14 May 2020

 

Grainger plc

 

Half year results for the six months ended 31 March 2020

 

Strong H1 performance; positive lead indicators for H2

·      Net rental income up +27%

·      Like-for-like rental growth up +3.4%

·      LTV at six year low at 32.9%

·      No staff furloughed

·      Dividend policy maintained, +6% on a per share basis

 

 

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

"Grainger is in a strong position financially and our portfolio is performing as expected, showing a high degree of resilience during these uncertain times. We have achieved high rent collection, strong rental growth and maintained occupancy levels over 97%. We have continued to grow our business, serve our customers and deliver new rental homes.  

 

"Our business has been focused on three key areas since the coronavirus lockdown: Innovate, Communicate and Improve. We have implemented new ways of serving our customers remotely and enabling safe interactions and property transactions using technology and virtual viewings. We have increased our contact with and support for our customers, suppliers and partners. And we have been investing in training for our employees so that we can emerge from this global crisis stronger.

 

"Due to the strength of the business and the resilience of our sector, our dividend policy will be maintained, with a +6% increase in our interim dividend.

 

"Our focus for the rest of the year will remain on the continuity of service to our customers and the delivery of new rental homes, whilst ensuring the health and safety of all our employees, customers and suppliers remains our highest priority."

 

Key financial headlines

§ Resilient rental demand

o  60% of Grainger's income is now derived from PRS assets

o  Net rental income¹ up +27% to £37.0m in H1 (HY19: £29.1m)

o  +3.4% like-for-like rental growth² in H1 across our entire portfolio (HY19: 3.7%)

o  Rent collection for March 2020 of 95% and April 2020 of 94%

o  Rental growth in April of +3.3% (PRS: 3.0%; Regulated tenancies: 4.0%)

§ Robust sales in H1, continuing in H2

o  H1 sales generated £22.8m of profits (HY19: £31.3m) with last year having a higher level of asset recycling from our GRIP portfolio

o  In line with Government guidelines we took swift action to ensure sales momentum continue into early H2 with new offers received and contracts exchanged. Government guidelines were further relaxed on 13 May 2020.

§ Pipeline delivery continues and construction sites active

o  Our PRS pipeline remains in progress, totalling £2bn of investment and c.9,000 new rental homes

o  The majority of our schemes under construction in our secured pipeline are open and active, with a few having temporarily closed in order to implement social distancing and new safety guidelines

§ Strong balance sheet and liquidity

o  £527m of cash and committed undrawn facilities available, a six year high

o  LTV at six-year low at 32.9%

o  No debt maturities until March 2022

o  Cost of debt reduced to 3.0%

§ Robust H1 performance

o  Adjusted earnings³ were in line with expectations at £33.7m (HY19: £38.3m) due to higher levels of asset recycling last year

o  Profit before tax³ was £49.6m (HY19: £54.3m)

o  Adjusted EPRA earnings⁴ were up +9% to £16.0m (HY19: £14.7m)

o  Valuation of our total portfolio increased +1.6%

o  EPRA Net Tangible Assets (NTA)⁴ per share rose to 281p (FY19: 278p)

o  Dividend policy maintained with interim dividend per share increased +6% to 1.83p per share⁵ (HY19: 1.73p), driven by rental growth and investment activity

 

 

Financial Highlights  

Income return	HY19	HY20	Change
Rental growth (like-for-like)2	3.7%	3.4%	(33) bps
PRS rental growth (like-for-like)	3.4%	3.0%	(41) bps
Regulated tenancy rental growth (like-for-like)	4.4%	4.5%	+7 bps
Net rental income1	£29.1m	£37.0m	+27%
Adjusted earnings3	£38.3m	£33.7m	(12)%
Adjusted EPRA Earnings4	£14.7m	£16.0m	+9%
Profit before tax	£54.3m	£49.6m	(9)%
Earnings per share (diluted, after tax)	9.0p	6.4p	(29)%
Dividend per share5	1.73p	1.83p	+6%

 

Capital return	FY19	HY20	Change
EPRA NTA per share4	278p	281p	+1%
EPRA NNNAV per share4	272p	280p	+3%
Net debt6	£1,097m	£1,000m	(9)%
Group LTV6	37.1%	32.9%	(420) bps
Cost of debt (average)	3.2%	3.0%	(20) bps
Reversionary surplus	£302m	£306m	+1%

 

 

Net rental income - strong H1, resilient performance in early H2 trading

§ Overall net rental income increased +27% to £37m (HY19: £29.1m).

