Grainger Annual Report 2006

Plain-text annual report

grainger grainger trust plc annual report and accounts 2006 2 Strategy and operations 4 regulated tenancies 6 market tenancies 8 equity release 10 property and asset management 12 development 14 europe 16 17 20 30 31 36 44 46 52 59 62 64 69 125 127 128 133 134 135 136 138 Highlights 2006 Chairman’s statement Chief executive’s review Leadership and strategy group Financial review Corporate social responsibility The board Corporate governance report Report of the remuneration committee and directors’ remuneration report Directors’ report Independent auditors’ report to the members of Grainger Trust plc Consolidated ﬁnancial statements Notes to the consolidated ﬁnancial statements Independent auditors’ report to the members of Grainger Trust plc Parent company ﬁnancial statements Notes to parent company ﬁnancial statements Five-year record Shareholders’ information Advisers Glossary of terms Corporate addresses With over 12,000 homes, Grainger is the largest quoted residential property owner in the UK. While acquiring, managing and selling these properties is the mainstay of our business, we’re increasingly active in other areas such as equity release, residential development, fund and asset management. We are also expanding into residential development and investment in Continental Europe. 1 P I T M A S T O N C O U RT 2 Grainger Trust plc Annual report and accounts 2006 grainger strategy and operations Grainger’s strategy is to provide its shareholders with sustained superior returns through its long term exposure to all aspects of the residential market. Our ambition is to use our residential skills to become one of Europe’s leading co-investing fund managers. our six areas of operation regulated tenancies market tenancies equity release This mature business is low yielding These assets are let at market rates on The assets in this business produce no but produces high reversionary returns. standard assured shorthold tenancy rental income year-on-year, but a high A key aspect of this portfolio is that agreements. Not only do they produce margin on eventual sale. It therefore it is extremely cash generative. With a market rent but they also offer an has similar return characteristics to the approximately 9% of the total properties element of reversionary potential through regulated portfolio despite its relative falling vacant every year, it produces in their discount to vacant possession immaturity. We aim to build this activity excess of £100m cash per annum which value. We now operate these assets both in size and scope; achieving a is available for recycling either into other through our recently launched Fund, portfolio that will produce a large future regulated assets or into other parts of G:res 1, and our objectives are to raise stream of cash ﬂow but also widening the Grainger business. Our objective for further equity in this Fund and grow the types of retirement solution product this part of the business is to continue the assets under management. As well that we can offer. to invest as much as expected returns as sharing in the performance of our and availability allow. co-investment stake, we receive fees, enhancing our overall return. PA G E 4 PA G E 6 PA G E 8 3 Our strategy is currently applied through: Within the business we use numerous benchmarks • direct ownership of a high quality, reversionary to measure operational performance and to assess portfolio of residential properties; the success of our strategy in creating long term • our property and asset management skills which shareholder value. Key amongst these are: not only service our own portfolio but which produce income from third parties; and • our development division which delivers returns from changes of use or density and from development. • • • Total shareholder return; Return on shareholder equity; and Return on capital employed. property and asset management development europe This represents the core skill of the This division gives us valuable exposure We aim to provide a similar mix of Grainger business. It includes the to another side of the residential market, return proﬁles as our UK businesses. ability to manage large-scale residential building on our residential expertise, In Germany, our portfolio produces a net portfolios from the point of view of funding capability and ability to work rental return after ﬁnancing costs whilst both an investor and a manager. Our in partnership with a variety of other also providing an opportunity for capital objectives are to continue to provide organisations such as housing growth. Our objective is to successfully a cost effective high quality service to associations, local councils, other acquire sufﬁcient assets to use as the our tenants and to generate additional developers and occupiers. Our objective basis of a third party fund and to recycle fee income for the group by selling is to produce a consistent stream of some of the capital released into new that service to third party owners. This good quality returns by focusing on opportunities. ties very closely with our market-rented larger scale, mixed use developments. properties which are largely held in a fund in which we have secured third party investors. PA G E 1 0 PA G E 1 2 PA G E 1 4 4 Grainger Trust plc Annual report and accounts 2006 graingerinvests Regulated tenancies Grainger own over 7,700 regulated residential properties, valued at over £1bn. Our tenants have security of tenure and pay a ‘fair’ rent. This portfolio is core to our business and provides signiﬁcant, predictable ongoing cash ﬂows from rents and sales proceeds. Grainger’s core business remains the ownership, management and trade of residential properties which are subject to regulated tenancies. Under this arrangement, the tenant can stay in the property for the rest of their life. The rent is set by an independent rent ofﬁcer and is usually less than that which would be achieved if the property was let on the open market. We buy these properties at a discount to vacant possession value (the price achievable without a tenant in place) to reﬂect the low rent we receive and the fact that the tenant has lifetime rights of occupation. When the tenant leaves we sell the property into the owner-occupier market, realising the discount and any house price inﬂation from the date of purchase. These properties give us two sources of income – rents and the proﬁts made when they are sold. The size and geographic spread of the portfolio (some 7,700 units across the UK), combined with the fact that we buy and sell properties over long periods of time, help to protect us against some of the risks associated with residential investment – in particular a short term or localised fall in house prices. Due to a change in the law, no new regulated tenancies have been created since January 1989 so the overall number in existence is falling from year to year. We make every effort to replace the regulated properties that fall vacant and are then sold but inevitably the portfolio will decline over time. The management and trading skills that we have developed over many years working with the regulated portfolio are now being applied to our other areas of residential ownership such as equity release NORTH & SCOTLAND MIDLANDS/EAST OTHER SOUTH 14% £261m 18% £331m 20% £363m 48% LONDON £864m and market let properties. W H O L E U K R E S I D E N T I A L P O RT F O L I O B Y G E O G R A P H Y, I N C L U D I N G S H A R E O F J O I N T V E N T U R E S ( £ M ) ( I N V E S T M E N T VA L U E ) 5 L O C K H O U S E was purchased E S S E X P O RT F O L I O G L O U C E S T E R R O A D , South at auction. This unique property one of the 21 attractive, rural, Kensington, London was acquired in East London is occupied by regulated properties acquired a regulated tenant. in October 2005. in June 2006. Three of the six apartments are ‘regulateds’. WALBOTTLE HALL COTTAGE forms part of a mixed tenure portfolio of 84 properties, acquired in September 2006 from the Duke of Northumberland. The properties are predominantly located in attractive and desirable rural locations where excellent capital growth potential exists. the vacant possession value of our 7,715 regulated properties is £1,403m 6 Grainger Trust plc Annual report and accounts 2006 graingerlets Market tenancies are those properties let at market rates on assured shorthold tenancy agreements, typically six months or a year in length. The majority of these are now held in our recently launched co-investment Fund, G:res 1. Although Grainger’s core tenanted residential business has been in regulated tenancies, we also built up a large high quality market-rented portfolio of properties, much of which came from our acquisition of City North Group plc in 2005. During the course of the year, in common with many other property companies, we transferred these assets (some 1,044 units worth approximately £200m) to a Jersey Property Unit Trust with a view to attracting third party equity investment into the fund. The successful ﬁrst close was announced on 22 November 2006 with committed equity from a number of institutional investors. This, together with currently available bank ﬁnance of up to £125m, should enable this fund to grow to achieve signiﬁcant assets under management. Such structures enable us to not only retain a geared exposure to the residential investment market through our retained ownership but also to provide us with a valuable source of both property and asset management fees, enhancing the overall return. There is also the potential to earn performance fees. In addition to providing management services to G:res 1, we also continue as property advisor and provide property management services to Schroder’s ResPUT, a market let fund. We also own a 22% stake in this fund, which at the year end was valued at some £19m. 7 THE COURTYARD, KEMPSHOT PARK is a block of 25 apartments and two retail units speciﬁcally developed by Grainger in 2005 for the letting market. All of the apartments were let within one month following completion of the works. The building has a gross yield G:res 1 has property with a total value of £210m of approximately 6%. P I T M A S T O N C O U RT , Birmingham, is a purpose-built 1930s art deco block comprising 65 recently refurbished ﬂats. S H I L L I N G T O N O L D S C H O O L , Clapham, formerly a Victorian school, now comprises 58 apartments and studios. B E T H N A L G R E E N is a mixed use estate in East London. There is a rolling programme of refurbishment and improvement. 8 Grainger Trust plc Annual report and accounts 2006 graingerinnovates Equity release offers home owners in or near retirement the opportunity to access some of the value of their home while continuing to live there for the rest of their lives. Grainger specialises in home reversions, which can provide customers with both certainty and access to more cash than a lifetime mortgage. Grainger constantly seeks innovative ways to maintain long term investment exposure to the housing market. One of our major initiatives over the last few years has been in the area of ﬂexible retirement solutions and in particular, the sale of home reversion plans. These plans are part of the wider equity release market and enable home owners to raise cash from what is usually their most signiﬁcant asset – their home. Under a typical plan, we buy some or all of a home owner’s property for a lump sum or series of payments which depend on the value of the property, the age of the owner(s) and the proportion they wish to sell. The owner can then stay in the property, rent free, for the rest of their life or until they decide to leave. At that point, Grainger is able to sell the property and realise its proﬁt. The long term cash ﬂows from this business provide a good strategic ﬁt with the cash ﬂows already being generated by the regulated tenancy business. We acquire home reversion assets from three main sources – our own Bridgewater brand, through our distribution agreement with Norwich Union and through the direct acquisition of existing portfolios or home reversion plans from third parties. We expect the home reversions market to grow considerably in the next few years as elderly people seek to release cash from their homes to supplement their pensions or to fund improvements in their lifestyles. We are also seeking opportunities to broaden the types of retirement 196 354 241 421 05 06 INVESTMENT VALUE £m VACANT POSSESSION VALUE £m products we can offer. I N V E S T M E N T VA L U E A N D VA C A N T P O S S E S S I O N VA L U E Bridgewater Equity Release offers home owners aged 65 and over all the advantages of home reversions, with added ﬂexibility. They choose how much equity in their home they want to release – from a minimum of 25% – and they can release further amounts at any time. 9 3,000 full or part-equity residential properties under home reversion plans A typical Grainger home reversion property is a 3 bedroom bungalow with a vacant possession value of some £200,000. The innovation award, won by Bridgewater Bridgewater won ‘Best Provider – Home Reversions’ in October 2006. in November 2006. 10 Grainger Trust plc Annual report and accounts 2006 graingerconnects Property and asset management We are proud of our skills as property and asset managers – producing the required returns for our shareholders whilst ensuring that the needs of our customers are met. We also apply this added value ‘owner’s’ approach to the beneﬁt of our increasing number of co-investment arrangements. One of Grainger’s key strengths is our ability to manage property on a large-scale. Operating from seven UK ofﬁces and one in Germany, our property management teams look after almost 18,000 homes and are trained to understand all types of property and tenure. Residential property management is a demanding role requiring complex daily decisions. We fulﬁl our obligations as landlords and provide excellent service to our customers whilst protecting the value of our assets and enhancing the performance of our portfolio. Our property management professionals are skilled at balancing these demands. Further, our property management and sales and acquisitions teams work together to ensure that the correct strategy and targets for the portfolio are set at the outset and that the right blend of refurbishments, sales and acquisitions achieve the required performance. We believe that our combination of large-scale residential ownership and nationwide management capabilities provides us with a unique offer to third party partners. We currently provide such services to the Schroders ResPUT residential investment and to two partnerships set up between Grainger and the Genesis Housing Group. We also service G:res 1, our own residential fund which was launched in November 2006. This fund will act as a blueprint for our ambitions to grow our business as a co-investing fund manager; a model which could be applied to all of our business sectors. 13,226 13,567 15,221 04 05 06 N U M B E R O F U K P R O P E RT I E S M A N A G E D 11 B E R K E L E Y PA R K we successfully completed a project to create an additional 17 studio apartments and a new reception area at this serviced apartment development near Heathrow. W E L L E S L E Y C O U RT, Twickenham, is a 1930s block of 24 apartments. We created ﬁve additional apartments in the roof space. C AV E N D I S H S T R E E T is an off-market acquisition made on behalf of Schroders ResPUT. managing some 18,000 properties DIBDIN HOUSE, MAIDA VALE was included within the ﬁrst portfolio of three estates acquired from the Church Commissioners in a joint venture with Genesis Housing Group. The three estates will undergo a comprehensive refurbishment programme, increasing the value of our investment and also improving the environment for our tenants. 12 Grainger Trust plc Annual report and accounts 2006 graingerdevelops Development Grainger’s evolving development business is increasingly focused on large and complex mixed use projects. The recently strengthened management team is based in London, Newcastle and Oxford, thus ensuring good geographic coverage. Working as either principal or with joint venture partners, Grainger has a diverse portfolio of existing development opportunities. Grainger is keen to maintain its exposure to all sectors of the residential market. One way in which we do this is through our development division. Our interests range from strategic land holdings to large-scale mixed use developments, often in co-operation with a funding or development partner. Our development division produces added value through gaining planning permission with a change of use or density, or through physical development. One example of this is the acquisition of green or brownﬁeld land sites and, over time, obtaining planning permission for residential or mixed use developments. We are increasingly involved in large mixed use developments where our residential expertise can be used to good effect with the skills of other development partners – for example, during the year we announced a collaborative agreement with Development Securities plc. Since the year end we have entered into our ﬁrst transaction under this agreement for the development of a 10 acre site in Birmingham. 13 M A C A U L AY R O A D Detailed N E W L A N D S , WAT E R L O O V I L L E , planning consent was obtained will provide 1,550 residential units and in 2006 for 94 residential units one million sq. ft. of commercial space. and a 26,000 sq. ft. ofﬁce building. HORNSEY ROAD will include 145 private residential units, 62 affordable units and a 40,000 sq. ft. ofﬁce building. Demolition will be ﬁnished in early 2007 and completion is due during summer 2008. end value of our development portfolio £675m 14 Grainger Trust plc Annual report and accounts 2006 graingerexpands Europe represents an opportunity for Grainger to expand and use our skills and experience in new and less developed residential markets. As owner occupation increases, Grainger is well positioned to take advantage of this trend and build a proﬁtable part of the business. Grainger is seeking to replicate some of the main characteristics of our UK activities in mainland Europe – long term exposure to the tenanted residential market and residential development opportunities. Our main focus for residential investment is currently Germany where we have recently built up a portfolio of some 3,000 residential units. We see the German market as providing opportunities for an experienced professional landlord such as Grainger. The low price per unit relative to other European markets and the low level of home ownership (42% compared to an average of 59% in the rest of the European Union) augur well for future capital growth. The attractive ﬁnancing environment also means that net rents can exceed ﬁnancing costs, unlike the UK market where low residential net yields require an element of house price inﬂation to produce an acceptable total level of return. In the future our European tenanted residential assets could form the basis for us to act as a co-investing fund manager on a much larger scale – the recent opening of our management ofﬁce in Mannheim is the ﬁrst step in this journey. On the development side we have two relatively small but exciting ventures with experienced local partners in Estonia (Tallinn) and the Czech Republic (Prague). We continue to look for other markets where we can utilise our skills to achieve appropriate returns. 303 units 1,501 units 935 units G E R M A N Y Our investments in Germany are in 3 main regions – Metro-Ruhr, Baden-Wurttemberg/Bavaria and Berlin 15 2,739 residential units exchanged in three regions of Germany GERMANY is in a different stage in the residential cycle to the UK and has had in aggregate, ﬂat house prices for a decade. With economic growth returning, we think now is a good time to invest. A Grainger Property in Mannheim. A Grainger Property in Karlsruhe. A Grainger Property in Böblingen. 16 Grainger Trust plc Annual report and accounts 2006 highlights 2006 +20% Grainger NAV up to 595p +10% dividend increased to 5.62p per share 39.1% total shareholder return for the year +19% increase in market value of property assets to £1.9bn £314m total UK and European residential acquisitions in the year 1,294 1,438 1,597 1,901 03 04 05 06 439 03 546 04 563 05 677 06 3.26 4.65 5.11 5.62 03 04 05 06 G R O S S P R O P E RT Y A S S E T S G R O S S N AV P E R S H A R E ( P E N C E ) * D I V I D E N D S P E R S H A R E ( P E N C E ) * * * ’03 and ’04 are under UK GAAP, ’05 and ’06 are under IFRS, there are no material differences. ** Dividends per share relate to the total of the interim and ﬁnal declared for the ﬁnancial year. 17 chairman’sstatement In my last statement as Chairman of Grainger Trust I am pleased to report on another year of signiﬁcant progress and achievement. In particular our emerging business lines are evolving well to complement our core residential regulated tenancy business. R O B E RT D I C K I N S O N Chairman Results This is the ﬁrst full year for which we present our results under International Financial Reporting Standards (IFRS) and therefore the ﬁnancial review contains a greater degree of explanation and interpretation than is usual. Sufﬁce to say that the implementation of IFRS has no impact on the strategy and cash ﬂows of our business and our key ﬁnancial indicators, based around net asset values, show very healthy growth levels. Gross net asset value per share (i.e. before any deductions for contingent tax or mark to market adjustments) has risen by 20.2% to 677p from 563p. Base case Grainger Net Asset Value (NAV) which brings in contingent tax and the reversionary surplus within our long term portfolio now stands at 595p, up 19.8% from 496p. Statutory NAV ﬁgures can be found in the ﬁnancial review. Proﬁt before tax has increased by 75% to £71.7m from £41.0m. Much of the increase comes from revaluation or mark to market surpluses; on a like-for-like basis, removing these items and the goodwill impairment loss, earnings before interest and tax (‘EBIT’) fell by 4% to £81.5m from £85.3m, largely as a result of the previously foreseen decrease in contribution from our development division and from the increased cost of running a larger and more complex enterprise. Increased borrowing costs from funding our investment programme have reduced proﬁt before tax on the same basis to £27.4m from £35.6m. 18 Grainger Trust plc Annual report and accounts 2006 chairman’s statement continued a ﬁnal dividend of 3.75p per share total dividend for the year of 5.62p per share We are again increasing our dividend by 10% per annum and consequently the board are recommending a ﬁnal dividend of 3.75p per share. If approved, this will be paid on 6 March 2007 to shareholders on the register on 16 February 2007. Together with the interim dividend of 1.87p per share paid in July this will produce a total dividend for the year of 5.62p per share (2005: 5.11p). Strategy and Outlook Grainger has been successful at delivering consistent shareholder value over a sustained period of time. Over the last ten years our average total shareholder return has been 28.4% per annum. By comparison, over the same period, the FTSE 250 has delivered average annual returns of 13.6% and the UK Real Estate Sector 15.9%. Our performance has largely been based on the trading proﬁts and revaluation surpluses generated by our substantial residential portfolio. It is our aim to continue to deliver superior returns to shareholders. Whilst we believe that a major part of this will come from the core regulated portfolio we also acknowledge that Grainger must evolve over time to replace those returns as the overall stock of regulated assets declines. Grainger’s key strengths come from a combination of its asset base, sound ﬁnancial platform, reputation with key stakeholders and experience and expertise in the residential market. We have ambitious plans to leverage these to expand the range and depth of the Grainger business to ensure further growth in shareholder value. These include introducing third party capital (both debt and equity) to improve the efﬁciency of our capital structure and to achieve signiﬁcant scale more quickly but without taking on disproportionate risk. This will also be achieved by working with joint venture and collaborative partners and using our management skills to produce fee income for the group at little or no incremental cost. We have already made signiﬁcant progress with these plans, including the introduction of equity funding in our Jersey Property Unit Trust, G:res 1, by bringing in non-recourse debt to our European business and some equity release interests, by working with joint venture partners to acquire both residential and development assets and by acting as property and asset managers for a number of third parties. This evolution will continue and as our various portfolios mature and reach critical mass we can foresee a time when our returns will come from a more balanced combination of direct property ownership, co-investment in residential funds and fee income. In the long term, this will help us deliver sustainable 19 performance driven returns and thereby further enhance shareholder value. We see a real opportunity for Grainger ultimately to become the leading European co-investing fund manager in residential property. As shareholders will be aware, a consortium comprising Regis, Merrill Lynch and the William Pears Group announced in October that it was ‘assessing the attractions of making a proposal regarding a possible cash offer’ for Grainger. Later that month, the consortium announced that it had no present intention of making an offer. I can conﬁrm that their activity did not deﬂect the Board of Grainger or its executive management from the strategy outlined above. Prospects We have great belief in Grainger’s ability to deliver attractive returns to shareholders: • we have a unique and irreplaceable portfolio, unrivalled expertise and a very strong reputation amongst our stakeholders; • the existing business model has substantial income and growth potential; • we can create additional income and shareholder value by moving towards a co-investing fund management model; and • our ability to work with co-investors and other partners has been illustrated by our joint venture relationships, our launch of G:res 1 and our agreement with Development Securities plc. These are exciting times for Grainger – and I leave the board optimistic and conﬁdent about its future prospects. The group has considerably changed the way in which it operates over the last few years and to reﬂect those changes we consider it appropriate to move forward with a clearer identity – one which is more in keeping with the reputation and image we intend to present in the future. Consequently, we will propose to our shareholders at our Annual General Meeting a change of name to Grainger plc. I would like to take this ﬁnal opportunity to thank all of our staff for the commitment and expertise they have demonstrated not only during the year but also throughout my time as a director. Robert H. Dickinson 22 December 2006 20 Grainger Trust plc Annual report and accounts 2006 chiefexecutive’sreview Our major business areas share a common theme: an ability to generate superior returns through our expertise in owning, managing, developing and trading residential property either directly or as co-investor. We are pleased with the progress made in these areas in the year and are excited by the opportunities we are creating. R U P E RT D I C K I N S O N Chief executive The Market The UK residential market has shown strong levels of growth in the 12-month period to the end of September – both the Nationwide and the Halifax House Price Indices showed year-on-year growth of 8.2%. Healthy growth levels were recorded in most parts of the country with London and the South East showing particular increases in the latter part of the year. Our own portfolio, which has some 59% by value in London and the South East, showed an average increase of 9.1%. The increase in interest rates in August has done little to deter price growth and it is too early to say what impact the November movement will have, although it is likely that lenders will pass on a higher proportion of the increase to their customers than seems to have been the case to date. Since September, we have seen the annualised October Halifax Index rise to 8.7% and sales from our own portfolio have been achieving prices 3% above our September vacant possession values. This ﬁgure should, however, be treated with some caution because of the relatively low number of transactions involved. The UK residential market has shown signiﬁcant growth levels over extended periods of time: the average UK house price in 1986 was £41,000; in 2006 that has risen to £181,000, an annual compound growth rate of just under 8%. Much of this has come in the last ﬁve years where the equivalent rate has been 14%. Whilst the economic and interest rate outlook are likely to dampen these rates, we still remain conﬁdent of the long term potential of the residential market. We believe that our core portfolio is particularly well placed to withstand short term ﬂuctuations. It has a broad geographical base but also a strong core in London and the South East where average annual values are expected to remain ﬁrm because of high demand. The average vacant possession value of the individual properties in our main reversionary portfolio, the regulated tenancies, is £182,000 and some 31% of the portfolio is within 20% of that ﬁgure. We have relatively few properties at the more volatile top end of the market and as the majority of our properties are unmodernised there is usually strong demand from ﬁrst or second time buyers and property developers who wish to improve the property. Geographic distribution of UK residential portfolio (ﬁgures include our share of joint ventures) London South East South West East East Midlands West Midlands Wales Yorkshire North West North East Scotland Northern Ireland Investment value £m 864 267 96 112 73 134 12 68 140 39 13 1 % of value 47% 15% 5% 6% 4% 7% 1% 4% 8% 2% 1% – 1,819 100% 21 144 03 164 04 173 05 188 06 AV E R A G E VA C A N T P O S S E S S I O N VA L U E O F G R A I N G E R ’ S P R O P E RT I E S £ ’ 0 0 0 484 03 536 04 560 05 566 06 R E V E R S I O N A RY S U R P L U S £ m (the difference between vacant possession value and investment value) 01 02 03 04 05 06 GRAINGER TRUST FTSE 350 REAL ESTATE FTSE 250 INDEX Source Datastream Grainger’s share price was 628p at the year end, up 38% on last year’s closing share price and up 315% on the share price ﬁve years ago. 22 Grainger Trust plc Annual report and accounts 2006 chief executive’s review continued Our Business Core Portfolio – Regulated Tenancies Our core portfolio consists primarily of regulated tenancies which account for 54% by value of our total property and investment interests. At 30 September 2006, we owned 7,715 regulated units valued at £1,090m (2005: 8,161 units at £984m). At the same date, the vacant possession value (the value at which we hope to sell them when vacant at today’s prices) of the regulated portfolio amounted to £1,403m (2005: £1,349m). Including our share of regulated tenancies held within joint ventures, the vacant possession value becomes £1,474m (2005: £1,367m). The regulated portfolio is valued by deducting a discount from the vacant possession value. This discount takes account of the fact that the rental yield is generally below market rates and that it may be some years before we obtain vacant possession and can then sell the property. Over time, this discount has narrowed although for the last few years we have used a rate of 27.5%. Strong market and transaction activity has led us to believe that this discount is conservative and our valuers have now certiﬁed the valuation of these properties at 77.5% of vacant possession value – a discount of 22.5%. This realignment has produced an increase in value at the year end of £67m. In addition to regulated tenancies, our core portfolio includes a further 652 units comprising vacants, assured tenancies short term lets, and other interests. These units have a value at 30 September 2006 of £141m (2005: £117m) and their vacant possession value is £160m (2005: £124m). Range of residential vacant possession values (excluding other interests and share of joint ventures) >£500K £250K – £500K £175K – £250K £100K – £175K <£100K No. of properties Vacant possession value £m 141 1,679 3,716 4,823 2,061 119 559 784 706 172 12,420 2,340 NB: shows full vacant possession of equity release assets even if we own less than 100%. Sales in this division have remained constant at £126m and margins on normal sales (i.e. when a property is sold on vacancy as opposed to with a tenant in situ) amounted to 48.6% (2005: 48.5%). Including net rental and other income of £24m, the regulated 23 The highlight of the year was the acquisition of ﬁve London ﬂat blocks for £196m from the Church Commissioners in the second 50:50 joint venture of this type with Genesis Housing Group. portfolio produced an operating contribution of £76m (2005: £74m). The 2005 ﬁgure includes market rented properties transferred to the Jersey Property Unit Trust (JPUT) as explained below. Analysis of residential sales in the year (from stock and ﬁxed assets) Regulated (including APT) Assured Vacant Equity release Other Sales proceeds £m Trading proﬁt/proﬁt on disposal £m 91 25 3 13 7 139 45 4 1 6 5 61 No. 607 166 14 110 – 897 For a portfolio of this type it is essential that we recycle capital – during the year, we acquired 325 units for a consideration of £44m. The highlight of the year, however, was the acquisition of ﬁve London apartment blocks for £196m from the Church Commissioners in the second 50:50 joint venture of this type with the Genesis Housing Group. This portfolio included 429 regulated units. Analysis of acquisitions in the year Regulated (including APT) Assured Vacant Equity release Other No. 325 121 16 432 – 894 Cost £m 44 19 3 29 4 99 Vacant possession value £m 61 22 4 60 4 151 Equity Release The equity release business is a strong ﬁt and a natural investment channel for the surplus cash generated by our regulated business. We are building up a highly reversionary portfolio which will provide us with the long term geared exposure to the residential market that we strategically seek. We have been building our portfolio through three primary routes – our distribution agreement with Norwich Union, portfolio acquisitions and our Bridgewater brand. 