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Grainger Strategy Update
28 January 2016
Objective
A strategy to deliver improved shareholder returns
Grow rents
Simplify and focus
Build on our heritage
Strategy Update
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28 January 2016
Strategy review process
The strategy review process

Bottom up review of every division

All major assets and portfolios appraised

All key sites assessed

Growth avenues explored

Group wide employee engagement
Strategy Update
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28 January 2016
The growth opportunity

Residential – top performing asset class

Substantial market opportunity for growth in the Private Rented Sector (PRS)
Residential market returns
25%
Residential v other asset classes
%
Residential returns
20%
12
15%
10
7
10%
8
1.7
1.6
5.7
6
5%
1
6.9
6
0%
6.1
-5%
4
4
3.5
-10%
2.9
2
-15%
0
-20%
Income Return
Income return
Capital Growth
Total Return
Total returns
Source: MSCI, IPD Residential Index, 2001-2014, Annualised returns
Strategy Update
Capital Growth
Source: MSCI, IPD Residential Index, 2001-2014
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28 January 2016
Key findings
Significant competitive advantages

Unparalleled residential expertise

Best in class asset management

High quality cash generative portfolio

National platform
Reception at Springfield Lofts, Dalston, London

Significant market opportunity

Committed employees, ready for change
Grainger’s skillset
Acquisitions
Strategy Update
Asset
Management
Development
Lettings
6
Property
Management
Refurbishment
Sales
28 January 2016
Key findings
Improvement needed

Structure leading to lack of co-ordination

Complexity creating duplication

Too much focus on capital returns

Too much effort on small scale projects

Expertise shared too readily

High operating costs
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28 January 2016
Simplified Grainger
Focusing on growing rental income and maximising total returns
The leading institutional UK residential investment vehicle
Grow rents
Simplify
and focus
Build on
our heritage
Strategy Update

Inject pace and improve PRS sourcing

Accelerate transition to a more balanced, lower risk
business

Exit non-core assets

No more focus on fees/ third party

Focus development team on PRS

Reduce overheads

Maximise returns from our regulated tenancy portfolio

Leverage our platform
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28 January 2016
Delivering the strategy
New structure
Simplified and focused
Current Divisional
Structure
Action
New Structure
UK Residential
Regulated tenancies and PRS
Simplified Grainger
Value Drivers
Development
Exit non-core; support PRS
Rental income
Capital growth
Two assets
Funds
No new funds; London/SE via GRIP
Retirement
Solutions
Exit
Germany
Exit
Strategy Update
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Regulated
tenancies
PRS
28 January 2016
Changing the composition of our business
Re-focusing a diverse, complex business
Development ‘for sale’
Equity
Release
Sales
Simplified Grainger
Rents
Regulated
tenancies
Capital
Growth
Fees
PRS
German
Assets
Rental Income / Growth
Tenanted acquisitions
Strategy Update
New build PRS assets
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28 January 2016
Regulated tenancies
A high quality residential investment that will help accelerate PRS growth

