Empiric Student Property PLC

LSE:ESP

Earnings Call Transcript 2021-Q4

[Operator]

Good

morning

and

welcome

to

the

Empiric

Student

Property

PLC

Full-Year

Results

2021.

My

name

is

Katie, and

I'll

be

coordinating

your

call

today.

[Operator Instructions]

I

will

now

hand

over

to your

host,

Duncan

Garrood,

Chief

Executive,

to

begin.

Duncan,

please

go

ahead.

[Duncan Steven Garrood]

Good

morning

and

thank

you for

joining

us

today.

I'm here

with

our

CFO,

Lynne

Fennah.

And

our

agenda

today

showed

on

slide

3

is

as

follows:

I'll

give

a

short

introduction;

Lynne

will

take

you

through

the

financial

performance

and

our

progress

on

ESG; after

that,

I'll

talk

in

more

detail

about

the business;

and

then,

we'll

open

up

for

questions.

So,

let

me

start

with

the

headlines

on

slide

4.

As

you

know,

we

started

2021

in

challenging

conditions

due

to

the

pandemic,

with

revenue

occupancy

averaging

65%

during

academic

year

2021.

However,

market

conditions

improved

during

the

year,

and

academic

year

2021/2022

has

reached

occupancy

of

84%

at

the

upper-end

of

our

guidance.

It

was

a busy

year

with

a lot

of

activity

on

the

portfolio.

In

particular,

we

made

a

total

of

nine

noncore

asset

disposals

for

£44.6

million,

above

book

value

[ph]



at aggregate (00:01:35); the

disposal

of

five

of

these

assets

completed

after

the

year-end.

This has

allowed

us

to

recycle

capital,

and

we

recently

announced

our

first

acquisition

since

2018.

In

addition,

we

have

two

developments

under

construction

and

successfully

completed

two

pilot

refurbishments

which

is

delivering

target

returns.

We've

also

agreed

clear

metrics

for

our

ESG

program,

including

setting

a

target

to

achieve

net

zero

in

our

own

operations

by

2035.

Most

importantly,

we

have

resumed

dividend

payments

and

committed

to

a

fully

covered

progressive

dividend

policy,

with

a

minimum

payment

of

£0.025

for

2022.

As

shown

the chart

on

slide

5

at

the

half-year,

and

you

can

see

how

occupancy

has

developed

during

2021.

We

believe

the

most

transparent

way

to

measure

occupancy

is

to

show

the

percentage

of

gross

annual

revenue.

In

other

words, the

total

rental

potential

of

the

business

for

the

year

rather

than

the

number

of

rooms

occupied.

Other

PBSA companies

may

use

different

measures

which

can

make

direct

comparisons

difficult.

We

ended

2021

with

occupancy

at

84%

to

10

percentage

points

below

our

best

performance

in

2019

pre-COVID.

This

gives

us

confidence

that

we're

now

on

the

road

to

market

recovery.

We

also

believe

the

transformation

work

we've

done, both

before

and

during

the

pandemic,

puts

us

in

a

strong

position

as

the

world

starts

to

open

up

again.

I'd

now

like

to

hand

over

to

Lynne

to

take

us

through

the

financial

performance.

As

you

know,

until

recently,

Lynne

was

also

our

COO.

But

now

that our

insourcing

is

complete

and

we

have

a

full

leadership

team

in

place,

she

has

relinquished

that

role

and

taken

on

responsibility

for

ESG

as

our

Chief

Sustainability

Officer.

Over to you, Lynne.

[Lynne Fennah]

Thank

you,

Duncan, and

good

morning,

everyone.

Let's

start

with

the

2021

headlines

on

slide

7.

Despite

occupancy

revenues

being

lower

than

pre-COVID

levels,

the

business

continued

to

generate

cash

and

we're

reporting

revenue

today

of

£56

million,

with

a

gross

margin

of

59%

and

administration

costs

of

£10.5

million,

below

our

£11

million

guidance.

Adjusted

earnings

decreased

to £10

million

which

translated

into

adjusted

basic

earnings

per

share

of

£0.017.

On

a

like-for-like

basis,

investment property

valuation

increased

by

3.3%.

EPRA

net

tangible

asset

value

per

share

was

up

2.2%

to

£1.074.

And

total

accounting

return,

the

sum

of

income

and

capital

growth,

has

increased

to

4.6%

mainly

due

to

the

higher

fair

value

of

investment

property.

Turning

now

to

the

income

statement

on

slide

8.

Revenue

decreased

6%

to

£56

million

as

occupancy

for

the

first

eight

months

of

academic

year

2021

was

65%

compared

to

84%

in

the

same

period

in

2020.

We

started

the

academic

year

2021/2022 at

81%

occupancy,

and

this

has

increased

to

84%

since

then.

As

we

told

you

at

the

half

year,

like-for-like

revenue

growth

for

the

academic

year

2021

was

1.3%

as

we

prioritize

occupancy

levels

over

rental

growth.

Property

expenses

were

up

2%,

mainly

driven

by

having

paid

council

tax

on

empty

rooms

as

a

result

of

lower

occupancy

levels. Gross

margins

decreased

from

62%

to

59%

due to

a £3.5

million

fall

in

revenue.

During

the

period,

we

sold

four

assets

with

a

net

gain

on

disposal

of

£1.7

million.

Since

the

year-end, we

have announced

a

further five

disposals

of

assets

of

also

above

book

value. The

net

profit

from

a

change

in

the

fair

value as

investment

properties

was

£17.6

million

compared

to a

£37.6

million

loss

the previous

year.

And

I

will

talk

through

this

in

detail

on

the

valuation

slide.

Net

finance

expense

was

£12.4

million,

7%

less

than

the

prior

year

[indiscernible]

(00:06:26)

due

to

maintaining

[ph]



the offices

(00:06:27) at

a

low

level

and

continued

low

interest

rates.

Taking

all

of

this

together,

we're

reporting

a

profit

of

€29.2

million

with

basic

earnings

per

share

of

£0.0484.

Slide

9

shows

a

breakdown

of

the

movement

in

our

portfolio

valuation.

During

2021,

we

sold

four

assets

for

£18.1

million,

above

the

book

value

shown

here

of

£16.3

million. After

that

disposal,

the

portfolio

was

valued

at

£988.8

million.

