Grainger plc

 

Interim results for the six months ended 31 March 2018

 

Strong financial performance and growth trajectory,

leading the market in private rental homes

 

 

Helen Gordon, Chief Executive of Grainger, the UK's largest listed residential landlord, comments:

“I am pleased to report another period of strong performance. We delivered 9% growth in net rental income and 20% growth in adjusted earnings. We continue to lead the private rented sector (PRS), a sector undergoing structural growth, and we are well positioned for the future. Our secured PRS investment pipeline now stands at £756m and we have a further £258m at the planning or legals stage.

 

“We are a business on a strong growth trajectory and the opportunity in the UK PRS market is vast.  We are uniquely placed given our market leading position and our in-house capability to originate, invest and operate homes for rent.

 

“Our recent development, Argo Apartments in Canning Town, London, has delivered an exceptionally high-quality rental product at affordable levels and we have seen excellent demand for these homes with 97% let in four months, above estimated rental levels, representing a 7.5% gross yield on cost. The customer service and experience we are delivering is at the forefront of the PRS market and we will continue to invest and innovate to further build on our position.

 

“Our sales have continued to perform well with profit up 11%. We continue to be disciplined in our asset recycling to support improved portfolio performance and enable future growth. In the few weeks since the period end, we sold our investment in our Walworth joint venture, further simplifying and focusing Grainger and providing additional capital for recycling into new PRS schemes. We also refinanced our corporate bond, with a new £350m, 10-year issuance, extending our debt maturity and reducing costs. We have recently acquired two attractive new PRS schemes, one in Southampton and another in Milton Keynes, which together will deliver 393 new high-quality homes for rent.

 

“We are improving customer operations and our customers are responding by staying with us longer. Our like-for-like rental growth was 4.1% over the six-month period. We are positioning Grainger for the next stage of growth, with investment in people, processes and technology to optimise our efficiency and scalability. We look to the future with confidence as we develop further good quality homes for rent, for the benefit of our customers, shareholders and employees.”

 

Key headlines

§ £756m secured PRS investment pipeline (FY17: £651m, HY17: £439m)

§ Net rental income¹ up 9% to £21.8m (HY17: £20.0m)

§ 4.1% like-for-like rental growth² across our entire portfolio (HY17: 3.5%)

§ Adjusted earnings³ up 20% to £40.9m (HY17: £34.1m)

§ Profit before tax² increased 23% to £50.6m (HY17: £41.2m)

§ Interim dividend per share up 9% to 1.74p per share⁴ (HY17: 1.60pps)

§ Net debt⁵ of £912m reflecting our continuing investment into PRS assets (FY17: £848m, HY17: £791m)

§ Loan to value⁵ of 39.0% (FY17: 37.7%, HY17: 36.0%)

§ EPRA NNNAV⁶ up 1% since the year end to 306p per share after returning £13.6m (3.26pps) to shareholders in the period (FY17: 303pps, HY17: 295pps)

 

Strategic progress

Growing rents – securing investment and growing income returns

§ 9% increase in net rental income to £21.8m (HY17: £20.0m), with acquisitions and rental growth more than offsetting the impact of disposals.

§ 4.1% like-for-like rental growth across our entire portfolio (HY17: 3.5%). We delivered 3.2% growth on our PRS homes (HY17: 2.9%), outperforming the market and evidencing the benefits that a well-managed, professional and customer service focussed offering can deliver. 5.5% annualised growth was achieved on regulated tenancy rent reviews (HY17: 4.3%).

§ Our market leading position and ability to originate, invest and operate underpins our investment success. We have secured £756m of private rented sector (PRS) investments (FY17: £651m, HY17: £439m), a further £258m is at the planning or legals stage and £519m is under consideration as we progress towards our initial £850m target and beyond.

§ High rental income margins are underpinned by our focused cost discipline, together with our recently improved processes and supply chain management, all of which drive our efficiency. Our gross to net (property operating costs ratio) was 25.9% (HY17: 25.8%).

§ 9% growth in our interim dividend to 1.74p per share (HY17: 1.60pps), reflecting the growth in net rental income.

 

Simplified and focused – well placed for significant growth

§ Our strategy to simplify and focus our business and improve efficiency continues to serve us well.

§ Overheads and other expenses remain well managed at £13.8m for the half year (HY17: £13.8m) and we are investing in technology, systems and processes to enhance the scalability of our platform and prepare Grainger for our ambitious growth plans.

