Grainger plc Regulatory News (GRI)

20 November 2014

Grainger plc

("Grainger", the "Group" or the "Company")Preliminary Results for the year ended 30 September 2014

GRAINGER REPORTS OUTPERFORMANCE AND

A SIGNIFICANT INCREASE IN ASSET VALUES & PROFITS

PORTFOLIO WELL POSITIONED TO DELIVER SUSTAINABLE AND ONGOING GROWTH OWING TO CHARACTERISTICS AND LOCATION

Grainger plc, the UK's largest listed residential property owner and manager, today announces its preliminary full year results for the twelve months to 30 September 2014.

Highlights

· Strong value growth delivered, with gross net asset value (NAV) per share up 20% to 291p (FY13: 242p) and triple net asset value (NNNAV) up 24% to 242p (FY13: 195p);

· Profit before tax up 26% to £81.1m (FY13: £64.3m);

· Strategy has delivered continued outperformance from our UK residential assets, with a 14.6% increase in the market value of our portfolio, significantly higher than the average of 9.5% for the Nationwide and Halifax house price indices;

· Encouraging start to the new financial year. As at 31 October 2014 our total Group sales pipeline1 amounted to £77m (helped by an increased level of development activity), which should deliver £35m of profit, with UK vacant sales values 1.9% above September 2014 valuations (FY13: £52m, £18m and 6.3% respectively).

Robin Broadhurst, chairman of Grainger, commented:

"In my final statement as chairman of Grainger, I am pleased to announce that the Group has once again had a strong period of performance and is on solid ground for continued growth.

"We have set out a clear strategy for the business which will continue to trade reversionary assets, which provide attractive returns. In addition, Grainger will increasingly allocate capital to market rented assets and opportunities in the growing build to rent market, often through Grainger managed co-investment vehicles.

"There is significant value in the business for shareholders and I am excited by the prospects for the future of Grainger."

Andrew Cunningham, chief executive of Grainger, said:

"Grainger has had another period of strong financial performance and we have continued to significantly grow the asset value of the Company. Our net asset value and profits are up substantially, margins on sales have increased, our leverage is down and we have again seen the value of our portfolio rise faster than the general market.

"Following a period of very strong house price growth, particularly in London and the South East, we are now seeing more sustainable rates of growth. Conditions in the regions and some areas of the capital remain positive and notwithstanding some evidence of moderating of house price inflation and transaction volumes, our own assets are continuing to command good prices due to their defensive qualities, notably their price points, location and nature. For the first time in recent years, we have seen growth in the values of our assets across every region of the UK over the period.

"We continue to believe that the supply-demand dynamics of the housing market, and the gradual improvement in the economy and employment market will ensure we remain in a positive house price environment, which will include improvement in those regions with strong economic prospects outside of London and the South East.

"We are confident that we are in a good position for the forthcoming year, and our focus is set on growing the business through purchases of reversionary assets and investment in market rented assets and build to rent opportunities."

Financial performance

· Recurring profit increased by 27% to £47.1m (FY13: £37.0m);

· Gross cash generated of £303m (FY13: £430m);

· Loan to value reduced to 46.5% (FY13: 48.0%), despite £182m of new investment;

· Net debt of £1,044m (FY13: £959m). Further diversification of funding sources achieved with £275m of corporate bonds issued;

· Reversionary surplus2 of £503m, which is supplementary to our reported net assets, equivalent to 120p per share (FY13: 127p).

Sales

· Profit from sales increased by 14.0% to £88.6m (FY13: £77.7m);

· Gross sales proceeds of £274.4m (FY13: £352.9m), or £177.8m (FY13: £152.9m) after excluding sales of tenanted properties;

· Margins on sales of vacant properties rose to 49.2% (FY13: 44.9%);

· Sales of vacant properties made at an average of 14.1% above September 2013 vacant possession value (FY13: 7.9%).

Rents

· Gross rents were £57.4m (FY13: £71.1m), reducing as expected due to assets sold or transferred into co-investment ventures in the previous year. Net rents of £37.0m (FY13: £48.5m);

· Like-for-like rents on the UK market rented properties which we manage increased on average by 9.1% on new lets and 4.2% on renewals.

Fees

· Fees from co-invested and co-managed vehicles and other income consistent at £12.8m (FY13: £12.9m).

Investment activity

· Post year end, new partnership agreement signed with Sigma Capital, providing Grainger with the exclusive option to acquire sites from their substantial pipeline of build to rent developments outside of London;

· Ongoing activity in build-to-rent and other business development opportunities, with a particular focus on UK regional investment;

· Selected by the Greater London Authority along with the London Pensions Fund Authority as part of a Bouygues-led consortium to deliver a 211 unit build to rent project at Pontoon Dock in East London;

· £160m purchase in second half of exceptional London reversionary portfolio (the Chelsea Houses Portfolio) with significant refurbishment and redevelopment opportunities that has performed ahead of expectations.

