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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Empiric Student Property Plc | LSE:ESP | London | Ordinary Share | GB00BLWDVR75 | ORD GBP0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.10 | -0.11% | 91.00 | 90.30 | 91.00 | 91.30 | 90.90 | 91.30 | 20,857 | 09:28:28 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Investment Trust | 80.5M | 53.4M | 0.0885 | 10.28 | 549M |
From Apr 2019 to Apr 2024
TIDMESP
RNS Number : 9795V
Empiric Student Property PLC
13 August 2020
13 August 2020
Empiric Student Property plc
("Empiric" or the "Company" or, together with its subsidiaries, the "Group")
Half year results for the six months to 30 June 2020
SIGNIFICANT OPPORTUNITIES FOR THE GROUP TO GROW AND DELIVER VALUE TO OUR STAKEHOLDERS DESPITE THE SHORT-TERM UNCERTAINTY
Empiric Student Property plc (ticker: ESP), the owner and operator of premium student accommodation across the UK, is today reporting its half year results for the six months ended 30 June 2020.
Mark Pain, Chairman of Empiric Student Property plc, commented:
"We are confident that we have a business which will be able to work through the current pandemic and provide a platform for growth moving forward.
Despite COVID-19, we continue to see the increasing benefits of our operational transformation and we are optimistic for the future of the business. Following recent senior appointments, the Board believes it has the right Executive and Senior Leadership Team to lead Empiric in its next phase of growth.
The attractive fundamentals of increasing structural demand from both domestic and international students for premium, responsibly managed student accommodation focused in high demand UK towns and cities remains strong, whilst the supply of such accommodation continues to be restricted. Combined with the Company's robust balance sheet, differentiated well located portfolio focused on premium studio-led and smaller buildings with rooms predominantly direct-let, and the benefits of our operational transformation continuing to strengthen, we see significant opportunities for the Group to grow and deliver value to our stakeholders despite the short-term uncertainty."
Financial Headlines
Hot Features
Premium
H1 2020 H1 2019 FY 2019 Change from
H1 2019
Revenue GBP34.0m GBP35.7m GBP70.9m (5)%
----------- --------- --------- ------------
Gross margin 68.8% 68.5% 67.1% 0%
----------- --------- --------- ------------
Administration expenses GBP5.2m GBP5.0m GBP9.2m (3)%
----------- --------- --------- ------------
(Loss)/ Profit before GBP(14.4)m GBP28.8m GBP54.8m -
tax
----------- --------- --------- ------------
Basic earnings per
share (2.39)p 4.78p 9.08p -
----------- --------- --------- ------------
Adjusted earnings
per share 1.98p 2.36p 4.43p (16)%
----------- --------- --------- ------------
Dividends declared
per share 1.25p 2.50p 5.0p (50)%
----------- --------- --------- ------------
Dividend cover 159% 94% 89% +69%
----------- --------- --------- ------------
As at 30 June 2020 30 June 2019 31 December Change from
2019 31 December
2019
Property valuation GBP1,010m GBP1,001m GBP1,029m (2)%
------------- ------------- ------------ -------------
EPRA NAV per share 106.6p 108.5p 110.2p (3)%
------------- ------------- ------------ -------------
LTV 35.5% 32.1% 32.9% +8%
------------- ------------- ------------ -------------
Total Return (2.1)% 4.5% 8.6% -
------------- ------------- ------------ -------------
Strong Revenue Despite COVID-19 Impact
-- Revenue of GBP34.0 million (H1 2019: GBP35.7 million) is net of GBP3.8 million rent forgone (for H1) and the loss of about GBP0.7 million expected revenue for summer term lets due to COVID-19. Underlying growth was 8% on the first six months of 2019.
-- Gross margin 68.8% slightly ahead of the previous half year (H1 2019: 68.5%), with expenditure reduced to offset the rent forgone.
-- Basic earnings per share of (2.39) pence (H1 2019: 4.78 pence) and adjusted earnings per share decreased 16% to 1.98 pence (H1 2019: 2.36 pence).
-- Dividends of 1.25 pence per share were 159% covered by adjusted earnings (H1 2019: 94%) reflecting the dividend declared on 17 February 2020. Dividends remain suspended with an update in Q4 2020.
Transforming Operational Performance
-- In-sourcing and embedding now largely complete with the back office revenue management system on track to be fully in-house by Q4 2021.
-- Significant benefits from the in-sourcing programme completed to date, including having the organisational agility to respond quickly to the impact of COVID-19.
-- A major improvement in colleague engagement full survey score of 83% up from 69% in 2019, against the UK all-sector average of 68%.
-- Within the colleague engagement survey employees returned a score of 82% when specifically rating the Group's response to COVID-19.
Benefits of Our Business Model
-- Emphasis on premium accommodation in small buildings with 50 to 200 beds has enabled us to adapt our buildings to COVID-19 more easily than larger buildings.
-- 83% of our beds are either self-contained studios or en-suite accommodation which is increasingly in demand as a result of the current social distancing requirements.
-- Historically strong demand from postgraduate students, and we expect to benefit further from this segment in a more challenging jobs market.
-- Our direct let model allows us to dynamically price, which is beneficial in an increasingly competitive market.
Income and Rental Growth
-- A flexible approach adopted for summer 2020 tenancies has been well received by customers and universities.
-- Total rent foregone of GBP7.2 million to students who wished to leave their tenancy early reflecting 10.2% of contracted revenue for the 2019/20 academic year.
-- GBP3.8 million of this is recognised in these interim results, with the GBP3.4 million balance to be recognised in the six months to December 2020.
-- Before rent foregone, like-for-like rental growth for academic year 2019/20 v 2018/19 of 3.1%.
-- Bookings of 65% for the 2020/21 academic year at 12 August, compared to 85% as at 19 August 2019.
-- Re-booker rate for 2020/21 academic year currently at 17% in line with the previous year.
-- Adopted a flexible approach to tenancies for the 2020/21 academic year, with flexibility on start dates and semester lets.
-- We have expanded our digital marketing activity to reach a wider UK audience, targeting their parents as well as students.
-- Working to diversify our international customer base, with new international agents appointed.
High Quality Portfolio of Well-Located Assets
-- Property portfolio valued at GBP1,010 million at 30 June 2020 (31 December 2019: GBP1,029 million), representing a like-for-like decrease of 2%.
-- Underlying valuation yield of 5.54% (December 2019: 5.55%) has remained stable with valuation decrease driven as a result of an assumption of reduced income for the next academic year by the valuer (see page 8 for valuation movement).
-- EPRA NAV per share down 3% to 106.6 pence (31 December 2019: 110.2 pence).
-- 65% of our beds located in Russell Group university towns, with CBRE classing 93% of our portfolio as prime or super prime.
-- Development pipeline being mobilised with work instructed to recommence on two of the four development sites paused due to COVID-19. 385 beds from these developments are to be delivered for the 2021/22 academic year. On 30 June we achieved practical completion on a 52-bed scheme in Leicester.
Robust Financial Position
-- Debt net of loan arrangement fees of GBP360 million at 30 June 2020 (31 December 2019: GBP350 million), resulting in a LTV ratio of 35.5% (31 December 2019: 32.9%), in line with our long-term target of 35% and below our stated maximum of 40%.
-- Of our total drawn debt of GBP365 million, GBP277 million (76%) is at fixed interest rates and GBP88 million (24%) is at floating rates. The aggregate cost of debt is 3.0%, with a weighted average term to maturity of 6.2 years. We complied fully with our covenants during the period.
-- During the period we refinanced two investment debt facilities in the period, extending on more favourable terms and increasing one of the facilities by GBP10 million and agreed a development facility for GBP22.5 million.
