Final Results
Grainger Trust PLC
28 November 2006
28 November 2006
GRAINGER TRUST PLC ('Grainger' / 'Group')
Preliminary Results for the year ended 30 September 2006
GRAINGER REPORTS STRONG PROGRESS
Grainger Trust, the UK's largest quoted residential property owner, announces
its results for the year ended 30 September 2006:
• Profit before tax up 75% to £71.7m (2005: £41m)
• Gross Net Asset Value per share up 20% to 677p (2005: 563p); Grainger NAV
up 20% to 595p (2005: 496p)
• Market value of assets up 19% to £1,901 million (2005: £1,597 million)
• Earnings per share up 57% to 39.1p (2005: 24.9p)
• Final dividend of 3.75p, making a total dividend for the year of 5.62p -
up 10%
• Average shareholder return over the last ten years of 28.4%
• Regulated tenancies valuation increased to 77.5% of vacant possession
value from 72.5%, resulting in an additional £67m of valuation uplift
• Market value of Equity Release portfolio increased 23% to £241m, whilst
Grainger's overall market share of the UK's home reversion market grew to
44% from 28% at the half year
• Post year-end, G:res 1, Grainger's market rented fund, achieved first
close, raising £56m of third party equity
• Significant progress in growth of European operations, with the German
portfolio now numbering 2,739 units at year end and office now established
in Mannheim
• Strong development pipeline with an estimated value of £675 million, of
which £178m currently has planning consent.
Robert H Dickinson, Chairman of Grainger Trust, said:
'In my last statement as Chairman of Grainger Trust I am pleased to report on
another year of significant progress and achievement. We have great belief in
Grainger's ability to deliver enhanced shareholder return. We have a unique and
irreplaceable portfolio, unrivalled expertise and a very strong reputation
amongst our stakeholders. The existing business model has substantial income
and growth potential. We can create additional income and shareholder value by
moving towards a co-investing fund management model and our ability to work with
co-investors and other partners has been illustrated by our joint venture
relationships, our launch of G:res 1 and our agreement with Development
Securities.
'These are exciting times for Grainger - and I leave the Board optimistic and
confident about its future prospects.'
For further information:
Grainger Trust Financial Dynamics
Rupert Dickinson/Andrew Cunningham Stephanie Highett/Dido Laurimore
Tel: +44 (0) 20 7795 4700 Tel: +22 (0) 20 7831 3113
Chairman's Statement
In my last statement as Chairman of Grainger Trust I am pleased to report on
another year of significant progress and achievement. In particular our
emerging business lines are evolving well to complement our core residential
regulated tenancy business.
Results
This is the first full year for which we present our results under IFRS and
therefore the financial review contains a greater degree of explanation and
interpretation than is usual. Suffice to say that the implementation of IFRS
has no impact on the strategy and cashflows of our business and our key
financial indicators, based around net asset values, show very healthy growth
levels. Gross net asset value per share (i.e before any deductions for
contingent tax or mark to market adjustments) has risen by 20.2% to 677p from
563p. Base case Grainger NAV which brings in the reversionary surplus within
our long term portfolio now stands at 595p, is up 19.8% from 496p. Statutory NAV
figures can be found in the financial review.
Profit before tax has increased by 75% to £71.7m from £41.0m. Much of the
increase comes from revaluation or mark to market surpluses; on a like for like
basis, removing these items and the goodwill impairment loss, earnings before
interest and tax ('EBIT') fell by 4% to £81.5m from £85.3m, largely as a result
of the previously foreseen decrease in contribution from our development
division and from the increased cost of running a larger and more complex
enterprise. Increased borrowing costs from funding our investment programme
have reduced profit before tax on the same basis to £27.4m from £35.6m.
We are again increasing our dividend by 10% per annum and consequently the Board
are recommending a final dividend of 3.75p per share. If approved, this will be
paid on 6 March 2007 to shareholders on the register on 16 February 2007.
Together with the interim dividend of 1.87p per share paid in July this will
produce a total dividend for the year of 5.62p per share (2005: 5.11p).
Strategy and Outlook
Grainger has been successful at delivering consistent shareholder value over a
sustained period of time. Over the last ten years our average total shareholder
return has been 28.4% per annum. By comparison, over the same period, the FTSE
250 has delivered average annual returns of 13.6% and the UK Real Estate Sector
15.9%. Our performance has largely been based on the trading profits and
revaluation surpluses generated by our substantial residential portfolio.
It is our aim to continue to deliver superior returns to shareholders. Whilst
we believe that a major part of this will come from the core regulated portfolio
we also acknowledge that Grainger must evolve over time to replace those returns
as the overall stock of regulated assets declines. Grainger's key strengths
come from a combination of its asset base, sound financial platform, reputation
with key stakeholders and experience and expertise in the residential market.
We have ambitious plans to leverage all of these to expand the range and depth
of the Grainger business to ensure further growth in shareholder value. These
include introducing third party capital (both debt and equity) to improve the
efficiency of our capital structure and to achieve significant scale more
quickly but without taking on disproportionate risk. This will also be achieved
by working with joint venture and collaborative partners and using our
management skills to produce fee income for the Group at little or no
incremental cost.
We have already made significant progress with these plans, including the
introduction of equity funding in our Jersey Property Unit Trust, G:res 1, by
bringing in non-recourse debt to our European business and some equity release
interests, by working with joint venture partners to acquire both residential
and development assets and by acting as property and asset managers for a number
of third parties.
This evolution will continue and as our various portfolios mature and reach
critical mass we can foresee a time when our returns will come from a more
balanced combination of direct property ownership, co-investment in residential
funds and fee income. In the long term this will help us deliver sustainable
performance driven returns and thereby further enhance shareholder value. We
see a real opportunity for Grainger ultimately to become the leading European
co-investing fund manager in residential property.
