Grainger plc Regulatory News (GRI)

7 November 2013

Grainger plc

("Grainger", the "Group" or the "Company")Preliminary Results for the year ended 30 September 2013

GRAINGER REPORTS STRONG GROWTH IN ASSET VALUES

Strong overall performance

· Strong rise in net asset value: Triple net asset value rose 38p (24%) to 195p per share (2012: 157p) and gross NAV by 19p (9%) to 242p per share (2012: 223p)

· Pre-tax profit increased significantly to £64.3m (2012: loss of £1.7m)

· Net debt reduced by £235m to £959m with consolidated LTV falling to 48% (2012: 55%)

Continued market outperformance

· Market values of our residential UK portfolios grew by 8.3% (2012: 3.9%) compared to a 5.6% average increase for the combined Nationwide and Halifax house price indices

· Margins on sales of vacant properties increased to 44.9% (2012: 39.6%)

· Sales of vacant properties made at an average of 7.9% above September 2012 vacant possession value (2012: 6.1%), supporting valuations

Dividend

· Final dividend of 1.46p per ordinary share (2012: 1.37p) making a total dividend for the year 2.04p per ordinary share (2012: 1.92p), an increase of 6.25%, resuming a progressive dividend policy while maintaining capacity for accretive reinvestment in the business

Strong income streams

· Receipts from sales of assets were £352.9m (2012: £258.4m) including sales of tenanted properties

· Net rents were £48.5m (2012: £62.8m), reducing as expected as assets were injected into co-investment structures during the year

· Fees from co-invested and co-managed vehicles and other income increased by 17% to £12.9m (2012: £11.0m)

· The contribution from our investment in joint ventures and associates, comprising our share of recurring profit plus our share of revaluation surpluses, amounted to £15.4m (2012: £3.5m)

Robin Broadhurst, Chairman of Grainger plc, commented:

"The first year of our second century has seen strong increases in asset values and reduced debt. Grainger continues to be uniquely placed to take a leading role in a dynamic residential sector which is likely to become increasingly institutional. We are progressing opportunities in the private rented sector and our first build-to-rent scheme at London Road, Barking is already under construction. In addition, we have also been successful in creating new, and reinforcing existing, strategic alliances with high quality partners, such as APG and Heitman. These arrangements enhance our returns and endorse the value of our in-house expertise and operational platforms in the UK and Germany.

We have positioned the business both to take advantage of the positive changes in the owner occupied market (through our reversionary portfolio) and the private rented market sector (through our market rental portfolio)."

Analyst presentation

Grainger plc will be holding a presentation for analysts and investors today at 9.00a.m (GMT), Thursday 7 November 2013 at FTI Consulting, 26 Southampton Buildings, Holborn Gate, London WC2A 1PB.

The presentation will begin promptly at 9.15am (GMT).

The presentation is also available via the web and can be accessed here: http://www.axisto-live.com/investis/clients/grainger-plc/presentations/52498082290a749c58028f79/preliminary-results-2013

There is also a dial-in facility and a copy of the presentation slides will be available on Grainger's website, www.graingerplc.co.uk.

Conference call details:

A replay of the call will be available after the event until May 2014. Dial-in details for the archive call are:

Telephone Number +44 121 260 4861

Passcode 4720450

Chairman's Statement 

The first year of our second century has seen strong increases in asset values and reduced debt.

As I wrote in my statement last year Grainger continues to be uniquely placed to take a leading role in what is a dynamic and changing residential sector. In the year our business has produced strong growth in asset values, substantially increased profit and generated cash to reduce debt. We have taken forward opportunities in the private rented sector and our first build-to-rent scheme at London Road, Barking is already under construction. We have also been creating new, and reinforcing existing, strategic alliances with high quality partners. These arrangements enhance our returns.

Results

Triple net asset value ("NNNAV") rose 38p (24%) to 195p per share (2012: 157p). Gross net asset value rose 19p (9%) to 242p per share (2012: 223p).

The composition of our profit reflects our evolution into a lower geared business. Recurring profit has increased to £37.0m (2012: £34.6m), with reduced interest cost more than outweighing reduced operating profit on a less capital intensive asset base. Supported by strong valuation gains and positive movement on interest rate derivatives, our pre-tax profit rose significantly to £64.3m after a year-on-year favourable movement of £39.1m on derivatives (2012: loss of £1.7m).

In line with our stated strategy, we continued to reduce net debt which fell in the period by £235m from £1,194m to £959m. This reduction combined with our continued outperformance in UK asset values means that the Group's consolidated loan to value ("LTV") is now 48% (2012: 55%). Since March 2011 we have reduced our net debt by a total of £611m whilst increasing our NNNAV by £152m (23%).

Dividends

The directors have recommended a final dividend of 1.46p per ordinary share (2012: 1.37p) to be paid on 7 February 2014 to shareholders on the register at close of business on 20 December 2013. The total dividend for the year will therefore be 2.04p per ordinary share (2012:1.92p), an increase of 6.25%, following the interim dividend of 0.58p per ordinary share (2012: 0.55p). The dividend is covered 6.4 times by earnings.

