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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Empiric Student Property PLC Full-Year Results 2021. My name is Katie, and I'll be coordinating your call today. [Operator Instructions]
I will now hand over to your host, Duncan Garrood, Chief Executive, to begin. Duncan, please go ahead.
Good morning and thank you for joining us today. I'm here with our CFO, Lynne Fennah. And our agenda today showed on slide 3 is as follows: I'll give a short introduction; Lynne will take you through the financial performance and our progress on ESG; after that, I'll talk in more detail about the business; and then, we'll open up for questions.
So, let me start with the headlines on slide 4. As you know, we started 2021 in challenging conditions due to the pandemic, with revenue occupancy averaging 65% during academic year 2021. However, market conditions improved during the year, and academic year 2021/2022 has reached occupancy of 84% at the upper-end of our guidance. It was a busy year with a lot of activity on the portfolio. In particular, we made a total of nine noncore asset disposals for £44.6 million, above book value [ph] at aggregate (00:01:35); the disposal of five of these assets completed after the year-end. This has allowed us to recycle capital, and we recently announced our first acquisition since 2018.
In addition, we have two developments under construction and successfully completed two pilot refurbishments which is delivering target returns. We've also agreed clear metrics for our ESG program, including setting a target to achieve net zero in our own operations by 2035. Most importantly, we have resumed dividend payments and committed to a fully covered progressive dividend policy, with a minimum payment of £0.025 for 2022.
As shown the chart on slide 5 at the half-year, and you can see how occupancy has developed during 2021. We believe the most transparent way to measure occupancy is to show the percentage of gross annual revenue. In other words, the total rental potential of the business for the year rather than the number of rooms occupied. Other PBSA companies may use different measures which can make direct comparisons difficult. We ended 2021 with occupancy at 84% to 10 percentage points below our best performance in 2019 pre-COVID. This gives us confidence that we're now on the road to market recovery. We also believe the transformation work we've done, both before and during the pandemic, puts us in a strong position as the world starts to open up again.
I'd now like to hand over to Lynne to take us through the financial performance. As you know, until recently, Lynne was also our COO. But now that our insourcing is complete and we have a full leadership team in place, she has relinquished that role and taken on responsibility for ESG as our Chief Sustainability Officer.
Over to you, Lynne.
Thank you, Duncan, and good morning, everyone.
Let's start with the 2021 headlines on slide 7. Despite occupancy revenues being lower than pre-COVID levels, the business continued to generate cash and we're reporting revenue today of £56 million, with a gross margin of 59% and administration costs of £10.5 million, below our £11 million guidance. Adjusted earnings decreased to £10 million which translated into adjusted basic earnings per share of £0.017. On a like-for-like basis, investment property valuation increased by 3.3%. EPRA net tangible asset value per share was up 2.2% to £1.074. And total accounting return, the sum of income and capital growth, has increased to 4.6% mainly due to the higher fair value of investment property.
Turning now to the income statement on slide 8. Revenue decreased 6% to £56 million as occupancy for the first eight months of academic year 2021 was 65% compared to 84% in the same period in 2020. We started the academic year 2021/2022 at 81% occupancy, and this has increased to 84% since then. As we told you at the half year, like-for-like revenue growth for the academic year 2021 was 1.3% as we prioritize occupancy levels over rental growth. Property expenses were up 2%, mainly driven by having paid council tax on empty rooms as a result of lower occupancy levels. Gross margins decreased from 62% to 59% due to a £3.5 million fall in revenue. During the period, we sold four assets with a net gain on disposal of £1.7 million.
Since the year-end, we have announced a further five disposals of assets of also above book value. The net profit from a change in the fair value as investment properties was £17.6 million compared to a £37.6 million loss the previous year. And I will talk through this in detail on the valuation slide. Net finance expense was £12.4 million, 7% less than the prior year [indiscernible] (00:06:26) due to maintaining [ph] the offices (00:06:27) at a low level and continued low interest rates. Taking all of this together, we're reporting a profit of €29.2 million with basic earnings per share of £0.0484.
