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300p PT BUY. Multiple looks very well supported by rental growth. We leave our MTSE unchanged. Grainger’s trading update is punctuated by 8.3% rental growth. Our 12.6p MTSE figure is unchanged based on information in the release which did not mention development starts, capital allocation news or refinancings. However, the growth part of our price target process received a strong boost, and justifies why GRI is a BUY with c16% upside to our 300p PT. This is because our MTSE yield might be 5% (20x) but our visible MTSE growth is 6.1%. We must incorporate the future speculative rental growth into our PT. We can do this via our multiple adjustment which is 1/(r-g). The g in the case of Grainger looks to be mid to high single digit, and quite sticky - this justifies a PT multiple more than the current 23x, which we shy away from but reserve the right to review. We reiterate our BUY rating and see upside risk to our PT of 300p on the back of this figure, and expect to see positive MTSE drivers at the half year in May.
Grainger plc
A resilient set of prelims from Grainger with NAV down 4% over the year and 2% in 2H. We prudently trim our NAV forecast to account for further outward yield shift with the shares trading on a 17% NAV discount. We reiterate our Add rating and 260p TP.
Grainger's P&L performance is ahead of expectations and whilst NTA is slightly below our forecast, we think it is still a highly resilient performance in the context of the economic backdrop. We expect the supply/demand imbalance in the rental market to persist, which should ensure that rental
Elton John and Glastonbury make way for the summer of sport, with cricket, tennis and cycling to look forward to over the coming days – a welcome distraction no doubt. James and Matt’s visit to Milton Keynes this week provided an opportunity to see beds and sheds, and to witness first-hand the value that can still be created through disciplined stock selection and judicious asset management. Click on the link below to listen to the Real Estate team's weekly podcast #Corporate client of Peel Hunt
Grainger plc Warehouse REIT PLC
On our new forecasts, the shares now trade on a 17% discount to NAV and with a future potential dividend yield of almost 5%, we upgrade to Add (from Hold) and increase our TP to 275p (from 250p).
After many years of growing the PRS business, Grainger has now provided a clear timeline as to when it is going to convert to REIT status. The end of 2025 is just outside the timeframe of our formal forecasts but we believe management’s expectation of doubling the EPRA EPS over a four year time period is a realistic prospect (our FY2025E EPRA EPS of 5.7p shows growth of 73%). Nearer term, both elements of the portfolio (PRS and regulated) are proving more resilient than expected from a valuation perspective and rental growth, underpinned by wage growth, remains strong. However, this resilience and the company’s growth prospects are not reflected in the share price which is currently trading on a discount to 18% to NTA and we retain our Buy rating.
On the back of a strong 1H, we expect to upgrade our NAV forecast by around 6%. This leaves the shares trading on a near 20% NAV discount.
We increase FY23 NTA by 6%, reflecting the resilient valuation performance of Grainger's portfolio in H1 and a highly favourable outlook. In our view, this resilience and the ongoing momentum of Grainger makes the c.20% discount to FY23 NTA look anomalous — and in our view, the quality of the stand
Results ahead of our expectations (NTA of 310p down just 2% over the 6 months) with both its PRS (-1.6%) and regulated (-0.5%) portfolios proving relatively resilient. Like-for-like rental growth continues to be strong at +6.8% underpinned by inflation (specifically wage inflation) and given the strength of demand for its product and lack of supply. The company has attractive in-built growth with its committed pipeline (3,397 homes) expected to deliver a doubling of EPRA earnings within the next four years. Management notes that this will enable it to convert to a REIT in 2.5 years’ time. The shares have moved little (+1.6%) year to date in line with the sector at 2.2%. At 256p they are trading on a 17% discount to the reported NTA which we believe looks good value given the continued rental growth prospects and retain our Buy rating.
Grainger's update points to all KPI's improving/remaining at record levels. However, to reflect the expectation of modest outward yield shift (30bp/c.8%), and house price deflation (4%), offset by slightly by higher rental growth, we reduce our NTAps from 329p to 295p. Whilst uncertainty around yie
Similar to PRS REIT yesterday, Grainger’s trading update shows an acceleration in PRS rental growth to 6.1% (7.8% new lets/5% renewals and at similar levels across London and the regions) as demand for rental properties remains at elevated levels. Management is focused on customer affordability (around 28-30% of income) and bad debts are low. There has been no slowdown in the sale of the regulated assets and the pricing remains relatively robust at just 1.2% on average below the September VP values. Management recognises the changing yield environment but notes that investor interest for PRS is strong with rental growth supporting values. Finally progress is being made with its development pipeline which is set to deliver 1,640 new homes this year. The shares are up 2.1% year to date underperforming the sector up 10.7%. At 257p they are trading on an 17% discount to NAV and offer a 2.5% dividend yield. We retain our Buy rating.