Board changes

As announced during the year, there have been two changes since 30 September 2012. Henry Pitman retired from the Board at our Annual General Meeting on 6 February 2013 and I would like to take this opportunity to thank him for his contribution to the Group during his six year tenure. Simon Davies was appointed to the Board on 20 November 2012 and we are already benefiting from his wealth of experience, including that gained during his seventeen years at Threadneedle Investments which included the roles of Chief Executive and Chairman.

Outlook

The last few years have shown our ability to outperform when market conditions are challenging. Our results for 2013 show us continuing to outperform in strengthening markets.

The major housing market indices (Nationwide and Halifax) show that national UK house prices have strengthened on average over the twelve months to 30 September 2013 by 5.6%. Transaction volumes have also increased, with the Council of Mortgage Lenders (CML) reporting gross mortgage lending at an estimated £16.2bn in September 2013, 41% higher than September 2012. The UK economy is showing more general signs of growth with GDP showing an increase of 0.8% in Q3 2013, up by 1.5% from Q3 2012. The issues around the Euro, whilst not yet fully resolved, have abated and the September German election result, whilst a coalition is yet to be confirmed, is a sign of stability in the Eurozone's largest economy which bodes well for the future of assets which we own either directly or indirectly in Germany.

The Government support for the owner occupied market has been very evident in 2013. The Help to Buy scheme has enabled more buyers to access mortgage finance and this will continue as the scheme is expanded. Local housing market price performance will however continue to experience variations driven by housing supply and demand, which in turn is driven by the strength of the local economy. 

The Government has also been increasing its support of the private rented sector, introducing two major financial incentive schemes to help stimulate growth and investment in the sector. These are the £1bn Build to Rent Fund and £10bn of Government Housing Guarantees to support growth in the rental sector. In addition, it has also established a specialist Private Rented Sector ("PRS") Taskforce to support growth in the sector, comprising experts from the private sector with residential experience including the secondment of a senior manager from Grainger. We will continue to engage closely with the Government and Taskforce and are confident that we will benefit from these financial incentive schemes in due course.

We have positioned the business both to take advantage of the positive changes in the owner occupied market (through our reversionary portfolio) and the private rented sector (through our market rental portfolio) including both assets on our balance sheet and in funds and joint ventures. Whilst taking this positive stance we have also further protected the group from the effect of any future cooling of the markets by reducing leverage.

Strategy and Financial Position

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.

Our strategy and our business reflect the changing dynamics of the residential market and the current point in the market cycle. 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.

In the past year we have managed the composition of profit between trading, rents and fees and attained another key objective of reducing net debt and LTV. The deleveraging resulted in a higher level of property sales in 2013 compared to 2012. Adjusting for the effect of profit from sales from tenanted property, the proportion of net rents and gross fees compared to rents, fees and trading profits from vacant sales in 2013 is 54% (2012: 59%). We intend to increase our income from net rents and fees over the coming years, taking advantage of the Group's in-depth expertise and operating platforms.

Having achieved a net debt position of £959m and loan to value of 48.0% we are within a range of gearing of 45% to 50% which we feel is appropriate in the medium term. We believe that LTV, rather than absolute debt levels, will be a more relevant measure through which we can manage the capital structure. Whilst mindful of maintaining appropriate leverage, we are now in a position, with headroom of £292m and on-going cash generation, to take advantage of opportunities that are aligned with the strategy outlined above so long as they generate acceptable returns for our shareholders. In this context we are pleased to confirm that we will pursue a progressive dividend policy.

Our centenary year has been another period of huge achievement. My thanks go to our highly skilled, enthusiastic and committed staff whose efforts have allowed us to reach this position.

We see 2014 as being a year of continuing strength in our markets and we anticipate another year of outperformance.

Robin Broadhurst

Chairman

7 November 2013

Chief Executive's Review

We have seen another period of outperformance from our UK assets this year. Margins on normal trading sales have increased as have net asset values and we have delivered on our target to reduce debt and gearing. Our UK assets have again outperformed the National indices with their market value rising by 8.3% compared to the average increase of 5.6% in the Nationwide and Halifax indices. Within central and inner London the market value of our assets rose by 15.6% compared to an average increase of 9.5% in the Nationwide and Halifax indices for those regions.

Market Overview

The housing market continues to improve particularly beyond London and the South East which has already seen considerable house price growth. It is important that the Government ensures the increased purchasing ability of homebuyers is matched by an increase in housing supply to avoid excessive house price inflation although we currently see no signs of this.

The residential market continued to show regional variations in 2013. However there was an underlying upward trend in house prices across the whole of the UK according to the Land Registry, Nationwide and Halifax house price indices. For the first time since 2007, Nationwide's Q3 index showed annual house price growth in all thirteen UK regions. In London and the South East, where 60% of our assets by market value are located we saw year on year growth of 10.7% in vacant possession values ("VPV") (2012: 6.0%).

