Grainger plc (GRI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Grainger's half year results. The format for this morning is that I'll take you through the highlights, in particular, the period of intense activity and progress in the first half despite the constraints of lockdown. I'll cover the enhancements that we continued to make to our operating platform to enable us to outperform the market on customer care, customer retention, leasing and rental growth. I'll also update you on the progress on our ESG commitments and our pipeline for growth. Toby Austin, our Interim Group Finance Director, will review our performance in more detail, dealing with the strength of our balance sheet, the resilience of future growth of our income and the funding of our growth agenda. I'll then update you on our investment case and why we believe that post pandemic, it's more compelling than ever; the market fundamentals of our sector, which is attracting a lot of interest. And I'll also provide you with a greater insight into our pipeline and our success in acquisitions and the exciting openings that will be coming forward this year. We'll then have an opportunity for Q&A, and Andrew Saunderson, our Director of Investments; Mike Keaveney, our Director of Land and Developments; David Prescott, our Director of Strategy and Corporate Finance; and John Blanshard, our newly appointed Director of Operations, will join Toby and me in answering your questions. I'm pleased to say that despite the challenges of the pandemic and the majority of H1 being in lockdown, the business is in good shape. Our earnings are up 11%. Our like-for-like rental growth is up 1.7% and our average rent collection is 98%. Importantly, our pipeline is in an unprecedented period of growth. We have launched 2 new schemes in March. And in H2, we have 3 further schemes launching, a total of 1,021 homes. More recently, we have seen an 86% increase in inquiries since January 2021. We have real momentum in our business, and we are well positioned to capitalize on the structural shift in the private rented sector. At the start of the pandemic last year, we identified the difference between a good and a bad home and a good and a bad landlord would never be more important than at a time when the government has been encouraging us all to stay at home. This first half, people have been spending long periods of time in their homes, and their homes need to be safe havens and protected places. One week into the first lockdown, we announced our clear strategy for dealing with the pandemic, which I outlined this time last year. Our COVID response was to innovate, to communicate and to improve so that we emerge stronger, and this strategy has guided us through. I am exceptionally proud of the team at Grainger and of the period of intense activity in the first half of the year when we have found new ways to do things, new ways to support customers, and we have invested in our pipeline, our homes, our employees and, importantly, our operational platform. Our support for our customers has been the focus of our activities. Our frontline teams have been supporting through additional hygiene standards, building protocols and parcel services, but also through our enhancements of broadband and well-being programs. In addition, we have introduced a new centralized service desk in Newcastle. Through our enhanced communications, we feel we know our customers better. We have expanded our direct letting activity, launching a new digital lead-to-lease journey. We've taken advantage of the strong sales market and have accelerated our sales. We've increased our employee support, supplier support, and we've increased our focus on ESG, which I'll talk about more in a moment. We have increased our work in the area of fire safety going beyond current requirements to future-proof our homes, and we've taken advantage of the opportunity to expand our refurbishment program and to update our design specification. And we continue to invest in technology to support our business. This is an exceptional agenda of activity designed to prepare us for a strong period of growth. And all of this has led to a strong and socially responsible performance. Our adjusted earnings were up 11% to GBP 37.5 million. At a time when reports that rents have been falling, our rental growth is up 1.7%, ahead of the market and the headlines. It is lower than last year but reflecting our focus on customer retention and renewals. Our overall rental income is down slightly, reflecting our asset recycling program, selling buildings that we think will not be appropriate in the long term and taking advantage of the strong investment market. Our rents also reflect a high level of void and delays in our pipeline delivery. And where this is not COVID-related, we have received compensation from contractors, which is why we have maintained our dividend for the first half. Our EPRA NTA is in a similar place to the year-end, reflecting the cautious approach on rental growth and building completions that have reflected in our valuations. We have increased in our sales profit 30%, due in part to our asset recycling. Our normal sales are transacting at 0.6% above September valuations. HPI is ahead of this, and this is partly because the volume of sales in the market generally, at the moment, means that the sales timing has extended to 120 days because, for example, of delays in local authority searches. Sales that we completed in the first half are, therefore, largely reflecting those going under offer shortly after