Grainger plc (GRI) Earnings Call Transcript & Summary

So good morning, everyone, and welcome to Grainger's half year results. Rob and I are really looking forward to presenting these to you. The company is in a strong position, and we delivered a particularly strong set of results. And this performance is ahead of our plan that I set out 6 years ago, and we are now delivering our pipeline at pace. At the end of last year, I told you we had been resilient throughout the pandemic and have recovered swiftly, and we're now ahead of pre-pandemic on all key measures. This strong growth in the first half is principally driven by 2 factors, the delivery of our pipeline, and the leasing ahead of plan. So the agenda this morning is that I'll take you through the highlights and in particular, I'll cover the strong results, driven by openings and lettings, the operational progress across all areas, and how our pipeline is delivering and expanding, and the strong structural growth for the sector and for our business. Rob Hudson, our CFO, will take you through the financial review, and will also give you greater detail on how our pipeline translates into earnings and returns whilst also explaining our valuation growth, the impacts of inflation on Grainger and how we see this business delivering sustainable, high single-digit returns. I'll then update you on the market and will give you more insight on our customers, our competitive advantage, the growth in our market, and our new acquisitions. And then we'll have an opportunity for questions and there's a number of the Grainger's senior leadership team in the room today to help with these. So this first half we have delivered a strong performance. Our net rental income has grown by 23%. Our like-for-like rental growth is 3.5%. And I had predicted last results that by the end of the full year we would be at pre-pandemic occupancy levels. In fact, we achieved that in March. This result has been driven through a combination of the momentum we maintained throughout the pandemic in developing our pipeline and to the changes that we made this time last year to develop in-house, our own leasing team and to enhance our leasing team with our CONNECT technology, enabling us to respond swiftly to the market, both in terms of product offering and price. Our new schemes are attracting strong customer interest and are leasing up well ahead of plan. Our operational portfolio is now GBP 3.1 billion, and we have a pipeline of a further GBP 2.4 billion. A more than a billion of that is secured and most of that is already on site. This will enable us to deliver 10,000 new homes. This is a business that performs better at scale. We are able to enhance returns for shareholders and also to enhance our customer offer. We continue to drive returns for shareholders, our adjusted earnings for the first half were up 23% at GBP 46.3 million. Our net rental income is up 23% at GBP 42.8 million. And we have delivered schemes with GBP 16 million of passing net rental income in the last 12 months. Our like-for-like growth is 3.5%, which is 3.7% for our Reversionary portfolio, 3.5% for our PRS portfolio. And this has been reflected in our first half valuation, uplift of GBP 79 million on our EPRA NTA is 305p per share, up 3% for the half year and 7% in the year. Our interim dividend is up 14% to 2.08p per share. And our residential sales profit is up 7% from our regulated properties, and we sold these at 3.6% above the September valuation. Our operational PRS portfolio is now GBP 2.2 billion, which is 71% of our portfolio. And we continue to invest in our customer experience. Following consultation with the government, build-to-rent was excluded from the Building Safety Repair Pledge and Residential Property Developer Tax. Our New London assets at Apex Gardens and Windlass Apartments, which launched in late summer last year, are now fully stabilized. And our new launch at Pin Yard in Leeds is 65% leased in just 7 weeks. We have 5 completions in total due in 2022 and with the expectation that we will deliver accelerated growth in net rental income over the next 2 years. We've made good progress on our TFL portfolio with 5 schemes now having achieved planning consent. And in a moment I'll take you through our pipeline where we have over 1 billion in the secured pipeline and 12 out of the 16 are on fixed price secured construction contracts. Grainger is a socially responsible business. 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 difference in people's lives goes much further than the provision of new homes to our customer and community engagement programs and raising the standards of renting to enable customers to live a greener life. We've highlighted here just some of the progress that we've made in the first half. 87% of our PRS portfolio has an EPC rating of A to C, and we continue to make progress well ahead of the regulations that are expected to come into force in 2025, '26. We're now on 100% renewable green energy contracts for our landlord supplies. Our discounted and affordable housing program, which is delivered through our main portfolio and Grainger Trust, is now approaching 1,000 homes. This year we have established a board level responsible business committee to give further focus to our commitment to making a positive social and environmental impact. We have launched our customer initiative of living a greener life and we are committed to helping our residents with greener buildings, operational practices, help and advice. Our carbon emissions reduction program is on track. We have a clear strategy for Scopes 1 and 2, and we're making good progress. Scope 3 is underway and we have engaged the whole business in our program of living a greener life, which includes our resident engagement program to reduce Scope 3 emissions. I'm pleased to say that