Grainger
Annual Report 2018

Plain-text annual report

ANNUAL REPORT AND ACCOUNTS 2018 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 1 8 AT HOME WITH GRAINGER OUR PURPOSE MORE AND MORE PEOPLE ARE RENTING IN THE UK, AND WE ARE MEETING THIS NEED BY PROVIDING GREAT HOMES TO RENT. WE ARE THE UK’S LARGEST LISTED RESIDENTIAL LANDLORD AND A MARKET LEADER IN THE PRIVATE RENTED SECTOR. WE THINK AND PLAN FOR THE LONG TERM. BY PROVIDING WELL-DESIGNED HOMES IN GREAT LOCATIONS, COUPLED WITH GREAT CUSTOMER SERVICE, WE PROVIDE OUR CUSTOMERS WITH A PLACE THEY ARE PROUD TO CALL HOME. 2018 HIGHLIGHTS FINANCIAL Net rental income Dividend per share £ 43.8m +8% (FY17: £40.4m) 5.26p +8% (FY17: 4.86p) Adjusted earnings Profit before tax £94.0m +26% £100.7m +17% (FY17: £74.4m) (FY17: £86.3m) Cost of debt (at period end) 3.2% -22bps (FY17: 3.4%) Loan to value 37.1% -53bps (FY17: 37.7%) IFRS net assets EPRA NNNAV 195pps +9.5% 316pps +4.3% (FY17: 178pps) (FY17: 303pps) Total return (ROSE) 6.1% -120bps (FY17: 7.3%) Definitions and additional information relating to all KPIs are shown on pages 18 and 19. STRATEGIC AND OPERATIONAL Growth in net rental income Customer retention 8% 27 months Gross to net (rental margin) Employee retention 26% 90.2% (FY17: 94.5%) Total secured PRS investments in pipeline £943m Number of new homes added to the pipeline this year 1,522 “The transformation of your Company is ahead of plan with another strong set of financial results ” Our business model in action Page 6 CEO’s Review Page 9 CFO’s Review Page 20 Business model and strategy Grainger at a glance Chairman’s statement CONTENTS STRATEGIC REPORT 2 4 Market drivers 6 8 9 14 Grainger in action 18 Key performance indicators 20 Financial review 24 Our stakeholders 26 Our people, assets and environmental impact Chief Executive’s review S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 32 Risk management 34 Principal risks and uncertainties 37 Viability statement GOVERNANCE 38 Chairman’s introduction to governance 40 Leadership 42 Board of Directors 44 Effectiveness 47 Nominations Committee report 50 Accountability: Audit Committee report 53 Key activities 55 Relations with stakeholders 59 Remuneration Committee report 62 Remuneration Policy summary 66 Annual Report on Remuneration 77 Directors’ report Independent auditor’s report FINANCIAL STATEMENTS 81 87 Consolidated income statement 88 Consolidated statement of comprehensive income 89 Consolidated statement of financial position 90 Consolidated statement of changes in equity 91 Consolidated statement of cash flows 92 Notes to the financial statements 140 Parent company statement of financial position 141 Parent company statement of changes in equity 142 Notes to the parent company financial statements 149 EPRA performance measures 153 Five year record OTHER INFORMATION 154 Shareholders’ information 155 Glossary of terms 156 Advisers Minor, non-material adjustments have been made to this document since its original publication on 13 November 2018. 1 Grainger plc Annual Report and Accounts 2018 Strategic report GRAINGER AT A GLANCE LEADING THE MARKET: TWO ATTRACTIVE PORTFOLIOS Our regulated tenancies Our PRS properties Characteristics • Generates c.50% of net rental income • Gross yields of 2-4% • Attractive rental growth of 5.4% annualised in FY18 • Steady vacancy rates leading to sales, with 41% of vacancies arising from mortality and 25% from moving into assisted living accommodation Characteristics • Generates c.50% of net rental income • Gross yields of existing PRS properties 4-6% • Gross yields on cost of new investments 5-8% • Rental growth of 3.0% in FY18 • Occupancy of 97% • Average customer retention of 27 months Rental growth Rental growth Rental income Capital growth Sales price Reversionary surplus Purchase price Rental income Capital growth Reversionary surplus Purchase price (book value) Predictable cash flow generation underpins funding for growth OUR STRATEGY – Sell properties on vacancy, crystallising the reversionary surplus OUTLOOK – Sales of properties on vacancy expected to continue at between 6-7% per year of the portfolio, with average tenant age of 76 – Uplift on sale generates NAV growth, with current year sales c.1% above vacant possession book value – Provides funds for reinvestment in the PRS portfolio OUR STRATEGY – Continue investing in high-yielding properties, securing high-quality schemes with strong rental demand – Focus on 14 key cities, including London, Manchester, Bristol, Leeds, Birmingham – Recycling capital into PRS from regulated tenancy sales and asset recycling OUTLOOK – Strong and growing rental demand in target locations – Attractive rental growth prospects – Strong demand underpins valuations and yields 2 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i Key project Clippers Quay (phase 1 complete) • 614 PRS apartments • £99m investment • c.8% targeted gross yield LONDON Why we invest in London • Largest PRS market • Strongest rental growth prospects Stat 60%of households forecast to be renting by 2020 (PwC) s t a t e m e n t s O t h e r i n f o r m a t i o n Key project Argo Apartments, Canning Town (completed) • 134 PRS apartments • 97% let in 4 months • Gross yield on cost of c.8% achieved • High customer satisfaction A well located portfolio (highlights include) LEEDS PRS Operational units 100 PRS Units under development 242 Total PRS investment £58m MANCHESTER Why we invest in Manchester • 8-10% population growth forecast • 1 in 5 represent our target market (aged 25-34) • High employment rate • High graduate retention rate, second only to London Stat 52% graduate retention (HESA) BIRMINGHAM Why we invest in Birmingham • Strong economy • Good rental growth prospects • Supportive planning environment • Planned infrastructure investment • High graduate retention rate – 49% Stat 108k+ increase in population in last decade (ONS) Key project Gilders Yard, Jewellery Quarter (in construction) • 156 PRS apartments • £28m investment • c.7% targeted gross yield MILTON KEYNES PRS development schemes 2 PRS Units under development 400 Total PRS investment £95m BEREWOOD, HAMPSHIRE PRS units under development 104 Total PRS investment £17m BRISTOL Why we invest in Bristol • Infrastructure improvements • Supportive demographics • Lack of purpose built professionally managed assets • High house price to earnings ratio Stat 79%employment rate, above the UK average (ONS) Key project Finzels Reach • 194 PRS apartments • £46m investment • c.7% gross yield targeted WELLESLEY, HAMPSHIRE PRS units under development 107 Total PRS investment £22m 3 Grainger plc Annual Report and Accounts 2018 Strategic report MARKET DRIVERS A VAST MARKET OPPORTUNITY SET TO GROW TO 7.2m RENTAL HOUSEHOLDS BY 2025 4.7m RENTAL HOUSEHOLDS INCREASED BY 74% IN THE PAST 10 YEARS Grainger is the market leader with Largest growth in renting among 35-44 year olds Over 30% of tenants are families with children Mean age of PRS tenants 100k new households in 2017 38% 40 4,548 PRS units. Remainder of top 10 PRS providers have 10,500 units between them Supply of PRS homes in the pipeline (build-to-rent) 132k 4 Grainger plc Annual Report and Accounts 2018The PRS has grown rapidly in the last decade and now accounts for 20% of all UK households up from 13% in 2007. The rising cost of home ownership, particularly in large cities, as well as societal lifestyle changes have been key drivers. The PRS is largely dominated by buy-to-let landlords, who are estimated to account for 97% of rental supply (IPF), but there are increasing calls for a more institutional and professional approach to managing large scale residential property, designed specifically for the rental market. Although young people (aged 25-34) remain the most prominent group in the PRS, growth has been recorded across all age groups. The PRS is projected to account for 25% of all households by 2025 (PwC) and, additionally, one third of millennials (c.2.1m people) are forecast to live their whole life in the PRS (Resolution Foundation). MARKET DRIVERS WHAT’S HAPPENING THE IMPACT HOW OUR STRATEGY IS OPTIMISED TO RESPOND 1. GROWING THE PRIVATE RENTED SECTOR 2. UNDERSUPPLY OF HOUSING 3. REDUCTION IN NUMBER OF BUY-TO-LET LANDLORDS 4. LIFESTYLE CHANGES ARE INCREASING DEMAND FOR RENTED PROPERTIES 5. POLICY ENVIRONMENT The number of households in the UK PRS has been steadily increasing for over a decade. This is forecast to continue. The UK created fewer than 230,000 homes for each of the past 10 years. The Government’s target is for 300,000 homes per year. Tax and policy changes have caused small buy-to-let landlords to leave the sector, reducing the number of rental homes available. A trend toward spending on experiences rather than properties means people are delaying owning a home until later in life. Positive recent changes to government policy, particularly the National Planning Policy Framework (‘NPPF’) and Guidance, in favour of PRS development and professional, large scale landlords. 6. PROFESSIONALISATION OF THE PRS Increasing number of large scale, professional landlords. Increasing demand for rental homes. Investing in our portfolio and growing the number of rental homes we provide. Upward pressure on house prices and greater demand for rental homes. Creating high-quality homes for rent. Maintaining high occupancy and customer retention. Upward pressure on house prices and greater demand for rental homes. Creating high-quality homes for rent. Maintaining high occupancy and customer retention. Increasing demand for rental homes. Providing long-term and flexible tenancies to meet the increasing demand for ‘lifestyle’ renting. Some equalisation between PRS development (build-to-rent) and the build-for-sale sector. Bringing forward more development opportunities to increase our portfolio. Increasing competition. Increasing consumer recognition of two types of rental products, providing an opportunity for differentiation against buy-to-let. Protecting our intellectual property. First-mover advantage through our regional city strategy. Constantly evolving our product design and customer- service offering. More on page 4 More on page 6 S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 5 Grainger plc Annual Report and Accounts 2018 Strategic report BUSINESS MODEL AND STRATEGY CREATING AND SUSTAINING LONG-TERM VALUE w Our inputs OUR PEOPLE Recruiting and retaining top talent with a commitment to excellence and company culture are key focus areas of our people strategy, ensuring alignment to our purpose and core values. OUR ASSETS Well-designed, safe and secure rental homes that are priced well, enable us to achieve superior shareholder returns. FINANCIAL DISCIPLINE A strong balance sheet is critical to long-term sustainable shareholder value. RELATIONSHIPS Knowing the market and our customers is critical to finding new opportunities to derive value. INTELLECTUAL PROPERTY Our unrivalled knowledge-base is critical to our ability to compete effectively. TECHNOLOGY A key growth enabler, it supports the growth of our portfolio and cost maintenance while enhancing service to our customers. WHAT MAKES US DIFFERENT IGINAT E R O OUR STRATEGY I N V E S T GROW RENTS SIMPLIFY AND FOCUS BUILD ON OUR EXPERIENCE OPERAT E We believe in having a vertically integrated business that enables us to invest capital effectively, originate our own buildings to our specific designs and operate our assets directly. From this, we build strong long-term relationships with our customers. Our integrated approach means that we benefit directly from our experience and can constantly evolve and improve on what we do. 6 See our KPIs Page 18 Grainger plc Annual Report and Accounts 2018“ The opportunity in the rental market remains vast and we continue to take actions aligned to our strategic priorities ” Helen Gordon, CEO Value creation STRATEGY AND BUSINESS MODEL WORKING TOGETHER GROWING NET RENTAL INCOME AND DIVIDEND New investments and improving operational efficiencies enable us to grow net rental income and our dividend. ENHANCING CAPITAL RETURNS A strategically located portfolio in the strongest markets, coupled with our development activity, generate good capital returns. STRONG TOTAL RETURNS Risk adjusted, sustainable and long term. Strategic priority 1: Grow rents A clear focus on driving growth in rental income. Strategic priority 2: Simplify and focus A simplified strategy, business model and financial structure enable greater returns. Strategic priority 3: Build on our experience Doing what we are good at – providing homes for rent in the UK in line with our core values of being a responsible, long-term landlord. S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n See our business model in action Page 14 Value created for our stakeholders CUSTOMERS Providing desirable, healthy and well-designed homes for the mid-market. Delivering great customer service so renting is easy and hassle free. SHAREHOLDERS Creating value through growth in our net asset values (EPRA NNNAV) and through increasing our net rental income and dividend. LOCAL COMMUNITIES We seek to enhance the places we invest in – for our customers and existing communities. We engage with local stakeholders to shape the future of their area. SUPPLIERS We strive for our suppliers to grow in line with our success. EMPLOYEES Providing opportunities to grow, develop, be challenged and succeed. See our stakeholders Page 24 7 Grainger plc Annual Report and Accounts 2018 Strategic report CHAIRMAN’S STATEMENT Our business as a housing provider is important, serving those who either cannot get onto the ‘housing ladder’ or simply do not want to buy. Forecasts of the growth needed to match demand is not being delivered and that is why we will continue to lobby government to support PRS in order to accelerate housing supply and enable us to deliver good quality homes for rent where people can put down roots. The Board takes governance requirements very seriously and our aim is to take a leadership position where we can. One of the critical areas of focus is health and safety. The Company has clear plans to ensure that it continues to keep staff, customers and the general public safe. Alongside delivering a customer service culture, keeping safe is one of the highest priorities within the business. Tony Wray has decided to step down at the AGM in 2019, by which time he will have served over seven years on the Board as a Non-Executive Director. I would like to thank Tony for his significant contribution to the success of the Company and wish him well for the future. Mark Clare Chairman I am pleased to report that 2018 has been a year of significant progress in delivering the strategy, underpinned by a good financial performance. This puts Grainger in a strong position going forward to deliver growth in the business and its returns. The Board is pleased to see the Company receive external recognition for the service it provides its customers as Asset Manager of the Year at the RESI Awards. The Board has a real expectation of continued progress which will deliver critical competitive advantage going forward. Net rental income growth reflects acquisitions and strong like for like rental growth ahead of the market. Sales from the regulated portfolio and asset recycling initiatives have contributed to the strong profit performance, supported by a continued focus on cost control. Following on from the strong financial performance delivered, the Board is pleased to recommend an increase in the final dividend to 3.52p per share, bringing the total for the year to 5.26p per share, up 8% on the prior year. Progress on growing our PRS business continues with the launch of Argo Apartments in London and Clippers Quay in Manchester. Over the next few years around 5,300 PRS units are expected to be added from our pipeline. In parallel, our commitment