Grainger Annual Report 2007

Plain-text annual report

G R A I N G E R P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 7 www.graingerplc.co.uk ANNUAL REPORT AND ACCOUNTS 2007 The future of residential property Grainger specialises in owning, developing, managing, selling and delivering sustainable value from residential property. We are the largest quoted residential property owner and manager in the UK. But we never stand still. We use our unique expertise gained from owning and managing property in local communities throughout the UK to create innovative and successful new products and services: from strongly-performing residential property funds to equity release schemes tailored to our individual customers’ needs. Our ambition is to capitalise on the strengths and skills we have forged in the UK to continue to build our core portfolio, to deliver proﬁtable new business lines. We believe our approach will enable Grainger to become one of Europe’s leading quoted integrated residential property companies. 1 our achievements and objectives 2007and our prospects how we manage the business our performance working together who we are we are the UK’s largest quoted residential proper ty owner and manager what we do we own a unique por tfolio and have exper tise in different residential markets and products how we do it we have ﬁrst-class skills and resources that we apply to deliver real value from our assets strategy ﬁnancial highlights 2007 chairman’s statement chief executive’s review ﬁnancial review how we behave adviser’s statement governance the board corporate governance repor t repor t of the remuneration committee and directors’ remuneration repor t directors’ repor t ﬁnancials independent auditors’ repor t to the members of Grainger plc on the group ﬁnancial statements consolidated ﬁnancial statements notes to the ﬁnancial statements independent auditors’ repor t to the members of Grainger plc on the parent company ﬁnancial statements parent company ﬁnancial statements notes to the parent company ﬁnancial statements useful information ﬁve-year record shareholders’ information advisers glossary of terms corporate addresses annual general meeting 12 february 2008 3 11 21 28 29 32 40 45 53 54 56 62 70 74 76 81 139 141 142 147 148 149 150 152 W O R K I N G T O G E T H E R S T R A T E G Y G O V E R N A N C E F I N A N C I A L S U S E F U L I N F O R M A T I O N 2 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R SEVEN OFFICES ACROSS THE UK with over 100 dedicated property management and sales and valuations staff Newcastle London Putney Manchester Birmingham Ipswich Exeter who we are... Grainger is a company that puts passion and energy into everything we do. Our people work together as a team. We have a culture which encourages the sharing of information and a vision for the future. 3 W O R K I N G T O G E T H E R Grainger is currently the UK’s largest quoted residential property owner and manager. We have, over many years, acquired a substantial portfolio of property assets of varying types and tenures. We are a long-term business and trade our properties throughout market cycles. Established in Newcastle in 1912 to acquire and manage tenanted residential properties, Grainger now owns over 14,000 homes in the UK and 4,000 in Germany. Our business has grown steadily over the years, most signiﬁcantly in the 1970s and 80s when several large industrial companies deregulated or denationalised and released their tenanted housing stocks. In 1983 Grainger ﬂoated on the London Stock Exchange. Grainger has been a signiﬁcant player in residential property for many years. While acquiring, managing and selling properties remains fundamental to our business, we have been actively developing complementary areas which are now signiﬁcant contributors to our cash ﬂows and proﬁts. Grainger today is a much broader-based and more dynamic business. Teamwork is vital to our success. Only by working closely across all our divisions to share our skills and experiences can we derive the best returns from our assets. 1912 Grainger was established in Newcastle to acquire and manage tenanted residential properties. 1983 Floated on the London Stock Exchange with gross assets of £18m. 1985 Entered land development with the acquisition of 350 acres of land between Basingstoke and the M3. Grainger, subsequently achieved planning consent, established the infrastructure then sold the land to housebuilders. 4 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R Our strategy We now hold a unique position in the UK residential market; that of being an owner, property manager, trader, asset and fund manager. As a result, few people understand the complexities and opportunities of residential property as well as Grainger. Acquiring, managing and selling residential tenanted properties has always been at the heart of our business. While the increase in property values over the long term has inevitably contributed to our growth, this builds on astute buying founded on our local expertise. As well as growing this core business, we have developed new income streams through exposure to other areas of the residential property market. For instance, Grainger is now an emerging force in the development of residential-led, mixed-use schemes; we are leaders in the UK’s home reversion market, providing equity release for elderly homeowners; we have launched and continue to manage the largest UK market-let residential property fund; and we have successfully replicated our business model in Germany, spreading the risk of our UK-based portfolio. Our experience gives us a unique perspective that enables us to see opportunities where others only see challenges. Our ambition is to become one of Europe’s leading quoted, integrated residential property companies. To achieve this, we aim to: (cid:129) provide superior risk-adjusted returns; (cid:129) maximise the efﬁciency of our capital structure by introducing third-party equity and debt through residential property funds; (cid:129) enter new residential sectors where we can use our management skills and resources to build large portfolios; (cid:129) diversify income streams to include fund management fees alongside co-investment growth; (cid:129) continue to build on our unique position as a long-term holder, asset manager, trader and developer of residential property; (cid:129) use our skills and property network reputation to integrate developing, managing and funding; and (cid:129) encourage and capitalise on the growing recognition of residential property as an investment class. These aims are underpinned by our group-wide ethical way of doing business. This includes commitment to integrity in all business relationships, employee development, tenant care, environmental responsibility and community service. 1989 Grainger acquired Channel Hotels and Properties which owned over 700 London ﬂats and resulted in its ﬁrst London ofﬁce. 2001– 03 The next major expansion, with the acquisition of Bradford Property Trust plc (BPT), creating the largest quoted residential property portfolio in the UK. 2007 The closing of the highly successful capital raising activity for G:res1, the UK’s largest, market-rented residential investment fund. We are now working towards becoming one of Europe’s leading, quoted, fully integrated, residential property companies. Grainger has a substantial asset base including several different types of residential property and property-related interests. 5 W O R K I N G T O G E T H E R 7,655 UK regulated properties with a market value of £1,221m With over 14,000 UK properties, Grainger is the UK’s largest quoted residential landlord 4,520 German properties with a market value of £242m Grainger UK average market property value £205,000 Total market value of property- related assets £2.5bn Fund manager of G:res1 the UK’s largest market-rented fund seven property asset management ofﬁces across the UK Grainger currently has in excess of 40% of the UK home reversion market £809m Gross development value of existing developments 6 GRAINGER PLC Annual report and accounts 2007 our people are professionals Across all levels and disciplines we seek to employ not only the best in their ﬁeld, but those who can consistently apply their skills and experiences for the beneﬁt of the group as a whole. It is by this cross working that we continue to unlock real value from our portfolios and ventures. W O R K I N G T O G E T H E R U K R E S I D E N T I A L OPERATIONS Core portfolio PAGE 12 Joint ventures PAGES 12 and 15 Funds PAGE 15 Retirement solutions PAGE 16 Germany PAGE 18 Development PAGE 19 Development Joint ventures PAGE 19 % GRAINGER OWNED 7,655 Regulated tenancies sit at the heart of our business. We also own 555 assured shorthold tenancies, 277 vacant properties and more… Grainger GenInvest is a joint venture with Genesis Housing Association with over 1,500 units predominantly in ﬂourishing areas of London. G:res1 is a 2,000-unit market-let residential fund which was launched and then fully invested during 2007. ResPUT is the 550-unit Schroders market-let residential fund. We hold a signiﬁcant stake in each. Initially, simply a home reversion portfolio, now with over 3,000 properties and growing, we have now expanded considerably into retirement housing. We started buying properties in Germany in October 2005 and now have over 4,500 units mostly in the south and west of the country, where demand is highest. Our focus in this division is on large, mixed-use schemes. The expected end gross development value of our current portfolio is over £800m. Curzon Park is our ﬁrst joint venture with Development Securities plc. It is developing a 10-acre, residential-led, mixed-use development site in Central Birmingham. 100% 50% 22% 100% 100% 100% 50% 7 W O R K I N G T O G E T H E R GROSS PROPERTY-RELATED ASSETS £ GRAINGER TEAM SKILLS 1,418m 364m 547m 542m 242m 110m 34m A L L A C T I V I T I E S T H R O U G H O U T T H E B U S I N E S S A R E P E R F O R M E D B Y S K I L L E D E X P E R T S FINANCING bank debt, capital markets, equity raising RESIDENTIAL fund management, asset management, acquisitions, strategic sales and refurbishment PROPERTY SERVICES lettings, proper ty management, rent reviews, sales, valuations, customer care, repairs and maintenance, block management RETIREMENT SOLUTIONS acquisitions, marketing, customer relations, compliance, actuarial, sales, regulatory repor ting, intermediary relationships, product design and innovation DEVELOPMENT ﬁnancial modelling, land acquisitions, planning, procurement, project management, design, marketing, sales SUPPORT SERVICES accounting, tax compliance, credit control, ﬁnancial modelling, ﬁnancial repor ting, purchase ledger, sales ledger, treasury, transactional suppor t, IT, insurance, internal audit, company secretarial, HR, ofﬁce suppor t GROUP investor relations, company secretarial, governance 8 GRAINGER PLC Annual report and accounts 2007 what makes Grainger successful? W O R K I N G T O G E T H E R We are completely attuned to the markets in which we operate and how government policy could effect residential property. In addition, Grainger’s unique geographic coverage, owner/manager reputation and ability to innovate enables us to compete where others can’t. We are determined to achieve our ambitious plans for growth, though in the current climate this will no doubt prove more challenging and may take longer than hoped. We will be guided by the overarching values that have brought us success to date: PASSION We approach every challenge with energy, enthusiasm and an open mind. Our creative approach helps us to see new ideas and opportunities where others may only see obstacles. PERFORMANCE We aim to continuously improve every aspect of our business, and appreciate that our investors and colleagues should expect nothing less. First-class performance demands hard work, professionalism, teamwork and high-quality processes. PRINCIPLES Our business is not in commodities but in people’s homes and aspirations. So we never forget we have a responsibility to individuals, to the environment and to society as a whole. We have a proud reputation to maintain and a strong legacy to leave behind. 9 W O R K I N G T O G E T H E R We are eager to achieve our vision through careful evolution of our business model. We stand by the values that have made us successful. Ours is a transparent approach and we believe that meaningful relationships with all of our stakeholders are essential. Teamwork is also vital to our cause, working across our divisions to ensure we derive the maximum returns from all of our assets and interests. our leadership team from left to right: MARIE GLANVILLE Company secretary, ﬁnance and IT MARK ROBSON Property services ANDREW SCRIVENER Development ANDREW CUNNINGHAM Deputy chief executive and ﬁnance director RUPERT DICKINSON Chief executive DEBRA YUDOLPH Corporate affairs PETER COUCH Retirement solutions ANDREW PRATT UK residential STEPHANIE JENKINS HR director QUINTON HILL-LINES Corporate development and funds 10 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R Regulated UK other assets German market-let Retirement solutions Development GenInvest* Curzon Park* G:res1* ResPUT* BREAKDOWN OF PROPERTY ASSETS BY MARKET VALUE (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) *Joint ventures and associates shown at full value. For Grainger’s share see page 6. TOTAL AT 30 SEPTEMBER 2007 – £3,232m £1,221m £196m £242m £542m £121m £353m £34m £435m £88m what we do... We have a well ﬁnanced, unique portfolio of residential properties and investments and a rare, skilled workforce to be proud of. This effective combination delivers value from our assets. 11 W O R K I N G T O G E T H E R Our portfolio We own, either directly or with co-investors, a substantial value of residential property assets, in the UK and Germany. Our portfolio of properties subject to regulated tenancies in itself is worth over £1.2bn. Most of our assets are reversionary in nature. This means that there is an inherent gain outside of normal capital appreciation or rent which will be delivered through vacancy or from work that we do, for example, obtaining planning permission. Our assets and interests are efﬁciently ﬁnanced using both debt and equity to give investors one of relatively few current opportunities to invest in a geared residential company. More recently we have broadened our business to include management fee income. We do this by applying our honed skills and experiences, to manage property on behalf of other people – generally funds and ventures in which we hold a signiﬁcant stake. Annualised income is now running at some £7m per annum and has been generated with very little incremental cost due to the sheer scalability of our platform. UK RESIDENTIAL GERMANY DEVELOPMENT PAGE 12 to 16 Core portfolio Joint ventures Funds Retirement solutions PAGE 18 German market-let PAGE 19 Development Curzon Park joint venture with Development Securities 12 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R UK residential WHOLE UK RESIDENTIAL PORTFOLIO BY GEOGRAPHY Excluding share of joint ventures (£) (investment value) North and Scotland £317m Midlands/East £409m Other South £494m London £739m UK TENANTED RESIDENTIAL Portfolio analysis by investment value (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Regulated Assured/other Vacant Equity release Hotel complex Other interests Share of joint ventures/ associates £1,221m £104m £50m £542m £9m £33m £290m TOTAL AT 30 SEPTEMBER – £2,249m Core portfolio REGULATED We currently own some 7,600 regulated residential properties valued at over £1.2bn, and these remain central to our portfolio. These assets provide signiﬁcant and predictable cash ﬂows of over £100m per annum – from rents and from proceeds received when they are sold. A regulated tenancy gives security of tenure – the right for the tenant to stay in the property for the rest of their lives. The rent is set independently and is less than the market rate for similar properties. Due to changes in the law, no regulated tenancies have been created since 1989. This gives us predictable vacancies and therefore sales, as our tenants get older. While inevitably this portfolio will decline, it will continue to be a major contributor to our business for some time. We do aim to buy as many of these assets as returns and availability allow. Properties subject to regulated tenancies can be acquired at a discount to the ordinary property value (known as vacant possession value). On vacancy, we sell the properties to realise both the discount (which we call the reversion) and any house price inﬂation from the date we originally bought them. We therefore realise high margins on sale. We are protected against some of the risks associated with the residential market, such as short-term or localised falls in house prices, by the size and geographical spread of our portfolio, and the fact that we buy and sell properties over long periods of time. The regulated portfolio also has low exposure to top-end volatility. Currently the average vacant possession value of our regulated stock is £205,000 per unit (£182,000 in 2006) with 60% of our properties valued below £250,000. Further, these properties are typically unmodernised and appeal to ﬁrst-time buyers and those hoping to create value on renovation. This keeps them in demand. ASSURED These are residential properties let at market rates on assured shorthold tenancy (‘AST’) agreements, typically of six months to a year. In the year to September 2006 we transferred a large number of our ASTs to G:res1, the fund we subsequently launched this year. Increasingly we are purchasing regulated tenancies in portfolios which also contain ASTs. We will either hold these for ongoing capital growth, or trade them over a relatively short period, depending on how we believe returns can be maximised. Joint ventures GRAINGER GENINVEST LLP In June 2005, Grainger and Genesis Housing Association formed a 50/50 joint venture to acquire a £70m portfolio of 461 residential units from the Church Commissioners. The partnership acquired a further 1,138 units for £196m in March/June 2006. 13 W O R K I N G T O G E T H E R TILT Grainger acquired The Tilt Estate Company Limited, consisting of 309 homes, in September 2007. The portfolio is located in East Dulwich, London SE22 and includes many Victorian properties most of which look out onto a private garden square. HOMEWELL, HAVANT, HAMPSHIRE Grainger acquired a row of ex-workman’s period cottages in Havant in March 1997. We currently own eight of the row which are let on regulated tenancies. REGIONAL OFFICES Grainger’s seven ofﬁces in the UK give good geographical coverage and localised knowledge. TAIT & BENSON is one of the blocks belonging to Grainger GenInvest. Since acquisition from the Church Commissioners, a major works project has been completed on the communal areas. 14 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R Troy and Simon rent their contemporary designed ﬂat in Hackney, London from the Grainger managed fund G:res1. DIBDEN HOUSE, MAIDA VALE, LONDON Since acquisition in 2005 from the Church Commissioners, Grainger GenInvest has spent £2m on major works to the communal areas of this block of 246 units. BUILDING HOMES FOR THE FUTURE When we develop proper ties, we use our management exper tise to build homes that are efﬁcient to manage and can be speciﬁcally designed to let. Grainger’s open plan ofﬁces encourage a friendly working atmosphere and easy sharing of information and ideas. 15 W O R K I N G T O G E T H E R UK residential JOINT VENTURES Share of joint ventures/associates 2006 £151m £179m 2007 £290m £328m (cid:129) (cid:129) Market value Vacant possession value NUMBER OF UK PROPERTIES MANAGED 2004 13,226 2005 13,567 2006 15,221 2007 19,312 Joint ventures continued The portfolio now consists of 1,641 units in eight blocks in central London. Grainger provides asset management services while Genesis handles day-to- day property management. Over the coming year we aim to identify strategic opportunities to increase returns through appropriate refurbishment and individual sales. Funds Fund management is an integral part of Grainger’s evolving business model. It adds another layer of leverage to our operations, allowing us to generate fees from the skills of the people we employ. In this way our returns are no longer derived only from the properties directly and our return on capital is enhanced. We believe that by following this model our group will be worth more than the sum of its parts. G:res1 Established in November 2006, the G:res1 fund is a Jersey-based company that invests primarily in market-let residential properties in the UK. Grainger is a co-investor in the fund, which is independently managed and controlled. The fund was set up to capitalise on the growing attractiveness of residential property as an investment class. Investors are currently a broad mix of UK and overseas institutions. The fund’s initial portfolio included 1,480 units in 38 blocks across the UK. In March 2007, acting on our advice, the fund acquired a 700-unit portfolio consisting of properties predominately located to the east of the City of London. The fund now holds 2,155 individual units in 56 unbroken clusters of property, with a market value totalling £435m. 90% of these are in London and the South East. The fund is aiming to acquire further assets over the coming year, and make strategic sales, while refurbishing other properties. As adviser and asset and property manager, we earn fees for delivering returns. As a co-investor, we beneﬁt from the resulting dividends and growth. ResPUT (The Schroders Residential Property Unit Trust) ResPUT is a specialist residential fund which provides investors with almost ungeared exposure to the UK residential market. The fund is managed by Schroders Property Managers (Jersey) Limited and advised by Grainger. We also manage the property on a day-to-day basis. The fund aims to combine a high-quality income yield with above average prospects for capital growth. It has gross assets of just under £100m, and Grainger currently owns a 22% stake valued at approximately £20m. Capital is recycled through strategic sales and astute acquisitions. 16 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R UK residential HOME REVERSION MARKET Investment value and vacant possesion value 2006 £241m £421m 2007 £542m £779m (cid:129) (cid:129) Investment value Vacant possession value Retirement solutions Our retirement solutions business has more than doubled in size over the year. We have recognised that not all people will choose to release equity in their homes in retirement, but some will prefer other housing solutions. As a result we have begun to broaden our offering and now own in excess of 1,000 retirement apartments. We have maintained our 40% share of the home reversion market. Under a home reversion plan, an individual or couple sells Grainger part or all of their home in return for a cash lump sum which is dependent upon the value of the property, the proportion being sold and the age(s) of the homeowner(s). The occupiers are then able to remain in their property rent-free for the remainder of their lives. Bridgewater, Grainger’s own brand, offers a ﬂexible reversion plan which as an alternative to a single lump sum, offers an escalating release or a series of cash payments. The property is purchased at a discount to the vacant possession value of the property (the selling price without a tenant in situ). Similarly to regulated property, this provides a reversion, which is realised on ultimate sale of the property, when the tenant vacates. The reversion is greater on a home reversion than on a regulated property since there is typically no rent at all on a home reversion. The home reversion market became regulated by the FSA in April 2007. Against demanding deadlines we achieved regulation from the outset, a hurdle not achieved by some. We believe that regulation is a catalyst for growth in the industry, placing it on a level footing with lifetime mortgages, the most popular method of equity release. As well as using the Bridgewater brand, we source home reversions through a distribution agreement with Norwich Union and many ﬁnancial advisors. We also aim to acquire more mature portfolios through our extensive property network. We expect continued growth in this market as more people seek to release cash to supplement their pensions, improve their lifestyles or realise their dreams. The ﬁnal major constituent of our retirement solutions business is the CHARM portfolio which we acquired early in 2007 for £135m. This is a portfolio of equity mortgages, where the mortgage is repaid as a proportion of the sales proceeds rather than as the amount of the loan originally borrowed. Interest, which grows with rpi, is also received. 17 W O R K I N G T O G E T H E R WOODVILLE GARDENS, EALING Grainger advised Schroders on the acquisition of this large detached Victorian house in July 2007. The property comprises of eight self-contained ﬂats all let on assured shorthold tenancies. ROTHENBURG WÜMME GERMANY Acquired in 2006, this property comprises of 16 units of which 10 are residential and six are commercial. The property is fully occupied. Our in-house property services team works closely across all divisions. They also liaise with tenants and suppliers. POINT HOUSE, BLACKHEATH LONDON Laura is a regulated tenant in this historic listed building which Grainger acquired in May 2002. 18 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R Germany G E R M A N M A R K E T- L E T 4,520 properties with a market value of €346m HAMBURG DÜSSELDORF BERLIN STUTTGART MUNICH MUNICH GERMANY Portfolio overview (cid:129) (cid:129) (cid:129) 2,528 properties 1,684 properties 308 properties 4,520 properties German market-let We entered Germany, Europe’s largest residential market, in 2006, in order to replicate our business model in a market that was behind the UK in levels of home ownership. As Germany continues to deregulate its housing, major portfolios of reversionary property are becoming available. This has made the market very attractive to investors and since 2002, €25bn has been invested in 600,000 units. The tenant-friendly laws and controlled rents attract professional landlords. The relatively low price per unit provides potential for signiﬁcant capital growth. As single occupancy continues to grow and the supply of new housing is diminishing, we believe there will be a growing demand for quality housing. We have targeted the more afﬂuent regions and concentrated on higher quality properties that suit owner occupation, rather than only focusing on yield. Our background as a long-term residential property owner differentiates us from the many purely ﬁnancial purchasers in this market. We now own approximately 4,500 homes in Germany, worth £242m. The tenants have security of tenure similar to regulated tenancies in the UK. We will continue to work with local partners, looking for strategic expansion opportunities. We also intend to seek third-party equity so we can apply our co-investment fund management model. Our Mannheim ofﬁce currently employs seven staff who advise on acquisitions and asset management. We currently outsource the day-to-day management of the portfolio to local agents. 19 W O R K I N G T O G E T H E R Development MAJOR DEVELOPMENT PROJECTS Project West Waterlooville 520 acres of greenland in Hampshire Hornsey Road Baths Islington 212 residential units and community buildings Macaulay Road Clapham 97 residential units Barnsbury Complex Islington 141 residential units Gateshead College 263 residential units Newbury 330 units 50,000 sq. ft. retail Wards Corner Seven Sisters 198 residential units Estimated end value Land Phase1: £135m £44m £56m £49m £72m £82m £76m Development This business aims to create mixed-use developments with a signiﬁcant residential element. Current programmes consist of nearly 7,000 residential homes with 2 million sq. ft. of commercial space, including healthcare facilities, schools and nurseries, sports and recreational facilities, a community theatre and a cemetery. Our philosophy is simple and responsible. We take a long-term interest in the communities we create and are committed to their sustainability. We also promote the beneﬁts of good design, with schemes that really take into account the way people actually live, which of course, ensures a demand for the homes. We are not afraid to challenge conventional wisdom. We also aim to maintain an open and straightforward relationship with all parties involved. We have recently strengthened the management team with bases in both London and Newcastle to ensure good geographical coverage. Our strategy is to reduce our development risk by focusing on larger long-term residential- led schemes, in project-speciﬁc joint venture partnership with others. Current projects in the pipeline, valued by their expected end development value, include £324m with planning consent and £485m without. Joint venture with Development Securities CURZON PARK Curzon Park is a 10-acre site in central Birmingham, acquired for £33.5m in December 2006 through a collaborative (50/50) agreement with Development Securities plc. The site will be developed over six to eight years to create up to 800,000 sq. ft. of ofﬁces, 400,000 sq. ft. of homes, a 180-bed hotel, 20,000 sq. ft. of retail space and parking for 1,500 cars. The development will cost over £300m which will be appropriately ﬁnanced. A planning application was submitted in summer 2007 and it is expected that work will begin on-site in early 2008. 20 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R 85% Eligible Grainger employees participating in our Share Incentive Plan how we do it... Working together is fundamental to our success. When our people direct their varied skills, experiences and professionalisms to supplement those of others, the consequent lateral creativity and inspiration delivers results. 21 W O R K I N G T O G E T H E R Our people We pride ourselves on recruiting and retaining outstanding people who are individual experts and great team players. We encourage an entrepreneurial culture where everyone feels they can make a signiﬁcant contribution to the business, as well as be rewarded by it. 59% of our staff are shareholders in Grainger and our permanent staff retention for the year October 2006 to September 2007 was 90.1% against a national average of 84.3%. For Grainger, investing in people means giving staff the opportunity to develop both as employees and individuals. We believe in building the business with them, and our people development activities are guided by a mix of business objectives and individual needs. Twice-yearly reviews ensure everyone understands their role, and the impact they can make on the overall business. During 2008, we intend to introduce a number of learning and development initiatives for our employees. These will include a management development programme, tailored to relevant individuals. We aim to become the employer of choice in our market by connecting our people strategy, values and HR policies to reinforce and promote our distinctive culture. We aim to be a high-performance team of like-minded experts who share a common vision for growth. GRAINGER SKILLS DEVELOPMENT PAGE 25 SUPPORT SERVICES PAGE 25 GROUP PAGE 25 FINANCING PAGE 22 RESIDENTIAL PAGE 22 PROPERTY SERVICES PAGE 22 RETIREMENT SOLUTIONS PAGES 22 AND 25 22 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R We restructured our management and teams during the year. The key change made was to create a ‘residential’ team, separate from ‘property services’. The division of their responsibilities is described below, alongside those of our other teams. FINANCING The success of our group is not only dependent upon the performance of our assets, but also how effectively we fund them. The bulk of our funding comes from the debt markets but during the year, we introduced £159m of third-party equity (through G:res1) and entered the capital markets with the launch of a seven-year convertible bond. This raised c. £110m at a rate of 3.625% and a conversion price of £8.64. Our expansion into Germany has been funded by new euro facilities, to ensure a natural hedge. We believe it is necessary to refresh and update our borrowings and take innovative opportunities as they arise. Our traditional bank debt is made up of a combination of term loans and revolving facilities with varying maturity dates, currently all in excess of two years. We have a ‘club’ of banks, most of whom we have had relationships with for a number of years. Our covenants, which include a loan to value test and a cash cover over interest are relatively generous. Our core business in particular, is very cash generative, and this gives us the ability to pay down debt quickly if necessary. Further, the loan to value calculation uses the current market value of our assets. This has an in-built reversion, so there is an additional layer of comfort not immediately apparent. We have a policy of hedging the interest rate on at least two thirds of our debt, keeping our hedging instruments separate from the facilities. We use a combination of swaps and caps. RESIDENTIAL This team has two key responsibilities: Portfolio, corporate and individual acquisitions both in our established markets and also to capitalise on potential growth areas by deﬁning residential in a wider sense, e.g. caravan parks, serviced apartments. This requires astute awareness of changing markets, a wide network of contacts and high-calibre, creative thinking; and Strategy-setting/decision-making at a portfolio/fund level including buy and sell decisions for capital recycling and on refurbishment programmes intended to increase rental yield and/or capital values. PROPERTY SERVICES In total there are just over 100 people working in this team, in six of our seven UK ofﬁces. Their work falls into two major categories: Property management covers the day-to-day operational running of the properties including rent reviews and renewals, reducing voids, repairs and maintenance, refurbishment, block management, commercial, lettings and customer care. With more than 19,000 UK properties belonging to ﬁve different owners, it is essential that not only their operational work is of a high standard, but that they also give value-added recommendations based on their local knowledge; and Sales and valuations includes completing day-to-day sales of 12 properties every week, valuing properties which have been identiﬁed by the residential team for potential purchase and also carrying out our year-end valuation of every property that Grainger owns directly. RETIREMENT SOLUTIONS The roles in our retirement solutions team vary from that of actuarial to customer relations. In particular, success within the home reversion market depends on the following three factors: Product innovation Our own Bridgewater brand includes a ﬂexible reversion alternative. Our team monitors the success of this by reference to, for example, the number of enquiries which result in the purchase of a property. We seek to be at the forefront of any emerging products; 23 W O R K I N G T O G E T H E R SUPPORT SERVICES Finance and IT work closely together to deliver management information in an efﬁcient way. RETIREMENT SOLUTIONS The home reversion market became FSA regulated in 2007 which we believe will be a catalyst for growth in the industry. WETHERBY ROAD, LEEDS Acquired in June 2007 for our core portfolio, Wetherby Road contains six 1 and 2 bed ﬂats of regulated and AST tenure. REFURBISHMENT Our Knightsbridge based refurbishment team carries out strategic works, including extensions and conversions, to increase rental yields or sales values. 