Grainger's diversity and inclusion program is accelerating. And as we continue to attract a diverse range of talent, it is important that we nurture this, which is why we've created our diverse talent acceleration program with the first cohort identified this year. Our work continues to be recognized by many benchmarks, awards, and endorsement from the EPRA Gold Award to ISS Prime rating. Like many companies, we have been appalled by the war in the Ukraine. And I am pleased to say that the business and our employees have taken action. We have made a commitment to provide a suite of homes at our Poppy Apartment Scheme rent free for a year for fleeing families, helping them to create a small community in a new country. We have a very clear strategy and our exceptional performance of delivering on our strategy is down to the design, the strength, and the value of our operating model. The whole business is focused on great homes. In origination, our development team have 12 schemes on site. And in the first half, they have secured 3 other land sites and taken 6 schemes successfully through the London planning system. Our investment team has 11 schemes in planning and legals, has successfully implemented GBP 35 million of asset recycling, have attracted an outer pipeline of almost 3,000 homes, and implemented a program of adding value to our older stock. And we continue to attract talent to this high performing team. Our operational team have delivered the lease up and the renewals whilst also harnessing new technology through our CONNECT platform and new ways of working to enhance our customer journey. This platform is unique in the U.K. It adds real values to our business and to our shareholders' returns. And now to our pipeline. Later, Rob is going to give you more detail on how this translates to exceptional earning growth in the future. Our operational portfolio is GBP 3.1 billion. Our regulated portfolio is now less than GBP 1 billion with our PRS portfolio at just under GBP 2.2 billion. And last year was a strong year of delivery for us, which has driven rental growth this year. But this year is also a strong year of delivery. In March, we delivered our Pin Yard scheme in Leeds, which is a further 216 homes in our Leeds cluster where we now have 3 major schemes and we're planning to hold a Capital Markets Day in Leeds in June. Later this month in Birmingham, we will launch our Gilders Yard scheme. And we have launched the first phase of Weavers Yard in Newbury and this development, which is going to be delivered in a number of phases, is a great location immediately next to the railway station. And towards the end of this year, we have our second scheme in Milton Keynes, a further 261 homes at Enigma Square, and the Copper Works in Cardiff, which is 307 homes. And together these schemes will deliver a further GBP 13 million of net rental income. In the first half, we've secured new investment opportunities in Exeter, Sheffield and London, and another 881 homes added to the PRS pipeline. And we've achieved planning consent on 6 schemes in London, 5 with TFL, and 1 in Lewisham. London is one of the most challenging cities to gain consent, but the demand for rental homes is consistently strong. In total, we have a further 16 schemes, of which the majority are on fixed price contracts and are already on site and underway. We have delivered a good performance in the first half and this has led to strong capital growth. And the sector as a whole has proved itself resilient with good growth potential. But it's also worth reflecting that there are 5 key reasons why the PRS sector is attracting investment capital and these are the fundamentals of structural growth. So there remains a strong demand and whilst a lot is talked about new supply, there are still only 1.4% of the 5 million private rental households in the U.K. that are built to rent households and that surround 73,000 homes. Rental growth has been strong in the sector and occupancy has proved resilient. Our occupancy is 98%. Our like-for-like rental growth is 3.5%. And there is increasing price tension and potential for further rental growth. Consumers are attracted to the professionalization of the sector with small landlords exiting and being unable to compete in the same way as the larger landlords at a point where consumers are expecting greater value in terms of money and better service. There is an expectation of yield compression. The sector still looks inexpensive, particularly if you compare London yields with the major international cities. But also our regional cities offer good risk adjusted returns compared to their European counterparts. GBP 4.3 billion of new capital was invested into the market in 2021. And we expect strong demand to continue as the U.K. market matures and this market is differentiated from the European market by having a more supportive regulatory environment. Whilst we have new entrants to our sector, we remain the market leader. We are the largest listed owner operator, but we also have the longest track record, the largest pipeline, and an unrivaled platform. We have a scalable platform, which is throughout the U.K. And this national platform is driving compounded earnings growth, delivering material net margin growth and is a key competitive advantage to enable us to grow quicker. Our pipeline for growth is significant and is secured. GBP 1 billion of our GBP 2.4 billion pipeline is fully secured and we have a proven track record of outperforming our underwriting. Our secured pipeline is fully funded and we have capacity to grow, and there is always the option to accelerate our regulated tenancy sales. So we have delivered a very strong first half and our secured plan for further growth is accelerating. So I'll now hand over to Rob, who will take you through the details of our performance.