to the efficient management of our regulated portfolio and delivering good levels of service remains. During the year the Board carried out a thorough review of the Company’s strategy and were very satisfied with the progress made. The key areas discussed included how growth of the PRS portfolio could be accelerated and how the investment in operational efficiency and enhancing customer experience will be delivered. This performance is testament to the hard work and dedication of every member of the Grainger team. I thank everyone, on behalf of the Board. Looking ahead, our objective remains the same: to deliver great homes for rent and a great customer experience. We will do this by delivering our growth strategy, investing to improve our operational efficiency and by improving the performance of our portfolio wherever we can. Mark Clare Chairman 13 November 2018 8 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Strategic report CHIEF EXECUTIVE’S REVIEW The reduction in our cost of debt has been a success. The refinancing of our corporate bond earlier this year reduced our cost of debt further to 3.2%. Operational excellence also remains a focus and we have maintained an optimal level of 26% gross to net leakage. The business is now well established and disciplined in its asset recycling, analysing each property for its future growth prospects. We profitably sold £157m worth of assets. These actions place us in a strong position for the growth trajectory we have embarked upon. Strategic priority 3: Build on our experience Our reputation as a responsible and high-performing landlord underpins our strategy. We have invested in operational improvements and our digital platform to deliver high-quality customer service, and to improve our customers’ lives. Our commitment to health and safety remains the most important aspect of securing our future and licence to operate, and a critical focus area for the Executive management team. Delivering results Strong financial performance With the actions we have taken, I am pleased to report that the underlying financial performance of the business remains strong. Helen Gordon Chief Executive It is less than three years since I presented the strategy to transform Grainger into the UK’s leading private rental provider, providing shareholders with resilient and strong returns, and I am pleased that the transformation of your Company is ahead of plan with another strong set of financial results. Adjusted earnings increased by 26% in the year to £94.0m (FY17: £74.4m). Net rental income increased further by 8% to £43.8m (FY17: £40.4m). We delivered strong sales performance from our regulated tenancy portfolio and our remaining development activity. The opportunity in the rental market remains vast and we continue to take actions aligned to our strategic priorities: investing in PRS assets to increase net rental income, organisational improvements to simplify and focus the business, and operational enhancements to build on our century of experience in the market. Our successful, disciplined approach to investment and operations alongside cost control is delivering strong results. Strategic priority 1: Grow rents We have achieved our £850m investment target two years ahead of plan, acquiring some of the best PRS development opportunities, whilst securing superior levels of return. These investments will increase our net rental income over the next two to three years, underpinning growth in our dividend. This year saw the successful completion and letting of three important new PRS assets, Argo Apartments in London, which was 97% let in four months; phase 1 of Clippers Quay in Greater Manchester, our largest PRS scheme; and our first 104 family units in Berewood, Hampshire. We are focused on driving returns for shareholders, and over the year we delivered a total return of 6.1% (FY17: 7.3%). Supported by our growth in net rental income, I am pleased to announce the Board is recommending an 8% increase in our total dividend to 5.26p per share (FY17: 4.86p per share), in line with our policy to deliver sustainable, income backed growth and distribute 50% of net rental income. Investing in the right assets and places At the end of last year we presented our work on investable cities. We have clear criteria for where we invest, in areas that have the strongest current rental demand and the greatest rental growth prospects. This enables us to allocate internal resources effectively and has contributed to our investment success. Our operations team supplement local market insight and sign off the design of the assets prior to acquisition, whilst our development and investment teams ensure that schemes can deliver shareholder value. Strategic priority 2: Simplify and focus We continue to streamline the business and its operations. Cost controls remain robust. We have retained a steady level of overheads following the 25% reduction of the previous two years. Our research and insight into local markets informs our capital allocation, in terms of our investments and our disposals as part of our asset recycling programme. 9 Grainger plc Annual Report and Accounts 2018 Strategic report CHIEF EXECUTIVE’S REVIEW CONTINUED Delivering in partnership Grainger’s heritage as a good landlord has enabled it to forge partnerships with landowners in the public and private sectors and with developers. through the Global Real Estate Sustainability Benchmark (‘GRESB’) where Grainger’s PRS fund, GRIP REIT, was awarded Sector Leader and Grainger took third overall among European listed residential peers. We have successful partnerships with the Defence Infrastructure Organisation at Wellesley and the London Pensions Partnership at Pontoon Dock, and I am particularly pleased we were selected by the London Borough of Lewisham to deliver c.300 private and social rental homes. During the year, we brought two successful partnerships to an end: with Dorrington Investment plc and with the Royal Borough of Kensington and Chelsea. The JV with Dorrington was part of our asset recycling strategy. Our exit from this JV was amicable and profitable. The Royal Borough of Kensington and Chelsea has experienced challenges following the tragedy of the fire at Grenfell Tower and Grainger supported the Borough providing them with high-quality homes for the displaced families and bringing our partnership to an appropriate conclusion. We look forward to replicating these partnerships where they bring access to land to support Grainger’s growth strategy. Investing in our people Without the dedication, commitment, expertise, compassion and enthusiasm of our people, Grainger could not retain our leadership of the sector. Nor would we have the confidence in our future and our growth plans, were it not for those that make up the organisation. We recognise the importance of our people – and of attracting and retaining the best. Throughout the year we run our employee engagement programme. This includes a comprehensive annual employee survey, the Best Companies Index. I am delighted that over 80% of employees took part. We have made strides across all areas of the business. It is clear that colleagues are committed to the Company vision, live our values, and come to work focused on delivering great homes for rent. Enhancing customer operations to secure our leading position Customer service is a focus area. We have invested in training and improving processes to enable operational staff to deliver better service. Grainger’s success is a result of our ability to attract and retain highly talented individuals. We have made significant investment in our development team with four senior hires, ensuring we have the right resource in place to deliver our PRS development pipeline. We are seeing signs of the benefits of these investments, with lower voids and arrears, maintained customer retention, increased customer satisfaction and efficient levels of property operating costs. Enhancing operations through technology We are investing in our digital platform to create a more efficient and scalable platform to support our growth plans and enable us to manage costs over this period of growth. We launched our Project Connect to improve our operations, enhanced by technology aimed at enabling scalable growth within the business and enhancing the rental experience for our customers, including a digital leasing journey. We have recruited talented specialists in this area and our plans for our customers’ digital experience reinforce our vision for greater leadership in the sector. Recognition as a market leader Our leading position in the UK PRS was acknowledged during the year with Asset Manager of the Year at the national RESI Awards, and we were a finalist in the Residential Property Company of the Year at the national EG Awards. Delivering great homes to rent Grainger’s focus is on delivering private rental homes for the largest number, and most diverse range of people. We target investment at those earning local average incomes. This ensures our homes are always in high demand and occupancy levels are high, providing sustainable shareholder returns. In turn, the commitment of our operational teams to deliver the best rental experience supports customer retention and the creation of long-term communities within our buildings. Our ambition is to be the best PRS landlord in the UK, delivering great homes to rent with great customer service. We are well on our way, yet we recognise there is much still to do. The outlook for the business is positive as we deliver numerous developments in our pipeline, and our operational platform undergoes a step change in delivery as a result of our investment in technology and our digital platform. My thanks go to the Board and shareholders for their ongoing support but, most importantly, I thank the Grainger team for all their outstanding efforts. Our leadership in sustainability and corporate social responsibility (‘CSR’) was also recognised, with a Gold Award in EPRA’s Sustainability Best Practices Recommendations. We also received recognition Helen Gordon Chief Executive 13 November 2018 10 Grainger plc Annual Report and Accounts 2018INVESTMENT CASE A compelling investment case, with strong fundamentals S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i National reach Presence across the country. Local knowledge Local market knowledge provides a competitive advantage. A disciplined approach to investment and multiple channels Robust governance, in-house research to support forwarding-funding acquisitions, direct development, development partnerships and acquiring existing assets. Strong future cash flows Regulated tenancy home sales are expected to generate an average of £100m p.a. £100m p.a. Plus asset recycling opportunities s t a t e m e n t s O t h e r i n f o r m a t i o n Market leading operating platform Unparalleled scale and expertise. Fully integrated business model, encompassing origination, investment and operations. Vast market opportunity 4.7m PRS households growing to 7.2m by 2025. SET TO GROW TO 7.2m BY 2025 4.7m HOUSEHOLDS Responsible business FTSE4Good Index listed, consistent top GRESB performer, with robust governance framework and committed to upholding high environmental, social and ethical standards. Maintained our inclusion in the FTSE4Good index for eighth consecutive year Strong balance sheet Capacity to deliver £1.2bn investment plan. A well-established network Scale and strong industry contacts ensure access to the best investment opportunities in the market. 11 Grainger plc Annual Report and Accounts 2018 Strategic report CHIEF EXECUTIVE’S REVIEW CONTINUED DEC JAN FEB MAR Acquisition – Forward funding project Gore Street Manchester Investment value £80m PRS homes 375 Selected partner of Lewisham Borough Council Besson Street London Income-share partnership PRS homes c.300 Launch Argo Apartments Acquisition – Forward funding project Eccy Village Sheffield Investment value £32m PRS homes 237 Sustainability Age UK London delivered training to Grainger employees working on our regulated portfolio, on good practice in working with older tenants Appointment Director of Land: Paul McGowan Sustainability Nine Grainger employees participated in the LandAid SleepOut, raising £15,000 towards ending youth homelessness Appointment Director of Land and Development: Mike Keaveney Credit rating upgraded Grainger’s credit rating upgraded to BB+ with positive outlook, and Grainger’s secured notes upgraded to BBB- investment grade A YEAR OF GROWTH OCT NOV Appointment Director of Business Technology: Michael Robinson Acquisition – Forward funding project Gilders Yard Birmingham Investment value £28m PRS homes 156 Acquisition – Stabilised portfolio Tribe Portfolio Manchester Investment value £26m PRS homes 192 Sale Sold back interest in 31 homes to Royal Borough of Kensington and Chelsea to house those needing accommodation after the Grenfell Tower fire 12 Grainger plc Annual Report and Accounts 2018APR MAY JUN JUL AUG SEP Launch Berewood Grainger’s first PRS family housing Corporate bond refinancing – £350m senior secured bond – BBB- rating – 3.375% for 10 years – Reducing cost of debt by 40bps – Extending debt maturities from 4.7 years to 6.5 years Acquisition – Forward funding project YMCA, Milton Keynes Investment value £63m PRS homes 261 Sustainability BPF Futures’ first site visit held at Argo Apartments, showcasing build-to-rent to the next generation of property professionals Sale – Exit JV Sold our 50% interest in Walworth JV Further Group simplification Proceeds £67m Acquisition – Forward funding project Via GRIP REIT East Street Southampton Investment Value £28m PRS homes 132 Fully let – Argo Apartments 5% Above ERV c.8% gross yield on cost 97% let in 4 months Customer service workshops Operations team runs series of workshops focusing on customer service Government policy NPPF updated to positively support PRS and build-to-rent Sustainability As part of their design and technology coursework, year 9 students of Gladesmore Community School designed amenity space at Apex House – delivered as part of Haringey Council’s Tottenham Charter S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Appointment National Acquisitions Director: Tom Henry Launch New customer website for Clippers Quay and initial phases of digital leasing platform, first output from Grainger’s Connect business technology programme Awards EPRA Sustainability Gold Award GRESB – GRIP wins Sector Leader and Grainger top three amongst peers Staff engagement survey – 81.7% response rate – Improved score across all categories – Grainger rated as ‘One to Watch’ with good levels of engagement 13 Grainger plc Annual Report and Accounts 2018 GRAINGER IN ACTION WHAT MAKES US DIFFERENT – BUILDING STRONG RELATIONSHIPS WITH OUR CUSTOMERS 134 homes £33m purchase price c.8% gross yield on cost achieved Creating, designing and developing new PRS homes provides us with control over the delivery of new buildings. This is important because in this emerging sector there is an undersupply of high-quality investment assets available in the market and our approach enables us to enhance returns. The success of our recent development, Argo Apartments in Canning Town, is based on our ability to originate, invest and operate our investments fully in-house, and we have organised the business to provide a strong focus on each area. Find out more online: www.argoapartments.co.uk 4 months, 97% let 14 Grainger plc Annual Report and Accounts 2018WHAT WE DID S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n ORIGINATE Worked closely with developer, Linkcity – Fully specified amenity – High-spec, well-proportioned apartments – Utilised off-site construction for exterior brick facade INVEST Our second deal with Bouygues UK – Great location – Walk Score 84/100 ‘Very Walkable’ – Great transport links – Close to major employment zones – Attractive pricing for local average income earners OPERATE Leasing and marketing delivered in-house – 97% let in four months – 5% above ERV – +20 customer NPS score – 4 residents events held 15 “The property is beautiful and the range of facilities on offer is second to none. Living at Argo has genuinely improved my quality of life and I couldn’t ask for a better base in London ” – Resident at Argo Apartments Grainger plc Annual Report and Accounts 2018 GRAINGER IN ACTION WHAT MAKES US DIFFERENT – CREATING LONG TERM COMMUNITIES FOR OUR RESIDENTS 614 homes £99m purchase price c.8% gross yield targeted 54% phase 1 units pre-let Creating spaces and communities is at the heart of what we do. Our Clippers Quay customers will be part of a new rental community on the waterfront, with social events, a great range of retailers and lots of outdoor space. Find out more online: www.clippersquay.co.uk 16 Grainger plc Annual Report and Accounts 2018WHAT WE DID S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n ORIGINATE Worked closely with developer, Amstone, and contractor, Sir Robert McAlpine – Fully specified amenity – High-spec, well-proportioned apartments – Utilised modular off-site construction for bathrooms INVEST Great location, next to MediaCity UK, home of the BBC. Walk Score 76/100 ‘Very Walkable’ – Great transport, next to tram stop, 15 mins to Manchester City Centre – Close to major employment zones – Very attractive pricing for local average income earners OPERATE Pre-leasing and marketing with strong positive initial indicators – Full on-site team overseeing operations and lettings – New digital marketing website and leasing journey – Place-making initiatives planned (community events) – Public realm investment (art, gardens, social spaces) – Community consultation and engagement events 17 “Bringing a new type of renting to Manchester, with smart, stylish apartments and amenities at a price that the majority of people working in Manchester can afford ” – Nicola, General Manager at Clippers Quay Grainger plc Annual Report and Accounts 2018 Strategic report KEY PERFORMANCE INDICATORS Our key performance indicators (‘KPIs’) are aligned to the business strategy. These measures are used by the Board and senior management to actively monitor business performance. 