Full year results presentation

Grainger plc will be holding a presentation for analysts and investors at 9.00a.m. (UK time), Thursday 1 December 2016

The presentation will also be available live via webcast and a telephone dial-in facility. In addition, a copy of the presentation slides will be available on Grainger's website, www.graingerplc.co.uk.

Webcast details:

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

Grainger's Full Year Results Analyst Presentation Webcast

(http://www.investis-live.com/grainger-plc/580e1ab2f3908a11003099f7/b3uws5)

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

Conference call details:

Telephone:        + 44 20 3059 8125

Password:         Grainger

Chairman's statement

I am pleased to report significant progress following our changes in the executive leadership at the beginning of the year.

Shortly after taking office as Chief Executive, Helen Gordon, supported by an energetic leadership team, reviewed and refined the strategy the Board had initiated at the end of 2015. She immediately set out the key milestones to achieving a step change in the strategic direction of the Company with the ultimate objective of improving value for all stakeholders. The benefits are already beginning to materialise and the future attractions of the business as an income generating, residential rental company are becoming increasingly clear.

In simple terms, we are shifting the nature of the business from a traditional trading model, heavily reliant on house price inflation as a driver of capital value, to an investment model with a sustainable and visible income stream from well-run private rented residential homes.

The Grainger model continues to capture over time the full reversionary value of our regulated portfolio. The predictable cash flow from these properties is then reinvested directly into developing or acquiring modern, purpose-built residential rental properties. This is a significant growth market in the UK as the demand for homes outstrips supply and the option to rent becomes an increasingly attractive and affordable alternative to buying a home.

I am pleased to say that the new management team has lost no time in delivering on the milestones set out in January 2016 and in reshaping the organisation to support the strategy.

Disposals have been made, costs have been cut, and resources have been concentrated on identifying and creating a strong pipeline of private rented sector ('PRS') assets that build on our heritage and will deliver strong, sustainable shareholder returns over the coming years.

The transition from strategy to implementation has been short and decisive and I would like to thank all of my colleagues on the Board for their tremendous effort in achieving this.

The effective management and proper governance of the Group is critical to our continued success and in our Annual Report I set out a number of key actions that we have taken to ensure that it remains of the highest standard.

We have also enjoyed strong support from the majority of our Shareholders for our move to a UK residential rental model with a greater focus on reliable income. Their support of this and our new management team during this first year of transition has been much appreciated.

Sadly we have to report that this year we lost Stephen Dickinson, who died after a short illness. Stephen joined Grainger in 1974 and was an extremely effective Chief Executive of the Company until 2002, eventually retiring from the Board in 2009, and was instrumental in leading the Company from private to public ownership. He was a wonderful person who left a very strong legacy and will be much missed by all at Grainger.

Finally, we never forget that over 18,000 people choose to make their home with Grainger. We take that responsibility very seriously and our staff will continue to go the extra mile for our customers, day in and day out providing the best service and best support possible.

Baroness Margaret Ford

Chairman

1 December 2016

Chief Executive's review

This is my first full year statement to you as Chief Executive of your Company and I am pleased to report a solid performance and the swift execution of the planned strategic changes in the business, which will ultimately drive all stakeholder value.

I set out in this report how we have simplified and put focus into the business to capture the opportunity created by the growing demand for private rental housing in the UK.

Strategic review

In January I presented my review of the Company's strategy. The strategy positions Grainger for sustainable growth in an emerging sector. It is designed to grow rents, simplify and focus the business and build on the operational strength and foundations of over 100 years of renting homes.

I was supported in this review by an enthusiastic and engaged leadership team. The whole of the Grainger team provided insights and contributions. The review examined every division and all assets and portfolios were appraised and avenues for growth explored.

The key findings supported our view that there is a significant market opportunity in an area where Grainger has unparalleled expertise and committed employees ready for change.

We identified the need for Grainger to focus on growing rental income, to exit non-UK assets and dispose of assets which consume shareholder capital and were focused on capital growth.

We concluded that our regulated tenancy business remains a compelling investment with robust cash flows. The retention of these assets supports and provides financing for Grainger's evolution to our new PRS model. Most importantly, this PRS model will establish Grainger as an income generating quoted vehicle, which provides Shareholders easy and liquid access to the UK's high-growth PRS market, which is otherwise only achievable through direct real estate investment.

Delivering on our strategy of simplifying the business

During the year we sold our non-core assets and reorganised our operational platform.