There remains a significant mis-match between housing supply and demand in the UK, and the three major political parties in the UK recognise the need for a major increase in housing supply of all tenure types.

The UK government has supported the housing market in a number of ways. In the home ownership mortgage market the Government has introduced two financial support measures - Funding for Lending and Help to Buy - which have led to an increase in the number of housing transactions over the last year. This, in turn, has boosted confidence among house-builders and developers and, according to the Purchasing Managers' Index (PMI), housing construction activity is at its highest point since November 2003.

Following the Montague Review, the Government has made significant strides in implementing policies to stimulate investment and growth in the sector. In particular, it has introduced a £1bn fund for the construction of Build-to-Rent developments and set aside £10bn of Housing Guarantees, whereby it will guarantee borrowers' liabilities against new rental homes. In addition, the Government has established the PRS Taskforce, a specialist group of private sector experts within Government, including a Grainger secondee, responsible for kick-starting investment in the private rented sector. We are well placed to take advantage of these financial incentive schemes and are in regular dialogue with the Government and the Taskforce.

The general political consensus in the UK in support for growth and investment in the private rented sector, particularly focused on large scale, institutional investors, was clearly demonstrated by a recent inquiry by the Communities and Local Government Select Committee. In the same report, the Committee found that rent controls would have a significant negative impact on the sector and called for increased supply of privately rented housing to combat affordability issues. In mid-October 2013, the Government responded to the Select Committee's inquiry and alongside its response published a draft Tenant's Charter for the private rented sector. The Tenants' Charter, which is evidence of the Government's ambition to drive up standards in the sector, is business-friendly and will help improve understanding among both the landlord and tenant communities.

As a result of all these initiatives, we have seen increased activity and investor interest in the UK's private rented sector as we and others have engaged with the Government to put into practice our shared aspirations for this increasingly important tenure type.

Business Overview

Grainger has three main sources of income: receipts from sales of assets that are vacant (2013: £116.4m, 2012: £127.9m) and tenanted and other asset sales (2013: £236.5m, 2012: £130.5m); rents (2013: net rents of £48.5m, 2012: £62.8m); and fees from co-invested and co-managed vehicles and other income (2013: £12.9m, 2012: £11.0m).

In addition, the contribution from our investment in joint ventures and associates before tax and non-recurring items, comprising our share of profit plus our share of revaluation surpluses, amounted to a strongly increased figure of £15.4m (2012: £3.5m).

We have used our skills in trading, managing, developing, fund management and investing in residential property, to great effect in 2013 and have generated growth in the value of our property through our asset and property management expertise, both on our own behalf and that of our co-investors and partners.

Trading

Profit from total asset sales increased by £0.1m to £77.7m (2012: £77.6m). Margins on sales of vacant properties increased to 44.9% (2012: 39.6%) and sales of vacant properties were made at an average of 7.9% above September 2012 VPV (2012 excess to 2011 VPV: 6.1%). Sales of tenanted properties and other sales increased from 2012 by £106.0m to £236.5m (2012: £130.5m). Whilst we do not expect this scale of tenanted sales in 2014, this nonetheless re-emphasises the liquidity of our portfolio and the defensive quality of our assets as well as our ability to manage the scale of our investments.

Managing

Market values of our UK residential portfolio rose by 9.3% (2012: 4.8%) and market values of our retirement solutions portfolio rose by 5.9% (2012: 1.0%). We mobilised the outsourcing of UK repairs and maintenance to Kier in September 2013 which has resulted in run rate savings of approximately £2m per annum. We also sold a further 1,534 properties for Lloyds Bank under our RAMP proposition.

Our performance was again recognised by our peers when we won the award of "Asset Manager of the Year" at the RESI Awards in May 2013 for the second year in a row, and when we were awarded "Best Property Company - Residential" at the Estates Gazette Awards in December 2012.

Developing

At Wellesley, Aldershot we act as development partner for the Defence Infrastructure Organisation. Our application to redevelop the former Aldershot Garrison for 3,850 homes was granted consent within a six month timescale and work to facilitate the sale of the first phase has already commenced.

We also made progress on our Macaulay Walk scheme in Clapham. We have already pre-sold the social housing element to Networking Housing Group and we will commence sales of the 65 private houses/ apartments and 30,000 sq. ft. office space in early 2014. The estimated gross development value is £58m.

We announced in October 2012 that we had agreed a 125 year contract with the Royal Borough of Kensington and Chelsea to construct and manage a development of affordable, private rented and private homes for sale. In August this year we submitted a detailed planning application for 84 units with a gross development value of circa £110m, of which approximately £60m is build to rent.

We submitted a detailed planning application (in joint venture with Helical Bar) for 196 private residential units as part of a mixed use scheme in Hammersmith. The scheme also includes 20,000 sq ft of retail/leisure and a 40,000 sq ft Council office. This has a gross development value of circa £150m.

