Grainger plc Regulatory News (GRI)

The announcement released on 19 November 2015 at 7am under RNS No 2313G has been re-released to facilitate onward transmission by third party vendors.

The announcement is unchanged and is reproduced in full below.

---------------------------------------------------------------------------------------------------------------------------------

19 November 2015

Grainger plc

("Grainger", the "Group" or the "Company")Preliminary Results for the year ended 30 September 2015

GRAINGER REPORTS SOLID PROGRESS

AND KEY MILESTONES IN DELIVERING STRATEGY

Grainger plc, the UK's largest listed residential property owner and manager, today announces its preliminary results for year ended 30 September 2015.

HIGHLIGHTS

· Strong value growth, with gross net asset value (NAV) per share up 9.7% or 28p, to 319p (FY14: 291p) and triple net asset value (NNNAV) up 8.8% or 21p, to 263p (FY14: 242p);

· Continuing strength in trading of reversionary assets on vacancy with profits from these sales totalling £68.4m (FY14: £60.6m);

· UK vacant sales values 9.1% above September 2014 valuations (FY14: 14.1%); sales margins on vacancy of 50.5% (FY14: 49.2%) and sustained cash generation enabling further strategic investment into our growing PRS business;

MILESTONES IN DELIVERING STRATEGY

· Group simplification:

o German business - Further to the announcement of Grainger's intention to dispose of its wholly owned German assets, the process of which is well underway, yesterday the Company exchanged contracts to sell its other interest in Germany, our joint venture with Heitman, to a large German investor, which should generate a non-recurring pre-tax profit for Grainger of c.€16m (c.£11m);*

· Continued investment and growth in PRS portfolio:

o Acquired 927 income producing PRS units over the period, bringing total UK PRS portfolio to c.3,650 units (including c.1,900 in co-investment vehicles), with a market value of c.£1,025m, and a further 112 units completed post-year end;

o Total development pipeline of over 1,500 PRS units, the majority of which are expected to be developed over the next three years;

· Reduced funding costs

o Renewed financing facilities have reduced the group's cost of debt to 4.6% at the year end (FY14: 5.4%);

FINANCIAL PERFORMANCE

· Recurring profit £41.2m (FY14: £47.1m);

· Profit before tax of £50.0m (FY14: £81.1m), impacted by the £18.2m loss on re-acquisition of ERIL and a £7.0m adverse movement on derivatives;

· Loan to value at 45.5% (FY14: 46.5%);

· A final dividend of 2.11p per ordinary share (FY14: 1.89p), resulting in a total dividend for the year of 2.75p per ordinary share (FY14: 2.50p), an increase of 10%.**

* Please see this morning's separate RNS announcement for further details.

** The dividend will be paid on 12 February 2016 to shareholders on the register at close of business on 29 December 2015.

· New senior management team appointed

o Appointments of Helen Gordon as CEO and Vanessa Simms as Finance Director provide business with experienced and motivated leadership to execute future strategy;

· New CEO Strategy Update - 28 January 2016

o On 28 January 2016, Helen Gordon, Grainger's new CEO, will provide an update on the Board's strategy.

Baroness Ford, chairman of Grainger, commented:

"I am pleased that we have delivered a number of important changes this year. We continue to make good progress simplifying the Group and making strides in growing our private rented sector business, whilst reducing our cost of debt. We have successfully appointed a new management team with Helen Gordon as CEO and Vanessa Simms as Finance Director, both of whom will add significant value to our business. The business is well positioned to build on its core residential platform. Under Helen's leadership, I have every confidence that we are well placed for the future."

Andrew Cunningham, chief executive of Grainger, said:

"Over the past year, the business has performed well with net asset value rising by nearly 10 per cent. I am pleased that we have made progress with the proposed sale of our German assets and have agreed with our JV partner, Heitman, to bring forward the exit from our German JV. We have also continued to successfully build our private rented sector business, supported by our reversionary assets, which are continuing to deliver good value for the business, providing substantial and predictable cashflows for our investment in higher yielding PRS assets. In addition, we have extended our core facilities out to 2020 and have reduced our cost of borrowing.

