Grainger Plc · LSE:GRI

Grainger — H1 2016 Earnings Presentation

43 slides from Grainger's earnings presentation, May 19, 2016

  1. Slide 1: Half year financial results

    Half year financial results Six months ended 31 March 2016 1 www.graingerplc.co.uk 19 May 2016

  2. Slide 2: Agenda

    Agenda 1. Highlights Helen Gordon 2. Financial review Vanessa Simms 3. Grainger delivering PRS Helen Gordon 4. Market outlook and summary Helen Gordon 5. Q&A www.graingerplc.co.uk 2 19 May 2016

  3. Slide 3: Highlights

    Highlights Strong financial performance Significant progress  Private rented sector (PRS) pipeline  Net rental income up 13% to £18.0m ahead of plan: £268m secured of £850m target  Recurring profit up 13% to £25.4m,  Cost review: minimum of 24%, £8.6m and strong FY expected savings identified, t

  4. Slide 4: Simplified Grainger

    Simplified Grainger Focusing on growing rental income and maximising total returns The leading listed UK PRS investment vehicle Grow rents  Inject pace and improve PRS sourcing  Accelerate transition to a more balanced, lower risk business Simplify  Exit non-core assets and focus  No more focus

  5. Slide 5: Progress update: Grow rents

    Progress update Grow rents  Net rental income up +13% to £18m  Rental growth on new lets: +5.4%  £850m investment target by 2020  £268m of investment secured to date, one third of target  New dividend policy linked to net rental income £918m of PRS investment identified £850m target £268m £398m

  6. Slide 6: Good progress on PRS pipeline

    Good progress on PRS pipeline £250m targets £41m £73m Tenanted Acquisitions £115m £219m Direct Developments £99m £179m £96m Forward Funding £100m target £13m £83m PRS Fund (GRIP)* 0 50 100 150 200 250 300 350 400 Secured Planning / Legals Under consideration * Grainger’s 24.9% share. See appendix fo

  7. Slide 7: Progress update: Simplify and focus

    Progress update Simplify and focus  Non-core disposals (Germany and equity release)  Profitable disposals of non-core business units; 4p per share benefit to EPRA NNNAV  c.£500m reduction in net debt, enabling PRS investment  Reducing operating costs  New property and operations structure  £8.

  8. Slide 8: Successful disposal of German division

    Successful disposal of German division FY15 – 5,330 units, total AUM £336m; exit announced Execution of Germany exit  Nov 15: Heitman JV sold to Vonovia  Feb 16: Largest wholly owned portfolio (FRM) and platform sold to Heitman  Apr 16: Sale announced for the bulk of remaining assets to LEG Outco

  9. Slide 9: Progress update: Build on our heritage

    Progress update Build on our  Sales achieving prices 6.8% above Sept 15 values heritage  Residential sales revenue: £71.3m, generating £32.5m profit (+9%)  Property valuations: +4.7% in 6 mths to 31 Mar 16  Leveraging our portfolio and relationships 1. Apex House PRS development resolution to gr

  10. Slide 10: Our PRS business model

    Our PRS business model What we do Core skills Value drivers Driving returns • Sourcing • Location Capital • Networks • Asset type & quality Buy / Build • Negotiating • Entry price Value accretion • Execution • Design • Local • Long term tenancies knowledge • Market demand Income Let • Marketing • Cu

  11. Slide 11: Building on our regulated tenancy platform

    Building on our regulated tenancy platform What we do Core skills Value drivers Driving returns • Sourcing • Location Capital • Networks Buy • Negotiating • Asset type & quality • Entry price Value accretion • Execution • Operating platform • Customer mgt Capital & income • Arrears management Manage

  12. Slide 12: New structure for success

    New structure for success  A scalable operating platform for growth  Delivering improved customer service and shareholder returns  Leveraging our core skill set Customer focus  Net rental income  Customer service management  Rental margins Operations Income  Technology-led innovation  Custom

  13. Slide 13: Financial review

    Financial review Vanessa Simms, Finance Director 13 www.graingerplc.co.uk

  14. Slide 14: Drivers of total return

    Drivers of total return Value drivers KPIs  Grow rental income > trading profits  Rental growth  Operating efficiency for scalability  Recurring profit Income  Overhead and finance cost reductions  EPS return  Sales profit  Cost of debt  Enabling dividend growth  Dividend  Valuations: ren

  15. Slide 15: Financial highlights

    Financial highlights Income HY16 HY15 Change PRS rental growth (new lets / renewals) 5.4% / 3.1% 6.2% / 2.4% (80)/70 bps Net rental income £18.0m £16.0m  13% Recurring profit £25.4m £22.5m  13% Recurring EPS (after tax) 4.9p 4.3p  14% Dividend per share 1.45p 0.64p  127% Capital HY16 FY15 Change