Grainger is not immune to the headwinds blowing across the property industry however, we believe its underlying growth prospects are better than most. At the property level, its assets are in demand given current affordability issues in the ‘for sale’ market and quality rental supply is limited, meaning that rental growth is likely to continue running at elevated levels. At the corporate level, Grainger’s development pipeline is fully-funded with fixed construction costs and with debt 97% hedged and no significant refinancings until 2027, its growth profile is largely de-risked. Despite this, the shares are still off 22% year to date (although this is an outperformance of the wider REIT sector) and trade at a 21% discount to NTA. We think this reflects the company’s association with the wider housing market and concerns about the outlook for house prices. However, with the BTR market increasingly being seen as a sub-sector in its own right, we believe this is unwarranted and retain our Buy rating.
The REcap – Friday 18 November 2022 James reflects on a week of results, and discusses the “game of two halves” as operational metrics remain robust even as investment markets continue their repricing. A pair of pre-lets highlighted the continued flight to quality in the London office market and the underlying trends likely to constrain the future supply of new space. Meanwhile, Grainger’s finals showed it is delivering operational excellence against a supportive market backdrop – but it is the portfolio yield of 3.7% that may attract the attention of both investors (and valuers) over the coming months. Matthew.Saperia@peelhunt.com, James.Carswell@peelhunt.com Click on the image below to listen to the Real Estate team's weekly podcast
Prelims: Operational excellence but not immune Grainger has had a strong year with EPRA NTA up +7% and DPS up +16%. The rental market is in great shape with Grainger reporting record occupancy and accelerating rental growth. Combined with a timely refinancing, a fully hedged debt book, and a large development pipeline with fixed costs, Grainger is in a great position. But despite all this, the PRS assets are valued on a relatively low net yield of 3.7% and we expect values to soften over the coming year. We downgrade our NAV forecast by 5%, which leaves the shares trading on a 17% discount. We reiterate our 300p target price and Hold rating. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com
Grainger has posted strong results which are marginally ahead of our forecasts on all metrics. Whilst we are leaving estimates unchanged, we think these are looking well underpinned by the strength of the rental market and new scheme launches planned. Despite this strong backdrop and the inherent a
NTA in line with our forecast at 317p showing growth of 7% over the year driven by valuation growth of 4.4% (yields relatively flat but ERV growth of 3.1%). Earnings up 12% driven by 4.7% like-for-like rental growth (which accelerated in H2 to 5.5% and has remained at this level in October) with steady profits from regulated sales. The company has a significant committed pipeline of homes which is fully-funded and de-risked with fixed construction costs, which will drive further earnings momentum over the next few years. The average cost of debt at 3.1% is expected to rise to 3.3% next year. The debt is 97% hedged/ fixed and there are no significant refinancing requirements until 2027. The shares are down 25% year-to-date outperforming the wider real estate sector down 33%. At 237p they are trading on a 25% discount to the reported NTA which looks unwarranted given the positive outlook for rental growth and continued investor demand for the BTR asset class. We retain our Buy rating.
Whilst Grainger has been benefiting from both house price inflation as well as a swift recovery in the rental market over the past year, much of its forward-looking growth will come from its secured pipeline (4,000 homes) and operational efficiencies as the company scales up. However, the shares (trading broadly in line with NTA) are attributing little value to this potential at present and whilst we show in this note how earnings from the PRS business should rise over the next few years, with limited near-term catalysts to drive share performance (REIT conversion is still 3-4 years off), we retain our Hold rating for now and 322p target price.
The REcap – Friday 13 May 2022 This week’s podcast sees us reflect on Grainger’s interims, a visit to clients in Leeds, and Matt’s first steps inside a shopping centre (well, four to be precise!) in a number of years. We also ponder the upcoming reporting season, discussing the key themes as well as the risks to our forecasts. Enjoy the weekend. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com Click on the link below to listen to the Real Estate team's weekly podcast
Interims: set for the future Grainger reported record occupancy, LFL rental growth towards the top end of guidance and record lease-up of new developments. All of the key financial metrics are ahead of our expectations, and this leads to modest upgrades. The investment case for Grainger remains predicated on becoming an income-focussed, pure-play PRS REIT, and the company sees the potential for delivering “high single-digit total returns with an increasing component from income”. The market remains favourable, and with an impressive future development pipeline, the shares look good value on an 11% discount to NAV. Buy. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
A safe haven in choppy waters
Improving market conditions have resulted in occupancy of 98% and like-for-like rental growth of 3.5% together with a swift lease up of newly completed developments (two over the period). Grainger has a further three assets due to be delivered in the remainder of 2022 and with new acquisitions its secured pipeline totals 4,001 homes. 12 of its 16 secured pipeline schemes have fixed price contracts and it notes that 96% of its debt is hedged giving it protection against inflation and interest rate rises. The shares have held up relatively well this year down just 11% versus the wider sector down 17%. At 281p they are trading at an 8% discount versus the reported NTA which looks good value but we continue to struggle to see the catalyst near term for an immediate positive rerating and retain our Hold rating.
