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Strong NAV returns and quarterly DPS increase

GCP Student Living 5 February 2020 Update
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GCP Student Living

Strong NAV returns and quarterly DPS increase

5 February 2020

Q220 update

Price

203.5p

Market cap

£926m

NAV*

174.71p

Premium/(discount) to NAV

16%

*EPRA NAV (including income) at 31 December 2019

Yield*

3.1%

*Based on Q220 DPS of 1.57p annualised of 6.32p

Ordinary shares in issue

455.0m

Code

DIGS

Primary exchange

LSE

AIC sector

Property – UK residential

Benchmark

N/A

DIGS vs UK property index (three-year total returns)

52-week high/low

156.2p

138.4p

146.9p

138.4p

Gearing

Loan to value*

19%


*As at 31 December 2019

Analyst

Martyn King

+44 (0)20 3077 5700

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

GCP Student Living (DIGS) continued to generate strong accounting and share price returns in the three months ended 31 December 2019 (Q220). Portfolio performance continues to benefit from strong supply-demand fundamentals in the markets in which it operates, primarily in and around London (85% of the portfolio value). This is reflected in full occupancy, above inflation rental growth and tightening valuation yields. Dividends are growing and cover building as new assets come on stream and DIGS is well on track for full cover on a fully developed and let basis.

Real estate investment trusts

Year end

Rental income (£m)

Adjusted
earnings* (£m)

Adjusted
EPS* (p)

EPRA
NAV/share (p)

DPS
(p)

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

06/19

44.4

21.2

5.23

165.5

6.15

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

Shareholder return 16.8% in Q220

Based on the share price with dividends reinvested, the Q220 shareholder total return was 16.8%, taking the year to date return to 24.3%. From the IPO in May 2013 to 31 December 2019 (share price 198p) the total share price return (dividends reinvested) was 160.8%, representing an annualised return of 15.6%. Q220 EPRA NAV per share (cum income) increased to 174.71p (end-FY19: 165.52p; end-Q120: 170.12p). Including DPS paid, the quarterly NAV total return was 3.6%, taking the year to date return to 7.4%. The Q220 quarterly DPS was declared at 1.58p (Q120: 1.57p) for payment on 9 March 2020.

Portfolio performance driving income and NAV

During Q220 the portfolio value increased to £987.3m and, like Q120, this was driven by investment in the forward-funded assets and organic growth reflecting rent increases, full occupancy and yield tightening. NAV per share also benefitted (by c 1.3p) from the accretive £77m (gross) share placing December at a 10.4% premium to the end-Q120 NAV. As previously disclosed, the portfolio is again fully let for the 2019/20 academic year with rental growth of 4.4%. With the student accommodation completed during Q120, the forward-funded Circus Street, Brighton will contribute to current year income and Scape Brighton remains on track to become operational for the FY20/21 academic year. With end-Q120 LTV at 19% and borrowing headroom in place, DIGS is well positioned to meet existing capex commitments and pursue additional growth opportunities including the potential acquisition of Scape Canalside.

Positive fundamentals support growth and returns

Share price and NAV returns continue to be well ahead of the 8–10% target set at IPO. Growing dividends are supported by continuing strong fundamentals in DIGS’s chosen markets and should be covered by adjusted earnings on a fully operational basis. Recognising these strong returns the shares now trade at a c 16% premium to NAV; however, this is slightly below the sector average and the prospects for further income and capital growth appear positive.

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 through the potential for modest capital appreciation and regular, sustainable, longterm dividends with inflationlinked income characteristics.

4 February 2020: NAV, dividend, and portfolio update.31 December EPRA NAV per share (cum income) 174.71p. Second quarterly interim DPS of 1.58p to be paid on 9 March 2020. Quarterly share price total return (dividends reinvested) 16.8% and NAV total return 3.6%.

19 December 2019: Results of placing. Oversubscribed placing at 186.0p per share scaled back to 41.4m shares raising gross proceeds of £77m, of which £50m subscribed by APG Asset Management NV.

Forthcoming

Capital structure

Fund details

AGM

November 2020

Ongoing charges

1.32% (excluding direct property costs)

Group

Gravis Capital Management

H120 results

Mar 2020e

Loan to value

19% (Dec 2019)

Manager

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 2021

Loan facilities

£335m

Website

www.gcpstudent.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 is pro rata the 6.10p in dividends declared for the accounting period 20 May 2013 to June 2014, as published by DIGS.