-- We have no further refinancing requirements until November 2022.
Post Period End
-- On 31 July 2020, the Group increased the GBP70 million revolving credit facility ("RCF") with Lloyds Bank plc by GBP20 million to provide additional headroom for the Group if required.
Results Presentation
The Company presentation for investors and analysts will take place via a webcast and conference call at 9.00am on the day .
For those who wish to access the live webcast, please register here: https://www.investis-live.com/empiric/5f216247503c070c0021d90e/wrhe
For those who wish to access the live conference call, please contact Maitland/AMO at
empiric-maitland@maitland.co.uk or by telephone on +44 (0) 20 7379 5151.
The recording of the webcast/conference call will also be made available later in the day via 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) Mark Pain (Chairman) Lynne Fennah (Chief Financial & Operating Officer) Jefferies International Limited Tel: 020 7029 8000 Stuart Klein Tom Yeadon RBC Europe Limited (trading as RBC Tel: 020 7653 4000 Capital Markets) Charlie Foster Marcus Jackson M aitland/AMO (Communications Adviser) Tel: 020 7379 5151 James Benjamin Email: empiric-maitland@maitland.co.uk
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 located in high-demand university towns and cities across the UK. 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(R) 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
Despite the impact of COVID-19, it is clear the decision to transform the business to a fully integrated operational property business has been the right one. The in-sourcing of most functions by the start of the year has allowed us to be swift and agile in our response to the pandemic whilst ensuring that we have protected the business for the future and the interests of our stakeholders and we continue to be committed to delivering sustainable returns to shareholders.
COVID-19
The COVID-19 pandemic has caused massive disruption across the UK and the world. However, we have carefully managed the impact on Empiric and our stakeholders through making agile decisions and actions made possible through our in-house operational model. Our focused response to COVID-19 falls under three key priorities:
Keeping Our People and Customers Safe
In the first few days of the pandemic, we released a reporting tool which allowed us to keep track of the status of staff and customers who were presenting with potential symptoms or were choosing to self-isolate. This enabled us to take rapid action to prevent the spread of the virus, and to put measures in place to support staff and customers.
Communication with our people was critical, we issued a daily communication and update from the senior team to customers and staff to ensure that they were kept aware of all the actions and measures which were being taken to ensure their safety. Regular communication with all our people helped us monitor how the pandemic was affecting them and also, where appropriate, allowed us to share information and ideas on how to best manage challenges caused by the pandemic and on measures being put in place as the UK starts to recover from it.
We updated and amended many HR policies, including the agile working policy and sickness policy to ensure that if any of our people developed COVID-19 they would be appropriately supported.
With our centralised IT system, we were able to seamlessly move to home working in the early days of the pandemic. This meant that our people were able to work from home with ease and efficiency where the nature of their roles allowed them to do so.
To ensure that our sites are safe for our customers and our people, we have fitted protective screens to our reception desks in our buildings, and our people are also issued with a supply of PPE to ensure that they can move around the buildings safely when they are working.
We have also revised procedures to ensure that social distancing is maintained when our people are at work.
Maintaining Critical Services for our Customers
As we provide homes to around 9,000 students a year, their safety has always been of paramount importance.
To help our customers feel safe, we issued bi-weekly updates to ensure they were kept abreast of what Empiric was doing to support them and what the current situation was with the fast-moving government updates.
Where possible we instigated one-way systems and installed hand sanitiser stations in all our buildings. These actions helped to reassure our customers regarding their safety in their homes.
In April, as a responsible student focused business, we felt it was right to launch a refund programme which we made available to our customers who met certain criteria, such as having moved out of their rooms and having no arrears. Our worst-case assessment of this potential impact was a reduction of GBP21 million in revenue for the 2019/20 academic year. In fact, the impact to date has been considerably lower at GBP7.2 million reflective of the fact that our customers view our buildings as their home rather than the more traditional student halls--based university experience. This was demonstrated when in May when we reported that 55% of our bedrooms were still occupied. The rent forgone programme has generated significant brand goodwill with both our customers and universities.
Due to viewings for the upcoming academic year being challenging as a result of social distancing, we have recorded virtual video tours for each building and made them available on our Hello Student(R) website.
We have also launched our "Book With Confidence" and "Stay With Confidence" pledges which provide customers with a clear position on key areas such as cancellations and safety in our buildings.
In addition, we created new ways for parcels to be delivered, and we implemented a new booking process for the use of study rooms and gyms- so that we can clean between each use, and placed restrictions on the number of people that can use a lift at any one time, by encouraging people to use stairs where possible. Social distancing fire drills are also in place keeping both our customers and our buildings safe.
Protecting Value for Shareholders
When the COVID-19 pandemic took hold, we implemented a number of actions to cut costs, reduce capital commitments and improve liquidity to ensure that the Group would be in the best position to trade through this uncertain period. In March, we put a pause on all discretionary spending, halted work on our development sites and suspended dividend payments.
We undertook detailed scenario planning and assessed the Group's liquidity. See Going Concern further on for full details on the current position. We have also taken the prudent step of increasing our GBP70 million existing RCF with Lloyds Bank plc to GBP90 million.
The work we undertook, keeping our people safe and maintaining critical services for our customers all help to protect value for our shareholders.
The actions we have taken, the most important of which are explained above, have ensured that we effectively steered the Group through the initial stages of the pandemic and have also prepared the business to be resilient during the next stages.
Our Market
The PBSA investment market was in great health at the start of 2020, and with the sale of the iQ student accommodation platform to Blackstone, pre COVID-19 transaction volumes were GBP4.75 billion. The market has since slowed due to the current pandemic, however there are a number of positive signs emerging.
Since March 2020 when the COVID-19 pandemic struck, there have been seven standing asset transactions, and one land deal completed totalling over GBP280 million. These transactions had some form of rental guarantees for the upcoming year and the net initial yields were either equal to or better than before March 2020, showing that there is continued interest in the PBSA investment market.
There is also positive news from universities with most UK universities preparing to provide some form of in--person teaching this autumn. Of the universities surveyed by Universities UK, 97% confirmed they would be providing in-person teaching at the start of term this next academic year. This face to face teaching will result in students needing to be on or near campus.
Operational Update
The decision to transform to a fully integrated property business has been the right one. The in-sourcing of most functions by the start of this year has allowed us to be agile in dealing with the pandemic.
In addition, we have made positive steps in a number of other areas.
The development of our new in-house revenue management system is progressing well, and we will start selling on this platform for the 2021/22 academic year in November this year. This revenue management system will bring us several benefits, including:
-- More timely pricing adjustments. -- Improving the journey, communication and interaction with the customer. -- Efficient use by our people, as all activity will be on one platform.
-- Expected cost saving of GBP1.5 million annually, with the first full year of savings expected in 2022.
We have also seen improved efficiencies as a result of the operational transformation. The quality of management information available throughout the business has allowed greater insight and higher visibility on costs than ever before. These efficiencies combined with discretionary cost cutting in reaction to the pandemic have meant a reduction of 7% the average cost per bed compared to the first half of last year.
In May, the HR team launched the Group's third colleague engagement survey which achieved a response rate of 72% and an overall colleague engagement score of 83% against the UK all-sector average of 68% and previous year's result of 69%. These results were delivered despite the current pandemic and helps to give us a better understanding of what matters to our people.
Financial Performance
Revenue decreased by 5% to GBP34.0 million (H1 2019: GBP35.7 million), after the impact of GBP3.8 million of rent foregone and the loss of about GBP0.7 million expected revenue for summer term lets due to the impact of COVID-19 on student occupancy. On an underlying basis, revenue increased by 7.8%, driven by improved occupancy, new developments coming on stream and like-for-like rental growth of 3.1% for the 2019/20 academic year.
