6th Dec 2005 07:01
Grainger Trust PLC06 December 2005 6 December 2005 GRAINGER TRUST plc: PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2005 HIGHLIGHTS • Core business operating contribution up by 7.6% to £88.2m. • Grainger NAV up by 2.5% to 4.92p per share • First acquisitions on Continental Europe announced • Sales and distribution agreement with Norwich Union finalised • £61m takeover of City North Group plc • Total dividend up to 5.11p per share, an increase of 10% • Portfolio continues to grow in asset value terms: • Vacant Possession value now £2.067bn • Investment value now £1.507bn • Reversionary surplus stands at £560m "This has been another year of significant progress at Grainger Trust. We havecontinued to meet many of our strategic objectives - in particular, we haveconsolidated our position as the UK's leading quoted residential investor andtrader" said Robert Dickinson, Chairman" Contact: Grainger Trust plcRupert Dickinson, Chief Executive 020 7795 4700Andrew Cunningham, Deputy Chief Executive and Finance Director 020 7795 4700/0191 261 1819Baron Phillips AssociatesBaron Phillips 020 7920 316107050 124119 Chairman's Statement-------------------- I am pleased to report another year of significant progress at Grainger Trust.Whilst we have not benefited from the exceptional market growth that hascharacterised more recent results, we have concentrated on consolidating ourposition as the UK's leading quoted residential investor and trader and haveworked to meet the strategic objectives we set ourselves 12 months ago. Our focus remains on Grainger's core business - the acquisition, management andsale on vacancy, of residential regulated tenancies. This business provides uswith a unique set of skills, asset base, cash flow and market knowledge thatallows us to examine residential based opportunities that have similarmanagement challenges or return characteristics. During the year under review we have launched our equity release joint ventureprogramme with Norwich Union, expanded into Europe for the first time with twojoint venture developments, acquired a substantial land bank in Hampshire, andcommenced work on several mixed-use urban developments. In addition we concluded a £61.3m agreed takeover of the central London-basedmarket rented residential investment company City North Group plc and a £70mjoint venture acquisition of a tenanted residential portfolio with GenesisHousing Group, one of the country's leading Registered Social Landlords. We alsodisposed of our last remaining major commercial property investments through anasset swap. Since the year end we have exchanged contracts on a €71.5m residentialinvestment portfolio in Germany comprising more than 1,400 units and generatingannual income of €4.5m. This acquisition will mark our first key investmentpurchase within continental Europe and we continue to look for further similaracquisitions where we can bring our deep and extensive knowledge of the sectorto generate superior returns for shareholders. Shareholders will also be aware that we entered into preliminary discussionswith Parkdean Holidays to acquire its entire issued share capital. Althoughthese discussions were terminated, they demonstrate our willingness to examine awide range of less obvious opportunities where we believe we can bring ourresidential and development skills to deliver long term reversionary returns. Results------- Sales of tenanted residential property and net rental income from our coreportfolio continue to be the group's main profits drivers. Operatingcontributions from our core business, increased by 7.6% over the year to £88.2mfrom £81.9m. This included a contribution of £2.4m from City North. At thepre-tax level, results for the 12 months to 30 September 2005 were impacted byboth a more normal contribution from our development and trading division of£12.8m compared with £25.3m we recorded last year and higher interest charges of£49.5m against £40.1m, resulting from our successful acquisition programme overthe period. Accordingly pre-exceptional profits before tax were lower, but in line withexpectations at £42.1m compared with £59.6m for the same period a year ago. I amalso pleased to report that Grainger's net asset value continues to rise despitethe general perception of the residential market. As shareholders appreciate, we consider the group's net asset position in threeways: net asset value per share ("NAV"), diluted net asset value per share("NNNAV"), which takes into account contingent tax and the market value of longterm debt and hedging, and the Grainger Net Asset Value, which adjusts for thereversionary surplus within our portfolio. Our NAV has grown 2.0% to 558p from547p, NNNAV has risen 3.5% to 385p from 372p, and the Grainger NAV is up 2.5% to492p from 480p. In line with the guidelines we established last year the Board is recommending afinal dividend of 3.41p per share which, together with the interim payment of1.7p per share, will make a total for the year of 5.11p per share, an increaseof 10%. If approved, the final dividend will be paid on 8 March 2006 to theshareholders on the register on 17 February 2006. Strategy-------- Long term exposure to the residential investment market has delivered annualcompound growth rates (as measured by the Halifax House Price Index) of 7%,10.5% and 14.2% over the last 20, 10 and 5 years. There has been a more recentslow down in growth -house prices rose by 3% over the 12 months to the end ofSeptember 2005 - and the outlook over the coming 12 months is somewhatuncertain. Despite contradictory views of the market our own experience is that sales inthe