Grainger plc ($GRI)

Good afternoon, ladies and gentlemen, and welcome to the Grainger plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. I'm sure the company would be most grateful for your participation. I'd now like to hand over to CEO, Helen Gordon. Helen, good afternoon.

Good afternoon, everyone, and thank you for joining. I'm joined here by Rob Hudson, our CFO; and Kurt Mueller, our Head of Corporate Affairs. Grainger delivered a strong set of results last week, really strong performance, excellent earnings outlook. And this is really driven from the fact that in a time of global uncertainty, we are a needs-based asset class. We are actually everyone needs somewhere to live. So I'm going to start by just talking about how we're on track for our GBP 60 million of earnings this year. And that will be a 12% increase and then on track for a 35% increase to full year '29. So we're delivering compounding earnings growth. And it's really around the 3 elements -- 3 strong elements to our business. It's a resilient business. In a country with a housing shortage, we have very high occupancy. We have rental growth, which is underpinned by wage inflation, a large and diverse customer base and really good rent-to-income affordability ratios. We've also got locked in growth. We've got a committed pipeline, which is on site, construction cost fixed, and that's going to be delivering another GBP 14 million of rent. And we're leasing into an undersupplied market, and that undersupply is growing as more people rent for longer. So we've got strong growth in both our margin and our earnings. The business is deleveraging at the moment. One of the things that people don't realize about Grainger is that we have GBP 850 million of noncore assets that we're recycling through. And actually, we're using that prioritizing deleveraging of GBP 300 million to GBP 350 million, which will mean that we're around 8x net debt to EBITDA. So really strong position supported by these 3 pillars of activity. I'll just take you through now the headlines. So the -- our rental income was up 7.8%. Our like-for-like rental growth was up 3.1%, earnings up 4% and dividend up 3%. Our NTA or our underlying value was just slightly lower than full year '25, but this value has been incredibly resilient because although we've seen a very large outward yield movement of 100 bps, we've seen great rental growth more than supporting the value of our properties. And then operationally, we're also strong, 96% occupancy, which is high. We run the business between 95% and 97%. Really strong customer retention. Our customers are staying with us for longer, but they're also 61% of them are renewing with us each year. And then a really healthy income to rent ratio. And then our costs, although we've seen headwinds in cost this year, we've managed to keep our cost base so that it's 25% of our gross rents is spent on our operational costs. And just as a reminder, we put all of our refresh costs, et cetera, through that figure. I mentioned that we're a resilient business. We're also a growing business. We're a needs-based asset class, meaning that there's very little downside in terms of our occupational market, very low obsolescence. And we're inflation-linked. Our income is underpinned by wage inflation, and you can -- I'll show you some slides later that shows how closely we track that. We're very diversified in our customer base. We've got limited cost inflation, and we've got an embedded margin expansion because each time we add to our portfolio of 11,000 homes, actually, we increase that margin. Moving on to talk a little bit about our disposals. The Grainger as a business has been transformed over the last 10 years. We've recycled through GBP 2 billion of assets and invested almost GBP 3 billion into new build, purpose-built, build-to-rent. We've sold GBP 700 million since September 2022. Now the first half of our first half was overshadowed really by the 2-month wait for a budget that at times speculated about whether or not we'd see the removal of stamp duty. So sales were affected slightly at the beginning, but they've now picked up. We've done GBP 82 million of sales of our non-core assets and that's either completed or exchanged in the year-to-date. So we're on track for GBP 175 million to GBP 200 million, which you can see even through the most difficult times, we've managed to achieve. We're recycling out of our regulated tenancies. Those are our older tenancies in our non-core portfolio and some strategic land, and that is what is funding our growth. So moving forward, we've been very clear this time on our capital allocation strategy. I put a similar slide in a year ago and at the year-end. But our first priority is to complete our schemes on site. The next priority is to deleverage. And then after that, with the share price where it is, our next priority, probably it would be very compelling to do share buybacks rather than grow our outer pipeline. But obviously, we've been very clear this time about our disciplined capital allocation and that we will be delivering for shareholders in the short, medium and the long term. So this is our portfolio, almost GBP 3 billion in our build-to-rent portfolio, our regulated tenancies, the black bar on this pipeline is what we have on site and the paler bars are actually our optionality for the future. And it's the black bar that's delivering that GBP 72 million of earnings, 35% increase. So moving forward, we have got a very good track record of consistent delivery of growing rents, growing earnings and improving our operational leverage and -- but there's a lot more to come. And with that, I'm going to hand over to Rob.