24 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R ELMCROFT DRIVE, ASHFORD, MIDDLESEX Rick and Gill have been tenants here for nearly 10 years. Their one-bed ﬂat forms par t of the Elmcroft estate which Grainger sold to G:res1. RETIREMENT SOLUTIONS Based in Newcastle, the retirement solutions team commands 40% of the home reversion equity release market. OUR PEOPLE We are keen to offer our staff both career and personal development to ensure they fulﬁl their potential at Grainger. HOMES FOR THE FUTURE Grainger’s development pipeline is spread across the UK. The current programme is set to deliver over 3,000 homes. 25 W O R K I N G T O G E T H E R Distribution It is critical to reach as many potential customers as possible and marketing is key. We have individual relationships with ﬁnancial advisers and an online system that allows those advisers to access cases and pricing day or night. We also have an important agreement with Norwich Union who offer our home reversions alongside its own lifetime mortgages. As a group, we price the plan, acquire the property, manage the property and undertake the sale on vacancy. We also acquire existing portfolios of home reversion assets, which are actuarially priced based on market valuations of the properties; and Regulation Since April 2007 home reversions have been regulated by the FSA. We employ compliance and education staff who ensure that our operations are of the exacting standards required and all reporting is completed on time. We are very proud to have been recently awarded ‘Best Home Reversion Provider’ for the second year running at the prestigious Mortgage Solutions Awards. Our staff are also involved in setting up lifetime leases on our new retirement properties and monitoring the performance of our CHARM investment. DEVELOPMENT Our development team works closely with local authorities, communities, joint venture partners and all other relevant stakeholders. It also makes the most of the knowledge and expertise within our other divisions to design buildings that can be managed efﬁciently. Our people are strong negotiators and their speciﬁc responsibilities include: (cid:129) acquisition of land suitable for regeneration, often through tender; (cid:129) ﬁnancial modelling of possible design variations; (cid:129) gaining planning permission; (cid:129) project management; (cid:129) selling developments, wholesale or individual units; and (cid:129) hand-over for ongoing management. SUPPORT SERVICES Our support services cover all the areas expected in a FTSE 250 company. Above all they strive to constantly improve the ways they work, by increased automation as well as better methods. Finance look after our management accounting and ﬁnancial reporting, treasury, tax, internal audit, credit control, invoice processing, service charge accounting and insurance. The requirements for efﬁcient funding, tax management and meaningful and timely ﬁnancial information are rightly demanding; IT supports a vast array of applications and systems. Our systems and communications are vital to the running of our operations and our team have both proactive development and reactive support responsibilities; HR helps us to attract and retain the very best people. Our team ensures that our policies and practices, and salaries and beneﬁts are competitive. In addition, they are responsible for learning and development, ensuring it is aligned to our business objectives; and Corporate affairs is responsible for internal and external communications (except investor relations) as well as corporate responsibility (see page 45). Their aim is to build a stronger brand and ensure our public relations activity is controlled and focussed. GROUP There are some functions which are operated centrally within the business, which we describe as group functions. These include: Investor relations which is predominantly carried out by the executive directors and includes many meetings with shareholders and analysts; Company secretarial is responsible for compliance with the Companies Act and the Listing Rules, as well as value- added activities such as board evaluation and share plan administration; and Governance describes the board’s strategy setting as well as monitoring and control. 26 GRAINGER PLC Annual report and accounts 2007 W O R K I N G T O G E T H E R our people are more than the key to our success. We share our vision and believe that by working together, we can achieve it. Our culture will ensure enjoyment along the way! 34% Our staff that have five or more years’ service. 27 W O R K I N G T O G E T H E R 28 GRAINGER PLC Annual report and accounts 2007 ﬁnancial highlights In the last year we have invested in total some £614m on property or related property assets. Grainger NAV 732p + 23.0% earnings per share 47.3p + 81.9% return on shareholders’ equity 27.1% proﬁt before tax £77.5m + 62.5% ﬁnal dividend 4.12p per share +10.0% + 25.0% increase in the market value of property- related assets to £2.5bn GROSS PROPERTY ASSETS (£m) GROSS NAV PER SHARE (pence) DIVIDENDS PER SHARE (pence) 2004 1,438 2005 1,597 2006 1,901 2007 2,322 2004 546 2005 563 2006 677 2007 828 2004 4.65 2005 5.11 2006 5.62 2007 6.18 29 chairman’s statement In my ﬁrst year as chairman of Grainger, I am pleased to report another year of strong progress and signiﬁcant achievement in our three emerging business lines that complement our core residential regulated tenancy business. ROBIN BROADHURST Chairman S T R A T E G Y Overview Conditions over the ﬁnancial year have generally been favourable and we have increased our gross property asset base to £2.5bn from £2.0bn in 2006. The increase has come from both revaluation uplifts (our UK portfolio has shown an uplift of 9.8%) and from acquisitions. In total we spent £614m on property assets in the year, including the major corporate and portfolio acquisitions of CHARM, The Capital Appreciation Trust and The Tilt Estate. The year-end value of our retirement solutions business has grown to £542m and we are pleased with our progress in Germany where we now own over 4,500 units worth £242m. Capital recycling through the successful launch of our G:res1 fund and prudent debt raising in the early part of the year have meant that this growth has been achieved at sensible loan to value ratios (53% at 30 September 2007) whilst maintaining a valuable liquidity position – our headroom on our lending facilities at the year end amounted to £226m. Results In the light of evolving practice of accounts presentation under IFRS, we have conducted a review of the classiﬁcation of our property assets. This has involved reclassifying a small proportion of those assets (4%) from trading stock to investment property or vice versa. The main impact has been that the revaluation surplus of £23.5m taken through the 2006 income statement on the transfer of assets to the Jersey Property Unit Trust (‘JPUT’) (that forms part of G:res1) has instead been taken through retained earnings at the beginning of that year net of tax of £7.0m. There is no change to market value net asset value measures or to business cash ﬂows. Our 2006 ﬁgures have been restated accordingly and further details are given in the ﬁnancial review section of this report. Proﬁt before tax has increased by 62% to £77.5m from £47.7m (restated), the principal driver of this being an improved contribution from our associates and joint ventures (up to £40.6m from £0.4m). Operating proﬁt (before fair value movements and goodwill impairment) has increased to £89.0m from £81.5m, largely due to improvements in trading proﬁts from our core business. Gross net asset value per share (‘Gross NAV’) has increased by 22.3% to 828p from 677p and there are similar improvements in our other NAV measures: Triple net asset value (‘NNNAV’) up 25.8% to 613p from 487p and base case Grainger NAV up 23.0% to 732p from 595p. Details of the calculations of these are given in the ﬁnancial review. Return on shareholders’ equity has increased to 27.1% from 26.5%. 30 GRAINGER PLC Annual report and accounts 2007 chairman’s statement continued total dividend for the year 6.18p per share (2006: 5.62p) S T R A T E G Y Our goal to become a leading European quoted residential property company, we believe, will deliver consistent long- term growth in results and in dividends to our shareholders. We are again increasing our dividend by 10% (our 13th consecutive year of increased dividends) with the result that the board are recommending a ﬁnal dividend of 4.12p per share. Together with the interim dividend of 2.06p per share paid on 16 July 2007, this will produce a total dividend for the year of 6.18p per share (2006: 5.62p). At this level the dividend is covered 7.7 times (2006: 4.6 times). If approved the ﬁnal dividend will be paid on 18 February 2008, to shareholders on the register on 18 January 2008. Strategy The group’s goal is to maintain and consolidate its position as the UK’s leading quoted residential property company. It is proud of its core property management services model which is at the heart of the business and seeks to deliver a personal and caring service to its many tenants. Expanding and continuing the successful delivery of this service model will allow the group to expand and diversify its offerings, particularly in the ﬁelds of fund management and development, but operating within the residential arena utilising the experience gained over its long history. We believe this goal will continue to deliver consistent long-term growth in results and in dividends to our shareholders. We are developing a mix of residential businesses away from our previous heavy reliance on regulated tenancies. Following the Housing Act 1988, the number of these tenancies will reduce over the next 10 years as this type of structure gradually disappears. Historically the business has been largely centred on the ownership and trading of these large-scale residential portfolios of regulated tenancies. Returns have been generated through rental income and, more signiﬁcantly, from capturing reversionary surpluses on sales when the properties fall vacant. These returns have been enhanced by a cautious approach to acquisition, the application of rigorous management, growth in house prices and by appropriate levels of ﬁnancial gearing. In recent years we have used our cash generation and property management platform in the residential sector to enable us to capture a wider range of assets. This expansion and diversiﬁcation has enabled us to become market leaders in three residential sectors; the ownership of properties subject to regulated tenancies, providers of home reversions and residential fund management. This latter activity, in particular, produces an income stream not reliant on the direct ownership of property and at low incremental cost. We have also widened our risk and return exposure by increasing our involvement in residential development and by entering the German residential market. Board changes At the beginning of May, we welcomed Henry Pitman as a non-executive director. He was previously chief executive of Tribal Group Plc and his experience, which includes both property and government-related housing business, will be of great assistance to the board. We see good opportunities in continuing to apply our own variety and blend of skills to different residential asset classes. Widening our spread of activities will give us both resilience as well as increase our long-term growth prospects. 31 S T R A T E G Y My personal thanks go to Robert Dickinson from whom I took over as chairman at the conclusion of the Annual General Meeting in February. His long service and contribution to the growth of the group has been previously recorded, but his help and guidance in the handover of the chairmanship was hugely appreciated. Outlook Whilst residential house prices continued to rise through this ﬁnancial year, the listed property sector (including real estate investment trusts) fell by more than 20%, largely fuelled by the sentiment that the rapid rises of recent years are unsustainable. This has now proved to be the case and there is little doubt that the next year will be a challenging one both for the sector and for Grainger. Notwithstanding this, recent evidence suggests that properties in our portfolio are continuing to sell at or slightly above current valuation levels. Grainger’s average house price in its core portfolio is £205,000 and the portfolio is geographically diverse. In light of this and our limited exposure to new build ﬂats in city centres (the area we expect to be the most difﬁcult in the coming months), we believe that we are relatively well protected from the slowdown in the current market. Going forward, we see good opportunities in continuing to apply our own variety and blend of skills to different residential asset classes. Where appropriate, we will introduce third-party capital to enhance our returns and reduce our direct balance sheet exposure. This may be in the form of joint ventures (for example, along the lines of Grainger GenInvest and Curzon Park) or in co-investing funds (G:res1). This will not be the ﬁrst period of more challenging market conditions that the company has weathered in its long history. Our experience, combined with the more diversiﬁed business model we now have in place, gives us conﬁdence in our positioning and prospects. We plan to continue our long-standing prudent approach towards acquisitions and liquidity and believe that our spread of activities will give us resilience and increase our long-term growth prospects to create shareholder value. I would like to take this opportunity to thank everyone at Grainger for the welcome and help that they have given me in my ﬁrst nine months as chairman. Their commitment and enthusiasm will serve the company and its shareholders well in the future. ROBIN BROADHURST Chairman 18 December 2007 32 GRAINGER PLC Annual report and accounts 2007 chief executive’s review S T R A T E G Y Market review There has been much recent debate over the state of the UK housing market and the impact that recent events in the world credit markets, triggered by events in the US subprime sectors, will have in the future. Many indicators point to a slowdown in the rate of house price growth – in particular, falling levels of mortgage approvals, falls in certain house price indices and slowing sales volumes from house builders. Commentators vary between predictions of a severe fall in actual house prices (as was the case in the early 1990s) and a soft landing where price growth slows and possibly stagnates for a period. Our view is that rates of house price growth are fundamentally determined by two factors: the balance between supply and demand and levels of affordability. The UK is currently suffering from long-term imbalance between the supply of housing stock and the amount required to support the increasing number of households. In the ﬁrst seven years of this century, UK housing completions averaged 166,000 per annum. Government initiatives have been announced to increase this level of supply to 240,000 (recently increased from 200,000) per annum by 2016. Set against this are population forecasts indicating that the UK population will rise from 60.6 million in 2006 to 65 million in 2016. More importantly, the trends of immigration, an ageing population and an increasing number of single person households will lead to an additional requirement of 209,000 households per year to 2026. This is a continuation of the trend that has seen the numbers of households increase by 30% in the last three decades of the 20th Century – matched by a fall in the level of new housing built over the same period of 50%. It remains to be seen whether, given the current planning environment, increased availability will be able to absorb both existing and future demand. As well as the imbalance at a total stock level, of equal importance is the limited supply for the right type of dwelling at the right price in the right location. For example, London and the South East has limited availability and great levels of wealth generation. This has produced some of the largest price increases we have seen over the last few years which, we believe, will help to sustain the market in this area for some time to come. We have some 55% by value of our portfolio in this region. Conversely, there appears to be oversupply in certain provincial cities of, in particular, recently built one- or two-bedroom city centre apartments primarily built for the buy to let market. We have kept out of these more speculative markets and therefore have virtually no exposure to this sector. RUPERT DICKINSON Chief executive 33 The second key factor is the level of affordability, with many commentators pointing to the impact this had on the housing market in the early 1990s. There are two main differences between that period and now. Firstly, base rates between mid-1988 and mid-1992 did not drop below 10% and, at their peak, mortgage rates were approaching 17%. Current base rates are at 5.5%, having fallen 0.25% since the time of our preliminary announcement. Secondly, the economic situation is far more robust – GDP at 3.3% in Q3 2007 (above the average long-term rate of 2.5%) and employment levels are at a record high (in 1992 unemployment approached three million). One of the key measures of affordability is the ability of households to meet their normal expenditure once they have paid all their housing costs. Research indicates that, whilst income net of housing costs still exceeds household spend, the surplus is narrowing as a result of increased mortgage costs arising from rate rises. The unwinding of relatively cheap ﬁxed rate loans may well reduce it further in the coming months but not to levels that would be likely to precipitate a severe correction in house prices. Consequently, whilst we are planning for a period of slower house price growth and are therefore being more cautious in our acquisitions, we do not expect a wholesale and signiﬁcant fall in prices in the short term. However, our long-term model can withstand short-term price ﬂuctuations and we believe that the wide geographic spread, low average price and reversionary potential in our portfolio will enable it to continue to deliver enhanced returns. Although the volume of transactions is relatively small, since the year-end sales values achieved on vacancy have exceeded our September vacant possession values by 4.0%. S T R A T E G Y Risk review The key risks to the Grainger business are: • a severe long-term downturn in the UK housing market; • signiﬁcant increases in interest rates; and • a lack of availability of ﬁnance. Dealing with each of these in turn: Housing market We have assembled our unique residential portfolio over a signiﬁcant period of time and its current market value is substantially greater than cost. Moreover, much of the portfolio is reversionary and the value that we will obtain by selling on vacancy currently exceeds market value by over £600m (the ‘reversionary surplus’). The nature of our portfolio is inherently defensive in times of house price slowdown. It is geographically diverse and, whilst one of its long-term strengths is a signiﬁcant exposure to the high demand areas of London and the South East, we are not overly exposed to cluster risk. In other areas, house price growth tends to follow the South East but, coming from a lower base, can show dramatic levels of increase. 34 GRAINGER PLC Annual report and accounts 2007 chief executive’s review continued S T R A T E G Y The majority of our properties are unrefurbished and of relatively low value. This level of affordability is a key element of continued and sustained demand for our properties when they become available for sale. Our average vacant possession value is £205,000 (the UK average is £198,000) and 60% of the portfolio is below £250,000. Our exposure to the higher end of the market (>£500,000) which traditionally shows greater volatility is restricted to some 279 properties out of our total UK-owned portfolio of over 14,000 units. We have found that demand for our typical properties (affordable and offering potential for value appreciation through refurbishment) is resilient even in times of market slowdown. Operationally we manage our exposure to house price inﬂation by constant reviews of the portfolio to ensure that we crystallise gains to maximise returns at the right time. We are also diversifying our income streams (for example, fund management income) and our geographic spread (investment in Germany) to spread risk. Interest rates Our exposure to adverse interest rate movements is limited by adopting a prudent hedging policy. At 30 September 2007, over 70% of group debt was hedged by being either ﬁxed or subject to caps or swaps. The hedging instruments used and the ﬁxed rate debt have a variety of maturity dates giving protection over the medium term. Availability of ﬁnance At 30 September the group’s headroom amounted to £226m and the average maturity of our debt was six years. The ﬁrst signiﬁcant maturity (a revolving facility of £400m) is not until June 2010. We guard against lack of liquidity by constantly recycling capital; for example, we raised £282m of third-party funding through equity and debt raising in the G:res1 fund during the course of the year. The core business in particular is very cash generative – gross rents and property sales amounted to £165m in the year. Whilst we spent £151m on new acquisitions, the vast majority of this can be stopped in adverse market conditions. Consequently we are able to reduce gearing levels and improve liquidity quickly by cutting back on purchases if necessary. As explained above, the low value, unrefurbished nature of our portfolio means that it is very liquid and easily realisable. Operating review General Despite the repercussions of the credit crunch in the banking markets in late summer, the UK residential market showed strong levels of growth to the end of September – the Nationwide and Halifax House Price indices recording gains of 9.0% and 10.7% respectively. Several regions showed growth of over 15%, in particular Greater London at 18.6%. Our own portfolio, with some 55% by value in London and the South East, showed an average increase of 9.8%. 35 Our main operating divisions and the market value of each as a percentage of our total property and investment assets are: Core portfolio Retirement solutions 57% 22% Primarily our portfolio of properties subject to regulated tenancies. Our interests of home reversion and retirement-related assets. Fund management and 7% These are investments in managed funds (G:res1 and Schroders) investments in residential joint ventures Development and in Grainger GenInvest (our joint venture with Genesis Housing Group). 4% Focused on relatively large scale residential or residential-led mixed-use developments. Continental Europe 10% Principally investment in German residential portfolios. S T R A T E G Y These operating divisions are supported by our property and asset management divisions of over 100 staff based in our seven UK and one German ofﬁces. Core portfolio Regulated units owned Market value Vacant possession value Other assets (vacants, assured etc) Market value Vacant possession value 2007 7,655 £1,221m £1,571m 882 £196m £220m 2006 7,715 £1,090m £1,403m 652 £141m £160m Trading performance in this division has been strong. Although the number of units sold has declined from 787 to 661, as explained below, sales proceeds have increased marginally from £126m to £128m, reﬂecting higher average values achieved (£193,000 compared to £160,000). Margins on normal sales (i.e. when a property is sold on vacancy) have also improved from 48.6% to 50.7%. The number of sales has declined because we have made fewer investment sales (when a property is sold with a tenant in situ), down to 86 at a gross sales value of £17.2m and proﬁt of £9.7m, from 224 at a value of £31.3m and a proﬁt of £13.0m in 2006. 36 GRAINGER PLC Annual report and accounts 2007 chief executive’s review continued S T R A T E G Y This is a trading portfolio and, as such, we make a number of these sales as a result of active portfolio management where we feel that returns would not be signiﬁcantly enhanced by waiting for vacancy in the usual way. The level of investment sales has been relatively high in recent years as we have worked through assets acquired in major portfolios. We would expect the volumes to continue to decline in the future as this process is completed. We have been pleased with the levels of acquisitions in the year, enhanced by two major corporate transactions. Firstly, The Tilt Estate Company Limited, bought for £48m and comprising a mixed tenure estate of over 300 units in East Dulwich, London SE22 and secondly Portland House Holdings Limited comprising 135 properties located across England and Scotland for £12m. In total we have acquired 863 units for £151m (2006: 462 for £70m). Operating contribution for this division (comprising proﬁts on sale of trading and investment assets together with net rents and other income, after deducting divisional overheads) amounted to £81m (2006: £76m). Retirement solutions Interest in residential units (number) Market value Vacant possession value 2007 5,952 £542m £779m 2006 3,003 £241m £421m We have retained our market leadership in the writing of home reversion plans, with a 40% market share at 30 September 2007*. Of particular note has been our achievement in obtaining regulated status from the Financial Services Authority in April of this year. This puts home reversion plans on a level footing with other equity release products which were regulated by virtue of being mortgages. Although there was some market disruption during the period approaching the regulation deadline, leading to a slowdown in acquisitions, we believe that, in the long term, regulation will be a key factor in the continuing success of not only our business, but the home reversion market in general. In the period, we sold interests in 139 home reversion property assets for £14.9m and recorded a proﬁt of £7.4m (2006: 110 assets for £12.5m and a proﬁt of £5.7m). We have made signiﬁcant progress in building this business in the year, investing a total of £252m on 2,899 assets (2006: £29m on 432 assets). These included the major acquisitions of the CHARM portfolio (a ﬁnancial interest in some 1,287 equity mortgages from the Church Commissioners for £135m) and The Capital Appreciation Trust (Isle of Man) plc (‘CAT’) which comprises 911 sheltered housing units for £72m. This latter acquisition is signiﬁcant in that it enhances our product offering in this sector, giving us the opportunity to provide more ﬂexible tenure alternatives from rental and lifetime lease through to shared equity. Operating contribution from this division amounted to £8m (2006: £3m). * Source: SHIP 37 Fund management and residential investments Grainger GenInvest G:res1 Schroders Total 2007 Total 2006 Holding 50.0% 21.6% 22.4% Gross asset value £m Net asset value £m Grainger share £m 364 457 90 911 312 80 219 90 389 27 40 47 20 107 14 S T R A T E G Y This division has made signiﬁcant progress in the year, the highlight being the close of G:res1, our market-rented fund. Total third-party investment in the fund stands at £159m, representing 78.4% and investors include Mitsubishi Corporation, Achmea, APP, British Airways Pensions Fund, FF&P, LGPI, Nomura, Norsk Hydro, Storebrand, Swiss Re and the Universities Superannuation Scheme. The fund itself grew considerably in the year with the acquisition of the Ability Portfolio (700 units in East London for £205m) and NAV grew by 14% in the period from launch in November 2006 to the end of June 2007. Grainger GenInvest, our joint venture with Genesis Housing Group, has also shown strong growth on the back of the London house price market – average increases in the value of the portfolio amount to 24.7% and the value of our total investment has increased from £10m to £40m. Including amounts lent by Grainger to the joint venture of £68m (2006: £58m) our total investment is £108m (2006: £68m). Annualised fee income from our fund and property management activities now stands at £7m. The contribution from this division (being share of proﬁts, dividends received, fee income and share of revaluation surpluses in the year) amounted to £40m (2006: £5m). We hope that current market conditions alongside political and social imperatives will mean that the government and local authorities have to look more favourably towards the professional private rented sector as a potential partner in providing some of the new housing supply to 2016. We are engaged in this debate and are conﬁdent that the model we are creating will be well placed to respond to any initiatives that are introduced. Property services This division carries out the asset and day-to-day property management of our core portfolios and those of our co-invested funds. The division also now includes our lettings team and regional sales and valuations. In this way we can provide a consistent level of service to each of the portfolios we manage. Residential units managed Gross rent roll Gross property expenditure 2007 19,312 £69m £18m 2006 15,221 £51m £12m 38 GRAINGER PLC Annual report and accounts 2007 chief executive’s review continued S T R A T E G Y Development Market value of development portfolios (including share of joint ventures) Estimate of completed development value Of this, with planning consent 2007 £110m £809m £324m 2006 £97m £675m £178m We have been building our team and reﬁning our strategy for development so that it is more aligned to the long-term ownership model of the group. We intend to continue to sell assets to the open market to assist in generating cash ﬂows for the group, whilst also retaining some stock. Good progress has been achieved on all major development sites during 2007. In particular, at Newlands (West Waterlooville) we obtained a resolution to grant planning for the development of 100,000 sq. metres of commercial space and 1,550 new homes. In addition the adopted Hampshire County Structure plan includes a reserve allocation for a further 1,000 units. We are currently in the process of agreeing the Section 106 agreement and hope to start on infrastructure work in the latter part of 2008. This is an exemplar scheme where we will be directly involved in some of the construction and in the long-term management of the estate. We expect the ﬁrst house sales to commence in the ﬁnancial year ending 2009. The current status of our other major projects is set out below: Project Description Status Expected gross development value Income from Wholly owned Hornsey Road, Islington Macaulay Road, Clapham Barnsbury Complex, Islington 212 residential units, community buildings 97 residential units 30,000 sq. ft. retail 141 residential units Wards Corner 198 residential units Newbury 330 residential units 50,000 sq. ft. retail Gateshead College 263 residential units Under construction Consent granted and demolition commenced Detailed planning consent obtained Conditional development agreement signed Preferred developer status, conditional development agreement early 2008 Detailed planning application late 2007 £44m £56m £49m £76m £82m £72m 2008 2009 2010 2012 2011 2009 Joint venture Curzon Park Mixed-use joint venture with Development Securities plc including 400,000 sq. ft. residential, 800,000 sq. ft. ofﬁce, 20,000 sq. ft. retail and 118-bed hotel Outline application submitted (Grainger share) £196m 2009 The above analysis demonstrates that revenues from this division will become more signiﬁcant from 2009 onwards. 