Slide 9 shows a breakdown of the movement in our portfolio valuation. During 2021, we sold four assets for £18.1 million, above the book value shown here of £16.3 million. After that disposal, the portfolio was valued at £988.8 million. At the interim, we indicated we would spend £30 million on health and safety work over the next five years. CBRE's assumption is that £17.2 million of this cost should now be reflected in the year-end valuation in relation to work on external wall systems and fire stopping. The value of developments has fallen by £2.5 million due to a delay on obtaining planning consent on Canterbury.
At the end of December 20, we reported a COVID-related reduction in our portfolio valuation of £21.4 million, mainly due to CBRE's assumption of 50% occupancy for the balance of the academic year 2021. We are now reporting £15.2 million move in our favor as CBRE reduced their COVID deduction to £6.2 million. This deduction relates to the 2021/2022 academic year only, with no deduction proposed for the academic year 2022/2023. During the year, we spent £8 million on capital expenditure and £7.4 million on development, mainly on St. Mary's, Bristol. Our operational assets increased in value by £21.3 million, driven by improved deals on our super prime assets, partially offset by rent reduction in secondary assets. Our commercial portfolio, which comprises convenience stores and restaurants within our sites, went up by £800,000.
The valuation at the end of December, before adjusting for assets that we have sold following the year-end, was £1.0218 billion. Over the year, net initial yield has improved from 5.6% to 5.3%. And as I mentioned since the year-end, we have made further disposals as well as an acquisition which Duncan will talk about later, and we have £25.9 million of assets classified as held for sale at the year-end.
Turning now to look at the balance sheet on slide 10. As you have seen, the portfolio is now valued at £995.9 million. The cash holding was £37 million, compared to £34 million in the prior year. Debt now stands at £371 million after deducting loan arrangement fees, down from £385 million. And the net asset value of the group was £648 million compared to £633 million.
Looking at our debt position in more detail on slide 11. At the end of December, before deduction of loan arrangement fees, the group has committed investment debt facilities of £420 million, of which £375 million were drawn down. £277 million of this debt is fixed and £98 million is floating. The aggregate cost of debt was 3% with a weighted average term of 4.9 years. And the loan to value for the group was 33.1%, below our 35% long-term target. As of January 31, we had £81.2 million of undrawn investment facilities and cash, and we currently have around £44 million of unencumbered assets. We have recently signed a three-year extension on similar terms of a £90 million Lloyds Bank RCF, which was due to expire in November. In an environment with rising interest rates, it is important that three-quarters of our drawn debt is fixed.
I'd like to move on now to talk about progress on our continuous improvement initiatives on slide 12. The final work on our new revenue management system concluded in October when we brought the process for the collection of receivables in-house. This is now a centralized function within the finance team. The system gives us direct control of our revenue management, enabling us to make price changes more efficiently and swiftly. It allows us to manage the relationship with our customers directly end to end. It makes debt collection easier. And importantly, we are delivering annualized cost savings of £1.5 million which started in September.
As we told you in August, we have turned our focus to sustainability now that we have direct control of all our assets. In 2021, our ESG Committee undertook our first formal materiality assessment using an independent third-party consultant. This review process included listening to over 1,700 students to better understand their expectations; undertaking a range of surveys and focus groups with our colleagues; as well as one-to-one interviews with other stakeholders such as investors, banks, professional advisers and analysts.
The output of this work is the materiality matrix presented on slide 13. At the interims, we advised we would focus on four key themes, all shown on the top right-hand side: energy efficiency, sustainable buildings, health and safety, and mental health and well-being. The ESG Committee have further reviewed the materiality matrix and decided to combine energy efficiency and sustainable buildings under one heading. So, we have added a fourth area which is providing opportunities for all through all of our business activities.
I'll talk about each focus area in turn on slide 14. So, starting with becoming a sustainable business, we intend to become net zero in all our operations, property portfolio and energy consumption by 2035. As part of our ambition to achieve net zero, we have appointed CBRE to help define meaningful KPIs. Also, our utilities adviser is building an asset-by-asset roadmap of green initiatives to reduce energy usage.