"As I approach my retirement, I am pleased to be leaving Grainger in a strong position to move forward and build on its leadership in the UK residential market. With an exciting future ahead, I wish Helen and Vanessa every success in their new roles."

Analyst presentation:

Grainger plc will be holding a presentation for analysts and investors today at 9.00a.m. (GMT), Thursday 19 November 2015 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.investis-live.com/grainger-plc/5603b7394731d008002a3c55/fy15

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 

In 2015 we have made some important changes at Grainger, in terms of both the leadership of our Company and our future strategy.

Leadership

Robin Broadhurst served the Company with great diligence and skill prior to his retirement in February 2015 after eight years as Chairman and we had intended that Ian Coull would succeed him. Due to ill health, however, Ian was unable to take up the role and so when I was asked by my Board colleagues to take over, I was more than willing to do this. I have now served on the Board for over seven years and have developed a deep admiration for the Company and for the tremendous work that our staff do to ensure that Grainger's customers are well served in safe, secure and decent homes.

Andrew Cunningham also signalled his intention to retire in 2016 after nineteen years as a Director, the last six as Chief Executive. Andrew will retire in early 2016, having seen the Company through the financial crisis and consequent challenges for the property sector. His steady hand and sound judgment meant that Grainger came through the difficult period of 2007-2010 in very good shape. Andrew will be succeeded by Helen Gordon, a highly regarded and very experienced property professional who brings a wealth of expertise gained from senior positions in property development, fund management and most recently, banking. Helen was selected following a thorough search process in which we attracted many first class candidates. The Board is looking forward to working with Helen as we reshape the business during 2016 in line with a refreshed strategy.

Mark Greenwood has been our Finance Director for the last five years. Mark is also retiring this year and we are grateful to him for the important contribution he has made to our business during his time with us. 

We are delighted to welcome Vanessa Simms as our new Finance Director in early 2016. She joins us from Unite Group plc, where she has been Deputy Finance Director since 2012, and brings with her significant relevant PLC and real estate experience.

Strategy

When I took over as Chairman, I was pleased to have the backing of so many shareholders for accelerating the pace of change at Grainger, which consisted of making three important changes.

Firstly, we had a clear message that our drive to build the UK's leading private rented sector (PRS) business was well understood and that an increase in pace was greatly welcomed. We have been working hard to accelerate our progress in this area during 2015 with some important acquisitions and development projects. We remain committed to our strategic objective to build a substantial, market-leading PRS business. In our Annual Report and Accounts, we set out both the market opportunity and the risks and challenges associated with this strategy.

In order to accomplish this, our second planned change was to simplify our business model. Although Grainger has traditionally seen merit in diversification, it was clear that the overhead cost of such a strategy was high and that the business needed to be more focussed and play to our core competencies. Accordingly, in 2015 we have been reviewing each of our business lines and where these did not fit with the future shift to a PRS portfolio, we would look to divest, thereby driving enhanced shareholder value. We are well underway with the sale of our German assets, taking advantage of strong demand. We will continue this process of simplification where we are of the view that individual business lines do not align well with our future move to PRS assets.

Thirdly, as part of our on-going balance sheet management we announced early this year that we were reviewing our cost of debt. The majority of our debt was arranged in 2011 (when lending markets were still feeling the effects of the global financial crisis), but as the term of this funding approached an end, we sought to take advantage of the lower costs of borrowing available in the market today. Over the course of this year we have refinanced our core syndicate debt as well as a facility for one of our portfolios. The average cost of debt at the year end is 4.6% which is more appropriate for our future business.

In summary, our business will transition over the next few years from a traditional trading model that was historically aligned with house price inflation to one that is more income focussed, based on a market leading portfolio of PRS assets. The pace and shape of this change and the detail of the execution will be the priority for the new leadership team and a detailed review of our strategy for accomplishing this shift will be set out in the early part of 2016. 