As shareholders will be aware, a consortium comprising Regis, Merrill Lynch and
the William Pears Group announced in October that it was 'assessing the
attractions of making a proposal regarding a possible cash offer' for Grainger.
Later that month, the consortium announced that it had no present intention of
making an offer. I can confirm that their activity did not deflect the Board of
Grainger or its executive management from the strategy outlined above.
Prospects
We have great belief in Grainger's ability to deliver attractive returns to
shareholders:-
- we have a unique and irreplaceable portfolio, unrivalled expertise and a
very strong reputation amongst our stakeholders
- the existing business model has substantial income and growth potential
- we can create additional income and shareholder value by moving towards a
co-investing fund management model
- our ability to work with co-investors and other partners has been
illustrated by our joint venture relationships, our launch of G:res 1
and our agreement with Development Securities plc.
These are exciting times for Grainger - and I leave the Board optimistic and
confident about its future prospects.
The Group has considerably changed the way in which it operates over the last
few years and to reflect those changes we consider it appropriate to move
forward with a clearer identity - one which is more in keeping with the
reputation and image we intend to present in the future. Consequently we will
propose to our shareholders at our Annual General Meeting a change of name to
Grainger plc.
I would like to take this final opportunity to thank all of our staff for the
commitment and expertise they have demonstrated not only during the year but
also throughout my time as a Director.
Robert H. Dickinson
28 November 2006
Chief Executive's Statement
Our major business areas share a common theme: an ability to generate superior
returns through our expertise in owning, managing, developing and trading
residential property either directly or as co-investor. We are pleased with the
progress made in these areas in the year and are excited by the opportunities we
are creating.
The Market
The UK residential market has shown strong levels of growth in the 12 month
period to the end of September - both the Nationwide and the Halifax House Price
Indices showed year on year growth of 8.2%. Healthy growth levels were recorded
in most parts of the country with London and the South East showing particular
increases in the latter part of the year. Our own portfolio, which has some 59%
by value in London and the South East, showed an average increase of 9.1%.
The increase in interest rates in August has done little to deter price growth
and it is too early to say what impact the November movement will have, although
it is likely that lenders will pass on a higher proportion of the increase to
their customers than seems to have been the case to date. Since September, we
have seen the annualised October Halifax Index rise to 8.7% and sales from our
own portfolio have been achieving prices 3.7% above our September vacant
possession values. This figure should, however be treated with some caution
because of the relatively low number of transactions involved.
The UK residential market has shown significant growth levels over extended
periods of time: the average UK house price in 1986 was £41,000; in 2006 that
has risen to £181,000, an annual compound growth rate of just under 8%. Much of
this has come in the last five years where the equivalent rate has been 14%.
Whilst the economic and interest rate outlook are likely to dampen these rates,
we still remain confident of the long term potential of the residential market.
We believe that our core portfolio is particularly well placed to withstand
short term fluctuations. It has a broad geographical base but also a strong
core in London and the South East where average annual values are expected to
remain firm because of high demand. The average vacant possession value of the
individual properties in our main reversionary portfolio, the regulated
tenancies, is £182,000 and some 31% of the portfolio is within 20% of that
figure. We have relatively few properties at the more volatile top end of the
market and as the majority of our properties are un-modernised there is usually
strong demand from first or second time buyers and property developers who wish
to improve the property.
Our Business
Core Portfolio - Regulated Tenancies
Our core portfolio consists primarily of regulated tenancies which account for
54% by value of our total property and investment interests. At 30 September
2006 we owned 7,715 regulated units valued at £1,090m (2005: 8,161 units at
£984m). At the same date, the vacant possession value (the value at which we
hope to sell them when vacant at today's prices) of the regulated portfolio
amounted to £1,403m (2005: £1,349m). Including our share of regulated tenancies
held within joint ventures, the vacant possession value becomes £1,474m (2005:
£1,367m).
The regulated portfolio is valued by deducting a discount from the vacant
possession value. This discount takes account of the fact that the rental yield
is generally below market rates and that it may be some years before we obtain
vacant possession and can then sell the property. Over time this discount has
narrowed although for the last few years we have used a rate of 27.5%. Strong
market and transaction activity has led us to believe that this discount is
conservative and our valuers have now certified the valuation of these
properties at 77.5% of vacant possession value - a discount of 22.5%. This
realignment has produced an increase in value at the year end of £67m.
In addition to regulated tenancies, our core portfolio includes a further 652
units comprising vacants, assured tenancies short term lets, and other
interests.
These units have a value at 30 September 2006 of £141m (2005: £117m) and their
vacant possession value is £160m (2005: £124m).
Sales in this division have remained constant at £126m and margins on normal
sales (i.e when a property is sold on vacancy as opposed to with a tenant in
situ) amounted to 48.6% (2005: 48.5%). Including net rental and other income of
£24m the regulated portfolio produced an operating contribution of £76m (2005:
£74m). The 2005 figure includes market rented properties transferred to the
JPUT as explained below.
For a portfolio of this type it is essential that we recycle capital - during
the year we acquired 325 units for a consideration of £44m. The highlight of
the year, however, was the acquisition of five London apartment blocks for £196m
from the Church Commissioners in the second 50:50 joint venture of this type
with the Genesis Housing Group. This portfolio included 429 regulated units.
Equity Release
The equity release business is a strong fit and a natural investment channel for
the surplus cash generated by our regulated business. We are building up a
highly reversionary portfolio which will provide us with the long term geared
exposure to the residential market that we strategically seek. We have been
building our portfolio through three primary routes - our distribution agreement
with Norwich Union, portfolio acquisitions and our Bridgewater brand.