24 Grainger Trust plc Annual report and accounts 2006 chief executive’s review continued Industry ﬁgures from Safe Home Income Plans (‘SHIP’) indicate that we are now providing 44% of all new home reversions in the UK. The market value of our 3,003 unit equity release portfolio at 30 September 2006 stood at £241m, with a vacant possession value of £421m (2005: 2,663 units with a market value of £196m, vacant possession value of £354m). During the year, we acquired 432 units for £29m and sold 110 units for £13m. The division produced an operating contribution of £3m (2005: £4m). Average vacant possession values in our three key portfolios are: Regulated Market rented Equity release Overall (excluding other interests) £’000 182 196 203 188 This is a market in which critical mass, service integrity and product innovation and development are key. We were therefore delighted to receive the ‘Award for Innovation’ at the Investment, Life and Pension Awards 2006. Critical mass will enable us to put in place more efﬁcient forms of ﬁnancing, while product development will help us to provide a greater selection of retirement solutions to potential customers. Since the year end we have announced an offer to acquire a portfolio of over 900 retirement properties, which are subject to lifetime leases, or are currently vacant. Market-Rented Properties Over the years, the group has acquired a number of market rented properties usually as a result of purchases of mixed tenure portfolios. This was bolstered by the acquisition of City North Group plc in 2005, and by the start of this ﬁnancial year we owned 1,102 market rented properties with a value of £188m. We believe that we can maximise returns from such a portfolio by introducing third party equity and non-recourse debt, with Grainger retaining a substantial investment and obtaining the beneﬁt of asset and property management fees. Consequently, during the year, we transferred the bulk of our market rented properties to a JPUT and then marketed the holding as G:res 1, an independent Jersey exempt company, to institutional investors. Although we still owned all of the units at 30 September 2006, we announced ﬁrst closing on 22 November 2006 having raised third party equity commitments of £56m. We are expecting to secure further equity commitments of £69m in due course and see this as a model for other co-invested funds which we could establish. 25 shortly after the year end we closed G:res 1 our market rented fund with equity committments of £56m In G:res 1 at the year end, we had 1,178 market rented properties with a market value of £210m and a vacant possession value of £238m, producing operating proﬁt before valuation gains of £4.6m. Property and Asset Management One of Grainger’s key strengths is its ability to provide property and asset management services to third parties with the specialist expertise derived from being a substantial owner in its own right. Almost uniquely we can provide these services across the UK through our seven managing ofﬁces and network of managing agents. We expanded this capability into mainland Europe in October when we opened an ofﬁce in Mannheim to manage our growing German residential portfolio. In total we employ 103 staff in our property and asset management division. As well as taking responsibility for our own UK portfolio of 12,420 residential units they also provide services for a total of 2,801 units for third party owners or for joint venture vehicles in which we are participants. This includes the Schroders ResPUT, in which we hold a 22.3% stake and the joint ventures with the Genesis Housing Group. Our property managers also support our own market rented fund, G:res 1, which was valued at 30 September 2006 at £210m; we anticipate that, before any performance related elements, this will generate annualised fee income for the group of approximately £2.2m. Our total recurring fee income will be approximately £4m per year. We see great potential for the fund management structure to be applied to other areas of our business, most obviously our European portfolio. Analysis of tenanted residential portfolio by tenure Regulated Assured Vacant Equity Release Hotel complex – short term lettings Other interests Share of joint ventures 30 September 2006 30 September 2005 No. of properties 7,715 1,297 355 3,003 50 – – 12,420 12,382 Vacant possession value £m 1,403 Investment value £m 1,090 254 62 421 9 57 179 2,385 2,067 224 56 241 9 48 151 1,819 1,507 % of vacant possession value 78% 88% 89% 57% 100% 84% 84% 76% 73% 26 Grainger Trust plc Annual report and accounts 2006 chief executive’s review continued the value of our UK development portfolio stands at £97m (including share of joint ventures) Development Grainger Development is an important proﬁt contributor to the group and provides us with entrepreneurial development skills which complement our other spheres of residential expertise. We have reﬁned our focus in this division to concentrate on larger scale residential or residential-led mixed use opportunities, particularly in those areas where the longevity of the project, the need to work with partners or the nature of the development itself makes it unsuitable for housebuilders. At the year end, the value of our UK development portfolio stood at £90m (2005: £124m) and the division produced operating proﬁts and proﬁts on the sale of ﬁxed assets totalling £7m (2005: £13m). Major gross contributions were £2.8m from The Glasshouse, Putney, £2.5m from sales of three properties in Slough and £2.3m from the ongoing sales of Grainger Homes sites. The decrease in returns compared to the prior year was foreseen and reﬂects the predictable but volatile nature of the proﬁt stream in any development business. It is our ambition to enable this division to produce a more steady ﬂow of returns but given that many of our current projects are at an early stage of development, this may be some time in the future. At 30 September, the completed development value of our sites is estimated at £675m, of which £178m has planning consent. Major development projects Project Description Status Estimated end value Income expected from West Waterlooville 520 acres of greenland in Hampshire Outline planning application submitted Land Phase 1 – £105m 2008 Phase 2 – unknown Macaulay Road, Clapham. SW4 Barnsbury Complex, Islington 94 residential units 26,000 sq. ft. ofﬁce 140 residential units Planning consent obtained Detailed planning consent obtained Hornsey Road Baths, Islington 200 residential units and community buildings Detailed planning consent obtained Wards Corner, Seven Sisters Newbury 327 residential units, 53,000 sq. ft retail Cooperation agreement signed 331 units 47,000 sq. ft. retail Preferred developer status £48m £44m £44m £102m £73m Gateshead College 200-220 residential units Site under contract. £47m Planning application to be submitted in 2008 2008/09 2009/10 2007/08 2008/09 2008/09 2009/10 27 During the year, we outsourced project management and delivery responsibility for Grainger Homes to its then management. Although we retain ownership of the existing sites, representing a future bank of some 318 new houses and will receive proﬁts as they are sold, it is not our intention to have future involvement in small-scale housebuilding activities where we are competing directly against national and/or local housebuilders. There has been signiﬁcant progress in planning on our major sites in the year. At the Barnsbury Complex in Islington we have achieved detailed planning consent on a scheme comprising 140 private and affordable residential units. At Hornsey Road Baths, Islington, we have commenced demolition at the start of the development of new council ofﬁces, 200 private and affordable units and community buildings. We were also pleased to obtain planning consent for 94 residential units and a 26,000 sq. ft. ofﬁce building at Macaulay Road, Clapham after many years of endeavour. We have also submitted an outline planning application for 1,550 residential units, 12 hectares of employment use and 14 hectares of mixed use at our site at West Waterlooville. Other major sites in our current portfolio include two large residential schemes in the North East of England which will deliver approximately 300 housing units. Further details on when these projects are expected to become income producing are shown in the Financial Review later in this report. The division’s future pipeline includes a scheme above Seven Sisters underground station for 327 residential units and 53,000 sq. ft. of retail under a co-operation agreement with the London Borough of Haringey and appointment as preferred developer by Newbury Council to develop 331 units and 47,000 sq. ft of retail at Market Street in the town centre. Since the year end, we have been delighted to announce the ﬁrst joint venture acquisition with Development Securities plc under the co-operation agreement we revealed previously. This is for the 10 acre Curzon Park site in Birmingham, with an end value in the region of £350m-£400m. It will provide a mixed use scheme of c. 1.4 million sq. ft. to include c. 800,000 sq. ft. of grade A ofﬁce space, c. 400,000 sq. ft. of residential accommodation, a 180 bed hotel and c. 30,000 sq. ft. of retail space. We see our ability and willingness to work with partners (other developers, land owners, councils, housing associations) as being key to giving us access to the larger mixed use residential-led schemes on which we aim to focus. This enables us to achieve scale without taking on a disproportionate level of risk. We have invested heavily in the human capital of this division in the year and feel that we now have the team to deliver our vision. 28 Grainger Trust plc Annual report and accounts 2006 chief executive’s review continued Europe At this stage last year we were looking forward to completing our ﬁrst acquisition of 1,406 German residential properties. At 30 September 2006, the portfolio stood at 2,739 units and, as announced in October, we have acquired a further 308 units in Munich with anticipated completion early in 2007. Geographic analysis of German portfolio Location Metro Ruhr Baden-Wuerttemberg Berlin Residential units 1,501 935 303 €m Gross annual rent 4.9 4.7 1.3 2,739 10.9 163.5 €m Purchase € Purchase price price psm 76.0 71.3 16.2 759 1,069 818 875 €’000 Average price per unit 50.6 76.3 53.5 59.7 Net yield 4.5% 5.5% 6.3% 5.1% Whilst we are constantly examining other areas for potential residential investment, Germany still holds attraction for us. A combination of low levels of home ownership, an attractive ﬁnancing environment enabling us to achieve a positive yield spread, low price levels relative to other European markets and potential for rental growth provides good opportunities for experienced professional landlords. At 30 September, our portfolio comprised 186,844 sq. metres of residential space at a cost of £117m (generally below replacement cost) and providing an annualised gross rent of £7.5m. The operating contribution of the division in the year was £2.0m. There has been considerable comment on the opportunities for residential investment in Germany and it is clear that competition for portfolios is ﬁerce. However, we are constantly pursuing opportunities and our decision to open a small management ofﬁce in Mannheim illustrates our commitment and enthusiasm for this sector. It is our ambition to grow the German portfolio to a size where it becomes an attractive proposition for third party investment and where we can apply our strategic model for co-investing fund management. In addition to our residential interests we also have an 81.6% stake in a company registered in the Czech Republic. This company owns a well positioned development site of 21 acres in Zizkov to the East of Prague City Centre. The site is designated as a mixed use development site and we are hopeful of receiving a detailed planning consent in 2008. 29 Robert Dickinson We would also like to take this opportunity to pay tribute to Robert Dickinson who retires as Chairman at the conclusion of our next Annual General Meeting. Robert was made a director of Grainger in 1961 and has been Chairman since 1992. Since 1961, Grainger has evolved from a small family company through initial listing on the then Unlisted Securities Market, full listing and is now the UK’s largest listed residential property company. This tenure has seen a remarkable period of growth and return. A shareholder who had invested £10,000 in Grainger shares on ﬂotation in March 1983 would, at 30 September, have had shares worth £438,124 and would have beneﬁted from £30,210 in dividends, including the proposed 2006 ﬁnal dividend. Further, if dividends had been reinvested on receipt, the shareholder would, at 30 September, have had shares worth £738,565*. In a long term business like Grainger it has proved invaluable to have someone who has been able to provide unrivalled experience and knowledge of the group and its market over such a long continuous period. We have been fortunate to have been the recipients of his wise and expert leadership. Rupert J. Dickinson 22 December 2006 *Source: Datastream 30 Grainger Trust plc Annual report and accounts 2006 graingerworks As the Grainger business grows in size and complexity, it is essential that we have an appropriate management structure in place to achieve our objectives. 1 2 3 4 5 6 7 8 L E A D E R S H I P A N D S T R AT E G Y G R O U P During the year, the senior executive team (pictured) have made signiﬁcant 1 M A R I E G L A N V I L L E Company secretary and ﬁnancial operations 2 D E B R A Y U D O L P H Residential asset and property management 3 R I C H A R D E X L E Y Development 4 P E T E R C O U C H Equity release 5 Q U I N T O N H I L L - L I N E S Corporate development and fund management 6 C A M E R O N S P RY Europe progress, working with the board to formulate future strategy for each distinct operating division with the aim of delivering growth within the existing capital structure. Currently, Grainger is valued primarily on the basis of net assets. We believe that future outperformance will be achievable if we are able to leverage our day-to-day operational expertise in managing, trading and developing residential property, with strategic corporate and ﬁnancial skills not widely used or accepted in the currently 7 R U P E RT D I C K I N S O N Chief executive fragmented residential investment sector. We are therefore continuing 8 A N D R E W C U N N I N G H A M Deputy chief executive and ﬁnance director to invest in our management and staff as their proﬁciency and retention are key to our ongoing success. 31 ﬁnancialreview This is the ﬁrst year in which the group’s results have been presented under International Financial Reporting Standards (IFRS) as endorsed by the EU. Although this has resulted in some material restatements of the statutory ﬁgures, the change of accounting basis has had no effect on our underlying business performance, and little effect on our primary Key Performance Indicators of net asset value. A N D R E W C U N N I N G H A M Deputy chief executive and ﬁnance director operatinghighlights 39.1% total shareholder return 26.5% return on shareholder equity 15.3% return on capital employed 32 Grainger Trust plc Annual report and accounts 2006 Financial Review continued Financial Position General Most of our properties are held as trading stock and are therefore shown in the statutory balance sheet at cost. This does not reﬂect the true worth of Grainger’s assets and so we set out below a summary of our net assets with the properties restated to market value. Properties Investments/other assets Goodwill Cash Total assets Borrowings etc Other net liabilities Provisions/deferred tax Total liabilities Net assets 2006 Net assets per share (pence) 2005 Net assets per share (pence) Statutory balance sheet £m 1,374 93 2 39 1,508 (1,100) (65) (92) (1,257) 251 193p 159p Market value deferred tax and derivatives adjustment £m Gross NAV balance sheet £m Contingent tax £m Derivatives £m Triple NAV balance sheet £m 527 16 (2) – 541 2 (4) 89 87 628 484p 404p 1,901 109 – 39 2,049 (1,098) (69) (3) (1,170) 879 677p 563p – – – – – – – (243) (243) (243) (187)p (165)p – – – – – (5) – 2 (3) (3) (3)p (9)p 1,901 109 – 39 2,049 (1,103) (69) (244) (1,416) 633 487p 389p The European Public Real Estate Association (EPRA) Best Practices Committee has recommended the calculation and use of a diluted EPRA NAV and a diluted EPRA Net Net Asset Value (NNNAV). The deﬁnitions of these measures are consistent with Gross NAV and Triple NAV shown in the above table. Market value analysis of property assets Residential Development Total September 2006 Total September 2005 Shown as stock at cost £m Market value adjustment £m Market value £m Fixed assets at value £m 864 89 953 962 515 12 527 413 1,379 101 1,480 1,375 421 – 421 222 Total £m 1,800 101 1,901 1,597 Net Asset Value Measurements of net asset value are Key Performance Indicators for the group. We set out three measurements to better enable shareholders to compare our performance with our peers, while reﬂecting the somewhat unique nature of our business. 33 Gross Net Assets Per Share of our tenants we can estimate the timing of the vacancy and Up 20.2% to 677p from 563p. This measure gives the therefore also the timing of the crystallisation of the tax liability. market value net assets per share before any deductions If we were to discount this liability at our weighted average for deferred tax on revaluation gains. cost of capital, the deferred tax deduction would reduce by The chart below shows the major movements in NAV £112m and so our NNNAV would increase by 86p per share. in the year. Grainger NAV 950 900 850 800 750 700 650 600 £m £45m £(63)m £65m 34p (49)p £(20)m £879m £124m 50p (17)p £728m 96p 563p V A N s s o r G 5 0 t p e S e r a h s r e p l s e s u p r u s n o i t a u l a v e R r e h t O 677p V A N s s o r G 6 0 t p e S e r a h s r e p d e n i a t e R i s g n n r a e t n u o c s i d n o i t a u l a v d e t a l u g e r i f o g n w o r r a N l s e s u p r u s d e s i n g o c e r y l s u o i v e r p f o n o i t a n m i i l E Triple Net Assets Per Share NNNAV Up 25.0% to 487p from 389p. This is the gross net assets per share ﬁgure adjusted for deferred tax on revaluation gains and for mark to market adjustments such as those Base case up 19.8% to 595p from 496p. Grainger’s NAV brings in the reversionary value which resides in our long term regulated and equity release portfolios. It adjusts NNNAV for the taxed present value of the reversionary surpluses in these portfolios which will revert over the expected duration of our tenants occupation. The major variables in calculating the Grainger NAV are: • anticipated house price inﬂation over the reversionary period; • the discount rate used to calculate the present value; • whether deferred taxation on the revaluation surpluses recognised in our market value balance sheet is discounted; and • the average period it will take to obtain vacancy. The base case Grainger NAV takes a very prudent approach to these key assumptions as follows: • house price inﬂation is taken as zero over the entire expected remaining period of occupation by the tenants; • we have used a discount rate of 8.67% (our weighted average cost of capital plus 3%); • deferred taxation on revaluation surpluses has not been discounted; and arising from the restatement of ﬁnancial instruments. • we have taken the period of reversion as being 12 years It should be noted that the deduction for deferred tax assumes that all of the tax on the revaluation gains in our for our regulated tenants and 9.5 years for our equity release tenants. We update these ﬁgures each year. portfolio is payable immediately. With our long term To illustrate the sensitivity of the Grainger NAV under reversionary portfolios (regulated and equity release) the different assumptions, we have prepared a ﬁnancial model assets will only be sold when vacancy arises and this will on our website www.graingertrust.co.uk where these ﬁgures be some time in the future. As we know the average age can be ﬂexed. Some illustrative examples are: House price inﬂation per annum 0% 4% 6% No discount of deferred tax Discount rate WACC Discount rate WACC +3% Discounting deferred tax Discount rate WACC Discount rate WACC +3% 595p 654p 693p 634p 715p 768p 708p 767p 806p 720p 801p 854p 34 Grainger Trust plc Annual report and accounts 2006 Financial Review continued Other Financial Performance Measures Our total administrative costs in the year of £32m have As well as NAV measures we use other key performance risen from £22m in 2005. The major increases have come indicators to evaluate our ﬁnancial performance: from a series of one-off costs (City North and development Total shareholder return for the year was 39.1%, an increase of 13.2 percentage points over 2005. Return on shareholder equity (measured as the growth in NNNAV plus dividends per share as a percentage of opening NNNAV) was 26.5%, compared to 6.0% in 2005. Return on capital employed (measured as proﬁt before costs of ﬁnancing together with all revaluation surpluses as a percentage of opening gross capital) was 15.3%, an increase of 9.1 percentage points over 2005. Financial Performance in the Year Operating proﬁt before fair value movements fell from £85.3m to £81.5m in the year, the major changes as shown below: division re-organisations, various transaction costs) and from the investments in high quality staff we are making in our emerging business lines (Europe, equity release and development). Many of our administrative overheads (property management, sales and acquisitions, and our development division’s costs) are directly attributable to operating divisions and for statutory disclosure purposes are netted off those income streams. Overall, £12m has been added to property expenses, £6m has been added to sales costs and £4m has been added to the cost of development sales. Earnings Per Share Basic earnings per share has increased by 57% to 39.1p from 24.9p as shown below: 100 90 80 70 60 £m £7.1m £(2.5)m £(2.9)m £(8.8)m £85.3m £3.3m £81.5m n i e s a e r c n I s t n e r s s o r g 5 0 0 2 t i f o r p g n i t a r e p o y t r e p o r p n i e s a e r c n I s d a e h r e v o d n a s e s n e p x e s t i f o r p g n d a r t i l a i t n e d i s e r n i e s a e r c e D s t i f o r p g n d a r t i t n e m p o l e v e d n i e s a e r c e D r e h t O t n e m r i a p m i l l i w d o o g d n a t i f o r p g n i t a r e p o 6 0 0 2 s t n e m e v o m e u l a v r i a f e r o f e b Operating contribution from our residential businesses (net rents together with trading proﬁts and proﬁts on sale of ﬁxed assets) increased by 6.5% to £83m from £78m. As predicted last year, operating contribution from our development and trading division fell by £6m to £7m. 60 50 40 30 20 10 £m £11m £(5)m (4.1)p £(11)m £34m 8.4p (9.0)p £50m £31m £(10)m (7.9)p 26.8p 24.9p S P E 5 0 0 2 g n i t a r e p o n i l l a F r i a f e r o f e b t i f o r p s t n e m e v o m e u l a v f o n o i t a u l a v e r n o n i a g n i e s a e r c n I s e i t r e p o r p t n e m t s e v n i s t e s s a l a i c n a n i f d n a s e v i t a v i r e d f o e u l a v r i a f n i e s a e r c n I n i e s a e r c n I e l b a y a p t s e r e t n i r e h t o d n a n o i t a x a t n i e s a e r c n I 39.1p S P E 6 0 0 2 The gain in valuation of investment properties of £39.9m has arisen largely from the establishment of our Jersey Property Unit Trust for market rented properties. On transfer, these assets were classiﬁed as investment properties and the uplift in value from cost is shown as a revaluation surplus. 35 Not all of our ﬁnancial instruments met the complex hedging requirements of IAS 39 during the year and so movements in their fair value have been taken to the income statement. These amount to £10.4m. The vast majority by value of these instruments are now compliant and so value movements will be taken through reserves in future and we should see less income statement volatility. Since the year end we have entered into a non-recourse €150m facility which will be drawn down to fund our German acquisitions. Also since the year end we have reached agreement with our major lenders to revise the terms of our core £1.3bn facility, which will spread the loan maturity dates and extend the average maturity by two years and which Our net interest bill has increased by £5.3m to £54.5m, will reduce the overall borrowing margin by 13 basis with interest payable increasing by £8.9m. This is primarily points. Together with a reduction in commitment fees on as a result of higher average debt levels arising from our any un-drawn facility this will produce an annualised signiﬁcant investment programme in Europe, equity release saving of some £1.7m. and in joint venture acquisitions. The average of our monthly debt levels has been some £188m higher in 2006 than 2005. At the year end, our net borrowings were £1,051m (2005: £861m) and our average cost of borrowings was 5.8% (2005: 5.9%). To protect ourselves against interest rate risk Our annual tax charge is at an effective rate of 29.59%, the group’s treasury policy is to maintain a ﬂoating rate the major items affecting it being: exposure of no greater than 35% of expected borrowings. At the year end, we were 66% economically hedged (2005: 76%) and at current levels of borrowing we have protection in place to meet our policy requirement for the next 2.5 years and have at least £250m of hedging for the next six years. Our loan to value ratio at 30 September was 52% (2005: 53%). Group proﬁt before tax Tax at 30% Adjustments: Goodwill impairment (not allowable) Utilisation of capital losses Other including prior period adjustments Actual tax charge Financial Resources £m 71.7 21.5 1.9 (6.4) 4.2 (0.3) 21.2 The business continues to be highly cash generative. Cash from operating activities and from sales of investment Andrew R. Cunningham FCA 22 December 2006 property, amounted to £208m (2005: £174m). Out of this cash ﬂow we paid interest of £55m, and tax of £15m and we reinvested a total of £301m in acquiring properties, funding development and investing in joint ventures. We borrowed an additional £165m, and the headroom on our core facility at the year end stood at £307m. This headroom affords us enviable strength in bidding for signiﬁcant acquisitions. 36 Grainger Trust plc Annual report and accounts 2006 graingertargets corporate social responsibility I am pleased to report that CSR is gathering momentum within Grainger, and this year we have worked hard to achieve our targets. Our corporate culture is very dynamic and go-getting which has enabled us to embrace some of the challenges of CSR with gusto and creativity. I believe this responsiveness to change will increasingly be necessary in rapidly changing global markets, and in the face of new business risks such as climate change. In 2006, Grainger developed a corporate environmental policy and we now look forward to further formalising our environmental commitments across areas of signiﬁcant impact. We have reviewed and extended our community investment practices, both through active employment programmes run in conjunction with BiTC, and through our charitable activities. During the year, we also developed our new Employee Charter and launched an award-winning The following symbol has been used throughout this section to cross-reference detailed information on the company website at www.graingertrust.co.uk 1 1 4 0% ACHIEVED 50% ACHIEVED 75% ACHIEVED 15 100% ACHIEVED Payroll Giving scheme that has already been a tremendous success. Following a comprehensive Health and Safety (H&S) review across all of our activities, we now have robust procedures in place to manage, measure, monitor and reduce H&S incidents across the entire business. We have also continued to improve our customer service quality through extensive training of property managers, and issued clear concise guidance to our tenants on a variety of issues, including facilitating grant applications for them to improve heating and insulation standards in their homes. These are just some of the areas that we have been working on in the past year. This report summarises our achievements against our 2006 CSR targets, structured under our seven longer-term CSR objectives (reviewed and updated in 2005). It also includes a number of quantitative measures of our performance against each objective, and thereby further improves our transparency on social and environmental issues. Of course, we recognise that we still have more to learn, and we continue to have ideas to further improve our business performance and align it with the values underpinning CSR. We look forward to continuing our efforts over the coming year. Rupert J. Dickinson Chief executive The above chart indicates the progress that Grainger Trust made against its CSR targets in 2005/06. It is encouraging that, in our ﬁrst year of ofﬁcial CSR target-setting, we fully achieved over 70% of our targets, with just one target unprogressed at year end. A detailed review of progress against individual targets, carried out by our CSR advisors. Upstream, is on our website . 37 objective 1 Encourage staff to contribute to, and share in, the success of the company through their own ideas and ongoing professional development, whilst supporting them to maintain a healthy balance between home and work commitments. In Autumn 2005, Grainger Trust participated in the Times 100 Best Companies to work for Survey. Although not making the top 100, Grainger scored well across a broad range of areas, and the survey was helpful in conﬁrming areas Grainger has identiﬁed as in need of improvement. The most important of these was internal communication and staff involvement, which we will be working on in the coming year. Grainger will participate in the survey again in 2006, and will hope to demonstrate real improvement in performance. key performance indicators Number of employees undertaking professional education as reported in 2005/06 Average number of training days per employee KPI Investment in training per employee % of employees with ﬁve or more years’ service Proportion of all staff that are female % of women in senior management positions % of women in technical or professional positions new in 2006 % of part-time employees % of eligible employees participating in the sharesave scheme % of eligible employees participating in share incentive plan *Due to change in deﬁnitions. 2005 31 3 £671 30% 56% 23.5% 16% – – – 2006 34 3 £674 38.5% 56% 4%* 12.8% 9.6% 50% 83% targets 2006/07 • Develop and implement an action plan to encourage employees to lead a healthy and sustainable lifestyle. • Conduct a survey of all staff to canvas opinions on the quality and effectiveness of internal communications within Grainger. • Review and evaluate the effectiveness of current methods and opportunities for employee involvement. • Develop our employee beneﬁts package to offer greater ﬂexibility, thereby enabling employees to better reﬂect their individual needs. • Develop and launch a new Training & Development site on SOURCE, providing employees with easier access to training and personal development information and activities. • For all our property managers, and 50% of property management assistants, to become Association of Residential Letting Agents qualiﬁed. 