At

the

interim,

we

indicated

we

would

spend

£30 million

on

health

and safety

work

over

the

next

five

years.

CBRE's

assumption

is

that

£17.2

million

of

this

cost

should

now

be

reflected

in

the

year-end valuation

in

relation

to

work

on

external

wall

systems

and

fire

stopping.

The

value

of

developments

has

fallen

by

£2.5

million

due

to

a

delay

on

obtaining

planning

consent

on

Canterbury.

At

the

end

of

December

20, we

reported

a

COVID-related reduction

in

our

portfolio

valuation

of

£21.4

million,

mainly

due

to

CBRE's

assumption

of

50%

occupancy

for

the

balance

of

the

academic

year

2021. We

are

now reporting

£15.2

million

move

in

our

favor

as

CBRE

reduced

their

COVID

deduction

to

£6.2

million.

This

deduction

relates

to

the

2021/2022

academic

year

only,

with

no

deduction

proposed

for

the

academic

year

2022/2023.

During

the

year,

we

spent

£8

million

on

capital

expenditure

and

£7.4

million

on

development,

mainly

on

St.

Mary's,

Bristol.

Our

operational

assets

increased

in

value

by

£21.3

million,

driven

by

improved

deals

on

our super

prime

assets,

partially

offset

by

rent

reduction

in

secondary

assets.

Our

commercial

portfolio,

which

comprises

convenience

stores

and

restaurants

within

our

sites,

went

up

by

£800,000.

The

valuation

at

the

end

of

December,

before

adjusting

for

assets

that

we have

sold

following

the

year-end,

was

£1.0218

billion.

Over

the

year,

net

initial

yield

has

improved

from

5.6%

to

5.3%.

And

as

I

mentioned

since

the

year-end,

we

have

made

further

disposals

as

well

as an

acquisition

which

Duncan

will

talk about

later,

and

we

have

£25.9

million

of

assets

classified

as

held

for

sale

at

the

year-end.

Turning

now

to

look

at

the

balance

sheet

on

slide

10. As

you

have

seen,

the

portfolio

is

now valued

at

£995.9

million.

The

cash

holding

was

£37

million,

compared

to

£34

million

in

the

prior

year.

Debt

now

stands

at

£371

million

after

deducting

loan

arrangement

fees,

down

from

£385

million.

And

the

net

asset

value

of

the

group

was

£648

million

compared

to

£633

million.

Looking

at our

debt

position

in

more

detail

on

slide

11.

At

the

end

of

December,

before

deduction of

loan arrangement fees, the

group

has

committed

investment

debt

facilities

of

£420

million,

of

which

£375

million

were

drawn

down.

£277

million

of

this

debt

is

fixed

and £98

million

is

floating.

The

aggregate

cost

of

debt

was

3%

with

a

weighted

average

term

of

4.9

years.

And

the

loan to

value

for

the

group

was

33.1%,

below

our

35%

long-term

target.

As

of

January

31,

we

had

£81.2

million

of

undrawn

investment

facilities

and

cash,

and

we

currently

have

around

£44

million

of

unencumbered

assets.

We

have

recently

signed

a

three-year

extension

on

similar

terms

of

a £90 million

Lloyds

Bank

RCF,

which

was

due

to

expire

in

November.

In

an

environment with

rising

interest

rates,

it

is

important

that

three-quarters

of

our

drawn

debt

is

fixed.

I'd

like

to

move

on

now

to

talk

about

progress

on

our

continuous

improvement

initiatives

on

slide

12.

The

final

work

on

our

new

revenue

management

system

concluded

in

October

when

we brought

the

process

for

the

collection

of receivables

in-house.

This

is

now

a

centralized

function

within

the

finance

team.

The

system

gives

us

direct

control

of

our

revenue

management,

enabling

us

to

make

price

changes

more

efficiently

and

swiftly.

It

allows

us

to

manage

the

relationship

with

our

customers

directly

end

to

end.

It

makes

debt

collection

easier.

And

importantly, we

are

delivering

annualized

cost

savings of £1.5

million

which

started

in

September.

As

we

told

you

in

August,

we

have

turned our

focus

to

sustainability

now

that

we

have

direct

control

of

all

our

assets.

In

2021,

our

ESG

Committee

undertook

our

first

formal

materiality

assessment

using

an

independent

third-party

consultant.

This

review

process

included

listening

to over

1,700

students

to

better

understand

their

expectations;

undertaking

a

range

of

surveys

and

focus

groups

with

our

colleagues;

as

well

as

one-to-one

interviews

with

other

stakeholders

such as

investors,

banks,

professional

advisers

and

analysts.

The

output

of

this

work

is the

materiality

matrix

presented

on

slide

13.

At

the

interims,

we

advised

we

would

focus

on

four

key

themes,

all

shown

on

the

top

right-hand

side:

energy

efficiency,

sustainable

buildings,

health

and

safety,

and

mental

health

and

well-being.

The

ESG

Committee

have

further

reviewed

the

materiality

matrix

and

decided

to

combine

energy

efficiency

and

sustainable

buildings

under

one

heading.

So,

we

have

added

a

fourth area

which

is

providing

opportunities

for

all

through

all

of

our

business

activities.

I'll

talk

about

each

focus

area

in

turn

on

slide

14. So,

starting

with

becoming

a

sustainable

business,

we

intend

to

become

net

zero

in

all

our

operations,

property

portfolio

and

energy

consumption

by

2035.

As

part

of

our

ambition

to

achieve

net

zero,

we

have

appointed

CBRE to

help

define

meaningful

KPIs.

Also,

our

utilities

adviser

is

building

an

asset-by-asset roadmap

of

green

initiatives

to

reduce

energy

usage.

In

December

2021,

we

undertook our

first pilot

green

initiative

on

three

assets

in

Manchester

costing

£100,000. We

installed

smart

panel

heat

network

system

which

adapts the

heating

ability

based

on

environmental

factors

within

rooms,

thereby

minimizing

the

use of

energy.

The

payback

on

this

project

is

expected

to

be

less

than

two

years.

During

2021,

we

also

replaced

all

of

our

site

vans

with

electric

vehicles.

And

we

have

also

signed

up

to

the

Task

Force

on

Climate-Related

Financial Disclosure,

and

this

is

our

first

year

of

making

disclosure

in

line

with TCDF

(sic) [TCFD] (00:14:31) recommendations.