§ We remain focused on improving our debt maturity profile and reducing our cost of debt. The average cost of debt at 3.5% for the first half was in line with the average for FY17.

§ Since the period end, we have issued a new £350m 10-year corporate bond, with a coupon of 3.375%. We were delighted by the positive response and investor demand for the issuance, reflecting our improved credit rating and the success of our strategy.

§ After the period end on 2 May 2018 as part of our asset recycling, we announced the sale of our 50% interest in the Walworth joint venture for net proceeds after debt of £67m. Our share of the gross property assets was £103m. The transaction generated c.£7m of profit before tax and legal costs, and is expected to be marginally accretive to NNNAV. The disposal simplifies and focuses Grainger and provides capital for recycling into higher yielding PRS assets, which we believe will deliver greater returns for shareholders.

 

Strong financial performance

§ 20% increase in adjusted earnings to £40.9m (HY17: £34.1m), driven by increased rental income, a strong sales performance and tightly controlled operational and finance costs.

§ Sales profit is 11% ahead of the prior year at £38.9m (HY17: £35.0m), fuelled by growth from residential sales which was supported by asset management led capital recycling initiatives. This more than offset the lower sales on vacancy following the high volume of completions at the end of FY17 and a slight increase in the time taken for sales transactions in the first half.

§ Our sales of vacant, ex-regulated tenancies continue to perform well. On average, we have been selling vacant residential properties at 1.7% above the September 2017 vacant possession value (HY17: 2.0%).

§ Overall residential sales pipeline⁷ as at 30 April 2018 of £127m (30 April 2017: £115m), providing good visibility for the second half.

§ EPRA NNNAV increased by 1% since the year end to 306p per share (FY17: 303pps, HY17: 295pps), after a £13.6m (3.26pps) final dividend was returned to shareholders in the period. 

 

Outlook

 

We expect to deliver a good performance in the second half of the year and a positive overall result. We remain selective and disciplined in our investment approach and the strength and quality of the PRS investment opportunities we are seeing provides us with increased confidence as we follow this growth trajectory.

The potential for the private rented sector is compelling and alongside securing new investments, we are focused on further developing Grainger's platform to support growth, scalability and the delivery of excellent and efficient services for our customers.

High-quality, customer focused rental homes are providing a new way of living. Grainger is the UK's largest listed residential landlord and we are at the forefront of this developing market. The strength of the market and our potential provides the opportunity for us to grow and invest significantly ahead of our initial target and we are confident in the future prospects for Grainger.

 

 

¹ Refer to Note 5 for net rental income calculation.

² Rental growth is the average increase in rent charged across our portfolio on a like-for-like basis.

³ Refer to Note 2 for adjusted earnings reconciliation and PBT.

⁴ Dividend – The dividend of 1.74p per share (gross) amounting to £7.2m will be paid on 5 July 2018 to shareholders on the register at the close of business on 25 May 2018. Shareholders will again be offered the option to participate in a dividend re-investment plan and the last day for election is 11 June 2018 – refer also to Note 10.

⁵ Refer to Note 18 for net debt and LTV calculations.

⁶ Refer to Note 3 for reconciliation of EPRA measures.

⁷ Completed sales, contracts exchanged, with solicitors and available for sale.

 

 

FY18 reporting dates

§ Trading update – September 2018

§ Full year results – 30 November 2018

 

FY19 reporting dates

§ Trading update – February 2019

§ Half year results – 16 May 2019

§ Trading update – September 2019

§ Full year results – 28 November 2019

 

 

 

Full year results presentation

 

Grainger plc will be holding a presentation of the results at 8:00am (UK time) today, 17 May 2018 and will be broadcast live via webcast and a telephone dial-in facility (details below).

 

A copy of the presentation slides will be available to download on Grainger's website (www.graingerplc.co.uk) from 9:00am (UK time).

 

 

 

Webcast details:

 

To view the webcast, please go to the following URL link. Registration is required.

 

Grainger's Full Year Results Presentation Webcast

http://webcasting.brrmedia.co.uk/broadcast/5ad61cfa5a296618f17932b3

 

 

The webcast will be available for six months from the date of the presentation.

