Empiric Student Property Share Discussion Threads

[chucko1] 23/3/2018 18:10

That was shocking price action today. No other way of saying it. I suspect that someone or other has csst their slide rule over the numbers and increase in rents and reduction in costs and worked out that covering the EPRA dividend will not be easy or may not happen.

The management said that the target was FY19 with strong milestones end of FY18. I can wait until then and take the risk which, I suspect, some fund or another was not prepared to.

Other student REITs were not impacted today, so it’s an ESP specific bad day.

[spectoacc] 23/3/2018 12:33

Thanks @speedsgh, just finished reading it, all very good. Not sure the fact we're pushing new lows after results is a good sign - seems we've got a ways to fall yet - but I'm happy to sit on them.

[chucko1] 22/3/2018 21:03

Speedsgh, great effort on your part and many thanks. Saves me having to listen to the first part and read all the slides!

I am entirely unsurprised by almost every response given. The rebuttal of the share buyback thesis was interesting. It actually makes no sense if you believe in the model they are pursuing - scale is important so better to keep developing and investing. Even though there is a quick 20% gain on the buyback route.

It seems likely that they will sell small locations as the model tells them that you want concentration, and the selling prices will hopefully demonstrate how good a job the previous CEO and Attlee actually did in this respect.

I have no reason upon these results and especially reading the Q & A to change my view that this is a pretty decent risk/reward for the medium and long term. The risks are twofold, in my opinion. Firstly the excessively high valuation on financial assets in general, and secondly the direction of interest rates (arguably little different from the first reason). I see these as notably greater than the actual risk of ESP itself failing to deliver operationally.

Today, we saw 724 points of the Dow and some crazy tweets from Trump. On Tuesday we saw a bit of a mess in Tech, with FB and Uber asking if their valuations are truly justified. There is a heck of a lot of risk in all of this, especially with the backdrop of QE tapering and near record high CAPEs. ESP may not escape this, but at least it is not overvalued and is backed by good quality assets, so I am happy to stay right here and enjoy the rents. It seems a lot more promising now that they will collect these rents!

[stemis] 22/3/2018 20:52

Excellent, thanks speedsgh

[speedsgh] 22/3/2018 19:58

Q&A session from the FY2017 Final Results webcast, part 5...

Q (Andrew Gill, Jefferies: 43m35s)
I’m just wondering on the completed developments, in the second year of operation, do you see an above portfolio uplift in rental growth once you’ve got students in-house? And just a second point for Lynne. Looking at the facility headroom in the debt, on a fully drawn basis what sort of cost of debt can we see, assuming stable interest rates?

A (Tim Attlee, Acting CEO: 44m08s)
So the answer is ‘yes’, you tend to target more conservative rents for the first year of a new development because you’re bringing something brand new into the market that nobody has had the opportunity to try or test. And the expectation, even having made that adjustment, is that you might not necessarily achieve 100% occupancy in the first year. So, that’s why I think it was striking to show you those two slides of Manchester & Nottingham where we actually did achieve 100% occupancy in the first year of trading. Many people will build in a buffer of maybe 90% that would be acceptable for the first year. Yes, you’re quite right, in the second year you will quite often see that you can adjust the rent and that the market might have moved ahead of you.

Q (Andrew Gill, Jefferies: 44m50s)
I know it depends on the market but is there any kind of quantum of portfolio target? Are we looking 3%? 5%+?

A (Tim Attlee, Acting CEO: 44m58s)
I think if you were modelling, I think that’s a reasonable assumption to make. You might achieve 5% going from first to second year.

A (Lynne Fennah, CFO: 45m08s)
We have, of the total facilities available to us of £390m at this time, £70m of that is RCF with Lloyds Bank and that is at a cheaper cost than our other facilities. So you can see the average rate that we have currently coming down slightly. And we have some facilities coming to the end this year and at the end of next year, and we’re looking at maybe swapping those out. So I hope that we’ll see the average weighted cost coming down.

[speedsgh] 22/3/2018 19:58

Q&A session from the FY2017 Final Results webcast, part 4...

