REG - Empiric Student Prop - Final Results for the Year 30 June 2016 <Origin Href="QuoteRef">ESP.L</Origin> - Part 2
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quality, modern student accommodation, generally located in prime, city-centre locations in
top university cities and towns, spreading risk through a diverse geographic exposure.
Each of our properties, generally, has:
· 50-200 beds in total
· Studios and 1-3 bedroom apartments
· Generous space per student bed
· All rooms with en-suite bathroom and kitchen facilities
· Communal facilities including a cinema room, gym, launderette, study rooms and break-out areas
Income
Rental income is predominantly generated from direct leases, as well as commercial lease opportunities within the
properties. We target upper quartile rent and primarily accommodate postgraduate and international students. We have annual
rent reviews and rent varies within each building and for each room.
Investment
We acquire individual buildings and portfolios of properties as assets. We undertake development of new buildings or
refurbish or convert student accommodation with other development partners, through forward funding third party developers
or on our own. Apart from the development assets held in 50/50 joint ventures during the development phase, we have sole
ownership of all investments.
We intend to hold the investments for the long term, but will sell investments if a sale would represent a satisfactory
return on the initial investment or enhances the value of Empiric, taken as a whole. There is no limit on disposals.
Investment Restrictions
· Generate income from no less than five separate buildings
· No single asset represents more than 20% of the gross asset value
· At least 90% of the properties directly and indirectly owned are freehold or long leasehold properties (with at
least 100 years remaining)
· A maximum of 15% of NAV may be committed to spend on the equity requirement for development or forward funded
projects, including conversions. This is conducted in special purpose vehicles with no recourse to other Empiric assets
· Rent from commercial leases is limited to 25% of the total rent receipts of any single building and 15% of total
rent receipts
· No investment in other closed-ended investment companies
Borrowing Policy
The Company will maintain a conservative level of aggregate borrowings typically of 35%, but no more than 40%, of the Gross
Asset Value (calculated at the time of draw down) and will comply with REIT provisions. This limit will be inclusive of the
Group's pro rata share of development loans incurred in relation to joint venture development projects.
Borrowings employed by the Group may either be secured on individual assets without recourse to the Company or by a charge
over some of the Group's assets to take advantage of potentially preferential terms. Development loans, however, will only
be secured at the individual asset level, without recourse to the Group's other assets or revenues.
The Company may engage in interest rate hedging in respect of borrowings, or otherwise seek to mitigate the risk of
interest rate increases, for efficient portfolio management purposes only.
Chief Investment Officer's Portfolio Review
Overview
The Company has continued to grow selectively its portfolio of premium, student accommodation assets, more than doubling
the number of rooms contracted over the year to 30 June 2016. We have built a reputation as a reliable acquirer of standing
assets and reliable funding partner on development assets. As a result, we are seeing more off-market transactions at
competitive prices and the relationships we have formed with developers are leading to further transactions negotiated
directly with these developers. Not only does this reduce acquisition costs (specifically, fees paid to third party
introducers) but, importantly, we are working with development partners who know our design specifications and we can be
sure will develop properties to our high standards.
We have expanded Empiric's presence across the UK with assets in 29 prime university towns and cities at the year end and
we have also built our portfolios within key centres, either on an asset by asset basis (both operational and development
assets) or through portfolio acquisitions. We target 300-400 beds per town or city, across multiple buildings, as we
believe that this provides us with suitable scale to achieve operational efficiencies while enabling us to offer slightly
different, distinctive accommodation to our customers.
While we were very active in acquiring assets, we also decided to withdraw from one conditional contract entered into in
the previous financial year, Framwellgate House. Our investment team concluded that, given the specifics of the proposed
contract, the Company's funds would be better invested in alternative projects. A key function of our investment team is to
determine which of the vast number of proposals introduced to Empiric best meet the Company's investment objectives and
which do not. On occasion, we recommend to the Board that we do not proceed with an acquisition where we believe that the
conditions to a contract are not capable of being met (at all or within a reasonable timeframe) so that committed funds can
be deployed elsewhere.
Assets
During the year to 30 June 2016, the Group invested in, or committed to, the freeholds (unless otherwise stated) of 35
assets, comprising a mix of operating properties, forward funded assets (funding of third party developments in return for
a discount on the acquisition price) and a development project (to be developed by the Group directly), with an aggregate
price of £251.2 million (including acquisition costs) (2015: 37 assets with an aggregate price of £228.5 million (including
acquisition costs)).