In December 2021, we undertook our first pilot green initiative on three assets in Manchester costing £100,000. We installed smart panel heat network system which adapts the heating ability based on environmental factors within rooms, thereby minimizing the use of energy. The payback on this project is expected to be less than two years. During 2021, we also replaced all of our site vans with electric vehicles. And we have also signed up to the Task Force on Climate-Related Financial Disclosure, and this is our first year of making disclosure in line with TCDF (sic) [TCFD] (00:14:31) recommendations.
Moving on to health and safety. At our interim results, we announced we've undertaken work to ensure that our buildings are compliant with future health and safety legislation. We undertook fire stopping work on 21 buildings during the year. We also conducted external wall surveys on 19 buildings, including those over 18 meters tall and won't be categorized as high risk. Our property team are currently working through [ph] the acquisitions arising (00:15:05). In addition, we undertook training at every level in the organization, updated our health and safety policy, and recruited a full-time in-house health and safety expert who joined this month.
Turning to mental health and wellbeing. During the year, we delivered mental health training throughout the organization so that we are better-equipped to support both colleagues and students. And we continue to provide customers with unlimited access to a 24/7 mental health and counseling service.
Our new category is providing opportunities for all. We believe that being inclusive improves opportunities for our students, employees and people looking at the communities we operate in. On January 2021, we became a living wage employer as we strongly believe that our people should be fairly rewarded. And we've introduced two new people KPIs, one to track mandatory training levels and the other to track internal promotions. You can see our 2022 priorities in all four areas on the slide.
I'd like to move on now to give you more details on capital expenditure. Last August, we gave a high-level indication of our plans over the next five years. Starting with an estimated £44 million refurbishment spend, we spent £1.5 million on two pilot refurbishments in Bristol, Leeds, and we plan to spend a further £4.4 million on refurbishment projects in 2022 with a more significant program planned for 2023.
Managing our office in a sustainable way is now a key focus. And having spent £100,000 pilot project in Manchester I just mentioned, we're turning investment of £0.5 million in 2022 on more smart panel heat network systems and also solar panels.
We previously advised we plan to spend £30 million on fire safety works in our buildings. We were uncertain how much we'll recover from developers, so we have increased this to £37 million. Last year, we spent £2.5 million on fire stopping work and £800,000 on external wall surface. In 2022, we plan to spend a further £3 million on fire stopping work and £12.6 million on the first work for external wall system replication. Annual maintenance CapEx in 2021 was £3.1 million, and we estimate £4 million for 2022.
Turning now to the outlook on slide 16. Trading conditions are starting to improve and current revenue occupancy for the 2021/22 academic year is 84%, at the upper-end of our guidance. Occupancy for the next academic year 2022/2023 is currently at 36%, broadly in line with March 2020 before the pandemic. With greater confidence to market conditions normalizing, we expect occupancy for the academic year 2022/2023 to be in the range of 85 to 95%, and we are targeting the upper-end of that range assuming no further disruption.
We expect administration costs to be around £12 million, taking into account higher inflation and our investment in the business for growth. Our cost forecast includes an inflationary uplift in salaries this year for those in more junior positions and a smaller uplift for more senior roles. We are benefiting from having hedged our electricity and gas costs from Q1 2020 up to Q3 2024. And, of course, three quarters of our drawn debt is fixed, which gives us a significant protection from rising interest rates.
Our expectation for capital expenditure in 2022 is £24 million (sic) [£24.5 million] (00:19:22) in total, taking into account the expenditure I detailed earlier, and a further £13 million on development. On the dividend, we are pleased to have reinstated payments in Q4 2021 with the payments of £0.025 to cover 2019 and 2020. In 2022, we plan to pay a minimum of £0.025 per annum and have just announced our first quarterly payment.
Thank you very much. I'll now hand back to Duncan.
Thank you, Lynne.
Slide 18 shows the full academic year 2021/2022 applications data from UCAS. Acceptances were a little lower than applications due to COVID. But the continued growth of applications shows the underlying demand for UK higher education. Total undergraduate applications grew 3%. But within this, domestic applications were up 5%. Non-EU international applications increased 13%, and EU applications declined 40% post Brexit. The increase in sponsored study visas issued to international students is encouraging as they surpassed pre-pandemic levels by 55%.
