Strong FY18 progress and positive outlook

GCP Student Living 12 September 2018 Update
Download PDF

GCP Student Living

Strong FY18 progress and positive outlook

Real estate investment trusts

12 September 2018

FY18 results and placing

Price

150.0p

Market cap

£578m

NAV*

149.12p

Premium to NAV

0.6%

*EPRA NAV (including income) as at 30 June 2018

Yield*

4.0%

*Based on Q418 DPS of 1.51p annualised

Ordinary shares in issue

385.1m

Code

DIGS

Primary exchange

LSE

AIC sector

Property Specialist

Benchmark

N/A

DIGS vs UK property index (3 years)

52-week high/low

153.2p

136.4p

146.9p

138.4p

Gearing

Loan to value*

26%


*As at 30 June 2018

Analyst

Martyn King

+44 (0)20 3077 5700

GCP Student Living is a research client of Edison Investment Research Limited

GCP Student Living (DIGS) saw strong growth in FY18 rental income, driven by an increasing number of operational beds, continuing full occupancy and good levels of rental growth. Growing dividends should be fully covered once current development projects are completed and let. Capital values also grew, with investor interest in the asset class remaining strong, contributing to 11.5% NAV total return for the FY18 year. The company continues to find attractive investment opportunities, maintaining its selective approach to investment, both by location and asset quality, and is seeking to raise up to £55m in a share pacing.

Year end

Rental income (£m)

Adjusted
earnings* (£m)

Adjusted
EPS* (p)

EPRA
NAV/share (p)

DPS
(p)

06/15

11.5

5.6

5.11

125.5

5.60

06/16

22.5

9.7

5.30

136.9

5.66

06/17

28.8

13.6

4.69

139.1

5.75

06/18

35.8

15.4

4.01

149.1

5.95

Note: *Adjusted for revaluation movements, gains/losses on disposal, licence fees on forward-funded developments and other exceptional items.

Rental and capital growth drive 11.5% return

FY18 rental income grew c 24% with good levels of profitability maintained. With positive supply-demand conditions in DIGS’s chosen markets (94% in and around London), income benefited from continuing full occupancy, average rent growth of 4.1%, continuing acquisitions and completion of a first forward-funding development. DPS increased 3.5% to 5.95p, while NAV per share increased 7.2% to 149.12p. The EPRA NAV total return from the IPO (May 2013) to end June 2018 is now a compound 13.5% pa, and the share price total return 12.5%, both exceeding the 8–10% long-term total shareholder return target.

Growing operational portfolio to cover dividends

The portfolio is again fully occupied for the 2018/19 academic year with like-for-like rents growing by 3.5%. Letting of the recently completed Scape Bloomsbury refurbishment, and completion and letting of the two current forward-funding developments (one agreed post year-end), will also add to future earnings growth. The investment manager indicates the potential enhancement to adjusted EPS from these completions at an annualised 2.6p to 3.2p per share, enough to fully cover DPS. This is not affected by the announced placing (scheduled to close 20 September 2018) of up to 38.5m shares at 149.5p per share. Further attractive growth opportunities remain under review.

Positive fundamentals support growth and returns

The shares offer a 4.0% dividend yield and a growing DPS, supported by continuing strong fundamentals in DIGS’s chosen markets, and which should be fully covered on a fully operational basis. Total share price and NAV returns since IPO are well above the 8–10% target, while the small 0.6% premium to the 30 June EPRA cum-income NAV is below the c 5% average since IPO.

Exhibit 1: GCP Student Living at a glance

Investment objective and fund background

Recent developments

GCP Student Living is a specialist UK real estate investment trust (REIT) investing in student residential assets, with a focus on London. The company seeks to provide shareholders with attractive total returns in the longer term, targeting 8–10% pa, through the payment of regular, sustainable, long-term dividends with the potential for modest capital appreciation.

10 September 2018. Announced placing of up to 38.5m shares at 149.5p per share. Closes 30 September 2018.

6 September 2018: Annual results to 30 June 2018 - EPRA NAV 149.12p (cum-income) from 139.08p at 30 June 2017. Ex-income NAV 147.61p. Total DPS declared of 5.95p (+3.5%). Share price total return 5.7% and NAV total return 11.5%.