Our reversionary portfolio is still highly cash generative and, as these assets naturally become vacant, we are able to realise their full latent value. This process will be important in ensuring that as we grow our PRS portfolio, through both acquisition and development, it can be financed, in part, by recycling capital from this reversionary portfolio.

Board

I am pleased to have had tremendous support from my Board colleagues this year and have worked closely with Andrew Cunningham and Mark Greenwood to implement the changes required to our business. Each has accomplished so much in their final months with Grainger. I wish them both well in their retirement. I would also like to welcome Rob Wilkinson to the Board whose expertise in fund management and real estate will replace the contribution from Simon Davies, who retires from the Board this year. On behalf of the Board, I would like to thank Simon for his valuable input, and we wish him well for the future. Details of the work and activities of the Board and its Committees over the last year are set out in the corporate governance section of our Annual Report and Accounts.

Our staff

Finally, I would like to thank all of the staff at Grainger who deliver such an unrivalled service to our customers. We never forget that we have many thousands of families that make their home with Grainger and we all take that responsibility very seriously. The Board is very grateful to our staff for the tremendous effort they make each and every day.

Baroness Margaret Ford

Chairman

19 November 2015

Chief Executive's Review

In addition to the solid trading performance this year, we have continued to simplify the Group's operations and accelerate the growth of our private rented sector (PRS) business. Over time we will maximise the returns from our regulated tenancy portfolio as properties naturally fall vacant and are sold. In turn we will grow the PRS business to increase the proportion of our income generated by rents. Underpinning this long-term strategic change is our continuing simplification of the business. We have announced the sale of our German JV with Heitman and our intention to dispose of our German assets, which together will leave us as a UK-only focussed residential business. 

Financial performance

We have seen strong levels of growth in our key performance measures. NAV has increased by 9.7% and NNNAV by 8.8% and our return on shareholder equity was 10.0%. At the asset level our UK portfolio increased in value by 5.7% and we sold our vacant properties at 9.1% above last September's valuation at a margin of 50.5%, producing a strong sales profit performance of £68.4m, 12.9% above last year's figure of £60.6m. After several years of outperformance, this year our UK residential portfolios performed broadly in line with the wider UK housing market. We continue to see positive signs of future growth in the English regions and continue to invest accordingly.

Our profit before tax reduced to £50.0m from £81.1m, having been adversely affected by the £18.2m loss we incurred as we exercised our security rights to re-acquire the ERIL portfolio, a £7.0m increase in the derivatives fair value charge and a £4.6m reduction in fees and other income compared to last year.

Building a modern PRS business

The imbalances between housing supply and demand allied with the changing attitude towards home ownership have led to increased demand for good quality, well managed private rented accommodation. The PRS is the fastest growing housing tenure in the UK, with nearly one in five people renting privately today.This growing demand is a result of changing lifestyles and economic drivers, which are set to continue. We will meet some of the demand through the acquisition of existing assets and we have successfully bought 927 such units in the year for £86.7m, producing a gross yield of 7.7%. These acquisitions have the advantage of producing immediate income and the opportunity to produce future income and capital growth once absorbed into Grainger's residential management platform.

We have focussed much of our effort this year in building a pipeline of purpose built rental properties. We believe there is considerable demand for such assets, particularly when linked to good property management and high customer service standards. Along with the compelling market opportunity, there are also challenges and risks associated with our strategy. We set these out in detail in our Annual Report and Accounts.

The attractiveness of purpose built PRS assets to the consumer market has been evidenced by our experience at our first such development released to the private rental market earlier this year, Abbeville Apartments in Barking. This building was fully let in less than eight weeks at rent levels above both our expectations and the local market and is producing a gross yield on cost of 10.2%. The block was built under a forward purchase agreement and we will deliver further projects through similar purchase or funding agreements.

This pipeline of assets is further enhanced by our direct development activities, for example at land that we own at Seven Sisters, on sites being developed with the Royal Borough of Kensington and Chelsea and at strategic land sites such as Berewood in Hampshire and Wellesley near Aldershot. Going forward the activities of our development division will increasingly be focussed on delivering product for our PRS business.