§ We achieved strong like-for-like rental growth across our total portfolio of +3.4% (HY19: 3.7%), with +3.0% growth on our PRS homes (HY19: 3.4%) and +4.5% annualised growth on regulated tenancy rent reviews (HY19: 4.4%).

§ Our gross to net (property operating costs ratio) remained stable at 26.0% and we achieved further efficiencies on our stabilised portfolio with gross to net now at 24.9% (HY19: 26.2% / 25.2%).

§ Occupancy within our PRS portfolio remains high at 97.2% (HY19: 97.5%).

§ Rental performance proving resilient in early H2 trading. For the month of April, post-half year close, we have seen similar levels of rent collection (94%) and rental growth (+3.3%) albeit with a higher proportion of renewals compared to new lets in our PRS portfolio, as customers choose to cancel or postpone their home moves.

§ The lettings market remains active, albeit at lower levels. We have seen a pick-up in enquiries in recent weeks, returning to normal pre-Covid levels. Leveraging our digital platform and virtual viewings capability, we have safely continued to secure new customers.

 

Sales - strong H1, transactions continuing in early H2 trading with strong visibility on pipeline for remainder of year

 

Profit from sales was £22.8m (HY19: £31.3m) with last year's performance reflecting a higher level of asset recycling from the GRIP portfolio.

§ In H1, we have been selling vacant residential properties 1.0% ahead of previous valuations (FY19 vacant possession value).

§ Sales velocity (our 'keys to cash' metric) during H1 remained strong, measuring 113 days (HY19: 112 days).

§ We have taken actions that enable us to safely conduct sales transactions within current government guidelines, and we are seeing the benefits of this come through.

§ As we enter the second half of our financial year, sales activity continues:

o  We have transacted on six vacant properties in the month of April, ahead of valuations, compared with seven vacant properties this time last year.

o  As at 30 April 2020, we have £23.9m of properties in our sales pipeline (committed or in solicitors' hands) compared to £21.5m this time last year, providing us with a high degree of visibility on future sales in H2.

 

Valuations

§ The market value of our total portfolio rose by +1.6% (HY19: 0.6%).

o  The market value of our PRS portfolio rose by +1.5% (HY19: 0.9%).

o  The market value of our regulated tenancy portfolio rose by +1.8% (HY19: 0.3%).

o  Our PRS development pipeline remained flat reflecting current market uncertainty.

 

 

Operational highlights: supporting all stakeholders amidst uncertainty

§ Our primary focus has been on the health and safety of our customers, staff, partners and suppliers.

§ We have successfully implemented our business continuity plans with little to no disruption in business operations.

§ We have retained all of our staff across the whole business, with no employee furloughed and no one laid off as a result of Covid-19.

§ We have continued to serve our customers throughout the current crisis, including all critical repairs and maintenance work across our portfolio of c.9,300 homes.

§ Our strategic focus on providing mid-market homes continues to serve us well, and our homes remain in high demand.

§ We have increased support for our customers, including enhanced outreach and communications, particularly with our older customers. We have also included initiatives to support mental health and wellbeing.

§ To date, we have been contacted by less than 2% of our customers regarding affordability concerns due to Covid-19. With support from our specialist inhouse team many customers have subsequently successfully accessed government support measures. For those that have required further assistance, we have agreed rent deferral repayment plans. This totals less than 1% of our customer base.

§ Overheads remained stable at £13.8m for the half year (HY19: £13.8m) despite our growth, demonstrating our operational leverage. 

 

Investment activity & pipeline update

§ Grainger's PRS growth strategy remains as relevant as ever and we continue to see opportunities in the market and are pursuing those that meet with our strict investment criteria. We are, however, remaining prudent and highly disciplined in our investment decision making during these times of increased economic uncertainty.