In January 2016 we agreed to sell our Equity Release business as it was no longer complementary to Grainger's core focus. This was completed in May 2016.

Having decided to sell our German business, we disposed of a series of portfolios. We sold our German joint venture in January. In February we agreed to sell our German business platform with one of the portfolios, thereby securing the majority of the Grainger employees' jobs with the new owners and reducing exit costs. The majority of remaining assets were also sold by May 2016. We disposed of surplus land at Kennel Farm, Basingstoke, and in August we were able to secure the unwinding of our joint venture in Prague by securing planning consent and disposing of the land. I am pleased to report that these disposals have been achieved profitably, while successfully securing the future for Grainger colleagues within those non-core businesses under their new owners.

These disposals reduced the quantum and cost of debt and enabled us to embark on a restructuring of our more expensive debt resulting in further cost reductions. This is explained more fully in the financial review. In June 2016 we embarked on the restructuring of our operations by removing divisions and restructuring the business into Property and Operations (a PropCo:OpCo model) backed by our central corporate teams. This is designed to focus on driving capital and income growth in the business as well as significantly reducing overheads. The benefit of this will be fully realised in 2017 when overheads are on track to be 24% lower than in 2015. We will continue to pursue ongoing improvements where possible, realising further cost efficiencies that our new model creates.

Delivering on our strategy of growing rents and dividends

The growth of our rental income is at the heart of the strategic objective of delivering shareholder returns which are a balanced mixture of both income and capital growth. During this transitional period to 2020 we have linked our dividend directly to net rental income and will distribute the equivalent of 50% of net rents to Shareholders. The majority of Grainger staff are also Shareholders and this approach will further incentivise the teams to drive rental growth alongside providing a high-quality service.

In January we announced a target that over 50% of our wholly-owned assets would be modern PRS stock by 2020 and that by that date net income would exceed profit from sales. This is a model which is more income focused and structured to give more sustainable and less volatile returns.

We also announced we would invest £850m (c.£1.1bn alongside our partners) in PRS between now and 2020. I am pleased to announce that we have already achieved significant progress and have secured £389m with a further pipeline of £347m of potential sites in the planning or legal process.

The growth in rents has been achieved by new acquisitions but also by the operations team delivering great customer service and encouraging our customers to stay for longer, and increasing demand for our homes.

Disciplined approach to acquisition

We have restructured our investment and acquisitions teams to enable them to identify and assess opportunities quickly in our target markets, and provided an investment framework which is supported by rigorous analysis and in-depth local knowledge. This has dramatically increased the number of opportunities we are evaluating and has enabled us to make good progress on our pipeline.

UK PRS market

The demand for renting is growing and this trend is set to continue. Ten years ago, one in ten households in England rented privately. Today it is one in five. In London, it is one in four. PwC predicts that 1.8 million new rental homes will be required by 2025 to meet demand. This demand, coupled with positive support for the build-to-rent sector and large scale institutional investment in the PRS, presents Grainger with a very compelling opportunity.

As the UK market leader in the residential rental sector, we are targeting investment in the PRS in key target cities where demand for renting is highest and local economic prospects are greatest, including cities with top universities and good graduate retention, teaching hospitals and strong professional services. Our top five target cities are: London, Manchester, Bristol, Birmingham and Leeds.

I am pleased to say that we have secured sizeable investments in four of five of these cities since we launched our strategy.

Working in partnership

Our reputation of working in partnership and taking the long-term view of key relationships is well established. Whilst we are clear about our commitment to existing partners, we believe we should drive returns for our shareholders and not take on more third-party property management mandates at this time.

Our relationship with APG is important to us and I am delighted that GRIP, our fund with APG, was converted to a Real Estate Investment Trust (REIT) in July of this year.

Our partners in local and central government are important to us. We are aligned in our objective of creating new high-quality homes. Grainger's longevity and commitment to stewardship with communities has been evidenced across a number of development projects. In particular, our work at Aldershot in partnership with the Defence Infrastructure Organisation (part of the Ministry of Defence) and our developments with the Royal Borough of Kensington and Chelsea are both worthy of highlighting.

We continue to work with some housebuilders and to look for ways in which to increase the availability of private rental housing stock in the UK which is complementary to housebuilders' needs to build new homes.

Political and legislative changes

There is an undersupply of quality housing in the UK and this has been recognised by central and local government. Whilst the political environment has been largely supportive, the sector was adversely affected by an additional 3% stamp duty land tax surcharge on second homes in the Spring. In June the vote to leave the European Union was seen to have a negative impact on the housing market but was not evidenced in our sales pipeline, and the PRS sector is widely regarded as one of the most resilient real estate classes post the EU referendum.