In total including acquisitions completed since our year end, we now own, or manage in co-investment vehicles, c.3,650 PRS units in the UK with a further pipeline of c.1,500 units either already secured or at an advanced stage, of which we expect the majority to be developed over the next three years.

Creating a sustainable business

We recognise the importance of creating a sustainable business for all our stakeholders. In particular we are conscious of our responsibility to provide homes to our customers with a personal level of service. Consequently we continue to develop ways of communicating with our tenants - whether through tenants charters or customer satisfaction surveys. We believe that this communication and feedback will become increasingly important in creating a distinctive PRS product in a competitive environment.

We are delighted that our commitment to sustainability and customer service has been recognised in a number of ways this year - Green Star Status in the Global Real Estate Sustainability Benchmark, and being awarded Residential Asset Manager for the fourth successive year in the Property Week RESI Awards amongst others.

Outlook

This year has seen us make real progress in accelerating the strategic change of the business. We are simplifying our activities to create a UK focussed residential specialist with exposure to two main asset classes - a highly cash generative portfolio of reversionary properties which deliver a unique exposure to both capital appreciation and rental income and a growing portfolio of PRS properties which will provide consistent rental income streams. As part of this simplification, we have exchanged contracts for the sale of our German JV with Heitman, which follows our stated intention to dispose of our wholly owned German assets. Following completion of these transactions, we will be a UK-only focussed residential business.

As we simplify the Group, our balance sheet will be significantly strengthened, providinga robust financial platform on which to build a modern PRS business.

The beginning of the 2015/16 year continues to provide evidence of the robust trading characteristics of the business. As at 31 October 2015 our total Group sales pipeline1 amounted to £68m, which should deliver £33m of profit, with vacant UK sales values on completed sales 1.0% above September 2015 valuations (October 14: £77m, £35m and 1.9% respectively).

Our extensive and unrivalled experience in all aspects of the residential market puts us in an excellent place to be the market leader. It is an important time for the sector and the whole business looks forward to the future with confidence and excitement.

Andrew Cunningham

Chief Executive

19 November 2015

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

Performance Overview and Financial Review

Performance Overview

This section reviews the overall Group financial performance, the growth in assets and provides further detail on our income streams.

Reversionary assets

Our reversionary asset portfolio is valued at £1.74bn and comprises 8,498 units in the UK, predominantly in England.

Private rented sector (PRS) assets 

Our total managed PRS portfolio is valued at £1.36bn and comprises 8,983 units.

Group Performance

For the twelve months ended 30 September 2015, Gross NAV increased by 9.7% to 319p and NNNAV by 8.8% to 263p.

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 £507m, equivalent to 121p per share before tax (FY14: £503m; 120p). For our wholly owned assets, this is £477m before tax, 114p per share (FY14: £455m, 109p). This surplus is based on current values (it excludes future house price inflation), is supplementary to our net asset calculations and represents part of the cash and profit which will be crystallised when the properties are sold on vacancy.

UK residential portfolios movements in the year

Our UK residential portfolios have performed well in 2015. The vacant possession value (VPV) in our combined UK portfolios rose by 5.7% whilst their market value rose by 9.6%. A particular contributor to the rise in market value has been the recognition, on advice from our independent valuers, of a narrowing of the discount applied to the vacant possession value to arrive at our market value. This is supported by continuing evidence from tenanted transactions across the whole market. It is also reflective of our own experience when selling and buying tenanted properties. The underlying drivers of the narrowing of the discount are that the average age of the tenants is increasing giving a shorter period to vacancy, there is increasing demand for regulated properties and rents are moving closer to market levels.

The weighted average discount to vacant possession value on our regulated tenancy portfolio has narrowed from 22.8% to 20.0%, increasing NAV by 12.6p and NNNAV by 10.1p (post tax) per share respectively. The impact of this has been to increase the revaluation gain on owned investment properties in the income statement by £1.5m and the uplift on trading stock from statutory book value to market value in our NAV measures by £51.4m.

