Half Year Results

11 August 2022

Empiric Student Property plc

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

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE  2022

Good progress to date in 2022 and increasingly confident in the positive outlook for our business and long-term strength of our market

Empiric Student Property plc (ticker: ESP), the owner and operator of premium student accommodation serving key UK universities, today reports its interim results for the six months ended 30 June 2022.

 

Duncan Garrood, Chief Executive Officer of Empiric Student Property plc, said:

"We are pleased to have grown our revenue, earnings and portfolio valuation in the first half, and to have delivered a total accounting return, the sum of income and capital growth, of 10.9% for the period, up from 1.1% in H1 2021. This reflects the reduced impact of COVID on the academic year 2021/22, strong yield compression, increased rents and our continuing work on further improving our portfolio and business.

We are encouraged to have achieved occupancy to date for the forthcoming academic year 2022/23 of 92%. This is ahead by 10% compared to the same time pre-pandemic, and we expect to deliver revenue occupancy at the upper end of our revised guidance of 90% to 95%. This has been driven not only by market conditions normalising but also by the proactive enhancements we are making to our business and portfolio. We remain committed to paying a minimum dividend of 2.5 pence in 2022 and will review this in Q4 once occupancy levels are confirmed for the new academic year.

In a rising inflationary environment, it is important to note that we have hedged our energy costs up until Q3 2024. We have also fixed two thirds of our total debt facilities, which gives us significant protection from rising interest rates.

Despite the wider uncertain backdrop, we are well positioned to provide further attractive growth. We are increasingly confident in the normalisation, and long-term strength and resilience of our market, and of the strong, sustainable growth and value creation potential within our business."

 

HIGHLIGHTS

	30 June 2022	30 June 2021	change
Revenue	£35.6m	£25.9m	+37%
Property costs	£10.6m	£10.9m	-3%
Gross margin	70.2%	57.9%	+21%
Administrative expenses	£6.3m	£5.3m	+20%
Adjusted earnings per share	1.97p	0.59p	+234%
(Loss)/Gain on disposal of investment property	(£0.1)m	£1.7m	-109%
Change in fair value of investment property	£58.6m	£1.8m	+3,141%
Profit before taxation	£70.3m	£7.0m	+904%
Dividends paid	£7.5m	-	-
Loan to value (%)	32.8%	33.1%	-1%
	30 June 2022	31 December 2021
Property valuation	£1,087.7m	£1,021.8m	+6%
EPRA NTA Per share	117.8p	107.4p	+10%
Total return (%)	10.9%	1.1%	+890%

Delivering improving financial performance and attractive returns

·      Growth in revenue of 37% to £35.6 million (H1 2021: £25.9 million), as occupancy for the first half was 86% compared to 65% for the same period in 2021.

·      Like for like rental growth for the academic year 2021/22 was 1.5%, up from 1.3% reported previously, as we focused on occupancy levels during the year over rental growth.

·      In March, we reported 84% revenue occupancy for the academic year 2021/22, which has increased to 86% since then, slightly above the upper end of our guidance.

·      Property costs of £10.6 million were 3% lower than the same period last year.

·      Gross margin has increased by 21%, from 57.9% to 70.2%, as a result of a £9.7 million improvement in revenue.

·      Administration expenses were £6.3 million and in line with guidance.

·      Adjusted Earnings for the period were £11.9 million (H1 2021: £3.5 million), with Adjusted earnings per share of 1.97 pence (H1 2021: 0.59 pence).

·      We sold five assets in the period for £26.7 million slightly above book value and reported a net loss on disposal of investment property (£0.1) million after deducting re-financing and sales costs.

·      The net profit from a change in the fair value of investment properties was £58.6 million (H1 2021: gain of £1.8 million).

·      Profit before tax of £70.3 million (H1 2021: £7.0 million).

·      Basic earnings per share of 11.65 pence (H1 2021: 1.16 pence). 

·      Property portfolio valued at £1,087.7 million (31 December 2021: £1,021.8 million). On a like for like basis, the investment property valuation increased by 7%.  This was driven by strong yield compression and like for like rental growth, CBRE's removal of the Covid-related valuation reduction of £6.2 million and by our continuing work on further improving our portfolio and business.

·      Underlying valuation yield of 5.2% (31 December 2021: 5.3%) has improved, reflecting both a strengthening of yields in our prime assets and improved rental growth.

·      EPRA Net Tangible Assets ("NTA") per share up 10% to 117.8 pence (31 December 2021: 107.4 pence).

·      Total accounting return, the sum of income and capital growth, increased to 10.9% (H1 2021: 1.1%).

We have made significant progress in further improving our portfolio and business across the following critical areas: actively managing our property portfolio; strengthening our brand proposition; driving performance through data analytics; delivering consistently high customer service; and developing our people.

Strong student demand for academic year 2022/23 - ahead of pre-pandemic peak

·      We are encouraged to have to date achieved occupancy for the forthcoming academic year 2022/23 of 92%, which is ahead by 10% compared to the same time pre-pandemic.

·      We expect to deliver revenue occupancy at the upper end of our revised guidance of 90% to 95%. This has been driven not only by market conditions normalising but also by the proactive improvements that we are continuing to make to our portfolio and business.

·      Through our enhanced and more targeted marketing, combined with good customer service, we have significantly increased the participation of domestic students in our business, showing how we can successfully flex our customer base depending on the market environment.

·      Bookings achieved to date for academic year 2022/23 indicate that half our customers are from the UK, up from pre-pandemic levels of a third.

·      One third of our bookings are from China and the remainder are other international students, though this balance may change slightly by September as some markets, including India, tend to book very late. Asian markets are again at the forefront of international enquiries, and we have done considerable work to tap into these markets directly, using specific social media and platforms.

·      We have seen encouraging growth in rebookers to 23% and the proportion of postgraduates has increased by approximately 8%. This gives us confidence that our Postgrad product, which we are piloting in Edinburgh, will have significant attraction.

Further enhancing our business and portfolio to provide attractive, sustainable returns and enhanced value to all our stakeholders

·      Our portfolio optimisation and recycling capital strategy is progressing well. Since March 2021, we have sold 9 assets for £44.6 million (£26.7 million in H1 2022), and with asset disposals worth £40 million currently under offer at or around book value. Our disposal programme remains on track, as we work to eliminate non-core assets.

·      Disposals allow us to recycle capital and in March we announced our first acquisition since 2018, Market Quarter in Bristol, for a cost of £19 million with an expected unlevered IRR of 8% to 9%. It is fully let for academic year 2022/23, with an 18% increase in rent.

o  This site is close to our other assets in Bristol and creates a cluster of four buildings run by the same management team. This enables us to maintain our small boutique proposition whilst reducing costs and improving our margin.

o  Future acquisitions will focus on continuing our cluster strategy.

·      We have secured a good pipeline of potential acquisitions and development opportunities and are under offer on a further acquisition worth £15 million within a key growth city and clustered location.

·      We are on track to complete two developments in September 2022 in Bristol and Edinburgh, all launched rooms for the academic year 2022/23 are fully let with waiting lists, and with yields on cost of 6.3% and 6.1% and IRRs of 10%-11% and 12%-13%, respectively.

·      Following successful pilots, we are undertaking further refurbishments of two communal areas and 47 rooms for the academic year 2022/23, with a further three communal areas and 300 rooms for the academic year 2023/24, with an IRR target of 9%-11%.

Strong balance sheet

·      Loan to value for the Group was 32.8%, broadly in line with our 35% long-term target.

·      At 30 June 2022, before deduction of loan arrangement fees, the Group had committed investment debt facilities of £420 million, of which £400 million were drawn down. £277 million of this debt is fixed and £123 million is floating. The aggregate cost of debt was 3.3%, with a weighted average term of five years.

Committed to being a responsible business

·      At our annual results reported in March this year, we announced our plan to be net zero on our operations, property portfolio and energy consumption by 2035 and we are pleased to report that we are reducing this timeframe to 2033.

·      Our Paris aligned scope 3 target is by 2050 or before, and we will be reviewing this target regularly with the aim of achieving it faster as more data becomes available.

·      We have published our first full Net Zero Strategy report on the sustainability section of our corporate website today, and this includes setting out the seven KPIs that will enable us to track our progress against this commitment.

Encouraged by the strong outlook for our business and the wider sector

·      With strong occupancy to date of 92% for the forthcoming academic year 2022/23, we expect to deliver revenue occupancy at the upper end of our revised guidance of 90% to 95%.

·      We are driving strong life for like rental growth, and we now expect to deliver rental growth in the region of 5% to 6% for academic year 2022/23. While some of this is due to our enhanced marketing and new dynamic pricing strategy, it is also in part a result of the recovery from Covid, which is likely to moderate in future years.