§ During the first half, we secured five new schemes totalling £376m and 1,377 new PRS homes, including:

o  Exchange Square, Birmingham - £77m investment and 375 units

o  Canning Town 3, London - £56m investment and 132 units

o  Capital Quarter, Cardiff - £57m investment and 307 units

o  Queens Road, Nottingham - £56m investment and 348 units

o  Waterloo, London - £130m additional investment and 215 units

§ We have £1,048m of investment in our secured PRS pipeline, comprising 4,213 new homes. In addition, we have a further £349m in the planning and legal process and £600m for the TfL partnership. Further details on our secured pipeline below.

§ Development activity is ongoing on all nine sites under construction in our pipeline. A number of our projects under construction paused due to social distancing measures. We are pleased to report that all sites are now open and active.

 

Secured pipeline
Total investment value	£1,048m
Total units	4,213
Total number of schemes	18
Total number of schemes under construction	9
Targeted net rental income	£51m
Targeted gross yield on cost (weighted average)	6.5%

 

Strong cash position and robust capital structure

§ We are well capitalised and in a strong financial position to weather any near-term economic uncertainty.

§ Following the successful equity raise in February to support our strategic growth plans, we have £527m of available headroom in cash and committed undrawn facilities, compared to an expected capital expenditure of £165m for the next twelve months.

§ Loan to value⁶ stands at a six-year low of 32.9% (FY19: 37.1%).

§ Average cost of debt at 3.0% for the first half of the year (FY19: 3.2%), with our incremental cost of debt at 1.7%.

§ Net debt⁶ was £1,000m (FY19: £1,097m).

§ We have no debt maturities until March 2022, and we have significant headroom to our debt covenants.

 

Dividend

§ Dividend policy maintained: to distribute the equivalent of 50% of net rental income (with a one-third, two-third split between interim and full dividend).

§ +6% growth in our interim dividend to 1.83p per share (HY19: 1.73p).

 

Positive lead indicators for H2

§ Rent collection stable at 95% and 94% in March and April respectively.

§ Rental growth in April stable with the first half at +3.3%.

§ Occupancy remains high at 97.2%.

§ Continued to secure new customers, and a similar level of vacant sales completed in April as at the same time last year, with resilient pricing in line with valuations.

 

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 profit before tax and adjusted earnings reconciliation.

⁴ Refer to Note 3 for reconciliation of EPRA measures and EPRA performance measures section at the end of this document.

⁵ Dividend - The dividend of 1.83p per share (gross) amounting to £12.3m will be paid on 3 July 2020 to shareholders on the register at the close of business on 29 May 2020. Shareholders will again be offered the option to participate in a dividend re-investment plan and the last day for election is 12 June 2020 - refer also to Note 10.

⁶ Refer to Note 19 for net debt and LTV calculations.

 

Future reporting dates

§ Capital Markets Day & Trading update - 29 September 2020

§ Full year results - 19 November 2020

 

 

Half year results presentation

 

Grainger plc will be holding a virtual presentation of the results at 8:30am (UK time) today, 14 May 2020 via webcast and a telephone dial-in facility (details below), which will be followed by a Q&A session.

 

 

Webcast details:

 

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

 

https://webcasting.brrmedia.co.uk/broadcast/5df9ecd91727256b168b6cd6

 

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

 

 

Conference call details:

 

Call: +44 (0)330 336 9105

Confirmation Code: 1072758

 

A copy of the presentation slides will also be available to download on Grainger's website (http://corporate.graingerplc.co.uk/) from 8:00am (UK time).

 

 

 

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, set out in the Risk Management report on pages 41-43 of the 2019 Annual Report and Accounts.

 

A number of risks faced by the Group are not directly within our control such as the wider economic and political environment.

 

In line with our risk management approach detailed on pages 39-40 of the 2019 Annual Report and Accounts, the key risks to the business are under regular review by the Board and management, applying Grainger's risk management framework.  The Covid-19 pandemic has had a substantial impact on many aspects of society, including business, with the duration and depth of the impact being uncertain.  Specifically in relation to Grainger, it is currently considered that the principal risks previously reported remain our principal risks.  However, it is recognised that a pandemic, and consequently Government restrictions and societal behavioural changes flowing therefrom increase the likelihood of such risks being accelerated or becoming more acute.  This would include, but is not limited to market, regulatory and supplier risks. The risks to Grainger will continue to be monitored closely as well as the potential controls and mitigants that may be applied during this unprecedented period. 