The Group had also exchanged conditional contracts on three further properties (mainly forward commitments acquired subject
to practical completion), for which the outstanding conditions had not been met as at 30 June 2016, with an aggregate price
of £72.6 million (excluding acquisition costs) (2015: two assets with an aggregate price of £17.8 million (excluding
acquisition costs)). In addition, the Group had exchanged conditional contracts on three further sites for development,
subject to receipt of planning consent.
As at 30 June 2016, the Group owned, or was committed on, a total of 68 assets (representing 6,191 beds) (2015: 37 assets
representing 3,503 beds) and had exchanged conditional contracts, including on sites subject to planning permission being
obtained, (with the conditions or planning remaining outstanding at the year-end) on a further seven assets (representing
1,207 beds) (2015: three assets representing 229 beds), in a total of 29 towns and cities.
Summaries of these properties are set out in Tables 1 and 2 on pages 26 and 27 of the Annual Report.
Table 1 - Operating Assets (and Those that had Reached Practical Completion) as at 30 June 2016 (55 in total)
Name Location Number of Beds Date of Acquisition or Practical Completion Purchase Price (£m) Net Yield on Acquisition or Cost Valuation Yield
Centro Court Aberdeen 56 September 2014 6.5 6.8% 5.9%
St Peter Studios(1) Aberdeen 123 June 2016 13.7 7.0% 6.0%
Canal Bridge Bath 20 November 2015 1.7 5.9% 5.5%
Widcombe Wharf Bath 40 November 2015 3.9 5.5% 5.3%
Piccadilly Place Bath 47 November 2015 3.6 5.9% 5.5%
The Brook Birmingham 106 July 2014 12.0 6.5% 5.7%
Edge Apartments Birmingham 77 August 2014 8.9 7.0% 5.7%
College Green(2) Bristol 84 July 2014 10.0 6.7% 5.7%
Summit House Cardiff 87 July 2014 9.6 7.0% 5.8%
Alwyn Court Cardiff 51 October 2014 3.5 6.4% 5.9%
Northgate House Cardiff 67 February 2015 5.2 7.0% 6.0%
St Margaret's Flats Durham 109 May 2015 5.1 7.5% 6.4%
Buccleuch St(1) Edinburgh 88(3) June 2016 8.5 8.1% 5.6%
Picturehouse Apartments Exeter 102 July 2014 11.4 6.3% 5.8%
Dean Clarke Lofts(4) Exeter 30 December 2014 4.5 6.6% 5.7%
Library Lofts Exeter 61 September 2015 6.1 6.3% 5.7%
Maritime Studios Falmouth 138 August 2015 8.8 6.5% 6.1%
Ballet School Glasgow 103 March 2015 11.9 6.7% 6.2%
333 Bath Street Glasgow 70 September 2015 7.4 6.5% 6.1%
Curzon Point(5) Hatfield 116 December 2014 9.2 6.4% 5.8%
Kingsmill Studios Huddersfield 98 September 2015 7.5 7.5% 6.1%
City Block 1 Lancaster 30 May 2015 2.1 6.1% 5.9%
City Block 2 Lancaster 77 May 2015 5.6 6.1% 5.9%
City Block 3 Lancaster 100 May 2015 7.9 6.1% 5.9%
Algernon Firth Leeds 111 January 2015 7.2 6.6% 5.7%
St Mark's Court Leeds 85 March 2015 7.1 6.0% 5.8%
Pennine House Leeds 127 June 2016 17.8 6.6% 5.9%
City Block 1 Leicester 98 May 2015 6.2 6.3% 6.2%
City Block 2 Leicester 76 May 2015 4.8 6.3% 6.2%
160 Upper New Walk Leicester 17 May 2016 1.7 6.1% 6.3%
136-138 New Walk Leicester 30 May 2016 2.9 6.0% 6.2%
Bede Park Leicester 59 May 2016 3.7 6.2% 6.2%
The Octagon Liverpool 19 June 2015 2.0 6.4% 6.2%
Grove Street Studios Liverpool 28 June 2015 2.7 6.5% 6.2%
Chatham Lodge Liverpool 50 June 2015 3.9 6.5% 6.2%
Art School Lofts Liverpool 64 June 2015 8.4 6.3% 6.0%
Hayward House Liverpool 74 June 2015 5.4 6.3% 6.0%
Maple House Liverpool 147 June 2015 12.9 6.3% 6.0%
Halsmere Studios London 79 February 2015 13.3 6.4% 5.1%
Ladybarn House Manchester 117 March 2016 10.3 6.3% 6.1%
Victoria Point 1 Manchester 98 April 2016 29.5 5.6% 5.7%
Victoria Point 2 Manchester 85 April 2016 - -
Victoria Point 3 Manchester 85 April 2016 - -
Victoria Point 4 Manchester 84 April 2016 - -
Victoria Point 5(6) Manchester 132 April 2016 - -
Victoria Point 6 Manchester 77 April 2016 - -
Metrovick House(1) Newcastle 63 May 2016 7.4 6.5% 6.3%
Talbot Studios Nottingham 98 September 2014 8.2 6.9% 5.8%
Stone Mason House Oxford 44 May 2016 4.5 5.1% 5.0%
Registry Portsmouth 41 August 2015 4.5 6.5% 6.3%
Saxon Court Reading 83 March 2016 13.0 6.0% 5.7%
London Road(7) Southampton 46 November 2014 3.6 7.0% 5.9%
Brunswick Apartments Southampton 173 September 2015 16.7 7.2% 5.9%
Ayton House St Andrews 241 December 2015 26.0 5.5% 5.3%
Caledonia Mill Stoke-on-Trent 120 June 2015 6.3 6.5% 6.1%
Total/average yield 4,531 404.4 6.4% 5.9%
Notes:
(1) Reached practical completion as at the date indicated but was not operational as at 30 June 2016.