Thank you, Helen, and good morning everybody. So today I'm going to cover off the key financial highlights for the first half. And also given the strength and the visibility of our secured pipeline, I'm also going to provide you with some color over the growth potential this brings both our earnings and our returns. So turning to the financial highlights, we've delivered a particularly strong set of results in the first half. Our pipeline and our lettings performance have generated an acceleration in both our occupancy and growth over the period. Net rents increased by 23%, reflecting the letting up of our 2021 launches, good levels of like-for-like rental growth, and our record levels of occupancy. Adjusted earnings were also up 23% as a result of the performance in net rents and also the continued strong delivery of residential sales in the period. So with this, our interim dividend was up 14% in the half. That reflects the impact of the September placing and our strong underlying performance. Profit before tax was up 122%. That reflects valuation growth from yield shift from scheme lease up, our performance on disposals and also residential market strength. So with this, our TPR for the 6 months accelerated to 3.8%, TAR grew to 3.2%, and EPRA NTA was up 3% in the half and 7% over the last 12 months. The balance sheet remains in great shape with LTV at 31% reflecting ongoing reinvestments into our pipeline. Overall, we've delivered a strong set of results with the business very well placed to grow in the year ahead. Turning now to the income statement. Adjusted earnings were up 23% in the half reflecting strong rental growth and continued strength in residential sales. The recovering occupancy during the second half of last year continued at pace and now stands at 98%. At the start of the year, we guided to recovery and rental growth to our pre-pandemic levels of 3% to 3.5% for the year. And I'm pleased to say we've already delivered at the upper end of that range with a like-for-like rental growth of 3.5% in the period. We saw little variation in both rental growth and occupancy levels between London and the regions. Stabilized gross to net was 25.5%, improved from 27% in the same period last year, reflecting our reduction in voids and strong cost control. We've continued to deliver a strong sales performance with residential profits up 7% in the half. Looking ahead at our sales program, we continue to see a strong pipeline disposals into the range of FY '22 and expect to make a similar quantum of sales profits for FY '22 as we did for FY '21. As a build-to-rent business, the government has recently confirmed we're outside the scope of the Residential Property Developers Tax and remediation fund pledge. Health and safety remains a key focus for this business. As our high rise portfolio has predominantly been constructed post-Grenfell with very little fire safety issues on these assets. We've invested in remediation and have already taken any associated costs throughout valuations over the last couple of years. We've also performed an extensive review by historic Exeter developments over the last 30 years. During the half, we've taken a full provision of GBP 9 million for legacy fire safety matters on these schemes as an exceptional item. Where appropriate, we're seeking recoveries from both contractors and insurers, which may reduce the overall liability over time. Turning now to movements in that rental income. Net rent was GBP 8 million ahead of the prior half with outstanding growth of 23%, reflecting the latter of our FY '21 launches, the rapid recovery of our occupancy to record levels and the like-for-like rental growth of 3.5%. PRS rental growth was also 3.5%. This was made up of 4.4% growth from new lets and 2.7% on renewals. So overall net rent for the half was GBP 43 million. The new launches in FY '22 are largely weighted towards the back end of the year, with the majority of the impact, therefore, benefiting FY '23. With this, I'd expect a similar run rate for the second half of the year with rental growth and disposals broadly offsetting one another. Turning now to the valuation summary. Overall, we delivered valuation growth of GBP 79 million in the half. That's up 2.3%. The ongoing delivery of our strategy means that PRS has now grown to 71% of the operational portfolio. PRS valuations were up 2.1% in the half, with the majority of PRS assets being valued on a rent and yield basis. Growth was driven through the delivery of our pipeline, the lease-up of our new launches, together with yield compression of around 10 basis points on recently delivered schemes in both London and the regions. ERVs grew by 1.3%. Regs have now reduced to 29% of the operational portfolio, and the majority of our regs are based in London and the Southeast, where HPI has been more muted. We saw good growth in the regions of 5.4%. Overall, regs were up 3.2% in the half. This slide sets out the EPRA NAV measures. We consider EPRA NTA the most relevant measure for Grainger. The 3% increase in the half to 305p is driven by the strong growth in valuations. The Reversionary surplus in our portfolio is excluded from this measure, and it's still a significant amount at GBP 242 million, which equates to about 33p per share. Also a further reminder that our NTA also excludes the value of our platform and our technology as well as our pipeline. This chart shows the key movements in NTA over the year. Rental income and valuations continue to be the key drivers of growth in NTA. With this, our EPRA NTA was up 3% in the half. It comes off EPRA NTA growth of 4% in the prior 6 months, delivering 7% growth over the last year. Our net debt closed the half modestly higher at GBP 1.1 billion. Our operating cash flows remained strong at GBP 54 million, and we continue to invest heavily in our pipeline as we accelerate our growth with GBP 151 million invested during the half. We're focused on maintaining a low-risk flexible capital structure supporting the business and its growth ambitions. A key action that we've delivered during the first half was raising new bank finance, extending maturities, and reducing our fully drawn cost of debt. LTV remains