The REcap – Friday 6 May 2022 On this week’s podcast we discuss the fallout from Amazon’s comment that it has “too much space right now”, and what this may mean for the logistics market. We also look back on another successful Peel Hunt Real Estate Conference, and pick out some key takeaways. Finally, next week sees Grainger reporting interim results and we deliberate on what to expect. Have a good weekend! James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com Click on the link below to listen to the Real Estate team's weekly podcast
New forecasts: on track Today we publish new forecasts for Grainger, with our upgraded NAV numbers reflecting the higher than expected NAV reported last month and improved capital growth assumptions. Our DPS forecasts are reduced marginally, but our three-year forecast horizon doesn’t capture the full benefits of Grainger’s lucrative development pipeline. As this is built out, we see the potential for a fully-covered dividend yield in the region of 4.5-5.0%, and it is this that drives our Buy recommendation and 370p target price. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
2022 should be a good year for Grainger. With occupancy back at more normal levels, it can focus on rental growth which is expected to bounce back in London and be sustained in the regions as stock remains tight and demand remains robust. Its development pipeline continues to grow and will help accelerate the company’s transition to becoming wholly focused on PRS (as opposed to regulated) tenancies. However, in this in-between stage, returns for shareholders are driven by a combination of a limited (but growing) dividend, development surpluses, rental growth, yield compression as well as house price inflation and regulated sales. This maybe confusing mix of drivers has been reflected by a share price that has moved sideways over the past 6 months despite a recovery in underlying market conditions (improving occupancy rates, swift letting up of new projects and strong HPI). We believe this is unwarranted and reiterate our Buy rating, expecting investors to focus increasingly on the fundamentals over the next year.
Meeting Notes - Nov 24 2021
GRI DPLM FDEV PHLL CPG DLAR BREE CVSG FORT HILS MOTR
Grainger's results highlighted the resilience of the PRS sector and its model. Whilst Covid presented short term challenges, the group still collected 98% of rent in FY21 and occupancy has now returned to stabilised levels (having dipped in H2 2020 and H1 2021). As we emerge from the pandemic tenan
Finals: Bouncing back Grainger reports a 4% increase in NAV, almost all of which was delivered in 2H, and this was driven by strong performance from newly-completed PRS assets and developments. Strong enquiries and lettings have led to a recovery in occupancy and although the dividend is down marginally this year (as expected), growth looks set to return in FY22E. The longer-term potential for a dividend yield of 4.5%+ remains and with the company continuing to find attractive acquisitions, this could rise further over the coming years. Buy. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
NTA (297p) and NRV (316p) a little ahead of our forecasts reflecting the strong underlying residential market in the UK and the progress being made with its development pipeline. Operationally activity levels have recovered well in Q4 and there is good momentum leading into FY2022E (95% occupancy currently) which should result in more normalised levels of rental growth. The company continues with its transition to becoming a PRS focused company (PRS currently comprises 69% of the portfolio by value) with its £1.9bn pipeline having the potential to more than double its net rental income. After a weak start to the year the shares are now up 10% year-to-date (+5% over the last 3 months), though they have underperformed the wider sector +21%). At 312p the shares are trading broadly in line with the NRV which looks fair given the growth prospects of Grainger’s portfolio and the strength of the underlying fundamentals (Zoopla’s latest report suggests strong demand in Q3 has pushed rental growth to the highest level in 13 years).
A positive trading update from Grainger highlighting a recovery in activity levels which has resulted in occupancy improving faster than expected (95% anticipated to be reached imminently) and the newly launched schemes generally filling up ahead of underwriting. Whilst PRS rental growth for the year was dampened (from 1.6% to 0.3%) due to incentives used to support occupancy these incentives are no longer being needed and management expects a return to normal levels of rental growth (3-3.5%). Indeed, just yesterday The Times reported on the latest Rightmove report which suggests that residential tenants are returning to city centres with properties letting up at the fastest time on record and rents starting to rise. As a result, we retain our Buy rating and expect to see a recovery in Grainger’s share price which is off 10% over the past month (year to date up just 5% versus the wider UK REIT sector up 15%), trading broadly in line with NAV.