Development portfolio

As at 30 September 2015, the market value of our UK development portfolio was £95.0m (FY14: £107.2m), the reduction being largely due to sales at our Macaulay Walk development during the year.

The gross development value, including joint ventures and partnerships, with detailed planning consent is valued at £550m (FY14: £434m). This includes our 50% share of the King Street, Hammersmith development in conjunction with Helical Bar, which has a total gross development value of £202m, following the receipt of planning permission in November 2013 and seven sites in the Royal Borough of Kensington and Chelsea with a gross development value of £96m.

Co-investment vehicles

Grainger's equity investment in its joint ventures and associates equates to £179.2m (FY14: £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 in Germany with Heitman, with contracts exchanged for sale post year end;

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

· During the year we disposed of our 50% interest in the Sovereign joint venture with Moorfield to Lonestar Real Estate Fund III. This disposal gave rise to a profit of £4.4m which has been treated as a non-recurring item.

The gross asset value of co-investment vehicles at 30 September 2015 was £1,050m (FY14: £1,016m). Grainger's total return from co-investment vehicles in the year amounted to 16.6% (FY14: 23.5%.)

* Our interest in Sovereign was sold during the year.

Germany

The overall German residential market has continued to perform well and investor interest in the market has continued to strengthen. As announced on 13 August 2015 in our trading update we believe now is an appropriate time to capture the growth in value of our wholly owned assets there and re-invest the proceeds within our UK PRS business. The process of preparing for the sale of our German assets is well underway although, at the year end, not advanced enough for us to classify the business as held for sale.

Our Heitman associate in Germany has delivered a positive performance in 2015, supported by our active asset management approach, returning 25% to Grainger in 2015 (FY14, 15%).

This morning we have announced that we have agreed with our partner, Heitman, to bring forward our exit from our German JV ("MH Grainger JV Sarl", the "JV") and sell it to a large German investor, for a total consideration of c.€136m (c.£97m).

As well as representing a strong return on capital invested, this successful transaction is a further step forward in the Group's stated objective of simplifying its business model, enabling Grainger to align and focus its resources on growing its UK Private Rented Sector business. Today's announcement follows on from Grainger's previously stated intention to sell its wholly owned German assets, which is underway.

Grainger will receive a total gross consideration of c.€48m (c.£34m) for its 25% interest in the JV and performance related premium return on equity, subject to closing balance sheet adjustments. The sale should generate a pre-tax profit compared to the 30 September 2015 investment value of c.€16m (c.£11m) which will be treated as a non-recurring item (c.3p/share NAV benefit before tax). Grainger's internal rate of return on its investment in the German JV over the period since its establishment in late 2012 is 42%. Contracts have been exchanged with completion anticipated by 31 December 2015, subject to regulatory approval by Germany's Federal Cartel Office.

Purchases

Our strong cash generation continues to support reinvestment and we have spent £106m on property purchases in our UK Residential business (FY14: £182m). During the year, we have acquired 927 tenanted PRS units located predominantly in the English regions for £86.7m. On an annualised basis these acquisitions should deliver around £6.7m of gross rental income, reflecting a yield on cost of 7.7%. These acquisitions, and those completed since the year end take Grainger's overall UK owned and managed PRS portfolio to c.3,650 units, one of the largest portfolios in the UK.

Assets under management

The total market value of assets under management ('AUM') at 30 September 2015 was £3,360m, up from £3,159m the previous year. 19,490 units were under management at the year-end (FY14: 19,831). Whilst the number of units has fallen slightly following disposals, strong valuation gains achieved this year on both the wholly owned assets and our co-investment assets has resulted in a net increase in AUM of £201m.

Sales

UK Residential & Retirement Solutions

The Company's trading business performed very strongly throughout the year. Margins on sales of vacant properties increased to 50.5% (FY14: 49.2%) and sales of vacant properties were made at an average of 9.1% above September 2014 VPV (2014 excess to 2013 VPV: 14.1%).