(2) 150 year lease, started in August 2010.
(3) In June 2016, the Group acquired a retail site adjacent to the Buccleuch Steet building which will be
converted to provide, inter alia, an additional two studios
resulting in a total of 88 beds for the property with an estimated total project cost of £0.65 million (not
included in the price above).
(4) 999 year lease, started in March 2014.
(5) 199 year lease, started in December 2014.
(6) This building is to be significantly refurbished and, therefore, will not be operational for the 2016/17
academic year.
(7) Freehold/leasehold
The portfolio of 52 operating properties (2015: 29) was fully let for the 2015/16 academic year. The gross annualised rent
for these properties was £33.1 million (2015: £18.4 million), of which £0.9 million (representing 2.7% of the gross
annualised rent) was attributable to commercial revenue (2015: £0.8 million representing 4.4% of gross annualised rent). We
have targeted an average uplift in annual rents of 2.78% for the 2016/17 academic year (2015/16: 3.0%).
Name Location Proposed Date of Price Paid or Estimated
Number of Beds Acquisition Total Investment to Completion Completion Date
(£m)
Forward Funded Projects
William & Matthew House(1) Bristol 75 April 2015 8.3 September 2016
Bonhay Road Exeter 150 September 2015 12.3 October 2017
155 George Street Glasgow 89 November 2015 9.5 September 2017
Oldgate House(1) Huddersfield 179 May 2015 11.3 September 2016
Welsh Baptist Chapel Manchester 87 May 2015 8.3 September 2017
The Frontage(1) Nottingham 162 October 2015 18.7 November 2016
Talbot Point(1) Nottingham 77 February 2015 5.9 September 2016
Europa House Portsmouth 242 April 2016 21.9 September 2017
Trippet Lane Sheffield 63 April 2016 5.4 September 2017
Portobello Road(1) Sheffield 134 August 2015 11.6 September 2016
Lawrence Street York 115 March 2016 10.7 September 2017
Development Project
Willowbank(1) Glasgow 178 December 2014 7.05(2) September 2016
Provincial House Sheffield 107 December 2015 11.6 September 2017
Total 1,658 142.6
Forward Commitments and Sites Acquired Subject to Planning
1-3 James Street West(1)(3) Bath 78 August 2015 7.65(4) September 2016
James House(1)(3) Bath 169 August 2015 25.0(4) September 2016
Windsor House(1)(3) Cardiff 314 November 2015 41.0(4) August 2016
Well Street(5) Exeter 68 - - September 2018
Ocean Bowl(5) Falmouth 286 - - September 2018
Claremont Place(1)(3) Newcastle 88 May 2015 10.9(4) October 2016
Forthside(5) Stirling 204 - - September 2017
The average net yield on acquisition of the operating properties, or on cost for those development assets that had reached
practical completion, as at 30 June 2016 was 6.4% (2015: 6.6%). The average valuation yield as at 30 June 2016 was 5.9%
(2015: 6.1%).
Table 2 Forward Funded and Development Assets as at 30 June 2016 and Forward Commitments and Sites Acquired Subject to
Planning (20 in total)
(1) Subsequent to the year ended 30 June 2016, these assets have or are planned to reach practical completion and
will be operational for the 2016/17 academic
year.
(2) Development is being undertaken as a joint venture with Revcap and total investment to completion figure
excludes Revcap's contribution.
(3) The Group had exchanged contracts on this property though certain conditions had not been satisfied as at 30
June 2016.
(4) Purchase price on acquisition.
(5) The Group had exchanged contracts on this site, subject to planning consent being obtained. Planning consent
had not been obtained as at 30 June 2016.