 

 

 

Conference call details:

 

Call: 0800 358 6377

Confirmation Code: 9105801

 

 

 

For further information, please contact:

 

Investor relations

Kurt Mueller, Grainger plc:                                                     +44 (0) 20 7940 9500

 

Media

Ginny Pulbrook / Geoffrey Pelham-Lane, Camarco:             +44 (0) 20 3757 4992 / 4985                         

 

Forward-looking statements disclaimer

 

This publication contains certain forward-looking statements. Any statement in this publication that is not a statement of historical fact including, without limitation, those regarding Grainger plc's future financial condition, business, operations, financial performance and other future events or developments involving Grainger, is a forward-looking statement.  Such statements may, but not always, be identified by words such as 'expect', 'estimate', 'project', 'anticipate', 'believe', 'should', 'intend', 'plan', 'could', 'probability', 'risk', 'target', 'goal', 'objective', 'may', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on these expressions. By their nature, forward-looking statements involve inherent risks, assumptions and uncertainties as they relate to events which occur in the future and depend on circumstances which may or may not occur and go beyond Grainger's ability to control. Actual outcomes or results may differ materially from the outcomes or results expressed or implied by these forward-looking statements. Factors which may give rise to such differences include (but are not limited to) changing economic, financial, business, regulatory, legal, political, industry and market trends, house prices, competition, natural disasters, terrorism or other social, political or market conditions. Grainger's principal risks are described in more detail in its Annual Report and Accounts. These and other factors could adversely affect the outcome and financial effects of the events specified in this publication. The forward-looking statements reflect knowledge and information available at the date they are made and Grainger plc does not intend to update on the forward-looking statements contained in this publication.

 

This publication is for information purposes only and no reliance may be placed upon it. No representative or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this publication. Past performance of securities in Grainger plc cannot be relied upon as a guide to the future performance of such securities.

 

This publication does not constitute an offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities of Grainger plc. 

 

 

 

 

 

Chief Executive's review

Overview

 

The first half of our 2018 financial year has seen a strong performance, both operationally and financially. We continue to lead the market in the UK private rented sector (PRS) and build to rent sector, and we have a strong growth trajectory.

 

We delivered growth in adjusted earnings of 20%, a net rental income increase of 9% supported by investment and like-for-like rental growth of 4.1%, and sales profit growth of 11%. We have also secured a number of attractive new investments in the private rented sector.

 

Our total portfolio consists of over 9,000 rental homes of which c.5,100 are in our PRS portfolio and our investment plans see this more than doubling in the next 2-3 years. Our regulated tenancy portfolio continues to perform well, providing good returns, with regular and resilient cashflows which support our PRS investment plans.

 

Our strategy remains to grow net rental income, simplify and focus the business which has enabled us to reduce costs and deliver improved efficiencies, and build on our 106 year old heritage and experience as a leading landlord in the UK.

 

Since setting out our strategy in January 2016, we have now secured £756m of new investment in the UK private rented sector and we have good visibility over a further £258m of investment opportunities in the advanced stages of the planning process or legal negotiations. In addition, we have £519m of opportunities under consideration.

 

We are approaching our £850m initial investment target and have the funding capacity from strong operational cashflows and accelerated asset recycling opportunities to go well beyond this level. Our investment pipeline has continued to grow and we have good visibility on opportunities beyond our initial £850m target.

 

Our investment plans will see Grainger fundamentally transform from a business which relied heavily upon trading income and capital value growth, to one more balanced with a greater focus on recurring net rental income. Our investment pipeline (secured and planning/legals) has the potential to deliver a significant increase in net rental income once schemes are secured, developed and let-up, the majority of which should occur over the next three years.

 

We are investing in technology in order to increase our scalability, manage costs and improve our customer experience. This will underpin future returns and growth. We continue to focus on finding ways of improving customer service and efficiencies, all of which will enable us to maintain our market leading position and grow our market share.

 

Our strategy is to deliver enhanced and more sustainable, long-term shareholder returns, whilst delivering high-quality rental homes with excellent amenities and services for our customers.

 

 

 

Key highlights

 

We continue to make good further progress on our strategy.

 

PRS investment pipeline

 

Since the start of the financial year, we have added over 1,353 PRS homes (£236m) to our secured pipeline.

 

In addition to the build to rent development scheme at Gore Street (375 PRS homes) and the tenanted Tribe portfolio (192 PRS homes) in Manchester, and Gilder's Yard in Birmingham (156 PRS homes), which we discussed at our full year results in November, we have secured:

 

·    Eccy Village, Sheffield – a forward funding acquisition of a build to rent development comprising 237 purpose-built PRS homes for £32m;

·    East Street, Southampton – a forwarding funding acquisition via our co-investment vehicle, GRIP REIT, which will see 132 PRS homes delivered. The total value of the investment is c.£27m (Grainger share c.£7m) and is expected to generate c.6.5% gross yield;

·    YMCA, Milton Keynes – our second investment in Milton Keynes, which will deliver 261 new PRS homes for c.£63m with a targeted gross yield of c.6.25%.