Sales of tenanted properties and other sales decreased from £103.1m in 2014 to £23.5m. The largest disposal in the previous year was the sale of a home reversion (Retirement Solutions) portfolio in January 2014 for £84.7m, which generated a profit of £9.9m. This was subsequently re-acquired on 2 April 2015 following the company exercising its security under the sale contract.

Although we expected a deminimus level of profits from tenanted investment sales, we undertook a few opportunistic disposals which enabled us to deliver £4.8m of profit (FY14: £10.4m).

Development

The Development business had sales of £33.7m and generated £9.8m of profit (FY14: £32.8m of sales and £12.3m of profit). This performance was weighted towards the first half of FY15.

Our Macaulay Walk development has again been the principal profit contributor and has delivered an outstanding sales performance with 56 of a total of 57 private units sold by year end with the final unit sold in October. Sales have been completed at values between £850-£1,300/sqft. Since sales commenced at the development it has made a profit of £21.2m delivering a gross margin of 34%. The final phase fit-out of a further 24 residential units is well progressed and we anticipate completion before the end of the calendar year. We already have two units exchanged and two under offer.

Germany

The £2.3m of sales (FY14: £15.2m) relates to general portfolio management and optimisation activities. A broadly breakeven profit result (+£0.1m) built on the small loss (£0.2m) in the prior year which arises as assets are held as investment property and are revalued annually.

Net Rents

We recorded an increase in net rent following the recent portfolio purchases of stabilised PRS assets. Total net rents in the year amounted to £37.9m (FY14: £37.0m).

Our UK Residential portfolio generated net rental income in the year of £32.3m (FY14: £30.2m).

The German business saw net rents of £3.8m (FY14: £5.1m), the reduction principally reflecting the higher level of vacancies arising as we have been upgrading one of our large portfolios, FRM.

Certain assets in the Retirement Solutions portfolio also produce a net rental income and this amounted to £1.7m in the year (FY14: £1.5m).

The UK PRS (market rented) properties which we manage saw like-for-like rent increases, excluding the impact of refurbishment, on new lets of 5.6% and on renewals of 2.4%, compared to the market average of 2.7% according to the Office of National Statistics.

Across our wholly-owned portfolio, rental increases generated an additional £1.5m of gross rental income.

Fees and other income

The majority of fee income is derived from asset and property management fees from co-investment vehicles and management contracts.

In the prior year we saw material contributions from performance fees on our G:Ramp arrangement with Lloyds Banking Group. As predicted we have a reduced level of activity in 2015 as this particular arrangement approaches its conclusion. Hence this year we saw a fall in fees and other income from £12.8m to £8.2m. The largest single contributor to fee income is £3.4m arising from management of the GRIP portfolio co-owned with APG.

Financial Review

Our key measures of financial performance are: 

*Operating profit after net valuation movements 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.

Divisional analysis of OPBVM

The major movements within OPBVM are:

· A reduction in management fee income with 2014 benefitting from the receipt of performance fees from G:RAMP (our residential asset management agreement with Lloyds Banking Group).

· An increase in interest income from CHARM as a result of an increase in projected cash flows with an increase in vacant possession values of 6.2% this year compared to a forecast 4.0% increase.

· In the development division both 2015 and 2014 have benefitted from strong profits from our Macaulay Walk development where profit in 2015 was slightly lower than in 2014 accounting for the majority of the £2.5m reduction in development trading profit.

Interest income and expense

The net recurring interest charge has decreased from £63.4m in 2014 to £62.3m at 30 September 2015.

Joint ventures and associates

Joint ventures and associates contributed a profit of £1.6m to recurring profit in the year (FY14: £3.0m). (The major contribution from these entities is seen through revaluation - see over).

Valuation and non-recurring items

Valuation and non-recurring items in 2015 compared with 2014 is analysed as follows:

UK investment property valuation gain

The net valuation uplift in 2015 on our UK wholly owned investment property assets, relating primarily to the Group's wholly owned investment property in its UK Residential division showed an uplift of £17.0m (FY14: £7.6m).