Dividend

· A final dividend of 1.89p per ordinary share (FY13: 1.46p), resulting in a total dividend for the year of 2.50p per ordinary share (FY13: 2.04p), an increase of 22.6%, reflecting our performance in the year and maintaining capacity for accretive reinvestment in the business.

1 Completed sales, contracts exchanged and properties in solicitors' hands.

2 Reversionary surplus is the uplift from the reported market value of our properties to the vacant possession value and includes our share of investment in joint ventures/associates. It is not included in our net asset calculations and therefore highlights the latent value in our reversionary portfolios.

Analyst presentation:

Grainger plc will be holding a presentation for analysts and investors today at 9.00a.m. (GMT), Thursday 20 November 2014 at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.

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

Webcast:

The presentation is available via the web and can be accessed here: http://www.axisto-live.com/investis/clients/grainger-plc/presentations/5429670f3bb675e80a00f2cc/full-year-results-2014

Conference call details:

A replay of the call will be available after the event. Dial-in details for the archive call are:

Chairman's Statement 

During the year, our business has continued to produce strong growth in asset values and increased profits. We are also making good progress within the build to rent sector and towards our goal of substantially increasing our market rented assets across the country. In addition, our regulated tenancy and equity release businesses also performed strongly.

Dividend

The Company is declaring a final dividend of 1.89p per ordinary share (FY13: 1.46p) to be paid on 6 February 2015 to shareholders on the register at the close of business on 30 December 2014. The total dividend for the year will therefore be 2.50p per ordinary share (FY13: 2.04p), an increase of 22.6%. This reflects our performance in the year whilst maintaining capacity for accretive reinvestment in the business.

Board changes

As previously announced, I will be stepping down as chairman at the AGM in February 2015 and Ian Coull, who joined the Board in September 2014, will take over as chairman following that meeting.

I am also pleased to announce that Andrew Carr-Locke will be joining the Board as an independent non-executive director following the AGM in February 2015, subject to normal FCA confirmations. Andrew is a Fellow of the Chartered Institute of Management Accountants and has previously held directorships of a number of companies including as Group Finance Director at George Wimpey plc and as Executive Chairman of Countryside Properties plc. 

I am confident that Ian will be a strong leader for the business, and that Andrew's experience and expertise will be of great value to the Company.

John Barnsley will also step down from the Board at the AGM, having been a Board director since 2003. I would like to thank John for his significant commitment and contribution to Grainger over those years.

Concluding remarks

The last few years have been a period of significant achievement and success for the Company. It has been a privilege to work with so many skilled and committed individuals within the Company who do their jobs with great enthusiasm and with such enjoyment. I am pleased that this has been recognised by Grainger receiving a number of industry awards this year including: Best Residential Asset Manager for the third consecutive year3; Macaulay Walk was named Best Development and Best Mixed Use Development4; our market rented fund with APG, GRIP, was recognised as a Sector Leader for sustainability measurement5; our Wellesley development in Aldershot achieved a Built for Life quality mark and our build to rent development at Young Street won the Best Private Rented Sector design award6. These achievements are a direct result of the efforts of all of the staff at Grainger. I will miss being part of the Company, but I know that it is also on solid foundations to achieve even greater things.

Robin Broadhurst

Chairman

20 November 2014

3 RESI Awards

4 Sunday Times' British Homes Awards

5 Global Real Estate Sustainability Benchmark

6 Housing Design Awards

Chief Executive's Review

Grainger has had another period of strong financial performance and we have created significant growth in the asset value of the Company. Our triple net asset value has risen 24% to 242p per share, and our gross net asset value has risen by 20% to 291p per share. Profit before tax increased 26% to £81.1m (FY13: £64.3m), while margins on sales of vacant properties rose strongly to 49.2% (FY13: 44.9%).

The market value of our portfolio once again outperformed the general market in capital value terms, increasing 14.6% compared to the 9.5% average of the Nationwide and Halifax indices. This achievement reflects the nature and geographic location of our assets and the benefits of our strong asset management capabilities, which have always been and will continue to be a key strategic focus.

Market commentary

As we indicated when announcing our half year results in May, we have seen strong house price growth over the year and, for the first time in many years, we have seen values in the UK increase in every region in which we operate. In addition, the performance of our portfolios have been supported by strong sales margins. We also continue to see growth in London, albeit at varying rates.

Sentiment within the housing market has been dampened by wider concerns about the economy combined with the possibility of interest rate rises, the mortgage market review and the Labour Party's proposed mansion tax, should they assume power after the next election. This political uncertainty and the outcome of the forthcoming election has likely been a factor in the reduction in house price inflation in some areas of London as well as reduced transaction levels.

There remains, however, a significant undersupply of housing in the UK and, along with a slowly improving economy, jobs market and expected population growth, this imbalance supports a positive house price inflation environment, albeit at more sustainable levels. In the regions we have seen positive momentum in terms of sales and capital values. Specifically, we expect to see a gradual improvement in those regions with stronger economic prospects. In our own experience in the south of England over recent months, we have seen the time to complete sales slightly increase and the number of viewings diminish; this has been most apparent in central London.