 

We have also been selected by Lewisham Borough Council as preferred partner on the Besson Street build to rent development opportunity to deliver around 232 PRS homes on local authority owned land.

 

Our PRS pipeline with our newest building designs and service offerings are now coming online and becoming operational, including:

 

·     Argo Apartments – comprising 134 apartments in our GRIP REIT, Argo opened for leasing on 10 January this year and we saw an excellent lettings performance. Average leasing velocity at Argo was more than an apartment a day, and it was 97% let in four months, around two months ahead of plan. Rents achieved were ahead of estimates and the scheme is generating a gross yield on cost of 7.5%. Grainger's returns are supplemented by management fees.

·   Berewood, Hampshire – our suburban style, family-friendly rental housing scheme (104 PRS homes) continued its phased leasing strategy, with strong take-up, also ahead of estimated rent levels.

 

Sales and valuations

 

We delivered a strong sales performance, with sales profit up 11% in the period to £38.9m (HY17: £35.0m), fuelled by growth from residential sales which was supported by asset management led capital recycling initiatives. We achieved sales prices 1.7% above previous valuations on our vacant sales (HY17: 2.0%). The market value of our wholly owned portfolio increased by 0.9% over the period (FY17: 3.4%, HY17: 2.1%).

 

Asset recycling

 

Alongside our 2017 full year results we set out our plan for further accelerating our growth. This included an asset hierarchy review, which identified opportunities for asset recycling to fund further investment in the PRS. We have taken action to deliver on this with:

 

·   The sale of the Walworth joint venture after the period end, generating a profit before tax and legal costs of c.£7m;

·  An increase in investment sales of tenanted regulated tenancies (alongside our sales on vacancy), where we generated £17m of revenue in the first half (up from £2m last year). 

 

Building on the significant strides we have taken to increase operational efficiencies over the past two years, we have continued to invest in our platform, including significant investment in technology. This will support our ambitious growth plans by increasing our scalability while minimising cost and headcount growth. It will also enable us to enhance net rental income through improving our service to our customers and utilising tools such as dynamic revenue management. We expect to launch the first phase of these solutions later this year.

 

Similarly, we have remained focused on reducing other costs within our business and enhancing overall returns. Our latest key achievement was the refinancing of our corporate bond which had a 5% coupon. We issued a new, 10-year £350m corporate bond with a coupon of 3.375%, which will save us around £3m per annum. Investor demand for the new bond was exceptionally high, reflecting the strong support for our strategy. When I joined Grainger in late 2015, our cost of debt was 5.3% (FY15), following this bond refinancing our proforma cost of debt is 3.1%.

 

Market opportunity

 

The investment opportunity in the UK private rented sector is vast. While the UK housing market remains one characterised by a lack of housing supply, it is equally characterised by a shift away from home ownership toward renting. Whilst affordability is a factor, there is also a structural shift which has seen greater demands for the flexibility, cost benefits (e.g. no stamp duty, no maintenance), and increasingly the service and amenity benefits that high-quality rental homes and communities can deliver.

 

The PRS has doubled since 2002 and demand for renting is set to continue to grow. 4.7m households rent privately in the UK. PwC predicts that demand will grow to 7.2m households by 2025, increasing from 20% to 25% of all households.

 

The PRS is a fragmented market, dominated by individuals owning small portfolios of properties. These smaller 'buy-to-let' landlords represent 98% of all landlords in the UK, with each owning less than 10 rental properties.

 

The UK government has introduced a series of measures over the past few years to regulate and curtail buy-to-let investment and we have seen a slowdown in this part of the market.

 

In contrast, the UK government has been introducing positive measures to encourage further investment into the UK PRS from large scale investors. As market leader, we actively engage with the Government and across political parties. Most recently, the Government has proposed positive changes to the planning system through the National Planning Policy Framework (NPPF) in support of build to rent, which will support our investment plans.

 

The UK PRS has seen significant interest from institutional investors who account for a pipeline of 117,893 new PRS homes (completed, under construction, in planning, British Property Federation: April 2018).

 

Our fully integrated business model enables us to successfully secure opportunities ahead of new entrants to the market and generate strong rental growth. It brings together origination, investment and operations under one roof and allows us to design market-leading rental properties, informed by our experienced operational team. Similarly, each of our investment decisions are supported by colleagues in our development and design teams as well as our operations team, giving us real insight when acquiring sites and investments.