Q (Michael Prew, Jefferies: 40m37s)
Mike Prew, Jefferies. Just really following on from the student bed-ratio. Is that the criteria that you’re going to use to select which locations you’re going to start selling? Will there therefore be any margin enhancement affected by the sales programme? And if you are realising cash, surely a share buyback option would be a sensible option?

A (Tim Attlee, Acting CEO: 41m00s)
So, I think we’ve suggested that we’ve made a top-to-bottom analysis of the business in all its facets and among that has been an analysis of the performance of every single asset against a number of criteria. So student-bed ratio is a really interesting one and it is something where you can take into account the existing supply-and-demand ratio as well as the future supply-and-demand ratio. And it’s an interesting indicator for future rental growth. So there are cities which have got a relatively modest SBR ratio, so somewhere like for example Falmouth which is close to my heart in Cornwall where the SBR ratio is very high at 2.7 or nearly 3. And a city where you’ve got a lower ratio, such as Liverpool, where it’s a well provided city at 1.3. But interestingly from our perspective, what we’ve discovered is that there isn’t necessarily a straight line correlation between a performance or a margin and the SBR ratio, or indeed rental growth because in the end it’s all about the real estate, it’s all about the assets you’ve got in the city. A low SBR ratio, in other words where there is a lot of supply, will potentially constrain your ability to drive rental growth because you’ve got a lot of competition. But it’s not necessarily the only parameter that’s used either to select an asset for disposal or to select places where you might develop. Because if you have an exceptional location in a city, even a well-supplied city, there’s still a case for acquiring it.

A (Stuart Beevor, Acting Chairman: 42m40s)
And to answer your second question, Mike, in terms of buybacks and so on, as you can imagine the Board has considered all sorts of different matters but our main focus is delivering this improvement plan and, if we can do that, then we hope that the share price will get back to where we think it should be. And that’s our main focus. If I can just add very briefly, one of the challenges that we have at the moment is making sure that we deliver the right income to cover the dividend but at the same time use our capital, our balance sheet, to take advantage of development opportunities where we’ve got expertise and we can add extra value. And so that’s part of our consideration at the moment, it’s to get the right balance between all of those things.

[speedsgh] 22/3/2018 19:57

Q&A session from the FY2017 Final Results webcast, part 3...

Q (Robert Duncan, Numis: 38m55s)
This is Robbie at Numis. Again, just to reiterate, great, I understand everything that’s happening. I think it’s a real improvement so obviously now you need to deliver as you’ve touched upon. But why do you continue to report and have a focus so much on your IFRS Income Statement. Obviously within your £13.5m admin cost one-offs. Why not start to strip out, you talk about the £10m run rate, why not start to report that? Why not report like other property companies, which may not always be the best but it does give a much better understanding of the true operational performance. You know, your slide in the pack, Lynne, obviously was much more IFRS focus because there’s lots of non-cash items in there. I just wonder why, actually, that could have been an additional step as part of your review. Can you just discuss how that could evolve because, obviously, you know, I think it’s important for consistency and comparability both for yourself and within the sector.

A (Lynne Fennah, CFO: 39m57s)
It’s an excellent point that you raise. In the eight months that I’ve been here, I think you can see that we have covered quite a lot of ground, and we’ve been very focused. I mean, very focused each week with the operational teams as well as building a new finance team. I’ve been very focused on driving sales and cutting costs. I haven’t necessarily given maybe enough thought to how we present our numbers and I’ll certainly take that on board for next time. It’s a very valid point. We could provide some granularity later on for sure. It’s a good point.

[speedsgh] 22/3/2018 19:56

Q&A session from the FY2017 Final Results webcast, part 2...

