GCP Student Living (DIGS) is gauging shareholder support on how to fund a second development in Brighton as it looks to return to full dividend cover.
The 4%-yielding real estate investment trust (Reit) is in advanced negotiations about the construction of a 550-bed hall of residence with cafe on the University of Brighton campus.
The construction of ‘Scape Brighton’ – with its main building partner Scape Student Living – would be bigger than the Circus Street 450-bed development the company is already funding in the seaside town, which is due to complete next year.
Fund manager Gravis says Brighton has a similar shortage of modern, purpose-built student accommodation to London, where 95% of the five-year old investment trust has been successfully invested.
‘The property will primarily serve students from Brighton University and the University of Sussex, which together have c.36,000 students, including c.7,500 international students, and is currently expected to be operational in September 2020,’ GCP Student Living stated.
The new-build is expected to secure ‘a new asset at a yield which is expected to be more attractive than yields on acquiring comparable operational assets, and should provide rental and earnings growth for the company over the long term, in addition to net asset value (NAV) growth prospects,’ the company added.
If the acquisition proceeds, GCP Student Living will receive a 5.5% licensing fee or coupon from the developer, which means its investment will generate a return from day one. This is a similar arrangement to its other developments at Circus Street and Scape Wembley.
Nevertheless, the presence of a third unlet site in the £560 million portfolio and the prospect of another share issue that will depress earnings per share requires consultation with shareholders.
‘The board and investment manager are considering the optimum way to finance this acquisition, including consulting with shareholders in regards to the potential of issuing new equity in June/ early July, as well as exploring potential sources of debt finance,’ it said.
Issuing debt would not affect the timing of the company's return to full dividend cover but would require it increase its £235 million fixed rate, credit facilities on which it is fully drawn.
The Reit ended last year with half-year dividends covered only 65% by adjusted earnings per share but has repeatedly spoken of its aim to return to a fully covered quarterly dividend once all the portfolio is operational and generating rent.
GCP Student Living last issued shares in July 2017 when it raised £70 million in a placing at 142p to fund Circus Street and Podium.
The issue of dividend cover is a sensitive one after rival Empiric Student Property (ESP) was forced to cut its dividend last year in response to spiralling costs and more recently by healthcare property fund Medicx (MXF) which last month announced it would ‘rebase’ its high but uncovered dividend next year.
GCP Student Living yields less than the 6% offered by Empiric but more than the 2.7% from the £2.2 billion sector leader Unite (UTG) although its dividends are fully covered by earnings. Whereas Unite shares have soared in the past year, delivering a total return of 38% including its semi-annual dividends, GCP’s have been flat, suggesting some investor unease at the lack of dividend cover, although the performance is much better than Empiric, whose stock has plunged 19%.
Over five years GCP has generated a total shareholder return of 73.8%. At 146.4p, up a penny today, the shares trade at 'par' or net asset value (NAV), having revived from a 5% discount in March but down from a 10% premium to NAV last summer.
Its leading shareholders are fund managers Old Mutual, BMO, CCLA and Premier.