39 Operating contribution from this business in the year (including trading proﬁts, proﬁts on sale of ﬁxed assets and joint venture interests, net of divisional overheads) amounted to £4m (2006: £7m). Continental Europe Residential units owned Market value Gross rent Gross annual running rent 2007 4,520 2006 2,739 £241.7m £116.9m £9.8m £15.0m £4.5m £7.5m S T R A T E G Y We have made signiﬁcant advances in our European operation, in particular the opening of our Mannheim asset and property management business, which now employs seven members of staff. Whilst increasing interest costs have narrowed the spread between yields and funding costs we remain optimistic for the prospects of our German residential business. This is based on our long- term strategy which includes buying good quality assets with favourable tenant structures in areas where residential demand is likely to remain high. The results of this have been reﬂected in the valuation of our portfolio which shows an uplift of 4.0%. We focus on smaller value portfolios (below €20m) and do not rely on overly aggressive privatisation rates to deliver the required level of returns. We continue to investigate alternative funding structures for our German business and, in particular, the possibility of introducing third-party equity. The operating contribution from our German portfolio in the year was £5m, primarily from net rental yield on the properties which is running at 4.5% (2006: 5.0%). We have two further European interests, one of which was sold in the year, delivering proﬁt of £1.2m on an original investment of £2m. The other, a subsidiary company in which we own an 81.6% stake, holds a development site in Zizkov, Prague and is going through the planning process. Our investment amounts to £3.5m and the gross development value may amount to as much as £170m on phase I with a second phase of similar size to follow. Prospects We have been building each of our businesses in a prudent way, without assuming the relatively high levels of house price growth that we have beneﬁted from in recent years. However, we believe that we now have in place a market-leading platform that can acquire, develop, fund, manage and sell a diverse range of residential products on a national basis. We are also conﬁdent that we can still produce good long-term returns from our specialist portfolios which rely on active management, development and trading of reversionary surpluses and will continue to concentrate our resources in these areas. RUPERT DICKINSON Chief executive 18 December 2007 40 GRAINGER PLC Annual report and accounts 2007 ﬁnancial review S T R A T E G Y Evolution of the application of IFRS and a review of our accounts by the Financial Reporting Review Panel has caused us to reconsider the suitability of certain of our accounting policies, in particular the classiﬁcation of market- rented residential assets which were transferred to G:res1 during the year ended 30 September 2006. In full agreement with our auditors, these assets have been reclassiﬁed as investment assets rather than trading assets with effect from 1 October 2005 and a prior year adjustment has been made accordingly. The effect has been to remove a revaluation surplus of £23.5m taken through the income statement in 2006 and instead take it through retained earnings at 1 October 2005 net of tax of £7.0m. This adjustment has no effect on the key indicator of market value, namely net asset value, and has no implications for the economics or cash generation of the business. An added beneﬁt is that by removing the one-off revaluation surplus taken to proﬁt in 2006, the disclosed income statements for 2006 and 2007 are far more directly comparable. We have also taken this opportunity to reclassify an immaterial balance of equity release home reversion assets to ensure consistent presentation. Full details of the adjustment are given in note 1(b) to the ﬁnancial statements on pages 81 and 82. Performance overview Our key performance indicators are: Gross net asset value per share (pence) Return on shareholder equity (1) Return on capital employed (2) Operating proﬁt before fair value 2007 828p 27.1% 12.1% 2006 677p 26.5% 14.0% Change 22.3% 0.6% (1.9)% and goodwill adjustments £89.0m £81.5m 9.2% (1) growth in NNNAV plus dividends paid per share as a percentage of opening NNNAV (2) proﬁt before ﬁnancing costs plus all revaluation surpluses as percentage of opening gross capital ANDREW CUNNINGHAM Deputy chief executive and ﬁnance director 41 S T R A T E G Y 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 the assets and so we set out below a summary of our net assets with the properties restated to market value. Statutory balance sheet £m Adjustments to market value, deferred tax and derivatives £m Gross NAV balance sheet £m Contingent tax £m Derivatives £m Triple NAV balance sheet £m Properties Investments/other assets Goodwill Cash Total assets Borrowings etc Other net liabilities Provisions/deferred tax Total liabilities Net assets 2007 net assets per share (pence) 2006 net assets per share (pence) 1,679 186 17 80 1,962 (1,408) (117) (114) (1,639) 323 251 193 643 5 – – 648 (12) (6) 112 94 742 577 484 2,322 191 17 80 2,610 (1,420) (123) (2) (1,545) 1,065 828 677 – – – – – – – (285) (285) (285) (221) (187) – 2 – – 2 9 – (3) 6 8 6 (3) 2,322 193 17 80 2,612 (1,411) (123) (290) (1,824) 788 613 487 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 assets value (NNNAV). The deﬁnitions of these measures are consistent with Gross NAV and Triple NAV as described and shown in the table above. This deﬁnition of Gross NAV requires us to take out any adjustments for deferred tax and changes in the fair value of derivatives as calculated under IFRS. NNNAV requires certain of these adjustments to be reinstated and in addition a deduction is made for contingent tax which is calculated by applying the expected rate of tax to the full inherent gains at the balance sheet date. Market value analysis of property assets Residential Development Total September 2007 Total September 2006 (restated) Shown as stock at cost £m Market value adjustment £m Market value £m 964 105 1,069 986 627 16 643 527 1,591 121 1,712 1,513 Fixed assets/ ﬁnancial interests in property at market value £m 610 – 610 388 Total £m 2,201 121 2,322 1,901 42 GRAINGER PLC Annual report and accounts 2007 ﬁnancial review continued 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 year-on-year and with our peers, whilst reﬂecting the unique nature of our business: Gross net assets per share up 22.3% to 828p from 677p (market value of net assets per share before deduction for deferred tax on property assets and before adjustments for fair value of derivatives). Triple net assets per share NNNAV up 25.8% to 613p from 487p (gross NAV per share adjusted for deferred tax on revaluation gains and for mark to market adjustments). Grainger NAV up 23.0% to 732p from 595p (NNNAV adjusted for the discounted and taxed reversionary surplus in our long-term regulated and home reversion portfolios). Gross net assets per share S T R A T E G Y (£m) 61 (55) Grainger net assets per share Reconciliation of Grainger NAV to NNNAV NNNAV as at 30 September 2007 Discounted reversionary surplus Tax thereon Grainger NAV as at 30 September 2007 £m 788 216 (62) 942 Pence per share 613 168 (49) 732 As in previous years, we set out below the major assumptions we have used in calculating the base case Grainger NAV and how it might change by amending those assumptions: • house price inﬂation is taken as zero over the entire reversionary period; • a discount rate of 9.38% has been used (weighted average cost of capital plus 3%); • no discounting of contingent tax on the revaluation surpluses; and 1,100 1,050 1,000 950 900 850 800 750 158 47p (43)p 22 25p 1,065 • reversionary periods taken as 13 years for regulated properties and 11 years for home reversions. Sensitivity analysis (refer to the ﬁnancial model on our website www.graingerplc.co.uk). 879 122p 677p t a s a V A N s s o r G 6 0 0 2 r e b m e t p e S 0 3 l s e s u p r u s n o i t a u a v e R l t i f o r P x a t r e t f a y l s u o v e r p i f o n o i t a n m E i l i r e h t O l s e s u p r u s d e s i n g o c e r 828p t a s a V A N s s o r G 7 0 0 2 r e b m e t p e S 0 3 43 House price inﬂation per annum 0% 4% 6% No discount of deferred/contingent tax Discounting deferred/contingent tax Discount rate WACC + 3% Discount rate WACC Discount rate WACC +3% Discount rate WACC 732p 805p 855p 780p 882p 952p 878p 951p 1,001p 896p 998p 1,069p Financial performance in the year Operating proﬁt before fair value movements and goodwill impairment increased to £89.0m from £81.5m as shown below: Earnings per share Basic earnings per share have increased by 71.5% to 47.3p from 26.0p (restated) as shown below: 100 (£m) (£m) S T R A T E G Y 90 80 70 60 75.1 s t n e m e v o m e u a v l r i a f e r o f e b t i f o r p g n i t a r e p o 6 0 0 2 10.5 (3.7) 0.7 89.0 4.1 (4.3) 6.4 81.5 t i f o r p g n i t a r e p o 6 0 0 2 t n e m r i a p m i l l i w d o o g k c a b d d A t n e m r i a p m i l l i w d o o g d n a s t n e m e v o m e u a v l r i a f e r o f e b e m o c n i r e h t o d n a s t n e r s s o r g n i e s a e r c n I 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 i g n d a r t l a i t n e d i s e r n i e s a e r c n I s t i f o r p i g n d a r t t n e m p o e v e d l n i e s a e r c e D r e h t O t i f o r p g n i t a r e p o 7 0 0 2 t n e m r i a p m i l l i w d o o g d n a s t n e m e v o m e u a v l r i a f e r o f e b The major movement in operating proﬁt derives from an increase in trading proﬁts from our core residential and home reversion portfolios. As expected, development proﬁts have decreased in line with the fall in the number of projects coming through for completion in the year. 70 60 50 40 30 20 10 40.2 (7.9) (6.1)p (2.4) 60.9 (1.9)p 7.5 (9.0) 6.4 5.8p (6.9)p (7.4) 33.5 4.9p (5.7)p 31.2p 26.0p ) d e t a t s e r ( S P E 6 0 0 2 n i e g n a h C t n e m r i a p m i l l i w d o o g f o e u a v l r i a f n i e s a e r c e D t i f o r p g n i t a r e p o n i e s a e r c n I s t n e m e v o m e u a v l r i a f e r o f e b n o i t a u a v e r l s e i t r e p o r p t n e m t s e v n i f o n o i n a g n i e s a e r c e D s t e s s a l i a c n a n i f d n a s e v i t a v i r e d 47.3p S P E 7 0 0 2 n i e s a e r c n I l e b a y a p t s e r e t n i n i e s a e r c n I r e h t o d n a n o i t a x a t n o i t u b i r t n o c i s e t a c o s s a / V J m o r f d e s a e r c n I As well as an improvement in operating proﬁt, this year’s result has been enhanced by the signiﬁcant contribution from our joint ventures and associates. In particular, Grainger GenInvest which is an exclusively London-based portfolio, has shown large revaluation gains, our share of which amounts to some £35m. 44 GRAINGER PLC Annual report and accounts 2007 ﬁnancial review continued S T R A T E G Y Interest and tax Our net interest charge has increased by £7.9m to £65.0m with interest payable increasing by £11.5m. The increase has arisen from a combination of higher debt levels used to ﬁnance the growth in our asset base (particularly home reversions and Germany) and higher underlying interest rate costs. On average monthly debt levels have exceeded 2006 ﬁgures by £208m and we have seen three-month LIBOR and Euribor rates rise by 123 basis points and 137 basis points respectively in the year. Our annual tax charge is at an effective rate of 21. 4%, the major items affecting it being: Group proﬁt before tax Tax at 30% Adjustments: Impact of tax rate change on deferred tax Utilisation of capital losses Other including prior period adjustments Actual tax charge £m 77.5 23.2 (6.0) (3.0) 2.4 16.6 Financial resources The business continues to be highly cash generative producing £497m (2006: £208m) from operating activities and sales of investment property. Major cash outﬂows relate to interest £66.1m, tax £8.5m and dividends £7.6m. Furthermore we spent a total of £723m on acquiring new properties, funding development and investing in joint ventures. To assist in funding this we raised additional net debt of £336m. During the year we revised the terms of our core borrowing facility, extending the average maturity by two years and reducing the overall borrowing margin by 13 basis points. The ﬁrst major repayment of £400m under this facility is not due until June 2010. We also issued a seven-year convertible bond producing net proceeds of £110m. The bond has a coupon of 3.625%, a post-tax cash cost of approximately 1.5% and a conversion share price of 864p. Subsequent to this issue we bought 1,525,000 shares back in the market for cancellation at an average price per share of £5.12. The average maturity of our debt is 5.9 years (2006: 4.1 years). At 30 September 2007 we had total headroom of £226m and the loan to value ratio stood at 53% (2006: 52%). Our all-in cost of debt in the year was 6.1% (2006: 5.8%) and our weighted average cost of capital has moved out to 6.38% from 5.67%. Net borrowings of £1,332m were 74% hedged (2006: £1,051m and 66%). We put in place a signiﬁcant level of new hedging early in the year including a 15-year £100m swap, at 4.98%. In total our ﬁnancial instruments were ‘in the money’ by £12.3m at 30 September 2007 (2006: out of the money £(2.1)m) and we have hedges/ﬁxed rates of at least £711m in place until March 2009. ANDREW CUNNINGHAM Deputy chief executive and ﬁnance director 18 December 2007 how we behave... 45 At Grainger, we know that our future is based around people – whether they are our dedicated staff, the tenants we care for, the investors and shareholders we answer to or the communities that we are part of. We are proud of our commitment to all these groups. 1 The Warm Front Grant provides a package of insulation and heating improvements up to the value of £2,700 (or £4,000 if oil central heating is recommended). It is a Government-funded initiative. S T R A T E G Y This has been an exciting year for Grainger’s Corporate Responsibility programme and I am pleased to report that social and environmental concerns have become increasingly central to our core business activities. Our commitment to sustainability has had a signiﬁcant impact on Grainger’s developments. At our Hornsey Road site all homes are being built to the EcoHomes Very Good standard and all future developments will now be built to Code for Sustainable Homes level three. We have also conducted a baseline review to establish signiﬁcant environmental impacts across the business. A two-year action plan is being drawn up to deliver against these recommendations. Social considerations are also being taken into account at our development sites. At Hornesy Road we are working with the school neighbouring the site on a number of different projects. On our other planned developments, all local communities impacted by our work are extensively consulted before works on site begin. Regarding our existing homes, we have been very successful in helping tenants access funds through the Warm Front initiative1. Not only does this provide greater support for our more vulnerable tenants, but it also improves the energy efﬁciency of our portfolio. I am very proud of our work with Business in the Community where we welcomed three people who have been affected by homelessness to join us on two-week work placements. This has been an enriching experience for all concerned – not least our own staff. In the year ahead we will be taking our commitment to our people further with a strengthened programme of training and additional investment in Human Resources. This year we are pleased to have launched a dedicated Corporate Responsibility website (www.graingercr.com) which contains more detailed information on all our CR activities. Grainger is challenging itself to perform better in all areas. We have set ourselves short-term targets as well as a programme of long-term goals to take our CR strategy forward in the coming years. RUPERT DICKINSON Chief executive 46 GRAINGER PLC Annual report and accounts 2007 how we behave continued S T R A T E G Y 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. Training remains a key area for Grainger. We have developed and launched a new training and development site on the company intranet and are also ensuring that all property managers are qualiﬁed to the Association of Residential Letting Agents (‘ARLA’) standard. In 2008, we will be concentrating on learning and career development with the aim of increasing average training days. Our HR director will undertake an HR policy review to ensure the business and culture continue to align in accordance with best practice. We will also be conducting a review of the Grainger employer brand with the aim of connecting our values, people strategy and HR policies. TARGETS 2007/08 Enable employees to better share in the success of the company by developing a career development framework to encompass all roles; and launch a new management development programme as part of our succession planning. Reﬁne our performance management system to reinforce our culture that each employee makes a valuable contribution to the business. Develop our employee beneﬁts package to offer greater ﬂexibility, thereby enabling employees to better reﬂect their individual needs. Key performance indicators Employees Number of employees undertaking professional education Average number of training days per employee Investment in training per employee % staff turnover % 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 % of part-time employees % of eligible employees participating in the sharesave scheme % of eligible employees participating in share incentive plan 2005 31 3 £671 19% 30% 56% 24% 16% n/a n/a n/a 2006 34 3 £674 25% 39% 56% 4% 13% 10% 50% 83% 2007 38 4 £628 10% 34% 56% 5% 28% 6% 53% 85% 47 S T R A T E G Y ARCHIKIDS Grainger continued to support Open House in 2006/07 by ﬁnancing the launch of the Archikids website; www.archikids.org.uk. The initiative is aimed at educating children about the built environment. DOT & JOAN, EASTBOURNE Dot is a regulated tenant and still lives in the same house she was born in. A few years ago, we gave her special dispensation to allow her friend Joan to move in with her. STAFF DEVELOPMENT Holly Walker joined Grainger as a property management assistant (‘PMA’) in 2005 and has shown great personal initiative and drive in this role. Recognising where data management systems could be improved, Holly devised a new method of storing, sharing and tracking information. This was implemented across our Property Services division. Holly also developed an induction guide for new PMAs to ensure comprehensive technical training was available for all. Holly was a clear candidate for promotion to trainee property manager (‘PM’) and enrolled on our six month PM training programme. After successfully completing this, we were delighted to promote Holly to property manager in September 2007. “I enjoy working at Grainger because of the focus they have on their staff and their development. They provide a supportive atmosphere where individuals can identify the need for change and these ideas are responded to positively.” HOLLY WALKER 48 GRAINGER PLC Annual report and accounts 2007 how we behave continued S T R A T E G Y objective 2 Ensure that we treat our tenants and customers fairly, and that we are responsive to their needs. Key performance indicators Customers We are pleased to report that tenant satisfaction increased this year, with 65% of existing market rented tenants rating Grainger’s Management Service as ‘very good’ or ‘excellent’ (up from 60% last year). We continue to help our more vulnerable tenants access funding via the Warm Front initiative. 36% of homes surveyed under this initiative have now had insulation work carried out. One focus on training this year has been to ensure all our property managers are ARLA qualiﬁed. This has enabled us to continue to deliver the highest standards of service. Number of properties surveyed to date under the Warm Front/Miller Paterson initiative % of above properties which have had insulation work done Proportion of rent due that has been collected Rent loss due to voids as a percentage of open market rental value * Warm Front only TARGETS 2007/08 2006 445* 28% 99% 6% 2007 2,946 36% 98% 2% As a founder member of REAL SERVICE*, work to establish our current performance level within the benchmarking criteria. Following the launch of British Property Federation Crystal marked Standard Tenancy Agreement, implement across Grainger for all new and renewed tenancies. To measure, via a sample of tenants, the level of satisfaction with repair work in order to establish a baseline and set improvement targets from next year. * REAL SERVICE is a benchmarking group dedicated to helping the real estate industry improve customer service and generate improved property performance (www.real-service.co.uk) objective 3 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. Our 2007 environmental baseline review has provided us with an accurate picture of our most signiﬁcant impacts; energy use, transport, waste and procurement. We will focus on these as well as collecting data so we can report accurately and set performance-related improvement targets next year. We have had considerable success in sustainable design, environmentally- friendly practices and construction at Hornsey Road this year with all homes being built to EcoHomes Very Good standard. Our contractors are measuring and monitoring waste levels and we can report that 40% has either been recycled or sent to a Materials Recovery Facility. By considering sustainability earlier, including speaking in advance to contractors, we are conﬁdent of achieving higher environmental standards. 49 objective 3 continued With regard to our existing portfolio, we have conducted a research exercise to identify more environmentally-friendly alternatives to the materials that we use in our refurbishments. We will now be developing minimum standards for a range of materials and incorporating this information into our refurbishment software programme. S T R A T E G Y TARGETS 2007/08 Devise and implement a company-wide employee environmental awareness programme. To increase the proportion of recycled content in materials used in new builds to 10% by value and use good practice measures to increase this still further. All new Grainger homes to be designed and delivered to CSH level three or EcoHomes ‘Very Good’ in the case of some existing schemes. LONG-TERM TARGETS Provide online access advice, information and guidance to tenants, on environmental issues and explore a suitable partner organisation with whom to communicate with tenants about the environment. Develop an action plan to implement agreed recommendations from the Environmental Baseline Review over the coming two years. Develop and implement a carbon management strategy by 2010. As our business is based around providing and managing homes, reducing homelessness is particularly relevant to Grainger. We were therefore delighted to welcome three people into the business through the Business Action on Homelessness work placement scheme. In addition, we have also hosted a Ready to Go Training and Action Day, which prepares clients affected by homelessness for work placements, and hosted a CV workshop. As our development activities have grown, we have been mindful of the potential impact that we could have on local communities and have worked with specialist organisations to deliver effective community consultation. By engaging actively with the community and key stakeholders pre-application, we not only produce a better scheme which meets the needs of the community that surround it, but also increase our chances of success in planning. At our Hornsey Road development, we have enjoyed working with the local school and getting to know those in the community through a fun day held in conjunction with Tollington Community Association. objective 4 Seek to understand the needs of the communities within which we operate, and positively contribute to their well-being 50 GRAINGER PLC Annual report and accounts 2007 how we behave continued S T R A T E G Y objective 4 continued TARGETS 2007/08 Develop and implement a Community Investment strategy that supports charities and community activities relevant to our business and staff. Work in partnership with Shelter to support their policy seminars on raising awareness of the professional private rented sector. Each business division to identify and undertake relevant community activity. Key performance indicators Community Money raised for charity of the year (Shelter) Number of staff involved in community activities Total amount raised for charities 2005 2006 2007 £30,764 £24,112 £10,296 180 220 250 £42,234 £58,747 £71,283 objective 5 Safeguard the health, safety and welfare of our employees, and where possible that of our tenants, contractors, visitors, clients and the general public. Over the past year, we have formalised our health and safety strategy and have proactively communicated with our network of contractors. We also produced and distributed a handbook, ‘Health and Safety Requirements for Property Maintenance Contractors’ and this has proved to be a useful tool for embedding health and safety throughout the business. We are pleased to report that our key performance indicators – RIDDOR reportable accidents and incidents, and pollution incidents – are zero again this year. TARGETS 2007/08 Gather and present health and safety data for all Grainger activities and projects, track performance and identify trends. Ensure accident/incident rates for Grainger and contracted activity is below the national average year-on-year. Undertake health and safety audits for a representative sample of Grainger activities and contractors to assess compliance and inform improvement activity. Identify suitable health and safety training and deliver to relevant Grainger staff. 51 SUPPORTING OUR STAFF Ian Lawson, senior property manager, set up his own under 9’s football team this summer, the Hebburn Wanderers. Grainger’s sponsorship of his team enabled them to purchase new equipment and it has given them the necessary ﬁnancial stability to offer season awards and man of the match medals. “This sponsorship money has been warmly received by all at Hebburn Wanderers, it has allowed my team to train and compete in brand new quality kit, and provided the required training equipment to give the kids all the chance of success in the league. The setting up of a team and all that comes with the running of a junior football season takes a lot of my time and effort and the fact that Grainger provided such excellent support has delighted me.” IAN LAWSON S T R A T E G Y “The strips are really cool, and we so feel part of the wanderers now, lets hope we can start challenging for the title soon, come on the wanderers.” DYLAN PHOENIX MORRISON, Team Captain. BUSINESS IN THE COMMUNITY Grainger has continued its relationship with BITC. In 2006/07, we gave three work placements to clients from Business Action on Homelessness. 52 GRAINGER PLC Annual report and accounts 2007 how we behave continued S T R A T E G Y objective 6 Engage proactively with prioritised suppliers. Grainger has embarked on a programme of supplier engagement this year. This has involved circulating a Code of Good Practice which has a focus on community awareness and respect for the environment. We are also working with KPMG to review our supply chain which will incorporate sustainability issues. We spend a signiﬁcant amount of money on property expenses and capital expenditure, and development projects. During the year we completed a tender process and are pleased to have appointed an environmentally preferable stationery supplier across our ofﬁces. Key performance indicators Supplier Average payment term from invoice date 2005 30 days 2006 30 days 2007 18 days objective 7 Maintain high standards of business conduct, and secure long-term sustainable returns for our investors. TARGETS 2007/08 Request supplier environmental information as part of future tender processes and actively consider this information when awarding signiﬁcant supplier contracts. Grainger continues to engage with investors wherever we see an opportunity to do so. This year we undertook a corporate benchmarking exercise, learning more about both our investors’ and our peers’ public CR commitments. This has given us a better understanding of the sustainability goals of these groups. We held an internal workshop with staff to discuss the results and brainstorm CR target ideas for the future. The outcomes of this workshop were fed directly into the development of our targets for 2007/08. TARGETS 2007/08 Formally respond to requests for information sent by our major investors (owners of at least 2% of shares) on sustainability and CR in general. Proactively engage with the CR committee of at least one major investor to help develop and improve our own internal CR strategy. adviser’s statement 53 S T R A T E G Y Upstream has assessed Grainger’s achievement against the 2006/07 targets based on: • meetings and telephone interviews with Grainger individuals responsible for speciﬁc CR areas and for target delivery; and • detailed review of documentation and information submitted as evidence against the targets. On this basis we can provide assurance that Grainger plc has made some progress on 86% of its 22 applicable CR targets, with eight of these being fully achieved by the year end. A number became not applicable due to circumstances beyond Grainger’s control, a change in responsibility for other targets unfortunately slowed progress. Nevertheless, Upstream believes that Grainger retains a genuine commitment to improving its CSR credentials, and we note that several of the targets that were not fully achieved in the past year have been carried forward for completion during the 2007/08 period. Grainger’s successes this year include: • a baseline review of environmental aspects and impacts to prioritise those that pose the most signiﬁcant risk to Grainger’s business; • an initiative to engage with contractors requiring them to provide environmental performance data for individual construction sites for monitoring purposes; and • Grainger’s work with the homeless, along with its commitment to staff, should be celebrated as particular areas of success. Grainger has set some challenging targets for the year ahead and, for the ﬁrst time, the company has committed to a number of longer-term goals. This demonstrates a more strategic approach to CR. The gathering of environmental performance data across key business activities will represent a real challenge in the coming year, but internal monitoring systems are already being developed and work is under way with a number of external organisations to facilitate this important task. At Upstream, we look forward to continuing to work with Grainger as it continues to address its material impacts and further develops its CR strategy. JULIE HIRIGOYEN Director 54 GRAINGER PLC Annual report and accounts 2007 the board ROBIN BROADHURST C.B.E., F.R.I.C.S. Chairman, ANDREW CUNNINGHAM F.C.A. Deputy chief executive chairman of nomination committee. Aged 61 and ﬁnance director. Aged 51, Chartered Accountant Appointed director of the company in February 2004. Joined Deloitte Haskins and Sells in London in 1978 and worked Previously European chairman of Jones Lang La Salle, trustee in their Nairobi and Bristol offices before being made a partner and non-executive director of Grosvenor, a senior advisor in their Newcastle office in 1989. Appointed director of the to Credit Suisse Group, property consultant to Sir Robert company in December 1996. Appointed deputy chief executive McAlpine Limited, member of the Prince’s Council for the in December 2002. In May 2007, was appointed non-executive Duchy of Cornwall and non-executive director of the British director of The Local Shopping REIT plc. Library and Invista Real Estate Investment Management plc. STEPHEN DICKINSON* F.C.A. Deputy chairman, member RUPERT DICKINSON M.R.I.C.S. Chief executive. of nomination committee. Aged 73, Chartered Accountant Aged 48, Chartered Surveyor In practice in the British Virgin Islands 1963-1974. Appointed Joined the company in 1992 from Richard Ellis (now CBRE). managing director of the company in 1974. Upon retiring as Appointed a director of the company in 1994. Appointed chief managing director in October 2002, became deputy chairman. executive in October 2002. Joined Workspace Group plc as British Virgin Islands representative on United Kingdom Overseas a non-executive director in August 2006. Chairman of the Territories Association 1993-2004. Chairman of Deutsche Land residential committee and member of the policy committee plc since February 2006. of the British Property Federation, member of the International Property Federation. G O V E R N A N C E Bill Tudor John John Barnsley Stephen Dickinson Rupert Dickinson 55 ROBERT R S HISCOX* A.C.I.I. Member of nomination HENRY PITMAN* Member of audit committee. Aged 45 and remuneration committees. Aged 64 Appointed a director in May 2007. Previously chief executive Appointed a director of the company in March 2002. of Tribal Group plc, a company he founded in September 1999. Chairman of Hiscox plc. Deputy chairman of Lloyd’s 1993-1995. Prior to this, he was managing director of JHP Group Limited. JOHN BARNSLEY* F.C.A. Chairman of audit committee and member of remuneration committee. Aged 59, Chartered Accountant Appointed a director of the company in 2002. Non-executive director of Northern Investors Company plc, American From 1990 to 1995 he worked for the Property Corporation of South Africa. BILL TUDOR JOHN* Senior independent director, chairman of remuneration committee, member of audit committee. Aged 63 Appraisal Associates LLP and LMS Capital plc. Chairman Appointed a director of the company in February 2005. Creswell Medical Limited. Until December 2001 was a Currently a managing director of Lehman Brothers, previously senior partner at PricewaterhouseCoopers. a partner at Allen & Overy LLP for 29 years, serving as senior partner for six years. Also 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 G O V E R N A N C E Andrew Cunningham Robin Broadhurst Robert R S Hiscox Henry Pitman 56 GRAINGER PLC Annual report and accounts 2007 corporate governance report G O V E R N A N C E Robin Broadhurst, appointed chairman in February 2007, has Roles continued to uphold the highest standards of governance which There is a written, approved statement of the separation were maintained under the previous chairman. He has, inevitably, of duties of the chairman, who reports to the board and the made some changes to the operation of the board in line with chief executive, who reports to the chairman. Other key the increasing complexity of the business and these are differentiating factors are as follows: described in this report. The chairman The board believes that corporate governance is fundamentally Responsible for running the board about the way a company operates and should not be an automatic response to a check list. However, it is also mindful that The Combined Code 2003 and the modifications to it Only the chief executive and the company secretary (for corporate governance matters) report to him in 2006 are generally accepted to describe best practice in Guardian of the board’s decision making governance and seeks to comply as far as possible where this is in the best interests of the company. The statement of compliance refers to The Combined Code 2003, which was The chief executive Responsible for running the business applicable to Grainger. All executive management report to him, directly or indirectly This report fulfils the requirements of the Listing Rules and should be read in conjunction with the reports of the individual Responsible for implementing the board’s decisions committees which follow. The directors A company is only as good as the people who work for it and the directors are committed to ensuring that the board itself includes people who have all of the necessary skills, knowledge and experience to successfully lead the organisation. The Other key roles include the senior independent director and the chairmen of the committees. Robin Broadhurst held the position of senior independent director until his appointment as chairman following the Annual General Meeting in February 2007 and was replaced by Bill Tudor John. The committees’ compositions and work are described in detail in their own reports which follow. composition of the board, which is relatively small, changed Independence at two points during the year as follows: On 28 February 2007, Robert Dickinson retired as chairman and was succeeded by Robin Broadhurst, previously the senior independent director. Up until that date, in the board’s view, the board consisted of the chairman, deputy chairman, two executive directors and four independent non-executive directors. There were no new additions to the board at that date. On 1 May 2007, Henry Pitman was appointed to the board as an independent non-executive director, re-establishing the same balance of non-executives as previously. The directors therefore believe that, excluding the chairman, the board consisted of at least half independent non-executive directors for the entire reporting period. With the retirement of Robert Dickinson as chairman and subsequent appointment of Henry Pitman, an independent non-executive director, the board has again demonstrated its commitment to increasing the independence on the board. It will no doubt still be of concern to some that the chief executive is a cousin of the deputy chairman, however this is the only lasting family tie which remains on the Grainger board following many years of greater links. As intimated in The Combined Code, the criteria of A.3.1 are only a guideline and it is the directors’ view of the independence of a particular director that is ultimately important. In forming their opinion, the directors consider, amongst other things, the individual’s professional characteristics, their behaviour at board meetings, their contribution to the debate and unbiased judgement. The following analysis explains the board’s duly considered view of the independence of the directors. 