tax charge Adjusted loss for the year Net valuation losses on investment property Loss on sale of property (Loss) / profit on part disposal of investment in joint venture Share of joint venture loss on disposal Share of joint venture tax charge Changes in fair value of interest rate swaps Interest rate swap receipts on ineffective hedges allocated to investment segment Share of joint venture valuation (losses) / (gains) Minority interest share of valuation gains Share of joint venture deferred tax Deferred tax Loss for the year Note 31 Dec 2008 £’000 2(c) 947 31 Dec 2007 £’000 7,515 (27,523) (3,822) (6,326) (4,809) (290) (6,120) (478) (137) - - (24) (44,760) (25,342) (12,396) (2,464) (56) - (32,414) (1,409) (10,360) 480 244 12,535 (115,942) (5,878) - (632) - (57,392) - (2,120) 186 (795) (62,938) (2,733) (4,205) 1,803 (81) (1,438) (5,352) - 5,179 - 1,843 30,447 (37,475) 63 (c) Segment result (see through basis) Information on the Group’s investment activities on a see through basis, including an allocation of interest, is set out below. 31 December 2008 100% UNITE Share of co-invested joint ventures Group on see through basis Wholly Owned £’000 Leased / Other £’000 Total £’000 USAF £’000 Capital Cities £’000 Student Village £’000 Total £’000 Total £’000 Rental income Property operating expenses (excl. lease rentals) Operating lease rentals 44,895 (15,209) - 12,948 (5,710) (9,109) 57,843 (20,919) (9,109) 13,032 (3,990) - 5,016 (708) - 2,343 (568) - 20,391 (5,266) - 78,234 (26,185) (9,109) Net rental income 29,686 (1,871) 27,815 9,042 4,308 1,775 15,125 42,940 Joint venture management fees Overheads - - 5,237 (13,680) 5,237 (13,680) - - (336) - - - (336) - 4,901 (13,680) Investment segment result before interest 29,686 (10,314) 19,372 9,042 3,972 1,775 14,789 34,161 Loan interest & similar charges Finance income Interest rate swap receipts (28,365) 1,877 1,409 - - - (28,365) 1,877 1,409 (4,505) 342 - (2,646) 95 - (1,561) 140 - (8,712) 577 - (37,077) 2,454 1,409 Investment segment result 4,607 (10,314) (5,707) 4,879 1,421 354 6,654 947 31 December 2007 100% UNITE Share of co-invested joint ventures 5 n o i t c e S Group on see through basis Wholly Owned £’000 Leased / Other £’000 Total £’000 USAF £’000 Capital Cities £’000 Student Village £’000 Total £’000 Total £’000 Rental income Property operating expenses (excl. lease rentals) Operating lease rentals 53,110 (16,917) - 9,698 (3,595) (7,101) 62,808 (20,512) (7,101) 12,622 (3,671) - 3,816 (516) - 3,033 (886) - 19,471 (5,073) - 82,279 (25,585) (7,101) Net rental income 36,193 (998) 35,195 8,951 3,300 2,147 14,398 49,593 Joint venture management fees Joint venture promote fee Overheads - - - 4,172 2,965 (11,548) 4,172 2,965 (11,548) - - - (250) - - - - - (250) - - 3,922 2,965 (11,548) Investment segment 36,193 (5,409) 30,784 8,951 3,050 2,147 14,148 44,932 Loan interest & similar charges Finance income (30,953) 1,763 - - (30,953) 1,763 (4,642) 299 (2,249) 213 (1,980) 132 (8,871) 644 (39,824) 2,407 Investment segment result 7,003 (5,409) 1,594 4,608 1,014 299 5,921 7,515 64 2. Segment reporting (continued) (d) Segment assets and liabilities (see through basis) 31 December 2008 Investment property Investment property under development Completed property Property under development Investment and development property Cash Other assets - investment Other assets - development Other assets Debt - completed properties Debt - development properties Other liabilities - investment Other liabilities - development Interest rate swaps Other liabilities - unallocated Total liabilities 100% UNITE Wholly Owned £’000 Share of co-invested joint ventures USAF £’000 Capital Cities £’000 Student Village £’000 Total £’000 Total £’000 Group on see through basis 403,700 52,989 75,214 249,124 781,027 111,845 121,551 14,934 248,330 (381,587) (259,653) (53,272) (27,272) (47,776) - (769,560) 166,381 - - - 166,381 3,998 (51,327) - (47,329) (89,132) - (3,040) - (2,001) - (94,173) 116,919 150 - - 117,069 2,310 142 166 2,618 (74,989) - (1,354) (1,926) (7,046) - (85,315) 29,040 - - - 29,040 3,576 (162) - 3,414 (22,972) - (7,252) - (1,027) (85) (31,336) 312,340 150 - - 312,490 9,884 (51,347) 166 (41,297) (187,093) - (11,646) (1,926) (10,074) (85) (210,824) 716,040 53,139 75,214 249,124 1,093,517 121,729 70,204 15,100 207,033 (568,680) (259,653) (64,918) (29,198) (57,850) (85) (980,384) Net assets attributable to ordinary shareholders 259,797 24,879 34,372 1,118 60,369 320,166 Minority interest Net assets 50 15,150 - - 15,150 15,200 259,847 40,029 34,372 1,118 75,519 335,366 Joint venture investment loans and minority interest (55,630) 36,763 - 3,667 40,430 (15,200) Underlying capital employed 204,217 76,792 34,372 4,785 115,949 320,166 Mark to market of interest rate swaps Valuation gain not recognised on property held at cost Deferred tax 46,668 28,937 - 2,001 - - 7,046 - - 1,027 - 85 10,074 - 85 56,742 28,937 85 Adjusted net assets Investment assets Development assets Total assets Investment liabilities Development liabilities Unallocated liabilities Total liabilities 279,822 78,793 41,418 5,897 126,108 405,930 581,516 392,261 973,777 170,964 - 170,964 119,371 316 119,687 (486,544) (283,016) - (769,560) (94,172) - - (94,172) (83,389) (1,926) - (85,315) 36,121 - 36,121 (31,251) - (85) (31,336) 326,456 316 326,772 (208,812) (1,926) (85) (210,823) 907,972 392,577 1,300,549 (695,356) (284,942) (85) (980,383) In order to show the Group’s full investment in joint ventures their net assets have been adjusted for loans that are capital in nature to show the underlying capital employed in the above table. See through gearing is calculated on an adjusted basis as 174% (2007: 136%). 65 (d) Segment assets and liabilities (see through basis - continued) 31 December 2007 Investment property Investment property under development Property under development Investment and development property Cash Other assets - investment Other assets - development Interest rate swaps Other assets Debt - completed properties Debt - development properties Other liabilities - investment Other liabilities - development Interest rate swaps Other liabilities - unallocated Total liabilities Net assets Joint venture investment loans Underlying capital employed 100% UNITE Wholly Owned £’000 Share of co-invested joint ventures USAF £’000 Capital Cities £’000 Student Village £’000 Total £’000 Total £’000 Group on see through basis 597,747 102,180 121,936 821,863 56,316 107,698 111,728 1,103 276,845 (409,253) (185,898) (62,471) (55,330) (8,803) (12,873) (734,628) 167,042 - - 167,042 67,593 36,001 - 103,594 4,158 (45,136) - - (40,978) (78,398) - (3,293) - (228) - (81,919) 2,522 1,113 365 - 4,000 (43,696) (20,458) (1,228) (4,247) (434) - (70,063) 31,826 - - 31,826 3,910 (3,572) - 338 676 (23,552) - (3,895) - - (718) (28,165) 266,461 36,001 - 302,462 10,590 (47,595) 365 338 (36,302) (145,646) (20,458) (8,416) (4,247) (662) (718) (180,147) 864,208 138,181 121,936 1,124,325 66,906 60,103 112,093 1,441 240,543 (554,899) (206,356) (70,887) (59,577) (9,465) (13,591) (914,775) 364,080 44,145 37,531 4,337 86,013 450,093 (49,312) 45,645 - 3,667 49,312 - 314,768 89,790 37,531 8,004 135,325 450,093 5 n o i t c e S Mark to market of interest rate swaps Valuation gain not recognised on property held at cost Deferred tax 6,828 38,726 12,873 228 - - 434 - - (338) - 718 324 - 718 7,152 38,726 13,591 Adjusted net assets Investment assets Development assets Total assets Investment liabilities Development liabilities Unallocated liabilities Total liabilities 373,195 90,018 37,965 8,384 136,367 509,562 713,552 335,844 1,049,396 171,709 - 171,709 71,228 36,366 107,594 (480,527) (241,228) (12,873) (734,628) (81,919) - - (81,919) (45,358) (24,705) - (70,063) 36,169 - 36,169 (27,447) - (718) (28,165) 279,106 36,366 315,472 (154,724) (24,705) (718) (180,147) 992,658 372,210 1,364,868 (635,251) (265,933) (13,591) (914,775) In order to show the Group’s full investment in joint ventures their net assets have been adjusted for loans that are capital in nature to show the underlying capital employed in the above table. See through gearing is calculated on an adjusted basis as 136%. 66 3. Expenses Group result before tax is stated after charging / (crediting): 2008 2007 £’000 £’000 £’000 £’000 Auditor’s remuneration: Fees payable to the company’s auditor for the audit of the company’s financial statements Fees payable to the company’s auditor for other services: - The audit of the company’s subsidiaries - Taxation - Relating to corporate finance transactions entered into by the company - Other services Depreciation of property, plant and equipment Net valuation losses on investment property: - Investment property - Write down of investment property under development - Freehold land and buildings Loss on disposal of property to: - USAF (see note 9) - Other purchasers Loss / (profit) on the part disposal of joint ventures Amortisation of intangible assets other than goodwill (included in administrative expenses) Rentals paid under operating leases 186 65 238 500 10 1,403 25,342 12,396 2,464 1,953 11,899 2,733 - - 849 3,356 20,379 4,638 325 5,412 6,984 The auditor’s remuneration in respect of corporate finance transactions entered into by the company includes £0.196m (2007: £0.453m) relating to the UNITE UK Student Accommodation Fund. Non-audit fees in respect of the parent company are included within the group amounts as disclosed above. 4. Staff numbers and costs The average number of persons employed by the Group (including directors) during the year, analysed by category, was as follows: Managerial and administration Site operatives The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Pension costs Fair value of share based payments Company Number of employees 2008 466 542 1,008 2008 £’000 30,741 3,141 788 308 34,978 181 44 275 679 10 1,555 2,733 4,205 (1,803) 539 9,790 2007 456 552 1,008 2007 £’000 29,771 3,096 565 411 33,843 The employees are paid by one of the Company’s wholly owned subsidiaries, UNITE Integrated Solutions plc, which recharges various corporate costs to the Company (see note 22). 