 

We have recently invested in our development team with senior hires, including a highly experienced Director of Land and Development, Mike Keaveney. In addition to potential development site acquisitions, we will look to build on our strong track record of partnerships, particularly with public sector bodies. We believe there is a significant opportunity to support our growth plans through partnerships as a channel to source new investments and our long-term investment approach is one that we believe is highly attractive to potential partners.

 

Outlook

 

The future for Grainger is exciting and we are in a growth sector. The actions we have taken consolidate our leadership position and enable us to grow our market share, enhance shareholder returns and deliver great homes to rent.

 

Demand for renting continues to grow, and will likely accelerate as the PRS market matures, professionalises and as customers begin to experience the benefits from this new way of renting. Political support continues to gather momentum, with positive policy and regulatory changes further underpinning our investment plans.

 

Later this year we will launch two new schemes. The first phase comprising 135 homes at Clippers Quay in Salford will launch in the Autumn. The remaining phases will launch in 2019 and in total, Clippers Quay will comprise 614 apartments for rent. The second scheme is Gunhill at our Wellesley development in Aldershot, Hampshire, which comprises 107 homes for rent. It is our second suburban style, family rental housing offer in Hampshire.

 

As we look ahead, we will continue to progress our asset sales and capital recycling plans, supporting returns and enabling us to accelerate our PRS investment strategy.

 

 

Helen Gordon

Chief Executive

17 May 2018

 

 

 

Financial review

The strong financial performance for the six-month period ended 31 March 2018 is a testament to the success of our strategy. We have delivered growth in net rental income and sales, alongside effective cost management.

We increased adjusted earnings by 20% to £40.9m (HY17: £34.1m) and profit before tax by 23% to £50.6m (HY17: £41.2m). EPRA NNNAV increased by 1% since the year end to 306p per share (FY17: 303pps, HY17: 295pps) after we returned £13.6m (3.26pps) for the FY17 final dividend. 

 

Our increasing focus on rental income is enhancing the quality and resilience of our residential, total returns focused business model. We are evolving our capital structure to improve performance and we are recycling assets to accelerate our strategic transition.

 

Our capital structure has further improved and, subsequent to the period end, we refinanced our corporate bond. We saw significant investor demand for the bond, which reflects support for our strategy, and achieved a coupon of 3.375% (an improvement from 5% for the previous bond). This has built upon our recent actions to diversify our funding, improve our maturity profile, lock into lower rates for longer, and it will continue to enhance returns as we grow and capitalise on our market leading position.

 

We are committed to delivering income backed dividend growth, where a significant increase is expected in the coming years as new investments complete. In line with our policy to distribute 50% of annual net rental income, with a one third payment at the interim stage, our interim dividend has increased by 9% to 1.74p per share (HY17: 1.60pps).

 

 

Highlights

 

Income returns	HY17	HY18	Change
Rental growth (like-for-like)	3.5%	4.1%	+60 bps
– PRS	2.9%	3.2%	+30 bps
– Regulated tenancies (annualised)	4.3%	5.5%	+120 bps
Net rental income (Note 5)	£20.0m	£21.8m	+9%
Adjusted earnings (Note 2)	£34.1m	£40.9m	+20%
Adjusted EPS (diluted, after tax) (Note 2)	6.6p	7.9p	+20%
Profit before tax (Note 2)	£41.2m	£50.6m	+23%
Dividend per share (Note 10)	1.60p	1.74p	+9%
Operating cashflow^	£63.5m	£77.5m	+22%
EPS (diluted, after tax) (Note 9)	8.0p	10.0p	+25%

 

^ Operating cashflow comprises cash receipts from trading activities net of property operating expenses, overheads and other expenses, taxation and net finance costs.
 

Capital returns	FY17	HY18	Change
EPRA NAV per share (Note 3)	343p	345p	+1%
EPRA NNNAV per share (Note 3)	303p	306p	+1%
Net debt (Note 18)	£848m	£912m	+8%
Group LTV (Note 18)	37.7%	39.0%	+130 bps
Cost of debt (average)	3.5%	3.5%	–
Reversionary surplus	£310m	£305m	(2)%

 

 

Income statement

 

We have delivered another strong period of growth in adjusted earnings, with increased net rental income, strong growth in profit from sales and tightly controlled operational and finance costs driving the performance.

