Grainger plc Regulatory News (GRI)

17 May 2012

Grainger plc

("Grainger", the "Group" or the "Company")

INTERIM RESULTS FOR THE SIX MONTHS TO 31 MARCH 2012

GRAINGER CONTINUES TO DELIVER VALUE AND OUTPERFORM THE MARKET

Grainger is a specialist residential business focused on utilising its core skills of asset and property management to generate income through trading, renting out and managing residential property.

Sales

·; Completed sales from UK portfolios increased 5.8% year-on-year to £94.6m (31 March 2011: £89.4m). Sales on vacancy exceeded valuation by 5.7% compared to September 2011 vacant possession values (31 March 2011: 1.9%)

Rental income

·; Net rental income increased by 16.4% to £31.8m

Fee income

·; Fee income up 61.2% to £5.0m

Financial highlights

·; Operating profit before valuation movements and non-recurring items (OPBVM) up 7.9% to £64.1m (31 March 2011: £59.4m)

·; Profit before tax ("PBT") of £15.1m (31 March 2011: £65.2m). PBT for the corresponding six month period was materially enhanced by valuation gains of £45m

·; Market value of the Group's residential UK portfolios up 2.8% and German portfolio up 0.4%

·; Gross net asset value per share up to 224p (30 September 2011: 216p), a growth of 3.4% over the six month period and 12% over an eighteen month period

·; Triple net asset value per share up to 161p (30 September 2011:153p), a growth of 4.7% over the six month period and 15% over an eighteen month period

·; Group net debt was reduced by £42m to £1,412m (30 September 2011: £1,454m)

·; UK syndicate LTV reduced to 50% (30 September 2011: 52%)

Operational highlights

·; On-going progress in integrating significant acquisitions and management contracts introduced during 2011

·; Continued focus on developing innovative strategic initiatives to leverage our existing platform and generate shareholder value.

Robin Broadhurst, Chairman of Grainger plc, commented:

"Grainger continues to deliver value through strong operational performance, maintaining the momentum gathered in the previous financial years. Grainger's residential UK portfolio valuation has risen 2.8% and sales on vacancy are being achieved at 5.7% above September 2011 vacant possession values. This demonstrates our ability to outperform the wider housing market as a result of our portfolio's strategic geographical weighting and the application of our specialist expertise and skills."

Analyst presentation

Grainger plc will be holding a presentation for analyst and investors today, Thursday, 17 May 2012 at FTI Consulting, 26 Southampton Buildings, London, WC2A 1PB at 9.00am (GMT).

The meeting can be accessed through the following dial-in facility and a copy of the presentation slides will be available on Grainger's website, www.graingerplc.co.uk.

Conference call details:

Webcast details: To view a webcast of the presentation, please register by visiting the following website: http://event.on24.com/r.htm?e=458598&s=1&k=BEB9157131F40402FD231C1FE6A32B4F

Chairman's Statement

Grainger remains uniquely placed to take a leading role in, and benefit from, shifts in the residential property market. All of our activities are underpinned by the application of the Group's core skills in property and asset management.

Our major strategic initiatives of the previous year have augmented the resilience of the Group and the first six months of this year have seen continued good progress with the integration of these significant acquisitions and contracts into our business.

The recent inclusion of the UK Residential Index within the UK Real Estate Index by the Investment Property Databank (IPD), the world's leading benchmarking provider for investors in real estate, is a significant milestone for the sector, recognising the importance and potential of residential property to the real estate investment community and to the wider economy.

Results

Profit before tax to 31 March 2012 amounted to £15.1m (2011: £65.2m). Last year's results benefited from a number of significant valuation credits amounting to £45.2m but it is notable that operating profit before valuation movements and non-recurring items (OPBVM) increased by 7.9% to £64.1m (31 March 2011: £59.4m). Triple net asset value (NNNAV) increased to 161p per share (September 2011: 153p per share).

Dividends

The Board is declaring an interim dividend of 0.55p per share to be paid on 6 July 2012 to shareholders on the register at close of business on 8 June 2012. At the same point last year the Company returned cash to shareholders by way of a tender offer rather than by paying an interim dividend. The cash returned at that time amounted to £2.2m, equivalent to 0.53p per share.

Board changes

Robert Hiscox retired from the Board at the annual general meeting in February 2012 and I would like to take this opportunity to thank him for his significant contribution over the years. As previously reported, we have welcomed Tony Wray to the Board and are already benefiting from his considerable operational experience derived from being CEO of a FTSE 100 company.

