Empiric Student Property : Annual Report for Empiric Student Property plc

Our purpose

To help students make the most of their university life by creating and managing some of the highest quality and most thoughtfully designed accommodation, which is secure, modern and homely.

Values

The Customer comes first

Our customer experience is of paramount importance to the development of our strategic priorities.

We take ownership

We are reliable, respectful, and responsive.

We do what we say we will do.

Culture

Our people are key to delivering a high- quality, personalised service to our customers. We work tirelessly to create a team who are diverse & inclusive, agile, proactive, thoughtful, and responsive.

Highlights

During what has been another record year for the Company, we have delivered strong rental growth and filled our rooms earlier than ever before. Customer satisfaction improved further and continues to be amongst the highest in the sector with our Hello Student brand awarded Platinum Operator certification by the industry-recognised Global Student Living. Combined with ongoing undersupply of high quality, well located student accommodation in prime cities, this dynamic continues to drive increased rebookings and greater demand for our rooms. This momentum has continued into the new sales year, and positions us well for growth.

Strategic Report

1. Highlights
2. At a Glance

1. Our market

1. Business Model

1. Our Strategy

1. Chairman's statement

1. Chief Executive Officer's Review

1. Monitoring our performance (KPIs)

1. Operating Review

1. Principal Risks and Viability

1. Financial Review

1. EPRA and other alternative performance measures

1. ESG Report

Governance Report

74 Board of Directors

Empiric Student Property plc | Annual Report &

Financial

IFRS Earnings Per Share (basic)

8.8p

2022 | 11.2p

Change | -21%

Gross Margin1

69%

2022 | 67%

Change | +2% pts

Dividend per Share

3.5p

2022 | 2.75p

Change | +27%

EPRA Earnings

Per Share1

4.0p

2022 | 3.4p

Change | +18%

Total Return1

7.6%

2022 | 10.5%

Change | -2.9% pts

IFRS NAV

£734.2m

2022 | £700.8m

Change | +4.8%

EPRA NTA

Per Share1

120.7p

2022 | 115.4p

Change | +4.6%

Property Valuation

£1.1bn

2022 | £1.1bn

Change | +3.0% (LfL)

EPRA Loan to Value1

30.6%

2022 | 32.7%

Change | -2.1% pts

76 Chairman's Introduction

to Corporate Governance

1. Nomination Committee Report

1. Audit and Risk Committee Report

1. Remuneration Committee Report

1. Directors' Report

1. Directors' Responsibilities

Financial Statements

1. Independent Auditor's Report

1. Consolidated Statement of Comprehensive Income
2. Consolidated Statement of Financial Position
3. Company Statement of Financial Position
4. Consolidated Statement of Changes in Equity
5. Company Statement of Changes in Equity
6. Consolidated Statement of Cash Flows
7. Notes to the Financial Statements

1. Glossary
2. Company Information and Corporate Advisers

Accounts 2023

Strategic Report

1  An alternative performance measure. See page 42 for further details.

01

Investment proposition

Differentiated Business Model within the Popular PBSA Property Sector

Responsible and

Industry- Leading

Operating Brand

Sustainable Long-Term Business Model

Delivering attractive sustainable shareholder returns

We target investment in prime regional cities which attract students from the growing pool of affluent international, postgraduate and returning undergraduates, whose premium accommodation requirements are relatively under-served by the PBSA market. This segmented supply and demand imbalance drives both occupancy and rental growth, creating relatively high-yielding investments providing attractive total returns.

Hello Student, our operating brand, has become one of the most effective, responsible and recognisable in the sector. In the 2023 Global Student Living Index, Hello Student was awarded Platinum Operator Certification, with an NPS score of +30.5, well exceeding the average for University and Private Halls (+13), and a further improvement on 2022 when we scored +27. We pride ourselves on high quality customer service and amenities.

There has been consistently strong growth in student numbers over the past decade, with strong growth set to continue for the foreseeable future.

We target a gross margin of over 70% and annualised total returns of 7%-9%.

Financial snapshot

As at 31 December 2023

Portfolio valuation

£1.1bn

EPRA NTA1

120.7p

EPRA EPS1

4.0p

Total Return1

7.6%

Dividend per share

Empiric Student Property plc | Annual Report & Accounts 2023

Strategic Report

Socially and

Environmentally

Responsible

Progressive Culture Embedded by Core Values and Purpose

We are a company who is socially and environmentally responsible. We have set an ambitious net zero target of no later than 2033 and have allocated significant capital to invest in decarbonisation initiatives aimed at reducing energy consumption and managing future EPC risk.

Our culture and values are embedded in our business and in our team.

3.5p

EPRA LTV1

30.6%

1 An alternative performance measure. See page 42 for further details.

03

In 2023, the UK PBSA sector continued to demonstrate its attractiveness to investors globally as an inflation hedge driven by strong rental growth, fuelled by an undersupply of high-quality operational accommodation, long- term strengthening demand and historically low levels of new supply.