 

These risks 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

 

Our strategy is to continue to transition Grainger into a business focused on the private rented sector (PRS), which we believe has long-term structural growth and compelling returns. Today with over 60% of our portfolio and income derive from our PRS assets, the strength of our business, our strategy and our sector are being reaffirmed during the current uncertain economic climate.

 

The first half of our financial year, the majority of which predates social distancing in the UK, was a period of strong performance and significant achievements. We delivered an increase in net rental income of +27% from our investment activity and secured +3.4% like-for-like rental growth across our 9,300-home portfolio. To accelerate our growth strategy and to bring forward four further PRS, build-to-rent schemes in our pipeline, we successfully raised £183m of net proceeds from an equity raise in February at a premium to net asset value, receiving significant backing from our shareholders.

 

 

Coronavirus (Covid-19)

 

As the first half came to a close, the business was in its strongest financial position in recent years. With a robust balance sheet, low leverage and significant liquidity, Grainger is well positioned to weather the current economic uncertainty caused by coronavirus, while continuing to serve our customers, retaining full employment and delivering on our growth plans.

 

Our focus during the pandemic and lockdown has had three themes: (1) innovate, (2) communicate, and (3) improve.

 

Ahead of the UK Government's lockdown measures, Grainger had successfully tested our business continuity plans and swiftly implemented full remote working across all our offices. With instructions for everyone to work from home, we found our assets being used more intensely than ever before. We adapted swiftly, ensuring no disruption to customer service and critical repairs, while we have successfully carried on with lettings and sales safely through the use of virtual viewings and other innovative measures.

 

We have increased our contact with our customers, introducing a buddy-system across our portfolio so that customers have a single point of contact at Grainger on a first name basis. We have been in regular active dialogue with the UK Government and their officials, providing insight and perspective to inform their rapidly evolving policy response. In addition, we have been supporting our suppliers to ensure that they can continue to operate and enable us to efficiently serve our customers.

 

Lastly, we have been increasing our focus on training and professional development for our employees, with the launch of our internally-developed, bespoke training programme, the Grainger Academy; and the roll out of the second phase of our best-in-class health & safety programme, Live.Safe 2.0. We have also been working to further improve our customer service, standardising and refining every aspect of operating a PRS asset, which covers 320 separate tasks and responsibilities. This exercise will enhance the rental experience for our customers, ensuring that there is a Grainger standard that is met across each and every one of our 9,300 properties today, and c.9,000 more from our pipeline.

 

Our ambition is to emerge from the coronavirus lockdown even stronger.

 

 

Strong H1 performance

 

Financial performance over the past six months has been strong. We have increased net rental income by +27% and like-for-like rental growth of +3.4%. We delivered strong adjusted earnings for the period at £33.7m, reflecting a high level of asset recycling this time last year, and EPRA earnings rose +9%. Our EPRA net tangible asset value (EPRA NTA) rose to 281p.   

 

Our portfolio grew to 9,300 homes over the period, with new scheme openings, including Brook Place in Sheffield and Solstice Apartments in Milton Keynes. Our PRS portfolio now represents over 60% of our asset base and income.

 

Our pipeline continues to progress well. Our secured pipeline now totals £1,048m and 4,213 new PRS homes. Our pipeline of schemes in planning or legals totals £949m and 4,323 new PRS homes, which includes our joint venture with Transport for London. Once completed, we expect that the projected income from these new investments will more than double our net rental income and provide us with sustainable dividend growth of a similar scale.

 

During the first half we successfully raised £183m of net proceeds in an equity placing to bring forward four new schemes into our secured pipeline. Our prudence in the way we manage the business meant that we sought commitment for the funding ahead of the commitment to start on site. This has enabled us to increase the pace of our pipeline delivery whilst maintaining a strong balance sheet.

 

 

Key highlights

During the first half of the financial year, we had a number of key achievements.

 

TfL Partnership update

 

We have made good progress on all seven sites in the TfL partnership, with planning applications for three schemes having been submitted, with a further one to be submitted imminently.

 

We are assured that TfL remain committed to the partnership, which will deliver homes on public land and generate income to support TfL.