57 Director Board’s determination Explanatory notes Robin Broadhurst Independent (cid:129) independent under A.3.1 criteria. (Appointed chairman 28 February 2007, previously senior independent director) Stephen Dickinson (Deputy chairman) Not independent (cid:129) close family ties; (cid:129) more than nine years’ service; (cid:129) previously managing director; (cid:129) part-time executive responsibilities; (cid:129) participation in all-employee share scheme. Bill Tudor John Independent (cid:129) independent under A.3.1 criteria. (Appointed senior independent director 28 February 2007) John Barnsley Independent (cid:129) independent under A.3.1 criteria. Robert R S Hiscox Independent (cid:129) although a trustee for a trust holding a material shareholding (7% at 30 September), 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; (cid:129) the trust has reduced its shareholding over the past three years, from 12.5 million shares to 9 million shares. Henry Pitman Independent (cid:129) independent under A.3.1 criteria; (Appointed 1 May 2007) (cid:129) note that as explained at the time of his appointment Mr Pitman is related to the Dickinson family, there are no close ties between him and the current or former directors of Grainger. Robert Dickinson Not independent (cid:129) close family ties; (Retired 28 February 2007) (cid:129) more than nine years’ service. Full biographical details of all current directors are given on pages 54 and 55. Retirement by rotation and re-election of a significant development, is considered particularly beneficial. The board recognises that it is important to adhere to good The board therefore continues to consider itself fortunate governance principles and all board members are, as such, that the deputy chairman, being willing and able, will again offer required to stand for re-election upon appointment and at himself for re-election, despite having passed the age of 70 and intervals of no more than three years. However, the board having stood for re-election for each of the past three years. is also of the view that long-term stability in the board is an The chairman has satisfied himself that, following evaluation, important factor, given the long-term nature of the business. all directors offering themselves for re-election continue to Continuation of leadership throughout, for example, the period show the required commitment and effective performance. G O V E R N A N C E 58 GRAINGER PLC Annual report and accounts 2007 corporate governance report continued G O V E R N A N C E Meetings Each director is given an opportunity to raise an item to the There were four ordinary meetings of the board in the year, agenda and any request for further information from a director where the board met to review the business and to consider is treated as a high priority. The directors also have direct the items reserved specifically for it which have been documented access to the services of the company secretary, who reports and approved by the board. These include setting the overall to the chairman regarding matters of corporate governance. strategy, approving major transactions, setting debt/gearing limits The appointment and removal of the company secretary is and associated hedging strategy and agreeing accounting policies. a matter for the board as a whole. Procedures also exist for No changes were made to this schedule during the year. directors to take independent professional advice as required, Decisions regarding more minor transactions are delegated at the group’s expense. to management. The chairman met once during the year with the non- Each meeting was preceded, the evening before, with an executives, without the executives present. It was the joint view informal meeting allowing more time for debate and also a of the chairman and the non-executives that this was indeed dinner, giving an opportunity for the directors to enhance their useful and two such meetings have been planned for the next relationships with each other. All directors attended all meetings reporting period. during their relevant periods of office except for Robert Hiscox, who was not present at two of the meetings. On one occasion when unable to attend the formal board meeting, Mr Hiscox attended the previous evening meeting and dinner to ensure that his views could be taken to the board meeting. It is intended that there will be six ordinary board meetings in the next reporting period. As in previous years, at the June meeting, the board met for an extended period in order to debate and reflect fully on strategy. This event also provides an ideal opportunity for the board to spend time with the senior executives. As well as the ordinary meetings, ad hoc meetings are arranged as necessary in order to consider major transactions or events. Due to the short notice, which is unavoidable, all directors are not always able to attend, or to join by teleconference. Wherever possible the chairman will take on views of the non-attending director prior to the meeting. Board papers are produced and distributed in a timely manner for each meeting. They contain sufficient financial and non- financial information to allow the board to properly monitor the group and understand the challenges facing it and opportunities open to it. The format of the papers has recently been amended to specifically highlight items for decision and for discussion. In this way the board can be sure that it concentrates its efforts and allocates sufficient time to those items which are most important. Induction, evaluation, training and development Henry Pitman was appointed in the year and received a comprehensive, tailored induction to the company. This consisted of the provision of a ‘bible’ of information covering such items as the most recent risk review, recent minutes, terms of reference of the committees etc. as well as sessions with each member of the senior management team. These meetings were arranged in small groups so that as well as the divisional leaders each giving a presentation of their business area, discussion and debate was encouraged. Mr Pitman was also taken on two property tours, to enable him to see some of the company’s properties – ranging from the core regulated portfolio through to the development activities. Mr Pitman was fortunate to join the board in time to participate in the June extended strategy meeting described above, which gave him an ideal opportunity to understand the strategy at a very early opportunity. Directors and Officers insurance is held by the company and details of the policy are given to new directors on appointment. The evaluation process this year again built on the success of the previous year, extending the work involved and in turn enhancing the outcomes. The process was conducted internally and consisted of a written questionnaire followed by an interview with the chairman. Rather than a box ticking or simple rating scheme, the response required from directors this year was an ‘in their own words’ approach. This allowed for more 59 than just the standard areas of performance to be recognised. together or individually in several roadshows throughout Europe The questionnaire covered all of the board as a whole, the and in the USA. In particular this year, more meetings have taken committees and the individual directors and all of these areas place with private client brokers. Feedback is always sought were picked up as relevant in the subsequent interviews. following such events and is presented to the board as a whole. Notes of the interviews are held only by the chairman and the The board is briefed on the views of major shareholders. company secretary since it has been proven in recent years that Further, all directors, including the chairman and non-executives, this allows the directors to be more open in their discussions. are available for meetings with shareholders. There were no The chairman was pleased with the commitment shown by the directors to the process and felt that it was very useful for him in his first year of chairmanship. The whole process and its outcomes were reviewed formally at a board meeting. As a requests in the year from shareholders to meet Henry Pitman, the newly appointed non-executive director. He, along with all other directors, will be in attendance at the Annual General Meeting and available to answer questions. result of the evaluation process it has been agreed that more The group’s website includes a specific and comprehensive communication between the executives and the non-executives Investor Relations section, containing all RNS announcements, could be beneficial. This will be in part achieved through a share price information and annual documents available for planned increase in number of board meetings to be held download etc. All shareholders have the opportunity to attend each year. The senior independent director met firstly with the executives the Annual General Meeting, which continues as a route for communication with smaller/private shareholders. and then immediately after with the non-executives in order to The notice of meeting and annual report and accounts are sent evaluate the performance of the chairman. The board’s written out at least 20 working days before the meeting. Separate votes document for the separation of the roles of the chairman and are held for each proposed resolution, including the approval of the chief executive was used as a basis for the evaluation, the remuneration committee report, and a proxy count is given bearing in mind that the chairman had only very recently in each case after the voting on a show of hands. At the Annual been appointed. The board is provided with regular written updates which are relevant to a listed property company. In the year this included further information on the REIT regime and the Companies Act 2006. Directors are able to request specific training, through the chairman or company secretary. If any development areas are identified for the board as a whole, its committees or for directors as individuals, then they would be appropriately addressed on appointment or thereafter. Relations with stakeholders The primary contacts with shareholders, analysts and potential investors are the chief executive and deputy chief executive/ finance director. The usual half yearly results announcements and briefings were also attended by some of the company’s most senior management and this was welcomed by shareholders. Apart from these meetings, there have again been circa. 100 meetings and presentations by the executive directors, to maintain an appropriate dialogue. They also participated either General Meeting in February 2007, Grainger included a ‘vote withheld’ category for the third year, in line with best practice. Shareholders were also able again to lodge their votes through the CREST system. Internal control The group has a cyclical process for identifying, assessing and managing its internal control, which has been in place for the full year under review and up to the date of this report. The process is designed to enable the board to be confident that such risks are mitigated, or controlled as far as possible. It should be noted however that no system can eliminate the risk of failure to achieve business objectives entirely and can only provide reasonable and not absolute assurance against material misstatement or loss. The audit committee is delegated the task of reviewing all identified risks, with the absolute key risks retained for full board review. The audit committee reports to the board at every board meeting. Risks and controls are reviewed to ensure effective management of appropriate G O V E R N A N C E 60 GRAINGER PLC Annual report and accounts 2007 corporate governance report continued strategic, financial, operational and compliance issues. The audit B.1.6 The company complied with this requirement at the committee also reviews the half year and full year financial year end, however as explained in detail in the directors’ statements and holds discussions with the group’s auditors. In remuneration report, Rupert Dickinson and Andrew addition, the group has an internal audit function which performs Cunningham held service contracts during the year with relevant reviews as part of a programme approved by the audit notice periods in excess of one year. The notice periods were committee. The committee considers any issues or risks arising being reduced from two years to one year on a straight-line from internal audit in order that appropriate actions can be basis over a period of five years from 1 October 2002 to undertaken for their satisfactory resolution. The internal audit 30 September 2007. manager has a direct reporting line to the chairman of the audit committee. An annual budget is produced, together with longer-term projections in accordance with the agreed strategy, which are presented to the board for approval. A fundamental part of the control process is the diligent monitoring of actual performance against this budget by the board. Where applicable, revisions are made to expected outturn against which further progress can be monitored. The board also discusses in detail the projected financial impact of major proposed acquisitions and disposals, including their financing. All such proposed substantial investments are considered by all directors. Where meetings are required G O V E R N A N C E Nomination committee report The nomination committee composition changed during the year due to the retirement of Robert Dickinson, the previous chairman, but at all times consisted of the chairman of the board (who is the chairman of the committee) and two independent non-executive directors as follows: Until 28 February 2007 Robert Dickinson Robert R S Hiscox Robin Broadhurst From 28 February 2007 Robert R S Hiscox Bill Tudor John Chairman Member Member Chairman Member Member between board meetings and a full complement of directors Robin Broadhurst cannot be achieved, a 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. Going concern Due to the relatively small size of the board, matters which are included within the nomination committee’s terms of reference After making diligent enquiries, including the review of future are often discussed by the board as a whole. As a result, this anticipated cash flows and compliance with banking covenants, year, the committee met only informally and communicated the directors have a reasonable expectation that the group and on other occasions by email or by telephone. company have adequate resources to continue in existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. 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 The terms of reference of the nomination committee are available on the group’s website and principally relate to filling vacancies on the board, whether arising through resignation, retirement or desired expansion and succession planning. Following some restructuring of the senior management team it is expected that succession planning will be high on the nomination committee’s agenda next year. non-compliance on grounds of independence has been recorded. The retirement of the previous chairman and appointment Except as noted below, the board considers that it has complied with the Combined Code 2003 during the year ended 30 September 2007. of the new chairman had been announced prior to last year’s report and as reported in last year’s nomination report, the recruitment of a further independent non-executive was in progress. This involved the use of an agency. 61 The nomination committee is also responsible for reviewing the The audit committee adheres to particularly strict and detailed desirability of the continuation of service of directors required terms of reference, which are available for inspection on the to retire by rotation. In this regard each of the directors group’s website. In addition to the work described within the required to retire by rotation this year has continued to ‘internal control’ section of the main report above, the audit demonstrate full, capable and committed participation in setting committee is also responsible for reviewing the independence and monitoring strategy for the group. Details of those directors of the external auditor, which includes the approval of any standing for re-election in the February 2008 Annual General non-audit service fees above a relatively nominal level. The audit Meeting are given in the notice of meeting which accompanies committee is responsible for the appointment of the external this report and biographies are displayed on pages 54 and 55. auditor and for agreeing the audit fee. The deputy chief executive/finance director and external audit partner as well as other senior management are invited to attend meetings of the committee. In particular this year, the audit committee has started to receive presentations from members of staff such as the treasury director, tax director and IT director (all non-statutory directors), to ensure that they feel sufficiently close to these important individuals who have significant levels of control to maintain. Once each year the audit committee meet with management without the auditors present and also with the auditors without management present. During the year the committee received 26 internal audit reports covering both control and value for money matters. By order of the board G O V E R N A N C E MARIE GLANVILLE ACA ACIS Company secretary 18 December 2007 Audit committee report The audit committee meets four times each year and reports on its work at every subsequent board meeting. This is a critical part of the internal control process. Meetings of the committee invariably last two hours or more. As a result of Robin Broadhurst being appointed chairman of the board on 28 February 2007, he resigned from the committee on that date. The board therefore comprised only two members for the two months until 1 May 2007 when Henry Pitman was appointed to the board and the audit committee. However, since there were no meetings of the committee during that period, there were three independent members available for all meetings. As a result, this minor non-compliance with provision C.3.1 has not been formally raised to the compliance statement. Attendance of the individual directors is shown below. Mr Barnsley has the particular recent, relevant financial experience required by The Combined Code. John Barnsley Chairman Bill Tudor John Member Nov 2006 Feb May 2007 2007 Sep 2007 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Robin Broadhurst Member (resigned 28 February 2007) ✓ ✓ n/a n/a Henry Pitman Member (appointed 1 May 2007) n/a n/a ✓ ✓ G O V E R N A N C E 62 GRAINGER PLC Annual report and accounts 2007 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 with Grainger’s remuneration policy is designed to attract, motivate usual practice will be put to shareholders for approval at the and retain high calibre individuals to enable the group to operate Annual General Meeting. The remuneration committee The remuneration committee consisted throughout the period of Bill Tudor John (chairman), with Robert Hiscox and John Barnsley as members. In the opinion of the directors the committee therefore comprised three independent non-executives throughout the year. Certain shareholder pressure groups raised concerns again last year that Mr Hiscox, as trustee of an unconnected family trust owning a material shareholding (7% as at 30 September 2007), should not be regarded as independent. The board maintains their view that Mr Hiscox is independent and a valued contributor to the remuneration committee. The remuneration committee met formally twice during the year and all members attended except for Robert Hiscox, who was unable to attend one of those meetings. The committee have also communicated informally during the year, in particular with regard to the finalisation of the new LTIS, which had been substantially agreed at the September 2006 committee meeting and was approved by shareholders at the February 2007 Annual General Meeting. They also exchanged correspondence regarding uplifts in salaries and bonuses for all staff, including the executive directors and share awards made in accordance with the new LTIS in March 2007. This year New Bridge Street Consultants LLP (‘NBSC’) continued to be involved in the set up and implementation of the new LTIS, as approved at the February Annual General Meeting. NBSC have no other connection with the company or its directors as individuals. The chairman and committee have also had access to advice from the director of HR. This position was vacated during the year and a new director of HR was appointed in November 2007. strategically for the continued benefit of shareholders, over the long term. In order to operate this policy, the remuneration committee receives information on remuneration packages awarded to directors in comparable organisations and aims to ensure that the rewards paid by Grainger are competitive. The policy is also designed to align the 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 70. 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 or senior independent position is held, are determined by the board as a whole. Following his appointment as chairman, Robin Broadhurst recommended to the board as a whole that John Barnsley, as chairman of the audit committee, should receive an interim rise in fees to £50,000 per annum. This was in recognition of the significant and increasing amount of work involved in this role. Usually, non-executive directors’ fees are only reviewed biennially and as such would not fall to be reviewed in the current The committee’s terms of reference are available on the reporting year. group’s website. 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. 63 Usual benefits are also afforded to these individuals. In this context, senior management are those employees who are members of the ‘executive team’ which was restructured in the year. 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. The remuneration committee also review the total level of salaries and bonuses paid to the group as a whole. This includes reviewing the details of any employee earning over £100,000, or earning a bonus in excess of £50,000 or a bonus in excess of 25% of salary. Service contracts As explained in prior years, Rupert Dickinson and Andrew Cunningham each hold service contracts with notice periods which were decreasing on a straight-line basis from two years to one year, over a period of five years which ended on 30 September 2007. At the year end and as at the date of this report therefore the notice periods were reduced to one year and are now in full compliance with the Combined Code. Contract dates and unexpired terms for the directors are as follows: Rupert Dickinson Andrew Cunningham Robin Broadhurst Stephen Dickinson Bill Tudor John John Barnsley Robert Hiscox Henry Pitman Contract date Unexpired term* Notice period 19 July 1996 No fixed term 26 July 2000 No fixed term 12 months 12 months 26 February 2004 28 February 2000 24 February 2005 27 February 2003 6 March 2002 1 May 2007 5 months 5 months 5 months 5 months 5 months 7 months None None None None None None G O V E R N A N C E * calculated as at 30 September 2007 and rounded to the nearest whole month Apart from salary and benefits in relation to the notice period After full consideration it was agreed by the remuneration described above, there are no other terms in any of the contracts committee that both executive directors should retain the fees which would give rise to compensation payable for early paid to them by the respective organisations. In the year under termination, or any other liability of the company. review, Rupert Dickinson and Andrew Cunningham retained Each non-executive director has specific terms of reference. Their letters of appointment state an initial one-year period, with a continuation subject to review at that time. The letters of appointment contain no entitlement to compensation for early termination. Other directorships Rupert Dickinson has served as a non-executive director of Workspace Group plc throughout the period under review. Grainger’s board were satisfied that the appointment would be of mutual benefit, with Rupert gaining invaluable experience of another plc. On 2 May 2007 it was announced that Andrew Cunningham joined the board of The Local Shopping REIT plc. £16,500 and £12,385 respectively. Non-performance-related remuneration 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 are performed at the same time of year. Executive directors and the deputy chairman, Stephen Dickinson, who has part-time executive responsibilities, along with other senior members of staff, receive a fully expensed company car, or a car allowance. All members of staff, including the executive directors and Stephen Dickinson, benefit from health and life insurances. G O V E R N A N C E 64 GRAINGER PLC Annual report and accounts 2007 report of the remuneration committee and directors’ remuneration report continued The chairman’s and non-executive directors’ fees, which is the price indices and also interest rates – using five year swap rates. only remuneration received, are reviewed on a biennial basis by Bonuses remain capped at 150% of salary which would only be the whole board. Pensions 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. Share schemes open to all employees Executive directors, and Stephen Dickinson, deputy chairman, are eligible to participate in two share schemes which are open to all employees with relevant service, subject to the rules of the schemes. The first is a save as you earn (‘SAYE’) scheme, and the second a share incentive plan (‘SIP’). Both are Inland Revenue approved and therefore subject to the limits prescribed. Amounts relating to directors’ participation in the SIP and share options under the SAYE scheme are shown on pages 67 and 68 respectively. Performance-related remuneration As should be expected and in accordance with the Combined Code, 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 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 achieved under exceptional performance conditions. Subject always to the committee’s 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 2007 represents 107% of salary for that year (2006: 90%). Long-term incentives Grainger’s policy in relation to long-term incentive schemes has evolved over time to more closely align the long-term interests of executives and senior management with those of shareholders, to reward sustained performance over a number of financial years and to encourage these employees to grow their shareholdings. In order to maintain best practice and more closely align performance with reward, a resolution to adopt a new long- term incentive scheme (‘LTIS’) was put to and approved by shareholders at an Extraordinary General Meeting, convened immediately after the Annual General Meeting in February 2007. Current long-term incentive scheme This scheme makes conditional awards of shares to reward performance and retain key staff over rolling three-year periods. The potential award is split into two, with two thirds of the awards being dependent upon the absolute level of increase in NNNAV (triple net asset value – i.e. net assets after adjusting for contingent tax and mark to market adjustments) and one third dependent upon the increase in absolute total shareholder return (‘TSR’) (increase in value of shares plus dividends which are assumed to be reinvested) as follows: Average annual growth in NNNAV Less than or equal to average WACC Percentage of the NNNAV proportion of an award which will vest 0% Equal to average WACC +3% 100% Between average WACC and average WACC +3% Pro rata on a straight-line basis between 0% and 100% 65 Previous long-term incentive scheme There are two previous years of awards outstanding which operate under the previous long-term incentive scheme year so the details of that scheme are also included here. Participants were eligible to receive annual conditional awards of shares worth up to 50% of salary under the long-term incentive scheme and of share options up to a maximum of 125% of salary under the executive share option scheme. The awards under both schemes will become unconditional if challenging performance criteria are satisfied over a single three-year performance period following grant. The criteria for the awards TSR of the company over the TSR performance period Percentage of the TSR proportion of an award which will vest TSR being less than or equal to 8% compounded per annum (25.98% growth in total over the TSR performance period) 0% TSR being equal to or greater than 16% compounded per annum (56.09% growth in total over the TSR performance period) 100% Between 8% compounded per annum and 16% compounded per annum Between 0% and 100% pro rata on a straight-line basis were based on TSR – dependent upon where Grainger’s TSR lies with respect to a pre-determined comparator group as follows: Performance condition Vesting of option There is also a matching awards element to the scheme, to encourage executives to develop and maintain a shareholding in the company. Participants may pledge or buy shares of equivalent value to 30% of their relevant salary and to the extent that performance criteria are met, these shares will be matched one for one at the end of the three-year period. Full explanation of why the board considered absolute rather than relative measures to be appropriate was given in the previous notice of general meeting. Fundamentally it was considered that Grainger was unusual in nature and has no natural comparator group. Grainger is the only listed company of its size to invest, trade and manage primarily in residential property assets. All other comparably sized property companies are principally commercial or development focussed. Awards were made under this current scheme in March 2007 and are quantified below. These performance criteria are believed to be stretching, but realistic and reward executives if Grainger’s return to shareholders is significant in absolute terms. G O V E R N A N C E If Grainger’s TSR is equal to or greater than the upper quartile TSR of the comparator companies If Grainger’s TSR is equal to the median TSR of the comparator companies 100% 40% If Grainger’s TSR is above the median but below the upper quartile TSR of the comparator companies Pro rata vesting If Grainger’s TSR is below the median TSR of the comparator companies 0% As shown in the table above, no award vests unless Grainger’s TSR is higher than the median TSR of the comparator group. It should be noted that during its period of operation, it has been necessary to change the comparator group due to companies being taken over. The comparator group for the awards made in January 2006 comprised A & J Mucklow Group plc, Big Yellow Group plc, Brixton plc, Capital and Regional plc, CLS Holdings plc, Daejan Holdings plc, Derwent Valley Holdings plc, Freeport plc, Great Portland Estates plc, Helical Bar plc, London Merchant Securities plc, Mapeley Limited, Minerva plc, Mountview Estates plc, Quintain Estates and Development plc, Shaftesbury plc, St Mowden Properties plc, The Unite Group plc, Warner Estate Holdings plc and Workspace Group plc. 66 GRAINGER PLC Annual report and accounts 2007 report of the remuneration committee and directors’ remuneration report continued As required by legislation covering the directors’ remuneration report, the graph below shows TSR (based upon share price growth with dividends reinvested) for Grainger, compared to the 2005/06 LTIP 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, abeit that the Real Estate Index comprises mainly commercial property companies. 320 240 160 80 G O V E R N A N C E 02 03 04 05 06 07 GRAINGER NET TSR FTSE MID 250 NET TSR FTSE 350 REAL ESTATE NET TSR Source: Datastream LTIP COMPARATOR 2005/06 67 Total £’000 The auditors have audited the following parts of the remuneration report. Robin Andrew Broadhurst Dickinson Dickinson Dickinson Cunningham £’000 Stephen Rupert Robert £’000 £’000 £’000 £’000 Directors’ remuneration Chairman, deputy chairman and executive directors Non-performance-related remuneration Salary and fees Taxable benefits (see page 63) 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 2007 Total remuneration for the year ended 30 September 2006 Pension contributions into money purchase schemes Year ended 30 September 2007 Year ended 30 September 2006 Non-executive directors 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 2007 Total remuneration for the year ended 30 September 2006 G O V E R N A N C E 88 – – 88 – – 88 38 – – 56 – – 56 – – 150 18 6 174 – – 462 12 6 480 496 496 347 1,103 26 6 56 18 379 1,177 371 371 867 867 56 174 976 750 2,044 108 166 856 653 1,821 – – – – John Barnsley £’000 Robert Hiscox £’000 69 66 Bill Tudor John £’000 52 50 Henry Pitman £’000 121 116 Total £’000 Total all directors 2007 £’000 47 – – 47 – – 47 38 35 – – 35 – – 35 30 47 – – 47 – – 47 38 15 – – 15 – – 15 0 144 1,247 – – 56 18 144 1,321 – – 867 867 144 2,188 106 1,927 Robert Dickinson retired from the board on 28 February 2007. Robin Broadhurst was appointed chairman on the same date. Henry Pitman was appointed a non-executive director on 1 May 2007. No amounts were paid for loss of office in the year. 68 GRAINGER PLC Annual report and accounts 2007 report of the remuneration committee and directors’ remuneration report continued Directors’ share options Ordinary shares (thousands) Dates exercisable Stephen Dickinson Rupert Dickinson Andrew Cunningham Total Exercise price 30 Sep 2007 30 Sep 2006 30 Sep 2007 30 Sep 2006 30 Sep 2007 30 Sep 2006 30 Sep 2007 30 Sep 2006 Non-performance-related (available to all staff) SAYE scheme 8 August 2007 to 8 February 2008 1 September 2008 to 1 March 2009 1 September 2012 to 28 February 2013 Performance-related (conditional awards) Inland Revenue Approved Executive Share Option Scheme £1.636 £1.865 £4.543 G O V E R N A N C E 23 March 2010 to 23 March 2017 £6.409 Long-Term Incentive Scheme 9 July 2000 to 9 July 2007 12 January 2007 to 12 January 2014 (lapsed) 11 January 2008 to 11 January 2015 12 January 2009 to 12 January 2016 £0.534 £3.264 £3.818 £5.280 – 9 – – – – – – 9 – 9 – – – – – – 9 – – 4 5 – – 138 104 251 10 – – – 64 153 138 104 469 – – 4 5 – – 103 78 190 10 – – – – 115 103 78 306 – 9 8 20 9 – 10 – – – 241 182 450 64 268 241 182 784 On 30 September 2007 and 1 September 2007 respectively, On 3 April 2007, Rupert Dickinson exercised 63,645 share Rupert Dickinson and Andrew Cunningham each exercised options at £0.534 per share. The share price at the previous 10,115 SAYE approved share options at £1.636, when the share night closing was £6.475 so the gain before tax arising was prices were £4.475 and £5.215 and the gains before tax were £378,115. Exercise was conditional upon a growth in earnings £28,716 and £36,202 respectively. Performance conditions for options exercisable 12 January 2007 to 12 January 2114 at £3.264 were not met, thus the options lapsed. per share in excess of the retail price index over a period of three consecutive years during the period of the option. These were the last remaining options under that scheme. The market price of the company’s shares at the end of the financial year was £4.475, and the range of the closing mid- market prices during the year was £4.225 to £6.95. 