25 July 2018: Acquisition of Scape Brighton and new debt facility.

Forthcoming

Capital structure

Fund details

AGM

November 2018

Ongoing charges

1.3% (excluding direct property costs)

Group

Gravis Capital Management

Interim results

March 2019

Loan to value

26% (June 2018)

Manager

Tom Ward and Nick Barker

Year end

June

Annual mgmt fee

1.0% of NAV

Address

24 Savile Row,

London W1S 2ES

Dividend paid

Mar, Jun, Sep, Dec

Performance fee

None

Launch date

May 2013

Trust life

Indefinite

Phone

020 3405 8500

Continuation vote

November 2018

Loan facilities

£235m (fully drawn)

Website

www.graviscapital.com

Dividend policy and history

EPRA NAV per share and EPRA NAV total return history

DIGS pays dividends quarterly. A key objective is to provide regular, sustainable, long-term dividends. FY14 pro ratas the 6.10p in dividends declared for the accounting period 20 May 2013 to June 2014, as published by DIGS.

The company is targeting an 8–10% pa total return over the longer term. EPRA NAV TR has been a compound 13.5% pa since IPO (calculated with dividends reinvested).

Major shareholders (as at 4 September 2018). Source: Thomson Reuter

Geographic exposure by property value (as at 30 June 2018)

Portfolio summary (as at 30 June 2018)

Property

Location

Date of completion

Valuation (£m)

NIY*

No. of beds

Scape East

East London

2012

139.0

4.90%

588

Scape Wembley

North London

2017

90.4

5.25%

578

Scape Shoreditch

East London

2015

193.0

4.45%

541

Scape Bloomsbury*

Central London

2018

166.0

N/A

432

Scape Greenwich

East London

2014

55.4

4.80%

280

The Pad

Egham

Phase 1: 2012/phase2 : 2015

35.3

5.75%

220

Podium

Egham

2017

30.1

5.75%

178

Scape Surrey

Guildford

2015

25.2

5.50%

141

Circus Street**

Brighton

2019

30.5

N/A

450

Water Lane Apartments

Bristol

2015

19.5

5.75%

153

Total

784.4

5.04%

3,561

Source: GCP Student Property. Note: *NIY is net initial yield. *Scape Bloomsbury was under refurbishment at 30 June 2018 and completed post year end. **Circus Street is a forward-funded new development under construction or refurbishment as at 30 June 2018 and expected to complete in 2019 at a total cost of c £70m.

London-focused student accommodation

GCP Student Living (DIGS) was the first real estate investment trust (REIT) in the UK to focus on the specialist property asset class of student residential property. It was admitted to trading on the London Stock Exchange in May 2013, initially trading on the Specialist Fund segment of the Main Market, and transferring to the Premium segment in September 2016. The investment objective is to provide shareholders with attractive total returns in the longer term through the potential for modest capital appreciation and regular sustainable dividends with RPI-inflation linked characteristics.

Gravis, the external investment manager, was established in 2008 and is privately owned by its directors and founding members. It currently manages £2.5bn in assets, including two other listed closed-end vehicles. Tom Ward and Nick Barker from Gravis have day-to-day responsibility for the provision of investment advice to DIGS. The primary asset manager is Scape Student Living, which is closely aligned with Gravis, the directors of which own 50% of Scape.

Exhibit 2: Portfolio value and revenues since IPO

Exhibit 3: Number of assets and beds since IPO

Source: Company data

Source: Company data

Exhibit 2: Portfolio value and revenues since IPO

Source: Company data

Exhibit 3: Number of assets and beds since IPO

Source: Company data

The student housing sector has attracted investor interest for its favourable risk-adjusted yields, which benefit from a positive supply-demand situation, good levels of rental growth and less exposure to the economic-led cycles that affect traditional commercial property sectors such as offices, industrial and retail property. As discussed at length in our initiation note, DIGS is differentiated by a focus on properties that are located primarily in or around London, or markets with similar supply-demand characteristics, where growing student numbers significantly outstrip the supply of student accommodation. London continues to see increasing numbers of international and post-graduate students, driving demand for purpose-built student accommodation (PBSA), while planning restrictions and competing demands limit supply. The investment manager targets high-specification, modern, purpose-built accommodation with proximity to a suitable higher education institution and/or a major transport hub. Such properties may be more likely to both appeal to students today and offer longevity of income potential.