Outlook

The major market indices indicate that UK national house prices have remained broadly flat over the last six months and liquidity and transaction volumes remain low. Over the last three years, Grainger has rebalanced its UK residential portfolio to focus on geographic locations where economic activity is more robust and this continues to show benefits. At 31 March 2012, 62% of the UK portfolio was located in London and the South East (March 2009: 53%). This is supplemented by the type of property (predominantly low unit cost with high reversionary element) and how we manage it. As a result of all these factors, our UK portfolio continues to outperform the general housing market.

We apply a similar approach to our German portfolio where 82% (March 2011: 78%) of our properties lie in four of the more affluent areas of the country: Baden-Wuerttemberg, Hesse, Northrhine-Westphalia and Bavaria.

The more recent new sources of income which are less reliant on trading, such as the acquisition of Hi-Tricomm, the commencement of Grainger's Residential Asset Management Platform (RAMP) and the Sovereign Joint Venture, also add additional resilience to our business model alongside other avenues we are exploring such as Build-To-Rent.

Despite the prevailing economic headwinds, we have continued confidence in our business model and our proven ability to utilise our skills and operational platform to take advantage of opportunities that we identify to generate shareholder value.

Robin Broadhurst

Chairman

17 May 2012

Chief Executive's Review

Market conditions

During the first half of the year we have seen continued operational progress, allowing us to outperform the broader UK housing market, as outlined in the following table:

During 2011 the general housing market showed some stability which has broadly continued into 2012. The average movement in the two most commonly quoted house price measures, the Halifax and Nationwide indices, between October 2011 and March 2012 is down by 0.1%. Transaction volumes, as evidenced by the number of house purchase loans secured in March 2012 which amounted to 51,200, are up 31% from the previous year and 44% from the previous month (Source: Council of Mortgage Lenders). Although mortgages remain affordable by historical comparison, the need for higher deposit levels continues to constrain the market.

As events in Europe over recent days have reminded us, volatility still remains in the global economy. However, in the absence of a significant global event, we anticipate that general house prices will start to show gradual, but more consistent, improvement from 2013, with broadly stable prices and relatively low liquidity until then. Recovery will be earlier and more pronounced in those areas where there is the greatest economic activity and greater imbalance between housing supply and demand. Indeed, as we have previously reported, this had already begun this time last year in parts of London, where a combination of inward investment, high demand and economic strength had already supported house price increases.

Strategic objectives

Grainger's strategic objectives are set out below:

1. Maintain our leading position in residential property: Grainger = Residential

2. Increase the proportion of non-trading income in relation to trading income

3. Maintain, in the medium term, the size of our regulated tenancy portfolio.

Underlying and supporting the broad objectives above are these more detailed objectives:

1. Re-balance the portfolio to selective areas of value or growth

2. Reduce capital employed in non-core or underperforming assets

3. Introduce third party capital to diversify returns

4. Reduce overall debt levels in the short to medium term

5. Generate further fee income.

Our approach to the market

We are focused on leveraging our operational excellence in three ways, actively managing our portfolio, extracting maximum value from existing assets and offering the benefits of our expertise and strong operational platform to third parties. Our operational excellence has recently been recognised by the award of Asset Manager of the Year at the RESI Awards.

Actively managing our portfolio

Grainger has created a unique portfolio over its 100 year history. We actively manage our assets, ensuring they deliver a robust performance to generate maximum value across economic cycles. In the last three years, we have shifted the geographical weighting of our UK portfolio to London and the South East (from 53% in March 2009 to 62% as at the end of March 2012) where we anticipate more buoyant markets and long term growth potential. Similarly, 82% of our German portfolio lies predominantly in four of the more affluent areas of the country.

Extracting valueIn addition to the inherent reversionary value and consistent rental income of our portfolio, many of our assets hold significant value-add opportunities. For example, we are redeveloping a block of 14 flats in an attractive area of Islington in North London which will generate a substantial profit through an increase in floorspace, reconfiguration of the units, improvement of the common parts of the building and installation of high quality fixtures.

During the period we also completed and sold a luxury penthouse (creating c5,800 sq ft of new space) on top of one of our freehold blocks in Bayswater, London. We purchased the block as an investment asset with development potential and, through this initiative, have realised that potential. The Company recognised a substantial profit on the sale of the penthouse, reflecting the quality of the development and the high demand for super prime residential property in central London.