38 Grainger Trust plc Annual report and accounts 2006 Corporate Social Responsibility continued objective 2 Ensure that we treat our tenants and customers fairly, and that we are responsive to their needs. During the year, Grainger developed new Tenant Guide Packs for both our regulated and market let tenants. These packs provide clear information relating to the terms of the rental agreement, complaints procedures, and respective rights of both tenants and landlord. We have also published a Tenants Charter which clearly states our commitment to act in a professional and helpful manner to our tenants. Our website includes ‘graingerlets’, which includes details of our properties available to let and a tenant guide to renting, for prospective tenants. We began to centrally monitor all complaints received in March, and to date we have received a total of 27, which represents only 0.2% of our tenants by number. Throughout the year we also supported our tenants in accessing funding via Warm Front, the government’s main grant-funded programme for tackling fuel poverty. 28% of the properties we inspected had insulation work carried out and many of our tenants successfully secured funding for central heating installation. Our property managers are the ‘face’ of Grainger to our tenants. It is essential, therefore, that our property managers are equipped to manage the great range of demands made of them. With this in mind, Grainger launched ‘The Balancing Act’, an innovative and interactive e-learning programme for property managers. Consisting of four modules, the programme challenges staff to ﬁnd ways to balance the often conﬂicting demands and expectations of property management. The programme has proved a great success, and all property managers have now completed modules one and two, with the remaining modules to be completed in early 2007. “The Balancing Act has given us a new and innovative way of learning; many of our day-to-day issues do not have one speciﬁc solution – we must apply our experience and knowledge of operational objectives to deal with a range of complex issues.” DAVID HANCOCK, PROPERTY MANAGER, ALTRINCHAM key performance indicators • 445 properties surveyed to date under the Warm Front initiative, of which 28% new in 2006 had insulation work done. • • 98.7% of rent due has been collected. Rent loss due to voids as a percentage of Open Market Rental Value was 5.5% for the year against a target of 7%. • 60% of exiting market rented tenants rated Grainger’s Management Service as very good or excellent. 39 targets 2006/07 • Become accredited under the local authority initiative ‘Landlords Accreditation Scheme’ where this is implemented in areas in which we manage housing. • Develop and issue a Tenant Satisfaction Questionnaire for regulated tenants. • Develop and launch a web area for tenants providing easy access to information relevant to their tenancy, as well as guidance on other topical issues, such as the environment. • Monitor our performance against the percentage of emergency repairs completed in 48 hours. • Increase the proportion of our exiting market let tenants who rate our management service as either Very Good or Excellent to 65% (from 60%). Reduce our direct adverse environmental impacts, and help and encourage our tenants and customers to do the same in respect of the properties they occupy. In 2006, we have formalised our commitment to the environment in a policy statement, with a particular focus on our development activities, where we feel we have the greatest ability to mitigate our impacts. The policy can be viewed on our website . In May 2006, we conducted a preliminary review against EcoHomes for our Hornsey Road development. This assessment included a cost beneﬁt analysis of a variety of heating systems, and indicated that we are likely to achieve a Very Good EcoHomes rating. objective 3 targets 2006/07 • Undertake a baseline review of Grainger’s environmental aspects and impacts with a view to formalising our management procedures around those that are most signiﬁcant. • All new Grainger developments to achieve a minimum EcoHomes rating of Very Good. • Monitor the performance of all our development projects in relation to both waste management during construction and cost in use following completion. • Carry out research to identify environmentally friendly materials/products with a view to listing these on our refurbishment site ‘Property Design Solutions’ and actively encourage our contractors to use them. 40 Grainger Trust plc Annual report and accounts 2006 Corporate Social Responsibility continued objective 4 Seek to understand the needs of the communities within which we operate, and positively contribute to their well-being. During 2006, Grainger strengthened its commitment to act as a responsible corporate citizen, through the implementation of several initiatives and improved engagement with local communities. • Community Consultation at Widdrington Station Grainger piloted a best practice community consultation technique at our proposed regeneration development at Widdrington Station. We commissioned local social regeneration consultants to carry out the consultation, including proactive communication with residents, and design workshops. The technique proved very successful and we have now committed to apply minimum community consultation standards at all future development projects. • Business in the Community In 2006, Grainger became a member of Business in the Community. This has helped us identify opportunities to make a real difference in the communities in which we operate. As a result, we have committed to providing work placements to disadvantaged groups by operating a ‘buddying’ scheme with our existing staff to assist long term unemployed in getting back into the workplace. • Workplace Giving In 2006, we launched our employee payroll giving scheme in partnership with Workplace Giving and Shelter, which has proved to be very successful. Peter O’Hara, Managing Director of Workplace Giving UK said “It is great Community consultation Widdrington Station to see that smaller employers who embrace Payroll Giving are successful and we congratulate Grainger for their initial and ongoing commitment to the scheme which has already raised more than £13,000 for UK Charities.” Grainger has already won two awards for its payroll giving scheme and been awarded the Gold Award under the new Payroll Giving Quality Mark. key performance indicators • £24,112 raised for Shelter, our charity of the year again in 2006 as reported in 2005 (Shelter in 2005 – £30,764). • • 220 staff involved in community activities (180 in 2005). £58,747 raised in total for charities (£42,234 in 2005). 4,480 25,455 42,234 58,747 03 04 05 06 T O TA L R A I S E D F O R C H A R I T I E S ( £ ) 41 targets 2006/07 • To provide four work placements to socially disadvantaged persons under Business in the Community’s Business Action on Homelessness Programme. objective 5 • Review and redevelop a corporate-wide charity strategy which seeks to encourage staff participation in identifying local charities for support. • Develop a community consultation procedure to include minimum standards to be implemented on all development projects, and guidance on the use of best practice techniques for appropriate projects. Safeguard the health, safety and welfare of our employees, and where possible that of our tenants, contractors, visitors, clients and the general public. During 2006, Grainger carried out an extensive and detailed Health and Safety (H&S) review, which resulted in a detailed action plan being put in place. The majority of actions have now been completed, so we are developing a further plan for the coming year to ensure continuous improvement. All property managers and development division managers were required to attend a comprehensive H&S training course during 2006. The H&S manager also started a programme of e-learning display screen equipment training, which 110 members of staff have now completed. key performance indicators • No RIDDOR* reportable accidents and incidents. new in 2006 • No pollution incidents. targets 2006/07 • Gather and present H&S data for major development projects to track H&S performance and identify any trends. • Embed Grainger’s Construction, Design and Management policy into the organisation and monitor KPIs. • Undertake H&S audits of a sample of Managing Agents, in order that their H&S performance can be assessed. • All Property Maintenance Contractors to be issued, and conﬁrm compliance, with Grainger’s Health and Safety Handbook. *Reporting of injuries, Diseases and Dangerous Occurrences Regulations 1995. 42 Grainger Trust plc Annual report and accounts 2006 Corporate Social Responsibility continued objective 6 Engage proactively with prioritised suppliers to ensure that they meet with our speciﬁed economic, social and environmental standards. During the year, Grainger developed the ‘Black Book’, a new electronic supplier management database. The system, which already includes H&S criteria, has been designed to accommodate more CSR related questions, and will allow for contractors to be graded accordingly. Scorecards are being used to measure the community and environmental practice of suppliers, and environmentally preferable ofﬁce suppliers are being identiﬁed. key performance indicators • Average payment term from invoice date remained at 30 days in 2006. as reported in 2005 targets 2006/07 • Develop relevant guidance for contractors on tenant care, considerate construction, and environmental good practice. objective 7 Maintain high standards of business conduct, and secure long term sustainable returns for our investors. • Investor Engagement We continue to keep our investors well informed of our strategy and success through regular meetings and presentations. In particular, during 2006, the group’s chief executive and deputy chief executive/ﬁnance director have, between them, conducted almost 100 meetings with shareholders, potential investors and analysts (approximately 80 in 2005) in the UK, Europe and the US. • Employee Charter During the year, we developed an Employee Charter setting out all the guiding principles by which we expect our growing number of staff to conduct business. In keeping with our ‘people ﬁrst’ culture, this Charter clariﬁes to employees the nature of their own, and Grainger's responsibilities. It refers employees to other more detailed policies including public interests disclosure (whistle blowing). targets 2006/07 • Formally respond to requests for information sent by our major investors (owners of at least 3% shares) on CSR. • Proactively undertake research into the public CSR commitments of our major stakeholders (including investors, peers, partners, and contractors) to shape our future strategy. 43 Advisor’s Statement Upstream has assessed Grainger’s achievement against these targets based on: • Meetings and face-to-face interviews with the Grainger individuals responsible for speciﬁc CSR areas and for target delivery. • Detailed review of documentation and information submitted as evidence against the targets. On this basis we can provide assurance that Grainger has fully achieved 15 out of its 21 targets (70%), with ﬁve substantially progressed, and only one target not met at all. This demonstrates a high level of achievement by a company that set CSR targets for the ﬁrst time, suggesting a commendable sense of ownership and commitment to CSR. Grainger performed particularly well against its socio-economic targets, but has also demonstrated signiﬁcant progress this year in developing its environmental policy statement and further addressing the management of its environmental impacts. The year’s highlights are well documented in these pages of the Annual Report, and more detail is provided on the company website. The only target not to have been met was the inclusion of a set of CSR standards in major construction contracts. Although a number of environmental and H&S issues are covered as standard practice, the company is committed to further strengthening its requirements of contractors on speciﬁc issues such as waste management. Tighter management of environmental impacts also represents a considerable challenge to Grainger, given that it is not able to exert direct control over many of its properties due to the management/leasehold arrangements. However, the company is committed to identifying those areas where it does have inﬂuence, and to taking action in these areas as much as possible. At Upstream, we look forward to continuing to work with Grainger as it addresses current and future challenges, and continues to embed CSR into the core of its business. Julie Hirigoyen Director 44 Grainger Trust plc Annual report and accounts 2006 1 3 5 7 2 4 6 8 45 theboard 1 ROBERT DICKINSON* C.B.E., D.L. Chairman, 6 JOHN BARNSLEY* F.C.A. Chairman of Audit chairman of Nomination Committee Committee and member of Remuneration Aged 72, Solicitor Committee Aged 58, Chartered Accountant. Appointed a director of the company in 1961, Appointed a director of the company in 2002. and chairman in 1992. Chairman of AON Minet Pension Trust. Non-executive director of Northern Investors Company plc, American Appraisal Associates LLP 2 RUPERT DICKINSON M.R.I.C.S. Chief executive Aged 47, Chartered Surveyor Joined the company in 1992 from Richard Ellis (now Insignia Richard Ellis). Appointed a director of the company in 1994. Appointed chief executive in October 2002. Joined Workspace Group plc as a non-executive director in August 2006. 3 ANDREW CUNNINGHAM F.C.A. Deputy chief executive and ﬁnance director Aged 50, Chartered Accountant. Joined Deloitte Haskins and Sells in London in 1978 and worked in their Nairobi and Bristol ofﬁces before being made a partner in Newcastle in 1989. Appointed a director of the company in December 1996. Appointed deputy chief executive in December 2002. 4 STEPHEN DICKINSON* F.C.A. Deputy chairman Aged 72, Chartered Accountant In practice in British Virgin Islands 1963-1974. Appointed managing director of the company in 1974. Upon retiring as managing director in October 2002, became deputy chairman. British Virgin Islands representative on United Kingdom Overseas Territories Association 1993 – 2004. Chairman of Deutsche Land plc since February 2006. 5 ROBERT R S HISCOX* M.A., A.C.I.I. Member of Nomination and Remuneration Committees Aged 63 Appointed a director of the company in March 2002. Chairman of Hiscox plc. Deputy chairman of Lloyd’s 1993 to 1995. and Leo Capital plc. Chairman KCS plc 2005. Until December 2001 was a senior partner at PricewaterhouseCoopers. 7 ROBIN BROADHURST* C.B.E., F.R.I.C.S. Senior independent non-executive director and member of Nomination and Audit Committees Aged 60 Appointed a director of the company in February 2004. Previously European chairman of Jones Lang La Salle, trustee and non-executive director of Grosvenor, a senior advisor to Credit Suisse Group, property consultant to Sir Robert McAlpine Limited, member of the Prince’s Council for the Duchy of Cornwall and non-executive director of the British Library and Invista plc. 8 BILL TUDOR JOHN* M.A. Chairman of Remuneration Committee, member of Audit Committee Aged 62 Appointed a director of the company in February 2005. Currently a managing director of Lehman Brothers, previously a partner at Allen & Overy LLP for 29 years, serving as senior partner for six years. Also deputy chairman of the Portman Building Society and deputy chairman of the Bank of England Financial Markets Law Committee. An Associate Fellow of Downing College, Cambridge. * Non-executive directors. 46 Grainger Trust plc Annual report and accounts 2006 Corporate governance report The board of Grainger continue to believe that it is at such meetings is almost always achieved, although due essential to maintain the highest standards of corporate to the unpredictability of such transactions, cannot always governance. In their view, good corporate governance is be guaranteed. In these circumstances, the chairman speaks achieved through the way that Grainger acts, and does to the director who is unable to join the meeting in advance. not necessarily automatically follow from ‘ticking boxes’. As in prior years, where the group departs from the Combined Code 2003 (‘the Code’), this has been an active decision taken by the board that the provision is not in the best interests of the group. In June each year, the board meets for two days to receive presentations from senior management and to discuss strategy at length. This ensures that non-executives fully understand and are able to impact the strategy of the group in bringing their respective experiences to bear. As required by the Listing Rules, a statement of how the It also gives opportunities for the non-executive directors principles of the Code are applied is given below, along to meet with senior management to discuss their speciﬁc with our formal compliance statement and explanations business areas. where the Code has not been applied. The main part of this report should be read in conjunction with the additional statements made by the board committees which follow. Board Conduct Further to the outcome of last year’s board evaluation, the board have held strategy meetings on the evening prior to each of the four ordinary board meetings this year. Each meeting has been some two hours in length and has included presentations from the most senior management The board meets regularly, four times each year, for the where appropriate to the topic for debate. Dinner follows consideration of strategy and to monitor and evaluate the each of the strategy meetings, allowing the directors more group’s performance and prospects. This brings together informal time together. a wealth and depth of experience ranging from the cautious to the entrepreneurial, suitable to the effective management of the group. The table below shows the attendance by each director at the ‘ordinary’ board meetings held during the year. Biographical details are given on page 45. There is a formal schedule of matters reserved for the board’s attention which includes: • setting the overall strategy; • approving major transactions; • setting loan to value limits and associated hedging strategy; and Dec Mar ‘06 ‘05 Jun ‘06 Sep ‘06 • accounting policies Robert Dickinson Stephen Dickinson Rupert Dickinson Andrew Cunningham Robin Broadhurst Robert R S Hiscox John Barnsley Bill Tudor John ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✗ ✓ ✓ Further to the regular ‘ordinary’ meetings, the board also meets, by teleconference where necessary, in order to consider major transactions as they arise. Full attendance The schedule is kept under review and updated as appropriate to ensure that the most important matters affecting the business are dealt with by the main board. Other tasks which require main board director attention are delegated to the board’s committees or to the executives. Grainger therefore considers committee membership and chairmanship to be of the utmost importance to ensure each committee has the necessary skills to properly discharge its duties. Relevant ﬁnancial and non-ﬁnancial information is supplied to directors in a timely manner before each board/committee meeting. Any ad hoc request for information from a director is dealt with as a high priority, and every director 47 is able to table agenda items at a board meeting. The Chief executive directors have direct access to the services of the company Reports to the chairman secretary, who reports to the chairman regarding matters of corporate governance. The appointment and removal of the company secretary is a matter for the board as a whole. Procedures also exist for directors to take independent professional advice as required, at the group’s expense. The chairman met during the year with the non-executives, without the executive directors. Investment Committee All executive management report to him, directly or indirectly Responsible for running the business Responsible for implementing the board’s decisions As announced at the interim on 13 June 2006, Robert Dickinson will be retiring from the board at the Annual General Meeting on 28 February 2007. He will be replaced During the year, Grainger has formed an investment as chairman by Robin Broadhurst, currently senior committee. Its terms of reference include the objectives of independent director. Bill Tudor John will replace Robin approving strategic and/or material investments made by the group, to monitor ‘routine’ investments to ensure they are made in line with the group’s acquisition policies and business plan, and ﬁnally, to recommend major investment proposals to the main board. The committee comprises Rupert Dickinson, Andrew Cunningham, Richard Exley and Cameron Spry (see page 30). Broadhurst as senior independent director. A search is under way to ﬁnd a new independent non-executive director. Following the appointment, committee membership will be reviewed to ensure the most appropriate composition for each committee depending upon the skills and experience of the directors. Independence The formation of this committee has added a new depth The independence of the non-executive directors remains and formality to the strategic decision-making of the group the principal potentially contentious corporate governance in line with its increasing size and complexity. Roles issue. The board does not consider that the criteria set out in section A.3.1 of the Combined Code should be taken Grainger employs a relatively small board, which consisted as automatic failure of a director to be independent. It is throughout the year of the chairman, deputy chairman, their fundamental belief that directors should be assessed two executive and four non-executive directors. Each non-executive is therefore required to participate in two committees of the board and Robin Broadhurst fulﬁlled the senior independent director role. The roles of chairman and chief executive are very distinct, and a written division of their respective responsibilities has been reviewed and approved by the board as a whole. In brief, the principal differentiating factors are: robustly as individuals, taking into account their own unique experiences, reputations and competencies along with their mindfulness and willingness to contribute to decisions of the board on the basis of those. However, the board has carefully made progress with this issue over the last few years, and after the retirement of the chairman in February 2007, would expect that all non-executive directors except for Stephen Dickinson and Robert Hiscox will be independent on the strict A.3.1 criteria. Chairman Reports to the board Only the CEO and company secretary report to him Responsible for running the board Guardian of the board’s decision-making 48 Grainger Trust plc Annual report and accounts 2006 Corporate governance report continued The board itself is in the best position to assess independence, given their knowledge and experience of working with the individuals themselves as professionals. The board has therefore, after due diligence and careful consideration, assessed the independence of the non-executives as follows: Director Board’s determination Explanatory notes Robert Dickinson Not independent • close family ties (Chairman) • more than nine years’ service Stephen Dickinson Not independent • close family ties (Deputy Chairman) • more than nine years’ service • previously managing director • part-time executive responsibilities • participation in all-employee share scheme Robin Broadhurst Independent • although previously European chairman at Jones Lang LaSalle, who have valued some of Grainger’s German properties, there is no material business relationship under A.3.1 • regarded as independent by search consultants used for his appointment Robert R S Hiscox Independent • although a trustee for an Estate holding a material shareholding, the board is of the opinion that this position does not interfere with or inﬂuence his character or judgement in any way. As chairman of Hiscox plc, and past deputy chairman of Lloyds, Mr Hiscox brings extensive skills and experience in his own right, which can only be beneﬁcial to Grainger’s board • the Estate has reduced its shareholding over the past two years, from 12.5m shares to 9.5m (10.1% to 7.3%) John Barnsley Independent • John Barnsley was not connected with any service provided to Grainger, whilst a partner at PwC, the group’s auditors. It is now almost ﬁve years since Mr Barnsley left PwC Bill Tudor John Independent • no A.3.1 criteria relevant The board therefore concluded that it included four Retirement by Rotation and Re-election independent non-executive directors throughout the year Although board members have been required to stand under review. The independent directors therefore for re-election at intervals of no more than three years comprised one half of the board for the full year, and are for several years now, the board believes it is important greater in number than any other ‘group’ of directors. to maintain stability and continuity for longer periods. Following the AGM in February 2007, and the expected Principally, this is due to the long term nature of the appointment of a further independent non-executive, there group’s core businesses. The process of purchasing land, will be ﬁve independent directors including the chairman. negotiating planning and then subsequent development to sale can amount to many years’ diligent work, where continuity of leadership is a real asset. The board in fact 49 considers itself fortunate to have retained the services Feedback from the process was discussed by the board of several long-standing directors for extended periods. as a whole at a meeting speciﬁcally held for the purpose. Along with those directors retiring by rotation, the deputy There were no comments regarding individuals required chairman will stand for re-election again this year, having to be made, which would have been made directly by passed the age of 70. As described above, whilst he is the chairman to the individual concerned. willing and able, the board considers itself fortunate to beneﬁt from his continued services. The board is provided with technical updates relating to the property industry and the listed company regime, as Induction, Evaluation and Training appropriate. In particular this year, the board has been During the year, there were no new appointments to regularly updated on the upcoming REIT regime. the board, so no tailored induction has been undertaken. Upon appointment to the board, a director would expect to receive an introduction to the group via meetings with all senior management and also a ‘bible’, divided into digestible chapters, of policies and procedures of the board, committees and the operating business. The evaluation this year, built on the experience gained last year, was considered to have been very successful, with a number of outcomes being acted upon. Should the need for any further training be identiﬁed, this would be provided to directors on appointment or thereafter. Relations with Shareholders and Potential Investors The chief executive and deputy chief executive/ﬁnance director meet regularly with institutional shareholders and analysts. In addition to the usual meetings after results announcements, ad hoc meetings are arranged to continue dialogue throughout the year. In particular, during the year under review, the group’s chief executive and deputy chief Further to last year, the written questionnaire was executive/ﬁnance director have, between them, conducted extended to be two dimensional, asking all board members almost 100 meetings with shareholders, potential investors to rate how important they thought various characteristics and analysts. Further, the executives also presented at The were, as well as how good they thought that the board/ Credit Suisse Annual Real Estate Conference held in New committees are at those things. The result was a matrix York, and gave one-to-one presentations at the Morgan ensuring that the board acted upon any items considered Stanley 9th Annual European Property Conference. They essential, but where performance could be improved. This also participated in roadshows in Amsterdam, Rotterdam, part of the process resulted in an effective self-assessment Paris, Munich and Frankfurt, as well as in the UK. Feedback of the board as a whole and the committees. gathered by the group’s broker and ﬁnancial PR agent Given the upcoming handover of the chairmanship, the chairman and the chairman-elect together formally interviewed each director, with an agenda of items covering board, committee and individual director evaluation. Results of the individual meetings are held only by the chairman and company secretary so that directors following such meetings and presentations is always presented to the board as a whole and the board is briefed on the views of major shareholders. Further, non-executive directors are available for meetings with the same, although there have been no requests for such meetings in the year under review, or since the year end. are encouraged to be open and free with their views. The Annual General Meeting (AGM) is the primary route Certain topics for discussion were particularly tabled due to their being of particular importance to Grainger currently or imminently. As the timing for the evaluation process is towards the end of the ﬁnancial year, and the chairman’s retirement had already been announced, it was felt that it was not necessary or appropriate to evaluate the chairman this year. for communication with smaller/private shareholders, although the group’s website also includes a speciﬁc Investor Relations section. All directors attend the AGM, and the chairmen of all committees are available to answer questions. The notice of meeting and annual report and accounts are sent out at least 20 working days before the meeting. Separate votes are held for each proposed resolution, including the approval of the remuneration 50 Grainger Trust plc Annual report and accounts 2006 Corporate governance report continued committee report, and a proxy count is given in each case The board also discusses in detail the projected ﬁnancial after the voting on a show of hands. At the AGM in March impact of major proposed acquisitions and disposals, 2006, Grainger included a ‘vote withheld’ category for the including their ﬁnancing. All such proposed substantial second year, in line with best practice. Shareholders were investments are considered by all directors. Where also able to lodge their votes through the CREST system. meetings are required between board meetings and a full Internal Control The group has a cyclical process for identifying, assessing and managing its signiﬁcant risks, which has been in place for the full year under review. The process is designed to enable the board to be conﬁdent that such risks are complement of directors cannot be achieved, an executive committee of directors considers the necessary formalities. The board is also responsible for the discussion and approval of the group’s treasury strategy, including mitigation against changes in interest rates. mitigated, or controlled as far as possible. It should be Going Concern noted, however, that no system can eliminate the risk of After making enquiries, including the review of future failure to achieve business objectives entirely and can only anticipated cash ﬂows and banking covenants, the directors provide reasonable and not absolute assurance against have a reasonable expectation that the group and company material misstatement or loss. The audit committee is have adequate resources to continue in existence for the delegated the task of reviewing all identiﬁed risks, with the foreseeable future. For this reason they continue to adopt absolute key risks retained for full board review. Risks and the going concern basis in preparing the accounts. controls are reviewed to ensure effective management of appropriate strategic, ﬁnancial, operational and compliance issues. The audit committee also reviews the half year and full year ﬁnancial statements and holds discussions with the group’s auditors. In addition, the group has an internal audit function which performs relevant reviews as part of a programme approved by the audit committee. During the year, Grainger also employed KPMG to perform internal audit work on the German operations, ensuring that the work was done by suitably qualiﬁed individuals. The committee considers any issues or risks arising from internal audit in order that appropriate actions can be undertaken for their satisfactory resolution. The internal audit manager has a direct reporting line to the chairman of the audit committee. An annual budget is produced, together with longer-term projections, which are presented to the board for approval. At each meeting the board discusses progress against the budget and monitors any variances. Where applicable, revisions are made to expected outturn against which further progress can be monitored. Compliance Statement Independence of non-executive directors is explained in