67 4. Staff numbers and costs (continued) Directors’ Remuneration Group Directors’ emoluments 2008 £’000 1,611 2007 £’000 1,943 The aggregate amount paid to money purchase pension schemes in respect of the directors for the year was £99,845 (2007: £68,318). Retirement benefits accrued to 4 directors during the year (2007: 4 directors). Full details of Directors’ Remuneration are disclosed on pages 45 to 51. Company The directors are paid by one of the Company’s wholly owned subsidiaries, UNITE Integrated Solutions plc, which recharges various corporate costs to the Company (see note 22). Included within these recharges is £0.580m (2007: £0.686m) in respect of Board services. 5. Net financing costs Group Recognised in the income statement: Finance income - Interest income on deposits Gross interest expense on loans Interest capitalised Loan interest and similar charges Exceptional item: Bond redemption premium Loan break costs Loan set up costs written off on refinancing Bond and loan redemption costs Changes in fair value of interest rate swaps - transferred from equity - relating to ineffective hedges Finance costs Net financing costs Recognised directly in equity: Changes in fair value of interest rate swaps - transferred to income statement - relating to effective hedges 2008 £’000 (1,877) 48,789 (20,424) 28,365 - 478 - 478 1,586 30,828 32,414 61,257 59,380 (1,586) 7,604 6,018 5 n o i t c e S 2007 £’000 (1,763) 47,951 (16,998) 30,953 46,586 3,260 7,546 57,392 (101) 7,573 7,472 95,817 94,054 101 1,280 1,381 On 18 October 2007 the Group completed the early redemption of the UNITE Finance One plc bonds in order to allow the management of the related portfolio in accordance with the Group’s strategy. The costs associated with this early redemption totalled £57.392m as analysed above. 68 6. Tax credit Group Recognised in the income statement: Current tax expense Current year Income tax on UK rental income arising in overseas group company Corporation tax in respect of UK rental income arising in overseas group company Adjustments for prior years Deferred tax credit Origination and reversal of temporary differences - On exceptional bond and loan redemption costs - Other Adjustments for prior years Total tax credit in income statement Reconciliation of effective tax rate 2008 £’000 - 301 101 (378) 24 - (12,093) (442) (12,535) (12,511) 2008 2007 % £’000 % Loss before tax (100.0)% (128,853) (100.0)% Income tax using the domestic corporation tax rate Effect of indexation on investment and development property Non-deductible expenses Capital allowances gain crystallised Share of joint venture profit Movement on unprovided deferred tax asset Effect of property disposals to USAF Adjustments for prior years - deferred tax Adjustments for prior years - current tax Rate difference on deferred tax Deferred tax recognised directly in equity: Relating to hedging reserve movements Relating to net valuation gains recognised directly in equity (28.5)% 0.8% 3.4% - 0.5% 19.1% (4.7)% (0.3)% (0.3)% 0.3% (9.7)% (36,723) 986 4,433 - 639 24,613 (6,053) (442) (378) 414 (12,511) (30.0)% (12.9)% 4.5% 0.8% (1.4)% 3.2% (26.2)% 17.8% 0.1% (0.1)% (44.2)% 2008 £’000 (1,579) 797 (782) 2007 £’000 - 514 187 94 795 (16,070) (26,298) 11,921 (30,447) (29,652) £’000 (67,127) (20,138) (8,634) 3,015 550 (935) 2,143 (17,578) 11,921 94 (90) (29,652) 2007 £’000 (761) 2,265 1,504 69 7. Investment and development property 2008 Balance at start of year Cost capitalised Interest capitalised Transfer from property under development Transfer from land held for development Transfer from investment property under development Transfer from work in progress Disposals Net realisable value provision Valuation gains Valuation losses Net valuation (losses) / gains Balance at end of year Investment property under development £’000 Completed Property £’000 Property under development £’000 102,180 37,808 3,894 - - (88,352) - - - 3,389 (5,930) (2,541) 52,989 - - - 87,757 - - 40,119 (51,434) (1,228) - - - 75,214 121,936 146,833 15,011 (87,757) 70,297 - 2,291 - (19,487) - - - 249,124 Investment property £’000 597,747 4,577 311 - - 88,352 - (266,908) - 15,387 (35,766) (20,379) 403,700 Total £’000 821,863 189,218 19,216 - 70,297 - 42,410 (318,342) (20,715) 18,776 (41,696) (22,920) 781,027 Carrying value of properties on which borrowings are secured 402,190 52,989 75,214 249,124 779,517 2007 Balance at start of year Acquisitions Cost capitalised Interest capitalised Transfer from investment property Transfer from land held for development Transfer from investment property under development Disposals Valuation gains Valuation losses Net valuation losses Balance at end of year Investment property under development £’000 Property under development £’000 Investment property £’000 656,969 77,506 7,473 230 (5,941) - 146,770 (282,527) 28,669 (31,402) (2,733) 597,747 124,980 - 108,090 8,512 - - (146,770) - 10,224 (2,856) 7,368 102,180 12,093 - 96,668 3,501 5,941 3,733 - - - - - 121,936 5 n o i t c e S Total £’000 794,042 77,506 212,231 12,243 - 3,733 - (282,527) 38,893 (34,258) 4,635 821,863 Carrying value of properties on which borrowings are secured 597,747 95,389 90,606 783,742 Property has been valued on the basis of “market value” as defined in the RICS Appraisal and Valuation Manual issued by the Royal Institution of Chartered Surveyors as determined by CB Richard Ellis Ltd, Jones Lang LaSalle Ltd and Messrs King Sturge, Chartered Surveyors as external valuers. Investment property and investment property under development are carried at fair value. Property under development of £249.124m (2007: £121.936m) and Completed property of £75.214m (2007: £nil) held in current assets are carried at cost, but their fair values have been determined as described below. 70 7. Investment and development (continued) Following the formation of the UNITE UK Student Accommodation Fund it is likely that the fund will acquire the Group’s future developments. Hence properties acquired with the intention of selling them to the UNITE UK Student Accommodation Fund following completion are now treated as property under development in current assets, (carried at the lower of cost and net realisable value), rather than fixed assets, (carried at fair value). The impact if these properties were carried at fair value rather than cost is as follows: 2008 Balance at end of year Valuation gain not recognised on property held at cost Fair value at end of year 2007 Balance at end of year Valuation gain not recognised on property held at cost Fair value at end of year Investment property under development £’000 52,989 - 52,989 Investment property £’000 403,700 - 403,700 Completed Property £’000 75,214 5,026 80,240 Property under development £’000 249,124 23,911 273,035 Investment property under development £’000 Property under development £’000 Investment property £’000 597,747 - 597,747 102,180 - 102,180 121,936 38,726 160,662 Included within investment properties and investment properties under development are the following values in respect of leasehold interests: 2008 Valuation and net book value Long leasehold Short leasehold 2007 Valuation and net book value Long leasehold Short leasehold Investment property under development £’000 Completed Property £’000 Property under development £’000 - - - - - - - - - Investment property £’000 46,170 10,660 56,830 Investment property under development £’000 Property under development £’000 32,320 - 32,320 - - - Investment property £’000 105,230 11,920 117,150 Total £’000 781,027 28,937 809,964 Total £’000 821,863 38,726 860,589 Total £’000 46,170 10,660 56,830 Total £’000 137,550 11,920 149,470 The total interest included in investment and development properties at 31 December 2008 was £40.772m (2007: £29.197m). Total internal costs relating to manufacturing, construction and development costs of group properties, which have been deducted in arriving at the revaluation uplifts recognised on these properties, amount to £56.119m at 31 December 2008 (2007: £52.271m). 71 8. Property, plant and equipment Year ended 31 December 2008 Cost or valuation Balance at start of year Additions Disposals Revaluation Balance at end of year Depreciation and impairment losses Balance at start of year Depreciation charge for the year Balance at end of year Carrying amount at 31 December 2008 Year ended 31 December 2007 Cost or valuation Balance at start of year Additions Disposals Revaluation Balance at end of year Depreciation and impairment losses Balance at start of year Depreciation charge for the year Balance at end of year Carrying amount at 31 December 2007 Valuation Freehold land and buildings £’000 Leasehold improvements £’000 Motor vehicles, plant and equipment £’000 Fixtures, fittings and equipment £’000 1,745 - - (325) 1,420 245 175 420 2,021 256 (102) - 2,175 607 251 858 6,306 348 - - 6,654 2,962 384 3,346 7,746 162 - - 7,908 4,910 593 5,503 Total £’000 17,818 766 (102) (325) 18,157 8,724 1,403 10,127 1,000 1,317 3,308 2,405 8,030 Freehold land and buildings £’000 Leasehold improvements £’000 Motor vehicles, plant and equipment £’000 Fixtures, fittings and equipment £’000 1,586 - - 159 1,745 85 160 245 1,898 132 (9) - 2,021 406 201 607 6,019 287 - - 6,306 2,456 506 2,962 7,199 574 (27) - 7,746 4,222 688 4,910 5 n o i t c e S Total £’000 16,702 993 (36) 159 17,818 7,169 1,555 8,724 1,500 1,414 3,344 2,836 9,094 Freehold land and buildings are carried at fair value on the basis of “market value” as defined in the RICS Appraisal and Valuation Manual issued by the Royal Institution of Chartered Surveyors as determined by Messrs King Sturge, Chartered Surveyors as external valuers. The freehold land and buildings carried at value have an historical cost of £1.807m (2007: £1.807m). Assets subject to finance leases At 31 December 2008 plant and machinery with a carrying amount of £nil (2007: £0.885m) were subject to finance lease agreements under which the group has the option to purchase the assets at a beneficial price at the end of the lease. 