We are able to successfully undertake these portfolio management and value add initiatives because of our expert and experienced staff and their diverse set of skills in the residential market.

Third party offering

Grainger has a number of key strategic partnerships with high quality partners, such as the Defence Infrastructure Organisation, Lloyds Banking Group and Moorfield. The quality of these partners reflects our market-leading position in the residential sector and supports the Group's strategic objectives. We will continue to explore opportunities to bring in further partnership arrangements to support our objective of generating further fee income.

G:res 1, the residential fund in which we co-invest and to which we provide asset and property management services, saw uplifts in rent levels on new rental agreements averaging 8.0% in the six months to 31 March 2012, illustrating strong growth over the period.

Our Residential Asset Management Platform (RAMP) has processed over 2,000 units since its inception in May 2011. In the six months to 31 March 2012, RAMP has disposed of 345 assets worth approximately £35.7m, demonstrating our ability to apply our skills on behalf of third parties to create value for our shareholders by adding new income without investing new capital.

Trading and valuation update

Total gross cashflow from property sales completed in the first six months amounted to £112m (2011: £90m) and by 14 May 2012 our total sales pipeline amounted to £188m (13 May 2011: £155m). This includes completed sales, transactions with contracts exchanged or where solicitors have been instructed.

The residential UK portfolios, assisted by the strong London and South East weighting, showed a market valuation uplift of 2.8%, with UK Residential increasing by 3.1% and Retirement Solutions by 1.6%. Values in our German portfolio also increased by 0.4%.

The average vacant possession value of our residential UK properties stands at £183,000 (September 2011: £180,000) and the reversionary surplus (the difference between vacant possession value and market value) is £571m (September 2011: £571m).

Debt reduction programme

Over the six month period to 31 March 2012, we delivered on our commitment to begin our debt reduction programme, having reduced our debt by £42m to £1,412m (30 September 2011: £1,454m). This has been achieved by the natural cash generation characteristics of the portfolios through vacancy, being highly selective in acquisitions and selling non-core or underperforming assets.

We expect our debt reduction programme will continue over the remainder of the year at a comparable rate to the first half.

Summary and business prospects

Our focus on trading, rents and fees supports our strategic objectives of rebalancing our portfolio towards selective areas of value or growth, reducing capital employed in non-core or underperforming assets, introducing third party capital and increasing the proportion of non-trading income.

As well as continuing to grow third party assets under management, the greater political impetus supporting the private rented sector is on-going and we foresee opportunities for market rented properties to become a greater part of our business going forward. This is the backdrop to our exploration of Build-To-Rent initiatives.

There are a number of public policy developments that could also impact the residential sector. We are prepared both to take advantage of any opportunities that may arise from these and to mitigate any downside. In particular, we are monitoring the progress of the Government's review of barriers to institutional investment in the private rented sector, led by Sir Adrian Montague, and the changes to the real estate investment trust (REIT) regime, both of which could present beneficial opportunities to Grainger.

Finally, we have applied for a Grainger subsidiary to become a Registered Provider of social housing to take advantage of long term ownership of the affordable elements of our development pipeline, such as at the recently renamed Berewood scheme (previously Waterlooville), in Hampshire.

We have demonstrated again that we have the people, assets and structures in place to perform consistently in uncertain times.

Andrew Cunningham

Chief Executive

17 May 2012

Operating Review

Our main operating divisions and the market value of the assets in each are as follows:-

The Group has over £3bn of assets under management, not including our 50% interest in Gebau Vermogen GmbH, our Germany property management platform. Taking into account Gebau Vermogen GbmH, we own and/or manage approximately 39,900 properties.

The Directors' valuations, carried out as at 31 March 2012, and supported by independent verification, indicate that the market value of our residential UK portfolios (UK residential and retirement solutions) has increased by 2.8% overall in the six month period to 31 March 2012. The valuation of the German portfolio increased by 0.4%. The valuation takes account of changes in property transfer tax rates in some of the federal states in which Grainger operates. Without this effect, the underlying increase in valuation would have amounted to 1.1%.

Operating divisions' performance

UK residential

Sales of vacant properties, 'normal sales', are £2m higher than last year at £41m. Margins are higher than last year at 46% compared to 41%.

We have also made tenanted sales (sales with a tenant in place) of £6m (2011: £13m) and other sales of £29m (2011: £3m).