detail above. In the board’s view it is their assessment of independence which determines compliance with the Code and therefore no non-compliance on grounds of independence has been recorded. Except as noted below, the board considers that it has complied with the Code throughout the year ended 30 September 2006: B.1.6 As explained in detail in the Directors’ Remuneration Report, Rupert Dickinson and Andrew Cunningham currently hold service contracts with notice periods in excess of one year. The notice periods are being reduced from two years to one year on a straight- line basis over a period of ﬁve years from 1 October 2002. At the date of this report the notice period outstanding stood at approximately 14 months. Report of the Nomination Committee The nomination committee consists of the chairman and two non-executive directors. It met once formally during the year, and informally on other occasions. The attendance of individual directors, who all served throughout the year under review, are shown overleaf: 51 Robert Dickinson Chairman Robert R S Hiscox Member Robin Broadhurst Member Sep ’06 ✓ ✗ ✓ John Barnsley Chairman Robin Broadhurst Member Bill Tudor John Member Nov ‘05 Feb May ‘06 ‘06 Sep ‘06 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ The terms of reference of the nomination committee are The audit committee adheres to particularly strict and available on the group’s website and principally relate to detailed terms of reference, which are available for ﬁlling vacancies on the board, whether arising through inspection on the group’s website. In addition to the work resignation, retirement or desired expansion and also described within the ‘Internal Control’ section of the main consideration of succession planning. report above, the audit committee is also responsible for During the year, the committee started to consider the appointment of an independent non-executive director, to follow the resignation of the chairman. The nomination committee ﬁrst discussed with the board the desirable background and experience of a new non-executive, reviewing the independence of the external auditor, which includes the approval of any non-audit service fees above a relatively nominal level. The audit committee is responsible for the appointment of the external auditor and for agreeing the audit fee. and then approached an agency with this information. The deputy chief executive/ﬁnance director and external The process is ongoing. The nomination committee is also responsible for reviewing the desirability of the continuation of service of directors required to retire by rotation. In this regard, each of the directors required to retire by rotation this year has continued to demonstrate full, capable and committed participation in setting and monitoring strategy for the audit partner as well as other senior management are invited to attend meetings of the committee. Once each year the audit committee meet with management without the auditors present and also with the auditors without management present. group. Details of those directors standing for re-election By order of the board at the February 2007 Annual General Meeting are given in the Notice of Meeting which accompanies this report, with biographies on page 45. Report of the Audit Committee The audit committee meets four times each year, ahead of each board meeting, reporting any relevant matters to the board where ﬁt. Attendance of the individual directors, Marie Glanville ACA ACIS who all served on the committee throughout the year, Company Secretary is shown below. In the opinion of the directors, the audit 22 December 2006 committee comprised three independent non-executive directors throughout the period, and Mr Barnsley has the particular recent, relevant ﬁnancial experience required by the Code. 52 Grainger Trust plc Annual report and accounts 2006 Report of the Remuneration Committee and Directors’ Remuneration Report This report meets the disclosure requirements of the Remuneration Policy Companies Act and the Listing Rules and in accordance Grainger’s remuneration policy is designed to attract, with usual practice will be put to shareholders for approval motivate and retain high calibre individuals to enable the at the Annual General Meeting. group to operate strategically for the continued beneﬁt of PricewaterhouseCoopers LLP have audited certain parts of this report where indicated. The Remuneration Committee The composition and attendance of the individual directors at the three remuneration committee meetings held during the year were as follows: Bill Tudor John Chairman Robert R S Hiscox Member John Barnsley Member Dec ‘05 ✓ Jun ‘06 ✓ Sep ‘06 ✓ ✓ ✓ ✓ ✓ ✗ ✓ In the opinion of the directors, the committee therefore comprised three independent non-executives throughout the year. Certain shareholder pressure groups raised concerns that Mr Hiscox, as trustee of an estate containing a material shareholding, should not be regarded as independent. The board maintains their view that Mr Hiscox is independent and a valued contributor to the remuneration committee. This year, the committee continued to receive advice from New Bridge Street Consultants LLP (‘NBSC’). As well as providing information regarding the competitiveness of overall packages for the executive directors, NBSC also advised on the group’s incentive schemes. In particular, speciﬁc guidance has been given on the changes to the long term incentive plan for senior executives, which is further described later in the report. The committee has also had access to advice from the group’s HR Manager, who is invited to attend remuneration committee meetings when appropriate. The committee’s terms of reference are available on the group’s website. shareholders, over the long term. In order to operate this policy, the Remuneration Committee receives information on remuneration packages awarded to directors in the most comparable organisations and aims to ensure that the rewards paid by Grainger are competitive. The policy is also designed to align directors’ interests with those of shareholders. This is principally achieved through the use of share-based incentives and by encouraging executive directors to maintain a reasonable shareholding in the group. As a guideline, executive directors (and senior executives) are expected to hold the equivalent value of at least one year’s salary in Grainger shares. Details of executive directors’ shareholdings are shown on page 59. Share awards are generally satisﬁed by the acquisition of shares in the market, so are not dilutive to shareholders. Share options are satisﬁed by the issue of new share capital. Remuneration packages balance both short and long- term rewards, as well as performance related pay and non-performance related. They include salary, bonus and deﬁned contribution pension elements as well as long- term share incentive and option schemes. Usual beneﬁts are also afforded. No executive director is involved in the determination of his own remuneration. Fees of the non-executive directors, which include increments where a committee chairmanship are held, are determined by the board as a whole. The salaries and bonuses of senior management are determined by the executive directors and reported to the remuneration committee. Senior management also participate in long term incentive scheme arrangements described below. Usual beneﬁts are also afforded to these individuals. In this context, senior management are those employees who are members of the Leadership & Strategy Group, which was formed in the year (see page 30). In addition to this, speciﬁc bonus schemes were negotiated with certain key senior management during the year, based on their speciﬁc business areas, in order to drive performance. 53 The remuneration committee also reviews the total level of salaries and bonuses paid to the group as a whole. This includes reviewing the details of any employee earning over £50,000 or earning a bonus in excess of £5,000. Service Contracts As explained in prior years, Rupert Dickinson and Andrew Cunningham each hold service contracts with notice periods decreasing on a straight-line basis from two years to one year, over a period of ﬁve years which began on 1 October 2002. At the date of this report, therefore, the notice periods have been reduced to approximately 14 months. Contract dates and unexpired terms for the directors are as follows: Rupert Dickinson Andrew Cunningham Robert Dickinson Stephen Dickinson Robin Broadhurst John Barnsley Robert Hiscox Bill Tudor John Contract date Unexpired term* Notice period 19 July 1996 No ﬁxed term 26 July 2000 No ﬁxed term 14 months 14 months 17 July 1998 10 months** 28 February 2000 26 February 2004 27 February 2003 6 March 2002 24 February 2005 5 months 5 months 5 months 5 months 5 months None None None None None None *Calculated as at 30 September 2006 and rounded to the nearest whole month. **Note that as Robert Dickinson is retiring at the forthcoming AGM he will only serve ﬁve months from 30 September 2006. Apart from salary and beneﬁts in relation to the notice Non-Performance Related Remuneration period described above, there are no other terms in any of the contracts which would give rise to compensation payable for early termination, or any other liability of the company. Basic Salaries and Beneﬁts Basic salaries are reviewed by the remuneration committee annually. Uplifts are by reference to cost of living, responsibilities and market rates, as for all employees and Each non-executive director has speciﬁc terms of reference. are performed at the same time of year. Executive directors Their letters of appointment state an initial one-year and the deputy chairman, Stephen Dickinson, who has period, with a continuation subject to review at that time. part-time executive responsibilities, along with other senior The letters of appointment contain no entitlement to members of staff, receive a fully expensed company car, compensation for early termination. or a car allowance. All members of staff, including the Other Directorships executive directors, beneﬁt from health and life insurances. On 2 August 2006, Rupert Dickinson joined Workspace The chairman’s and non-executive directors’ fees are Group plc as a non-executive director. Grainger’s board reviewed on a biennial basis by the whole board. were satisﬁed that the appointment would be of mutual Pensions beneﬁt, with Rupert gaining invaluable experience of another plc. The associated non-executive fees are payable to Grainger. The group contributes 15% of basic salary to the money purchase pension schemes of Rupert Dickinson and Andrew Cunningham. No other elements of remuneration are pensionable. 54 Grainger Trust plc Annual report and accounts 2006 Report of the Remuneration Committee and Directors’ Remuneration Report continued Share Schemes open to all Employees Long Term Incentives Executive directors, and Stephen Dickinson, deputy Grainger’s policy in relation to long term incentive schemes chairman, are eligible to participate in two share schemes has evolved over time to more closely align the long term which are open to all employees with relevant service, interests of executives and senior management with those subject to the rules of the schemes. of shareholders, to reward sustained performance over The ﬁrst is a Save as you Earn scheme (SAYE), and the second a Share Incentive Plan (SIP). Both are Inland Revenue a number of ﬁnancial years and to encourage these employees to grow their shareholdings. approved and therefore subject to the limits prescribed. In order to maintain best practice and more closely align Amounts relating to directors’ participation in the SIP and share options under the SAYE scheme are shown on pages 56 and 57. Performance Related Remuneration As should be expected, a signiﬁcant element of executive directors’ and senior management’s potential remuneration is performance related. The combination of short and long term incentives attempt to align the interests of executives and senior management with the interests of shareholders, and to reward signiﬁcant outperformance of budgeted expectations. Non-executive directors do not receive performance related remuneration. Annual Discretionary Bonus Each year, the remuneration committee considers the award of a bonus to the executive directors, which is at their ultimate discretion. The chief and deputy chief executive ofﬁcers, Rupert Dickinson and Andrew Cunningham participate in an arrangement introduced in 2003 whereby the provisional bonus is calculated over a three-year period, by reference to the enhancement of the triple net asset value of Grainger, relative to a theoretical market comparator. The comparator movement is calculated with regard to the Nationwide and Halifax house price indices and also interest rates, using ﬁve- performance with reward, a proposal is being made to shareholders, to adopt a new Long Term Incentive Scheme (LTIS). A resolution will be put to shareholders at the AGM in February 2007. Proposed Long Term Incentive Scheme It has been recognised that the Grainger business is somewhat unique and as such it has become increasingly difﬁcult to ﬁnd a meaningful comparator group. For this principal reason, a new LTIS has been proposed, and major shareholders have been consulted on its proposed operation. The main elements of the proposal are as follows: • Two-thirds of the award will be based upon the increase in NNNAV above WACC over a three-year period. The remaining third will be based upon the absolute increase in TSR, again over a three-year period. In each case, minimum thresholds must be achieved and a prorate award is made between that level and a preset top level, above which the entire conditional award would vest. • The maximum award will, in normal circumstances, be made up to 150% of relevant salary, though may be made up to 200% in exceptional circumstances. • Participants may also purchase or pledge existing shares worth up to 30% of their relevant salary and receive a matching award of an equivalent size, depending on the same performance criteria. year swap rates. Bonuses remain capped at 150% of • The remuneration committee retain the ability to award salary which would only be achieved under exceptional up to £30,000 of approved share options to performance conditions. Subject always to the committee’s participants. discretion, one-third of the calculated amount is approved for payment and the provisional balance is taken into account over the next two years. The award payable for the year ended 30 September 2006 represents 90% of salary for that year (2005: 63%). Full details of the proposed LTIS are included in the Notice of Meeting which accompanies this report. 55 Existing Long Term Incentive Scheme It should be noted that during its period of operation, In the year under review, awards were made to executive it has been necessary to change the comparator group directors and senior management under the existing LTIS. due to companies being taken over. The comparator group In those schemes, participants are eligible to receive annual for the awards made in January 2006 comprised A & J conditional awards of shares worth up to 50% of salary Mucklow Group plc, Big Yellow Group plc, Brixton plc, under the Long Term Incentive Scheme and of share options up to a maximum of 125% of salary under the Capital and Regional plc, CLS Holdings plc, Daejan Holdings plc, Derwent Valley Holdings plc, Freeport plc, Executive Share Option Scheme. The awards under both Great Portland Estates plc, Helical Bar plc, London schemes become unconditional provided challenging Merchant Securities plc, Mapeley Limited, Minerva plc, performance criteria are satisﬁed over a single three-year Quintain Estates and Development plc, Shaftesbury plc, performance period following grant. The criteria for all St Mowden Properties plc, The Unite Group plc, Warner awards granted since March 2002 have been based on Estate Holdings plc and Workspace Group plc. Total Shareholder Return (TSR) – dependent upon where Grainger’s TSR lies with respect to a predetermined comparator group as follows: Performance condition Vesting of option If Grainger’s TSR is equal to or greater than the upper quartile TSR of the comparator companies 100% Total shareholder return graph The graph below shows TSR (based upon share price growth with dividends reinvested) for Grainger, compared to the extended 2006 comparator group, the original comparator group, the FTSE 250 and the FTSE Real Estate Index. These comparators have been chosen on the basis that they are the markets within which Grainger operates. If Grainger’s TSR is equal to the median TSR of the comparator companies If Grainger’s TSR is above the median but below the upper quartile TSR of the comparator companies If Grainger’s TSR is below the median TSR of the comparator 40% Pro-rata vesting companies 0% As shown in the table above, no award vests unless Grainger’s TSR is at least equal to the median TSR of the comparator group. 01 02 03 04 05 06 GRAINGER TRUST COMPARATOR GROUP OLD 14 FTSE 350 REAL ESTATE COMPARATOR GROUP NEW 21 FTSE 250 INDEX Source Datastream 56 Grainger Trust plc Annual report and accounts 2006 Report of the Remuneration Committee and Directors’ Remuneration Report continued The auditors have audited the following parts of the Remuneration Report: Directors’ Remuneration Chairman, deputy chairman and executive directors Non-performance related remuneration Salary and fees Taxable beneﬁts Share incentive plan Robert Rupert Stephen Dickinson Dickinson Dickinson £’000 £’000 £’000 Andrew Cunning- ham £’000 Sean Slade £’000 108 142 440 330 – – 18 6 12 6 20 6 Total non-performance related remuneration 108 166 458 356 Performance related remuneration Annual discretionary bonus Total performance related remuneration Total remuneration for the year ended – – – – 398 398 297 297 30 September 2006 108 166 856 653 Total £’000 1,020 50 18 1,088 695 695 1,783 – – – – – – – Total remuneration for the year ended 30 September 2005 108 165 714 535 267 1,789 Pension contributions into money purchase schemes Year ended 30 September 2006 Year ended 30 September 2005 – – – – Non-executive directors Robin Broadhurst £’000 John Barnsley £’000 Robert Hiscox £’000 Non-performance related remuneration Salary and fees Taxable beneﬁts Share incentive plan Total non-performance related remuneration Performance related remuneration Annual discretionary bonus Total performance related remuneration Total remuneration for the year ended 30 September 2006 Total remuneration for the year ended 30 September 2005 38 – – 38 – – 38 34 38 – – 38 – – 38 38 30 – – 30 – – 30 34 66 63 Bill Tudor John £’000 38 – – 38 – – 38 18 50 47 – 2 116 112 Robin Herbert £’000 Nichola Pease £’000 Total all directors 2006 £’000 Total £’000 – – – – – – – – – – – – – – 144 1,164 – – 50 18 144 1,232 – – 695 695 144 1,927 15 15 154 1,943 57 Taxable beneﬁts for Stephen Dickinson, Rupert Dickinson and Andrew Cunningham relate to car and fuel beneﬁts and private medical insurance. Details of share awards and options exercised in the year are included below. On 24 February 2005, Bill Tudor John was appointed. This followed Robin Herbert’s and Nichola Pease’s resignations of the same date. Sean Slade resigned from the board on 12 November 2004. Directors’ Share Options Ordinary Shares (thousands) Dates exercisable Stephen Dickinson Rupert Dickinson Andrew Cunningham Total Exercise price 30 Sep 2006 30 Sep 2005 30 Sep 2006 30 Sep 2005 30 Sep 2006 30 Sep 2005 30 Sep 2006 30 Sep 2005 Non-performance related (available to all staff) SAYE scheme 8 August 07 to 8 February 08 1 September 08 to 1 March 09 Performance related (conditional awards) Inland Revenue Approved Executive Share Option Scheme £1.636 £1.865 23 December 99 to 23 December 06 £0.685 Long Term Incentive Scheme 9 July 00 to 9 July 07 24 January 06 to 24 January 13 12 January 07 to 12 January 14 11 January 08 to 11 January 15 12 January 09 to 12 January 16 £0.534 £1.918 £3.264 £3.818 £5.280 – 9 – – – – – – 9 – 9 – – – – – – 9 10 – 10 – 10 – 10 – 20 9 20 9 – – 64 196 153 138 – 64 – 153 138 104 469 – – – 115 103 78 44 – 44 37 143 115 103 – 64 – 268 241 182 101 339 268 241 – 561 306 452 784 1,022 Under the company’s Executive Share Option Scheme, The closing market price of the company’s shares at the Andrew Cunningham exercised 43,795 approved share end of the ﬁnancial year was £6.28, and the range of options at £0.685 on 26 June 2006. On the same date, the closing mid-market prices during the year was £4.29 he also exercised 37,075 unapproved share options under to £6.28. the LTIS at £0.5342. The mid-market closing price on that date was £5.04. The total gain before tax was £357,780. The current LTIS replaced an older scheme, however, some options granted under this scheme are still in existence and On 24 January 2006, 65.9% of the share options in the are disclosed above. Exercise is conditional upon a growth £1.918 scheme vested and were exercised by Andrew in earnings per share in excess of the retail price index over Cunningham and Rupert Dickinson. The share price at a period of three consecutive years during the period of the previous night closing was £5.46. The total number the option. of options exercised by Rupert Dickinson was 128,844 and by Andrew Cunningham was 94,484 with gains before tax arising of £456,365 and £334,662 respectively. All remaining £1.918 options lapsed. 58 Grainger Trust plc Annual report and accounts 2006 Report of the Remuneration Committee and Directors’ Remuneration Report continued Directors’ Share Awards Ordinary Shares of 5p each (thousands) Performance related (conditional awards) Long Term Incentive Scheme Rupert Dickinson Andrew Cunningham Total Award date Earliest 30 Sep 2006 vesting date 30 Sep 2005 30 Sep 2006 30 Sep 2005 30 Sep 2006 30 Sep 2005 1999 scheme (matching awards) 5 Dec 05 2002 scheme 2003 scheme 2004 scheme 24 Jan 03 24 Jan 06 12 Jan 04 12 Jan 07 11 Jan 05 11 Jan 08 2005 scheme (granted in the year) 12 Jan 06 12 Jan 09 – – 61 55 42 52 78 61 55 – – – 46 41 31 45 57 46 41 – – – 107 96 73 97 135 107 96 – 158 246 118 189 276 435 On 12 December 2005, the matching awards under the 1999 scheme vested. The share price at the previous close was £4.815. On 24 January 2006, when the previous closing share price was £5.46, 65.9% of the 2002 scheme awards vested in accordance with the performance conditions of that scheme. The remaining awards lapsed. Rupert Dickinson and Andrew Cunningham were awarded as follows: Number of matching awards Value of matching shares (£) Number of LTIS awards (after performance criteria applied) Value of LTIS shares (£) Deferred Bonus Rupert Dickinson 51,945 250,115 51,537 Andrew Cunningham 45,450 218,842 37,794 281,392 206,355 As reported fully in previous years, Rupert Dickinson and Andrew Cunningham participate in a one-off deferred bonus scheme as detailed below: Rupert Dickinson Original monetary amount £600,000 Andrew Cunningham £300,000 On behalf of the board Equivalent number of shares, based on average share price 1 Oct 00 – 30 Sep 01 (£1.4264) First tranche – vested 11 Dec 03 (mid-market value £3.15) Second tranche – vested 12 Dec 05 (mid-market value £4.815) 420,650 210,320 210,325 105,160 210,325 105,160 Gain before tax on second tranche £1,012,715 £506,345 Bill Tudor John Chairman of the Remuneration Committee 22 December 2006 59 Directors’ report The directors present their report and the audited ﬁnancial An interim dividend of 1.87p per share (2005: 1.70p) was statements for the year ended 30 September 2006. paid on 28 July 2006 amounting to £2.4m (2005: £2.2m) Principal Activities During the year the group has continued its activities of property trading and development. Review of Business Development and Prospects Development of the group’s activities and its prospects are reviewed in the chairman’s statement on pages 17 to 19 and the chief executive’s statement on pages 20 to 29. Results for the Year The results of the group are set out in the consolidated income statement on page 64 which shows a proﬁt for the ﬁnancial year of £50.5m (2005: £31.1m). and the directors recommend the payment of a ﬁnal dividend of 3.75p per share (2005: 3.41p), to be paid on 6 March 2007, amounting to £4.9m (2005: £4.4m). Any shareholder wishing to participate in the Dividend Reinvestment Plan for the 2006 ﬁnal dividend will need to ensure that their application form is returned to our registrars by 5 February 2007. Directors The directors of the company who served during the year are listed on page 45. Directors’ and other Interests The interests of the directors in the shares of the company at 30 September 2006 and 5 December 2006, with comparative ﬁgures as at 1 October 2005, are as follows: Ordinary Shares of 5p each (thousands) Robert Dickinson Stephen Dickinson Rupert Dickinson Robin Broadhurst Andrew Cunningham John Barnsley Robert Hiscox Bill Tudor John 1 Oct 2005 958 3,758 1,248 – 371 14 – – Beneﬁcial 30 Sep 2006 808 3,560 1,374 3 487 14 10 – 5 Dec 2006 808 3,560 1,374 3 487 14 10 – 1 Oct 2005 2,102 2,436 212 – – – Non-beneﬁcial 30 Sep 2006 2,002 2,436 207 – – – 5 Dec 2006 2,002 2,386 207 – – – 10,227 9,500 9,500 – – – Details of directors’ share options are given on page 57. 6,349 6,256 6,256 14,977 14,145 14,095 60 Grainger Trust plc Annual report and accounts 2006 Directors’ report continued Save as disclosed in the previous table, as at 5 December The directors conﬁrm that they have complied with the 2006, the company is aware of the following interests above requirements in preparing the ﬁnancial statements. amounting to 3% or more in the company’s shares: The directors are responsible for keeping proper Schroder Investment Management Limited* Taube Hodson & Stonex Partners Ltd* Aberforth Partners* Majedie Asset Management* F+C Asset Management plc* Holding 000’s % Holding accounting records that disclose with reasonable accuracy at any time the ﬁnancial position of the company and the 9,951 7.65% assets of the company and of the group, and hence for group. They are also responsible for safeguarding the taking reasonable steps for the prevention and detection 7,512 6,339 4,927 4,751 5.78% 4.88% 3.79% 3.65% of fraud and other irregularities. Creditor Payment Policy It is the group’s policy to pay suppliers in accordance with their normal terms and conditions of trading. Payment in respect of the purchase of property is subject to and will comply with contractual terms. Trade creditors existing at 30 September 2006 relating to purchases of property stock * Shares held by funds managed or advised by the company indicated and/or its subsidiaries. The company is not aware of any other substantial interests generally complete 28 days after exchange of contracts. amounting to 3% or more. Directors’ Interests in Signiﬁcant Contracts No directors were materially interested in any contract of signiﬁcance. Insurance of Directors The group maintains insurance for Grainger Trust plc’s directors in respect of their duties as directors. Statement of Directors’ Responsibilities The directors are required by UK Company law to prepare ﬁnancial statements for each ﬁnancial year which give a true and fair view of the affairs of the company and the group as at the end of the ﬁnancial year and of the proﬁt or loss for that period and comply with the Companies Act 1985. The directors are responsible for ensuring that applicable accounting standards have been followed and that suitable accounting policies, consistently applied and supported by reasonable and prudent judgments and estimates, have been used in the preparation of the ﬁnancial statements for the year ended 30 September 2006. The directors must also prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the company and the group will continue in business. Trade creditor days relating to other trade creditors of the company and group were calculated as 30 days (2005: 30 days). Financial Risk Management Details of this are included in note 21 to the ﬁnancial statements. Charitable Donations During the year the group made charitable donations amounting to £58,747 (2005: £42,234). Details are provided on page 40. Health and Safety The company seeks to achieve the highest standards in respect of health and safety of employees, and the safety of tenants. Consultants are employed to ensure that the company complies with health and safety regulations and each year the gas supply and appliances within all of the group’s relevant residential properties are independently inspected under the Gas Safety (Installation and Use) Amended Regulations 1996 and certiﬁcates of compliance issued. The group employs a full-time health and safety manager. 61 Employment of Disabled Persons Post Balance Sheet Events The company gives full and fair consideration to Since the year end, Grainger has announced ﬁrst closing applications for employment made by disabled persons, of G:res 1, its market let fund, made an offer for a having regard to their particular aptitudes and abilities. company containing some 900 retirement homes, signed In the event of an employee becoming disabled every effort is made to ensure that their employment within the company continues and that appropriate training is arranged where necessary. It is the policy of the company a development agreement relating to a 10 acre site in Birmingham and made a €32m portfolio acquisition in Germany. We have also arranged a €150m facility with EuroHypo AG and restructured the group’s core debt. that the training, career development and promotion of See note 36 to the ﬁnancial statements for further details. By order of the board Marie Glanville ACA ACIS Company Secretary 22 December 2006 disabled persons should, as far as possible, be identical to that of other employees. Employee Involvement The group places considerable value on the involvement of its employees and has continued its practice of keeping them informed on matters affecting them as employees, for example, eligibility to join company share schemes, and on the various factors affecting the performance of the group. Communication is made using the intranet, ‘The Source’, and through regular meetings with, and presentations by senior management. Auditors So far as each director is aware, there is no relevant audit information of which the company’s auditors are unaware. Each director has taken all steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of that information. PricewaterhouseCoopers LLP have expressed their willingness to continue in ofﬁce as auditors to the company and group. A resolution to reappoint them as auditors to the company will be proposed at the next Annual General Meeting. Shares As disclosed in Note 28 to the ﬁnancial statements, the company issued 551,088 5p Ordinary Shares for an aggregate consideration of £960,083 in the year under various employee share schemes. As at 30 September 2006, the directors had unexpired power to repurchase up to 19,411,990 shares. 62 Grainger Trust plc Annual report and accounts 2006 Independent auditors’ report to the members of Grainger Trust plc We have audited the group ﬁnancial statements of In addition we report to you if, in our opinion, we have Grainger Trust plc for the year ended 30 September 2006 not received all the information and explanations we which comprise the consolidated income statement, require for our audit, or if information speciﬁed by law the consolidated statement of recognised income and regarding director’s remuneration and other transactions expense, the consolidated balance sheet, the statement is not disclosed. of consolidated cash ﬂows and the related notes. These group ﬁnancial statements have been prepared under the accounting policies set out therein. We review whether the Corporate governance report reﬂects the company’s compliance with the nine provisions of the Combined Code (2003) speciﬁed for our review by We have reported separately on the parent company the Listing Rules of the Financial Services Authority, and ﬁnancial statements of Grainger Trust plc for the year we report if it does not. We are not required to consider ended 30 September 2006 and on the information in whether the board’s statements on internal control cover all the Report of the Remuneration Committee and Directors’ risks and controls, or form an opinion on the effectiveness Remuneration Report that is described as having been of the group’s corporate governance procedures or its risk audited. and control procedures. Respective Responsibilities of Directors and Auditors We read other information contained in the Annual The directors’ responsibilities for preparing the Annual Report and consider whether it is consistent with the Report and the group ﬁnancial statements in accordance audited group ﬁnancial statements. The other information with applicable law and International Financial Reporting comprises only the chairman’s statement, the chief Standards (IFRSs) as adopted by the European Union are executive’s review, the ﬁnancial review, the Corporate set out in the Statement of Directors’ Responsibilities governance report, the Directors’ report, the corporate included within the Directors’ report. social responsibility report and the unaudited part of Our responsibility is to audit the group ﬁnancial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies the Report of the Remuneration Committee and Directors’ Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the group ﬁnancial statements. Our responsibilities do not extend to any other information. Act 1985 and for no other purpose. We do not, in giving The maintenance and integrity of the Grainger Trust plc this opinion, accept or assume responsibility for any other website is the responsibility of the directors; the work purpose or to any other person to whom this report is carried out by the auditors does not involve consideration shown or into whose hands it may come save where of these matters and, accordingly, the auditors accept no expressly agreed by our prior consent in writing. responsibility for any changes that may have occurred to We report to you our opinion as to whether the group ﬁnancial statements give a true and fair view and whether the ﬁnancial statements since they were initially presented on the website. the group ﬁnancial statements have been properly prepared Legislation in the United Kingdom governing the in accordance with the Companies Act 1985 and Article 4 preparation and dissemination of ﬁnancial statements of the IAS Regulation. We also report to you whether in may differ from legislation in other jurisdictions. our opinion the information given in the Directors’ report is consistent with the group ﬁnancial statements. 