Property expenses were lower at GBP10.6 million (H1 2019: GBP11.2 million). This decrease was primarily caused by a pause on discretionary spending and lower staffing costs. This resulted in a slight improvement in the gross margin to 68.8%, up from 68.5% for the first half of 2019 and 67.1% for 2019 full year.
We maintained our rigorous focus on controlling administrative expenses, which were broadly flat at GBP5.2 million (H1 2019: GBP5.0 million).
Operating loss under IFRS was GBP(8.0) million (H1 2019 profit: GBP35.1 million), a reduction of GBP43.1 million. GBP42 million of the reduction in profit arose purely from the revaluation of our property portfolio. The property portfolio was reduced by 2% as a result of CBRE's assumption around income uncertainty in the coming
academic year as a result of COVID-19, see Portfolio and Valuation section for detail. The initial yield of 5.54% is marginally better than the beginning of the year.
Net financing costs for the period were GBP6.4 million, net of interest earned (H1 2019: GBP6.3 million).
Loss before tax was GBP14.4 million (H1 2019 profit: GBP28.8 million). No corporation tax was charged in the period, as the Group fulfilled all its obligations as a REIT.
Adjusted EPS, was 1.98 pence (H1 2019: 2.36 pence), against a dividend of 1.25 pence (H1 2019: 2.50 pence) resulting in dividend cover of 159% (H1 2019: 94%), an increase of 69% as a result of the dividend suspension. Adjusted EPS is defined in Note 4.
Of the total dividend paid in the period, 0.85 pence per share was declared as property income dividends and 0.40 pence per share was declared as ordinary UK dividends (H1 2019: 0.68 pence and 1.82 pence respectively).
As at 30 June 2020, the Net Asset Value ("NAV") per share was 106.6 pence, (31 December 2019: 110.2 pence, prior to adjusting for the interim dividend of 1.25 pence per share paid in March 2020).
Dividends
The dividends paid in relation to the period are shown in the table below:
Quarter ending Declared Paid Amount (p) ----------------- ----------------- -------------- ---------- 31 December 2019 17 February 2020 20 March 2020 1.25 ----------------- ----------------- -------------- ----------
Financing
During the period we refinanced two of our debt facilities. In February, we refinanced an expiring unsecured facility with First Commercial Bank and increased the facility from GBP10 million to GBP20 million. On 16 March 2020, we signed a four and a half-year GBP22.5 million development debt facility with RBS. In April we refinanced an expiring GBP32.8 million facility with AIB on more favourable terms. Following the period end in July, we increased our existing GBP70 million RCF with Lloyds Bank plc by GBP20 million.
At the period end, we had committed investment debt facilities of GBP400 million, of which GBP365 million (31 December 2019: GBP355 million) had been drawn down, resulting in an LTV of 35.5% (31 December 2019: 32.9%). The aggregate cost of debt is 3.0%, with a weighted average term to maturity of 6.2 years at 30 June 2020. We fully complied with all of our banking covenants during the period.
Of our total drawn down facilities, GBP277 million is at fixed interest rates and GBP88 million is at floating rates.
Portfolio and Valuation
As at 30 June 2020, the Group owned, 95 assets representing 9,401 beds (31 December 2019: 9,401 beds). The portfolio included 92 revenue-generating properties at the period end, with 8,835 beds. 65% of our beds are located in Russell Group university towns, and CBRE class 93% of our portfolio as prime or super prime.
Each property in the portfolio has been independently valued by CBRE, in accordance with the Royal Institution of Chartered Surveyors ("RICS") Valuation - Professional Standards January 2014 and the UK national supplement 2018 (the "Red Book"). At 30 June 2020, the portfolio was valued at GBP1,010 million, a decrease of 2% during the period (31 December 2019: GBP1,029 million).
The valuation decrease was driven by CBRE reducing the portfolio value by a GBP42 million capital deduction. CBRE have based their valuation on the assumption of a 50% reduction in gross rents due to the uncertainty around the income for the next academic year. However, the underlying Net initial yield ("NIY") (before capital deductions) was steady at 5.54% (December 2019: 5.55%) along with an expected Net operating income ("NOI") increase.
Considering the market uncertainty caused by COVID-19, the 30 June 2020 valuations have been reported on the basis of "material valuation uncertainty". On 7 July 2020, after the period end, the RICS recommended that the "material uncertainty" clause would no longer be appropriate for valuations of institutional grade student accommodation which is professionally managed, such as Empiric's portfolio.
Developments and Redevelopment
At the period end, we had a pipeline of four development projects, as shown in the table below:
Site Development Basis Beds Delivery Year --------------------------- ------------------------------- ---- ------------- 140/142 New Walk, Leicester Forward funded 52 2020 --------------------------- ------------------------------- ---- ------------- Emily Davies, Southampton Major refurbishment 232 2021 --------------------------- ------------------------------- ---- ------------- St Mary's, Bristol Direct development 153 2021 --------------------------- ------------------------------- ---- ------------- FISC, Canterbury Major refurbishment/development 181 TBC --------------------------- ------------------------------- ---- -------------
The Leicester development which completed on 30 June 2020, ready to operate for the 2020/21 academic year. After a detailed review of the associated costs and benefits, we have recommenced development work on the Southampton and Bristol developments. We will review the Canterbury development in October 2020 once we have gained planning on a second phase of the build and have greater certainty around our income for the 2020/21 academic year.
Total Return ("TR")
TR is the growth in NAV per share plus dividends paid per share in the period, as a percentage of the opening NAV per share. The TR for the six months to 30 June 2020 was negative 2.13% (H1 2019: 4.53%).
Post Balance Sheet Events
On 31 July 2020 the Group increased its RCF with Lloyds Bank plc by GBP20 million, to GBP90 million to provide additional headroom if required.
Management Changes
-- On 18 March 2020, the Board announced that Tim Attlee would be stepping down from his role as Chief Executive Officer of the Group. Tim remained in his position until the end of June 2020 to ensure an orderly handover.
-- On 26 June 2020, the Board announced the appointment of Duncan Garrood as Chief Executive Officer. Duncan is an experienced and proven business leader in quoted and large privately-owned businesses in the UK and international markets and he has strong operational, sales and marketing skills. Duncan will join Empiric no later than 1 January 2021.
-- In July, we appointed William Atkinson as Property Director and a member of the Senior Leadership Team. William has 16 years' experience in investment and development across operational assets, in particular multi-family real estate, and will join Empiric no later than October 2020.
Looking Forward
We are confident we have a business which will be able to work through the current pandemic and provide a platform for growth moving forward.
We continue to suspend guidance with a further update expected in Q4 2020 once we have a clearer picture of our revenue for the 2020/21 academic year. We will review the resumption of dividends at this time.
Despite COVID-19, we continue to see the increasing benefits of our operational transformation and we are optimistic for the future of the business. Following recent senior appointments, the Board is confident and excited in the capabilities of the Executive and Senior Leadership Team to lead Empiric in its next phase of growth.
The attractive fundamentals of increasing structural demand from both domestic and international students for premium, responsibly managed student accommodation focused in high demand UK towns and cities remains strong, whilst the supply of such accommodation continues to be restricted. Combined with the Company's robust balance sheet, differentiated well located portfolio focused on premium studio-led and smaller buildings with rooms predominantly direct-let, and the benefits of our operational transformation continuing to strengthen, we see significant opportunities for the Group to grow and deliver value to our stakeholders despite the short-term uncertainty.