first two months of the current financial year have been marginally ahead ofthe end of September 2005 vacant possession values. We believe that over thecourse of the current financial year overall house price inflation within ourportfolio will be muted. However our business model is based on long term investment returns rather thanshort term gains. Our interests are focused on market sectors where reversionarypotential is not entirely dependant on short term market growth, but also ongains secured through tenure or use changes and by gaining planning consent.These opportunities exist both in the UK and within continental Europe. At the same time we will continue to generate income through our asset andproperty management skills, particularly when these can be used to help thirdparty investors maximise their returns from the residential market. Also we aimto take full advantage of any market opportunities that may arise where ourstrong financial base, long term outlook and experience will enable us to unlockvalue. We are pleased that the Chancellor has committed to introducing UK REITs (Real Estate Investment Trusts), in the 2006 Finance Bill. We now hope that the eventual legislation is not overly restrictive and that it will encourage real new investment to the Residential Sector. Board----- During the course of the year under review Bill Tudor John, former seniorpartner at Allen & Overy and currently a Managing Director of Lehman Brothers,joined the Board and has taken over the chairmanship of the RemunerationCommittee from Robert Hiscox. People------ As Grainger expands it is essential we have the right level of skills andexpertise to manage this growth. Although much of this comes from our core ofcommitted and dedicated professional senior executives, in the year we have beenable to augment this with a number of external high level appointments. It ispleasing that Grainger is able to attract such highly qualified executives. Outlook------- The way forward is clear. We will focus on our core regulated business but,recognising that this stock is finite, we will continue to develop into areasthat capitalise on our existing skills and economic base and which offerexposure to the residential market. The most significant of these will be equityrelease, investment in Europe, residential development and residential fund andproperty management. Bearing these objectives in mind, together with our solid financial platform andour asset and skills base, we believe we have the framework for continued longterm success. Robert Dickinson6 December 2005 Chief Executive's Review------------------------ Last year we set out our objectives for Grainger Trust in our key business areasand we have made significant progress in all of these. Tenanted Residential-------------------- This is our core business, providing us with a long term exposure to theresidential market and good levels of profit and cash generation. It is based onour large and diverse portfolio - at 30 September 2005 its market value amountedto £1.5 billion an increase of 10.8% in the year - our experience and expertiseat managing and trading property and our solid financial underpinning. Despite sluggish market conditions throughout the last year this division hascontinued to trade well, generating sales of £133m, only marginally down on2004's figure of £135m. It has been pleasing that we have achieved these levelswithout significantly reducing prices on sale. Margins on normal sales in 2005(i.e when a property is sold on vacancy) were 48.5%; the equivalent figure in2004 was 48.6%. In valuation terms, our portfolio has risen in value by 2.6% and the averagevacant possession value of our properties at 30 September 2005 stood at£173,000.The reversionary surplus in our portfolio (including our share of jointventures) is £560m (2004: £536m) or 433p per share. This figure represents thedifference between what we expect to sell our properties on vacancy for and whatwe value them at in our market value balance sheet. The difference between thevacant possession value of our residential portfolio and its original cost is£967m (2004: £928m). Just as important as annual trading performance and valuation uplifts is ourability to replenish stock levels and to grow businesses offering long termgrowth potential. In our regulated business we have acquired 480 properties for £51m. We have alsopurchased a highly reversionary portfolio of 455 London flats for £70m from theChurch Commissioners in a joint venture with the Genesis Housing Group. We aredelighted to have been successful in acquiring this portfolio as well as to beworking with Genesis and their property management subsidiary Pathmeads. We seean interesting future for Grainger in working more closely with the HousingAssociation Sector. As has been announced previously we entered into an agreement with Norwich Unionenabling our home reversion products to be sold through their own in-houseadvisors and IFA distribution network. Sales through this channel have beenslower than anticipated when we announced the initiative in March. This reflectsgeneral market conditions in the equity release market and a slower thanexpected start up, although recent figures for our originations and the homereversion sector in general are more encouraging. We are building our home reversion portfolio using three routes (Bridgewater,Norwich Union and portfolio acquisitions) and we anticipate being able toincrease the total portfolio by at least £50m in the year ahead. As part of thisstrategy, we have recently launched our own Bridgewater Flexible Reversion Plan,and this has been well