63 Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group ﬁnancial statements. It also includes an assessment of the signiﬁcant estimates and judgments made by the directors in the preparation of the group ﬁnancial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the group ﬁnancial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group ﬁnancial statements. Opinion In our opinion: • the group ﬁnancial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 30 September 2006 and of its proﬁt and cash ﬂows for the year then ended; • the group ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • the information given in the Directors’ report is consistent with the group ﬁnancial statements. PricewaterhouseCoopers LLP Chartered accountants and registered auditors Newcastle upon Tyne 22 December 2006 64 Grainger Trust plc Annual report and accounts 2006 Consolidated income statement For the year ended 30 September 2006 notes Group revenue Net rental income Proﬁt on disposal of trading properties Administrative expenses Other income Goodwill impairment loss Net other (expenses)/income Proﬁt on disposal of investment property Operating proﬁt before net valuation gains on investment properties and changes in fair values Net valuation gains on investment properties Net gain in fair value of derivatives Gain in fair value through proﬁt or loss ﬁnancial assets Operating proﬁt Interest expense Interest income Share of loss from associates after tax Share of proﬁt/(loss) from joint ventures after tax Proﬁt before tax Taxation – current Taxation – deferred Tax charge for the year Proﬁt for the ﬁnancial year Attributable to: Equity shareholders of the parent Minority interest Proﬁt for the ﬁnancial year Basic earnings per share Diluted earnings per share 4 5 7 22 6 3 14 10, 21 18 10 10 16 17 3, 9 11 13 13 2006 £m 205.7 28.3 55.9 (10.4) 2.1 (6.4) (4.3) 5.6 75.1 39.9 10.4 0.4 125.8 (60.3) 5.8 (0.1) 0.5 71.7 (30.6) 9.4 (21.2) 50.5 50.5 – 50.5 39.1p 38.9p 2005 £m 227.6 19.1 67.2 (5.4) 2.9 – 2.9 1.5 85.3 5.4 – – 90.7 (51.6) 2.4 (0.2) (0.3) 41.0 (17.9) 8.0 (9.9) 31.1 31.1 – 31.1 24.9p 24.5p Included within proﬁt for the ﬁnancial year is a loss of £29,000 (2005: nil) attributable to minority interests. All of the above results relate to continuing operations. Consolidated statement of recognised income and expense For the year ended 30 September 2006 notes Proﬁt for the year Actuarial proﬁt/(loss) on BPT Limited deﬁned beneﬁt pension scheme net of tax 25 Net exchange adjustments offset in reserves Changes in fair value of cash ﬂow hedges net of tax Total recognised income and expense in the year Effect of adoption of IAS 32 and IAS 39 on 1 October 2005 net of tax 17, 21 23 The total recognised income and expense in the year is attributable to: Equity shareholders of the parent Minority interest 65 2006 £m 50.5 0.4 0.1 (0.8) 50.2 (5.4) 44.8 50.2 – 50.2 2005 £m 31.1 (0.5) – – 30.6 – 30.6 30.6 – 30.6 66 Grainger Trust plc Annual report and accounts 2006 Consolidated balance sheet At 30 September 2006 ASSETS Non-current assets Investment property Property, plant and equipment Investments in associates Investments in joint ventures At fair value through proﬁt or loss ﬁnancial assets (2005: Investments) Goodwill Current assets Inventories – trading properties Trade and other receivables Derivative ﬁnancial instruments Cash and cash equivalents Assets held for sale Total assets LIABILITIES Non-current liabilities Interest bearing loans and borrowings Trade and other payables Retirement beneﬁts Provisions for other liabilities and charges Deferred tax liabilities Current liabilities Interest bearing loans and borrowings Trade and other payables Current tax liabilities Derivative ﬁnancial instruments Total liabilities Net assets Notes 2006 £m 2005 £m 14 15 16 17 18 22 19 20 21 23 22 23 24 25 24 26 23 27 21 252.7 222.4 2.1 2.0 71.5 19.0 – 2.0 0.1 17.9 15.4 6.1 347.3 263.9 952.7 5.3 2.3 34.5 168.3 1,163.1 1,510.4 961.5 10.5 – 53.3 – 1,025.3 1,289.2 1,070.5 887.9 8.0 4.6 1.3 91.1 8.0 5.3 3.9 102.8 1,175.5 1,007.9 19.4 23.3 37.2 4.4 84.3 26.4 21.8 22.0 – 70.2 1,259.8 1,078.1 250.6 211.1 Consolidated balance sheet continued At 30 September 2006 EQUITY Capital and reserves attributable to the company’s equity holders Issued share capital Share premium Merger reserve Capital redemption reserve Cash ﬂow hedge reserve Retained earnings Total shareholders’ equity Minority interest Total equity 67 Notes 28, 29 29 29 29 29 29 29 29 2006 £m 2005 £m 6.5 22.6 20.1 0.2 (0.8) 201.8 250.4 0.2 250.6 6.5 21.6 20.1 0.2 – 162.7 211.1 – 211.1 The ﬁnancial statements on pages 64 to 124 were approved by the Board of Directors on 22 December 2006 and were signed on their behalf by: Rupert J. Dickinson Andrew R. Cunningham Director Director 68 Grainger Trust plc Annual report and accounts 2006 Statement of consolidated cash ﬂows For the year ended 30 September 2006 Cash ﬂow from operating activities Proﬁt for the year Depreciation Impairment of goodwill Net valuation gains on investment properties Net ﬁnance costs Share of (proﬁt)/loss from associates and joint ventures Gain on disposal of investment properties and other investments Equity settled share-based payment expenses Change in fair value of derivatives and fair value through proﬁt or loss ﬁnancial assets Taxation Operating proﬁt before changes in working capital and provisions Decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase in trading properties Increase in provisions for liabilities and charges Cash generated from operations Interest paid Taxation paid Net cash outﬂow from operating activities Cash ﬂow from investing activities Proceeds from sale of investment property and property, plant and equipment Interest received Dividends received Acquisition of subsidiaries, net of cash acquired Investment in associates and joint ventures notes 15 22 14 10 16, 17 6 8 10, 18 11 37 Acquisition of investment property and property, plant and equipment Acquisition of at fair value through proﬁt or loss ﬁnancial assets (2005: Investments) 18 Net cash outﬂow from investing activities Cash ﬂows from ﬁnancing activities Proceeds from the issue of share capital Proceeds from new borrowings Purchase of own shares Repayment of borrowings Dividends paid Net cash inﬂow from ﬁnancing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 29 29 12 23 2006 £m 50.5 0.6 6.4 (39.9) 54.5 (0.4) (5.6) 0.9 (10.8) 21.2 77.4 3.2 2.7 (31.4) – 51.9 (55.0) (15.4) (18.5) 47.8 2.6 0.4 (3.4) (57.8) (131.8) (0.4) (142.6) 1.0 165.2 (0.5) (12.0) (6.9) 146.8 (14.3) 53.3 39.0 2005 £m 31.1 0.4 – (5.4) 49.2 0.5 (1.5) 0.5 – 9.9 84.7 0.9 (24.2) (42.6) 0.6 19.4 (49.9) (16.6) (47.1) 13.3 2.2 0.1 (41.6) (11.1) (18.8) (8.4) (64.3) 0.1 170.0 (0.1) (52.2) (6.9) 110.9 (0.5) 53.8 53.3 69 Notes to the ﬁnancial statements 1 Accounting Policies (a) Basis of preparation Grainger Trust plc is a company incorporated in the United Kingdom. The group ﬁnancial statements consolidate those of the company and its subsidiaries, together referred to as the ‘group’, and equity account the group’s interests in joint ventures and associates. The Parent Company ﬁnancial statements present information about the company and not about its group. The group ﬁnancial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The company has elected to prepare its company ﬁnancial statements in accordance with UK GAAP. These are presented on pages 127 to 132. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in the group ﬁnancial statements and in preparing an opening IFRS balance sheet as at 1 October 2004 for the purposes of transition to IFRS. The principal exception is that, as more fully explained in note (m) below, ﬁnancial instruments are accounted for on different bases in the current year and the comparative year owing to the transitional provisions of IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’. The consolidated ﬁnancial statements have been prepared under the historical cost convention except for the following assets and liabilities which are stated at their fair value; investment property, derivative ﬁnancial instruments and investments. The preparation of ﬁnancial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Although these estimates are based on management’s best knowledge of the events and amounts involved, actual results ultimately may differ from those estimates. Transition to IFRS The group is preparing its ﬁnancial statements in accordance with IFRS for the ﬁrst time and, consequently, has applied IFRS 1. An explanation of how the transition to IFRS has affected the reported ﬁnancial position and the ﬁnancial performance of the group is provided in note 38 to the ﬁnancial statements. IFRS 1 contains certain exemptions, both mandatory and optional, to assist the transition to IFRS. The group has utilised these exemptions as follows: i) Business combinations exemption – The group has applied the business combinations exemption in IFRS 1 allowing it not to restate business combinations that took place prior to the 1 October 2004 transition date. ii) Share-based payment transactions exemption – The group has applied this exemption and has therefore applied IFRS 2 to all grants of shares and share options made after 7 November 2002 that had not vested by 1 January 2005. iii) Exemption from restatement of comparatives for IAS 32 and IAS 39 – The group has applied this exemption thereby allowing it to present comparative information that does not comply with IAS 32 and IAS 39. Accordingly, the adjustments required for differences between UK GAAP and IAS 32 and IAS 39 are recognised in the opening balance sheet as at 1 October 2005. iv) Employee beneﬁts – In accordance with IFRS 1 the group has elected to recognise all actuarial gains and losses in full at the date of transition. Accordingly, the deﬁcit in the BPT Retirement Beneﬁts pension scheme as at 1 October 2004 has been taken through reserves. The group has applied the amendment to IAS 19 with effect from 1 October 2004 allowing it to report all actuarial gains or losses in full in the period in which they were incurred through the statement of recognised income and expense. 70 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 1 Accounting Policies continued (b) Basis of consolidation i) Subsidiaries Subsidiaries are all entities (including special purposes entities) over which the group has the power to govern the ﬁnancial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date control ceases. ii) Goodwill and impairment The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of the acquisition is measured as the fair value of the assets given, equity instruments issued plus the costs directly attributable to the acquisition. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the date of acquisition. Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of net identiﬁable assets, including intangible assets of the acquired entity at the date of acquisition. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisitions of joint ventures and associates is included in investments in joint ventures and associates. Goodwill is allocated to cash-generating units for the purpose of impairment testing and is tested annually for impairment and carried at cost less accumulated impairment losses. For details of the impairment review performed in 2006, see note 22. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. iii) Joint ventures and associates Joint ventures are those entities over whose activities the group has joint control, established by contractual agreement. Associates are all entities over which the group has signiﬁcant inﬂuence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investment in joint ventures and associates are accounted for by the equity method of accounting and are initially recognised at cost. The group’s investment in joint ventures and associates includes goodwill (net of any accumulated impairment loss) identiﬁed on acquisition. The group’s share of its joint ventures’ and associates’ post-acquisition proﬁts or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post- acquisition movements are adjusted against the carrying amount of the investment. 71 1 Accounting Policies continued (c) Segmental reporting A business segment is a distinguishable group of assets and operations, reﬂected in the way that the group manages its business, that are subject to risks and returns that are different from those of other business segments. The group has identiﬁed six such segments as follows: • UK Core portfolio – Regulated tenancies • UK Market-Rented Properties • Equity Release • UK Development • • European Tenanted Residential European Development. More detail is given relating to each of the above segments in the chief executive’s review on pages 20 to 29 and in note 3. (d) Foreign currency translation i) Functional and presentation currency Items included in the ﬁnancial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated ﬁnancial statements are presented in pounds sterling, which is the company’s functional and presentation currency. ii) Foreign currency transactions Foreign currency transactions are translated at the foreign exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at the foreign exchange rate ruling at that date. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the income statement. iii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to sterling at foreign exchange rates ruling at the balance sheet date. Revenues and expenses of foreign operations are translated at average foreign exchange rates for the relevant period. Exchange differences arising from the translation of the net investment in foreign operations are taken to the translation reserve. 72 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 1 Accounting Policies continued (e) Investment property Property that is held for long term rental yields or for capital appreciation or both, and that is not occupied by the companies in the consolidated group, is classiﬁed as investment property. Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the speciﬁed asset. If this information is not available, the group uses alternative valuation methods such as recent prices on less active markets or discounted cash ﬂow projections. A structured sample of in-house valuations is reviewed annually by external valuers who have an appropriate recognised professional qualiﬁcation and who have recent experience of the location and type of the property being valued. Subsequent expenditure is included in the carrying amount of the property when it is probable that future economic beneﬁt associated with the item will ﬂow to the group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the ﬁnancial period in which they are incurred. Gains or losses arising from changes in the fair value of the group’s investment properties are included in the income statement of the period in which they arise. (f) Property, plant and equipment Property, plant and equipment is stated at historical cost less subsequent depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets’ carrying amount or recognised as a separate asset, as appropriate, only when it is probable that the future economic beneﬁts associated with the item will ﬂow to the group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the ﬁnancial period in which they are incurred. Land is not depreciated. Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their cost less residual values over their estimated useful lives, as follows: Land Nil Fixtures, ﬁttings and equipment Five years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 73 1 Accounting Policies continued (g) Inventories – trading properties Tenanted residential properties held for sale in the normal course of business are shown in the ﬁnancial statements at the lower of cost and net realisable value. Cost includes legal and surveying charges incurred during acquisition together with improvement costs. Net realisable value is the net sale proceeds which the group expects on sale of a property with vacant possession. Land and property held within the development’s segment of the business, including house-building sites, are shown in the ﬁnancial statements at the lower of cost and net realisable value. Cost represents the acquisition price including legal and other professional costs associated with the acquisition together with subsequent development cost net of amounts transferred to costs of sale. Net realisable value is the current market value which the group expects to receive on sale net of associated selling costs. (h) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. (i) Income tax Income tax on the proﬁt for the periods presented comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using rates applicable at the balance sheet date. Tax payable upon the realisation of revaluation gains recognised in prior periods is recorded as a current tax charge with a release of the associated deferred taxation. Deferred income tax is provided using the balance sheet liability method. Provision is made for temporary differences between the carrying value of assets and liabilities in the consolidated ﬁnancial statements and the values used for tax purposes. Deferred income tax is calculated after taking account of any indexation allowances and capital losses. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities and is calculated using rates enacted or substantially enacted at the balance sheet date in the tax jurisdiction in which the temporary differences arise. Deferred income tax assets are recognised only to the extent that it is probable that future taxable proﬁts will be available against which the assets can be used. The deferred income tax assets and liabilities are only offset if there is a legally enforceable right of set off. 74 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 1 Accounting Policies continued (j) Employee beneﬁts i) Deﬁned contribution pension scheme Obligations for contributions to deﬁned contribution pension schemes are recognised as an expense in the income statement in the period to which they relate. ii) Deﬁned beneﬁt pension scheme The group currently contributes to a deﬁned beneﬁt pension scheme that was closed to new members and employee contributions in 2003. The full deﬁcit in the scheme was recognised in the balance sheet as at 1 October 2004. An actuarial valuation of the scheme is carried out every three years. However, the valuation is updated annually by a qualiﬁed actuary for the purpose of determining the amounts to be reﬂected in the group’s ﬁnancial statements under IAS 19. There are no current or past service costs as the scheme is closed to new members and employee contributions. Interest on pension scheme liabilities and the expected return on pension scheme assets will be reﬂected in the income statement each year. Actuarial gains and losses will be reﬂected in the consolidated statement of recognised income and expense each year. iii) Share-based compensation The group operate an equity-settled, share-based compensation plan comprising awards under a Long Term Incentive Scheme (‘LTIS’) and a Save As You Earn Scheme (‘SAYE’). The fair value of the employee services received in exchange for the grant of shares and options is recognised as an employee expense with a corresponding increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally entitled to the shares and options. This excludes the impact of any non-market vesting conditions which are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the group revises its estimates of the number of options that are expected to become exercisable. Awards under the LTIS are fair valued using a Monte Carlo simulation model and under SAYE using a Black Scholes model. When options are exercised, the proceeds received net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium. 75 1 Accounting Policies continued (k) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and is stated net of sales taxes and value added taxes. Revenue is recognised as follows: i) Rental and similar income Rental income from operating leases is recognised on a straight-line basis over the lease term on an accruals basis. ii) Service charge and similar income Service charge and management charge income is recognised in the accounting period in which the services are rendered. The group acts as principal in the operation of service charge accounts and therefore gross income received is recorded as revenue. Other income is accounted for as follows: i) Proﬁt or loss on property sales Proﬁts or losses arising from the sale of investment and trading properties (including development properties) are included in the income statement of the group where contract completion has taken place. Proﬁts or losses arising from the sale of trading and investment properties are calculated by reference to their carrying value and are included in operating proﬁt. ii) Income from investments Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. (l) Leases i) Group as lessor The net present value of ground rents receivable is, in the opinion of the directors, immaterial. Accordingly, ground rents receivable are taken to the income statement on a straight-line basis over the period of the lease. Properties leased out to tenants are included in the balance sheet as either investment property or as trading property under inventories. ii) Group as lessee The group occupies a number of its ofﬁces as a lessee. After a review of all of its occupational leases, the directors have concluded that all such leases are operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from lessor) are charged to the income statement on a straight-line basis over the period of the lease. The net present value of ground rents payable is, in the opinion of the directors, immaterial. Accordingly, ground rent expenses are taken to the income statement on a straight-line basis over the lease term. 76 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 1 Accounting Policies continued (m) Financial instruments (Under UK GAAP from 1 October 2004 until 30 September 2005) i) Derivative ﬁnancial instruments The group uses derivative ﬁnancial instruments to reduce exposure to interest rate movements. The group does not hold or issue derivative ﬁnancial instruments for speculative purposes. For an interest rate swap to be treated as a hedge, the instrument must be related to actual assets or liabilities or a probable commitment and must change the nature of the interest rate by converting a ﬁxed rate to a variable rate or vice-versa. Interest differentials under these swaps are recognised by adjusting net interest payable over the periods of the contracts. If an investment ceases to be a hedge, for example, because the underlying hedged position is eliminated, the instrument is marked to market and any resulting proﬁt or loss recognised at that time. ii) Loan issue costs Costs incurred in raising loan ﬁnance are capitalised and set off against the outstanding debt in the balance sheet. The costs are charged to the proﬁt and loss account on a straight-line basis over the term of the facility. iii) Investments Investments are stated at cost less provisions for permanent diminution in value. Financial instruments (Under IFRS from1 October 2005) Derivatives The group uses derivative instruments to help manage its interest rate risk. In accordance with its treasury policy, the group does not hold or issue derivatives for trading purposes. The derivatives are recognised initially at fair value. Subsequently, the gain or loss on re-measurement to fair value is recognised immediately in the income statement, unless the derivatives qualify for cash ﬂow hedge accounting in which case any gain or loss is taken to equity in a cash ﬂow hedge reserve. In order to qualify for hedge accounting, the group is required to document in advance the relationship between the item being hedged and the hedging instrument. The group is also required to document the relationship between the hedged item and the hedging instrument and demonstrate that the hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is immediately transferred to the income statement. 77 1 Accounting Policies continued Fair value estimation The fair value of interest rate swaps is based on a discounted cash ﬂow model using quoted market information. Derecognition of ﬁnancial assets and liabilities Derecognition is the point at which the group removes an asset or liability from its balance sheet. The group’s policy is to derecognise ﬁnancial assets only when the contractual right to the cash ﬂows from the ﬁnancial asset expires. The group also derecognises ﬁnancial assets that it transfers to another party, provided the transfer of the assets also transfers the right to receive cash ﬂows from the ﬁnancial asset. When the transfer does not result in the group transferring the right to receive the cash ﬂows of the ﬁnancial asset but it does result in the group assuming a corresponding obligation to pay the cash ﬂows to another recipient, the ﬁnancial asset is derecognised. The group derecognises ﬁnancial liabilities only when its obligation is discharged, is cancelled or expires. At fair value through proﬁt or loss ﬁnancial assets At fair value through proﬁt or loss ﬁnancial assets represents the group’s holding of units in the Schroder Residential Property Unit Trust. They are included in the balance sheet at fair value with changes in fair value taken through the income statement. These units have been designated at fair value through proﬁt or loss as they are managed and their performance is evaluated on a fair value basis in accordance with the group’s documented investment policy. The group adopts the valuation provided by the fund manager as long as the valuation method adopted does not differ materially from group valuation methods. (n) Borrowings Borrowings are initially recognised at cost, being the fair value of consideration received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classiﬁed as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12-months after the balance sheet date. (o) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment in trade receivables is established when there is objective evidence that the group will not be able to collect all amounts due. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows, discounted at the effective interest rate. The movement in the provision is recognised in the income statement. (p) Provisions Provisions are recognised when a) the group has a present obligation as a result of a past event and b) it is probable that an outﬂow of resources will be required to settle the obligation and c) a reliable estimate can be made of the amount of the obligation. 78 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 1 Accounting Policies continued (q) Dividends Dividend distributions to the company’s shareholders are recognised as a liability in the group ﬁnancial statements in the period in which the dividends are approved by the company’s shareholders. (r) Assets held for sale Where a group of assets are to be disposed of by sale together as a single group, they are classiﬁed as a disposal group. The disposal group is classiﬁed as held for sale as deﬁned by IFRS 5 when they are available for sale in their present condition and the sale is highly probable and expected to be completed within one year from the date of classiﬁcation. Non-current assets held for sale within a disposal group are stated at the lower of their carrying amount and fair value less costs to sell. (s) Investment in own shares The group acquires its own shares through the Grainger Trust Employee Trustee Company Limited. The shares are held to enable the company to meet its obligations under the LTIS. The acquisition cost of shares is debited to an investment in own shares reserve within retained earnings. When shares are issued to employees under the LTIS, a transfer is made at the average cost of the shares issued between the investment in own shares reserve and the share-based payments reserve all within retained earnings (see note 29). (t) Standards and Interpretations issued but not applied At the date of approval of these ﬁnancial statements, the following Standards and Interpretations which have not been applied in these ﬁnancial statements, were issued but the application was not yet mandatory for the period: IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ IFRS 7 ‘Financial Instruments: Disclosures’; and the related amendment to IAS 1 on capital disclosures IFRS 8 ‘Operating Segments’ IFRIC 4 ‘Determining whether an Arrangement contains a Lease’ IFRIC 5 ‘Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds‘ IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinﬂationary Economies‘ IFRIC 8 ‘Scope of IFRS 2’ IFRIC 9 ‘Reassessment of Embedded Derivatives’ IFRIC 10 ‘Interim Financial Reporting and Impairment’ IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’ IFRIC 12 ‘Service Concession Arrangements’ The directors anticipate that, with the exception of the additional ﬁnancial instrument disclosures required by IFRS 7 ‘Financial Instruments: Disclosures’, the adoption of these Standards and Interpretations in future periods will have no material impact on the ﬁnancial statements of the group. 79 2 Critical accounting estimates and assumptions Those estimates and assumptions that have a risk of causing a material adjustment to the carrying amount of the assets and liabilities are shown below: Investment property valuations The group uses the valuations performed by its own in-house surveying team to value the core regulated portfolio. A structured sample of these valuations is checked by external independent valuers. Investment property in the JPUT and in Germany has been valued by external independent valuers. In the UK, the majority of the portfolio is invested in the type of properties where demand is high. Accordingly, the valuers generally have good information on current market prices for properties similar to our own. Valuers also make reference to discounted cash ﬂow projections based upon estimates of future rental income, anticipated property expenses and an appropriate discount rate. Trading property valuations The group’s residential trading properties are carried in the balance sheet at the lower of cost and net realisable value. In assessing net realisable value, the group uses valuations performed by its own in-house surveying team. A structured sample of these valuations is subjected to checks by an external independent valuer and where the valuations initially differ, agreement is reached after further discussion. As with investment properties, the valuers generally have good information on current market prices for properties similar to our own. Development trading properties are carried in the balance sheet at the lower of cost and net realisable value. All properties in the portfolio have been valued by an external independent valuer with the exception of short term housebuilding sites and assets pre-sold prior to practical completion. Provision is made on a project-by-project basis to reduce cost to net realisbale value to the extent that the total projected costs exceed total projected revenues. Market valuation of regulated residential property assets The group values its regulated residential property assets for market value purposes by deducting a discount from the vacant possession value. This discount takes account of the fact that the rental yield is generally below market rates and that it may be some years before we obtain vacant possession value and can then sell the property. Over time, this discount has narrowed, although for the last few years we have used a rate of 27.5%. Strong market and transaction activity has led us to believe that this discount is conservative and our valuers have now certiﬁed the valuation of these properties at 77.5% of vacant possession value, a discount of 22.5%. This realignment has produced an increase in market value at the year end of £67m. Distinction between investment and trading properties The group considers the intention at the outset for each property acquired in order to classify the property as either an investment property or a trading property. Where the intention is either to trade the property or to hold it during its normal life cycle and to sell it upon receiving vacant possession, the property is classiﬁed as a trading property. Where the intention is to hold the asset for its long term rental yield and/or capital appreciation, the property is classiﬁed as an investment property. Where the intention for a property changes, the property is reclassiﬁed accordingly. Income taxes There are some transactions and calculations that involve a degree of estimation and judgement and whose tax treatment can not be ﬁnally determined until a formal resolution has been reached with the relevant tax authorities. In such cases, the group’s policy is to be prudent and conservative in its assessment of the tax beneﬁt that may accrue in line with the contingent asset rules set out in IAS 37. Where the ﬁnal tax outcome of these matters is different from the amounts initially recorded, such differences will impact on the income and deferred tax amounts reﬂected in subsequent accounting periods. 