Principal Risks and Uncertainties
The principal risks and uncertainties we face are described in detail on pages 32 to 35 of our Annual Report and Accounts for the year ended 31 December 2019. The Audit Committee, which assists the Board with its responsibilities for managing risk, has considered those principal risks and uncertainties and concluded that whilst the categories of principal risks are unchanged during the period, there has been an overall increase in risk across all aspects of our business as a result of the combination of the impact of COVID-19 and the potential impact of a "no trade deal" Brexit.
COVID-19
We have been agile in our response to the pandemic, with a clear focus on the safety of colleagues and customers, maintaining critical services for customers and protecting value for shareholders.
Whilst the level of risk has increased across all our identified principal risks and uncertainties, COVID-19 has accentuated the Student Demand Risk, Property Market Risk and Health & Safety Risk.
Further detail on some of the steps to mitigate these risks are detailed on page 2 of our Interim Report.
Beyond the immediate impact of COVID-19, there is a forecast recession in the UK and global economies. A counter cyclical impact is that historical evidence shows that in times of recession there is a greater influx into higher education, and we anticipate this will benefit Empiric.
The resilience of our business as a result of COVID-19 uncertainty has been documented on page 8 of our Interim Report under Going Concern.
Brexit
The Board continues to review the potential impact of Brexit on the Group's business. While we do not deem it to be a principal risk at this stage, we are monitoring developments. Until Brexit negotiations are finalised it is impossible to judge what impact leaving the EU will have. This government is, however, committed to growing international student numbers - from the current level of almost 450,000 to 600,000 by 2030 - the Treasury has also recognised the value of higher education exports by making visa applications and postgraduate employment limitations less onerous. However, EU international students make up about 7% of the full-time student population in the UK - a relatively small proportion. Of equal potential significance to the sector is the fate of EU teaching and research staff employed in higher education, and the European medical and science research programmes.
Principal Risks
The principal risks and uncertainties described in the Annual Report and Accounts are summarised below:
External Risks
-- Student Demand Risk - There is a risk that the level of student demand will decrease.
-- 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.
Internal Risks
-- Health & Safety Risk - The occurrence of a major health and safety incident including a fire.
-- Cyber Security Risk - The Group suffering from a cyber security breach. -- People Risk - Inability to retain and attract top levels of staff. -- Cost Control Risk - Costs rising out of control across the Group.
-- Development Risk - The potential for developments to be delivered late or incomplete, or over budget.
Going Concern
The COVID-19 pandemic has created global economic uncertainty, and in particular uncertainty around income for the 2020/21 academic year. 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 IAS 34 as adopted by the European Union 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.
Mark Pain
Chairman
12 August 2020
INDEPENT REVIEW REPORT TO EMPIRIC STUDENT PROPERTY PLC
Introduction
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 2020 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.
We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' Responsibilities
The half-yearly financial report is the responsibility of and has been approved by the 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.
As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Financial Reporting Council for use in the United Kingdom. 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.
Emphasis of matter: Property valuations
We draw attention to the disclosures made in Note 6 to the financial statements. As described in the note, due to the fact that the valuers attached less weight to previous market evidence for comparison purposes, property valuations are therefore reported on the basis of 'material valuation uncertainty' in accordance with the RICS Valuation - Global Standards. Consequently, less certainty should be attached to the valuation of the investment properties than would normally be the case. Our review report is not modified in respect of this matter.
Material Uncertainty Related to Going Concern
We draw attention to Note 1 to the financial statements, which indicates that the Company's future covenant compliance may be breached. As stated in Note 1, these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our review report is not modified in respect of this matter.
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 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Use of Our Report
Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting its responsibilities in respect of half-yearly financial reporting in accordance with 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
12 August 2020
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 Unaudited six months to 30 Audited year
June 2020 June 2019 31 December 2019
Notes GBP'000 GBP'000 GBP'000
---------------------------- ----- ---------------------------- ---------------------------- -----------------
Continuing operations
Revenue 34,014 35,735 70,908
Property expenses (10,599) (11,245) (23,351)
Gross profit 23,415 24,490 47,557
---------------------------- ----- ---------------------------- ---------------------------- -----------------
Administrative expenses (5,199) (5,030) (9,222)
Change in fair value of
investment property 6 (26,202) 15,680 29,176
Operating (loss)/profit (7,986) 35,140 67,511
---------------------------- ----- ---------------------------- ---------------------------- -----------------
Finance cost (6,445) (6,408) (13,148)
Finance income 22 94 409
---------------------------- ---------------------------- -----------------
Net finance cost 2 (6,423) (6,314) (12,739)
(Loss)/Profit before tax (14,409) 28,826 54,772
---------------------------- ----- ---------------------------- ---------------------------- -----------------
Corporation tax 3 - - -
(Loss)/Profit for the period (14,409) 28,826 54,772
---------------------------- ---------------------------- -----------------
Other comprehensive income
Items that will be
reclassified to profit and
loss
Fair value gain on cash flow
hedge - 104 80
Total comprehensive
(expense)/income for the
period (14,409) 28,930 54,852
---------------------------- ----- ---------------------------- ---------------------------- -----------------
Earnings per share expressed
as pence per share
Basic 4 (2.39) 4.78 9.08
Diluted 4 (2.39) 4.77 9,07
---------------------------- ----- ---------------------------- ---------------------------- -----------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Unaudited
30 June 2020 30 June 2019 Audited 31 December 2019
Notes GBP'000 GBP'000 GBP'000
----------------------------------------- ----- ------------- ------------- ------------------------
Non-current assets
Property, plant and equipment 333 338 352
Intangible assets 1,672 1,406 1,619
Investment property - operational assets 6 984,631 943,561 999,380
Investment property - development assets 6 25,449 57,619 29,700
----------------------------------------- ----- ------------- ------------- ------------------------
1,012,085 1,002,924 1,031,051
----------------------------------------- ----- ------------- ------------- ------------------------
Current assets
Trade and other receivables 6,335 10,288 10,538
Fixed term deposit - 10,000 -
Cash and cash equivalents 6,157 22,509 16,517
----------------------------------------- ----- ------------- ------------- ------------------------
12,492 42,797 27,055
----------------------------------------- ----- ------------- ------------- ------------------------
Total assets 1,024,577 1,045,721 1,058,106
========================================= ===== ============= ============= ========================
Current liabilities
Trade and other payables 13,590 35,950 14,372
Borrowings 7 - 65,386 42,675
Derivative financial liability - 112 -
Deferred rental income 8,110 10,983 29,204
----------------------------------------- ----- ------------- ------------- ------------------------
21,700 112,431 86,251
----------------------------------------- ----- ------------- ------------- ------------------------
Non-current liabilities
Bank borrowings 7 359,913 279,484 307,097
----------------------------------------- ----- ------------- ------------- ------------------------
359,913 279,484 307,097
----------------------------------------- ----- ------------- ------------- ------------------------
Total liabilities 381,613 391,915 393,348
----------------------------------------- ----- ------------- ------------- ------------------------
Total net assets 642,964 653,806 664,758
----------------------------------------- ----- ------------- ------------- ------------------------
Called up share capital 6,032 6,029 6,032
Share premium 257 - 257
Capital reduction reserve 475,038 497,654 482,578
Retained earnings 161,637 150,099 175,891
Cash flow hedge reserve - 24 -
----------------------------------------- ----- ------------- ------------- ------------------------