received by the market. We are pleased with the progress we have made in our market rented and asset andproperty management businesses. We believe that the key is to ally a goodportfolio with excellent property and asset management skills and appropriatefinancing. The acquisition of City North Group plc combined with our existingholdings has provided us with a critical mass of market rented properties -close to £200m as at 30 September 2005. We are now well advanced in preparing afund structure to attract third party equity into this portfolio. This willenable us to benefit from the rent and reversionary potential in market rentedhousing directly as one of the fund participants and indirectly through thereceipt of management and performance fees. Our management expertise is illustrated by the fact that we currently manage ourown portfolio of 12,382 properties and a further 1,185 properties for otherresidential investors. These include Schroders Residential Property Unit Trust(ResPUT) where we have increased our stake and are due to take on furtherresponsibilities including strategy and acquisitions in addition to our assetand property management roles. Grainger Europe--------------- Our objective in mainland Europe has been to replicate certain key aspects ofthe Grainger UK business. Consequently we have been reviewing opportunities inreversionary residential portfolios and development. Shortly after the year end we announced our first portfolio acquisition - atotal of 1,400 properties in the Metro Ruhr of Germany for a consideration of •71.5m (£48.9m). This is due to complete by the end of 2005. The combination ofrelatively high rental yields, low borrowing costs and potential for significantgain over time, if the properties are sold to the owner occupier sector, makethis an attractive area for us. We are optimistic that this first acquisitionwill provide a good platform for us to build on. During the year we also announced our participation in two developmentopportunities. Firstly, an 81.6% stake in a mixed residential/retail scheme inZizkov in Prague, representing an investment of €6.7m and which we hope to takethrough the planning process over the next 18 months. Secondly a €2.6minvestment representing a 45.7% stake in an 800 unit proposed residentialdevelopment in Tallinn, Estonia. Development and Trading----------------------- Over the last few years we have moved away from pure commercial investment andthis process was substantially completed in the year. We are now focussed on three areas: residential development, primarily mixed useand residential schemes in London and the South East, urban and ruralregeneration schemes, including the acquisition of strategic land withdevelopment potential, and Grainger Homes, our housebuilding arm based largelyin the North East of England. After the exceptional year ended 2004, when several major schemes came tofruition, the division this year has moved to a more normal level of trading,producing an operating contribution of £12.8m on an asset base at the beginningof the period of £109m. The development of the former South London Hospital in Clapham comprising 77units has gone well with 67 reserved or exchanged for a value of £20.3m. InApril we acquired 520 acres of land at West Waterlooville, Hampshire, which werepreviously held under option. This has been included in the West ofWaterlooville Major Development Area and provisionally allocated 1,550residential units with a further 1,000 in reserve. A key element of our progress has been our ability and willingness to work withpartners. At Smiths Dock in North Tyneside we have formed a joint venture withtwo local landowners to regenerate some 30 acres of waterfront land. We havesubmitted an application for detailed planning permission for 1,250 units. Wehave made progress on our schemes with Islington Borough Council having nowobtained planning consent for our 208 unit scheme at Hornsey Road and the 141unit scheme in Barnsbury. Grainger Homes has continued to develop, completing the sale of 84 units in theyear for a total of £11.3m, producing a trading contribution of £3.3m. Operationally, therefore, we are pleased with the Group's performance in a yearin which market conditions have, as expected, proved testing. People------ As this Group continues to grow and operate in new market areas it is veryimportant to ensure that we have the personnel and management structure in placeto maximise the potential of both our existing asset base and new opportunities.This year has been one of continued growth and change and we have made threesenior appointments Peter Couch, as Director of our Equity Release business,Quinton Hill-Lines as Director of Corporate Development and, most recently,Richard Exley who has joined as Director of Development and who is charged withmoving forward this division. In addition we have recently introduced a newSenior Management Structure to ensure that each part of our business is run inaccordance with our stated strategy and that we take full advantage of the vastrange of knowledge and skills we have within the organisation. Outlook-------- We remain very confident in the outlook for Grainger. Our core portfolio isgeographically widespread, with a typical value near or below the UK average andis generally un-modernised. These features help sustain demand in times ofmarket fragility. As importantly, the reversionary surplus in the portfolio ofover half a billion pounds acts as a potential reservoir for future gains. Wewill focus on reversionary property for our core portfolio and continue to growour property and asset management skills so that