80 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 3 Segmental information 2006 Income Statement (£m) Total revenue Gross rental income Net property operating expenses Net rental income Proceeds from sale of trading property Carrying value of trading properties sold and administrative expenses Proﬁt on disposal of trading properties Administrative expenses Other income/(expense) Goodwill impairment loss Net other income/(expense) Investment property disposal proceeds Carrying value of investment property sold Proﬁt on disposal of investment property Operating proﬁt before valuation gains on investment properties and changes in fair values Net valuation gains on investment properties Change in fair value of derivatives Change in fair value through proﬁt or loss ﬁnancial assets Operating proﬁt Net interest expense Share of loss from associates after tax Share of proﬁt from joint ventures after tax Proﬁt before tax Included in the above analysis are: Depreciation Goodwill impairment loss Other non-cash expenses UK core portfolio- regulated tenancies UK market tenancies Equity release/ retirement solutions 38.0 (17.8) 20.2 107.6 (56.7) 50.9 – 3.8 – 3.8 18.3 (17.4) 0.9 75.8 8.6 (2.5) 6.1 – – – – (1.9) – (1.9) 2.1 (1.7) 0.4 4.6 0.1 (0.3) (0.2) 12.0 (9.4) 2.6 – 0.1 – 0.1 0.5 (0.2) 0.3 2.8 (0.4) – (0.2) – – – (0.1) – (0.1) The Group monitors its operations in the above segments, there is no natural primary and secondary split although the above is a complete analysis by business and geographic segments. See note 7 for further information in connection with the allocation of administrative expenses. Although property and asset management are one of the six areas in which the group operates, historically the ﬁnancial results and ﬁnancial position of that segment have not been recorded separately and it is not possible to reliably extract that ﬁnancial information for the purpose of this segmental analysis. In future, the results of this segment will be recorded separately and we will report this in future accounts. 81 UK development European tenanted residential European development Total 30 September 2006 Group 1.4 (1.0) 0.4 31.4 (29.0) 2.4 – – – – 26.1 (22.3) 3.8 6.6 4.5 (2.7) 1.8 – – – – – – – 0.8 (0.6) 0.2 2.0 – – – – – – – 0.1 – 0.1 – – – – – – – – – (10.4) – (6.4) (6.4) – – – 0.1 (16.8) (0.1) – (0.2) – – – – – – – (6.4) (0.4) 52.6 (24.3) 28.3 151.0 (95.1) 55.9 (10.4) 2.1 (6.4) (4.3) 47.8 (42.2) 5.6 75.1 39.9 10.4 0.4 125.8 (54.5) (0.1) 0.5 71.7 (0.6) (6.4) (0.9) 82 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 3 Segmental information continued 2005 Income Statement (£m) Total revenue Gross rental income Net property operating expenses Net rental income Proceeds from sale of trading property Carrying value of trading properties sold and administrative expenses Proﬁt on disposal of trading properties Administrative expenses Other income Goodwill impairment loss Net other income/(expense) Investment property disposal proceeds Carrying value of investment property sold Proﬁt on disposal of investment property Operating proﬁt before valuation gains on investment properties and changes in fair values Net valuation gains on investment properties Change in fair value of derivatives Change in fair value through proﬁt or loss ﬁnancial assets Operating proﬁt Net interest expense Share of loss from associates after tax Share of loss from joint ventures after tax Proﬁt before tax Included in the above analysis are: Depreciation Goodwill impairment loss Other non-cash expenses UK core portfolio- regulated tenancies UK market tenancies Equity release/ retirement solutions 42.7 (25.2) 17.5 124.9 (71.0) 53.9 – 2.1 – 2.1 6.4 (5.6) 0.8 74.3 (0.4) – (0.1) – – – – – – – – – – – – – – – – – – – – 7.8 (4.2) 3.6 – – – – 0.5 (0.3) 0.2 3.8 – – – The Group monitors its operations in the above segments, there is no natural primary and secondary split although the above is a complete analysis by business and geographic segments. See note 7 for further information in connection with the allocation of administrative expenses. The UK market tenancies segment was formed in 2006 with the transfer of properties into the JPUT. It is not possible to reliably measure the result from that segment in 2005. Operations in the European residential segment and the European development segment did not commence until 2006. 83 UK development European tenanted residential European development Total 30 September 2005 Group 2.8 (1.2) 1.6 45.1 (35.4) 9.7 – 0.8 – 0.8 6.7 (6.2) 0.5 12.6 – – (0.1) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (5.4) – – – – – – (5.4) – – (0.3) 45.5 (26.4) 19.1 177.8 (110.6) 67.2 (5.4) 2.9 – 2.9 13.6 (12.1) 1.5 85.3 5.4 – – 90.7 (49.2) (0.2) (0.3) 41.0 (0.4) – (0.5) 84 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 3 Segmental information continued 2006 Segment Assets (£m) Assets Investment property Property, plant and equipment At fair value through proﬁt or loss ﬁnancial assets Goodwill Trading properties Trade and other receivables Assets held for sale Investments in associates (equity accounted) Investments in joint ventures (equity accounted) Derivative ﬁnancial instruments Cash and cash equivalents Total assets Liabilities Trade and other payables Provisions for other liabilities and charges Segment Liabilities Interest-bearing loans and borrowings Retirement beneﬁts Deferred tax liabilities Current tax liabilities Derivative ﬁnancial instruments Total Liabilities Net assets Other segment items: UK regulated tenancies UK market tenancies UK development 60.0 42.1 – – – 720.2 1.1 (2.6) 778.7 – 67.4 – – 846.1 5.0 – 5.0 – – – – 0.1 170.9 213.1 – – – 1.1 214.2 0.5 – 0.5 0.4 – – – 83.1 0.3 – 83.8 – 4.1 – – 87.9 9.3 – 9.3 Capital expenditure on property, plant and equipment – – – The Group monitors its operations in the above segments, there is no natural primary and secondary split although the above is a complete analysis by business and geographic segments. Although property and asset management are one of the six areas in which the group operates, historically the ﬁnancial results and ﬁnancial position of that segment have not been recorded separately and it is not possible to reliably extract that ﬁnancial information for the purpose of this segmental analysis. In future, the ﬁnancial position of this segment will be recorded separately and we will report this in future accounts. 85 Equity release/ retirement solutions European tenanted residential European development Total 30 September 2006 Group 33.3 – – – 143.8 0.1 – 177.2 – – – – 116.9 – – – – 0.1 – 117.0 – – – – 177.2 117.0 2.6 – 2.6 1.6 – 1.6 – – – – 5.6 – – 5.6 2.0 – – – 7.6 0.4 – 0.4 – 2.1 19.0 – – 3.6 – 252.7 2.1 19.0 – 952.7 5.3 168.3 24.7 1,400.1 – – 2.3 33.4 60.4 11.9 1.3 13.2 2.0 71.5 2.3 34.5 1,510.4 31.3 1.3 32.6 1,089.9 4.6 91.1 37.2 4.4 1,259.8 250.6 – – – 0.7 0.7 86 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 3 Segmental information continued 2005 Segment Assets (£m) Assets Investment property Property, plant and equipment Investments Goodwill Trading properties Trade and other receivables Investments in associates (equity accounted) Investments in joint ventures (equity accounted) Derivative ﬁnancial instruments Cash and cash equivalents Total assets Liabilities Trade and other payables Provisions for other liabilities and charges Segment Liabilities Interest-bearing loans and borrowings Retirement beneﬁts Deferred tax liabilities Current tax liabilities Derivative ﬁnancial instruments Total Liabilities Net assets Other segment items: UK regulated tenancies UK market tenancies UK development 195.3 – – – 726.8 1.0 923.1 – 8.8 – – 931.9 5.8 – 5.8 – – – – – – – – – – – – – – – 19.6 – – – 91.3 0.6 111.5 – 9.1 – – 120.6 11.4 – 11.4 Capital expenditure on property, plant and equipment – – – The Group monitors its operations in the above segments, there is no natural primary and secondary split although the above is a complete analysis by business and geographic segments. The UK market tenancies segment was formed in 2006 with the transfer of properties into the JPUT. It is not possible to reliably extract information for that segment in 2005. 87 Equity release/ retirement solutions European tenanted residential European development Total 30 September 2005 Group 7.5 – – – 143.4 1.1 152.0 – – – – 152.0 2.3 – 2.3 – – – – – – – – – – – – – – – – – – – – – – 0.1 – – – 0.1 – – – – 2.0 15.4 6.1 – 7.8 31.3 – – – 53.3 84.6 10.3 3.9 14.2 222.4 2.0 15.4 6.1 961.5 10.5 1,217.9 0.1 17.9 – 53.3 1,289.2 29.8 3.9 33.7 914.3 5.3 102.8 22.0 – 1,078.1 211.1 – – – 1.0 1.0 88 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 4 Net rental income Gross rental income Property operating expenses Ground rents paid Service charge income on principal basis Service charge expenses on principal basis 5 Proﬁt on disposal of trading properties Proceeds from sale of trading properties Carrying value of trading properties sold and administrative expenses 6 Proﬁt on disposal of investment property Proceeds from sale of investment property Carrying value of investment property sold 7 Administrative expenses Total group administrative expenses 2006 £m 52.6 (23.7) (0.1) 0.9 (1.4) 28.3 2006 £m 151.0 (95.1) 55.9 2006 £m 47.8 (42.2) 5.6 2006 £m 32.0 2005 £m 45.5 (26.1) (0.2) 1.2 (1.3) 19.1 2005 £m 177.8 (110.6) 67.2 2005 £m 13.6 (12.1) 1.5 2005 £m 21.8 Many of the group’s administrative expenses are directly attributable to the operating divisions. Therefore, for statutory reporting purposes, these are added to the costs in those divisions. The group administrative expenses shown above have been allocated as follows: Included within property operating expenses (see note 4) Added to the carrying value of trading properties sold (see note 5) Disclosed as administrative expenses 2006 £m 11.6 10.0 10.4 32.0 2005 £m 11.6 4.8 5.4 21.8 89 7 Administrative expenses continued Included within total administrative expenses in 2006 are redundancy costs of £1.5m, abortive deal costs of £1.4m, an accelerated write off of equity release transaction costs of £1.1m and £0.6m of overhead costs relating to a subsidiary company SIP Home Limited which has ceased trading since the year end. Resulting from a review of the allocation of overheads to the various business streams in 2005, the amount disclosed as administrative expenses in the consolidated income statement shown previously as £9.8m has been reduced to £5.4m. The difference has been reallocated to increase property expenses by £2.0m and the carrying value of trading properties sold by £2.4m. There is no impact on net proﬁt and management consider the revised ﬁgures to be better cost allocations to the different business areas. 8 Employees Wages and salaries Social security costs Other pension costs – deﬁned contribution scheme (note 25) Share-based payments 2006 £m 13.8 1.8 0.7 0.9 17.2 2005 £m 9.2 1.1 0.7 0.5 11.5 Included in wages and salaries is £1.5m relating to redundancy costs primarily incurred as a result of reorganisation within the property management and development teams. The average monthly number of group employees during the year (including executive directors) was: UK tenanted residential UK development Europe 2006 203 16 3 222 2005 172 16 0 188 Details of directors’ remuneration (including pensions), share options and interests in the LTIS are provided in the audited section of the remuneration committee report on pages 56 to 58. Key management compensation Salaries and short term employee beneﬁts Post-employment beneﬁts Share-based payments Key management ﬁgures shown above include the executive directors. 2006 £m 3.5 0.2 0.6 4.3 2005 £m 2.0 0.2 0.3 2.5 90 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 9 Proﬁt before tax Proﬁt before tax is stated after charging: Depreciation on ﬁxtures, ﬁttings and equipment Impairment of goodwill Bad debt expense Auditors’ remuneration – audit Auditors’ remuneration – non-audit 2006 £m 0.6 6.4 0.1 0.2 0.1 2005 £m 0.4 0.4 0.5 0.1 0.2 Total audit fees charged in 2006 were £168,050. Non-audit fees comprised £61,500 for tax advisory services and £66,575 for other services which included £48,000 for advice on IFRS transition. The goodwill impairment relates primarily to goodwill on the acquisition of City North Group plc of £5.8m. This goodwill was impaired following the transfer of properties to the JPUT (see note 22 for further details of the goodwill impairment). 10 Interest Interest expense Bank loans and mortgages Loan notes Other interest payable Amortisation of issue costs Interest on net pension scheme liabilities Interest income Income from at fair value through proﬁt or loss ﬁnancial assets Interest receivable from associates and joint ventures Other interest receivable Net gain in fair value of derivatives 2006 £m 56.8 0.9 1.1 1.3 0.2 60.3 0.4 2.8 2.6 5.8 10.4 2005 £m 48.0 1.3 1.0 1.1 0.2 51.6 0.3 – 2.1 2.4 – In accordance with IAS 39, the group has reviewed its interest rate hedges and those of its joint ventures. The fair values of such hedges have been assessed by JC Rathbone Associates Limited, ﬁnancial risk consultants. Movements in fair value since 1 October 2005 have been taken directly to the income statement unless they are viewed as being effective in which case they have been recognised through equity (see note 21). All interest payable is charged to the income statement. No interest has been capitalised in this year or in prior years. 11 Income tax expense Current tax: UK corporation tax on proﬁts Adjustments relating to prior years Deferred tax: Origination and reversal of timing differences Adjustments relating to prior years Income tax expense for the year The tax for the year is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Proﬁt before tax Proﬁt before tax at a rate of 30% Expenses not deductible for tax purposes Goodwill impairment Corporation tax on capital gains Capital losses not previously recognised Deferred tax released in respect of capital gains Other losses and non-taxable items Adjustment in respect of prior periods Total income tax expense in the income statement (see above) 91 2006 £m 26.3 4.3 30.6 (9.8) 0.4 (9.4) 21.2 2006 £m 71.7 21.5 0.4 1.9 12.7 (6.4) (11.0) (2.6) 4.7 21.2 2005 £m 17.9 – 17.9 (5.0) (3.0) (8.0) 9.9 2005 £m 41.0 12.3 0.6 – – – – – (3.0) 9.9 As detailed in note 26, deferred tax has been taken direct to equity in relation to the actuarial surplus on the BPT pension scheme and the fair value movement in cash ﬂow hedges. Factors that may affect future tax charges The group has not taken all of the beneﬁt in respect of capital losses brought forward and available to offset against subsequent capital gains arising as this has yet to be formally agreed with the relevant tax authorities. If it is found that all the capital losses are available for offset against capital gains, then provisions of up to £23m would be released over the coming years. 92 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 12 Dividends Under IAS 10, ﬁnal dividends are excluded from the balance sheet until they are approved by the company in general meeting. Dividends paid in the year are shown below: Ordinary dividends on equity shares: Interim paid of 1.87p per share (2005: 1.7p) Final for prior year paid 3.41p per share (2004: 3.84p) 2006 £m 2.5 4.4 6.9 2005 £m 2.2 4.7 6.9 A ﬁnal dividend relating to 2006 of 3.75p per share has been proposed by the board. This will result in a further distribution of £4.9m. If approved, it will be paid on 6 March 2007 to shareholders on the register on 16 February 2007. The 2006 interim dividend of 1.87p per share was paid in July 2006. This gives a total dividend for 2006 of 5.62p per share compared to £5.11p per share in 2005, an increase of 10%. 13 Earnings per share Basic Basic earnings per share is calculated by dividing the proﬁt attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Grainger Trust Employee Trustee Company Limited to meet its obligations under the LTIS (see note 29). Diluted Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding by the dilutive effect of ordinary shares that the company may potentially issue relating to its share option schemes and contingent share awards under its LTIS, based upon the number of shares that would be issued if 30 September 2006 was the end of the contingency period. 30 September 2006 30 September 2005 Proﬁt for the year Weighted average number of shares £m (thousands) Earnings per share pence Proﬁt for the year Weighted average number of shares £m (thousands) Earnings per share pence Basic earnings per share Proﬁt attributable to shareholders 50.5 129,001 39.1 31.1 125,077 24.9 Effect of potentially dilutive securities Options and shares – 803 (0.2) – 1,770 (0.4) Diluted earnings per share Proﬁt attributable to shareholders 50.5 129,804 38.9 31.1 126,847 24.5 14 Investment property At 1 October 2004 Additions – capital expenditure – asset acquisitions – corporate acquisitions Disposals Transferred to joint ventures Revaluation gain At 30 September 2005 Additions – capital expenditure – asset acquisitions Disposals Transferred from trading properties Transferred to trading properties Revaluation gain Transferred to a disposal group (see note 22) At 30 September 2006 93 Total £m 105.3 2.5 15.3 110.8 (11.9) (5.0) 5.4 222.4 3.7 144.4 (33.3) 43.5 (2.1) 42.4 (168.3) 252.7 Investment properties in the core-regulated portfolio, with a value of £93.7m, were valued as at 30 September 2006 at their market value by our in-house chartered surveyors. These valuations were reviewed and approved by the directors. A structured sample of the in-house valuations was reviewed by Allsop LLP, Chartered Surveyors, independently of the group. Based on the results of that review, Allsop LLP concluded that they have a high degree of conﬁdence in all of the valuations. Investment properties in the JPUT with a value of £210.4m as at 30 September 2006, were valued at their market value by DTZ Debenham Tie Leung Limited. The JPUT is considered to be a disposal group as at 30 September 2006, and 80% of the value of its investment properties have been transferred to current assets (£168.3m). Investment properties in Germany were valued by CB Richard Ellis prior to their acquisition by the group. These valuations took place between September 2005 and July 2006. The directors consider that these initial values have not changed materially in the period to 30 September 2006. The value of investment properties in Germany as at 30 September 2006 is £116.9m. The historical cost of the group’s investment and development properties as at 30 September 2006, including those held as a disposal group under current assets was £370.4m (2005: £214.3m). The revaluation gain in 2006 of £42.4m shown above has been included in the income statement. However, an accrual for fees of £2.5m relating to the cost of raising equity investment in the JPUT has been set against this revaluation gain to give a net amount of £39.9m. The total value of investment property shown in the above table, includes £13.0m (2005: £10.8m) held under long leases. 94 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 15 Property, plant and equipment Cost: At 1 October 2004 Additions At 30 September 2005 Additions At 30 September 2006 Depreciation: At 1 October 2004 Charge for the year At 30 September 2005 Charge for the year At 30 September 2006 Net book value: At 30 September 2006 At 30 September 2005 At 30 September 2004 16 Investments in associates At 1 October 2004 Additions Loans advanced Provisions against loan and goodwill impairment loss Share of losses At 30 September 2005 Loans advanced Share of losses At 30 September 2006 Fixtures, ﬁttings and equipment £m Owner- occupied property £m 2.2 1.0 3.2 0.7 3.9 0.9 0.4 1.3 0.6 1.9 2.0 1.9 1.3 0.1 – 0.1 – 0.1 – – – – – 0.1 0.1 0.1 Total £m 2.3 1.0 3.3 0.7 4.0 0.9 0.4 1.3 0.6 1.9 2.1 2.0 1.4 Total £m – 0.5 0.6 (0.8) (0.2) 0.1 2.0 (0.1) 2.0 The group’s interest in associates at 30 September 2006 and for the period then ended is as follows: Oü Robbins (incorporated in Estonia) Assets £m 2.1 Liabilities £m (2.2) Loans £m 2.1 Proﬁt/(loss) £m Interest held % (0.1) 43.2 17 Investments in joint ventures The movement in investments in joint ventures is as follows: Net assets £m Loans £m Goodwill £m At 1 October 2004 Additions Loans advanced Transfer from investment property Transfer from other investments Share of losses At 30 September 2005 Additions Loans advanced Share of proﬁts Share of effective portion of changes in fair value of cash ﬂow hedges Disposals At 30 September 2006 At 30 September, the group’s interest in joint ventures is as follows: – 2.4 – 5.0 3.3 (0.3) 10.4 6.5 – 0.5 (0.2) (5.0) 12.2 – – 6.0 – – – 6.0 – 51.7 – – – – 1.5 – – – – 1.5 0.1 – – – – 57.7 1.6 95 Total £m – 3.9 6.0 5.0 3.3 (0.3) 17.9 6.6 51.7 0.5 (0.2) (5.0) 71.5 Grainger Geninvest LLP Grainger Geninvest No 2 (2006) LLP Regen (NT) LLP % of share capital held 50 50 331⁄3 Country of incorporation United Kingdom United Kingdom United Kingdom 96 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 17 Investments in joint ventures continued The group sold its share in the Prescot Street Partnership to its joint venture partner in February 2006. The group’s share of the results of its joint ventures can be summarised as follows: Summarised income statement Net rental income Administrative expenses Operating proﬁt before valuation and fair value gains Gain on valuation of investment properties Gain on fair value of derivatives Operating proﬁt Interest payable Proﬁt before tax Taxation Proﬁt after tax Summarised balance sheet Investment property Current assets Total assets Non-current liabilities Current liabilities Net assets 2006 £m 1.7 (0.1) 1.6 3.5 0.8 5.9 (5.3) 0.6 (0.1) 0.5 2006 £m 143.3 8.6 151.9 (134.9) (4.8) 12.2 Investment property within Grainger Geninvest LLP, with a market value of £81.2m at 30 September 2006 was valued by Allsop LLP. The remaining investment property was acquired in March and June 2006 and was not revalued at 30 September 2006. 18 At fair value through proﬁt or loss ﬁnancial assets (2005: Investments) Investments were carried at cost less provisions for permanent diminution in value in 2005. In accordance with IAS 39, the group’s investment in the units of the Schroder Residential Property Unit Trust have been designated as ‘at fair value through proﬁt or loss’ ﬁnancial assets. Accordingly, changes in the fair value of the units have been taken to the income statement. The provisions of IAS 39 have been applied with effect from 1 October 2005 and the movements during the year are set out below: 18 At fair value through proﬁt or loss ﬁnancial assets (2005: Investments) continued Balance as at 30 September 2005 Effect of adoption of IAS 39 on 1 October 2005 – Uplift to fair value* Balance as at 1 October 2005 Units acquired in the year Uplift to fair value Balance as at 30 September 2006 The cost of at fair value through proﬁt or loss ﬁnancial assets at 30 September 2006 is £15.8m. * There is a rounding adjustment of £0.1m within this amount. 19 Inventories – trading properties Residential trading properties Development trading properties 97 £m 15.4 2.8 18.2 0.4 0.4 19.0 2005 £m 870.2 91.3 961.5 2006 £m 864.0 88.7 952.7 The residential trading properties shown above at the lower of cost and net realisable value, were all valued as at 30 September 2006 at their market value by our in-house chartered surveyors. These valuations were reviewed and approved by the directors. A structured sample of the in-house valuations was reviewed by Allsop LLP, Chartered Surveyors, independently of the group. Based on the results of that review, Allsop LLP concluded that they have a high degree of conﬁdence in all of the valuations. The market value of the residential trading properties as at 30 September 2006 was £1,379.1m. The development trading properties are shown above at the lower of cost and net realisable value. The majority of these assets were valued by Knight Frank LLP as at 30 September 2006. The remaining trading properties were valued internally by the directors. The Knight Frank valuation of £72.8m compared to book value of £65.7m, a surplus of £7.1m. The directors valuation of the remaining properties was equal to their book cost. 20 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 2006 £m 2.9 2.2 0.2 5.3 2005 £m 1.9 4.8 3.8 10.5 As at 30 September 2006, the impairment provision relating to trade receivables is £1.0m (2005: £1.1m). 98 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 21 Financial risk management and derivative ﬁnancial instruments (i) Financial risk management The group is subject to a number of ﬁnancial risks, in particular, interest rate, liquidity, foreign currency and credit risks. Interest rate risk – The group does not take trading positions in ﬁnancial instruments but uses them to minimise the risk of exposure to ﬂuctuating interest rates. The majority of the group’s debt is subject to protective swaps, caps or collars or is maintained at ﬁxed rates of interest (see note 23). To protect itself against interest rate risk the group’s treasury policy is to maintain ﬂoating rate exposure of no greater than 35% of expected borrowings. At 30 September 2006, 66% of the group’s debt was economically hedged. Liquidity risk – The group maintains a combination of long term and short term committed facilities that are designed to ensure that it has sufﬁcient available funds for ongoing operations and to meet planned future investments. Foreign currency risk – The group invests in property acquired in currency other than pounds sterling. In such situations, the group’s policy is to take out loans in the same currency to act as a natural hedge against currency ﬂuctuations. Credit risk – The group’s principal ﬁnancial assets are cash and bank balances and trade and other receivables. The group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are shown net of provisions for impairment (see note 20). Such provisions are made where there is objective evidence that the group will not be able to collect all amounts due. The group has no signiﬁcant concentration of credit risk as its exposure is spread over a large number of counterparties. Until 1 July 2006, the group did not meet the strict criteria set out in IAS 39 to enable certain swaps to be treated as being effective cash ﬂow hedges. Accordingly, all fair value movements on derivatives were taken to the income statement until 30 June 2006. From 1 July, certain swaps did qualify to be treated as effective cash ﬂow hedges and the movement in their fair values to 30 September 2006 has been taken directly through equity. The proﬁle of the group’s interest rate swaps in existence at 30 September 2006 which were classiﬁed as effective cash ﬂow hedges at 30 September 2006 was as follows: Maturity date Interest rate swaps 07 June 2009 07 March 2014 07 June 2012 07 June 2009 18 December 2011 Amount £m 50.0 30.0 155.0 55.0 10.2 300.2 Rate % 5.100 5.170 5.380 4.782 3.510 Fair value at 30 September 2006 £m Fair value at 01 October 2005 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m – (0.4) (2.4) 1.0 0.1 (1.7) (1.0) (1.3) (7.6) (0.8) – (10.7) 1.0 1.1 5.6 1.9 0.2 9.8 – (0.2) (0.4) (0.1) (0.1) (0.8) 99 21 Financial risk management and derivative ﬁnancial instruments continued In addition to the above, there were a number of ﬁnancial instruments that were in existence at 30 September 2006 but which were classiﬁed as ineffective hedges during the whole year to that date. Maturity date Interest rate swaps 08 June 2015 07 June 2006 07 June 2006 07 March 2016 30 September 2013 Interest rate collars and caps 14 November 2006 07 December 2009 07 September 2007 18 December 2011 07 March 2016 Swaption 07 March 2014 Amount £m – – – 16.8 17.0 Rate % 5.380 5.677 4.855 3.598 3.965 15.0 5.550 232.2 3.501- 6.000 6.000 3.430 3.598 5.170 25.0 10.2 16.3 – 332.5 632.7 Fair value at 30 September 2006 £m Fair value at 01 October 2005 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m (1.0) – – 0.2 (0.2) – 0.4 – 0.3 0.3 (0.4) (0.4) (2.1) (0.2) (0.8) – – – – 0.4 – – – (0.4) (1.0) (0.8) 0.8 – 0.2 (0.2) – – – 0.3 0.3 – 0.6 – – – – – – – – – – – – (11.7) 10.4 (0.8) Derivative ﬁnancial instruments are shown in the consolidated balance sheet as follows: Current assets Current liabilities 2006 £m 2.3 (4.4) (2.1) As at 30 September 2006, the following interest rate swaps, shown at their full amount, were held within Grainger Geninvest LLP and Grainger Geninvest No. 2 (2006) LLP both of which are joint ventures in which the group holds a 50% interest. As with the group swaps these hedges were ineffective until 1 July 2006 and all fair value movements up to that date have been taken through the income statement. Movements in fair value since 1 July 2006 have been taken directly through equity. 100 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 21 Financial risk management and derivative ﬁnancial instruments continued Maturity date Grainger Geninvest LLP 23 June 2010 Grainger Geninvest No. 2 (2006) LLP 20 March 2011 20 March 2011 Amount £m Rate % Fair value at 30 September 2006 £m Fair value at 01 October 2005 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m 29.3 4.455 120.0 – 149.3 4.890 4.890 0.3 0.8 0.1 1.2 – – – – 0.3 1.1 0.2 1.6 – (0.3) (0.1) (0.4) All of the ﬁnancial derivatives included in the above tables were valued by JC Rathbone Associates Limited, ﬁnancial risk consultants, using a discounted cash ﬂow model using quoted market information and were checked internally using a bespoke software package. 22 Assets held for sale The sale of 38% of the units in the Jersey Property Unit Trust (JPUT) completed on 21 November 2006. Negotiations are ongoing with investors and the current expectation is that 80%, in total, of the units will be sold within 12-months of the balance sheet date. Accordingly, as at 30 September 2006, 80% of the net assets of the JPUT, less an accrual for sales fees, have been reclassiﬁed as a disposal group under assets held for sale within current assets. The balance is comprised as follows: Investment property Trade and other receivables Cash and cash equivalents Trade and other payables 2006 £m 168.3 0.2 4.5 (4.7) 168.3 Included within the transfer of assets into the JPUT on 1 December 2005 was £67m of properties that had previously been classiﬁed as trading stock. On transfer to the JPUT their intended use was changed to them being held for rental yield and long term capital appreciation. Accordingly, these properties were re-classiﬁed as investment properties. A one-off revaluation gain of £23.5m was recognised within net valuation gains on investment properties in the income statement. Goodwill amounting to £5.8m was written off following the transfer of the properties as they were transferred out of their respective income generating units resulting in the goodwill being impaired. 