Industry figures from Safe Home Income Plans ('SHIP') indicate that our overall
market share of the UK's home reversion market has now reached 44%.
The market value of our 3,003 unit equity release portfolio at 30 September 2006
stood at £241m, with a vacant possession value of £421m (2005: 2,663 units with
a market value of £196m, vacant possession value of £354m). During the year we
acquired 432 units for £29m and sold 110 units for £13m. The division produced
an operating contribution of £3m (2005: £4m).
This is a market in which critical mass service integrity and product innovation
and development is key. We were therefore delighted to receive the 'Award for
Innovation' at the Investment, Life and Pension Awards 2006.
Critical mass will enable us to put in place more efficient forms of financing,
while product development will help us to provide a greater selection of
Retirement Solutions to potential customers.
Market Rented Properties
Over the years, the Group has acquired a number of market rented properties
usually as a result of purchases of a mixed tenure portfolio. This was
bolstered by the acquisition of City North Group plc in 2005, and by the start
of this financial year we owned 1,102 market rented properties with a value of
£188m. We believe that we can maximise returns from such a portfolio by
introducing third party equity and non recourse debt, with Grainger retaining a
substantial investment and obtaining the benefit of asset and property
management fees.
Consequently, during the year, we transferred the bulk of our market rented
properties to a Jersey Property Unit Trust (JPUT) and then marketed the holding
as G:res 1, an independent Jersey exempt company, to institutional investors.
Although we still owned all of the units at 30 September 2006 we announced first
closing on 22 November 2006 having raised third party equity commitments of
£56m. We are expecting to secure further equity commitments of £69m in due
course and see this as a model for other co-invested funds which we could
establish.
In G:res 1 at the year end we had 1,178 market rented properties with a market
value of £210m and a vacant possession value of £238m, producing operating
profit before valuation gains of £4.6m.
Property and Fund Management
One of Grainger's key strengths is its ability to provide asset and property
management services to third parties with the specialist expertise derived from
being a substantial owner in its own right. Almost uniquely we can provide
these services across the UK through our seven managing offices and network of
managing agents. We expanded this capability into mainland Europe in October
when we opened an office in Mannheim to manage our growing German residential
portfolio.
In total we employ 103 staff in our property and fund management division. As
well as taking responsibility for our own UK portfolio of 12,420 residential
units they also provide services for a total of 2,801 units for third party
owners or for joint venture vehicles in which we are participants. This
includes the Schroders ResPUT, in which we hold a 22.3% stake and the joint
ventures with the Genesis Housing Group.
Our property managers also support our own market rented fund, G:res 1, which
was valued at 30 September 2006 at £210m; we anticipate that, before any
performance related elements, this will generate annualised fee income for the
Group of approximately £2.2m. Our total recurring fee income will be
approximately £4m per year.
We see great potential for the fund management structure to be applied to other
areas of our business, most obviously our European portfolio.
Development
Grainger Development is an important profit contributor to the Group and
provides us with entrepreneurial development skills which complement our other
spheres of residential expertise. We have refined our focus in this division to
concentrate on larger scale residential or residential-led mixed use
opportunities, particularly in those areas where the longevity of the project,
the need to work with partners or the nature of the development itself makes it
unsuitable for housebuilders.
At the year end, the value of our UK development portfolio stood at £90m (2005:
£124m) and the division produced operating profits and profits on the sale of
fixed assets totalling £7m (2005: £13m). Major gross contributions were £2.8m
from The Glasshouse, Putney, £2.5m from sales of three properties in Slough and
£2.3m from the disposal of Grainger Homes sites. The decrease in returns
compared to the prior year was foreseen and reflects the predictable but
volatile nature of the profit stream in any development business. It is our
ambition to enable this division to produce a more steady flow of returns but
given that many of our current projects are at an early stage of development,
this may be some time in the future.
At 30 September the completed development value of our sites is estimated at
£675m, of which £178m has planning consent.
During the year we outsourced project management and delivery responsibility for
Grainger Homes to its then management. Although we retain ownership of the
existing sites, representing a future bank of some 318 new houses and will
receive profits as they are sold, it is not our intention to have future
involvement in small scale housebuilding activities where we are competing
directly against national and/or local housebuilders.
There has been significant progress in planning on our major sites in the year.
At the Barnsbury Complex in Islington we have achieved detailed planning consent
on a scheme comprising 140 private and affordable residential units. At Hornsey
Road Baths, Islington, we have commenced demolition at the start of the
development of new council offices, 200 private and affordable units and
community buildings including a theatre. We were also pleased to obtain
planning consent for 94 residential units and a 26,000 sq.ft. office building at
Macaulay Road, Clapham after many years of endeavour. We have also submitted an
outline planning application for 1,550 residential units, 12 hectares of
employment use and 14 hectares of mixed use at our site at West Waterlooville.
Other major sites in our current portfolio include two large residential schemes
in the North East of England which will deliver approximately 300 housing units.
Further details on when these projects are expected to become income producing
are shown in the Financial Review below.
The division's future pipeline includes a scheme above Seven Sisters underground
station for 327 residential units and 53,000 sq. ft. of retail under a
cooperation agreement with the London Borough of Haringey and appointment as
preferred developer by Newbury Council to develop 331 units and 47,000 sq.ft of
retail at Market Street in the town centre.
Since the year end we have been delighted to announce the first joint venture
acquisition with Development Securities plc under the co-operation agreement we
revealed previously. This is for the 10 acre Curzon Park site in Birmingham,
with an end value in the region of £350-£400m. It will provide a mixed use
scheme of c. 1.4 million sq. ft. to include c. 800,000 sq.ft. of grade A office
space, c. 400,000 sq.ft. of residential accommodation, a 180 bed hotel and
c.30,000 sq. ft. of retail space.
