Grainger Annual Report 2015
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ANNUAL REPORT AND ACCOUNTS 2015 Leading the market Simplifying the business CONTENTS DIRECTORS’ REPORT Strategic report 1 / Our objective and strategy 1 / Financial highlights 2 / Chairman’s statement 4 / Chief Executive’s review 6 / Abbeville case study 8 / Our market environment 10 / Our business model 12 / Key performance indicators 14 / Operational measures 15 / Performance income statement 17 / Performance asset values 19 / Financial review 24 / Our people and our customers 26 / Risk management 30 / Sustainability Governance 37 / Letter from the Chairman 38 / The Grainger Board 40 / Leadership 42 / Effectiveness 47 / Accountability 49 / Audit Committee report 53 / Nominations Committee report 55 / Remuneration Committee report 74 / Board Risk and Compliance Committee report 75 / Other disclosures Financials 77 / Independent auditors’ report 80 / Financial statements 156 / EPRA performance measures 160 / EPRA sustainability performance measures 169 / Five year record 170 / Shareholders’ information 171 / Glossary of terms 173 / Advisers 1 GRAINGER IS THE UK’S LARGEST LISTED RESIDENTIAL LANDLORD Strategic report Our objective is to be the UK’s leading private rented sector landlord, delivering sustainable long-term returns to our investors and our partners. Our strategy is to maximise the returns from our reversionary portfolio while we grow our Governance private rented sector business. We are simplifying our business to focus on our objective, and have accelerated the pace of change this year. This will continue. Financials FINANCIAL HIGHLIGHTS Recurring profit* Profit before tax OPBVM** Total dividend £41.2m £50.0m £101.9m 2.75p 2014: £47.1m 2014: £81.1m 2014: £107.5m 2014: 2.50p Gross NAV NNNAV Return on shareholder equity Return on capital employed 319p 263p 10.0% 9.5% 2014: 291p 2014: 242p 2014: 25.6% 2014: 17.0% Growth in vacant Group LTV Net debt possession value 45.5% £1,138m 5.7% 2014: 46.5% 2014: £1,044m 2014: 12.0% Profit before tax is the only recognised GAAP measure in the financial highlights above. * Recurring profit is defined as profit before tax, valuation movements and non-recurring items (see Note 3 to the accounts on page 100). ** OPBVM is operating profit before valuation movements and non-recurring items (see page 20 and Note 3 to the accounts on page 100). For more information visit our website: www.graingerplc.co.uk 2 Grainger plc / Annual Report and Accounts 2015 / Strategic report Chairman’s statement In 2015 we have made some important changes at Grainger, in terms of both the leadership of our Company and our future strategy. Leadership professional who brings a wealth of Firstly, we had a clear message that our Robin Broadhurst served the Company expertise gained from senior positions in drive to build the UK’s leading private with great diligence and skill prior to his property development, fund management rented sector (PRS) business was well retirement in February 2015 after eight and most recently, banking. Helen was understood and that an increase in pace years as Chairman and we had intended selected following a thorough search was greatly welcomed. We have been that Ian Coull would succeed him. Due to process in which we attracted many first working hard to accelerate our progress in ill health, however, Ian was unable to take class candidates. The Board is looking this area during 2015 with some important up the role and so when I was asked by my forward to working with Helen as we acquisitions and development projects. Board colleagues to take over, I was more reshape the business during 2016 in line We remain committed to our strategic than willing to do this. I have now served with a refreshed strategy. objective to build a substantial market- on the Board for over seven years and Mark Greenwood has been our Finance leading PRS business. Later in this report, have developed a deep admiration for the Director for the last five years. Mark is also we set out both the market opportunity Company and for the tremendous work retiring this year and we are grateful to him (See Our market environment) and the risks that our staff do to ensure that Grainger’s for the important contribution he has made and challenges (See Risk Management) customers are well served in safe, secure to our business during his time with us. associated with this strategy. and decent homes. We are delighted to welcome Vanessa In order to accomplish this, our second Andrew Cunningham also signalled his Simms as our new Finance Director planned change was to simplify our intention to retire in 2016 after nineteen in early 2016. She joins us from Unite business model. Although Grainger has years as a Director, the last six as Chief Group plc, where she has been Deputy traditionally seen merit in