 

Waterloo planning consent

 

We achieved planning consent on our Waterloo site, an existing asset within our regulated tenancy portfolio, which will see us redevelop the site and deliver 215 new homes for our PRS portfolio. This is a great example of the opportunities that exist within our portfolio, aligned to our PRS growth strategy.

 

New acquisitions

 

During the period, we successfully acquired four new schemes for our secured pipeline, including:

§ Capital Quarter, Cardiff (on site with construction underway)

§ Exchange Square, Birmingham (start on site expected in the Summer)

§ Queens Road, Nottingham (start on site expected in the Autumn)

§ Canning Town 3 (start on site follows the completion of Canning Town 2)

 

 

New scheme completions & launches

 

In the first half, we completed two new PRS schemes:

§ Solstice Apartments in Milton Keynes: 139 homes, £32m investment, c.6% gross yield targeted, which was launched just before lockdown but continues to lease through the period at rents ahead of underwriting.

§ Millet Place, Pontoon Dock, London: 236 homes, £26m investment (our share), c.6% gross yield targeted, which is due to launch at the end of May and we are experiencing good levels of interest.

New lettings continued over the past month during lockdown, leveraging our digital leasing platform, which forms part of our CONNECT technology platform.

 

Strong operational performance

In addition to strong like-for-like rental growth over the period, we have further improved our gross to net efficiency which now stands at 24.9% on our stabilised portfolio and occupancy remains high at 97.2%.

 

Political update

The Government recognises the benefits that a professionalised private rental housing sector can bring to the UK. We have an open and constructive positive dialogue with Ministers and officials across Whitehall.

 

In March, in a letter to the Mayor of London, the Secretary of State for Housing confirmed this Government's strong opposition to rent controls, demonstrating support for a strong professional rental sector.

 

We have increased our engagement with the Government during the coronavirus pandemic, providing support and insight to help inform their rapidly evolving policy decisions.

 

 

Positive lead indicators in early H2

 

We have carefully monitored our performance indicators in the early weeks of our second half due to the economic uncertainties. Rent collection, a key performance metric particularly during this period, remains stable at 95% and 94% in March and April respectively. Rental growth in April remained stable with the first half at +3.3%. Occupancy remains high at 97.2%. We have continued to secure new customers, and we have completed a similar level of vacant sales in April as we did this time last year, with resilient pricing in line with valuations.

 

 

Dividend maintained

 

Reflecting the strength of the business, our sector and the positive trading we are seeing early in the second half, the Board has confirmed that we remain committed to our dividend policy to distribute 50% of annual net rental income as a dividend, with a one-third payment at the interim stage. Our interim dividend has increased by +6% to 1.83p on a per share basis (HY19: 1.73p).

 

Outlook - a strong business in a resilient sector

 

Our PRS strategy has transitioned Grainger into a stronger business in a resilient sector. We enter our second half of this financial year well positioned and well capitalised. We aim to emerge from this global crisis stronger, having invested in innovation, communication and improvement during the lockdown. Lead indicators in April show that both the lettings and sales market are active, and that Grainger successfully and safely carrying on performing in line with our strategy.

 

We are prepared to adapt to a new way of life, as the lockdown is lifted, ensuring that we can continue to serve our customers and deliver our pipeline of new homes.  As market leader in PRS, with a business model that can deliver income and growth through the cycle, we believe Grainger is well positioned to maintain momentum in the second half as well as in the years to come.

 

Helen Gordon

Chief Executive

14 May 2020

 

 

 

Financial review

The past six months have seen the business continue to transition into a majority PRS business with earnings now predominantly driven by rental income and over 60% of our portfolio now in PRS assets.

We continued to deliver strong rental growth with +3.4% across our portfolio and our rent collection through the current lockdown has remained high at 94% in April. It is our confidence in the resilience of our income that enables us to maintain our dividend policy with an interim dividend of 1.83p per share, an increase of +6%.

We have taken steps to ensure that our growth is delivered from a position of financial strength. Following our successful equity raise of £187m in February, we end this half year with an LTV at a six year low of 32.9% and cash and committed facilities headroom at a six year high of £527m. We also refinanced our near-term debt maturities, with our next maturity now in March 2022.