At 30 June 2018, the portfolio comprised the 10 assets shown at the bottom of Exhibit 1 (2017: eight assets), providing c 3,600 beds (2017: c 3,000 beds), of which c 2,700 are operational and fully let for the 2017/18 academic year (c 1,900 operational and fully let in the 2016/17 academic year), with c 900 beds under refurbishment/development and expected to be completed and operational over the coming two academic years. The portfolio value was £784.4m (2017: £634.6m), 94% of which was located in and around London (2017: 96%), reflecting a net initial yield (NIY) of 5.04%.

FY18 results show good growth

DIGS’s results for the year to 30 June 2018 (FY18) show strong income growth, driven by an increasing number of operational beds, continuing full occupancy and good levels of rental growth. The company continues to find attractive opportunities to grow the portfolio, while maintaining its selective approach to asset selection, both by location and asset quality. Given the positive outlook, the progressive dividend policy has been maintained, and although dividend cover has been reduced in the short term by equity issuance to fund portfolio growth, the investment manager believes it would be fully covered on a fully developed and let basis.

Exhibit 4: Financial results summary

£m

FY18

FY17

% change

Rental income

35.8

28.8

24.2%

Property operating expenses

(7.9)

(6.3)

26.5%

Gross profit

27.8

22.5

23.6%

Gross margin

77.8%

78.2%

Administrative expenses

(7.4)

(6.1)

22.4%

Operating profit before gains on investment properties

20.4

16.5

24.1%

Operating margin

57.0%

57.1%

Fair value gains on investment properties

47.6

11.9

Operating profit

68.0

28.3

140.1%

Net finance expense

(6.9)

(4.8)

44.3%

PBT

61.1

23.5

159.7%

Tax charge

0.0

(0.0)

Profit for the year

61.1

23.5

160.1%

Adjust for:

Fair value gains on investment properties

(47.6)

(11.9)

License fees on forward funded developments

1.5

1.4

Exceptional items

0.4

0.6

Adjusted earnings

15.4

13.6

13.1%

IFRS basic EPS (p)

15.89

8.08

96.6%

Group adjusted EPS (p)

4.01

4.69

-14.5%

DPS declared (p)

5.95

5.75

3.5%

IFRS & EPRA NAV per share (p)

149.12

139.08

7.2%

Investment property value

784.4

634.6

23.6%

Net asset value

574.2

467.0

23.0%

Net debt

205.8

164.9

24.8%

LTV

26.2%

26.0%

1.0%

Source: Company data, Edison Investment Research

Key financial highlights from the FY18 results

Rental income increased by c 24%, including first-time contributions from Scape Wembley and the Podium, continued full occupancy, and an average 4.1% rent increase applied to the 2017/18 academic year, ahead of the national average (DIGS cites data from Cushman & Wakefield indicating a 2.9% increase).

Profitability was maintained at a good level, with the gross margin at 77.8% (FY17: 78.2%), and the operating margin before revaluation gains at 57.0% (FY17: 57.1%). The ongoing charge ratio was 1.3%.

Net finance costs increased broadly in line with average borrowing, with drawings utilised to grow the portfolio. Net LTV was little changed at 26.2%.

Net fair value movements on investment properties were £47.6m (FY17: £11.9m), equivalent to 7.3% of the opening value (FY17: 2.8%), and were driven by rental growth at full occupancy and yield compression, including a c £12m post-completion gain on the valuation of Scape Wembley. The end-FY18 blended net initial yield was 5.04%.