We see our ability and willingness to work with partners (other developers, land
owners, councils, housing associations) as being key to giving us access to the
larger mixed use residential led schemes on which we aim to focus. This enables
us to achieve scale without taking on a disproportionate level of risk.
We have invested heavily in the human capital of this division in the year and
feel that we now have the team to deliver our vision.
Europe
At this stage last year we were looking forward to completing our first
acquisition of 1,406 German residential properties. At 30 September 2006 the
portfolio stood at 2,739 units and, as announced in October, we have acquired a
further 308 units in Munich with anticipated completion early in 2007.
Whilst we are constantly examining other areas for potential residential
investment, Germany still holds attraction for us. A combination of low levels
of home ownership, an attractive financing environment enabling us to achieve a
positive yield spread, low price levels relative to other European markets and
potential for rental growth provides good opportunities for experienced
professional landlords.
At 30 September our portfolio comprised 186,844 sq. metres of residential space
at a cost of £117m and providing an annualised gross rent of £7.5m. The
operating contribution of the division in the year was £2.0m.
There has been considerable comment on the opportunities for residential
investment in Germany and it is clear that competition for portfolios is fierce.
However, we are constantly pursuing opportunities and our decision to open a
small management office in Mannheim illustrates our commitment and enthusiasm
for this sector.
It is our ambition to grow the German portfolio to a size where it becomes an
attractive proposition for third party investment and where we can apply our
strategic model for co-investing fund management.
In addition to our residential interests we also have an 81.6% stake in a
company registered in the Czech Republic. This company owns a well positioned
development site of 21 acres in Zizkov to the East of Prague City Centre. The
site is designated as a mixed use development site and we are hopeful of
receiving a detailed planning consent in 2008.
Robert Dickinson
We would also like to take this opportunity to pay tribute to Robert Dickinson
who retires as Chairman at the conclusion of our next annual general meeting.
Robert was made a Director of Grainger in 1961 and has been Chairman since 1992.
Since 1961 Grainger has evolved from a small family company through initial
listing on the then Unlisted Securities Market, full listing and is now the UK's
largest listed residential property company. This tenure has seen a remarkable
period of growth and return. A shareholder who had invested £10,000 in Grainger
shares on flotation in March 1983 would have received a total of £9,198 in
dividends and would, at 30 September, have had shares worth £146,041.
In a long term business like Grainger it has proved invaluable to have someone
who has been able to provide unrivalled experience and knowledge of the group
and its market over such a long continuous period. We have been fortunate to
have been the recipients of his wise and expert leadership.
Rupert J. Dickinson
28 November 2006
Financial Review
This is the first year in which the Group's results have been presented under
International Financial Reporting Standards (IFRS) as endorsed by the E.U.
Although this has resulted in some material restatements of the statutory
figures, the change of accounting basis has had no effect on our underlying
business performance, and little effect on our primary Key Performance
Indicators of net asset value.
Financial Position
General
Most of our properties are held as trading stock and are therefore shown in the
statutory balance sheet at cost. This does not reflect the true worth of
Grainger's assets and so we set out below a summary of our net assets with the
properties restated to market value.
Market value
Statutory deferred tax and Gross NAV Triple NAV
Balance derivatives balance Contingent Balance
Sheet adjustment sheet Tax Derivatives Sheet
£m £m £m £m £m £m
Properties 1,374 527 1,901 - - 1,901
Investments/other
assets 93 16 109 - - 109
Goodwill 2 (2) - - - -
Cash 39 - 39 - - 39
Total assets 1,508 541 2,049 - - 2,049
Borrowings etc (1,100) 2 (1,098) - (5) (1,103)
Other net liabilities (65) (4) (69) - - (69)
Provisions/deferred tax (92) 89 (3) (243) 2 (244)
Total liabilities (1,257) 87 (1,170) (243) (3) (1,416)
Net assets 251 628 879 (243) (3) 633
2006 Net assets per share
(pence) 193p 484p 677p (187)p (3)p 487p
2005 Net assets per share
(pence) 159p 404p 563p (165)p (9)p 389p
The European Public Real Estate Association (EPRA) Best Practices Committee has
recommended the calculation and use of a diluted EPRA NAV and a diluted EPRA
NNNAV. The definitions of these measures are consistent with Gross NAV and
Triple NAV shown in the above table.
Market value analysis of property assets
Shown
as stock Fixed
at cost Market value Market value assets
£m adjustment £m £m at value £m Total £m
Residential 864 515 1,379 421 1,800
Development 89 12 101 - 101
Total September 2006 953 527 1,480 421 1,901
Total September 2005 962 413 1,375 222 1,597
Net Asset Value
Measurements of net asset value are key performance indicators for the group.
We set out three measurements to better enable shareholders to compare our
performance with our peers, while reflecting the somewhat unique nature of our
business.
Gross Net Assets Per Share
Up 20.2% to 677p from 563p. This measure gives the market value net assets per
share before any deductions for deferred tax on revaluation gains.
The chart below shows the major movements in NAV in the year.
£m P
Gross NAV per share as at 30 September 2005 728 563
Revaluation surpluses 124 96
Narrowing of regulated stock valuation discount 65 50
Retained earnings 45 34
Elimination of previously recognised surpluses (63) (49)
Other (20) (17)
Gross NAV per share as at 30 September 2006 879 677
Triple net asset per share (NNNAV)
Up 25.0% to 487p from 389p. This is the gross net assets per share figure
adjusted for deferred tax on revaluation gains and for mark to market
adjustments such as those arising from the restatement of financial instruments.