72 9. Investments in subsidiaries and joint ventures Group Share of profit: - investment segment result - overheads - net revaluation (loss) / gains - current tax - deferred tax - shared of Landsbanki provision - other Share of items recognised directly in reserves: - valuation gains (net of deferred tax) - movements in effective hedges (net of deferred tax) Additions Disposals Profit adjustment related to trading with joint venture Distributions received At start of year At end of year Joint Venture Undertakings 2007 £’000 5,921 (632) 5,179 (1,438) 1,843 - 105 10,978 5,483 (1,423) 6,797 (28,575) (3,220) (10,314) (20,274) 106,287 86,013 2008 £’000 6,654 (293) (10,360) - 244 (6,120) (110) (9,985) 1,519 (9,761) 18,317 (2,924) (2,402) (5,258) (10,494) 86,013 75,519 During the year USAF Feeder (Guernsey) Ltd was formed, as a subsidiary of the Group, to invest in the UNITE UK Student Accommodation Fund. Some of the Group’s unit holding in the fund was transferred to this company. In addition, USAF Feeder (Guernsey) Ltd issued a further £16m of share capital to an investor, the proceeds of which were used to purchase new units in the fund. The investor’s interest in USAF Feeder (Guernsey) Ltd is accounted for as a minority interest in the consolidated accounts. Note 2(d) Segment assets and liabilities (see through basis) shows details of the value of the minority interest’s investment. The Group’s interests in joint ventures are held at a carrying value equivalent to its share of the underlying net asset value of the undertaking. The Group’s share of joint ventures’ results are as follows: Capital Cities JV Student Village JV’s - LDC (Project 110) Ltd - LDC (Project 170) Ltd UNITE UK Student Accommodation Fund 2008 Losses recognised directly in equity £’000 (5,082) - (987) (2,173) (8,242) 2008 Profit £’000 3,093 (2,350) 108 (10,836) (9,985) 2007 Gains/(losses) recognised directly in equity £’000 4,584 (296) - (228) 4,060 2007 Profit £’000 4,254 (846) 503 7,067 10,978 The UNITE UK Student Accommodation Fund is the joint venture formed with a consortium of investors in December 2006. This joint venture takes the form of a Jersey unit trust that controls a number of English limited partnerships in which the general partners are USAF GP No.1 Ltd, USAF GP No.4 Ltd, USAF GP No.5 Ltd, USAF GP No.6 Ltd, USAF GP No.8 and USAF GP No.10 Ltd, companies incorporated in England and Wales. The agreements integral to the above, which include the Group assuming delegated responsibility for property and asset management of the venture, result in the Group having joint control of these entities with the investors. 73 9. Investments in subsidiaries and joint ventures (continued) The Group receives management fees and is entitled to a promote fee if the venture outperforms certain benchmarks. This promote fee takes the form of increasing the Group’s capital participation in the joint venture. The impact of these fees on the Group results is summarised below. During the year the Group sold a further 13 (2007: 15) properties into the joint venture for £171.915m (2007: £252.574m), this includes £64.492m (2007: £nil) of completed property held as stock. The investment property previously held in the Student Village JV LDC (Project 170) Ltd was sold to the UNITE UK Student Accommodation Fund in October 2007 for £49.500m. The profits relating to these sales and associated disposal costs are set out below: Included in turnover Included in cost of sales (Loss) / profit relating to the sale of investment properties to USAF pre disposal costs Disposal costs Goodwill impairment Profit / (loss) on disposal of property Profit and loss 2008 £’000 Profit and loss 2007 £’000 61,890 (51,481) (5,080) (268) (64) 4,997 - - 1,034 (1,341) (542) (849) The goodwill impairment charged against the loss on disposal relates to synergistic benefits associated with the disposed properties. During the year the Group increased it’s interest in the UNITE UK Student Accommodation Fund from 20.1% to 22.2%. Some of this holding represents the beneficial interest of the minority; the ordinary shareholders of The UNITE Group Plc are beneficially interested in 18.5% of the fund (2007: 20.1%). The Capital Cities JV is the joint venture formed with GIC Real Estate Pte Ltd, a real estate investment vehicle of the Government of Singapore, to develop and operate student accommodation in the capital cities of London, Edinburgh, Dublin and Belfast, in which the Group owns a 30% equity share. This joint venture takes the form of a English limited partnership in which the general partner is LDC (Capital Cities) Ltd, a company incorporated in England and Wales. The agreements integral to the above, which include the Group assuming primary responsibility for development, property and asset management of the venture, result in the Group having joint control of this entity in conjunction with the majority partner. The Group receives management fees from the joint venture and recharges other costs in relation to the investment property under development. The impact of these fees on the Group results is summarised below. The Group’s joint venture in student villages with Lehman Brothers is held in LDC (Project 110) Ltd and LDC (Project 170) Ltd, companies incorporated in England and Wales, whose principal activity is the construction and letting of investment property. Under the Articles of Association, the Group cannot exercise control over these companies and its interest amounts to a 51% share of the profits and assets of the joint venture, although it holds a 75% interest in the ordinary shares. Under the articles of LDC (Project 170) Ltd, the Group is additionally entitled to the first £1.250m of net assets on any winding up of the company. The impact of amounts charged to LDC (Project 110) Ltd and LDC (Project 170) Ltd in respect of fees and construction costs on the Groups results is summarised below. On 3 October 2007 the investment property previously held in LDC (Project 170) Ltd was sold to UNITE Student Accommodation Fund for £49.500m. Following this disposal outstanding shareholder loans and the Group’s additional entitlement to the first £1.250m of the net assets of the company were settled. A promote fee was also paid to the Group by LDC (Project 170) Ltd as detailed below. 5 n o i t c e S The impact of joint venture management and promote fees and development sales on the Group results is as follows: Management Fees UNITE UK Student Accommodation Fund Capital Cities JV Promote Fees UNITE UK Student Accommodation Fund Student Village JV’s - LDC (Project 170) Ltd Development Sales Capital Cities JV Student Village JV’s - LDC (Project 110) Ltd - LDC (Project 170) Ltd 2008 £’000 2,758 2,479 5,237 - - - 698 42 - 740 2007 £’000 2,332 1,840 4,172 1,499 1,466 2,965 1,771 424 - 2,195 74 9. Investments in subsidiaries and joint ventures (continued) Summary financial information on joint ventures – UNITE UK Student Accommodation Fund Non-current assets Current assets Current liabilities Non-current liabilities Net assets / equity Represented by: Net assets attributable to the USAF fund unitholders Direct interest in partnership reserves Total equity / joint venture carrying value Minority partnership loans (classified as debt) Underlying capital employed (Loss) / profit for the period Capital Cities joint venture Non-current assets Current assets Current liabilities Non-current liabilities Net assets/equity Profit for the period Student Village JV - LDC (Project 110) Limited Non-current assets Current assets Current liabilities Non-current liabilities Net assets/equity Loss for the period Student Village JV - LDC (Project 170) Limited Non-current assets Current assets Current liabilities Non-current liabilities Net assets/equity Profit for the period 100% UNITE share 2008 £’000 2007 £’000 2008 £’000 2007 £’000 897,126 24,713 (22,100) (487,043) 412,696 371,033 (10,497) 360,536 52,160 412,696 (64,521) 366,848 8,573 (10,884) (249,963) 114,574 10,310 56,026 2,274 (7,459) (49,665) 1,176 (4,700) - 5,123 (4,063) - 1,060 216 834,544 22,175 (17,992) (392,585) 446,142 400,925 (501) 400,424 45,718 446,142 16,299 343,990 12,831 (17,872) (213,847) 125,102 14,180 63,600 2,787 (6,100) (52,463) 7,824 (1,693) - 5,951 (5,101) - 850 1,007 50,526 (10,497) 40,029 51,913 91,942 44,646 (501) 44,145 45,645 89,790 34,372 37,531 588 3,912 530 425 Investments in joint ventures per balance sheet 75,519 86,013 75 9. Investments in subsidiaries and joint ventures (continued) Company Cost or valuation At start of year Revaluation At end of year The Company has the following investments in principal subsidiaries and joint ventures: Unlisted subsidiary undertakings Joint venture undertakings 2008 £’000 2007 £’000 2008 £’000 238,195 (122,385) 115,810 266,200 (28,005) 238,195 3,912 (3,354) 558 LDC (Holdings) plc UNITE Holdings plc UNITE Finance Ltd LDC (Portfolio Four) Ltd UNITE London Ltd Unilodge Holding Ltd LDC (Project 110) Ltd UNITE Integrated Solutions plc UNITE Modular Solutions Ltd USAF LP Ltd USAF Jersey Investments Ltd UNITE (Capital Cities) Jersey Ltd LDC (Imperial Wharf) Ltd LDC (MTF Portfolio) Ltd LDC (Project 170) Ltd UNITE Finance One (Property) Ltd USAF Feeder (Guernsey) Ltd Country of Incorporation Class of Shares held Ownership England and Wales England and Wales England and Wales England and Wales England and Wales Guernsey England and Wales England and Wales England and Wales England and Wales Jersey Jersey England and Wales England and Wales England and Wales England and Wales Guernsey 2008 100% 100% 100% 100% 100% 100% 75% 100% 100% 100% 100% 100% 100% 100% 75% 100% 50% Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary The Company’s interest in LDC (Project 110) Ltd and LDC (Project 170) Ltd gives rise to joint control as explained above. The Company owns a controlling interest in USAF Feeder (Guernsey) Ltd. 5 n o i t c e S 2007 £’000 5,118 (1,206) 3,912 2007 100% 100% 100% 100% 100% 100% 75% 100% 100% 100% 100% 100% 100% 100% 75% 100% - 76 10. Intangible assets Group Year ended 31 December 2008 Cost Balance at start of year Additions Balance at end of year Amortisation Balance at start of year Amortisation charge for the year Impairment charge Balance at end of year Carrying amount at 31 December 2008 Year ended 31 December 2007 Cost Balance at start of year Additions Balance at end of year Amortisation Balance at start of year Amortisation charge for the year Impairment charge Balance at end of year Carrying amount at 31 December 2007 11. Inventories Land held for development Work in progress Raw materials and consumables Goodwill £’000 Development costs £’000 Computer software £’000 2,625 - 2,625 2,194 - 99 2,293 332 2,625 - 2,625 1,620 - 574 2,194 431 578 114 692 81 136 - 217 475 433 145 578 - 81 - 81 497 10,754 1,068 11,822 3,593 1,817 - 5,410 6,412 6,913 3,841 10,754 3,135 458 - 3,593 7,161 2008 £’000 5,000 3,664 1,647 10,311 Total £’000 13,957 1,182 15,139 5,868 1,953 99 7,920 7,219 9,971 3,986 13,957 4,755 539 574 5,868 8,089 2007 £’000 91,324 12,360 873 104,557 The land held for development has been written down by £10.774m to market value during the year (2007: £nil). Security has been given by way of a first charge over the land held for development to secure the Group’s borrowings. 