Including the revaluation gains, IFRS earnings more than doubled to £61.1m. Adjusted earnings, which excludes the valuation gain, adjusts for other one-off items, and includes licence fees on forward-funding developments, increased by 13.1% to £15.4m.

The average number of shares outstanding increased by c 32% to 384.3m, reflecting share issuance to fund portfolio growth. As a result, adjusted EPS of 4.01p was lower during the year (FY17: 4.69p) but, as discussed below, the investment manager estimates that the re-opening of Scape Bloomsbury, and completion and letting of the Circus St and Scape Brighton developments, has the potential to enhance adjusted EPS by an annualised 2.6p to 3.2p.

Aggregate quarterly dividends declared increased by 3.5% to 5.95p, comprising three quarterly dividends of 1.48p and an increased Q4 dividend of 1.51p. The FY18 dividend was 67% covered by adjusted EPS, but taking account of the earnings potential on a fully operational and let basis, DIGS expects dividends paid to be fully covered by earnings.

Benefiting from the revaluation gains, NAV per share increased by 7.2% to 149.12p. Including dividends paid during the period, NAV total return was 11.5%.

Looking to the current year, DIGS says that the portfolio is again fully occupied for the 2018/19 academic year and that rental growth continues to be above inflation, with a like-for-like average increase of 3.5%. With refurbishment completed since end-FY18, Scape Bloomsbury will also contribute to earnings.

Funding supplemented by share placing

To support the ongoing growth of the investment portfolio, in July 2017 DIGS raised c £70m (gross) in an over-subscribed equity placing. Gearing (defined as gross borrowing as a percentage of gross assets) was 28% at end-FY18, well below the fund’s 55% limit. More commonly used in the real estate sector, net loan to value or LTV (debt, net of £29.2m of cash resources, as a percentage of the property assets) was 26.2%, little changed on the year. Since end-FY18, DIGS has entered into a new £45m, three-year revolving credit facility with a margin of 1.85% over three-month Libor, supplementing its fully drawn £235m secured debt facilities at a blended fixed rate of 2.96%. DIGS indicates that the increased borrowing facilities, together with cash resources are sufficient to fund the remaining investment commitments at Scape Bloomsbury and Circus Street, as well as the cost of the land purchase for Scape Brighton. The announced placing (on 10 September 2018 and scheduled to close on 20 September 2018) of up to 38.5m shares, previously authorised by the AGM, at a price of 149.5p per share represents potential additional equity capital resources of c £55m which will be used primarily to fund the construction of Scape Brighton, due to complete during the first half of the FY20 financial year.

Fully operational earnings potential

DIGS remains focused on building a diversified portfolio of investments capable of providing sustainable long-term dividends. The refurbishment of Scape Bloomsbury has reduced near-term income, and portfolio growth through forward-funding the development of attractive assets that may otherwise be unavailable has a similar effect, although the impact on adjusted earnings is softened by licence fees payable on funds extended. Investment decisions have been made in the expectation that dividends will be covered on a fully developed and let basis and the investment manager has provided the illustrative explanatory data contained within Exhibit 5. To support the illustrations, it has been assumed that construction is completed on time and to budget and that the properties are fully let on terms in line with the investment manager’s expectations and market conditions. Completion of Scape Bloomsbury, Circus St Brighton and Scape Brighton is expected to add between £16m and £17m to net rental income (£27.8m in FY18) on an annualised basis, with a potential enhancement to adjusted EPS (4.01p in FY18) of between 2.6p and 3.2p, depending on the mix of equity and debt capital used to fund the remaining capex. At end-FY18, the incremental capital requirement to fund the completions was c £135m and DIGS has illustrated the impact of fully debt funding the projects (3.2p enhancement) or the impact assuming a 70:30 equity debt mix of funding, similar to the current position (2.6p enhancement). The illustration shows adjusted EPS increasing above the FY18 5.95p DPS in both cases. As discussed below, the completion of these three assets should also have a positive effect on valuations and NAV. We estimate that the announced equity placing would position the actual funding mix broadly mid-way between the two outcomes illustrated by DIGS, assuming all additional funding were debt. However, we would not expect DIGS to decide on this for several months, given the gradual deployment of funds over the period of construction.