Outlook

2016 has been a landmark year for Grainger. The team has worked hard to support the delivery of the key milestones of the strategy. The UK PRS market is on the cusp of high growth as it provides a practical and compelling solution to the housing shortage in the UK. Grainger's established leading market position and operational expertise provide us with confidence so that we can capture this market opportunity to its fullest.

2017 will be an important year for Grainger as we forge ahead with the transition into a more balanced rental model and as we realise the benefits of the restructuring and continue to manage our all-important portfolio of regulated tenancies. Our long-term aspirations for Grainger are for the business to be the acknowledged leader in the PRS market in the UK, delivering quality services whilst generating strong shareholder returns.

Grainger has seen substantial change and I would like to take the opportunity of thanking each and every one of our staff with whom so much has been and will be achieved. Together with our Shareholders, we look forward to an exciting and profitable future ahead.

Helen Gordon

Chief Executive

1 December 2016

Financial Review

FY16 has been a transformational year, with significant progress made in delivering our private rented sector ('PRS') growth strategy. We have secured £389m of investment, disposed of our non-core businesses, improved the capital structure of the Company and reduced financial and operational costs following our internal restructuring which has enhanced Grainger's income generation.

Performance overview

These positive changes have been achieved alongside the delivery of strong financial results, with an improved income return and good capital growth:

§ Net rental income increased by 15% to £37.4m (FY15: £32.4m);

§ Adjusted earnings increased by 69% to £53.1m (FY15: £31.5m);

§ EPRA NNNAV increased by 9% (24p per share) to 287p (FY15: 263p);

§ Profit before tax up 64% to £84.2m (FY15: £51.4m);

§ Net debt reduced by 33%, loan to value reduced to 35.9% (FY15: 45.5%), and cost of debt at the period end was down to 3.9% (FY15: 4.6%); and

§ Total return (return on shareholder equity) of 10.6% (FY15: 10.0%).

Substantial progress has been made during the year to simplify and focus the business, which has delivered a significant reduction in finance and operational costs. We have completed our internal restructuring and are on track to deliver an £8.6m (24%) overhead saving in FY17 to £27.5m from the FY15 reported result.

The strategic disposals of our Equity Release and German businesses are key milestones, which have enabled a c.£374m reduction in net debt to £764m (FY15: £1,138m) and, combined with refinancing activity, cost of debt is now below our 4% target.

With a strengthened balance sheet and loan to value ('LTV') of 35.9% (FY15: 45.5%) we have the capacity to invest, and grow our rental income. Coupled with reduced overhead and finance costs, this will further enhance Grainger's income returns in FY17 and beyond.

A new dividend policy, aligned to our strategy to grow rental income, is now in place, with distribution during Grainger's strategic transition to be equivalent to 50% of net rental income. The total dividend for the year of 4.5p per share is 64% up on the prior year (FY15: 2.75p).

Financial Highlights

* Adjusted earnings, previously called recurring profit, is profit before tax, less valuation movements and non-recurring items.

** Total return (return on shareholder equity) is growth in EPRA NNNAV in the year plus dividend declared as a percentage of opening EPRA NNNAV.

Income statement

The table below summarises adjusted earnings and profit before tax from continuing operations for the 12 months to 30 September 2016.

* Restated for continuing operations.

** See note 3 to these preliminary results for reconciliation from statutory measures.

Rental income

Gross rental income has increased by 11% to £51.9m (FY15: £46.7m), driven by 3.6% average rental growth on our PRS portfolio and the acquisition of tenanted rental homes that deliver immediate income. Net rental income has increased by 15% (£5.0m) to £37.4m (FY15: £32.4m), further benefiting from improvements made in operational efficiencies.

Sales

Profit from sales at £71.5m for the 12 months to 30 September 2016 was slightly ahead of the prior year (FY15: £70.6m) with increased profits from development activities more than offsetting a small reduction in residential sales profit, which is linked to the natural unwind of our regulated tenancy portfolio.

Over the year, sales on vacancy achieved average prices 8.6% over the September 2015 vacant possession value, illustrating the resilience of our valuations and liquidity of our assets.

Residential sales on vacancy generated revenue of £110.0m which was 11% ahead of 2015 (FY15: £99.5m) with profit marginally lower at £52.2m (FY15: £53.2m). The predominant driver of the revenue growth related to the Chelsea Houses portfolio, although this reduced the overall margin to 47.4% (FY15: 53.5%). We expect margins from this portfolio to improve over time from reversionary gains, refurbishment and further asset management activities.

