If you are keeping up, you may have noticed that I bought a chunk of Empiric Student Property (Epic code: ESP) on Wednesday 7th October 2015 at 109p for my Income Portfolio and I added to this position today with a Spreadbet at 109p. This Company listed back in June 2014 and has had a nice steady Uptrend since - that is something I always like. Buy Momentum.
For many years I have been a big fan of Unite Group UTG but in reality I have rarely been in the Stock and have missed out on huge gains - both these companies acquire Properties and refurbish them to rent out to Students. Despite all the rhetoric from the usual suspects, Student Numbers are growing extremely fast despite the introduction of Fees and Loans. This growth is also being boosted by the Government removing the cap on the total number of EU and UK students - this has meant more EU Students and the number grew by 11% last year. This trend is expected to continue particularly because Universities are now actively advertising their wares abroad. All those Students have got to live somewhere and they tend to pay up front for 51 Week Leases in ESP Buildings - so it is a very stable and lucrative Cash generator.
ESP currently has 4,820 beds across 51 buildings in 25 cities, 36 of which are operating assets and 15 are ‘forward funded’ or development assets. At IPO they had 4 Buildings so the progress in creating a proper Portfolio is clearly evident. The Buildings house between 50 and 200 students. Rents are charged around £130 to £200 per week (or more for one building I notice) and 70% of Tenants pay 51 weeks upfront. Net Rental Income for ESP is expected to rise from £6.1m this year to £21.3m next year.
The entire operating property portfolio for the 2015/16 academic year comprises 2,953 beds and is fully let (this means 97.5% of rooms are let out). ‘Operating Assets’ are buildings where all the refurb work has been done and the building is being rented out to Students and is being managed. ‘Forward Funded’ means buildings that are bought and about to start refurb whereas ‘Development Assets’ are currently in the refurb process.
Ongoing Property Management is outsourced and this includes all aspects such as Billing Students, handling repairs, dealing with Deposits, Health and Safety at Buildings etc. The company claims that this outsourcing reduces their Costs by around 4%.
The Company aims to have 10,000 beds by 2017 but will need to raise more Funds to buy the necessary Buildings and this will mean more Shares will be issued. So far the company has done a couple of Placings at higher than the Net Asset value (NAV) which means that existing Shareholders have not been diluted with regard to Properties already bought. New Properties will be bought with a mixture of New Shares being issued and an increase in Debt but the company has a limit of 40% Loan to Value Ratio on the Properties. The company uses Secured Debt on the Properties and these are siloed in sub-holding companies - the Debt is ring fenced and ‘non-recourse’ to other Assets.
On 8th October ESP announced a Final Placing under their existing Authority to issue more Shares - this is to raise £85m at a Price of 106.5p each (but of course this does not include the 1.5p Dividend so is effectively at 108p - similar to the price of Shares currently in the Open Market). The Placing Shares need to be applied for before 22nd October 2015 and the new shares will be listed on the Market on the 27th October 2015. The Ex-Dividend date for the 1.5p Dividend is Thursday 15th October - so you needed to have owned them no Wednesday 14th October to get the Divvy - don’t worry, the Share Price usually drops a bit to allow for this if shares are bought on or after the Exdiv date.
Existing Shareholders before future Share Placings (assuming that they continue to be priced above NAV) should be able to gain from the following:
- Growth in the valuation of current Buildings. It is likely that these increase as Rents rise - in the 2015/16 Academic Year ESP’s Rents increased by 3.25% - it strikes me that this kind of trend is likely to continue as Quality Student Property is in short supply with strong demand.
- Growth in the Rental Income of the Company, which means a Growth in the Dividend Payments. ESP aims to pay a Quarterly Dividend (great for Investors who need the Income to live off) and expect this to grow by not less than RPI (Retail Price Index) in coming years.
- Growth in the Value of New Properties - even though New Buildings will be largely funded by Share Placings, existing Shareholders will benefit from any growth in their Value to some extent due to the Debt element and if the Company utilises any spare cash it has sitting around.
- Growth from ‘Additional Services’ (laundry, cleaning etc.) but this will be small.
ESP targets higher quality Students as its customers - in fact only 4% of existing Renters are 18 year old First Year Students. The advantage of this is that the older ones tend to be more responsible and less likely to trash the joint. The offering is Premium Accommodation and they are targeting the Upper Quartile of Student Rental spend. ESP buildings include attractive facilities such as Games Rooms, Gyms, WiFi and Communal Study Areas.
ESP is currently working on a Branding Exercise and creating an App to improve Student Referrals and Rebooking - this strikes me as a very sensible thing to do and fairly low cost with big benefits.