Valuation
Each individual property in the Company's property portfolio has been valued by an external valuer, CBRE, in accordance
with the RICS Valuation - Professional Standards January 2014 (the "Red Book").
As at 30 June 2016, the Group's property portfolio had a market value of £514.2 million (excluding the joint venture
interests and the value of properties on which only conditional contracts had been exchanged at the year-end) (2015: £239.8
million). Of this, £443.4 million was attributable to operating assets or those which had reached practical completion, an
increase of 4.7% in value compared to the aggregate purchase price or cost of development of £423.2 million (2015: £218.8
million, an increase of 4.3% compared to purchase price of £209.7 million). The aggregate valuation attributable to the
forward funded and development assets that had unconditionally exchanged was £70.75 million, which is based on progress of
the development of the assets to 30 June 2016.
The Group had also exchanged conditional contracts on seven properties and sites for which conditions (e.g. practical
completion or planning consent) remained outstanding as at 30 June 2016 and, therefore, the value of these properties has
not been included in the aggregate valuation of the Group's property portfolio as at 30 June 2016.
Post Balance Sheet Events
Since the period end, we have announced the acquisition of five assets which were operational and one forward funded
development property which, together, represent a further 508 beds. Details of these acquisitions are set out in Table 3
below.
Table 3 - Assets Acquired Since 30 June 2016 to Date (6 in Total)
Name Location Number of Beds Date of Acquisition Price Paid or Total Investment to Completion (£m) Estimated Completion Date Net Initial Yield
Operating
Oolite Road Bath 31 July 2016 2.6 N/A 6.7%
Isca Lofts Exeter 71 August 2016 4.7 N/A 6.9%
Francis Gardner Hall London 70 August 2016 10.6 N/A 5.5%
Grosvenor Hall London 72 August 2016 6.2 N/A 6.3%
Pavilion Court Canterbury 79 August 2016 9.2 N/A 6.0%
Forward Funded Projects
The Emporium Birmingham 185 September 2016 19.5 September 2018 N/A
Total 508 52.8
Our Investment Team
Our investment team has worked hard over the year in identifying investment opportunities, concluding the acquisition of a
significant number of premium student accommodation assets and overseeing the development of new properties, all of which
underpin the successful growth of our Company. Key to their success are the strong relationships which they have built
within our sector - the agents we work with, vendors, development partners and the many professionals involved in adding a
premium student accommodation asset to our portfolio. I would like to thank the team for all their efforts.
Tim Attlee
Chief Investment Officer
14 September 2016
Chief Executive Officer's Operations Review
Introduction
At its core, Empiric is an investor in, and developer of, student accommodation assets - buildings which yield rent.
However, it is people who drive the value of those buildings: our customers who pay us the rent to live in the buildings
and the managers who ensure the smooth operation of those buildings. Since Empiric's IPO just over two years ago, we have
worked with a number of partner businesses to ensure that our portfolio of operating assets has been well marketed, managed
and maintained but as a critical component in our value chain, we believe that, as our portfolio of student accommodation
assets continues to grow, there are distinct advantages to bringing the operations management in-house.
In November 2015 we appointed Incentive FM to provide facilities management services on the first trial buildings and, in
January 2016, we directly employed the first Empiric building managers. In February 2016, we launched our website,
hellostudent.co.uk, the marketing face of our Hello Student branded operating platform. The launch of the website was the
culmination of many months of hard work on the part of
our operations team developing a bespoke operating platform which includes an integrated booking system, a student focused
brand and the
national facilities management. This is all underpinned by our staff, most notably, our customer-facing building, city and
regional managerial staff but also the key people behind the scenes without whom Hello Student would not exist.
In February 2016, we launched our website, hellostudent.co.uk. By September 2018 we plan to have all development and
standing assets migrated to Hello Student.
Integrated Operations Management
In our first six months after IPO, we were working with four management partner firms, mostly specialist national operators
such as CRM Student and Collegiate AC. Our operational assets were listed on their respective marketing websites, they
managed our properties and were responsible for collecting rents, contracting utilities and arranging maintenance, and they
provided us with their accounts for the properties on a regular basis. For these services, we paid them a fee variously
based on a percentage of net or gross rent and budgeted direct costs such as internet and utilities annually in advance.
By the end of June 2015, the number of partner management firms had increased to eight, mainly as a result of taking on
existing relationships when we acquired new standing assets. While all specialists, levels of service were variable,
purchasing power for smaller operators is limited and working with this large (and increasing) number of companies was
inefficient.