Moving

on

to

health

and

safety.

At

our

interim

results,

we

announced

we've

undertaken

work

to

ensure

that

our

buildings

are

compliant

with future

health and

safety

legislation.

We

undertook

fire

stopping

work

on

21

buildings

during

the

year.

We

also

conducted

external

wall

surveys

on

19

buildings,

including

those

over

18

meters

tall

and

won't

be

categorized

as

high

risk.

Our

property

team

are

currently

working

through

[ph]



the acquisitions arising

(00:15:05).

In

addition,

we

undertook

training

at

every

level

in

the

organization,

updated

our

health

and

safety

policy,

and

recruited

a

full-time

in-house

health

and

safety

expert

who

joined

this

month.

Turning

to

mental

health

and

wellbeing.

During

the

year,

we

delivered

mental

health

training

throughout

the

organization

so

that

we

are

better-equipped

to

support

both

colleagues

and

students.

And

we

continue

to

provide

customers

with

unlimited

access

to

a

24/7

mental

health

and

counseling

service.

Our

new

category

is

providing

opportunities

for

all.

We

believe

that

being

inclusive

improves

opportunities

for

our

students,

employees

and

people

looking

at

the

communities

we

operate

in.

On

January

2021,

we

became

a

living

wage

employer

as

we

strongly

believe

that

our

people

should

be

fairly

rewarded.

And

we've

introduced

two

new

people

KPIs, one

to

track

mandatory

training

levels

and

the

other

to

track

internal

promotions.

You

can

see

our

2022

priorities

in

all

four

areas

on

the

slide.

I'd

like

to

move

on

now

to

give

you

more

details

on

capital

expenditure.

Last

August,

we

gave

a

high-level

indication

of

our

plans

over

the

next

five

years.

Starting

with

an

estimated

£44 million

refurbishment

spend,

we

spent

£1.5

million

on

two

pilot

refurbishments

in

Bristol,

Leeds,

and

we

plan to

spend

a

further

£4.4

million

on

refurbishment

projects

in

2022 with

a

more

significant

program

planned

for

2023.

Managing

our

office

in

a

sustainable

way

is

now

a

key

focus.

And

having

spent

£100,000

pilot

project

in

Manchester

I

just

mentioned,

we're

turning

investment

of

£0.5

million

in

2022

on

more

smart

panel

heat

network

systems

and

also

solar

panels.

We previously

advised

we

plan

to

spend

£30 million

on

fire

safety

works

in

our

buildings.

We

were

uncertain

how

much

we'll

recover

from

developers,

so

we

have increased

this

to

£37

million.

Last

year,

we

spent

£2.5

million

on

fire

stopping

work

and

£800,000

on

external

wall

surface.

In

2022,

we

plan to spend

a

further

£3

million

on

fire

stopping

work

and

£12.6

million

on

the

first

work

for

external

wall

system

replication.

Annual

maintenance

CapEx

in

2021

was

£3.1

million,

and

we

estimate

£4

million

for

2022.

Turning

now

to

the

outlook

on

slide

16.

Trading

conditions

are

starting

to

improve

and

current

revenue

occupancy

for

the 2021/22

academic

year

is

84%,

at

the

upper-end

of

our

guidance.

Occupancy

for

the

next

academic

year

2022/2023

is

currently

at

36%,

broadly

in

line

with

March 2020

before

the

pandemic.

With

greater

confidence

to

market

conditions

normalizing,

we

expect

occupancy

for

the

academic

year 2022/2023

to

be

in

the

range

of

85

to

95%,

and

we

are

targeting

the

upper-end

of

that

range

assuming

no

further

disruption.

We

expect

administration

costs

to

be

around

£12

million,

taking

into

account

higher

inflation

and

our

investment

in

the

business

for

growth.

Our

cost

forecast

includes

an

inflationary

uplift

in

salaries

this

year

for

those

in

more

junior

positions

and

a

smaller

uplift

for

more

senior

roles.

We

are

benefiting

from

having

hedged

our

electricity

and

gas

costs

from

Q1

2020

up

to

Q3

2024.

And,

of

course,

three

quarters

of

our

drawn

debt

is

fixed,

which

gives

us

a

significant

protection

from

rising

interest

rates.

Our

expectation

for

capital

expenditure

in

2022 is

£24

million

(sic) [£24.5 million] (00:19:22) in

total,

taking

into

account

the

expenditure

I

detailed

earlier,

and

a

further

£13 million

on

development.

On

the

dividend,

we

are

pleased to

have

reinstated

payments

in

Q4

2021

with

the

payments

of

£0.025

to

cover

2019

and 2020.

In 2022,

we

plan

to

pay

a

minimum

of

£0.025

per

annum

and

have

just

announced

our

first

quarterly

payment.

Thank

you

very much.

I'll

now

hand

back to

Duncan.

[Duncan Steven Garrood]

Thank you, Lynne.

Slide

18

shows

the

full

academic

year

2021/2022

applications

data

from UCAS. Acceptances

were

a

little

lower

than

applications

due

to

COVID.

But

the

continued

growth

of

applications

shows

the

underlying

demand

for

UK

higher

education.

Total

undergraduate

applications

grew

3%.

But

within

this,

domestic

applications

were

up

5%.

Non-EU

international

applications

increased

13%,

and

EU

applications

declined

40%

post Brexit.

The

increase

in

sponsored

study

visas

issued

to

international

students is

encouraging

as

they

surpassed

pre-pandemic

levels

by

55%.

Now,

that

we

have

our own

in-house

marketing

and

booking

platforms,

we're

targeting

customers

with

much

greater

flexibility.

In

academic

year 2021/2022,

nearly

half our

customers

are

from

the

UK,

up from

pre-pandemic

levels

of

a

third.

The

other

half is

split

equally

between

Chinese

and

other

international

students. Whist

British

students

tend

to

prefer

the

lower

tariff

rooms

and

a

44-week

rental

commitment,

we

have not

discounted

our

rents

though

we

have

shown

some

flexibility

on

rental

lengths.

For

academic

year

2022/2023, we

will

again

flex

our

marketing

targets,

depending

on

the

behavior

of

particular

groups.

Our

focus

remains

on

returning

undergraduates

and

post-graduates,

both

from the UK

and

abroad. We're

encouraged

that

so

far

Chinese

and

other

Asian

markets

are,

again,

at

the

forefront

of

international

inquiries.