Thank you, Helen. So as Helen said, we've just delivered a strong set of results. So total rents up nearly 8% over the course of the first half. Underlying organic like-for-like rental growth up 3.1%, in line with our expectations. Occupancy remaining high at just under 96% and EPRA earnings up 4% -- and dividend per share also up 3% in line with that. And NTA continues to be resilient when you consider the context of everything that's been happening in the macro economy over this period. So what's been driving this very strong growth in rents that we've seen over the period. I just move on a couple of slides. And we can see here the key reasons of what's driving this rapid acceleration in the top line. So our underlying rate of rental growth and our occupancy have driven our rents up 3%. And then because we've continued to invest in terms of our pipeline deliveries, these are coming on stream and they're leasing up very well, which is adding a further GBP 5.7 million. And at the same time, we're disposing out of our older non-core assets, land, regulated tenancies. These are assets with a low yield, either no yield in the case of land, 2% in the case of the regulated tenancies. So the income we're selling out of is less of a reduction and that compared to the increase that we're investing in. And then therefore, 8% increase overall in our rents. So if we look at the earnings trajectory that we've got ahead of us, it's very strong, and Helen touched on some of the key headlines here. Here it is in a little bit more detail. So you can see this continued track record of accelerating and strong growth in our EPRA earnings. We are very much on track with the guidance we put out a couple of years ago. And the 2 key points here are GBP 60 million EPRA earnings for this financial year, which would represent a 12% increase on the GBP 54 million we delivered last year and then GBP 72 million, which is 35% growth going through to FY '29. So if we just look behind one of the key drivers, which we have a good degree of visibility over, I'll just talk through those key components. The first one is like-for-like rental growth, which we assume the long run average, which goes back over a very long period of time of 3% to 3.5%. The second piece is that this guidance is based purely on the committed pipeline alone, so it excludes all the other elements of the pipeline, which Helen just referred to earlier. It's just where we're on the ground. And in fact, we're largely through the delivery of this And that's net of recycling to fund the remaining GBP 120 million of CapEx out of our lower-yielding assets. So that's the income accretion that we have from that. The next element is our EBITDA efficiencies. Because we've designed the business around the use of technology, it's incredibly efficient for us to scale this platform. And what that means in practice is that we're not having to add new heads in order to deliver this growth centrally. And so that's making it very efficient. Each new home lending onto our platform comes at an incremental margin of 75%. And we're also very tightly controlling the central costs. So on a 10-year view, our costs have actually remained static at GBP 36 million. We've just taken a further GBP 2 million of cost out of the business as we continue to implement technology and use of AI and drive efficiency. And what that means is there's a further couple of years now locked in where our overheads will be completely flat. So with this focus on efficiency, our EBITDA margins are growing from what was 54% in FY '24 to a guided 60% plus by FY '29, and we see continued scope thereafter to continue to grow our margins. And we've made very good progress in the first year FY '25, growing margins to 56% from 54%. So we remain on track with this. And actually, when you look at the large U.S. players, who are operating typically at 10x plus scale compared to our platform in the States. They're actually operating at EBITDA margins in the mid-60s. So at this point in our journey and level of scale, we're actually driving a high level of efficiency relatively, and that's really through the use of technology that we have. The final piece is rebasing fully to higher interest -- so we -- when the Ukraine war broke out, we put in place fixes on our debt and did extensive refinancing, which meant that we're locked into rates in the mid-3s, and we did that for 7 years. So there's just over a couple of years of that left to run. Because this guidance period goes through to FY '29, this contemplates the period in which those fixes roll off and will roll on to higher rates. So we've assumed a full rebasing to higher interest costs, which we modeled here at 5.5%. And then that's partly offset by the mitigating impacts of deleveraging by GBP 300 million to GBP 350 million, taking our debt down to GBP 1.1 billion. So even after fully absorbing all of those higher interest costs, there's no further big step-up in interest costs or rebasing to happen after this period. We're growing our earnings by 35% even after that impact, which I think puts us in good stead. So if we just flip back a slide, where this takes our debt levels, you can see our target guidance ranges at the bottom right. We're thinking very much in this higher interest environment around debt metrics in relation to the income impacts and therefore, calibrating that according to the level of -- high level of interest rates. So we're bringing it down to GBP 1.1 billion. With that, our loan-to-value would be 30% and net debt to EBITDA of around 8x. During the first half as well, we also did some extensive refinancing of the business, GBP 540 million of facilities, which were extended out to 2033. And during that process, we actually shaved some reduction of in terms of the banking margins that we pay. So reducing the cost of debt by around GBP 1 million per annum. And that's really reflecting the fact that lenders really like our story, the growth in build-to-rent, the low volatility, the secure income that this provides, which I think provides us in very good stead. Worth just mentioning as well from a dividend point of view, over the -- we converted to a REIT at the end of last financial year. This means that we are on a path to paying out at least 90% of our property-related profits, which approximates to our EPRA earnings. And within the next 2 years, we will be fully covered out of our EPRA earnings. The next couple of years, there'll be a top of our dividend coming from our legacy regulated sales profits and then we need to be fully covered by FY '28. So we have a progressive growing dividend over this period, and we'll continue to deliver that for our shareholders.