our year-end valuations. Earlier this year, we achieved investment-grade credit rating. We have launched 2 new schemes, which is 508 homes and gained planning consent for 618 homes and have secured a further 490 homes in Bristol and Derby. We know that the provision of high-quality, well-run mid-market rental homes in a country with an acute housing shortage is a socially responsible thing to do. But our commitment to making a positive social impact goes further with investments in quality of life improvements for our customers and our communities. Our discounted and affordable housing program is integrated within our main portfolio. We have invested in our frontline teams, training them in the mental health and wellness to support our customers during the pandemic. We have also developed our diversity network and are committed to increasing diversity in our future talent through our work with schools outreach, apprenticeships and bursaries for those from disadvantaged backgrounds. We are progressing towards our commitment to net 0 by 2030 in our operations through our renewable energy rollout and our design upgrades. The recognition of our ESG achievements is growing, and in addition, I'm pleased that our commitments have been recognized with 3 significant awards this year, including being voted Residential Landlord of the Year. Our in-house operational model has once again enabled us to drive performance and growth at challenging times. In our investment, we have 6 more schemes in planning and legals. We have recycled GBP 52 million of lower-performing assets, and we've refurbished and repositioned some of our older, well-located assets. In our developments, we are completing 5 schemes this year that's over 1,000 homes, and our team has 3,000 homes on site. In our operations, which we continue to invest in, we have total control of our assets and a direct relationship with our customers. We have undertaken 2,330 lettings and renewals in H1. Our platform is built for growth, and it is this scalable in-house model that has enabled us to outperform the market. There is real value in our platform, as it has enabled us to deliver a stronger, more sustainable income. I mentioned earlier the reports of falling rents and very high levels of vacancy. This is not Grainger's experience. Whilst we are currently experiencing a higher level of vacancy than normal, our business model of focusing on mid-market rents accessible to local people and our leading operating platform has resulted in high occupancy, 89% versus 71% of the market generally; rental growth not falls despite the many headlines; Grainger's growth is 1.7%; higher rent collection at 98% versus 93% for the market and a longer-than-average stay. The Grainger's team's intense activity in H1, our purpose, our values and our commitments have delivered. Moving now to our pipeline. I mentioned earlier our disposals. Despite these disposals, we still have an operational portfolio of 9,109 homes worth GBP 2.8 billion and an impressive pipeline for future growth of GBP 2.1 billion. This year is Grainger's biggest delivery year so far with over 1,000 new homes. In March, we completed our first scheme in Southampton, and I'm pleased to say it's 41% let in 6 weeks. We also recently delivered The Filaments, beside the main business district in Manchester. And later this year, we launched Windlass Apartments in Tottenham, Apex Gardens at Seven Sisters, and The Headline in Central Leeds. Over the last 18 months, since the government announced its leveling up agenda and the push into the regions, we committed investment of GBP 291 million in regional schemes, and more recently, in H1, we have secured planning for further 618 homes in our TfL joint venture. I have been asked a lot about how and where people will live in the future. Our strategy has always been supported by in-house research and our anticipation of trends. For example, our commitment to well-being and for our homes to support working from home, WalkScores, healthy lifestyles, access to green spaces we anticipated in 2017. We did not anticipate how essential they would be during the COVID pandemic. COVID-19 has accelerated the flight to quality, the appreciation of professional management, walkability, connectivity and well-being. Our core demographic will always want connectivity to work and play in urban centers. These urban centers are more than just London with Leeds, Manchester, Birmingham and Bristol leading. Our focus is on the long-term trends of high-quality, energy-efficient, safe buildings with flexible space, highly connected to both community and technology. During this year of lockdown, we have proven our resilience, and we are on a strong growth trajectory. We are creating a high-quality, regionally diverse portfolio. We have a best-in-class operating platform, and we have a successful track record in sourcing and underwriting and, importantly, significant income growth through our pipeline. There is a strong demand outlook from our occupiers as they recognize the difference of our product and our service, and we will continue to reap the benefits of higher rental growth and greater retention rates. We know the resilience of our sector is attracting strong investment. All our lead indicators are suggesting an exceptional summer of growth, and Grainger is in a good position to benefit from this. Thank you. I'll now hand over to Toby to go through the financials. Toby joined Grainger in July 2016 and has worked closely on the delivery of Grainger's strategy over this time.