·      In a rising inflationary environment, it is important to note that we have hedged our energy costs up until Q3 2024. We have also fixed two thirds of our total debt facilities, which gives us significant protection from rising interest rates.

·      We are pleased to have resumed dividend payments and we remain committed to paying a minimum of 2.5 pence in 2022, and we will review the dividend in the fourth quarter once we have confirmed our occupancy levels for the new academic year, in line with our policy of being fully covered and progressive.

·      Strong and resilient outlook for student demand growth expected from:

o  Sustainable demographic growth projected from domestic students over the next 10 years.

o  Significantly growth in international student numbers (non-EU), which are projected to increase strongly through to at least 2026, according to the latest UCAS forecasts.

·      We are increasingly confident in the normalisation and long-term strength of our market, and of the strong, sustainable growth and value creation potential within our business.

 

Half year results presentation at 8.30 a.m. (UK) today

Please register below for the Company results presentation in-person briefing and live webcast and conference call for analysts and investors at 8.30 a.m. (UK) today.

 

To register to attend the in-person briefing, which is at the offices of Peel Hunt, 7th Floor, 100 Liverpool Street, London, EC2M 2AT, please contact Maitland/amo at:

[email protected] or by telephone on +44 (0) 20 7379 5151.

 

To access the live webcast, please register in advance here:

https://www.lsegissuerservices.com/spark/EMPIRICSTUDENTPROPERTY/events/2e76e4e3-0cd0-4958-97fc-c75d4d4af916

 

To access the live conference call, please register here to receive unique dial-in details:

https://cossprereg.btci.com/prereg/key.process?key=PTGBD68WD

 

The recording of the results presentation will be available later in the day via the Company's London Stock Exchange profile page

https://www.lsegissuerservices.com/spark/EMPIRICSTUDENTPROPERTY/events/2e76e4e3-0cd0-4958-97fc-c75d4d4af916

 

and from the Company website: https://www.empiric.co.uk/investor-information/company-documents

 

FOR FURTHER INFORMATION ON THE COMPANY, PLEASE CONTACT:

Empiric Student Property plc	(via Maitland/amo below)
Duncan Garrood (Chief Executive Officer)
Lynne Fennah (Chief Financial & Sustainability Officer)
Jefferies International Limited	020 7029 8000
Tom Yeadon
Andrew Morris
Peel Hunt LLP	020 7418 8900
Capel Irwin Carl Gough
Maitland/amo (Communications Adviser)	07747 113 930 / 020 7379 5151
James Benjamin	[email protected]
Alistair de Kare-Silver

 

The Company's LEI is 213800FPF38IBPRFPU87.

 

Further information on Empiric can be found on the Company's website at www.empiric.co.uk.

 

Notes:

Empiric Student Property plc is a leading provider and operator of modern, predominantly direct-let, premium student accommodation serving key UK universities. Investing in both operating and development assets, Empiric is a fully integrated operational student property business focused on premium studio-led accommodation managed through its Hello Student® operating platform, that is attractive to affluent growing student segments.

 

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.

 

MANAGEMENT REPORT

Market Continues to Grow

2021 saw investment volumes in the UK student accommodation sector total just over £4.1 billion despite the lingering effects of the COVID-19 pandemic. In 2022 so far, investment volumes have been considerable, highlighting demand from a growing list of private equity, sovereign wealth funds, property companies and private individuals looking to increase exposure in the sector. GIC and Greystar's purchase of the Student Roost portfolio from Brookfield for £3.3 billion in May, competed for by several well-funded bidders, demonstrates continued confidence in the market. Investors have been prepared to look beyond wider economic market sentiment to focus on the UK student accommodation sector's strong long-term growth prospects.

Student demand figures for the upcoming year are looking positive. In the UCAS June Deadline results the key points were:

-    Total undergraduate applicants up slightly by 0.2%

-    Non-EU international applicants up 9% with growth in applicants from China and India

-    Chinese applicants up 10%

-    Indian applicants up 20%

-    EU applicants down by 27%

-    Total applicants up 6% from 2019/20 applications

We are encouraged to see the year-on-year trend of growth in students, fuelled by the desire of international students to study in the UK, and in top quality UK universities in particular.

UCAS are predicting that by 2026 there will be over a million applicants for UK universities, and that at least a fifth of those will be international students. This means overall applications are projected to grow nearly 50% over the next 5 years.

There is also a long-term trend of growing numbers of postgraduate students. The data for this is not as recent as UCAS, which only records undergraduate applications, but the latest figures from the Higher Education Statistics Agency reported 743,000 UK post graduate students in 2020/21 which was up 16% on the previous year. This gives us confidence that our Postgrad product, which we are piloting in Edinburgh, will have significant attraction.

Our Mix of Students

Our bookings to date for the 2022/23 academic year suggest that half our customers are from the UK, up from pre-pandemic levels of a third. Through our enhanced targeted marketing, combined with good customer service, we have significantly increased the participation of domestic students in our business, showing how we can flex our customer base depending on the current offering to meet demand patterns.

One third of our bookings are from China in line with pre-pandemic levels with the remainder being other international students. This balance may change slightly by September as some markets, including India, tend to book very late.

Asian markets are leading our international enquiries. We have done considerable work to tap into these markets directly, using specific social media platforms and advertising campaigns.

We have seen encouraging growth in rebookers to 23% and the proportion of postgraduates has increased to approximately 41%. This gives us confidence that our new Postgrad product, which we are piloting in Edinburgh, will have significant demand.

5 Key Priorities

Within our 2021 Annual Report we highlighted five key priorities for the Group. We have made good progress on each of these, which are summarised below:

1 Actively Managing Our Portfolio

Clearly, our portfolio segmentation will fluctuate in size and value as we continue to optimise the portfolio.

Segment A (65%) comprises properties which we consider our best assets. We have grown this by 11% since March 2021, as a result of valuation uplifts, making an acquisition, and upgrading assets from Segment B through refurbishment.

Segment B (14%) consists of sites which fundamentally meet the Hello Student criteria but need investment to command the rental yield we require. Our aim is to upgrade these sites to Segment A.

Segment C (14%) originally included two sub-segments.

The first consisted of sites suitable for first years, bound by nomination agreements. We have now reviewed whether to dispose of these assets and so have moved them to Segment D.

Segment C now consists solely of sites ideal for postgraduates. We aim to grow this category and are launching a pilot with the sub-brand "Post Grad by Hello Student" in Edinburgh this autumn.

Segment D (7%) comprises assets that no longer remain core and are on our disposal programme. The Board will review whether to formally approve disposals on a case by case basis.

Portfolio Recycling

Since March last year, we have sold nine assets in segment D for £44.6 million. These were all sold above book value. We currently have further assets worth £40 million under offer. Most of these consist of apartments with shared facilities which are not in line with our core brand. We are in discussions on all our remaining segment D sites and expect the disposal programme to complete within the next 18 months.

In March 2022, we announced our first acquisition since 2018, Market Quarter Studios in Bristol, for a cost of £19 million with an expected unlevered IRR of 8 to 9%. It is fully let for the upcoming academic year with an average uplift in rent of 18%. This site is close to our other assets in Bristol and creates a cluster of four buildings run by the same management team. This will enable us to maintain our small boutique proposition whilst reducing costs and improving our margin. Future acquisitions will focus on continuing this cluster strategy.

We have a strong pipeline of potential acquisitions and development opportunities and are under offer on a further acquisition worth £15 million in a key growth city which will enhance the clustered location. This is funded through our capital recycling programme.

We have two developments which are due to complete for the forthcoming academic year, St Mary's in Bristol and Southbridge in Edinburgh. Both buildings are fully let for the forthcoming academic year.

We have a refurbishment plan to convert Segment B assets to Segment A and plan to invest £4.4 million this year with a target unleveraged IRR of 9% to 11%.

Following our two successful refurbishment pilot schemes earlier in the year, we are continuing with our programme though we have decided to delay some refurbishments until next year when we can contract them well in advance at better prices.

So, for this year we are focusing on a couple of communal areas and 47 rooms, whilst next year we will have a more expansive programme covering several communal areas and 300 beds.

We had 8,775 operating beds in the portfolio last August and will have 8,603 beds in September following:

-    disposals from segment D, reducing beds by 476

-    our acquisition in Bristol, Market Quarter Studios, adding 92 beds 

-    and the opening of 2 developments, St Mary's Bristol with 153 beds, and Edinburgh Southbridge with 59 post graduate beds.