Thanks, Rob. I thought what I'd do now is just take you through the steps that really underpin our investment case and the market we operate in. So why is build-to-rent our target sector, not just our target sector lots of global capital all over the world wants to enter the U.K. build-to-rent market. And it really has 2 main reasons. It has positive growth drivers, but it is also low risk. So the first one is that we're in a country with a housing shortage. We have 5.6 million rental households, but 97.5% of those are actually small buy-to-let landlords, whereas -- and only 2.6% are larger scale professional build-to-rent landlords. We've got great market fundamentals. We're very resilient. We've got this structural undersupply, but we've also got a growing demand. And the returns that we're delivering are compounding, so 3% plus rental growth over the very long term, and that's inflation linking through the cycle as well. And then we deliver a true net yield. And I've heard some people say, "Well, is Grainger and residential lower yielding?". I think the thing to remember is that through that net yield, we have actually deducted all of the maintenance repairs and everything that's expensed through that gross to net. So what's actually delivered at the end is a true net yield. So we've got no big dilapidations costs or end of lease redundancy. And then the low risk factors, there's virtually no obsolescence. We still have a few buildings in our portfolio from the 1950s purpose-built apartments and they still rent as well. We've got very low volatility, high occupancy even during COVID, we kept 90% plus occupancy. We have very low depreciation, no end of lease write-downs or big refurbishments needed. And finally, we've got this growing low-risk tenant base. So people deferring the point at which they buy houses. And actually in our core cities, we're seeing a very wide customer base. And because our homes are aimed at the mid-market, they are affordable. I'll just give you some stats that back up these points. So top left here, you can see that the orange line is showing the ONS rental index and the blue is actually showing the commercial rental index. So over the longer term, residential will outperform commercial real estate and has proven to do so. Very resilient in the sense of matching wage inflation and the higher interest rate environment, we've seen a stronger rental growth. Grainger is the largest of the professional build-to-rent landlord. So we've got a significant opportunity to grow. And then, of course, we've got our customer base, which on the bottom right here, you can see the over 25s have lower unemployment and less volatility around their incomes. And just moving on to the next slide. This is probably one of the supporting factors. Really, the amount of regulation that's come in for smaller landlords to less investment has meant that between August '21 and July '25, we've seen over 200,000 landlords come out of the market or homes from landlords coming out of the market. The blue lines here are the new investment. The orange lines are people exiting from the market. And during the run-up to the Renters Rights Act being initiated, actually, we saw 700 homes a day coming out of the sector. And then on the right here, you can see the steady decline in buy-to-let mortgages. And Grainger is in a great position to really operate because we operate at scale. And so we have this leading operational platform. We do everything ourselves from leasing right the way through to organizing all the repairs of the property. Our Grainger people are in the building. We delivered this scale, as Rob identified earlier, we've delivered this tripling of our income at the same time as we've kept our overhead stable by our investment in technology. We have our own proprietary platform, which is Connect -- but we're also -- because we have -- do capture all this data ourselves, we're able to really have a deep understanding of our customer, and we can talk to them in real time through our apps. And we're also using AI agents to help with our leasing, which means that no leasing call is dropped. So a really strong sector-leading operational platform. A little bit more about our customer base, 85% of them