Thank you, Helen, and good morning. This morning, I'll provide you with an update on our financial performance for the first half of the financial year and also share some additional color on our performance since the end of March when our reporting period closed. I'm pleased to report that we have delivered a strong performance over the first 6 months of the financial year while the country has remained with lockdown restrictions, and our balance sheet is in an excellent position to support our continued growth. We've delivered a very strong sales performance, up by 30% in this period, where we've taken advantage of a buoyant sales market. Our net rental income is 6% lower compared to the same period last year, which was almost all pre-pandemic. This reduction had 3 main drivers. It's a reflection of an acceleration of our asset recycling program where we disposed of lower-performing assets, some marginal delays in completion of our new developments and a temporary reduction in occupancy with ongoing lockdown restrictions impacting demand. As Helen said earlier, we successfully maintained occupancy in our PRS portfolio over the period at 89%, which is broadly where it was when we last reported. Our operating platform continues to deliver value through rental growth, successfully achieving a total of 1.7% growth for the period. With a good first half performance, we've delivered an 11% increase in adjusted earnings when we have positive outlook for the rest of the year. We are, therefore, maintaining our interim dividend of 1.83p per share. Our balance sheet and liquidity remains in a strong position supporting our continued growth plans. Our tangible net asset value has increased by 1p to 286p per share. Net debt is just under GBP 1.1 billion as we continue to invest, while our LTV stands at 34.5%, with our average cost of debt maintained at 3.1%. Net rents continued to deliver the largest proportion of our income. The small reduction in the first half was more than compensated by a strong sales performance demonstrating our agility and ability to perform in challenging times. Recurring rental income will make up an increasing proportion of earnings in the short term as the temporary reduction in occupancy improves and will grow further in the longer term as our pipeline continues to deliver in line with our strategy. As I mentioned on the previous slide, the reduction in net rents was driven by 3 factors: the profitable disposal of lower-performing assets as part of our asset recycling program; some marginal delays in delivery of our new developments; and a reduction in occupancy in our stabilized PRS portfolio. It is worth noting, however, that we have successfully recovered some of the lost rental income from the development delays I just mentioned. One way we offset risk within our development pipeline is through our forward funding contracts. These typically include clauses for compensation for lost rent due to delays. For the delays in the period unrelated to COVID, we have recorded GBP 0.8 million of additional income. This is included in management fees and other income in this presentation. Excluding the impact of voids, our gross to net operating cost ratio for stabilized occupied assets has improved to 24.7%, demonstrating our strong control over costs. When we include the temporary impact of lower occupancy and the cost of holding void units, this is slightly higher than usual at 27%. Our overall gross to net margin is 28.2%. This includes the impact of higher cost ratios for the new PRS assets as they lease up as well as factoring in the void and letting costs. We have delivered a very strong sales performance with a 30% increase in profits compared to the same period last year. GBP 14.8 million resulted from sales of our vacant properties. This is 10% ahead of last half year with pricing 0.6% ahead of September valuations. As Helen mentioned, this reflects the approximate 4-month sales process, which means that most of the sales achieved in half 1 were agreed around the time of the previous valuation. This process has been taking longer than usual with delays in local authority searches and the increased volume of transactions in the wider market. We continue to execute our asset recycling plans generating GBP 14 million of profit from sales of lower-performing assets in the period at attractive prices. Looking ahead at our sales pipeline, we see positive indications of strong pricing for the second half. We've continued to sell vacant properties throughout April with pricing ahead of valuation, and our pipeline is ahead of the same period last year. As a result of the strong sales performance and continued cost control, our adjusted earnings are GBP 37.5 million or 11% ahead of the first half performance last year. The graph on Slide 14 sets out the movement in net rental income compared to the prior year. Planned recycling of income-generating assets and sales of vacant properties reduced net rents by GBP 2 million. This has been offset by investment activity in new assets, adding GBP 2.1 million in the period. In a challenging market, we have delivered 1% like-for-like rental growth in our PRS assets, reflecting the flexible approach we are taking for both new letting activity and for customer retentions. Rental income for our regulated tenancies is RPI-linked and have continued to perform well with 4% annualized growth. Overall, this equates to like-for-like rental growth of 1.7%, demonstrating the quality and resilience of the combined portfolio. With regard to regional variations on PRS rents, we have experienced rental growth in all regions with a marginally stronger performance outside London. In this period, we've seen a reduction in gross rents received and a corresponding increase in void costs where we are liable for council tax and utilities in empty properties. Together, this has reduced net rents by GBP 3.4 million. This reflects our average occupancy in the period of 89%, which is down on last year. We see this as a temporary impact. Importantly, we continue to operate our tenanted stabilized portfolio efficiently. We've reduced the gross to net margin for operating these properties to 24.7%. We've maintained high levels of rent collections with an average of 98% of our rent collected on time throughout this period. This again demonstrates the benefits of our in-house operational team who have strong relationships with our customers. Since our half year close at the end of March, we have continued to successfully drive up our renewal activity in April and into early May with a greater proportion of customers choosing to stay with us as well as a significant and encouraging upturn in inquiries