69 Award date Earliest vesting date 30 Sep 2007 30 Sep 2006 30 Sep 2007 30 Sep 2006 30 Sep 2007 30 Sep 2006 Rupert Dickinson Andrew Cunningham Total Directors’ share awards Ordinary shares of 5p each (thousands) Performance-related (conditional awards) Long-Term Incentive Scheme 2003 scheme 2004 scheme 2005 scheme 2006 scheme (granted in the year) 23 Mar 2007 23 Mar 2010 108 Matching awards (conditional) 23 Mar 2007 23 Mar 2010 22 12 Jan 2004 12 Jan 2007 11 Jan 2005 11 Jan 2008 12 Jan 2006 12 Jan 2009 – 55 42 61 55 42 – – – 41 31 81 16 46 41 31 – – – 96 73 189 38 107 96 73 – – Performance conditions for the conditional share awards set to vest on 12 January 2007 were not met. The conditional awards 227 158 169 118 396 276 therefore lapsed on that date. On behalf of the board BILL TUDOR JOHN Chairman of the remuneration committee 18 December 2007 G O V E R N A N C E 70 GRAINGER PLC Annual report and accounts 2007 directors’ report G O V E R N A N C E The directors present their report and the audited financial An interim dividend of 2.06p per share (2006: 1.87p) was statements for the year ended 30 September 2007. paid on 16 July 2007 amounting to £2.7m (2006: £2.5m) and Principal activities During the year the group has continued its activities of property trading and development. the directors recommend the payment of a final dividend of 4.12p per share (2006: 3.75p), to be paid on 18 February 2008, amounting to £5.3m (2006: £4.9m). Any shareholder wishing to participate in the Dividend Reinvestment Plan for the 2007 Review of business development and prospects final dividend will need to ensure that their application form Development of the group’s activities and its prospects as is returned to our registrars by 18 January 2008. set out in the Business Review requirements are reviewed in the chairman’s statement on pages 29 to 31 and the chief executive’s review on pages 32 to 39. Results for the year The results of the group are set out in the consolidated income statement on page 76 which shows a profit for the financial year attributable to the equity holders of the company of £60.9m (2006: £33.5m restated). Directors The directors of the company who served during the year are shown in the tables on page 67. Directors’ and other interests The interests of the directors in the shares of the company at 30 September 2007 and 5 December 2007, with comparative figures as at 1 October 2006 (or date of appointment, if later), are as follows: Robin Broadhurst Stephen Dickinson Rupert Dickinson Andrew Cunningham Bill Tudor John John Barnsley Robert Hiscox Henry Pitman** Ordinary shares of 5p each (thousands) 1 Oct 2006* 3 3,560 1,374 487 – 14 10 25 Beneficial 30 Sept 2007 5 3,461 1,420 498 – 14 20 25 5 Dec 2007 9 3,461 1,430 498 – 28 20 25 1 Oct 2006 – 2,436 207 – – – Non-beneficial 30 Sept 2007 – 2,386 207 – – – 5 Dec 2007 – 2,386 207 – – – 9,500 9,000 9,000 – – – 5,473 5,443 5,471 12,143 11,593 11,593 * or date of appointment, if later ** appointed 1 May 2007 Details of directors’ share options are given on page 68. 71 Save as disclosed above, as at 5 December 2007, the company is The directors must also prepare the financial statements on the aware of the following interests amounting to 3% or more in the going concern basis unless it is inappropriate to presume that company’s shares: the company and the group will continue in business. Schroder Investment Management Limited* BlackRock Inc Taube Hodson & Stonex Partners Ltd* Aberforth Partners* Majedie Asset Management* Legal & General Investment Management Ltd* Holding 000s % Holding 18,237 14.17% 8,435 6.56% 7,872 5,848 5,173 6.12% 4.54% 4.02% The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and the group and to enable them to ensure that the financial statements comply with applicable laws and regulations. They are also responsible for safeguarding the assets of the company and of the group, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for maintaining the system of internal control 4,198 3.26% and reviewing its effectiveness. * shares held by funds managed or advised by the company indicated and/or Creditor payment policy its subsidiaries. The company is not aware of any other substantial interests It is the group’s policy to pay suppliers in accordance with their amounting to 3% or more Directors’ interests in significant contracts No directors were materially interested in any contract of significance. Insurance of directors 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 2007 relating to purchases of property stock generally complete 28 days after exchange of contracts. Trade creditor days relating to other trade creditors of the company and group were The group maintains insurance for Grainger plc’s directors calculated as 18 days (2006: 30 days). in respect of their duties as director. Financial risk management Statement of directors’ responsibilities Details of this are included in note 26 to the financial statements. 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 must ensure that the group financial statements are prepared in accordance with IFRS as adopted by the European Union and the parent company financial statements and the directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (UK GAAP), and that a statement of this is made. Further, that suitable accounting policies have been selected, consistently applied and supported by reasonable and prudent judgements and estimates. Charitable donations During the year the group made charitable donations amounting to £71,283 (2006: £58,747). More information is provided in the corporate responsibility report. 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. G O V E R N A N C E 72 GRAINGER PLC Annual report and accounts 2007 directors’ report continued Employment of disabled persons Shares The company gives full and fair consideration to applications for As disclosed in note 33 to the financial statements, the employment made by disabled persons, having regard to their company issued 255,903 5p ordinary shares for an aggregate particular aptitudes and abilities. In the event of an employee consideration of £477,016 in the year under various employee becoming disabled every effort is made to ensure that their share option schemes. The company also bought back 1,525,000 employment within the company continues and that appropriate 5p ordinary shares for total consideration of £7,846,020, which training is arranged where necessary. It is the policy of the were subsequently cancelled. A further 650,000 5p ordinary company that the training, career development and promotion shares were bought back for £3,590,216 and are being held in of disabled persons should, as far as possible, be identical to treasury. At 30 September 2007, the directors had unexpired that of other employees. Employee involvement power to repurchase up to 17,325,930 shares. Post balance sheet events The group places considerable value on the involvement of its employees and has continued its practice of keeping them Since the year end, our Euro credit facility was increased by €75m to €225m to fund future acquisitions. G O V E R N A N C E 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 As 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. By order of the board MARIE GLANVILLE ACA ACIS Company secretary 18 December 2007 ﬁnancials 74 76 81 139 independent auditors’ repor t to the members of Grainger plc on the group ﬁnancial statements consolidated ﬁnancial statements notes to the ﬁnancial statements independent auditors’ repor t to the members of Grainger plc on the parent company ﬁnancial statements 141 parent company ﬁnancial statements 142 147 notes to the parent company ﬁnancial statements ﬁve-year record for the year ended 30 September 2007 148 shareholders’ information 149 advisers 150 glossary of terms 152 corporate addresses F I N A N C I A L S 74 GRAINGER PLC Annual report and accounts 2007 independent auditors’ report to the members of Grainger plc on the group financial statements We have audited the group financial statements of Grainger plc In addition we report to you if, in our opinion, we have not for the year ended 30 September 2007 which comprise the received all the information and explanations we require for consolidated income statement, the consolidated statement of our audit, or if information specified by law regarding directors’ recognised income and expense, the consolidated balance sheet, remuneration and other transactions is not disclosed. the statement 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 the Listing We have reported separately on the parent company financial Rules of the Financial Services Authority, and we report if it does statements of Grainger plc for the year ended 30 September not. We are not required to consider whether the board’s 2007 and on the information in the report of the remuneration statements on internal control cover all risks and controls, or committee and directors’ remuneration report that is described form an opinion on the effectiveness of the group’s corporate as having been audited. governance procedures or its risk and control procedures. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the group financial statements in accordance with applicable law and International Financial Reporting Standards (‘IFRS’) as adopted by the European Union are set out in the statement of directors’ responsibilities. 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 Act 1985 and for no other purpose. We We read other information contained in the annual report and consider whether it is consistent with the audited group financial statements. The other information comprises only the chairman’s statement, the chief executive’s review, the financial review, the corporate governance report, the directors’ report, the corporate responsibility report and the unaudited part of the report of the remuneration committee and directors’ remuneration report and the other items listed on the contents page. 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. do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report Basis of audit opinion We conducted our audit in accordance with International is shown or into whose hands it may come save where Standards on Auditing (UK and Ireland) issued by the Auditing expressly agreed by our prior consent in writing. Practices Board. An audit includes examination, on a test basis, We report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the directors’ report is consistent with the group financial statements. The information given in the directors’ report includes that specific information presented in the chairman’s statement and the chief executive’s review that is cross-referenced from the review of business development and prospects section of the directors’ report. of evidence relevant to the amounts and disclosures in the group financial statements. It also includes an assessment of the significant estimates and judgements 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. F I N A N C I A L S Opinion In our opinion: (cid:129) the group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the group’s affairs as at 30 September 2007 and of its profit and cash flows for the year then ended; (cid:129) the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and (cid:129) the information given in the directors’ report is consistent with the group financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 18 December 2007 Note The maintenance and integrity of the Grainger 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 on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 75 F I N A N C I A L S 76 GRAINGER PLC Annual report and accounts 2007 consolidated income statement For the year ended 30 September 2007 Notes Group revenue Net rental income Proﬁt on disposal of trading properties Administrative expenses Other income Goodwill impairment loss Net other income/(expense) Proﬁt on disposal of investment property Proﬁt on disposal of shares in subsidiary Proﬁt on disposal of joint venture interest Interest income from ﬁnancial assets Operating proﬁt before net valuation gains on investment properties and changes in fair value Net valuation gains on investment properties Change in fair value through profit or loss ﬁnancial assets Operating proﬁt 4 5 7 8 6 9 10 21 17 Change in fair value of interest rate derivatives 13, 26 F I N A N C I A L S Interest expense Interest income Share of proﬁt/(loss) of associates after tax Share of proﬁt of joint ventures after tax Proﬁt before tax Taxation – current Taxation – deferred Tax charge for the year Proﬁt for the year attributable to equity holders of the company Basic earnings per share Diluted earnings per share Dividend per share 13 13 19 20 12 14 16 16 15 2007 £m 229.3 23.2 62.8 (9.5) 6.2 – 6.2 2.5 2.0 – 1.8 89.0 9.9 – 98.9 3.0 (74.4) 9.4 7.7 32.9 77.5 (16.6) – (16.6) 60.9 47.3p 46.6p 6.18p Restated 2006 £m 206.3 28.3 56.2 (10.4) 2.1 (6.4) (4.3) 4.9 – 0.4 – 75.1 18.5 0.4 94.0 10.4 (62.9) 5.8 (0.1) 0.5 47.7 (30.6) 16.4 (14.2) 33.5 26.0p 25.8p 5.62p Included within the proﬁt for the ﬁnancial year is a loss of £91,000 (2006: £29,000) attributable to minority interests. All of the above results relate to continuing operations. consolidated statement of recognised income and expense £m 1.5 0.3 9.0 For the year ended 30 September 2007 Notes Profit for the year Actuarial profit on BPT Limited defined benefit pension scheme net of tax Net exchange adjustments offset in reserves net of tax Changes in fair value of cash flow hedges 30 35 net of tax 19, 20, 26 Net income/(expense) recognised directly in equity Total recognised income and expense for the year Effect of adoption of IAS 32 and IAS 39 on 1 October 2005 net of tax Prior year adjustment – reclassification of equity release assets (see note 1(b)) Total recognised income and expense since last report The total recognised income and expense in the year is attributable to: Equity shareholders of the parent Minority interest £m 0.4 0.1 (0.8) 2007 £m 60.9 10.8 71.7 – (0.5) 71.2 71.8 (0.1) 71.7 77 Restated 2006 £m 33.5 (0.3) 33.2 (5.4) – 27.8 33.2 – 33.2 F I N A N C I A L S 78 GRAINGER PLC Annual report and accounts 2007 consolidated balance sheet As at 30 September 2007 ASSETS Non-current assets Investment property Property, plant and equipment Investment in associates Investment in joint ventures Financial interest in property assets At fair value through profit or loss financial assets 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 F I N A N C I A L S Notes 17 18 19 20 21 22 23 24 25 26 28 27 28 29 30 29 31 28 32 14 26 2007 £m 478.6 2.3 68.5 114.8 131.7 – 17.4 813.3 1,069.1 16.4 13.1 80.1 – 1,178.7 1,992.0 Restated 2006 £m 219.4 2.1 2.0 71.5 – 19.0 – 314.0 985.5 5.3 2.3 34.5 168.3 1,195.9 1,509.9 1,393.8 1,070.5 8.0 2.7 1.2 113.5 1,519.2 18.2 84.9 45.8 0.8 149.7 1,668.9 323.1 8.0 4.6 1.3 91.1 1,175.5 19.4 23.3 37.2 4.4 84.3 1,259.8 250.1 As at 30 September 2007 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 Equity component of convertible bond Retained earnings Total shareholders’ equity Equity minority interest Total equity Notes 33, 35 35 35 35 35 35 35 35 35 2007 £m 6.4 23.0 20.1 0.3 8.2 22.4 242.6 323.0 0.1 323.1 The financial statements on pages 76 to 138 were approved by the board of directors on 18 December 2007 and were signed on their behalf by: Rupert Dickinson Andrew Cunningham Director Director 79 Restated 2006 £m 6.5 22.6 20.1 0.2 (0.8) – 201.3 249.9 0.2 250.1 F I N A N C I A L S 80 GRAINGER PLC Annual report and accounts 2007 statement of consolidated cash flows For the year ended 30 September 2007 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 of associates and joint ventures Proﬁt on disposal of investment property Proﬁt on disposal of shares in subsidiary Proﬁt on disposal of joint venture interest Share-based payment charge Change in fair value of derivatives and fair value through proﬁt or loss ﬁnancial assets Interest income from ﬁnancial assets Taxation Operating proﬁt before changes in working capital (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables Increase in trading properties Cash generated from operations Interest paid Taxation paid Net cash outﬂow from operating activities F I N A N C I A L S Cash ﬂow from investing activities Proceeds from sale of investment property Proceeds from sale of joint venture interest Proceeds from ﬁnancial interest in property assets Disposal of subsidiary net of cash disposed of Interest received Dividends/distributions received Acquisition of subsidiaries, net of cash acquired Investment in associates and joint ventures Acquisition of investment property and property, plant and equipment Acquisition of ﬁnancial interest in property assets Acquisition of at fair value through proﬁt or loss ﬁnancial assets Net cash outﬂow from investing activities Cash ﬂows from ﬁnancing activities Proceeds from the issue of share capital Purchase of own shares including treasury shares Proceeds from new borrowings Issue of convertible bond net of costs Repayment of borrowings Dividends paid Purchase of ﬁnancial derivative Net cash inﬂow from ﬁnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Notes 18 23 17 13 19, 20 6 9 10 34 26 21 14 14 6 10 19, 20 42 21 35 35 15 26 28 28 2007 £m 60.9 0.6 – (9.9) 65.0 (40.6) (2.5) (2.0) – 1.0 (3.0) (1.8) 16.6 84.3 (12.1) (1.9) (65.1) 5.2 (66.1) (8.5) (69.4) 14.8 – 4.9 251.0 4.7 8.0 (146.5) (93.3) (100.9) (134.7) – (192.0) 0.5 (14.8) 227.2 109.6 (12.1) (7.6) (0.3) 302.5 41.1 39.0 80.1 Restated 2006 £m 33.5 0.6 6.4 (18.5) 57.1 (0.4) (4.9) – (0.4) 0.9 (10.8) – 14.2 77.7 3.2 4.0 (64.1) 20.8 (55.0) (15.4) (49.6) 40.6 5.4 – – 2.6 0.4 (3.4) (57.8) (98.9) – (0.4) (111.5) 1.0 (0.5) 165.2 – (12.0) (6.9) – 146.8 (14.3) 53.3 39.0 81 notes to the financial statements 1 Accounting policies (a) Basis of preparation in our balance sheet of our residential assets and, in particular, Grainger plc is a company incorporated and domiciled in the the transfer of assets to the JPUT (that forms part of G:res1 UK. It is a public limited liability company listed on the London Stock Exchange and the address of the registered office is given on page 148. The group financial statements consolidate those of the company and its subsidiaries, together referred to as the ‘group’, and equity account the group’s interest 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 in accordance with EU endorsed International Financial Reporting Standards (‘IFRS’), IFRIC interpretations and 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 141 to 146. Limited) in the 2006 financial year. Classification of property assets After a considered and detailed review we have concluded that all of our property assets are correctly classified with the exception of some of our equity release home reversion assets and assets transferred to the JPUT (see below). The equity release home reversion assets had been shown in the balance sheet as investment property but, as the most likely outcome will be the sale of these assets on vacancy, the more appropriate classification is as trading stock. This has been corrected retrospectively through a prior year adjustment. There is no impact on the accounts for the year ended 30 September 2005 and prior but the accounts for the year ended 30 September 2006 have been restated. The assets have been reduced from market value to historical The accounting policies set out below have, unless otherwise cost by deducting £0.5m both from the 2006 revaluation stated, been applied consistently to all periods presented in gain in the 2006 income statement and from the value of the group financial statements. investment property. The group financial statements have been prepared under The assets have then been correctly shown as trading stock the historical cost convention except for the following assets rather than as investment property with the result that trading and liabilities which are stated at their fair value; investment stock in the 30 September 2006 balance sheet has increased property, derivative financial instruments, financial interest in property assets and at fair value through profit or loss by £32.8m and investment property has decreased by the same amount. Sales of assets of £0.5m and the related cost financial assets. 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. (b) Prior year adjustment Evolution of the application of IFRS and a review of our accounts by the Financial Reporting Review Panel has caused us to reconsider the treatment of certain items in our accounts. We have reviewed the treatment and classification of sales of £0.2m have been moved from profit on disposal of investment property and added to profit on disposal of trading property. The additional profit arising is insignificant. Transfer of assets to the JPUT Included within the assets transferred to the JPUT on 1 December 2005 were properties with a carrying amount, at cost, of £43.5m that had been classified as trading stock. On transfer, these assets were reclassified as investment properties and a revaluation gain of £23.5m to take their value up to market value was recognised in the 2006 income statement. A tax charge of £7.0m arose in respect of this transfer. However, this reclassification did not comply with the requirements of IAS 40 paragraph 57 which explains the circumstances which provide evidence of a change in use of F I N A N C I A L S 82 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 1 Accounting policies continued a property asset allowing a transfer between categories ii) Goodwill and impairment to be made. These assets were originally acquired for The purchase method of accounting is used to account for the purpose of long-term capital appreciation and rental growth and, consequently, should always have been shown the acquisition of subsidiaries by the group. The cost of the acquisition is measured as the fair value of the assets given, as investment property rather than trading stock. Indeed equity instruments issued plus costs directly attributable to one of the main reasons why these assets were chosen to be the acquisition. Identifiable assets acquired and liabilities and transferred to the JPUT was that they had always been held contingent liabilities assumed in a business combination are for that purpose. Properties similar to these and retained by measured initially at their fair values at the date of acquisition. Grainger are shown in the accounts as investment properties. Goodwill represents the excess of the cost of an acquisition The error has been corrected by a prior year adjustment restating the opening 2006 balance sheet (i.e. at 1 October 2005) and the income statement for the year ended 30 September 2006. Retained earnings at 1 October 2005 have been increased by the revaluation gain of £23.5m and 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. a provision for deferred tax of £7.0m has been made Goodwill on acquisition of subsidiaries is included in (see note 35). The gain has been eliminated from the 2006 income statement. The tax charge for 2006 is reduced by £7.0m as intangible assets. Goodwill on acquisitions of joint ventures and associates is included in investment in joint ventures and associates. the deferred tax provision is released against the current tax Goodwill is allocated to cash-generating units for the purpose charge arising as a result of the transfer to the JPUT. Costs of impairment testing and is tested annually for impairment of £2.5m relating to the cost of raising equity investment in and carried at cost less accumulated impairment losses. Gains the JPUT offset against this revaluation gain in 2006 have and losses on the disposal of an entity include the carrying been transferred to interest expense. This transfer has no amount of goodwill relating to the entity sold. impact on 2006 profit before tax. iii) Joint ventures and associates The above changes have no effect on the market value net Joint ventures are those entities over whose activities the asset value of the business or on its cash flows. Basic earnings group has joint control, established by contractual agreement. per share for the year ended 30 September 2006 are reduced Associates are all entities over which the group has significant from 39.1p as previously stated to 26.0p and diluted earnings influence but not control, generally accompanying a shareholding per share from 38.9p to 25.8p. of between 20% and 50% of the voting rights. (c) 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 Investments 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. of more than one half of the voting rights. The existence and The group’s share of its joint ventures’ and associates’ post- effect of potential voting rights that are currently exercisable or acquisition profits or losses is recognised in the income convertible are considered when assessing whether the group statement, and its share of post-acquisition movements in controls another entity. Subsidiaries are fully consolidated from reserves is recognised in reserves. The cumulative post- the date on which control is transferred to the group. They are acquisition movements are adjusted against the carrying de-consolidated from the date control ceases. amount of the investment. F I N A N C I A L S 83 1 Accounting policies continued Unrealised gains on transactions between the group and its iii) Foreign operations joint ventures and associates are eliminated to the extent The assets and liabilities of foreign operations, including of the group’s interest in joint ventures and associates. The accounting policies of joint ventures and associates have been goodwill and fair value adjustments arising on consolidation, are translated to sterling at foreign exchange rates ruling changed where necessary to ensure consistency with the at the balance sheet date. Revenues and expenses of foreign policies adopted by the group. operations are translated at average foreign exchange rates (d) Segmental reporting for the relevant period. A business segment is a distinguishable group of assets and operations, reflected in the way that the group manages its Exchange differences arising from the translation of the net investment in foreign operations are taken to the translation business, that are subject to risks and returns that are different reserve. from those of other business segments. (f) Investment property The group has identified six such segments as follows: Property that is held for long-term rental yields or for (cid:129) UK core portfolio; (cid:129) Retirement solutions; capital appreciation or both, and that is not occupied by the companies in the consolidated group, is classified as (cid:129) Fund management/residential investments; investment property. (cid:129) UK development; (cid:129) European tenanted residential; and (cid:129) European development. More detail is given relating to each of the above segments, and their geographical split in the chief executive’s review on pages 32 to 39 and in note 3. (e) Foreign currency translation i) Functional and presentation currency 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 Items included in the financial statements of each of the flow projections. group’s entities are measured using the currency of the Subsequent expenditure is included in the carrying amount primary economic environment in which the entity operates of the property when it is probable that future economic (‘the functional currency’). The consolidated financial benefit associated with the item will flow to the group and statements are presented in pounds sterling, which is the the cost of the item can be measured reliably. All other repairs company’s functional and presentation currency. and maintenance costs are charged to the income statement ii) Foreign currency transactions during the financial period in which they are incurred. Foreign currency transactions are translated at the foreign Gains or losses arising from changes in the fair value of the exchange rates prevailing at the dates of the transactions. group’s investment properties are included in the income Monetary assets and liabilities denominated in foreign currencies statement of the period in which they arise. at the balance sheet date are translated into 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. (g) 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. F I N A N C I A L S 84 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 1 Accounting policies continued Subsequent costs are included in the assets’ carrying amount Land and property held within the development segments or recognised as a separate asset, as appropriate, only when of the business, including house-building sites, are shown in it is probable that the future economic benefits associated with the item will flow to the group and the cost of the item can the financial statements at the lower of cost and net realisable value. Cost represents the acquisition price including legal be measured reliably. All other repairs and maintenance costs and other professional costs associated with the acquisition are charged to the income statement during the financial together with subsequent development cost net of amounts 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: 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. (j) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits Land Nil held at call with banks, other short-term highly liquid Fixtures, fittings and equipment Five years investments with original maturities of three months The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. or less, and bank overdrafts. (k) Income tax (h) Financial interest in property assets Financial interest in property assets is initially recognised at fair value plus transaction costs and is subsequently carried at fair value. Subsequent to initial recognition, changes in value are recorded through the income statement based on revised cash flows using the effective interest rate applicable at acquisition. Differences based on revised cash flows using 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. the effective interest rate applicable at acquisition compared Deferred income tax is provided using the balance sheet to revised cash flows using a year-end effective interest rate, liability method. Provision is made for temporary differences assessed as the rate available in the market for an instrument between the carrying value of assets and liabilities in the with a similar maturity and credit risk, are taken through consolidated financial statements and the values used for equity. When gains or losses in the assets are realised, the tax purposes. Deferred income tax is calculated after taking accumulated fair value adjustments recognised in equity are account of any indexation allowances and capital losses. The included in the income statement as gains and losses from amount of deferred tax provided is based on the expected financial interest in property assets. Income received from manner of realisation or settlement of the carrying amount the mortgages is recognised in the income statement on an of assets and liabilities and is calculated using rates enacted accruals basis. The amount credited to the income statement or substantially enacted at the balance sheet date in the tax is shown on the line ‘interest income from financial assets’. jurisdiction in which the temporary differences arise. (i) 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. 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. F I N A N C I A L S 85 1 Accounting policies continued (l) 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. The liability recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of scheme assets. 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. When options are exercised, the proceeds received net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium. (m) 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 management fee income Service charge and management fee income is recognised in the accounting period in which the services are rendered. Other income is accounted for as follows: i) Income from property trading Profits or losses arising from the sale of trading and investment property are included in the income statement where contract completion has taken place. Profits or losses arising from the sale of trading and investment property 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. iii) Share-based compensation (n) Leases The group operates an equity-settled, share-based i) Group as lessor compensation plan comprising awards under a Long-Term The net present value of ground rents receivable is, in the Incentive Scheme (‘LTIS’) and a save as you earn (‘SAYE’) opinion of the directors, immaterial. Accordingly, ground rents scheme. The fair value of the employee services received in receivable are taken to the income statement on a straight-line exchange for the grant of shares and options is recognised as basis over the period of the lease. Properties leased out to an employee expense with a corresponding increase in equity. tenants are included in the balance sheet as either investment The total amount to be expensed is spread over the vesting property or as trading property under inventories. period during which the employees become unconditionally entitled to the shares and options. Where the group grants a lifetime lease on an investment property and receives from the lessee an upfront payment Awards that are subject to a market-based performance in respect of the grant of the lease, the upfront payment is condition are fair valued using the Monte Carlo simulation treated as deferred rent in the balance sheet. This deferred model. Awards not subject to a market-based performance rent is released to the income statement on a straight-line condition are fair valued using the Black-Scholes valuation basis over the projected term of the lease. At each year model. end the projected term of the lease is reassessed and the F I N A N C I A L S 86 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 1 Accounting policies continued remaining deferred rent is released to the income statement Fair value estimation on a straight-line basis over this reassessed lease term. The fair value of interest rate swaps is based on a discounted 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 the lessor) are charged to the income statement on a straight-line basis over the period the lease. 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 a 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 net present value of ground rents payable is, in the the right to receive cash flows from the financial asset. When opinion of the directors, immaterial. Accordingly, ground rent the transfer does not result in the group transferring the right expenses are taken to the income statement on a straight-line to receive cash flows from the financial asset but it does result basis over the lease term. (o) Financial instruments Derivatives The group uses derivative instruments to help manage its in the group assuming a corresponding obligation to pay 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. interest rate risk. In accordance with its treasury policy, the (p) At fair value through profit or loss financial assets group does not hold or issue derivatives for trading purposes. At fair value through profit or loss financial assets are The derivatives are recognised initially at fair value. Subsequently, the gain or loss on remeasurement 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. F I N A N C I A L S included in the balance sheet at fair value with changes in fair value taken through the income statement. At fair value through profit or loss financial assets are managed, and their performance is evaluated, on a fair value basis in accordance with the group’s documented investment policy. (q) Borrowings In order to qualify for hedge accounting, the group is required Borrowings are initially recognised at cost, being the fair to document in advance the relationship between the item value of consideration received, net of transaction costs being hedged and the hedging instrument. The group is also incurred. Borrowings are subsequently stated at amortised required to demonstrate that the hedge will be highly effective cost. Any difference between the proceeds (net of transaction on an ongoing basis. This effectiveness testing is reperformed costs) and the redemption value is recognised in the income at each period end to ensure that the hedge remains highly statement over the period of the borrowings using the effective. effective interest method. When a hedging instrument expires or is sold, or when a Borrowings are classified as current liabilities unless the group hedge no longer meets the criteria for hedge accounting, any has an unconditional right to defer settlement of the liability cumulative gain or loss existing in equity at that time remains for at least 12 months after the balance sheet date. 