diversification, Executive. Andrew will retire in early 2016, Finance Director since 2012, and brings it was clear that the overhead cost of such having seen the Company through the with her significant relevant PLC and real a strategy was high and that the business financial crisis and consequent challenges estate experience. needed to be more focussed and play to for the property sector. His steady hand our core competencies. Accordingly, in and sound judgment meant that Grainger Strategy 2015 we have been reviewing each of our came through the difficult period of 2007– When I took over as Chairman, I was business lines and where these did not fit 2010 in very good shape. Andrew will pleased to have the backing of so many with the future shift to a PRS portfolio, be succeeded by Helen Gordon, a highly Shareholders for accelerating the pace regarded and very experienced property of change at Grainger, which consisted of making three important changes. 3 Strategic report we would look to divest, thereby driving Our reversionary portfolio is still highly enhanced shareholder value. We are well cash generative and, as these assets underway with the sale of our German naturally become vacant, we are able to assets, taking advantage of strong demand. realise their full latent value. This process We will continue this process where we will be important in ensuring that, as we are of the view that individual business lines grow our PRS portfolio, through both do not align well with our future move to acquisition and development, it can be PRS assets. financed, in part, by recycling capital from Thirdly, as part of our on-going balance this reversionary portfolio. sheet management we announced early this year that we were reviewing our cost Board of debt. The majority of our debt was I am pleased to have had tremendous Governance arranged in 2011 (when lending markets support from my Board colleagues this were still feeling the effects of the global year and have worked closely with Andrew financial crisis), but as the term of this Cunningham and Mark Greenwood funding approached an end, we sought to implement the changes required to to take advantage of the lower costs of our business. Each has accomplished so borrowing available in the market today. much in their final months with Grainger. Over the course of this year we have I wish them both well in their retirement. refinanced our core syndicate debt as I would also like to welcome Rob Wilkinson well as a facility for one of our portfolios. to the Board, whose expertise in fund The average cost of debt at the year end management and real estate will replace is 4.6% which is more appropriate for our the contribution from Simon Davies, “Our strategic future business. who retires from the Board this year. Financials objective to build In summary, our business will transition On behalf of the Board, I would like to a substantial market over the next few years from a traditional thank Simon for his valuable input, and trading model that was historically aligned we wish him well for the future. Details of leading PRS business with house price inflation to one that is the work and activities of the Board and its remains our more income focussed, based on a market- Committees over the last year are set out leading portfolio of PRS assets. The pace in the corporate governance section of our clear aim” and shape of this change and the detail Annual Report and Accounts. of the execution will be the priority for the new leadership team and a detailed review of our strategy for accomplaccomplishing this shift Our staff Finally, I would like to thank all of the staff wwillill be set out in the earlyearly partp of 2016. at Grainger who deliver such an unrivalled service to our customers. We never forget that we have many thousands of families that make their home with Grainger and we all take that responsibility very seriously. The Board is very grateful to our staff for the tremendous effort they make each and every day. Baroness Margaret Ford Chairman 19 November 2015 4 Grainger plc / Annual Report and Accounts 2015 / Strategic report Chief Executive’s review Our extensive and unrivalled experience in all aspects of the residential market puts us in an excellent place to be the market leader. It is an important time for the sector and the whole business looks forward to the future with confidence and excitement. In addition to the solid trading performance Financial performance Building a modern PRS business this year, we have continued to simplify We have seen strong levels of growth in The imbalances between housing supply the Group’s operations and accelerate our key performance measures. NAV has and demand allied with the changing the growth of our Private Rented Sector increased by 9.7% and NNNAV by 8.8% attitude towards home ownership have led (PRS) business.