You can visit ESP’s Website here and it is worth looking at the type of buildings:
Information on the Directors can be found here:
BRR Media did a couple of Webcast things here:
I have listed to the recent one and it is superb - probably just over an hour long.
I really liked the sound of this, especially the first Paragraph so I thought I would bung it in, from the Final Results RNS published on 14th September 2015:
The Rt Hon Baroness Dean of Thornton-le-Fylde, Chairman of Empiric Student Property plc, commented:
"The Board is committed to delivering on the stated objectives of providing shareholders with regular, sustainable and growing long-term dividends, together with the potential for capital appreciation over the medium to long term.
"The market outlook is strong as the fundamental market dynamics for student accommodation remain unchanged. As Empiric's profile grows in the sector boosted by its listed status, it is being presented with a richer and broader pipeline of attractive investment opportunities.
"The Group continues to grow the asset base to deliver good returns to shareholders and seeks further enhanced returns through development and financing activities as well as developing an in-house operational capability, offering operational benefits and potentially even stronger property returns. By doing this, I believe the Company will be serving its shareholders well, delivering excellent returns as we continue to grow, with a diversified portfolio and increased profitability through improved operational efficiencies."
Other Attractions for a WheelieDealer……
- Very Low Risk business - Student numbers steadily growing and fairly immune to Economic Downturns - if anything, Kids more likely to want to go to University if they cannot get a job in the short term. It is worth noting thought that UTG suffered in the Credit Crunch - but I suspect part of that was because they use Debt Securitisation which was pretty unpopular at that time (grouping together individual Loans as Packages of Debt and selling them on - a key cause of the problems emanating from the US Sub-prime Housing Market). Up until now ESP has not used this particular trick to raise Financing.
- Quality and distinctive properties - people want to live in them. Not bland, branded, identical corporate buildings.
- The Company has a very strong pipeline comprising a mix of operating properties and properties under development across multiple locations in the UK representing, in aggregate, over 2,500 beds.
- At present, the Private Sector accounts for about 7% of Lettings in the Student Housing Market - in other words there is plenty of scope for ESP to grow - particularly as the Conservative Government is likely to reduce Public Sector involvement and the likelihood of the Labour Party getting elected in the next Decade is near Zero unless they ditch Citizen Smith from the Leadership.
- Revenues the UK gains from Students are planned to grow from £18bn in 2012 to £30bn in 2020, with a huge chunk coming from Foreign Students - obviously all these people will need decent Rooms and Foreign Students are more likely to want ESP’s quality offering.
- ESP expects its Costs to increase over time as the Business grows but they expect the Proportion that Costs represent of Total Revenues to decrease - this means Profitability will go up and seems plausible to me.
- The Company is working on growing what it calls ‘Secondary Sales’ - these are additional services which they can offer Students in their Properties such as Cleaning and Laundry Service - the latter of which they are launching next year. This could be another, admittedly minor, area of growth.
- The CEO made an interesting comment in the BRR Media Webcast saying that even if the Company does nothing in future with regard to buying new buildings etc., Income will jump this year and next as Properties move from Development and Refurb into Ongoing Property Management. If they do some more Acquisitions in the meantime, the Income will be even higher.
- As a Building moves from Development to Ongoing Management they can use the Asset as Security to Leverage up and use to fund the Debt element of future Acquisitions. This seems a pretty straightforward Property REIT growth model to me.
- ESP is becoming a ‘Go to Funder’ in the Industry - as time goes on they are getting a name for being a decent Company for Sellers to offload Property on to and they are finding that Sellers are coming to them. They currently reject 7 Buildings for every 1 that they buy - so they seem to be quite discerning.
- ESP does some deals that are ‘Forward Funded’ New Builds - these I understand are off-plan and are designed to ESP Specifications. They are being purchased at 8% to 8.5% Rental Yield which is very high.
- ESP specialises in Buildings priced around £5m to £15m - these are much smaller ‘Lot Sizes’ than the Big Boys (Fund Management Groups, Pension Companies etc.) want and they tend to buy outside of London where higher Rental Yields are available. ESP claim there are very few competitors for Buildings in this section of the Market. This means the ‘Yield Compression’ where Building Prices rise and Rental Yields fall is being largely sidestepped by ESP. They are currently getting about 6.6% Rental Yield on their Properties which are in Ongoing Management.
- In Edinburgh ESP has a slightly different Rental Model - here they do Leases for 44 Weeks instead of 51Weeks - this means they can Rent out at much higher Rents over the Edinburgh Festival period - seems very shrewd and I imagine they could do similar things at other locations. However, they say they intend to pretty much stick to the 51 week model.