 

Income statement (£m)	HY17	HY18	Change
Net rental income	20.0	21.8	+9%
Profit from sales – residential	28.7	32.3	+13%
Profit from sales – development	6.3	6.6	+5%
Mortgage income (CHARM)	3.1	2.9	(6)%
Management fees	2.3	2.8	+22%
Overheads & other expenses	(13.8)	(13.8)	0%
Joint ventures and associates	1.2	1.5	+25%
Net finance costs	(13.7)	(13.2)	(4)%
Adjusted earnings	34.1	40.9	+20%
Valuation movements	7.0	9.8
Derivative movements	0.4	(0.1)
Non-recurring items	(0.3)	–
Profit before tax	41.2	50.6	+23%

 

 

 

Rental income

Gross rental income increased by 9% to £29.4m (HY17: £26.9m), supported by like-for-like rental growth across our entire portfolio and the acquisitions of tenanted PRS homes which deliver immediate income, and more than offset the impact of disposals.

Once again we outperformed the market with like-for-like rental growth across our portfolio of 4.1%, reflecting the quality of our portfolio, our strength as a professional landlord and our customer proposition. In the six-month period, like-for-like rental growth in our PRS portfolio of 3.2% was significantly ahead of the market which saw a decline of 0.9% (average based on ONS, Countrywide and HomeLet). At the same time, we secured 5.5% annualised growth on regulated tenancy rent reviews.

We have delivered growth in net rental income of 9% to £21.8m (HY17: £20.0m), with like-for-like rental growth and tenanted acquisitions driving the increase. High rental income margins are supported by our cost discipline and improved processes which have strengthened our operating platform and improved efficiency. Our gross to net (property operating costs ratio) was 25.9% (HY17: 25.8%).

Grainger's net rental income is broadly equally split between regulated tenancies and PRS.

	£m
HY17 Net rental income	20.0
Disposals	(0.7)
Acquisitions	1.7
Rental growth	0.8
HY18 Net rental income	21.8
YoY growth	+9%

 

Sales

We have delivered a strong performance from sales activities, with 11% growth in profit to £38.9m (HY17: £35.0m).

 

Residential sales

 

Tenanted and other sales were the key driver of the outperformance, fuelled by active asset management to drive value from our portfolio. This provides additional capital for recycling into PRS investments, helping us accelerate our strategic transition. We delivered £25.6m of revenue and £13.5m of profit from these sales, significantly ahead of the prior year (HY17: £7.3m and £4.0m).

 

The vacancy rate for our regulated tenancy portfolio has increased to 7.1% over the period (HY17: 6.5%) and the performance of completed vacant sales has been positive, where on average we have been selling vacant residential properties at 1.7% above the September 2017 vacant possession value (HY17: 2.0%). Volumes in HY18 were however impacted by the high volume of sales completions achieved at the end of FY17 and a slight reduction in pace of transaction completions this year, where our keys to cash metric increased to 107 days (HY17: 103).

 

We have a strong overall residential sales pipeline* which provides good visibility for the second half. As at 30 April 2018 it totalled £127m (30 April 2017: £115m).

 

Development activity

 

Development activity generated £6.6m of profit in the first half, 5% ahead of the prior year (HY17: £6.3m), with our partnership with the Royal Borough of Kensington and Chelsea (RBKC) and land sales from our Berewood site in Hampshire the main activities. The majority of our activity with RBKC will complete this financial year.

 

 

Sales

	HY17				HY18
	Units sold	Revenue	Profit		Units sold	Revenue	Profit
		£m	£m			£m	£m
Residential sales on vacancy	148	49.5	24.7		99	38.3	18.8
Tenanted and other sales	55	7.3	4.0		104	25.6	13.5
Residential sales total	203	56.8	28.7		203	63.9	32.3
Development activity	–	34.6	6.3		–	41.5	6.6
Overall sales	203	91.4	35.0		203	105.4	38.9

 

 

The second half of the year has started well and we are confident in the outlook for the full year which will be underpinned by the progression of residential sales on vacancy. Development activities should also deliver further profits and we will continue to explore capital recycling opportunities to generate incremental cash and profits.

 

*Completed sales, contracts exchanged, with solicitors and available for sale.

 

Financing and capital structure

Grainger's business model generates significant cash flows, which enables our strategy to transition to a PRS focused business. We have also improved our capital structure further through refinancing activities, extending debt maturities and reducing costs.