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. (r) 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 87 1 Accounting policies continued impairment in trade receivables is established when there is Where the group buys back its own shares as treasury objective evidence that the group will not be able to collect shares it adopts the accounting as described above. Where all amounts due. The amount of the provision is the difference between the asset’s carrying amount and the present value of it subsequently cancels them, issued share capital is reduced by the nominal value of the shares cancelled and this same estimated future cash flows, discounted at the effective interest amount is transferred to the capital redemption reserve. rate. The movement in the provision is recognised in the income statement. (s) Provisions (w) Impact of standards and interpretations in issue but not yet effective At the date of authorisation of these financial statements there Provisions are recognised when a) the group has a present are a number of standards, amendments and interpretations obligation as a result of a past event and b) it is probable that have been published but which are not yet effective. All that an outflow of resources will be required to settle the of these have been endorsed by the EU with the exception obligation and c) a reliable estimate can be made of the of IFRS 8 ‘Operating Segments’, IFRIC 12 ‘Service Concession amount of the obligation. (t) 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. (u) Assets held for sale Where a group of assets are to be disposed of by sale together or 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. (v) Acquisition of and investment in own shares The group acquires its own shares to enable it to meet its obligations under the LTIS. No gain or loss is recognised in proﬁt or loss on the purchase, sale, issue or cancellation of the company’s own shares. The acquisition cost of the 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 35). Arrangements’, IFRIC 13 ‘Customer Loyalty Programmes’ and IFRIC 14 ‘IAS 19 – The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ and are therefore likely to be mandatory for the group’s accounting periods beginning on or after 1 October 2007. The group has not early adopted any standard, amendment or interpretation. The standards, amendments and interpretations that are expected to impact upon the group are: (cid:129) IFRS 7 ‘Financial Instruments: Disclosures’. IFRS 7 introduces new disclosures on quantitative and qualitative risks arising from financial instruments. This standard will apply to the group from 1 October 2007 and is expected to impact upon the group by requiring additional disclosures in the annual financial statements; (cid:129) IFRS 8 ‘Operating Segments’. IFRS 8 amends the current segmental reporting requirements of IAS 14 and requires a ‘management approach’ to be adopted so that segment information is presented on the same basis as that used for internal reporting purposes. This standard will apply to the group from 1 October 2009 and is expected to impact upon the group by requiring additional disclosures in the annual financial statements; (cid:129) Amendment to IAS 1 ‘Presentation of Financial Statements Capital Disclosures’. This amendment introduces new disclosures about an entity’s management of its capital resources. This amendment will apply to the group from 1 October 2007 and is expected to impact upon the group F I N A N C I A L S 88 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 1 Accounting policies continued by requiring additional disclosures in the annual financial transactions to the employees of a subsidiary that they statements; and (cid:129) Amendment to IAS 23 ‘Borrowing Costs’. This amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of be treated as equity-settled, whereas if the subsidiary grants shares to its employees the transactions are treated as cash-settled. This interpretation will apply to the group from 1 October 2007; a qualifying asset as part of the cost of the asset. A qualifying (cid:129) IFRIC 12 ‘Service Concession Arrangements’. IFRIC 12 asset is one that takes a substantial period of time to get provides guidance upon the accounting for public-to-private ready for use or sale. The option of immediately expensing infrastructure service concession arrangements. This these borrowing costs is removed. This amendment will apply interpretation will apply to the group from 1 October 2008; to the group from 1 October 2009 and its impact is currently being assessed. (cid:129) IFRIC 13 ‘Customer Loyalty Programmes’. IFRIC 13 requires the credits given as part of customer loyalty schemes to be The adoption of the following standards, amendments and recognised at their fair value as a separate component of interpretations are not expected to have any material impact revenue. The revenue related to these schemes should on the financial statements of the group: (cid:129) IFRIC 10 ‘Interim Financial Reporting and Impairment’. IFRIC 10 prohibits the reversal of impairment losses recognised in only be recognised when the entity’s obligations are fulfilled. This interpretation will apply to the group from 1 October 2008; and previous interim periods on goodwill, investments in equity (cid:129) IFRIC 14 ‘IAS 19 – The limit on a Defined Benefit Asset, instruments or financial assets; (cid:129) IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’. IFRIC 11 requires all share-based payment transactions for which services are received in exchange for shares in the company to be treated as equity-settled. It also requires that where the parent grants share-based payment Minimum Funding Requirements and their Interaction’. IFRIC 14 states when refunds or reductions in future contributions can be treated as available under IAS 19 and how a minimum funding requirement affects future contributions or may give rise to a liability. This interpretation will apply to the group from 1 October 2008. 2 Critical accounting estimates and assumptions The group’s significant accounting policies are stated in note 1 25% of these valuations is checked by an external independent above. Not all of these accounting policies require management valuer. Investment property in Germany has been valued to make subjective or complex judgements or estimates. The by an external independent valuer as at 30 September 2007 following is intended to provide further detail relating to those except for acquisitions since 1 June 2007 where the fair value accounting policies that management consider critical because as at 30 September 2007 has been assessed by the directors. of the level of complexity, judgement or estimation involved in Investment property in the group’s joint ventures and associates their application and their impact on the consolidated financial is valued by external independent valuers. In the UK the statements. Investment property valuations The group, after review by the directors, uses the valuations performed by its own in-house surveying team to value its own UK-based residential investment property as at 30 September 2007. A structured sample of approximately majority of the portfolio is invested in the type of properties where demand is high. Accordingly, the valuers generally are well informed and have good recent information on current market values for properties similar to our own. Valuers also make reference to discounted cash flow projections based upon estimates of future rental income, property expenses and an appropriate discount rate in order to value properties. F I N A N C I A L S 89 2 Critical accounting estimates and assumptions continued Trading property valuations the effective interest rate. The valuation utilised in the accounts The group’s residential trading properties are carried in the assumes HPI of zero for the next two years followed by 3.75% balance sheet at the lower of cost and net realisable value. In assessing net realisable value the group uses valuations carried per annum thereafter. A reduction in HPI to 3.50% per annum from year three onwards reduces the valuation by £2.1m. out by its own in-house surveying team. A structured sample of approximately 25% of these valuations is checked by an external independent valuer. Valuing the significant number of properties in our portfolio is a significant task and there are some subjectivities involved in the process. In particular, in relation to our regulated tenancies, we have no right to know the age of the tenant and, other than for specific limited purposes, for example, the annual gas safety check, we have no right of access to the property. Invariably, when our in-house valuations are compared to those of the external valuer, over 95% of the valuations are within a small acceptable Distinction between investment and trading property The group considers the intention at the outset when each property is acquired in order to classify the property as either an investment or a trading property. Where the intention is to either trade the property or where the property is held for immediate sale upon receiving vacant possession within the ordinary course of business, the property is classified as trading property. Where the intention is to hold the property for its long-term rental yield and/or capital appreciation, the property is classified as an investment property. tolerance. Where the difference is more significant we Income taxes discuss this with the valuer to determine the reasons for There are some transactions and calculations that involve the difference. Typically the reasons vary but it could be, for a degree of estimation and judgement and whose tax example, a different number of bedrooms, the possibility of treatment can not be determined until a formal resolution has planning permission or the wrong flat in the block having been been reached with the relevant tax authorities. In such cases, valued. Once such reasons have been identified we and the the group’s policy is to be prudent in its assessment of the tax valuer agree the appropriate valuation that should be adopted. benefit that may accrue in line with the contingent asset rules Development trading properties are included in the balance sheet at the lower of cost and net realisable value. Development projects with a cost of £86.0m out of a total cost as at 30 September 2007 of £104.6m have been valued by an external independent valuer. Of the remaining book cost of £18.6m, £12.2m relates to the group’s housebuilding sites and £6.4m to the group’s development in Prague. These have been valued as at 30 September 2007 by the directors. Provision is made on a project-by-project basis to reduce costs to net realisable value to the extent that total projected costs exceed total projected revenues. Valuation of financial interest in property assets The valuation is based on an assessment of the future cash flows that will arise from our financial interest and on the effective interest rate used to discount those cash flows. The valuation methodology adopted is set out in note 1(h) above. Key assumptions are house price inflation (‘HPI’) and F I N A N C I A L S set out in IAS 37. Where the final 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 (see note 14). Goodwill impairment Goodwill primarily arises from the difference between how deferred tax is calculated for accounting purposes and the value ascribed to it in the acquisition negotiations. Generally, the value of goodwill is supported by the fact that the taxation cash flows will arise in future years and the discounted value of these cash flows is significantly less than the tax actually provided. However, this position needs to be carefully monitored and goodwill is tested annually for impairment. 90 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 3 Segmental information 2007 Income statement (£m) Group revenue Net rental income Proﬁt on disposal of trading properties Administrative expenses Other income Proﬁt on disposal of investment property Proﬁt on disposal of shares in subsidiary Interest income from ﬁnancial assets Operating proﬁt before net valuation gains on investment properties and changes in fair value Net valuation gains on investment properties Operating proﬁt – segment result Change in fair value of derivatives Interest expense Interest income Share of proﬁt of associates after tax Share of proﬁt of joint ventures after tax Proﬁt before tax - UK core portfolio 160.3 15.0 59.2 4.6 0.6 1.6 – – 81.0 2.5 83.5 Retirement solutions Fund management/ residential investments 16.7 1.2 4.8 – – – – 1.8 7.8 (1.5) 6.3 1.1 1.1 – (4.6) 5.3 0.1 2.0 – 3.9 – 3.9 F I N A N C I A L S Included in the above analysis are the following non-cash expenses: Depreciation Share-based payments (0.4) (0.2) (0.1) (0.1) – (0.2) Of the share of profit of associates after tax of £7.7m, £6.5m is attributable to fund management/residential investment and £1.2m is attributable to European development. Of the share of proﬁt of joint ventures after tax of £32.9m, £29.6m is attributable to fund management/residential investment and £3.3m is attributable to UK development. The group monitors its operations in the above segments. There is no primary or secondary split and the above is a complete analysis by business and geographic segment. UK development European tenanted residential European development 41.3 1.3 (1.2) – 0.2 0.4 – – 0.7 – 0.7 9.9 4.6 – – 0.1 0.4 – – 5.1 8.9 14.0 (0.1) (0.1) – (0.1) – – – – – – – – – – – – – Total 30 September 2007 229.3 23.2 62.8 (9.5) 6.2 2.5 2.0 1.8 89.0 9.9 98.9 3.0 (74.4) 9.4 7.7 32.9 77.5 (0.6) (1.0) Group – – – (9.5) – – – – (9.5) – (9.5) – (0.3) 91 F I N A N C I A L S 92 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 3 Segmental information continued 2006 Income statement (£m) (restated) Group revenue Net rental income Proﬁt on disposal of trading properties Administrative expenses Net other income/(expense) Proﬁt on disposal of investment property Proﬁt on disposal of joint venture interest Operating proﬁt before net valuation gains on investment properties and changes in fair value Net valuation gains on investment properties Change in fair value through proﬁt or loss ﬁnancial assets Operating proﬁt – segment result Change in fair value of derivatives Interest expense Interest income Share of loss of associates after tax Share of proﬁt of joint ventures after tax Proﬁt before tax UK core portfolio 147.2 20.2 50.9 – 3.8 0.9 – 75.8 6.0 0.4 82.2 Retirement solutions UK market tenancies 12.7 (0.2) 2.9 – 0.1 – – 2.8 – – 2.8 9.0 6.1 – – (1.9) 0.4 – 4.6 12.9 – 17.5 F I N A N C I A L S Included in the above analysis are the following non-cash expenses: Depreciation Goodwill impairment loss Share-based payments (0.4) – (0.2) (0.1) – (0.1) – – – The share of loss of associates after tax of £0.1m is attributable to European development. The share of proﬁt of joint ventures after tax of £0.5m is attributable to UK core portfolio. The group monitors its operations in the above segments. There is no primary or secondary split and the above is a complete analysis by business and geographic segment. 93 F I N A N C I A L S Total 30 September 2006 206.3 28.3 56.2 (10.4) (4.3) 4.9 0.4 75.1 18.5 0.4 94.0 10.4 (62.9) 5.8 (0.1) 0.5 47.7 (0.6) (6.4) (0.9) Group – – – (10.4) (6.4) – – (16.8) – – (16.8) – (6.4) (0.4) European tenanted residential European development UK development 32.9 0.4 2.4 – – 3.4 0.4 6.6 – – 6.6 4.5 1.8 – – – 0.2 – 2.0 (0.4) – 1.6 – – – – 0.1 – – 0.1 – – 0.1 – – – (0.1) – (0.2) – – – 94 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 3 Segmental information continued 2007 Segment assets (£m) Assets Investment property Investment in associates Investment in joint ventures Financial interest in property assets Goodwill Inventories – trading properties Trade and other receivables Cash and cash equivalents Total segment assets Unallocated assets Property, plant and equipment Derivative ﬁnancial instruments Trade and other receivables Cash and cash equivalents Total assets Liabilities Interest-bearing loans and borrowings Trade and other payables Total segment liabilities Unallocated liabilities Interest-bearing loans and borrowings Trade and other payables Retirement beneﬁts Current tax liabilities Provisions for other liabilities and charges Deferred tax liabilities Derivative financial instruments Total liabilities Net assets Other unallocated items F I N A N C I A L S UK core portfolio Retirement solutions 127.8 109.1 – – – 14.1 753.7 1.5 1.6 898.7 – – 131.7 3.3 210.8 0.7 7.3 462.9 – 9.0 9.0 41.0 34.6 75.6 Capital expenditure on property, plant and equipment – – The group monitors its operations in the above segments. There is no primary or secondary split and the above is a complete analysis by business and geographic segment. 95 F I N A N C I A L S Fund management/ residential investments UK development – 67.5 108.0 – – – 8.1 – 183.6 – – 6.8 – – 98.2 1.3 0.1 106.4 European tenanted residential 241.7 – – – – – 1.0 4.9 247.6 European development Total 30 September 2007 – 1.0 – – – 6.4 2.3 0.7 478.6 68.5 114.8 131.7 17.4 1,069.1 14.9 14.6 10.4 1,909.6 – – – – 12.2 12.2 133.2 23.2 156.4 3.6 0.5 4.1 2.3 13.1 1.5 65.5 1,992.0 177.8 79.5 257.3 1,234.2 13.4 2.7 45.8 1.2 113.5 0.8 1,668.9 323.1 – – – – 0.8 96 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 3 Segmental information continued 2006 Segment assets (£m) (restated) Assets Investment property Investment in associates Investment in joint ventures Inventories – trading properties Trade and other receivables Cash and cash equivalents Assets held for sale Total segment assets Unallocated assets Property, plant and equipment At fair value through proﬁt or loss ﬁnancial assets Derivative ﬁnancial instruments Trade and other receivables Cash and cash equivalents Total assets Liabilities Interest-bearing loans and borrowings Trade and other payables Total segment liabilities Unallocated liabilities Interest-bearing loans and borrowings Trade and other payables Retirement beneﬁts Current tax liabilities Provisions for other liabilities and charges Deferred tax liabilities Derivative financial instruments Total liabilities Net assets Other unallocated items F I N A N C I A L S UK core portfolio Retirement solutions 60.0 – 67.4 720.2 1.1 – (2.6) – – – 176.6 0.1 – – 846.1 176.7 – 5.0 5.0 41.7 2.6 44.3 Capital expenditure on property, plant and equipment – – The group monitors its operations in the above segments. There is no primary or secondary split and the above is a complete analysis by business and geographic segment. 97 F I N A N C I A L S UK market tenancies UK development 42.1 – – – 0.1 1.1 170.9 214.2 0.4 – 4.1 83.1 0.3 – – 87.9 European tenanted residential 116.9 – – – 0.1 – – 117.0 – 0.5 0.5 – 9.3 9.3 36.9 1.6 38.5 European development Total 30 September 2006 – 2.0 – 5.6 – – – 7.6 3.1 0.4 3.5 219.4 2.0 71.5 985.5 1.7 1.1 168.3 1,449.5 2.1 19.0 2.3 3.6 33.4 1,509.9 81.7 19.4 101.1 1,008.2 11.9 4.6 37.2 1.3 91.1 4.4 1,259.8 250.1 – – – – 0.7 98 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 4 Net rental income Gross rental income Property repair and maintenance costs Property operating expenses (see note 7) 5 Profit on disposal of trading properties Proceeds from sale of trading properties Carrying value of trading properties sold Other sales costs (see note 7) 6 Profit on disposal of investment property Proceeds from sale of investment property Carrying value of investment property sold (see note 17) 2007 £m 52.7 (15.8) (13.7) 23.2 2007 £m 166.0 (92.8) (10.4) 62.8 2007 £m 14.8 (12.3) 2.5 2006 £m 52.6 (12.7) (11.6) 28.3 Restated 2006 £m 151.5 (85.3) (10.0) 56.2 Restated 2006 £m 40.6 (35.7) 4.9 In 2006, a profit on disposal of joint venture interest of £0.4m was shown within profit on disposal of investment property. This profit has been shown separately in the income statement in the 2006 comparative in these accounts. 7 Administrative expenses Total group expenses 2007 £m 33.6 2006 £m 32.0 Many of the group’s expenses relate directly to either property management activities or to staff involved directly with the sale and acquisition of property. Accordingly, total group expenses shown above have been allocated as follows: Property operating expenses (see note 4) Costs directly attributable to the disposal of trading properties (see note 5) Administrative expenses 2007 £m 13.7 10.4 9.5 33.6 2006 £m 11.6 10.0 10.4 32.0 F I N A N C I A L S 8 Other income Property and asset management fee income Crop store and agricultural income 9 Profit on disposal of shares in subsidiary Sale of shares in G:res1 Limited 99 2006 £m 1.8 0.3 2.1 2006 £m – 2007 £m 5.8 0.4 6.2 2007 £m 2.0 During the year, the group disposed of 78.4% of its equity interest in G:res1 Limited and made a profit on sale of equity of £2.0m (2006: £nil). 10 Profit on disposal of joint venture interest Proceeds from sale of joint venture interest Carrying value of joint venture interest sold (see note 20) 11 Employees Wages and salaries Social security costs Other pension costs – defined contribution scheme (see note 30) Share-based payments The average monthly number of group employees during the year (including executive directors) was: UK tenanted residential UK development Europe 2007 £m – – – 2007 £m 14.6 1.5 0.8 1.0 17.9 2007 226 14 7 247 F I N A N C I A L S 2006 £m 5.4 (5.0) 0.4 2006 £m 13.8 1.8 0.7 0.9 17.2 2006 203 16 3 222 Details of directors’ remuneration, including pension costs, share options and interests in the LTIS are provided in the audited section of the remuneration committee report on pages 67 to 69. 100 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 11 Employees continued Key management compensation Salaries and short-term employee beneﬁts Post-employment beneﬁts Share-based payments 2007 £m 4.5 0.3 0.8 5.6 Restated 2006 £m 3.9 0.2 0.6 4.7 Key management ﬁgures shown above include the executive and the non-executive directors. The 2006 ﬁgures have been restated to include the non-executive directors. 12 Profit before tax Profit before tax is stated after charging/(crediting): Depreciation on fixtures, fittings and equipment Impairment of goodwill Bad debt (credit)/expense Foreign exchange gains Operating lease payments Auditors’ remuneration – audit Auditors’ remuneration – non-audit F I N A N C I A L S The remuneration paid to PricewaterhouseCoopers LLP, the group’s principal auditors, is disclosed below: Auditors’ remuneration Audit fees Fees payable to the company’s auditors for the audit of the parent company and consolidated financial statements Non-audit fees The audit of the company’s subsidiaries pursuant to legislation Other services pursuant to legislation: Tax services Other services Total fees Other services include transaction services of £210,849 (2006: £18,575). 2007 £m 0.6 – (0.3) (0.4) 1.1 0.1 0.5 2006 £m 0.6 6.4 0.1 (0.2) 1.1 0.1 0.2 2007 £’000 2006 £’000 136 45 172 241 594 128 40 61 67 296 101 12 Profit before tax continued The goodwill impairment in 2006 related primarily to goodwill on acquisition of City North Group plc of £5.8m. Operating lease payments represent the minimum lease payments made in the year relating to renting of office space used by the group, car leases under contract hire arrangements and operating lease payments relating to office equipment such as photocopiers. Leases relating to office space used by the group have initial terms of varying lengths, between four to 15 years. Rent reviews generally take place every five years. Contract hire car leases generally have a three-year term. There are no other significant operating lease arrangements requiring disclosure under IAS 17. The group’s operating lease commitments are shown in note 39. 13 Interest Interest expense Bank loans and mortgages Loan notes Other interest payable Amortisation of issue costs Interest on net pension scheme liabilities Costs of equity raising Interest income Income from at fair value through proﬁt or loss ﬁnancial assets Interest receivable from associates and joint ventures (see note 37) Other interest receivable Net finance costs Change in fair value of derivatives 2007 £m 71.6 0.8 0.5 1.3 0.2 – 74.4 – 6.3 3.1 9.4 65.0 3.0 Restated 2006 £m 56.8 0.9 1.1 1.3 0.2 2.6 62.9 0.4 2.8 2.6 5.8 57.1 10.4 F I N A N C I A L S In accordance with IAS 39, the group has reviewed its interest rate hedges and those of its joint ventures and associates. The fair value of such hedges has been valued by JC Rathbone Associates Limited, ﬁnancial risk consultants. Movements in fair value have been taken directly to the income statement unless the hedge is viewed as being effective in which case any gain or loss has been taken to equity through the cash ﬂow hedge reserve (see notes 26 and 35). 102 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 14 Taxation 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 Movements in taxation during the year are set out below: 2007 £m 15.9 0.7 16.6 1.9 (1.9) – 16.6 F I N A N C I A L S Current tax Deferred tax Trading property uplift to fair value on acquisition Investment property revaluation Accelerated capital allowances Short-term timing differences Actuarial surplus on BPT Limited pension scheme Fair value movement in cash flow hedges Total tax – 2007 movement Total tax – 2006 movement Opening balance £m 37.2 73.7 16.5 1.4 (0.5) 0.2 (0.2) 91.1 128.3 129.5 The tax charge for the year comprises: UK taxation Overseas taxation Payments in the year £m Acquired in the year £m Movements recognised in income £m Movements recognised in equity £m (8.5) 0.5 16.6 – – – – – – – (8.5) (15.4) 3.3 15.6 – – – – 18.9 19.4 – (9.5) 8.5 0.7 0.3 – – – 16.6 14.2 – – – – – 0.6 2.9 3.5 3.5 – 2007 £m 9.2 7.4 16.6 Restated 2006 £m 26.3 4.3 30.6 (16.8) 0.4 (16.4) 14.2 Closing balance £m 45.8 67.5 40.6 2.1 (0.2) 0.8 2.7 113.5 159.3 128.3 2006 £m 13.2 1.0 14.2 103 14 Taxation continued The tax charge for the year is lower than the standard rate of corporation tax in the UK of 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 Impact of rate change on deferred tax Corporation tax on capital gains Capital losses not previously recognised Deferred tax released relating to capital gains Other losses and non-taxable items Adjustment in respect of prior periods Total income tax expense in the income statement (see above) 2007 £m 77.5 23.3 0.7 – (6.0) 7.4 (3.0) (6.3) 1.7 (1.2) 16.6 Restated 2006 £m 47.7 14.3 0.4 1.9 – 12.7 (6.4) (11.0) (2.6) 4.9 14.2 As detailed in note 31, deferred tax has been taken direct to equity in relation to the actuarial surplus on the BPT Limited pension scheme and the fair value movement in cash flow hedges. The 2007 Finance Act gained Royal Assent during 2007. This Act reduced the corporation tax rate to 28% from 1 April 2008. As the Act is substantially enacted as at 30 September 2007, deferred tax has been calculated at this lower rate. This has resulted in a reduction in deferred tax of £6.0m which has been taken through the income statement. Factors that may affect future tax charges The group has not taken all of the benefit in relation to capital losses brought forward and available for 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 £26m would be released over the coming years. 15 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: F I N A N C I A L S Ordinary dividends on equity shares: Final dividend for the year ended 30 September 2006 – 3.75p per share Final dividend for the year ended 30 September 2005 – 3.41p per share Interim dividend for the year ended 30 September 2007 – 2.06p per share Interim dividend for the year ended 30 September 2006 – 1.87p per share 2007 £m 4.9 – 2.7 – 7.6 2006 £m – 4.4 – 2.5 6.9 A final dividend relating to 2007 of 4.12p per share has been proposed by the board. If approved, this will result in a further distribution of £5.3m and it will be paid on 18 February 2008 to shareholders on the register on 18 January 2008. The 2007 interim dividend of 2.06p per share was paid in July 2007. This gives a total dividend for 2007 of 6.18p per share compared to 5.62p per share in 2006, an increase of 10%. 104 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 16 Earnings per share Basic Basic earnings per share is calculated by dividing 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 group and held both in trust and as treasury shares. 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 convertible bond and its share option schemes and contingent share awards under the LTIS, based upon the number of shares that would be issued if 30 September 2007 was the end of the contingency period. The profit for the year is adjusted to add back the after tax interest cost on the liability component of the convertible bond. 30 September 2007 Proﬁt for the year £m Weighted average number of shares (thousands) Earnings per share pence Restated 30 September 2006 Proﬁt for the year £m Weighted average number of shares (thousands) Earnings per share pence 60.9 128,849 47.3 33.5 129,001 26.0 – 1.8 752 4,866 (0.3) (0.4) – – 803 – (0.2) – 62.7 134,467 46.6 33.5 129,804 25.8 Basic earnings per share Profit attributable to equity holders Effect of potentially dilutive securities Options and shares Convertible bond Diluted earnings per share Proﬁt attributable to equity holders 17 Investment property F I N A N C I A L S Opening balance (2006 as previously reported) Prior year adjustment – transfer of assets to the JPUT (see note 1(b)) Additions – acquisitions – subsequent expenditure – business combinations Disposals Disposal as part of disposal of subsidiary Net valuation gains Exchange adjustments Transfer from/(to) a disposal group (see note 27) Closing balance 2007 £m 219.4 – 219.4 122.5 – 173.3 (12.3) (209.8) 9.9 7.3 168.3 478.6 Restated 2006 £m 222.4 67.0 289.4 111.8 3.7 – (35.7) – 18.5 – (168.3) 219.4 105 17 Investment property continued The group has valued all of its investment property as at 30 September 2007 at fair value. Investment property held in the core residential and equity release portfolios with a value of £236.9m was valued as at 30 September 2007 at fair value by our in-house chartered surveyors. These valuations have been reviewed and approved by the directors. A structured sample of approximately 25% 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 the directors’ valuations. As at 30 September 2007, investment property in our German portfolio had a fair value of £241.7m. All of the properties acquired prior to 1 June 2007 were valued at their fair value as at 30 September 2007 by Cushman & Wakefield, Chartered Surveyors, Frankfurt. This valuation amounted to £163.7m. Investment properties acquired after 1 June 2007 were valued at fair value on 30 September 2007 by the directors. The value of these properties was £78m. The assumptions relevant to the valuation of investment property are outlined in note 2 above. A revaluation gain of £9.9m has arisen on valuation of investment property to fair value as at 30 September 2007 and this has been taken to the income statement. The historical cost of the group’s investment property as at 30 September 2007 is £420.6m (2006: £370.4m). Rental income from investment property during the year was £16.1m (2006: £17.4m). Direct property repair and maintenance costs arising from investment property that generated rental income during the year was £4.2m (2006: £3.9m). Direct operating expenses arising from investment property that did not generate rental income during the year amounted to £0.4m (2006: £nil). 18 Property, plant and equipment Cost At 1 October 2006 Additions At 30 September 2007 Depreciation At 1 October 2006 Charge for the year At 30 September 2007 Net book value At 30 September 2007 At 30 September 2006 F I N A N C I A L S Fixtures, ﬁttings and equipment £m Owner- occupied property £m 3.9 0.8 4.7 1.9 0.6 2.5 2.2 2.0 0.1 – 0.1 – – – 0.1 0.1 Total £m 4.0 0.8 4.8 1.9 0.6 2.5 2.3 2.1 106 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 18 Property, plant and equipment continued Fixtures, ﬁttings and equipment £m Owner- occupied property £m Cost At 1 October 2005 Additions At 30 September 2006 Depreciation At 1 October 2005 Charge for the year At 30 September 2006 Net book value At 30 September 2006 At 30 September 2005 19 Investment in associates Opening balance Loans advanced Loans repaid Share of profits/(losses) Distributions received 3.2 0.7 3.9 1.3 0.6 1.9 2.0 1.9 Share of change in fair value of cash flow hedges taken through equity At fair value through profit or loss financial assets transferred to investment in associates (see note 22) Net assets of G:res1 Limited transferred to investment in associates Additional equity invested in G:res1 Limited Sale of equity in G:res1 Limited Closing balance As at 30 September 2007, the group’s interest in associates was as follows: G:res1 Limited Schroders Residential Property Unit Trust (ResPUT) OÜ Robbins F I N A N C I A L S 0.1 – 0.1 – – – 0.1 0.1 2007 £m 2.0 – (2.1) 7.7 (0.6) 0.4 19.0 88.3 84.4 (130.6) 68.5 % of share capital/units held Country of incorporation 21.6 22.4 43.2 Jersey Jersey Estonia Total £m 3.3 0.7 4.0 1.3 0.6 1.9 2.1 2.0 2006 £m 0.1 2.0 – (0.1) – – – – – – 2.0 107 19 Investment in associates continued Due to an increase in the group’s percentage holding in the ResPUT combined with an increased level of influence for the group arising from its engagement as property adviser to the Unit Trust, the group’s investment, which had been classified as an at fair value through profit or loss financial asset, was transferred during the year to investment in associates (see note 22). In relation to the group’s investment in associates, the group’s share of the aggregated assets, liabilities, revenues and proﬁt or loss are shown below: Non-current assets Current assets Non-current liabilities Current liabilities Net assets Revenues Proﬁt G:res1 Limited £m 94.6 4.3 (49.7) (1.9) 47.3 8.0 4.8 The amounts shown for 2006 all relate to OÜ Robbins. 