1 Driving our income returns The following KPIs focus on Grainger’s strategic priority to increase overall income returns and improve the resilience and efficiency of the business model which will support increasing dividend distributions. Net rental income (£m) Property operating cost (gross to net) (%) PRS rental growth (%) Adjusted earnings (£m) Profit before tax (£m) EPRA NAV (pence) EPRA NNNAV (pence) Total return (ROSE) Loan to value 43.8 40.4 28.0 26.0 26.0 3.6 3.3 37.4 3.0 74.4 53.1 94.0 100.7 84.2 86.3 343 348 330 303 316 287 (%) 35.9 37.7 37.1 Cost of debt (at period end) (%) 3.9 3.4 3.2 (%) 10.6 7.3 6.1 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 KPI definition Rental income after property operating expenses. Comment Increase of 8% driven by acquisitions and rental growth. Link to strategy Property operating costs expressed as a percentage of gross rental income. Like for like average growth of rents across our PRS portfolio. Profit before tax, valuation movements on investment assets, derivatives and other adjustments. Profit before tax including valuation movements and other adjustments. Market value of property EPRA NAV after deducting Growth in EPRA NNNAV Ratio of net debt to the Cost of debt at the period assets, before deferred and contingent tax on deferred and contingent tax combined with total market value of properties end including costs and on property revaluations dividend per share in on a consolidated commitment fees. property revaluations and and derivative adjustments. the year. Also known as Group basis. Stable gross to net performance demonstrating strong operational efficiency in our portfolio. Resilient like for like growth in our PRS rental income outperformed the market (1.4% market average) due to our strong customer proposition. 26% increase driven by lower finance and operating costs, increased sales profit and rental growth, along with strategic asset disposals. Increase of 17%, supported by adjusted earnings growth and valuation gains offset by one-off prepayment costs on redemption of the corporate bond. See Note 7 to the financial statements. See Note 7 to the financial statements. See Note 2 to the financial statements for explanation and Note 4 for reconciliation from statutory measures. 3 Non-financial KPIs The following metrics capture the non-financial performance of our business. See Our people, assets and environmental impact on pages 26 to 31. OUR CUSTOMERS Comment Attracting and retaining customers supports both the valuations of our assets and our net rental income. Further opportunity to improve through enhancing responsiveness and improving communications with our customers. Link to strategy 27 months a stable rate of customer retention 84% improvement in average time to resolve complaints 18 KPI definition derivative adjustments. Comment return on shareholder equity (‘ROSE’). 1.5% growth in FY18 4.3% growth in FY18 reflecting a strong trading supported by a strong and robust valuation performance in a challenging property market. trading performance and robust valuation growth. Driven by growth in EPRA NNNAV of 4.3% and net rental income Decrease of 160bps in LTV reflecting increasing investment Reduction of 20bps, helped by refinancing activity including the of 8% (linked to dividend). in property assets offset replacement of our The reduction in ROSE by disposals as we continue corporate bond and from previous years reflects to recycle non-core assets. our new PRS facility. lower valuation growth. Link to strategy See Note 5 to the financial See Note 5 to the financial EPRA NNNAV growth statements and EPRA performance measures from page 104. statements and EPRA performance measures from page 104. of 13p, plus dividend EPRA NNNAV of 303p. at 5.26p divided by opening properties and property related assets. See Note 28 to the financial statements. Loans as a proportion of the market value of See Note 28 to the financial statements. Grainger plc Annual Report and Accounts 2018 Key to strategy links Grow rents Simplify and focus Build on our experience Please refer to the remuneration report for details on how our strategy and key financial metrics are linked to remuneration. S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 2 Building our capital returns The following KPIs capture Grainger’s strategy to maximise total returns and capital growth from its residential investments, with an increasing focus on growing the PRS business and investing £850m by 2020. Net rental income Property operating cost PRS rental growth Adjusted earnings Profit before tax (£m) (£m) EPRA NAV (pence) EPRA NNNAV (pence) Total return (ROSE) (%) Loan to value (%) Cost of debt (at period end) (%) 3.3 3.0 94.0 100.7 84.2 86.3 343 348 330 303 316 287 10.6 35.9 37.7 37.1 3.9 3.4 3.2 (£m) 37.4 43.8 40.4 (gross to net) (%) 28.0 26.0 26.0 (%) 3.6 7.3 6.1 74.4 53.1 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Rental income after property Property operating costs Like for like average Profit before tax, valuation Profit before tax including operating expenses. expressed as a percentage growth of rents across movements on investment valuation movements of gross rental income. our PRS portfolio. assets, derivatives and and other adjustments. other adjustments. Stable gross to net Resilient like for like growth 26% increase driven by lower Increase of 17%, supported performance demonstrating in our PRS rental income finance and operating costs, by adjusted earnings growth strong operational efficiency outperformed the market increased sales profit and and valuation gains offset in our portfolio. (1.4% market average) due rental growth, along with by one-off prepayment to our strong customer strategic asset disposals. proposition. costs on redemption of the corporate bond. KPI definition Comment Increase of 8% driven by acquisitions and rental growth. Link to strategy KPI definition Market value of property assets, before deferred and contingent tax on property revaluations and derivative adjustments. Comment 1.5% growth in FY18 reflecting a strong trading and robust valuation performance in a challenging property market. Link to strategy EPRA NAV after deducting deferred and contingent tax on property revaluations and derivative adjustments. 4.3% growth in FY18 supported by a strong trading performance and robust valuation growth. Growth in EPRA NNNAV combined with total dividend per share in the year. Also known as return on shareholder equity (‘ROSE’). Driven by growth in EPRA NNNAV of 4.3% and net rental income of 8% (linked to dividend). The reduction in ROSE from previous years reflects lower valuation growth. Ratio of net debt to the market value of properties on a consolidated Group basis. Cost of debt at the period end including costs and commitment fees. Decrease of 160bps in LTV reflecting increasing investment in property assets offset by disposals as we continue to recycle non-core assets. Reduction of 20bps, helped by refinancing activity including the replacement of our corporate bond and our new PRS facility. See Note 7 to the financial statements. See Note 7 to the financial statements. See Note 2 to the financial statements for explanation and Note 4 for reconciliation from statutory measures. See Note 5 to the financial statements and EPRA performance measures from page 104. See Note 5 to the financial statements and EPRA performance measures from page 104. EPRA NNNAV growth of 13p, plus dividend at 5.26p divided by opening EPRA NNNAV of 303p. Loans as a proportion of the market value of properties and property related assets. See Note 28 to the financial statements. See Note 28 to the financial statements. OUR PEOPLE Comment Positive employee engagement underpins the successful delivery of our strategy and our strong financial performance. Link to strategy OUR IMPACT ON THE ENVIRONMENT 81.7% response rate to our employee engagement survey 95% of eligible employees are shareholders 90.2% retention rate Comment Aligned to our goal of protecting the long term future of our business, we are committed to monitoring and managing our impact on the environment to ensure it is as positive as it can be. Link to strategy 1,059 tonnes of CO2e our carbon footprint (market-based methodology) 6% market-based carbon emissions (increase due to acquisitions) 96% EPC ratings ‘E’ and above (where applicable) 19 Grainger plc Annual Report and Accounts 2018 Strategic report FINANCIAL REVIEW The recommended dividend for the year is 5.26p per share, up 8% (FY17: 4.86p per share), in line with our policy of distributing 50% of net rental income. Highlights Growing our income return Rental growth (like for like) Net rental income (Note 7) Adjusted earnings (Note 4) Adjusted EPS (after tax) (Note 4) Profit before tax Dividend per share (Note 15) Earnings per share (diluted) (Note 16) FY17 3.8% Change FY18 4.0% +20bps +8% +26% +27% +17% +8% +19% 14.3p £40.4m £43.8m £74.4m £94.0m 18.2p £86.3m £100.7m 5.26p 20.9p 4.86p 17.6p Vanessa Simms Chief Financial Officer FY18 has been a year of strong financial performance, building on the solid foundation of the last two years. With a significantly improved capital structure and a leading operational platform, we are well placed to take the Group’s growth strategy to the next level. As our investments in our development pipeline start to come on stream in the coming year, the benefits to both net rental income and our NAV will become evident. The fully integrated business model which we have constructed will help drive robust returns for shareholders for many years. The actions we have taken to improve our balance sheet, capital structure, cost base and operations, along with our disciplined approach to capital allocation, puts us in a strong position to accelerate our growth strategy and deliver attractive shareholder returns. Adjusted earnings increased by 26% to £94.0m (FY17: £74.4m), driven by strong like for like rental growth of 4.0% as well as a particularly strong sales performance with £81.8m profit during the year. EPRA NNNAV increased by 4.3% to 316p per share (FY17: 303p per share) with a total shareholder return of 6.1% (FY17: 7.3%) reflecting lower valuation growth than previous years. We have made good progress on our pipeline with £943m now secured. Upon completion, this will provide a step change in our net rental income and earnings. Driving our capital return EPRA NAV per share (Note 5) EPRA NNNAV per share (Note 5) Net debt (Note 28) Group LTV (Note 28) Cost of debt (average) Cost of debt (year end) (Note 27) Reversionary surplus Total return on shareholder equity FY17 343p 303p £848m 37.7% 3.5% 3.4% £310m 7.3% FY18 348p 316p Change +1% +4% +2% £866m 37.1% (53)bps 3.4% (13)bps 3.2% (22)bps (11)% 6.1% (120)bps £277m Income statement 2018 saw us deliver strong earnings performance, with good growth in net rental income combined with a strong sales performance, whilst continuing our focus on cost management. Finance cost came down significantly as we refinanced our corporate bond, securing a low cost of debt for the future. The coming year should see the capital recycled from our asset hierarchy review into our PRS pipeline starting to deliver income. Income statement £m Net rental income Profit on sale of assets – residential Profit on sale of assets – development Mortgage income (CHARM) (Note 21) Management fees Overheads Other expenses Joint ventures and associates Net finance costs Adjusted earnings Valuation movements Derivative movements Other adjustments Profit before tax continuing operations FY17 40.4 60.4 14.7 6.2 5.1 (27.2) (1.1) 2.9 (27.0) 74.4 14.4 0.3 (2.8) 86.3 FY18 43.8 70.1 11.7 5.8 7.1 (27.9) (1.1) 9.6 (25.1) 94.0 34.2 (0.1) (27.4) 100.7 Change +8% +16% (20)% (6)% +39% +3% 0% +231% (7)% +26% +17% 20 Grainger plc Annual Report and Accounts 2018Our focus on driving operational excellence has resulted in rental growth and reduced costs through improved voids, lower arrears and customer retention. The investment we are making in our technology platform will deliver further improvements in coming years and provide us with greater scalability as we continue to grow. Rental income Gross rental income has increased by 8% to £59.2m (FY17: £54.6m). Acquisitions and completions added £4.5m of gross rent during the year and more than offset a £2.1m decrease from disposals. Overall like for like rental growth was 4.0%, with 3.0% like for like rental growth in our PRS portfolio and 5.4% in our regulated tenancy portfolio. Our like for like rental growth significantly outperformed the market which was 1.4% over the same period (average based on ONS, Countrywide and HomeLet), demonstrating the quality of our offering and operational excellence. Net rental income increased by 8% to £43.8m (FY17: £40.4m) in line with our gross rental income growth, with our gross to net stable at 26.0% (FY17: 26.0%), whilst we continue to invest in our operational platform and build scalability for the future. Residential sales on vacancy Tenanted and other sales Residential sales total Development activity Overall sales The split of net rental income between our regulated tenancy portfolio and our PRS portfolio is c.50:50. 