76% of our portfolio currently serves our target universities which include Russell Group and other top-quality institutions, and once segment D is eliminated, we expect this to rise to well above 80%. In other cities where we have a strong commercial performance - for example Falmouth, Huddersfield and Portsmouth - we will maintain our position. 

2 Strengthening Our Brand

We have been carrying out work to refresh and evolve our brand, this is now complete and launched across our digital channels, with continued rollout at each touchpoint in the customer journey. 

Our new brand proposition was created following a number of workshops and focus groups with our students to really understand their needs and ensure that we have a brand which they can identify with and find appealing. The research with our students has been extremely positive and they find this an attractive and relatable brand. Next year we will undertake a thorough overhaul of our customers' digital journey to ensure we continue to provide the best possible experience that further strengthens the brand proposition and our differentiation in the market.

The strong brand position and increased differentiation will increase both new customer acquisition and retention rates.

3 Driving Performance - Data Analytics

Now that our revenue management platform is in house and fully operational, we have been able to maximise our revenue from our dynamic pricing model through rigorous algorithmic analysis coupled with human judgement.

An example of this is in Glasgow, where we applied an initial increase of 3.8% on our rents across the city. As bookings grew and certain room categories in some sites started to fill up, our algorithms recommended further targeted increases. As a result, overall Glasgow has achieved a total rental increase of 7.1% and is fully booked.

We are also working on a new room categorisation which significantly simplifies our current structure, and we will start selling on this basis in the autumn for the 2023/24 academic year.

For the current year, our 2022/23 academic year bookings of 92% are well ahead of the prior year and 10% ahead of the 2019/20 academic year, which was previously our best year ever.

As such, we are increasing our guidance for 2022/23 academic year to 90% to 95%, and we expect to be toward the top of this range assuming no further disruption.

4 Delivering Consistent Service

We have launched an app to enable students to communicate easily and quickly with us.

The app allows customers to contact us about maintenance issues, parcel deliveries, visitors or social plans at a time of their choosing. And we in turn will be able to monitor our response times and customer satisfaction levels.

The app has now been successfully piloted in seven properties. In those seven sites we have been able to halve the amount of time it takes to deal with almost three quarters of service and maintenance requests. So, we now plan to roll out the app across all our sites for the forthcoming academic year 2022/23.

5 Developing Our People

We have also continued to invest in our people, as they are at the heart of a successful service organisation.

We continue to pay the Real Living Wage which will always be above the National Living Wage minimum, to retain and motivate our key customer service team members.

We are very pleased that since joining the "Best Companies" scheme (the previous Sunday Times Best Employers), we have progressed to the "Star Employer" category and grown our positive engagement scores.

At a time when hiring is very competitive, increasing employee engagement helps to increase our retention.

Sustainable Shareholder Returns

In summary, we continue to focus on driving improved and sustainable shareholder returns and creating and delivering positive value and impact to all our stakeholders.

The number of students in the 2022/23 academic year is set for continued growth and based on our current bookings we expect revenue occupancy towards the top end of our guidance.

We are delivering strong rental growth as the business bounces back after the pandemic and expect a like-for-like uplift of around 5% to 6% for the 2022/23 academic year, which is helping to drive an uplift in our portfolio valuation.

We continue to actively manage our portfolio and recycle capital with good progress on disposals, acquisitions, developments, and refurbishments.

We have defined our sustainability metrics and now plan to achieve net zero on our own operations by 2033 rather than 2035.

We are pleased to have reinstated dividend payments and have committed to paying a minimum of 2.5 pence this year, which we will review once occupancy levels are confirmed in quarter four, in line with our fully covered and progressive policy.

Finally, we are targeting a gross margin above 70% and a total return of 7% to 9% in 2023, assuming a full year of normal occupancy levels.

Financial Performance

Revenue improved 37% to £35.6 million, as occupancy for the first half was 86% compared to 65% for the same period in 2021.

Like-for-like rental growth for the 2021/22 academic year was 1.5%, up from 1.3% reported in March, as we focused on occupancy levels during the year over rental growth.

Property expenses were marginally lower than the same period last year.

Gross margin increased from 58% to 70% as a result of a £9.7 million improvement in revenue.

During the first half we sold five assets for £26.7 million, above book value with a net loss on disposal of £0.1 million after costs.

The net profit from a change in the fair value of investment properties was £58.6 million compared to £1.8 million in the previous half year.

Net finance expense was £6.9 million, 11% higher due to higher interest rates and a higher level of borrowing.

Taking all this together, we are reporting a profit of £70.3 million with Basic earnings per share of 11.7 pence.

Valuation Movement

Since the year end, we have sold five assets for £26.7 million, in line with the book value shown here of £25.9 million.

We then purchased one asset in Bristol for £19 million to further our clustering strategy.

After these disposals and acquisitions, the portfolio was valued at £1,014.9 million.

During the period we spent £6.1 million on capital expenditure as well as £7.7 million on developments, mainly on St Mary's Bristol.

The value of developments has increased by £14 million in the first half.

At the year-end we reported a COVID-related valuation reduction of £6.2 million mainly due to CBRE's assumption of lower income for the 2021/22 academic year.

At the end of June, CBRE removed this reduction entirely, resulting in a favourable movement of £6.2 million.

Our commercial portfolio, which comprises convenience stores and restaurants within our sites, went up £0.3 million.

We told you last year that we will spend £37 million on health and safety works in the five years up to 2025 related to work on external wall systems and fire stopping.

CBRE have assumed that £17.2 million of this cost was reflected in the year-end valuation we reported in March. And they have assumed a further £10.8 million for the first half this year. This is due to greater certainty around the scope of works required on buildings as well as the cost.

In addition, CBRE have assumed a £2.4 million deduction, which reflects risk to income from the programme of work on external wall systems and fire stopping.

And the value of our operational assets grew by £51.7 million, driven by strong yield compression and like-for-like rental growth.

We are unlikely to experience the same level of yield compression in the second half and whilst this valuation uplift has driven a very strong total return in the first half, we expect this to moderate in 2023.

Overall Net Initial Yield has improved from 5.3% to 5.2% since the year-end.

Collectively, these movements resulted in a valuation at the end of June of £1,088 million.

Financial Position at 30 June 2022

The portfolio was valued at £1,088 million as at 30 June 2022.

The cash holding was £51 million compared to £37 million at the prior year end.

Debt now stands at £402 million after deducting loan arrangement fees, up from £371 million as at 31 December 2021.

And the Net Asset Value of the Group was £711 million, compared to £648 million, mainly due to the improved valuation.

At the end of June, before deduction of loan arrangement fees, the Group had committed investment debt facilities of £420 million, of which £400 million were drawn down.

£277 million of this debt is fixed and £123 million is floating.

The aggregate cost of debt was 3.3%, with a weighted average term of 5.0 years.

And the Loan to Value for the Group was 32.8%, broadly in line with our 35% long-term target.

As of 31 July, we had £72.5 million of undrawn facilities and cash, and we currently have around £38 million of unencumbered assets.

In an environment with rising interest rates, it is important that three quarters of our drawn debt is fixed.

Capital Expenditure

As stated in our December 2021 Annual Report, we have outlined our planned capital expenditure over the five-years from 2021 to 2025. This was split into three categories.

Refurbishment

We expect to invest £44 million in total on refurbishments. Of that we plan to spend £2.8 million in 2022, of which £0.6 million has been spent to date, with a more significant programme in 2023.

Green spend

Managing our assets in a sustainable way is a key focus with an estimated total spend of £4 million on green initiatives.

We expect to invest £500,000 this year on smart panel heat network systems and solar panels, with £50,000 spent so far.

Fire safety

The total estimated five-year spend on fire safety works is £37 million:

This year we are planning £4 million of fire stopping work with £2.3 million incurred to date, and a further £6.5 million on external wall rectification, with £1.3 million spent to date.

We also expect to maintain our on-going maintenance capital expenditure of about £4 million a year.

Outlook for Full Year 2022

We are encouraged that occupancy for the next academic year 2022/23 is currently at 92%, which is ahead by 10% compared to the same time pre-pandemic.

With greater confidence that market conditions are normalising and progress on further improving our business and portfolio, we are increasing our guidance for revenue occupancy to 90% to 95% for 2022/23 academic year, and we expect to be toward the top of this range, assuming no further disruption.

On Administration costs, we are at £6.3 million for the first half, in line with our guidance.

Our cost forecast includes an inflationary uplift in salaries this year for those in more junior positions and a small uplift for more senior roles.

We are benefiting from having fixed our electricity and gas costs up until Q3 2024.

And of course, two thirds of our drawn debt is fixed which gives us significant protection from rising interest rates.