Building blocks in place for a 4.5% dividend yield Grainger’s £2bn+ development pipeline looks set to increase net rent by almost £150m and earnings by c.60%. This could lead to a trebling of the dividend to a c.4.5% yield over the coming years. In addition to the recent placing, the pipeline will be funded through trading profits and Grainger’s ability to source quality assets at attractive yields, which may offer further upside. Tenant demand appears to be picking up, PRS retains its strong fundamentals and sustained earnings growth combined with an increasingly PRS focussed portfolio and REIT conversion make for a compelling investment story. We upgrade to Buy. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com 10-page note
Front footed placing and acquisitions
Premium placing Grainger has raised £209m through a 9.99% placing at 310p, a premium to NAV. The company continues to source good acquisitions at attractive prices and proceeds from the placing will fund two recent acquisitions as well as a pipeline of further opportunities. Although such schemes will take time to feed through into earnings and dividends, the placing will be accretive in due course, the purchases will accelerate the transition to a pure-play PRS specialist and the company will benefit from improved economies of scale and greater asset diversification. The shares continue to offer good value on a 5% NAV premium. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
With Grainger’s share price not far off its early 2020 high and trading at a premium of c.14% to the last reported NTA, it is of little surprise that management has decided to tap the equity market to fund the next stage of acquisitions. It has announced a £209m raise at 310p (4.6% discount to the closing price but an 8% premium to the March 2021 NTA of 286p) which including additional debt gives it funding capacity of c.£350m which is going to be used to finance two recent acquisitions (£95m) and go towards the acquisition of at least two schemes out of its pipeline. Management states that the additional NRI will add c.0.7p to the dividend and c.1.2p to the EPRA EPS on a proforma basis. However, investors will have to wait a while to receive this given completion of the developments is not likely until 2024. In the meantime, the focus will be on operations and in this regard, management highlights an upturn in letting activity over the summer (with rents achieved on its new schemes ahead of underwriting assumptions). After a weak start to the year the shares have started to perform and are now up 15% year to date. We see further share price performance potential as we expect continued improvements in activity levels and values are underpinned by the strong HPI experienced this year. We therefore retain our Buy rating on a year’s view and upgrade our 12-month target price to 341p.
The long-term attraction of Grainger to equity investors is its extensive PRS pipeline together with its operational platform and the pandemic hasn't changed this. However, just near term the focus is on occupancy rates, the leasing up of developments and whether there is any sign of rental declines (none so far and we note Zoopla's Q1 update suggesting growing demand for City centre properties). At 282p the shares are trading broadly at the NTA which looks fair value given these current uncertainties. However, taking a 12-month view, we see the shares moving back to a premium and so retain our Buy rating and 313p target price but acknowledge that positive newsflow is needed for the stock to outperform.
Interims: Long-term story intact Grainger reported in-line numbers with a small drop in EPS, a dividend held flat and a marginal increase in NAV. Occupancy was largely maintained over the past six months and, encouragingly, enquiries are now running significantly ahead of normal levels. We are optimistic for a quick recovery in occupancy assuming restrictions are relaxed as expected. Grainger’s investment case is predicated on the long-term earnings story and we don’t expect Covid-19 to have any significant, lasting impact. The shares trade close to spot NAV and remain attractive for the patient investor. Add. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
Solid trading in a difficult backdrop - green shoots are appearing
Small reduction to estimates, long-term attractions remain
Given the current lockdown it should come as no surprise that occupancy has not picked up since the Autumn (still 90%) and is not expected to recover until April/May. As a result, we are reducing our recurring profit forecast by £3m (to £79.5m) to reflect this delay. However, despite wider press commentary highlighting rental declines, Grainger has reported like-for-like PRS rental growth of +1.8% and interestingly neither the rental growth figure nor the occupancy rate fluctuates much between cities. Current developments are broadly on track, experiencing only marginal delays and recently completed schemes have good levels of interest.The shares outperformed the wider UK REIT sector over 2020 but were still down 9.5% and are down a further 5% year-to-date. At 270p they are trading on a 6% discount to current NAV. Whilst this looks good value, and we retain our 12-month Buy rating, near term we can see the share price moving sideways until occupancy rates improve.
Acceleration to scale; NTA premium pricing this
AGM statement – good start to the year
10% premium to NTA pricing in near-term outlook
Acquisition in Cardiff for £57m; 7% gross yield
Grainger has announced another forward-funded acquisition within Canning Town, this time a 132-home PRS development in Hallsville Quarter for ~£55m (5.5% gross yield), complementing its existing PRS developments in this area (Argo Apartments, Hallsville Quarter phase 1). We leave our forecasts are unchanged (not updated post yesterday’s prelims), but upgrade our PT from 290p to 305p, pricing the shares at a ~10% premium to EPRA Net Tangible Assets. Buy.
FY19 prelims have come in line. Key highlights include: NRI ~3% below our forecasts, but offset by disposal profits being ~6% ahead, resulting in an adj. op. profit beat of 3.4% . Adj. PBT was in line with our estimates, and 3% ahead of BB cons. EPRA NNNAV grew 1% LFL to 272p (post rights-issue). With the shares up 33% YTD, and tracking close to our 290p PT (unchanged), we acknowledge the shares are up with events. However, we leave our Buy stance unchanged noting the potential that exists for the shares to respond well should the UK political climate benefit from greater certainty in coming months.