77 12. Trade and other receivables Non-current Amounts owed by joint ventures Interest rate swaps Current Other trade receivables Amounts due from group undertakings Amounts owed by joint ventures Prepayments and accrued income Other receivables 13. Cash and cash equivalents Bank balances Overdrafts (note 15) Cash and cash equivalents per cash flow 2008 £’000 3,667 - 3,667 20,577 - 64,963 11,716 10,052 107,308 2008 £’000 111,845 (25,077) 86,768 Group Company 2007 £’000 3,667 1,103 4,770 14,900 - 57,356 11,370 10,393 94,019 2008 £’000 3,667 - 3,667 - 253,263 - - 7 253,270 2007 £’000 3,667 - 3,667 - 256,979 - 43 103 257,125 Group Company 2007 £’000 56,316 (2,799) 53,517 2008 £’000 - (1,730) (1,730) 5 n o i t c e S 2007 £’000 - (648) (648) Bank balances include £16.3m (2007: 16.1m) whose use at the balance sheet date is restricted by funding agreements to paying operating costs and loan interest relating to specific properties, a further £30.8m (2007: £nil) is secured against bank debt pending the refinancing of a property. 14. Trade and other payables Trade payables Amounts due to group undertakings Tax payable Other payables and accrued expenses Group Company 2008 £’000 15,269 - 372 64,903 80,544 2007 £’000 23,844 - 873 93,084 117,801 2008 £’000 - 37,804 - 2,769 40,573 Trade payables include £6.329m (2007: £5.296m) in relation to retentions on construction contracts. 2007 £’000 - 37,617 - 4,622 42,239 78 15. Borrowings and financial derivatives Non-current Bank and other loans Interest rate swaps Current Overdrafts Bank and other loans Interest rate swaps Finance lease liabilities Maturity analysis Financial liabilities fall due as follows: Group 2008 Non derivative financial liabilities Bank and other loans Bank overdrafts Trade and other payables Derivative financial liabilities Interest rate swaps 2007 Non derivative financial liabilities Bank and other loans Finance lease liabilities Bank overdrafts Trade and other payables Derivative financial liabilities Interest rate swaps 79 2008 £’000 507,739 44,401 552,140 25,077 108,424 3,375 - 136,876 Group Company 2007 £’000 2008 £’000 2007 £’000 354,917 8,803 363,720 2,799 237,400 - 35 240,234 - - - 1,730 - - - 1,730 - - - 648 - - - 648 Carrying value £’000 616,163 25,077 80,544 Within 1 year £’000 108,424 25,077 80,544 1-2 years £’000 2-5 years £’000 More than 5 years £’000 1,252 - - 257,269 - - 249,218 - - 47,776 3,375 - 1,478 42,923 Carrying value £’000 592,317 35 2,799 117,801 Within 1 year £’000 237,400 35 2,799 117,801 1-2 years £’000 2-5 years £’000 95,898 - - - 156,768 - - - More than 5 years £’000 102,251 - - - 8,803 - 32 - 8,771 15. Borrowings and financial derivatives (continued) The maturity of the Group’s obligations under hire purchase agreements is as follows: Within one year In the second to fifth years Minimum Lease Payments 2008 £’000 - - - Interest 2008 £’000 Principal 2008 £’000 - - - - - - Minimum Lease Payments 2007 £’000 35 - 35 Interest 2007 £’000 - - - Principal 2007 £’000 35 - 35 The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31 December 2008 in respect of which all conditions precedent had been met at that date were as follows: Expiring in one year or less Build facilities Other facilities 2008 £’000 - 56 56 2007 £’000 13 20,000 20,013 In addition, there are further committed facilities available where not all conditions precedent have yet been met amounting to £268m (2007: £330m). Of this amount £8m (2007: £49m) remains available only for completed properties and £20m (2007: £50m) only for development properties, the remaining £240m (2007: £231m) is available for both. Security for the Group’s property development and investment financing is by way of first charges over the properties to which they relate. In certain instances, cross guarantees are provided within the Group. The Company has guaranteed £311.435m of its subsidiary companies borrowings (2007: £164.523m). The guarantees have been entered into in the normal course of business. A liability would only arise in the event of the subsidiary failing to fulfil its contractual obligations. These guarantees are accounted for in accordance with IFRS 4. 5 n o i t c e S The Group’s gearing ratios are calculated as follows: Net debt per balance sheet: Cash and cash equivalents Current borrowings Non-current borrowings Interest rate swaps liabilities Interest rate swaps assets Mark to market of interest rate swaps Adjusted net debt Basic net asset value Adjusted net asset value (note 2(d)) Basic gearing Adjusted gearing Note 13 15 15 15 12 2008 Total £’000 111,845 (133,501) (507,739) (47,776) - (577,171) 2007 Total £’000 56,316 (240,234) (354,917) (8,803) 1,103 (546,535) 46,668 6,828 (530,503) (539,707) 320,166 450,093 405,930 509,562 180% 131% 121% 106% 80 16. Deferred tax liabilities Group Recognised deferred tax assets and liabilities are attributable to the following: Assets 2008 £’000 2007 £’000 Liabilities 2008 £’000 2007 £’000 Net 2008 £’000 2007 £’000 Investment property Investment property under development Development property held as stock Property, plant and machinery Investments in joint ventures Financial instruments Financial instruments relating to investments in joint ventures Tax value of losses carried forward Tax (assets) / liabilities Set off of tax Net tax liabilities - - (4,883) - - (12,735) - - (17,618) 17,618 - - - (457) (390) - (2,048) (199) (8,243) (11,337) 11,337 - 9,988 (156) - 282 7,504 - - - 17,618 (17,618) - 11,563 5,182 - - 7,465 - - - 24,210 (11,337) 12,873 9,988 (156) (4,883) 282 7,504 (12,735) - - - - - 11,563 5,182 (457) (390) 7,465 (2,048) (199) (8,243) 12,873 - 12,873 At 31 December 2008 the Group has calculated a potential deferred tax asset of £24.613m (2007: £nil), however, due to the uncertainty of future taxable profits against which this asset could be realised, it is not appropriate to recognise this asset in the financial statements. Movement in temporary timing differences during the year: Year ended 31 December 2008 Investment property Investment property under development Development property held as stock Property, plant and equipment Investments in joint ventures Financial instruments Tax value of losses carried forward Year ended 31 December 2007 Investment property Investment property under development Development property held as stock Property, plant and equipment Investments in joint ventures Financial instruments Tax value of losses carried forward At 31 Dec 2007 £’000 Transfers £’000 Recognised in income £’000 Recognised in equity £’000 At 31 Dec 2008 £’000 11,563 5,182 (457) (390) 7,266 (2,048) (8,243) 12,873 5,067 (5,067) - - - - - - (6,642) (858) (4,426) 672 (171) (8,909) 8,243 (12,091) - 587 - - 409 (1,778) - (782) 9,988 (156) (4,883) 282 7,504 (12,735) - - At 31 Dec 2007 £’000 Transfers £’000 Recognised in income £’000 Recognised in equity £’000 At 31 Dec 2008 £’000 27,103 7,254 - (449) 9,741 129 (1,962) 41,816 3,140 (3,663) 523 - - - - - (18,680) - (980) 59 (2,801) (1,763) (6,281) (30,446) - 1,591 - - 326 (414) - 1,503 11,563 5,182 (457) (390) 7,266 (2,048) (8,243) 12,873 Company Deferred tax has not been recognised on temporary timing differences of £14.462m (2007: £72.632m) in respect of revaluation of subsidiaries and investment in joint ventures as it is probable that the temporary timing difference will not reverse in the foreseeable future. 81 17. Capital and reserves Group Issued share capital £’000 Share premium £’000 Merger reserve £’000 Retained Revaluation reserve earnings £’000 £’000 Hedging reserve £’000 Total £’000 At 1 January 2007 30,763 173,008 40,177 218,035 18,053 1,151 481,187 Loss for the year Investment property under development - revaluation - deferred tax - revaluation - movements - deferred tax Other property Effective hedges Gains on hedging instruments transferred to income statement Deferred tax on gains transferred Share of joint venture valuation gain (net of related tax) Share of joint venture movements in effective hedges (net of related tax) Transfer on completion or disposal of investment property Shares issued Fair value of share based payments Own shares acquired Dividends to shareholders At 31 December 2007 and 1 January 2008 Loss for the year Investment property under development - revaluation - deferred tax - movements - deferred tax Effective hedges Gains on hedging instruments transferred to income statement Deferred tax on gains transferred Share of joint venture valuation gain (net of related tax) Share of joint venture movements in effective hedges (net of related tax) Transfer on completion or disposal of investment property Shares issued Fair value of share based payments Own shares acquired Dividends to shareholders Transfer to minority interest At 31 December 2008 - - - - - - - - - - - 111 - - - 30,874 - - - - - - - - - - 205 - - - - 31,079 - - - - - - - - - - - 1,325 - - - 174,333 - - - - - - - - - - 2,208 - - - - 176,541 - - - - - - - - - - - - - - - 40,177 - - - - - - - - - - - - - - - 40,177 (37,475) - - - - - - - - - 11,155 - 411 (1,096) (3,073) 187,957 (116,342) - - - - - - - - 18,658 - 308 (2,192) (3,090) 400 85,699 - 7,368 (1,591) 159 - - - - 4,810 - (11,155) - - - - 17,644 - 2,097 (587) - - - - 1,309 - (18,658) - - - - - 1,805 - - - - (1,280) 384 (101) 30 - (1,076) - - - - - (892) - - - (7,604) 1,779 1,586 (444) - (9,960) - - - - - 400 (15,135) (37,475) 7,368 (1,591) 159 (1,280) 384 (101) 30 4,810 (1,076) - 1,436 411 (1,096) (3,073) 450,093 (116,342) 2,097 (587) (7,604) 1,779 1,586 (444) 1,309 (9,960) - 2,413 308 (2,192) (3,090) 800 320,166 5 n o i t c e S 82 17. Capital and reserves (continued) Company Reconciliation of movement in capital and reserves At 1 January 2007 Loss for the year Revaluation of investment in subsidiaries and joint ventures Share options exercised Dividends to shareholders At 31 December 2007 and 1 January 2008 Loss for the year Revaluation of investment in subsidiaries and joint ventures Share options exercised Dividends to shareholders At 31 December 2008 Share capital Authorised shares of 25p each Issued at start of year – fully paid Shares issued to long term incentive plan Share options exercised Issued at end of year - fully paid Issued share capital £’000 30,763 - - 111 - 30,874 - - 205 - 31,079 Share premium £’000 173,008 - - 1,325 - 174,333 - - 2,208 - 176,541 Merger reserve £’000 40,177 - - - - 40,177 - - - - 40,177 Retained earnings £’000 249,351 (2,440) (29,210) - (3,073) 214,628 (2,594) (125,739) - (3,090) 83,205 Total £’000 493,299 (2,440) (29,210) 1,436 (3,073) 460,012 (2,594) (125,739) 2,413 (3,090) 331,002 Number of Ordinary shares 2008 2007 155,000,000 155,000,000 123,495,242 707,612 112,987 124,315,841 123,050,658 157,662 286,922 123,495,242 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Merger reserve This reserve represents the excess of the fair value over nominal value of shares issued as part consideration for assets acquired. Revaluation reserve The revaluation reserve represents revaluations relating to investment properties under development and land and buildings included in property, plant and equipment less any related deferred tax. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments where the hedged transaction has not yet occurred, less any related deferred tax. Dividends The following dividends were declared and paid during the year: Final dividend for 2007 of 1.67p (2006: 1.67p) per 25p ordinary share Interim dividend of 0.83p (2007: 0.83p) per 25p ordinary share After the balance sheet date the following dividends were proposed by the directors, for which no provision has been made: Final dividend proposed of nil (2007: 1.67p) per 25p ordinary share 83 2008 £’000 2,061 1,029 3,090 2008 £’000 - 2007 £’000 2,051 1,022 3,073 2007 £’000 2,062 18. Earnings per share and net asset value per share The calculations of basic and adjusted earnings per share for the Group are as follows: Earnings Basic (and diluted) Adjusted Weighted average number of shares (thousands) Basic Dilutive potential ordinary shares (share options) Diluted Earnings per share (pence) Basic Diluted Adjusted Note 2008 Total £’000 2007 Total £’000 (115,942) (37,475) 2(b) (44,760) (62,938) 124,095 303 124,398 123,239 1,257 124,496 (93.4) (93.4) (36.0) (30.4) (30.4) (50.6) Movements in the weighted average number of shares have resulted from the issue of shares arising from the employee share based payment schemes. The calculations of basic, adjusted and diluted net asset value per share for the Group are as follows: Net assets attributable to ordinary shareholders Basic Adjusted pre dilution Outstanding share options Adjusted diluted Number of shares (thousands) Basic Outstanding share options Diluted Net asset value per share (pence) Basic Adjusted pre dilution Adjusted diluted 5 n o i t c e S Note 2(d) 2008 £’000 2007 £’000 320,166 450,093 405,930 2,985 408,915 124,316 1,560 125,876 258 327 325 509,562 3,550 513,112 123,495 1,670 125,165 364 413 410 84 19. Employee benefits Share based payments The UNITE Group plc operates the following schemes: two executive share option schemes (“the Approved Scheme” and the “Unapproved Scheme”), an executive Long Term Incentive Plan (the “LTIP”), a Save As You Earn scheme (the “SAYE scheme”) and an Employee Share Ownership Trust (ESOT). Details of the two executive schemes and share options held by directors are detailed in the Directors’ Remuneration report. The SAYE scheme issues options to employees with vesting periods of 3 to 5 years. The only condition attaching to this scheme is a service condition. The ESOT is used to award part of directors’ and senior managers’ bonuses in shares. These shares vest after 3 years continued service. The number and weighted average exercise prices of share options is as follows: Outstanding at the beginning of the year Forfeited during the year Exercised during the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price 2008 Number of options (thousands) 2008 Weighted average exercise price 2007 Number of options (thousands) 2007 £2.12 £3.02 £1.96 £1.90 £1.96 £1.82 1,670 (237) (113) 287 1,607 1,088 £2.07 £2.88 £2.02 £2.99 £2.12 £1.83 1,899 (138) (287) 196 1,670 1,174 The weighted average remaining contractual life of outstanding options was 3.0 years (2007: 3.9 years). The weighted average share price on the date of exercise for options exercised during the year was £3.21 (2007: £4.07) Fair value of share options and assumptions The fair value of services received in return for share options granted after 7 November 2002 is measured by reference to the fair value of share options granted. Service conditions and non-market performance conditions are not taken into account in the grant date fair value measurement. The estimates of the fair value of the share options granted is measured based on the following models: Option scheme Model used Reason for model used Unapproved and approved share option schemes, LTIP – TSR component Monte Carlo simulations combined with binomial lattice SAYE share option scheme Black-Scholes ESOT bonus awards, LTIP – NAV component Discounted share price at grant For share options granted in the year, the fair values and assumptions made in applying the valuation models are as follows: Weighted average fair value at measurement date Share price Exercise price Expected volatility Option life Expected dividends Risk free interest rate (based on UK government bonds) Monte Carlo simulations used to model FTSE comparator groups (for TSR performance condition) combined with (for share options) binomial lattice to incorporate 7 year exercise window Service condition only, short exercise window makes a fixed date model appropriate Awards equate to a gift of free shares with a performance / service condition. Discounted for dividends not receivable during the service period (ESOT only) 2008 200p 227-310p 190p 17% - 37% 3-5 years 1.0% 4.1% - 4.2% 2007 318p 489-545p 299p 22% - 24% 3-5 years 1.0% 4.9% - 5.1% The expected volatility is based on the historic volatility (based on a period commensurate with the expected term of the options), adjusted for any expected changes to future volatility due to publicly available information. The fair value expense recognised in the income statement is disclosed in note 4. 85 20. Financial Instruments The Group holds or issues financial instruments for two main purposes: • • To finance the development and subsequent retention of investment properties; To manage the interest rate risks arising from its operations and from its sources of finance. In addition, various financial instruments – such as trade debtors and trade creditors – arise directly from the Group’s operations. All financial instruments are sterling denominated. The Group does not trade in financial instruments or derivatives. The Group finances its development and investment activities through a mixture of retained earnings, borrowings and fresh issues of equity. The Group borrows from major banking institutions primarily at fixed rates of interest, using derivatives where appropriate to generate the desired effective interest rate basis. The derivatives used for this purpose are interest rate swaps. The main risks arising from the Group’s financial instruments are interest rate risk and market price risk. The Board reviews and agrees policies for managing each of these risks, they are discussed in the Business Review and are summarised below. Interest rate risk The Group’s exposure to interest rate fluctuations on its borrowings and deposits are managed by using interest rate swaps and in some cases, simple fixed rate borrowing. The Group’s policy is separated into three areas: (i) Development finance After taking account of interest rate swaps, just under half of the Group’s development borrowing at 31 December 2008 is fixed, which is a significant increase over 2007. The Group will continue to review the level of its hedging in the light of the current low interest rate environment. (ii) Refinancing risk The Group’s principal exposure to interest rate fluctuations during development relates to movements in longer term interest rates, which affect the quantum of debt the property income is capable of servicing at completion. Significant adverse movements undermine the Group’s capital recycling strategy. The Group manages this risk via a programme of pre- hedging, through the use of forward starting interest rate swaps. At 31 December 2008 approximately £65.4m (2007: £154.0m) of the Group’s anticipated refinancing was hedged for an average term of 5.7 years (2007: 4 years). (iii) Medium and long term finance The Group holds its medium and long-term bank finance under floating rate arrangements. The majority of this debt is hedged through the use of interest rate swap agreements, although not all these arrangements qualify for hedge accounting under IAS 39. During 2008, the Group’s policy has been to hedge in excess of 80% of the Group’s exposure for terms of approximately 2-15 years. At 31 December 2008, after taking account of interest rate swaps, 87% (2007: 89%) of the Group’s medium and long-term investment borrowing was held at fixed rates. This is fixed at an average rate of 6.21% (2007: 6.74%) for an average period of 4 years (2007: 6 years). Liquidity risk With respect to its development activities, the directors have adopted a policy whereby the Group injects substantially the full amount of equity required for each development before drawing debt under associated facilities. In this way, the funding requirements of each scheme are substantially “ring fenced” and secured at the outset of works. Some of the Group’s banking facilities contain loan to value covenants, which if property values fall far enough may require some debt to be repaid. This position is closely monitored on a regular basis and the Group develops strategies that will minimise the impact of any such repayments on other operations. Some of the Group’s medium-term banking facilities are revolving, allowing the Group to apply its cash surpluses in the temporary reduction of its debt obligations. Market risk The Group’s primary market risk is interest rate exposure. It monitors this exposure through a process of sensitivity analysis, estimating the effect on operating cash flow over various periods of a range of possible changes in interest rates. At 31 December 2008, it is estimated that a general increase of one percentage point in interest rates would decrease the Group’s profit before tax by approximately £0.9m (2007: £1.3m). Effective and ineffective interest rate swaps have been included in this calculation. The Group’s policy is to accept a degree of interest rate risk, provided the effects of the various potential changes in rates remain within certain prescribed parameters. 