Q (John Cahill, Stifel: 36m30s)
Good morning. John Cahill from Stifel. Two questions. You’ve made an awful lot of changes to the business in a very short period of time and I’m sure in a year/18 months we’ll see very much improved results in terms of the earnings coming from that. I just wanted to ask, Lynne, you made a lot of comments about having to change the quality of the management information that you are receiving and now have new systems in place. Is there any risk that we might see any restatement of some of the previous results? The second question, unrelated, is to Aberdeen. You’re not the only student accommodation company that’s made a comment that student numbers there are down because of the collapse in the oil industry there. Just educate us. I’m just not sure how that’s linked to student numbers.

A (Lynne Fennah, CFO: 37m25s)
There is absolutely no risk of restatement at all. There has been a real focus on production of accounts historically but as the business grew really rapidly, they just didn’t capture all the cost they were committing themselves to for future forecasting and then making the right decisions because they didn’t have decent MI to do that. So there’s no risk of restatement.

A (Tim Attlee, Acting CEO: 37m52s)
So there are two factors here. One affecting supply, and one affecting demand. So, on the demand side, as I said in my slide the university recruited less well than it expected, it missed its recruitment targets this last cycle. But on the supply side, what the impact of the collapse of the oil industry, you may well think, well what impact can that have on student accommodation? So Aberdeen was a city in which there was a lot of temporary accommodation provided for oil workers and with the collapse of the oil industry, those oil workers are no longer there. So you’ve got a lot of private landlords who are looking to let their accommodation and students are as good as anybody at paying the rent. So you’ve just got a much more competitive landscape. Just out of interest, one of the ratios that we look at is the student-bed ratio, which is the number of full time students there are for every purpose built student accommodation bed and what you’ve got in that city is a city where that ratio has suddenly changed, quite dramatically because of one of the major employers in the city.

[speedsgh] 22/3/2018 19:56

Q&A session from the FY2017 Final Results webcast, part 1...

Q (Paul Gorrie, Numis: 32m50s)
Hi, it’s Paul Gorrie at Numis. A couple from me, please. The first one relates to, you know, obviously you’ve talked about Cardiff & Aberdeen and the issues we’ve seen there. I think in the statement you referenced possibly lesser issues, but in cities Glasgow & Newcastle, more operational challenges. I wonder if you could just give a bit more colour as to what’s happening in those cities but also what the corrective action is and whether it’s pricing related or if there’s something else? The second question relates to, just a specific one on the finance employees. So I just wanted to check, was that 12 FTEs [Full Time Employees] of which 8 have now been replaced and there’s still a team of 12 or were some of them consultants and they’ve been rolled off? And then, just the third one [question], this is not supposed to be an indelicate question but, Tim [Attlee], you referred to yourself as the Acting CEO and that’s the title you’ve given but obviously your duties, and you talked about in the slide the way the business works, you’re doing everything that the CEO does. As I understand there’s no external search in place, so if we can just get clarity; why is this Acting CEO in place? Is there a time period in mind? Or what the next steps are, please.

A (Stuart Beevor, Acting Chairman: 34m00s)
Thank you. That’s very clever because there’s a question each for us to try and answer, I think. So, Tim, why don’t you do the first one about other challenging cities. And then, Lynne, if you deal with the finance team and I’ll talk about the Acting CEO position.

A (Tim Attlee, Acting CEO: 34m15s)
So, I think the really important thing for you all to take away from this is that we have got a grip on the business and in particular we’ve got a grip on revenue generation. And the reason that we had shortfall in the…, I think the reason that we put the slides up on Aberdeen & Cardiff is that we wanted people to understand the fact that the reason that we’re underperforming in those cities is not because of any problem with the quality of the assets. The assets themselves are built to the same specification as we have around the rest of the UK and they’re in terrific locations. And the emphasis has been on the underperformance of the operating platform. And so all efforts now are on directed marketing and directed attention to the sales process which is what that is all about. So, yes, we had lower than expected levels of occupancy in other cities but it’s for the same reasons that we had it in Cardiff. It was because of not being sufficiently agile in our response to market conditions and that’s what we’re all over.

A (Lynne Fennah, CFO: 35m18s)
When I joined in June last year, there was a finance team, total FT of 12, including myself. Eight of those people, including myself, are new now. So 12 FTE as before but 8 [of them] are new.