The solution was to bring together the marketing, management and maintenance of our operating portfolio under one branded
platform. The advantages of this are both financial and functional:
· Our single student-facing branded website, Hello Student, will enable us to broaden our reach, drive re-bookers and
referrals and engage students directly through a recognised brand across the UK;
· We have selected and reached agreement with CRM Students, the largest third party manager of student accommodation
in the UK, to host the specialist booking engine which the Hello Student website feeds into. This integrates marketing,
bookings and accounting and facilitates monthly reporting to Empiric, enabling us to maintain accurate and timely data on
all of our standing assets which will become increasingly important as the operating portfolio grows;
· We have started to employ building managers and, in June 2016, employed our first regional manager directly. These
people are our customer interface and, as such, it is important that they project our values and corporate culture. We
encourage a sense of brand ownership and belonging to our team, reinforced by a definitive career path. The staff costs are
more than offset by the reduction in fees and costs paid to third party management companies;
· We are able to negotiate portfolio-wide deals on utilities and services, and the added purchasing power enables us
to obtain better prices and, where possible, superior services (for example, high speed broadband); and
· We have selected and reached the agreement with Incentive FM, a nationwide facilities management provider, to
provide a complete facilities management solution for our operating portfolio, again saving us costs as well as providing a
superior service.
The Hello Student® Brand
In developing a brand through which we would communicate with our customers, it was important to identify the factors that
had the most appeal to our target market, principally, international students and those beyond their first year of
university, particularly, postgraduates. To this end, we undertook a survey of prospective students within these
demographics in three international markets, namely India, China and South Korea. In collaboration with a specialist brand
design agency, we developed a brand based on the results of the research: Hello Student.
The principal tool is the Hello Student website supported by social media. All buildings on the Hello Student website also
appear on other
managers' websites. Of the 65 buildings that are being marketed for September 2016 the majority of buildings managed by
Hello Student can be booked on the website, while the others click through to the external managers' websites.
Between its soft launch in February 2016 and 30 June 2016, the site had attracted approximately 18,000 visitors, with
minimal external marketing. The website usage statistics indicate that it is drawing high quality traffic with an audience
that is very engaged with the content on the site, visiting an average of four pages before exiting the site. A key
statistic for us is that a total of 1,178 booking enquiries have been driven through the website to date which is
comparatively higher than the conversion rate of enquiries of Hello Student properties listed on
other sites.
As well as the Hello Student website, we have in place a full set of brand guidelines and branded material to support
local, on-site property
teams to drive lettings and ensure consistency of the brand across the portfolio.
Marketing
Earlier this year we commissioned research into our existing customers which identified four distinct groups based on their
circumstances prior to moving into one of our buildings - "New Overseas", "City Switchers", "Site Switchers" and
"Re-bookers". Further details on this research are set out in "Our Market" (see pages 12 to 13 of the Annual Report).
Differentiated by profile, experience, motivation and accommodation search behaviours, these key groups have been used as
the basis to inform all of our subsequent marketing activity in order to deliver targeted messaging and engaging visuals
relevant to the particular audience. Critically, while our current customers represent 98 different nationalities, 71% of
them were already in the UK last year. Therefore, the majority of next year's tenants are likely to be in the UK already
and that is a key focus of our marketing.
Our social media strategy, including Facebook, Twitter and Instagram, connects with potential and current residents and has
seen a rapid take-up with over 50,000 followers. This enables us to actively communicate with our online student community
in a low cost way: managing and executing social media takeovers with student focused influencers; launching global
competitions using cinematic video content with a paid amplification strategy; and initiating social media paid
advertising, targeted at students and parents in key geographic locations.
In August 2016, a key booking period, we launched an online advertising campaign based on the lifestyle, demographic and
geographic profiles generated from the data gathered from the profiles of users of the Hello Student website. The focus of
the campaign, "We Do Homes", positions Hello Student as a provider of high quality accommodation with a personal touch that
not only provides a customer with
their own space for independence and privacy but communal areas to encourage social interaction with like-minded people
from around the world. Our target groups for this campaign will be New Overseas customers as well as Site and City
Switchers, particularly those who are not already familiar with the accommodation and service that we provide. This
campaign, shot on location at Brunswick House in Southampton, is supported by an outdoor billboard campaign to increase
awareness of the brand across the UK.
As a follow on, we plan to launch a beta version of a Hello Student app which will be first trialled in Nottingham, with a
view to rolling it out
across our operating portfolio from September 2017. The app will allow customers to purchase additional chargeable services
such as dry cleaning, room servicing and shipping services as well as having direct contact with the building management
and maintenance teams in order to request support. With access to promotions, discounts and notification of events, the app
will also serve as a tool to build the community within a particular building, a city-wide portfolio of buildings or our
wider national community. We see this as a useful tool to encourage Re-bookers as well as Site or City Switchers,
particularly those are who already part of the Hello Student community.
