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Grainger reduces debt

RESULTS: Residential landlord Grainger should eventually profit from the rise of the private rented sector, but reducing debt is a more pressing priority.
November 23, 2012

The changes afoot at Grainger (GRI) mirror the gradual maturing of the buy-to-let sector. The residential landlord has historically made almost all its profits through buying up properties subject to regulated tenancies and selling them on when the tenant dies. But, longer-term, says chief executive Andrew Cunningham, it will replace trading profits with rental cash flows. Its eventual transformation into a higher-yielding real-estate investment trust is "inevitable" - but is a "long way down the road".

IC TIP: Buy at 114p

This strategy - which received a boost from the recent Montague Review to promote institutional ownership of private-rented portfolios - sits behind some of Grainger’s more eye-catching announcements of recent months. It recently launched a for-profit social-housing provider to develop 77 units in Hampshire, and signed an innovative build-for-rent deal on a car park owned by the London Borough of Kensington & Chelsea. But Grainger still has a £1.39bn portfolio of trading properties and operating profit from selling these accounted for around 60 per cent of the total over the period. Its transformation into a pure rent collector will take a very long time.

More pressing is the company’s £1.19bn net debt pile, which is huge but shrinking - last year it was £1.45bn. Mr Cunningham has set a target to reduce it further to £1bn by the end of next year, at which point the dividend policy will be reviewed.

GRAINGER (GRI)

ORD PRICE:114pMARKET VALUE:£475m
TOUCH:114-115p12-MONTH HIGH:119pLOW: 81p
DIVIDEND YIELD:1.7%TRADING PROP:£1.02bn
DISCOUNT TO NAV:49%
INVESTMENT PROP:£526mNET DEBT:304%

Year to 30 SepNet asset value* (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2008305-112-34.83.53
2009194-170-50.81.29
2010200-20.8-2.901.70
201121626.19.501.83
2012223-1.700.101.92
% change+3--99+5

Ex-div: 5 Dec

Payment: 8 Feb

*Including revaluation of trading