The business is well placed to respond to the market. Our assets have defensive qualities which help maintain strong values due to their size, type, location, pricing and condition. Moreover, it is important to note that, although 68% of our UK portfolios by value are in London and the South East of England, only 27% of our assets are located in Central London. In addition, we have only 80 assets worth £2m and over at vacant possession value out of our UK portfolio of c.11,500 units.

Rent levels in the market rented sector remain robust, with stable increases seen throughout the year. The UK market rented properties which we manage strongly outperformed the market. According to the Office of National Statistics, the average private rent increases in the UK were 1% for the year to September 2014. Our portfolio saw like-for-like rent increases at both renewals (4.2%) and on new lets (9.1%). This outperformance is due to our active asset management, refurbishment investment programme and strong asset characteristics which are in high demand.

Although political manoeuvring in the run-up to the General Election, such as the proposal for a mansion tax, risk creating uncertainty over the next six months, it is encouraging to note that the main political parties are broadly supporting growth policies in terms of housing supply and institutional investment in the private rented sector, which is important to our longer term strategy.

The Government and the Conservative party are pursuing policies with the intention of supporting house building, the mortgage market and the private rented sector and Labour's Lyons Review of the housing market was broadly welcomed by the industry, setting a positive direction of travel for the formation of Labour's housing policies in the run-up to the election.

This backdrop continues to provide a good tailwind for institutional investor interest in the UK private rented sector, and we see clear opportunities for growth which we can leverage in order to further our long term strategic direction for the business.

Investment focus

As we have indicated previously, with our deleveraging programme now concluded, we are in a position to increasingly turn our attention to growing the business through purchases of reversionary assets and investment in build to rent opportunities. As such, we have been active in business development over the past year, with our strong team of experts pursuing a number of exciting opportunities.

We continue to believe that the regions provide increasingly attractive investment opportunities. In line with this, we have recently announced a new partnership agreement with Sigma Capital which provides us the exclusive option to acquire sites from their significant pipeline of build to rent developments outside of London, located across the UK in major regional cities.

We are also pleased to have been selected by the Greater London Authority, along with the London Pensions Fund Authority as part of a Bouygues-led consortium to develop 211 build to rent units in a scheme at Pontoon Dock in East London.

We acquired the Chelsea Houses Portfolio in April for £160m, a demonstration of our continued commitment to reversionary assets. The portfolio has significant potential for value enhancement through refurbishment and extension. Since acquisition, the portfolio has performed ahead of expectations and the vacant possession value of the portfolio has increased by 4.2%.

Strategy and Future Outlook

Grainger is a specialist residential company.

Our objective is to be a leader in the residential market, delivering sustainable long-term returns to our investors and our partners from a combination of sales, rents and fee income.

The four strands of our strategy remain: leading the market; ensuring our assets are located and managed to deliver the best returns; balancing the sources of our income; and optimising our financial and operational gearing.

Our strategy and our business reflect the changing dynamics of the residential market. We will use our core skills (trading, managing, investing, developing and fund management) and our agility to take advantage of the opportunities presented by these changes.

Our core business is the acquisition, management and sale of properties subject to regulated tenancies and other reversionary assets. Even at current levels, we estimate our reversionary portfolio will generate over £120m of cash each year until 2030. The overall market for these assets is in gradual decline and this is why, over the years, we have increased our exposure to other forms of residential assets, for example home reversion assets in the UK and residential investments in Germany.

We are market leaders in both the regulated tenancy and home reversion markets and it is our intention to maintain those positions. We will continue to actively acquire those assets while they remain available and provide appropriate levels of return.

Changes to the residential landscape, in particular the development of the market rented sector, present a further opportunity for growth, building on our reputation and expertise and our existing operating and management platforms. Consequently, it is one of the areas in which we will invest over the next few years.

Our long term vision is to be the first (and foremost) truly national market rented landlord offering a high quality product and service that enables people to increase their housing choices; this entails a strong, recognised brand that will help people to move easily and seamlessly both from location to location, and through different price points.

We will grow this part of the business primarily through build to rent projects, integrating our core skills of asset and property management, with those of development.

Our geographic focus for investment will continue to be in the UK, ahead of anticipated value growth in the regions and in the 'doughnut' zones around central London.

We have had an encouraging start to the new financial year and are confident of delivering good levels of profitability in 2015. Our sales will continue to benefit from the realisation of the reversionary value embedded in our portfolio. In addition to our core rental and fee income, our development business is expected to see high levels of activity over the next three years, with existing schemes anticipated to generate on average c.£10-12m of profit per annum.

Grainger will continue to be highly cash generative, providing significant firepower to invest in market rental and fee generating opportunities, as well as our more traditional reversionary assets.