- ESP recently appointed an ‘Operations Director’ to manage Marketing and Financial Control of the local Property Managers that they use (I think I read/heard that they have 11 such Property Managers). This is not currently a Board Role but I got the impression that if this key chap does the business he will get promoted to the Board of Directors.
ESP has drawn down £19.1 million of a £20 million additional Royal Bank of Scotland facility agreed in February 2015. Following draw-down, total drawn debt (including the Group's share of joint venture debt) is £107.9 million (source: recent Trading Update RNS.)
I copied the following Text from the Final Results ‘Funding Risk’ section:
“Since IPO, the Executive Directors have been in active discussions with a number of debt providers and, to date, have secured facilities with four separate providers (including joint venture debt providers) and have agreed fixed rates or employed interest rate hedging which is in place for 65.4% of the variable rate debt. The weighted average term to maturity of the Group's debt is 8.07 years.”
From what I can tell, a big chunk of the Debt is at Fixed Interest Rates and the rest is dependent on LIBOR - obviously this means that if Interest Rates rise quickly and if ESP are unable to Hedge, then there is a significant risk here.
- As mentioned just above, Debt Financing could bring its own issues if the company loses control.
- ESP is a fairly new Company and this in itself brings a lot of Risk - the only mitigations really are the short history of success and the fact that Directors have plenty of incentives to make it work from their Share Interests.
- I think there could be considerable ‘Execution Risk’ - so far the Company has not put a foot wrong but if they hit a period of time where they are unable to find good properties at the right price, it could impact on the growth plans.
- Immigration is a Key Political Issue in the UK - if the Government takes a harder line against allowing Foreign Students in this could impact on ESP’s Customer Base. It seems unlikely although if the UK Public sees sense and we leave the woeful EU silliness then that might be a risk to Foreign Student numbers.
- From a Share Buyer’s point of view, one issue here is that I expect ESP could be a bit of a Plodder. For me in my Income Portfolio this is fine, but for people who like things to be a bit more racy and exciting, it might disappoint. For Tortoise Traders this is just the ticket !!
- So far ESP has been very well behaved at issuing Placing Shares to fund growth priced at or around NAV - if this changes and they start doing Discounts, it could negatively impact existing shareholders. This is unlikely in my view as the Directors talked about this issue on the Webcast and clearly understand the dilution issue.
- It has been pointed out on Twitter that Director Remuneration seems high - this may well be the case and potential Investors need to consider this in the framework of their own preferences. For me, I don’t get too hung up on it - I don’t see my job as Policing the Markets - I have enough to do as it is. I will leave that to Tom Winnifrith !!
- I think it is very possible that ESP could get taken over by UTG or some other large Financial Group looking for a steady Income Stream - chances are it would get taken out of my hands way too cheap just like QED was !!
- An incoming Far-Left Labour Party could have many negative impacts on ESP - not least would probably be Rent Controls. Thankfully I think there is Zero chance of this happening. Anyway, if it were to happen you wouldn’t want to be holding any Stocks at all.
- A General Recession could mean Property Values fall and this might impact on ESP’s Banking Covenants - this is a serious Risk although it depends firstly on a Recession and secondly the Student Accommodation Sector might be more defensive than many other areas of the Property Market.
- Development activities could carry Risk such as Health & Safety issues or time and cost overruns. ESP seem to mitigate these by doing ‘Forward Funded’ (effectively Fixed Cost) Construction Projects and only allowing 15% of NAV to be involved in Development stuff.
- Availability of Debt to fund new Building Acquisitions could be a risk, however, it seems to me that such Debt for Property with a steady Rental Stream will not be difficult to get - unless of course we go into Recession which will bring a myriad of problems.
- ESP is quite a small company in terms of Number of Employees - there could be considerable ‘Key Man’ Risk here - I note that there appears to be 2 main Property Buyers and losing these might be very nasty.
- It is very important that ESP keeps its REIT status for advantageous Taxation arrangements.
- Wheelie could have really screwed up here and ESP could turn out to be a steaming pile of doo doo.
According to the CEO, the latest NAV of 103.5p understates the true NAV by a bit - this is because timing issues mean it is not matched to Valuation Uplifts on recently acquired Buildings. However, ignoring this, at my Buy Price of 109p I have paid a Premium to NAV of about 5% - I don’t normally like paying a Premium but in this case the attractive expected Dividend and the Growth trajectory in a pretty low risk area of the Property Market make me quite happy to pay up. I expect that in a few years this price will look very cheap.
As per my ‘Dividend’ Section below, at my Buy Price of 109p I am hopefully going to pick up a Dividend Yield of 5.5% next year.
The House Broker forecast is for NAV to hit 112p for next year to June 2016.