Derivative movements

Fair value movements on derivatives is a charge of £6.2m relating to the Group's derivative contracts including £0.4m relating to our share of derivatives within joint ventures and associates.

The fair value of swaps at 30 September 2015 is a net liability of £33.5m compared to a net liability of £48.0m at 30 September 2014. The reduction relates primarily to £17.9m of swaps cash settled during the year.

Valuation gains in UK joint ventures/ associates

Valuation gains within UK joint venture and associates amounted to £20.2m before deferred tax, or £18.1m after tax (FY14: £37.0m and £33.2m) comprising gains from our joint venture and associate operations with our partners Dorrington and APG.

Germany investment property valuation gains

The German portfolios in direct ownership and in the Heitman joint venture showed an overall valuation gain before deferred tax of £5.1m, (£2.5m after tax) (FY14: a deficit of £3.9m before tax and £4.6m after tax).

Non-recurring

Non-recurring items of £17.3m comprise a loss of £18.2m reported at the half year with respect to the reacquisition of the ERIL portfolio along with a £4.4m profit arising from the disposal of our joint venture interest in Sovereign and a charge of £3.5m relating to the accelerated write off of loan costs on the refinancing of our bank syndicate debt.

Profit before tax

Having taken account of all of the above movements, profit before tax was £50.0m compared to a profit before tax of £81.1m in 2014. The most significant movements which contributed to the decrease were the £18.2m loss on re-acquisition of ERIL, a £7.0m adverse movement on derivatives and a £4.6m reduction in fees and other income.

Tax

The Group has an overall tax charge of £7.3m for the year, comprising a £7.4m UK tax charge and a £0.1m overseas tax credit.

The net reduction of £2.9m, from the expected charge of £10.2m, results from a prior period credit of £4.7m, a £2.8m reduction as tax on JV and Associates' profit is included above the tax line in the Income Statement, a £0.3m reduction from other losses and non-taxable items, offset by non-deductible expenditure totalling £4.9m.

The Group works in an open and transparent manner and maintains a regular dialogue with HM Revenue & Customs. This approach is consistent with the 'low risk' rating we have been awarded by HM Revenue & Customs, which was reconfirmed this year, and to which the Group is committed.

The Group made net corporation tax payments totalling £4.9m in the year.

Earnings per share

Basic earnings per share is a profit of 10.4p (FY14: a profit of 18.1p). 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 2.11p per ordinary share (FY14: 1.89p) which equates to £8.7m (FY14: £7.8m). This is in addition to the interim dividend of 0.64p per ordinary share (FY14: 0.61p). The total dividend for the year will therefore be 2.75p per ordinary share (FY14: 2.50p), an increase of 10%. Earnings cover dividends by 3.8 times. The dividend will be paid on 12 February 2016 to shareholders on the register at close of business on 29 December 2015.

Net asset values

We set out below two key measures 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:

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 after tax

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 £24.7m before deferred and contingent tax and £19.6m after tax. This is equivalent to 6p per share on NAV and 5p 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 2015 net debt was £1,138m, an increase of £94m from the 30 September 2014 level of £1,044m. Our consolidated loan to value now stands at 45.5% (FY14: 46.5%). LTV on the core facility was 40.6% (FY14: 42.0%) compared to a maximum allowable LTV covenant under that facility of 75%. The interest cover ratio on the core facility stood at 3.1 times (2014: 3.7 times) compared to a minimum interest cover covenant of 1.35 times.

As at 30 September 2015, the average maturity of the Group's drawn debt was 5.2 years (FY14: 4.8 years).

In August 2015 the group refinanced its syndicated core facility which had been due to mature in July 2016. The new £580m facility will mature in August 2020. The margin on the facility reduced by 50bps to 170bps and the facility structure enables further pricing benefits to be gained at future lower levels of loan to value.

On 1 October 2015, an amendment and restatement of the Grainger Invest property portfolio bank facility was concluded with the existing lenders, HSBC and Santander, reducing its cost, extending its maturity and increasing its size to £150m from £120m.

