Grainger: all Reit in the end

Who’d be a residential landlord these days? Well, if you’re a company or investment fund with hundreds of millions of pounds to deploy, the answer is “quite a few”. For Newcastle-headquartered Grainger (GRI), which has been active in the space for more than a century, a niche in build-to-rent properties is starting to pay dividends – albeit largely in the figurative sense.

Full-year results showcase the opportunity Grainger sees: 1,300 new homes were added in the period and have already been 91.5 per cent let. Another 1,000 are slated for this year and investors can expect numbers to “ramp up over time”, says chief executive Helen Gordon. Overall occupancy levels, which dipped slightly during the pandemic, are back up to 95 per cent. Throw in like-for-like rental growth and passing net rental income is up 9 per cent.

One blot on earnings was a steep rise in the tax charge from £16.3m to £42.6m, following a £33.4m recognition of deferred tax liabilities. This is due to the tax on the difference between the carrying value of the group’s trading properties, which could incur a 25 per cent tax take after new fiscal rules are applied in April 2023.

The accounting move underlines the group’s desire to switch to real-estate investment trust (Reit) status. Doing so effectively eliminates capital gains tax liabilities incurred on asset sales, although the change can only occur once at least 75 per cent of gross assets and accounting profits relate to property rental business.

FactSet-compiled consensus forecasts are for earnings of 26p and tangible book value of 310p a share for the year to September 2022. That suggests the market continues to doubt the structural growth story. We don’t. Buy.

Last IC View: Buy, 284p, 20 May 2021