1.6 43.8 3.4 Residential sales on vacancy Tenanted and other sales Residential sales total Development activity Overall sales 44 43 42 41 40 39 38 40.4 (1.6) FY17 Net rental income Disposals Acquisitions Rental growth FY18 Net rental income Sales It has been an excellent year for our sales activity delivering £81.8m of profits, up 9% on the year (FY17: £75.1m). Vacant residential sales contributed £49.1m of profits at 0.9% ahead of vacant possession values, reflecting the resilience of our portfolio. Our sales transactions velocity (i.e. keys to cash) of 112 days remains significantly better than the market. Development activity also had a strong year, with profits from development activities at £11.7m (FY17: £14.7m), the majority of which was from the conclusion of our RBKC partnership. Development profit from sales will slow in FY19 as we focus our development activity on PRS investments. S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n FY18 Revenue £m 107.4 40.1 147.5 62.0 209.5 FY17 Revenue £m 110.1 20.7 130.8 83.7 214.5 Units sold 262 185 447 – 447 Units sold 274 242 516 – 516 Profit £m 49.1 21.0 70.1 11.7 81.8 Profit £m 51.1 9.3 60.4 14.7 75.1 Overheads Our cost base remains a key focus for the business, balancing the delivery of a market leading operational platform with our future growth plans. Having reduced overhead cost by 25% since FY15, the overheads for FY18 were relatively flat year-on-year at £27.9m (FY17: £27.2m). We continue to keep overheads tightly under control whilst at the same time developing a market leading platform to support our plans for growth. We continue to invest in technology that improves both our customer experience and our operational efficiency through streamlining our processes, reducing costs, and delivering a scalable platform for the future. We believe our overheads are at a sustainable level to support our medium term growth plans. 21 Grainger plc Annual Report and Accounts 2018 Strategic report FINANCIAL REVIEW CONTINUED Other adjustments Other adjustments that are one-off in nature for the year were £27.4m. This includes the cost associated with refinancing our corporate bond, where we incurred a prepayment cost net of tax of £21m. The main difference between EPRA NAV and EPRA NNNAV is the inclusion of deferred and contingent tax liabilities associated with revaluations of our portfolio. Around 83% relates to our trading asset portfolio, which will crystallise on disposal of these assets. We therefore view EPRA NNNAV as an important measure for valuing our balance sheet. Grainger is a UK based, tax paying Group with a tax charge of £13.3m (FY17: £12.8m). We continue to work in an open and transparent manner with the tax authorities. HM Revenue and Customs has graded the Group as a ‘low risk’ tax payer and we are committed to maintaining this status. Balance sheet We continue to strengthen our balance sheet, maintaining an efficient capital structure whilst delivering enough firepower to fund our pipeline of opportunities. Market value balance sheet (£m) Residential – PRS Residential – regulated tenancies Residential – mortgages (CHARM) Forward funded – PRS work in progress Development work in progress Investment in JVs/associates Total investments Net debt Other assets/liabilities EPRA NAV Deferred and contingent tax – trading assets Deferred and contingent tax – investment assets Fair value of fixed rate debt and derivatives EPRA NNNAV EPRA NAV (pence per share) EPRA NNNAV (pence per share) LTV FY17 526 1,214 86 75 63 206 2,170 (848) 112 1,434 (123) (21) (22) 1,268 343 303 FY18 591 1,107 82 198 100 146 2,224 (866) 99 1,457 (109) (22) (2) 1,324 348 316 37.7% 37.1% EPRA NNNAV increased by 4% during the year to 316p per share (FY17: 303p per share), driven by valuation growth and a strong earnings performance. EPRA NAV for the year came in at 348p (FY17: 343p per share). Excluded from both EPRA NAV measures is a reversionary surplus of £277m or 66p per share (FY17: £310m). This is the difference between the market value of our assets whilst they are tenanted and the value we could realise if they became vacant today and were sold. EPRA NNNAV movement EPRA NNNAV at 30 September 2017 Adjusted earnings Revaluations (trading and investment property) Corporate bond redemption Disposals (trading assets) Tax (deferred and contingent) Derivatives/other Dividends EPRA NNNAV at 30 September 2018 £m 1,268 94 55 (27) (60) (10) 25 (21) Pence per share 303 22 13 (7) (14) (2) 6 (5) 1,324 316 Property portfolio We delivered a solid portfolio performance for the year with values up by 1.6% (FY17: 3.4%). This was split between our PRS portfolio at 2.6% and our regulated portfolio at 1.1%. The UK housing market indices over the same period were; Halifax 2.5% and Nationwide 2.0%. Regional performance Central and Inner London Outer London South East South West East and Midlands North West Other regions Total Market value FY18 £m 833 162 168 165 122 189 59 1,698 Change since FY17 (0.2)% +2.1% +5.5% +1.8% +5.0% +3.8% +1.5% +1.6% Units 1,456 441 698 576 692 1,596 491 5,950 The table above includes wholly-owned PRS and regulated tenancy assets only; it excludes 580 units and £82m of market value relating to mortgages (CHARM) and excludes co-investments. 22 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Portfolio summary – property assets Market value £m 591 Vacant possession value £m 641 Reversionary surplus £m 50 No. units 2,841 3,109 1,107 1,317 210 580 82 81 – 198 198 – 6,530 100 2,078 100 2,337 425 173 191 6,955 2,251 2,528 1,282 523 573 8,237 2,774 3,101 (1) – – 259 18 277 50 327 Residential – PRS Residential – regulated tenancies Residential – mortgages (CHARM) Forward funded – PRS work in progress Development work in progress Wholly-owned assets Co-investments (Grainger share) FY18 total investments Assets under management (third- party share) Total assets under management Financing and capital structure FY18 was a landmark year in terms of repositioning our capital structure, where we secured longer term debt at lower rates through refinancing our corporate bond. Our regulated tenancy sales business continues to generate strong cash flows, providing a stable source of capital to help fund our PRS strategy. During the year we generated £135m of cash from this part of the business. In terms of our capital deployment we invested £218m during the year. This was split between investment in our forwarding funding and development pipeline (£162m), acquisitions of stabilised assets (£26m), affordable homes (£17m) and regulated tenancies (£4m) and a further £9m in refurbishment activities. Of our £943m secured pipeline, we have already invested £425m, leaving an outstanding capital requirement of £518m which can comfortably be covered by future working capital or, indeed, headroom on our debt facilities which amounts to £388m. During the year we refinanced our corporate bond, issuing a new 10-year £350m corporate bond at 3.375%. We incurred a prepayment cost net of tax of £21m for the previous £275m corporate bond at 5%, which was due to mature in 2020. Overall this action locks us into lower rates for longer and delivers over £3m of savings each year. As a result of the corporate bond refinancing and other actions wehave taken, cost of debt at the period end stands at 3.2%, a reduction of 22bps from the prior year (FY17 3.4%). Our incremental cost of debt is less than 2%, and our cost of debt would be 3.0% if our debt facilities were fully drawn at the year end. Our weighted average debt maturity was also lengthened this year from 4.4 years to 5.7 years. Including extension options our weighted average debt maturity stands at 6.1 years. With the business moving from a reliance on capital appreciation to an increasing income focus we expect to see continued improvement in our business and financial risk profile. Summary and outlook We have delivered strong financial results for FY18, which reflects our focus on operational excellence, disciplined investment and cost management. The investment we are making into our business and operational platform, including technology, will underpin future financial performance as we continue to grow and maintain our position as the UK’s largest listed residential landlord and a market leader in the PRS. The £943m pipeline of PRS investments we have built up since setting out our strategy in January 2016 will significantly increase our net rental income over the next two to three years as the projects complete and are stabilised. This will enable us to both grow our dividend significantly and our NAV over coming years. The actions we have taken over the recent years to improve our capital structure, operations, and financial discipline to our investments put us in a position for accelerating our growth trajectory and delivering strong shareholder returns. Group LTV at FY18 is reduced slightly to 37.1% (FY17 37.7%) as we have continued to deploy our recycled capital into our investment pipeline. Net debt for the Group also increased to £866m (FY17: £848m) and we retain our LTV target range of 40-45%. Vanessa Simms Chief Financial Officer 13 November 2018 23 Grainger plc Annual Report and Accounts 2018 Strategic report OUR STAKEHOLDERS UNDERSTANDING AND RESPONDING TO THE NEEDS OF OUR STAKEHOLDERS CUSTOMERS SHAREHOLDERS LOCAL COMMUNITIES EMPLOYEES SUPPLIERS GOVERNMENT Stakeholder expectations A safe and enjoyable home and for Grainger to provide a good service, responding to their needs promptly. How we engage We offer a wide range of customer communication channels. Each resident has a dedicated point of contact and we encourage our team members to build long-lasting relationships with them. Additionally, customer touch points include a customer care line and an updated, transparent complaints procedure. We regularly survey our customers to learn how we can better serve them. We run customer focus groups to tailor the design of our buildings to our customers’ needs and feedback. Outcomes & examples High levels of occupancy (97%). Maintained customer retention levels (27 months). 84% improvement in average time taken to resolve customer complaints. Operational changes to improve our responsiveness and service. Investment in technology to enhance customer service and enable fully digital self-service. Outputs include new website, digital leasing platform and online portal in development. 24 For Grainger to generate long-term, sustainable attractive total returns and to meet Environmental, Social and Governance (‘ESG’) expectations. For Grainger to act responsibly and make a positive impact to the local area while listening to and taking on board local views, preferences and concerns. We run a comprehensive investor relations programme. Activities include investor roadshows, conferences, trading updates and property tours. Key engagement events are reported on page 56. We ensure that we are available and accessible to the investment community. We respond annually to a range of ESG benchmarks, as reported on page 26. Extensive local engagement and consultation concerning assets and developments including via events, residents’ meetings, direct communications and newsletters. We support local businesses and charities, sponsor local sports and cultural activities and engage with local authorities. We encourage communities to develop within our buildings, through organising residents’ events – examples include a homework club at Abbeville Apartments. During the year in review, we had 239 interactions with investors. 60 pieces of analyst coverage. Diversified shareholder base. Increased geographic spread among shareholders. At Wellesley, 305 local residents participated in community activity classes and 15 young people were supported through an employment skills initiative. A green travel plan was developed through consultation and a residents’ survey found 92% are proud to live in the area. In Haringey, we signed up to the Tottenham Charter and partnered with a local school near Apex House to deliver reading support sessions and a design project for technology students. Four residents events held since launch of Argo Apartments. Stakeholder expectations For work to be fulfilling and rewarding. For us to act with integrity and For us to act responsibly as an employer To be fairly treated, recognised and professionalism, pay promptly and and as a housing provider. remunerated. To operate in a safe ensure that we are protecting the and comfortable environment, with rights of all those employed through development opportunities. our supply chain. How we engage Regular two-way engagement includes Regular supply chain reviews and Regular contributions to government biannual employee engagement customer satisfaction surveys to consultations, including the NPPF and surveys, monthly cascade meetings ensure regulatory compliance and London Plan, and regular feedback on from senior management, biannual service levels, including matters government policies. Numerous meetings all-staff update calls with the CEO, our related to GDPR, health and safety, with government and shadow government newsletter and our intranet. Feedback and modern slavery. ministers, and officials. Strategic partnership board with City engagement strategy designed to our largest repairs and maintenance engage with key stakeholders and map local issues in areas targeted for investment. partner which meets quarterly. Set standards for suppliers on framework agreements, requiring registration with Constructionline. Partnerships with local authorities in our targeted investment locations and local authority outreach in collaboration with industry bodies. High response rate of 81% to 89% of customers surveyed Positive changes to the UK planning system Best Companies Index and improved were satisfied with repairs and through the NPPF in support of investment score to 619 (‘One to watch’), which maintenance service. in the PRS and build-to-rent. Conducted nine health and safety audits of our suppliers Responded to the Hampton-Alexander Review providing data on females in senior (managing agents and contractors), roles as reported on page 29. is gathered following specific activities such as training and through a biannual performance review process. We organise a range of employee events, including a Christmas family day and volunteering activities. Outcomes & examples reflects organisations with ‘good’ levels of workplace engagement. Scores have improved in all categories of engagement and across all business areas. In response to employee feedback, we held a Company-wide staff conference and employee awards ceremony in October 2018. Customer service training programme delivered to operations team. with all meeting or exceeding our requirements. Largest repairs and maintenance partner completed full year without lost time injury in the delivery of services to Grainger. Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i CUSTOMERS SHAREHOLDERS LOCAL COMMUNITIES EMPLOYEES SUPPLIERS GOVERNMENT Stakeholder expectations Stakeholder expectations A safe and enjoyable home and for Grainger to provide a good service, For Grainger to generate long-term, For Grainger to act responsibly and make sustainable attractive total returns a positive impact to the local area while responding to their needs promptly. and to meet Environmental, Social listening to and taking on board local views, and Governance (‘ESG’) expectations. preferences and concerns. For work to be fulfilling and rewarding. To be fairly treated, recognised and remunerated. To operate in a safe and comfortable environment, with development opportunities. For us to act with integrity and professionalism, pay promptly and ensure that we are protecting the rights of all those employed through our supply chain. For us to act responsibly as an employer and as a housing provider. How we engage We offer a wide range of customer We run a comprehensive investor Extensive local engagement and consultation communication channels. Each resident relations programme. Activities concerning assets and developments has a dedicated point of contact and include investor roadshows, including via events, residents’ meetings, we encourage our team members to conferences, trading updates and direct communications and newsletters. build long-lasting relationships with property tours. Key engagement We support local businesses and charities, them. Additionally, customer touch points include a customer care line and an updated, transparent events are reported on page 56. We ensure that we are available and accessible to the investment complaints procedure. We regularly community. We respond annually survey our customers to learn how to a range of ESG benchmarks, we can better serve them. We run as reported on page 26. sponsor local sports and cultural activities and engage with local authorities. We encourage communities to develop within our buildings, through organising residents’ events – examples include a homework club at Abbeville Apartments. customer focus groups to tailor the design of our buildings to our customers’ needs and feedback. Outcomes & examples High levels of occupancy (97%). During the year in review, we had At Wellesley, 305 local residents participated 239 interactions with investors. in community activity classes and 15 young Maintained customer retention levels (27 months). 