We have identified potential further tenanted sales of c£50m and as at 14th May 2012, total tenanted sales completed, exchanged and solicitors instructed was £31.0m. Rental income has had the benefit in 2012 of six months of rent from HI Tricomm and Grainger Invest, acquired in February and March 2011 respectively.

The overall market valuation uplift in the portfolio, including the uplift in Grainger Invest asset valuations, in the six months to 31 March 2012 is £41m (3.1%).

We have continued to be particularly selective with regard to purchases. At 31 March 2012 we had completed on £12m of residential property purchases, and had a further £4m in solicitors' hands or with contracts exchanged. This compares to £397m at 31 March 2011 (including 2011 corporate acquisitions).

Retirement solutions

Sales are higher than last year at £17.7m including CHARM sales, compared to £14.6m in 2011. Margins are lower at 34% (2011:42%) broadly maintaining profit at £6.0m (2011: £6.1m). The overall market valuation of the Retirement Solutions property portfolio increased by 1.6% in the six months to 31 March 2012.

In the period we bought 88 units for £7m (2011: 107 units for £7m).

Fund and third party management

* The Group's investment shown above represents our investment in G:res1 Limited.

The division's income arises from management fees relating to both asset and property management activities for G:res and RAMP.

Below operating profit, the division's result is impacted by asset valuation movements. Asset values in G:res increased by 2.6% in the period, Grainger's share being £2.0m.

Development

In 2011 this division benefitted from profits on sales of two properties generating a profit of £12.6m out of a total profit of £13.4m. As at 31 March 2012 the market value of the UK portfolio increased by £5.9m (8.0%), the majority of the increase relating to the Berewood site. This follows agreement, in March 2012, of the section 106 agreement required to commence sales of serviced plots to housebuilders.

 German residential

\* This includes 302 commercial units (2011: 321 commercial units).

Sales of property in the six months to 31 March 2012 amounted to €21m (2011 €1m). A further c€50m of asset sales have been identified which are largely expected to complete by the end of the calendar year.

Financial Review

Our key performance indicators at the half year are:

Income Performance

OPBVM

We have three income streams within operating profit before valuation movements and non-recurring items (OPBVM). These are sales of residential properties, rental income and fees or other income, net of property expenses and overheads and before valuation and non-recurring items. In the six months to 31 March 2012 OPBVM was as follows:

The major movements within OPBVM are:

·; An increase of £6.2m in gross rents. This is due mainly to the acquisitions of HI Tricomm in February 2011 and the remaining 50% share in Grainger Invest in March 2011.

·; An increase of £9.5m in residential trading profits. This arises primarily from value added sales in UK Residential.

·; A reduction of £12.6m in development profits.

Fees have risen to £5.0m from £3.1m as a result of the income arising from RAMP which commenced during the second half of 2011.

Sales and margins

Profit from sales of property including CHARM, was £39.9m, compared to £41.7m in 2011, generated from gross sales proceeds of £112.3m compared to £90.2m in 2011. This movement in volume was driven mainly by an increase in tenanted sales (properties with tenants in place) and other sales which rose from £15.6m to £35.1m. Margins on our vacant properties rose from 41.1% to 42.4% assisted by higher levels of sales in those areas where prices are increasing.

Overheads

Overhead costs in 2012 at £15.3m are virtually unchanged (2011: £15.2m), despite the increased activities of our property management, highlighting the potential scalability of our platform.

Valuation and non-recurring items

The movement in valuation and non-recurring items is analysed as follows:

In 2011 the gain on acquisition arose from our acquisition of HI Tricomm providing a gain of £14.9m, and in the case of Grainger Invest, £1.2m. The change in fair value of derivatives reflects the movement in the interest yield curve in the period and transfers from equity to income statement resulting from both swaps cancelled in prior years and repayment of loans and related swaps in the current year. Since 30 September 2011, there has been a decrease in the Group's fair value of derivatives net liability in the consolidated statement of financial position from £154.3m to £151.5m with a charge through the consolidated income statement of £8.8m (2011: credit of £22.9m).

Valuation movements, impairment and goodwill adjustments and non-recurring items amounted to a credit of £5.5m (2011: credit of £13.2m) as shown below:

Interest expense and similar charges

Our net interest charge has increased by £13.2m from £33.7m to £46.9m. The interest charge increased following debt either assumed or raised in connection with the acquisitions of HI Tricomm and Grainger Invest. These acquisitions were made at the end of the first half of 2011 which leads to the like for like increase in the first half. There is also an increase in the average cost of debt following the refinancing activities of 2011.