Grainger has confirmed that a detailed planning application to develop on Besson Street (New Cross Gate, Lewisham) has now been submitted as part of its 50/50 JV with the London Borough of Lewisham. The scheme will include 324 new homes (35% affordable), as well as 5,000 sq. ft of amenity space. Subject to planning permission, construction is expected to start in April 2021 with completion anticipated for April 2024. We make no changes to our forecasts and leave our Buy rec unchanged, noting that the FY19 prelims will be reported on Weds 27th Nov.
We update our forecasts for Grainger following the Sept trading update and CMD, revising down our net rental income estimates by ~8%/10% for FY20/21e taking a more conservative view over the lag between passing rents vs. NRI materialised. As a result our adj. PBT estimates fall by ~7%/9% for FY20/21e, which moves us from the top-end of consensus to the middle of the range. We retain our Buy rec and 290p PT, seeing moderate upside (~8%) at current levels noting the recent bounce in the shares over the most recent quarter (+29% YTD, +23% since Aug lows of 217p). FY19 prelims are scheduled for 27th Nov.
Grainger has announced a £42m forward-funded acquisition of a 284- home PRS development in Sheffield (gross yield ~7% on cost), complementing its existing presence in the region. We make no forecast changes at this stage, and with the shares trading at a ~13% discount to our FY20e EPRA NNNAV, we continue to believe this undervalues the company’s sector-leading positioning in the PRS market, reiterating our Buy rating.
Grainger has released a trading update to the end of August reporting LFL rental growth of 3.4% (ahead of our forecasted 3% for FY19e), leasing ahead of expectations at its new schemes in Bristol, Manchester & Hampshire, and a complimentary acquisition also in Bristol. We leave our forecasts unchanged at this stage, though we note we are ahead of consensus for FY20 and reiterate our Buy recommendation seeing value at current levels.
Grainger has announced that construction has now commenced at its 216-home PRS development in Leeds, which is being forward funded for £34m. The scheme (known as Fabrik) is anticipated to generate gross yield on cost in excess of 6.5% once stabilised, with completion anticipated for late 2021. We highlight the fact that this development builds on Grainger’s existing presence in Leeds (complimenting its 242-home Yorkshire Post development, also anticipated to complete in 2021) giving the company significant regional scale, a typical characteristic of Grainger’s acquisition strategy. We leave our forecast unchanged having already accounted for this transaction, and reiterate our Buy recommendation given the attractiveness at current levels (13.5% discount to FY19e NAV, 2.2% yield).
Following the interims last week, we rebase our earnings by 15.8% for FY19E and 21% - 22% for FY20-21E to reflect disposal profits in H1 19 being lower than expected, and updated assumptions on net rental income post the interims. We make other small changes (explained below) which repositions EPRA NNNAV from 287p to 283p in FY19E and from 306p to 299p in FY20E. Though we move from the top-end to the middle of consensus earnings, we remain buyers of Grainger seeing significant scope for a re-rating from the current 8.5% NAV discount as the group delivers on its £1,825m dev’t pipeline, capitalising on structurally supportive fundamentals within the UK PRS market. Buy, PT 290p
Grainger’s interims reported net rental income of £29.1m (up 33% YoY, +3.6% excluding the GRIP consolidation) and underlying PBT of £38.3m (- 6% YoY due to the timing of residential sales, as previously indicated). EPRA NNNAV was reported at 271p (up marginally from a restated 270p at Sept 18, which our calculations assumed would be 277p). The company has also declared an interim dividend of 1.73p (up 10% YoY) but below our original forecast of 1.96p due to the impact of right issue restatement. Net debt currently stands at £1,080m (LTV of 37.2%). The group has delivered substantial progress on its PRS pipeline (now £1.3bn plus a further £760m secured, significantly ahead of its 2020 target of £850m). At current levels (10% NAV discount, 2.2% yield), we see scope for the shares to re-rate into NAV premium territory fuelled by Grainger’s growing investment pipeline and strong PRS fundamentals and maintain our Buy and 290p PT.
GRI – Grainger – TfL PRS Build to Rent partnership | RESI – Residential Secure Income – Shared ownership acquisition | SONG – Hipgnosis Songs – Portfolio update
GRI RESI SONG
CATCo Reinsurance Opportunities – Portfolio update and discount control | SDCL Energy Efficiency Income – Update | Grainger – Rights issue update
Earlier this month, Grainger posted a strong set of FY18 results, although the key focus, unsurprisingly, was the proposed £396m acquisition of GRIP REIT, to be majority funded by a £347m rights issue at a price of 178p, representing a 39% discount to closing (291p) and a 30% discount to TERP (255p). In addition, the company stated a significant increase in its secured investment pipeline to £943m (FY17A: £651m), with visibility over a further £427m of investments. We strongly firmly that the rights issue is coming from a position of strength, exhibited by Grainger’s track record since it set out its new strategy in 2016 to become a leader in the UK PRS market. We continue to take a long-term view on the shares and strongly believe that existing shareholders should take up their rights. We maintain our Buy rating but lower our PT to 290p to reflect the dilution impact.