in the low 30s. We maintain our approach to having our committed CapEx fully funded. Were we to include this committed CapEx, LTV would be 40%, within our stated 40% to 45% range. Our cost of debt remains consistent at 3.1%, reflecting that we've only minimal exposure to interest rate rises on our current debt. Nearly 100% of our variable rate debt is fully hedged, and our weighted average debt maturity is 6.2 years. We have no significant debt maturities until August 2024. Despite the wider macro uncertainty, over the last couple of months we successfully raised GBP 150 million of new bank facilities through a combination of both existing and new lenders. These facilities are on the same terms as our existing RCFs, so lowering our average cost of debt over time, which would be 2.9% if fully drawn. We also renewed a couple of our smaller facilities on the same terms as before, supporting our weighted average maturity. As our PRS portfolio continues to grow, we'll further align our debt structure with the growth of our investment assets, diversifying our sources of funding, and securing longer term debt. We're in a good place for funding our ambitious growth strategy. Given the current focus on inflationary issues, I've set out what this means for Grainger across a number of different areas. Overall, we've got a good degree of protection in place. As is clear from the chart, historically, rental growth has closely tracked general cost inflation with the impact benefiting the business. Our staff costs grew in line with wage inflation, and we had the benefit of driving operational efficiencies as we scale and leverage use of our technology and our platform. And we always seek to fix pricing in our developments, and we've got a good degree of protection in place with 12 out of the 16 of our secured pipeline projects now under fixed price contracts. And as I've just set out, our fully funded secured pipeline with near 100% hedging in place gives us good protection against a rising interest rate environment. This slide shows the progression of our passing net rent based on the delivery of our pipeline. Recurring income will form an increasing component of our earnings as we continue to build out our pipeline in line with our strategy. FY '21 reported ramp was GBP 71 million, and the delivery of our pipeline has already grown passing rents to GBP 88 million at the half year. Overall, our secured pipeline nearly doubles this to GBP 140 million. And we have clear line of sight at the delivery of this increase as it's all fully funded and secured. The opportunities in our planning and legals give us the potential to increase net rents by a further GBP 34 million and now include the 4 TFL schemes before planning. We've also given further visibility for the first time of our outer pipeline of schemes under consideration across our business and TFL, which have the potential to add a further GBP 30 million. These additional areas have the potential to near trouble rents as a result. And as net rental income grows, so will the dividend as our policy is to distribute 50% of our net rents by way of dividend. The doubling of our rental income delivered by our secured pipeline has been well trailed over recent years. I'm also including some new information for the first time to help the understanding of how this translates to growth in both our earnings and our returns. The chart bridges our total accounting return for last year of 5.5%, is what we see as our sustainable run rate per annum post the delivery of our secured pipeline of 8%. The investment we've made in our in-house operating model, our expertise and our CONNECT technology means we have a very scalable platform. Our results into operating leverage means we're able to keep our central investments in overheads to only slightly ahead of inflation each year, that's significantly below our top line growth. Scale, therefore, not only delivers increased income returns with higher rent from the secured pipeline, but also has a compounding benefits on our profitability and our operating efficiency. The delivery of the secured pipeline also enables us to achieve REIT conversion, say from 25% corporation tax on our rental profits. All of this combined will be highly accretive on our earnings. As you can see from the chart, the delivery of our secured pipeline will grow total returns to around 8% per annum, particularly attractive on a risk-adjusted basis. An increasing component of this will come from income, which will represent a little under half. This assumed capital growth of 3.5%, in line with the long-run average, so that's included in both the start and the end points of the chart, the growth in income returns from the delivery of our secured pipeline, the REIT tax savings as well as the associated capital return from development. Our secured pipeline is already fully funded in line with our policy. The majority of our development contracts are already placed with cost fixed, so delivery risks are relatively minimal. Finally, all of this excludes any further upsides in both earnings and returns from the delivery of our planning and legals and TFL schemes. It also excludes any upside from further market yield compression. And by way of illustration, 5 basis points would add a further 1.5% to our returns. So to summarize, we've delivered a particularly strong performance in the first half, and we've seen our momentum further strengthen with strong rental and adjusted earnings growth of 23%. With this, our dividend per share is up 14%. Our valuation gains and returns have increased, reflecting lettings performance, rental growth, and the ongoing strength in investment markets. Our liquidity and our balance sheet are strong, giving us the firepower and the flexibility to continue to grow our PRS portfolio. So we're going into the second half with strong momentum, a strong product offering, an exceptional pipeline of new assets and our best-in-class operating platform. We're in a good position to capitalize on our near-term opportunities, together with being well positioned for longer term growth and an acceleration of our total returns. And with that, I'll now hand you back to Helen.