are over 25%, as I said earlier, but we're seeing the growth coming in that later age range of people diferring the point at which they buy a home and living well with us. And you can see on the right-hand side, top right-hand side, that customer affordability and the dark bars are the general market for renting based on the English National Housing Survey and the orange bars are Grainger's customers. And you can see that on average, they are 39,000 per annum. We have lots of key workers in there from a very diversified background and diversified in geographies as well. One of the things we've tried to do, the majority of our portfolio is 4.5 years old on average. It's very modern and very well insulated. So on average, our customers pay a lot less for their energy because 99.9% of them are in energy efficiency certificates, A to C, 85% are A and B. And you can see on the bottom right here, the difference that makes in terms of your energy bills. Our customers pay their own energy bills. Grainger's direct energy bill is GBP 2 million. It's one of the reasons I say that we're actually keeping our costs very tight. And our city strategy, which is identified here, you could say that you could build rental homes anywhere in the U.K. and you probably wouldn't lease them. Where we concentrate in is the cities with the highest growth potential, that's economic and demographic growth. And that's shown in the horizontal axis and then the vertical axis is actually supply and demand. And it won't surprise you that London is the best rental city, but you can see other major cities there where we have representation, Bristol, Oxford, Manchester, et cetera. The yellow stars are where we're currently on site. So 2 schemes in London and 1 scheme in Guildford. -- and these are them. So the Merrick in Southhall, right next to the Elizabeth line, it will come online early next year, GBP 9 million of additional rental income. And then we've got the Mint at Guildford immediately next to the station. You might just be able to see a picture of the train in the foreground there. And that is an additional GBP 3 million per annum of net rental income. And then one that I'm very excited, our joint venture with Transport for London and our first scheme built with -- using a major housebuilder, and that will deliver another GBP 2 million of income. So -- and all the construction costs on these schemes are fixed. So I thought I'd just touch a little bit on what's happening in our sector. For the last 2 years, we were talking to the previous government and then the new Labor Government about the Renters Rights Act. It actually came into power on the 1st of May. It was really designed to improve the standards of leasing, but we're very proud of our standards, and we have nothing to fear by the introduction of this act. Pet-friendly policies, we already implemented. The abolition of no-fault evictions. Our business model was always that we wanted people to stay with us. Open-ended periodic tenancies is probably the main change. And that means that instead of doing an annual renewal of a lease, we will do an annual rent review. But Grainger is well equipped to deal with this. I know we heard the specter of potential for rent controls. The government have completely ruled that out and many aspects of the government, not just Number 10. One of the things that they all recognize, in fact, all political parties recognize that rent controls are inflationary. They reduce supply and push up rents. And the moment to introduce them was as part of this act, and they didn't take that opportunity because they saw how damaging it would be to the rental sector. So we -- occasionally, we get people advocating for them, but our reassurance from all the work that we do is that most of the people across all parties understand that they're not good for renters. And so I'm going to return to this slide about our earnings growth. And the fact that our business is so resilient, it's got locked in growth, a lot more growth to come. And through deleveraging, I think we're being very strong in terms of our capital allocation. So a lot more growth and real optionality for the future. And I'm going to pause there and hope that we've got some questions.