Development sales activity delivered £11.8m of profit primarily driven by the final phase of Macaulay Walk, a residential development for sale scheme in Clapham, London (£5.8m) and the disposal of non-core development land at Kennel Farm, Basingstoke (£5.8m).

In addition, we recorded revenue of £24.1m on our PRS development for The Royal Borough of Kensington & Chelsea. Due to the early stage of the development no profit has yet been recognised.

Operating expenses

The overhead cost for this year was £31.8m for continuing operations (FY15: £32.4m). We are on track to achieve our FY17 overhead cost target of £27.5m, which is 24% (£8.6m) lower than the reported FY15 overhead of £36.1m (before restatement for discontinued operations). This has been achieved through restructuring savings, corporate overhead reductions and lower costs following the disposal of non-core businesses.

Other expenses relate to pre-contract transaction costs. Through improved acquisition targeting and effective cost management, our other expenses have reduced to £1.1m (FY15: £3.2m).

Fee income is associated with the recovery of overheads. Overall operating expenses net of fee income totalled £27.0m as set out in the table below (FY15: £30.6m).

Finance costs and capital structure

Net debt has reduced by 33% to £764m (FY15: £1,138m), LTV is down to 35.9% (FY15: 45.5%) and cost of debt is now below our 4% target, ahead of plan.

The reduction in net debt was driven by the non-core disposals and supplemented by resilient cash generation from sales of vacant regulated tenancies; this more than offset £162m of new investment predominantly in PRS assets. Cost of debt benefited from the non-core disposals and re-financing activities.

Our strengthened balance sheet provides capacity for our planned PRS investment. As funds are deployed our optimal target range for LTV is 40-45%.

In the second half of the year, immediately following the EU Referendum we took the opportunity to recoupon two legacy swaps, securing lower rates at a discount to market value. The upfront cost (before tax savings) was £37.8m (£30.2m after tax) and the benefit to cost of debt is c.55bps (£4.8m saving per annum). 

Net finance costs for the year are £11.8m lower, a 24% reduction at £37.1m (FY15: £48.9m). Average cost of debt over the year was 4.4%, a 90bps improvement, while cost of debt at the period end was 3.9%.

Subsequent to the year end, we have refinanced a £100m loan which is expected to reduce the average cost of debt by a further c.20bps in 2017 (3.7% proforma). With our incremental cost of debt less than 2%, we have the potential to prudently utilise leverage to deliver strong earnings accretion as we invest.

Adjusted earnings

We have delivered adjusted earnings (previously referred to as recurring profit) of £53.1m which is 69% ahead of the prior year (FY15: £31.5m), a result of growth in net rental income, a robust sales performance and lower operational and financial costs.

Tax

Grainger is a UK-based, taxpaying Group with a tax charge of £9.7m for the year from continuing operations.

Grainger works in an open and transparent manner with the tax authorities. HM Revenue & Customs has graded the Group as a 'low risk' taxpayer. We are committed to maintaining this status.

Discontinued operations

The disposal of our non-core Equity Release and German businesses were accretive to EPRA NNNAV, adding £23m, 6p per share. These delivered a discontinued profit before tax of £62.0m, £48.3m from the Equity Release disposal, £8.3m from the sale of the German operations and £5.4m from pre-disposal trading. 

Dividend

The Board revised and implemented a new dividend policy in the year, which is supported by strong underlying cash generation to enhance distribution returns to shareholders during Grainger's strategic transition, with payment aligned to the group's strategy of growing rental income. 

The policy is to distribute the equivalent to 50% of annual net rental income. Around one-third of the payment will be made through the interim dividend based on half year results, with the balance paid through the final dividend. As the shape of the business evolves to a more balanced total return model, we are committed to delivering progressive and sustainable dividend returns.

The dividend payment for the year will be £18.7m, 50% of the £37.4m net rental income reported. This delivers 64% growth in the total dividend for the year to 4.5p per share, comprising 1.45p interim dividend and 3.05p proposed final dividend. The dividend is 4.0x covered by diluted EPS.

If approved at the AGM, the final dividend will be paid on 10 February 2017 to Shareholders on the register at the close of business on 30 December 2016.