Grainger – Finals to 30 September 2018, acquisition and rights issue | NextEnergy Solar – Issuance of preference shares
Grainger plc NextEnergy Solar Fund Ltd
Grainger is the UK’s largest listed residential landlord, with a property portfolio of over 9,000 rental homes valued at £2.3bn. It has a strategy to invest £850m in the Private Rented Sector (PRS) by 2020, and having secured over 85% of this, and with the capacity to fund an additional £350m, we believe that Grainger is set to capitalise on the expansion of the PRS market. The shares currently trade at a marginal discount of 1.0% to the HY18 adjusted NAV. We believe that this does not fully appreciate the growth potential of the PRS sector and the benefits this brings to Grainger’s new strategy.
Grainger has announced an in line trading update for the first 4 months of FY18e. Underlying rental performance was positive while progress continues to be made converting the pipeline of opportunities to invest £850m in PRS by 2020. The secured pipeline has grown from £651m FY17 to £690m (projects announced separately in Q1). We do not make any changes to our forecasts. We reiterate our BUY recommendation and 356p 12m Target Price (1.1x P/NNNAV) as we believe that Grainger should trade at least at NNNAV, but has opportunity to capture attractive returns in PRS.
Grainger’s final results show execution according to the strategic plan and a strong year for underlying earnings. Net rental income and profits on sales grew and overheads and gross to net reduced. The key valuation metric, NNNAV, grew by 5.6% to 303p on appreciation in property assets and from retained earnings. There is balance sheet headroom to convert the PRS pipeline which now incorporates £651m secured but, including other opportunities, totals £1.3bn vs the £850m target. We see continued value creation investing into PRS with attractive yields into prevailing demand.
Grainger continues to make progress towards the £850m 2020 PRS target, acquiring a £30.5m PRS development in Milton Keynes via the GRIP REIT JV. The site will comprise 136 homes and once completed is expected to generate a 6% yield on cost. We make no changes to our forecasts, with our model already assuming continued progress towards the £850m target. We see shareholder value creation through deployment of capital into attractive PRS opportunities. We reiterate our BUY recommendation and 320p 12m Target Price (1.1x P/NNNAV).
Brooks Macdonald Group (BRK LN) FuM +5%, planned costs dampen margin progress | Elementis (ELM LN) Summit integration on track; guidance maintained | GlobalData (DATA LN) Revenues ahead | Grainger (GRI LN) Addition to PRS pipeline: £30.5m site in Milton Keynes | SDL (SDL LN) Investments impact profits; confident in LT strategy
GRI DATA ELM BRK RWS
Blackstone/GSO Loan Financing (BGLF LN) CLO refinancing outlook | Clipper Logistics (CLG LN) Interims highlight further significant growth | Grainger (GRI LN) Final results in line, further progress on PRS investment pipeline | Vernalis (VER LN) AGM statement in line with expectations | WYG (WYG LN) Order book strength underpins FY expectations
GRI WYG BGLP CLG VER
Grainger issued a positive trading update (11th October) highlighting that recurring PBT would exceed £50m for FY16e, above the upper end of market expectations. We factor this into our forecasts, but make a small 2% reduction to NNNAV to reflect the impact of marking-to-market fixed rate debt. With an increasing pipeline of PRS investment, we have a positive stance and believe that the current 20% discount is too conservative. We remain at BUY with a 320p 12m Target Price (1.1x NNNAV).
Grainger has issued a trading update covering the 10 month period YTD to the end of July. Rents have continued to grow on both new lets and renewals, whilst sales completed year to date, and in the pipeline, are as expected. Sales transactions are performing well with prices realised 7.7% above the last valuation, and no material impact post-Referendum. We note continued progress towards strategic goals: PRS investment and capturing cost savings. We leave our forecasts unchanged. We continue to believe that Grainger should trade at a small premium to NNNAV given the opportunity in the PRS pipeline – our 320p target price equates to 1.1x P/NNNAV. We retain our BUY recommendation.
Stability of residence is a core aspiration of most UK households. Traditionally, this has been through homeownership, and recently the advent of institutionally backed private-rented sector (“PRS”) accommodation which has similar characteristics. We believe that companies involved in the provision of PRS – Sigma Capital and Grainger – are likely to be beneficiaries of economic weakness which results from Brexit driving demand for more affordable accommodation. We see this as an entry point to capitalise on this opportunity.
Grainger plc Sigma Capital Group plc
Grainger reported interim results (19/5) which highlighted strong 8% NNNAV growth from revaluation gains. Underlying OPBVM was in line with expectations on net rental growth (+10%). The pipeline of PRS opportunities is growing with £268m now committed. Further cost savings of £5m have been identified while a revised dividend policy will provide a link to rental returns. We increase our FY16e NNNAV to 290p, capturing the strong valuation gains in H1. We believe that Grainger should be valued at least at NNNAV and we increase our 12m Target Price to 320p (1.1x P/NNNAV).