Whilst there is a heightened level of uncertainty surrounding the current economic outlook, we believe our business has both the flexibility and firepower to navigate its way through these challenges and capitalise on any opportunities that may arise.

 

Highlights

Income returns	HY19	HY20	Change
Rental growth (like-for-like)	3.7%	3.4%	(33) bps
- PRS	3.4%	3.0%	(41) bps
- Regulated tenancies (annualised)	4.4%	4.5%	+7 bps
Net rental income (Note 5)	£29.1m	£37.0m	+27%
Adjusted earnings (Note 2)	£38.3m	£33.7m	(12)%
Adjusted EPRA earnings (Note 3)	£14.7m	£16.0m	+9%
Profit before tax (Note 2)	£54.3m	£49.6m	(9)%
Earnings per share (diluted, after tax) (Note 9)	9.0p	6.4p	(29)%
Dividend per share (Note 10)	1.73p	1.83p	+6%

 

 

Capital returns	FY19	HY20	Change
EPRA NTA per share (Note 3)	278p	281p	+1%
EPRA NNNAV per share (Note 3)	272p	280p	+3%
Net debt (Note 19)	£1,097m	£1,000m	(9)%
Group LTV (Note 19)	37.1%	32.9%	(420) bps
Cost of debt (average)	3.2%	3.0%	(20) bps
Reversionary surplus	£302m	£306m	+1%

 

 

 

 

 

 

 

Income statement

 

The transition in the composition of earnings has continued with a significant increase in net rental income (+27%). Recurring net rental income delivered over 60% of income and this proportion will continue to grow as our PRS pipeline delivers. The resilience of this net rental income provides a solid foundation for both earnings and cashflow.

Adjusted earnings decreased by 12% to £33.7m (HY19: £38.3m) as a result of higher levels of asset recycling in the same period last year. Overheads remained flat demonstrating our inherent operational leverage as we continue to invest in our best in class operating platform.

 

 

Income statement (£m)	HY19	HY20	Change
Net rental income	29.1	37.0	+27%
Profit from sales	31.3	22.8	(27)%
Mortgage income (CHARM) (Note 15)	2.8	2.6	(7)%
Management fees	2.2	1.6	(27)%
Overheads	(13.8)	(13.8)	+0%
Pre-contract costs	(0.6)	(0.2)	(67)%
Joint ventures and associates	1.8	0.1	(94)%
Net finance costs	(14.5)	(16.4)	+13%
Adjusted earnings	38.3	33.7	(12)%
Valuation movements	31.7	14.6
Other adjustments	(15.7)	1.3
Profit before tax	54.3	49.6	(9)%

 

Rental income

Net rental income increased by +27% to £37.0m (HY19: £29.1m) as a result of investment activity and strong operating performance.

Like-for-like rental growth remained strong in the six months to March demonstrating the resilience of our net rental income stream. Like-for-like rental growth across the portfolio was +3.4%. In our PRS portfolio we delivered +3.0% like-for-like rental growth with +2.7% on renewals and +3.5% on new lets. The regulated tenancy portfolio also continued to deliver strong growth of +4.5% on an annualised basis.

Our occupancy rate has remained high at 97.2% and the gross to net (property operating cost ratio) remained relatively flat at 26.0% (HY19: 26.2%). Our stabilised portfolio improved further to 24.9% (FY19: 25.2%). Passing net rental income at the half year is now £74m, up +10% from £67m at HY19.

	£m
HY19 Net rental income	29.1
Disposals	(1.7)
PRS investment	8.7
Rental growth	0.9
HY20 Net rental income	37.0
YoY growth	+27%

 

Sales

Sales activity during the period was in line with expectations delivering £22.8m of profits (HY19: £31.3m). Vacant sales profit from our regulated tenancy portfolio remains robust and in line with the prior year and we continue to recycle our legacy assets.

Residential sales

 

Vacant property sales delivered £13.5m of profit (HY19: £13.5m) from £21.6m of revenue (FY19: £28.2m) in the period, with a regulated tenancy vacancy rate of 6.6% over the six month period. Sales values achieved were strong with pricing 1.0% ahead of previous vacant possession value. Our sales transaction velocity (keys to cash) remained flat at 113 days (HY19: 112 days).