A (Stuart Beevor, Acting Chairman: 35m42s)
… and the Acting CEO position. The Board was clear that we are confident that we’ve got a very good quality portfolio but that we didn’t have the operations last year to match. We were clear in terms of what needed to be done in the short term, and we were confident that Tim & Lynne [Fennah, CFO] were the right people to deliver that. But we also recognise that we need to deliver and so this year, 2018, is that year. And if we can get to the end of this year demonstrating that we’ve delivered on those expectations, then I think you can expect that we will resolve the Acting CEO position.

[speedsgh] 22/3/2018 11:02

FY2017 Final Results webcast -

51m53s

[chucko1] 21/3/2018 10:27

Speedsgh, I get it now. I’m a little bit old and thick in reality!!

[chucko1] 21/3/2018 10:26

SpectoAcc, I actually read the clarity we now see on Aberdeen and Cardiff as a positive. The reason is that the NAV is clearly being done on each property in terms of its achievable net margin. So those two got clobbered, but the remainder slightly increased. This gives credence to the overall NAV and it is that which underpins the value of this company.

Interesting also to note 8 out of the 12 former finance employees been booted. That department must have been a crazy mess. Any change, therefore, is likely to be a positive and I suspect a rather large positive in this particular case.

I have no issues with the interim CEO as he is the former investment guy. This part of the business seems to have been done well - one of the comments in the report refers to “locked-up value” in the context of a few potential future sales. I believe they have bought and developed well, but the operational side was really bad (we can now clearly see).

If they mess up from here, the company gets bought as these assets are valuable and with competent management can provide a decent return. I suspect for the major shareholders, this management are in the last-chance saloon. That said, interesting to note the reaffirmation of a targeted medium term return of 10%. For the long term shareholders, the last year ought to be nothing more than a nuisance with little value destruction (client short-termism is a strong headwind, though).

I actually did buy in at the 109p offer, but sold them all at 112 to 114p on the basis that a 9% premium to NAV had not really yet been earned via performance, but that is not to say that I did not already own a lot (and I mean a lot) of ESP, in particular that other REITs were comparatively more expensive (even more so now!).

Finally, a little bit of (hopefully not misplaced) bravado: I have some expertise in structured finance and investment trusts and such like - I have never failed (in 20 years or more) to earn a positive return on any such tradable investment and I do not see ESP breaking that trend. That said, I bought too much of this and got the risk wrong (not by a lot, but I did not expect anything like a fall to a 20% discount to NAV). But my breakeven price including significant trading profits is about 91p so today’s lack of bad news is a significant step in the right direction.

Another thing whilst I am here - I looked into the pedigree (or otherwise) of the analysts at Numis and Jefferies who cover this stock (Paul Gorrie and Michael Prew, respectively). They now have target prices of 91p and 100p respectively (flat and minus 10p respectively on today’s results). Gorrie is less experienced than Prew, but seemingly well educated as he studied Modern Languages at Oxford (amazing how that leads to investment management etc.) while Prew had been at Lehman Brothers and then (by succession) Nomura where he was covering lots of property related companies. He is not prone (biased) to being bullish on the sector which was a relief, as he seemed so on ESP.

[stemis] 21/3/2018 09:56

The main thing is that they are making progress. Overheads cut by £1.8m in H2 and targets that they outlined around the interims remain in place, which hopefully suggests they are confident they are achievable.

Although dividend won't be covered by rental profit until at best 2019, net asset value will also be driven by valuation of properties. Unless there is yield expansion I'm assuming valuations will effectively track rent rises. Even 2% would be enough to protect NAV from erosion by dividend.

So I'm happy to collect a 5.8% yield (at current 86.5p Share price) and let them get on with it.

[spectoacc] 21/3/2018 08:49

I'm long (though well down) so I don't disagree with you @chucko1.

But the fact remains - they've operational issues (mainly Aberdeen & Cardiff), costs that are still too high, and whilst they brag about the boardroom clearout, it's still the same bloke in charge.