At Berewood, the construction work is progressing on site and the first residents moved into the new community this summer. Further to the sale of Phase I to Bloor Homes in September 2012, Grainger sold Phase 2 to Redrow Homes in September this year. The sale comprised 14.4 acres of serviced land on which Redrow will build 248 homes. Total sales revenue from this site now amounts to £24.9m and we anticipate that the next phase will come to market in December 2014.

The development business will be a material contributor to Group profit in 2014.

Fund Management and investing

In December 2012, we formed a strategic partnership with Heitman in Germany, allowing Grainger to retain a management mandate and earn a long term recurring fee income. The gross asset value of this entity at 30 September 2013 is €253m (£212m) and Grainger's net equity investment is €22.5m (£18.8m).

We also formed GRIP, a strategic partnership with Dutch pension fund asset manager APG, in January 2013 to take over the G:Res portfolio, keeping it under Grainger's property and asset management. GRIP is one of the largest PRS funds in the UK and has the ambition to continue to grow, through further acquisitions. The gross asset value of this entity is £429m and Grainger's net equity investment is £65.4m. As part of GRIP's acquisition strategy, Grainger retained management of its Tilt portfolio, through an arm's-length sale to GRIP, further increasing the recurring source of fee income from that vehicle in the process.

We formed a joint venture with Dorrington allowing Grainger to partly crystallise the capital growth in its Walworth Estate, South London, while maintaining a strategic long term stake. The gross asset value of this entity is £136m and the Company's net equity investment is £36.1m.

Asset Performance

We continued to outperform the general housing market in 2013. In the year to 30 September 2013 the two major housing indices (Nationwide and Halifax) showed an average rise of 5.6%. By contrast, the vacant possession value (VPV) in our combined UK portfolios rose by 6.4% whilst their market value rose by 8.3%. The valuations are supported by normal sales (675 units of vacant properties) which on average were made at 7.9% in excess of September 2012 VPV.

Within this, the VPV of our UK Residential portfolio, which benefits from a concentration weighted towards London and the South East of England, rose by 8.2%. The VPV of the more geographically diverse Retirement Solutions assets rose by 2.3%.

The assets in our UK reversionary business continue to sell above their previous valuation. On average our regulated tenancies, supported by selective refurbishment prior to sale, sold at values 10.4% above their September 2012 VPV. Without the benefit of pre-sale refurbishment, sales were at 6.3% above September 2012 VPV. Properties in our retirement solutions business were sold at 2.8% above their September 2012 VPV.

We have been particularly selective in our acquisition activity during the year and have spent only £9.0m on property purchases (2012: £21.7m). Going forward, whilst we will require purchases to meet strict investment criteria, we will be actively seeking and creating investment opportunities.

Despite asset sales of £353m, the reversionary surplus attributable to our UK portfolio is £483m, 116p per share before tax and, including our share of the reversionary surplus in joint ventures and associates, is £527m, 127p per share before tax. This surplus, which does not include future house price inflation, represents the difference between the VPV and market value of our properties which we will realise on sale. This surplus is excluded from Gross NAV and NNNAV and represents a pipeline of profit which will be realised with no planning or construction risk of any sort.

In the year ended 30 September 2013, the market value of our UK development portfolio increased by £7.8m before sales. This increase primarily relates to Macaulay Walk where completion of all phases of the development is expected in early 2014.

Our German portfolio increased in value by 0.9% over the last year although this uplift was partly negated by an increase in real estate taxes which serve to reduce the valuation increase to £0.4m. The two Stuttgart portfolios in our co-investment with Heitman saw increases in market value of 2.2% over the nine months to September 2013. The Group's share of this increase amounted to £1.0m which has been taken through the income statement.

Grainger's equity investment in its joint ventures and associates amounts to £145.9m and principally comprises: our 24.9% investment in GRIP for which we provide property and asset management services, a 50% investment in Walworth Investment Property (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 New Sovereign Reversions Ltd joint venture with Moorfield, a 50% interest in our joint ventures at Curzon Park, Prague and Hammersmith within the Development division, a 50% interest in our joint venture in Gebau and our remaining investment in G:Res 1 Limited. 

Operational and financial gearing

We have been taking actions in the year to reduce both the operational and financial gearing of the business. Property expenses, on a run rate basis as at 30 September 2013 compared to 30 September 2012 have fallen by £2.5m. We have reduced Group net debt by £235m to £959m in the past twelve months. Over the same period growth NNNAV level is 38p (24%) to 195p since September 2012 when it was 157p. Growth at gross net asset value is 19p (9%) to 242p since 30 September 2012 when it was 223p.

Sales

The majority of our sales revenue is generated through the sale of properties when they fall vacant (also known as normal sales). In addition, when we decide that a particular property or portfolio no longer offers attractive future value growth we sell these properties while occupied (tenanted sales). We also take advantage of opportunities to add value by utilising our in-house expertise to refurbish a select number of properties before sale.

