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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 listed on the Main Market (Premium Listing) of the London Stock Exchange on 30th June 2014 at an issue price of 100 pence per share. The Shares were included in the FTSE All Share Index from June 2015. In other words, this is no AIM rubbish !!
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:
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……
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.
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.
The Screenshot below shows the Bollinger Bands in the upper Window - my Blue Arrow shows that the Price is currently sort of in the middle of the Bands. Careful Buyers might want to buy at the bottom of the Band - but of course there is the risk that it might run away before going down.
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.
The Chart below shows the Weekly Candlesticks. My Black Arrow is pointing to a Hammer Candle that was generated the Week before I bought - this seems to be indicating a Reversal from the move down shown by the Big Red Down Candle of the Week prior to the Hammer.
Finally here is a Chart of UTG over 15 years - note the Strong Uptrend since the Credit Crunch in 2009 ish and also how it suffered in the Recession in 2003. I leave you Readers to draw your own inferences from this !!
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 !!
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