Now, that we have our own in-house marketing and booking platforms, we're targeting customers with much greater flexibility. In academic year 2021/2022, nearly half our customers are from the UK, up from pre-pandemic levels of a third. The other half is split equally between Chinese and other international students. Whist British students tend to prefer the lower tariff rooms and a 44-week rental commitment, we have not discounted our rents though we have shown some flexibility on rental lengths.
For academic year 2022/2023, we will again flex our marketing targets, depending on the behavior of particular groups. Our focus remains on returning undergraduates and post-graduates, both from the UK and abroad. We're encouraged that so far Chinese and other Asian markets are, again, at the forefront of international inquiries.
So, let me turn now to slide 19, which shows the five key priorities for the business that I set out last year. We've made progress on each of these priorities, so I'll talk about them in turn starting with our portfolio, which we are managing actively to enhance returns.
Slide 20 shows the portfolio segmentation we presented last March and the current percentage by value of each segment, updated for disposals, acquisitions, changes in categorization, and fair market value. Clearly, these segments will fluctuate in size and value as we continue to optimize our portfolio.
Segment A comprises properties yielding our best results. We've grown this segment by 7 percentage points through the addition of an acquisition and the assets that's been upgraded from Segment B, as well as valuation uplifts. Segment B consist of sites, which fundamentally meets the Hello Student criteria, but need investments to command an improved rental yield. Our aim is to upgrade these sites to Segment A. One asset has already been moved as I just mentioned.
Segment C are not core Hello Student assets but have good commercial characteristics. Originally, this included a small number of sites balanced by nomination agreements and what's mostly suitable for UK [ph] freshers (00:23:26). We've decided to eliminate this group. And as a result, four sites have moved from Segment C to Segment D. So, Segment C now solely cover sites ideal for mature graduates or postgraduates. We aim to grow and sub-brand this category subject to successful pilots.
Segment D comprises assets that are no longer core and are on a disposal program. So far, we've sold nine assets in total, which reduced it to 6% of the portfolio by value. However, as I just mentioned, we also recategorized four properties from Segment C to D, which brought it back up to 80%.
So, let me give you more detail on slide 21. Since March last year, we've sold nine assets in Segment D for £44.6 million located in Durham, Exeter, Leicester, Portsmouth. Most of the accommodation in these assets consisted of apartments with shared facilities, which is not in line with our core brand offer. We're at various stages of discussion on the remaining assets in Segment D and expect further progress in 2022. These disposals are enabling us to recycle capital as you will see on slide 22.
We've recently announced our first acquisition since 2018, Market Quarter Studios in Bristol for a cost of £19 million with an expected unlevered IRR of 8% to 9%. Market Quarter adds 92 high-quality beds in a site close to the university, the city center, and to our two existing operational assets. In terms of quality, this asset sits comfortably towards the top of the Segment A and is currently fully occupied. Within days of ownership, we made significant changes. Long-running plumbing issues were fixed immediately. The reception is now manned 24/7, and a series of social events in the building has been announced for the very first time. As a result, at our first week of ownership, 30 students told us that they were going to rebook.
Bookings for academic year 2022/2023 are encouraging with an average uplift in rent of 18%, which, together with letting the vacant retail unit, will raise the net initial yield well above 5%. Our strategy is to increase sites and bed density in Russell Group and other top-quality university cities, which are in high demand and have a growing number of students.
So, we're also completing the development of St Mary's in Bristol, which adds a further 153 top-quality beds. This means that within the year we will have increased our cluster in Bristol from two sites with 159 beds to four sites with 404 beds, all within 10 minutes' walk of each other and with the same management team. In this way, we can retain the small site homely boutique proposition, reduce our costs, and improve our margin.
We're also recycling capital into three developments, which you can see on slide 23. First is St Mary's, Bristol, which we expect to complete from the start of the new academic year at a cost of £28.5 million. As a result of COVID, our original yield of cost has moved slightly from a planned 6.5% to 6.3%. The unlevered IRR is 10% to 11%. We've already sold 50% of the rooms at St Mary's and some of the highest rents in our portfolio.
The second development is in Edinburgh, South Bridge, which will provide accommodation for 59 students ready for academic year 2022/2023 at a cost of £12 million. This is a pilot site for a new sub-brand for postgraduates as we believe there is a significant opportunity for tailor-made proposition for these customers that make up nearly 25% of all UK university students. We expect South Bridge to deliver a yield on cost of 6.1% and the unlevered development IRR of 12% to 13%.
