Grainger Plc - Half Year Results
Delivering growth through operational excellence:
Strong performance, with a step change in net rental income
Helen Gordon, Chief Executive of Grainger, the UK's largest listed residential landlord, said:
"I am pleased to report a period of strong performance, in which we delivered +33% growth in net rental income, supported by like-for-like rental growth up +3.7%, and a +7% increase in profit before tax.
"We continue to successfully execute our strategy to invest in high quality new rental homes for the mid-market across the UK in target cities, with an operational portfolio of over 8,400 rental homes and a further c.8,200 new homes in our pipeline. Our strategy is designed to enhance shareholder returns by delivering a step change in our net rental income and thereby support strong dividend growth.
"Following the successful acquisition of GRIP in December, a PRS portfolio of c.1,700 rental homes in London, we have achieved a significant increase in net rental income. The integration of GRIP is ahead of plan and is beginning to deliver strong results. This major acquisition along with our pipeline of PRS development projects will see our net rental income more than double over the coming years, delivering strong future dividend growth.
"Our leading position in the private rented sector (PRS) was bolstered by our selection by Transport for London as their PRS partner to develop over 3,000 new homes across an initial number of seed sites in London. In addition to the TfL sites, our PRS investment pipeline will deliver over 5,200 new homes, of which £760m is secured and committed with a further £465m in the planning or legals stages.
"Our recently completed development, Clippers Quay in Greater Manchester, has seen strong lettings performance since its launch in November 2018. The first phase of 135 apartments was fully let in 4.5 months, with rents achieved +6.3% above ERV and a customer rating of 4.9 stars out of five."
§ Net rental income1 up +33% to £29.1m (HY18: £21.8m), with a repositioned income profile toward rental income and less reliance on sales
§ +3.7% like-for-like rental growth2 across our entire portfolio (HY18: 4.1%)
§ Adjusted earnings3 were down slightly to £38.3m (HY18: £40.9m) due to timing on sales and reduced development profits as previously indicated.
§ Profit before tax3 increased +7% to £54.3m (HY18: £50.6m)
§ Interim dividend per share increased +10% to 1.73p per share4 (HY18: 1.57p5)
§ Integration of GRIP ahead of plan and delivering results with operational efficiency targets achieved (32% gross to net improved to 26%), £4m overheads savings secured, +3.4% rental growth delivered and portfolio valuation uplift of £4.1m on the purchase price.
§ Market value of our portfolio has risen +0.6%, with strong growth in the regions, particularly in the South East, and East and Midlands, +2.7% and +2.6% respectively.
§ EPRA NNNAV6 of 271p per share at the period end was stable compared with 270p per share post rights issue (FY18: 286pps restated for the bonus adjustment of the rights issue). Uplifts in earnings and valuations were largely offset by the payment of the final dividend (3.18pps) and the write off of goodwill.
§ Significant positive structural drivers continue to support a professionalised, large scale PRS, with a growing trend of private landlords exiting the sector.
Growing rents - increasing net rental income returns and securing new investments
§ In addition to overall net rental income increasing +33%, we achieved strong like-for-like rental growth across our entire portfolio of +3.7% (HY18: 4.1%), with +3.4% growth on our PRS homes (HY18: 3.2%) and +4.4% annualised growth on regulated tenancy rent reviews (HY18: 5.5%).
§ Our secured PRS pipeline now stands at £760m7. We have a further £465m of investment opportunities in the planning or legals stages, and over 3,000 new homes via our partnership with TfL, representing an estimated c.£600m investment by Grainger.
§ We maintained our gross to net (property operating costs ratio) at 26.2% (FY18: 26.0%, HY18: 25.9%).
§ Occupancy within our PRS portfolio remains high, increasing 50bps to 97.5% (FY18: 97.0%).
§ +10% growth in our interim dividend to 1.73p per share (HY18: 1.57p), supported by the growth in net rental income over the period.
Simplified and focused - a platform ready for growth
§ Our strategic focus to simplify and focus our business and build scalability in our operational platform continues to serve us well.
§ The acquisition of GRIP further simplifies our business and provides Grainger with the full benefit of its pipeline in London and the South East. The integration of the portfolio is well advanced and delivering strong results.
§ Overheads for the Group remain stable as we continue to keep costs under tight control at £13.8m for the half year (HY18: £13.5m) and we are investing in our technology platform to enhance the scalability of our platform further.
§ Improved financial reporting - following the repositioning of our investment portfolio and income profile, we have revised our segmental reporting to reflect our PRS and regulated tenancy portfolios.
Strong financial performance
§ Net rental income up +33% to £29.1m (HY18: £21.8m)
§ +3.7% like-for-like rental growth across our entire portfolio (HY18: 4.1%)
§ Adjusted earnings were down slightly to £38.3m (HY18: £40.9m) due to timing on sales and reduced development profits as previously indicated.
§ Profit before tax increased +7% to £54.3m (HY18: £50.6m)
§ EPRA NNNAV of 271p per share at the period end was stable compared with 270p per share post rights issue (FY18: 286pps restated for the bonus adjustment of the rights issue). Uplifts in earnings and valuations were largely offset by the payment of the final dividend (3.18pps) and the write off of goodwill.
Regulated portfolio performing well and sales resilient
§ Valuations and achieved sales prices from our regulated tenancy portfolio were solid.
§ The market value of our regulated tenancy portfolio rose by +0.3% (HY18: 0.8%).
§ Year to date, we have been selling vacant residential properties 0.4% ahead of previous valuations (FY18 vacant possession value).
§ Sales velocity remains strong with our 'keys to cash' metric measuring 112 days, the same as in September last year when we reported our full year results.
§ A lower opening sales pipeline from a strong finish last year, reducing development activity and seasonality with weighting toward the second half, led to a reduced number of properties available for sale in the first half of the year, resulting in a lower profit from sales of £31.3m (HY18: £38.9m).
§ We remain confident in our ability to deliver a robust sales performance for the full year due to a strong sales pipeline8 as at 30 April 2019 of £128m (30 April 2018: £127m), providing good visibility for the second half.
Financing and capital structure
§ Average cost of debt stood at 3.2% for the first half of the year, reflecting our flexible capital structure and the tenor of the financing terms.
§ Net debt9 of £1,080m reflecting our continuing investment into PRS assets, including the consolidation of 100% of GRIP's debt post the acquisition (FY18: £866m, HY18: £912m)
§ Loan to value9 of 37.2% (FY18: 37.1%, HY18: 39.0%)
The investment case for a professionalised, large-scale PRS remains strong, with growing positive structural drivers, and Grainger is in a leading position to benefit.
Over 2019 we will deliver a number of our early investments from our pipeline, namely Clippers Quay in Greater Manchester, Gunhill in Hampshire, Finzels Reach in Bristol and Eccy Village in Sheffield (1,152 homes). From this year, our pipeline of PRS development schemes will begin to deliver at scale.
Grainger's fully integrated business and operational platform are designed for growth, and as we grow there will be further opportunities to enhance shareholder returns and profitability through operational leverage. Our investment in technology will support this further.
We are in a strong position to deliver a good performance in the second half of the year and a positive overall result. The acquisition of GRIP significantly accelerated our growth strategy to enhance shareholder returns and we have repositioned the income profile of the business. We expect our pipeline to more than double our net rental income over coming years and will directly lead to sustainable dividend growth.