Empiric Student Property NAV slips on over distribution – Over the course of 2017, Empiric Student Property’s EPRA NAV fell from 106.2p to 104.5p. The portfolio value at 31 December 2017 was £890.1m. EPRA earnings per share rose from 0.4p to 0.7p, still well short of the 5.55p of dividends that they declared (and their 6.1p target) and this hit the NAV. They prefer a measure they call adjusted basic earnings per share, which adds licence fees and rebates from forward funded developments plus adjustments related to rental guarantees. On this measure, earnings per share were 1.86p.
The portfolio comprises 94 assets with 9,158 beds in 29 prime university cities and towns. 85 of these were operational at the year end and these had an average valuation yield of 5.7% and average yield on cost of 6.7%. Six more should become operational in 2018, with the balance coming on stream in later years (if they don’t sell them). Trippet Lane in Sheffield, was delayed and is due to be completed in April 2018. Trippet Lane was therefore subject to a rental guarantee from the developer for the 2017/18 academic year. Rental guarantees on forward funded developments give them full protection in the first year of selling, mitigating construction risk. They have identified eight operating assets which are suitable for redevelopment, giving them the potential to enhance the properties and increase rental income and capital values. Any redevelopment would be subject to the availability of finance and would be timed to minimise the impact on dividend cover.
Low occupancy of 92% held back revenue. They say that this was down to property management issues and local economic conditions in some cities (Aberdeen and Cardiff mainly). The group’s operating margin was 57% – they acknowledge that this needs to be higher. They are targeting rental increases of 3.2% for the new academic year.
Outlook
- Revenue projections for academic year 2017/18 remain unchanged based on 92% occupancy until the start of the new academic year.
- For the 2018/19 academic year, they are targeting occupancy levels of 97% supported by an increased focus on the end to end sales process.
- Bookings for the 2018/19 academic year are currently 48% compared to 22% at the same time last year.
- A modest increase in gross margin is forecast for FY 2018, with a significant uplift in the fourth quarter as occupancy levels increase from September onwards and as the cost of third party property management and facilities management begins to fall away (they are moving all their properties onto their Hello Student platform).
- Targeting an operating margin of 70% in 2019 with tangible progress towards that target in FY 2018.
- They intend to reshape the investment portfolio by reinvesting the proceeds of the sale of a parcel of non-core assets into core markets. This will involve less than 10% of the Group’s property assets by value.
- They will unlock the value of their development assets through joint ventures.
- They are targeting administration expenses of GBP10 million in 2018, a reduction of 26% on FY 2017.
- They are targeting a dividend of 5.0 pence per share for the year ending 31 December 2018.
- On an adjusted basis, they expect to see a fully covered dividend by the year ending 31 December 2019 with significant progress towards that target in FY 2018.
Tim Attlee, Acting Chief Executive Officer of Empiric Student Property plc, commented: “We have a very strong property portfolio which operationally underperformed in 2017. We have identified the causes of that underperformance and are implementing the changes necessary to allow the business to deliver the improvements we all want to see. We expect these actions will deliver growth in operating margin and dividend cover during 2018 and beyond. As a result, we continue to target a total return of 10% per annum over the medium term.”
The chairman’s statement was largely written before her death on 13 March. She said “The board is acutely aware that performance was below expectations in what was a difficult year for Empiric. We have identified the reasons for this and have taken quick and decisive action to rectify it. The work we are doing will transform Empiric’s performance and support delivery of our target total return of 10% per annum.”
ESP : Empiric Student Property NAV slips on over distribution