We've also successfully completed two refurbishments during the year in Bristol and Leeds, as you can see on slide 24. As a result, the site in Bristol has been moved to Segment A. We have upgraded between 20% and 25% of the rooms at these sites. All the refurbished rooms are occupied in academic year 2021/2022, and gross annual revenue for academic year 2022/2023 reflects an average expected refurbishment uplift of 15%. Both refurbishments were delivered within budget, deploying £1.5 million of CapEx and will achieve a target IRR of 9% to 11%.
We don't plan to upgrade all the rooms at any one site as we want to offer a choice of room grades and prices to our customers to have broad appeal to a wide group. We have a five-year refurbishment program to eliminate Segment B. The work will be phased in line with cash generated from disposals.
As Lynne said earlier, in 2022 we plan to spend £4.4 million on at least four further refurbishments to be completed this summer. One of these covers the common areas of the Pennine House, Leeds site where we have just completed the refurbishment of bedrooms. And this asset will then move into Segment A. Other sites include Birmingham, Leeds, and Leicester. They will all be subject to our 9% to 11% IRR threshold.
Slide 25 shows our current portfolio. We have 8,775 operating beds in the portfolio last August and now have 8,391 beds following the disposals from Segment D and the addition of our acquisition in Bristol. We expect this number to increase to 8,603 beds at the start of academic year 2022/2023 once the development in St Mary's, Bristol and Edinburgh, South Bridge are complete.
76% of our portfolio currently serve our target universities. And once Segment D is eliminated, we expect this to rise to well above 80%. In other cities where we are the dominant provider of space and have a strong commercial performance, for example, Falmouth, we intend to maintain our position.
I'll move on now to our brand on slide 26. Our Hello Student brand already has strong awareness and a good reputation. But we are refreshing our proposition through further research in customer insights. This identifies four key principles that are essential for our brand proposition to deliver what the students expect. Our refreshed brand proposition will be used to redesign our website, revise our approach to social media, and for a thorough overhaul of our customer's digital journey with Hello Student. This will give us strong differentiation in the market and will also increase conversion and retention rates.
With in-house revenue management fully operational, slide 27 shows how we're combining the rigor of algorithmic analysis with human judgment. We hired experienced data analysts to give us detailed understanding of pricing, conversion rates, and the effectiveness of our marketing. The operating teams review their output on a weekly basis and apply experience and judgment to make the right adjustments, so that we can optimize room pricing and marketing spend in relation to occupancy rates and competition.
As an example, in one of our sites we had fast-growing demand in the early part of the booking season in December. Instead of leaving prices static and filling up right at the start of the season, our algorithm suggested price increases for some rooms of up to 10%. This has delivered an uplift in the overall site average rent of 3% to-date. Since then demand has continued but at a moderated rate. So, it's clear that we made the adjustment at just the right time and we expect to be full for academic year 2022/2023.
We're also using data to completely overhaul our room categorization. In total, we have over 70-room categories, and we plan to simplify this significantly to deliver an easier booking process and better conversion.
Slide 28 shows that academic year 2022/2023 bookings are well ahead of the previous year. You could see a flatter early trajectory as we use dynamic pricing to take pricing opportunities as I just described. As the student mix gets closer to pre-pandemic levels and with continual quality improvement, we expect our higher tariff rooms to sell well. As you heard from Lynne, we're giving cautious guidance on occupancy for academic year 2022/2023 of 85% to 95% and are aiming for the upper end of that range assuming no further disruption.
Let's turn now to customer service on slide 29. With a new director of operations in place, we're reviewing all our processes, so that we can deliver high-quality customer service consistently across all our sites and drive higher net promoter scores. For example, we could do some things such as ID checking, which is a statutory requirement more effectively online before a resident arrives. This would free-up time to welcome new residents with a guided tour instead of checking paperwork. We know that a friendly personal experience leads to a greater propensity to recommend a stronger retention. It also underpins our ability to charge premium rents. Another way we plan to improve service is by launching a customer app later this year, which will enable our students to communicate with us easily and quickly.