Total equity 642,964 653,806 664,758
Total equity and liabilities 1,024,577 1,045,721 1,058,106
========================================= ===== ============= ============= ========================
NAV per share basic (pence) 8 106.60 108.45 110.21
NAV per share diluted (pence) 8 106.36 108.17 109.99
EPRA NAV per share basic (pence) 8 106.60 108.46 110.21
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Period from 1 January to 30 June 2020 (unaudited)
Called Capital Cash flow
up share Share reduction Retained hedge Total
capital premium reserve earnings reserve equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- --------- -------- ---------- --------- --------- --------
Balance at 1 January 2020 6,032 257 482,578 175,891 - 664,758
Changes in equity
Loss for the period - - - (14,409) - (14,409)
Fair value gain on cash - - - - - -
flow hedge
----------------------------------- --------- -------- ---------- --------- --------- --------
Total comprehensive expense/income
for the period - - - (14,409) - (14,409)
Share-based payment - - - 155 - 155
Dividends - - (7,540) - - (7,540)
------------------------------------ --------- -------- ---------- --------- --------- --------
Total contributions and
distribution recognised
directly in equity - - (7,540) 155 - (7,385)
------------------------------------ --------- -------- ---------- --------- --------- -------- Balance at 30 June 2020 6,032 257 475,038 161,637 - 642,964 ==================================== ========= ======== ========== ========= ========= ========
Period from 1 January to 30 June 2019 (unaudited)
Capital
Called up reduction Retained Cash flow
share capital Share premium reserve earnings hedge reserve Total equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- ------------- ------------- ------------- -------------- -------------- ------------
Balance at 1
January 2019 6,029 467,268 45,458 121,215 (80) 639,890
Changes in
equity
Profit for the
period - - - 28,826 - 28,826
Fair value gain
on cash flow
hedge - - - - 104 104
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Total
comprehensive
income for the
period - - - 28,826 104 28,930
Share-based
payment - - - 58 - 58
Reduction in
share premium
(Note 12) - (467,268) 467,268 - - -
Dividends - - (15,072) - - (15,072)
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Total
contributions
and
distribution
recognised
directly in
equity - (467,268) 452,196 58 - (15,014)
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Balance at 30
June 2019 6,029 - 497,654 150,099 24 653,806
=============== ============= ============= ============= ============== ============== ============
Year from 1 January to 31 December 2019 (audited)
Capital
Called up reduction Retained Cash flow
share capital Share premium reserve earnings hedge reserve Total equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- ------------- ------------- ------------- -------------- -------------- ------------
Balance at 1
January 2019 6,029 467,268 45,458 121,215 (80) 639,890
Changes in
equity
Profit for the
period - - - 54,772 - 54,772
Fair value gain
on cash flow
hedge - - - - 80 80
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Total
comprehensive
income for the
period - - - 54,772 80 54,852
Share-based
payment - - - 164 - 164
Share premium
cancellation - (467,268) 467,268 - - -
Share options
exercised 3 257 - (260) - -
Dividends - - (30,148) - - (30,148)
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Total
contributions
and
distribution
recognised
directly in
equity 3 (467,011) 437,120 (96) - (29,984)
--------------- ------------- ------------- ------------- -------------- -------------- ------------
Balance at 31
December 2019 6,032 257 482,578 175,891 - 664,758
=============== ============= ============= ============= ============== ============== ============
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited six months to Unaudited six months to 30 Audited year to 31
30 June 2020 June 2019 December 2019
GBP'000 GBP'000 GBP'000
--------------------------- -------------------------- -------------------------- --------------------------
Cash flows from operating
activities
(Loss)/Profit before income
tax (14,409) 28,826 54,772
Share-based payments 155 58 164
Depreciation charge 157 128 283
Finance income (22) (94) (409)
Finance costs 6,445 6,408 13,148
Change in fair value of
investment property 26,202 (15,680) (29,176)
---------------------------- -------------------------- -------------------------- --------------------------
18,528 19,646 38,782
Decrease in trade and other
receivables 4,201 2,186 958
(Decrease) in trade and
other payables (512) (1,667) (1,269)
(Decrease)/increase in
deferred rental income (21,094) (15,985) 2,236
---------------------------- -------------------------- -------------------------- --------------------------
(17,405) (15,466) 1,925
Net cash flows generated
from operations 1,123 4,180 40,707
---------------------------- -------------------------- -------------------------- --------------------------
Cash flows from investing activities
Purchase of tangible fixed assets (77) (21) (85)
Purchase of intangible assets (113) (235) (552)
Purchase of investment property (7,497) (4,787) (39,620)
Interest received 22 94 409
Fixed term deposit - - 10,000
-------------------------------------------------- -------- -------- --------
Net cash flows from investing activities (7,665) (4,949) (29,948)
-------------------------------------------------- -------- -------- --------
Cash flows from financing activities
Dividends paid (7,540) (14,645) (30,148)
Bank borrowings 10,000 20,000 115,500
Repayments of bank borrowings - - (90,500)
Loan arrangement fees paid (371) (4) (1,064)
Finance costs (5,907) (5,546) (11,603)
-------------------------------------------------- -------- -------- --------
Net cash from financing activities (3,818) (195) (17,815)
-------------------------------------------------- -------- -------- --------
Decrease in cash and cash equivalents (10,360) (964) (6,956)
Cash and cash equivalents at beginning of period 16,517 23,473 24,473
-------------------------------------------------- -------- -------- --------
Cash and cash equivalents at end of period 6,157 22,509 16,517
================================================== ======== ======== ========
UNAUDITED NOTES TO THE FINANCIAL STATEMENTS
For the period 1 January 2020 to 30 June 2020
1. Accounting Policies
1.1 Trading Period
The condensed interim financial statements of the Group reporting period is from 1 January 2020 to 30 June 2020.
1.2 Going Concern
The COVID-19 pandemic has created global economic uncertainty, and in particular an uncertainty around income for the 2020/21 academic year. Accordingly, the Group has conducted a detailed going concern review and considered its liquidity position and banking covenant compliance strength.
The Group has GBP6 million in cash and GBP45 million of undrawn investment debt facilities as at 30 June 2020. Since the period end, we have increased our GBP70 million RCF with Lloyds Bank plc by GBP20 million. We believe the Group is sufficiently funded, with no refinancing requirements until November 2022.
Our debt facilities include covenants in respect of LTV and interest cover, both projected and historic. The Group maintains regular dialogue with all of its lenders as part of the ordinary course of business, however during the pandemic we have increased the frequency of this dialogue. As part of these discussions with our lenders we have had conversations specifically around the interest cover covenants to ensure we either temporarily restructure these or gain the relevant waivers from the banks to ensure that no issues arise. To date all of our banks have been supportive during this period and have expressed commitment to the long-term relationship which they wish to build with Empiric.
On 31 March 2020, the Group announced the difficult decision to suspend dividend distributions and guidance at this time. The Group also took decisive action to focus on liquidity. All development spend was paused and other discretionary costs were reviewed with reductions identified and implemented. The Group also announced it would look favourably upon requests on a case by case basis from its customers who were either no longer in occupation or, due to university closures, plan not to return to their accommodation, to be released from their rent and lease obligations from 25 April 2020 onwards. The worst-case estimate for this was a GBP21 million cash impact.
On 6 May 2020, the Group announced that the impact from releasing students from their rent obligations would have a total reduction in income for the current academic year 2019/20 of up to 12% (GBP8 million), which is below the worst-case reduction in revenue of up to c.GBP21 million as previously announced. This has now reduced further to a total reduction of GBP7.2 million. The Group also announced that one of the developments had recommenced and which completed in June 2020.
Management has applied the following stress tests and assumptions in its half year going concern model:
1) Revenue occupancy for the 2020/21 academic year of 60%
2) Revenue occupancy for the 2020/21 academic year of 70%
3) Revenue occupancy for the 2020/21 academic year of 80%
As of 12 August 2020 our current booking levels are 65% (85% as at 19 August 2019), the Board therefore believes that scenario 2 is the prudent outcome expectation for the forthcoming academic year.
