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Research: Real Estate
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.
GCP Student Living |
Strong NAV returns and quarterly DPS increase |
5 February 2020 |
Q220 update |
DIGS vs UK property index (three-year total returns)
Gearing
Analyst
GCP Student Living is a research client of Edison Investment Research Limited |
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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 |
Adjusted |
EPRA |
DPS |
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 |
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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, long‑term dividends with inflation‑linked 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. |
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Forthcoming |
Capital structure |
Fund details |
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AGM |
November 2020 |
Ongoing charges |
1.32% (excluding direct property costs) |
Group |
Gravis Capital Management |
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H120 results |
Mar 2020e |
Loan to value |
19% (Dec 2019) |
Manager |
Nick Barker |
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Year end |
June |
Annual mgmt fee |
1.0% of NAV |
Address |
24 Savile Row, London W1S 2ES |
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Dividend paid |
Mar, Jun, Sep, Dec |
Performance fee |
None |
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Launch date |
May 2013 |
Trust life |
Indefinite |
Phone |
020 3405 8500 |
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Continuation vote |
November 2021 |
Loan facilities |
£335m |
Website |
www.gcpstudent.com |
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Dividend policy and history |
EPRA NAV per share and EPRA NAV total return history |
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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%. |
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Major shareholders |
Geographic exposure by property value (at 31 December 2019) |
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Portfolio summary (at 31 December 20199) |
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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 |
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Period to 31 December 2019 |
3m |
6m |
1yr |
3yr |
5yr |
Since IPO |
16.8% |
24.3% |
38.6% |
51.2% |
109.9% |
160.8% |
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Annual performance |
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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 |
Yield |
Share price performance |
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1 month |
3 months |
12 months |
From 12m high |
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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% |
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UK property index |
1,909 |
3.6 |
-2% |
4% |
13% |
-3% |
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FTSE All-Share Index |
4,102 |
4.5 |
-2% |
3% |
7% |
-4% |
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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 |
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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: |
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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 |
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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 |
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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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