Compelling asset class

Highly cash generative and robust performance throughout cycles

Supports our growth into UK PRS

Future investment secondary to UK PRS capital allocation

>3,600 units

£1.17bn portfolio at market value

Rental income producing – £28m of gross rental income, with growth linked to RPI

Capital growth – Well located assets with significant growth prospects

£268m of unrealised, locked in value (reversionary surplus)
Strategy Update
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28 January 2016
Regulated tenancy business model
1. Buy at a discount
2. Hold and receive rental income
3. Sell and capture house price inflation and locked-in value (reversionary surplus)
Value
Recurring Rental Income
House Price Inflation (“HPI”)
Sales price
Purchase Price
Strategy Update
Time
Buy at
discount
Hold
Sell
1.
2.
3.
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28 January 2016
Supporting our UK PRS growth
 Excellent, proven liquidity, throughout cycles (see charts below)
 Regulated tenancies estimated to deliver on average >£100m p.a. of gross cash to 2025
 Strong total returns from residential assets
UK Residential market returns
Grainger’s strong cashflows
25%
£m
20%
350
15%
300
10%
250
5%
200
0%
150
-5%
100
-10%
-15%
50
-20%
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Income Return
Capital Growth
Total Return
Gross rents
Source: MSCI, IPD Residential Index, 2001-2014
Strategy Update
Property sales (net of fees)
Source: Company data; UK Residential division.
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28 January 2016
Nick Jopling
Executive Property Director
The UK PRS growth opportunity
Continued undersupply of housing
27m households in the UK, housing market worth >£5 trillion
New Supply Vs Population
70,000
350,000
65,000
300,000
250,000
60,000
200,000
55,000
150,000
100,000
50,000
50,000
-
45,000
1971
1981
1991
Annual Completions All Tenures (DCLG)
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2001
2011
UK Population (ONS)
28 January 2016
UK Population (000s)
New homes built (per annum)
400,000
The UK PRS growth opportunity
UK housing tenures
 Fastest growing housing tenure
(over 4m households)
10
9
Households (m)
8
 1 million new households since 2005
7
6
 Doubled in size in the last decade
5
 One in five households rent privately,
one in four in London
4
3
2
 1.7m more PRS customers by 2018,
totalling 5.7m (Savills)
1
0
 7.2 million households by 2025 (PwC)
Buying with mortgage
Private renters
Source: English Housing Survey 2014
Strategy Update
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28 January 2016
PRS target customers – UK Generation Rent
Households (25 - 34 years), by tenure
1.9
Households (m)
1.7
Financial drivers
 Mortgage constraints
 Lower savings
1.5
Behavioural drivers
 Later family formation
 Greater job mobility
 Urbanisation
1.3
1.1
0.9
0.7
0.5
buying with mortgage
private renters
Source: English Housing Survey 2014
A growing rental culture
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28 January 2016
UK PRS – Competitive landscape
Significant opportunity for large scale, professional investors
Number of properties per landlord
0%
3% 1%
1%
1
17%
2-4
5-9
10-24
25-100
More than 100
78%
Source: ONS, Landlord Survey
Strategy Update
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28 January 2016
PRS investment case

Significant growth prospects

Compelling demographics

Stable, inflation linked income

Robust income

Compelling total return investment

Broad political support for large scale,
institutional investment
Hallsville Quarter, Canning Town, London, GRIP Portfolio
Strategy Update
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28 January 2016
Growing our PRS pipeline
Future direction
Changing the composition of our business
PRS Strategic Targets
Wholly owned assets by value
100%
Balance sheet
75%
 Over £850m of investment targeted
Regulated
tenancies
PRS assets
 50%+ of wholly-owned
PRS assets by
2020
50%
PRS assets
25%
0%
2015
Strategy Update
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2020
28 January 2016
Future direction
Changing the composition of our business
PRS Strategic Targets
2020
2015
Income statement
 Net rental income to
exceed profit from sales
 Net rents and other
* to more
assets
recurring incomePRS
than cover overheads,
expenses and finance costs
 Dividend to materially
increase and be linked to
rental growth
Sales Profit
2015
Overheads, Exps &
Fin. Costs
* Excludes normal sales income.
Strategy Update
Net rents
Sales Profit
Net rents
2020
Net Rents
& Other
Income
Charts for illustrative purposes
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Overheads, Exps &
Fin. Costs
Net Rents
& Other
Income
28 January 2016
Build to rent – Overview
Purpose built rental assets

Designed to optimise occupancy and
rental levels

Constructed to reduce property operating
costs

Closely managed development activities
supplement returns
Abbeville Apartments, Barking, London
Strategy Update
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28 January 2016
Attracting and retaining customers
Transitioning a 104 year old business into the modern day

Moving to a business to consumer (B2C) brand

Technology led services

Designing products and services to meet
customer preferences and lifestyles

Supports stable, recurring rental income
Strategy Update
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28 January 2016
Build to rent – Development re-focus
On-balance sheet, secured PRS
development schemes provide the
potential for over 700 units.
1. Development re-focus
 Exit schemes not aligned to PRS
Including:
 Honour existing commitments
1.
2.
3.
4.
 Secure new PRS opportunities
Seven Sisters
Waterloo
Apex House
Berewood
2. Improve PRS yield
 Earlier site investment
 Manage development programme
 Maximise yield on cost
 Capture revaluation uplift
Strategy Update
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28 January 2016
Increasing our UK PRS pipeline
Re-allocate existing resources
GRIP
~£100m
Forward
acquisition
~£250m
Direct
development
~£250m
Tenanted
acquisitions
~£250m
PRS
>£850m investment
Strategy Update
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28 January 2016
Increasing our UK PRS pipeline
The experience and platform to be a leader in a growth market

Scale – National platform and local expertise

Experience – Manager of over 3,600 market rented properties

Transaction capability – Strong balance sheet and proven execution

Value add – Accretive asset management

Multiple growth avenues – Tenanted stock through to development of PRS
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28 January 2016
Tenanted acquisitions