PBSA continues to outperform other sectors despite rising interest rates and high inflation, with unprecedented rental growth achieved for 2023/24 and strong prospects for 2024/25 forecasted. This rental growth has held capital values stable with best-in-class assets in prime locations increasing in value.

The CBRE Purpose-Built Student Accommodation Index 2023 reports that in the year to September 2023, the index delivered total returns of 7.7 per cent, outperforming 'All Commercial Property' which according to CBRE's UK Monthly Index, reported -11 per cent total returns in the same period1.

The PBSA Index reports capital growth of 2.4 per cent in the year to September 2023, softer than the previous year, with net income growing by 9.8 per cent. During the same period, the net initial yield across all assets softened by 35 basis points to 4.9 per cent1. Across the quality segments, Prime Regional assets reported the highest capital value growth, increasing by 2.8 per cent and the highest total return at 8.6 per cent. London assets saw the highest income growth, rising by 16.3 per cent, but this was offset by softening yields, delivering a 6.8 per cent total return. The Empiric portfolio is well aligned to the best performing locations with 93 per cent by value classified as Prime Regional in the December 2023 portfolio valuation and 2 per cent in London.

Investor demand remains strong for locationally driven best in class 'clean and green' properties with strong rental growth prospects. However, non-prime assets are seeing reduced demand from investors unless they offer value add opportunities that serve growing higher tariff universities. After a record setting year for transaction volumes in 2022 that involved large portfolio deals with £7.1bn of PBSA traded, increased uncertainty, greater operational scrutiny and 'higher for longer' interest rates stifled transaction volumes in 2023, resulting in £2.8bn of transactions completing1.

Occupational

Demand

The UK Higher Education sector as a whole remains strong with over 2.2 million full-time students7, driven by recent increases in the proportion of undergraduate applicants accepted, the compelling international appeal of UK institutions and the growth of postgraduate study. Strong demand for university places continues to translate into an increased requirement for high-quality PBSA bedspaces at a level that the construction supply is unable to match. Significant rental pricing increases are expected for the academic year 2024/25, building on double-digit rental growth achieved in many locations for the academic

2023 Undergraduate UCAS acceptances

Key

  UK acceptances Non-EU acceptances   EU acceptances

Empiric Student Property plc | Annual Report & Accounts

year 2023/244. Emerging data indicates undergraduate student numbers are reducing to pre-COVID levels, but this is highly nuanced across the sector with continued polarization and growth of the higher tariff universities.

The latest UCAS Undergraduate 2023 admission data reports that a total of 752,025 students applied to UK higher education institutions in 2023, a slight fall of

1 per cent, with acceptances also falling by 2 per cent, reaching their lowest level since 20143. Undergraduate applications from UK domiciled students fell by 2 per cent, with acceptances falling by 1 per cent to 482,895. This can be attributed to a second consecutive annual decrease in the UK 18-year-old entry rate, which fell to

The flight to quality in the sector is more evident than ever, with higher tariff institutions experiencing a year-on-year increase in undergraduate acceptances, whilst medium and lower tariff institutions have seen fewer acceptances. Higher tariff acceptances make up 33 per cent of total acceptances compared with 28 per cent in 2014 and lower tariff institutions make up 34 per cent in 2023 compared with 41 per cent in 20144. The total number of undergraduates accepted to UK higher education institutions has increased from 512,370 in 2014 to 554,470 in 2023.

Aside from undergraduate admissions, the take up of postgraduate study continues to grow considerably. A transformation in postgraduate study - aided by the student loan system, visa changes, a desire for additional qualifications and universities looking to generate increased revenue means 538,375 students, representing over one quarter of students, now study at this level full-time7. The latest dataset from HESA, for the 2021-22 academic year, reports that full-time postgraduate student numbers have grown over

54 per cent since the 2017/18 academic year7.

2023

Strategic Report

35.6 per cent following a peak of 37.9 per cent in 2021. However, current levels are still historically very high, as student participation returns to pre-COVID trends3. Undergraduate applications from EU domiciled students fell by 4 per cent, with acceptances falling by 7 per cent to 10,570. Undergraduate applications from non-EU domiciled students continued sustained growth, rising by 2 per cent, however, acceptances fell by 2 per cent3. The fall in acceptances can primarily be attributed to a

1 per cent decrease in Chinese admissions compared to the 2022 peak. Despite this decline, China remains the dominant domicile of international students. In contrast, Indian applicants have increased by 7 per cent, indicating a shifting demographic in the international student make-up3.

538,000

Postgraduate students, now represent over one quarter of the total student population.