from new customers. With our high-quality mid-market priced rental homes, the launch of more than 500 brand-new homes in March and over 500 more due this summer, we're well placed to benefit from increased activity as lockdown restrictions are eased. So moving on to our net asset values. Slide 15 provides components of our EPRA NAV measures. We consider the EPRA net tangible asset value the most relevant measure for Grainger, and this stands at 286p per share. This is marginally higher than the year-end, and I'll explain the movements in a moment. We've continued to invest in technology over this period, which will drive future benefits to the business. These intangible yet valuable assets are excluded from this measure. The reversionary surplus in our portfolio is also excluded from our NAV metrics and stands at GBP 286 million, which equates to an additional 42p per share before tax. This graph shows the movement in our net tangible asset value over the half year. Our rental income and corresponding valuation gains continue to be the key driver of NAV growth. Our rental income after overheads has contributed 5p per share, and our property valuations added a further 5p, representing an increase of 1.3% over the first half of the year. Our stabilized PRS asset values have increased by 0.9%, while the value of our regulated portfolio has increased by 2% over this time. As we noted at the year-end, our valuers are continuing to take a more cautious approach to our development pipeline in progress, only realizing the valuation uplift on stabilization and have assumed no rental growth for at least 6 months depending on the scheme and location. This is, however, not what we're currently experiencing in practice. Also in this period, we distributed last year's final dividend of almost GBP 25 million or 4p per share to our shareholders. Our net debt has increased by GBP 66 million in the first half of the year. Our operations delivered cash of GBP 39 million, and we have executed GBP 52 million of asset recycling as we continued to dispose of lower-performing assets to fund our pipeline. We have invested almost GBP 120 million into our PRS development pipeline in this period to drive future growth in the business, and we plan to invest around GBP 300 million into our secured pipeline before the end of the next financial year. So on to capital structure. Our balance sheet is strong. We have maintained a strong liquidity position with GBP 587 million of cash and undrawn facilities to fully fund our current commitments. Our average cost of debt has been maintained at 3.1% in this period. Our incremental cost of debt is 1.7%, and our fully drawn position is 2.8%. Our LTV is below 35%, and based on our planned investment, we expect it to remain below our stated upper target range of 40% to 45% in the near term. Our reported LTV calculation excludes the reversionary surplus, which provides additional comfort and, if included, would further reduce our LTV to 31.7%. Currently, our average debt maturity is 6.1 years, and our next maturity is GBP 50 million in November 2022. In this period, we achieved a corporate investment-grade rating with Fitch who also confirmed investment-grade ratings on our corporate bonds. This demonstrates the robust nature of our business model and capital structure. As our PRS portfolio grows, we will continue to refine our funding strategy, diversify our sources of funding, secure longer-term debt and further align our debt structure with the growth of our investment assets. Grainger is a highly cash-generative business, targeting around GBP 150 million from operational cash flows and asset recycling each year. We currently have GBP 587 million of headroom available to fund our investment pipeline, and we have committed CapEx of GBP 520 million planned over the coming 3.5 to 4 years. Our investment plan is phased to manage our LTV within our target range of 40% to 45%, and we project that we will remain below this range over the near term. As this slide illustrates, we expect to have around GBP 142 million of further investment capacity by the end of this year with this capacity increasing by around GBP 150 million each year from operational cash flows and asset recycling. Our net rental income progression reflects the updated position on our pipeline of secured schemes. We've revised the timing of our secured pipeline to reflect our current view of development delays. Our passing net rent is now GBP 75 million. This includes the current temporary impact of lower occupancy, of which indicators suggest a quick improvement. We expect this to increase on average by GBP 50 million per annum over the coming years as schemes progress. This increases our secured net rental income to GBP 135 million when our pipeline has completed and stabilized. This 80% increase is being delivered from developments that we have fully secured and are fully funded. As a reminder, this slide is based on passing net rental income, and our reported net rental income reflects the buildup over the asset stabilization and, therefore, tends to lag the passing net rent. We also continued to make progress with securing the schemes in our outer pipeline. The schemes in the planning and legal process and our share of the TfL partnership illustrates the potential for our net rental income to further increase to almost GBP 180 million. Our dividend progression is aligned to this growth with our policy to distribute 50% of our net rental income. For reference, we've included the scheme detail in the appendix to the pack. And so to summarize, we've delivered a strong performance over the first half of this financial year and continued to secure good results during the extended lockdown period. We have delivered rental growth during the first half of the year, and this has continued since the March close. Rent collection has remained high in line with the first half, benefiting from the diversity of our customer base, the strength of our customer relationships and our operating platform. We have capitalized on the positive sales market, taking the opportunity to execute planned asset recycling to accelerate our growth. This has also continued in the recent weeks, and our sales pipeline is ahead of the same time last year. Our liquidity is strong and more than covers our current capital commitments as we continue to grow our PRS portfolio. As we exit the current lockdown restrictions with our strong product offering, exceptional pipeline of new assets and our best-in-class operating platform, we're in a good position to capitalize on the near-term opportunities, and we're well positioned for continued long-term growth. Thank you. I'll hand back to Helen.