So,

let

me

turn

now

to

slide

19,

which

shows

the

five

key

priorities

for

the

business

that

I

set

out

last

year.

We've

made

progress

on

each

of

these

priorities,

so

I'll talk

about

them

in

turn

starting

with

our

portfolio,

which

we

are

managing

actively

to

enhance

returns.

Slide

20

shows

the

portfolio

segmentation

we

presented

last

March

and

the

current

percentage

by

value

of

each

segment,

updated

for disposals,

acquisitions,

changes

in

categorization,

and

fair

market

value.

Clearly,

these

segments

will

fluctuate

in

size and

value

as

we

continue

to

optimize

our

portfolio.

Segment

A

comprises

properties

yielding

our

best

results.

We've

grown

this

segment

by

7

percentage

points

through

the

addition

of

an

acquisition

and

the

assets

that's

been

upgraded

from

Segment

B,

as

well

as

valuation

uplifts.

Segment

B

consist

of

sites,

which

fundamentally

meets

the

Hello

Student

criteria,

but

need

investments

to

command

an

improved

rental

yield.

Our

aim

is

to

upgrade

these

sites

to

Segment

A.

One

asset

has

already

been

moved as

I

just

mentioned.

Segment C

are

not

core

Hello

Student

assets

but

have

good

commercial

characteristics.

Originally,

this

included

a

small

number

of sites

balanced

by

nomination

agreements

and

what's

mostly

suitable for

UK

[ph]

freshers (00:23:26).

We've

decided

to

eliminate

this

group.

And

as a

result,

four

sites

have

moved

from

Segment

C

to

Segment

D.

So,

Segment

C

now

solely

cover

sites

ideal

for

mature

graduates

or

postgraduates.

We

aim

to

grow

and

sub-brand

this

category

subject

to

successful

pilots.

Segment

D

comprises

assets

that

are

no

longer

core

and

are

on

a

disposal

program.

So

far, we've

sold

nine

assets

in

total,

which

reduced

it

to

6%

of

the

portfolio

by

value.

However,

as

I

just

mentioned,

we

also

recategorized

four

properties

from

Segment

C

to

D,

which

brought

it

back

up

to

80%.

So,

let

me

give

you

more

detail

on

slide

21.

Since

March

last

year,

we've

sold

nine

assets

in

Segment

D

for

£44.6

million

located

in

Durham,

Exeter,

Leicester,

Portsmouth. Most

of

the

accommodation

in

these

assets

consisted

of

apartments

with

shared

facilities,

which

is

not

in

line

with

our

core

brand

offer.

We're

at various

stages

of

discussion

on

the

remaining

assets

in

Segment

D

and

expect

further

progress

in

2022.

These

disposals

are

enabling

us

to

recycle

capital

as

you

will

see

on

slide

22.

We've

recently

announced

our first

acquisition

since

2018,

Market

Quarter

Studios

in

Bristol

for

a

cost

of

£19

million

with

an

expected

unlevered

IRR of

8%

to

9%.

Market

Quarter

adds

92

high-quality

beds

in

a

site

close

to

the

university,

the

city

center,

and

to

our

two

existing

operational

assets.

In

terms

of

quality,

this

asset

sits

comfortably

towards

the

top

of

the

Segment

A

and

is currently

fully

occupied.

Within

days of

ownership,

we

made

significant

changes.

Long-running

plumbing

issues

were

fixed

immediately.

The

reception

is

now

manned

24/7,

and

a

series

of

social

events

in

the

building

has been

announced

for

the

very

first

time.

As

a

result,

at

our

first

week

of

ownership, 30

students

told

us

that

they

were

going

to

rebook.

Bookings

for

academic

year

2022/2023

are

encouraging

with

an

average

uplift in

rent

of

18%,

which,

together

with

letting

the

vacant

retail

unit,

will

raise

the

net

initial

yield

well

above

5%.

Our

strategy

is

to

increase

sites

and

bed

density

in

Russell

Group

and

other

top-quality

university

cities,

which

are

in

high

demand

and

have

a

growing

number

of

students.

So,

we're

also

completing

the

development

of

St

Mary's

in

Bristol,

which

adds

a further

153

top-quality

beds.

This

means

that

within

the

year

we

will

have

increased

our

cluster

in

Bristol

from

two

sites

with

159

beds

to

four

sites

with

404

beds,

all

within

10 minutes'

walk

of

each

other

and

with

the

same

management

team.

In

this

way,

we

can

retain

the

small

site

homely

boutique

proposition,

reduce

our

costs,

and

improve

our

margin.

We're

also

recycling

capital

into

three

developments,

which

you

can

see

on

slide

23.

First

is

St

Mary's,

Bristol,

which

we

expect

to

complete

from

the

start

of

the

new

academic

year

at

a

cost

of

£28.5

million. As

a

result

of

COVID,

our

original

yield

of

cost

has

moved

slightly

from

a

planned

6.5%

to

6.3%.

The

unlevered

IRR

is

10%

to

11%.

We've already

sold

50%

of

the

rooms

at

St

Mary's

and

some

of

the

highest

rents

in

our

portfolio.

The

second

development is

in

Edinburgh,

South

Bridge,

which

will

provide

accommodation

for

59

students

ready

for

academic

year

2022/2023 at a

cost

of

£12 million.

This

is

a

pilot

site

for

a

new

sub-brand

for

postgraduates

as

we

believe

there

is

a

significant

opportunity

for

tailor-made

proposition

for

these

customers

that

make

up

nearly

25%

of

all

UK

university

students.

We

expect

South

Bridge

to

deliver

a

yield

on

cost

of

6.1%

and

the

unlevered

development IRR

of

12%

to

13%.

We've

also

successfully

completed

two

refurbishments

during

the

year

in

Bristol

and

Leeds,

as

you

can

see

on

slide

24.

As

a

result,

the

site

in

Bristol

has

been

moved

to

Segment

A.

We

have upgraded

between

20%

and

25%

of

the

rooms

at

these

sites.

All

the refurbished

rooms

are

occupied

in

academic

year

2021/2022, and

gross

annual

revenue

for

academic

year

2022/2023

reflects

an

average

expected

refurbishment

uplift

of

15%.