That's great, Helen. Thank you very much indeed and Rob, for updating investors.[Operator Instructions] I would like to remind you we're recording this presentation along with copy of the slides and the published Q&A will be available by your Investor Meet Company dashboard. Kurt, if I may hand back to you. You've had a number of questions from investors today. Thank you to everybody for your engagement. If I may ask you, please, just to read out the questions and where appropriate to hand them over to a member of the team.

That's it. Thank you, Mark. So the first question here, I think, is one for Rob. I'll read it out loud. What is the debt profile and current interest rates? You sort of covered that in the presentation, Rob, but the subsequent question was will interest rates put the dividend at risk?

Right. Well, certainly, interest rates will not put the dividend at risk. And that's going back to the slide which I talked to earlier, which shows 35% growth in our profits even after fully rebasing to higher interest rates over that period with no further impact to come. So because our debt is fixed for the next couple of years, both through the underlying instruments themselves and hedging, which we put on top, then effectively, we rebased towards the end of this period, but that's fully factored into our guidance. So I think this makes us -- puts us quite a distinction actually in terms of that level of profit growth that we have compared to some others that were obviously having the impact of higher interest rates without all the other growth impacts that we have to offset it could obviously impact profitability, but it doesn't for us. So that means that we continue to maintain a progressive growing dividend.

Thanks, Rob. We had a couple of questions around net debt and dividend, but I won't ask those again because I think you've covered them now. The next topic, again, a few questions on this is around capital allocation and buybacks versus the prioritization over deleveraging, sort of understanding the math there and when we might start beginning to think about buybacks and why deleveraging we think is the right current priority.

Yes. So I'll deal with the priorities first. The first one is obviously as we recycle out of our lower-yielding non-core assets, we will be completing our committed pipeline. That's the pipeline that's on site. As Rob said, explained, we've got this lovely fixed debt that we fixed at the outbreak of the Ukraine war. That doesn't run off for another year or so, which fits nicely with our committed pipeline. But it's still more accretive to shareholders to actually pay down that debt than it is to do share buybacks. And Rob, why don't you explain that?

Yes. So when we look at the incremental cost of debt, we've guided to 5.5%. Actually, today, things will probably be a little bit closer to 6%, although obviously, we've got the ability to deleverage more. Nobody ultimately knows where things will settle down to. But at these kinds of levels of rates, the incremental earnings impact of buying back our shares on an EPS basis are actually a touch below deleveraging. So as well as, of course, reducing the financial risk in the business, which we believe is the right course of action. But both numerically relatively and also from a risk profile, deleveraging actually remains the most attractive option when you consider it from all angles.

Great. Thanks both. The next question here is around Mike Ashley. Do you see Mike Ashley as a long-term value investor? May he have other ideas? Perhaps a bit of context and background for those that don't know.

So earlier this year, we had a notification that Mike Ashley, in his personal capacity, so not in Frasers, had actually crossed the 3.1% threshold in the business via a spread. So no interest in the shares, if you like, other than the economic interest in the spread. And we subsequently found out he does have a small direct shareholding. As you would imagine, that's a large shareholding for an investor. And so we reached out to have a conversation. We talked to his team, incredibly supportive of the business. And in that conversation, we established that he had been buying for a while and just really saw Grainger's offering terrific value with low risk. So he's continued to buy. And more recently, that 3% has gone over 4% now. But no sign of wanting us to change anything in the business other than, of course, the share price.

There's a question here around potential impact on regulatory changes, rent controls, tenant protections following the rent reform agenda. I know you touched on that earlier. Was there anything further you wanted to add to that?

It's really that distinction between those that run a really good operation that have all of the levers, the information, the operational capability, the technology. It's much, much easier for a larger landlord to respond to the new Renters Rights Act. It's early days. We'll see it sort of we'll see it bedding in, but it completely aligns to our business. And we have had reassurances that if it's not working and it's leading to congestion in the system that the government will put additional measures in to make sure that it can support the whole sector.

Great. Thank you. I'm going to group a few questions together here, and it's really around share price performance and the discount to NTA, which is in contrast to the strong underlying business performance. So questions around, does the Board share that frustration? What is the Board and yourself and Rob thinking about? What actions are you doing? We've touched on buybacks. But really, what else is there from a shareholder perspective that you're thinking about?