20 Investment in joint ventures At 1 October 2005 Additions Loans advanced Share of profits Share of change in fair value of cash flow hedges taken through equity Disposals (see note 10) At 30 September 2006 Loans advanced Share of profits Share of change in fair value of cash flow hedges taken through equity Distributions received At 30 September 2007 ResPUT £m OÜ Robbins £m 19.7 0.5 – – 20.2 1.0 1.7 Net assets £m 10.4 6.5 – 0.5 (0.2) (5.0) 12.2 – 34.3 0.7 (7.4) 39.8 – 1.0 – – 1.0 3.3 1.2 Loans £m 6.0 – 51.7 – – – 57.7 17.1 – – – 74.8 2007 £m 114.3 5.8 (49.7) (1.9) 68.5 12.3 7.7 Goodwill £m 1.5 0.1 – – – – 1.6 – (1.4) – – 0.2 2006 £m 2.1 – (2.2) – (0.1) – (0.1) Total £m 17.9 6.6 51.7 0.5 (0.2) (5.0) 71.5 17.1 32.9 0.7 (7.4) 114.8 F I N A N C I A L S At 30 September 2007, the group’s interest in joint ventures is as follows: Grainger GenInvest LLP Grainger GenInvest No 2 (2006) LLP Regen (NT) LLP Curzon Park Limited % of share capital held 50 50 331⁄3 50 Country of incorporation United Kingdom United Kingdom United Kingdom United Kingdom 108 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 20 Investment in joint ventures continued In relation to the group’s investment in joint ventures, the group’s share of the aggregated assets, liabilities, revenues and profit are shown below: 2007 Summarised income statement Net rental income Proﬁt on disposal of trading property Proﬁt on disposal of investment property Goodwill impairment Operating proﬁt before valuation gains Valuation gains on investment properties Operating proﬁt Change in fair value of derivatives Interest payable Proﬁt before tax Taxation Proﬁt after tax 2007 Summarised balance sheet Investment property Current assets Total assets Non-current liabilities Current liabilities Net assets F I N A N C I A L S Grainger GenInvest LLP £m Grainger GenInvest No 2 LLP £m Regen (NT) LLP £m Curzon Park Limited £m 1.3 – 1.5 – 2.8 9.1 11.9 – (2.4) 9.5 – 9.5 Grainger GenInvest LLP £m 49.3 0.3 49.6 (33.1) (2.4) 14.1 3.8 – 1.1 – 4.9 22.3 27.2 – (7.1) 20.1 – 20.1 Grainger GenInvest No 2 LLP £m 127.4 4.7 132.1 (102.9) (3.5) 25.7 – 5.1 – (1.4) 3.7 – 3.7 – – 3.7 – 3.7 – – – – – – – – (0.4) (0.4) – (0.4) Regen (NT) LLP £m Curzon Park Limited £m – 0.4 0.4 – – 0.4 – 20.9 20.9 (11.2) (10.1) (0.4) 2007 £m 5.1 5.1 2.6 (1.4) 11.4 31.4 42.8 – (9.9) 32.9 – 32.9 2007 £m 176.7 26.3 203.0 (147.2) (16.0) 39.8 There is no tax charge on the profits made in the the LLP companies as they are ‘transparent’ for tax. The tax payable on Grainger’s share of the profits is included within the group tax charge. 109 2006 £m 1.7 (0.1) 1.6 3.5 5.1 0.8 (5.3) 0.6 (0.1) 0.5 2007 £m 143.3 8.6 151.9 (134.9) (4.8) 12.2 2006 £m – – – – – F I N A N C I A L S Grainger GenInvest LLP £m Grainger GenInvest No 2 LLP £m Regen (NT) LLP £m 0.7 – 0.7 3.5 4.2 0.1 (2.1) 2.2 (0.1) 2.1 Grainger GenInvest LLP £m 40.6 0.9 41.5 (34.5) (2.1) 4.9 1.0 (0.1) 0.9 – 0.9 0.7 (3.2) (1.6) – (1.6) Grainger GenInvest No 2 LLP £m 102.7 4.0 106.7 (100.4) (1.6) 4.7 – – – – – – – – – – Regen (NT) LLP £m – 3.7 3.7 – (1.1) 2.6 2007 £m – 134.7 (0.6) (2.4) 131.7 20 Investment in joint ventures continued 2006 Summarised income statement Net rental income Administrative expenses Operating proﬁt before valuation gains Valuation gains on investment properties Operating proﬁt Change in fair value of derivatives Interest payable Proﬁt before tax Taxation Proﬁt after tax 2006 Summarised balance sheet Investment property Current assets Total assets Non-current liabilities Current liabilities Net assets 21 Financial interest in property assets Opening balance Additions Change in fair value Disposals Closing balance Financial interest in property assets relates to the CHARM portfolio, which is a financial interest in equity mortgages, acquired in the year. It is accounted for under IAS 39 in accordance with the designation available-for-sale financial assets. 110 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 21 Financial interest in property assets The amount credited to the income statement comprises: Change in fair value Interest income Profit on redemption of mortgages 22 At fair value through profit or loss financial assets Opening balance Units acquired in the year Uplift to fair value Transfer to investment in associates (see note 19) Closing balance 2007 £m (0.6) 2.0 0.4 1.8 2007 £m 19.0 – – (19.0) – 2006 £m – – – – 2006 £m 18.2 0.5 0.3 – 19.0 Due to an increase in the group’s percentage holding in the Schroder Residential Property Unit Trust combined with an increased level of influence for the group arising from its engagement as property adviser to the Unit Trust, the group’s investment, which had been classified as an at fair value through profit or loss financial asset, was transferred during the year to investment in associates (see note 19). F I N A N C I A L S 23 Goodwill Opening balance Arising on acquisitions during the year (see note 42) Impaired during the year Closing balance 2007 £m – 17.4 – 17.4 2006 £m 6.1 0.3 (6.4) – Of the £17.4m of goodwill carried in the group’s balance sheet, £14.1m relates to the UK core portfolio and £3.3m to the equity release/retirement solutions division. Impairment has been tested by comparing the carrying amount of each business’s assets and liabilities with its recoverable amount, being its value in use. The value in use has been calculated by reference to the cash flow projections for each business. The discount rate used for the 2007 test was 6.87%. In 2006 goodwill of £6.4m was impaired and an impairment loss for this amount was recognised in the 2006 income statement. Of this amount, the largest portion, £5.8m, related to goodwill that had arisen on acquisition of the City North Group in 2005. Goodwill had arisen primarily from the difference between how deferred tax had been calculated for accounts purposes and the value ascribed to it in the acquisition negotiations. The value of goodwill was supported by the fact that the taxation cash flows will arise in future years and the discounted value of this cash flow is significantly less than the tax actually provided. During 2006, however, when the assets from the City North acquisition were transferred to the JPUT, that tax was actually crystallised so that the carrying value of the goodwill could be no longer justified by reference to future cash flows. The gross amount of goodwill and accumulated impairment losses as at 30 September 2007 were £23.8m and £6.4m respectively. 24 Inventories – trading properties Residential trading properties (2006 as previously stated) Prior year adjustment – reclassification of equity release assets (see note 1(b)) Development trading properties The market value of inventories as at 30 September 2007 was £1,711.9m (2006: £1,513.1m as restated). Write-downs to net realisable value in the year amounted to £1.9m (2006: £0.8m). 25 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 111 Restated 2006 £m 864.0 32.8 896.8 88.7 985.5 2006 £m 2.9 2.2 0.2 5.3 2007 £m 964.5 – 964.5 104.6 1,069.1 2007 £m 5.7 9.0 1.7 16.4 F I N A N C I A L S As at 30 September 2007, the impairment provision relating to trade receivables is £0.7m (2006: £1.0m). Therefore the gross amount of trade receivables is £6.4m (2006: £3.9m). Other receivables in 2007 includes a loan of £7.0m made to the Mornington Capital Special Situations Co-Investment Fund 1 Limited Partnership. The loan is to be used by the fund to invest in real estate joint venture partnerships. The loan bears interest at 5% per annum above EURIBOR and is repayable within one year. The loan is secured by fixed and floating charges over the assets in the fund. 26 Financial risk management and derivative ﬁnancial instruments 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 28). 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. As at 30 September 2007, 74% (2006: 66%) of the group’s net borrowings 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. In addition, the core business in particular is very cash generative from its gross rents and sales of trading properties. In adverse trading conditions, new acquisitions can be stopped and, consequently, we are able to reduce gearing levels and improve liquidity quickly. Foreign currency risk The group invests in property acquired in a currency other than pounds sterling. In such situations, it is the group’s policy to take out loans in the same currency to act as a natural hedge against currency ﬂuctuations. 112 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 26 Financial risk management and derivative ﬁnancial instruments continued Credit risk The group has signiﬁcant ﬁnancial assets held in cash and bank balances and in 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 25). Such provisions are made when there is objective evidence that the group will not be able to collect all amounts due. The group has no individually material risk as its exposure is spread over a large number of tenants. The proﬁle of the group’s interest rate swaps in existence at 30 September 2007 which were classiﬁed as effective cash ﬂow hedges was as follows: Maturity date Interest rate swaps 7 June 2009 7 March 2014 7 June 2012 7 June 2009 18 December 2011 11 October 2013 11 October 2013 11 October 2013 25 January 2013 28 June 2013 11 October 2013 11 October 2013 11 October 2013 11 October 2013 7 March 2012 7 December 2012 15 October 2012 F I N A N C I A L S Amount £m 50.0 30.0 135.0 115.5 10.5 9.8 7.7 16.4 20.9 100.0 5.6 1.4 3.7 14.0 10.5 – – 531.0 Rate % 5.100 5.170 5.380 4.782 3.510 3.995 3.995 3.670 3.833 4.980 4.150 4.150 4.235 4.028 4.365 4.495 4.390 Fair value at 30 September 2007 £m Fair value at 30 September 2006 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m 0.6 0.6 1.1 2.1 0.3 0.2 0.2 0.5 0.6 2.7 0.1 – 0.2 0.3 – (0.1) – 9.4 – (0.4) (2.4) 1.0 0.1 – – – – – – – – – – – – (1.7) – – – – – – – – – – – – – – – – – – 0.6 1.0 3.5 1.1 0.2 0.2 0.2 0.5 0.6 2.7 0.1 – 0.2 0.3 – (0.1) – 11.1 113 26 Financial risk management and derivative financial instruments continued In addition to the above, the following financial instruments were in existence at 30 September 2007 which were classified as Fair value at 30 September 2007 £m Fair value at 30 September 2006 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m ineffective hedges: Maturity date Interest rate swaps 8 June 2015 16 November 2006 16 November 2006 11 October 2013 7 March 2022 Interest rate collars and caps 7 December 2009 18 December 2011 16 November 2006 7 March 2016 7 June 2012 7 March 2012 7 December 2012 Swaption 7 March 2014 Rate % 5.380 3.598 3.965 3.628 4.980 6.000 3.430 3.598 3.598 6.000 4.365 4.495 5.1700 Amount £m – – – – – 231.6 10.5 – 13.7 50.0 10.5 – – 316.3 847.3 Deduct: cost of cap acquired in the year Total amount reflected in the income statement (0.1) – – 0.1 0.4 1.1 0.4 – 0.6 0.6 0.2 0.3 (0.7) 2.9 12.3 (1.0) 0.2 (0.2) – – 0.4 0.3 0.3 – – – – (0.4) (0.4) (2.1) 0.9 (0.2) 0.2 0.1 0.4 0.7 0.1 (0.3) 0.6 0.6 0.2 0.3 (0.3) 3.3 3.3 (0.3) 3.0 The fair value movement reflected in the income statement is now presented below operating profit as the instruments are held entirely to manage interest rate risk on the group’s borrowings. Included within the total value of financial instruments of £847.3m were Euro instruments totalling €193.6m (£135.2m) at rates between 3.43% and 4.495%. Derivative financial instruments are shown in the consolidated balance sheet as follows: Current assets Current liabilities 2007 £m 13.1 (0.8) 12.3 As at 30 September 2007 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 and also within G:Res-co 2 Limited and G:Res-co 4 Limited in which the group has a 21.6% interest. These hedges were effective for the whole year to 30 September 2007. – – – – – – – – – – – – – – 11.1 2006 £m 2.3 (4.4) (2.1) F I N A N C I A L S 114 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 26 Financial risk management and derivative ﬁnancial instruments continued Maturity date Grainger GenInvest LLP 23 June 2007 23 June 2010 Grainger GenInvest No.2 (2006) LLP 1 October 2006 1 October 2006 20 March 2011 G:Res-co 2 Limited 17 January 2014 G:Res-co 4 Limited 17 January 2014 Amount £m – 40.0 – – 140.0 112.5 94.5 387.0 Rate % 4.455 5.610 4.890 4.890 4.890 5.000 5.250 Fair value at 30 September 2007 £m Fair value at 30 September 2006 £m Movement reﬂected in income statement £m Movement reﬂected in equity £m – – – – 2.9 2.1 0.3 5.3 0.3 – 0.8 0.1 – – – 1.2 – – – – – – – – (0.3) – (0.8) (0.1) 2.9 2.1 0.3 4.1 F I N A N C I A L S 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. 27 Disposal group and assets held for sale As at 30 September 2006 negotiations with investors were well advanced in relation to the sale of units in the JPUT and the expectation at that time was that 80%, in total, of the units would be sold within 12 months of the balance sheet date. Accordingly, as at 30 September 2006, 80% of the net assets of the Trust, less an accrual for sales fees, were reclassiﬁed as a disposal group under assets held for sale within current assets. The balance comprised the following: Investment property Trade and other receivables Cash and cash equivalents Trade and other payables During the 2007 financial year the group sold 78.4% of its interest in the JPUT to external investors. 2007 £m – – – – – 2006 £m 168.3 0.2 4.5 (4.7) 168.3 28 Financial assets and liabilities (i) Interest-bearing loans and borrowings Current liabilities Mortgages Bank loans Loan notes Non-current liabilities Mortgages Bank loans Convertible bond Total interest-bearing loans and borrowings 115 2006 £m – 1.0 18.4 19.4 17.7 1,052.8 – 1,070.5 1,089.9 2007 £m 0.2 1.8 16.2 18.2 18.0 1,287.3 88.5 1,393.8 1,412.0 Costs relating to the raising of the loan finance set off against the balances shown in the above table amount to £10.5m (2006: £6.2m). 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 2007 £m 225.0 200.0 475.0 141.0 84.5 1,125.5 2006 £m 225.0 200.0 475.0 10.0 83.5 993.5 F I N A N C I A L S Headroom on the MOF at 30 September 2007 was £175m (2006: £307m). 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. Margin % Final repayment date 0.90 0.85 0.70 0.60 0.60 13 June 14 June 11 June 10 June 10 June 116 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 28 Financial assets and liabilities continued (b) Other UK bank loans Fixed rate – Pounds sterling Variable rate – Pounds sterling 2007 £m 43.2 10.0 53.2 2006 £m 44.0 – 44.0 The fixed rate loan is secured by fixed charges over specific equity release home reversion assets in the group’s subsidiary company Hamsard 2517 Limited and bears interest at a fixed rate of 6.32%. The variable rate loan is secured by fixed charges over specific investment property assets in The Tilt Estate Company Limited and bears interest at 0.9% above base rate. (c) European bank loans Bank loans – Euro Bank loan – Czech Coruna 2007 £m 115.6 3.6 119.2 2006 £m 19.4 3.1 22.5 Headroom on these facilities at 30 September 2007 amounted to £41m (2006: £nil). The Euro bank loans are secured by floating charges and by fixed charges over the investment property in the group’s German portfolio. The loans bear interest at between 0.6% and 2.1% over EURIBOR. The Czech Coruna bank loan is secured by a fixed charge over land held for development in Zizkov, a suburb of Prague in the Czech Republic, and bears interest at 2% over PRIBOR. F I N A N C I A L S Analysis of loan notes Fixed rate – Pounds sterling Floating rate – Pounds sterling 2007 £m 0.9 15.3 16.2 2006 £m – 18.4 18.4 The ﬁxed rate loan notes were issued during the year and are secured by a bank guarantee and bear interest at a ﬁxed rate of 3.25%. The ﬂoating rate loan notes are secured by bank guarantees and cash collateral and bear interest at between 0.75% and 1% under LIBOR. Mortgages Mortgages – Euro 2007 £m 18.2 2006 £m 17.7 The mortgages are secured by floating charges and by fixed charges over the investment property in the group’s German portfolio and bear interest at a fixed rate of 0.5%. 28 Financial assets and liabilities continued Convertible bond Value at issue Equity component at issue (see note 35) Amortisation during the year 117 2006 £m – – – – 2007 £m 112.0 (22.4) 0.6 90.2 A £112m 3.625% convertible bond due 2014 was issued in May 2007. Interest is payable semi-annually. Unless previously redeemed, converted, purchased or cancelled the bond is convertible at any time up to 12 May 2014 into fully paid up ordinary shares at a conversion price of £8.64. The convertible bond is a compound ﬁnancial instrument and the carrying amount has been allocated to its equity and liability components in the group balance sheet. The liability component has been determined by measuring the fair value of a similar liability that does not have an associated equity component. The discount rate used for this was a rate of 7.5% compounded semi-annually. The liability component has been deducted from the fair value of the compound ﬁnancial instrument as a whole and the residual element has been assigned to the equity component. The liability element is subsequently measured at amortised cost using the effective interest rate method. The analysis of the loans and borrowings in the above tables is before deducting unamortised issue costs relating to the raising of the loan ﬁnance. The MOF, variable rate UK bank loans and the European bank loans are generally rolled over every three months. At roll over, LIBOR, EURIBOR and PRIBOR are reset for the following interest period. The ﬁxed rate UK bank loan and the mortgages are at a ﬁxed rate of interest which do not reprice. The ﬁxed rate loan is repayable after more than ﬁve years. The mortgage has repayments of £0.2m within one year, £0.9m within two to ﬁve years and £17.1m after more than ﬁve years. The effective interest rate on borrowings was 6.1% (2006: 5.8%). 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 2007 £m 18.2 5.0 783.6 605.2 2006 £m 19.4 0.4 822.3 247.8 1,412.0 1,089.9 F I N A N C I A L S 118 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 28 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 Mortgages – Euro Convertible bond Bank loans Pounds sterling Euro Czech Coruna Unamortised issue costs F I N A N C I A L S Loan notes Mortgages – Euro Bank loans Pounds sterling Euro Czech Coruna Unamortised issue costs 2007 Fixed rate liabilities £m Capped rate liabilities £m Floating rate liabilities £m 0.9 18.2 90.2 43.2 – – 152.5 – – – 712.1 135.1 – 847.2 15.3 – – 338.9 65.0 3.6 422.8 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 Total £m 16.2 18.2 90.2 1,094.2 200.1 3.6 1,422.5 (10.5) 1,412.0 Total £m 18.4 17.7 954.0 102.9 3.1 1,096.1 (6.2) 1,089.9 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. 28 Financial assets and liabilities continued Loan notes Mortgages – Euro Convertible bond Bank loans – Pounds sterling Bank loans – Euro 119 2007 Fixed rate weighted average rate % Weighted average period Years Capped rate weighted average rate % Weighted average period Years 3.25 0.50 3.63 6.32 – – – – 6.30 4.76 1 43 7 17 – 2006 – – – 3 7 Fixed rate weighted average rate % Weighted average period Years Capped rate weighted average rate % Weighted average period Years Mortgages – Euro Bank loans – Pounds sterling Bank loans – Euro 0.50 6.30 – 43 19 – – 6.00 4.30 In December 2007 the group’s €150m Euro credit facility was increased by €75m to €225m. This additional facility will be used to ﬁnance acquisitions in Germany, both those currently in the acquisition pipeline as well as future acquisitions. (ii) Financial assets The group has the following cash and cash equivalents at 30 September 2007: Pounds sterling Euro Czech Coruna 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 2007 £m 73.4 6.0 0.7 80.1 2007 £m 80.1 – 80.1 – 4 5 2006 £m 33.0 4.8 1.2 39.0 2006 £m 34.5 4.5 39.0 F I N A N C I A L S Short-term deposits totalling £14.7m (2006: £17.7m) with an average maturity of three months are held as cash collateral. These have an effective interest rate of 4.86% (2006: 4.395%). At the year end, £47.2m (2006: £4.6m) was placed on the overnight money market, £46.0m at a rate of 5.49% and £1.2m (€1.7m) at a rate of 3.01%. Remaining cash and cash equivalents are held as cash at bank or in hand. The group has an overdraft facility of £10m as at 30 September 2007 (2006: £10m). 120 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 28 Financial assets and liabilities continued (iii) Fair value table The fair value of the group’s ﬁnancial assets and liabilities, including those within assets held for sale, are as follows: 2007 Fair value £m Book value £m Fair value differences £m Financial interest in property assets 131.7 131.7 At fair value through proﬁt or loss ﬁnancial assets Trade and other receivables Derivative ﬁnancial instruments Cash and cash equivalents Total ﬁnancial assets Non-current liabilities – 16.4 13.1 80.1 – 16.4 13.1 80.1 241.3 241.3 – – – – – – 2006 Fair value £m Fair value differences £m 19.0 5.5 2.3 39.0 65.8 – – – – – Book value £m 19.0 5.5 2.3 39.0 65.8 Interest-bearing loans and borrowings 1,393.8 1,396.6 2.8 1,070.5 1,073.9 3.4 Trade and other payables Provisions for other liabilities and charges Current liabilities Interest-bearing loans and borrowings Trade and other payables Derivative ﬁnancial instruments Total ﬁnancial liabilities 8.0 1.2 18.2 84.9 0.8 8.0 1.2 18.2 84.9 0.8 1,506.9 1,509.7 Total net ﬁnancial liabilities 1,265.6 1,268.4 – – – – – 2.8 2.8 8.0 1.3 19.4 28.0 4.4 8.0 1.3 19.4 28.0 4.4 1,131.6 1,135.0 1,065.8 1,069.2 – – – – – 3.4 3.4 The fair value adjustment relates to the group’s ﬁxed rate loan with TSB Lloyds bank and the liability component of the convertible bond, both of which are stated at amortised cost in the consolidated balance sheet. There is no requirement under IAS 39 to revalue these loans to fair value in the statutory balance sheet. F I N A N C I A L S 29 Non-current liabilities (i) Trade and other payables Trade and other payables 2007 £m 8.0 Trade and other payables is deferred consideration for the purchase of land at West Waterlooville and is payable in two equal instalments in April 2009 and April 2013 respectively. (ii) Provisions for other liabilities and charges Other 2007 £m 1.2 2006 £m 8.0 2006 £m 1.3 121 30 Pension costs Deﬁned contribution scheme The group operates a deﬁned contribution pension 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 67. The pension cost charge in these ﬁnancial statements represents contributions payable by the group. This is shown in note 11. Deﬁned beneﬁt scheme In addition to the above, the group also operates a deﬁned beneﬁt pension 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 with the valuation as at 1 July 2007 currently in progress. This scheme was operated by BPT Limited which became a subsidiary of Grainger 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 deﬁciency 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 2007 by a qualified independent actuary. 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 13). 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 gain Beneﬁts paid Present value of closing deﬁned beneﬁt obligation F I N A N C I A L S 2007 £m 0.9 (0.7) 0.2 2007 £m 18.1 0.9 (2.0) (0.3) 16.7 2006 £m 0.9 (0.7) 0.2 2006 £m 17.4 0.9 – (0.2) 18.1 The actuarial gain shown above has been included in the consolidated statement of recognised income and expense net of tax (see page 77). 122 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 30 Pension costs continued 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 Deﬁned beneﬁt obligations, scheme assets and scheme deﬁcit Total market value of assets Present value of scheme liabilities Scheme deﬁcit at 30 September 2007 £m 14.0 (16.7) (2.7) 2006 £m 13.5 (18.1) (4.6) 2005 £m 12.1 (17.4) (5.3) 2007 £m 13.5 0.7 0.1 – (0.3) 14.0 2004 £m 10.7 (15.3) (4.6) The scheme deficit of £4.6m, net of deferred tax, was taken into the opening IFRS balance sheet as at 1 October 2004. Actuarial gain recognised in the consolidated statement of recognised income and expense F I N A N C I A L S Actual return less expected return on assets Gain on change of assumptions Total actuarial gain before tax Market value of scheme assets and expected rates of return 2007 £m – 2.0 2.0 2006 £m 12.1 0.7 0.3 0.6 (0.2) 13.5 2003 £m 10.5 (14.2) (3.7) 2006 £m 0.6 – 0.6 Equities Bonds Properties Other Total value of assets 30 September 2007 30 September 2006 Long-term expected rate of return % 7.6 5.3 7.6 5.8 Market value £m 6.3 6.8 0.4 0.5 14.0 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 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 7.6% in 2007 and 7.0% in 2006 is based on an equity risk premium of 2.6% above the 15-year ﬁxed rate on gilts. The directors consider this to be at the mid-point of the acceptable range. The return on bonds has been determined by reference to actual yields. 30 Pension costs continued 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 Mortality tables for non-pensioners * after allowing for short cohort effect 123 2007 2006 5.90% pa 3.40% pa 4.90% pa 5.00% pa 5.10% pa 3.00% pa 4.50% pa 5.00% pa PXA92c2025 PXA92c2025 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 expected improvements in life expectancies up to 2025. For non-pensioners the mortality assumption has been changed in 2007 to reflect the improvements in short cohort projections. The resulting life expectancy for a future male pensioner is 86.2 years (2006: 84.8 years), and for a future female pensioner is 89.1 years (2006: 87.8 years). The life expectancy for a current male pensioner is 85.9 years (2006: 85.9 years), and for a current female pensioner is 88.7 years (2006: 88.7 years). History of experience gains and losses 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 2007 2006 2005 2004 2003 – – – – £0.6m 4.20% – – £0.8m 6.60% £0.9m 5.20% £(0.9)m (8.40)% £(0.3)m (2.90)% £(0.5)m (3.30)% £0.1m 0.10% F I N A N C I A L S The actual return on scheme assets in 2007 was £0.7m (2006: £1.3m). The cumulative amount of actuarial gains recognised in the consolidated statement of recognised income and expense before taxation is £1.9m (2006: £(0.1)m). Payments to the scheme in 2008 The group expects to continue its payments to the scheme in 2008 based on the recommendations of the actuary. Contributions in the next 12 months are estimated at £300,000. 124 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 31 Deferred tax liabilities The movement in the provision for deferred taxation is as follows: Opening balance Prior year adjustment – transfer of assets to the JPUT (see note 1(b)) Balance as at 30 September (2006 as restated) Effect of adoption of IAS 39 on 1 October 2005 At 1 October Acquisition of subsidiaries in the year Recognised in the income statement Recognised in equity Actuarial surplus on BPT pension scheme Fair value movement in cash flow hedges Closing balance 2007 £m 91.1 – 91.1 – 91.1 18.9 – 0.6 2.9 113.5 Restated 2006 £m 102.8 7.0 109.8 (2.3) 107.5 – (16.4) 0.2 (0.2) 91.1 In addition to the above the group has a contingent tax liability representing the difference between the carrying value of trading properties in the balance sheet and their market value. This contingent tax, which is not provided in the accounts, amounts to £176.7m (2006: £152.6m). 32 Trade and other payables F I N A N C I A L S Deposits received Trade payables Other taxation and social security Accruals and deferred income 2007 £m 0.6 29.7 0.3 54.3 84.9 Trade payables in 2007 includes £23.6m relating to acquisitions of property where contracts have either been unconditionally exchanged or notarised (2006: £nil). Accruals and deferred income in 2007 includes £31.2m of rent received in advance, relating to lifetime leases (2006: £nil). 33 Share capital Authorised 160,000,000 (2006: 160,000,000) ordinary shares of 5p each Allotted, called-up and fully paid 128,656,385 (2006: 129,925,482) ordinary shares of 5p each 2007 £m 8.0 6.4 2006 £m 0.8 8.4 1.5 12.6 23.3 2006 £m 8.0 6.5 As at 30 September 2007, share capital included 584,673 (2006: 584,673) shares held by the Grainger Trust Employee Trustee Company Limited, 520,000 (2006: nil) shares held by the Grainger Employee Beneﬁt Trust and 650,000 (2006: nil) shares held by Grainger plc as treasury shares. The total of these shares is 1,754,673 (2006: 584,673) with a nominal value of £87,734 (2006: £29,234). 125 Nominal value £’000 6,468 2 23 3 Number 129,374,394 43,795 454,359 52,934 129,925,482 6,496 63,645 74,586 117,672 (1,525,000) 128,656,385 3 4 6 (76) 6,433 33 Share capital continued Movements in issued share capital during the year and the previous year were as follows: At 1 October 2005 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes At 30 September 2006 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes Treasury shares bought back and cancelled At 30 September 2007 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 employees. The number of shares subject to options as at 30 September 2007, 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 1997 Long-Term Incentive Scheme (LTIS) 2003 2004 2005 2006 2007 SAYE share options 2001 2002 2003 2004 2005 2006 2007 Total share options F I N A N C I A L S Exercise price (pence) Exercise period 2007 number 53.4 2000-07 191.8 326.4 381.8 528.0 640.9 138.0 163.6 186.5 271.8 334.0 413.0 454.3 2006-13 2007-14 2008-15 2009-16 2010-17 2004-07 2005-08 2006-09 2007-10 2008-11 2009-12 2010-13 – – 63,893 – 370,525 313,445 14,040 761,903 – 10,115 58,060 29,655 39,702 65,798 65,592 2006 number 63,645 63,645 115,739 471,365 495,689 420,322 – 1,503,115 12,225 56,630 58,455 94,490 46,791 71,153 – 268,922 339,744 1,030,825 1,906,504 126 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 33 Share capital continued The movement on the share option schemes during the year was as follows: Number of ordinary shares Executive scheme 1997 LTIS 2003 2004 2005 2006 2007 SAYE schemes 2001 2002 2003 2004 2005 2006 2007 Exercised Granted Lapsed Opening position 63,645 63,645 115,739 471,365 495,689 420,322 – (63,645) (63,645) (51,846) – (22,739) – – 1,503,115 (74,585) 12,225 56,630 58,455 94,490 46,791 71,153 – (12,225) (44,351) (393) (58,124) (2,579) – – 339,744 (117,672) Closing position – – 63,893 – 370,525 313,445 14,040 761,903 – 10,115 58,060 29,655 39,702 65,798 65,592 – – – – – – 18,720 18,720 – – – – – – 65,592 65,592 – – – (471,365) (102,425) (106,877) (4,680) (685,347) – (2,164) (2) (6,711) (4,510) (5,355) – F I N A N C I A L S For those share options exercised during the year, the weighted average share price at the date of exercise was 610p (2006: 544p). For share options outstanding at the end of the year, the weighted average remaining contractual life is 1.17 years (2006: 1.39 years). Further details of the above option schemes is provided in the report of the remuneration committee and directors’ remuneration report from pages 62 to 69. (18,742) 268,922 127 34 Share-based payments 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. For awards under the 2007 LTIS, one third are subject to an absolute total shareholder return performance condition measured over three years from the date of grant and two thirds are subject to annual growth in Net Net Net Asset value (‘NNNAV’) measured over three years from the date of grant. One third of the awards, therefore, are subject to a market-based performance condition and these have been fair valued using a Monte Carlo simulation model. The remaining two thirds of the awards are subject to a non-market-based performance condition and have been fair valued using a Black-Scholes valuation model. Awards under the LTIS for 2006 and prior 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%. Awards under the LTIS for 2006 and prior have been fair valued using a Monte Carlo simulation model. Awards under the SAYE scheme have been fair valued using a Black Scholes model. The Monte Carlo simulation model takes into account the market-based performance conditions which effectively estimate the number of shares or options expected to vest. No subsequent adjustment is made to the fair value charge for shares or options 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. For awards under the 2007 LTIS which are subject to a non-market-based performance condition, the number of shares or options expected to vest is adjusted during the vesting period based on the best available estimate. On vesting, the estimate will be revised to equal the number of shares or options that will ultimately vest. 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 2007 after adjustment for leavers. This same information is given for the SAYE schemes. F I N A N C I A L S 128 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 34 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 (£) 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 (£) F I N A N C I A L S 12 January 2004 250,165 173,044 – 3 7 3.360 4.370 1.150 22.680 1.802 12 January 2004 625,495 432,651 3.264 3 7 3.360 4.589 1.530 22.680 0.680 11 January 2005 225,575 153,247 – 3 7 3.786 4.453 1.140 23.310 1.750 11 January 2005 563,955 423,560 3.818 3 7 3.786 4.493 1.560 23.310 0.588 12 January 2006 185,553 153,412 – 3 7 5.350 4.217 0.960 20.180 3.226 12 January 2006 463,882 383,538 5.280 3 7 5.350 4.260 0.960 20.180 1.178 23 March 2007 23 March 2007 Market-based Non-market-based 206,496 163,335 412,994 326,672 – 3 7 6.625 5.310 0.900 26.000 2.540 – 3 7 6.625 5.310 0.900 26.000 6.440 23 March 2007 23 March 2007 Market-based Non-market-based 6,240 6,240 6.409 3 7 6.625 5.054 0.900 21.000 1.060 12,480 12,480 6.409 3 7 6.625 5.054 0.900 21.000 2.150 129 34 Share-based payments continued SAYE Award date 7 August 2003 1 August 2006 5-year scheme 3-year scheme 5-year scheme 3-year scheme 5-year scheme 3-year scheme 5-year scheme 1 August 2006 5 August 2004 5 August 2004 1 August 2005 1 August 2005 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 (£) 58,060 58,060 1.865 5 75,870 63,060 2.718 3 32,105 21,280 2.718 5 32,718 25,062 3.340 3 14,640 14,640 3.340 5 45,199 44,521 4.130 3 25,954 22,836 4.130 5 1 Dec 08 1 Dec 07 1 Dec 09 1 Dec 08 1 Dec 10 1 Dec 09 1 Dec 11 2.546 4.280 1.740 21.240 0.923 3.498 5.010 1.280 23.970 1.180 3.498 5.040 1.400 22.710 1.314 4.240 4.267 1.310 22.340 1.320 4.240 4.301 1.310 21.170 1.480 5.140 4.745 1.100 24.000 1.660 5.140 4.698 1.100 21.000 1.840 The expected volatility ﬁgures used in the valuation were calculated based on the historic volatility over a period equal to the expected term from the date of grant. The share-based payments charge recognised in the income statement is £1.0m (2006: £0.9m). Of this amount, £0.7m (2006: £0.4m) related to the LTIS share awards, £0.2 (2006: £0.4m) to the LTIS options and £0.1m (2006: £0.1m) to the SAYE options. SAYE options awarded in August 2007 under the 2007 scheme have not been fair valued in the accounts to 30 September 2007 as the cost to be charged to the income statement is very small in the context of materiality to the group results. Accordingly, the cost of calculating the fair value exceeded the beneﬁt to be obtained. The 2007 SAYE awards will be valued in 2008 along with the 2008 LTIS awards. Movements in options and options exercisable as at 30 September 2007 are shown in note 33. F I N A N C I A L S 130 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 35 Consolidated statement of changes in equity Balance as at 30 September 2005 as previously reported Prior year adjustment – transfer of assets to the JPUT (see note 1(b)) Balance as at 30 September 2005 as restated Effect of adoption of IAS 32 and IAS 39 on 1 October 2005 Balance at 1 October 2005 Retained profit for the year (restated) 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 as restated 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 Treasury shares bought back and cancelled Share-based payments charge Dividends paid Issue of convertible bond Minority interest on business combination Balance as at 30 September 2007 Merger reserve F I N A N C I A L S Issued share capital £m 6.5 – 6.5 – 6.5 – – – – – – – – – 6.5 – – – – – – (0.1) – – – – 6.4 Share premium £m Merger reserve £m Equity component of convertible bond £m 21.6 – 21.6 – 21.6 – – – – – 1.0 – – – 22.6 – – – – – 0.4 – – – – – 20.1 – 20.1 – 20.1 – – – – – – – – – 20.1 – – – – – – – – – – – 23.0 20.1 – – – – – – – – – – – – – – – – – – – – – – – – 22.4 – 22.4 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 issues 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. 