Thank you, Toby. In this section, I'll take you through the long-term fundamentals and the lead indicators of the growing rental momentum that we are seeing, and I'll give you a greater insight into the successful sourcing of our pipeline and more detail on our new openings. But first, just a reminder, it's 5 years since I outlined our strategy to focus this business to the purpose-built rental sector and to focus on mid-market homes and greater customer service. We have 3 key limbs to our strategy. Firstly, to simplify the business and focus on PRS. We are now a business dominated by PRS, 73% of our net rental income. We sold more than 450 million of noncore businesses and, based on our asset hierarchy, sold 460 million of assets. We have significantly reduced our overhead and our cost of debt. The second limb was to grow our rents, and we have doubled our net rental income, and it's set to more than double again with our pipeline. We said we would target GBP 850 million of PRS investment over 5 years, but we have well exceeded that with a current operational portfolio of GBP 1.8 billion and our future pipeline of a further GBP 2.1 billion. I wanted us to build on our heritage and our in-house platform. We have the best-in-class operating platform, which during this time has delivered outperformance. Turning to our investment case. This remains strong. The private rented sector has shown to be more resilient than most other real estate sectors. There is a huge undersupply of good quality rental homes and demand is likely to grow. The structural shift from buy-to-let to institutional landlords is only just starting. We have a supportive government and a light-touch regulatory environment. And Grainger is poised to benefit. We are the market leader with a growing pipeline and integrated business model and a lead operating platform, but we are enabled by technology, and we have a good track record of investing. We are a good partner, and we have a strong balance sheet. I will now explain these fundamentals in more detail using the 2020 data. Only 3% of the 4.5 million homes in the U.K. are owned by institutional landlords. 97% are owned by buy-to-let private landlords, but private landlords are shrinking as a percentage of the overall market due to a variety of reasons, concerns over increasing personal taxation, higher regulation for individuals and difficulty in management. So whilst overall demand is growing, the main supplier of rental homes is shrinking, and this undersupply also underpins our pricing. And the long-term fundamentals are showing strong growth in renting across most age groups. And whilst the English Housing Survey shows growth in most age groups, it is showing a higher percentage of growth in the older age group, meaning people are renting for longer. Savills' recent analysis showed that built-to-rent schemes are benefiting from the flight to quality. And whilst the residential sector overall has outperformed even after the concessions we have made to our customers at Grainger, we have also outperformed the wider market. Looking at the near term, our occupancy was maintained at 89%, despite ongoing lockdown restrictions. We took a number of key actions, for example, the rollout of our digital leasing platform, the establishment of our customer service team to support retention. We expanded our direct letting team. We enhanced our digital marketing, and we took the opportunity to refurbish some of our apartments, which have not been vacant for many years and enhanced our customer offer. Despite lockdown, we saw good lettings and renewals, achieving rental growth across all regions. More recently, we have seen a strong growth in inquiries and lettings and strong demand for our new products. And as we enter this traditional busy letting period, we are well positioned to capitalize on it. We are continually building on Grainger's positive social impact business model of delivering good quality mid-market rental homes. At Grainger, we say we don't just build houses, we build homes and communities. And I am proud of how the Grainger team has taken this to heart, how frontline teams based at our buildings, who are responsible for them, have worked tirelessly to roll out our community events programs to support our customers during COVID lockdowns. We are also aware of the wider issues of homelessness in the U.K., and we've become a foundation partner with LandAid to create some of the First Step housing out of homelessness. We have continued our focus on well-being and our resident services team have been undertaking mental health first aid trading, and we have reviewed and enhanced our specification to reflect the lifestyle changes from COVID-19. All these things Grainger is doing to create a positive impact on the lives of our residents and communities and are part of our core activities. Our business has a great potential to make a positive social impact, which is why ESG is integrated into all of our investment decisions. Our commitment to net 0 carbon in operations by 2030 is clear. But in addition, we've been working to encourage and influence our customers to reduce their carbon footprint, enabling green energy supplies and informing them of changes they can make to support our green agenda. We are committed to a diverse and inclusive workforce, and our diversity network is maturing as we put our initiatives in place to support those who would ordinarily not be attracted to a career in real estate or housing. Our ESG leadership is being recognized by our outperformance against multiple benchmarks and by multiple assessors. We have a strong track record of delivery on our pipeline ahead of our competitors, and I'm often asked about the ingredients of our successful approach. We continue to evolve our proprietary research approach to focus on cities with high growth potential and robust supply-demand fundamentals, but we also look at the micro location of potential investments reviewing the connectivity to amenities, access to green spaces and air quality, amongst many things. Our cities and London strategy were recently refreshed, adding more research, looking at the detailed economic, demographic and housing market fundamentals of each local authority. We do invest in suburban locations, but we cap our portfolio allocation and are focused on locations that still benefit from accessibility to major employment centers and with strong barriers to home ownership. We have multiple routes to acquisition, and this also maximizes our ability to access the market. The most popular method across the portfolio is forward funding. This is where we work with third-party developers to deliver stock to our specification. It enables us to accelerate resourcing and scale quickly. By and large, we are partnering with developers with in-depth local knowledge, which accelerates our ability to go through planning. Our development team, which has a deep level of experience, has project management oversight, and Grainger is shielded in these instances from developer and contractor delays, usually by contractual terms, which enable compensation for any delay. Direct development gives us full delivery oversight and an opportunity to enhance returns. It leverages our in-house skills. It does have slightly higher planning and development risk and, usually, as we start from the [ raw site ], has a longer lead-in time. We kept this activity in our business at no more than 15% of GAV. And finally, stabilized acquisitions. Obviously, this is the traditional way of building a portfolio. However, in the U.K., as the market is so young, there is very little purpose-built built-o-rent stock that matches the quality of Grainger's specification. It does, however, give us immediate income and the opportunity for us to leverage our platform, but there are limited high-quality investment opportunities already built that fit our design, safety and ESG criteria. We work to optimize these 3 acquisition routes to mitigate risk and balance the growth of our portfolio. We are concentrating on developing our clusters to increase our operational efficiency. Our London cluster pipeline looks like the largest, but it is delivered over the longer term, as London, whilst having the best fundamentals for renting, is the most challenging to develop in. Of the 6,225 units in London, our PRS operational homes are currently less than 2,000, but with a further 271 being delivered this year. In the short term, our new releases are timed well for the easing of lockdown restrictions and the early uptake of our Southampton and Manchester schemes is extremely encouraging. We are delivering our secured pipeline at pace, and it is the quality of our homes management with great amenities that our schemes in Southampton, Manchester, London and Leeds are in a great place for the unlocking of the market in the coming months. Grainger's direct leasing team and our mid-market pricing will position us well for the pickup in momentum. This is a business that has both near-term momentum and long-term growth fundamentals. There are positive demand drivers for the sector, and it is proven to have a strong investment fundamentals. Our sales performance is supporting our growth. We have significant income growth via our secured pipeline under development, and we have a strong balance sheet and a flexible funding structure. This is a high-quality and regionally diverse business. We have a track record of leading the sector and a successful sourcing, and we have a best-in-class operating platform. We are well positioned for a period of accelerated growth. Thank you. I'll now invite you to ask questions, and I'll be joined by Toby Austin, our Interim Group Finance Director; Andrew Saunderson, our Director of Investments; Mike Keaveney, our Director of Land and Development; David Prescott, our Director of Strategy and Corporate Finance; and John Blanshard, our new Director of Operations. Kurt Mueller, our Director of Corporate Affairs, will field the questions. But first, we'll take questions from the conference call.