Our business provides shareholders with:

· exposure to the housing market;

· a unique residential portfolio supported by an expert management platform;

· short term profitability from our opening sales pipeline and expected development profits;

· medium term value growth from our portfolio and the realisation of the £503m reversionary surplus; and

· significant long term opportunities from the market rented sector.

I would like to personally thank Robin Broadhurst who has been chairman for over seven years and a director of the Company for over ten. Over this period, Grainger has seen significant change and positive advancements, and together we have successfully worked through some challenging economic times. His constant support and counsel have been valuable and much appreciated. Likewise, my sincere thanks and best wishes go to John Barnsley who leaves after many years of service with Grainger. We wish them both the very best for the future.

Andrew Cunningham

Chief executive

20 November 2014

Performance Overview and Financial Review

Performance Overview

This section reviews the overall Group performance, the growth in assets and provides further detail on our three main income streams: Sales, Rents and Fees.

Group Performance

For the twelve months to 30 September 2014, Gross NAV increased by 20% to 291p and triple NAV by 24% to 242p.

Grainger's reversionary surplus, which is the uplift from the reported market value of our properties to the vacant possession value, including our share of investments in joint ventures and associates, is valued at £503m, equivalent to 120p per share before tax (FY13: 127p, £527m). For our wholly owned assets, this is 109p per share (£455m) before tax (FY13: 116p, £483m). This surplus is based on current values (it excludes future house price inflation), is supplementary to our net asset calculations and highlights the additional latent value in Grainger's reversionary portfolio.

Market Value Analysis - Property Assets

*Includes Grainger share of assets held within joint ventures and associates

This is after the one-off valuation deficit of £5.9m relating to some of our German assets referred to below.

UK residential portfolios

Our traditional reversionary UK residential portfolios have performed particularly strongly in 2014 and have again outperformed the wider UK residential market. In the year to 30 September 2014 the two major housing indices (Nationwide and Halifax) showed an average rise of 9.5%. By contrast, the vacant possession value (VPV) in our combined UK portfolios rose by 12.0% whilst their market value rose by 14.6%.

Within this, the VPV of our UK Residential portfolio, which benefited from a concentration weighted towards London and the South East of England, rose by 14.6%. The VPV of the more geographically diverse Retirement Solutions assets rose by 6.0%.

Development portfolio

As at 30 September 2014, the market value of our UK development portfolio increased to £107.2m (FY13: £84.3m), largely fuelled by the investment in our Macaulay Walk scheme (Clapham, London).

The gross development value, including joint ventures, with detailed planning consent is valued at £434m (FY13: £314m). This includes our 50% share of the King Street, Hammersmith development in conjunction with Helical Bar, which has a total gross development value of £180m, following the receipt of planning permission in November 2013, and two sites in the Royal Borough of Kensington and Chelsea which also received planning permissions within the period.

Co-investment vehicles

Grainger's equity investment in its joint ventures and associates equates to £177.2m and principally comprises:

· our 24.9% investment in GRIP, for which we provide property and asset management services, co-investing with APG;

· a 50% investment in Walworth Investment Properties Limited (WIP), our joint venture with Dorrington, which owns the Walworth Estate;

· our 25% investment in the two Stuttgart portfolios with Heitman;

· a 50% interest in the Sovereign joint venture with Moorfield;

· and a 50% interest in the Hammersmith joint venture with Helical Bar.

The gross asset value of co-investment vehicles at 30 September 2014 was £1,016m (FY13: £924m). Grainger's total return from co-investment vehicles in the year amounted to 23.5%.

\* The Heitman gross asset value at 30 September 2014 was €259m (FY13: €253m). The 2014 equity investment is lower as a result of distributions, including proceeds from a successful sales programme on behalf of the vehicle, as well as exchange rate movements.

Germany

The overall German residential market has developed well and investor interest continues to be strong. In order to benefit from this interest and to further leverage its platform and assets, the Group intends to use existing German portfolios to form further co-investment vehicles with institutional partners to which it will provide asset management services. This relates mainly to the FRM portfolio. During the past year and following a thorough portfolio review, we have initiated an investment programme in order to ensure compliance with local regulations which will maximise the potential of the assets in respect of rents and occupancy. We believe it is right to invest in order to create a highly attractive entry possibility for institutional investors. The costs of this programme have been accounted for in the current year and have impacted profit before tax and net asset value by £5.9m.

Our Heitman associate in Germany has delivered a positive performance in 2014, supported by investment activity in Munich and other dynamic markets and our active asset management approach, returning in excess of 15% to Grainger in 2014.

The value of the assets Grainger manages in Germany, including the Heitman associate, has increased by 4.4% on a per sqm like-for-like basis. As at 30 September 2014, the market value of the wholly owned German portfolio was £148.4m (8% of our overall wholly owned portfolio; FY13: £178.3m). The reduction in market value follows sales of €18.6m (£15.2m) and the cost of additional investment outlined above.