Balance sheet

EPRA NNNAV is an important metric for Grainger as it reflects overall assets and liabilities (including deferred and contingent tax and fair value adjustments for fixed rate debt). These future liabilities are presented in current terms (not discounted) and neither EPRA NNNAV or EPRA NAV include the future benefit of the reversionary surplus, which as at 30 September 2016 was valued at £327m, or 78p per share.

EPRA NNNAV increased by 9% (24p per share) to 287p (FY15: 263p), supported by a strong trading performance, valuation growth, accretive strategic disposals and reduced deferred and contingent tax liabilities associated with lower corporation tax rates. This growth was achieved despite the negative impact from movements in bond markets which resulted in an adverse movement in the year of £16m (4p per share) from the mark to market of fixed rate debt.

EPRA NAV increased by 7% to 341p, reflecting a strong trading and valuation performance, before the adjustment for discontinued operations and the recoupon of legacy swaps. 3% growth (11p per share to 330p (FY15: 319p)), is reported after these adjustments. The Equity Release disposal was accretive to EPRA NNNAV but dilutive to EPRA NAV by £15m (3p per share). The recoupon of two legacy swaps after tax had an adverse impact of £30m (7p per share) on EPRA NAV.

Reconciliation of EPRA NAV to EPRA NNNAV

A reconciliation between the statutory balance sheet and the market value balance sheets for both EPRA NAV and EPRA NNNAV is set out in note 4 to these preliminary results.

Our portfolio saw a 5.3% growth in market value over the year and a 4.8% increase in vacant possession value. This compares to 3.7% for the LSL Acadata House Price Index, 5.5% for the combined average of the Nationwide and Halifax house prices indices, and 7.7% according to the Office of National Statistics. This contributed to £116m total valuation gain, which comprises £84m on trading stock and £32m from investment property assets and associates/joint ventures included within profit after tax.

The positive contingent tax movement of £13m (3p per share) relates to a £19m (4p per share) release due to lower corporation tax rates, offset by a charge on the revaluation of trading properties.

Disposals of our Equity Release and German businesses were both EPRA NNNAV accretive, with a total gain of £23m (6p per share).

EPRA NNNAV was also affected by movements in the bond markets in the period, which had an adverse impact on the mark to market of our corporate bond. This reduced EPRA NNNAV by £16m after tax (4p per share).

Investment

We have spent £162m in the 12 months to 30 September 2016, of which £17m relates to the acquisition of regulated tenancies and the remainder to PRS assets and capital expenditure on our existing portfolio. Our investments are expected to deliver gross rental yields of between 6.5% and 8.0%.

Having fully considered the Group's current trading, cash flow generation and debt maturity, the Directors have concluded that it is appropriate to prepare the Group financial statements on a going concern basis.

Strategy financial targets to 2020

The three strands of the 2020 strategy are to:

            1) grow rents (and increase distributions to shareholders);

            2) simplify and focus; and

            3) build on our heritage as the UK's leading listed residential landlord.

The four financial benchmarks used to monitor progress against our strategy are:

            Invest over £850m into PRS assets

§ £389m secured, £347m in planning or legal process.

            More than half of our portfolio comprising PRS assets

§ 27% of PRS assets (FY15: 23%).

§ We expect to see an acceleration towards 2020 as assets being constructed are completed and let.

            Net rental income to exceed profit from sales

§ FY16 net rental income was the equivalent to 52% of profit from sales (FY15: 44%).

§ Sales profit will benefit from development activity over the next two to three years as we work through current schemes and projects. Net rental income growth should accelerate towards the end of the strategy period as assets being constructed are completed and let out.

            Reducing reliance on sales (cost coverage)

§ FY16 income covered 74% of costs (FY15: 53%).

§ This benchmark was designed to reflect the transition to an increasingly income focused model with reduced reliance on capital growth and profit from sales. Substantial progress has been made in FY16. Reduced finance costs and lower overheads have been the key drivers. Rental growth and tightly controlled overheads and finance costs are expected to deliver further benefits.

Conclusion

This year's results demonstrate that the Company is performing strongly in conjunction with delivering against its strategic objectives as set out in January.

It has been a year of significant change and progress, with £389m of investment secured, the disposal of two major non-core businesses, an improved capital structure, materially reduced finance costs and restructured operations which will deliver further efficiencies in FY17. Alongside these changes, the Company has delivered a 69% increase in adjusted earnings to £53.1m and a total return (return on shareholder equity) of 10.6%. The actions we are taking to make Grainger a more balanced total return business with an increased focus on income returns will support further strategic progress in the coming years.

Vanessa Simms

Chief Financial Officer

1 December 2016