Thank you, Rob. In this section, I will review some of the long-term occupational stats that are underpinning this growth in our market and why the market is continuing to perform. I'll also go through some of the work that we've been doing on researching affordability, our portfolio positioning and our customer insights and data, and also touch on our new openings and recent acquisitions. So earlier, I talked about the strong structural potential for our sector. It still remains a small part of the private rented sector in the U.K. So with 5 million rental households and only 1.4% of that is the build-to-rent households, 73,000 homes, there is a long way for this sector and for Grainger to grow. And this is at a time when demand is broadening across all age groups. The English National Housing Survey is showing that although there's a small drop in the under 24s, there is growth in all other areas. And significantly, there is growth in the 35 to 54 age group showing that people are renting for longer. And we expect this trend to continue as house purchases continue to allude first-time buyers, and this, of course, is likely to get even more challenging at the end of Help to Buy approaches next year. And even if house prices flatten, interest rates have increased. Not only is there significant pent-up demand, a new statistic for you today, 3.6 million of 20 to 34 year olds, which, of course, is our target age group are living at home with parents and that's up 24% in the last decade. So there's obviously potential to move into our sector. Earlier I explained how we'd achieved our 98% occupancy with our in-house leasing team. The leasing market remains strong. And in fact, data now shows that days to lease have almost halved in the last 5 years, and that's in the market as a whole. It's hard to see how it can get any stronger. This demand gives us potential to grow rents further and rental growth has always traditionally followed wage inflation, but we have something interesting happening at the moment, which is that wage inflation in our core cohort of young professionals who are developing their careers and achieving salary increases ahead of national wage inflation. All of these factors -- occupational factors are helping to encourage investment into this low-risk resilient sector with high growth potential. Investment in the build-to-rent sector is increasing. Last year was a record volume in terms of investment with GBP 4.3 billion, but the first quarter of this year is showing the strong start for the sector. And although there is a long-term track records of rents being closely correlated to inflation over the longer term, rents by most commentators, including Oxford Economics, are expected to outperform inflation from next year. And one question I'm asked at the moment is whether or not the economic squeeze on our residents is going to affect their ability to pay increased rents. Knight Frank and Oxford Economics data shows as a proportion of household income spent on rent and bills. We're still significantly lower than the long-term average, which does give us some cushion. And as a reminder, Grainger focuses on the mid-market in the build-to-rent sector. And in our tenant's assessments, we work on the basis of 1/3 of income spent on rent. 87% of our homes have an EPC of C or above and 50% have an EPC of B or above. They are highly energy efficient, and that compares to 2% in the private rented sector as a whole. And our residents are thinking about their total cost of occupation and their bills. But they're also thinking about their gym membership, their broadband and all of these are included in their ramp with Grainger. In the market as a whole, 73.3% of private renters are employed. And this compares to only 59.5% of homeowners. And this is because, of course, 35.8% of homeowners are retired. So we have a more resilient cohort living in purpose-built build-to-rent. They are usually working, their salaries are growing, and they're paying around 30% in rent, and they are protected from the worst impacts of rising energy costs. Our success in the sourcing has come from our commitment to using a research-led approach to where we invest and data insights as to what we build and how we operate it. This is our usual slide, and London remains our strongest city, but our portfolio is growing in regional cities. And I'm pleased to say that our new acquisition in Exeter, it was a key target city for us. And as we build scale, we continue to enhance our offer and our economies of scale by the creation of regional clusters. And this enables us to manage more efficiently and offer our customers more options in a location. I mentioned earlier our exceptional leasing performance, and its worth reflecting how our 2021 launches and our 2022 future launches provide a step change in net rental income for this business. As a reminder, we usually allow a year to 18 months in our underwriting to lease up the schemes depending on the scale. In 2021, we had 6 new schemes in the portfolio. They're now all fully stabilized and on within 3 months of opening. Over 1,300 new homes delivering GBP 60 million of passing net rental income. And in calendar year 2022, we have 5 new schemes launching. That's 1,174 homes, and that's another GBP 13 million of net rental income. 2 of these schemes have already launched, Pin Yard in Leeds and the first phase of Weavers Yard in Newbury, and they're already leasing well ahead of underwriting. We have 3 further schemes to be launched later in the year. So this is GBP 29 million delivered from our recent launches once they're stabilized. Our customer insights program is invaluable in helping us to understand what our customers are looking for. It drives and informs our business. We connect with our customers through all key events in their leasing, on move-in, move-out, post repairs, and we gather feedback and we look at reviews. But we also undertake quantitative surveys and qualitative focus groups, and this gives us a deep insight into what customers are looking for so that we can design our product and our service. It informs our underwriting, our apartment design, our amenity design, our lease terms, our marketing, our customer experience and our customer experience enhancement program, which is underway. And Grainger's leadership in the sector, in both existing portfolio and pipeline, is down to the quality of our portfolio resourcing. I've spoken about our research into where we invest or analytics into what we invest in. And our advantage is we can source through multiple routes through land, direct development, forward funding. And we have a proven track record, which is important for partners and for landowners, and we have a London and regional-based teams embedded in local markets. We have experienced an integrated in-house acquisition, development, and operational teams, adding real value to our pipeline. And together, we have sourced over GBP 3 billion, and there's more coming through. In the first half, we secured 4 schemes using 3 of our sourcing routes. And to give you a little bit more detail on our acquisitions, at Merrick Place, Southall, we have 401 homes in partnership with Network Homes. This has a full consent. It's a forward funding project, and it's brilliantly located next to a cross rail station. We acquired a site in Exeter, which will be our first scheme in the city. And it's a city with strong leasing fundamentals and extremely constrained with supply. And adjacent to our Sheffield scheme, we've brought the land for 250 PRS homes at Brook Place 2. And Brook Place has been one of our most successful schemes, and Sheffield has been one of our strongest cities. And finally, I'm pleased to say that after 28 years, we have acquired the remainder of the strategic land in Hampshire from our development partner, enabling us to add another 250 suburban build-to-rent homes as well as the remaining potential for Grainger Trust affordable homes. So in summary, we are accelerating our growth and our returns. We've delivered a very strong first half and the conditions are attractive for our sector and for Grainger as we deliver. And there is upside on rental growth and yield. PRS is a structural growth sector, and there are 5 key things driving Grainger's success. These are our market leadership, attracting talent and opportunities. Our next stage of growth is locked in and it's funded, and we have a proven track record of delivery. We have our scalable, high-performing national operating platform. We are delivering accelerated growth and returns for our shareholders. Thank you. So I'm now going to ask you to ask us some questions, and Rob and I will attempt to answer those. And for those of you listening in on the webcast, if you have a question, please enter it via the tool bar at the bottom of your screen. And Kurt Mueller will read it out and we'll answer that.