Purchases

Our strong cash generation supports reinvestment and we have spent £182m on property purchases, excluding development (FY13: £9.0m). The largest single element of this expenditure was the acquisition in April of the Chelsea Houses Portfolio. This portfolio has performed well in the five months since acquisition, with a growth in vacant possession value of 4.2%. Apart from its attractive reversionary characteristics and returns, the portfolio provides a significant number of value accretive refurbishment and redevelopment opportunities.

Assets under management

The total market value of assets under management at 30 September 2014 was £3,159m, up from £2,796m the previous year. 19,831 units were under management at the year-end (FY13: 21,569), with most of the reduction attributable to the successful conclusion of G:Ramp asset management activities.

Sales, rents and fees

Sales

UK Residential & Retirement Solutions

Margins on sales of vacant properties increased to 49.2% (FY13: 44.9%) and sales of vacant properties were made at an average of 14.1% above September 2013 VPV (2013 excess to 2012 VPV: 7.9%).

Sales of tenanted properties and other sales decreased from 2013 by £100.4m to £103.1m (FY13: £203.5m). The main disposal in the year was the sale of a home reversion (Retirement Solutions) portfolio in January 2014 for £88m, which generated a profit of £9.9m. This represents the end of the deleveraging programme which Grainger has been working through in recent years.

Development

The Development business had a good year with £32.8m of sales and £12.3m of profit (FY13: £15.0m and £1.9m respectively). This performance was weighted towards the second half of FY14 which saw higher levels of activity that have continued into the first half of FY15.

Our Macaulay Walk development has been the key profit driver and has delivered an outstanding sales performance with 53 of a total of 57 private units now sold, exchanged or reserved at values between £800-£1300/sqft, significantly above expectations. Over the period, Macaulay Walk has delivered £11.6m of profit to the business, and we expect a similar level of profit in the new financial year which will be weighted toward the first half. The development won Best Mixed Use Scheme and Best Development (between 26-100 units) at the Sunday Times' British Homes Awards 2014.

We will shortly be entering the construction phase on our two schemes with the Royal Borough of Kensington and Chelsea, Young Street and Hortensia Road.

At Berewood, we sold Phase 2 to Redrow Homes in September 2013, and anticipate that the next phase will come to market in 2015.

Over the next three years, our development activities on average are currently expected to generate £10-12m of profit per annum.

Germany

The £15.2m of sales (FY13: £18.0m) relates to general portfolio management and optimisation activities. A broadly breakeven profit result (-£0.2m) compares against a £1.2m loss in the prior year. As assets are held as investment property and are revalued annually, a breakeven result indicates that the sales prices achieved met the latest valuation.

Rents

We recorded an anticipated reduction in net rent following the recent portfolio transfers into co-investment structures and investment sales. Total net rents in the year amounted to £37.0m (FY13: £48.5m).

Our UK Residential portfolio generated net rental income in the year of £30.2m (FY13: £37.2m).

The German business delivered net rents of £5.1m (FY13: £8.7m).

Certain assets in the Retirement Solutions portfolio also produce a net rental income and this amounted to £1.5m in the year (FY13: £2.3m).

Despite the overall net rent decrease, the UK market rented properties which we manage saw like-for-like rent increases on new lets of 9.1% and on renewals of 4.2%, compared to the market average of 1% according to the Office of National Statistics. While rent levels generally follow market trends, more importantly they reflect the quality of the individual unit and benefit from our active management to maximise rental income.

Across our entire portfolio, rental increases generated an additional £1.8m of gross rental income.

Fees and other income

Allied to our strategy of growing our private rented sector offering are the opportunities we have developed for creating new joint ventures and fund management structures where we can leverage our core skills to create added value for shareholders and partners and generate fee income for Grainger.

The majority of fee income is derived from asset and property management fees from co-investment vehicles and management contracts. Overall, fees were stable year-on-year.

Retirement Solutions saw increased activity levels and fees following the commencement of services for Clifden Holdings Limited (the buyer of one of our home reversion portfolios in January). Development fees also increased. These relate to land sales at Wellesley, the Aldershot Urban Extension, working with the Defence Infrastructure Organisation, part of the Ministry of Defence.

Following a very positive 2013 for G:Ramp (our residential asset management agreement with Lloyds Banking Group), 2014 also benefited from performance fees, albeit at a lower level. These relate to the successful work-out of the bulk of the portfolios we have been managing, a reduced level of activity is therefore expected in 2015.

Financial Review

Our key measures of financial performance are: 

*Operating profit after net valuation movements (OPBVM) on investment properties plus share of results from joint venture/associates plus the movement on the uplift of trading stock to market value as a percentage of opening gross capital defined as investment property, financial interest in property assets (CHARM), investment in joint venture/associates and trading stock at market value.

**Growth in triple asset value (NNNAV) in the year plus the dividend per share relating to each year as a percentage of opening NNNAV.