60 pieces of analyst coverage. 84% improvement in average time Diversified shareholder base. taken to resolve customer complaints. Increased geographic spread Operational changes to improve our among shareholders. responsiveness and service. Investment in technology to enhance customer service and enable fully digital self-service. Outputs include new website, digital leasing platform and online portal in development. people were supported through an employment skills initiative. A green travel plan was developed through consultation and a residents’ survey found 92% are proud to live in the area. In Haringey, we signed up to the Tottenham Charter and partnered with a local school near Apex House to deliver reading support sessions and a design project for technology students. Four residents events held since launch of Argo Apartments. How we engage Regular two-way engagement includes biannual employee engagement surveys, monthly cascade meetings from senior management, biannual all-staff update calls with the CEO, our newsletter and our intranet. Feedback is gathered following specific activities such as training and through a biannual performance review process. We organise a range of employee events, including a Christmas family day and volunteering activities. Outcomes & examples High response rate of 81% to Best Companies Index and improved score to 619 (‘One to watch’), which reflects organisations with ‘good’ levels of workplace engagement. Scores have improved in all categories of engagement and across all business areas. In response to employee feedback, we held a Company-wide staff conference and employee awards ceremony in October 2018. Customer service training programme delivered to operations team. Regular supply chain reviews and customer satisfaction surveys to ensure regulatory compliance and service levels, including matters related to GDPR, health and safety, and modern slavery. Strategic partnership board with our largest repairs and maintenance partner which meets quarterly. Set standards for suppliers on framework agreements, requiring registration with Constructionline. Regular contributions to government consultations, including the NPPF and London Plan, and regular feedback on government policies. Numerous meetings with government and shadow government ministers, and officials. City engagement strategy designed to engage with key stakeholders and map local issues in areas targeted for investment. Partnerships with local authorities in our targeted investment locations and local authority outreach in collaboration with industry bodies. 89% of customers surveyed were satisfied with repairs and maintenance service. Positive changes to the UK planning system through the NPPF in support of investment in the PRS and build-to-rent. Responded to the Hampton-Alexander Review providing data on females in senior roles as reported on page 29. Conducted nine health and safety audits of our suppliers (managing agents and contractors), with all meeting or exceeding our requirements. Largest repairs and maintenance partner completed full year without lost time injury in the delivery of services to Grainger. s t a t e m e n t s O t h e r i n f o r m a t i o n 25 Grainger plc Annual Report and Accounts 2018 Strategic report OUR PEOPLE, ASSETS AND ENVIRONMENTAL IMPACT DELIVERING STRONG PERFORMANCE THROUGH OUR REVISED SUSTAINABILITY STRATEGY Our strategy Following the review of the business’s sustainability strategy last year, the focus this year was on embedding the revised strategy into business operations and decision making. We have responded to the risks and opportunities identified in the materiality review that informed our sustainability strategy: People • Wellbeing: developed an approach to employee wellbeing, and reviewed how we assess the impact of our assets on customers’ wellbeing. • Diversity: carried out internal review of workforce diversity and inclusion. Assets • Health and safety: undertaking portfolio-wide review of the integrity of apartment front doors. • Affordability: conducted research into assessing affordability. Environment • Carbon: comprehensively reviewed environmental performance data to improve its coverage. See our greenhouse gas statement on page 78. OUR SUSTAINABILITY AND CSR COMMITTEE Grainger’s Sustainability and CSR Committee is made up of senior representatives from key areas of our business. It meets monthly to monitor progress of key activities. Highlights of the year The Committee’s priorities for the year were increasing employee engagement on sustainability and reviewing our approach to community engagement. Key projects and outputs included: • updating our charity and volunteering policy; • monitoring progress towards compliance with Minimum Energy Efficiency Standards; • reviewing asset-level sustainability risks and key performance indicators; and • preparing for compliance with the Energy Savings Opportunity Scheme Phase 2 in 2019/20. Sustainability governance w Our performance Board of Directors (Governance and strategic oversight) Grainger has successfully maintained its listing in the FTSE4Good Index for the eighth consecutive year. On the Global Real Estate Sustainability Benchmark (‘GRESB’), GRIP REIT maintained its position as sector leader of the European listed residential group, with Grainger maintaining third place. Both entities named health and wellbeing leaders. Successfully maintained our Gold EPRA Sustainability Award for the fifth consecutive year. Grainger was one of the first organisations to comply with the new EPRA Sustainability Best Practices Recommendations (‘sBPR’) to report environmental, social and governance criteria. Our EPRA sBPR Report is available on our website at www.graingerplc.co.uk/responsibility. On the Best Companies Index, Grainger is rated as ‘One to Watch’ – reflecting organisations with ‘good’ levels of workplace engagement. This year was the second consecutive year Grainger participated, with improvements in our overall employee engagement score and in all eight categories of engagement. Executive Committee (Oversight of strategy implementation and objectives) Sustainability and CSR Committee (Management of performance and reporting into Executive Committee) Operational teams (Responsibility for delivery) Charity and Social Committee (Responsibility for delivery) 26 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n PEOPLE TREATING PEOPLE POSITIVELY “Our customer service training programme delivered over 1,100 hours of training to 70 employees ” Delivering excellent customer service Following the launch of a portfolio-wide satisfaction survey for our PRS customers in 2017, this year we implemented a comprehensive action plan to respond to their feedback. Key activity included delivering a customer service training programme for our operations team, covering topics including personal planning, organisation skills and emotional intelligence. This year’s survey demonstrated improvements in customer satisfaction levels for both accommodation and the service provided by Grainger. Charity partnerships We continued working with our charity partner, LandAid, to raise funds towards ending youth homelessness. Nine Grainger employees took part in the first LandAid SleepOut, raising over £15,000 (5% of the total raised from the event) and, overall, our fundraising increased by 200% year-on-year. We also partnered with Age UK London, who delivered training to customer-facing staff on communicating effectively with older and vulnerable residents in our regulated portfolio. We also work with local partners in the areas around our assets and developments. At Wellesley, Aldershot Enterprise Centre was established in 2015 through a partnership between Grainger, Hampshire County Council and WSX Enterprise to provide local people with support and affordable space to set up their own business. Over 70 new businesses have started to date, creating over 300 jobs over the last three years. The Centre is home to various charities and voluntary sector organisations, and has become a focal point for people who live and work in the area. What we have achieved • Improvement in Best Companies employee engagement scores for giving something back and wellbeing (both increased by 4%). • 1,100 hours of customer service training provided to 70 front-line employees. • Four schools engaged through employment and skills programmes. • Maintained average customer retention at 27 months. • Achieved 12% of staff volunteering and 200% increase in employee fundraising. • 95% of eligible employees are Company shareholders. What we are going to do • Develop an approach to enhance diversity and inclusion within our workforce. Annual ‘tea party on the lawn’ community event at Aldershot Enterprise Centre Engaging communities throughout the development cycle Our commitment to community engagement continues throughout the development cycle to ensure our buildings and our residents are integrated into the local community for the long term. Pre-planning • Stakeholder mapping and research into local needs • Engagement with existing residents • Develop community engagement plan Planning and design • Community forums, events and focus groups to inform design • Online engagement platform • Consultation on initial and revised designs Construction • Construction impact monitoring • Employment and skills programmes • Engagement with local schools • Space provided to local charities Operation • Dedicated property manager • Residents events • Support local businesses and community initiatives 27 Grainger plc Annual Report and Accounts 2018 Strategic report OUR PEOPLE, ASSETS AND ENVIRONMENTAL IMPACT CONTINED PEOPLE TREATING PEOPLE POSITIVELY “43% of Grainger employees have five or more years’ service ” Ongoing employee engagement This year was the second consecutive year we participated in the Best Companies Index, conducting an annual employee engagement survey. In response to feedback provided in the 2017 survey, we introduced a health and wellbeing cashback plan, increased opportunities for employees to participate in charity activity and updated our performance appraisal documentation. This year’s results demonstrated an improvement in all categories of engagement, and in all areas of our business. Our plans to continue this improvement include introducing a training and development academy and delivering a programme of wellbeing activities. A key engagement event held in October 2018 was our all-staff conference, which included a business update and site tour giving all employees an opportunity to experience Clippers Quay. It also launched our annual employee awards, recognising employees who demonstrate exceptional performance aligned to Grainger’s values. Looking after employee wellbeing The wellbeing of our workforce was identified as a priority and a survey of employees’ wellbeing goals has helped focus our approach. This year, we updated our procedures for lone working and delivered new personal safety training to staff in collaboration with the Suzy Lamplugh Trust. Stress awareness training was rolled out to all line managers. We also delivered a series of learning hours designed to help our employees make the most of our benefits programme. Topics included our health and wellbeing cashback plan, pensions and the Company share schemes. We continue to monitor the effectiveness of our actions against modern slavery and human trafficking. We are improving our procurement processes, which include measures to ensure that the obligations under the Modern Slavery Act 2015 are also adhered to in our supply chain, and continue with our supplier review and audit programme. Winners at the inaugural Grainger employee awards 28 Grainger plc Annual Report and Accounts 2018PEOPLE TREATING PEOPLE POSITIVELY Developing and retaining a diverse workforce Retaining our workforce is critical to maintaining our knowledge and providing a great service to our customers. We continue to focus on talent retention, through our learning and development programme and our talent forum. 99.6% of employees participated in training in 2018, with topics including the GDPR, anti-bribery, stress awareness and employee benefits. Turnover remained low at 10% and currently 43% of employees have five or more years’ service. We believe widening the pool of people entering our industry is key to ensuring diversity of perspectives and representing our customer base. This year, three graduates completed our two-year scheme and have been placed in new roles across our business, and we have two new graduates who commenced their employment in September. We continue to support apprenticeships directly and through our supply chain, with 55 apprenticeships supported across our operations and our developments. We work with a number of schools and colleges in proximity to our developments, helping give young people insight into working in real estate. Examples include partnering with Gladesmore Community School in Tottenham to deliver a design project for technology students, and providing site tours to construction students leaving the armed forces at Wellesley. Headcount by gender 00 113  Male 113  Female 137 00 137 Gender by job level (headcount) 100 80 60 40 20 0 Executive Director Senior Management Management Associate Support Graduate Off-site Male Female S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Hampton-Alexander Review Grainger submits data annually to the Hampton- Alexander Review and is committed to achieving the targets for FTSE 250 boards and leadership teams to have 33% female representation by 2020. Due to changes during the year, Grainger’s Board now comprises 29% female representation. We are targeting re-establishing at least 33% representation in 2019. We have increased female representation in our leadership team (consisting of members of our Executive Committee and their direct reports) to 45%. We are committed to change and are working with the British Property Federation (‘BPF’) on the development of an industry-wide plan for greater diversity and inclusion. 