There are two key areas that we have focused on over the past eight months: the technology to convert the interest
generated by our marketing efforts into bookings and manage information flows; and ensure that, once a customer has secured
a bed in one of our buildings, we have the right team in place to ensure that they receive a service that reflects the
brand values of Hello Student.
Technology
Having considered the possibility of building a bespoke software product and reviewed the existing technology available in
the market, we selected CRM Students' existing TCAS software as the basis of our new booking platform. We believe that
TCAS, which powers other booking websites, provides the functionality that we require and is a proven product; a bespoke
software product would be more expensive and unlikely to provide significantly better functionality. The TCAS software,
which sits behind the Hello Student website, has been
designed also to interact with industry standard accounting software, providing an integrated booking, accounting and
reporting system.
This feature is currently enabled for the majority of buildings which are currently managed directly through Hello
Student.
The implementation and operation of this platform is being undertaken by a specialist team from CRM Students, seconded to
Hello Student Management Limited, hence providing us with a dedicated service, working seamlessly with our own employees.
The team will provide marketing administration, document administration and provide monthly accounting and reporting data
(on an individual SPV basis) to the Empiric accounts team.
Management
We believe that our buildings should be managed by our people. As at 30 June 2016, Hello Student Management Limited had 39
full-time employees, comprising building managers, assistant managers and community ambassadors. These new managers have
undergone induction and training so that they know what it is that we expect from them.
Their principal objective is to develop relationships within their local community, including the associated universities
and, most importantly, our customers, both existing and prospective. As the principal customer interface, our site
management teams are able to use the marketing and management tools at their disposal to encourage re-booking from existing
customers and drive new bookings from prospective customers, with a view to achieving full occupancy on a site-by-site
basis or across a particular city. They provide general oversight and reporting on the performance of outsourced providers
with regards to marketing, booking, site accounting, facilities management, housekeeping and security.
Direct employment of site management has meant quicker decision making, consistency of approach, higher accountability and
innovation from the onsite teams. Those employees with the right aptitude will have the opportunity to develop their
careers within the Group, with the ability to progress from the management of one building to responsibility for an entire
city portfolio, and so on eventually to a corporate level.
Not only does the Group benefit from increasingly consistent levels of customer service but the direct employment of
managerial staff reduces costs as management fees paid to third parties decrease. While we are still in the early stages of
this initiative, this is likely to have a positive impact on the Group's net operating income going forward.
Maintenance
Our facilities management is supported by Incentive FM, a specialist facilities management provider with an existing
national network. Incentive FM will provide a comprehensive facilities management solution to complete all statutory
requirements, planned preventative maintenance, general repairs and maintenance, utilities procurement and invoice
management, site security and housekeeping. Incentive FM has the technical backend systems to provide clear and consistent
reporting, both technical, to the building management teams, and monthly cost accounting, to Empiric's accounting team on
behalf of Hello Student.
There are also cost and operational advantages, as working with Incentive FM gives us national buying power and a single
point of programming and planning. Again, we expect this to have a positive impact on the Group's Net Operating Income
going forward.
The culmination of the roll-out of Hello Student will deliver a premium brand experience across Empiric's entire portfolio
coupled with greater
operational efficiencies.
Paul Hadaway
Chief Executive Officer
14 September 2016
Chief Financial Officer's Review
The financial results for the Group reflect another year of solid investment and growth.
Accounting Policies
The Group's annual consolidated financial statements have been prepared in accordance with IFRS.
Financial Results
The financial results for the Group for the year ended 30 June 2016 reflect another period of solid investment and growth,
building our portfolio of purpose-built student accommodation assets. We have also invested in launching our operating
platform, with a view to bringing the marketing, management and maintenance of the operating portfolio within our control.
The operating profit for the Group for the year to 30 June 2016 under IFRS was £30.0 million (2015: £12.6 million), the
biggest contribution coming from the gain of £21.7 million, net of property acquisition costs, recognised on revaluing each
property within the Group's property portfolio at the year-end (2015: £11.3 million). The operating profits have also
benefitted from the rental income derived from the standing assets in the Portfolio, which operated on a fully let basis1
and produced rental income of £21.6 million in the period (2015: £8.3 million).
The Group's share of results from joint ventures in the period was £1.8 million, which primarily related to uplift in fair
values of its properties (2015: £2.8 million). Administrative and other expenses, which include the ongoing costs of
running the business, were £7.3 million equivalent to 1.4% of the value of the property portfolio as provided by CBRE, as
at 30 June 2016 (2015: £4.8 million, equivalent to 1.9% of the value of the property portfolio as provided by CBRE, as at
30 June 2015).
Net financing costs for the period were £3.6 million net of money market investment income of £0.9 million (2015: £1.2
million and £0.2 million, respectively).