It should be noted that the deduction for deferred tax assumes that all of the
tax on the revaluation gains in our portfolio is payable immediately. With our
long term reversionary portfolios (regulated and equity release) the assets will
only be sold when vacancy arises and this will be some time in the future. As
we know the average age of our tenants we can estimate the timing of the vacancy
and therefore also the timing of the crystallisation of the tax liability. If
we were to discount this liability at our weighted average cost of capital the
deferred tax deduction would reduce by £112m and so our NNNAV would increase by
86p per share.
Grainger NAV
Base case up 19.8% to 595p from 496p. Grainger's NAV brings in the reversionary
value which resides in our long term regulated and equity release portfolios.
It adjusts NNNAV for the taxed present value of the reversionary surpluses in
these portfolios which will revert over the expected duration of our tenants
occupation. The major variables in calculating the Grainger NAV are:-
- anticipated house price inflation over the reversionary period
- the discount rate used to calculate the present value
- whether deferred taxation on the revaluation surpluses recognised in our
market value balance sheet is discounted
- the average period it will take to obtain vacancy.
The base case Grainger NAV takes a very prudent approach to these key
assumptions as follows:-
- house price inflation is taken as zero over the entire expected remaining
period of occupation by the tenants
- we have used a discount rate of 8.67% (our weighted average cost of capital
plus 3%)
- deferred taxation on revaluation surpluses has not been discounted
- we have taken the period of reversion as being 12 years for our regulated
tenants and 9.5 years for our equity release tenants. We update these
figures each year.
To illustrate the sensitivity of the Grainger NAV under different assumptions,
we have prepared a financial model on our website www.graingertrust.co.uk where
these figures can be flexed. Some illustrative examples are:-
No discount of deferred tax Discounting deferred tax
House price inflation Discount rate Discount rate
per annum WACC + 3% WACC WACC +3% WACC
0% 595p 634p 708p 720p
4% 654p 715p 767p 801p
6% 693p 768p 806p 854p
Other Financial Performance Measures
As well as NAV measures we use other key performance indicators to evaluate our
financial performance:-
Total shareholder return for the year was 39.1%, an increase of 13.2 percentage
points over 2005.
Return on shareholders equity (measured as the growth in NNNAV plus dividends
per share as a percentage of opening NNNAV) was 26.5%, compared to 6.0% in 2005.
Return on capital employed (measured as profit before costs of financing
together with all revaluation surpluses as a percentage of opening gross
capital) was 15.3%, an increase of
9.1 percentage points over 2005.
Financial Performance in the Year
Operating profit before fair value movements fell from £85.3m to £81.5m in the
year, the major changes as shown below:-
£m
2005 operating profit before fair value movements 85.3
Increase in gross rents 7.1
Increase in property expenses and overheads (2.5)
Decrease in residential trading profits (2.9)
Decrease in development trading profits (8.8)
Other 3.3
2006 Operating profit before fair value movements and goodwill impairment 81.5
Operating contribution from our residential businesses (net rents together with
trading profits and profits on sale of fixed assets) increased by 6.5% to £83m
from £78m.
As predicted last year operating contribution from our development and trading
division fell by £6m to £7m.
Our total administrative costs in the year of £32m have risen from £22m in 2005.
The major increases have come from a series of one-off costs (City North and
development division re-organisations, various transaction costs) and from the
investments in high quality staff we are making in our emerging business lines
(Europe, equity release and development).
Many of our administrative overheads (property management, sales and
acquisitions, and our development divisions costs) are directly attributable to
operating divisions and for statutory disclosure purposes are netted off those
income streams. Overall, £12m has been added to property expenses, £6m has been
added to sales costs and £4m has been added to the cost of development sales.
Earnings Per Share
Basic earnings per share has increased by 57% to 39.1p from 24.9p as shown
below:-
£m P
2005 EPS 31 24.9
Change in goodwill impairment (6) (5.0)
Fall in operating profit before fair value movements (4) (2.9)
Increase in gain on revaluation of investment properties 34 26.8
Increase in fair value of derivatives and financial assets 11 8.4
Increase in interest payable (5) (4.1)
Increase in taxation and other (11) (9.0)
2006 EPS 50 39.1
The gain in valuation of investment properties of £39.9m has arisen largely from
the establishment of our Jersey Property Unit Trust for market rented
properties. On transfer these assets were classified as investment properties
and the uplift in value from cost is shown as a revaluation surplus.
Not all of our financial instruments met the complex hedging requirements of IAS
39 during the year and so movements in their fair value have been taken to the
income statement. These, amount to £10.4m. The vast majority by value of these
instruments are now compliant and so value movements will be taken through
reserves in future and we should see less income statement volatility.
Our net interest bill has increased by £5.3m to £54.5m, with interest payable
increasing by £8.9m. This is primarily as a result of higher average debt
levels arising from our significant investment programme in Europe, equity
release and in joint venture acquisitions. The average of our monthly debt
levels has been some £188m higher in 2006 than 2005.
Our annual tax charge is at an effective rate of 29.59%, the major items
affecting it being:-
£m
Group profit before tax 71.7
Tax at 30% 21.5
Adjustments:-
Goodwill impairment (not allowable) 1.9
Utilisation of capital losses (6.4)
Other including prior period adjustments 4.2
--
(0.3)
--
Actual tax charge 21.2
--
Financial Resources
The business continues to be highly cash generative. Cash from operating
activities and from sales of investment property, amounted to £208m (2005:
£174m).
Out of this cashflow we paid interest of £55m, and tax of £15m and we reinvested
a total of £301m in acquiring properties, funding development and investing in
joint ventures. We borrowed an additional £165m, and the headroom on our core
facility at the year end stood at £307m. This headroom affords us enviable
strength in bidding significant acquisitions.
Since the year end we have entered into a non-recourse €150m facility which will
be drawn down to fund our German acquisitions.