Exhibit 5: Illustrative effect of construction assets becoming operational

Funding mix

Equity 70%/debt 30%

Debt 100%

£m

EPS

£m

EPS

Adjusted earnings in year ended 30 June 2018

15.4

4.01

15.4

4.01

Add:

Scape Bloomsbury

7.4

1.91

7.4

1.91

Circus St, Brighton

3.2

0.82

3.2

0.82

Scape Brighton

5.7

1.47

5.7

1.47

Funding cost to complete developments/refurbishments

(6.0)

(1.55)

(3.9)

(1.00)

Impact of construction assets becoming operational

10.2

2.65

12.3

3.20

Fully operational adjusted earnings

25.6

6.66

27.7

7.21

Source: Company data

Portfolio and operational update

During FY18, Scape Wembley, DIGS’s first forward-funded development was completed and opened in September 2017. It was fully occupied for the 2017/18 academic year, providing 578 beds, and contributed a c £12m revaluation surplus. The two assets acquired during FY18 were Podium in Egham, and Circus Street, Brighton. Podium is a 178-bed newly developed operational asset, in the same locality as 220-bed The Pad, which was acquired through a conditional forward purchase agreement, first entered into in 2016. Circus St is DIGS’s second forward-funded development, a 450-bed development situated in the heart of Brighton city centre. It remains on track for completion in September 2019, in time for the 2019/20 academic year. The other non-operational asset at end-FY18 was Scape Bloomsbury, in the heart of London WC1, where refurbishment has subsequently been completed, allowing the property to open, offering 432 beds for the 2018/19 academic year.

Not reflected in Exhibit 1 are the conditional forward purchase agreement entered into in October 2017 in relation to Scape Canalside, and the forward funding of Scape Brighton, agreed since year end. Scape Canalside is expected to be completed and then acquired by DIGS in time for the 2019/20 academic year, providing approximately 410 beds. The property is in the same locality as the group’s existing c 590-bed Scape East asset, opposite Queen Mary University of London. Scape Brighton, the second DIGS asset in the city, will provide c 550 beds and extensive communal areas, with c 1,500 sq ft of retail space, on the primary campus of Brighton University. It is expected to be operational in September 2020, in time for the 2020/21 academic year.

London and beyond

DIGS is differentiated by its highly selective approach to the locations in which it invests, and the investment manager continues to review a number of investment opportunities that meet its criteria and which it believes to be attractive. The vast majority of the portfolio continues to be focused on assets in and around London. However, the investment manager has identified the student accommodation markets in cities such as Brighton, Bath, Bristol, Oxford and Cambridge as having similarly favourable supply/demand dynamics to London, with the potential to deliver long-term, sustainable rental growth and value. In practice, investment opportunities in Oxford and Cambridge are scarce, but DIGS is already invested in Bristol (Water Lane apartments) and now has two investments in Brighton, which like London has an undersupply of student accommodation perpetuated by restrictive planning guidelines. The University of Sussex (a top 20 UK university located in Brighton) and University of Brighton have c 36,000 students (c 7,500 international students), while Brighton is also home to two of the largest English language foundation course providers. There are 6,800 beds available to students in Brighton, of which only 240 are in direct-let, private PBSA. Other than the 1,000 beds that will be provided by Circus St and Scape Brighton, just 500 PBSA beds have been consented for development in Brighton.

Property valuation gains continuing

The blended net initial yield (NIY) was 5.04% at end-FY18, an increase from 5.00% at end-FY17, with the increase driven by asset mix. Valuation gains were recorded on each individual asset, and NIY compressed for all but The Pad.