  16. Slide 16: Income statement

    Income statement HY16 HY15 Net rental income £18.0m £16.0m Profit from sales £36.5m £38.3m Mortgage income (Charm) £4.4m £4.6m Management fees £3.3m £3.0m Operating expenses £(17.0)m £(15.8)m JVs £0.8m £1.1m Finance cost £(20.6)m £(24.7)m Recurring profit £25.4m £22.5m Recurring EPS (after tax) 4.9p

  17. Slide 17: Identified cost savings

    Identified cost savings Cost review  Reduction of at least 24% in overheads from FY15 FY15^ overhead costs £36.1m  Full benefit to be delivered in FY17 Cost savings  Operational process review in progress: − Increase scalability of operating Disposal savings £(3.6)m platform Restructure savings £

  18. Slide 18: Increasing dividend in line with rents

    Increasing dividend in line with rents  New dividend policy to distribute Dividend Distribution the equivalent of 50% of net rental income during transition HY16 net rental income £18.0m  Aligned with our strategy to grow net rental income Annualised £36.0m  Dividend payment – one third interim,

  19. Slide 19: Building blocks for rent & earnings growth

    Building blocks for rent & earnings growth Net rental income illustration £30m £5m £(6)m £75m £14m £32m 2015 net rental Secured pipeline Remaining pipeline Rental growth, Regulated tenancy 2020 net rental income (Illustration based on 6.5-7% gross yield, 3% pa disposals income 70-75% margin) (7% vac

  20. Slide 20: Growth in EPRA NNNAV

    Growth in EPRA NNNAV 295 Reversionary surplus 290 £332m 80p per share (6)p (3)p 285 4p Corp Tax Change (1)p +4p 280 18p 275 270 NNNAV +20p 8p 283p 265 +8% 260 263p 255 250 FY15 PAT* Valuation Disposals** Discontinued Deferred & Derivatives HY16 growth - Operations Contingent Trading Tax and Properti

  21. Slide 21: Reducing net debt

    Reducing net debt 1,300 1,200 £111m £(123)m £1,138m £(146)m 1,100 £35m £1,059m £(363)m £44m 1,000 900 800 Reduction of £442m £696m 700 600 FY15 Gross rent, Propex, Finance Investment Discontinued HY16 Discontinued Proforma sales & fees overheads, costs operations operations HY16 tax & dividend www.g

  22. Slide 22: Capital structure

    Capital structure HY 16 HY 16 FY 15 6.5% 60% Annualised Pro Forma^ 55% Fin. cost 6.0% £41m FY16 50% Avg. cost of debt 5.5% 45% Fin. cost LTV Net debt £696m £1,059m £1,138m 40% £91m FY12 Loan to value 33.4% 43.0% 45.5% 5.0% 35% Headroom £379m £207m £142m 30% 4.5% 25% Derivatives (6/12 mth) £(4.1)m £(

  23. Slide 23: Positive financial outlook for FY16

    Positive financial outlook for FY16  Recurring Profit  Strong underlying trading from regulated tenancy sales and development, H1 weighted  £5.8m of profit from a development land sale completed in H2  Benefits being seen from increasing rents and lower finance costs  Strong FY expected  Strat

  24. Slide 24: Grainger delivering PRS

    Grainger delivering PRS Helen Gordon, CEO 24 www.graingerplc.co.uk 19 May 2016

  25. Slide 25: Securing attractive PRS opportunities through forward funding

    Securing attractive PRS opportunities through forward funding Clippers Quay, Salford  £99m  Gross yield target c.8%  Over 600 units  Scale provides management efficiencies  Leveraging existing scale of operations in Manchester  Est. completion 2018-19 www.graingerplc.co.uk 25 19 May 2016

  26. Slide 26: Accessing PRS through development

    Accessing PRS through development Secured In planning Berewood, Waterlooville Apex House, Seven Our first family style PRS Sisters, London 104 new homes, on site 163 new homes First completions Sept. 2017 Resolution to grant, May ‘16 Seven Sisters, London Newbury, W. Berkshire 196 new homes 232 new

  27. Slide 27: Tenanted PRS acquisitions

    Tenanted PRS acquisitions £41m total tenanted Kings Dock Mill, PRS assets acquired Liverpool in HY16  £14.5m investment  6.5-7% gross yields  c.400 units  £1m of gross rents  Leveraging our  c.7% gross yield presence in Northern  120 units regions  Leveraging existing scale of operations in

  28. Slide 28: Adding value in our existing portfolio

    Adding value in our existing portfolio Regional PRS portfolio  £56m (June 2015)  Initial gross yield: 7.3%  c.600 units Portfolio enhancement  +8.8% valuation growth HY16  +3.2% rental growth  +4.8% rent increase on renewals and new lets  Portfolio management: £1.9m sales at 19% profit margin