Christopher Millington from Numis. You very clearly outlined the strength of the market, the discount yields the U.K. is trading on versus some of its continental peers. What do you think we need to see to start getting a little bit of underlying yield compression moving through the U.K. PRS market? I'll come on with the other side.

Okay. Not sure if Mike is turned on. Yes, I think the key thing is that we're in a very nascent market at the moment. And what we're not seeing is what we saw in places like Germany and Paris where you actually see stabilized PRS trading with only 73,000 homes very little actually trades. But I think the weight of money coming into the sector once it starts trading, then I think we will see further yield compression. The fundamentals in investment terms are, as I said earlier, are very, very strong for the sector. If you think across all real estate sectors, how resilient we've been throughout the pandemic, how diversified the income stream is, and how essential the real estate is to people's lives. And I think it's -- in terms of risk-adjusted returns, I think we should see some more yield compression.

Next one is just on TFL. Obviously, it's starting to move at pace now. When should we expect the first completions coming out of TFL? And can you also just remind us how you expect to structure the JV and finance the JV ultimately as well?

I'm going to -- we've got Mike and Mike's lost his voice, but he will attempt to -- he will attempt to answer this. Mike is our Head of Land and Development. The TFL joint venture is already structured. So we're in good shape on that. But Mike, if you can talk about the completions start on certain completions. And then, Rob, if you talk about financing.

So apologies for my voice. But -- so generally, we're aiming to start on site at the end of this year, accelerating through into 2023. There are schemes of different sizes and complexities. So the first one is landed in '25, '26. Allowing to be the first rent income from the TFL partnership.

Yes. And I'll talk to the financing point. So as you saw within our planning and legals, we now have those 4 schemes move into planning and legals, and it's a little under half of the GBP 740 million total investment. So you can see just over GBP 300 million in that initial phase. And for financing it through a combination of debt within the JV vehicle, Connected Living London, and then also we'll be injecting funds from Grainger as part of that. And we'll raise that funding in the usual way from all the normal sources through disposals, debt and then, of course, this part of our funding strategy over time, with equity raises as well.

And do you think, given it's in the JV structure, you'll look to gear it at a higher LTV than the core business?

It will be slightly higher geared than the core business, but broadly within our kind of operating promises so not materially different.

Next one, sorry, I'll be quiet after this one, is just suburban PRS, whether or not you've had a change in attitude, they are still very urban aligned. But obviously, we got a Berewood site acquired.

Yes.

Has there been any change in for that?

No. I mean one of the key things for us on suburban PRS is that if you think about where interest rates have been and also if you think about the market that we want to enter, we've always been very, very clear that it should actually be in high-value areas where the barriers to homeownership are higher, which is why we're sorry, Hampshire, Wilshire, et cetera, is our sort of main portfolio at the moment. It's been a harder portfolio to enter. There's a lot of money looking at this at the moment, but it's been harder because, obviously, we compete with the land, the house builders for land. But the good news about the Berewood acquisition is that gives us the freedom to plan more homes at a site that's been incredibly successful for us.