Exhibit 6: Portfolio valuation and yield movement

FY18

FY17

£m

Valuation

NIY

Valuation

NIY

Scape East

139.0

4.90%

129.8

5.05%

Scape Wembley

90.4

5.25%

59.1

N/A

Scape Shoreditch

193.0

4.45%

177.7

4.75%

Scape Bloomsbury*

166.0

N/A

138.7

N/A

Scape Greenwich

55.5

4.80%

51.8

5.03%

The Pad

35.5

5.75%

34.9

5.75%

Podium

30.1

5.75%

N/A

N/A

Scape Surrey

25.2

5.50%

23.8

5.65%

Circus Street**

30.5

N/A

N/A

N/A

Water Lane Apartments

19.5

5.75%

18.8

5.75%

Portfolio total

784.7

5.04%

634.6

5.00%

Source: Company data. Note: *Scape Bloomsbury was under refurbishment at 30 June 2018 and completed post year end. **Circus Street is a forward-funded new development under construction or refurbishment as at 30 June 2018 and expected to complete in 2019 at a total cost of c £70m.

The completion and full letting of Scape Wembley during FY18 contributed a valuation uplift of c £12m, although its £90.4m year-end valuation continues to reflect an NIY of 5.25%, above the portfolio average. The investment manager expects the post year-end completion and letting of Scape Bloomsbury, a prime central London asset, to also have a positive valuation impact of between £8m and £12m.

The continuing attraction to investors in PBSA assets, particularly London-based assets, is evident from recent market transactions, and may indicate scope for further portfolio yield tightening. The investment manager notes the impact of recent transactions involving the London-focused Pure Student Living and Chapter portfolios, with an estimated aggregate value of £2.4bn, in supporting yield compression across the London market. It was reported in the media that the £870m sale of the Pure Student Living portfolio reflects a yield of just above 4%, and the investment manager believes that this was consistent with the yield on the partial sale of the Chapter portfolio of London assets. It is a common for a premium to be paid for assets acquired on a portfolio basis compared with standalone property valuations. This makes a direct read-across to the standalone property valuations that comprise the DIGS portfolio value difficult, although the positive implications of this continuing investor interest are clear. We estimate that a 50bp tightening in the blended DIGS portfolio yield would increase NAV per share by c 22p.

Student demand remains positive

With demand for higher education remaining strong, there continues to be an undersupply of purpose-built student accommodation nationally, although some regional pockets of over-supply have emerged. For London and a number of other core markets with similar demand-supply characteristics, the position of undersupply remains very clear. For London in particular, increasing global demand for the world-class educational facilities that it offers, combined with a significant undersupply and substantial obstacles to new development, represents an attractive environment for investors.

The differentiating features of the London market can be summarised as:

It is home to more than 300,000 full-time students, more than any other city in the UK.

Four of the top 50 universities in the world are in London, as are five of the 24 Russell Group universities, widely perceived as representing some of the best universities in the country.

As a result of the high standard of education available, and the wider appeal of London as a place in which to live, a quarter of all international students studying in the UK are based there.

London universities are only able to supply accommodation to c 30% of their first year and international students.

UCAS data for applications to UK universities as at 30 June 2018 (for the 2018/19 academic year) stood at c 637k and, although down 2% on the same point in 2017, this will have no discernible impact on student numbers, with c 1.3 applicants for each student place. Within total applications, demand for international students has continued to grow. EU student applications are up 2%, and other international students up 6%. Helping to counter Brexit uncertainties, EU students entering in the 2018/19 academic year are guaranteed the same fee rates as UK students, as well as access to student finance for the duration of the course. The decline in UK-domiciled applicants seems largely driven by demographics, although the long-term decline in the number of UK 18- to 20-year-olds should begin to reverse from 2020, while the desire to go to university, measured by participation rates, remains strong with more UK 18 year olds going to university than ever before.

Valuation and performance

Performance ahead of 8–10% target

In the period from IPO (20 May 2013) to the last published quarterly NAV at 30 June 2018 (end-FY18), DIGS has generated an EPRA NAV total return (dividends reinvested) of 91.2% on the opening NAV per share (after issue costs) of 97p, or an annualised compound return of 13.5% pa. Over the same period, the share price total return (dividends reinvested) was an aggregate 82.3% on the IPO price of 100p, or an annualised compound return of 12.5% pa. The share price has risen since 30 June 2018, taking the aggregate return to 87.9% or 12.6% annualised (as at 10 September 2018.