  29. Slide 29: Market outlook and summary

    Market outlook and summary Helen Gordon, CEO 29 www.graingerplc.co.uk 19 May 2016

  30. Slide 30: Strengthening investment case for PRS

    Strengthening investment case for PRS Number of properties per landlord  PRS is fastest growing tenure, and 1% 0% 1% 1 predicted to expand by c.25% by 2020 3% 17% 2-4  Supply and demand imbalance will 5-9 underpin rental growth 10-24 25-100  98% of PRS is buy-to-let, but being More than squeezed

  31. Slide 31: Grainger's growth potential

    Grainger’s growth potential Structural shift toward private renting and strong fundamentals  Increasing friction costs of ownership  Changing spending patterns  Increasing job mobility  Affordability (house prices to earnings)  Later family formation  Increasing demand for quality Grainger wil

  32. Slide 32: Delivering on strategy, good performance, potential to grow

    Delivering on strategy, good performance, potential to grow  A strong first half and strong FY recurring profit expected  Simplifying and focusing, supported by non-core disposals  Substantial firepower for investment  Growing rental income with a PRS pipeline over £850m; good conversion rate 

  33. Slide 33: Thank you

    Thank you 33 www.graingerplc.co.uk 19 May 2016

  34. Slide 34: Appendices

    Appendices 34 www.graingerplc.co.uk

  35. Slide 35: Impact of Budget 2016

    Impact of Budget 2016  Stamp duty land tax changes  3% additional rate, no exemptions for large corporates  No impact on development activity  Reflected in our acquisition appraisals and half year valuations  Corporation tax  Lower rates enhance future income returns and support distributions

  36. Slide 36: PRS pipeline – secured

    PRS pipeline – secured Name Location Status Est. date of GRI Gross yield completion investment target Direct development Berewood Waterlooville, Hampshire On site Sept. 2017 £17m 7.5-8% Consent granted, Seven Sisters Haringey, London 2020 £76m c.7% CPO underway Gun Hill, Wellesley Aldershot, Hampshi

  37. Slide 37: Regulated tenancy business model

    Regulated tenancy business model 1. Buy at a discount 2. Hold and receive rental income  Biennial rent reviews, achieving rental growth of up to 5% + RPI 3. Sell and capture house price inflation and reversionary surplus  Reversionary surplus relating to regulated tenancies of £269m Value Recurrin

  38. Slide 38: Balance Sheet

    Balance Sheet HY16 FY15 £m £m Residential - Market Rented 455 399 Residential - Reversionary 1,345 1,337 Development Work In Progress 101 95 Investment in JVs/Associates 180 179 Total Investments 2,081 2,010 Net Debt (1,059) (1,138) Other Assets/Liabilities 11 59 Discontinued (excluding loans) 345 4

  39. Slide 39: JV & Associates

    JV & Associates HY16 (£m) GRIP Walworth Other Total Property assets 600 191 72 863 Other assets 33 9 3 45 Total assets 633 200 75 908 External debt (195) (60) (7) (262) Loans to/(from) equity participants (126) (13) (31) (170) Other liabilities (9) (16) (44) (69) Total liabilities (330) (89) (82) (5

  40. Slide 40: Portfolio Summary

    Portfolio Summary HY16 No. Units Market Vacant Reversionary IV/VP % Gross Rent Gross Sales Profit on Sale Value Posession Surplus Annualised Proceeds £'m £'m Value £'m £’m £’m £'m Residential - PRS (Market Rented) 2,133 455 489 34 93% 24 6 4 Residential - Regulated Tenancies 3,710 1,251 1,520 269 82

  41. Slide 41: Sales

    Sales HY16 HY15* Units sold Sales Profit Units sold Sales Profit £m £m £m £m UK residential 174 62.7 29.6 152 47.4 27.7 Charm sales 27 3.5 0.1 26 3.2 0.1 Sales on vacancy 201 66.2 29.7 178 50.6 27.8 Tenanted and other 38 5.1 2.8 5 3.9 1.9 Residential sales total 239 71.3 32.5 183 54.5 29.7 Developme

  42. Slide 42: Net asset reconciliation

    Net asset reconciliation HY16 (£m) Adj IAS 39 re Add back fixed rate Market Fair value of loan and Statutory value Add back derivative derivative Deferred and NNNAV Balance Market Value Balance Def Tax on financial financial Contingent Balance Sheet Adjustments Sheet property instruments Gross NAV i

  43. Slide 43: Look through debt

    Look through debt Counterparty Group WIP GRIP Other Total JVs Grainger Share JVs (£m) 50% 25% 50% (£m) Syndicate 407 Corporate Bond 275 M&G 100 Core Total 782 Bilateral 150 HCA funding 25 Assurance Company/Annuity Provider 160 Joint Ventures and associates 60 196 7 263 82 Germany 23 Total Group Gros

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