 

Cash flow and investment

 

We generated £119m of cash from revenue in the six months ended 31 March 2018 and invested £128m into our property portfolio in the period, comprising £107m into our secured PRS investment pipeline, £18m into development and refurbishment activities and £3m into regulated tenancy acquisitions.

 

Net debt increased to £912m (FY17: £848m, HY17: £791m) reflecting investment in our PRS schemes. Group loan to value was 39.0% (FY17: 37.7%, HY17: 36.0%).

 

With respect to our £756m secured pipeline, total spend up to 31 March 2018 was c.£325m.

 

Finance costs

 

Despite the increased level of debt, we benefitted from recent refinancing activities and a reduced cost of debt. Our overall finance cost was lower than the prior year at £13.2m (HY17: £13.7m). The average cost of debt at 3.5% for the first half is in line with the average for FY17. Our incremental cost of debt on our headroom is less than 2%.

 

Capital structure

 

We have made excellent progress on our strategy to transform our capital structure over the last two years. We have locked into lower rates for longer, enhanced our maturity profile, and diversified our sources of funding. The post period end completion of our corporate bond refinancing was the final key strand of our debt refinancing and structuring activities. These initiatives will deliver improved returns for Grainger as we grow and capitalise on our market leading position.

 

We issued a £350m 10-year corporate bond, with a coupon of 3.375% and were delighted by the positive response and investor demand for the issuance. We repaid our existing £275m corporate bond (5% coupon) which was due to mature in 2020. The annual interest cost saving will be c.£3m and Grainger's proforma cost of debt reduces to 3.1%.

 

The prepayment cost net of tax for the existing corporate bond was £21m, which will reduce EPRA NAV in the second half of the year by 5p per share. The impact on EPRA NNNAV is negligible.

 

 

Our key financial metrics are set out below for the half year and proforma to reflect the corporate bond refinancing which took place after the half year.

	FY17	HY18	Proforma HY18
Net debt	£848m	£912m	£935m
Loan to value	37.7%	39.0%	39.9%
Cost of debt (average)	3.5%	3.5%	3.1%
Incremental cost of debt	< 2%	< 2%	< 2%
Interest cover	3.8x	4.1x	4.1x
Headroom	£269m	£271m	£316m
Weighted average facility maturity^	5.2	4.7	6.6
Hedging	87%	81%	86%

 

^ Including extension options; excluding these options it is 4.4 years (FY17), 3.9 years (HY18) and 5.8 years (HY18 proforma).

 

 

 

 

Balance sheet

 

We continued to secure attractive PRS investment opportunities in the period and have seen positive growth in the overall net asset value of the Group.

 

Market value balance sheet (£m)	FY17	HY18
Residential – PRS	526	564
Residential – regulated tenancies	1,214	1,177
Residential – mortgages (CHARM)	86	86
Forward Funded – PRS under development	75	152
Development work in progress	63	60
Investment in JVs/associates	206	211
Total investments	2,170	2,250
Net debt	(848)	(912)
Other assets/liabilities	112	107
EPRA NAV	1,434	1,445
Deferred and contingent tax – regulated tenancies	(95)	(93)
Deferred and contingent tax – PRS & other	(49)	(47)
Fair value of fixed rate debt and derivatives	(22)	(24)
EPRA NNNAV	1,268	1,281
EPRA NAV (pence per share)	343	345
EPRA NNNAV (pence per share)	303	306
LTV	37.7%	39.0%

 

EPRA NNNAV increased by 1% over the six-month period to 306p per share (FY17: 303pps, HY17: 295pps), driven by a strong trading performance and modest valuation growth, offset by the final FY17 dividend payment (3.26pps).

EPRA NNNAV includes deferred and contingent tax liabilities associated with revaluations of our portfolio. Around 66% relates to our regulated tenancy portfolio, which will crystallise over time as we dispose of assets. We view EPRA NNNAV as a prudent measure for Grainger.

Our EPRA NAV and NNNAV, however, excludes a reversionary surplus of £305m (73pps). This is the difference between the market value of our assets whilst they are tenanted and the value we could realise if they became vacant today and were sold. £219m (52pps) relates to our regulated tenancy portfolio and the remaining £86m (21pps) relates to joint ventures, CHARM and PRS assets.

The following table shows the movement in EPRA NNNAV in the period. Adjusted earnings and revaluations combined delivered growth of 15p per share, with disposals on trading assets and dividends reducing EPRA NNNAV by 7p per share and 3p per share respectively.