Both the NAV and share price total return are well ahead of the 8–10% target for long-term shareholder returns set by DIGS at IPO, including growing dividends per share and modest long-term capital appreciation.

Exhibit 7: Returns since IPO (at 100p per share) to 30 June 2018

One year

Three years

Five years

Since IPO

DIGS share price total return*

5.7

8.7

11.6

12.5

DIGS NAV total return**

11.6

10.4

13.8

13.5

All-UK property index total return

9.3

2.6

9.9

7.7

FTSE All-Share total return

9.0

9.6

8.8

7.2

Benchmark UK 10yr bond total return

1.3

4.7

5.0

3.9

Source: Thomson Datastream, Edison Investment Research. Note: Data to 30 June 2018. Note: *Share price return since IPO based on IPO price of 100p. **NAV total return since IPO based on opening NAV, after issue costs, of 97p.

The DIGS NAV total return to 30 June 2018 is ahead of the broad UK commercial property sector, the FTSE All-Share Index, and UK gilt returns over one, three and five years, and since inception.

P/NAV below historical average

For much of the period since IPO, DIGS has traded at a premium to NAV (including income), of up to a peak of 12% (Exhibit 7). The main exception to this was in the aftermath of the mid-2016 EU referendum result, but also during the 12 months to March 2018 there was a steady de-rating, to a c 7% discount at the low point. The shares have since moved higher to trade at a modest premium of 0.6%, but still remain below the average since IPO of c 5%.

Exhibit 8: Share price premium/discount to NAV (including income) since IPO

Source: Thomson Datastream

Over the same period the broad UK-listed property sector has shown a more marked reduction in P/NAV, with valuations failing to keep pace with NAV growth. The effect has been more noticeable for those companies in the mainstream commercial property segment that are more dependent on asset management/development initiatives to drive capital appreciation, and generally less so for income-focused companies, which is how we would describe DIGS.

Exhibit 9: DIGS premium/discount to NAV compared with the UK property sector (%)

Source: Bloomberg, Thomson Reuters

Peer comparison suggests further potential

In Exhibit 9, we focus on the three UK-listed student accommodation companies, DIGS, Unite and Empiric, showing summary valuation and share price performance data. In terms of share price performance, and unlike the broader UK-listed property sector and FTSE All-Share Index, both DIGS and Unite are trading very close to 12-month highs, and although the Empiric share price is still some way below the 12-month high, the shares have recovered from the low point following its internally driven trading problems in 2017 and reduced dividend guidance. Investor interest in the student accommodation subsector remains positive.

DIGS offers a higher dividend yield compared with Unite, the largest of the three, yet it trades on a lower P/NAV and its share price rise over the past 12 months has been less. This suggests further potential for the DIGS share price to appreciate, supported by the continuing strong fundamentals in its target areas of the market, and as additional refurbishment/development assets come on stream to support earnings, cash flow, and dividend cover.

Exhibit 10: Student accommodation valuations and performance

Price
(p)

Market cap
(£m)

P/NAV
(x)

Yield
(%)

Share price performance

One month

Three months

12 months

From 12-month high

GCP Student Liv.

150

578

1.01

4.0

1%

2%

1%

-2%

Unite

887

2336

1.17

3.2

1%

3%

29%

-1%

Empiric

96

578

0.91

5.2

2%

10%

-16%

-16%

Median

1.01

4.0

1%

3%

1%

-2%

UK property index

1,781

4.1

-4%

-6%

-1%

-7%

FTSE All-Share Index

4,106

4.2

-5%

-6%

-1%

-7%

Source: Company data, Edison Investment Research, Bloomberg data as at 11 September 2018

Exhibit 11: Financial summary

Year ending 30 June (£000's)

2014

2015

2016

2017

2018

INCOME STATEMENT

Rental income

9,132

11,505

22,482

28,806

35,790

Property operating expenses

(1,664)

(2,529)

(4,600)

(6,281)

(7,946)

Gross profit

7,468

8,976

17,882

22,525

27,844

Administrative expenses

(2,357)