[Operator Instructions] We will now take our first question from Kieran Lee from Berenberg.

Three questions, if I may. The first one related...

Kieran's line seems to have muted. We will now go to our next question from Sander Bunck from Barclays.

Two quick ones, if I may. The first one is a slightly different one is on your disposals. I noticed that quite a big chunk of the portfolio was -- not a big chunk of the portfolio, but around 400 units or so were sold at relatively low average pricing. Can you give a bit more detail around that? What it exactly was -- how that -- yes, what it exactly was basically? And the second question is just more broadly on the market. And I must say, I was a bit surprised probably to see that the overall occupancy in the market, I think you mentioned, was around 71%. And I was just wondering if you could shed a bit further light on that because it seems a bit counterintuitive given the strong wider market fundamentals that you addressed elsewhere in the report and just kind of interesting to see, like, how that evolves, how you play into that market, where it currently sits, what value is taken into their assumptions in that regard, et cetera?

Thanks, Sander. So for your first question, we have -- I'm going to come on to Andrew, who deals with the investment disposals. But we have a very robust asset recycling program. So we rank all of our assets in terms of the hierarchy for future returns, and then we have a disposal program, and it's a mixture of assets that we think are no longer appropriate for the long term sort of platform and some tenanted regs and then also normal regulated properties. But yes, it is quite a significant number of disposals, but I'll hand over to -- and it represents about GBP 2 million of income. But I'll represent -- pass it over to Andrew.

Yes. Thank you, Helen. So in terms of our disposals, I think part of that relates to our core regulated tenancies that have become vacant over the course of the year and that our standard approach to those is to sell those on vacancy. And then as Helen said, through our asset hierarchy work, where we look at every single property that we own within the portfolio, we do assess that on an annual basis, and those that we consider to be the lowest performing and with the lowest potential future growth prospects are those that we target for sale, and that's what's predominantly made up the approximately GBP 50 million of tenanted sales that we've done over the course of the financial year so far.

Sander, does that answer? I suppose the other thing to add is that some of them are quite small because they are sort of things like odd individual houses in low-value areas, for example, that we've -- that are more intense from management. And then the second question that you asked was really about our comparator group. There's very little data out there in terms of the overall market. So that comparator group of 71% is taken from the U.K. Landlords Association data that they collect from, probably sort of not every landlord but members of their organization, which is quite broad. I would probably say that it's quite Southeast-centric focused and so that might be importing into that 71% figure. So it's not -- we don't have overall -- for example, ONS data doesn't collect on that sort of overall occupancy.

Okay. Just to slightly push on that, though, because that is -- it is a significant -- I'm surprised by the high level of it. And obviously, you continue to perform well within that and the occupancy is much higher than that market. And that's obviously because of the better quality build. But at the same time, I can imagine it's quite difficult to develop and to rent in a market where vacancy is effectively 30%. So I'm just trying to get a sense of how you feel about maintaining that rental [ tension ] going forward?

Yes. So also, I think, you need to look at -- we've gone through just over a year of threats of, for example, capital gains tax and small individual landlord tend to invest in it for a combination of both income and capital. So there has been some elective [ voids ], and charts that I showed you on the market as a whole is saying that actually the market for the buy-to-let landlord is shrinking. So that -- we do know that that's gone from 4.7 million down to 4.5 million and is likely to shrink as a market as a whole. So actually, what we're saying is the demand pie is getting bigger, if you like. But overall, the letting is -- the market is shrinking for the small buy-to-let landlords. So there'll be some electives they can see in that as well.

Okay. Do you have a comparable number for the same period last year?

I don't -- I haven't got them here, no. This is the only data we have at the moment.

We will now take our next question from James Carswell from Peel Hunt.

Just a quick question on the inquiries. So the -- I think the 86% increase you referred to. I guess, 2 questions. One is, is that kind of uniform across the country? And any particular trends you're seeing within those inquiries? And then second -- can you just talk a little bit about how the current level of inquiries compares to a normal pre-COVID year? I think it's a little bit ahead, from what I understand. And then the second question follows on from Sander's. On the occupancy, how quickly do you think you might get back to your kind of full occupancy at the kind of high 90s that you used to run at? Do you think there would be a pretty sharp rebound? Or do you think that will take a bit of time just given some of the vacancy across the wider market?

Thanks, James. Yes, the letting inquiries 86% increase is from the start of this year. It is significantly ahead of that period last year. And if you remember, we really didn't go into lockdown until the end of March. So that's obviously -- it's an 86% from start of this year, but it is also significantly ahead of last year as well. I think that is because there has been, obviously, quite a lot of rotation in the market and people looking to sort of -- our main cohort may be looking to return from staying with parents or whatever. The other thing that you're asking about is return to our normal levels. [indiscernible] normal level. Good level would be at around 95%. We have driven it more recently to 97% before the pandemic and then obviously maintained it from September of last year at around 89%, 90%. So I think we're just about to come into our busiest letting period, and we're likely to, obviously, pull back some of that. And the inquiries are indicating to a strong summer letting period, much stronger than the one that we had last year. But I wouldn't expect us necessarily to get up to the level pre-pandemic within this financial year. But I would expect us to be making some progress towards that 95% level.

Great. And just on the inquiries, is there any -- is that fairly uniform across the country in terms of the demand you're seeing? Or is it concentrated in the regions or London or...

Yes. And I'm going to -- I'm dropping John in. He's certainly been in the business for a month, but I'm just going to ask John if he wants to add to that one, James.

Yes. Thank you. I was just going to say, actually, we do, of course, have a real time focus on achieving the required run rate to get there. And we're continuing, I believe, at the moment to move in the right direction. So I think with the further easing of the restrictions, that will also support further improvement in lettings and renewals that Helen did mention in the presentation. We have already seen 2,000 -- just over 2,300 lettings and renewals already achieved this year. So I think we're really well placed and well on our way to intimate it by sort of the summer, early autumn.