Notwithstanding the impact of all of these scenarios, the Group continues to maintain adequate levels of liquidity and makes no assumption to utilise the additional GBP20 million RCF facility negotiated with Lloyds Bank plc throughout the same assessment period. The model we have used does not include any deeper cost cutting measures or mitigating actions we could undertake.
The Group also continues to maintain covenant compliance for its LTV thresholds throughout the going concern assessment period to 31 December 2021. Property values would have to fall by more than 20% from June 2020 valuations before we approach any of our LTV covenants.
However, the Directors note that in scenario 1 for two lenders the interest cover covenant threshold would not be met at the measurement date of 31 March 2021. Thereafter, the covenants would be met by the March 2022 measurement date.
The Directors further note that in scenario 2 for one lender the interest cover covenant threshold would not be met at the measurement date of 30 June 2021. Thereafter, the covenants would be met by the December 2021 measurement date. The Group is in detailed discussions with the lender who have communicated they will look favourably upon any waiver as it is required but have not provided a formal waiver at the time of signing this interim report. The Group also has cure rights under the lending agreement, and we could use the additional GBP20 million RCF facility to cure any breaches if required.
Overall, under the model the level of revenue occupancy for the 2020/21 academic year which needs to be achieved where we have no covenant breaches is 76%. At the other end of the scale, if our occupancy falls below 53% then we would be in breach of all of our ICR covenants.
To support the Directors' going concern assessment, a "Reverse Stress Test" was performed to determine the level of performance at which adopting the going concern basis of preparation may not be appropriate. This involved assessing the minimum amount of income required to ensure we had enough capital to continue to fund our obligations over the next 18 months. Under this scenario, revenue occupancy for the 2020/21 academic year could fall to 23% which is 42% below our worst-case scenario 1. The model we have used does not include any deeper cost cutting measures or mitigating actions we could undertake.
The Group faces uncertainty with the level occupancy over the 2020/21 academic year in general or as a result of a prolonged lockdown. This therefore represents a material uncertainty that could cast significant doubt on the Group's ability to continue as a going concern.
The Directors have discussed the outputs of this stress testing with all of their lenders, together with their internal management forecast for the remainder of the year which predicts all covenants will be complied with for all future measurement points. The Group will maintain a regular dialogue with all of its lenders as trading returns to normal.
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.
1.3 Basis of Preparation
The condensed interim financial statements for the six months ended 30 June 2020 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34, Interim Financial Reporting, as adopted by the European Union.
The condensed consolidated financial statements for the six months ended 30 June 2020 have been reviewed by the Group's independent auditor, BDO LLP, in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity and were approved for issue on 12 August 2020.
The condensed consolidated financial statements presented herein for the period to 30 June 2020 do not constitute full statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group's Annual Report and Accounts for the year to 31 December 2019 have been delivered to the Registrar of Companies. The Group's independent auditor's report on those accounts was unqualified, did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.
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 2019 with the exception of rent forgone as a result of COVID-19 - see below - and are expected to be consistently applied during the year ending 31 December 2020.
(a) Rent forgone
Where a student requested a rent refund and they met the criteria set out, including leaving the property, the Group recognise no further income in relation to that let, reduce cash with the cash amount refunded, wrote off any deferred income in relation to the refund and any difference between cash and deferred income was debited or credited to revenue in the Statement of Comprehensive Income.
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.
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) 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.
Considering the market uncertainty caused by COVID-19, the 30 June 2020 valuations have been reported on the basis of "material valuation uncertainty". On 7 July 2020 after the period end, the RICS recommended that the material uncertainty clause would no longer be appropriate for valuations of institutional grade student accommodation which is professionally managed, such as Empiric's portfolio.
b) Operating lease contracts - the Group as lessor
The Group has acquired investment properties which are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms 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.
c) Material uncertainty around going concern
Given the COVID-19 pandemic, enhanced judgement is needed around the material uncertainty relating to the Group's ability to be a going concern, see Note 1.2 for detail.
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 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.
1.7 Impact of New Accounting Standards and Changes in Accounting Policies
We have applied IFRS 16 during the year, but it has no material effect.
2. Net Finance Cost
Unaudited six months to 30 Unaudited six months to 30 Audited year to 31
June 2020 June 2019 December 2019
GBP'000 GBP'000 GBP'000
--------------------------- -------------------------- -------------------------- --------------------------
Finance costs
Fair value loss on interest
rate cap - - -
Interest expense on bank
borrowings 5,890 5,792 11,947
Amortisation of loan
transaction costs 555 616 1,201
---------------------------- -------------------------- -------------------------- --------------------------
6,445 6,408 13,148
Finance income
Fair value gain on interest
rate cap - 21 -
Fair value gain on interest
rate swap - - 181
Interest received on bank
deposits 22 73 228
---------------------------- -------------------------- -------------------------- --------------------------
22 94 409
Net finance cost 6,423 6,314 12,739
============================ ========================== ========================== ==========================
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 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.
- The adjustment for licence fee receivable is calculated by reference to the fraction of the total period of completed construction during the period, multiplied by the total licence fee 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:
Calculation of
Calculation of Calculation of Calculation of Calculation of adjusted basic
basic EPS diluted EPS EPRA basic EPS EPRA diluted EPS EPS
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ ---------------- ---------------- ---------------- ---------------- ---------------
Unaudited six
months to 30 June
2020
Earnings (14,409) (14,409) (14,409) (14,409) (14,409)
Adjustment to
include discounts
on acquisition due
to rental
guarantees
in the period - - - - 162
Changes in fair
value of
investment
property (Note 6) - - 26,202 26,202 26,202
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Earnings/adjusted
earnings (GBP'000) (14,409) (14,409) 11,793 11,793 11,955
Weighted average
number of shares
('000) 602,939 602,939 602,939 602,939 602,939
Adjustment for
employee share
options ('000) - -(1) - 1,367 -
Total number of
shares ('000) 602,939 604,306 602,939 604,306 602,939
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Per-share amount
(pence) (2.39) (2.39) 1.96 1.95 1.98
=================== ================ ================ ================ ================ ===============
(1) Due to the Group making a loss in the year, under IAS 33 the share options become antidilutive and thus are excluded from the above calculation.