29 Grainger plc Annual Report and Accounts 2018 Strategic report OUR PEOPLE, ASSETS AND ENVIRONMENTAL IMPACT CONTINED Ensuring our homes are accessible to local people We want to invest where our homes will be accessible to the widest range of local residents and local workers. This year, we expanded on the market research undertaken for our target cities by researching local affluence and thresholds of affordability. The findings influence the rents we set and where we invest, ensuring our products are attractive to the local population. Customer health, safety and wellbeing Following the Grenfell Tower fire, Grainger reacted quickly to ensure our portfolio was not at risk from cladding. We have since comprehensively reviewed apartment front door integrity across the portfolio and implemented a health and safety management system at Wellesley, Aldershot. A full best in class review of health and safety throughout our business has resulted in the launch of our Live Safe commitment, a key focus area for the coming year. We have integrated wellbeing into our PRS specification and have evaluated ways to assess the impact of our properties on residents’ wellbeing. Connecting our customers Through our Connect business transformation programme, we are investing in technology to enhance customer service. This year, we launched a new customer website and the first phase of a digital leasing platform to enhance our customers’ online experience. We have considered how well connected our buildings are, assessing the ‘walkability’ of all developments and acquisitions using Walk Score. Argo Apartments, Canning Town saw the first partnership between Virgin Media and a build-to-rent landlord to deliver ultra-fast broadband through fibre-to-the-premises (‘FTTP’). To further develop the design of our buildings, we gathered data and feedback from our existing build-to- rent customers on their experiences and use of building amenities. We are conducting focus groups in key regional cities to ascertain renters’ expectations and concerns. Delivering a healthy community at Wellesley On our masterplan site at Wellesley, we introduced a bespoke health, safety and environmental management system based on ISO 45001 (health) and ISO 14001 (environmental management) standards. The system is for all major stakeholders involved in the development. It will ensure legal compliance, reduce workplace risks and improve employee health as well as promote efficiencies and best practice through experience, acquired knowledge and continual improvement. The new Cambridge Primary School opened at Wellesley in October 2018 What we have achieved • Maintained excellent performance on the Considerate Constructors Scheme with an average score of 39/50. • Grainger’s affordable homes portfolio has 289 homes in operation and 623 in the pipeline. • Average Walk Score of completed developments 77 or ‘Very Walkable’. • 3 RIDDOR reportable incidents. • Head of Sustainability and CSR became an approved Fitwel (a healthier building rating system) assessor. What we are going to do • Review the portfolio’s capability for electric vehicle charging provision. • Pilot Fitwel health and wellbeing certification on a new development. • Explore strengthening environmental requirements through our supply chain, including within development agreements. ASSETS CREATING DESIRABLE AND HEALTHY HOMES “Achieved average score of 39/50 on Considerate Constructors Scheme audits of our developments ” 30 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n ENVIRONMENT SECURING OUR FUTURE “71% of PRS units have energy efficiency ratings A to C ” Assessing and monitoring risk We are conscious that climate change presents an emerging risk to our property portfolios and have commenced a project to better understand and assess this risk. In addition to considering property-level risks in our asset acquisition and disposal strategies, we undertook a flood risk review for our regulated portfolio. We are developing key performance indicators for a range of environmental and socio-economic risks across our existing portfolios. Material climate related risks are reported in our annual submission to CDP’s climate change programme (formerly the Carbon Disclosure Project). Reducing our environmental impact To better understand our direct environmental impacts, we undertook a comprehensive environmental data review and gap analysis across our portfolio, the results of which are reported in our greenhouse gas statement on page 78 and online EPRA Sustainability Report. Our work to ensure compliance with Minimum Energy Efficiency Standards regulations applying from 2020 continues on our regulated portfolio. We began engaging with industry bodies and government on the potential standards to apply from 2030. Other areas of engagement focused on the updated NPPF, Government’s Integrated Communities Strategy and the Draft New London Plan. Helen Gordon spoke on the panel at the Government’s first housing design quality conference, highlighting the importance of good design in creating long term communities within Helen Gordon discussing the future of living at panel event hosted by Aon buildings. Helen’s contribution to the industry was recognised at the RESI Awards 2018, where she was awarded property ‘Personality of the Year’. Piloting modern methods of construction We have successfully trialled off-site construction on our recent developments at Argo Apartments and Clippers Quay (see pages 14 and 16). In 2018, a comprehensive research project evaluated the potential for applying fully modular homes across our portfolio. What we have achieved • 71% of PRS properties have EPC ratings A to C and 73% of regulated properties have EPC ratings A to E. • Reduction of 30% in office carbon emissions per employee. • Reduction of 2% in our location-based carbon emissions with market-based emissions increasing by 6% due to acquisitions (see page 78). • Expanded coverage of environmental data and purchased renewable energy for 78% of buildings. • Over 30 interactions with industry bodies and government policymakers, and over 30 property tours delivered. What we are going to do • Ensure compliance with Phase 2 of the Energy Savings Opportunity Scheme. • Integrate sustainability into the facilities management system being developed as part of the Grainger Connect programme. Engaging with our industry Grainger employees collaborate with peers in a range of industry associations to improve the collective performance of the residential and property sectors. Grainger’s CEO chairs the BPF’s Policy Committee and the Director of Corporate Affairs chairs the Communications Committee. Our CEO is also a member of the Bank of England’s Residential Property Forum, advising on build-to-rent. A number of Grainger employees are members of the BPF Futures network and we hosted the first members’ site tour at Argo Apartments, with 40 young real estate professionals gaining insight into PRS. This was one of more than 30 tours of Grainger buildings delivered throughout the year to a range of audiences, from investors to government and the media, aimed at increasing build-to-rent’s profile. 31 Grainger plc Annual Report and Accounts 2018 Strategic report RISK MANAGEMENT RISKS: OUR IDENTIFY, MONITOR AND CONTROL APPROACH Our risk management framework is designed to identify the principal risks to our business and ensure that they are being appropriately monitored, that controls are in place and that required actions have clear ownership and accountability. Risk management approach Good risk management is fundamental for meeting our operational and strategic objectives. The competitive market we operate in requires effective decision making, ensuring we properly assess risks, apply controls and calculate returns. We need to be resilient to risks we have limited control over, by maintaining adequate disaster recovery and business continuity procedures. This year we have removed the ‘Strategy’ risk from our principal risks because the implementation of our strategy is well under way. We have modified our ‘Market’ risk to include transactional elements and have considered the controls we have in place to mitigate this threat. The cyber and information security risk was a new principal risk in 2017. It is considered that the likelihood of the risk has reduced owing to the significant activity and development of our safeguards in this area over the last year. We are embedding our risk management culture and applying a ‘three lines of defence’ model throughout the business. 2017 was a year of designing and implementing enhanced processes with related risk and control matrices. Our focus in 2018 has been on embedding those changes within a culture of continuous improvement, with robust controls forming part of day-to-day activities. Our overall risk management approach is to nurture a responsive, forward-looking, consistent and accountable culture of risk management. Rigorous risk assessment We consider a range of risk categories, including strategic, market, financial, legal or regulatory, operational, IT, project and people. We identify individual risks using both a ‘bottom-up’ and a ‘top-down’ approach. We determine the potential probability and impact of each risk and give it a gross (before mitigation) and net (after mitigation) score. This identifies which risks depend heavily on internal mitigating controls. We use a risk-scoring matrix to ensure we take a consistent approach when assessing the overall impact. For risks in operational areas, we base their likelihood on how often they occur in a rolling 12-month period. We record their impact and likelihood scores in departmental risk registers. The relevant internal committee reviews these registers at least quarterly. We then collate a Group top risk report for consideration by the Executive Committee and Audit Committee. MAPPING OUR KEY RISKS (POST MITIGATION) h g H i d o o h i l e k L i i m u d e M w o L Low 1 3 7 2 4 8 5 9 Medium Impact 6 High Current principal risk areas 1. Market and transactional (see page 34) 2. Financial (see page 34) 3. Regulatory (see page 35) 4. People (see page 35) 5. Supplier (see page 35) 6. Health and safety (see page 36) 7. Development (see page 36) 8. Cyber and information security (see page 36) 9. Customers (see page 36) Movement from 2017 Decreased 32 Grainger plc Annual Report and Accounts 2018S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Risk control framework and appetite The Board has ultimate responsibility for Grainger’s risk management and internal control systems, and for determining the Group’s risk appetite. We have built on last year’s detailed assessment of risk appetite for our principal risks. The Board continues to adopt a generally low tolerance for risk, particularly for regulatory and reputational matters. However, following an in-depth assessment of Grainger’s strategy carried out in the summer of 2018, the Board decided to invest in the development business to capitalise on the substantial opportunity within the PRS sector. Our appetite for development risk has increased as a consequence. the principal risk report. The Audit Committee supports the Board by monitoring and reviewing the control processes and mitigation for the identified risks. It also ensures we reconsider the principal risks. We monitor the internal control framework for these risks through the Internal Audit monitoring plan and the resulting audit outcomes. For more information on internal controls, please refer to page 54. Assurance on risk controls is provided by internal management information, internal audits, external audits and Board oversight. We also carried out a process of assurance mapping our principal risks this year. To complement the risk framework, we have developed key risk indicators to monitor the change in the level of risk exposure associated with specific processes and activities and to assess whether the business is operating within the set risk appetite. The Board approves the risk management framework developed by the Executive Committee. Our internal governance structure complements our evolution to a ‘three lines of defence’ model, with a view to having clear divisions between each line. This framework includes various management committees, with dedicated risk registers, overseeing key investment, operational and corporate functions. The management committees and the Executive Committee examine the identified risks, reported controls, mitigation and We have an externally supported whistleblowing hotline that staff can use anonymously if they do not wish to use our other processes for raising concerns. GDPR compliance has been a major project within Grainger this year. The project has introduced a range of controls in the form of policies, processes and systems to achieve compliance with the legislation and manage the associated risks. Looking forward to next year the areas of focus will include embedding our GDPR compliance and the new key risk indicators in the business. We are striving to enhance our risk and control environment by leveraging technology to automate processes and increase preventative control systems. RISK CONTROL FRAMEWORK Board and Audit Committee Executive Committee 1st line of defence 2nd line of defence 3rd line of defence Management and financial controls Risk management and compliance Internal audit Policy and procedure Executive deep dives Risk-based review/audit Understanding of risk management Key performance indicators Oversight by management committees E x t e r n a l a u d i t 33 Grainger plc Annual Report and Accounts 2018 Strategic report PRINCIPAL RISKS AND UNCERTAINTIES Managing our principal risks and uncertainties The Directors have systematically assessed the Group’s principal risks. They have considered them across four years, which aligns with our viability statement on page 37. The Board has closely considered the potential risks arising from the UK leaving the European Union (‘Brexit’). The Board continues to hold the view that the ongoing material lack of supply of homes in the UK substantially mitigates the risks to Grainger that may arise from Brexit. Our opinion is that the Company’s exposure to this risk is not materially higher than similar UK-focused businesses. As at the date of this report, there is much uncertainty regarding a potential no-deal Brexit and what this would mean for trade, our economy and the future political landscape. Brexit is still a risk to the business in the context of wider geo-political and economic uncertainty, and the impact this may have on the real estate and capital markets. This being so, the potential risks of Brexit are specified in respect of a number of our principal risks. Principal risks, uncertainties and opportunities Risks are considered by the Board as an intrinsic part of strategy setting and consideration of new opportunities. Category of risk Risk description Impact on strategy Key mitigants Risk status 1. Market and transactional 2. Financial Weak macro-economic conditions leading to long-term flat or negative valuation movements and/ or the inability to transact and acquire PRS assets on acceptable terms. This could arise due to poor market conditions associated with the cyclical nature of the real estate sector or potentially negative consequences arising from Brexit. Risk opportunity Capitalise on the substantial opportunity in the PRS. The inability to obtain sufficient finance arising from external factors/events (including, but not limited to, Brexit) which impacts the ability to fund the delivery of the strategy and maintain a strong capital structure. Risk opportunity Utilise financial strength to deliver our strategy and operate our business. Economic uncertainty leading to a reduction in home ownership and less demand for assets that we are looking to dispose of; pressure on rental levels; falling asset values; subsequent investment constraints on further investment into the PRS; covenant compliance risk; unable to provide shareholders with sustainable returns in the long term. • We are transitioning the business to reduce reliance on trading income and house price inflation. • We have a high proportion of liquid and diverse assets to enable sales where necessary, a strategy we successfully employed in the last economic downturn. • We have a geographically diverse portfolio and exercise