This has been a landmark year for Grainger Trust. We have achieved record levels of profits, asset and share price growth as well as making significant progress in our key strategic objectives. The year under review has also been important as it represents the first 12 month period in which our Bromley joint venture has been wholly owned and incorporated into the year’s results.
We have continued to focus on our core tenanted residential business and we have increased the market value of this portfolio by 14% to £1.3 billion. Our total gross assets at market value now stand at £1.5 billion. We have maintained our leading position as the largest quoted investor in the long-term residential market by purchasing 486 regulated and 374 life tenancy units in the year. We have invested considerable management time and energy in positioning our life tenancy activities and believe that we are now well placed to take advantage of this exciting business opportunity. Our rationalisation of the commercial investment portfolio has been completed at a significant profit and we now have greater clarity and focus in our development and trading activities.
To help lay the foundations for the group’s future growth, we completed a highly successful refinancing of our debt portfolio with a more flexible funding platform that will enable us to take full advantage of opportunities as they become apparent.
ResultsThe strong residential market, as well as a good performance from Grainger development and trading division, have been the major drivers of the year’s record results. I am pleased to report that Grainger has produced profits before tax and exceptional interest of £59.6m for the year to 30 September 2004, a 23% increase over the previous year’s £48.5m. As a result earnings per share before exceptional interest have grown 25% to 149.7p.
Net assetsNet assets per share have grown by 25% to £27.34 from £21.94. Fully diluted net asset value, taking into account contingent tax and the market value of our long-term debt and hedging, has increased by 34% to £18.62 from £13.91. Grainger net asset value, which incorporates an estimate of the reversionary surplus within our core portfolio, is £24.00 per share, a 30% increase from last year’s figure of £18.40.
DividendsFor the last five years we have adopted a consistent dividend growth policy of 15% per annum. Given the group’s outstanding record of profit increases however, this has resulted in a low dividend yield and high dividend cover in comparison to our peers. Your board is therefore recommending a step up increase in the year end dividend to 19.20p per share, to be paid on 4 March 2005 to shareholders on the register at close of business on 11 February 2005. This will produce a full year figure of 23.24p per share, an increase of 42% over last year. It is our intention to continue with a progressive dividend policy, albeit at a more moderate target growth of 10% per annum. We will also take the opportunity to restructure the phasing of our dividend payments and it is our intention that the interim dividend (to be paid in July of each year) will comprise approximately one third of the total, the balance being paid at the time of the final in March of each year.
Share structureFive years ago our share price was approximately £4.00. At 30 September 2004 this had grown to £18.35. At this level, we consider it appropriate to introduce a share split on a five for one basis, replacing each 25p ordinary share with five 5p ordinary shares. We believe that this will improve liquidity in our shares and will help dampen share price volatility. Appropriate resolutions to approve this, together with others to modernise our Articles of Association, will be proposed at an extraordinary general meeting to be held immediately after our annual general meeting.
BoardRobin Herbert and Nichola Pease will be retiring from the board at the annual general meeting. Robin has been a board member since February 1994 and has served as chairman of the audit committee and latterly as senior non-executive director, a role which will be assumed by Robin Broadhurst. Nichola leaves the board after four years’ service and her position as chairman of the remuneration committee will be taken by Robert Hiscox. We thank both Robin and Nichola for the very significant contribution they have made to the group. During a period of unprecedented growth and activity, they have been a source of wise counsel and encouragement.
As announced in November 2004 Sean Slade has resigned as an executive director. Sean joined the group when we owned a significant commercial investment portfolio, however the redefinition of the group’s focus into residential activities and the consequent disposal of the group’s commercial portfolio has meant that the challenges and opportunities for Sean were no longer available. We are grateful to Sean for the professional and efficient way in which the investment portfolio rationalisation was conducted and wish him every success for the future.
PeopleGrainger has a core of committed staff, expert in buying, selling, managing and developing residential property. As the group activities have expanded we have complemented this core group with several senior appointments to ensure that we are well placed to take advantage of future opportunities. I would like to thank our enthusiastic and hard working staff for the continuing contribution they have made to another successful year.
Strategy and outlookWe are delighted with the performance in the year but accept that our market place may present a more difficult trading environment in the shortterm. Indeed since the year end we have seen a slowing in demand for our vacant properties. We are still exceeding, on average, September 2004 vacant possession values by circa 3% on recent sales, but the time taken to complete these sales has extended. However, we believe that our core business activities are resilient and can produce good levels of shareholder return even when economic conditions are less favourable.
It is clear that the property sector and our particular niche in it will face many new challenges and opportunities over the coming year. Whilst our business is robust we are aware that the overall perception of our potential success is driven by general and media comments on the state of the housing market. Our view is that the overall trend of house prices is flattening and that growth over the next year may well be limited. Indeed we believe that the market in London and the South East has already experienced a significant correction. The housing market is primarily affected by expectations of interest rate levels and many commentators are now indicating that rates may stabilise. If this happens then we would expect to see forecasts of healthier house price movements.
However, we believe that the case for residential property as a long-term investment remains strong. Increases in the number of households from a combination of smaller family units, greater levels of self occupancy and increasing life expectancy are sustaining demand. This at a time when new house build levels are at their lowest for several decades. Home ownership in the UK has long been seen as an investment, as well as a method of occupation – and its attraction as an alternative to equities or traditional forms of pension provision has become more pronounced over recent years. Interest rates remain at a comparatively low level and this helps to support affordability.
The property sector faces a future in which real estate investment trusts or ‘REIT’s’ may play a significant role, although the recent pre-budget report indicated that any legislation will not be introduced until July 2006 at the earliest. Whilst the trading nature of Grainger business does not immediately lend itself to a REIT type structure, we will ensure that we are at the forefront of any initiative that will facilitate investment in the private rented sector.
We will continue to focus on our core regulated business which is high margin and cash generative. We are optimistic about the growth potential of the life tenancy sector and are pushing hard for this to become a significant contributor to group profit. We are excited by opportunities that are being presented to us on mainland Europe and are confident that we can successfully transfer our skills and expertise to these emerging markets. Our development and trading activities are well defined and our vision is to build a series of coherent, related activities showing our ability to operate in all sectors of the residential market, while producing consistent levels of profitability and growth.
We have in place the three key resources for us to continue as a consistently successful long-term business; a superb asset base, a sound funding platform and an expert and unrivalled team. We look forward to the future with confidence and enthusiasm.
21 December 2004