Grainger plc

Good afternoon, ladies and gentlemen. Welcome to the Granger PLC Half-Year Results Investor Presentation. Throughout today's recorded meeting, attendees will be in listen-only mode. Questions are encouraged. They can be submitted at any time just using the Q&A tab. Please submit your questions at any time. Just press send after you've typed in your question. Before we begin, we'd like to submit the following poll. I'm sure the company would be most grateful for your participation. I'd now like to hand over to CEO Helen Gordon. Helen, good afternoon.

Good afternoon, everyone, and thank you for joining. I'm joined here by Rob Hudson, our CFO, and Kurt Mueller, our head of corporate affairs. Grainger delivered a strong set of results last week, really strong performance, excellent earnings outlook. And this is really driven from the fact that in a time of global uncertainty, we are a needs-based asset class. We are actually – everyone needs somewhere to live. So I'm going to start by just talking about how we're on track for our 60 million of earnings this year. And that'll be a 12% increase and then on track for a 35% increase to full year 29. So we're delivering compounding earnings growth. And it's really around the three elements, three strong elements to our business. It's a resilient business. In a country with a housing shortage, we have very high occupancy. We have rental growth, which is underpinned by wage inflation, a large and diverse customer base and really good rent to income affordability ratios. We've also got locked in growth. We've got a committed pipeline, which is on site construction cost fix. And that's going to be delivering another 14 million of rent. And we're leasing into an undersupplied market. And that undersupply is growing as more people rent for longer. So we've got strong growth in both our margin and our earnings. The business is deleveraging at the moment. One of the things that people don't realize about Grainger is that we have 850 million of non-core assets that we're recycling through. And actually, we're using that prioritizing deleveraging of 300 to 350 million, which will mean that we're around 18 times net debt to EBITDA. So really strong position supported by these three pillars of activity. I'll just take you through now the headlines. So our rental income was up 7.8%. Our like for like rental growth is up 3.1%. Earnings up 4% and dividends up 3%. Our NTA or our underlying value was just slightly lower than full year 25. But this value has been incredibly resilient because although we've seen a very large outward yield movement of 100 bits, we've seen great rental growth more than supporting the value of our properties. And then operationally, we're also strong, 96% occupancy, which is high. We run the business between 95 and 97. Really strong customer retention. Our customers are staying with us for longer, but they're also 61% of them are renewing with us each year. And then a really healthy income to rent ratio. And then our costs, although we've seen headwinds in costs this year, we've managed to keep our cost base so that it's 25% of our gross rents is spent on our operational costs. And just as a reminder, we put all of our refresh costs, et cetera, through that figure. I've mentioned that we're a resilient business. We're also a growing business. We're a needs-based asset class, meaning that there's very little downside in terms of our occupational market, very low obsolescence. And we're inflation linked. Our income is underpinned by wage inflation. I'll show you some slides later that shows how closely we track that. We're very diversified in our customer base. We've got limited cost inflation and we've got an embedded margin expansion because each time we add to our portfolio of 11,000 homes, actually we increase that margin. Moving on to talk a little bit about our disposals. Grainger as a business has been transformed over the last 10 years. We've recycled through 2 billion of assets and invested almost 3 billion into new build, purpose built, built to rent. We've sold 700 million since September 2022. Now, the first half of our first half was overshadowed by really by the two month wait for a budget that at times speculated about whether or not we'd see the removal of stamp duty. So sales were affected slightly at the beginning, but they've now picked up. We've done 82 million of sales of our non-core assets. That's either completed or exchanged in the year to date. So we're on track for 175 to 200 million, which you can see even through the most difficult times we've managed to achieve. We're recycling out of our regulated tenancies. Those are our older tenancies and our non-core portfolio and some strategic land. And that is what is funding our growth. So moving forward. We've been very clear this time on our capital allocation strategy. I put a similar slide in a year ago and at the year end. But our first priority is to complete our schemes on site. The next priority is to do leverage. And then after that, with the share price where it is, our next priority, probably it would be very compelling to do share buybacks rather than grow out of pipeline. But obviously, we've been very clear this time about our discipline capital allocation and that will be delivering for shareholders in the short, medium and the long term. So this is our portfolio, almost 3 billion in our built-to-rent portfolio, our regulated tenancies. The black bar on this pipeline is what we have on site, and the paler bars are actually our optionality for the future. And it's the black bar that's delivering that 72 million of earnings, 35% increase. So moving forward, we have got a very good track record of consistent delivery, of growing rents, growing earnings and improving our operational leverage. But there's a lot more to come. And with that, I'm going to hand over to Rob.