EPRA NNNAV movement
	£m	Pence per share
EPRA NNNAV at 30 September 2017	1,268	303
Adjusted earnings	41	10
Revaluations (trading & investment property)	22	5
Disposals (trading assets)	(28)	(7)
Tax (deferred & contingent)	(5)	(1)
Derivatives / other	(3)	(1)
Dividends	(14)	(3)
EPRA NNNAV at 31 March 2018	1,281	306

 

 

Property portfolio

 

Our portfolio has proved resilient, with the market value increasing by 0.9% over the six month period (FY17: 3.4%, HY17: 2.1%). This compares to 0.6% for the LSL Acadata House Price Index, 0.1% for the five month period to February 2018 (latest available data) according to ONS, and 1.5% for the combined average of the Halifax and Nationwide house price indices.

As illustrated in the table below, we have seen stable conditions in Central and Inner London, modest growth of 1% in outer London and the North West, and 2-3% growth in the South East, South West and East and Midlands.

 

Regional performance		Units		Market value HY18 £m	Change since FY17
Central and Inner London		1,506		876	0.0%
Outer London		453		165	+1.0%
South East		651		154	+3.1%
South West		595		169	+2.3%
East and Midlands		753		130	+3.0%
North West		1,640		186	+1.0%
Other regions		515		61	+0.1%
Total		6,113		1,741	+0.9%

 

The table above includes wholly-owned PRS and regulated tenancy assets only, it excludes 611 units and £86m of market value relating to mortgages (CHARM) and excludes co-investments.

 

 

 

Portfolio summary – property assets
31 March 2018	No. units	Market value £m	Vacant possession value £m	Reversionary surplus £m
Residential – PRS	2,775	564	618	54
Residential – regulated tenancies	3,338	1,177	1,396	219
Residential – mortgages (CHARM)	611	86	85	(1)
Forward Funded – PRS under development	–	152	152	–
Development work in progress	–	60	60	–
Wholly-owned assets	6,724	2,039	2,311	272
Co-investments (Grainger share)	718	269	302	33
HY18 total investments	7,442	2,308	2,613	305
Assets under management (third party share)	1,598	604	684	80
Total assets under management	9,040	2,912	3,297	385

 

 

Post balance sheet event

 

On 2 May 2018, we announced the disposal of Grainger's 50% investment in its Walworth Investment Property joint venture for net proceeds after debt of £67m.  Our share of the gross property assets was £103m. The transaction generated a £7m profit before tax and legal costs with the proceeds above the market value of the investment at 31 March 2018. It is expected to be marginally accretive to Grainger's EPRA NNNAV, further simplifies and focuses Grainger and provides capital for recycling into higher yielding PRS assets.

 

Summary and outlook

 

The strength of our first half performance reflects the growth we achieved in rental income and the flexible sales channels and asset recycling opportunities that we have employed to enhance returns and provide capital for investing in PRS assets. It also reflects the benefits of the investment we are making into our operating platform.

 

We are preparing for further growth through investing in people, processes and technology to develop an operating platform with even greater scalability. We have also further improved our capital structure through refinancing activities, extending debt maturities and reducing costs. This will enable a step-change in future rental income and returns and ensure Grainger can capitalise on its market leading position and ambitious growth plans.

 

We remain confident in our ability to source compelling PRS investments, whilst remaining selective and disciplined in our approach as we move towards our initial £850m target and continue to prepare the business for investment significantly beyond this level.

 

We expect to deliver a good performance in the second half of the year and build on our market leading position.

 

Vanessa Simms

Chief Financial Officer

17 May 2018

 

 

 

 

 

Responsibility statement of the directors in respect of the half-yearly financial report

 

We confirm that to the best of our knowledge:

 

§ the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

 

§ the interim management report includes a fair review of the information required by:

 

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

 

 

Helen Gordon                                                                                   Vanessa Simms

Chief Executive Officer                                                                      Chief Finance Officer

17 May 2018                                                                                     17 May 2018

 

 

 

 

 

 

Independent Review Report to Grainger plc

 

Conclusion 

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2018 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Other Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules (“the DTR”) of the UK's Financial Conduct Authority (“the UK FCA”).   

 

Scope of review 

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.   

 

Directors' responsibilities 

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

 

As disclosed in note 1a, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. 

 

Our responsibility 

 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

 

 

 

 

 

 

 

 

The purpose of our review work and to whom we owe our responsibilities

 

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

 

 

Bill Holland

for and on behalf of KPMG LLP 

 

Chartered Accountants 

15 Canada Square

Canary Wharf

London

E14 5GL

 

17 May 2018