Grainger PLC - Acquisition of GRIP REIT plc
Transaction accelerates Grainger's growth strategy into the UK private rented sector and delivers enhanced income returns for its shareholders
Alongside the announcement of a strong set of financial results today, Grainger, the UK's largest listed residential landlord, is pleased to announce that it has conditionally agreed to acquire the entire share capital and shareholder loans in GRIP REIT plc ("GRIP") from its joint venture partner, APG, for £396 million (the "Acquisition"). GRIP is a joint venture between Grainger and APG, currently owned 75.1% by APG and 24.9% by Grainger, which comprises 35 PRS assets (c.1,700 units) with a gross asset value of £696 million. Following the acquisition Grainger will become the 100% owner of GRIP.
Commenting on the Transaction, Helen Gordon, Chief Executive of Grainger plc said:
"I am pleased to announce today the acceleration of our growth strategy in the UK private rented sector with the proposed acquisition of GRIP REIT, our £696m PRS co-investment vehicle with APG, the expansion of our PRS investment pipeline to £1.37bn, and a strong set of financial results for the year.
The GRIP portfolio, which we have managed since 2013 and therefore know very well, is an exceptional acquisition. It will provide a step change in our investment in the PRS market and generate increased net rental income growth, which in turn will deliver enhanced shareholder returns."
"We have a well-established strategy for growth supported by an excellent operational platform to successfully manage the enlarged PRS portfolio, ensuring that we can deliver strong returns and great homes for our customers.
These actions will reinforce Grainger's position as the UK market leader in the private rented sector and will deliver enhanced shareholder returns going forward as we deliver our pipeline of PRS investments.
Today's announcements, highlighting our acceleration of our PRS strategy, coupled with our consistently strong financial performance gives us confidence in the continued future success of the Group."
Excellent strategic fit
GRIP's large, high quality residential property portfolio of c.1,700 PRS units at mid-market rental price points, are already well known to Grainger, who has managed the portfolio directly since 2013:
· The Acquisition is expected to be accretive to EPRA NNNAV in the medium term due to additional value from asset management initiatives on the GRIP portfolio and future development profits from the expanded pipeline which are expected to more than offset any immediate dilution from the Rights Issue and Acquisition
· Delivers £32.5m of gross rents per annum
· Generates a gross yield of 4.9% with strong rental growth prospects
· Assets located in strong rental growth locations in London and the South East of England
· Mid-market pricing - average weekly rent in the GRIP portfolio is 8% lower in London than the market average and 24% lower in the SE than the market average, supporting high occupancy of 95% and strong rental growth of 3.0% for the year to 30 June 2018
· A portfolio with a strong track record of performance:
o +4.2% outperformance in MSCI UK Residential Universe over the past 3 years;
o Sector Leader award for past two years in the Global Real Estate Sustainability Benchmark
· £17m of additional profit targeted from value add opportunities within the GRIP portfolio
· Alignment of operational and portfolio strategies which will deliver improvements on occupancy levels and gross to net from 32% to 26% in line with Grainger's overall operational performance
Acquisition supported by the Rights Issue will enable Grainger to expand its PRS pipeline
· Enables Grainger to expand PRS pipeline, utilising operating cash flow, gearing on the pipeline as schemes complete, and the Company's well-established asset recycling programme
· Ability to increase the Company's PRS pipeline by a further £382 million currently in the planning/legals stage, with targeted gross yields on cost of between 5.5 and 8 per cent
· Grainger's PRS investment pipeline will total £1,370 million, comprising £943 million secured, an additional £45 million secured via GRIP and the further £382 million referred to above
Delivery of enhanced income returns for shareholders
· Step change in net rental income and dividend; additional £32.5m gross rents per annum; projected increase in net rental income of approximately 3 times post pipeline stabilisation, underpinning dividend growth
· Future NAV growth potential captured from expanded pipeline; expected strong accretion from pipeline, planned asset management and recycling programme
· Enables the Company to use existing funding capacity to expand its PRS pipeline and take full control over PRS investments in London and the South East
· Operational and financial synergies
· Supports improved credit profile
· PRS portfolio will exceed regulated tenancy portfolio based on gross asset value
· Acceleration to REIT conversion
Full year results for year ended 30 September 2018
· The Company has also announced strong results today for the financial year ended 30 September 2018 which showed strong growth across all key metrics
· Adjusted earnings up +26% to £94.0m (FY17: £74.4m)
· EPRA NNNAV up +4% to 316p per share (FY17: 303p per share)
Funding of the Acquisition
The Acquisition will be funded by a £346.7 million rights issue fully underwritten by J.P. Morgan Cazenove and Numis.
The Rights Issue will result in the issue of up to 194,748,913 New Ordinary Shares (representing approximately 47 per cent. of the existing issued share capital of Grainger and 32 per cent. of the enlarged issued share capital immediately following completion of the Rights Issue). The Rights Issue will be on the basis of a 7 for 15 Rights Issue at 178 pence per New Ordinary Share.
The Rights Issue Price represents:
· a 30 per cent. discount to the theoretical ex-rights price of an Existing Ordinary Share, when calculated by reference to the Closing Price of 291 pence per Existing Ordinary Share on 13 November 2018; and
· a 39 per cent. discount to the Closing Price of 291 pence per Existing Ordinary Share on 13 November 2018.
Dealing in the New Ordinary Shares (nil paid) is expected to commence at 8.00 a.m. on 3 December 2018, the first trading day after the General Meeting to be held at 11.00 a.m. on 30 November 2018, at which Shareholders will be asked to approve the Resolutions.
Pursuant to the Underwriting Agreement, the Company has agreed, subject to customary exceptions, not to issue any Ordinary Shares or rights to subscribe for or acquire Ordinary Shares during the period of 180 days from the date of settlement of the Banks' payment obligations to the Company under the Underwriting Agreement, without the prior written consent of the Banks (not to be unreasonably withheld or delayed).
Class 1 transaction
The size of the Acquisition means that it is classed as a Class 1 transaction under the listing rules of the U.K. Financial Conduct Authority (the "Listing Rules"). Accordingly, the Acquisition is conditional upon, among other matters, the approval of Grainger's shareholders.
A combined Class 1 circular and prospectus (the "Prospectus") containing further details of the Acquisition and the Rights Issue and containing the notice convening the General Meeting (to be held at 11.00 a.m. on 30 November 2018 at the offices of Hogan Lovells International LLP, Atlantic House, Holborn Viaduct, London, EC1A 2FG) will be sent to Grainger's shareholders as soon as practicable.