Kieran Lee at Berenberg. Just a couple from me. In the buildup of total returns you presented, Rob, there was a REIT conversion element. Are you able to talk more towards timings on that at all?

Yes, I can certainly talk about. So I suppose a couple of things, actually. So it's based on what unlocks it is the delivery of this skilled pipeline, and we provide the timing of the delivery of that within our net rental bridge, but you'll see the majority of that is delivered by 2025. And of course, at the year-end, as had bid convert to a REIT within 4 years and 6 months since then. So I think we'd expect it to bring it a little under the 3.5 years that we're now at.

Perfect. And then last one for me is on construction cost inflation. I know that a lot of your developments are locked in under fixed price contracts, forward funding agreements, et cetera. But we've seen some peers that use a similar structure, report some yield on cost decline. Have you audited your forward funding partners to just check the resilience of those pipelines? And have you seen any differences in likely yield on costs versus initial underwrite?

No, we actually believe we're in a strong position and not just at the moment, but we always do very rigorous checks in terms of the financial health, not only of the developers that we work with, but also their principal contractor underneath them as well. So not just upfront when signing the contract, so we look to work with major contracting partners in good health, but then we also monitor that health on a monthly basis. And the finance team works very closely with Mike's development team to have any on-the-ground intelligence as well. So we're not seeing any signs of distress certainly at the moment. And the other thing to mention as well is because the majority of this is delivered through forward fund contracts, the developers' margins that they make are typically 10%, but we back-end load that payment, and it's not paid until the end of the development. That gives a further degree of buffer as well.

I don't get muted at this time. That's very good. It's Sander Bunck at Barclays. Just following on a bit on the construction cost inflation and obviously understand there's a buffer like forward-funded double checks and balances. But at the same time, the cost price increases across Europe are around 10% to 15%. So there's no doubt that it's happening. So just how do you mitigate or how do the constructors mitigate that impact? I mean, are you able to, for example, pass it through in actual higher rents, so your yield and cost is broadly the same? Or how to think about that? And slightly related to that, even if the actual construction cost stays the same, do you face any delays because I think there's obviously a wide supply chain issues across the globe.

Yes. I'll let Rob talk about the sort of pricing, what we're seeing. But because it is shielded by the fact that we've got strong rental growth at the moment. But the -- in terms of the supply chain, we did something a few years ago, which I don't know whether people will remember, which we switched a lot of our specification supply chain into a U.K. market. And so, we haven't been as badly impacted as others. That was done in response to Brexit as opposed to the situation that we find ourselves in post-pandemic with inventories in the war in Ukraine, so that's held us in good stead. The ingredients as well of our buildings, obviously vary. And so, although, you quoted a figure of between 10% and 15% in some areas because of the specification, we're not seeing anything like that. But Rob, why don't you talk to how we've got the comfort of price?

Yes. So I guess there's a couple of answers I break out, Sander. I think firstly, in terms of the secured pipeline, we do have those contracts locked in. So I think to that degree, with rental growth rising, we actually should see some benefits of that as they kind of draws widen between the 2. When it comes to sort of planning and legals, which are a little bit further out, we have seen a range of inflation. It varies from the nature of the scheme and from location to location, but on average, around 10%. And given the time frames involved, we would expect that to be offset by rental growth.

Sure. Okay. And last one. We've seen German counterparts commenting on the fact that their cost of capital has increased quite significantly, basically because of the interest rate environment and share prices having come down. And as a result, slightly tweaking their investment kind of requirements. Are you in a position where you're saying like, look, actually, that's not because we are pretty well capitalized, et cetera, there is no need for us to do that? Or are you kind of looking with new acquisitions? Are you also thinking about that you require a higher yield? Or kind of how are you thinking about an increased cost of capital world?

Yes. I can talk to that. So I think, firstly, as you say, Sander, we're in a very strong position with respect to funding because our policy is to have all of our secured projects fully funded upfront and we are fixed. And we have quite long maturities. So I think that puts us with very clear line of sight over what we're delivering and a good degree of protection. And of course, we've got lots of optionality in terms of our funding as well. So it's not only about they don't debt, but we also have disposals, which we can always choose to accelerate. And of course, we have the option for equity as well. So we've got lots of means at our disposal. The other thing to note is, as well, we had some of our lenders in the room today, we have raised new bank finance over the last couple of months even in this environment on previous terms. So I think lenders like the story of Grainger, the attractiveness it brings in terms of our growing rent roll. And over time, I think there is the ability to continue to improve our credit rating as well. So we see that as a positive dynamic. But nevertheless, in a rising rate environment over time for some of the longer-term projects, we would always consider that in the context of the rental growth and the returns on the projects themselves, but we've not changed our hurdle rates in terms of what we're investing in.