Average annual EPRA NAV total return from IPO to 31 December 2019, adding back but not reinvesting dividends, has been 12.0%. Based on the share price performance over the same period with dividends reinvested, annualised shareholder total return has been 15.6%.

Major shareholders

Geographic exposure by property value (at 31 December 2019)

Portfolio summary (at 31 December 20199)

Property

Location

Date of completion

Valuation (£m)

NIY

No. of beds

Scape Mile End

East London

2012

165.2

4.45%

588

Scape Wembley

North London

2017

107.0

4.65%

578

Scape Shoreditch

East London

2015

213.3

4.24%

541

Scape Bloomsbury

Central London

2018

196.5

4.00%

432

Scape Greenwich

East London

2014

60.8

4.55%

280

Podium

Egham

2017

31.8

5.65%

178

The Pad

Egham

Pase 1: 2012/phase2 : 2015

34.4

5.80%

220

Scape Guildford

Guildford

2015

28.7

5.15%

141

Circus Street, Brighton*

Brighton

2019

74.2

3.94%

450

Water Lane Apartments

Bristol

2015

22.7

5.25%

153

Scape Brighton**

Brighton

2020e

52.7

N/A

555

Total

987.3

4.42%

4,116

Source: GCP Student Property. Note: NIY: net initial yield. *The student accommodation element of Circus Street is operational and the office element was under construction at 31 December 2019. **Scape Brighton is a forward funding agreement that is expected to complete in 2020.

Continuing to benefit from London focus

We last wrote in detail following the results for the year to 30 June 2019 (FY19) and will do so again following the publication of the interim results, expected in March 2020. In this note we provide an update on portfolio, NAV and DPS growth in the period to 31 December 2019 as well as other developments.

Quarterly DPS increased

For the Q220 period the company has declared a quarterly DPS of 1.58p and increase from 1.57p in Q120. The dividend will be paid on 9 March 2020 to shareholders on the register at 14 February 2020. It will be paid 1.42p as a REIT property income distribution (PID) for the tax-exempt property rental business and 0.16p as an ordinary UK dividend (non-PID).

The Q220 DPS annualises at 6.32p per share, representing a 3.1% yield on the ordinary share price. Tracking income growth, we note the quarterly DPS has increased in Q4 of each of the past three years.

Portfolio growth driven by investment, rent increases and further yield tightening

At 31 December 2019 (Q220) the portfolio was independently valued at £987.3m compared with £921.6m at end-FY19 (Q120: £962.2m), of which 85% by value was in and around London. The portfolio growth reflects continuing investment in the two forward-funded developments in Brighton as well as valuation growth at the operational assets. Organic operational asset value growth reflects the impact of increasing rents and further yield tightening across many of the assets, particularly those situated in the London area. The portfolio is again fully let for 2019/20 academic year, with rental growth of 4.4%. The blended portfolio net initial yield of 4.42% at end-Q220 compares with 4.54% at end-FY19 (end-Q120: 4.49%).

The forward-funded construction of the student accommodation at Circus Street, Brighton, was completed in Q120, in line with the investment managers’ expectations. It provides 450 beds, contracted on a 21-year lease with annual rent uplifts of RPI plus 4bp, capped at 5% and floored at 2%, to a subsidiary of Kaplan, a global education provider. The 30,000 sq ft of commercial, primarily office, space was still under construction at end-Q220.

Scape Brighton, a large 555-bed development on the primary campus of the University of Brighton, remains on track to become operational for the 2020/21 academic year. The company benefits from licensing fees, which provide a 5.5% coupon on the funding extended in the construction phase.

Share placing accretive to NAV

In late December 2019 DIGS launched a non-pre-emptive share placing, under existing shareholder authorities. It targeted gross proceeds of up to £75m, in response to specific demand from APG Asset Management in its capacity as the discretionary manager of various pension funds, which had indicated its intention to subscribe for up to £75m of shares, subject to a minimum of £50m. The placing price of 186p was at a premium of 10.4% to the end-Q119 NAV per share and a discount of 6.3% to the share price immediately ahead of the launch. The placing was substantially oversubscribed requiring applications to be scaled back, with APG acquiring £50m of the £75m shares issued. We estimate the terms of the issue were c 1.3p, or c 0.8%, accretive to NAV per share.

DIGS intends that the net proceeds of the placing will be used to partly fund the acquisition of Scape Canalside (if acquired) and for the purpose of maintaining conservative borrowing levels, including (should Scape Canalside not be acquired) the repayment of re-drawable borrowings and funding the completion of construction of its Scape Brighton asset with equity in place of drawing on additional debt for those purposes.