The table below summarises our OPBVM, recurring profit and profit before tax.

We have three income streams within OPBVM. These are sales of residential properties, rental income and management fees/ other income. Within OPBVM we also include income from our CHARM asset, property expenses, overheads and other expenses. A summary of OPBVM by division and of the main movements in the year is set out below:

Divisional analysis of OPBVM

The major movements within OPBVM are:

· A decrease of £13.9m in gross rents. This has arisen, as predicted, primarily as a result of the transfer of assets into co-investment vehicles in the prior year with Heitman for German assets, and with Dorrington and APG for UK assets. This reduced gross rents by £8.9m. Sales across the Group have resulted in a reduction in gross rents of £7.9m. This has been offset by £1.1m of additional rents from acquisitions in the year, primarily the Chelsea Houses Portfolio, and £1.8m of rental increases.

· An increase of £0.9m in relation to profit on sale of residential property assets, primarily due to an increase in margin on vacant sales from 44.9% to 49.2% and a reduction in tenanted sales as we reached the end of our deleveraging programme.

· An increase of £10.4m in relation to profit on sale of assets from our development division. In the year our Macaulay Walk site has come to market, realising profits of £11.6m based on completion of 34 of the 57 private units and 6 of the commercial units.

Interest income and expense

The net recurring interest charge has decreased by £7.9m from £71.3m in 2013 to £63.4m at 30 September 2014. This follows on from the reduction in debt which was (on a daily average) £1,101m in 2014 (FY13: £1,248m), and an average cost of debt at the period end including costs but excluding commitment fees of 5.4% (FY13: 5.9%). 

Joint ventures and associates

Joint ventures and associates contributed a profit of £3.0m to recurring profit in the year (FY13: £0.7m) as we benefited from a full year of trading from our Heitman and Walworth ventures.

Valuation and non-recurring items

Valuation and non-recurring items in 2014 compared with 2013 is analysed as follows:

Investment property valuation gain

The net valuation uplift in 2014 totals £1.5m (FY13: £2.9m). Our UK portfolios, relating primarily to the Group's wholly owned investment property in its UK Residential division showed an uplift of £7.6m (FY13: £2.5m). In Germany, as stated previously, we are intending to start a programme of works on our FRM portfolio, the cost of which has been taken into account as part of the September valuations, resulting in a one-off downward valuation of £5.9m. The remaining German portfolios showed a deficit of £0.2m (FY13: surplus of £0.4m).

Derivative movements

Fair value movements on derivatives is a credit of £1.2m relating to the Group's derivative contracts, offset by a £0.4m charge relating to our share of derivatives within joint ventures and associates.

The fair value of swaps at 30 September 2014 is a liability of £48.0m compared to £91.1m at 30 September 2013.

Valuation gains in joint ventures/ associates

Valuation gains within joint venture and associates amounted to £39.2m before deferred tax (FY13: £14.7m) comprising gains from our joint venture and associate operations with Heitman, Dorrington and APG.

Non-Recurring

The non-recurring items in 2014 included a £0.7m gain on sale of a subsidiary as part of the tenanted portfolio sale completed in January 2014 and a £0.1m gain on sale of our Gebau joint venture in October 2013. This is offset by a £2.4m loan impairment charge relating to our Prague investment, £1.3m of one-off property costs and provision increases relating to a small number of properties across the portfolio and £0.8m following the acquisition of the Chelsea Houses Portfolio.

Profit before tax

Having taken account of all of the above movements, profit before tax was £81.1m compared to a profit before tax of £64.3m in 2013. The most significant movements which contributed to the 26.1% increase were a £11.3m increase in profit from sales largely driven from development sales in the year, a £7.9m decrease in interest costs and a £4.6m increase in valuation gains from investment properties, offset by a reduction in net rents of £11.5m following the recent portfolio transfers into co-investment structures and investment sales.

Tax

The Group has an overall tax charge of £6.4m for the year, comprising a £7.3m UK tax charge and a £0.9m overseas tax credit. 

The net reduction of £11.4m, from the expected charge of £17.8m, results from a prior period credit of £6.5m, a £4.2m reduction as tax on JV and Associates' profit is included above the tax line in the Income Statement and a £1.8m deferred tax credit following recognition of future capital losses against future capital gains, offset by non-deductible expenditure totalling £1.1m.

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

The Group made net corporation tax payments totalling £7.2m in the year. 

Earnings per share

Basic earnings per share is a profit of 18.1p (FY13: a profit of 13.1p). A year-on-year comparison is shown below:

Dividend for the year

After considering the investment and working capital needs of the business, the directors have recommended a final dividend of 1.89p per ordinary share (FY13: 1.46p) which equates to £7.8m (FY13: £6.0m). This is in addition to the interim dividend of 0.61p per ordinary share (FY13: 0.58p). The total dividend for the year will therefore be 2.50p per ordinary share (FY13: 2.04p), an increase of 22.6%. Earnings cover dividends by 7.3 times.