Moving on now to our people on slide 30. We've continued to invest in our people as a successful service organization must do. So, let me give a few examples. Now that our leadership team is complete, we've employed a high-quality performance coach to develop individuals and the team. We're putting 25 of our middle managers through a development scheme and using the apprenticeship levy to improve skills in our customer service teams. In the case of maintenance teams, this means we could do more jobs in-house and reduce costs.
Last year, our colleagues engagement of 81% compared very favorably to the national average of 68%. We've also joined the Best Companies scheme, the previous Sunday Times' Best Employers Group. And in our first survey, we were at the top end of the ones to watch. At a time when hiring is very competitive, there is a strong rationale for focusing on employee retention and development.
So, in summary on slide 31, our plans are focused on delivering improved, sustainable shareholder returns. The number of students in academic year 2022/2023 is set for continued growth, and we are cautiously optimistic that revenue occupancy would normalize with guidance of 85% to 95%. We're actively managing the portfolio to recycle capital with good progress on disposals and developments. We've also made our first new acquisition since 2018.
We've initiated a refurbishment program that's generating good returns. Our ESG road map now has metrics, which include achieving net zero on our own operations by 2035. We're pleased to have reinstated dividend payments and expect to pay a minimum of £0.025 this year fully covered with a view to increasing the dividend progressively as revenue grows. Finally, we're targeting gross margin above 70% and a total return of 7% to 9% as occupancy returns to normal.
Thank you very much. And we're happy to take your questions now. [Operator Instructions]
We have a question from the webcast from [ph] Tom Madden (00:38:31).
Thanks very much for the presentation. One question for me, please. To help with our modeling, how should we think about average bed numbers in 2022 versus 2021 given potentially more capital recycling in the year ahead? Thanks.
So, thanks for the question, [ph] Tom (00:38:51). Clearly, in managing the portfolio, we are going to reduce the number of beds in Segment D. And as you've seen through both developments and through acquisition of [ph] outstanding (00:39:06) assets, increase them in categories A and to come probably in category C, too. Whilst we're not able to give individual details of sites that we intend to dispose of, and therefore we can't directly give you a correlation between beds, we will keep the market posted as we make disposals and acquisitions. So, as we move through that process, we will always make an announcement on the changes in number of beds. Hope that answers your question.
We have a question on the telephone line from Kieran Lee from Berenberg. Please go ahead, Kieran.
Hi, all. Thank you very much for the presentation. Actually, a few for me if that's okay. Would you be able to give us a little bit more color on how occupancy rates and pricing compared for category A versus category B or even D buildings in the current academic year?
The second question was that you mentioned that even after the target Segment D sales, you'd still be only 80% exposed to those sort of core markets. Should we be reading into sort of further future disposals or recategorizations?
And then lastly was actually on the dividend. You flagged a minimum payment of £0.025, but what would it take to increase this perhaps over into sort of Q4?
Kieran, thank you for that. I'll answer the first two of those, and then I'll hand over to Lynne to answer the question on dividends.
In terms of occupancy rates, clearly, one of the attractions for us in investing in Segment B is to upgrade the quality of the asset to Segment A, which, by the very nature of that process, will uplift rental yields. And as I mentioned in the presentation, those investments are giving an average IRR of 9% to 11%. So, indeed, we command better rents in Segment A than we do in Segment B, hence, the investments that we intend to make.
In terms of physical occupancy though, there is no correlation because clearly rents are set to the quality of the asset and the competition for every single site. So, there is no disparity in percentage revenue occupancy across the portfolio.
And to your second question on core markets, you're quite right in saying that we believe, after our current disposals of Segment D, that we will be over 80% in our core target markets. This is not to say that the other 20 or so percent are not attractive markets for us, but the 80% of those markets where we aim for further growth. So, for example, in Bristol, which is one of those core markets, where we have increased our footprint, we will intend to continue to look for more bed stock in those 80%. But the remaining sites are not located in areas that we would dispose of, they [ph] performed with this (00:42:29) very well indeed. It's just that they may not quite have the growth and cluster density potential that the core sites have.
Lynne, do you want to take the...