Also since the year end we have reached agreement with our major lenders to
revise the terms of our core £1.3 billion facility, which will spread the loan
maturity dates and extend the average maturity by 2 years and which will reduce
the overall borrowing margin by 13 basis points. Together with a reduction in
commitment fees on any un-drawn facility this will produce an annualised saving
of some £1.7m.
At the year end our net borrowings were £1,051m (2005: £861m) and our average
cost of borrowings was 5.8% (2005: 5.9%). To protect ourselves against interest
rate risk the Group's treasury policy is to maintain a floating rate exposure of
no greater than 35% of expected borrowings. At the year end we were 66%
economically hedged (2005: 76%) and at current levels of borrowing we have
protection in place to meet our policy requirement for the next 2.5 years and
have at least £250m of hedging for the next 6 years.
Our loan to value ratio at 30 September was 52% (2005: 53%).
Andrew R. Cunningham
28 November 2006
Further information
Geographic distribution of UK residential portfolio (figures include our share
of joint ventures)
Investment % of
value £m value
London 864 47%
South East 267 15%
South West 96 5%
East 112 6%
East Midlands 73 4%
West Midlands 134 7%
Wales 12 1%
Yorkshire 68 4%
North West 140 8%
North East 39 2%
Scotland 13 1%
Northern Ireland 1 -
1,819 100%
Average vacant possession values in our three key portfolios are:-
£'000
Regulated 182
Market rented 196
Home reversions 203
Overall (excluding other interests) 188
Range of vacant possession values (excluding other interests and share of joint
ventures)
Vacant
No. of Possession
properties value £m
>£500K 141 119
£250-£500K 1,679 559
£175K - £250K 3,716 784
£100K- £175K 4,823 706
<£100K 2,061 172
12,420 2,340
NB: shows full vacant possession of equity release assets even if we own less
than 100%.
Analysis of UK tenanted residential portfolio by tenure
Vacant % of vacant
No. of possession Investment possession
properties value £m value £m value
Regulated 7,715 1,403 1,090 78%
Assured 1,297 254 224 88%
Vacant 355 62 56 89%
Equity Release 3,003 421 241 57%
Hotel complex - short term lettings 50 9 9 100%
Other interests - 57 48 84%
Share of joint ventures - 179 151 84%
30 September 2006 12,420 2,385 1,819 76%
30 September 2005 12,382 2,067 1,507 73%
Analysis of acquisitions in the year
Vacant
Cost possession
No. £m value £m
Regulated (including APT) 325 44 61
Assured 121 19 22
Vacant 16 3 4
Equity release 432 29 60
Other - 4 4
894 99 151
Analysis of residential sales in the year (from stock and fixed assets)
Sales Trading
Proceeds profit/profit
No. £m on disposal
Regulated (including APT) 607 91 45
Assured 166 25 4
Vacant 14 3 1
Equity release 110 13 6
Other - 7 5
897 139 61
Geographic analysis of German portfolio
€m €'000
Gross €m € Average
Residential annual Purchase Purchase Net Price
Location Units Rent Price Price psm Yield Per Unit
Metro Ruhr 1,501 4.9 76.0 759 4.5% 50.6
Baden-Wuerttemberg 935 4.7 71.3 1,069 5.5% 76.3
Berlin 303 1.3 16.2 818 6.3% 53.5
2,739 10.9 163.5 875 5.1% 59.7
Major development projects
Income
Project Description Status End value expected from
West 520 acres of Outline planning Land Phase 1 - £105m 2008
Waterlooville greenland in Application Phase 2 - unknown
Hampshire submitted
Macaulay Road, 94 residential Planning consent £48m 2008/09
Clapham. SW4 units 26,000 obtained
sq.ft. office
Barnsbury 140 residential Detailed planning £44m 2009/10
Complex, units consent obtained
Islington
Hornsey Road 200 residential Detailed planning £44m 2007/08
Baths, Islington units and consent obtained
community
buildings
Wards Corner, 327 residential Cooperation £102m 2008/09
Seven Sisters units, 53,000 agreement
sq.ft retail signed
Newbury 331 units Preferred £73 2008/09
47,000 sq. ft. developer status
retail
Gateshead 200-220 Site under £47m 2009/10
College residential units contract.
Planning
application to be
submitted in 2008
Consolidated income statement (un-audited)
For the year ended 30 September 2006
2006 2005
Note £m £m
Group revenue 205.7 227.6
Net rental income 2 28.3 19.1
Profit on disposal of trading properties 3 55.9 67.2
Administrative expenses (10.4) (5.4)
Other income 2.1 2.9
Goodwill impairment loss (6.4) -
Net other (expenses)/income (4.3) 2.9
Profit on disposal of investment property 4 5.6 1.5
Operating profit before valuation
gains/(losses) on investment properties 75.1 85.3
and changes in fair values
Net valuation gains on investment properties 10 39.9 5.4
Change in fair value of derivatives 10.4 -
Change in fair value through profit or loss
financial assets 0.4 -
Operating profit 125.8 90.7
Interest payable (60.3) (51.4)
Interest receivable 5.8 2.2
Share of loss of associates after tax (0.1) (0.2)
Share of profit/(loss) of joint ventures after tax 0.5 (0.3)
Profit before tax 71.7 41.0
Taxation - current (30.6) (17.9)
Taxation - deferred 9.4 8.0
Tax charge for year 6 (21.2) (9.9)
Profit for the financial year 50.5 31.1
Attributable to:
Equity shareholders of the company 50.5 31.1
Minority interest - -
Profit for the financial year 50.5 31.1
Basic earnings per share 5 39.1p 24.9p
Diluted earnings per share 5 38.9p 24.5p
Dividend information is shown in note 7 to the announcement.
Included within profit for the financial year is a loss of £29,000 (2005:nil)
attributable to minority interests.
