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It Doesn’t Get Much Better Than This

Peter Hemple reviews the performance of our fictional PIN Fund of property related shares

When reviewing the quarterly performance of the PIN Property Fund (a fictional fund consisting of 10 property related UK companies that we created just over five years ago), I usually like to start with the bad news first. The worst performer in our Fund in Q4 2019 was Emperic Student Property, a REIT (Real Estate Investment Trust) that focuses on UK student property. Emperic “only” returned 6.5% in Q4, which is still the equivalent of 26% per year, but considering that the PIN Fund returned 18% overall in Q4, it was still way off the pace set by the other nine companies, which all returned between 15% and 27% during the past three months.

So where has it all gone wrong for Emperic? Of course I am joking and the company was specifically selected for our Fund because it is a reliable, slowly growing company that pays an annual dividend of 5p per year (1.25p per quarter), which on the purchase price in Q3 2018 of 90.8p is equivalent to an annual yield of 5.5%.

At the end of October 2019, Emperic announced that it is anticipating a 10% increase in student revenues in 2019, compared to 2018, driven by an increase in the number of beds, increased occupancy and an increase in revenue generated per bed. The Company says it is continuing to reduce average cost per bed and expects a further reduction of 8% in 2019. At the time, bookings for the 2019/20 academic year were at 93%, in line with the previous academic year. The company anticipates a 3% growth in average rents for the 2019/20 academic year and a gross margin of around 67% in 2019, with dividend cover in excess of 85%.

The student market now looks promising
The other student accommodation firm in our Fund, Unite Group, has managed to make the slow and steady business of managing student accommodation exciting. Over the five six years, earnings per share have grown at a compound annual rate of 15% and Unite has reinvested rental profits back into operations to fund the development of new buildings. Over the same time frame, the company’s dividend to investors has grown 10-fold.

Demand for high-quality student accommodation across the UK is still growing if it is in the right location and Unite is the clear market leader. Dividends are expected to keep rising by 20-30% each year as well. Since being entered into the PIN fund just 3.5 years ago, Unite has returned 116%.

Housebuilders continue to outperform
With an average return of almost 20% in Q4, the five housebuilders in our Fund gave shareholders a stress-free Christmas this year.

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