active asset management to enhance returns. We have target towns and cities for future investment. • Focus on the PRS potentially leverages greater customer flexibility and lower overall financial commitment compared with home ownership. Renting could be attractive for customers during uncertain economic periods. Lack of finance from credit markets and cash resources; breach of loan and bond covenants; adverse movement in interest rates could have an unacceptable impact on the cost of new debt; inability to fund acquisitions at the relevant time. • We monitor our banking covenants closely to maintain sufficient capacity. • We carry out detailed financial viability sensitivity testing and develop clear mitigation contingency plans. • We conduct our business within Board-approved capital operating guidelines and interest rate hedging policy. • We have a diversity of finance sources. • Due to our close monitoring of the transactional pipeline, we can control the timing and number of acquisitions to reduce cash outflows if needed. • Our strategic focus is to increase income credentials to provide greater interest cover. Impact on our business model Impact on our strategy Risk change Originate Invest Operate 34 Grow rents Simplify and focus Build on our experience Unchanged Decreased Grainger plc Annual Report and Accounts 2018 Category of risk Risk description Impact on strategy Key mitigants Risk status S t r a t e g i c r e p o r t G o v e r n a n c e 3. Regulatory 4. People 5. Supplier Failure to meet current or additional regulatory obligations or anticipate and respond to changes in regulation that increase cost. These include the introduction of rent controls or similar limitations, the new privacy and data protection regime imposed by the GDPR, and the operating framework facing UK businesses in connection with Brexit and the political uncertainty that it has fostered and which may continue. Risk opportunity Enhance the reputation and the long term sustainability of the business. Failure to attract, retain and develop our people to ensure we have the right skills in the right place at the right time for our strategy; failure to increase female and ethnic minority representation at senior levels within the organisation. Risk opportunity Build expertise and capability in the business to execute strategic goals. A significant failure within, or by, a key third-party supplier or contractor. Risk opportunity Maintain a high level of service to our customers and exceed expectations. Fines, penalties and sanctions; damage to reputation; loss of operational efficiency and competitiveness; increased costs; reduction in market opportunities; impact on ability to finance opportunities; reduced ability to generate rents; inability to build competitive PRS portfolio; attracting adverse publicity regarding a data breach and leading to significant numbers of data subject rights requests. • We have an ongoing programme of management and staff training, including in relation to GDPR. • We employ specialist legal, compliance and corporate affairs teams which monitor and advise internally, review the regulatory horizon and have close involvement with leading industry bodies. • We have strict asset management controls and compliance processes which can adapt as required. See page 31 for details of our proactive management of the forthcoming Minimum Energy Efficiency Standards, as an example. • Our position as the UK’s leading PRS provider brings a cultural ethos of seeking to adopt best practice. Reduced ability to achieve business plan and strategy; reduced control; inability to grow market share of the PRS; failure to innovate and evolve to maintain competitiveness in a customer-driven market; damage to reputation. • We have introduced a talent identification process and have succession plans and retention strategies for key staff. • We have a programme of learning and development for staff, which includes management and leadership training. • We carry out regular performance reviews and appraisals of staff. • We identify opportunities for staff to develop, and we provide internal career progression. • We undertake an annual employee engagement survey and we carry out wellbeing activities. Increased costs; inability to achieve performance objectives; legal action and regulatory sanctions; reputational damage; customer dissatisfaction; a restriction on ability to grow platform; negative impact on organisational or portfolio growth plans; increased Grainger workload to reschedule reactive and/or planned maintenance in a timely manner. • We have control over our technology suppliers via our Connect technology project. • Our internal controls and management systems regarding contractors/suppliers, which include counterparty reviews and covenant strength assessments, are well developed. • Experienced senior managers oversee relationships. • We have sufficient diversity of key suppliers and relationships with potential suppliers to minimise over-reliance on any one organisation. i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 35 Grainger plc Annual Report and Accounts 2018 Strategic report PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED Category of risk Risk description Impact on strategy Key mitigants Risk status 6. Health and safety A significant health and safety incident as a result of inadequate or inappropriately implemented procedures. Risk opportunity Maintain a high level of compliance which enhances our reputation as a leader in the sector. Harm to customers, tenants, employees, contractors or visitors; possible legal action or fine; subsequent reputational damage. 7. Development We allocate a portion of our capital to activities which carry development risk. Risk opportunity Take advantage of the demand for homes specifically designed and built for renting. Exposure to risk of cost overrun or income shortfall, affecting achievement of the strategy and returns in developing rent schemes. Brexit could conceivably increase labour costs as well as the ability to source materials cost effectively. • We have specific management systems and compliance assessments to mitigate health and safety risk, including technological solutions and a programme of audit and assurance. • We employ a specialist Health and Safety Director and team who are responsible for overseeing compliance. • Our risk management framework applies close oversight and reporting of health and safety matters. • We have planned and reactive maintenance measures in place. For example, we are in the process of reviewing and replacing flat front doors across our portfolio, whilst also engaging with and having regard to the Dame Judith Hackitt report. • We monitor the capital we deploy to development matters carefully, following capital allocation guidelines. • We employ an experienced team with specialist development skills and have established relationships with expert advisers and development partners. • We have an established governance structure to review and monitor our development schemes. • As part of our PRS strategy, the portfolio of development schemes focuses on build-to-rent assets and does not seek speculative returns from investing in development that is solely for sale. 8. Cyber and information security 9. Customers The breach of confidential data or technology disruption due to an internal or external attack on our information systems and data or by internal security control failure. Risk opportunity Ensure that we are a trustworthy and secure landlord for our customers’ data. The failure to implement change initiatives to people, processes and technology to fulfil our customer service standards to all our existing and future customers resulting in the loss of our position as the UK’s leading PRS landlord. Risk opportunity Establish a leading reputation in the sector for customer service. 36 Financial loss; fines; reputational damage; operational and business disruption; loss of customers; loss of employees; share price devaluation; inability to serve our customers, manage our properties and conduct our business; competitive disadvantage; inability to meet contractual obligations. • We employ an experienced IT team and work with trusted suppliers, to deploy cyber protection tools. • Technology is a key part of our strategy. We are investing in new technology platforms and related processes that have ‘data security by design’ and compliance with GDPR. • We engage external advisers to carry out regular penetration testing to ensure our systems are robust. • Staff training and awareness of our IT policies and commitment to data protection. Negative publicity; increased complaints; poor customer experience; reputational damage; loss of customers; lower rental increases. • We have a leading operational platform with substantial experience in managing a portfolio of over £2bn of assets and of meeting the requirements of our residential customers. • Our new operating model is designed to provide a platform for optimising a customer- focused strategy. • We carry out proactive asset management. We have restructured to increase staff time in the field and gain greater asset and customer knowledge. • We carry out customer service focused reviews measuring customer preferences and satisfaction levels. Grainger plc Annual Report and Accounts 2018 S t r a t e g i c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Strategic report VIABILITY STATEMENT In accordance with provision C.2.2. of the UK Corporate Governance Code, the Board has assessed the prospects of the Group over a longer period that the 12 months that has been required by the ‘Going Concern’ provision. In doing so, the Board considered the Group’s current position and the potential impact of our principal risks and future prospects. The Group has completed two years of the five-year strategy launched in 2016 with a number of significant milestones set out in the strategy now achieved. A comprehensive review of the Group’s progress against this strategy has been completed in the year resulting in the plan being revalidated and extended beyond the original timeframe, reflecting the scale of progress to date, along with the current outlook and future ambitions for the business. This process resulted in a revised strategic plan being developed with and approved by the Board with year one forming the budget for the next financial year. This plan provides a basis for settling all detailed financial budgets and strategic actions that are subsequently used by the Board to monitor performance and the Remuneration Committee to set targets for annual incentive. The viability assessment was made with the updated strategy forming the base case and then recognising the principal risks that could have an impact on the future performance of the Group (see pages 34 to 36). The planning review incorporates severe scenario planning, with the amalgamation of multiple risks, including sensitivities to rental levels, asset valuations, financing and costs, in order to assess the potential impact on longer term viability of the Group. The Group’s business model has proven to be strong and resilient throughout the different economic cycles even with higher levels of gearing and over the long term, with consistent demonstration through its ability to sell assets and let vacant properties to provide stable income returns and cash generation, even during challenging market conditions. Currently the Group directly owns £1.7bn of residential property assets which are relatively liquid, as proven throughout previous property cycles. The Group would remain viable, even in the event of severe and sustained house price deflation, as it would be able to accelerate the natural conversion of our assets to cash including the sale of tenanted assets and reduce or suspend development and acquisition activity. Only an unprecedented and continued long- term lack of liquidity in UK residential property markets would cause any threat to the Group. In this situation, the Group has the option to continue to let assets to generate income and protect overall asset value. The Board has reviewed its strategic and financial plans in detail and believes that a viability assessment period to September 2022 is appropriate, given this covers the period of the detailed strategy review and incorporates both the investments and returns currently considered as being secured. In addition, any of the principal risks during this period could be managed. The financial plan has been stress tested against severe and prolonged reductions in house prices. The financing risks of the Group are also considered to have an impact on the Group’s financial viability. The two principal financing risks for the Group are the Group’s ability to replace expiring debt facilities and adverse movements in interest rates. The Group has secured funding to deliver the secured PRS pipeline and has prepared the strategic plan on this basis. In addition, the Group manages its hedge exposure with interest rate swaps, caps and fixed rate facilities. Based on the Board’s assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the four-year period to September 2022. Our 2018 Strategic Report, from pages 1 to 37, has been reviewed and approved by the Board of Directors on 13 November 2018. Vanessa Simms Chief Financial Officer 37 Grainger plc Annual Report and Accounts 2018 Governance CHAIRMAN’S INTRODUCTION TO GOVERNANCE Grainger has a long and established heritage in residential property and continues to lead the way in the PRS. The current strategy was launched in January 2016 and the Board and I considered that it was the right time to have a detailed review of Grainger’s strategy, which we did during the summer of 2018. We considered issues such as how to materially increase our PRS base through forward funding and direct development opportunities. We spent time reviewing the operational requirements to support a larger scale PRS business, including the technological and people needs in this regard. Lastly, we looked at how the business was developing its customer proposition and the degree of cultural change needed to embed it. The Non-Executive Directors and I challenged the Executive team on their proposals, and as a group we helped shape the strategy to look beyond that articulated in 2016. As we progress the next phase of our development, the Board will provide continued oversight and advice through this period of change maintaining the appropriate balance between supporting and questioning management. Good governance also means ensuring we have rigorous risk management and controls. The application of the skills and experience of the Directors, coupled with the substantial work of the Audit Committee, provides strong governance for the benefit of all our stakeholders. To learn more about our Board activity in 2018, please see page 44. Culture The culture of a business is crucially important to its successful performance over the long term. The Financial Reporting Council (‘FRC’) 2016 report ‘Corporate Culture and the Role of Boards’ articulates how directors can influence and contribute to fostering a strong and positive corporate culture. Whilst the culture of the organisation comes up in many aspects of the Board’s work, at the September 2018 Board meeting we spent time specifically discussing Grainger’s culture. As part of this we received a presentation from the HR Director on our people strategy, employee engagement programme and survey, which included details of our employees’ views on the Company. We provide further details on our culture and employee engagement on page 28. During the year, I have also spent time with our employees from across the business, which included visits to our Newcastle office. I took these opportunities to meet with staff and to gauge their views on the business, the strategy and its implementation. Mark Clare Chairman Highlights • Full compliance with the Code during the year. • Board review of strategy which focused on increasing the scale of our PRS business and pipeline, how we best utilise our development capabilities, achieving operational excellence and delivery. • As part of the Board’s continued corporate culture programme, details of our employees’ views on the Company and culture were sought and shared with the Board. • Investor engagement showcasing our product, including development-focused investor presentation. • Internal review of Board effectiveness. Dear shareholders, This is my second year as Grainger’s Chairman , and I have thoroughly enjoyed being part of this exciting business which is leading in the private rented sector (‘PRS’) and going through much change to deliver its strategy. Whilst the business continues to successfully execute its strategy and carry out its operations, the Directors and I are committed to applying effective corporate governance and promoting the highest standards throughout the Company. I am therefore very pleased to introduce this year’s corporate governance report. 