Calculation of
Calculation of Calculation of Calculation of Calculation of adjusted basic
basic EPS diluted EPS EPRA basic EPS EPRA diluted EPS EPS
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ ---------------- ---------------- ---------------- ---------------- ---------------
Unaudited six
months to 30 June
2019
Earnings 28,826 28,826 28,826 28,826 28,826
Adjustment to
include licence
fee receivable on
forward funded
developments in
the period - - - - 991
Adjustment to
include
development
rebate receivable
on forward funded
developments in
the period - - - - 140
Changes in fair
value of
investment
property (Note 6) - - (15,680) (15,680) (15,680)
Changes in fair
value of interest
rate derivatives
(Note 2) - - (21) (21) (21)
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Earnings/adjusted
earnings (GBP'000) 28,826 28,826 13,125 13,125 14,256
Weighted average
number of shares
('000) 602,888 602,888 602,888 602,888 602,888
Adjustment for
employee share
options ('000) - 1,549 - 1,549 -
Total number of
shares ('000) 602,888 604,437 602,888 604,437 602,888
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Per-share amount
(pence) 4.78 4.77 2.18 2.17 2.36
=================== ================ ================ ================ ================ ===============
Audited year to 31
December 2019
Earnings 54,772 54,772 54,772 54,772 54,772
Adjustment to
include licence
fee
receivable on
forward funded
developments in
the period - - - - 1,038
Adjustment to
include discounts
on acquisition due
to rental
guarantees in the
year - - - - 229
Changes in fair
value of
investment
property (Note 6) - - (29,176) (29,176) (29,176)
Changes in fair
value of interest
rate derivatives
(Note 2) - - (181) (181) (181)
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Earnings/adjusted
earnings 54,772 54,772 25,415 25,415 26,682
Weighted average
number of shares
('000) 602,929 602,929 602,929 602,929 602,929
Adjustment for
employee share
options ('000) - 1,215 - 1,215 -
Total number of
shares ( '000) 602,929 604,144 602,929 604,144 602,929
------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Per-share amount
(pence) 9.08 9.07 4.22 4.21 4.43
=================== ================ ================ ================ ================ ===============
5. Dividends Paid
Unaudited six Unaudited six Audited year
months to 30 months to 30 to 31 December
June 2020 June 2019 2019
GBP'000 GBP'000 GBP'000
--------------------------------- ------------- ------------- ---------------
Interim dividend of 1.25 pence
per ordinary share
in respect of the quarter ended
31 December 2018 - 7,536 7,536
Interim dividend of 1.25 pence
per ordinary share
in respect of the quarter ended
31 March 2019 - 7,536 7,536
Interim dividend of 1.25 pence
per ordinary share
in respect of the quarter ended
31 June 2019 - - 7,536
Interim dividend of 1.25 pence
per ordinary share
in respect of the quarter ended
31 September 2019 - - 7,540
Interim dividend of 1.25 pence
per ordinary share
in respect of the quarter ended
31 December 2019 7,540 - -
---------------------------------- ------------- ------------- ---------------
7,540 15,072 30,148
================================= ============= ============= ===============
6. Investment Property
Investment Investment
properties properties Total operational Properties
freehold long leasehold assets under development Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ----------- --------------- ----------------- ------------------ ---------
As at 1 January 2020 861,639 137,741 999,380 29,700 1,029,080
Property additions 2,064 227 2,291 4,911 7,202
Transfer of completed
developments 5,582 - 5,582 (5,582) -
Change in fair value during
the period (18,230) (4,392) (22,622) (3,580) (26,202)
---------------------------- ----------- --------------- ----------------- ------------------ ---------
As at 30 June 2020
(unaudited) 851,055 133,576 984,631 25,449 1,010,080
============================ =========== =============== ================= ================== =========
As at 1 January 2019 796,640 132,732 929,372 41,670 971,042
Property additions (970)(1) 21 (949) 15,407 14,458
Change in fair value during
the period 11,201 3,937 15,138 542 15,680
---------------------------- ----------- --------------- ----------------- ------------------ ---------
As at 30 June 2019
(unaudited) 806,871 136,690 943,561 57,619 1,001,180
============================ =========== =============== ================= ================== =========
(1) The credit recognised in additions relates to a non-cash adjustment from the reversal of construction accruals previously recognised.
Investment Investment
properties properties Total operational Properties
freehold long leasehold assets under development Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ----------- --------------- ----------------- ------------------ ---------
As at 1 January 2019 796,640 132,731 929,371 41,670 971,041
Property additions 4,206 410 4,616 24,247 28,863
Transfer of completed
developments 34,441 - 34,441 (34,441) -
Change in fair value during
the year 26,352 4,600 30,952 (1,776) 29,176
---------------------------- ----------- --------------- ----------------- ------------------ ---------
As at 31 December 2019
(audited ) 861,639 137,741 999,380 29,700 1,029,080
============================ =========== =============== ================= ================== =========
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 2020, 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 Independent Valuer has included the following disclosure relating to material uncertainty as at the valuation date:
"The outbreak of the novel coronavirus (COVID-19), declared by the World Health Organisation as a "Global Pandemic" on the 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.
Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.
Our valuations are therefore reported on the basis of "material valuation uncertainty" as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the properties under frequent review.
For the avoidance of doubt, the inclusion of the "material valuation uncertainty" declaration above does not mean that the valuation cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner that - in the current extraordinary circumstances - less certainty can be attached to the valuation than would otherwise be the case."
In arriving at these valuations, the valuers have exercised greater judgement regarding the level of rent collection for the 2020/21 academic year.
On 7 July 2020 after the period end, the RICS recommended that the material uncertainty clause would no longer be appropriate for valuations of institutional grade student accommodation which is professionally managed, such as Empiric's portfolio.
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 Unaudited
six months six months Audited year
to 30 June to 30 June to 31 December
2020 2019 2019
GBP'000 GBP'000 GBP'000
-------------------------------------------- ----------- ----------- ---------------
Value per independent valuation report 1,009,610 1,000,710 1,028,610
Plus: long leasehold liability 470 470 470
--------------------------------------------- ----------- ----------- ---------------
Fair value per Group Statement of Financial
Position 1,010,080 1,001,180 1,029,080
============================================= =========== =========== ===============
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 2020 30 June 2019 31 December 2019 ------------- ---------------- ---------------- GBP102-GBP357 GBP93-GBP347 per GBP97-GBP347 per per week week 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 2020 30 June 2019 31 December 2019 ------------ ------------ ---------------- 2.86% 2.57% 3.55%
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 2020 30 June 2019 31 December 2019 ------------ ------------ ---------------- 4.35%-7.50% 4.50%-7.00% 4.50%-7.25%
d) Unobservable input: Physical condition of the property
e) Unobservable input: Planning consent
No planning enquiries undertaken for any of the development properties.