Grainger has reported interim results showing strong NNNAV growth driven by HPI in the period, ahead of our forecasts, as well the conclusions of the operating cost review. NNNAV grew by 8% whilst LTV fell by 250bps on receipt of proceeds from a number of disposals. The cost review has concluded that there are a number of opportunities to reduce the overall cost base. We welcome this and believe that it will improve overall shareholder returns, and maximising capital available to reinvest in PRS. The dividend policy has been revised to payout 50% of net rental income with the interim dividend increased We retain our BUY recommendation and 295p 12m Target Price.
Grainger has disposed of the last major tranche of assets in Germany, leaving only a small number of assets remaining. This transaction has delivered a c.£42m gross consideration. Grainger is progressively disposing of noncore assets – including the German estate and the Equity release business – in order to focus on investing in UK Private Rented Sector (“PRS”) residential housing. Investments have already been made in both standing stock and forward purchase agreements. Grainger continues to trade on a significant 17% discount to the most conservative NAV (NNNAV). We reiterate our BUY recommendation and 295p 12m Target Price (1.1x FY16e NNNAV). We believe that the shares are undervalued vs the current carrying value of assets and in light of future PRS opportunities.
Grainger has proposed meaningful action: targeting >£850m PRS investment by 2020 and investigating material cost savings. Management is focussing on recurring rental income and subsequent dividend growth. Evidence that investment is being deployed will be a key price catalyst. A £100m build-to-rent development has already been secured. Current operational performance is in-line. We revise forecasts for new investment and disposals. The shares trade at a substantial 22% discount to our FY16e NNNAV forecast. We retain our BUY recommendation and 295p 12m TP.
Grainger has released a trading update for the 4 months to the end of January. Rental growth is strong and sales performance is healthy, with sales values exceeding last appraised VPV and an £81m pipeline. Year to date, Grainger has committed £124m to PRS investment including c.£25m of tenanted PRS units. We await further detail on cost savings which will be announced at the interim results (19th May). The shares continue to trade at a c.20% discount to NNNAV. We reiterate our BUY recommendation and 295p 12m Target Price.
The GRIP property fund, in which Grainger has a 25% interest, has acquired a PRS portfolio in Kew Bridge, London for £57.3m. The site is an unbroken portfolio of 94 flats, 4 houses and 80 parking spaces; expected to deliver c.£3m gross rental income p.a.. There is development and asset management potential with existing planning permission for 5 additional units. We are encouraged that Grainger has secured a tenanted acquisition, although this is a small contribution to the £850m strategic target given Grainger’s 25% interest in the GRIP fund. The discount to NNNAV has widened to 21% on recent price weakness. We reiterate our BUY recommendation and 295p 12m Target Price.
Grainger (GRI LN) GRIP fund makes £57m London PRS acquisition | Skyepharma (SKP LN) Very attractive opportunity
Grainger plc SkyePharma
Grainger has exchanged contracts to dispose of part of the German estate, the FRM portfolio, to Heitman, a global real estate investment manager. The total gross consideration is £94m comprising £42m cash and transfer of £52m debt. Grainger has approximately £45m of assets in Germany remaining on which the sale process is underway, progressing towards a complete exit from the country. The NNNAV/NAV impact is marginal at -1p/-2p and improving LTV by c.1.6%. We are encouraged by further progress and release of capital for PRS investment in the UK. >£850m UK PRS investment by 2020 is a key strategic target. We retain our BUY recommendation and 295p 12m Target Price.
Grainger has secured a 600 unit build to rent development in Salford Quays. 600 completed units will be purchased from the developer over the next three years and overall is expected to deliver a 7.6% initial yield on cost. We are encouraged that Grainger has begun to investment into PRS so soon after the Strategy Update (Thursday 28th). Grainger continues to trade at a 15% discount to NNNAV. We retain our BUY recommendation and 295p 12m Target Price.
Grainger will focus on accelerated conversion and delivery of opportunities in the private-rented sector (“PRS”), reallocating resources and simplifying the business to deliver this. The objective to invest more than £850m into PRS by 2020 will target increased rental income, aiming to cover overheads, and drive dividend payout. Overheads are the subject of an ongoing review to transition to a streamlined structure (to be announced at the Interims – 19/5) and further reduction in cost of debt is also being pursued. We look for further detail on the mechanics of how increased PRS investment can be delivered and will review our forecasts following the presentation this morning. We are encouraged by the strategic update, which if successfully executed will deliver accelerated shareholder value creation in the medium term. With 31% upside to our 12m Target Price, we retain our BUY recommendation.