This year, profit from sales of property was £77.7m, compared to £77.6m in the previous year. Total gross sales proceeds were £352.9m, compared to £258.4m in 2012. Normal sales generated proceeds of £116.4m compared to £127.9m in the previous year at margins of 44.9% (2012: 39.6%). Tenanted sales rose this year to £200.0m from £58.2m in 2012. These figures reiterate how well our properties continue to sell due to their low average value and un-refurbished nature.

Several large, one-off portfolio sales contributed to this year's sales of tenanted properties, an intentional result of our strategic objective both to reduce our debt and to remove less well performing property from the portfolio. Some investment sales, however, were sold into third party entities in which Grainger has an existing equity stake, allowing us both to repatriate capital and continue to share in the future upside of the assets' value. The sales value recorded is the share of proceeds sold externally and includes the sale of the Walworth Estate, with £56.0m being a 50% share of the full sales value, and the sale of the Tilt Estate to GRIP Fund, with £43.6m being a 75.1% share of the full sales value.

Our vacant sales revenue - a stable and reliable cash flow - will not only continue to be supported through the natural vacancy rate on our reversionary assets, but will also be supported by a number of forthcoming development projects including Berewood, Hortensia Road (RBKC), Macaulay Walk and Young Street (RBKC) in future years.

Our 2013/14 financial year has started well. As at 31 October 2013 our total Group sales pipeline (completed sales, contracts exchanged and properties in solicitors' hands) amounted to £52.3m with UK vacant sales values 6.3% above September 2013 valuations (2012: £38.4m and 4.1% respectively).

Rents

Rental income is a regular and predictable income stream for our business. The main contributors to our rental income stream are our wholly owned UK and German portfolios. Our opportunities to increase rent come largely from rent reviews of existing tenanted assets. 

In our market let properties and those we manage on behalf of others, rents follow market trends and reflect the quality of the individual unit. As the average length of tenure is around 20 months, we have regular opportunities to ensure that we maximise rents (and our related fees) through our market awareness, the proactivity of our lettings team and our asset management activities.

Our regulated tenancy portfolio also provides a reliable rental income stream albeit at a lower gross yield than our market rented portfolio since the rents charged on our regulated tenancies are sub-market rents. Application can be made for rents on regulated tenancies to be re-registered every two years by local Government rent officers. Any rent increase is capped at the percentage change in UK RPI since the rent was last registered plus a percentage prescribed by law, which is currently 5%. In the past year our regulated tenancy portfolio generated £30m of gross rent.

The UK rental market continues to grow with strong consumer demand and significant interest among international institutional investors. The UK private rented sector is beginning to show signs of maturity, with recent investments from major pension funds and the breakthrough of several build-to-rent schemes, including our development in Barking, East London. We expect this momentum to continue, providing future opportunities for leveraging our expertise and skills to generate further rental income.

Total net rents in the year amounted to £48.5m (2012: £62.8m). Our UK Residential portfolio generated net rental income in the year of £37.2m (2012: £41.8m), an anticipated reduction following the portfolio transfers into co-investment structures referred to above. Underlying rental levels per asset, however, remain strong. The German business delivered net rents, before property management expenses, of €11.6m (2012: €22.8m). Again, the reduction was anticipated and resulted from the transfer of the two Stuttgart portfolios into our co-investment vehicle with Heitman. Certain assets in the Retirement Solutions portfolio also produce a net rental income and this amounted to £2.3m in the year (2012: £3.7m).

Fees and other income

A key strategic element of Grainger's business is to seek opportunities to generate recurring income, including fees. Over the past years we have been successful in increasing fee income through a number of different ventures. Fee income currently makes up 11% of Grainger's total income, and has increased by 128% over three years.

Gross fee income was £12.5m, an increase of 24% compared to £10.0m in 2012 and derives from asset and property management fees from our co-investment vehicles and management contracts. In addition, the Group earned other income of £0.4m (2012: £1.0m).

The UK Residential division generated £0.5m in service charge management fees and £0.2m in other income. In Retirement Solutions, management fees of £1.1m and other income of £0.1m were earned. Management fees relate to the management both of the assets owned by our Sovereign joint venture and the third-party assets managed under external management contracts with Sovereign.

During 2011 Grainger was appointed as development partner for Wellesley, the Aldershot Urban Extension, working with the Defence Infrastructure Organisation, part of the Ministry of Defence. This year this partnership generated a management fee income of £0.3m (2012: £0.3m). As land sales commence, our fees for this project will increase.

Fund and third party management fees of £9.6m comprise management fees from RAMP and GRIP.