(2,001)

(5,712)

(6,072)

(7,434)

Operating profit before gains on investment properties

5,111

6,975

12,170

16,453

20,410

Fair value gains on investment properties

5,010

25,660

27,156

11,855

47,565

Operating profit

10,121

32,635

39,326

28,308

67,975

Net finance expense - recurring

(2,412)

(1,336)

(3,366)

(4,794)

(6,917)

Non-recurring finance expense

0

0

(7,635)

0

0

PBT

7,709

31,299

28,325

23,514

61,058

Tax charge

0

(18)

3

(40)

0

Profit for the year

7,709

31,281

28,328

23,474

61,058

Adjust for:

Fair value gains/(losses) on investment property

(5,010)

(25,660)

(27,156)

(11,855)

(47,565)

Fair value movement on financial derivative & close out fees

599

0

0

0

0

EPRA earnings

3,298

5,621

1,172

11,619

13,493

License fees on forward funded developments

0

0

0

1,421

1,490

Exceptional finance and other costs

0

0

8,519

394

427

Other

0

0

0

189

0

Adjusted earnings

3,298

5,621

9,691

13,623

15,410

Average number of shares (m)

73.4

109.9

183.0

290.5

384.3

IFRS EPS (p)

10.50

28.46

15.48

8.08

15.89

EPRA EPS (p)

4.49

5.11

0.64

4.00

3.51

Adjusted EPS (p)

4.49

5.11

5.30

4.69

4.01

DPS declared (p)

5.47

5.60

5.66

5.75

5.95

BALANCE SHEET

Investment property

151,560

177,220

424,787

634,640

784,424

Other non-current assets

956

308

815

308

2,956

Total non-current assets

152,516

177,528

425,602

634,948

787,380

Cash & cash equivalents

3,629

106,292

66,337

55,110

29,213

Other current assets

1,362

18,683

6,867

7,517

9,005

Total current assets

4,991

124,975

73,204

62,627

38,218

Interest bearing loans & borrowings

(39,456)

(39,569)

(128,174)

(217,469)

(232,771)

Other non-current liabilities

(956)

(522)

(815)

(308)

(308)

Total non-current liabilities

(40,412)

(40,091)

(128,989)

(217,777)

(233,079)

Financial liabilities

0

(117,422)

0

0

0

Other current liabilities

(4,240)

(7,261)

(11,349)

(12,804)

(18,309)

Total current liabilities

(4,240)

(124,683)

(11,349)

(12,804)

(18,309)

Net assets

112,855

137,729

358,468

466,994

574,210

EPRA adjustments

(47)

214

0

0

0

EPRA net assets

112,808

137,943

358,468

466,994

574,210

Period end number of shares (m)

109.9

109.9

261.8

335.8

385.1

IFRS NAV per share (p)

102.7

125.3

136.9

139.1

149.1

EPRA NAV per share (p)

102.6

125.5

136.9

139.1

149.1

CASH FLOW

Net cash flow generated from other activities

5,943

6,356

4,171

14,168

22,168

Net cash used in investing activities

(87,038)

0

(210,561)

(195,469)

(102,209)

Net cash flow generated from financing activity

84,724

96,307

166,435

170,074

54,144

Change in cash

3,629

102,663

(39,955)

(11,227)

(25,897)

Opening cash

0

3,629

106,292

66,337

55,110

Closing cash

3,629

106,292

66,337

55,110

29,213

Debt as per balance sheet

(39,456)

(156,991)

(128,174)

(217,469)

(232,771)

Unamortised loan arrangement fees

(544)

(431)

(1,826)

(2,531)

(2,229)

Drawn debt

(40,000)

(157,422)

(130,000)

(220,000)

(235,000)

Net debt

(36,371)

(51,130)

(63,663)

(164,890)

(205,787)

Net LTV

24.0%

28.9%

15.0%

26.0%

26.2%

Source: Company data, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority (Financial Conduct Authority). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GCP Student Living and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority (Financial Conduct Authority). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by GCP Student Living and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues