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Empiric Student Prop (ESP)

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Thursday 23 November, 2017

Empiric Student Prop

Business Review and Trading Update

RNS Number : 2937X
Empiric Student Property PLC
23 November 2017

23 November 2017

Empiric Student Property plc

("Empiric" or the "Company" or, together with its subsidiaries, the "Group")


Further to the announcement on 7 November 2017, the Board of Empiric Student Property plc (the "Board") (ticker: ESP), the owner and operator of premium student accommodation across the UK, announces the following business review and update on trading.


The Company has grown significantly since its IPO in June 2014 and, particularly, since June 2016 to the start of this current academic year, where operating properties have increased from 52 to 84 and the number of buildings under internal management have grown from 18 to 61.


There has been good progress with regard to the Group's development portfolio with 1,145 new beds becoming operational for September 2017.  However, the performance of the Group's operating portfolio has been impacted by a number of financial and operational inefficiencies within the Group and its supply chain, which have adversely affected the Company's operating margins and dividend cover.


Lynne Fennah, who joined the Company on 26 June 2017 as CFO, has led and now completed a full financial and operational review of the Group with Paul Hadaway (CEO) and Tim Attlee (CIO).  


The Group is in the process of implementing significant financial and operational improvements and cost savings arising from this review, which the Board expects will deliver growth in operating margin, dividend cover and total shareholder return through 2018 and beyond.  


These initiatives are not expected to negatively impact the Company's core business activities or its investment strategy.


Key Points

·     Robust processes and procedures are now in place to substantially improve the Group's key financial and operational metrics and budgeting capability.

·     The Company's dividend target for the year ending 31 December 2017 is to be reduced from 6.1 pence per Share to 5.55 pence per Share.

A dividend of 1.25 pence per Share has been declared today in respect of the quarter ended 30 September 2017.

The Company is targeting a further dividend of 1.25 pence per Share for the quarter ending 31 December 20171.

·     The Company is targeting a dividend of 5.0 pence per Share for the year ending 31 December 20181.

·     The Board expects the dividend for the year ending 31 December 2018 to be substantially covered by adjusted EPRA earnings and fully covered by the year ending 31 December 2019.

·     The Company's operating margin is expected to be between 57% to 60% for the year ending 31 December 2017.

·     The Company is targeting an operating margin above 70% and the Board expects to make significant progress towards this level in 2018

·     The Group's operating portfolio is currently 92% let for the 2017/18 academic year.  Excluding the Group's buildings in Cardiff and Aberdeen, the operating portfolio is fully let2.

·     The Group's rental growth target for the 2018/19 academic year is 3.2% in aggregate (2017/18: 2.8%).

·     From 27 June 2014 to 30 June 2017, the Group has generated an aggregate net total return (NAV growth plus dividends paid) of 23.8 pence per share, of which dividends paid comprised 16.1 pence per share. This equates to a total return of 24.3% over the three year period.

·     The Company will continue to target a net total return of 10% p.a. over the medium term.

·     The Group is targeting a total expense ratio for 2018 of 1.15%.


Baroness Dean, Chairman of Empiric Student Property plc, commented:

"With the increase in operating properties from 52 to 84 and in internally managed buildings of 18 to 61, from June 2016 to the start of the current academic year, 2017 has been a year of exceptional growth for Empiric.


The review undertaken has identified a number of operational inefficiencies which have adversely impacted performance.  The Board is acutely aware that performance has fallen below expectations and is fully focused on delivering operational efficiencies.  We are confident in the quality of the portfolio, prospects for future performance and the Company's potential to deliver returns which meet market expectations."


Trading Update

·     The Group owns 84 assets (7,841 beds) which are operational for the 2017/18 academic year and nine further assets (1,3453 beds) scheduled to become operational in future years, across 29 cities and towns in the UK.

·     61 buildings are now operated by Hello Student® with the remaining 23 buildings operated by third party providers.

·     The gross annualised rent roll (including commercial revenue) for the 2017/18 academic year is £66.8 million4. This is expected to increase to approximately £73.9 million for the 2018/19 academic year following completion of six development assets currently under construction.

·     Lettings in Cardiff and Aberdeen are below budget having been impacted by local property management issues in Cardiff which are now largely resolved and local economic issues in Aberdeen arising from the oil price slump.  To address these issues, management has adopted earlier and more effective marketing, implemented rent reductions in Cardiff and Aberdeen, offset by higher than average rents in other cities, and commenced rigorous weekly monitoring of room-by-room bookings to effect earlier rental adjustments if necessary.

Operating Cost Improvements and Margin Targets

·     Following completion of the financial and operational review, more robust financial and operational processes, reporting and procedures are now in place alongside a strengthened finance team led by Lynne Fennah.  Operational cost improvements identified to date include the following:

Restructuring of operating partner procedures to avoid inefficient VAT treatment.

Acceleration of central buying of utilities by the Group to reduce external management fee costs and reduce and fix unit costs.

Acceleration of the internalisation of outsourced facilities management in cities where the Group has a larger number of properties, increasing efficiency and reducing costs.

Implementation of tighter internal controls and budgeting of outsourced management and facilities management.

·     With the successful implementation of the operating cost improvements detailed above, and the completion of the development pipeline, the Board anticipates a steady increase in operating margin.

The Company's operating margin is expected to be between 57% to 60% for the year ending 31 December 2017.

The Company is targeting an operating margin above 70% and the Board expects to make significant progress towards this level in 2018.

Administration Expenses

·     Administration expenses in H1 2017 were reported as £7.6 million and are forecast to be approximately £6.0 million for H2 2017 (H2 2016: £5.3 million).

·     Savings in H2 2017 are expected to be achieved mainly from one-off costs incurred in H1 2017 that have now fallen away, including the cost of a settlement agreement with the previous CFO and the cost of temporary finance staff to support the migration to a new accounting platform.

·     The Group is targeting administration expenses for the year ending 31 December 2018 of £10.0 million which would result in a total expense ratio of approximately 1.15%.

·     Further savings to achieve this expense level include completion of administration projects and a reduction in consultancy agreements and contractor head-count.

Executive Bonus

·     Paul Hadaway and Tim Attlee have waived their rights entirely to a bonus for the 2017 financial year under the Company's annual bonus scheme.


Operational and Portfolio Strategy

·     The Group will continue to focus on internalising operational building management and increasing bed numbers per city to drive economies of scale and reduce costs per bed. 

·     In this regard, in the seven cities or towns where the Group owns more than 400 beds, the average estimated operating cost for 2018/19 is 12% lower than the estimated operating cost for the current year, for the same cities.

·     In the seven cities or towns where the Group owns fewer than 200 beds, the estimated average operating cost for 2018/19 is 10% higher than the estimated operating cost for the seven cities where the Group owns more than 400 beds for the same year.

·     One of the central themes of the 2025 strategic plan is to increase the number of operating beds in cities where the Group is already active, with a diversified range of student accommodation properties to drive efficiencies.

·     This has begun to be implemented in three cities in particular: Exeter, Leicester and Manchester. The latter two cities each have more than 700 beds and an estimated average operating cost for the 2018/19 academic year 10% lower than the estimated operating cost for the seven cities with more than 400 beds (above) for the 2018/19 academic year.

·     The Group has conducted a review of cities where it owns fewer than 200 beds (operating or in development) to assess their viability.  These cities are opportunities for further investment or, where appropriate, assets may be sold with proceeds used to fund development and redevelopment opportunities.

·     In October 2017, the Group exchanged unconditional contracts to dispose of its development asset in Stirling substantially above acquisition price.


Investment Strategy and Pipeline

In July 2017, the Company raised net proceeds of £107.8 million through an equity fundraising, of which £51 million has been committed.

·     The Group continues to pursue a standing asset pipeline but currently sees more opportunities in forward funded development and direct development. 

·     The Group has a £69 million pipeline of development assets, both forward funded assets yielding approximately 6.8-7.5% on cost and direct development assets yielding approximately 7.25-8.25% on cost which will deliver higher yielding assets in the Group's target cities.

·     The Group has also identified eight operating assets within the existing portfolio that are suitable for redevelopment (subject to planning).

·     All development opportunities will be phased to manage the impact on dividend cover.

·     The acquisition of a portfolio of operating assets in London where the Company was in exclusive negotiations was not pursued to completion due to uncertainty over latent liabilities within the target's corporate structure.


Debt Arrangements

·     On 20 November 2017, the Company announced a new three year £70 million revolving credit facility with Lloyds Bank ("Lloyds RCF") with two 12-month extension options.

·     The Group now has total debt facilities of £390 million of which £86.2 million is undrawn. The current LTV is 32.2%. 

·     In aggregate, £191.1 million of debt is borrowed at fixed interest rates and £198.9 million is borrowed at floating rates. The prevailing aggregate cost of debt is 3.25% with a weighted average term of 6.9 years.


Market Overview

Early UCAS figures for September 2018 showed a record number of students making applications (61,440), an increase of 7% on applications for September 2017, with applications from non-EU students increasing by 12%, well above previous increases of c.1% per year.  EU applications increased by 6% after being down 9% between September 2016 and 2017 following the Brexit vote, whilst UK applications also increased by 6%.


As part of the due diligence for the Lloyds RCF, the lending group assets were revalued by Knight Frank acting for the lender after lettings for the 2017/18 year were complete. The revaluation confirmed that yields have remained the same since the CBRE revaluation of the Company's portfolio at the end of June 2017. This underlines the continuing strength of the student accommodation investment market where sentiment remains positive for well located and well designed investments.



(1)     The target dividend is a target only and not a forecast. There can be no assurance that the target will be met and it should not be taken as an indication of the Company's expected or actual future results.

(2)     Meaning an occupancy and/or income level of the operating portfolio of 97% or more. 

(3)     1,189 development beds remain subject to planning.

(4)     Gross annualised rent includes commercial revenue and marketed student revenue for the academic year at 100% occupancy.


For further information on the Company, please contact:

Empiric Student Property plc

(via Newgate below)

Paul Hadaway (Chief Executive)


Lynne Fennah (Chief Financial Officer)


Tim Attlee (Chief Investment Officer)




Akur Limited (Joint Financial Adviser)

Tel: 020 7493 3631

Tom Frost


Anthony Richardson


Siobhan Sergeant




Jefferies International Limited (Joint Financial Adviser and Broker)

Tel: 020 7029 8000

Gary Gould


Stuart Klein




Newgate (PR Adviser)

Tel: 020 7680 6550

James Benjamin

Em: [email protected]

Anna Geffert


Lydia Thompson



Further information on Empiric can be found on the Company's website at


The Company's LEI is 213800FPF38IBPRFPU87.


The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.



Empiric Student Property plc is a leading provider and operator of modern, direct-let, nominated or leased student accommodation across the UK. Investing in both operating and development assets, Empiric is a multi-niche student property company focused on, (i) providing good quality first year accommodation managed through its Hello Student® operating platform in partnership with universities, (ii) offering a variety of second and third year purpose built accommodation options for individual students and those wanting a group living environment, and (iii) continuing to expand the Group's existing premium, studio-led accommodation portfolio which is attractive to international and postgraduate students.


The Company, an internally managed real estate investment trust ("REIT") incorporated in England and Wales, listed on the premium listing segment of the Official List of the Financial Conduct Authority and was admitted to trading on the main market for listed securities of the London Stock Exchange in June 2014.

This information is provided by RNS
The company news service from the London Stock Exchange

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