22 Assets held for sale continued The goodwill impairment loss of £6.4m comprises the following: Goodwill relating to the JPUT transfer Goodwill on acquisition of remaining shares in SIP Home Limited Goodwill relating to the acquisition of Farm House Enterprises Limited 101 2006 £m 5.8 0.3 0.3 6.4 23 Financial assets and liabilities (i) Transition to IAS 32 and IAS 39 The group has taken advantage of the IFRS 1 exemption which allows it to present comparative information for 2005 that does not comply with IAS 32 and IAS 39. The following adjustments were made at 1 October 2005 to implement the provisions of IAS 32 and IAS 39. Uplift in fair value through proﬁt or loss ﬁnancial assets (note 18) Fair value of derivative ﬁnancial instruments Tax effect of the above adjustments The adjustment shown above was charged against retained earnings at 1 October 2005. (ii) Interest-bearing loans and borrowings Current liabilities Bank loans Loan notes Non-current liabilities Mortgages Bank loans Total interest-bearing loans and borrowings 2006 £m 2.9 (10.6) (7.7) 2.3 (5.4) 2005 £m – 26.4 26.4 – 887.9 887.9 914.3 2006 £m 1.0 18.4 19.4 17.7 1,052.8 1,070.5 1,089.9 Costs relating to the raising of the loan ﬁnance set off against the balances shown in the above table amount to £6.2m (2005: £7.2m). 102 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 23 Financial assets and liabilities continued Analysis of bank loans (a) £1.3bn Multi-Option Facility Agreement (the ‘MOF’) Term Facility A Term Facility B Revolving Facility A Revolving Facility B Revolving Facility B (Euro) Total 2006 £m 225.0 200.0 475.0 10.0 83.5 993.5 2005 £m 225.0 200.0 425.0 – – 850.0 Headroom on the MOF facility at 30 September 2006 was £307m (2005: £460m). This headroom provides the group with a strong position when it bids for signiﬁcant acquisitions. Interest is payable at the agreed margin over LIBOR plus Mandatory Costs. The agreed margin and ﬁnal repayment date of the options are as follows: Facility Term Facility A Term Facility B Revolving Facility A Revolving Facility B Revolving Facility B (Euro) The MOF is secured by ﬂoating charges over various assets of the group. (b) Fixed rate loan Bank loan Margin % Final repayment date 0.90 0.90 1.00 0.70 0.70 2006 £m 44.0 Jun-09 Jun-14 Jun-09 Jun-09 Jun-09 2005 £m 45.1 The loan is secured by ﬁxed charges over the speciﬁc assets it is ﬁnancing and bears interest at a ﬁxed rate of 6.32%. 23 Financial assets and liabilities continued (c) Loan notes 103 2006 £m 18.4 2005 £m 26.4 The loan notes are secured by bank guarantees and cash collateral and bear interest at between 0.75% and 1% under LIBOR. (d) Grainger Recklinghausen Portfolio 1 Sarl & Co. K.G. Bank loan (Euro) Mortgage (Euro) 2006 £m 19.4 17.7 37.1 2005 £m – – – The loans are secured by ﬁxed and ﬂoating charges and bear interest at rates between 0% and 0.95% over EURIBOR. (e) CCZ a.s. Bank loan (Czech Crowns) 2006 £m 3.1 2005 £m – The loan is secured by a ﬁxed charge over the speciﬁc asset it is ﬁnancing and bears interest at 2% over PRIBOR. The MOF, Euro bank loan and loan in CCZ a.s. are generally rolled over every 3 months. At roll over LIBOR, EURIBOR and PRIBOR are re-set for the following interest period. The ﬁxed rate loan on page 102 and mortgage shown in (d) above are at ﬁxed rates of interest which do not re-price. The ﬁxed rate loan is all repayable after more than ﬁve years. The mortgage has repayments of £0.2m within one year, £0.9m within two to ﬁve years and £16.6m after more than ﬁve years. The effective interest rate on borrowings was 5.8% (2005: 5.9%). The maturity proﬁle of the group’s debt, net of ﬁnance costs, is as follows: Within one year Between one and two years Between two and ﬁve years Over ﬁve years 2006 £m 19.4 0.4 822.3 247.8 1,089.9 2005 £m 26.4 644.8 201.2 41.9 914.3 104 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 23 Financial assets and liabilities continued The interest rate risk proﬁle of the group’s debt after taking into account the various ﬁnancial derivatives used by the group to manage its interest rate risk is as follows: Loan notes (pounds sterling) Mortgages (Euro) Bank loans Pounds sterling Euro Czech Crowns Unamortised issue costs Loan notes (pounds sterling) Bank loans (pounds sterling) Unamortised issue costs 2006 Fixed rate liabilities £m Capped rate liabilities £m Floating rate liabilities £m – 17.7 44.0 – – 61.7 – – 562.2 70.5 – 632.7 18.4 – 347.8 32.4 3.1 401.7 2005 Fixed rate liabilities £m Capped rate liabilities £m Floating rate liabilities £m – 45.1 45.1 – 612.5 612.5 26.4 237.5 263.9 Total £m 18.4 17.7 954.0 102.9 3.1 1,096.1 (6.2) 1,089.9 Total £m 26.4 895.1 921.5 (7.2) 914.3 The group’s borrowings subject to ﬁxed interest rates and to swaps, caps and collars (capped rates) have the following weighted average interest rates and weighted average maturity dates. The weighted average interest rates shown are inclusive of loan margins. Mortgages (Euro) Bank loans (pounds sterling) Bank loans (Euro) 2006 Effective interest rate. Fixed rate % Weighted average period Years Effective interest rate. Capped rate % Weighted average period Years 0.5 6.3 – 43 19 – – 6.0 4.3 – 4 5 23 Financial assets and liabilities continued Bank loans – pounds sterling 6.3 19 6.0 2005 Fixed rate weighted average rate % Weighted average period Years Capped rate weighted average rate % 105 Weighted average period Years 4 Since the year end, the following matters have been concluded: (1) A reﬁnancing of the MOF was completed on 13 December 2006. The four tranche £1.3bn structure was retained but with lower interest margins and an extension to the average maturities of two years. (2) A €150m credit facility for Grainger Berlin Portfolio 1 Sarl & Co.KG, Grainger Stuttgart Portfolio 1 Sarl & Co.KG and Grainger Stuttgart Portfolio 2 Sarl & Co.KG was completed on 11 October 2006. This facility extends the overall funding available to the group, provides greater ﬂexibility for future investment within Germany and acts as a natural currency hedge against Euro currency property acquisitions. (iii) Financial assets The group has the following cash and cash equivalents at 30 September 2006: Pounds sterling Euro Czech Crowns Cash and cash equivalents are shown in the consolidated balance sheet as: Cash and cash equivalents as a separate line item Within assets held for sale 2006 £m 33.0 4.8 1.2 39.0 2006 £m 34.5 4.5 39.0 2005 £m 53.3 – – 53.3 2005 £m 53.3 – 53.3 Short term deposits totalling £17.7m with an average maturity of three months are held as cash collateral. These have an effective interest rate of 4.395%. At the year end £6.4m was placed on the overnight money market at a rate of 4.95%. Remaining cash and cash equivalents are held as cash at bank or in hand. 106 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 23 Financial assets and liabilities continued (iv) Fair value table The fair value of the group’s ﬁnancial assets and liabilities including those within assets held for sale are as follows: Other non-current assets Trade and other receivables Derivative ﬁnancial instruments Cash and cash equivalents Non-current liabilities 2006 2005 Book value £m 19.0 5.5 2.3 39.0 65.8 Fair value £m Fair value adjustment £m 19.0 5.5 2.3 39.0 65.8 – – – – – Book value £m 15.3 10.5 – 53.3 79.1 Fair value £m Fair value adjustment £m 18.2 8.7 0.4 53.3 80.6 2.9 (1.8) 0.4 – 1.5 Interest-bearing loans and borrowings (1,070.5) (1,073.9) (3.4) (887.9) (904.6) (16.7) Trade and other payables Provision for other liabilities and charges Current liabilities Interest-bearing loans and borrowings Trade and other payables Derivative ﬁnancial instruments (8.0) (1.3) (19.4) (28.0) (4.4) (8.0) (1.3) (19.4) (28.0) (4.4) – – – – – (8.0) (3.9) (26.4) (21.8) – (8.0) (1.0) (26.4) (21.8) – – 2.9 – – – Total net ﬁnancial liabilities (1,065.8) (1,069.2) (3.4) (868.9) (881.2) (12.3) The fair value adjustment in 2006 relates to the group’s ﬁxed rate loan with Lloyds TSB bank which is stated at amortised cost in the consolidated balance sheet. There is no requirement under IAS 39 to revalue this loan to fair value. 24 Non-current liabilities Included within non-current liabilites are the following amounts: i) Trade and other payables of £8.0m (2005: £8.0m) – This represents deferred consideration for the purchase of land at West Waterlooville. It is payable in two equal instalments in April 2009 and April 2013 respectively. Provisions for other liabilities and charges £1.3m (2005: £3.9m). This comprises the following: At 30 September 2005 Effect of adoption of IAS 32 and IAS 39 (see note 18) At 1 October 2005 Released to income statement Provision charged to income statement At 30 September 2006 Retirement liabilities £m Provision for fair value of ﬁnancial instruments £m 1.0 – 1.0 (0.1) 0.4 1.3 2.9 (2.9) – – – – Total £m 3.9 (2.9) 1.0 (0.1) 0.4 1.3 107 24 Non-current liabilities continued The provision for retirement liabilities reﬂects an estimate of the amount required to meet future contracted salary commitments to former employees. The provision for fair value of ﬁnancial instruments as at 30 September 2005 was taken to retained earnings on implementation of IAS 39 on 1 October 2005 as part of the overall adjustment made to reﬂect the fair value of derivative ﬁnancial instruments on implementation of IFRS. 25 Pension costs Deﬁned contribution scheme The group operates a deﬁned contribution scheme for its employees. The assets of the scheme are held separately from those of the group in independently administered funds. Pension arrangements for directors are disclosed in the report of the remuneration committee and the directors’ remuneration report on page 56. The pension cost charge in these ﬁnancial statements represents contributions payable by the group. This is shown in note 8. Deﬁned beneﬁt scheme In addition to the above, the group also operates a deﬁned beneﬁt scheme, the BPT Retirement Beneﬁts Scheme. The assets of the scheme are held separately in funds administered by trustees and are invested with an independent investment manager. Costs and funding are assessed with the advice of an independent qualiﬁed actuary using the attained age method. Actuarial valuations are carried out every three years and the last full actuarial valuation was undertaken as at 1 July 2004. This scheme was operated by BPT Limited which became a subsidiary of Grainger Trust plc in 2003. The actuarial valuation as at 1 July 2004 was based on the main actuarial assumptions of an investment return of 6.5% per annum, salary increases of 5% per annum and inﬂation-linked increases to pensions in deferment of 2.5% per annum, the scheme assets were valued at £10.5m and scheme liabilities at £13.3m, a funding level of 79%. The actuary has recommended an employer contribution rate of 28.5% in order to eliminate the deﬁcit over the expected working lifetimes of the members. The actuary also undertook a Minimum Funding Requirement valuation as at 1 July 2004 in accordance with the Pensions Act 1995. The value of assets of the scheme was determined at 101% of the liabilities of the scheme. The scheme was closed to new members and to employee contributions in 2003. Accordingly, there is no current service cost for the scheme. The IAS 19 calculations for disclosure purposes have been based upon the 1 July 2004 actuarial valuation but have been updated to 30 September 2006 by a qualiﬁed independent actuary. 108 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 25 Pension costs continued Pension cost recognised in the income statement Interest on pension scheme liabilities Expected return on pension scheme assets The net pension cost shown above has been included within interest expense (see note 10). Change in the present value of deﬁned beneﬁt obligation in the year Present value of opening deﬁned beneﬁt obligation Interest on pension scheme liabilities Actuarial loss Beneﬁts paid Present value of closing deﬁned beneﬁt obligation Change in the present value of the scheme assets in the year Opening fair value of scheme assets Expected return on scheme assets Employer contributions Actuarial gain Beneﬁts paid Closing fair value of scheme assets Scheme deﬁcit since the acquisition of BPT Limited Total market value of assets Present value of scheme liabilities Scheme deﬁcit at 30 September 2006 £m 13.5 (18.1) (4.6) 2005 £m 12.1 (17.4) (5.3) 2006 £m 0.9 (0.7) 0.2 2006 £m 17.4 0.9 – (0.2) 18.1 2006 £m 12.1 0.7 0.3 0.6 (0.2) 13.5 2004 £m 10.7 (15.3) (4.6) 2005 £m 0.8 (0.6) 0.2 2005 £m 15.3 0.8 1.5 (0.2) 17.4 2005 £m 10.7 0.6 0.2 0.8 (0.2) 12.1 2003 £m 10.5 (14.2) (3.7) The scheme deﬁcit of £4.6m, net of deferred tax, was taken into the opening IFRS balance sheet as at 1 October 2004. 25 Pension costs continued Actuarial gain/(loss) recognised in the statement of recognised income and expense Actual return less expected return on assets Experience gain on liabilities Loss on change of assumptions Total actuarial gain/(loss) before tax Market value of scheme assets and expected rates of return 109 2006 £m 0.6 – – 0.6 2005 £m 0.8 0.9 (2.4) (0.7) Equities Bonds Properties Other Total value of assets 30 September 2006 30 September 2005 Long term expected rate of return % 7.0 4.4 7.0 4.5 Market value £m 5.5 7.2 0.4 0.4 13.5 Long term expected rate of return % 6.8 4.7 6.8 – Market value £m 4.9 6.9 0.3 – 12.1 The assets are held with AXA Sun Life in a managed fund. As the above table shows, the assets of the scheme are primarily held within equities and bonds. The equity return of 7% in 2006 is based on an equity risk premium of 2.6% above the 15-year ﬁxed rate on gilts of 4.4%. The directors consider this to be at the mid-point of the acceptable range. The directors have used the 15-year ﬁxed rate on gilts as the expected rate of return on bonds. Principal actuarial assumptions under IAS 19 Discount rate Inﬂation Rate of increase in salaries Rate of increase in pensions in payment Mortality tables for pensioners and non-pensioners 2006 2005 5.10% pa 3.00% pa 4.50% pa 5.00% pa 5.00% pa 2.90% pa 3.90% pa 5.00% pa PXA92c2025 PXA92c2025 The mortality table referred to above, PXA92c2025, is based on the latest commonly used study of pensioners carried out over the period 1991 to 1994 and includes updates for reductions in mortality levels up to 2025. 110 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 25 Pension costs continued History of experience gains and losses since the acquisition of BPT Limited Difference between the expected and the actual return on scheme assets – Amount – Percentage of scheme assets Experience gains and losses on scheme liabilities – Amount – Percentage of present value of liabilities 2006 2005 2004 2003 £0.6m 4.2% – – £0.8m 6.6% £0.9m 5.2% (£0.9m) (8.4%) (£0.5m) (3.3%) (£0.3m) (2.9%) £0.1m 0.1% In the above tables, where relevant, 2005 and 2006 ﬁgures above are stated under IAS 19. 2003 and 2004 ﬁgures are stated under FRS 17. The actual returns on scheme assets in 2006 was £1.3m (2005:£1.4m). The cumulative amount included within equity is £(0.1)m (2005: £(0.5)m). Payments to the scheme in 2007 The group expects to continue its payments to the scheme in 2007 based on the recommendations of the actuary. Contributions in the next 12-months are estimated at £300,000. 26 Deferred tax liabilities The movement in the provision for deferred taxation is as follows: At 1 October 2004 Recognised in the income statement Acquisition of subsidiary At 30 September 2005 Effect of adoption of IAS 39 on 1 October 2005 At 1 October 2005 Recognised in the income statement Recognised in equity: Actuarial surplus on BPT pension scheme Fair value movement in cash ﬂow hedges At 30 September 2006 Total £m 101.5 (8.0) 9.3 102.8 (2.3) 100.5 (9.4) 0.2 (0.2) 91.1 In addition to the above, the group has a contingent tax liability on the difference between the carrying value of trading properties as recorded in the balance sheet and their market value. This contingent tax, which is not provided in the accounts, amounts to £152.6m (2005: £108.0m). 27 Trade and other payables Deposits received Trade payables Other taxation and social security Accruals and deferred income 28 Share capital Authorised: 160,000,000 (2005: 160,000,000) ordinary shares of 5p each Allotted, called-up and fully paid: 129,925,482 (2005: 129,374,394) ordinary shares of 5p each 111 2006 £m 0.8 8.4 1.5 12.6 23.3 2006 £m 8.0 6.5 2005 £m 1.1 6.7 1.5 12.5 21.8 2005 £m 8.0 6.5 As at 30 September 2006, share capital included 584,673 (2005: 1,164,380) shares held by the Grainger Trust Employee Trustee Company Limited. These shares had a nominal value of £29,234 (2005: £58,219). Movements in issued share capital during the year were as follows: At 1 October 2004 Issued on purchase of City North Group plc Options exercised under the executive share option scheme Options exercised under SAYE schemes At 30 September 2005 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes At 30 September 2006 Number 124,055,020 5,189,893 89,925 39,556 Nominal value £’000 6,203 259 4 2 129,374,394 6,468 43,795 454,359 52,934 2 23 3 129,925,482 6,496 112 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 28 Share capital continued Share options Certain senior executives hold options to subscribe for shares in the company under executive share option and long term incentive schemes. In addition, the company operates a SAYE share option scheme available to all employees. The number of shares subject to options as at 30 September 2006, the periods in which they were granted and the periods in which they may be exercised are given below: Year of grant Executive share option scheme 1996 1997 Long Term Incentive Scheme (LTIS) 2003 2004 2005 2006 SAYE share options 2001 2002 2003 2004 2005 2006 Total share options Exercise price (pence) Exercise period 2006 number 2005 number 68.5 53.4 1999-06 2000-07 191.8 326.4 381.8 528.0 138.0 163.6 186.5 271.8 334.0 413.0 2006-13 2007-14 2008-15 2009-16 2004-07 2005-08 2006-09 2007-10 2008-11 2009-12 – 63,645 63,645 115,739 471,365 495,689 420,322 43,795 100,720 144,515 787,410 564,225 563,955 – 1,503,115 1,915,590 12,225 56,630 58,455 94,490 46,791 71,153 26,895 66,745 95,425 102,850 47,358 – 339,744 339,273 1,906,504 2,399,378 113 Closing position – 63,645 63,645 115,739 471,365 495,689 420,322 28 Share capital continued The movement on the share option schemes during the year was as follows: Number of ordinary shares Executive scheme 1996 1997 LTIS 2003 2004 2005 2006 SAYE scheme 2001 2002 2003 2004 2005 2006 Exercised Granted Lapsed Opening position 43,795 100,720 144,515 787,410 564,225 563,955 – (43,795) (37,075) (80,870) (408,215) – (9,069) – 1,915,590 (417,284) 26,895 66,745 95,425 102,850 47,358 – (14,670) – (36,970) (1,294) – – 339,273 (52,934) – – – – – – 463,882 463,882 – – – – – 71,153 71,153 – – – (263,456) (92,860) (59,197) (43,560) (459,073) 1,503,115 – (10,115) – (7,066) (567) – 12,225 56,630 58,455 94,490 46,791 71,153 (17,748) 339,744 Further details of the above option schemes are provided in the report of the remuneration committee and directors’ remuneration report on page 57. 114 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 29 Consolidated statement of changes in equity Balance as at 30 September 2004 Retained proﬁt for the year Actuarial loss on BPT pension scheme net of tax Premium on shares issued to acquire City North Group plc Issue of shares Share-based payments charge Dividends paid Balance as at 30 September 2005 Effect of adoption of IAS 32 and 39 on 1 October 2005 Retained proﬁt for the year Actuarial gain on BPT pension scheme net of tax Changes in fair value of cash ﬂow hedges net of tax Net exchange adjustment offset in reserves Purchase of own shares Issue of shares to satisfy employee share options Share-based payments charge Dividends paid Minority interest on business combination Balance as at 30 September 2006 Share capital £m 6.2 Share premium £m 21.5 – – – 0.3 – – 6.5 – 6.5 – – – – – – – – – 6.5 – – – 0.1 – – 21.6 – 21.6 – – – – – 1.0 – – – 22.6 Merger reserve £m – – – 20.1 – – – 20.1 – 20.1 – – – – – – – – – 20.1 115 Capital redemption reserve £m 0.2 – – – – – – 0.2 – 0.2 – – – – – – – – – Cash ﬂow hedge reserve £m – – – – – – – – – – – – (0.8) – – – – – – Retained earnings £m 138.5 31.1 (0.5) – – 0.5 (6.9) 162.7 (5.4) 157.3 50.5 0.4 – 0.1 (0.5) – 0.9 (6.9) – Total £m 166.4 31.1 (0.5) 20.1 0.4 0.5 (6.9) 211.1 (5.4) 205.7 50.5 0.4 (0.8) 0.1 (0.5) 1.0 0.9 (6.9) – 0.2 (0.8) 201.8 250.4 Minority interest £m – – – – – – – – – – – – – – – – – – 0.2 0.2 Total equity £m 166.4 31.1 (0.5) 20.1 0.4 0.5 (6.9) 211.1 (5.4) 205.7 50.5 0.4 (0.8) 0.1 (0.5) 1.0 0.9 (6.9) 0.2 250.6 116 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 29 Consolidated statement of changes in equity continued The retained earnings reserve comprises various elements. Those elements and the movements in each are set out below: Balance as at 30 September 2004 Retained proﬁt for the year Actuarial loss on BPT pension scheme net of tax Share-based payments charge Dividends paid Balance as at 30 September 2005 Effect of adoption of IAS 32 and 39 on 1 October 2005 Retained proﬁt for the year Actuarial gain on BPT pension scheme net of tax Net exchange adjustment offset in reserves Purchase of own shares Award of shares from own shares Share-based payments charge Dividends paid Balance as at 30 September 2006 Share-based payment reserve £m Investment in own share reserve £m Translation reserve £m 0.5 – – 0.5 – 1.0 – 1.0 – – – – (1.4) 0.9 – 0.5 (2.3) – – – – (2.3) – (2.3) – – – (0.5) 1.4 – – (1.4) – – – – – – – – – – 0.1 – – – – 0.1 Retained earnings £m 140.3 31.1 (0.5) – (6.9) Retained earnings reserve total £m 138.5 31.1 (0.5) 0.5 (6.9) 164.0 162.7 (5.4) 158.6 50.5 0.4 – – – – (6.9) 202.6 (5.4) 157.3 50.5 0.4 0.1 (0.5) – 0.9 (6.9) 201.8 Merger reserve – the merger reserve arose when the company issued shares in partial consideration for the acquisition of City North Group plc. The issue satisﬁed the provisions of section 131 of the Companies Act 1985 and the premium relating to the shares issued was credited to a merger reserve. Cash ﬂow hedge reserve – the fair value movements on those derivative ﬁnancial instruments qualifying for hedge accounting under IAS 39 are taken to this reserve. Share-based payments reserve – this reserve comprises the credit entry relating to the share-based payments charge made in the income statement less the average cost of own shares issued to employees as part of the LTIS. Investment in own shares reserve – the Grainger Trust Employee Trustee Company Limited acquired 100,000 shares in Grainger Trust plc in the year at a cost of £504,000. The shares are held to enable the company to meet its obligations under the LTIS. A total of 679,707 shares were issued to employees during the year. At the year end 584,673 shares were held at an average total cost of £1,438,375. The shares had a market value at the year end of £3,671,746. 117 29 Consolidated statement of changes in equity continued Translation reserve – exchange differences arising from the translation of the net investment in foreign operations are taken to this reserve. The movement in minority interest is as follows: At 1 October 2005 Arising on acquisition of CCZ a.s. Minority interest in CCZ a.s. loss for the year At 30 September 2006 30 Share-based payments 2006 £m – 0.2 – 0.2 The group operates an equity-settled, share-based compensation plan comprising awards under a Long term Incentive Scheme (LTIS) and a Save As You Earn (SAYE) scheme. Awards under the LTIS are fair valued using a Monte Carlo simulation model and under the SAYE scheme using a Black Scholes model. Awards under the LTIS are subject to market performance conditions under which the Total Shareholder Return (TSR) of the company is measured against a peer group. There is no vesting below median performance. If the company TSR equals the median of the peer group, 40% will vest. If the group’s TSR is equal to or greater than the upper quartile TSR of the peer group, 100% will vest. At points between the median and upper quartile of the peer group there is pro-rata vesting between 40% and 100%. The Monte Carlo simulation model takes into account these market based performance conditions which effectively estimate the number of shares expected to vest. No subsequent adjustment is made to the fair value charge for shares that do not vest in the event that these performance conditions are not met. Adjustments are, however, made for leavers and once adjusted for leavers the total expense for each equity-settled award is spread over the vesting period. Options under the SAYE scheme are fair valued at the date of grant and are not adjusted thereafter. Adjustment is made, however, for assumptions about leavers. The tables below summarise the main assumptions used to fair value the awards made under the above schemes. For the LTIS, the number of shares or options is shown for both the maximum number at award and the latest number as at 30 September 2006 after adjustment for leavers. This same information is given for the SAYE scheme. 118 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 30 Share-based payments continued LTIS Share awards: Award date Number on grant Number adjusted for leavers Exercise price (£) Vesting period from date of grant (years) Exercise period after vesting (years) Share price at grant (£) Expected risk-free rate (%) Expected dividend yield (%) Expected volatility (%) Fair value per share (£) 24-Jan-03 12-Jan-04 11-Jan-05 12-Jan-06 338,995 303,393 250,165 194,099 225,575 194,997 185,553 185,553 – 3 7 1.960 3.869 1.7 21.90 0.9906 – 3 7 3.360 4.370 1.15 22.68 – 3 7 3.786 4.453 1.14 23.31 1.8022 1.7504 – 3 7 5.350 4.217 0.96 20.18 3.226 Translation reserve – exchange differences arising from the translation of the net investment in foreign operations are taken to this reserve. The movement in minority interest is as follows: At 1 October 2005 Arising on acquisition of CCZ a.s. Minority interest in CCZ a.s. loss for the year At 30 September 2006 LTIS Options: Award date Number on grant Number adjusted for leavers Exercise price (£) Vesting period from date of grant (years) Exercise period after vesting (years) Share price at grant (£) Expected risk-free rate (%) Expected dividend yield (%) Expected volatility (%) Fair value per share (£) 2006 – 0.2 – 0.2 24-Jan-03 12-Jan-04 11-Jan-05 12-Jan-06 847,530 758,518 1.918 3 7 1.960 4.165 2.34 21.90 0.3052 625,495 485,301 3.264 3 7 3.360 4.589 1.53 22.68 0.6796 563,955 495,508 3.818 3 7 3.786 4.493 1.56 23.31 0.5876 463,882 463,882 5.280 3 7 5.350 4.260 0.96 20.18 1.178 119 30 Share-based payments continued SAYE Award date Number on grant Number adjusted for leavers Exercise price (£) Vesting period from date of grant (years) Expected exercise date Share price at grant (£) Expected risk-free rate (%) Expected dividend yield (%) Expected volatility (%) Fair value per share (£) 7-Aug-03 3-year scheme 7-Aug-03 5-year scheme 5-Aug-04 3-year scheme 5-Aug-04 5-year scheme 1-Aug-05 3-year scheme 1-Aug-05 5-year scheme 37,660 37,365 1.865 3 58,060 52,610 1.865 5 75,870 67,280 2.718 3 32,105 29,700 2.718 5 32,718 32,718 3.340 3 14,640 14,640 3.340 5 1-Dec-06 1-Dec-08 1-Dec-07 1-Dec-09 1-Dec-08 1-Dec-10 2.546 4.100 1.580 23.43 2.546 4.280 1.740 21.24 0.8674 0.9228 3.498 5.010 1.280 23.97 1.18 3.498 5.040 1.400 22.71 4.24 4.267 1.310 4.24 4.301 1.310 22.340 21.170 1.3142 1.32 1.48 SAYE options awarded in August 2006 under the 2006 scheme have not been fair valued in the accounts to 30 September 2006 as the cost to be charged to the income statement is very small in the context of materiality to the group results. The cost of calculating the fair value exceeded the beneﬁt to be obtained. The 2006 SAYE awards will be valued early in 2007 along with the 2007 LTIS awards. Movements in options and options exercisable as at 30 September 2006 are detailed in note 28. 120 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 31 List of principal subsidiaries The directors consider that providing details of all subsidiaries, joint ventures and associates as at 30 September 2006 would result in disclosure of excessive length. The following information relates to those subsidiary undertakings whose results or ﬁnancial position, in the opinion of the directors, principally affected the ﬁgures of the group. A full list will be appended to the next Annual Return. Name of undertaking Northumberland and Durham Property Trust Limited GIP Limited Grainger Limited Grainger Residential Management Limited Grainger Asset Management Limited City North Group Limited Derwent Developments Limited Grainger Homes Limited West Waterlooville Developments Limited Grainger Rural Limited BPT (Bradford Property Trust) Limited BPT (Assured Homes) Limited BPT (Residential Investments) Limited Grainger (Octavia Hill) Limited Grainger Finance Company Limited Bromley Property Investments Limited Home Properties Limited Bridgewater Tenancies Limited Bridgewater Equity Release Limited Homesafe Equity Release LP Hamsard 2518 Limited Grainger Residential Property Unit Trust Grainger Recklinghausen Portfolio 1 Sarl & Co KG Grainger Recklinghausen Portfolio 2 Sarl & Co KG Grainger Berlin Portfolio 1 Sarl & Co KG Grainger Stuttgart Portfolio 1 Sarl & Co KG Grainger Stuttgart Portfolio 2 Sarl & Co KG Grainger Luxembourg Financing (No 1) Sarl Grainger Luxembourg Financing (No 2) Sarl Grainger Luxembourg Financing (No 3) Sarl Grainger Luxembourg Germany Holdings Sarl All subsidiaries are consolidated in the group accounts. Proportion of nominal value of ordinary issued shares held by: Group % Company % Incorporated Activity 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 100 England & Wales England & Wales Property Trading Property Trading & Investment 100 100 100 100 England & Wales Property Management England & Wales Property Management England & Wales Asset Management England & Wales Property Investment England & Wales England & Wales England & Wales England & Wales England & Wales Land Development House-building Land Development Property Trading Property Trading England & Wales Property Investment England & Wales Property Investment England & Wales Investment holding 100 England & Wales England & Wales England & Wales England & Wales Finance Company Finance Company Property Trading Property Trading England & Wales Property Investment England & Wales Property Investment England & Wales Holding Company Jersey Property Investment Germany Germany Germany Germany Germany Luxembourg Luxembourg Luxembourg Luxembourg Property Investment Property Investment Property Investment Property Investment Property Investment Finance Company Finance Company Finance Company Holding Company 121 32 Related party transactions During the year, the group held a 50% interest in Grainger Geninvest LLP and Grainger Geninvest No. 2 (2006) LLP. The group provides a number of services to both partnerships and receives an asset adviser fee of 0.25% p.a. of the latest property valuation, a sales fee of 0.5% of gross sales proceeds from the sale of properties, a commercial management fee of 7% of gross commercial rents received and a treasury fee of £30,000 p.a. These fees are calculated on an arm’s length basis. In addition to the above, the group has provided loans to both partnerships totalling £57.7m. These loans are shown within investments in joint ventures in note 17 and were provided by way of ﬁxed interest 8.5% p.a. and 11% p.a. loan notes and a mezzanine loan bearing interest at LIBOR plus 4%. Interest receivable on the loan notes in the year amounted to £2.7m and is included in interest receivable from associates and joint ventures shown in note 10. The group also has a 331⁄3% interest in Regen (NT) LLP and receives a management fee for the provision of accountancy and other services. As above, the fees are calculated on an arm’s length basis. On 1 September 2006, the group acquired a portfolio of properties at a cost of £13.1m from the Duke of Northumberland. The Duke of Northumberland is a joint venture partner in Regen (NT) LLP with an interest of 331⁄3%. During the year, the group disposed of its 50% share in the Prescot Street Partnership to its joint venture partner for a consideration of £5.5m. The group has a 43.2% interest in OÜ Robbins, a company incorporated in Estonia. The group has provided a loan to OÜ Robbins amounting to £2.1m by way of 9% p.a. ﬁxed rate unsecured loan notes. Interest receivable on the loan notes in the year to 30 September 2006 amounted to £0.1m and is included in interest receivable from associates and joint ventures shown in note 10. During the year, the group disposed of ﬁve properties in Crouch End, London to Clocktower Asset Management Limited, a company which is 50% owned by Clocktower Properties Limited which in turn is owned 100% by Mr Michael Sherley- Dale. Mr Sherley-Dale although never a director of Grainger Trust plc, was a director of City North Group plc at the time of its acquisition by Grainger in April 2005. Following Grainger’s decision to sell the properties, an independent agent was appointed to market the properties. A signiﬁcant number of offers were received by the agent but Clocktower’s was the highest bid. On 1 December 2005, the bulk of the group’s market-rented properties with a value of £197m were transferred to a Jersey Property Unit Trust (JPUT). The group owned all of the units in the JPUT as at 30 September 2006. Details of the key management compensation are provided in note 8. 33 Capital commitments As at 30 September 2006, the group had capital commitments of £0.2m (2005: Nil). 