On the back of our confidence in occupancy levels for the 2022/23 academic year, we are revising our administration cost forecast for the full year to £13 million. This reflects our decision to accelerate investment in the future growth of the business, as well as salary uplifts to reflect the current competitive labour market.

Our expectation for capital expenditure in 2022 remains at £24.5 million in total, taking into account the expenditure we detailed earlier, with a further £13 million for development.

On the dividend we have committed to paying a minimum of 2.5 pence in 2022 and will review this in Q4 once occupancy levels are confirmed for the new academic year.

Environment, Social and Governance Update

In our 2021 Annual Report, we outlined four key themes that we intend to focus on:

-    Becoming a sustainable business

-    Health and safety

-    Mental health and wellbeing

-    Providing opportunities for all

We continue to make good progress across all four areas and will provide an update on each one in our 2022 Annual Report.

This section will focus solely on how Empiric Student Property plc will become a sustainable business.

At the year-end, we announced our plan to be net zero on our own operations, property portfolio and energy consumption by 2035, and we are pleased to report that we are reducing this timeframe to 2033.

We are pleased to have established and started to mobilise our net zero strategy, and we intend to review progress and update the pathway continuously as we move forward.

There is still more work to do on our Paris aligned Scope 3 target of 2050 which we hope to accelerate once we have more data to provide an accurate picture.

We have identified seven KPIs that will enable us to track our progress against this commitment; these are listed below:

-      For our first KPI, we are developing an ongoing ESG training and development programme for our employees by 2023.

-      Then for our second, a long-term programme to engage our customers on climate objectives, by 2024.

-      Our third is focused on procuring renewable electricity by 2023 in line with RE:100 definitions of evidence. For those who are not familiar with RE:100, this is a global initiative with over 370 corporate members committed to using 100% renewable electricity.

-      Fourth, we plan to establish a means of measuring whole life carbon in our developments by 2025.

-      Our fifth KPI tracks our progress in removing fossil fuels from our buildings, with the aim of removing natural gas in 80% of our assets by 2030 and 100% by 2033.

-      Sixth we plan to deliver on government requirements for all buildings to be EPC B or better by 2030.

-      Finally, we are reducing energy used per bed across our portfolio from 4,813 kilowatt hours in 2019 to 2,000 by 2033 with a longer term target of below 1.500 by 2040.

ESG Key Milestones

We have published our full Net Zero strategy and summary of our EPC ratings on the ESG section of our corporate website as at the date of publication of this document.

Phase I

2022 - 2024

In this phase we will:

-      establish and mobilise a Net Zero Pathway,

-      develop an engagement plan for colleagues and customers,

-      conduct a whole life carbon assessment of new developments.

Phase II

2025 - 2028

This phase will deliver:

-      updated net zero pathway targets to incorporate key learnings,

-      along with upgrading EPCs and the removal of fossil fuels across our assets.

Phase III

2029 - 2033

This phase will focus on:

-      updating the pathway targets to achieve net zero,

-      establishing offsetting requirements and an offsetting programme in advance of 2032,

-      and reducing operational emissions to zero.

 

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties we face are described in detail on pages 48 to 53 of our Annual Report and Accounts for the year ended 31 December 2021.

Risk Environment

The Board is cognisant that the risk environment has heightened since the year end, with the war in Ukraine, inflation and rising interest rates alongside a highly competitive labour market. However, the Audit Committee, which assists the Board with its responsibilities for managing risk, has considered the principal risks and uncertainties and concluded that they have not changed since the year-end report.

They did note however that all of the external risks and the people risk noted below have increased since the year end.

Principal Risks

The principal risks and uncertainties described in the Annual Report and Accounts are summarised below:

External Risks

-    Competition Risk - The risk of an increased level of competition and supply in the student accommodation sector.

-    Property Market Risk - The potential for a downturn in the property market.

-    Regulatory Risk - Large levels of regulation being applied to the student accommodation market.

-    Funding Risk - The availability of debt or equity and ability to raise it on acceptable terms.

-    Revenue Risk - The risk of reduced revenue from various changes to university operations and travel restrictions.

Internal Risks

-    Health and Safety Risk - The occurrence of a major health and safety incident, including a fire.

-    Cyber Security Risk - The Group suffering a cyber security breach.

-    People Risk - Inability to retain and attract top levels of staff.

-    Safe and Sustainable Buildings Risk - How our buildings will withstand increased legislation around fire safety as well as pressure from climate change.

Going Concern

The Board is cognisant that the risk environment has heightened since the year end, with the war in Ukraine, inflation and rising interest rates alongside a highly competitive labour market. Accordingly, the Group has conducted a detailed going concern review and considered its liquidity position and banking covenant compliance strength. The detailed assessment we have undertaken is set out in Note 1.2 of the financial statements.

The Directors consider that the Group has adequate resources in place for at least 12 months from the date of these results and have therefore adopted the going concern basis of accounting in preparing the half year financial statements.

Responsibility Statement of the Directors in Respect of the Interim Report and Accounts

The Directors confirm that to the best of their knowledge this condensed set of financial statements has been prepared in accordance with UK adopted International Accounting Standard 34 and that the operating and financial review herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority, namely:

-    an indication of important events that have occurred during the first six months of the financial period and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial period; and

-    material related party transactions in the first six months.

A list of the current Directors is shown further on in the Interim Report and Accounts. Shareholder information is as disclosed on the Empiric Student Property plc website, www.empiric.co.uk.

For and behalf of the Board

Mark Pain
Chairman

10 August 2022

 

INDEPENDENT REVIEW REPORT TO EMPIRIC STUDENT PROPERTY PLC

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and related notes. 

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1.3, the annual financial statements of the Group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the Directors have inappropriately adopted the going concern basis of accounting or that the Directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however, future events or conditions may cause the Group to cease to continue as a going concern.

Responsibilities of Directors

The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the Review of the Financial Information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of Our Report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants
London, United Kingdom
10 August 2022

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

 

Unaudited Condensed Consolidated Statement of Comprehensive Income

		Unaudited six months to 30 June 2022		Unaudited six months to 30 June 2021		Audited year 31 December 2021
	Notes	£'000		£'000		£'000
Continuing operations
Revenue		35,628		25,921		55,967
Property expenses		(10,610)		(10,925)		(23,061)
Gross profit		25,018		14,996		32,906
Administrative expenses		(6,289)		(5,257)		(10,547)
(Loss)/gain on disposal of investment property		(149)		1,651		1,652
Change in fair value of investment property	6	58,564		1,807		17,567
Operating profit		77,144		13,197		41,578
Finance cost		(6,871)		(6,199)		(12,382)
Finance income		2		1		1
Net finance cost	2	(6,869)		(6,198)		(12,381)
Profit before tax		70,275		6,999		29,197
Corporation tax	3	-		-		-
Profit for the period and Total comprehensive income		70,275		6,999		29,197
Earnings per share expressed as pence per share
Basic	4	11.65		1.16		4.84
Diluted	4	11.64		1.16		4.84

 

Unaudited Condensed Consolidated Statement of Financial Position

		Unaudited 30 June 2022		Unaudited 30 June 2021		Audited 31 December 2021
	Notes	£'000		£'000		£'000
Non-current assets
Property, plant and equipment		1,051		177		426
Intangible assets		1,398		1,011		1,318
Right of use asset		1,476		-		1,010
Investment property - operational assets	6	1,037,315		969,355		967,194
Investment property - development assets	6	50,350		24,942		28,692
		1,091,590		995,485		998,640
Current assets
Trade and other receivables		5,013		7,161		7,839
Assets classified as held for sale		-		-		25,870
Cash and cash equivalents		51,087		32,160		37,127
		56,100		39,321		70,836
Total assets		1,147,690		1,034,806		1,069,476
Current liabilities
Trade and other payables		19,371		15,878		19,990
Borrowings	7	19,984		-		44,712
Lease liability		107		-		107
Deferred rental income		13,649		8,007		29,862
		53,111		23,885		94,671
Non-current liabilities
Borrowings	7	382,422		370,508		326,244
Lease liability		1,418		-		963
		383,840		370,508		327,207
Total liabilities		436,951		394,393		421,878
Total net assets		710,739		640,413		647,598
Called-up share capital		6,032		6,032		6,032
Share premium		295		295		295
Capital reduction reserve		452,418		475,038		459,958
Retained earnings		251,994		159,048		181,313
Total equity		710,739		640,413		647,598
Total equity and liabilities		1,147,690		1,034,806		1,069,476
NAV per share basic (pence)	8	117.83		106.17		107.36
NAV per share diluted (pence)	8	117.76		105.71		106.75
EPRA NTA per share basic (pence)	8	117.83		106.17		107.36