All the while, the divi is effectively coming out of NAV, a NAV that will likely fall if targets aren't hit.

So the jury remains out - but hitting this 97% occupancy target would certainly help.

One thing's for sure - I'm glad I wasn't in in the 109p placing.

[chucko1] 21/3/2018 08:47

But the whole point is to wait! 2 years to go from 85p to, say, NAV flat (assume 103p after uncovered divs slightly erode capital) plus 10p of divs would produce a total return of about 33%

Even with short of 100% faith, that’s a decent return on what now seems to be a lower risk. One which has a lowish correlation to the FTSE.

There are other risks, of course, but the current price is too low, in my opinion.

[speedsgh] 21/3/2018 08:13

Past performance might suggest not! Not sure I would be willing to wait that long :o)

[spectoacc] 21/3/2018 08:03

The 97% target is a biggie.

Hope this was a typo! "a fully covered dividend by the year ending 31 December 20191..." :))

[speedsgh] 21/3/2018 08:01

Think I prefer the WJG update this morning!

[speedsgh] 21/3/2018 08:00

Outlook

· Revenue projections for academic year 2017/18 remain unchanged based on 92% occupancy until the start of the new academic year.
· For the 2018/19 academic year, we are targeting occupancy levels of 97% supported by an increased focus on the end to end sales process.
· Bookings for the 2018/19 academic year are currently 48% compared to 22% at the same time last year, an increase of more than double.
· A modest increase in gross margin is forecast for FY 2018, with a significant uplift in the fourth quarter as occupancy levels increase from September onwards and as the cost of third party property management and facilities management begins to fall away.
· Targeting an operating margin of 70% in 2019 with tangible progress towards that target in FY 2018.
· Reshape the investment portfolio by reinvesting the proceeds of the sale of a parcel of non-core assets into our core markets. This will involve less than 10% of the Group's property assets by value.
· Unlock the value of our development assets through joint ventures.
· Targeting administration expenses of £10 million in 2018, a reduction of 26% on FY 2017.
· Targeting a dividend of 5.0 pence per share for the year ending 31 December 2018.
· On an adjusted basis we expect to see a fully covered dividend by the year ending 31 December 20191 with significant progress towards that target in FY 2018..

[speedsgh] 21/3/2018 08:00

RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2017 -

Dividend declared per share - 5.55p
Adjusted Earnings Per Share - 1.86p
Dividend cover on an adjusted basis of 33%

> Targeting a dividend of 5.0 pence per share for the year ending 31 December 2018
> On an adjusted basis we expect to see a fully covered dividend by the year ending 31 December 20191 with significant progress towards that target in FY 2018

[spectoacc] 21/3/2018 07:45

Jeez there's a lot to read in the results today. Thankfully mainly historic as much of it is dreadful. Let's hope what they've done is enough - this time next year before we know for certain.

[chucko1] 19/3/2018 09:55

As fine a woman as she was (and she was in many ways), this obituary highlights the fact that there was little top-level commercial experience. All of the posts she held appear to be non-technical and so it is not surprising that she was no more able than others to challenge the financial details.

Her notable “management221; skills (I vaguely recall her voice of reason at a time of union ultra-hardliners back in the day) may have been valuable in the overall company set-up, but it is the hard numbers that will make (or not) for ESP ultimately.

As a more general comment, one often sees Lords and Ladies, the good, the great in politics on Boards of companies, and they seem to fail often and utterly. There is the recent case of fraud against a US blood-testing company, valued at $4.5bn which had two extremely well known politicians (one being Henry Kissinger) on its Board. One would be far better off with a faceless retired accountant, but they lack the skills to get the job in the first place! Another example - the banks that fared worse in the great financial crisis (there may be a bigger crisis in a few years, but that’s another story) of 2007-9 often had lawyers as their CEOs. Great at getting the job, but stunningly awful at the technical side (risk management in particular).

Perhaps Wednesday might bring a little sunshine and a tad of joy to all involved.

[spectoacc] 19/3/2018 06:58

Wow - brings back memories!