Following the refinancing of the Grainger Invest Portfolio, which was completed on 1 October 2015 and which had £109m of outstanding debt due in March 2016 at the balance sheet date. there are now no significant debt repayments until 2020.

At 30 September 2015 the Group had free cash balances of £44m plus available overdraft of £1m along with undrawn committed facilities of £97m. Thus headroom totalled £142m (FY14: £297m). In early October, on the refinancing of the Grainger Invest facility noted above this had increased, on a proforma basis, to £183m.

The Group's average cost of debt at the period end, including costs but excluding commitment fees, was 4.6% (FY14: 5.4%).

At 30 September 2015, gross debt was 77% hedged (FY14: 68%) of which 11% was subject to caps (FY14: 4%).

The material cash outflows were attributable to property purchases, capex and investment totalling £148m, property expenses and overheads of £57m, interest payments of £60m, and swap settlements of £18m. The £65m acquisition of the Just Retirement loan as part of the re-acquisition of ERIL also contributed to the increase in net debt. These outflows were largely offset by gross rents, sales and fees of £258m.

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

19 November 20151 Including costs and commitment fees2 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 £0.6m net of tax (2014: credit of £0.9m) 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 19 November 2015.

The financial information included in this preliminary announcement does not constitute the Group's statutory accounts for the years ended 30 September 2014 or 30 September 2015. Statutory accounts for the year ended 30 September 2014 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 September 2015 will be delivered to the Registrar of Companies following the Company's annual general meeting.

The auditors in 2015, KPMG LLP, have reported on the 2015 accounts and the previous auditors, PricewaterhouseCoopers LLP, have reported on the 2014 accounts. The reports of both auditors were unqualified, did not include reference 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 2015 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 2015.

The financial information included in this preliminary announcement has been prepared in accordance with the principles of 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 and interpretations

There are no new standards, amendments or interpretations that are effective for the first time for the current financial year that have a material impact on the Group.

The Group is assessing the impact of the following revised standards and interpretations that are not yet effective. Where already endorsed by the EU, these changes will be adopted on the effective dates noted. Where not yet endorsed by the EU the adoption date is less certain.

Annual Improvements to IFRSs 2012 - 2014, effective 2017 financial year;

IFRS 9 Financial Instruments: Classification and Measurement, effective 2019 financial year (not yet endorsed by the EU);

IFRS 15 Revenue from Contracts with Customers, effective 2018 financial year (not yet endorsed by the EU)

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 where fair value is the same as market value. The Group does, however, in its principal net asset value measures, NAV and NNNAV, include trading stock at market value.

The composition of property assets at both their statutory book value and at their market value is 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

1d Group risk factors

The principal risks and uncertainties facing the Group are set out in the Risk Management report of the 2015 Annual Report and Accounts.

A number of risks faced by the Group are not directly within our control such as the deterioration and/ or lack of stability of wider economic markets or the lack of availability of finance from the market. 

Specific risks include the failure to implement our PRS strategy, the failure of a key third party supplier 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 before tax

The results for the years ended 30 September 2015 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.

Profit before tax in the trading columns above of £41.2m (2014: £47.1m) is the recurring profit of the Group.

The non-recurring items in 2015 include a loss of £18.2m in relation to the re-acquisition of Equity Release (Increments) Limited (ERIL), a £4.4m profit on the sale of the Sovereign joint venture, and a £3.5m charge relating to the accelerated write off of loan costs after refinancing of bank syndicate debt during 2015. The impairment of joint venture of £4.1m relates to the Group's investments in Curzon Park Limited and its Prague joint venture.

In the prior year the £1.1m non-recurring cost presented within net rental income relates to a provision for contractor remedial costs which we are taking action to recoup. The £2.4m impairment of joint venture relates to the Group's investment in it's Prague joint venture.

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 table distinguishes between trading, valuation and non-recurring items and should be read in conjunction with Note 2.

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

2015 Income Statement