Net asset values

We set out below the two measurements to enable shareholders to compare our performance year on year.

The European Public Real Estate Association (EPRA) Best Practices Committee has recommended the calculation and use of an EPRA NAV and an EPRA NNNAV. The definitions of these measures are consistent with Gross NAV and NNNAV as described and shown in this document.

A reconciliation between the statutory balance sheet and the market value balance sheets for both Gross NAV and NNNAV is set out in Note 3 to the accounts in this announcement.

Reconciliation of Gross NAV to NNNAV

The major movements in Gross NAV in the year are:- 

The major movements in NNNAV in the year are:

The effect of HPI and our outperformance of it has been a major contributor to growth in asset value. An analysis of the sources of valuation growth split between the gain shown in the income statement and the gain included within our Gross NAV and NNNAV movements is shown below:

*Includes Grainger share of assets held within joint ventures and associates

An increase in market value of 1% across the Group's residential property including our share of joint ventures and associates leads to an increase in value of £22.5m before deferred and contingent tax and £17.7m after tax. This is equivalent to 5p per share on NAV and 4p per share on NNNAV.

Market value analysis of property assets

* Incudes property assets within held-for-sale

Financial resources, interest cost and derivative movements

As at 30 September 2014 net debt was £1,044m, an increase of £85m from the 30 September 2013 level of £959m. Our consolidated loan to value now stands at 46.5% (FY13: 48.0%). LTV on the core facility was 42.0% (FY13: 40.1%) compared to a maximum allowable LTV covenant under that facility of 75%. The interest cover ratio on the core facility stood at 3.7 times (2013: 5.0 times) compared to a minimum interest cover covenant of 1.35 times.

As at 30 September 2014, the average maturity of the Group's drawn debt was 4.8 years (FY13: 4.6 years). 

The Group has free cash balances of £50m plus available overdraft of £5m along with undrawn committed facilities of £242m. Thus, headroom totals £297m as at 30 September 2014 (FY13: £292m). There are no further significant repayments until March 2016.

The Group's average cost of debt at the period end, including costs but excluding commitment fees, was 5.4% (FY13: 5.9%). We will continue to manage the average cost of debt, balanced with terms and tenor.

At 30 September 2014, gross debt was 68% hedged (FY13: 68%) of which 4% was subject to caps (FY13: 3%).

During the year we further diversified our sources of debt by issuing £275m of bonds with a maturity date of December 2020 at an all in effective rate of 4.94%.

The business has produced £303m of cash from gross rents, property sales net of fees and fee and other income. The largest outflows of cash are £160m investment in the Chelsea Houses Portfolio, £35m to settle interest rate swaps required before issuance of our corporate bonds and £55m of interest.

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

Mark Greenwood

Finance director

20 November 2014

8 Including costs but excluding commitment fees

Consolidated income statement (audited)

Consolidated statement of comprehensive income (audited)

Included within other comprehensive income is a charge of £0.9m (2013: credit of £2.4m) relating to associates and joint ventures accounted for under the equity method.

Consolidated statement of financial position (audited)

Consolidated statement of changes in equity (audited)

Consolidated statement of cash flows (audited)

Notes to the Preliminary Announcement of audited financial results

Consolidated statement of cash flows continued (audited)

1 Accounting policies

1a Basis of preparation

The Board approved this preliminary announcement on 20 November 2014.

The financial information included in this preliminary announcement does not constitute the Group's statutory accounts for the years ended 30 September 2013 or 30 September 2014. Statutory accounts for the year ended 30 September 2013 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 September 2014 will be delivered to the Registrar of Companies following the Company's annual general meeting.

The auditors have reported on the 2014 and 2013 accounts; their report was unqualified, did not include any references to any matters by way of emphasis and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

These financial statements for the year ended 30 September 2014 have been prepared under the historical cost convention except for the following assets and liabilities which are stated at their fair value; investment property, derivative financial instruments, financial interest in property assets and assets classified as held-for-sale.

The accounting policies used are consistent with those contained in the Group's last annual report and accounts for the year ended 30 September 2014.

The financial information included in this preliminary announcement has been prepared in accordance with EU endorsed International Financial Standards ('IFRS'), IFRS IC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

1b Adoption of new and revised International Financial Reporting Standards

New standards and interpretations in the year

i) New and amended standards issued in the year At the date of approval of these financial statements, the following interpretations and amendments were issued, endorsed by the EU and are mandatory for the Group for the first time for the financial year beginning 1 October 2013. There are no new standards, amendments or interpretations that are effective for the first time for the current financial year that have had a material impact on the Group.

ii) New and amended standards

- IAS 19, 'Employee benefits', has been amended and, for defined benefit plans, the Group has changed its measurement principles by replacing the interest costs and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability including the IFRIC 14 liability. There has also been a corresponding change in the amount recognised in other comprehensive income, so that the net impact on total comprehensive income and net assets is £nil.