5 n o i t c e S Interest rate swaps maturity Within 1 year 1 – 2 years 2 – 5 years More than 5 years 2008 Nominal amount hedged £’000 2008 Applicable interest rates £’000 2007 Nominal amount hedged £’000 2007 Applicable interest rates £’000 158,205 - 18,244 364,551 3.36% - 4.98% - 4.79% - 5.15% 5.12% - 5.63% 26,000 105,361 - 364,620 5.0% 3.1% - 5.4% - 5.1% - 5.6% The Group intends to dispose of certain property assets; at the present time conditions in the banking markets are very volatile and as a result these sales could be at risk as a result of potential purchaser’s inability to raise any necessary debt finance. Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. 86 20. Financial Instruments (continued) Cash Other trade receivables Interest rate swaps Amounts due by joint ventures (excluding loans that are capital in nature) Other trade receivables represent amounts due from the Group’s external customers as follows: 2008 Commercial tenants Individual tenants Manufacturing debtors Provisions carried 2007 Commercial tenants Individual tenants Manufacturing debtors Provisions carried 2008 £’000 111,845 20,577 - 13,050 145,472 2007 £’000 56,316 14,900 1,103 11,711 84,030 Total £’000 7,003 4,359 11,362 10,896 (1,681) 20,577 2008/09 £’000 Academic year 2007/08 £’000 Prior years £’000 4,100 1,371 5,471 10,896 (652) 15,715 1,514 2,988 4,502 - (671) 3,831 1,389 - 1,389 - (358) 1,031 Total £’000 Academic year 2007/08 £’000 2006/07 £’000 Prior years £’000 4,052 7,047 11,099 4,945 (1,144) 14,900 3,440 5,429 8,869 4,945 (665) 13,149 612 1,618 2,230 - (479) 1,751 - - - - - - The Group holds £8.450m (2007: £8.157m) in tenant deposits as collateral on the above debts. Effective interest rates Interest rate swaps with fair value liabilities of £47.776m (2007: £7.700m) and remaining lives of 1 to 15 years have been accounted for in creditors and debtors. The Group’s overall average cost of debt as at 31 December 2008 is 5.7% (2007: 7.0%). Fair value of financial assets and liabilities The fair value of the Group’s financial assets and liabilities do not differ from their book values other than as shown below: Fixed rate loans (20,900) (23,211) - - Fair values have been calculated by discounting future cash flows at prevailing interest rates. 2008 Book value £’000 2008 Fair value £’000 2007 Book value £’000 2007 Fair value £’000 87 20. Financial Instruments (continued) Capital management The Group’s financing strategy is based around its developer and co-investing manager business model, which allows capital from stabilised developments sold to UNITE UK Student Accommodation Fund to be recycled into new schemes. The Board has adopted this business model to achieve an appropriate balance between the capital deployed in mature, lower return investments and higher yielding development opportunities. The Board regularly reviews the capital available to the business with a view to ensuring that the Group has an appropriate capital base to maintain investor, creditor and market confidence and sustain the future development of the business. The Board has processes in place to ensure capital is only committed to new schemes, for site purchase or build, when there is sufficient capital available. These processes also ensure that capital is allocated to the opportunities offering the greatest return. The Group regards its available capital as the amount of its adjusted net assets, as this excludes deferred tax and the fair value of financial instruments, which will not be crystallised in the normal course of trade and includes all property assets at market value. At 31 December 2008 capital on this basis amounted to £406m (2007: £510m). 21. Operating leases Leases as lessee The future minimum lease rentals payable under non-cancellable operating leases are as follows: Less than one year Between one and five years More than five years Leases for commercial properties typically run for 5 – 15 years with market rent reviews every 5 years. 2008 £’000 10,993 41,426 150,316 202,735 2007 £’000 7,974 30,441 108,761 147,176 5 n o i t c e S Leases of residential accommodation properties run for periods between 18 and 26 years and are generally subject to annual RPI based rent reviews. One property is subject to a fixed annual rent increase of 2%. Leases as lessor The Group leases out its investment property under operating leases. The future minimum lease payments receivable under non-cancellable operating leases are as follows: Less than one year Between one and five years More than five years 2008 £’000 31,894 27,665 28,907 88,466 2007 £’000 26,622 11,323 44,763 82,708 88 22. Related parties Group The Group has had a number of transactions with its joint ventures, which are disclosed in notes 9 and 12. Company During the year, the company entered into various interest free loans with its subsidiaries, the aggregate of which are disclosed in the cash flow statement. In addition, the following material transactions took place. Intercompany recharges for corporate costs UNITE Integrated Solutions plc As a result of these intercompany transactions, the following amounts were due (to)/from the company’s subsidiaries at the year end. Intercompany recharges for corporate costs UNITE Holdings plc UNITE Finance One (Property) Ltd UNITE Finance Ltd UNITE Modular Solutions Ltd LDC (Frogmore) Ltd LDC (Portfolio One) Ltd Amounts due from group undertakings LDC (Holdings) plc Unilodge Holding Ltd Unilodge Holdings (UK) Ltd Amounts due to group undertakings The Company has had a number of transactions with its joint ventures, which are disclosed in notes 9 and 12. 2008 £’000 2,354 2008 £’000 130,694 99,772 12,767 - - 10,030 253,263 (8,130) (13,862) (15,812) (37,804) 2007 £’000 2,120 2007 £’000 134,400 99,772 12,767 7 3 10,030 256,979 (7,943) (13,862) (15,812) (37,617) Transactions with key management personnel Directors’ Remuneration is disclosed in note 4. Five Year Record Adjusted diluted net asset value per share (pence)* Net asset value per share (pence) Adjusted net assets (£m) IFRS net assets (£m) Managed portfolio value (£m) Gearing - adjusted (%) - including share of co investment funds (%) - on balance sheet (%) Rental income - from wholly owned assets (£m) - including share of co investment funds (£m) Investment segment result (£m) Adjusted (loss)/profit before tax (£m) (Loss)/profit before tax (£m) Earnings per share - adjusted (pence) - basic (pence) 2008 2007 2006 2005 2004 325 258 406 320 1,829 131 174 180 58 78 1 (45) (116) (36) (93) 410 364 510 450 1,723 106 136 121 63 82 8 (63) (37) (51) (30) 379 391 526 481 1,435 78 111 85 92 98 8 (9) 71 (7) 58 317 314 447 383 1,165 162 172 193 81 86 4 3 32 3 29 282 289 373 322 1,006 197 192 228 67 67 4 (4) 17 (3) 16 *2006 and prior years have been restated to show the 46 pence per share impact of redeeming the UNITE Finance One bond. 89 Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of The UNITE Group plc (the “Company”) will be held at The Core, 40 St Thomas Street, Bristol BS1 6JX at 9.30 a.m. on 15 May 2009 for the purpose of considering and, if thought fit, passing the following resolutions which, in the case of resolutions numbered 1 to 8 (inclusive), will be proposed as ordinary resolutions and, in the case of resolutions numbered 9 to 11 (inclusive), will be proposed as special resolutions. Ordinary business 1. To receive the audited annual accounts of the Company for the year ended 31 December 2008, together with the Directors’ Report and Auditor’s Report on those accounts. 2. To approve the Directors’ Remuneration Report for the year ended 31 December 2008. 3. To re-appoint Mr P M White as a Director of the Company. 4. To re-appoint Mr S R H Beevor as a Director of the Company. 5. To re-appoint Mr N A Porter as a Director of the Company. 6. To re-appoint Mr N P Hall as a Director of the Company. 7. To re-appoint KPMG Audit Plc as auditors to hold office from the conclusion of the meeting until the conclusion of the next general meeting of the Company at which accounts are laid and to authorise the Directors to determine their remuneration. Special business 8. THAT the Directors be generally and unconditionally authorised, in accordance with Section 80 of the Companies Act 1985 (the “Act”): (a) to exercise all powers of the Company to allot relevant securities (as defined for the purposes of that Section) up to a maximum nominal amount of £10,359,653; and further (b) to allot equity securities (as defined by Section 94 of the Act) in connection with a rights issue in favour of holders of ordinary shares in the capital of the Company, where the equity securities respectively attributable to the interests of such holders are proportionate (as nearly as may be), to the respective number of ordinary shares in the capital of the Company held by them, up to an aggregate nominal amount of £10,359,653 provided that this authority shall expire at the conclusion of the next annual general meeting of the Company after the passing of this Resolution or fifteen months after the passing of the Resolution, whichever shall be sooner (unless previously renewed, varied or revoked by the Company in general meeting), save that the Company may, before this authority expires, make an offer of agreement which would or might require relevant securities to be allotted after it expires and the Directors may allot relevant securities in pursuance of such an offer or agreement as if this authority had not expired and provided further that this authority shall supersede and revoke all previous authorities under Section 80 of the Act. 9. THAT, in