I'm James from Peel Hunt. Just on I think Slide 21, where you showed the building blocks to the total accounting how the future accounts for about 8%. And I guess the operating efficiency is quite a small part of that kind of story in. Obviously, there are clear benefits. I'm just wondering why that is quite a small part. And is it because you're effectively assuming improvements in the gross to net and therefore, that net rent barge comes in higher? And so you are getting those efficiencies just in the wrong or just in the other block?

Yes.

And can you just talk a little bit about where you think that gross to net could get to?

Yes. I mean really in practice, I think you're right to highlight it, James, you do need to look across the 2 to some degree. We are driving quite strong leverage, particularly as well in our central costs, which is where that's also reflected within the operating efficiency because our net margins improved quite substantially over this period because we're only growing overheads broadly in line with inflation with a little bit of investments on top versus the doubling of the rent over this period. But yes, you do really need to look across the 2.

And where do you think the gross to net leakage could get to over the medium term? I think it's 25.5% looking backwards.

Yes. I think we've made a strong recovery on gross to net. So this year, 25.5%. But I can see that you should work on a figure just below the 25%. And I don't know that a lot of our peers that are outsourced are looking at 30%, 31%, 32%. So actually, it is one of our competitive advantages of our in-house platform.

Okay. Sure. And then just one other question, if I may. Helen, you mentioned you still have the option of accelerating the sale of the tenanted regulated portfolio. I'm just wondering what would make you kind of go down that avenue? And is that something we're quite close to potentially doing? Or is that just something…

Yes. We do -- and if you look at the back of the RNS, James, you can see that we frequently trimmed the portfolio, both in terms of geography. We look at the age of the customer in there to see whether we're likely to get the reversion quite quickly. We put quite a number this year through auctions, and we're receiving very high sort of almost VP prices from them, but they are sort of smaller sales. And we did a portfolio this year where it was younger sort of tenants in there, so the reversion was further away. So we've always had asset recycling as part of it. And we can continue to do that. But there's a strong appetite for these portfolio. So it could be a series of portfolios as well.

Good morning, everyone. We've had a few come through online, which I'll read out, some of which have been covered in the room. So apologies for those listening in, if I skip over your question, but hopefully, they have already been answered. The first one is from Andrew Gill at Jefferies. He was wondering if we are still offering incentives within the portfolio on new lettings and renewals as we did during the pandemic, which is the first part of the question. And the second part of the question was now that rents have recovered in the broader London rental market, do you expect ERV growth and like-for-like rental growth to further accelerate beyond where we are today?

Yes. So I think, interestingly, one of the great things about having a direct leasing team is that they are taking direct flows through from inquiries from Rightmove and we switched off our incentives late last summer. So actually, we've got our head of our leasing team in the room and he's nodding. So yes, we switched them off. So no, we're not having to give any incentives and haven't done for some time. We said that we would do between 3%, 3.5% rental growth this year. We're already at 3.5% and the momentum still going. So yes, I can see further ERV growth coming through this year.

Great. We had a couple of questions from Miranda and Mike Prew about the timing of REIT conversion, but I think that's been covered. There was a question from Philip Argabant. He was asking about whether or not there's a charge or fee associated with conversions to REITs?

No. No, the conversion charge was abolished several years ago.

Great. Paul Gorrie from BMO is the next question. For the development pipeline schemes without fixed price contracts, the remaining 4 at 16, what is the likely profitability of these schemes, profit on cost? And how does that compare to what was expected before the current inflationary environment?

So I think we've partly answered that by the fact that we've seen rental growth across those schemes as well. So we're working on around 10% profit on cost. And I think the key thing, and I think this is perhaps where some competitors in the real estate sector have actually been caught out is to always be on top of a really refreshed cost plan and a current cost plan. And so, therefore, we're expecting those -- that profitability to stay intact because of rental growth because of fuel compression, but also because we're on top of our cost plans.

Final question from Paul Gorrie at BMO again. What is the risk of delays on these schemes, given the current cost pressures and the lack of willingness of contractors to commit to contracts today? Partially answered before, perhaps, but I don't know if there's anything to add.

Yes. And I don't know whether Mike wants to add anything on contractors and what we're seeing. I think we're a really good partner for contractors we've got. They can see a long-term pipeline coming out of Grainger. I mean there's some mainstream contractors that we're on our 6th scheme with now. So we've got some strong relationships. So we're not seeing a downturn in appetite of people willing to work for Grainger. But Mike, you're in the front line of this.

Yes. So to agree, we're not seeing a downturn in interest in undertaking contracts for Grainger or our joint venture partnerships. Part of that will be because we've refreshed our cost plans. So our expectations are not misaligned with the market.

Great. Thank you. That's everything from online.

Any more questions in the room? I just thank you all for coming. So lovely to see everybody in person again. So thank you.