Profit before tax and before movements on derivatives

Profit at this level was £23.9m compared to £42.3m in 2011.

Profit before tax

Having taken account of derivative movements, profit before tax was £15.1m compared to a profit of £65.2m in 2011.

Tax

The Group has an overall tax charge of £2.6m giving an effective tax rate of 17.4%. In achieving this rate, the Group has taken the benefit of the substantively enacted fall in corporation tax rates and agreed capital losses.

Earnings per share

Basic earnings per share were 3.0p (2011: 11.8p). A half year on half year reconciliation is shown below:

Dividend for the half year

After considering the investment and working capital needs of the business, the Directors have recommended an interim dividend of 0.55p per ordinary share (2011: 0.53p*) which equates to £2.3m (2011: £2.2m*). Earnings cover dividends by 5.5 times.

* expressed as the equivalent distributed in 2011 as a tender offer

Asset Performance

Net asset value

We set out two measurements to enable shareholders to compare our performance in the half 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 three of the accounts.

Reconciliation of Gross NAV to NNNAV

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

The major movements in NNNAV in the half year are:

Financial resources

The Group significantly refreshed and diversified its sources of finance during 2011. A total of £1.2bn of new debt was secured for the purposes of refinancing existing debt and in connection with acquisitions. 

As at 31 March 2012, the average maturity of the Group's committed facilities was 5.4 years (September 2011: 5.5 years) and the average maturity of the Group's drawn debt was 5.7 years (September 2011: 5.9 years).

In September 2011, a new forward start facility was signed with RBS, Lloyds, Barclays, Nationwide and HSBC, providing £840m of committed facilities which will be used to refinance the Group's existing core facilities. £606m of the committed £840m has a five year tenor, maturing in July 2016. The balance of the facilities mature in three stages, £166.5m maturing in December 2014, £7.5m maturing in July 2018 and £60m maturing in July 2020.

As previously announced on 24 November 2011, a further £28.6m of debt was provided by Partnership Assurance under similar terms to those applying to the £50m drawn in October 2011. These funds have been used to further reduce the Group's core facilities.

The Group's existing core facilities were £1,093m on 30 September 2011, of which £927m were then drawn. The core facilities have since been reduced to £948m, of which £848m were drawn as at 31 March 2012. The Group has free cash balances of £49m plus available overdraft of £5m along with undrawn committed facilities of £100m.The new forward start facility of £840m (which will be drawn to replace the existing facilities by 30 September 2012) together with existing free cash balances of £49m (as at 31 March 2012) will enable the Group to repay the existing core facilities in the course of the current financial year. We have the flexibility through cash generation and new debt facilities to ensure the Group can operate its business as planned and meet its strategic objectives.

The Group's average effective cost of debt as 31 March 2012 (based on current Libor/Euribor rates and on current debt hedging of 76%, is 6.0% (September 2011: 5.8%).

The business has produced £117m of cash from its operating activities being net rents and other income, property sales and other working capital movements net of overheads. The largest outflow of cash is £41m of net interest.

At 31 March 2012 net debt levels had fallen from £1,454m at September 2011 to £1,412m which is a decrease of £42m. Net debt is £158m lower than twelve months ago at 31 March 2011 when net debt was £1,570m.

At 31 March 2012 gross debt was 76% hedged (September 2011: 73%) of which 4% was subject to caps.

At the period end loan-to-value (LTV) on the core facility was 50% (September 2011: 52%). This compares to a minimum required LTV covenant of 75%. Group consolidated LTV was 59% (September 2011 61%).

At 31 March 2012 the interest cover ratio on the core facility stood at 3.0 times (September 2011: 3.1 times). This compares to an interest cover covenant of 1.35 times.

On the basis of the Group's current trading, cash flow generation and debt reduction, and its ability to draw down its new forward start facility by 30 September 2012, the Directors have concluded that it is appropriate to prepare the Group financial statements on a going concern basis.

Mark Greenwood

Finance Director

17 May 2012

All of the above results relate to continuing operations.

Included within other comprehensive income is £2.0m (2011: £6.1m) relating to associates and joint ventures accounted for under the equity method.