accordance with Section 95 of the Act, the Directors be given power to allot for cash equity securities (as defined for the purpose of Section 94 of the Act) pursuant to the general authority conferred on them by Resolution 8 above as if Section 89 (1) of the Act did not apply to the allotment, but this power shall be limited: (a) to the allotment of equity securities in connection with an offer or issue to or in favour of ordinary shareholders on the register on a date fixed by the Directors where the equity securities respectively attributable to the interests of all those shareholders are proportionate (as nearly as practicable) to the respective numbers of ordinary shares held by them on that date, but the Directors may make such exclusions or other arrangements as they consider expedient in relation to fractional entitlements, legal or practical problems under the laws in any territory or the requirements of any relevant regulatory body or stock exchange; and (b) to the allotment (other than under (a) above) of equity securities having a nominal value not exceeding in aggregate £1,553,948 and this authority shall expire at the conclusion of the next annual general meeting of the Company after the passing of this resolution or fifteen months after the passing of this resolution, whichever shall be the sooner, save that the Company may, before this authority expires, make an offer or agreement which would or might require equity securities to be allotted after it expires and the Directors may allot equity securities in pursuance of such offer or agreement as if this authority had not expired and provided further that this authority shall supersede and revoke all previous authorities under Section 95 of the Act. 10. THAT the draft regulations produced to the meeting and for the purposes of identification signed by the Chairman be and are hereby adopted by the Company in substitution for its existing Articles of Association. 11. THAT, subject to and conditional upon the passing of Resolution 10 above, a general meeting other than an annual general meeting may be called upon not less than 14 clear days’ notice. BY ORDER OF THE BOARD A D Reid SECRETARY Dated 9 March 2009 Registered office: The Core 40 St Thomas Street Bristol BS1 6JX Notes 1. A member who is entitled to attend, speak and vote may appoint a proxy to attend, speak and vote instead of him. A proxy need not also be a member of the Company but must attend the AGM in order to represent his appointor. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares (so a member must have more than one share to be able to appoint more than one proxy). A form of proxy is enclosed. The notes to the form of proxy include instructions on how to appoint the Chairman of the AGM or another person as proxy and how to appoint a proxy electronically or by using the CREST proxy appointment service. To be effective the form must reach the Company’s registrar, Computershare Investor Services PLC, The Pavilions, Bridgewater Road, Bristol BS13 3FB so as to be received not later than 9.30 a.m. on 13 May 2009. 2. The following documents are available for inspection at the registered office of the Company during the usual business hours on any weekday (Saturday, Sunday or public holidays excluded) from the date of this notice until the conclusion of the AGM and will also be available for inspection at the place of the AGM from 9.15 a.m. on the day of the AGM until its conclusion: 3. 4. 5. 6. 7. (a) (b) copies of the executive directors’ service contracts with the Company and any of its subsidiary undertakings and letters of appointment of the non-executive directors; and a copy of the proposed new articles of association of the Company, and a copy of the existing articles of association marked to show the changes being proposed in resolution 10. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that only those persons registered in the register of members of the Company at 9.30 a.m. on 13 May 2009 (or if the AGM is adjourned, 48 hours before the time fixed for the adjourned AGM) shall be entitled to attend and vote at the AGM in respect of the number of shares registered in their name at that time. Any changes to the register of members after such time shall be disregarded in determining the rights of any person to attend or vote at the AGM. Please note that communications regarding the matters set out in this notice of Annual General Meeting will not be accepted in electronic form other than as specified in the enclosed form of proxy. If you are a person who has been nominated by a member to enjoy information rights in accordance with section 146 of the Companies Act 2006, Note 1 above does not apply to you but you may have a right under an agreement between you and the member by whom you were nominated to be appointed or to have someone else appointed, as a proxy for the meeting. If you have no such right or do not wish to exercise it, you may have a right under such an agreement to give instructions to the member as to the exercise of voting rights. As at 6 March 2009 (being the last business day prior to the publication of this Notice) the Company’s issued share capital consists of 124,315,841 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 6 March 2009 are 124,315,841. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that (a) if a corporate shareholder has appointed the chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the chairman and the chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (b) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not appointed the chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. Corporate shareholders are referred to the guidance issued by the Institute of Chartered Secretaries and Administrators on proxies and corporate representatives (www.icsa.org.uk) for further details of this procedure. The guidance includes a sample form of representation letter if the chairman is being appointed as described in (a) above. 90 6 n o i t c e S Appendix Explanatory notes of principal changes to the Company’s articles of association 1. Articles which duplicate statutory provisions Provisions in the existing articles of association (the “Current Articles”) which relate to provisions contained in the Companies Act 2006 are in the main amended to bring them into line with the Companies Act 2006. Certain examples of such provisions include articles as to the form of resolutions, the variation of class rights, the requirement to keep accounting records and provisions regarding the period of notice required to convene general meetings. The main changes made to reflect this approach are detailed below. 2. Variation of class rights The Current Articles contain provisions regarding the variation of class rights. The proceedings and specific quorum requirements for a meeting convened to vary class rights are contained in the Companies Act 2006. The relevant provisions have therefore been amended in the articles proposed to be adopted at the forthcoming AGM (the “New Articles”). 3. Convening extraordinary and annual general meetings The provisions in the Current Articles dealing with the convening of general meetings and the length of notice required to convene general meetings are being amended to conform to new provisions in the Companies Act 2006. In particular an extraordinary general meeting to consider a special resolution can be convened on 14 days’ notice (provided that, for meeting convened after 3 August 2009, certain requirements set out in the Companies (Shareholders’ Rights) Regulations are met) whereas previously 21 days’ notice was required. 4. Votes of members 6. Conflicts of interest Under the Companies Act 2006 proxies are entitled to vote on a show of hands whereas under the Current Articles proxies are only entitled to vote on a poll. The time limits for the appointment or termination of a proxy appointment have been altered by the Companies Act 2006 so that the articles cannot provide that they should be received more than 48 hours before the meeting or in the case of a poll taken more than 48 hours after the meeting, more than 24 hours before the time for the taking of a poll, with weekends and bank holidays being permitted to be excluded for this purpose. Multiple proxies may be appointed provided that each proxy is appointed to exercise the rights attached to a different share held by the shareholder. Multiple corporate representatives may be appointed. The chairman of a general meeting no longer has a casting vote. The New Articles reflect all of these new provisions. 5. Age of directors on appointment The Current Articles contain a provision which stipulates that the Company may by ordinary resolution require a director to retire on account of age, render him ineligible for appointment or re-appointment or require notice of his age to be included in the notice of the resolution appointing or re-appointing him. Such provisions could now fall foul of the Employment Equality (Age) Regulations 2006 and so have been removed from the New Articles. The Companies Act 2006 sets out directors’ general duties which largely codify the existing law but with some changes. Under the Companies Act 2006, from 1 October 2008 a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the Company’s interests. The requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the articles of association contain a provision to this effect. The Companies Act 2006 also allows the articles of association to contain other provisions for dealing with directors’ conflicts of interest to avoid a breach of duty. The New Articles give the directors authority to approve such situations and to include other provisions to allow conflicts of interest to be dealt with in a similar way to the current position. There are safeguards which will apply when directors decide whether to authorise a conflict or potential conflict. First, only directors who have no interest in the matter being considered will be able to take the relevant decision, and secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. The directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. It is also proposed that the New Articles should contain provisions relating to confidential information, attendance at board meetings and availability of board papers to protect a director being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the position giving rise to the potential conflict has previously been authorised by the directors. 