Going into the second half of the year we have a good sales pipeline in place with of £26.2m committed or in solicitors' hands (HY19: £19.6m) and, despite the current disruption in the market, we have taken actions to ensure that we are able to continue to sell our vacant properties in line with government guidelines. Our properties are unique and have historically proven to be resilient in challenging markets.

Sales of tenanted and other properties delivered £16.0m of revenue (HY19: £52.3m) and £5.2m of profit (HY19: £13.0m). This reduction is a result of a higher level of asset recycling from the GRIP portfolio this time last year.

Development activity

 

Development activity continues to wind down in the business with the £4.1m profit relating to the sale of a strategic land asset in the period. Our legacy development for sale activity completed last year.

 

Sales

	HY19				HY20
	Units sold	Revenue	Profit		Units sold	Revenue	Profit
		£m	£m			£m	£m
Residential sales on vacancy	80	28.2	13.5		54	21.6	13.5
Tenanted and other sales	277	52.3	13.0		42	16.0	5.2
Residential sales total	357	80.5	26.5		96	37.6	18.7
Development activity	-	11.9	4.8		-	5.3	4.1
Overall sales	357	92.4	31.3		96	42.9	22.8

 

 

 

Cost Control

Cost control remains a key focus for the business as we continue with our targeted investment in technology to drive further efficiency and scalability of our platform.

 

Overheads

 

Overheads remained flat in the period at £13.8m (HY19: £13.8m) as the size of our PRS portfolio continues to grow.

Financing costs

 

Finance cost increased on the prior year at £16.4m (HY19: £14.5m) as we have a full six-month cost from our GRIP acquisition and we made further investments into our PRS portfolio. Our average cost of debt decreased by 20bps to 3.0% (HY19 3.2%) with our marginal cost of debt at 1.7%.

 

 

Balance sheet

 

Our ambitions for growth have always been aligned with a continued focus on balance sheet discipline, and of increasing importance given the current levels of uncertainty. Our conservative LTV and strong liquidity position ensure we can make the right decisions for the business from a position of financial strength.

Our successful equity placing in February provided net proceeds of £183m to fund our pipeline commitments and puts our balance sheet in great shape with an LTV at 32.9%, a six year low with £527m of available cash and undrawn facilities.

 

 

 

Market value balance sheet (£m)	FY19	HY20
Residential - PRS	1,526	1,615
Residential - regulated tenancies	1,017	1,017
Residential - mortgages (CHARM)	76	73
Forward Funded - PRS work in progress	160	162
Development work in progress	120	124
Investment in JVs/associates	33	41
Total investments	2,932	3,032
Net debt	(1,097)	(1,000)
Other assets/liabilities	(14)	(2)
EPRA NAV/EPRA NRV*	1,821	2,030
Deferred and contingent tax - trading assets	(102)	(114)
Exclude: intangible assets	(11)	(17)
EPRA NTA*	1,708	1,899
Add back: intangible assets	11	17
Deferred and contingent tax - investment assets	(19)	(21)
Fair value of fixed rate debt and derivatives	(34)	(3)
EPRA NNNAV/EPRA NDV*	1,666	1,892
EPRA net asset values (pence per share)
EPRA NAV	297	301
EPRA NNNAV	272	280
EPRA NTA	278	281
Reversionary surplus (excluded from NAV - £m)	302	306
Reversionary surplus (pence per share)	49	45

 

* EPRA Net Reinstatement Value (NRV), Net Tangible Assets (NTA) and Net Disposal Value (NDV) were introduced in October 2019. Definitions are included in Note 3 to the financial statements.

EPRA NTA increased by +1% from the year end to 281p per share (FY19: 278p per share) with the other NAV measures showing similar uplifts. EPRA NAV increased by +1% during the period to 301p per share (FY19: 297p per share) whilst EPRA NNNAV increased by +3% during the year to 280p per share (FY19: 272p per share), as the mark to market valuation of debt instruments moved in our favour.

Excluded from all these EPRA NAV measures is a reversionary surplus of £306m or 45p per share (FY19: £302m). This embedded value in our portfolio is the difference between the market value of our assets whilst they are tenanted and the value we could realise if they became vacant and were sold.