we can make them more widelyavailable to external investors in the market rented sector. We have put in place the products, distribution network and funding capabilityto support high levels of growth in the home reversion market. Uncertaintyconcerning the adequacy of pension provision and the widespread view that houseprice inflation will be lower in the future should provide the impetus forincreased demand. Home reversion products fit well with other related sectors ofthe market, for example second homes and retirement living and these may presentfurther opportunities for growth. We look forward to completing our first German acquisition and are reviewingseveral other opportunities that should help our European operation to become ameaningful part of the Group's business. We have continued to invest in the development division and have several schemesin the pipeline that will produce attractive returns in the short to mediumterm. We are growing this division and are confident that we can use ourunderstanding of local housing markets and management to ensure attractivereturns to our shareholders from a wide range of developments in the residentialsector. In the coming year we will continue to progress in these main areas, whilstexploring new opportunities to exploit our skills and asset base. I am confidentthat the team we have is well placed to continue at the forefront of residentialinvestment and development in this country and in Europe. We are continuouslychallenged by new legislation and regulations but we will look at these asopportunities rather than threats. Rupert Dickinson6 December 2005 Operational Review------------------ Tenanted residential-------------------- Key performance statistics-------------------------- 2005 2004 No. £m No. £m -------------- --------------Properties sold on vacancy 720 109 783 111Properties sold with tenants in occupation 193 24 248 24 ----- ----- ----- ----- Total sales 913 133 1,031 135 ----- ----- ----- -----Profits on sale* 61 58Release of negative goodwill on sales 6 6 ----- ----- 67 64 Net rental income and other income 23 20Direct overhead costs (2) (2) ----- -----Trading contribution 88 82 ----- -----* including gains on the sale of fixed assets Trading and rental performance has held up well in the year. The acquisition ofCity North Group contributed £2.4m to the years result. The overall return,which includes the net valuation uplift, has been depressed in comparison tolast year by the slowing down in house price inflation. In 2005 the percentagevaluation uplift in our portfolio was 2.6%, in 2004 it was 12.4%. After takingaccount of the elimination of revaluation surpluses realised on sales thevaluation movement in the year was £15.8m (2004: £121.3m). Although the sales process has been more sluggish this year, as reflected by thenumber of vacant properties at the year end (423 compared to 356 last year) wehave still experienced good levels of demand, helped by the geographic spreadand typical low value of individual units. Approximately 59% of our propertiesby value are in London and the South East, 26% in the Midlands, East, South Westand Wales and 15% in the North and Scotland. Less than 22% of our properties byvalue have vacant possession values in excess of £250,000 - the level at whichdemand volatility becomes more marked. The average vacant possession values in our three key portfolios are:- £K -----Regulated 165Market rented 191Home reversion 190 -----Overall (excluding other interests) 173 ----- This compares to the Halifax All House figure at 30 September of £166,000. We have continued to grow our portfolio in both number and asset value terms.The vacant possession value (including our share of joint ventures) is £2,067mand the investment value is £1,507m giving us a reversionary surplus of £560m.This is the gain over and above the market value of the properties we wouldachieve if we sold the properties on vacancy at today's values. The surplusabove original cost is £967m. We have acquired a total of 1,254 units in the year for a cost of £184m(including properties acquired in the City North portfolio). During the year we increased our stake in the Schroders Residential PropertyUnit Trust ("ResPUT") to 19.5%. We provide asset and property managementservices to this fund and the fee income that we received from this and fromother similar services for other customers amounted to £1.1m. Development and Trading----------------------- Key performance statistics-------------------------- 2005 2004 £m £m ----- -----Trading profits 11.7 13.5Profits on sale of fixed assets 0.5 3.5Net rental income less overheads - 0.4Other net income (2004 Pimlico flats) 0.6 7.9 ----- -----Trading contribution 12.8 25.3 ----- ----- The results for 2004 included profits achieved on sales of the commercialportfolio, of the last major housing allocated land site at Kennel Farm andreceipts relating to the Pimlico development, totalling £22.1m. These werelargely one-off transactions and the division has now moved to more normaltrading levels. The movement on revaluation in the year was a deficit of £12.0m (2004: deficitof £3.8m); this represents the net effect of the elimination of revaluationsurpluses realised on sales in the year together with the impact of year endvaluations. Major contributions to trading profits in the year have come from Kennel Farm(£3.5m) Grainger Homes (£3.3m) and the sale of Landmark Place, Slough (£2.3m). Opportunities for future income from Kennel Farm relate primarily toapproximately 5 acres of land currently allocated for business use and the localcentre. During the year Grainger Homes sold 