122 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 34 Operating lease arrangements Future minimum lease payments payable by the group under non-cancellable operating leases are as follows: Operating leases which expire: No later than one year Later than one year and no later than ﬁve years Later than ﬁve years 2006 £m 595 750 6,949 8,294 2005 £m 586 512 6,937 8,035 35 Contingent liabilities The properties in certain subsidiary companies forming a ‘guarantee group’ provide the security for the group’s MOF facility (see note 23). The properties in certain of the group’s German subsidiaries provide security for the non-recourse ﬁnance raised in those subsidiary undertakings. In addition, the group has an obligation, under the sale and purchase agreement for the land at West Waterlooville, to pay further consideration should the site value exceed certain pre-agreed amounts. It is not possible to determine the amount or timing of any such future payments due to the long term nature of the site’s development and the associated uncertainties with respect to planning applications. However, any future payments will not fall due until at least 2015 and will be spread over a number of years. 36 Post balance sheet events The group acquired a 308-unit residential portfolio in Munich for €32m at the end of October 2006 with anticipated completion in early 2007. In addition, in November, the group and an external third party company, Development Securities, have jointly acquired a 10 acre site at Curzon Park in Birmingham for £33.5m. On 1 December 2006, the group made a conditional offer to the shareholders of The Capital Appreciation Trust (CAT) which contains a portfolio of some 912 retirement properties. The offer price values CAT at £71.6m. On 21 November 2006, the group sold 38% of the shares in an independently managed private Jersey exempt company which, through its subsidiaries, invested in the JPUT. This was after having raised third party equity commitments of £56m. On 11 October, a €150m Euro credit facility was completed to fund further acquisitions in Germany and on 13 December 2006 the group reﬁnanced its main MOF lending agreement retaining a four tranche structure and £1.3bn of ﬁnancing but with lower margins and an average extension of two years to debt maturity. 37 Acquisition of subsidiaries The group acquired three subsidiaries during the year for a total consideration of £3.4m. Just prior to the year end, 100% of Suburban Homes Limited was acquired for £2.1m. The balance represents the acquisition of CCZ a.s., a company registered in the Czech Republic, in which the group owns 81.6% of the voting rights and the acquisition of the remaining shares in SIP Home Limited. 123 38 Reconciliation of UK GAAP to IFRS Explanation of transition to IFRS As stated in Note 1, these are the group’s ﬁrst consolidated ﬁnancial statements prepared in accordance with IFRS. The accounting policies set out in Note 1 have been applied in preparing the ﬁnancial statements for the year ended 30 September 2006, the comparative information presented in these ﬁnancial statements for the year ended 30 September 2005 and in the preparation of the opening balance sheet on 1 October 2004 (the group’s date of IFRS transition). In preparing the opening IFRS balance sheet, the group adjusted amounts reported previously in its ﬁnancial statements under UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected the group’s ﬁnancial position and ﬁnancial performance is set out in the accompanying reconciliations and notes. Reconciliation of equity reported under UK GAAP to equity under IFRS Equity shareholders’ funds under UK GAAP IFRS adjustments Share-based payments Negative goodwill reversed Goodwill/deferred tax adjustment relating to City North Group plc Dividend exclusion Deferred taxation Pension deﬁcit Equity shareholders’ funds under IFRS 30 September 2005 £m note 1 October 2004 £m 223.6 177.9 a b b c d e 1.6 81.6 (2.5) 4.4 (96.8) (0.8) 211.1 1.6 85.0 – 4.7 (102.6) (0.2) 166.4 Reconciliation of proﬁt for the ﬁnancial year reported under UK GAAP to proﬁt under IFRS Proﬁt for the year under UK GAAP IFRS adjustments Share-based payments Negative goodwill Taxation Investment property revaluations notes Year ended 30 September 2005 £m note a b d f 26.5 (0.5) (5.9) 5.6 5.4 31.1 a Under IFRS 2 the group operate an equity-settled, share-based compensation plan comprising awards under a Long Term Incentive Scheme (LTIS) and a Save As You Earn Scheme (SAYE). The fair value of the employee services received in exchange for the grant of shares and options is recognised as an employee expense with a corresponding increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally entitled to the shares and options. Awards under the LTIS are fair valued using a Monte Carlo simulation model and under SAYE using a Black Scholes model. The charge in the year ended 30 September 2005 was £0.5m. 124 Grainger Trust plc Annual report and accounts 2006 Notes to the ﬁnancial statements continued 38 Reconciliation of UK GAAP to IFRS continued As there is a corresponding credit to equity, there is no impact on group net assets in respect of the IFRS 2 adjustment. The adjustment in the reconciliation of equity of £1.6m in both years relates to the reversal of provisions made under UK GAAP, UITF 17. b Negative goodwill of £85.0m arising on acquisitions prior to 1 October 2004 has been credited to opening retained earnings at that date. Subsequent releases of negative goodwill to the proﬁt and loss account under UK GAAP have been reversed. The reversal amounted to £5.9m in the year ended 30 September 2005. The acquisition of City North Group plc on 15 April 2005 has been re-stated to account for the deferred tax payable on the difference between the fair value of the properties acquired and the tax base cost at entity level. This provision is required under IFRS whereas no provision was allowed under FRS 19. In the balance sheet at 30 September 2005 it results in the negative goodwill of £2.5m calculated under UK GAAP becoming positive goodwill of £5.8m under IFRS with a corresponding increase of £8.3m in deferred tax liabilities. c Proposed ﬁnal dividends at both 1 October 2004 and 30 September 2005 respectively reﬂected in the UK GAAP balance sheets at these dates have been excluded from current liabilities in the IFRS balance sheet reﬂecting the fact that neither dividend was a liability of the group under IFRS at those dates. The proposed ﬁnal dividend for the years ended on these dates is reﬂected in the statement of changes in equity in the period in which those dividends were formally approved at an Annual General Meeting. d A provision for deferred taxation of £102.6m has been made in the balance sheet at 1 October 2004 with a corresponding charge made to opening retained earnings. This provision relates primarily to the tax that may be payable on the difference ascribed to trading stock properties on acquisition compared to the tax base cost at entity level. This tax, which relates mainly to the BPT plc acquisition, could not be provided under FRS 19. In addition, the adjustment includes provision for tax that may be payable arising from the revaluation of the group’s investment properties and based upon the expected manner of realisation either through continued use or sale. The future impact of making these provisions in the balance sheet under IFRS is that the group’s effective tax rate, which has been historically high at around 40%, will be much closer to the actual current rate of tax of 30%. This is because when properties are sold, the majority of the tax payable as a result of the sale has already been provided for under IFRS whereas under UK GAAP the full tax payable was charged to the proﬁt and loss account in the year of sale. This has resulted in a reduction in the tax charge of £7.2m in the year ended 30 September 2005. After providing for the deferred tax of £1.6m on the revaluation gain (see (f) below) the overall reduction in the tax charge in the year ended 30 September 2005 was £5.6m. e The deﬁcit of £4.6m and the related deferred tax asset of £1.4m on the BPT Limited deﬁned beneﬁt scheme has been reﬂected in the opening balance sheet as at 1 October 2004 in full. When Grainger acquired BPT Limited it made provision for the pension scheme deﬁcit. As at 1 October 2004 that provision was £4.7m with a related deferred tax asset of £1.7m. Those entries have been reversed in the 1 October 2004 balance sheet. The net effect of the above entries is a charge of £0.2m to retained earnings at 1 October 2004.The deﬁcit had increased to £5.3m at 30 September 2005 and, net of tax, there was a £0.8m charge to retained earnings at 30 September 2005. The group has applied the amendment to IAS 19 with effect from 1 October 2004 allowing it to report all actuarial gains and losses in full in the period in which they were incurred through the statement of recognised income and expense. f The revaluation reserve at 1 October 2004 of £13.9m has been transferred into retained earnings. In the year ended 30 September 2005, the revaluation gain on investment property of £5.4m has been included in proﬁt for the year in the income statement. The deferred tax thereon of £1.6m is part of the adjustment referred to in (d) above. 125 Independent auditors’ report to the members of Grainger Trust plc We have audited the parent company ﬁnancial statements of In addition we report to you if, in our opinion, the Grainger Trust plc for the year ended 30 September 2006 company has not kept proper accounting records, if we which comprise the Company balance sheet and the related have not received all the information and explanations notes. These parent company ﬁnancial statements have we require for our audit, or if information speciﬁed by law been prepared under the accounting policies set out therein. regarding directors’ remuneration and other transactions We have also audited the information in the Report of the Remuneration Committee and Directors’ Remuneration Report that is described as having been audited. is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the We have reported separately on the group ﬁnancial audited parent company ﬁnancial statements. The other statements of Grainger Trust plc for the year ended information comprises only the chairman’s statement, the 30 September 2006. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent company ﬁnancial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities included within the Directors’ report. Our responsibility is to audit the parent company ﬁnancial statements and the part of the Report of the Remuneration Committee and Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the chief executive’s review, the ﬁnancial review, the Corporate governance report, the Directors’ report, the corporate social responsibility report and the unaudited part of the Report of the Remuneration Committee and Directors’ Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company ﬁnancial statements. Our responsibilities do not extend to any other information. The maintenance and integrity of the Grainger Trust plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the ﬁnancial statements since they were initially presented opinion, has been prepared for and only for the company’s on the website. members as a body in accordance with Section 235 of the Legislation in the United Kingdom governing the preparation Companies Act 1985 and for no other purpose. We do and dissemination of ﬁnancial statements may differ from not, in giving this opinion, accept or assume responsibility legislation in other jurisdictions. for any other purpose or to any other person to whom this Basis of audit opinion report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the We report to you our opinion as to whether the parent Auditing Practices Board. An audit includes examination, company ﬁnancial statements give a true and fair view and on a test basis, of evidence relevant to the amounts and whether the parent company ﬁnancial statements and the disclosures in the parent company ﬁnancial statements part of the Report of the Remuneration Committee and and the part of the Report of the Remuneration Directors’ Remuneration Report to be audited have been Committee and Directors’ Remuneration Report to be properly prepared in accordance with the Companies Act audited. It also includes an assessment of the signiﬁcant 1985. We also report to you whether in our opinion the estimates and judgments made by the directors in the information given in the Directors’ report is consistent with preparation of the parent company ﬁnancial statements, the parent company ﬁnancial statements. and of whether the accounting policies are appropriate to the company’s circumstances, consistently applied and adequately disclosed. 126 Grainger Trust plc Annual report and accounts 2006 Independent auditors’ report to the members of Grainger Trust plc continued We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the parent company ﬁnancial statements and the part of the Report of the Remuneration Committee and Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company ﬁnancial statements and the part of the Report of the Remuneration Committee and Directors’ Remuneration Report to be audited. Opinion In our opinion: • the parent company ﬁnancial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company’s affairs as at 30 September 2006; • the parent company ﬁnancial statements and the part of the Report of the Remuneration Committee and Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors’ report is consistent with the parent company ﬁnancial statements. PricewaterhouseCoopers LLP Chartered accountants and registered auditors Newcastle upon Tyne 22 December 2006 Company balance sheet At 30 September 2006 Tangible ﬁxed assets Investments Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Deferred tax liabilities Net assets Called up equity share capital Share premium account Capital redemption reserve Proﬁt and loss account Investment in own shares reserve Equity shareholders’ funds 127 Notes 2 3 4 5 6 7 8 8 8 8 2006 £m 0.5 144.5 145.0 164.7 0.7 165.4 (124.7) 40.7 185.7 (1.0) 184.7 6.5 22.6 0.2 156.8 (1.4) 184.7 2005 restated £m 0.7 140.9 141.6 52.5 1.7 54.2 (3.2) 51.0 192.6 – 192.6 6.5 21.6 0.2 166.6 (2.3) 192.6 The balance sheet is restated following adoption of FRS 21, ‘Events after the Balance Sheet Date’. The ﬁnancial statements on pages 127 to 132 were approved by the Board of Directors on 22 December 2006 and signed on their behalf by: Rupert J. Dickinson Andrew R. Cunningham Director Director 128 Grainger Trust plc Annual report and accounts 2006 Notes to the company ﬁnancial statements 1 Accounting policies (i) Basis of preparation The ﬁnancial statements have been prepared on a going concern basis in accordance with the historical cost convention, as modiﬁed by the revaluation of certain investments, in accordance with the Companies Act 1985 and applicable UK accounting standards. The Company has taken the exemption allowed under Section 230(4) of the Companies Act 1985 from the requirement to present its own proﬁt and loss account. The loss for the year was £3.5m (2005: proﬁt of £1.5m). On an historic cost basis, the loss for the year would have been £3.9m (2005: a proﬁt of £1.5m). These ﬁnancial statements present information about the company as an individual undertaking and not about its group. In accordance with the exemption in FRS 1, ‘Cash Flow Statements’, the company has not prepared a cash ﬂow statement because one is included in its own consolidated ﬁnancial statements. The company has taken advantage of the exemption in FRS 8, ‘Related Party Transactions’, from the requirement to disclose such transactions on the grounds that it has presented its own consolidated ﬁnancial statements. (ii) Adoption of new standards The company ﬁnancial statements have been prepared under UK GAAP, rather than under IFRS which has been adopted for group reporting. UK GAAP is converging towards IFRS and a number of new Financial Reporting Standards became applicable for the ﬁrst time in the year. In these ﬁnancial statements the following new standards have been adopted for the ﬁrst time: – FRS 20 ‘Share-Based Payments’ – FRS 21 ‘Events after the Balance Sheet Date’ – FRS 23 ‘The Effects of Changes in Foreign Exchange Rates’ – FRS 25 ‘Financial Instruments: Disclosure and Presentation’ – FRS 26 ‘Financial Instruments: Measurement’. The corresponding amounts in these ﬁnancial statements are, other than those covered by the exemption permitted by FRS 25 and FRS 26, restated in accordance with the new Standards. FRS 25 and FRS 26 permit the corresponding amounts not to be restated and the company has adopted this approach. The ﬁxed assets investment policy set out in note (iv) below provides further details of the effect of adopting FRS 26 on 1 October 2005. FRS 21 requires that ﬁnal dividends payable are recognised only in the period in which they are approved in the Annual General Meeting and therefore become a liability. Interim dividends are recognised in the period in which they are paid. This accounting treatment has superseded SSAP 17, ‘Accounting for Post Balance Sheet Events’ which required dividends to be accrued for when proposed. The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the company’s ﬁnancial statements. 129 1 Accounting policies continued (iii) Tangible ﬁxed assets These assets comprise ofﬁce ﬁxtures, ﬁttings and equipment and are carried at cost less accumulated depreciation and impairment. Depreciation is provided on a straight-line basis over the estimated useful life of the assets. (iv) Investments In 2005, investments are shown at cost less any provision for impairment. For 2006, investments in equity instruments that have a quoted market price in an active market or whose fair value can be reliably measured are fair valued under FRS 26. (v) Taxation Corporation tax is provided on taxable proﬁts at the current rate. Deferred tax assets and liabilities arise from timing differences between the recognition of gains and losses in the accounts and their recognition in a tax computation. In accordance with FRS 19 ‘Deferred Tax’, deferred tax is provided in respect of all timing differences that have originated, but not reversed, at the balance sheet date that may give rise to an obligation to pay more or less tax in future. Deferred tax is measured on a non-discounted basis. (vi) Own shares Transactions of The Grainger Trust Employee Trust Company Limited are included in the ﬁnancial statements. In particular, the Trust’s purchases of shares in Grainger Trust plc are debited directly to equity. 2 Tangible ﬁxed assets Cost: At 1 October 2005 Additions Disposals At 30 September 2006 Depreciation: At 1 October 2005 Charge for the year Released on disposals At 30 September 2006 Net book value: At 30 September 2006 At I October 2005 Fixtures, ﬁttings & equipment £m 1.5 – (0.6) 0.9 0.8 0.2 (0.6) 0.4 0.5 0.7 130 Grainger Trust plc Annual report and accounts 2006 Notes to the company ﬁnancial statements continued 3 Fixed asset investments Cost At 1 October 2005 Effect of adoption of FRS 25 and FRS 26 on 1 October 2005 Uplift to fair value Units acquired in the year At 30 September 2006 Investment in Schroder Residential Property Unit Trust £m Investment in subsidiaries £m 125.5 – 125.5 – – 125.5 15.4 2.8 18.2 0.4 0.4 19.0 Total £m 140.9 2.8 143.7 0.4 0.4 144.5 The company has taken advantage of the transitional arrangements not to restate corresponding amounts in accordance with FRS 25 and FRS 26. In the comparative period, all ﬁnancial assets and liabilities were carried at cost, amortised as appropriate, less, in the case of ﬁnancial assets, provision for any permanent diminution in value. Investments in equity instruments that do not have a quoted market price in an active market or whose fair value cannot be reliably measured cannot be fair valued under FRS 26. The investment in the Schroder Residential Property Unit Trust can be reliably measured and, therefore, has been fair valued under FRS 26. A list of the principal subsidiaries of the company is given on page 120. 4 Debtors Amounts owed by group undertakings Other debtors Prepayments and accrued income 5 Creditors: amounts falling due within one year Loan notes Trade creditors Amounts owed to group undertakings Corporation tax payable Other taxation and social security Accruals and deferred income 2006 £m 164.7 – – 164.7 2006 £m 0.8 0.3 118.4 0.8 0.7 3.7 124.7 2005 £m 49.4 0.4 2.7 52.5 2005 £m 1.3 0.4 – 1.0 – 0.5 3.2 6 Deferred tax liabilities On adoption of FRS 26 On revaluation gains in the year 131 2006 £m 0.9 0.1 1.0 2005 £m – – – The deferred tax balance relates to the tax on the unrealised gain relating to the revaluation of the investment in units in the Schroder Residential Property Unit Trust. The adjustment on 1 October 2005 relating to the adoption of FRS 26 is £0.9m and the movement on revaluation gains in the year is £0.1m. 7 Share capital Authorised: 160,000,000 (2005: 160,000,000) ordinary shares of 5p each Allotted, called-up and fully paid: 129,925,482 (2005: 129,374,394) ordinary shares of 5p each 2006 £m 8.0 6.5 2005 £m 8.0 6.5 As at 30 September 2006, share capital included 584,673 (2005: 1,164,380) shares held by the Grainger Trust Employee Trustee Company Limited. These shares had a nominal value of £29,234 (2005: £58,219). Movements in issued share capital during the year were as follows: At 1 October 2004 Issued on purchase of City North Group plc Options exercised under the executive share option scheme Options exercised under SAYE schemes At 30 September 2005 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes At 30 September 2006 Number 124,055,020 5,189,893 89,925 39,556 Nominal value £’000 6,203 259 4 2 129,374,394 6,468 43,795 454,359 52,934 2 23 3 129,925,482 6,496 132 Grainger Trust plc Annual report and accounts 2006 Notes to the company ﬁnancial statements continued 8 Reserves At 1 October 2005 as originally stated Restatement in respect of FRS 21: 2005 ﬁnal dividend Effect of adoption of FRS 20 Balance at 1 October 2005 as restated Effect of adoption of FRS 25 and FRS 26 on 1 October 2005 net of tax Retained loss for the year Issue of shares to satisfy employee share options Award of shares from own shares Purchase of own shares Dividends paid At 30 September 2006 Share premium £m 21.6 – – 21.6 – 21.6 – 1.0 – – – 22.6 Capital redemption reserve £m Investment in own shares reserve £m 0.2 – – 0.2 – 0.2 – – – – – 0.2 – – (2.3) (2.3) – (2.3) – – 1.4 (0.5) – (1.4) Proﬁt and loss account £m 159.9 4.4 2.3 166.6 2.0 168.6 (3.5) – (1.4) – (6.9) 156.8 The Grainger Trust Employee Trust Company Limited acquired 100,000 shares in Grainger Trust plc in the year at a cost of £504,000. The shares are held to enable the company to meet its obligations under the LTIS. A total of 679,707 shares were issued to employees during the year. At the year end, 584,673 shares were held at an average total cost of £1,438,375. The shares had a market value at the year end of £3,671,746. 9 Other Information Dividends – information on dividends paid and declared is given on page 92. Share options – details of share options outstanding and the movements during the year are given on pages 112 and 113 respectively. Contingent liabilities – 2006 £Nil (2005: £Nil). Employees – The Company had no employees in 2006 (2005: Nil). Audit fees – The audit fee for the year was £8,000 (2005: £6,000). 133 Five-year record for the year ended 30 September 2006 Turnover Gross rentals Sales of investment properties Trading proﬁts Proﬁt before taxation** Proﬁt after taxation and minority interests** Dividends Earnings** Dividends per share Fixed assets and stocks on a ﬁnancial statement basis Fixed assets and stocks at market value Share capital and reserves Net asset value on ﬁnancial statements basis Net asset value including ﬁxed assets and stocks at market value* Dividend cover** Gearing Share price at 30 September UK GAAP IFRS 2002 £m 213.8 22.0 7.1 33.7 44.9 23.5 3.5 2003 £m 173.6 21.4 2.1 38.8 48.5 29.3 4.0 2004 £m 217.4 41.0 41.1 72.6 59.6 36.8 5.7 2005 £m 227.6 45.5 13.3 67.2 41.0 31.1 6.9 2006 £m 205.7 52.6 47.8 55.9 71.7 50.5 6.9 Pence per share Pence per share Pence per share Pence per share Pence per share 19.28 2.84 £m 372.8 680.3 119.2 Pence per share 23.96 3.26 £m 907.2 1,305.8 146.7 Pence per share 29.94 4.65 £m 950.8 1,454.5 177.9 Pence per share 24.88 5.11 £m 1,225.4 1,639.3 211.1 Pence per share 39.11 5.62 £m 1,468.3 2,009.9 250.6 Pence per share 96.4 118.4 143.4 159.1 192.8 344.8 6.7x 52% 198.5p 438.8 7.3x 125% 273.0p 546.8 6.5x 103% 367.0p 475.4 4.7x 140% 456.0p 606.3 6.9x 133% 628.0p Share price and per share ﬁgures have been restated for 2002, 2003 and 2004 to take account of the ﬁve for one share split that took place in February 2005. Information relating to 2002, 2003 and 2004 is presented under UK GAAP as directed by IFRS 1. The main adjustments that would be required to comply with IFRS are those set out in note 38 to the consolidated ﬁnancial statements. In addition: * Corporation tax has not been provided on valuation surpluses relating to stocks. ** Excluding exceptional items and including share of joint venture. 134 Grainger Trust plc Annual report and accounts 2006 Shareholders’ information Financial calendar Share dealing service Annual general meeting 28 February 2007 A share dealing service is available to existing shareholders Payment of 2006 ﬁnal dividend 6 March 2007 to buy or sell the company’s shares via Capita Share Announcement of 2007 interim results June 2007 Dealing Services. Online and telephone dealing facilities Payment of 2007 interim dividend July 2007 provide an easy to access and simple to use service. Announcement of 2007 ﬁnal results November 2007 For further information on this service, or to buy or sell Share price During the year ended 30 September 2006, the range of the closing mid-market prices of the company’s ordinary shares, please contact: www.capitadeal.com – online dealing 0870 458 4577 – telephone dealing Please note that the directors of the company are not seeking to encourage shareholders to either buy or sell their shares. Shareholders in any doubt as to what action to take are recommended to seek ﬁnancial advice from an independent ﬁnancial adviser authorised by the Financial Services and Markets Act 2000. Secretary and registered ofﬁce Marie Glanville ACA ACIS, Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Company registration number 125575 shares were: Price at 30 September 2006 Lowest price during the year Highest price during the year 628p 429p 628p Daily information on the company’s share price can be obtained on our website or by telephoning: The Financial Times Cityline Service on 09068 432 750. Capital gains tax The market value of the company’s shares for capital gains tax purposes at 31 March 1982 was 6.08p. Website Website address www.graingertrust.co.uk Shareholders’ enquiries All administrative enquiries relating to shareholdings (for example, notiﬁcation of change of address, loss of share certiﬁcates, dividend payments) should be addressed to the company’s registrar at: Capita IRG plc, Northern House, Woodsome Park, Fenay Bridge, Huddersﬁeld, West Yorkshire, HD8 0LA 135 Advisers Solicitors Dickinson Dees, St Ann’s Wharf,112 Quayside, Newcastle upon Tyne Freshﬁelds, Bruckhaus Deringer, 65 Fleet Street, London Hammonds, 2 Park Lane, Leeds Auditors PricewaterhouseCoopers LLP, 89 Sandyford Road, Newcastle upon Tyne Stockbrokers JPMorgan Cazenove Limited, 20 Moorgate, London Brewin Dolphin Securities, Commercial Union House, 39 Pilgrim Street, Financial public relations Newcastle upon Tyne Registrars and transfer ofﬁce Capita IRG plc, Northern House, Woodsome Park, Huddersﬁeld, West Yorkshire Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London Golley Slater, 8 Mosley Street, Newcastle upon Tyne Bankers Clearing Bank and Facility Agent Barclays Bank PLC Other Bankers Lloyds TSB Bank plc The Royal Bank of Scotland plc Allied Irish Banks plc Bradford & Bingley plc The Governor and Company of the Bank of Scotland National Australia Bank Limited Nationwide Building Society Eurohypo AG 136 Grainger Trust plc Annual report and accounts 2006 Glossary of terms Property Assured periodic tenancy (‘APT’) Market-rented tenancy arising from succession from regulated. Assured shorthold tenancy (‘AST’) Assured tenancy (‘AT’) Investment value (‘IV’) Home reversion Regulated tenancy Tenanted Residential (‘TR’) Tenant has security of tenure. Market-rented tenancy where landlord may obtain possession if appropriate notice served. Market-rented tenancy where tenant has right to renew. Open market value of a property subject to relevant tenancies in place. Rent free tenancy where tenant has right of occupation until possession is forfeited (usually on death). If tenant retains an equity interest in the property this is a partial home reversion. Tenancy regulated under 1977 Rent Act, rent (usually sub market) set by rent ofﬁcer and tenant has security of tenure. Activity covering the acquisition, renting out and subsequent sale (usually on vacancy) of residential units subject to a tenancy agreement. Vacant possession value (‘VP’) Open market value of a property free from any tenancies. Corporate Grainger NAV IFRS NNNAV adjusted for the after tax value of the reversionary surplus in our regulated and equity release portfolios discounted back to present value using our risk adjusted weighted average cost of capital over the expected average period of realisation. Base case and sensitivities exist. International Financial Reporting Standards. Mandatory for UK listed companies for accounting periods ending on or after 31 December 2005. These are Grainger’s ﬁrst ﬁnancial statements prepared under IFRS. 137 Financial Cap Financial instrument which, in return for a fee, guarantees an upper limit for the interest rate on a loan. Contingent tax The amount of tax that would be payable on the difference between Dividend cover Earnings per share (‘EPS’) Hedging IAS 39 Interest cover Loan to value (‘LTV’) Net asset value (‘NAV’) the carrying value of trading properties as recorded in the balance sheet and their market value. Earnings per share divided by dividends per share. Proﬁt attributable to shareholders divided by the weighted average number of shares in issue in the year. The use of ﬁnancial instruments to protect against interest rate movements. Accounting standard containing complex rules for the recognition of the market value of long term debt and ﬁnancial instruments. Proﬁt on ordinary activities before interest and tax divided by net interest payable. Ratio of net debt to the market value of properties. Shareholders’ funds adjusted for the market value of property assets held as stock, and adding back deferred tax. Net net asset value (triple net or ‘NNNAV’) NAV adjusted for contingent tax liabilities which would accrue if assets sold at market value and for the market value of long term debt and derivatives. Swap Financial instrument to protect against interest rate movements. Total Shareholder Return (‘TSR’) Return attributable to shareholders on basis of share price growth with dividends reinvested. Weighted average cost of capital (‘WACC’) The weighted average cost of funding the group’s activities through a combination of shareholders’ funds and debt. 138 Grainger Trust plc Annual report and accounts 2006 Corporate addresses Newcastle Citygate St James’ Boulevard Newcastle upon Tyne NE1 4JE Tel: 0191 261 1819 London 161 Brompton Road London SW3 1QP Tel: 020 7795 4700 Birmingham The Circle Harborne Birmingham B17 9DY Ipswich 42a Barrach Square Martlesham Heath Ipswich Suffolk IP5 3RF www.graingertrust.co.uk Putney 1st Floor SW15H Building Luxembourg 5 Parc d’Activite Syrdall L-5365 Munsbach 73-75 Upper Richmond Road Luxembourg Germany D-68161 Mannheim Germany Willy-Brandt-Platz 3 Malta Suite 1, 17 Sir A Bartolo Street Ta Xbiex Malta Ireland 57 Herbert Lane Dublin 2 Ireland London SW15 2SR Manchester St John’s House Barrington Road Altrincham Cheshire WA14 1TJ Oxford East 24 Central 127 Milton Park Abingdon Oxford OX14 1SE Exeter Lower Ground Floor 4 Barnﬁeld Crescent Southernhay Exeter EX1 1RF 139 140 Grainger Trust plc Annual report and accounts 2006 This report has been produced on paper from a sustainable source by an environmentally accredited printing company. This report has been printed by Empress Litho Ltd who are accredited with the ISO 14001 environmental management system. Produced entirely using vegetable based inks which contain environmentally friendly, replenishable vegetable oils. On average 87% of all waste associated with the production of this report is recycled. The paper is made from at least 40% recovered ﬁbre and 60% virgin ﬁbre from plantation and sustainable forests. This report is recyclable and bio-degradable. Designed and produced by corporateedge.com www.graingertrust.co.uk

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