Yeah, absolutely. So, with dividend, obviously, we set a minimum of £0.025 at this year. You'll appreciate that because our academic year doesn't line up for the financial reporting calendar for the first eight months of this year, we already saw our revenue at quite a bizarre situation in the business actually, over 84% now for that first eight months. Also, being able to increase the dividend this year is largely going to be dependent on what the occupancy is come September for next academic year.
We would hope to be able to make some increase this year if we are at the upper end of our guidance. But the real price will come when we offer full financial year back to the mid to high 90s level of occupancy. As you've seen over the last two years, we've done a great job on costs. They are under control and it's really going to come back from revenue. I hope that helps.
All very helpful. Thank you.
Yes. Thanks, Kieran.
We have some more questions from the webcast. So, we have a question from Andrew Gill from Jefferies saying, could you add some color on the potential increase in gross profit margins from more the doubling the numbers of closed clustered beds in Bristol? And do you intend having a second brand in parallel to Hello Student? And could you provide any color around potential investment requirement?
Certainly, I'll cover those. So, in terms of the gross margin, Andrew, the nature of leverage is that as our occupancy gets up towards the target of the high, middle 90s, we certainly believe that we will be driving our gross margin up towards the 70% mark as we have declared. Now, clearly, 2022 is a blended year in the sense that three quarters of the year is governed by the academic year 2021/ 2022 where our occupancy is at 84%, and therefore will be at a lower-than-target gross margin.
But what we are aiming for is, at 2022/2023 academic year, if we reach the targets that we are shooting for in the middle 90s, then we will return to gross margins that are over 70%. As a result of which, the outlook, if you like, for 2023 financial year will be at those higher gross margins. Clearly, part of that drive on gross margins is because of the change in the portfolio. We typically have higher gross margins in our Segment A properties that we do in our Segment D. And therefore, the more that we upgrade the quality of our portfolio, the higher we are able to drive our overall blended gross margin.
In terms of the branding, you're quite correct in saying that, over time, we anticipate we will have more than one brand. At Hello Student we will have a second brand that is focused on postgraduates. And I'm hoping, at the interim announcements in August, we'd be able to give more color and detail around that.
And in terms of investments in that, we haven't determined it yet. I don't anticipate this being a costly exercise. It is more around rebranding and focusing our proposition on requirements of a particular market of postgraduates as opposed to undergraduates. But, of course, we will be able to exploit a different branding and targeted communication for them, which we believe we'll be able to drive better growth. And that is what Segment C will become. Hope that gives you an answer to those three questions, Andrew.
Okay. We have a question from Matthew Saperia from Peel Hunt. They say, thanks for the presentation. You mentioned weaker pricing in some secondary locations. Can you elaborate on that, and can you also discuss pricing more generally as we look to 2022/2023?
Thanks, Matt. In terms of the pricing, there is no difference from that which has been existing in our previous years in terms of the spread of pricing. As you might imagine, we tended to find higher pricing in the more competitive attractive markets of students. And as you move to secondary cities, the pricing gets cheaper as it does for many other commodity items, too. We haven't seen any further polarization of that as we're coming out of COVID or in during COVID, but it continues at that same differentiation between the markets as you would normally expect.
Okay. The next question comes from Michael Prew from Jefferies. They say, how do you see the further condensing of the portfolio? And how do nomination agreements feature in the decision to sell/retain process, please?
Thank you very much, Mike. You're quite right that we certainly see a focusing of our portfolio. As we started this process, we were active in 29 cities in the UK. And as we go through the consolidation of our portfolio around our target cities, that number will decrease. As you will have seen in the presentation, we have already exited one city which was Durham where we had a single site that we couldn't see the opportunity to expand growth in. So, you should expect to see, as we go through our disposal program, a further consolidation and that will be around the target university cities of high-quality that I mentioned before.
Now, for reasons that I hope are obvious, we're not able to list what those cities are. They are currently still attracting new customers and, therefore, we don't wish to jeopardize that process. However, what we can say is that where we have assets in high-quality university and Russell Group cities, those are the ones that we will be expanding on and we will be disposing in those that we can't grow in.