Strategy and Future Outlook

In the past, our core business has been heavily focussed on the long term ownership and trading of reversionary assets, principally those subject to regulated tenancies. These assets have and will continue to provide predictable income from sales and rental income, and can provide opportunities to deliver low risk, above-market returns. They also benefit from enhanced value growth due to their London and South East weighting. Market dynamics suggest, however, that in the future there will be greater demand for a more mature, customer focused private rental market. Grainger's experience and expertise make it ideally suited to thrive in this market. This focus on the private rented sector will therefore become a more significant part of our business in the future.

Allied to growth in the rental market are increasing numbers of opportunities for the creation of joint ventures and fund management structures where we can leverage our core skills to create added value for our shareholders and partners and thereby generate recurring fee income for the business. We will continue to strengthen our capabilities in these areas.

In addition the successful delivery of our strategy over recent years has created a scalable platform in terms of skilled people, expert processes, and financial strength that enables us to compete effectively now and in the future across the residential market. Over this period, we have reduced our debt, achieved a balance of income between sales, rents and fees and increased our two net asset measures, NAV and NNNAV.

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. As market conditions change so too will each of these strands to ensure an appropriate fit to the opportunities that will arise.

In some cases we will be able to acquire stock by forward commitment to the developers, as we have done at London Road, Barking with Bouygues Development UK. We are currently active in the 'doughnut' zones around central London to acquire similar but somewhat larger opportunities.

At Berewood, we are developing our own stock of PRS housing that we will hold and manage for the long term and we are investigating similar potential at Aldershot. These are examples of where we can accelerate the delivery of new homes on large development sites that we own or manage. As well as selling land with planning permission to house builders for the owner occupier market, we will build stock that we will commit to rent for the longer term. This has a number of advantages to Grainger: first, it allows us to complete large sites more quickly; secondly it ensures we will not compete with the house builders (the natural purchasers of our development plots); and, thirdly, it enables us to secure significant economies of scale in property management.

We are now operating within a range of gearing of 45%-50% which we consider is appropriate in the medium term. We will also actively manage our average cost of debt downwards from its current level, towards 5.0%, which will assist the relationship between rents and fees and interest costs.

After allowing for further vacant sales in the normal course of business, this means that the Group is able to create and take advantage of acquisition and investment opportunities. As well as our appetite for regulated tenancy portfolios and individual regulated properties our focus will include the development of purpose built residential rental stock (build to rent) in London and the South East and, increasingly, in key regional city locations. 

The Company is now strongly positioned to take advantage of the current positive market conditions and we look forward to another successful year of forward momentum and value creation.

Andrew Cunningham

Chief Executive Officer

7 November 2013

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 net net net 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 operating profit before valuation movements and non-recurring items (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 £18.5m in gross rents. This has arisen, as predicted, primarily as a result of the transfer of assets into co-investment vehicles during the year, in Germany with Heitman, and with Dorrington and APG in the UK. This reduced gross rents by £12.9m, with the decrease of £10.5m in Germany being the major contributor to the fall in their OPBVM. Sales across the Group have resulted in a reduction in gross rents of £6.6m, offset by £1.8m of rental increases.

· An increase of £1.8m in relation to profit on sale of residential property assets, primarily due to an increase in margin on vacant sales from 39.6% to 44.9%.

· An increase in gross management fees and other income of £1.9m arising primarily from RAMP, which generated an additional £1.3m of fee income, and the addition of fee income from our German co-investment vehicle within Heitman which contributed £0.8m.

Interest income and expense

The net recurring interest charge has decreased by £19.4m from £90.7m in 2012 to £71.3m at 30 September 2013. This follows from the reduction in debt which was (on a daily average) £1,248m in 2013 (2012: £1,528m), and a lower average cost of debt of 5.7% (2012: 6.1%). 

Joint ventures and associates

Joint ventures and associates contributed a profit of £0.7m to recurring profit in the year (2012: loss of £1.1m).

Valuation and non-recurring items

Valuation and non-recurring items in 2013 compared with 2012 is analysed as follows:

Tricomm debt settlement

On 27 March 2013 we purchased debt specifically associated with our Tricomm portfolio using our core Group facilities. This was at a discount of 25% to the principal amount of £67m, resulting in a non-recurring profit and a reduction in Group net debt of £15.3m along with an increase in NAV and NNNAV of 3.7p. The associated interest rate swap did not require settlement but we have transferred the movement on its mark to market since acquisition of £13.7m through our income statement in the period. The overall income statement impact is therefore a net gain of £1.6m.

This transaction follows our purchase of the portfolio in 2011 when we acquired net assets of £33.4m (which were reduced in full for the swap mark to market liability at the time of £8.6m) for a consideration of £18.5m leading to a profit on acquisition of £14.9m.

Investment property valuation gain

There was a valuation uplift in 2013 of £2.9m relating primarily to the Group's wholly owned investment property in its UK Residential division. This compares to an uplift of £2.1m to 30 September 2012.

Derivative movements

Fair value movements on derivatives is a credit of £21.6m excluding the Tricomm movement noted above. This includes a positive valuation gain of £31.8m and a further transfer from reserves to income statement of £10.2m relating to swaps settled during the current and prior periods.