f) 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 +3% change in rental -0.25% change in +0.25% change in
income income yield yield
GBP'000 GBP'000 GBP'000 GBP'000
--------------------- -------------------- -------------------- -------------------- --------------------
(Decrease)/increase
in the fair value of
investment properties
As at 30 June 2020 (40,000) 40,000 43,470 47,530
As at 30 June 2019 (41,290) 41,230 48,810 (44,590)
As at 31 December 2019 (39,190) 39,270 46,520 (42,350)
---------------------- -------------------- -------------------- -------------------- --------------------
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 GBP877 million at 30 June 2020. 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 Bank borrowings
drawn 30 June undrawn 30 Total
2020 June 2020 30 June 2020
GBP'000 GBP'000 GBP'000
------------------------------------ ---------------- --------------- -------------
At 1 January 2020 (audited) 355,000 35,000 390,000
Bank borrowings from new facilities
in the year 10,000 22,500 32,500
------------------------------------- ---------------- --------------- -------------
At 30 June 2020 (unaudited) 365,000 57,500 422,500
===================================== ================ =============== =============
At 1 January 2019 (audited) 330,000 60,000 390,000
Bank borrowings drawn in the period 20,000 (20,000) -
------------------------------------- ---------------- --------------- -------------
At 30 June 2019 (unaudited) 350,000 40,000 390,000
===================================== ================ =============== =============
At 1 January 2019 (audited) 330,000 60,000 390,000
Bank borrowings from new facilities
in the year 55,500 - 55,500
Bank borrowings drawn in the year 60,000 (25,000) 35,000
Bank borrowings repaid in the year (90,500) - (90,500)
------------------------------------- ---------------- --------------- -------------
At 31 December 2019 (audited) 355,000 35,000 390,000
===================================== ================ =============== =============
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 Unaudited Audited 31
30 June 2020 30 June 2019 December 2019
Current borrowings GBP'000 GBP'000 GBP'000
------------------------------------- ------------- ------------- --------------
Balance brought forward 42,800 55,500 55,500
Bank borrowings becoming current
in the period - 10,000 -
Less: Bank borrowings becoming
non-current during the period (42,800) - -
Less: Bank borrowings repaid in
the year - - (55,500)
Bank borrowings drawn down in the
year - - 42,800
-------------------------------------- ------------- ------------- --------------
Bank borrowings: due in less than
one year - 65,500 42,800
Less: Unamortised costs - (114) (125)
-------------------------------------- ------------- ------------- --------------
Current liabilities: Bank borrowings - 65,386 42,675
====================================== ============= ============= ==============
Unaudited Unaudited Audited 31
30 June 2020 30 June 2019 December 2019
Non-current borrowings GBP'000 GBP'000 GBP'000
----------------------------------------- -------------- ------------- --------------
Balance brought forward 312,200 274,500 274,500
Total bank borrowings in the period 10,000 20,000 115,500
Bank borrowings becoming non-current
during the period 42,800 - 55,500
Less: Bank borrowings becoming
current during the period - (10,000) (42,800)
Less: Bank borrowings repaid during
the period - - (90,500)
------------------------------------------ -------------- ------------- --------------
Bank borrowings: due in more than
one year 365,000 284,500 312,200
Less: Unamortised costs (5,087) (5,016) (5,103)
------------------------------------------ -------------- ------------- --------------
Non-current liabilities: bank borrowings 359,913 279,484 307,097
========================================== ============== ============= ==============
Unaudited Unaudited Audited 31
30 June 2020 30 June 2019 December 2019
Maturity of bank borrowings GBP'000 GBP'000 GBP'000
----------------------------------------- ------------- ------------- --------------
Repayable within 1 year - 65,500 -
Repayable between 1 and 2 years - 32,800 35,000
Repayable between 2 and 5 years 107,800 30,000 -
Repayable in over 5 years 257,200 221,700 277,200
------------------------------------------ ------------- ------------- --------------
Non-current liabilities: bank borrowings 365,000 350,000 312,200
========================================== ============= ============= ==============
Fair value
less book
Fair value Book value value
Fair value of fixed rate debt GBP'000 GBP'000 GBP'000
------------------------------ ----------- ---------- ----------
At 30 June 2020 - unaudited 308,496 272,996 35.500
At 30 June 2019 - audited 243,317 217,626 25,691
As at 31 December 2019 295,498 271,971 23,527
The fair value of the fixed rate debt has been valued by independent financial valuation expert, JCRA. The floating rate debt has been excluded as it is assumed the carrying value will be similar to the fair value.
The fair value of these contracts is determined by discounting the future cash flows estimated to be paid or received under these contracts using a valuation technique based on forward rates derived from short-term rates, futures, swap rates and implied option volatility.
8. NAV Per Share
Basic NAV per share is calculated by dividing net assets in the Statement of Financial Position attributable to ordinary equity holders of the parent by the number of ordinary shares outstanding at the end of the year.
Diluted NAV per share is calculated using the number of shares adjusted to assume the conversion of all dilutive potential ordinary shares.
EPRA NAV is calculated as net assets per the Consolidated Statement of Financial Position excluding fair value adjustments for debt-related derivatives.
EPRA NNNAV is the EPRA NAV adjusted to include the fair values of financial instruments and debt.
Net asset values have been calculated as follows:
Unaudited 30 Unaudited 30 Audited 31 December
June 2020 June 2019 2019
GBP'000 GBP'000 GBP'000
------------------------------- ------------ ------------ -------------------
Net assets per Statement
of Financial Position 642,964 653,806 664,758
Adjustment to exclude the
fair value
loss of financial instruments - 112 -
-------------------------------- ------------ ------------ -------------------
EPRA NAV 642,964 653,918 664,758
================================ ============ ============ ===================
Adjustment to include fair
value of debt (35,500) (25,691) (23,527)
Adjustment to include the
fair value
loss of financial instruments - (112) -
-------------------------------- ------------ ------------ -------------------
EPRA NNNAV 607,464 628,115 641,231
================================ ============ ============ ===================
Ordinary shares Number Number Number
------------------------------- ------------ ------------ -------------------
Issued share capital 603,160,940 602,887,740 603,160,958
Issued share capital plus
employee options 604,595,997 604,437,181 604,375,503
-------------------------------- ------------ ------------ -------------------
Pence Pence Pence
------------------------------- ------------ ------------ -------------------
NAV per share basic 106.60 108.45 110.21
NAV per share diluted 106.35 108.17 109.99
EPRA NAV per share basic 106.60 108.46 110.21
EPRA NAV per share diluted 106.35 108.19 109.99
EPRA NNNAV per share basic 100.71 104.18 106.31
EPRA NNNAV per share basic 102.47 103.92 106.10
-------------------------------- ------------ ------------ -------------------
9. Capital Commitments
As at 30 June 2020, the Group had total capital commitments of GBP15 million (31 December 2019: GBP32 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 share transactions by related parties during the period.
Share-Based Payments
On 8 April 2020, the Company granted Tim Attlee, Chief Executive Officer, nil-cost options over 80,116 ordinary shares in the Company ("Ordinary Shares") and Lynne Fennah, Chief Financial and Operating Officer, nil-cost options over 72,396 Ordinary Shares relating to the deferred shares element of the annual bonus award for the financial period to 31 December 2019 (the "Annual Bonus Award").
On the same date, the Company granted nil-cost options over a total of 511,982 ordinary shares to Lynne Fennah pursuant to the Empiric Long Term Incentive Plan (the "LTIP") for the 2020 financial year.
Board Change
On 18 March 2020, the Board announced that Tim Attlee would be stepping down from his role as Chief Executive Officer of the Company. Tim remained in his position until 30 June 2020 to help to ensure an orderly handover took place.
In accordance with the terms of his employment contract, his basic salary and contractual benefits amounting to GBP41,350 per month will be paid from 1 July 2020 until 17 March 2021. Tim Attlee's outstanding deferred bonus shares will vest three years after the date of grant. He is also is eligible for a 2020 bonus, prorated for the period up to the termination date. In view of impact of COVID-19 on the Company's performance, and the stretching performance targets agreed which apply for the full year, it is unlikely any bonus will be paid in respect of 2020. For further information around the settlement agreement see www.empiric.co.uk.
11. Subsequent Events
On 31 July 2020, the Group increased its RCF facility with Lloyds Bank plc by GBP20 million. The current RCF facility now stands at GBP90 million of which GBP45 million is drawn as of the date of this report. The facility is due to run until November 2022.
COMPANY INFORMATION AND CORPORATE ADVISERS
Directors and Advisers Directors Registrar Mark Pain (Chairman) Computershare Investor Services PLC Lynne Fennah (Chief Financial and Operating Officer) The Pavilions Jim Prower (Non-Executive Director) Bridgwater Road Stuart Beevor (Non-Executive Director) Bristol BS99 6ZZ Alice Avis (Non-Executive Director) Auditors Broker and Joint Financial Adviser BDO LLP Jefferies International Ltd 55 Baker Street 100 Bishopsgate London W1U 7EU London EC2N 4JL Valuer Broker and Joint Financial Adviser CBRE Limited RBC Europe Limited Henrietta House Riverbank House Henrietta Place 2 Swan Lane London W1G 0NB London EC4R 3BF Administrator and Company Secretary Legal Adviser to the Company FIM Capital Limited Gowling WLG (UK) LLP 25 Bedford Square, 4 More London Riverside London WC1B 3HH London SE1 2AU Communications Adviser
Maitland/AMO 3 Pancras Square London N1C 4AG Company Registration Number: 08886906 Registered Office Incorporated in the UK (Registered in England) 6th Floor, Swan House Empiric Student Property plc is a public 17-19 Stratford Place company limited by shares London W1C 1BQ
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
IR KKBBNOBKDAFD
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