In terms of nomination agreements, typically, it is not particularly around the nomination agreement that we've taken a decision to exit that group. It's really around the configuration of the type of asset. As you know, we have a majority and a focus in our business on studio, on suite apartments for our customers. And the assets that we're looking to dispose of mostly don't conform to that. They have shared facilities usually and tend to attract UK freshmen students, which is not our goal market. So, it's not particularly a comment on nomination agreements per se, it's more that the nature of the asset isn't consistent with the focus that we have within Hello Student, which is on the second year returning undergraduate and postgrads. So, I hope that answers that one. [Operator Instructions]
We have a question on the phone line from Julian Livingston-Booth from RBC. Please, go ahead.
Yeah. Good morning. Thanks for the presentation. Just one question for me. I wonder if you could give it a little bit of color on the number of acquisition opportunities that you're sort of currently seeing and maybe something on your confidence in terms of being successful on those?
Julian, thank you for that. I would say that we are currently in a happy position of having more opportunities than we have at the moment, the wherewithal to take up which is a very encouraging situation for us to be in. In terms of the type of acquisition that we are looking for, the market quarter acquisition in Bristol is a very good example of exactly the type of acquisition, the standing asset that we would want to make, increasing cluster density in target cities, conforming to the sort of more boutique nature of our – that college student brings, yet bringing a greater degree of operational efficiency by being clustered close to our existing assets. We have seen quite a few of those opportunities in our target cities more than we would be able at the moment to digest. And therefore, we are in the position that we're able to focus in on the ones that are really most attractive to us. And our very good and upgraded property team, very active in the marketplaces, looking for those opportunities and passing them through our funnel so that we pick the very best ones that are out there in the market. And I would hope, over the course of the next year, that we shall see more of that.
Okay. Thanks a lot.
We have a webcast question from [ph] Matthew Phillips (00:52:09). They say the shares of Empiric have consistently traded at a discount or a discount to asset value. At the same time, other companies in the sector such as Unite and previously GCP have enjoyed healthy premiums. Does the board believe there is a material reason for the valuation differences between our company and others in the sector? And how do you propose to address this?
Yes. I'll take that one. So, obviously, the group had some challenges in 2017/2016, and it started to change the leadership team in the business. The poor performance at that time really drove down the share price of the business. In January 2020, quite frustratingly for me after all that transformation work, we were only £0.05 [indiscernible] (00:53:07). We needed to do the transformation work to reduce our cost base, generate revenue better, and also prove the business model. Because we operate at a different segment, we obviously get compared to Unite because there we have [indiscernible] (00:53:25) GCP was more comparable to us but no longer there to lift the market. And I think we're starting to prove our business model. We operate in a different niche [indiscernible] (00:53:36) agreement. We're not targeting first years, it's the second, third years, post-grads [indiscernible] (00:53:41) and it's a different business model. We can still achieve operational efficiency by clustering assets which you can see that we're starting to do more.
So, I think it's been that history of Empiric enough to say we were quite close January 2020 but then we all heard of something called COVID, which has set us back in terms of returns for this period because of the impact on revenue. But during that period, we've continued our transformation work in earnest. So, I would hope that we start. Obviously, we have issues globally with conflict, but we are hoping that we do start now to come back to closer to that number.
And, [ph] Matthew (00:54:23), if I can just add, I think there's one other element to that, perhaps, when I came into the business, was said to me and that is because the business had never undertaken a transaction of any of its assets, there was a question mark over whether the NAV was a fair valuation of what assets would fetch in the market. But I think what we've seen in the last year with the sale of nine of our disposal properties at the lower-end of the quality spectrum at above book value that that NAV has been evidenced by market prices. And I think that gives confidence that the NAV valuation is very genuine, it's very real, and potentially has some upside in it that we believe should be reflected in the share price as we go forward.
I hope that helps, [ph] Matthew (00:5:08). [Operator Instructions]
Okay. We have no further questions, so I'll hand it back to Duncan and Lynne for any final remarks.
Can I say very many thanks to all of you for joining us today. I know for those based in London, it has been a trauma to travel. And so, we do thank you for giving your time this morning. And as ever, we're always happy to take questions from anybody outside of this presentation, and we look forward to speaking to many of you later on in that regard. So, thank you very much, indeed, and we wish you a very good day.
Thank you, everybody.