- IFRS 10, 'Consolidated Financial statements', establishes a single control model that applies to all entities including special purpose entities and requirements management to exercise judgement over which entities are required to be consolidated.

- IFRS 11, 'Joint arrangements', under IFRS 11 the structure of the joint arrangement, although still an important consideration, is no longer the main factor in determining the type of joint arrangement and therefore subsequent accounting.

- IFRS 12, 'Disclosures of interests in other entities', brings together all the disclosure requirements about the Group's interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities.

- IFRS 13, 'Fair value measurement', provides consistency by making available a single source of guidance on how fair value is measured. IFRS 13 is applied when fair value measurements or disclosures are required or permitted by other IFRSs. Investment property has been included within the fair value hierachy, but this has not resulted in any impact on total comprehensive income or net assets.

iii) New and amended standards not yet effective

At the date of authorisation of these financial statements, there were a number of new standards, amendments to existing standards and interpretations in issue that have not been applied in preparing these consolidated financial statements. The Group has no plan to adopt these standards earlier than the effective date. Those that are most relevant to the Group are set out below.

- IFRS 9, 'Financial Instruments', replaces IAS 39 and sets out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. IFRS 9 is effective for annual periods beginning on or after 1 January 2018.

- IFRS 15, 'Revenue from contracts', replaces both IAS 11 and IAS 19 as well as SIC 31, IFRIC 13, IFRIC 15 and IFRIC 18 and establishes a single, comprehensive framework for revenue recognition. IFRS 15 is effective for annual periods beginning on or after 1 January 2017.

All the above IFRSs, IFRS IC interpretations and amendments to existing standards are still to be endorsed by the European Union ('EU') at the date of approval of these financial statements.

1c Valuation of residential property

The Group's residential trading property is carried in the statement of financial position at the lower of cost and net realisable value. The Group's investment property is carried in the statement of financial position at fair value. The Group does, however, in its principal net asset value measures, NAV and NNNAV, include trading stock at market value. The market value of the Group's property which, in the case of investment property, is the same as fair value is detailed below.

The results and basis of each valuation and their impact on both the statutory financial statement and market value for the Group's NAV measures are set out in the following table:-

* The market value uplift is the difference between the statutory book value and the market value of the Group's properties. Refer to note 3 for market value net asset measures.

** Includes Group share of joint ventures and associates revaluation gain before tax

*** Includes investment property classified as held-for-sale

1d Group risk factors

The principal risks and uncertainties facing the Group are set out in the Risk Management report of the 2014 Annual Report and Accounts.

A number of risks faced by the Group are not directly within our control such as the wider economic and political environment including the run up to a general election in the UK. Indicators of possible change by the different political parties, such as a "Mansion tax", are monitored. 

Specific risks include the operational management of a large number of concurrent projects and transactions together with our on-going obligations to comply with Health & Safety requirements and other regulatory demands.

1e Forward-looking statements

Certain statements in this preliminary announcement are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct.

Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

2. Analysis of profit after tax

The results for the years ended 30 September 2013 and 2014 respectively have been affected by valuation movements and non-recurring items. The table below provides further analysis of the consolidated income statement showing the results of trading activities separately from these other items.

The £0.7m non-recurring profit on sale of subsidiary relates to the profit on sale of Equity Release (Increments) Limited to Clifden Holdings Limited in January 2014. The £0.1m profit on sale of joint venture relates to the sale of the Group's 50% share of Gebau Vermogen GmbH to our joint venture partners in October 2013.

The £2.4m impairment of joint venture relates to the Group's investment in Prague. The Group incurred costs of £0.8m following the acquisition of the Chelsea Houses Portfolio shown within other expenses. The £1.1m non-recurring costs presented within net rental income relate to a provision for contractor remedial costs which we expect to be recouped.

3. Segmental information 

IFRS 8 'Operating Segments' (IFRS 8) requires operating segments to be identified based upon the Group's internal reporting to the Chief Operating Decision Maker (CODM) so that the CODM can make decisions about resources to be allocated to segments and assess their performance. The Group's CODM is the Chief Executive Officer.

The Group has identified five segments and is treating all of these as reportable segments. The segments are: UK Residential; Retirement Solutions; Fund and third party management; UK and European development and German Residential. The Group has a segment director responsible for the performance of each of these five segments and the Group reports key financial information to the CODM on the basis of these five segments. Each of these five segments operate within a different part of the overall residential market.

The key operating performance measure of profit or loss used by the CODM is the trading profit or loss before valuation gains or deficits on investment property and excluding all revaluation and non-recurring items (OPBVM) as set out in note 2. The CODM reviews by segment two key balance sheet measures of net asset value. These are Gross Net Asset Value and Triple Net Asset Value.

Information relating to the Group's operating profit or loss by segments is set out below.

The title "Other" has been included in the tables below to reconcile the segments to the figures reviewed by the CODM.

2014 Income Statement