Further growth opportunities

Discussions with the vendor of Scape Canalside, for which DIGS has a conditional forward purchase agreement, are ongoing. Scape Canalside is high-specification, purpose-built, 412-bed private student accommodation residence located adjacent to Queen Mary University of London, a strong Russell Group higher-education institution. Its design and market positioning are complementary to the existing 588-bed Scape Mile End (formerly Scape East) that is in the same locality. Scape Canalside achieved practical completion in July 2019 and has been fully let for the 2019/20 academic year. If DIGS proceeds with the acquisition, the price would be determined by independent valuation, but the company has said this is likely to be in excess of £90m.

Additionally, the company has entered into a conditional forward-purchase agreement to acquire a well-situated, high-specification, purpose-built asset with 403 beds in the same locality as its 141-bed Scape Guildford asset. Guildford is home to the University of Surrey (a UK top 20 university), the University of Law and the Academy of Contemporary Music, contributing to an undersupply of private student residential accommodation and full occupation at Scape Surrey in each year since its acquisition in 2015. DIGS has provided no financial details at this stage. The property is expected to complete in time for the 2020/21 academic year.

Valuation and performance

Performance continues to outpace 8–10% return target

The 8–10% long-term return target that DIGS set at IPO reflects the anticipation of continued rental growth to drive income earnings and dividends, with a corresponding positive impact on capital values, assuming broadly stable yields and a positive impact from modest gearing. Returns since IPO have been well ahead of this target and the trend has continued in the first half of FY20. The H120 share price total return (dividends reinvested) was 24.3% and the annualised annual total return since IPO is now 15.6%.

Exhibit 2: Share price total returns

Cumulative performance

Period to 31 December 2019

3m

6m

1yr

3yr

5yr

Since IPO

16.8%

24.3%

38.6%

51.2%

109.9%

160.8%

Annual performance

12 months to 31 December

2019

2018

2017

2016

2015

38.6%

7.4%

1.6%

12.5%

23.4%

Source: Company data, Bloomberg. Percentage growth in share price total return with income reinvested. Return since IPO is calculated by reference to the IPO issue price of 100p per ordinary share.

In Exhibit 3, we show a summary valuation and share price performance comparison for the three UK-listed student accommodation companies, DIGS, Unite and Empiric. DIGS offers a higher dividend yield compared with Unite and trades at a lower P/NAV. Empiric has a higher yield but as it continues to reposition itself from internally driven trading problems in 2017, the prospects for dividend growth are modest. DIGS and Unite have both clearly outperformed the broad UK property sector and the FTSE All-Share Index over the past year.

In the near term, the continuing strong fundamentals in DIGS’s target areas of the market and the further benefit to earnings, cash flow and dividend cover from the completion of assets under development are positive indicators for DIGS’s performance. Perhaps even more important is DIGS’s focus on larger and more efficient, well-designed and purpose-built assets, in good locations in supply-constrained markets, which provide comfort that the portfolio will be capable of sustaining performance over the long term.

Exhibit 3: Student accommodation valuations and performance

Price (p)

Market cap (£m)

P/NAV
(x)

Yield
(%)

Share price performance

1 month

3 months

12 months

From 12m high

GCP Student Living

203

924

1.19

3.1

3%

16%

35%

-1%

Unite

1282

4660

1.56

2.3

2%

14%

41%

-4%

Empiric Student Properties

101

608

0.93

5.0

3%

7%

5%

-2%

Average

1.23

3.4

3%

12%

27%

-2%

UK property index

1,909

3.6

-2%

4%

13%

-3%

FTSE All-Share Index

4,102

4.5

-2%

3%

7%

-4%

Source: Company data, Edison Investment Research. Note: Prices at 26 January 2020. Based on last reported NAV and trailing 12-month DPS declared.