The profit before tax for the period was £28.1 million (2015: £14.2 million), with basic earnings per share for the period
of 7.29p (7.23p on a diluted basis) (2015: 9.67p and 9.61p (diluted)).
No corporation tax has been charged in the period because of the Group's fulfilment of all of its obligations as a REIT
including its policy of distributing at least 90% of its property related net income.
The NAV per share as at 30 June 2016 was 105.4p prior to adjusting for the fourth interim dividend of 1.5p per share (2015:
103.2p, prior to adjusting for the fourth interim dividend of 1p per share) and is shown net of all property acquisition
costs and dividends paid during the year.
Asset Valuation
The Group's Portfolio has been independently valued by CBRE in accordance the Red Book. As at 30 June 2016, the aggregate
market values of each property in our Portfolio was £523.9 million (excluding the joint venture interests not currently
owned by the Group) (2015: £251.3 million).
In relation to the valuation of the properties in our portfolio at 30 June 2016, CBRE has highlighted a lack of
transactional evidence in the aftermath of the EU referendum to gauge the impact of the result on values at that date (see
Note 13 on page 101 of the Annual Report for more details).
Further details on the portfolio and valuation are set out in the Chief Investment Officer's Portfolio Review on pages 25
to 28 (inclusive) of the Annual Report.
Dividends
For the period ended 30 June 2016, the Company declared four interim dividends amounting, in aggregate, to 6.0p per share
(of which 1.5p per share was declared on 26 July 2016) (2015: 4.0p per share including 1p per share declared after the
period end), which achieves the target set last year of a 6% dividend yield based on the IPO price of 100 pence per share.
Of these dividends, 1.45p per share was declared as PIDs in respect of the Group's tax exempt property rental business and
4.55p per share was declared as ordinary UK dividends (2015: 2.32p per share and 1.68p per share, respectively).
The Group's adjusted basic EPRA earnings per share for the year was 1.89p (2015: 0.13p). The adjusted earnings per share
figure takes the EPRA earnings per share for the year and adds the licence fee on forward funded developments that has not
been recognised in the Statement of Comprehensive Income. We see this as a more relevant measure when assessing dividend
distributions.
The Company is targeting an annualised dividend of 6.1p per share for the financial period commencing 1 July 2016, provided
that the Company can continue to implement successfully its investment policy. This reflects the prior year dividend of 6p
per share with an adjustment broadly in line with our dividend growth target of not less than RPI. The Directors
anticipate that the dividend for the quarter beginning 1 January 2017 and going forward will be substantially, if not
fully, covered by adjusted earnings per share.2
Accounting Reference Date
Following consideration of the Group's activities, in particular the focus of operational and development activity around
the start of an academic year in September, the Board has concluded that it would be appropriate to change the accounting
reference date of the Company from 30 June to 31 December, and intends to do so with effect from the period commencing 1
July 2016. Therefore, the next audited statutory accounts will be prepared and published for the six month period ending 31
December 2016.
Financing
In October 2014, the Company launched a share issuance programme enabling it to issue up to 300 million shares until 29
October 2015 (the "Share Issuance Programme"). In July and October 2015, the Company raised a total of £161.4 million in
gross equity in two tranches under the Share Issuance Programme.
In March 2016, the Company launched a second share issuance programme enabling it to issue up to 165 million shares valid
until 28 February 2017 (the "Second Share Issuance Programme"). The first tranche of the Second Share Issuance Programme,
which closed on 16 March 2016, was significantly oversubscribed with the Company increasing the gross equity raised from an
initial target of £90 million to £125 million.
As at 30 June 2016, the Company had raised during the year, in aggregate, gross equity proceeds of £286.4 million, with all
three fundraisings priced at a premium to NAV and significantly oversubscribed.
On 29 February 2016, the Company's wholly-owned subsidiary Empiric Investments (Two) Limited ("EITL") agreed a further
fixed rate term loan facility of £40.0 million with Canada Life Investments ("Canada Life"), secured against a portfolio of
forward commitment assets on their completion which were expected to occur in time for the start of the 2016/17 academic
year, held as a lending group by EITL (the "Canada Life Facility B"). The Canada Life Facility B is repayable in two
tranches of £20 million in March 2024 and July 2031, respectively, and has an all in rate of 3.52% which is fixed
throughout the term up to a LTV ratio of 50%.
On 1 April 2016, the Company's wholly owned subsidiary, Empiric Investments (Four) Limited ("EIFL") agreed a fixed rate
term loan facility of £80 million arranged by Cornerstone Real Estate Advisers Europe LLP, a member of the Massachusetts
Mutual Financial Group (the "Cornerstone Facility"). The Cornerstone Facility is secured against a portfolio of 18
operating assets, held as a lending group by EIFL. The Cornerstone Facility is repayable 12 years from the date of the
initial draw down and has an all in rate of 3.24% which is fixed throughout the term up to a LTV of 55%. An additional
committed facility of up to £40 million is available to the Group, to be requested on or before 7 December 2016, subject to
meeting certain conditions. Part of the Cornerstone Facility was used to refinance £37.9 million of debt repaid to
Santander and Royal Bank of Scotland.
As at 30 June 2016, the Group had, in aggregate, £216.6 million of committed debt in place of which £155.9 million had been
drawn down. The Group's aggregate LTV ratio as at 30 June 2016 was 22.7% (2015: 26.0%) and it was in full compliance with
its covenants.
Post Balance Sheet Events
Since the period end, the Group has agreed a £32.8 million development debt facility with AIB Group (UK) PLC (a member of
Allied Irish Bank) and a £30.6 million development debt facility with Royal Bank of Scotland.
Further, the Company has announced the acquisition of five assets which were operational and one property under development
which, together, represent a further 508 beds. Details of these acquisitions are set out in Table 3 of the Chief Investment
Officer's Portfolio Review.
Alternative Investment Fund Manager ("AIFM")
The Company continues to be authorised as a full-scope AIFM and is regulated by the Financial Conduct Authority. The
Company has engaged a specialist compliance consultancy, Portman Compliance Consulting LLP, to ensure that it adheres to
all of its regulatory obligations.
Thanks
I would like to thank our Finance Team for their hard work and dedication over this period of significant growth in the
business and meeting the challenges along the way.
Michael Enright
Chief Financial Officer
14 September 2016
(1) The Company budgets and models on the basis of 97.5% occupancy. Occupancy or income of the operational portfolio to
this level and in excess is considered fully let.
(2) Shareholders should note that the figures in relation to dividends set out above and elsewhere in this Annual Report
are for illustrative purposes only and are not intended to be, and should not be taken as, a profit forecast or estimate.
Principal Risks and Uncertainties
The Board has overall responsibility for risk management and internal controls within the Group.
The Audit Committee formally reviews the effectiveness of the Company's risk management processes on behalf of the Board.
The Board recognises that the operation of a company is not without risk but that effective risk management is key to the
success of an organisation.
Approach to Managing Risk
The overall risk management process is designed to identify, evaluate and mitigate (rather than eliminate) significant
risks that the Group faces. Therefore, the process can only provide reasonable, rather than absolute, assurance. The
Company outsources certain services to its administrator, FIM Capital Limited (the "Administrator"), and other service
providers, and a certain element of reliance is placed on the Company's service providers' own systems and controls.
The Board undertakes formal risk reviews with the assistance of the Audit Committee in order to assess the effectiveness of
the Company's risk management and internal control systems. During the course of such reviews, the Board has not
identified, nor been advised of, any failings or weaknesses which it has determined to be of a material nature.
Principal Risks
Principal risks have the potential to affect the Group's business materially - either favourably or unfavourably. Some
risks may be unknown at present, and certain risks that are currently regarded as immaterial, and therefore not included
here, might well become material in the future.
Property Market Risk
Risk Impact Mitigation
The performance of the Group's Portfolio will depend on general property and investment market conditions. There remains uncertainty in respect of the property market, in general, following the result of the EU referendum in June 2016, which could prevail until Brexit negotiations are concluded and beyond, depending on the outcome of such negotiations. An adverse change in the Group's property valuations may lead to the Group breaching its banking covenants. Market conditions may also negatively impact on the revenues earned from the property assets, which may impact the Group's ability to make distributions to shareholders. The Group's assets are located in multiple, prime locations, diversifying the risk of adverse changes to the Portfolio. The Group continually monitors and manages its
activities so as to always operate within its banking covenant limits and constantly monitors its margins. Further, with international students paying in advance, the
Group maintains substantial cash balances on account. The characteristics of the student property sector in recent years have demonstrated considerable robustness
underpinned by a significant and beneficial supply and demand imbalance. Notwithstanding this imbalance, the Group does not overstretch annual rent increases and varies
such increases according to the market backdrop of a particular area or building. With EU students representing only 6% of all full-time students in the UK, and with the
high number of other international students applying to study in the UK, the higher education sector in the UK is not reliant on students from the EU.
The ability of
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