Full-year results
Empiric Student Property PLC (LONDON:ESP) has spent its first year as a listed company assembling a portfolio of premium, purpose-built student accommodation in university cities across the UK. This has been funded with the money raised at IPO and two further equity raises above NAV totalling £235.7m and £115m of debt. The target dividend of 4p for the first year has been met and the board aims to pay 6p in FY16. Further opportunities for growth abound in a growing and already undersupplied market and ESP has 81.2m shares left available in its share issue programme, which would raise c £90m at the current share price.
Specialist student accommodation REIT
At 30 June 2015, ESP’s portfolio consisted of 31 standing properties and nine forward-funded or in development in 20 of the company’s 35 target cities. These had only been owned for five months on average and passing rent on that date was £18.4m vs revenue of £8.3m for the period. The operating properties were acquired at attractive prices and at an average initial yield of 6.6% (6.1% after a valuation uplift to standing assets of £13.4m). Post-balance sheet deals have added three standing and eight forward-funded or development properties, and the portfolio was valued at £365.3m as of 14 September. The LTV ratio is only 26.3% against a target of 35%, and the average cost of debt is 3.2%.
Undersupplied market
In the cities targeted by ESP, there is purpose-built accommodation for less than half of students on average and only 9% of students beyond first year. Student numbers having risen over the last two decades, the lifting of the cap on the overall student population and increasing numbers of international students (up 6% in the last academic year) are set to boost them even more. Last year’s increase of 3% was only just met by new accommodation. Current full occupancy (the company accounts for 97.5% as full) is likely to continue. Management’s five-year target is to have 10,000 operational beds and it already has 4,820 in the portfolio as a whole (2,953 operational). Given there were 435,000 international students in the UK in 2013/14, half of whom studied outside London, and around 540,000 post-graduate students (there is some overlap between the groups), there is still a large market to target.
Valuation: Dividend cover to increase
ESP trades at a 6.6% premium to NAV, supported by continued growth in the portfolio and visibility of revenue increases over the next two years: standing properties bought during the last year will make a full contribution in FY16, up from an average of five months to 30 June 2015, and some development properties will be completed, adding 970 beds from September 2016 and 893 from September 2017.
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