Tenanted residential acquisitions will be
a key component of our growth
strategy
Immediate income generation and
earnings enhancement

Attractive regional yields

Established platform to integrate
assets quickly
Strategy Update
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
£88m of rental assets acquired in the
2015 financial year, 927 homes

c.£23m acquired since the start of FY16

Gross rental income of c.£8.3m, 7.5%
yield on cost
28 January 2016
Adding value – Spectrum, Liverpool case study

Single site in Liverpool City Centre,
adjacent to Liverpool ONE

28 purpose built vacant apartments

Formerly serviced apartments

Acquired for £2.7m in Dec 2014

£0.25m refurbishment cost
Liverpool ONE
G
Liverpool ONE, Source: Grosvenor
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Adding value – Spectrum, Liverpool case study
Strategy Update
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28 January 2016
Adding value – Spectrum, Liverpool case study
Strategy Update
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28 January 2016
Adding value – Spectrum, Liverpool case study
Strategy Update
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28 January 2016
Adding value – Spectrum, Liverpool case study

Annual rent £248k

8.3% gross yield on cost
Strategy Update
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
Investment value at 30 September
2015 £3.4m

15% increase on cost
28 January 2016
Proven track record of acquiring quality PRS portfolios
 Proven ability to source accretive regional tenanted PRS portfolios
 £88m of rental assets acquired in the 2015 financial year, 927 homes
 Gross yield of c.7.7%
 Ability to immediately integrate and manage the assets
 Marginal incremental costs of management
 Experienced regional operational management team, familiar with the territory
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28 January 2016
Reducing costs
Improving efficiency to maximise returns
Opportunity to reduce overheads and costs through simplification and focus

Comprehensive operational review underway

Overheads of £36m in 2015; post Germany and Equity Release disposals, will
reduce by c.10% (£32.5m)

Opportunity to significantly improve our sustainable returns

Meaningful further reduction will be delivered

Report back at HY results in May
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28 January 2016
Improving efficiency to maximise returns
Reducing financing costs and optimising our capital structure

Substantial progress in reducing financing costs and diversifying funding

£275m of corporate bonds issued (now investment grade rated by S&P)

New £680m syndicate facility

£150m facility renewal for a c.1,200 unit portfolio

Average cost of debt reduced from >6% in FY12 to 4.6% by the end of FY15

No material refinancings required until 2020
Financing costs (£m)
Loan to Value (%)
100
60%
90
80
50%
70
60
40%
50
2012
2013
2014
2015
2012
38
2013
2014
2015
28 January 2016
Financing Targets
Reducing financing costs and increasing firepower
Cost of Debt
Loan to Value

4% average cost of debt target

Previous target of 45-50%

Supported by disposals


Substantial overall cost savings
Expectation <40% following Equity
Release and Germany disposals

Longer term LTV target of 40 – 45%
>£850m of potential investment firepower over 3-5 years
(post disposals, supported by reversionary cash generation)
Strategy Update
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28 January 2016
Vanessa Simms
Finance Director
Summary
Key drivers of performance
 Significant growth potential
 Accretive tenanted
acquisitions
 Inflation linked
 Value adding refurbishments
 Re-focus team onto PRS
 Move up development curve
 Capture higher returns
 Manage development process
RENTAL GROWTH
PRS DEVELOPMENT
 Overheads reduced by c.10%
after disposals
 4% cost of debt target
 Review underway, report back
at HY results in May
LOWER COSTS
Strategy Update
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28 January 2016
Key actions
1. Significantly grow our UK PRS pipeline
i.
ii.
Increase PRS development pipeline (build to rent)
Accelerate investment into tenanted PRS portfolios
2. No new speculative ‘for sale’ development; team re-focused to PRS
3. Generate best value from our high quality regulated tenancy portfolio
4. Prioritise direct investment; no new funds; no more focus on fee generation
5. Reduce overheads and finance costs
a) Operational review to identify savings, report back at half year results in May
b) Continued focus on reducing average cost of debt, towards a 4% target
Outcome: More balanced returns, lower volatility, higher dividend
Strategy Update
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28 January 2016
Strategy update
Grainger
Focused on growing rental income and
maximising total returns from residential investment
Grow rents
Simplify and focus
Build on our heritage
A strategy to deliver improved shareholder returns
Strategy Update
44
28 January 2016
Thank you