[Operator Instructions] There are currently no questions in the queue. We will turn over to the webcast for some questions.

Thank you, Emma. Good morning, everyone. The first question we have is from Chris Wright at HC Capital regarding build cost inflation and what we have been seeing over the last 3 months. And do we expect this to put pressure on margins? And finally, are there any concerns regarding contractor credit risk if they have agreed to fixed price build contracts?

Okay. Thanks, Chris. I would say that the majority or indeed all of our contracts at the point that we commit to them are guaranteed maximum price contracts. Our forward funding contracts also have a cushion in there, which is the developer's return as well. So it's -- in terms of our existing secured pipeline, it's obviously something we look at. I'm going to hand over to Mike Keaveney, who runs our development team and then also to David on how we deal with credit risk because it's something we look at quite carefully.

Thank you, Helen. So construction inflation is one of the key metrics we monitor closely through our cost consultants and also directly in dialogue with the supply chain. It's fair to say we're not unduly concerned by the overall level of inflation in our sector that's currently been experienced or that is being projected. Helen has already mentioned our mitigation policy on fixed price contracts, but that policy doesn't make us complacent. We're constantly monitoring it. And perhaps I'll pass to David to talk about how we manage the credit risk.

Yes. As Helen said, it's something that we think about carefully. Just to give you a bit of background as to what we do here, we do detailed counterparty reviews of all contractors that we're working with and, in some cases, subcontractors as well. It's a continual monitoring where we have alerts in place for any issues and early warning signals. And importantly, we have a very open dialogue with them all, which Mike leads. So yes, as a reminder, we generally work with top-tier contractors, and it's not something that we've seen any issues with at the moment.

The next question we have is from Mike Prew at Jefferies, also relating to construction cost inflation, which we've answered most of. He was also wondering if there are any specific trades that we're seeing affected. I don't know if you want to supplement any of that, Helen, Mike?

No, Mike, if you're looking at obviously trades, you're looking at mainly labor. Just to remind everybody that labor and wage inflation is usually good for rental housing because it improves the ability to pay. But I'm going to hand over to Mike Keaveney to give you the details of any particular trade insights he's got.

Thank you, Helen. So what will happen month-to-month is different trades and different materials will move, and you'll see deflationary and inflationary pressure. So I think you could ask this question in another couple of months, and it would be a different answer. Right now, last few months, there's been a spike in steel costs, which you've noted. But what's very interesting for us is that, in a sense, Brexit led the way in making contractors consider their supply chains themselves and avoid the sort of worries they've had about importing material inflation and import materials just generally. And that's [indiscernible] good step going forward.

The next question we have is from Chris Millington at Numis. I should say the next few questions we have is from Chris at Numis. How does pricing on recently agreed regulated sales compare to September '20 valuations? How do rental rates on newly launched schemes compare to underwriting criteria? How will you balance rental growth against the desired increased occupancy going forward? And finally, could you please comment on your recent experience in London and whether inquiry levels are recovering in line with the wider group?

Great. Well, I'm going to pass over to Andrew on the rental growth one. But if I can just explain regulated tenancy sales, they are 0.6% ahead of September valuations. But disguised in that slightly is the fact that sales in the U.K., because of the volume of sales in the market, are taking longer. So the average sales time is taking about 120 days, so 4 months. So things that we transacted in -- by the end of the first half, which -- in March, will have likely been an under offer around October time. So it's not surprising they're quite close to our valuation figure. But obviously, we've continued to sell, and so we'll probably get quite a strong performance based on the indices for the second half. I'm going to ask Andrew to talk about how the newly launched schemes are doing compared to underwriting, and then we'll come back on rental growth.

Thank you, Helen. So as Helen said earlier, we've launched 2 schemes recently, Gatehouse Apartments in Southampton and The Filaments in Manchester. I have to say, I have visited both schemes fairly recently since they reached practical completion, and I'm personally delighted with what I've seen. If I take Gatehouse Apartments, though, we launched that 6 weeks ago. We've now let 54 of the homes there, which equates to 41% of the total, which I think is a very, very encouraging stuff. We generally would allow a year to reach full occupancy for a scheme of that size, so we're ahead of our underwriting there. And also the rents that we're achieving are slightly ahead of underwriting. So we feel that we're off to a very good start there. And again, at The Filaments, we've let a similar number of homes, 54 homes, but owing to the size of that development being considerably larger than Gatehouse Apartments, it's a smaller percentage. But again, we're very pleased with what we're seeing.

Chris, your next question was about rental growth and how we balance it. Our rental growth figure at 1.7% is down from this time last year. And that's exactly what you're seeing, which is, at this period of time, we are not pushing the rents particularly for our existing occupiers, focusing more on retention. But certainly, the rental growth we're seeing in Grainger is, obviously, not what you'll read in the headline. So I think at 1.7%, it's a good figure. The -- it's 1% in the PRS. And then the last limb of your question was actually the London and whether inquiry levels are increasing. And yes, we're getting strong inquiry levels around the London product. Actually, we -- one of the things about inquiries is it depends what we're launching. So we're launching and marketing in Southampton and Manchester at the moment. So they will obviously be getting high numbers of inquiries. But generally, on the day-to-day inquiries, it's London and the return to London that's generating a lot of those.