Both

refurbishments

were

delivered

within

budget,

deploying

£1.5

million

of

CapEx

and

will

achieve

a

target

IRR

of

9%

to

11%.

We don't

plan

to

upgrade

all the

rooms

at

any

one

site

as

we

want

to

offer

a

choice

of

room

grades

and

prices

to

our

customers

to

have

broad

appeal

to

a

wide

group.

We

have

a

five-year

refurbishment

program

to

eliminate

Segment

B.

The

work

will

be

phased

in

line

with

cash

generated

from

disposals.

As

Lynne

said

earlier,

in

2022

we

plan

to

spend

£4.4

million

on

at

least

four

further

refurbishments

to

be

completed

this

summer.

One

of

these

covers

the

common

areas

of

the

Pennine

House,

Leeds

site

where

we

have

just

completed

the

refurbishment

of

bedrooms.

And

this

asset

will

then

move

into

Segment

A.

Other

sites

include

Birmingham,

Leeds,

and

Leicester.

They

will

all

be

subject

to

our

9%

to

11%

IRR

threshold.

Slide 25

shows

our

current

portfolio.

We

have

8,775

operating

beds

in

the

portfolio

last

August

and

now

have

8,391

beds

following

the

disposals

from

Segment

D

and

the

addition

of

our

acquisition

in

Bristol.

We

expect this

number

to

increase

to

8,603

beds

at

the

start

of

academic

year 2022/2023

once

the

development

in

St

Mary's,

Bristol

and

Edinburgh,

South

Bridge

are

complete.

76%

of

our

portfolio

currently

serve

our target

universities. And

once

Segment

D

is

eliminated,

we

expect

this

to

rise

to

well

above

80%.

In

other

cities

where

we

are

the

dominant

provider

of

space

and

have

a

strong

commercial

performance,

for

example, Falmouth,

we

intend

to

maintain

our

position.

I'll

move

on

now to

our

brand on

slide 26.

Our

Hello Student

brand

already has

strong

awareness and

a

good

reputation.

But

we

are

refreshing

our

proposition

through

further

research

in

customer

insights.

This

identifies

four

key

principles

that

are

essential

for

our

brand

proposition

to

deliver

what

the

students

expect.

Our

refreshed brand

proposition

will

be

used to

redesign

our

website,

revise

our

approach

to

social

media,

and

for a

thorough

overhaul

of

our

customer's

digital

journey

with

Hello

Student.

This

will

give

us

strong

differentiation

in

the

market

and

will

also

increase

conversion

and

retention

rates.

With

in-house

revenue

management

fully

operational,

slide

27

shows

how

we're

combining

the

rigor

of

algorithmic

analysis

with

human

judgment.

We

hired

experienced

data

analysts

to

give

us

detailed

understanding

of

pricing,

conversion

rates,

and

the

effectiveness

of

our

marketing.

The

operating

teams

review

their

output

on

a

weekly

basis

and

apply

experience and

judgment to

make

the

right

adjustments,

so

that

we

can

optimize

room

pricing

and

marketing

spend

in

relation

to

occupancy

rates

and

competition.

As

an

example,

in

one

of

our

sites

we

had

fast-growing

demand

in

the

early

part

of

the

booking

season

in

December.

Instead

of leaving

prices

static

and

filling

up

right

at

the

start

of

the

season,

our

algorithm

suggested

price

increases

for

some

rooms

of

up

to

10%.

This

has

delivered an

uplift

in

the

overall

site

average

rent

of

3%

to-date.

Since

then

demand

has

continued

but

at

a

moderated

rate.

So,

it's

clear

that

we

made

the

adjustment

at

just

the

right

time

and

we

expect

to

be

full

for

academic

year

2022/2023.

We're

also

using

data

to

completely

overhaul

our

room

categorization.

In

total,

we

have

over

70-room

categories,

and

we

plan

to simplify

this

significantly

to

deliver

an

easier

booking

process

and

better

conversion.

Slide

28

shows

that

academic

year

2022/2023 bookings

are

well

ahead

of

the

previous

year.

You

could

see

a

flatter

early

trajectory

as

we

use

dynamic

pricing

to

take

pricing

opportunities

as

I

just

described.

As

the

student

mix

gets

closer

to

pre-pandemic

levels

and

with

continual

quality

improvement,

we

expect

our

higher

tariff

rooms

to

sell

well.

As

you

heard from

Lynne,

we're

giving

cautious

guidance

on

occupancy

for

academic

year

2022/2023 of

85%

to

95%

and

are

aiming

for

the

upper

end

of

that

range

assuming

no

further

disruption.

Let's turn

now

to

customer

service

on

slide

29.

With

a

new

director

of

operations

in

place,

we're

reviewing

all

our

processes,

so

that

we

can

deliver

high-quality

customer

service

consistently

across

all

our

sites

and

drive

higher

net

promoter

scores.

For

example,

we

could

do

some

things

such

as

ID

checking,

which

is

a

statutory

requirement

more

effectively

online

before

a

resident

arrives.

This

would

free-up

time

to

welcome

new

residents

with a

guided

tour

instead

of

checking

paperwork.

We

know

that

a

friendly

personal

experience

leads

to

a

greater

propensity

to

recommend

a

stronger

retention.

It

also

underpins

our

ability

to

charge

premium

rents.

Another

way

we

plan

to

improve

service

is

by

launching

a

customer

app

later

this

year,

which

will

enable

our

students

to

communicate

with

us

easily

and

quickly.

Moving

on

now

to

our

people

on

slide

30.

We've

continued

to

invest

in

our

people

as

a

successful

service

organization

must

do.

So,

let

me

give

a

few examples.

Now

that our

leadership

team

is

complete,

we've

employed

a

high-quality

performance

coach

to

develop

individuals

and

the

team.

We're

putting

25

of

our

middle

managers

through

a

development

scheme

and

using

the

apprenticeship

levy

to

improve

skills

in

our

customer

service

teams.

In

the

case

of

maintenance

teams,

this

means

we

could

do

more

jobs

in-house

and

reduce

costs.

Last

year,

our colleagues engagement

of

81%

compared

very

favorably

to

the

national

average

of

68%.

We've

also

joined

the

Best

Companies

scheme,

the

previous

Sunday

Times'

Best

Employers Group.

And

in

our first

survey,

we

were at

the

top

end

of

the

ones

to

watch.