 

Unaudited Condensed Consolidated Statement of Changes in Equity

Period from 1 January to 30 June 2022 (unaudited)

		Called up share capital		Share premium		Capital reduction reserve		Retained earnings		Total equity
		£'000		£'000		£'000		£'000		£'000
Balance at 1 January 2022		6,032		295		459,958		181,313		647,598
Changes in equity
Profit for the period		-		-		-		70,275		70,275
Total comprehensive expense/income for the period		-		-		-		70,275		70,275
Share-based payment		-		-		-		406		406
Dividends		-		-		(7,540)		-		(7,540)
Total contributions and distribution recognised directly in equity		-		-		(7,540)		406		(7,134)
Balance at 30 June 2022		6,032		295		452,418		251,994		710,739

 

Period from 1 January to 30 June 2021 (unaudited)

		Called up share capital		Share premium		Capital reduction reserve		Retained earnings		Total equity
		£'000		£'000		£'000		£'000		£'000
Balance at 1 January 2021		6,032		257		475,038		151,950		633,277
Changes in equity
Profit for the period		-		-		-		6,999		6,999
Total comprehensive expense/income for the period		-		-		-		6,999		6,999
Share-based payment		-		-		-		137		137
Share options exercised		-		38		-		(38)		-
Total contributions and distribution recognised directly in equity		-		38		-		99		137
Balance at 30 June 2021		6,032		295		475,038		159,048		640,413

 

Year from 1 January to 31 December 2021 (audited)

		Called up share capital		Share premium		Capital reduction reserve		Retained earnings		Total equity
		£'000		£'000		£'000		£'000		£'000
Balance at 1 January 2021		6,032		257		475,038		151,950		633,277
Changes in equity
Profit for the period		-		-		-		29,197		29,197
Total comprehensive income for the period		-		-		-		29,197		29,197
Share-based payment		-		-		-		204		204
Share options exercised		-		38		-		(38)		-
Dividends		-		-		(15,080)		-		(15,080)
Total contributions and distribution recognised directly in equity		-		38		(15,080)		166		(14,876)
Balance at 31 December 2021		6,032		295		459,958		181,313		647,598

 

Unaudited Condensed Consolidated Statement of Cash Flows

		Unaudited six months to 30 June 2022		Unaudited six months to 30 June 2021		Audited year to 31 December 2021
		£'000		£'000		£'000
Cash flows from operating activities
Profit before income tax		70,275		6,999		29,197
Share-based payments		405		137		204
Depreciation charge		298		192		457
Finance income		(2)		(1)		(1)
Finance costs		6,871		6,199		12,382
Loss/(gain) on disposal of investment property		149		(1,651)		(1,652)
Change in fair value of investment property		(58,564)		(1,807)		(17,567)
		19,432		10,068		23,020
Decrease in trade and other receivables		2,826		6,025		6,670
(Decrease)/increase in trade and other payables		(1,092)		539		3,532
(Decrease)/increase in deferred rental income		(16,213)		(12,669)		9,186
		(14,479)		(6,105)		19,388
Net cash flows generated from operations		4,953		3,963		42,408
Cash flows from investing activities
Purchase of tangible fixed assets		(673)		(108)		(427)
Purchase of intangible assets		(207)		(83)		(537)
Investment property additions		(14,695)		(3,907)		(15,701)
Purchase of investment property		(19,453)		-		-
Proceeds from disposal of investment property		25,731		18,020		17,982
Interest received		2		-		1
Net cash flows from investing activities		(9,295)		13,922		1,318
Cash flows from financing activities
Dividends paid		(7,190)		-		(13,589)
Bank borrowings drawn		32,752		-		-
Repayments of bank borrowings		-		(15,000)		(15,000)
Loan arrangement fees paid		(1,738)		(137)		(168)
Finance costs		(5,458)		(4,515)		(11,769)
Lease liability repaid		(64)		-		-
Net cash from financing activities		18,302		(19,652)		(40,526)
Increase/(decrease) in cash and cash equivalents		13,960		(1,767)		3,200
Cash and cash equivalents at beginning of period		37,127		33,927		33,927
Cash and cash equivalents at end of period		51,087		6,157		37,127

Unaudited Notes to the Financial Statements

For the period 1 January 2022 to 30 June 2022

1. Accounting Policies

1.1 Trading Period

The condensed interim financial statements of the Group reporting period is from 1 January 2022 to 30 June 2022.

1.2 Going Concern

The Group is gaining more certainty over income as the COVID-19 pandemic becomes part of business as usual. However, the Board is aware that with the war in Ukraine, inflation and rising interest rates alongside a highly competitive labour market there is still global economic uncertainty.

Accordingly, the Group has conducted a detailed going concern review for the period to 30 September 2023 and considered its liquidity position and banking covenant compliance strength.

As at 30 June 2022 the Group had £51 million in cash and £20 million of undrawn investment debt facilities. The Group is well funded and has no refinancing requirements until February 2023. We have opened discussions with the £20 million loan due in February 2023 with a view to refinancing it.

The Group's debt facilities include covenants in respect of LTV and interest cover, both projected and historic, and all debt facilities are ring-fenced with each specific lender. The Group maintains regular dialogue with all of its lenders as part of the ordinary course of business. To date, all of our banks have been supportive during this period and have expressed commitment to the long-term relationship they wish to build with Empiric.

Management has evaluated a number of scenarios in its going concern model. The key variables we have used are revenue for the upcoming 2022/23 academic year, increasing interest rates and inflation. For the 2021/22 academic year our occupancy has been held at 86%. The list of scenarios are below, they are all on top of our base case model which includes our current prudent forecasts on cost inflation and interest rates.

Scenario	Occupancy level for 2022/23 academic year	Property cost inflation	Interest rate increases
Base case scenario	95%	Detailed assumptions per internal model.	Detailed assumptions per internal model.
Scenario 1	85%	As per base case	As per base case
Scenario 2	85%	Plus 2% above base case in 2023 & 2024	As per base case
Scenario 3	85%	As per base case	Plus 1.5% above base case

 

The Group continues to maintain covenant compliance for its LTV thresholds throughout the going concern assessment period. Property values would have to fall by more than 26% from June 2022 valuations before LTV covenants are breached.

In all the scenarios above the Group continues to maintain covenant compliance for all its interest cover covenants. It maintains adequate levels of liquidity throughout the going concern period. In addition, no assumption is made as to the level of additional cost-cutting measures or mitigating actions which could potentially be undertaken if the Group needed.

To support the Directors' going concern assessment, the management also evaluated the occupancy level at which all ICR covenant tests were breached and, additionally, the impact of a "Reverse Stress Test" which was performed to determine the level of revenue occupancy for the 2022/23 academic year at which the Group would need to seek alternative sources of funding. For this model we kept revenue occupancy for the 2021/22 academic year at 86%. The Directors noted that if occupancy falls below 63% then the Group would be in breach of all ICR covenants.

As at 10 August 2022 our bookings for the 2022/23 academic year are at 92% and we are seeing these grow on a daily basis. As such, we believe the downside scenario is unlikely.

Having reviewed and considered three modelled scenarios, the Directors consider that the Group has adequate resources in place for at least 12 months from the date of these results and have therefore adopted the going concern basis of accounting in preparing the interim financial statements.

1.3 Basis of Preparation

This condensed consolidated interim financial report for the half-year reporting period ended 30 June 2022 has been prepared in accordance with the UK adopted International Accounting Standard 34, "Interim Financial Reporting" and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

The Interim Report does not include all of the notes of the type normally included in an annual financial report. Accordingly, this Report is to be read in conjunction with the Annual Report for the year ended 31 December 2021, which has been prepared in accordance with both "international accounting standards in conformity with the requirements of the Companies Act 2006" and "international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union", and any public announcements made by the Group during the interim reporting period.

These condensed interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2021 were approved by the Board of Directors on 16 March 2022 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These financial statements have been reviewed, not audited.

The Group's financial statements have been prepared on a historical cost basis, except for investment property and derivative financial instruments which have been measured at fair value. The consolidated financial statements are presented in Sterling, which is also the Group's functional currency.

The accounting policies adopted in this Report are consistent with those applied in the Group's statutory accounts for the year ended 31 December 2021 and are expected to be consistently applied during the year ending 31 December 2022.

1.4 Significant Accounting Judgements, Estimates and Assumptions

The preparation of the Group's interim financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

Estimates

In the process of applying the Group's accounting policies, management has made the following estimates, which have the most significant effect on the amounts recognised in the consolidated financial statements:

a) Fair valuation of investment property

The market value of investment property is determined, by an independent real estate valuation expert, to be the estimated amount for which a property should exchange on the date of the valuation in an arm's length transaction. Properties have been valued on an individual basis. The valuation experts use recognised valuation techniques and the principles of IFRS 13.