Notes to the unaudited interim financial statements

1 Accounting policies

1a Basis of preparation

These condensed interim financial statements are unaudited and do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. This condensed consolidated interim financial information has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and International Accounting Standard 34 (IAS 34) 'Interim Financial Reporting' as adopted by the European Union. The interim condensed financial statements should be read in conjunction with the annual financial statements for the year ended 30 September 2011 which have been prepared in accordance with International Financial Reporting Standards (IFRSs') as adopted by the European Union.

These condensed interim financial statements have been prepared in accordance with the accounting policies set out on pages 70 to 80 of the 2011 Annual Report and Accounts which is available on the Group's website (www.graingerplc.co.uk).

Historically, the residential housing market is more active in the second half of our financial year. Therefore, we would normally expect that property sales and trading profit would be higher in the second half compared to the first half of the year. However, given current market conditions, the second half year may be similar to the first half in respect of sales of vacant properties. We have identified a significant number of properties for potential sale as tenanted sales for the second half year. Our expectation, therefore, is that tenanted sales in the second half year will exceed the £24m achieved in the first half year. Net rental income is not impacted by seasonality. Trading in the development division is subject to cyclicality with results dependent on the timing of development sales.

All our assets are now subject to a Directors' valuation at the half year end, supported by independent verification.

The Group's financial derivatives were valued as at 31 March 2012 by external consultants, using a discounted cash flow model and quoted market information.

Taxation is calculated based upon the best estimate of the weighted average corporation tax rate expected for the full year.

1b Adoption of new and revised International Financial Reporting Standards

At the date of approval of these condensed interim financial statements, the following standards, interpretations and amendments were issued, and are mandatory for the Group for the first time for the financial year beginning 1 October 2011.

Annual improvements to IFRSs (2010). 

This is a collection of amendments to 7 standards and IFRIC's as part of the IASB's programme of annual improvements.

The standards impacted by the annual improvements are:

·; IFRS 1, "First-time adoption of International Financial Reporting Standards"

·; IFRS 3, "Business Combinations"

·; IFRS 7, "Financial Instruments: Disclosures"

·; IAS 1, "Presentation of Financial Statements"

·; IAS 27, "Consolidated and separate financial statements"

·; IAS 34, "Interim Financial Reporting"

·; IFRIC 13, "Customer Loyalty Programmes"

International Financial Reporting Standards

·; IAS 24 (revised), "Related party disclosures"

Amendments to existing standards

·; Amendment to IFRS 1, "First-time Adoption: On Fixed Dates and Hyperinflation"

·; Amendment to IFRS 7, "Financial Instruments: Transfers of financial assets"

·; Amendment to IFRIC 14, "Prepayments of a Minimum Funding Requirement"

·; Annual Improvements to IFRSs 2010 (see above)

All the above IFRS's, IFRIC interpretations and amendments to existing standards are endorsed by the EU at the date of approval of these condensed interim financial statements with the exception of the amendment to IFRS 1, "First Time Adoption: On Fixed Dates and Hyperinflation".

There is no material impact from the adoption of these IFRS's, IFRIC interpretations and amendments in this condensed half yearly financial information.

1c 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 are as follows:

·; Long term flat or negative house price inflation depresses income from sales: management is taking action to mitigate this risk by rebalancing owned portfolios towards areas of higher economic growth and growing non-HPI dependent income streams.

·; A rapid further decline in house prices and/or mortgage availability increases difficulties in maintaining sales income: management is taking action to mitigate these risks by continuing to grow alternative income streams, focusing on sales in markets that are not mortgage dependent and regular scenario planning and active management of debt levels.

·; Limited availability of further capital constrains the growth of our business: management is taking action to mitigate this risk by continuously monitoring cash flows and funding needs to ensure sufficient headroom is available and building on our successful refinancing strategy and focusing on reducing our requirement for debt in the near to medium term.

The principal risks and uncertainties facing the Group have not changed from those as set out on pages 39 to 41 of the 2011 Annual Report and Accounts.

1d Forward-looking statements

Certain statements in these condensed interim financial statements 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 periods to 31 March 2011 and 2012 respectively have been affected by valuation movements and non-recurring items, although the impact of these items in 2012 is much less significant than in 2011. The table below provides further analysis of the income statement showing the results of trading activities separately from these other items.

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

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.

As explained in the 2011 Annual Report and Accounts, we now disclose information relating to the previously disclosed Property Services segment within UK residential and fund and third party management on the grounds of materiality as outlined within IFRS 8.