Great. On to the next question. We have Kieran Lee from Berenberg back, apologizing for his line dropping off. But he has 3 questions. The first we may have covered already relating to cost inflation in construction costs, and is this likely to impact on profitability of developments. Second question on the residential development tax, BTR was included in the initial scope of the consultation. Have you done any work on what this would look like, base case, worst case? And then finally, I believe, strategically, the reversionary portfolio is getting ever smaller and is relatively low return. What are your long-term thoughts here and prospects for REIT conversion given increasing corporate tax rates?

Okay. So I think we have answered your first question, Kieran, about inflation. I do hope your line didn't drop off and you did get some of that. And we are insulated on our developments by the fact that we have the guaranteed maximum price. The residential development tax is out for consultation at the moment. There is a huge difference, and we're making the Treasury and the Secretary of State aware of that. And the house builders, they build and pass over to individuals who are occupiers. With Grainger, we build and we hold. So any issues that we -- that are [ created ] through our construction, we pay and remedy ourselves. And so that's the argument as to why there's less logic for us to be included in the scope. What it will mean is that it will, obviously, just impact on the overall cost of housing. And then the third part of your question was that the reversionary portfolio is getting smaller and what are our thoughts in terms of REIT conversion. I'm going to ask David to sort of -- who has done quite a lot of work on this, to sort of chip in on that one. The reversionary portfolio, as you have seen, Kieran, is really supporting us through our growth agenda. And as it accelerates, I think, our vacancy rate to 7.1% in the first half is showing that, that is actually funding -- that cash flow that's funding our long-term development program. But we won't have it forever. Average age of our occupants is about 78 at the moment, so we won't have it forever. But also, we're calibrating at the same time our view of REIT conversion, and I'm going to hand over to David to talk about that.

Yes. So the tax rate is kind of only one of the inputs that goes into that. Tax rate going up does bring that closer. But as Helen mentioned, there's reversionary surplus to go for in our regs portfolio. The natural home for a fully PRS business is as a REIT, and that is our trajectory as a business. So it's something that we are working towards. I think at the moment, we'd probably say it was 4 years off, but something that we continue to look at as we grow our business.

The next question we have is from Marcus Phayre-Mudge at BMO. Another question on occupancy. He's wondering what the assumptions are being used by valuers on occupancy.

I'm going to hand over to Andrew on this one, but it's fair to say that the valuers are getting closer now to the way that we look at commercial in that they allow a period of letting within it. We might argue it's a little bit cautious, but that's the approach that they take. Andrew?

Yes. I think that's right, Helen. So for our PRS, our built-to-rent assets, effectively, it is a rent and yield valuation, but the occupancy assumption that the valuers achieve is only part of the calculation. So for the valuation that we've just been through, they will review and consider the current occupancy rate. But then there are a number of other factors that they will consider when they decide what the appropriate yield is to apply to that income, and that includes the location of the asset, the strength of the market. So yes, they do consider it. Yes, they do take into account the current occupancy, but it's by no means the only factor that drives the valuation.

And Marcus, just on that. If you've got a building with a high degree of void that was previously stabilized, they will make an allowance for an assumption on how long that would take to lease up. And I think that's what we're now seeing in the investment market as well. So this residential valuation market is really maturing.

The next question is from Daniela Lungu from First Sentier. Again, relating to occupancy, Daniela wondering what happened to occupancy since the end of March. And if we can provide any data on how many move-outs and move-ins we've seen since the end of March.

Daniela, we're not providing that data at the moment. We're averaging -- in terms of renewals, we're sort of -- we're running at the moment between -- and it depends from month to month, 50, 55 to sort of 60s in terms of renewals. And the occupancy has maintained fairly steady since September of last year. So we've had peaks and troughs, but the 89 is very close to the 90 figure that I gave in September of last year and February as well.

The next question from Jonas Kihlstrom at Schroders. Have workers leaving the U.K. because of COVID and Brexit impacted on demand and occupancy?

So no, they haven't -- we don't have a lot of -- our mid-market pricing has meant that we haven't had a huge amount of overseas residents or indeed overseas students in our portfolio. So that hasn't been a major factor in either because of COVID or Brexit. We did our pre-Brexit planning on this. Obviously, there's quite a lot of data protection in terms of how much you can ask for. But we do have the right to reside in the U.K. as part of our right to rent check. And so we do have some detail around that, but it isn't a significant factor in our occupancy.

The final question is from Miranda Cockburn of Panmure Gordon. Can you break down PRS rental growth by region and, likewise, occupancy? Where are the highs and where are the lows?

I'd ask Toby to do that one.

Thanks, Helen. In terms of rental growth, and we do see some regional variations, if you take the PRS overall, we experienced 1% like-for-like rental growth over the first half. If we break that down to London, we've seen 0.5% there, and across the regions, 1.7% to get back to that blended rate there. Overall, when including the regulated tenancies, 1.5%, London; 2% for the regions and 1.7% overall. Occupancy is broadly consistent throughout all of the regions. It's probably the main things. Anything more to add, Helen?

It's [ good ], I think.

Those are final questions from the webcast.

Great. Well, thank you very much, everybody, for a good set of questions. Thank you for joining us this morning. If there's anything that occurs to you when you review the detail of the RNS in the presentation, we're available. Please contact Kurt or myself, and we'll be happy to answer your questions. And very much looking forward to seeing some of you virtually on our road show coming up. So thank you.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.