The fair value of swaps at 30 September 2013 is a liability of £91.1m compared to £171.9m at 30 September 2012. The September 2012 balance included £21.7m relating to an agreed swap settlement and £4.8m included in liabilities associated with assets held-for-sale.

Valuation gains in joint ventures/ associates

Valuation gains within joint venture and associates amounted to £12.4m after deferred tax comprising gains from our joint venture and associate operations with Heitman, Dorrington and APG.

Other

In addition to those items mentioned above the other non-recurring items in 2013 included costs, charges and gains, including the recycling of swaps, of £2.6m in relation to the transfer of assets from G:Res to GRIP; a £2.3m loss on sale on our German co-investment vehicle with Heitman; and an impairment of goodwill of £4.7m on the sale of the Tilt portfolio to GRIP.

Profit before tax

Having taken account of all of the above movements, profit before tax was £64.3m compared to a loss before tax of £1.7m in 2012. (See note 2 to the accounts in this announcement for further analysis).

Tax

The Group has an overall tax charge of £10.7m for the year, comprising an £11.8m UK tax charge and a £1.1m overseas tax credit. 

The net reduction of £4.4m, from the expected charge of £15.1m, results primarily from a prior period credit of £7.5m relating to agreement of tax positions with the UK and German tax authorities, reduced by non-deductible expenditure totalling £2.7m.

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 £16.4m in the year. 

Earnings per share

Basic earnings per share is a profit of 13.1p (2012: a profit of 0.1p). 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 1.46p per ordinary share (2012: 1.37p) which equates to £6.0m (2012: £5.6m). This is in addition to the interim dividend of 0.58p per ordinary share (2012: 0.55p). The total dividend for the year will therefore be 2.04p per ordinary share (2012: 1.92p) an increase of 6.25%. Earnings cover dividends by 6.4 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 Triple NAV 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:

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 £20.4m before deferred and contingent tax and £16.0m 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

We delivered early on our commitment to reduce net debt to below £1bn by the end of 2013. As at 30 September 2013 net debt was £959m, a reduction of £235m from the 30 September 2012 level of £1,194m and a reduction of £611m in the 30 months since 31 March 2011 when net debt was £1,570m. Our consolidated loan to value now stands at 48% (2012: 55%). LTV on the core facility was 40% (2012: 48%). This compares to a maximum allowable LTV covenant under that facility of 75%. The interest cover ratio on the core facility stood at 5.0 times (2012: 3.0 times). This compares to a minimum interest cover covenant of 1.35 times.

The reduction in debt is after £39m cash outflow on breaking certain "fixed" rate swaps, investing £22.8m into our associate venture with APG and a rise in our euro denominated debt of £9m through exchange rate movements. Notable factors which have served to reduce debt are strong vacant sales of £116m, transfers of assets into strategic alliances of £100m and sales of tenanted and other assets of £137m.

As at 30 September 2013, the average maturity of the Group's committed facilities was 4.4 years (2012: 5.1 years) and the average maturity of the Group's drawn debt was 4.6 years (2012: 5.5 years). 

The Group has free cash balances of £62m plus available overdraft of £5m along with undrawn committed facilities of £225m. Thus, headroom totals £292m as at 30 September 2013 (2012: £148m). This headroom is already sufficient, without any further actions, to repay the element of the core debt facility of £137m due in December 2014. There are no further significant repayments until March 2016.

The Group's average interest rate, excluding costs as at 30 September 2013 (based on current Libor/Euribor rates and on current debt hedging), was 5.5% (2012: 6.0%).

The Group's average cost of debt, including costs, through the year to 30 September was 5.7% (year to September 2012: 6.1%). 

At 30 September 2013, gross debt was 68% hedged (2012: 85%) of which 3% was subject to caps (2012: 4%).

The business has produced £431m of cash from gross rents, property sales net of fees and fee and other income. The largest outflows of cash are £39m to settle swaps and £60m of interest.

We will also ensure we create options for ourselves as regards the medium to long term financing for the Group and act at appropriate times. These considerations will take into account diversification of funding sources (which may include accessing the debt capital markets), maturity profile, and average maturity as well as cost. This will include regular reviews of our level of interest rate hedging and in particular our portfolio of interest rate swaps.

Mark Greenwood

Finance Director

7 November 2013

Consolidated income statement (audited)

Consolidated statement of comprehensive income (audited)

Included within other comprehensive income is £2.4m (2012: £5.0m) 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

1 Accounting policies

1a Basis of preparation

The Board approved this preliminary announcement on 7 November 2013.

The financial information included in this preliminary announcement does not constitute the Group's statutory accounts for the years ended 30 September 2012 or 30 September 2013. Statutory accounts for the year ended 30 September 2012 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 September 2013 will be delivered to the Registrar of Companies following the company's annual general meeting.

The auditors have reported on the 2013 and 2012 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 2013 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 and financial interest in property assets. The accounting policies used are consistent with those contained in the Group's last annual report and accounts for the year ended 30 September 2012.

