Empiric Student Property more than doubles profit in a testing 2022

Student accommodation developer Empiric Student Property (ESP) had about as good a 2022 as a real estate investment trust (Reit) could ask for. While many of its peers swung to losses thanks to valuation hits from the higher interest rate environment, Empiric’s pre-tax profit more than doubled in 2022.

This was not just because its net asset value (NAV) ticked up 8 per cent, but because its gross profit – its revenue minus cost of sales but before valuation changes are taken into account – soared 48.9 per cent as well. The company says “clustering” has been the key to this. By expanding in areas where it already has a presence, it has been able to increase revenue 30.4 per cent while keeping costs broadly the same as it doesn’t need to spend much additional money on marketing or building management teams.

The company says this “clustering” strategy is also what has helped it to increase the value of its portfolio. Since the start of 2022, Empiric has sold £55.7mn-worth of assets to instead focus on a select group of cities with “close proximity to top-tier universities”. The downside of this is that it does limit the number of markets it has exposure to, but Empiric insists that its portfolio is still diverse – with student accommodation in more than 20 cities across the UK.

The business is evidently confident in its strategy, with investors receiving the benefit. Its full-year dividend increased by 10 per cent from 2021 to 2022 and the company is aiming to up the dividend by a further 18.2 per cent to 3.25p per share for the 2023 calendar year. This is still much lower than the 5p per share the business paid out in the pre-Covid years of 2018 and 2019, but it signals another move in the right direction.

Like its student accommodation rival Unite Group (UTG), the company does face the prospect of developing more assets at a time when debt is more expensive than it has been in the past. What’s more, there is always the slim possibility that another black swan event like Covid-19 makes owning and developing student accommodation unviable – particularly accommodation for international students who represent around half of Empiric’s users. However, at a 26 per cent discount to NAV, we feel the growth potential of this company has been heavily undervalued. Buy.

Last IC view: Buy, 97.5p, 18 Aug 2022