Exhibit 4: Financial summary

Year ending 30 June (£000's)

2014

2015

2016

2017

2018

2019

INCOME STATEMENT

Rental income

9,132

11,505

22,482

28,806

35,790

44,410

Property operating expenses

(1,664)

(2,529)

(4,600)

(6,281)

(7,946)

(9,364)

Gross profit

7,468

8,976

17,882

22,525

27,844

35,046

Gross margin

81.8%

78.0%

79.5%

78.2%

77.8%

78.9%

Administrative expenses

(2,357)

(2,001)

(5,712)

(6,072)

(7,434)

(8,808)

Operating profit before gains on investment properties

5,111

6,975

12,170

16,453

20,410

26,238

Operating margin

56.0%

60.6%

54.1%

57.1%

57.0%

59.1%

Fair value gains on investment properties

5,010

25,660

27,156

11,855

47,565

73,865

Operating profit

10,121

32,635

39,326

28,308

67,975

100,103

Net finance expense - recurring

(2,412)

(1,336)

(3,366)

(4,794)

(6,917)

(7,317)

Non-recurring finance expense

0

0

(7,635)

0

0

0

PBT

7,709

31,299

28,325

23,514

61,058

92,786

Tax charge

0

(18)

3

(40)

0

0

Profit for the year

7,709

31,281

28,328

23,474

61,058

92,786

Adjust for:

Fair value gains/(losses) on investment property

(5,010)

(25,660)

(27,156)

(11,855)

(47,565)

(73,865)

Fair value movement on financial derivative & close out fees

599

0

0

0

0

0

EPRA earnings

3,298

5,621

1,172

11,619

13,493

18,921

License fees on forward funded developments

0

0

0

1,421

1,490

2,263

Exceptional finance and other costs

0

0

8,519

394

427

0

Other

0

0

0

189

0

0

Adjusted earnings

3,298

5,621

9,691

13,623

15,410

21,184

Average number of shares (m)

73.4

109.9

183.0

290.5

384.3

404.8

IFRS EPS (p)

10.50

28.46

15.48

8.08

15.89

22.92

EPRA EPS (p)

4.49

5.11

.64

4.00

3.51

4.67

Adjusted EPS (p)

4.49

5.11

5.30

4.69

4.01

5.23

DPS declared (p)

5.47

5.60

5.66

5.75

5.95

6.15

Dividend cover (Adjusted earnings)

82%

91%

94%

82%

67%

85%

BALANCE SHEET

Investment property

151,560

177,220

424,787

634,640

784,424

919,203

Other non-current assets

956

308

815

308

2,956

308

Non-current assets

152,516

177,528

425,602

634,948

787,380

919,511

Cash & cash equivalents

3,629

106,292

66,337

55,110

29,213

15,509

Other current assets

1,362

18,683

6,867

7,517

9,005

17,242

Current assets

4,991

124,975

73,204

62,627

38,218

32,751

Interest bearing loans & borrowings

(39,456)

(39,569)

(128,174)

(217,469)

(232,771)

(249,111)

Other non-current liabilities

(956)

(522)

(815)

(308)

(308)

(308)

Non-current liabilities

(40,412)

(40,091)

(128,989)

(217,777)

(233,079)

(249,419)

Financial liabilities

0

(117,422)

0

0

0

0

Other current liabilities

(4,240)

(7,261)

(11,349)

(12,804)

(18,309)

(18,180)

Total current liabilities

(4,240)

(124,683)

(11,349)

(12,804)

(18,309)

(18,180)

Net assets

112,855

137,729

358,468

466,994

574,210

684,663

EPRA adjustments

(47)

214

0

0

0

0

EPRA net assets

112,808

137,943

358,468

466,994

574,210

684,663

Period end number of shares (m)

109.9

109.9

261.8

335.8

385.1

413.7

IFRS NAV per share (p)

102.7

125.3

136.9

139.1

149.1

165.5

EPRA NAV per share (p)

102.6

125.5

136.9

139.1

149.1

165.5

CASH FLOW

Net cash flow generated from other activities

5,943

6,356

4,171

14,168

21,398

25,614

Net cash used in investing activities

(87,038)

0

(210,561)

(195,469)

(101,439)

(66,199)

Net cash flow generated from financing activity

84,724

96,307

166,435

170,074

54,144

26,881

Change in cash

3,629

102,663

(39,955)

(11,227)

(25,897)

(13,704)

Opening cash

0

3,629

106,292

66,337

55,110

29,213

Closing cash

3,629

106,292

66,337

55,110

29,213

15,509

Debt as per balance sheet

(39,456)

(156,991)

(128,174)

(217,469)

(232,771)

(249,111)

Unamortised loan arrangement fees

(544)

(431)

(1,826)

(2,531)

(2,229)

(3,039)

Drawn debt

(40,000)

(157,422)

(130,000)

(220,000)

(235,000)

(252,150)

Net debt

(36,371)

(51,130)

(63,663)

(164,890)

(205,787)

(236,641)

Net LTV

24.0%

28.9%

15.0%

26.0%

26.2%

25.7%

Source: Company data, Edison Investment Research

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New Zealand

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Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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