These kind of Property Stocks really need to be valued with regard to NAV. It is not hard to imagine an NAV in the region of 130p in a few years if the Company can keep doing the right things well and doesn’t have any major hiccups like Key Staff leaving. With a Discount to NAV this might mean a Target of around 120p to 125p, however, many Property Plays are on Premiums to NAV so perhaps as much as 135p to 140p is possible.
With a Forecast Divvy next year of 6p, it is not hard to see 7p in a couple of years. On this basis, if the Shares hit 130p, the Forward Dividend Yield would be 5.4% - obviously this would still attract Income Seekers - especially as the Company intends to pay Quarterly Divvys. Even if the Share Price rose to 140p, the Forward Divvy Yield would be 5%.
We could then take this kind of thinking further and do the numbers on 8p several years out - I’ll leave this to you lot to figure out !!
For time reasons, I have not gone into Unite Group UTG numbers in detail so these are just to give a quick comparison. From the recent Interim Results, the UTG NAV seems to be about 521p a Share (having grown 20% over the figure for 2014) which means that on the current Share Price of UTG at 623.5p, this is a PREMIUM to NAV of 19.8%. If ESP was on a similar Premium, the ESP Share Price would be around 125p.
In addition, UTG has a Forecast Dividend Yield for next year of 2.65% - for the ESP Forecast Yield to fall this low, the ESP Share Price would need to hit around 225p (ok, that is Fantasyland but it gives a feel of a comparative undervaluation).
I have bought ESP in my Income Portfolio (please see my ‘Trades/Portfolios’ page for full details on my aims for this Portfolio and how it is currently constructed) and obviously this means I am after a sizeable and hopefully steadily growing Divvy payment. As per an RNS Statement from Thursday 8th October, the Company intends to pay out 6p for Next Year - this means I should pick up a Dividend Yield of 5.5%.
In a way this reminds me very much of the appeal I found with igIndex IGG Shares - ESP should be a nice boring steady performer that doesn’t shoot the lights out by any means but which should just plod along nicely over many years and keep paying out slightly larger Divvy Payments each year. Forget the ‘Turtle Traders’ - this is one for ‘Tortoise Investors‘.
Here’s the guts of the recent RNS:
“The Board of Empiric Student Property plc (ticker: ESP) has declared a first interim dividend for the financial year ending 30 June 2016 of 1.5 pence per Ordinary Share in respect of the quarter ended 30 September 2015, payable on or around 4 November 2015 to Ordinary Shareholders on the register on 16 October 2015. The ex-dividend date will be 15 October 2015.
0.725 pence of this dividend will be paid as a Property Income Distribution ("PID") in respect of the Company's tax exempt property rental business and 0.775 pence will be paid as an ordinary UK dividend ("non-PID").
The Company confirms an annual dividend target of at least 6 pence per Ordinary Share for the financial year commencing 1 July 2015. Thereafter, dividends are expected to grow by not less than the RPI inflation index.”
The bit in the middle about PIDs and stuff is not an issue if you hold in an ISA or SIPP I understand. Anyone holding outside of such a Tax Wrapper may need to thoroughly investigate the Tax Situation, especially with Gideon Osborne’s recent Divvy Tax changes.
There’s not really a lot to go on here as the Stock doesn’t have a lot of history. As usual, the Charts are from the Night before I made my Decision to Buy into ESP.
The Chart below basically just shows a nice Uptrend Channel - you can’t argue with that !!
The Blue Line marked with my Blue Arrow is the NAV line - this is something you can easily set in ShareScope. It doesn’t take Sherlock Cucumberpatch Holmes to figure out that as the NAV rises, the Share Price seems to go up.
In the bottom Window we have the MACD (Moving Average Convergence Divergence) - my Black Arrow points to how the Red Histogram Lines seem to be curling round and suggest it may go Green soon - this means the Share Price might rise.
As I have dug more and more into this business in order to create a sweet WheelieBlog, I have been increasingly impressed by what I am seeing. ESP seems a very nice fit in my Income Portfolio as it pays over 5% Dividend and I think there is very high likelihood of slow and steady Capital Gains on top. For me this is very much a ‘Long Term Buy and Hold’ and I will be looking for a Target Price around 140p in a few years, but I suspect a Takeover is very likely.
Since Listing ESP has had a pretty nice Uptrend and I always like to buy Momentum - when you consider the success of UTG, I see no reason why ESP cannot go a lot higher.
From various comments I have seen on Twitter etc., it strikes me that ESP is still ‘below the radar’ for many potential Investors - this is a lovely situation to be able to buy into relatively early.
Robbie ‘Naked Trader’ Burns holds this Stock - always a sign I like !!