The following table shows the movement in EPRA NTA in the period with the largest contributors being adjusted earnings and the movement in property valuations.

EPRA NTA movement
	£m	Pence per share
EPRA NTA at 30 September 2019	1,708	278
Adjusted earnings	34	5
Valuations (trading & investment property)	37	6
Disposals (trading assets)	(17)	(3)
Tax (current, deferred & contingent)	(19)	(3)
Dividends	(21)	(3)
Intangible assets	(6)	(1)
Equity Placing	183	2
EPRA NTA at 31 March 2020	1,899	281

 

 

Property portfolio valuations

 

The market value of our property portfolio increased by +1.6% over the six-month period (HY19: 0.6%). The PRS portfolio saw an uplift of +1.5% (HY19: 0.9%), with the regulated portfolio also delivering a strong performance at +1.8% (HY19: 0.3%). The valuation of our development pipeline remained flat over the period, due to the level of uncertainty around on-site progress and stabilisation within the current environment. This will be reviewed further at the financial year end.

Financing and capital structure

We are a well capitalised business with the lowest LTV and highest liquidity headroom of recent times. With £198m of cash available and £329m of available committed undrawn facilities we have enough liquidity to cover all future costs and liabilities comfortably for an extended period.

Following the repayment of two near-term debt maturities in the period, we now have an average debt maturity of 5.7 years, with the next maturity due in March 2022. At the same time, we have reduced our average cost of debt further to 3.0%, with significant headroom in our debt covenants.

 

	FY19	HY20
Net debt	£1,097m	£1,000m
Loan to value	37.1%	32.9%
Cost of debt (average)	3.2%	3.0%
Incremental cost of debt	1.7%	1.7%
Fully drawn cost of debt	2.9%	2.8%
Interest cover	3.6x	3.3x
Headroom	£430m	£527m
Weighted average facility maturity^	5.8	5.7
Hedging	98%	88%

 

^ Including extension options; excluding these options it is 5.8 years (FY19) and 5.6 years (HY20).

 

Cashflow and investment

 

Net debt decreased to £1,000m (FY19: £1,097m). Our equity placing provided net proceeds of £183m for PRS investment.  We generated £56m of cash from operations in the six months ended 31 March 2020, which reflects the timing of our sales, and invested £103m into our property portfolio in the period.

Dividend

 

We remain committed to our policy to distribute 50% of annual net rental income as a dividend, with a one-third payment at the interim stage. Our interim dividend has increased by +6% to 1.83p on a per share basis (HY19: 1.73p).

Summary and outlook

 

We have delivered a good performance over the first half of the financial year and have continued to enhance our income profile and balance sheet with over 60% of our portfolio invested into PRS assets and over 60% of our income from net rents. The resilience of our business model combined with the strength of our balance sheet places us in a strong financial position in the current economic uncertainty.

We have continued to deliver good results during the lockdown period. The diversity of our customer base, alongside the strength of operations and the quality of our space has enabled us to maintain high occupancy across our portfolio at 97.2% and strong rental growth at +3.3% since the half year close.

Our property sales have continued throughout the current uncertainty, having exchanged and closed on numerous transactions and we enter the second half with a strong pipeline of sales, ahead of our position this time last year.

Our balance sheet and liquidity are in a strong position with the lowest LTV and highest level of liquidity for six years. This position of strength combined with the resilience of our portfolio positions us well to navigate through the challenges in the economy and capitalise on any opportunities that may arise.

 

Vanessa Simms

Chief Financial Officer

14 May 2020

 

 

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 Financial Officer

14 May 2020                                                                           14 May 2020

 

 

 

 

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 2020 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 2020 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.  

Emphasis of matter - property valuations 

We draw attention to note 1a to the condensed financial statements which states that all property assets are subject to a Directors' valuation at the period end, supported by independent external valuations on a sample basis. As described in note 1e these external valuations are reported on the basis of 'material valuation uncertainty' as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty should be attached to the valuation than would normally be the case. Our conclusion is not modified in respect of this matter.

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. 

 

Richard Kelly

for and on behalf of KPMG LLP 

 

Chartered Accountants

15 Canada Square

Canary Wharf

London

E14 5GL

 

14 May 2020