84 units for £11.3m. Much effort has goneinto creating a sustainable land bank at this division and over the next threeyears we hope to achieve average annual sales of up to 200 units. Other projects in this division are making satisfactory progress and theirstatus is shown in table 7 in the attached appendix. Financial Review---------------- Results-------- Group profit before interest and tax has fallen from £99.7m to £91.6m. Netresidential rents and other income have increased by £3.5m to £23.2m, including£2.4m from City North Group, and trading profits on residential sales includingnegative goodwill released and profits on sale of fixed assets have improved by4.3% from £64.4m to £67.1m. However, these have been more than offset by adecrease in the contribution from the development and trading division whichfell from £25.3m to £12.8m. Interest payable---------------- Group pre-exceptional interest has increased from £40.1m to £49.1m. This is acombination of higher average debt levels (up by approximately £100m over theprevious year) and higher borrowing costs. The average base rate in 2005 was4.7% in 2004, 4.1%. This impacted on the proportion of our debt that is variableor is hedged through caps. Our average interest rate in the year was 5.9% (2004:5.8%). Interest is covered 1.9 times by profit before interest and tax (2004: 2.5times). Net cashflow (being all group receipts less expenses and taxation)covered interest 3.8 times (2004: 5.1 times). Taxation--------- Our annual tax charge is significantly affected by FRS 19, the accountingstandard preventing the provision of deferred tax on revaluation gains whencompanies are acquired. This serves to increase our effective tax rate above thestandard corporation tax rate of 30%. This year, it has been 37.1% (2004:39.1%). Major items affecting the tax charge are:- £m -----Group profit before tax 42.1 -----Tax at 30% 12.6 Adjusted for:Additional tax on the difference between book and tax base costsof trading property sales 7.4Negative goodwill (not taxable) (1.8)Other including adjustments to tax in prior periods (2.6) -----Actual tax charge 15.6 ----- Earnings per share and dividends-------------------------------- Earnings per share before exceptional items have fallen to 21.2p from 29.9p.Dividends have increased by 10% and are covered 4.0 times by profit aftertaxation but before exceptional items (2004: 6.5 times). Financial Position------------------ General------- Most of our properties are held as trading stock and are therefore shown in thestatutory balance sheet at cost. This does not reflect the true worth ofGrainger's assets and therefore we set out in the notes to this statement ournet assets with the properties restated to market value. Fixed assets------------ Fixed assets properties in the balance sheet comprise £202.2m tenantedresidential and £20.3m development totalling £222.5m (2004: £97.0m, £8.4m and£105.4m respectively). The major change relates to the acquisition of the CityNorth portfolio in the year. Investments and intangible assets--------------------------------- Investments relate to our investment in Schroders ResPUT and in joint venturesand associates. We invested a further £8.4m in the ResPUT this year and now own19.5% of the units issued. The market value at 30 September 2005 was £18.2m andthe cost £15.4m. Our main joint venture interests are a 33% stake in a limited liabilitypartnership to develop Smiths Dock in North Tyneside of £4.1m includinggoodwill, (2004: £3.3m) a 50% stake in a similar structure with Genesis HousingGroup of £8.8m which was established to acquire a portfolio of properties fromthe Church Commissioners which had a year end value of £72.6m and a 50% stake ina joint venture with Grange Prescot Limited to develop land at Prescot Street,London. E1 with a value of £5m. The negative intangible asset of £81.3m (2004: £84.8m) principally reflectsgoodwill arising on the acquisition of Bromley, the acquisition vehicle used toacquire the BPT group. It is being released to the profit and loss account inline with property sales from that business. Trading properties------------------- 30 Sept 2005 30 Sept 2004 £m £mStatutory Balance Sheet-----------------------Tenanted residential 870 843Development and trading 92 76 ----- ----- 962 919 ----- -----Market value balance sheet--------------------------Tenanted residential 1,271 1,232Development and trading 104 101 ------ ------ 1,375 1,333 ------ ------ The cost of our tenanted residential stock has increased from £843m to £870m,being stock purchases of £85m, capitalised improvement costs of £6m less salesand transfers of £64m. Market value figures have risen to £1,271m from £1,232m.Valuation uplifts account for £48m and this is reduced by the elimination onsale of previously recognised surpluses of £36m. The balance of £27m relates tothe net effect of sales, acquisitions and transfers. The market value of all our tenanted residential property at 30 September 2005is £1,473m (2004: £1,329m). The group's development and trading assets held as stock increased in cost termsto £92m and in market terms to £104m (2004: £76m and £101m respectively), themajor movements being expenditure on West Waterlooville amounting to £21.5m, netinvestment at Grainger Homes of £11.4m, and the sale of Landmark Place, Sloughwhich eliminated £20.0m of cost. The total market value of all of the Group's development and trading assets at30 September 2005 was £123.8m (2004: £109.0m) Proforma net assets------------------- Market Statutory Market value Conti- NNNAV balance value balance ngent balance sheet adjustments sheet FRS 13 tax sheet £m £m £m £m £m £m -------------------------------------------------------------Properties:-Tenanted residential 1,072 401 1,473 - - 1,473Development and trading 112 12 124 - - 124 ----- ----- ----- ----- ----- -----Total properties 1,184 413 1,597 - - 1,597Investment/others assets/cash 87 8 95 - - 95Negative goodwill (80) 80 - - - - ------ ----- ----- ----- ----- -----Total assets 1,191 501 1,692 - - 1,692 ------ ----- ----- ----- ----- -----Borrowings and creditors (922) - (922) (18) - (940)Net current liabilities (39) - (39) - - (39)Provisions/contingent tax (6) (1) (7) 7 (213) (213)Minority interest - (2) (2) - - (2) ----- ----- ----- ----- ----- -----Total liabilities (967) (3) (970) (11) (213) (1,194) ----- ----- ----- ----- ----- -----Net assets 30 September 2005 224 498 722 (11) (213) 498 ----- ----- ----- ----- ----- -----Net assets pence per share 173 385 558 (8) (165) 385 ----- ----- ----- ----- ----- ----- Other assets and liabilities---------------------------- Other net liabilities excluding cash balances and current debt instalments havefallen from £77.0m to £45.4m. Two major items contribute to this. Firstly theacquisition of a major portfolio of equity release properties (£19.5m) andsecondly the payment of the final instalment of the purchase price for DeutscheBank's stake in the Bromley joint venture (£10.0m) - both of these were includedin creditors in the September 2004 balance sheet and were paid shortlythereafter. Net assets---------- Net assets at market value have increased from £678m to £722m:- Reflected in Not reflected the accounts in the Total accounts £m £m £mNet assets at 1 October 2004 178 500 678 Retained profits 20 (6) 14Revaluation surpluses:- Tenanted residential 5 12 17 Development and trading 1 (13) (12) Investments - 4 4 Goodwill movements - 1 1Shares issued on acquisition of City North Group 20 - 20 ----- ----- -----Net assets at 30 September 2005 224 498 722 ===== ===== ===== Diluted NAV (or NNNAV) is computed by adjusting NAV for the market value of longterm debt and derivatives and for contingent tax. These two adjustments amount to 8p and 165p per share respectively (2004: 0p and174p respectively). The FRS 13 adjustment has increased because of the current low 5 year swap rate.At 30 September 2005 this was 4.535%, compared to 5.122% in 2004. This hasresulted in some of our hedging instruments moving out of the money. Contingent tax, which will only crystallise on the realisation of the assets andis therefore payable sometime in the future, has stayed relatively constantbecause of the low level of movement in the revaluation surplus in the year. As in previous years we also present Grainger NAV. This reflects our estimate ofthe present value of the reversionary surplus in our regulated and equityrelease portfolios. In gross terms this is the difference between what we wouldachieve on sale of our properties on vacancy and the value attributed to them inthe market value balance sheet. We have calculated the after tax present valueof that surplus by discounting it back over its expected average period ofrealisation at the discount rate of 8.6% (our weighted average cost of capitalplus a risk premium of 3% (2004: 8.6%). The adjustment increases NNNAV by 107pper share to give Grainger NAV of 492p (2004: 480p). It should be stressed that this calculation is based on current house prices andassumes no future house price inflation. An annual increase in house prices of4% would increase the adjustment to 177p and give a Grainger NAV of 562p. Cash and Debt------------- Cash balances at the year end amounted to £53m, representing 3.1% of our totalmarket value gross assets. Of this £26m, (2004:£30m) represents depositsreceived or acts as security for cash backed loan notes. Group borrowings have increased from £757m to £921m, including capitalised loancosts of £7m (2004: £7m). These will be written off over the period of the loan.The increase in borrowings has principally arisen from the acquisition of CityNorth and West Waterlooville. The total of our net borrowings expressed as a percentage of the market value ofour gross property assets ("loan to value ratio") at 30 September 2005 was 54%(2004: 49%) and gearing was 120% (2004: 103%). Financing--------- During the year the group extended its core borrowing facility by £400m to£1,300m and in so doing reduced the blended margin on the facility by 7 basispoints. At 30 September 2005, the Group had headroom in its borrowing capacityof £450m. Capital Management------------------ The group finances its operations through a combination of shareholders fundsand borrowings with the objective of optimising weighted average cost of capital("WACC") whilst retaining funding flexibility. At 30 September 2005 our estimateof WACC was 5.58% (2004: 5.64%). The group does not take trading positions in financial instruments but holdsthem to minimise the risk of exposure to fluctuating interest rates. Themajority of our debt is subject to protective swaps, caps or collars or ismaintained at fixed rates of interest. At 30 September 2005, £658m or 76% of thegroups net debt was either fixed to termination, or for over one year, or wasprotected by financial instruments (2004: 71%). A combination of interest rate swaps and financial caps is used to provide adegree of certainty over future interest rate costs whilst enabling the group totake advantage of favourable short term rates. At 30 September 2005 the groupheld £347m of swap contracts at an average pre margin rate of 5.4% maturingbetween 2006 and 2014 (2004: £223m @ 5.4%). There were also financial caps inplace of £265m at an average capped rate of 