91 7. Notice of board meetings Under the Current Articles, when a director is abroad he is not entitled to receive notice while he is away. This provision has been removed, as modern communications mean that there may be no particular obstacle to giving notice to a director who is abroad. It has been replaced with a more general provision that a director is treated as having waived his entitlement to notice, unless he supplies the Company with the information necessary to ensure that he receives notice of a meeting before it takes place. 8. Electronic and web communications Provisions of the Companies Act 2006 which came into force in January 2007 enable companies to communicate with members by electronic and/or website communications. The New Articles allow communications to members in electronic form and, in addition, they also permit the Company to take advantage of the new provisions relating to website communications. Before the Company can communicate with a member by means of website communication, the relevant member must be asked individually by the Company to agree that the Company may send or supply documents or information to him by means of a website, and the Company must either have received a positive response or have received no response within the period of 28 days beginning with the date on which the request was sent. The Company will notify the member (either in writing, or by other permitted means) when a relevant document or information is placed on the website and a member can always request a hard copy version of the document or information. 9. Directors’ indemnities and loans to fund expenditure The existing articles of association, which were last amended in 2003, enable the Company to indemnify the directors against liability in certain limited circumstances. The Companies (Audit, Investigations and Community Enterprise) Act 2004 (“CAICE”) amended the Companies Act 1985 to broaden the scope of permitted indemnities which a company may grant to a director. In broad terms, the changes introduced by CAICE enable a company to indemnify its directors against any liability incurred by a director to any person (other than the Company or any associated company) in connection with any negligence, default, breach of duty or breach of trust in relation to the Company (which was previously prohibited under section 310 Companies Act 1985), and to provide its directors with funds to cover the costs incurred by a director in defending legal proceedings against him or her. Previously, a company was only able to fund a director’s defence costs once final judgment in their favour had been reached. The Companies Act 2006 has in some areas widened further the scope of the powers of a company to indemnify its directors and to fund expenditure incurred in connection with certain actions against directors. In particular, a company that is a trustee of an occupational pension scheme can now indemnify a director against liability incurred in connection with the Company’s activities as trustee of the scheme. In addition, the exemption afforded by CAICE allowing a company to provide money for the purpose of funding a director’s defence costs now expressly covers regulatory proceedings and applies to associated companies. As directors are increasingly being added as defendants in legal actions against companies, and litigation is often very lengthy and expensive, the Board believes that the risk of directors being placed under significant personal financial strain is increasing. Further, the Board believes that the ability to provide appropriate indemnities and to fund directors’ defence costs as they are incurred, as permitted by the Companies Act 2006, afford the directors reasonable protection, and are important to ensure that the Company continues to attract and retain the highest calibre of directors. Individual directors of the Company would still be liable to pay damages awarded to the Company in an action against them by the Company, and to repay their defence costs (to the extent funded by the Company) if their defence is unsuccessful. 10. General Generally the opportunity has been taken to bring clearer language into the New Articles and in some areas to conform the language of the New Articles. In addition statutory references have been updated where necessary. 6 n o i t c e S 92 UCAS USAF / the Fund UCAS is the central organisation that processes applications for full time undergraduate courses at UK universities and colleges (www.ucas.co.uk). Uniaid Uniaid Foundation is a charity that supports students coping with the financial hurdles to higher education by providing online money management tools and practical support to students (www.uniaid.org.uk). SIFE Students In Free Enterprise, is an international organisation that mobilises university students around the world to make a difference in their communities while developing the skills to become socially responsible business leaders (www.sife.org). UNITE letting arrangements Direct let Properties where short hold tenancy agreements are made directly between the commercial operator and the student. Lease Properties which are leased to universities for a number of years and have no UNITE management presence. Nominations Properties where short hold tenancy agreements are made with students, with the university providing a long term occupancy guarantee in respect of a significant proportion of rooms. Sale and lease back Properties which have been sold to a third party investor then leased back to the Company. UNITE are responsible for the management of these assets on behalf of the owner. UNITE UK Student Accommodation Fund is Europe’s largest fund that purely focus’ on investment in direct let student accommodation investment assets. The Fund is an open ended infinite life vehicle which has unique buying access to UNITE’s portfolio. UNITE act as Fund Manager of the Fund, as well as owning a significant minority stake. UCC UNITE Capital Cities was established in 2005 as a joint venture between UNITE and GIC RE. It is a closed-ended fund due to mature in 2013 and was established by UNITE to develop and operate student accommodation in London and Edinburgh, markets in which UNITE’s growth was capital constrained at that time. UCC equity is now fully invested and all development projects have been completed. USV UNITE Student Village was established in 2004 as a joint venture between UNITE and Lehman Brothers to develop large student village schemes of c. 1,000 bedspaces. It is a closed ended fund with one remaining operational asset located in Sheffield. Blueprint ‘Blueprint’ is the business change programme UNITE initiated at the end of 2007. The programme has since identified £12 million in savings across the Group’s operational business, which will be realised during 2009. LTV The loan to value ratio is the amount of debt secured on a property as a percentage of the value of the property. ICR The interest cover ratio is the income generated by a property as a multiple of the interest charge on the debt secured on the property. Glossary Adjusted, fully diluted net asset value per share The basic NAV per share figure is recalculated to take account of the existence of outstanding share options and adjusted to: • exclude the impact of deferred tax; • exclude the mark to market of interest rate swaps; include the valuation gain not recognised on properties held at cost. • Adjusted gearing Adjusted net debt (excluding mark to market of interest rates swaps) as a percentage of adjusted net assets. Adjusted profit Adjusted profit adjusts the profit for the year calculated under International Financial Reporting Standards to exclude: • • • • the impact of deferred tax; the mark to market of interest rate swaps; valuation gains and losses on investment properties and; the profit or loss on disposal of investment properties (but not trading properties). Adjusted earnings per share The diluted earnings per share based on adjusted profit. Net rental growth The annual growth in income less costs from a property. Stabalising assets Properties that have recently been developed and are not yet generating their optimal net operating income. Non-core assets Properties which do not fit with the Group’s long term investment strategy, either because of their location or because they are let to universities under long term agreements and deliver lower returns. 93 Company information Registered office The Core 40 St Thomas Street Bristol BS1 6JX Registered number 3199160 www.unite-group.co.uk www.unite-students.com www.livocity.co.uk Auditors KPMG Audit Plc PO Box 695 8 Salisbury Square London EC4Y 8BB Registrars Computershare Investor Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH Financial adviser and broker Financial PR UBS Ltd 1 Finsbury Square London EC2M 2PP Financial Dynamics Holborn Gate 26 Southampton Buildings London WC2A 1PB UNITE management Leadership Executive Mark Allan Chief Executive Joe Lister Chief Financial Officer John Tonkiss Chief Operating Officer Matthew McAdden Managing Director, Special Projects Shane Spiers Group HR Director Richard Simpson Managing Director, Development Mark Morgan Operational Excellence Director Will Garrard Manufacturing Director Nathan Goddard Sales & Marketing Director James Granger Business Change Director Steve Grant Head of Fund & Asset Management 6 n o i t c e S 94 The UK’s leading developer and manager of student accommodation Annual Report & Accounts 2008 NITE Parkway Gate, home to 728 students in Manchester U T h e U K ’ s l e a d i n g d e v e o p e r l a n d m a n a g e r o f s t u d e n t a c c o m m o d a t i o n T h e I U N T E G r o u p p c l A n n u a l R e p o r t & A c c o u n t s 2 0 0 8 The UNITE Group plc The Core 40 St Thomas Street Bristol BS1 6JX Tel: 0117 302 7000 Fax: 0117 302 7400 info@unite-group.co.uk www.unite-group.co.uk www.unite-students.com www.livocity.co.uk This report is printed on Revive 100 Offset, which is 100% recycled paper. 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