At

a

time

when

hiring

is

very

competitive,

there

is

a

strong

rationale

for

focusing

on

employee

retention

and

development.

So,

in

summary

on

slide

31,

our

plans

are

focused

on

delivering

improved,

sustainable

shareholder

returns.

The

number of

students

in

academic

year 2022/2023

is

set for

continued

growth,

and

we

are

cautiously

optimistic

that

revenue

occupancy

would

normalize

with

guidance

of

85%

to

95%.

We're

actively

managing

the

portfolio

to

recycle

capital

with

good

progress

on

disposals

and

developments.

We've

also

made

our

first new

acquisition

since

2018.

We've

initiated

a

refurbishment

program

that's

generating

good

returns.

Our

ESG

road map

now

has

metrics,

which

include

achieving

net

zero

on

our

own

operations

by

2035.

We're

pleased

to

have reinstated

dividend

payments

and

expect

to

pay

a

minimum

of

£0.025

this

year

fully

covered

with

a

view

to

increasing

the

dividend

progressively

as

revenue

grows.

Finally,

we're

targeting

gross

margin

above

70%

and

a

total

return

of

7%

to

9%

as

occupancy

returns

to

normal.

Thank

you very

much.

And

we're

happy

to

take

your

questions

now.

[Operator Instructions]

[Operator]

We

have

a

question

from

the

webcast

from

[ph]



Tom

Madden

(00:38:31).

Thanks

very

much

for

the

presentation.

One

question

for

me,

please.

To

help

with

our

modeling,

how

should

we

think

about

average

bed

numbers

in

2022 versus

2021

given

potentially

more

capital

recycling

in

the

year

ahead?

Thanks.

[Duncan Steven Garrood]

So,

thanks

for

the

question,

[ph]



Tom (00:38:51).

Clearly,

in

managing

the

portfolio,

we

are

going

to

reduce

the

number

of

beds

in

Segment

D.

And

as

you've

seen

through

both

developments

and

through

acquisition

of

[ph]



outstanding (00:39:06)

assets,

increase

them

in

categories

A

and

to

come

probably

in

category

C,

too.

Whilst

we're

not

able

to

give

individual

details

of

sites

that

we

intend

to

dispose

of,

and

therefore

we

can't

directly

give

you

a

correlation

between beds,

we

will

keep

the

market

posted

as

we

make

disposals

and

acquisitions.

So,

as

we

move

through

that

process,

we

will

always

make

an

announcement

on

the

changes

in

number

of

beds.

Hope that

answers

your

question.

[Operator]

We

have

a

question

on

the

telephone line

from

Kieran

Lee

from

Berenberg.

Please

go

ahead,

Kieran.

[Kieran Lee]

Hi,

all.

Thank

you

very

much

for

the

presentation.

Actually,

a

few

for

me

if

that's

okay.

Would

you

be

able

to

give

us

a

little

bit

more

color

on

how

occupancy

rates

and

pricing

compared

for

category

A

versus

category

B

or

even

D

buildings

in

the

current

academic

year?

The

second

question

was

that

you

mentioned

that

even

after

the

target

Segment

D

sales,

you'd

still

be

only

80%

exposed

to

those

sort

of

core

markets.

Should

we

be

reading

into

sort

of

further

future

disposals

or

recategorizations?

And

then

lastly

was

actually

on

the

dividend.

You

flagged

a

minimum

payment

of

£0.025,

but

what

would

it

take

to

increase

this

perhaps

over

into

sort of

Q4?

[Duncan Steven Garrood]

Kieran,

thank

you for

that.

I'll

answer

the

first two

of those,

and

then

I'll

hand

over

to

Lynne

to

answer

the

question

on

dividends.

In

terms

of

occupancy

rates,

clearly,

one

of

the

attractions

for

us

in

investing

in

Segment

B

is

to

upgrade

the

quality

of

the

asset

to

Segment

A,

which,

by

the

very

nature

of

that

process,

will

uplift

rental

yields.

And

as

I

mentioned

in

the

presentation,

those

investments

are

giving

an

average

IRR

of

9%

to

11%.

So,

indeed,

we

command

better

rents

in

Segment A

than

we

do

in

Segment

B,

hence,

the

investments

that

we

intend

to

make.

In

terms

of

physical

occupancy

though, there

is

no

correlation

because

clearly

rents

are

set

to

the

quality

of the

asset

and

the

competition

for

every

single

site.

So,

there

is

no

disparity

in

percentage

revenue

occupancy

across

the

portfolio.

And

to your

second

question

on

core

markets,

you're

quite

right

in

saying

that

we

believe,

after our

current

disposals

of

Segment

D,

that

we

will

be

over

80%

in

our

core

target

markets.

This

is

not

to

say

that

the

other

20

or

so

percent

are

not

attractive

markets

for

us,

but

the

80%

of

those markets

where

we

aim

for

further

growth.

So, for

example,

in

Bristol,

which

is

one

of

those

core

markets,

where

we

have

increased

our

footprint,

we

will

intend

to

continue

to

look

for

more

bed

stock

in

those

80%.

But

the

remaining

sites

are

not

located

in

areas

that

we

would

dispose of,

they

[ph]



performed

with

this

(00:42:29) very

well

indeed.

It's

just

that

they may

not quite

have

the

growth

and

cluster

density

potential

that

the

core

sites

have.

Lynne, do

you

want

to

take the...

[Lynne Fennah]

Yeah,

absolutely.

So,

with

dividend,

obviously,

we

set

a

minimum

of

£0.025

at

this

year.

You'll

appreciate

that

because

our

academic

year

doesn't

line

up

for

the

financial

reporting

calendar

for

the

first

eight

months of

this

year,

we

already

saw

our

revenue

at

quite

a

bizarre

situation

in

the

business

actually,

over

84%

now

for

that

first

eight

months. Also,

being

able

to

increase

the dividend

this

year

is

largely

going

to

be

dependent

on

what

the

occupancy

is

come

September

for

next

academic

year.

We

would

hope

to

be

able

to make

some

increase

this

year

if

we

are

at

the

upper

end

of

our

guidance.

But

the

real

price

will

come

when

we

offer

full

financial

year

back

to

the

mid to high 90s

level

of

occupancy.

As

you've

seen

over

the

last

two years,

we've

done

a

great

job

on

costs.