6.1% expiring between 2006 and 2009(2004: £233m @ 6.1%). A summary of our gross borrowings is:- Interest Principal rate % Terminating --------- --------- -----------Fixed to termination 45 6.3 2006-32Hedged by swap contracts 347 6.3 2006-14Hedged by financial caps 265 5.6 2006-09Variable/fixed under one year 264 5.4 2006-14 ----- ----- -------Total debt 921 5.9Less: cash (53) -----Net debt 868 ----- The effect of the fair value adjustment of marking the group's fixed rate debtand derivatives to current market rates ("FRS 13 adjustments") would be toproduce a notional "liability" after tax of £10.6m or 8p per share (2004: 0p).This adjustment represents approximately 1.1% of group borrowings at 30September 2005 and will not be recognised in the accounts until the positionmatures or is terminated. The group also maintains a range of borrowing maturities to enable it to balancecontinuity of funding with flexibility. At 30 September 2005 the averageduration of the group debt was 5.1 years (2004: 6.4 years). International Financial Reporting Standards (IFRS) ------------------------------------------------- IFRS are mandatory for the main UK listed companies for accounting periodsending on or after 31 December 2005 and so will affect Grainger's financialstatements for the first time next year. As with most property companies, weexpect the main changes will arise in the areas of deferred taxation, financialinstruments, valuation movements and treatment of goodwill. In particular, theFRS13 adjustment and part of the contingent tax adjustment we currently make toNAV to arrive at NNNAV will form a part of the statutory balance sheet. Thedifference between NAV and NNNAV will therefore represent the contingent tax onthe uplift of trading properties from book value to market value. We anticipatethat, along with other companies with significant investment property assets,our income and expenditure account will become more volatile as valuationsurpluses and deficits will be recognised therein. In line with other FTSEcompanies, we will announce the restatement of prior year figures and thequalitative impacts on our accounts prior to our half year in March 2006. Andrew Cunningham6 December 2005 Consolidated Profit and Loss Account For the year ended 30 September 2005 ------------------------------------- Year Ended Year Ended 30.09.2005 30.09.2004 (unaudited) (audited) Note £m £m --------------------------------Turnover (2005: including share of joint ventures and associates) 226.9 217.4 Less: Share of turnover of joint ventures and associates (0.6) - ------ ------Group turnover 226.3 217.4 ------ ------Gross rentals 45.5 41.0Trading profits 74.8 72.6Other income 2.9 9.8 ------ ------ 123.2 123.4 Less:Property expenses (24.3) (22.7)Administrative expenses (9.4) (7.5) ------ ------Operating profit - group and share of joint ventures and associates 89.5 93.2 ------ ------ Net profit on disposal of and provisions againstfixed assets- Group 2.1 6.5 ------ ------Profit on ordinary activities before interest and taxation 91.6 99.7 Net interest payable and similar charges ---------------------- Group normal (49.1) (40.1)- Group exceptional - (5.4)- Joint venture (0.4) - --------------------- (49.5) (45.5) ------ ------Profit on ordinary activities before taxation 42.1 54.2Tax on profit on ordinary activities 2 (15.6) (21.2) ------ ------Profit on ordinary activities after taxation 26.5 33.0 ------ ------Dividends 3 (6.6) (5.7) ------ ------ Retained profit for the group 19.9 27.3 ------ ------Basic earnings per share 1 21.2p 26.8Diluted earnings per share 1 20.9p 26.7Basic earnings per share before exceptional items 1 21.2p 29.9 All results relate to continuing operations. Statement of Group Total Recognised Gains and Losses For the year ended 30 September 2005 ------------------------------------ Year Ended Year Ended 30.09.2005 30.09.2004 (unaudited) (audited) £m £m --------------------------------Profit for the period attributable to shareholders 26.5 33.0 Taxation on realisation of property revaluation gains of previous years - (0.4)Unrealised surplus on revaluation of properties 5.4 4.3 ------ ------Total gains and losses recognised since the last annual report - group 31.9 36.9 ------ ------ Consolidated Balance Sheet at 30 September 2005 -------------------- 30.09.2005 30.09.2004 (unaudited) (audited) Note £m £m -------------------------------- Fixed assetsIntangible assets (81.3) (84.8)Tangible assets 224.4 106.7Investments in joint ventures: ----------------------- Share of gross assets 44.7 - Share of gross liabilities (28.3) - Goodwill 1.5 - ----------------------- 17.9 -Investment in associates 0.1 -Other Investments 15.4 10.3 ------ ------ 176.5 32.2 ------ ------ Current assetsStocks 961.5 918.6Debtors: amounts falling due within one year 4 12.9 10.6Cash at bank and in hand 53.3 53.8 ------ ------ 1,027.7 983.0 -------- ------ Creditors: amounts falling due within one year 5 (76.2) (109.0) ------ ------ Net current assets 951.5 874.0 ------ ------ Total assets less current liabilities 1,128.0 906.2 -------- ------Creditors: amounts falling due after more than one year 5 (895.9) (717.9) Provisions for liabilities and charges (8.5) (10.4) -------- ------ Net assets 223.6 177.9 -------- ------ Capital and reservesCalled-up equity share capital 6.5 6.2Share premium account 21.6 21.5Revaluation reserve 17.7 13.9Merger reserve 20.1 -Capital redemption reserve 0.2 0.2Profit and loss account 157.5 136.1 -------- ------Equity shareholders' funds 223.6 177.9 -------- ------ Consolidated Cashflow Statement For the year ended 30 September 2005 ------------------------------------ 