The valuations have been prepared in accordance with the RICS Valuation-Professional Standards January 2014 and the UK national supplement 2018 (the "Red Book"). Factors reflected include current market conditions, annual rentals, lease lengths, and location. The significant methods and assumptions used by valuers in estimating the fair value of investment property are set out in Note 6.

For properties under development the fair value is calculated by estimating the fair value of the completed property using the income capitalisation technique less estimated costs to completion and an appropriate developer's margin.

Judgements

In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated interim financial statements:

a) Operating lease contracts - the Group as lessor

The Group has investment properties which have various categories of leases in place with tenants. The judgements by lease type are detailed below:

Student leases: As these leases all have a term of less than one year, the Group retains all the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

Nominations and commercial leases: The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the lease terms, insurance requirements and minimum lease payments, that it retains all the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

1.5 Seasonality of Operations

The results of the Group's operating business are closely aligned to the levels of occupancy achieved by the property portfolio in each academic year. Empiric targets 51-week tenancies, with a one-week void period falling in September. This results in slightly lower revenue on the existing portfolio in the second half year combined with slightly higher costs from turning around the rooms for the new academic year.

The Group counteracts this through the development cycle as construction is timed to complete ready for the start of the academic year in September each year. These new properties becoming available increases revenue in the second half of the year.

1.6 Segmental Information

The Directors are of the opinion that the Group is engaged in a single segment business, being the investment in student and commercial lettings, within the United Kingdom.

2. Net Finance Cost

		Unaudited six months to 30 June 2022		Unaudited six months to 30 June 2021		Audited year to 31 December 2021
		£'000		£'000		£'000
Finance costs
Interest expense on bank borrowings		6,435		5,820		11,567
Amortisation of loan transaction costs		436		379		815
		6,871		6,199		12,382
Finance income
Interest received on bank deposits		2		1		1
		2		1		1
Net finance cost		6,869		6,198		12,381

 

3. Corporation Tax

Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Taxation is recognised in the profit and loss within the Group Consolidated Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movement in equity, in which case it is also recognised as a direct movement in equity.

Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

4. Earnings Per Share

The number of ordinary shares is based on the time-weighted average number of shares throughout the period.

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential ordinary shares.

EPRA EPS, reported on the basis recommended for real estate companies by EPRA, is a key measure of the Group's operating results.

Adjusted earnings per share is a performance measure used by the Board to assess the Group's dividend payments. Licence fees, development rebates and rental guarantees are added to EPRA earnings on the basis noted below as the Board sees these cash flows as supportive of dividend payments. This is then divided by the weighted average number of ordinary shares outstanding during the period.

-    The adjustment for licence fees receivable is calculated by reference to the fraction of the total period of completed construction during the period, multiplied by the total licence fees receivable on a given forward-funded asset.

-    The development rebate is due from developers in relation to late completion on forward funded agreements as stipulated in development agreements.

-    The discounts on acquisition are in respect of the vendor guaranteeing a rental shortfall for the first year of operation as stipulated in the sale and purchase agreement.

Reconciliations are set out below:

Unaudited six months to 30 June 2022		Calculation of basic EPS		Calculation of diluted EPS		Calculation of EPRA basic EPS		Calculation of EPRA diluted EPS		Calculation of adjusted basic EPS
		£'000		£'000		£'000		£'000		£'000
Earnings		70,275		70,275		70,275		70,275		70,275
Changes in fair value of investment property (Note 6)		-		-		(58,564)		(58,564)		(58,564)
Loss on disposal of investment property		-		-		149		149		149
Earnings/adjusted earnings (£'000)		70,275		70,275		11,860		11,860		11,860
Weighted average number of shares ('000)		603,203		603,203		603,203		603,203		603,203
Adjustment for employee share options ('000)		-		352		-		352		-
Total number of shares ('000)		603,203		603,555		603,203		603,555		603,203
Per-share amount (pence)		11.65		11.64		1.97		1.97		1.97

 

Unaudited six months to 30 June 2021		Calculation of basic EPS		Calculation of diluted EPS		Calculation of EPRA basic EPS		Calculation of EPRA diluted EPS		Calculation of adjusted basic EPS
		£'000		£'000		£'000		£'000		£'000
Earnings		6,999		6,999		6,999		6,999		6,999
Changes in fair value of investment property (Note 6)		-		-		(1,807)		(1,807)		(1,807)
Gain on disposal of investment property		-		-		(1,651)		(1,651)		(1,651)
Earnings/adjusted earnings (£'000)		6,999		6,999		3,541		3,541		3,541
Weighted average number of shares ('000)		603,168		603,168		603,168		603,168		603,168
Adjustment for employee share options ('000)		-		2,593		-		2,593		-
Total number of shares ('000)		603,168		605,761		603,168		605,761		603,168
Per-share amount (pence)		1.16		1.16		0.59		0.58		0.59
Audited year to 31 December 2021
Earnings		29,197		29,197		29,197		29,197		29,197
Changes in fair value of investment properties (Note 6)		-		-		(17,573)		(17,573)		(17,573)
Gain/loss on disposal of investment property		-		-		(1,652)		(1,652)		(1,652)
Earnings/adjusted earnings		29,197		29,197		9,972		9,972		9,972
Weighted average number of shares ('000)		603,185		603,185		603,185		603,185		603,185
Adjustment for employee share options ('000)		-		254		-		254		-
Total number of shares ('000)		603,185		603,439		603,185		603,439		603,185
Per-share amount (pence)		4.84		4.84		1.65		1.65		1.65

 

5. Dividends Paid

		Unaudited six months to 30 June 2022		Unaudited six months to 30 June 2021		Audited year to 31 December 2021
		£'000		£'000		£'000
Interim dividend of 2.50 pence per ordinary share in respect of the quarter ended 30 September 2021		-		-		15,080
Interim dividend of 0.625 pence per ordinary share in respect of the quarter ended 31 December 2021		3,770		-		-
Interim dividend of 0.625 pence per ordinary share in respect of the quarter ended 31 March 2022		3,770		-		-
		7,540		-		15,080

6. Investment Property

		Investment properties freehold		Investment properties long leasehold		Total operational assets		Properties under development		Total
		£'000		£'000		£'000		£'000		£'000
As at 1 January 2022		835,452		131,743		967,195		28,690		995,885
Property additions		5,022		1,079		6,101		7,662		13,763
Property acquisitions		19,453		-		19,453		-		19,453
Change in fair value during the period		38,734		5,832		44,566		13,398		58,564
As at 30 June 2022 (unaudited)		898,661		138,654		1,037,315		50,350		1,087,665
As at 1 January 2021		849,220		132,149		981,369		23,751		1,005,120
Property additions		1,755		251		2,006		1,731		3,737
Property disposals		(16,367)		-		(16,367)		-		(16,367)
Change in fair value during the period		3,765		(1,418)		2,347		(540)		1,807
As at 30 June 2021 (unaudited)		838,373		130,982		969,355		24,942		994,297

 

		Investment properties freehold		Investment properties long leasehold		Total operational assets		Properties under development		Total
		£'000		£'000		£'000		£'000		£'000
As at 1 January 2021		849,220		132,149		981,369		23,751		1,005,120
Property additions		6,173		1,808		7,981		7,418		15,399
Property disposals		(16,330)		-		(16,330)		-		(16,330)
Transfer to held for sale asset		(25,870)		-		(25,870)		-		(25,870)
Change in fair value during the year		22,259		(2,215)		20,044		(2,477)		17,567
As at 31 December 2021 (audited)		835,452		131,743		967,195		28,691		995,886

 

While £40m of properties came under offer after the period end, the Board considers that the properties that are part of our disposal program do not meet the criteria for held for sale assets because management do not expect sales to be concluded within 12 months of 30 June 2022.

In accordance with IAS 40, the carrying value of investment property is their fair value as determined by independent external valuers. This valuation has been conducted by CBRE Limited, as independent external valuers, and has been prepared as at 30 June 2022, in accordance with the Appraisal and Valuation Standards of the RICS, on the basis of market value. This value has been incorporated into the financial statements.

The valuation of all property assets uses market evidence and also includes assumptions regarding income expectations and yields that investors would expect to achieve on those assets over time. Many external economic and market factors, such as interest rate expectations, bond yields, the availability and cost of finance and the relative attraction of property against other asset classes, could lead to a reappraisal of the assumptions used to arrive at current valuations. In adverse conditions, this reappraisal can lead to a reduction in property values and a loss in NAV.