You can't see that real sort of resilience and thesis around our investment case and a track record of 21 consecutive periods of reporting and delivering on all of that and not be disappointed that the share price is disconnected from the underlying performance of the business. I think there's a few things that people are perhaps not recognizing. And I think for a lot of real estate, they coalesce around the movements in the 10-year gilt and the 5-year swap. But I would say that because we're providing index-linked compounding growth, actually, we are closer to an index-linked bond rather than a 10-year. I think that's been challenging to recognize. The Board, obviously, I'm and Rob are heavily invested in the business. So are the majority of the workforce. So you can imagine that this weighs heavily. It's constantly a discussion that we have within the business. For me, the -- we're pulling all the levers that we can. And obviously, I had hoped that immediately following the introduction of renters rights, the political noise that was around renting and what would this mean will dissipate. So I think that's a good point. And then, of course, I think that the fact that we have been so consistent on delivering that earnings growth, and that will endure even in a higher interest rate environment. I think it's just a case of long-term versus short term and perhaps people seeing concerns that we know are under control. The share buybacks debate really comes back to what we were talking about earlier, which is the prioritization of our capital allocation and making sure that actually we're doing the best for shareholders. And that's why we think that the first and second priorities are the best thing we could do for shareholders.

Thank you, Helen. There's a question here around our Connect technology platform, use of AI, driving efficiency. Could you just add a bit more color and detail about how we're using this and the scope of that going forward?

Do you want to have a go at that one?

So we implemented Connect around 5 years ago, and this is basically digitized the whole of the customer journey. And what that's enabled us to do is actually bring a lot of our operations in-house, therefore, not having to pay away the margins to the third parties and improve the customer experience and have everything within our direct control. So it's very efficient for us to do it this way. So -- and it's everything from onboarding and customer acquisition. So for example, we have Salesforce, and that's meant that we took all our leasing in-house away from the agents, and that's given us great forward-looking KPIs so we can see how demand is coming through. And obviously, then that can feed through into decisions in how we run the business. This has also given us a huge amount of rich data in every aspect of how we run the business from customers to operations and so on. And even our ESG environmental agenda as well. So for example, with respect to our customers, our data and analytics team can look at all of our customer data, and we can predict now having used machine learning on it with 85% accuracy when a customer will -- how likely a customer is to remain with us at that particular length of stay with us. So you can imagine how we can start to use these kinds of analytics ultimately to drive customer lifetime value and improve the customer experience as well.

Great. Thanks. A few more questions here, topics that we haven't covered. A question about timing, it sort of touches on the capital allocation strategy, but the question was on the timing of that. So following the completion of the Bollo Lane Chiswick Reach development, which is in our committed pipeline, following that, is that the point at which the capital allocation framework will be revisited?

No, I think we -- I mean, we will start deleveraging before then because that scheme finishes in 2029, we will start deleveraging '27, '28. We don't need to because we've got a lot of fixed-term debt, but the first major maturity on that fixed term debt is 2028. So you'd expect us to start getting ready to delever from that beforehand.

Great. And a question on dividend and sort of future outlook. Is there a possibility that the dividend yield could grow to the 7% to 8% range currently available from other commercial property REITs?

Well, in terms of our dividend, I think what we offer is obviously a low-risk, low volatility earnings stream. And if you think back to some of the major events that we've had, whether that's the GFC, whether that's COVID, and our income profile has been incredibly resilient. And our balance sheet has also remained incredibly resilient over that period as well. In fact, our NTA has only moved by 2% over the last 5 years, whereas when you look across the commercial sector, typically, they've seen falls of 20% to 40%. So I think we've been -- what we offer is a low-risk, low volatility inflation-linked ultimately income stream because of that linked through inflation leading to wage inflation and then the affordability and the ability to grow rents. So obviously, with the share price as it is, our dividend is relatively high yielding. But really, ultimately, we are a total returns business -- and the return that we deliver is targeted at around 8% a year, which on an NTA underlying accounting asset valuation basis, which is the growth in the valuations plus the income element. However, of course, on today's current share price, that will be well into the teens.

Great. Thank you both. I believe we've covered all the topics and questions have come through. So Helen, are there any concluding remarks that you'd like to make?

I just want to thank everybody for tuning in and also to say that our full year results at the end of this year, we are on track to deliver that 12% earnings growth, and we're leasing into a strong market. So I think there's great growth so far, but a lot more to come.

That's great. Helen, Rob, Kurt, thank you very much indeed for updating investors. If I please ask investors not to close the session as we'll now automatically redirect you so you can provide your feedback in order the company can better understand your views and expectations. This will only take a few moments to complete. I'm sure it will be greatly valued by the management team. On behalf of the team from Grainger plc, we'd like to thank you for attending today's presentation, and good afternoon.