The financial information included in this preliminary announcement has been prepared in accordance with EU endorsed International Financial Standards ('IFRS'), IFRIC 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 2012. 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 1, 'Financial Statement Presentation' has been amended and introduced the requirement to group items presented in 'other comprehensive income' on the basis of whether they are potentially reclassable to profit or loss subsequently (reclassification adjustments). The group has adopted this revised presentation in these financial statements.

IAS 12, 'Deferred Tax: Recovery of Underlying Assets' introduces a rebuttable presumption that deferred tax on investment properties measured at fair value will be recognised on a sales basis, unless an entity has a business model that would indicate the investment property will be consumed in the business.

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.

IAS 19, 'Employee benefits', was amended in June 2011 and is effective for annual periods beginning on or after 1 January 2013. For defined benefit plans, the Group will change 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 will also be a corresponding change in the amount recognised in other comprehensive income, so that the net impact on total comprehensive income and net assets will be nil. If this standard had been applied to the year ended 30 September 2013, it is estimated the income statement charge would have been increased by approximately £0.1m.

IFRS 10, 'Consolidated Financial statements', which 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 10 is effective for annual periods beginning on or after 1 January 2014.

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 11 is effective for annual periods beginning on or after 1 January 2014.

IFRS 12, 'Disclosures of interests in other entities' brings together all the disclosure requirements about an entity's interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after 1 January 2014.

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. IFRS 13 is effective for annual periods beginning on or after 1 January 2013.

In addition, as part of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement', the IASB has issued the phases of IFRS 9 covering the classification and measurement of financial assets and the accounting for financial liabilities. The other phases, covering hedge accounting and impairment, are still to be completed. In December 2011, the IASB decided that IFRS 9 will be effective for annual periods beginning on or after 1 January 2015. The date for EU adoption is not yet known.

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

The directors are currently considering the potential impact arising from the future adoption of these standards and interpretations listed above.

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

As with all businesses, the Group is affected by certain risks, not wholly within our control, which could have a material impact on the Group and could cause actual results to differ materially from forecast and historical results. The most significant of these, all of which are macro-economic, are as follows:-

· Long term flat or negative growth in value of group assets

· Lack of readily available funding to either the Group or third parties

· Unfavourable legislation and increased burden from regulatory environment

The principal risks and uncertainties facing the Group are set out in the Risk Management report of the 2013 Annual Report and Accounts.

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 2012 and 2013 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 non-recurring gain of £15.3m under 'finance income' and £13.7m charge under 'changes in fair value of derivatives' relate to the purchase at a discount of bank debt from Bank of America and recycling of the associated swap. The non-recurring charges of £2.7m (2012: £1.6m) under 'other expenses' primarily relate to transaction costs. The £2.1m gain shown under 'profit on acquisition of equity in associate' and £4.6m charge under 'share of profit of associates after tax' relates to the transfer of assets from G:Res to GRIP. The £2.3m loss on sale of subsidiary relates to our German co-investment vehicle with Heitman.

The prior year non-recurring charge of £0.7m under 'net rental income' relates to a specific provision made against a one-off structural issue at one of our properties The prior year non-recurring charge of £6.9m relates to the disposal group of assets transferred into a co-investment vehicle post year end. The prior year non-recurring charge of £2.5m under 'Finance costs' includes interest payable on overdue tax of £1.5m.

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.

2013 Income Statement

2012 Income Statement

The majority of the Group's property assets are classified as trading stock and are therefore shown in the statutory balance sheet at the lower of cost and net realisable value. This does not reflect the market value of the assets and so the Group's key balance sheet measures of net asset value include trading stock at market value. The two principal net asset value measures reviewed by the CODM are Gross Net Asset Value (NAV) and Triple Net Asset Value (NNNAV).

NAV is the statutory net assets plus the adjustment required to increase the value of trading stock from its statutory accounts value of the lower of cost and net realisable value, to its market value. In addition, the statutory balance sheet amounts for both deferred tax on property revaluations and derivative financial instruments net of deferred tax, including those in joint ventures and associates, are added back to statutory net assets. Finally, the market value of Grainger plc shares owned by the Group is added back to statutory net assets.

NNNAV reverses some of the adjustments made between statutory net assets and NAV. All of the adjustments for the value of derivative financial instruments net of deferred tax, including those in joint ventures and associates, are reversed. The adjustment for the deferred tax on property revaluations is also reversed. In addition, adjustments are made to net assets to reflect the fair value, net of deferred tax, of the Group's fixed rate debt and to deduct from net assets the contingent tax calculated by applying the expected rate of tax to the adjustment to increase the value of trading stock from its statutory accounts value of the lower of cost and net realisable value, to its market value.

These measures are set out below by segment along with a reconciliation to the summarised statutory statement of financial position.

2013 Segment net assets

2013 Reconciliation of NAV measures