Thank you Helen. So as Helen said, we've just delivered a strong set of results. So total rents up nearly 8% over the course of the first half, underlying organic light flight rental growth up 3.1% in line with our expectations, occupancy remaining high at just under 96%, And EPRA earnings up 4% and dividend per share also up 3% in line with that. And NTA continues to be resilient when you consider the context of everything that's been happening in the macro economy over this period. So what's been driving this very strong growth in rent that we've seen over the period? I'll just move on a couple of slides. And we can see here the key reasons of what's driving this rapid acceleration in the top line. So our underlying rates of rental growth and our occupancy have driven our rents up 3%. And then because we continue to invest in terms of our pipeline deliveries, these are coming on stream and they're leasing up very well, which is adding a further 5.7 million. And at the same time, we're disposing out of our older non-core assets, land, regulated tenancies. These are assets with the low yield, either nil yield in the case of land, 2% in the case of the regulated tenancies. So the income we're summing out of is less of a reduction compared to the increase that we're investing in, and then therefore 8% increase overall in our rents. So if we look at the earnings trajectory that we've got ahead of us, it's very strong and Helen touched on some of the key headlines here. Here it is in a little bit more detail. So you can see this continued track record of accelerating and strong growth in our upper earnings. We are very much on track with the guidance we put out a couple of years ago. And the two key points here are 60 million upper earnings for this financial year, which would represent a 12% increase on the 54 million we delivered last year. And then 72 million, which is 35% growth going through to FY29. So if we just look behind one of the key drivers, which we have a good degree of visibility over, I'll just talk through those key components. The first one is like flight rental growth, which we assume the long run average, which goes back over a very long period of time of three to three and a half percent. The second piece is that this guidance is based purely on the committed pipeline alone. So it excludes all the other elements of the pipeline, which Helen just referred to earlier. It's just where we're on the ground. And in fact, we're largely through the delivery of this. And that's net of recycling to fund the remaining 120 million of CapEx out of our lower yielding assets. So that's the income accretion that we have from that. The next element is our EBITDA efficiencies. Because we've designed the business around the use of technology, it's incredibly efficient for us to scale this platform. And what that means in practice is that we're not having to add new heads in order to deliver this growth centrally. And so that's making it very efficient. Each new home landing onto our platform comes as an incremental margin of 75%. And we're also very tightly controlling the central costs. So on a 10-year view, our costs have actually remained static at 36 million. We've just taken a further 2 million of costs out of the business as we continue to implement technology and use of AI and drive efficiency. And what that means is there's a further couple of years now locked in where our overheads will be completely flat. So with this focus on efficiency, our EBITDA margins are growing from what was 54% in FY24 to a guided 60% plus by FY29. And we see continued scope thereafter to continue to grow our margins. And we've made very good progress in the first year, FY25 growing margins to 56% from 54%. So we remain on track with this and actually when you look at the large US players who are operating typically at 10 times plus the scale compared to our platform in the States, they're actually operating at EBITDA margins in the mid 60s. So at this point in our journey and level of scale, we're actually driving a high level of efficiency relatively and that's really through the use of technology that we have. The final piece is rebasing fully to higher interest costs. So when the Ukraine war broke out we put in place fixes on our debt and did extensive refinancing which meant that we're locked into rates in the mid threes and we did that for seven years so there's just over a couple of years of that left to run. Because this guidance period goes through to FY29 this contemplates the period in which those fixes roll off and will roll on to higher rates. So we've assumed a full rebasing to higher interest costs, which we've modelled here at 5.5%. And then that's partly offset by the mitigating impacts of deleveraging by 300 to 350 million, taking our debt down to 1.1 billion. So even after fully absorbing all of those higher interest costs, there's no further big step up in interest costs or rebasing to happen after this period. We're growing our earnings by 35% even after that impact, which I think puts us in good stead. So if we just flip back a slide. Where this takes our debt levels, you can see our target guidance ranges at the bottom right. We're thinking very much in this higher interest environment around debt metrics in relation to the income impacts and therefore calibrating debt according to the high level of interest rates. We're bringing it down to 1.1 billion. With that, our loans value would be 30% and net debt to EBITDA of around eight times. During the first half as well we also did some extensive refinancing of the business 540 million of facilities which were extended out to 2033 and during that process we actually shaved some reduction off in terms of the banking margins that we pay so reducing the cost of debt by around a million pounds per annum and that's really reflecting the fact that lenders really like our story, the growth in built-in rent, the low volatility, the secure income that this provides, which I think, you know, provides us in very good stead. Worth just mentioning as well from a dividend point of view, we've converted to REIT at the end of last financial year. This means that we are on a path to paying out at least 90% of our property-related profits, which approximates to our EPRA earnings. and within the next two years we will be fully covered out of our upper earnings. The next couple of years there'll be a top of our dividend coming from our legacy regulated sales profits and then we need to be fully covered by FY28. So we have a progressive growing dividend over this period and we'll continue to deliver that for our shareholders.