30.09.2005 30.09.2004 (unaudited) (audited) £m £m -------------------------Net cash inflow from operating activities 19.3 56.7 ------ ------Returns on investments and servicing of financeInterest received 2.2 3.3Interest paid - normal (49.9) (42.2) - exceptional - (5.4)Dividends received 0.1 0.2 ------ ------ (47.6) (44.1) ------ ------ TaxationUK corporation tax paid (16.6) (24.1) ------ ------ Capital expenditure and financial investmentPurchase of fixed asset investments (8.4) (4.5)Purchase of tangible fixed assets (18.8) (29.8)Sale of fixed asset investments - 1.2Sale of tangible fixed assets 13.3 41.1 ------ ------ (13.9) 8.0 ------ ------ Acquisitions and disposalsPurchase of subsidiaries (39.8) (2.3)Costs on purchase of subsidiaries (1.5) -(Overdraft)/cash acquired on purchase of subsidiaries (0.3) 0.2Investment in associates and joint ventures (11.1) - ------ ------ (52.7) (2.1) ------ ------Equity dividends paid (6.9) (4.2) ------ ------Cash outflow before financing (118.4) (9.8) ------ ------ FinancingNew loans raised 170.0 726.1Repayment of loans (52.2) (743.7)Purchase of shares - (0.6)Issue of shares 0.1 0.1 ------ ------Net cash inflow/(outflow) from financing 117.9 (18.1) ------ ------Decrease in cash in the year (0.5) (27.9) ------ ------ 30.09.2005 30.09.2004 (unaudited) (audited) £m £m ------------------------- Reconciliation of operating profit to net cash inflow from operating activitiesOperating profit 89.5 93.2Depreciation 0.4 0.4Movement in provisions for liabilities and charges (0.2) (0.2)Provision against investment 0.9 -Amortisation of goodwill (5.3) (6.1)Decrease/(increase) in debtors 0.9 (2.0)(Decrease)/increase in creditors (24.3) 1.7Increase in stocks (42.6) (30.3) ------ ------Net cash inflow from operating activities 19.3 56.7 ------ ------ NOTES TO THE PRELIMINARY ANNOUNCEMENT OF RESULTS 1 Earnings Per Share The calculation of basic, diluted and adjusted earnings per share is based on the following earnings and number of shares: ------------------------------------------------------------------------------------------------------ Year ended 30 September 2005 Year ended 30 September 2004 Weighted Weighted Profit average Profit average for the number Earnings for the number Earnings Year of shares per share year of shares per share £m (thousands) pence £m (thousands) pence------------------------------------------------------------------------------------------------------Basic earnings per shareProfit attributable to shareholders 26.5 125,077 21.2 33.0 122,815 26.8Exceptional item less tax - - 3.8 3.1------------------------------------------------------------------------------------------------------Adjusted earnings 26.5 125,077 21.2 36.8 122,815 29.9------------------------------------------------------------------------------------------------------Effect of potentiallydilutive securitiesOptions and shares - 1,770 (0.3) - 720 (0.1)------------------------------------------------------------------------------------------------------Diluted earnings per shareProfit attributableto shareholders 26.5 126,847 20.9 33.0 123,535 26.7Exceptional item less tax - - 3.8 3.1------------------------------------------------------------------------------------------------------Adjusted earnings 26.5 126,847 20.9 36.8 123,535 29.8------------------------------------------------------------------------------------------------------ The adjusted earnings per share is presented as, in the opinion of the directors, it gives a better picture of the underlying performance of the business. 2 Taxation Tax on profit on ordinary activities: 30 September 30 September 2005 2004 £m £m ------------------------------ Group: Normal 15.6 22.8 Exceptional - (1.6) ------ ------ 15.6 21.2 ------ ------ 3 Dividends Interim of 1.70p per share (2004: 0.81p) 2.2 1.0 Final of 3.41p per share (2004: 3.84p) 4.4 4.7 ------ ------ 6.6 5.7 4 Debtors Trade debtors 1.9 5.8 Other debtors 4.8 0.5 Prepayments and accrued income 3.8 2.9 Deferred tax 2.4 1.4 ------ ------ 12.9 10.6 ------ ------ 5 Creditors Amounts falling due within one year: Loan notes 26.4 31.8 Deposits received 1.1 0.8 Trade creditors 6.7 22.2 Corporation tax payable 22.0 20.5 Other taxation and social security 1.5 3.2 Accruals and deferred income 14.1 25.8 Dividends payable 4.4 4.7 ------ ------ 76.2 109.0 ------ ------ Amounts falling due after more than one year: Bank loans 887.9 717.9 Other Creditors 8.0 - ------- ------ 895.9 717.9 ------- ------ 6 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 2004 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. 7 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. 8 The Board of Directors approved this preliminary announcement on 6 December 2005 Appendices 1. Analysis of tenanted residential portfolio by tenure ---------------------------------------------------- Vacant % Vacant No of Possession Investment possession properties value £m value £m value -------------------------------------------------Regulated 8,161 1,349 984 73Assured 1,102 210 188 90Vacant 423 65 58 89Equity Release 2,663 354 196 55Hotel complex - short term lettings 33 5 5 100Other interests - 41 42 97Share of joint ventures 43 34 80 ------ ----- ----- -----30 September 2005 12,382 2,067 1,507 73 ------ ----- ----- -----30 September 2004 12,041 1,865 1,329 71 ------ ----- ----- ----- 2. Range of vacant possession values (excluding other interests and share ofjoint ventures)--------------- Vacant No of possession properties value £m ----------------------------> £500K 71 56£250K - £500K 1,167 385£175K - £250K 2,809 587£100K - £175K 4,943 690Related Shares:
Grainger plc