(Image Courtesy - UPP)

Acquisition of University Partnerships Programme (UPP) - one of the UK’s prominent on-campus university accommodation providers - was one of the key acquisition deals in the infrastructure space last year. It is also reflective of the recent heightened activity in the niche sector.

UPP has thus far invested around £1.4 billion (US$2.1bn) in the UK's higher education sector by way of building and managing student accommodation across the country's many universities.

While initially owned by Barclays Infrastructure Funds Management (BIFM) up until last year, a majority stake in UPP (60 per cent) was later acquired by Dutch fund manager PGGM in September 2012. The remaining 40 per cent was subsequently snapped up by Gingko Tree - an investment vehicle of the Chinese State Administration of Foreign Exchange. Dutch pension fund manager, PGGM which usually invests into stable social infrastructure projects with a long-term focus, currently manages around €140 billion of pension assets in Europe.

Acquisition Profile 

The transaction is a significant one in the UK student housing sector since UPP is the UK market leader in partnership-type transactions for student accommodation on university campuses.

UPP’s portfolio includes 28,000 rooms and a rent roll of £133 million. Recent deals include a 125-year concession to operate 4,321 rooms and the accommodation office of Reading University in a £230 million PPP. To date UPP has invested £1.4 billion in the Higher Education sector and plans to invest a further £1 billion into UK universities over the next two to three years. It is targeting an expected pipeline of about 20,000 beds spread between upwards of six universities.

UPP is understood to have the UK's largest leasehold portfolio of student accommodation based on a university-partnership model. Its business model differentiates from most operators in the social infrastructure market in that it derives value from long-term concessions with higher education institutions (a minimum of 40-years). The developer does not rely on increases in property values and is fully equipped to manage risks involved in the design, construction, financing and operation of residential and non-residential infrastructure.

One of the key reasons why UPP looked so attractive to pension funds is the sector it operates in, which delivers stable and resilient cash flows comparable with other concession businesses, something pension funds are keen on.

Henk Huizing, head of infrastructure at PGGM had commented at the time of the stake acquisition, “....The company [UPP] has an excellent market position and we are supportive of its strategy. In addition, we support its partnership model with the public sector and look forward to long term mutual beneficial relationships. The deal is a good example of implementing the fund’s direct investment strategy in stable social infrastructure sectors with a long term focus. Furthermore, the inflation linked, stable cash flows are an excellent match with our clients liabilities.”

UPP's income is primarily derived from rental of over 28,000 rooms as well as facilities management activities and new site development fees. The average occupancy of its facilities over the last 5 years has been in excess of 99 per cent across the portfolio, with many sites at 100 per cent, the company reported.

According to UBS, which worked on the transaction with BIFM, "it had several path-breaking features to address complexities and the current markets conditions." It is one of the largest acquisitions in the European social infrastructure sector.  The deal is also telling of the times since it attracted interest from two major institutional investors like PGGM and Gingko Tree.

Macquarie acted as advisor to PGGM on the deal and Macquarie's head of international infrastructure and utilities Daniel Wong told IJ News at the time of the transaction that, “The deal further evidences the rise of direct pension fund investors in infrastructure and real estate assets in the UK and globally."

BIFM first expressed a desire to sell its stake in UPP in 2010 which in itself was a tough economic time in Europe, the deal was a complex process and involved advisers doing a strategic review of UPP. However the successful acquisition of the developer highlights the attractiveness of the UK higher-education sector for infrastructure investors and the quality of the underlying cash flows. It is also the first time two internationally known pension funds have been brought together in this sector. While global pension fund investment into UK assets has been pretty good so far, it has mainly concentrated on regulated utilities like water and energy. The UPP acquisition is one of the significant deals outside of the traditional sectors.

Bond Programme

The M&A deal was also executed in parallel with a complex refinancing process undertaken by UPP which guarantees a stable and de-risked long-term capital structure for the new shareholders. In March this year UPP unveiled its £5 billion bond issuance programme signaling the fact that developers are looking at the bond market as a more attractive route for raising long-dated debt. The bond programme is also understood to be the largest in the student accommodation sector in recent times.

UPP raised £383 million in the first round of its bond issuance programme which will be used to refinance its existing debt facilities. The money raised matched the target the company had set when it launched the bond programme. About £307 million has been raised in a fixed rate tranche with a maturity of 27 years and the remaining £76 million has been raised in an index-linked tranche with a maturity of 34 years.

This bond issuance covers UPP's six university campuses:

• University of Kent
• University of Nottingham
• Nottingham Trent University
• Oxford Brookes University
• Plymouth University
• University of York.

Macquarie provided advice to UPP on the refinancing process. Joint bookrunners on the bond issuance programme were Barclays, RBC Capital Markets, Royal Bank of Scotland, UBS and MUSI (Mitsubishi UFJ Securities International).

PGGM first took a stake in the University of Reading which was refinanced on a long-term basis through a private placement with Aviva for an enterprise value of £200 million. The refinancing of six other SPVs mentioned above followed after Reading. The refinancing consists of a unique cross collateralised ring-fenced structure including a mix of fixed and index-linked debt in addition to inflation swaps which allow to hedge against the mismatch between RPI-linked revenues and fixed debt service.

Student accommodation is an asset class that has been a popular one in the UK particularly over the past two years. There are between five to six projects at different stages of procurement in the country at the moment confirming the strong demand dynamics in the student accommodation space.

There are various reasons why the sector has caught investor attention in the past years; demand-supply gap being one, no let-up in student numbers enrolling for higher education despite a hike in UK university education fees being another and last but not the least is the required refurbishment of the UK university student estates that were built back in the '1960s-70s.

The past year has witnessed a series of project finance-type tender announcements by various universities around the UK for new construction and refurbishment or replacement of their ageing on-campus student homes stock and this is expected to continue. The stable and long-term returns of the sector are being realised by many non-traditional lenders in the UK and Europe. Pension funds, insurers and bond players are expected to play an important role in the sector in the coming years. UPP's acquisition is a case in point.