They

are

under

control

and

it's

really

going to

come

back

from

revenue.

I

hope

that

helps.

[Kieran Lee]

All

very

helpful.

Thank

you.

[Duncan Steven Garrood]

Yes.

Thanks,

Kieran.

[Operator]

We

have

some

more

questions

from

the

webcast.

So,

we

have

a

question

from

Andrew

Gill

from

Jefferies

saying,

could

you

add

some

color

on

the

potential

increase

in

gross

profit

margins

from

more

the

doubling

the

numbers

of

closed

clustered

beds

in

Bristol?

And

do

you

intend

having

a

second

brand

in

parallel

to

Hello

Student?

And

could

you

provide

any

color

around

potential

investment

requirement?

[Duncan Steven Garrood]

Certainly,

I'll

cover

those.

So,

in

terms

of

the

gross

margin,

Andrew,

the

nature

of

leverage

is

that

as

our

occupancy

gets

up

towards

the

target

of

the

high,

middle 90s,

we

certainly

believe

that

we

will

be

driving

our

gross

margin

up

towards

the

70%

mark

as

we

have

declared.

Now,

clearly,

2022

is

a

blended

year

in

the

sense

that

three

quarters

of

the

year

is

governed

by

the

academic

year

2021/

2022

where

our

occupancy

is

at

84%,

and

therefore

will

be

at

a

lower-than-target

gross

margin.

But

what

we

are

aiming

for

is,

at

2022/2023

academic

year,

if

we

reach

the

targets

that

we

are

shooting

for

in

the

middle 90s,

then

we

will

return

to

gross

margins

that

are

over

70%.

As

a

result

of

which,

the

outlook,

if

you

like,

for

2023

financial

year

will

be

at

those

higher

gross

margins.

Clearly,

part

of

that

drive

on

gross

margins

is

because

of

the

change

in

the

portfolio.

We

typically

have

higher

gross

margins

in

our

Segment

A

properties

that

we

do

in

our

Segment

D.

And

therefore,

the

more

that we

upgrade

the

quality

of

our

portfolio,

the

higher

we

are

able

to

drive

our

overall

blended

gross

margin.

In

terms

of

the

branding,

you're

quite

correct

in

saying

that,

over

time,

we

anticipate

we

will

have

more

than one

brand. At

Hello Student

we

will

have

a

second

brand

that

is

focused

on

postgraduates.

And

I'm

hoping,

at

the

interim

announcements

in

August,

we'd

be

able

to

give

more

color

and

detail

around

that.

And

in

terms

of

investments

in

that,

we

haven't

determined

it

yet.

I

don't

anticipate

this

being

a

costly

exercise.

It

is

more

around

rebranding

and

focusing

our

proposition

on

requirements

of

a

particular

market of

postgraduates

as

opposed

to

undergraduates.

But,

of

course,

we

will

be

able

to

exploit

a

different

branding

and

targeted

communication

for

them,

which

we

believe

we'll

be

able

to

drive better

growth.

And

that

is

what

Segment

C

will

become.

Hope that

gives

you

an answer

to

those

three

questions,

Andrew.

[Operator]

Okay.

We

have

a

question

from

Matthew

Saperia

from

Peel

Hunt.

They

say,

thanks

for

the

presentation.

You

mentioned

weaker

pricing

in

some

secondary

locations.

Can

you

elaborate

on

that,

and

can

you

also

discuss

pricing

more

generally

as

we

look

to

2022/2023?

[Duncan Steven Garrood]

Thanks,

Matt.

In

terms

of

the

pricing,

there

is

no

difference

from

that

which

has

been

existing

in

our

previous

years

in

terms

of

the

spread

of

pricing.

As

you

might

imagine,

we

tended

to

find

higher

pricing

in the

more

competitive

attractive

markets

of

students.

And

as

you move

to

secondary

cities,

the

pricing

gets

cheaper

as

it

does

for

many

other

commodity

items,

too.

We

haven't

seen

any

further

polarization

of

that

as

we're

coming

out

of

COVID

or

in

during

COVID,

but

it

continues

at

that

same

differentiation

between

the

markets

as

you

would

normally

expect.

[Operator]

Okay.

The

next

question

comes

from

Michael

Prew

from

Jefferies.

They

say,

how

do

you

see

the

further

condensing

of

the

portfolio?

And

how

do

nomination

agreements

feature

in

the

decision

to

sell/retain

process,

please?

[Duncan Steven Garrood]

Thank

you

very

much,

Mike.

You're

quite

right

that

we

certainly

see

a

focusing

of

our

portfolio.

As

we

started

this

process,

we

were

active

in

29

cities

in

the

UK.

And

as

we

go

through

the

consolidation

of

our

portfolio

around

our

target

cities,

that

number

will

decrease.

As

you will

have seen

in

the

presentation,

we have

already

exited

one

city which

was

Durham

where

we

had

a

single

site

that

we

couldn't

see

the

opportunity

to

expand

growth

in.

So,

you

should

expect

to

see,

as

we

go

through

our

disposal

program,

a

further

consolidation

and

that

will

be

around

the

target

university

cities

of

high-quality

that

I

mentioned

before.

Now,

for

reasons

that

I

hope

are

obvious,

we're

not

able

to

list

what

those cities

are.

They

are

currently

still

attracting

new

customers

and,

therefore,

we

don't

wish

to

jeopardize

that

process.

However,

what

we

can

say

is

that

where

we

have

assets

in

high-quality

university

and

Russell

Group

cities,

those

are

the

ones

that

we

will

be

expanding

on

and

we

will

be

disposing

in those

that

we

can't

grow

in.

In

terms

of

nomination

agreements,

typically,

it

is

not

particularly

around

the

nomination

agreement

that we've

taken a decision

to

exit that group.

It's

really

around

the

configuration

of

the

type

of

asset.

As

you

know,

we

have

a

majority

and

a

focus

in

our

business

on

studio,

on

suite

apartments

for

our

customers.

And

the

assets

that

we're

looking

to

dispose

of

mostly

don't

conform

to

that.

They

have

shared

facilities

usually

and

tend

to

attract

UK

freshmen

students,

which

is

not

our

goal

market.

So,

it's

not

particularly

a

comment

on

nomination

agreements

per

se,

it's

more that

the

nature

of

the

asset

isn't

consistent

with

the

focus

that

we

have

within Hello Student,

which

is

on

the

second

year

returning

undergraduate

and

postgrads.