05

Empiric Student Property plc | Annual Report & Accounts 2023

Strategic Report

Our market | continued

PBSA

Supply

The PBSA sector continues to suffer from a severe undersupply of high- quality bedspaces, but this is highly contrasting across locations. Cushman and Wakefield reports that 718,805 PBSA beds were operational for the 2023/24 academic cycle in the UK, with 12,195 new beds delivered for the academic year. Of the total beds in the market,

41 per cent were direct let and 37 per cent were university owned. The net increase in beds compared to 2022/23 was only 8,760, as older university accommodation and first-generationprivately-owned assets were removed from operation for refurbishment4. This amount reflects the lowest delivery of PBSA beds in a decade and highlights the planning and viability challenges facing developers, with inflated construction costs and costly financing hurdles4. Cushman and Wakefield reports that only 16 markets can now feasibly sustain the necessary rent levels to support a viable PBSA development without further rent increases4.

Furthermore, the supply of new PBSA has been limited by the need for owners to modernize existing stock and recent legislative shifts to improve health and safety standards, including the Building Safety Act and Fire Safety Act4. In the private rented market, non-institutional landlords face increased challenges with strengthening regulations on Houses in Multiple Occupation (HMO), higher borrowing costs and reducing political support. This is expected to reduce supply and place further upward rental pressure on PBSA. Research by CBRE estimates that 400,000 private rented homes have been sold in recent years, contributing to a shortage of HMOs which form a key accommodation option for students, particularly domestic domiciled returners5. Despite deliveries remaining at a historic low, a national development pipeline of 131,211 PBSA beds remains, 57 per cent of which (74,000 beds) have planning approval, with 22,000 beds expected to be delivered for 2024/254. This potential supply is not uniformly distributed

Investor

Activity

In 2022, the investment in UK PBSA achieved a record £7.1bn even with the wider market investment activity dampening in the second half of the year, following the £3.3bn acquisition of the Student Roost portfolio. Selective investment activity continued in 2023, with transaction volumes falling to £2.8bn, the lowest level since 2018. In 2022, 57,508 beds were transacted regionally and 5,013 beds were transacted in London, but

this fell in 2023 to 19,649 regional beds and 3,595 London beds6. This reduction reflected other property sectors as investors reacted to the challenges of inflation and rising interest rates.

After a slow Q1, Q2 saw an increase in volume as pricing confidence and debt availability began to return, with several portfolios transacting.

In May 2023 DIF Capital Partners purchased the 4,500 bed, eight asset Ottoway Portfolio from Arlington Advisors for £300m and in Q3, Savills IM purchased a 1,292-bed portfolio from Vita for £295m, reflecting 5.35 per cent6. Later in the year, Cain and Menora purchased 1,481 beds from Fusion for £350m and Harbert purchased the regional 1,300 bed 'Project Skyfall' portfolio from Starwood and Round Hll for £150m. iQ purchased the 458-bed Havannah House in Glasgow for £60m, reflecting 5.50 per cent and later in the year two assets from Downing, The Mont in Edinburgh reflecting 5.50 per cent and Vega in Vauxhall reflecting 4.75 per cent. Forward funding deals were struck, as KKR agreed to forward-fund Watkin Jones' 819-bed scheme in Bedminster, Bristol for £100m and M&G committed to fund McLaren's 319-bed scheme in Nottingham for £52m, reflecting

5.25 per cent6.

06

8,760

2023 increase in PBSA beds, the lowest delivery of beds in a decade.

across the UK and is often not aligned to addressing the well published shortfalls. However, given the unfavourable market conditions for development, it also seems unlikely that all of these beds will materialize in the market.

Transaction volumes fell to

£2.8bn

in 2023, the lowest level since 2018, reflecting the challenges faced by rising interest rates and inflationary concerns.

Empiric Student Property plc | Annual Report & Accounts 2023

Strategic Report

Business Model

Our business model combines a high-quality, characterful portfolio of Purpose-Built Student Accommodation with an efficient in-house operational platform, designed to grow and create long-term sustainable returns

for our Stakeholders.

Key strengths 

Portfolio

We have an attractive, characterful portfolio that offers high-quality, well located accommodation for our customers.

Our people

Our people are key to our customers' journey. Our passionate and committed colleagues allow us

to deliver hassle-free student accommodation with a sense of community and belonging that supports mental health and wellbeing.

Specialist knowledge

We have a knowledge to acquire, develop and operate high-quality, sustainable student accommodation.

Brand

Hello Student® is a leading, Platinum certified, brand providing clear identity in the PBSA market.

Data analytics

We drive improvements in customer experience and performance through data analytics. We seek to understand behavioural characteristics using both geographic and demographic segmentation.

Financing

We have an appropriately leveraged balance sheet with strong liquidity allowing the business to be proactive and capitalise on opportunities as they arise

How we add value 

Our culture

Our customers and our people are our key focus. We aim to deliver stand-out customer service, which in turn drives occupancy and financial returns through working together.

Operate