All of the above results relate to continuing operations
Consolidated statement of recognised income and expense (un-audited)
For the year ended 30 September 2006
2006 2005
£m £m
Profit for the year 50.5 31.1
Actuarial profit/(loss) on BPT Limited defined benefit 0.6 (0.5)
pension scheme net of tax
Net exchange adjustments offset in reserves 0.1 -
Changes in fair value of cashflow hedges net of tax (1.0) -
Total recognised income and expense in the year 50.2 30.6
Effect of adoption of IAS 32 and IAS 39 on 1 October 2005 net of tax 5.4 -
55.6 30.6
The total recognised income and expense in the year is
attributable to:-
Equity shareholders of the company 50.2 30.6
Minority interest - -
50.2 30.6
Consolidated Balance Sheet (un-audited)
As at 30 September 2006
2006 2005
Note £m £m
ASSETS
Non-current assets
Investment property 252.7 222.4
Property, plant and equipment 2.1 2.0
Investments in associates 2.0 0.1
Investments in joint ventures 71.5 17.9
Other investments 19.0 15.4
Goodwill - 6.1
347.3 263.9
Current assets
Trading properties 952.7 961.5
Trade and other receivables 8 5.3 10.5
Derivative financial instruments 2.3 -
Cash and cash equivalents 34.5 53.3
Assets held for sale 10 168.3 -
1,163.1 1,025.3
Total assets 1,510.4 1,289.2
LIABILITIES
Non-current liabilities
Interest-bearing loans and borrowings 1,070.5 887.9
Trade and other payables 8.0 8.0
Retirement benefits 4.6 5.3
Provisions for other liabilities and charges 1.3 3.9
Deferred tax liabilities 91.1 102.8
1,175.5 1,007.9
Current liabilities
Interest-bearing loans and borrowings 19.4 26.4
Trade and other payables 23.3 21.8
Current tax liabilities 37.2 22.0
Derivative financial instruments 4.4 -
9 84.3 70.2
Total liabilities 1,259.8 1,078.1
Net assets 250.6 211.1
EQUITY
Capital and reserves attributable to the
company's equity holders
Issued share capital 6.5 6.5
Share premium 22.6 21.6
Merger reserve 20.1 20.1
Cash flow hedge reserve (1.0) -
Other reserves 2.1 1.2
Retained earnings 200.1 161.7
Total shareholders' equity 250.4 211.1
Equity minority interests 0.2 -
Total Equity 11 250.6 211.1
Statement of consolidated cash flows (un-audited)
For the year ended 30 September 2006
2006 2005
£m £m
Cash flow from operating activities
Profit for the period 50.5 31.1
Depreciation 0.6 0.4
Impairment of goodwill 6.4 -
Change in value of investment property (39.9) (5.4)
Net interest payable 54.5 49.2
Share of (profit)/loss of associates and joint ventures (0.4) 0.5
Gain on disposal of investment properties and
other investments (5.6) (1.5)
Equity settled share based payment expenses 0.9 0.5
Change in fair value of derivatives and fair value
through income statement financial assets (10.8) -
Taxation 21.2 9.9
Operating profit before changes in
working capital and provisions 77.4 84.7
Decrease in trade and other receivables 3.2 0.9
Increase/(decrease) in trade and other payables 2.7 (24.2)
Increase in trading properties (31.4) (42.6)
Increase in provisions for liabilities and charges - 0.6
Cash generated from operations 51.9 19.4
Interest paid (55.0) (49.9)
Taxation paid (15.4) (16.6)
Net cash from operating activities (18.5) (47.1)
Cash flow from investing activities
Proceeds from sale of investment property
and property, plant and equipment 47.8 13.3
Interest received 2.6 2.2
Dividends received 0.5 0.1
Acquisition of subsidiaries, net of cash acquired (3.4) (41.6)
Investment in associates and joint ventures (57.8) (11.1)
Acquisition of investment property and
property, plant and equipment (131.8) (18.8)
Acquisition of investments (0.5) (8.4)
Net cash outflow from investing activities (142.6) (64.3)
Cash flows from financing activities
Proceeds from the issue of share capital 1.0 0.1
Proceeds from the issue of loans 165.2 170.0
Purchase of own shares (0.5) (0.1)
Repayment of borrowings (12.0) (52.2)
Dividends paid (6.9) (6.9)
Net cash inflow from financing activities 146.8 110.9
Net decrease in cash and cash equivalents (14.3) (0.5)
Cash and cash equivalents at beginning of period 53.3 53.8
Cash and cash equivalents at end of period 39.0 53.3
Notes to the Preliminary Announcement of Un-audited Results
1. Basis of Preparation
The 2006 Preliminary Results have been prepared using International Financial
Reporting Standards ('IFRS') as approved by the International Accounting
Standards Board that, under European Regulations, are effective or available for
early adoption at the Group's first reporting date under IFRS, 30 September
2006. The accounting policies adopted for use in the preparation of 2006
Preliminary Results and for the 2006 Annual Financial Statements were included
in the Group's IFRS Transition Report published on the Grainger web site on 3
May 2006. The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities,
income and expenses.
As part of the expansion of the group, there is an increasing focus on the
allocation of overheads to the various business streams. Resulting from this
review the administrative expenses in 2005, shown previously as £9.8m, have been
reduced to £5.4m. The difference has been re-allocated to increase property
expenses by £2.0m and the carrying value of trading properties sold by £2.4m.
There is no impact on profits and management consider the revised figures to
better reflect the cost allocations to the different business areas.