131 F I N A N C I A L S Minority interest £m – – – – – – – – – – – – – 0.2 0.2 – – – – – – – – – – (0.1) 0.1 Total equity £m 211.1 16.4 227.5 (5.4) 222.1 33.6 0.4 (0.8) 0.1 (0.5) 1.0 0.9 (6.9) 0.2 250.1 60.9 1.5 9.0 0.3 (7.0) 0.4 (7.8) 1.0 (7.6) 22.4 (0.1) 323.1 Capital redemption reserve £m Cash ﬂow hedge reserve £m Retained earnings £m 162.7 16.4 179.1 (5.4) 173.7 33.6 0.4 – 0.1 (0.5) – 0.9 (6.9) – 201.3 60.9 1.5 – 0.3 (7.0) – (7.8) 1.0 (7.6) – – Total £m 211.1 16.4 227.5 (5.4) 222.1 33.6 0.4 (0.8) 0.1 (0.5) 1.0 0.9 (6.9) – 249.9 60.9 1.5 9.0 0.3 (7.0) 0.4 (7.8) 1.0 (7.6) 22.4 – – – – – – – – (0.8) – – – – – – (0.8) – – 9.0 – – – – – – – – 8.2 242.6 323.0 0.2 – 0.2 – 0.2 – – – – – – – – – 0.2 – – – – – – 0.1 – – – – 0.3 132 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 35 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: Share-based payment reserve £m Treasury shares bought back and cancelled £m Investment in own shares reserve £m Translation reserve £m Balance as at 30 September 2005 1.0 Prior year adjustment – transfer of assets to the JPUT (see note 1(b)) – Balance as at 30 september 2005 as restated Effect of adoption of IAS 32 and IAS 39 on 1 October 2005 Balance at 1 October 2005 Retained profit for the year (restated) Actuarial gain on BPT pension scheme net of tax Net exchange adjustment offset in reserves Purchase of own shares 1.0 – 1.0 – – – – Award of shares from own shares (1.4) Share-based payments charge Dividends paid Balance as at 30 September 2006 Retained profit for the year Actuarial gain on BPT pension scheme net of tax Net exchange adjustment offset in reserves Purchase of own shares Treasury shares bought back and cancelled Share-based payments charge Dividends paid Balance as at 30 September 2007 0.9 – 0.5 – – – – – 1.0 – 1.5 – – – – – – – – – – – – – – – – – (7.8) – – (7.8) (2.3) – (2.3) – (2.3) – – – (0.5) 1.4 – – (1.4) – – – (7.0) – – – (8.4) F I N A N C I A L S – – – – – – – 0.1 – – – – 0.1 – – 0.3 – – – – 0.4 Retained earnings £m 164.0 Total retained earnings reserve £m 162.7 16.4 16.4 180.4 179.1 (5.4) 175.0 33.6 0.4 – – – – (6.9) 202.1 60.9 1.5 – – – – (7.6) 256.9 (5.4) 173.7 33.6 0.4 0.1 (0.5) – 0.9 (6.9) 201.3 60.9 1.5 0.3 (7.0) (7.8) 1.0 (7.6) 242.6 133 35 Consolidated statement of changes in equity continued 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 treasury shares issued to employees as part of the LTIS. Shares bought back and cancelled During the year, Grainger plc bought back and cancelled 1,525,000 shares at a cost of £7,846,020 (2006: none). Investment in own shares reserve The Grainger Trust Employee Trustee Company Limited held 584,673 shares in Grainger plc at the start and end of the year. These shares were held at an average cost of £1,438,375. The Grainger Employee Benefit Trust acquired 520,000 shares in Grainger plc during the year at a cost of £3,426,783. Grainger plc bought back and retained 650,000 shares as treasury shares during the year at a cost of £3,590,216. All of the shares held are to enable the company to meet its obligations under the employee share schemes. The total number of shares held at the year end was 1,754,673 at a cost of £8,455,374. The shares had a market value at the year end of £7,852,162. F I N A N C I A L S 134 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 36 List of principal subsidiaries The directors consider that providing details of all subsidiaries, joint ventures and associates as at 30 September 2007 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 group. A full list will be appended to the next annual return. Proportion of nominal value of ordinary issued shares held by: Group % Company % 100 100 Name of undertaking Northumberland and Durham Property Trust Limited Grainger Residential Management Limited Grainger Asset Management Limited Derwent Developments Limited Grainger Homes Limited West Waterlooville Developments Limited BPT (Bradford Property Trust) Limited BPT (Residential Investments) 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 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 Grainger Treasury Properties LLP The Tilt Estate Company Limited Grainger Retirement Housing No1 (2007) Limited BPT Limited Grainger Malta Finance Limited All subsidiaries are consolidated in the group accounts. F I N A N C I A L S 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Incorporated Activity England & Wales Property Trading England & Wales Property Management England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales 100 England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales Germany Germany Germany Germany Germany Luxembourg Luxembourg Luxembourg Luxembourg England & Wales England & Wales England & Wales England & Wales Asset Management Land Development House-building Land Development Property Trading Property Investment Finance Company Finance Company Property Trading Property Trading Property Investment Property Investment Holding Company Property Investment Property Investment Property Investment Property Investment Property Investment Finance Company Finance Company Finance Company Holding Company Property Investment Property Investment Property Investment Investment Company Malta Finance Company 135 37 Related party transactions During the year and at the year end, 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, a sales fee, a commercial management fee and a treasury services fee. Amounts recognised in the income statement and outstanding balances at the year end are as follows: Asset adviser fee Sales fee Commercial management fee Treasury fee 2007 Fees recognised £’000 2007 Year-end balance £’000 2006 Fees recognised £’000 2006 Year-end balance £’000 688 83 7 10 788 200 – 5 9 214 410 – 14 20 444 358 – 18 27 403 In addition, the group has provided loans to both partnerships as follows: Grainger GenInvest LLP – 8.5% ﬁxed interest loan note Grainger GenInvest No 2 (2006) LLP – 11.0% ﬁxed interest loan note Grainger GenInvest No 2 (2006) LLP – mezzanine loan at LIBOR plus 4% Balance as at 30 September 2007 £m Balance as at 30 September 2006 £m 2007 interest receivable £m 2006 interest receivable £m 7.9 4.5 55.6 68.0 7.2 4.2 46.3 57.7 0.7 0.3 5.1 6.1 0.6 0.2 1.9 2.7 Interest receivable is included within interest receivable from associates and joint ventures shown in note 13. The loan notes have no ﬁxed repayment date and are subordinated to external ﬁnancing with each LLP. If not demanded before, the Grainger GenInvest LLP loan notes are repayable by 23 June 2015 and the Grainger GenInvest No 2 (2006) LLP loan notes by 31 December 2016. The mezzanine loan is repayable on demand but has a ﬁnal repayment date of 20 March 2011. The group held a 50% interest in Curzon Park Limited as at 30 September 2007. The group has provided a loan to Curzon Park Limited as at 30 September 2007 of £6.8m. The loan is repayable on demand and bears interest at 4.0% per annum. The group held a 21.6% interest in G:res1 Limited as at 30 September 2007. The group provides a number of services to the fund and receives a property management fee, a lettings and renewal fee, an asset management fee and an insurance intermediary fee. Amounts recognised in the income statement and the outstanding balance at the year end are as follows: F I N A N C I A L S Property management fee Lettings and renewal fee Asset management fee Insurance intermediary fee 2007 Fees recognised £’000 2007 Year-end balance £’000 2006 Fees recognised £’000 2006 Year-end balance £’000 1,081 130 2,078 38 3,327 352 49 707 – 1,108 613 61 1,073 13 1,760 222 22 326 – 570 136 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 37 Related party transactions continued The group held a 22.4% interest in the Schroder Residential Property Unit Trust as at 30 September 2007. The group provides a number of services to the Trust and receives a property management fee, a lettings and renewal fee and an asset management fee. Amounts recognised in the income statement and the outstanding balance at the year end are as follows: Property management fee Lettings and renewal fee Asset management fee 2007 Fees recognised £’000 2007 Year-end balance £’000 2006 Fees recognised £’000 2006 Year-end balance £’000 345 26 587 958 87 – 168 255 330 90 576 996 103 10 184 297 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. The fees amounted to £41,000 in the year (2006: £11,000) and the oustanding balance as at 30 September 2007 was £nil (2006: £19,000). The fees are calculated on an arm’s-length basis. The group has a 43.2% interest in OÜ Robbins, a company incorporated in Estonia, and provided a loan to the company of £2.1m by way of 9% ﬁxed interest loan notes. Interest receivable on the loan notes in the year to 30 September 2007 was £0.2m (2006: £0.1m) and is included in interest receivable from associates and joint ventures shown in note 13. The loan notes and accrued interest were repaid to the group during the year. On 16 July 2007, Grainger plc bought back 400,000 of its own shares from the Estate of Lord Portsmouth (‘the Estate’) at the prevailing open market price of 556.25p. The shares, which cost £2.2m were bought back as treasury shares and were subsequently cancelled by the group. Robert Hiscox, a non-executive director of Grainger plc is a Trustee of the Estate and is a related party to the transaction under the Listing Rules. On 20 March 2007 the group acquired a portfolio of properties at a cost of £4.1m from the Duke of Northumberland. The Duke of Northumberland is a joint venture partner in Regen (NT) LLP with an interest of 331⁄3%. Details of key management compensation are provided in note 11. F I N A N C I A L S 38 Capital commitments As at 30 September 2007, the group had capital commitments of £nil (2006: £0.2m). 39 Operating lease commitments Future minimum lease payments payable by the group under non-cancellable operating leases are as follows: Operating leases which expire: Not later than one year Later than one year and not later than ﬁve years Later than ﬁve years The group does not expect to receive any payments under non-cancellable sub leases (2006: £nil). 2007 £m 0.5 0.8 6.6 7.9 2006 £m 0.6 0.8 6.9 8.3 137 40 Contingent liabilities The properties in certain subsidiary companies forming a ‘guarantee group’ provide the security for the group’s MOF (see note 28). The properties in certain of the group’s German subsidiaries provide security for the non-recourse finance raised in those subsidiary undertakings. The group has provided guarantees under performance bonds relating to its UK development division. As at 30 September 2007 these amounted to £11.4m (2006: £11.3m). 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. 41 Post-balance sheet events In December 2007 the group’s €150m Euro credit facility was increased by €75m to €225m. This additional facility will be used to finance acquisitions in Germany, both those currently in the acquisition pipeline as well as future acquisitions. 42 Business combinations The group acquired 100% of 12 businesses during the year for a total consideration of £134.4m all of which have been accounted for as a business combination. These were as follows: The Tilt Estate Company Limited 17 September 2007 Property investment company The Portland Group Portland House Holdings Limited St Andrews Property Holdings Limited The ELM Group Economic Reversions Ltd Milford Reversions Ltd ELM Reversions Ltd ELM Property Investments LLP 14 March 2007 6 June 2007 The Capital Appreciation Trust Group (CAT Group) 12 January 2007 CAT (IOM) Ltd CAT (G) Ltd RHM (IOM) Ltd RHM (G) Ltd Property trading company Property trading company Property investment company Property investment company Property investment company Property investment company Property investment company Property investment company Property investment company Property investment company Langwood Properties Limited 21 December 2006 Property investment company F I N A N C I A L S 138 GRAINGER PLC Annual report and accounts 2007 notes to the ﬁnancial statements continued 42 Business combinations continued The fair value of the net assets acquired the fair value of the consideration and the resultant goodwill are shown below: The Portland Group £m The Tilt Estate Company Limited £m Langwood Properties Limited £m The CAT Group £m The ELM Group £m Investment properties Inventories – trading property Trade and other receivables Cash Debt and other creditors Deferred tax liabilities Net assets acquired Cost of investment Cash Loan notes Costs Cash – repayment of debt on acquisition Goodwill 66.0 – 0.3 0.5 (11.2) (15.6) 40.0 47.8 – 0.6 48.4 4.3 52.7 12.7 – 18.4 – – (0.6) (2.6) 15.2 12.3 – – 12.3 4.2 16.5 1.3 9.5 – 0.1 0.1 (3.4) (0.3) 6.0 0.2 – 0.1 0.3 5.8 6.1 0.1 96.2 – – 0.5 (28.0) – 68.7 71.6 – 0.3 71.9 – 71.9 3.2 1.6 – – 0.1 – (0.3) 1.4 0.3 1.0 0.2 1.5 – 1.5 0.1 F I N A N C I A L S Acquisition of subsidiaries net of cash acquired in the statement of consolidated cash flows is shown after repayment of debt on acquisition. Profit/(loss) since the date of acquisition 0.1 0.5 (0.1) (0.6) 0.4 Group revenue for the year assuming all business combinations effective at the beginning of the year Operating profit before net valuation gains on investment properties and change in fair value for the combined entity for the year assuming all business combinations effective at the beginning of the year Total £m 173.3 18.4 0.5 1.2 (43.2) (18.9) 131.3 132.2 1.0 1.2 134.4 14.3 148.7 17.4 0.3 233.3 92.1 It is not possible to estimate the impact of valuation gains had the property assets been acquired at the beginning of the year and so the impact of the acquisitions on profit is shown at the level of operating profit before valuation gains on investment properties and change in fair value rather than at the level of profit after tax. Goodwill in all of the acquisitions other than CAT, arises primarily from the difference between how deferred tax is calculated for accounts purposes and the value ascribed to it in acquisition negotiations. Goodwill relating to CAT reflects the value ascribed to the associated market position and the distribution arrangements that were acquired with the portfolio. The following fair value adjustments were made on acquisition: For The Portland Group ‘Inventories – trading property’ was fair valued at the date of acquisition at £18.4m an increase of £8.6m over entity book value. For The CAT Group and The ELM Group, an adjustment was made for properties held with lifetime leases to gross up the value of investment property to its vacant possession value with a corresponding adjustment to establish a deferred rent creditor representing the lifetime lease payments received but not yet credited to the income statement. These adjustments were for £26.1m and £2.8m respectively. 139 independent auditors’ report to the members of Grainger plc on the parent company financial statements We have audited the parent company financial statements of In addition we report to you if, in our opinion, the company has Grainger plc for the year ended 30 September 2007 which not kept proper accounting records, if we have not received all comprise the company balance sheet and the related notes. the information and explanations we require for our audit, or if These parent company financial statements have been prepared information speciﬁed by law regarding directors’ remuneration under the accounting policies set out therein. We have also and other transactions is not disclosed. audited the information in the report of the remuneration committee and directors’ remuneration report that is described as having been audited. We read other information contained in the annual report and consider whether it is consistent with the audited parent company ﬁnancial statements. The other information comprises We have reported separately on the group ﬁnancial statements only the chairman’s statement, the chief executive’s review, of Grainger plc for the year ended 30 September 2007. the ﬁnancial review, the corporate governance report, the 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. 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 opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the parent company ﬁnancial statements give a true and fair view and whether 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. We also report to you whether in our opinion the information given in the directors’ report is consistent with the parent company ﬁnancial statements. The information given in the directors’ report includes that specific information presented in the chairman’s statement and the chief executive’s review that is cross-referenced from the review of business development and prospects section of the directors’ report. directors’ report, the corporate responsibility report and the unaudited part of the report of the remuneration committee and directors’ remuneration report and the other items listed in the contents page. 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. 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 parent company ﬁnancial statements and the part of the report of the remuneration committee and directors’ remuneration report to be audited. It also includes an assessment of the signiﬁcant estimates and judgements made by the directors in the preparation of the parent company ﬁnancial statements, and of whether the accounting policies are appropriate to the company’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 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. F I N A N C I A L S 140 GRAINGER PLC Annual report and accounts 2007 independent auditors’ report to the members of Grainger plc on the parent company ﬁnancial statements continued Opinion In our opinion: (cid:129) 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 2007; (cid:129) 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 (cid:129) 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 18 December 2007 Note The maintenance and integrity of the Grainger 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 on the website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. F I N A N C I A L S parent company balance sheet At 30 September 2007 Non-current assets Tangible ﬁxed assets Investments Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year: Convertible bond Deferred tax liabilities Net assets Called-up equity share capital Share premium account Capital redemption reserve Equity component of convertible bond Proﬁt and loss account Equity shareholders’ funds 141 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 – 155.4 184.7 Notes 2 3 4 5 6 7 8 9 9 9 2007 £m 0.3 149.1 149.4 261.4 3.0 264.4 135.3 129.1 278.5 88.5 1.2 188.8 6.4 23.0 0.3 22.4 136.7 188.8 The ﬁnancial statements on pages 141 to 146 were approved by the board of directors on 18 December 2007 and signed on their behalf by: F I N A N C I A L S Rupert J. Dickinson Andrew R. Cunningham Director Director 142 GRAINGER PLC Annual report and accounts 2007 notes to the parent company ﬁnancial statements 1 Accounting policies continued (a) Basis of preparation (d) Investments The ﬁnancial statements have been prepared on a going Investments in equity instruments that have a quoted market concern basis in accordance with the historical cost convention, as modiﬁed by the revaluation of certain investments, in price in an active market or whose fair value can be reliably measured are fair valued under FRS 26. Fair value is measured accordance with the Companies Act 1985 and applicable as the net asset value per unit held. 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 proﬁt for the year was £2.1m (2006: loss of £3.5m). On an historical cost basis, the proﬁt for the year would have been £1.2m (2006: a loss of £3.9m). These ﬁnancial statements (e) Investment in subsidiaries Investments in subsidiaries are carried at historical cost less provision for impairment. (f) Taxation Corporation tax is provided on taxable proﬁts at the current rate. present information about the company as an individual Deferred tax assets and liabilities arise from timing differences undertaking and not about its group. between the recognition of gains and losses in the accounts In accordance with the exemption in FRS 1 ‘Cash Flow and their recognition in a tax computation. Statements’, the company has not prepared a cash ﬂow In accordance with FRS 19 ‘Deferred Tax’, deferred tax statement because one is included in its own consolidated 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. (g) Own shares including treasury shares Transactions of The Grainger Trust Employee Trust Company Limited and The Grainger Employee Beneﬁt Trust are included in the company’s ﬁnancial statements. In particular, the purchases of shares in the company by each trust and any treasury shares bought back by the company are debited directly to equity. F I N A N C I A L S 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. (b) Accounting policies The company ﬁnancial statements have been prepared under UK GAAP, rather than under IFRS which has been adopted for group reporting. The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the company’s ﬁnancial statements. (c) Tangible ﬁxed assets These assets comprise ofﬁce ﬁxtures, ﬁttings and equipment and are carried at historical cost less accumulated depreciation and impairment. 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 company and the cost of the item can be measured reliably. Depreciation is provided on a straight-line basis over the estimated useful life of the assets which is assessed as ﬁve years. 2 Tangible ﬁxed assets Cost At 1 October 2006 and 30 September 2007 Depreciation At 1 October 2006 Charge for the year At 30 September 2007 Net book value At 30 September 2007 At I October 2006 3 Fixed asset investments Cost At 1 October 2006 Additions Uplift to fair value At 30 September 2007 143 Fixtures, ﬁttings and equipment £m 0.9 0.4 0.2 0.6 0.3 0.5 Total £m 144.5 3.5 1.1 149.1 Investment in Schroder Residential Property Unit Trust £m 19.0 – 1.1 20.1 Investment in subsidiaries £m 125.5 3.5 – 129.0 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 in note 36 on page 134. F I N A N C I A L S 144 GRAINGER PLC Annual report and accounts 2007 notes to the parent company ﬁnancial statements continued 4 Debtors Amounts owed by group undertakings Other debtors Debtors in both 2006 and 2007 are all due within one year. 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 2007 £m 260.7 0.7 261.4 2007 £m 0.6 – 132.6 – – 2.1 2006 £m 164.7 – 164.7 2006 £m 0.8 0.3 118.4 0.8 0.7 3.7 135.3 124.7 The loan notes are secured by bank guarantees and cash collateral and bear interest at between 0.75% and 1% under LIBOR. The loan notes are repayable within one year. 6 Convertible bond F I N A N C I A L S Value at issue Equity component at issue Amortisation during the year Unamortised issue costs 2007 £m 112.0 (22.4) 0.6 90.2 (1.7) 88.5 2006 £m – – – – – – A £112m 3.625% convertible bond due 2014 was issued in May 2007. Interest is payable semi-annually. Unless previously redeemed, converted, purchased or cancelled the bond is convertible at any time up to 12 May 2014 into fully paid up ordinary shares at a conversion price of £8.64. The convertible bond is a compound ﬁnancial instrument and the carrying amount has been allocated to its equity and liability components in the balance sheet. The liability component has been determined by measuring the fair value of a similar liability that does not have an associated equity component. The discount rate used for this was a rate of 7.5% compounded semi-annually. The liability component has been deducted from the fair value of the compound ﬁnancial instrument as a whole and the residual element has been assigned to the equity component. The liability element is subsequently measured at amortised cost using the effective interest rate method. 7 Deferred tax liabilities Opening balance On revaluation gains in the year Impact of change in tax rate Closing balance 2007 £m 1.0 0.3 (0.1) 1.2 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. Deferred tax is provided at a rate of 28% (2006: 30%). As the Finance Act 2007, which introduced a corporation tax rate of 28%, was substantially enacted as at 30 September 2007, deferred tax has been calculated at this rate. This has resulted in a deferred tax credit of £0.1m in the year which has been taken through the income statement. 8 Share capital Authorised 160,000,000 (2006: 160,000,000) ordinary shares of 5p each Allotted, called-up and fully paid 128,656,385 (2006: 129,925,482) ordinary shares of 5p each 2007 £m 8.0 6.4 145 2006 £m 0.9 0.1 – 1.0 2006 £m 8.0 6.5 As at 30 September 2007, share capital included 584,673 (2006: 584,673) shares held by the Grainger Trust Employee Trustee Company Limited, 520,000 (2006: nil) shares held by the Grainger Employee Beneﬁt Trust and 650,000 (2006: nil) shares held by the company as treasury shares. The total of these shares is 1,754,673 (2006: 584,673) with a nominal value of £87,734 (2006: £29,234). Movements in issued share capital during the year were as follows: At 1 October 2005 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes At 30 September 2006 Options exercised under the executive share option scheme Options exercised under the LTIS Options exercised under SAYE schemes Treasury shares bought back and cancelled At 30 September 2007 Details of share options granted by the company are provided in note 33 on pages 125 and 126. Number 129,374,394 43,795 454,359 52,934 Nominal value £’000 6,468 2 23 3 129,925,482 6,496 63,645 74,586 117,672 (1,525,000) 128,656,385 3 4 6 (76) 6,433 F I N A N C I A L S 146 GRAINGER PLC Annual report and accounts 2007 notes to the parent company ﬁnancial statements continued 9 Reserves At 1 October 2006 Retained proﬁt for the year Share-based payment charge Issue of shares to satisfy employee share options Treasury shares bought back and cancelled Purchase of own shares Issue of convertible bond Dividends paid At 30 September 2007 Share premium £m Capital redemption reserve £m Equity component of convertible bond £m 22.6 – – 0.4 – – – – 23.0 0.2 – – – 0.1 – – – 0.3 – – – – – – 22.4 – 22.4 Proﬁt and loss account £m 155.4 2.1 1.6 – (7.8) (7.0) – (7.6) 136.7 The Grainger Trust Employee Trustee Company Limited held 584,673 shares in Grainger plc at the start and end of the year. These shares were held at an average cost of £1,438,375. The Grainger Employee Benefit Trust acquired 520,000 shares in Grainger plc during the year at a cost of £3,426,783. Grainger plc bought back and retained 650,000 shares as treasury shares during the year at a cost of £3,590,216. All of the shares held are to enable the company to meet its obligations under the LTIS. The total number of shares held at the year end was 1,754,673 at a cost of £8,455,374. The shares had a market value at the year end of £7,852,162. 10 Other information Dividends Information on dividends paid and declared is given in note 15 on page 103. Share options Details of share options outstanding and the movements during the year are given in note 33 on pages 125 and 126 respectively. Contingent liabilities 2007 £nil (2006: £nil). Employees The company had no employees in 2007 (2006: none) other than the directors. Details of their remuneration are provided on page 67. Audit fees The audit fee for the year was £8,000 (2006: £8,000). F I N A N C I A L S ﬁve-year record for the year ended 30 September 2007 147 2007 £m 229.3 52.7 14.8 62.8 77.5 60.9 7.6 Pence per share 47.26 6.18 £m 1,865.0 2,514.7 323.1 Pence per share UK GAAP 2003 £m 173.6 21.4 2.1 38.8 48.5 29.3 4.0 Pence per share 23.96 3.26 £m 907.2 1,305.8 146.7 Pence per share 2004 £m 217.4 41.0 41.1 72.6 59.6 36.8 5.7 Pence per share 29.94 4.65 £m 950.8 1,454.5 177.9 Pence per share IFRS Restated 2006 £m 206.3 52.6 40.6 56.2 47.7 33.5 6.9 2005 £m 227.6 45.5 13.3 67.2 41.0 31.1 6.9 Pence per share Pence per share 24.88 5.11 £m 1,225.4 1,639.3 211.1 Pence per share 25.99 5.62 £m 1,467.8 2,009.9 250.1 Pence per share 118.4 143.4 159.1 192.5 251.1 438.8 7.3x 125% 273.0p 546.8 6.5x 103% 367.0p 475.4 4.7x 140% 456.0p 606.3 4.6x 133% 628.0p 751.7 7.7x 138% 447.5p Turnover Gross rental income 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 statements basis Fixed assets and stocks at market value Share capital and reserves Net asset value on a ﬁnancial statements basis Net asset value including ﬁxed assets and stocks at market value* Dividend cover** Gearing Share price at 30 September Share price and per share ﬁgures have been restated for 2003 and 2004 to take account of the ﬁve for one share split that took place in February 2005. Information relating to 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 2006 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 ventures and associates U S E F U L I N F O R M A T I O N 148 GRAINGER PLC Annual report and accounts 2007 shareholders’ information Financial calendar Share dealing service Annual General Meeting 12 February 2008 A share dealing service is available to existing shareholders Payment of 2007 ﬁnal dividend 18 February 2008 to buy or sell the company’s shares via Capita Share Dealing Announcement of 2008 interim results May 2008 Services. Online and telephone dealing facilities provide an easy Payment of 2008 interim dividend June 2008 to access and simple to use service. Announcement of 2008 ﬁnal results November 2008 For further information on this service, or to buy or sell shares, Share price During the year ended 30 September 2007, the range of the closing mid-market prices of the company’s ordinary shares were: please contact: www.capitadeal.com – online dealing 0870 458 4577 – telephone dealing Price at 30 September 2007 Lowest price during the year Highest price during the year 448p 423p 695p 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.graingerplc.co.uk 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 Shareholders’ enquiries Company registration number 125575 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 U S E F U L I N F O R M A T I O N 149 advisers Solicitors Dickinson Dees St Ann’s Wharf 112 Quayside Newcastle upon Tyne Freshﬁelds, Bruckhaus Deringer Bankers Clearing Bank and Facility Agent Barclays Bank PLC Other Bankers Lloyds TSB Bank plc 65 Fleet Street The Royal Bank of Scotland plc London DWF West 1 Wellington Street Leeds LS1 1BA Financial public relations Financial Dynamics Holborn Gate 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 26 Southampton Buildings Hypo Real Estate Bank AG London Corporate public relations FD Tamesis 26 Southampton Buildings London 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 Newcastle upon Tyne Registrars and transfer ofﬁce Capita IRG Plc Northern House Woodsome Park Tenay Bridge Huddersﬁeld West Yorkshire HD8 0LA U S E F U L I N F O R M A T I O N 150 GRAINGER PLC Annual report and accounts 2007 glossary of terms Property Assured periodic tenancy (‘APT’) Market-rented tenancy arising from succession from regulated. Tenant has security of tenure. Assured shorthold tenancy (‘AST’) Market-rented tenancy where landlord may obtain possession if appropriate notice served. Assured tenancy (‘AT’) Market-rented tenancy where tenant has right to renew. Investment value (‘IV’) or market value Open market value of a property subject to relevant tenancies in place. Home reversion Rent free tenancy where tenant has right of occupation until possession is PRS Regulated tenancy forfeited (usually on death). If tenant retains an equity interest in the property this is a partial home reversion. Private rented sector. Tenancy regulated under 1977 Rent Act, rent (usually sub market) set by rent ofﬁcer and tenant has security of tenure. Vacant possession value (‘VP’) Open market value of a property free from any tenancies. Corporate Grainger NAV 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. IFRS International Financial Reporting Standards. Mandatory for UK listed companies for accounting periods ending on or after 31 December 2005. U S E F U L I N F O R M A T I O N 151 Financial Cap Contingent tax Dividend cover Earnings per share (‘EPS’) Gearing Goodwill Grainger NAV Financial instrument which, in return for a fee, guarantees an upper limit for the interest rate on a loan. The amount of tax that would be payable on the difference between 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 ratio of borrowings, net of cash, to the market net asset value. On acquisition of a company, the difference between the fair value of net assets acquired and the purchase price paid. NNNAV adjusted for the taxed discounted reversionary surplus on regulated and home reversion portfolios. Gross net asset value (‘Gross NAV’) Shareholders’ funds adjusted for the market value of property assets held as Hedging IAS 39 IFRS Interest cover stock, and adding back deferred tax and before adjustments for the fair value of derivatives. 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. International Financial Reporting Standards. Proﬁt on ordinary activities before interest and tax divided by net interest payable. Loan to value (‘LTV’) Ratio of net debt to the market value of properties. Net net asset value (triple net or ‘NNNAV’) Return on capital employed Return on shareholders’ equity Gross NAV adjusted for tax liabilities which would accrue if assets sold at market value and for the market value of long-term debt and derivatives. Growth in NNNAV plus dividends paid per share as a percentage of opening NNNAV. Proﬁt before ﬁnancing costs plus all revaluation surpluses as a percentage of opening gross capital. 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. U S E F U L I N F O R M A T I O N 152 GRAINGER PLC Annual report and accounts 2007 corporate addresses Putney 1st Floor SW15H Building 73-75 Upper Richmond Road Luxembourg 9 Parc d’Activite Syrdall L-5365 Munsbach Luxembourg London SW15 2SR Manchester St John’s House Barrington Road Altrincham Cheshire WA14 1TJ Exeter Lower Ground Floor 4 Barnﬁeld Crescent Southernhay Exeter EX1 1RF 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 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 Barrack Square Martlesham Heath Ipswich Suffolk IP5 3RF www.graingerplc.co.uk U S E F U L I N F O R M A T I O N Printed in the UK by MPG impressions, Environmental Management System ISO 14001 accredited and Forest Stewardship Council (FSC) chain of custody certified. This report is printed utilising vegetable based inks and approximately 96% of the waste associated with this product will be recycled. The Cover is printed on Go Velvet which uses pulp that is bleached using the ECF (Elemental Chlorine Free) process and is recyclable, compostable or biodegradable. It is manufactured at a paper mill that is certified to ISO 14001 environmental management standard. The text of this report is produced on Revive 50:50 Silk which is produced with 50% recycled fibre from both pre- and post-consumer sources, together with 50% ECF fibre and Revive 100 uncoated which is produced from 100% post-consumer reclaimed material. Both are from sustainable forests independently certified according to the rules of the Forest Stewardship Council. Designed and produced by corporateedge.com G R A I N G E R P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 7 www.graingerplc.co.uk ANNUAL REPORT AND ACCOUNTS 2007

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