Grainger announced final results (19/11) which surprised on NAV measures but with underlying OPBVM profitability in line with our expectations. We note that there has been positive strategic action by the board through FY15 and FY16 to date but believe that there should be greater urgency to capture PRS/Build to Rent returns while they persist. We retain our 295p 12m Target Price and our BUY recommendation.
Grainger has reported FY15 recurring PBT in line with our forecasts but has beaten our NAV forecasts on a change in discounts applied to VP to calculate carrying value (IV). NAV metrics continued to grow during the year buoyed by HPI and positive vacant realisation prices. We note positive strategic progress with this morning’s announcement that additional German assets are being sold. We see significant opportunity to create shareholder value through the continued reinvestment of reversionary capital into PRS which will deliver strong rental yields from the outset. We retain our BUY recommendation. Grainger is one of our Conviction Ideas for Q4.
Grainger has acquired a 112 unit regional PRS portfolio for £10.4m. The acquisition represents further progress in PRS which offers attractive income returns and leverages Grainger’s experience in managing portfolios of residential assets. We see upside to the current share price as Grainger reinvests in PRS to create significant shareholder value in the medium term utilising the capital released naturally as reversionary assets fall vacant. We retain our 295p 12m Target Price and our BUY recommendation. Grainger is one of our Conviction Ideas for Q4.
Grainger (GRI LN) Acquisition of 112 unit regional PRS portfolio | Skyepharma (SKP LN) EXPAREL® Q3 sales slightly ahead of expectations
Grainger has announced that a replacement has been appointed for Mark Greenwood, who is retiring as Finance Director at the end of the calendar year. Vanessa Simms will join Grainger in early Spring 2016 and brings experience from the listed property sector. The role will be covered on an interim basis by the Group Accounting Director. We are encouraged by the appointment and also on the news that Helen Gordon will take up the role of CEO imminently on 3rd November. We continue to see upside for Grainger as shareholder value is created through the reinvestment of proceeds from reversionary sales into PRS/Build to Rent, which offers compelling returns. We remain at BUY with a 295p 12m TP. Grainger is one of our Conviction Ideas for Q4.
Grainger has made further positive progress in improving the funding profile of the portfolio following the refinancing of the core facility. The debt facility backing the Grainger Invest portfolio in Central London (11% of group total facilities) has been refinanced increasing the size and lowering the margin. The new maturity on the facility leaves Grainger with no significant obligation for c.5 years. S&P has raised the rating on Grainger’s corporate bond to BBB- investment grade (from BB+) on an improved valuation of assets. We remain at BUY with a 295p 12m TP and we expect Grainger to create significant shareholder value in the medium term through the redeployment of capital released from reversionary assets into PRS/build-to-rent opportunities. Grainger is one of our Conviction Ideas for Q4.
Grainger is a unique play on the UK residential market, It stands to capitalise on attractive yield in PRS housing funded with capital released from reversionary assets. We expect that refreshed strategic drive from the incoming management team and positive full year results (19/11) will drive performance in Q4. We remain at BUY with a 295p 12m Target Price as we see significant value to be created from PRS investment.
Performance indicated in the trading update (10m to July) is in line with our expectations although we note that Grainger has been able to achieve a strong gross margin on vacant sales. The group is aiming to simplify through the sale of the German portfolio. CEO designate, Helen Gordon, will join the group a little earlier than planned although FD, Mark Greenwood, now plans to retire at the end of 2015. We hold a positive fundamental view that Grainger stands to create significant shareholder value as capital is released from the reversionary portfolio and redeployed into PRS assets. We retain our BUY recommendation based on a 295p 12m Target Price calculated using a NNNAV valuation for Reversionary assets and use a 1.5x P/B multiple for PRS assets. Grainger remains one of our Key Buys for 2015.
Cineworld Group (CINE LN) Stronger than anticipated H1 and decent upgrades anticipated | Grainger (GRI LN) In-line performance to July, strong vacant sales margin | North Midland Construction (NMD LN) Return to profitability; Progress in legacy contracts
GRI NMCN DQ6
Grainger has renewed the core syndicated bank facility as it approached maturity in July 2016. The new facility has been secured at a lower margin improving the overall group cost of debt. We do not make any changes to our forecasts at this stage. We retain our fundamental view that there is significant upside to be captured on the redeployment of capital released from the group’s reversionary portfolio which can be reinvested in attractive PRS assets. Our BUY recommendation is predicated on a 295p 12m Target Price set using a NNNAV valuation for reversionary assets and a 1.5x P/B multiple on market-rented assets. Grainger remains one of our Key Buys for 2015.
Grainger is creating value from redeployment of capital into market-rented assets. These assets deliver an attractive yield which can be reinvested to compound medium term returns. Increasing institutional investment will drive valuations. Valuing Grainger on a liquidation approach using NNNAV is unfair. We retain an NNNAV approach for the reversionary assets and apply a 1.5x implied P/B to market-rented assets to arrive at a blended 295p 12m TP. Grainger is one of our Key Buys for 2015.
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