So,

I hope

that

answers

that

one.

[Operator Instructions]

[Operator]

We

have

a

question

on

the

phone

line

from

Julian

Livingston-Booth

from

RBC.

Please,

go

ahead.

[Julian Livingston-Booth, Analyst, RBC Europe Ltd.]

Yeah.

Good

morning.

Thanks

for

the

presentation.

Just

one

question

for

me.

I

wonder

if

you

could

give

it

a little

bit

of

color

on

the

number

of

acquisition

opportunities

that

you're

sort

of

currently

seeing

and

maybe

something

on

your

confidence

in

terms

of

being

successful

on

those?

[Duncan Steven Garrood]

Julian, thank

you

for

that.

I

would

say

that

we

are

currently

in

a

happy

position

of

having

more

opportunities

than

we

have

at

the

moment,

the

wherewithal

to

take

up

which

is

a

very

encouraging

situation

for

us

to

be

in.

In

terms of

the

type

of

acquisition

that

we

are

looking

for,

the

market

quarter

acquisition

in

Bristol

is

a

very

good

example

of

exactly

the

type

of

acquisition,

the

standing

asset

that

we

would

want

to

make,

increasing

cluster

density

in

target

cities,

conforming

to

the

sort

of

more

boutique nature

of our –

that

college

student

brings,

yet

bringing

a

greater

degree

of

operational

efficiency

by

being

clustered

close

to

our

existing

assets.

We

have

seen

quite

a

few

of

those

opportunities

in

our

target

cities

more than

we

would

be

able

at

the moment

to

digest.

And

therefore,

we

are

in

the

position

that

we're

able

to

focus

in on

the

ones

that

are

really

most

attractive

to

us.

And

our

very

good

and

upgraded

property

team,

very active in

the

marketplaces,

looking

for

those

opportunities

and

passing

them

through

our

funnel

so

that

we

pick

the

very

best

ones

that

are

out

there

in

the

market.

And

I

would

hope, over

the

course

of

the

next

year,

that

we

shall

see

more

of

that.

[Julian Livingston-Booth, Analyst, RBC Europe Ltd.]

Okay.

Thanks

a

lot.

[Operator]

We

have

a

webcast

question

from

[ph]



Matthew

Phillips (00:52:09).

They

say

the

shares

of

Empiric

have

consistently

traded

at

a

discount

or

a

discount

to

asset

value.

At

the

same

time,

other

companies

in

the

sector

such

as

Unite

and

previously

GCP

have

enjoyed

healthy

premiums.

Does

the

board

believe

there

is

a

material

reason

for

the

valuation

differences

between

our

company

and

others

in

the

sector?

And

how

do

you

propose

to

address

this?

[Lynne Fennah]

Yes.

I'll

take

that

one.

So,

obviously,

the

group

had

some

challenges

in

2017/2016,

and

it

started

to

change

the

leadership

team

in

the

business.

The

poor

performance

at

that

time

really

drove

down

the

share

price

of

the

business.

In

January

2020, quite

frustratingly

for

me

after

all

that

transformation

work,

we

were

only

£0.05

[indiscernible]



(00:53:07).

We

needed

to

do

the

transformation

work

to

reduce

our cost

base,

generate

revenue

better,

and

also

prove

the

business

model.

Because

we

operate

at

a

different

segment,

we

obviously

get

compared

to

Unite

because

there

we

have

[indiscernible]



(00:53:25) GCP

was

more

comparable

to

us

but no

longer

there to lift

the market.

And

I

think

we're

starting

to

prove

our

business

model.

We

operate

in

a

different

niche

[indiscernible]



(00:53:36) agreement.

We're

not

targeting

first years,

it's

the

second,

third

years, post-grads

[indiscernible]

(00:53:41)

and

it's

a

different

business

model.

We

can still

achieve

operational

efficiency

by

clustering

assets

which

you

can

see

that

we're

starting

to

do

more.

So,

I

think

it's

been

that

history

of

Empiric

enough

to

say

we

were

quite

close

January

2020 but

then

we

all

heard of

something

called

COVID,

which has

set

us

back

in

terms

of

returns

for

this

period

because

of

the

impact

on

revenue.

But

during

that

period,

we've

continued

our

transformation

work

in

earnest.

So,

I

would

hope that

we

start.

Obviously,

we

have

issues

globally

with

conflict,

but

we

are

hoping

that

we

do

start

now to

come

back

to

closer

to

that

number.

[Duncan Steven Garrood]

And,

[ph]

Matthew (00:54:23),

if

I

can

just

add,

I

think

there's

one

other

element

to

that,

perhaps,

when

I

came

into

the

business,

was

said

to

me

and

that

is

because

the

business

had

never

undertaken

a

transaction

of

any

of

its

assets,

there

was

a

question

mark

over

whether

the

NAV

was

a

fair

valuation

of

what

assets

would

fetch

in

the

market.

But

I

think

what we've

seen

in

the

last

year

with

the

sale of

nine

of

our

disposal

properties

at

the

lower-end

of

the

quality

spectrum

at

above book

value

that

that

NAV

has

been

evidenced

by

market

prices.

And

I

think

that

gives

confidence

that

the

NAV

valuation

is

very

genuine, it's

very

real,

and

potentially

has

some

upside

in

it

that

we

believe

should

be

reflected

in

the

share

price

as

we

go

forward.

[Lynne Fennah]

I

hope

that

helps,

[ph]



Matthew (00:5:08).

[Operator Instructions]

[Operator]

Okay.

We

have

no

further

questions,

so

I'll

hand

it

back

to

Duncan

and

Lynne

for

any

final

remarks.

[Duncan Steven Garrood]

Can

I

say

very

many

thanks

to

all

of

you

for

joining

us

today.

I

know

for

those

based

in

London,

it has

been

a

trauma

to

travel.

And

so,

we

do

thank

you

for

giving

your

time

this

morning.

And

as

ever, we're

always

happy

to

take

questions

from

anybody

outside

of

this

presentation, and

we

look

forward

to

speaking

to

many

of

you

later

on

in

that

regard.

So,

thank

you

very

much,

indeed,

and

we

wish

you

a

very

good

day.

[Lynne Fennah]

Thank you, everybody.