All investment property is categorised as Level 3. There have been no transfers between Level 1 and Level 2 during any of the periods, nor have there been any transfers between Level 2 and Level 3 during any of the periods.

The valuations have been prepared on the basis of market value ("MV"), which is defined in the RICS Valuation Standards as:

"The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion."

The table below reconciles the fair value of the investment property as per the Consolidated Group Statement of Financial Position and the market value of the investment property as per the independent valuation performed in respect of each period end.

 

		Unaudited six months to 30 June 2022		Unaudited six months to 30 June 2021		Audited year to 31 December 2021
		£'000		£'000		£'000
Value per independent valuation report		1,087,197		993,828		1,021,288
Plus: long leasehold liability		468		469		468
Deduct: Assets held for sale		-		-		(25,870)
Fair value per Group Statement of Financial Position		1,087,665		994,297		995,886

 

The following descriptions and definitions relate to valuation techniques and key unobservable inputs made in determining fair values. The valuation techniques for student properties use a discounted cash flow with the following inputs:

a)  Unobservable input: Rental values

The rent at which space could be let in the market conditions prevailing at the date of valuation. The rent ranges per week are as follows:

30 June 2022		30 June 2021		31 December 2021
£87-420 per week		£89-£339 per week		£85-£387 per week

 

b)  Unobservable input: Rental growth

The estimated average annual increase in rent based on both market estimations and contractual arrangements. The assumed growths in valuations are as follows:

30 June 2022		30 June 2021		31 December 2021
2.60%		1.00%		(1.56%)

 

c)  Unobservable input: Net yield

The net initial yield is defined as the initial gross income as a percentage of the market value (or purchase price as appropriate) plus standard costs of purchase. The ranges in net initial yields are as follows:

30 June 2022		30 June 2021		31 December 2021
4.25%-8.15%		4.45%-8.15%		4.25%-8.15%

 

d)  Unobservable input: COVID rent deduction

The COVID-19 rent deduction which impacted the 2020 valuation has now fallen away. See prior year annual report for basis of this deduction. In December 2021 there was a total capital deduction totalling £6,368,080 to reflect occupancy shortfall. This was based on CBRE's market perception that 2021/22 is going to be an unaffected year and that no risk deduction in respect of COVID-19 uncertainties is required. In the June 2022 valuation this deduction has been removed.

 

e)  Unobservable input: Physical condition of the property

We have announced we would spend £37 million on health and safety works over the next five years. CBREs assumption is that £29.8 million of this cost should now be reflected in the valuation at the period-end (31 December 2021: £17.2 million) in respect of work on external wall systems and fire stopping on buildings over 18 metres tall as well as those for which we now have a clear programme of works for. Management has performed a sensitivity analysis to assess the impact of a change in its estimate of total costs relating to the £29.8 million deduction. A 20% increase in the estimated remaining costs would affect net valuation gains/losses on property in the IFRS P&L by £6.0 million and would reduce the Group's NTA by less than 0.1 pence on a per share basis. Whilst the spend is expected to be utilised within two years, there is uncertainty over this timing.

 

f)   Unobservable input: Planning consent

No planning enquiries undertaken for any of the development properties.

 

g)  Sensitivities of measurement of significant unobservable inputs

As set out in the significant accounting estimates and judgements, the Group's portfolio valuation is open to judgements and is inherently subjective by nature.

 

As a result, the following sensitivity analysis for the student properties has been prepared by the valuer:

		-3% change in rental income		+3% change in rental income		-0.25% change in yield		+0.25% change in yield
		£'000		£'000		£'000		£'000
(Decrease)/increase in the fair value of investment properties
As at 30 June 2022		(42,770)		42,840		53,670		(48,590)
As at 30 June 2021		(39,130)		39,250		41,550		(45,720)
As at 31 December 2021		(41,520)		40,710		48,480		(44,900)

 

7. Borrowings

The existing facilities are secured by charges over individual investment properties held by certain asset-holding subsidiaries. These assets have a fair value of £1,049 million at 30 June 2022. In some cases, the lenders also hold charges over the shares of the subsidiaries and the intermediary holding companies of those subsidiaries.

A summary of the drawn and undrawn bank borrowings in the period is shown below:

		Bank borrowings drawn 30 June		Bank borrowings undrawn 30 June		Total 30 June
		£'000		£'000		£'000
At 1 January 2022 (audited)		375,000		67,500		442,500
Facilities reduced during the period		-		(10,500)		(10,500)
Bank borrowings drawn in the period		32,752		(32,752)		-
At 30 June 2022 (unaudited)		407,752		24,248		432,000
At 1 January 2021 (audited)		390,000		52,500		442,500
Bank borrowings drawn in the period		(15,000)		15,000		-
At 30 June 2021 (unaudited)		375,000		67,500		442,500
At 1 January 2021 (audited)		390,000		52,500		442,500
Bank borrowings repaid in the year		(15,000)		15,000		-
At 31 December 2021 (audited)		375,000		67,500		442,500

 

Any associated fees in arranging the bank borrowings unamortised as at the period end are offset against amounts drawn on the facilities as shown in the table below:

		Unaudited 30 June 2022		Unaudited 30 June 2021		Audited 31 December 2021
Current borrowings		£'000		£'000		£'000
Balance brought forward		45,000		-		-
Bank borrowings becoming current in the period		20,000		-		45,000
Less: Bank borrowings becoming non-current during the period		(45,000)		-		-
Bank borrowings: due in less than one year		20,000		-		45,000
Less: Unamortised costs		(16)		-		(288)
Current liabilities: Bank borrowings		19,984		-		44,712

 

		Unaudited 30 June 2022		Unaudited 30 June 2021		Audited 31 December 2021
Non-current borrowings		£'000		£'000		£'000
Balance brought forward		330,000		390,000		390,000
Total bank borrowings in the period		32,752		-		-
Bank borrowings becoming non-current during the period		45,000		-		-
Less: Bank borrowings becoming current during the period		(20,000)		-		(45,000)
Less: Bank borrowings repaid during the period		-		(15,000)		(15,000)
Bank borrowings: due in more than one year		387,752		375,000		330,000
Less: Unamortised costs		(5,330)		(4,492)		(3,756)
Non-current liabilities: bank borrowings		382,422		370,508		326,244

 

		Unaudited 30 June 2022		Unaudited 30 June 2021		Audited 31 December 2021
Maturity of bank borrowings		£'000		£'000		£'000
Repayable within 1 year		20,000		-		45,000
Repayable between 1 and 2 years		52,800		-		20,000
Repayable between 2 and 5 years		77,752		117,800		52,800
Repayable in over 5 years		257,200		257,200		257,200
Non-current liabilities: bank borrowings		407,752		375,000		375,000

 

8. NAV Per Share

The principles of the three measures per EPRA are below:

EPRA Net Reinstatement Value: Assumes that entities never sell assets and aims to represent the value required to rebuild the entity.

EPRA Net Tangible Assets: Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax.

EPRA Net Disposal Value: Represents the shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. As the Group is a REIT, no adjustment is made for deferred tax.

The Group considers NAV to be the most relevant measure of the NAV measures and we expect this to be our primary NAV measure going forward.

A reconciliation of the three EPRA NAV metrics from IFRS NAV is shown in the table below.

		NAV		EPRA NAV measures
Unaudited six months to 30 June 2022		IFRS		EPRA NRV		EPRA NTA		EPRA NDV
		£'000		£'000		£'000		£'000
Net assets per Statement of Financial Position		710,739		710,739		710,739		710,739
Adjustments
Fair value of fixed rate debt		-		-		-		4,590
Purchaser's costs1		-		38,340		-		-
Net assets used in per share calculation		710,739		749,079		710,739		715,329
Number of shares in issue
Issued share capital ('000)		603,203		603,203		603,203		603,203
Issued share capital plus employee options ('000)		603,555		603,555		603,555		603,555
Net asset value per share		£		£		£		£
Basic net asset value per share		1.178		1.242		1.178		1.186
Diluted net asset value per share		1.178		1.241		1.178		1.185

 

		NAV		EPRA NAV measures
Unaudited six months to 30 June 2021		IFRS		EPRA NRV		EPRA NTA		EPRA NDV
		£'000		£'000		£'000		£'000
Net assets per Statement of Financial Position		640,415		640,415		640,415		640,415
Adjustments
Fair value of fixed rate debt		-		-		-		(31,295)
Purchaser's costs1		-		34,658		-		-
Net assets used in per share calculation		640,415		675,073		640,415		609,120
Number of shares in issue
Issued share capital ('000)		603,203		603,203		603,203		603,203
Issued share capital plus employee options ('000)		605,796		605,796		605,796		605,796
Net asset value per share		£		£		£		£
Basic net asset value per share		1.062		1.119		1.062		1.010
Diluted net asset value per share		1.057		1.114		1.057		1.005

 

		NAV		EPRA NAV measures
Year ended 31 December 2021		IFRS		EPRA NRV		EPRA NTA		EPRA NDV
		£'000		£'000		£'000		£'000
Net assets per Statement of Financial Position		647,598		647,598		647,598		647,598
Adjustments
Fair value of fixed rate debt		-		-		-		(14,333)
Purchaser's costs1		-		34,168		-		-
Net assets used in per share calculation		647,598		681,766		647,598		633,265
Number of shares in issue
Issued share capital ('000)		603,203		603,203		603,203		603,203
Issued share capital plus employee options ('000)		606,649		606,649		606,649		606,649
Net asset value per share		£		£		£		£
Basic net asset value per share		1.074		1.130		1.074		1.050
Diluted net asset value per share		1.068		1.124		1.068		1.044

¹ EPRA NTA and EPRA NDV reflect IFRS values which are net of purchaser's costs. Any purchaser's costs deducted from the market value are added back when calculating EPRA NRV.