2006 2005
£m £m
2. Net rental income
Gross rental income 52.6 45.5
Property operating expenses (23.7) (26.1)
Ground rents paid (0.1) (0.2)
Service charge income on principal basis 0.9 1.2
Service charge expenses on principal basis (1.4) (1.3)
28.3 19.1
2006 2005
£m £m
3 Profit on disposal of trading properties
Proceeds from sale of trading property 151.0 177.8
Carrying value of trading properties
sold net of administrative expenses (95.1) (110.6)
55.9 67.2
2006 2005
£m £m
4. Profit on disposal of investment property
Investment property disposal proceeds 47.8 13.6
Carrying value of investment property disposal (42.2) (12.1)
5.6 1.5
5 Earnings Per Share
The calculation of basic and diluted earnings per share is based on the following earnings
and number of shares:
30 September 2006 30 September 2005
Weighted Profit Weighted
Profit average for average
for the number Earnings the number Earnings
Year of shares per share year of shares per share
£m (thousands) pence £m (thousands) pence
Basic earnings per share
Profit attributable to shareholders 50.5 129,001 39.1 31.1 125,077 24.9
Effect of potentially dilutive
securities
Options and shares - 803 (0.2) - 1,770 (0.4)
Diluted earnings per share
Profit attributable to shareholders 50.5 129,804 38.9 31.1 126,847 24.5
6 Taxation
Tax on profit on ordinary 2006 2005
activities:
£m £m
Group:
Current 30.6 17.9
Deferred (9.4) (8.0)
21.2 9.9
7 Dividends 2006 2005
£m £m
Interim of 1.87p per share (2005: 1.70p) 2.4 2.2
Final of 3.75p per share
(2005: 3.41p) 4.9 4.4
7.3 6.6
Under IAS 10 final dividends are excluded from the balance sheet until they are
declared by the company in general meeting. Dividends paid in the year are
shown below:-
2006 2005
£m £m
Final dividend relating to previous year 4.4 4.7
Interim dividend for the current 2.5 2.2
year
Dividends absorbed as shown in the consolidated statement of
changes in equity 6.9 6.9
8 Trade and other receivables 2006 2005
£m £m
Trade receivables 2.9 1.9
Other receivables 2.2 4.8
Prepayments and accrued income 0.2 3.8
5.3 10.5
9 Current liabilities 2006 2005
£m £m
Interest-bearing bank loans and borrowings 19.4 26.4
Deposits received 0.8 1.1
Trade payables 8.4 6.7
Corporation tax payable 37.2 22.0
Other taxation and social security 1.5 1.5
Accruals and deferred income 12.6 12.5
Derivative financial instruments 4.4 -
84.3 70.2
10 Disposal group and assets held for sale
The sale of 38% of the units in the Jersey Property Unit Trust (JPUT) completed on 21 November 2006.
Negotiations are ongoing with investors and our current expectation is that 80% in total of the units will
be sold within 12 months of the balance sheet date. Accordingly 80% of the net assets of the Trust, less
an accrual for sales fees, have been reclassified within current assets as a disposal group under assets
held for sale at 30 September 2006. The balance is comprised as follows:-
2006
£m
Investment property 168.3
Trade and other receivables 0.2
Cash and cash equivalents 4.5
Trade and other payables (4.7)
168.3
Included within the transfer of assets into the JPUT on 1 December 2005 was £67m
of properties that had previously been classified as trading stock. On transfer
to the JPUT their intended use was changed to them being held for rental yield
and long term capital appreciation. Accordingly these properties were
reclassified as investment properties. A one-off revaluation gain of £23.5m was
recognised within net valuation gains on investment properties in the income
statement. Goodwill amounting to £5.8m was written off following the transfer of
the properties as they were transferred out of their respective income
generating units resulting in the goodwill being impaired.
11 Consolidated statement of changes in equity 2006 2005
£m £m
Opening equity shareholders funds 211.1 166.5
Opening adjustment relating to the adoption of IAS 39 (5.4) -
Adjusted opening equity shareholder's funds 205.7 166.5
Purchase of own shares (0.5) (0.1)
Proceeds from ordinary shares issued for cash 1.0 0.1
Nominal value of ordinary shares issued to acquire City North - 0.3
Group plc
Premium on ordinary shares issued to acquire City North - 20.1
Group plc
Share-based payments charge 0.9 0.5
Dividends paid in the year (6.9) (6.9)
Minority interest arising on business combination 0.2 -
200.4 180.5
Total recognised income and expense in the year 50.2 30.6
Closing equity shareholders funds 250.6 211.1
12. Significant Accounting Policies and Reconciliations between IFRS and
UK GAAP
The Group's key accounting policies under IFRS which differ from UK GAAP and the
impact of the implementation of IFRS will be included in the full Annual
Financial Statements. These were set out in the Interim Results for the 6
months ended 31 March 2006 issued on 13 June 2006 and in the Group's IFS
Transition Report published on the Grainger website on 3 May 2006. Copies of
the Interim Results are available on the Group's website at
www.graingertrust.co.uk
13 This announcement does not constitute statutory accounts within the meaning
of Section 240 of the Companies Act 1985. Statutory accounts for the year ended
30 September 2005 have been filed with the Registrar of Companies. The auditors
have reported on those accounts; their report was unqualified and did not
contain any statement under Section 237(2) or (3) of the Companies Act 1985.
14 Copies of the statement may be obtained from the Company's registered
office, Citygate, St. James' Boulevard, Newcastle upon Tyne, NE1 4JE. Further
details of this announcement can be found on our website,
www.graingertrust.co.uk.
15 The Board of Directors approved this preliminary announcement on
28 November 2006
This document contains certain forward-looking statements with respect to
certain of the plans of Grainger Trust plc, its current goals and expectations
relating to its future financial condition and performance. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. Annual future
results may differ materially from the results expressed or implied in these
forward-looking statements as a result of a variety of factors including
domestic and global economic conditions, market rates such as interest rates and
house price movements and unexpected changes in regulation, competition and
other factors.
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