 

9. Capital Commitments

As at 30 June 2022, the Group had total capital commitments of £5.2 million (31 December 2021: £8.6 million) relating to forward-funded or direct developments.

 

10. Related Party Disclosures

Key Management Personnel

Key management personnel are considered to comprise the Board of Directors.

Share Capital

There were no changes in the period.

Share-Based Payments

On 24 March 2022, the Company granted Duncan Garrood, Chief Executive Officer, nil-cost options over 20,084 ordinary shares in the Company ("ordinary shares") and Lynne Fennah, Chief Financial & Sustainability Officer, nil-cost options over 15,877 ordinary shares relating to the deferred shares element of the annual bonus award for the financial year to 31 December 2021 (the "Annual Bonus Award 2021").

Also on 24 March 2022, Duncan Garrood was granted nil-cost options over 701,814 ordinary shares, and Lynne Fennah was granted nil-cost options over 554,784 ordinary shares pursuant to the Empiric Long Term Incentive Plan for the 2022 financial year (the "LTIP").

Board Change

On 23 May 2022, it was announced that Lynne Fennah will be stepping down from her role as Chief Financial & Sustainability Officer of the Company to pursue other interests. Lynne will remain in her position until May 2023.

Also on 23 May 2022, Stuart Beevor, Independent Non-Executive Director and Chair of the Remuneration Committee of the Company, stepped down from the Board.

On 14 June 2022, Clair Preston-Beer has been appointed to the Board as an Independent Non-Executive Director, effective from 1 July 2022.

 

11. Subsequent Events

On 04 August 2022, it was announced that Donald Grant has been appointed as the new Chief Financial & Sustainability Officer of the Company effective 12 September 2022.

 

Definitions

Adjusted EPS - Adjusted earnings per share is a performance measure used by the Board to assess the Group's dividend payments. Licence fees, development rebates and rental guarantees are added to EPRA earnings on the basis noted below as the Board sees these cash flows as supportive of dividend payments. This is then divided by the weighted average number of ordinary shares outstanding during the period (refer to Note 8).

Alternative Performance Measures ("APM") - The Group uses alternative performance measures including the European Public Real Estate ("EPRA") Best Practice Recommendations ("BPR") to supplement IFRS as the Board considers that these measures give users of the Annual Report and Financial Statements the best understanding of the underlying performance of the Group's property portfolio. The EPRA measures are widely recognised and used by public real estate companies and investors and seek to improve transparency, comparability and relevance of published results in the sector. Reconciliations between EPRA and other alternative performance measures and the IFRS financial statements can be found in Notes 8 and 9 and in the definitions below.

ANUK - Accreditation Network UK is a central resource for tenants, landlords and scheme operators interested in accreditation of private rented housing.

Average Interest Cost - The weighted interest cost of our drawn debt portfolio at the balance sheet date.

Average Term of Debt - The weighted average term of our debt facilities at the balance sheet date.

Basic EPS - The earnings attributed to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period (refer to Note 8).

Colleague Engagement - KPI - Non-IFRS measure - Calculated as per the results of our biannual colleague engagement surveys.

Company - Empiric Student Property plc.

Customer Happiness - KPI - Non-IFRS measure - Calculated as per the results of our biannual customer surveys.

Dividend Cover - Adjusted earnings divided by dividend paid during the year.

EPRA - European Public Real Estate Association.

EPRA EPS - Reported on the basis recommended for real estate companies by EPRA (refer to Note 8).

EPRA NAV - EPRA NAV is calculated as net assets per the Consolidated Statement of Financial Position excluding fair value adjustments for debt-related derivatives (refer to Note 9).

EPRA Net Disposal Value ("NDV") - Represents the shareholders' value under a disposal scenario, where deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. As the Group is a REIT, no adjustment is made for deferred tax.

EPRA Net Reinvestment Value ("NRV") - Assumes that entities never sell assets and aims to represent the value required to rebuild the entity.

EPRA Net Tangible Assets ("NTA") - Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax.

EU - European Union.

Executive Team - The Executive Directors made up of the CEO and CFO/CSO.

GHG - Greenhouse gas.

Gross Asset Value or GAV - The total value of the Group's wholly owned property portfolio (refer to Note 13).

Gross rent - The total rents achievable if the portfolio was 100% occupied for an academic year.

Gross margin - Gross profit expressed as a percentage of rental income.

Group - Empiric Student Property plc and its subsidiaries.

Hello Student^® platform - Our customer-facing brand and operating system which we operate all of our buildings under.

HE - Higher education.

HMO - Homes of multiple occupants.

IASB - International Accounting Standards Board.

IFRS - International Financial Reporting Standards.

IPO - The Group's Initial Public Offering in June 2014.

LIBOR - London interbank offered rate.

Loan-to-value or LTV - A measure of borrowings used by property investment companies calculated as total drawn borrowings, net of cash, as a percentage of property value.

Net Asset Value or NAV - Net Asset Value is the net assets in the Statement of Financial Position attributable to ordinary equity holders.

Non-PID - Non-property income distribution.

PBSA - Purpose built student accommodation.

PID - Property income distribution.

RCF - Revolving credit facility.

Rebooker Rate - KPI - Non-IFRS measure - Calculated as the percentage of students staying with us in the previous year who chose to stay living with us for another academic year.

REIT - Real estate investment trust.

Revenue Occupancy - KPI - Non-IFRS measure - Calculated as the percentage of our Gross Annualised Revenue we have achieved for an academic year.

RICS - Royal Institution of Chartered Surveyors.

Safety - Number of accidents - KPI - Non-IFRS measure - Calculated as the number of RIDDOR accidents reported to the Health and Safety Executive.

Senior Leadership Team - The senior management team which sits beneath the Executive Team and is made up of the six department heads.

SONIA - Sterling Over Night Index Average is the effective reference for overnight indexed swaps for unsecured transactions in the Sterling market. The SONIA itself is a risk-free rate.

The Code - UK Code of Corporate Governance, as published in 2018.

Total Return ("TR" or "TAR") - The growth of NAV per share plus dividends per share measured as a percentage.

Total Shareholder Return - Share price growth with dividends deemed to be reinvested on the dividend payment date.

UKLA - United Kingdom Listing Authority.

 

Company Information and Corporate Advisers

 

Directors and Advisers
Directors Mark Pain (Chairman) Duncan Garrood (Chief Executive Officer) Lynne Fennah (Chief Financial and Sustainability Officer) Martin Ratchford (Non-Executive Director) Clair Preston-Beer (Non-Executive Director) Alice Avis (Non-Executive Director) Broker and Joint Financial Adviser Jefferies International Ltd 100 Bishopsgate London EC2N 4JL Broker and Joint Financial Adviser Peel Hunt LLP 7th Floor 100 Liverpool Street, London EC2M 2AT Legal Adviser to the Company Gowling WLG (UK) LLP 4 More London Riverside London SE1 2AU Communications Adviser Maitland/amo 3 Pancras Square London N1C 4AG			Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Auditor BDO LLP 55 Baker Street London W1U 7EU Valuer CBRE Limited Henrietta House Henrietta Place London W1G 0NB Administrator and Company Secretary APEX Group 6th Floor 140 London Wall London EC2Y 5DN
Company Registration Number: 08886906 Incorporated in the UK (Registered in England) Empiric Student Property plc is a public company limited by shares		Registered Office 1st Floor, 72 Borough High Street, London, SE1 1XF