38 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n My impression of the culture of the Company is that its staff are proud to work for Grainger and it has an open culture. There is a strong understanding of the strategic direction of business and a drive to achieve it. This openness fosters a willingness across the business to share ideas and engage with the operational changes that are required to deliver those improvements. In particular, staff are enthusiastic about the forthcoming technological changes that will enhance the service to our customers. As a Board, we need to continue to encourage this openness and engagement, and ensure we have a culture that puts customers at the heart of our business. Compliance with the UK Corporate Governance Code 2016 (the ‘Code’) The governance rules applying to all UK companies on the Official List of the UK Listing Authority are set out in the Code, published by the FRC. You can obtain copies of the Code from www.frc.org.uk. The Board fully supports the principles set out in the Code, and confirms we have complied with all its provisions throughout the financial year ended 30 September 2018. This report sets out Grainger’s governance policies and practices, and includes details of how the Company applies the principles and complies with the provisions of the Code. Diversity Grainger believes that a diverse perspective is key to success and supports the aspiration of the Hampton-Alexander Review to promote greater female representation on listed company boards, and achieve 33% female representation. As at the date of this report, Grainger is marginally below this level with 29% Board gender diversity. The Board aims to have at least one-third of directors being female from 2019 onwards. Diversity is of course much wider than gender. The Board and the Nominations Committee also have regard to the Parker Review on ethnic diversity. Diversity of thought is also hugely important to the Board. By bringing together Executive and Non-Executive Directors with diverse backgrounds and experience, we gain enormously from varied perspectives across a range of issues. Please see page 29 for further details of diversity in our business. Board evaluation This year the evaluation of Board effectiveness was carried out internally, with 2017 having been externally facilitated. I also took the opportunity to have ‘one-to-one’ sessions with each of the Directors to obtain their views on the Board and governance of the Company. We provide further details on page 46. Throughout 2018 the Board has also been monitoring the consultation and finalisation of the new UK Corporate Governance Code which comes into force next year (‘New Code’). The Board and its Committees are working to ensure compliance with the New Code and look forward to reporting our progress in the coming years. Stakeholder engagement The Board regards strong engagement with stakeholders and investors as fundamental to understanding their views. We are also supportive of the emphasis the New Code puts on the wider stakeholder group. Please see page 55 for examples of our work with our stakeholder groups. Board composition and independence In accordance with the Code, all current Directors, with the exception of Tony Wray, who is retiring, will stand for re-election at the 2019 Annual General Meeting (‘AGM’). Tony has served on the Board for over six years and during his time he also chaired the Risk and Compliance Committee. In particular, Tony’s significant operational expertise has made a substantial contribution to Grainger during a period of material change. On behalf of the Board, I would like to thank Tony for his excellent service to the Company and wish him well for the future. Details of the Directors are set out on pages 42 and 43, together with a summary of their experience and skills. Specifically regarding our investors, Helen Gordon and Vanessa Simms had regular meetings with the Company’s shareholders and analysts throughout the year. In particular, during 2018 we held a series of individual and group site visits for investors at the Argo Apartments PRS scheme in Canning Town, which culminated in a successful investor presentation day. When I met with our major shareholders after my appointment, I made it clear that I am happy to engage with them should they wish to. We anticipate that we will engage with fund managers and corporate governance officers of our major shareholders in advance of the AGM in February 2019. We provide further details of our shareholder engagement programme on pages 56 to 58. The Board reviews Non-Executive Director independence annually, and takes into account each individual’s professional characteristics, their behaviour at Board meetings, and their contribution to unbiased and independent debate. The Board agreed that I was independent on my appointment as Chairman and this remains the case. The Board considers all the Non-Executive Directors to be independent. Mark Clare Chairman 13 November 2018 39 Grainger plc Annual Report and Accounts 2018 Governance LEADERSHIP GOVERNANCE FRAMEWORK Board Responsible to the Company’s shareholders for the long-term success of the Group, its strategy, its values and its governance. Provides leadership of the Group and, either directly or by the operation of Board Committees and delegated authority, applies independent judgement on matters of strategy, performance, resources (including key appointments), the overall approach to risk management and internal control, culture and standards of behaviour. Audit Committee Responsible for overseeing the Company’s financial statements and reporting. Reviews the work of internal and external auditors and matters of significant judgement by management. It reviews the risk management framework and the integrity of the risk management and internal control systems. Remuneration Committee Responsible for determining the reward strategy for the Executive Directors to align their interests with those of the shareholders. Nominations Committee Reviews the structure, size and composition of the Board and its Committees. Oversees succession planning for Directors and Executive Committee members. It leads the process for appointing Board Directors. Executive Committee This Committee operates under the direction and authority of the Chief Executive. It makes key decisions on matters to ensure achievement of strategic plans, reviews strategic initiatives, ratifies executive decisions and considers the key business risks. It is supported by sub-committees, each focusing on an area of the business. Management Committee Responsible for the day-to-day management issues of the business and ensuring all senior leaders are briefed on business activity and priorities. Investment Committee Reviews and approves material transactions, allocates investment capital and agrees investment hurdle rates. Operations Board Responsible for executing operations strategy, performance management, risk management and governance across the operating business. Development Board Responsible for the strategy implementation, performance management, risk management and governance in relation to the development business. Finance Committee Responsible for financial matters across the Group, which include accounting, financial reporting, tax, treasury, corporate and commercial finance and financial support for the business. 40 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n ROLES AND RESPONSIBILITIES OF THE DIRECTORS Role Responsibilities Chairman Responsible for running the Board and ensuring its effectiveness. The Chief Executive reports to the Chairman, as does the Company Secretary, on matters of corporate governance. The Chairman is the guardian of the Board’s decision making process and is responsible for ensuring a constructive relationship between Executive and Non-Executive Directors and for fostering open debate with an appropriate balance of challenge and support. In accordance with the Code, the posts of Chairman and Chief Executive are separate, with their roles and responsibilities clearly established, set out in writing and agreed by the Board. Chief Executive Responsible for running the business and implementing the Board’s decisions. She recommends the strategy to the Board and is responsible for implementing it. She chairs a regular meeting with the Chief Financial Officer and the additional members of the Executive Committee. Chief Financial Officer Responsible for the financial stewardship of the Group’s resources through compliance and good judgement. She provides financial leadership in the implementation of the strategic business plan and alignment with financial objectives. Non-Executive Directors Responsible for bringing independent and objective judgement and scrutiny to all matters before the Board and its Committees, using their substantial and wide-ranging skills, competence and experience. The key responsibilities of Non-Executive Directors are set out in their letters of appointment and include requirements to: • challenge and contribute to the development of the Company’s strategy; • scrutinise the performance of management in meeting agreed goals and objectives, and monitor the reporting of performance; and • satisfy themselves that financial information is accurate, and that financial controls and systems of risk management are rigorous and secure. A copy of the standard letter of appointment for a Non-Executive Director is available from the Company Secretary. During the year, the Non-Executive Directors meet periodically without the Executive Directors present and also without the Chairman. Senior Independent Director Acts as a sounding board for the Chairman and serves as an intermediary for the other Directors where necessary. The Senior Independent Director will meet shareholders if they have concerns, and where contact through the normal channels has not resolved the issue or is inappropriate. The Senior Independent Director leads the annual performance review of the Chairman. Board meetings 2017/18 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Board meeting Site visit Attendance table to 30 September 2018 Balance of Directors (as at 30 September 2018) Executive Directors Helen Gordon Vanessa Simms Non-Executive Directors Mark Clare Belinda Richards Tony Wray Andrew Carr-Locke Rob Wilkinson Justin Read Meetings attended 8 Meetings eligible to attend 8 Male 8 8 3 8 8 8 8 8 8 3 8 8 8 8 Female 29% 71% Chairman Executive Directors Non-Executive Directors 41 Grainger plc Annual Report and Accounts 2018 Governance BOARD OF DIRECTORS THE SKILLS AND EXPERIENCE TO CONTINUE TO DELIVER OUR STRATEGY The Board is responsible to the Company’s shareholders for the long term success of the Group, its strategy, its values and its governance. Mark Clare N R Non-Executive Chairman Appointment: Appointed Chairman in February 2017 Helen Gordon E Chief Executive Appointment: Appointed to the Board in November 2015 Skills, competence and experience: Mark has wide-ranging experience in a number of sectors and extensive knowledge of the residential property market. He has substantial plc-level experience and is senior independent director of United Utilities Group plc and a non-executive director of Premier Marinas Holdings Limited. Mark was previously chief executive of Barratt Developments plc from 2006 to 2015, and is a former trustee of the Building Research Establishment and the UK Green Building Council. Prior to joining Barratt, he was an executive director of Centrica plc and held a number of senior roles within both Centrica plc and British Gas. Mark has also been a non-executive director of Ladbrokes Coral Group plc and BAA plc, the airports operator. Tenure: 1 year and 7 months Skills, competence and experience: Helen is a highly experienced, proven and well-regarded real estate investor. She has significant experience working across a wide range of real estate asset classes, including residential property. This is combined with an extensive knowledge of the City. Helen is a Chartered Surveyor and before joining Grainger was global head of Real Estate Asset Management of Royal Bank of Scotland plc. She previously held senior property positions at Legal & General Investment Management, Railtrack and John Laing Developments. Helen is a non-executive director of Derwent London plc and previously held a number of other non-executive board roles over her career, including British Waterways and the Covent Garden Market Authority. She is also a vice president of the British Property Federation, a director of EPRA and an advisory board member of Cambridge University’s Land Economy Department. Tenure: 2 years and 10 months Vanessa Simms E Chief Financial Officer Appointment: Appointed to the Board in February 2016 Skills, competence and experience: Vanessa brings extensive financial experience to Grainger from the property sector in the UK. She has particular expertise in leading and implementing strategic change in businesses. She has substantial experience in senior finance leadership roles in a listed environment. Vanessa has worked in finance since 1998 and immediately prior to joining Grainger held a number of senior positions within Unite Group plc, including deputy chief financial officer. Prior to that Vanessa was UK finance director at SEGRO plc. Vanessa is also a non-executive director of Drax Group plc, the power company. Tenure: 2 years and 7 months 42 Justin Read A N R Non-Executive Director Appointment: Appointed to the Board in February 2017 Skills, competence and experience: Justin has substantial experience in real estate and corporate finance. He was group finance director of SEGRO plc from August 2011 to December 2016. Between 2008 and 2011, Justin was group finance director at Speedy Hire plc. Prior to this, he spent 13 years in a variety of roles at Hanson plc, including deputy finance director, managing director of Hanson Continental Europe, head of corporate development, head of risk management and group treasurer. He was a non-executive director of Carillion plc for a six week period from 1 December 2017. Justin is also a non-executive director of Ibstock plc. Tenure: 1 year and 7 months Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i Andrew Carr-Locke A N R Non-Executive Director Appointment: Appointed to the Board in March 2015 and appointed as Senior Independent Director in February 2018 Tony Wray A N R Non-Executive Director Appointment: Appointed to the Board in October 2011 s t a t e m e n t s O t h e r i n f o r m a t i o n Skills, competence and experience: Tony brings extensive experience in a broad range of senior operational and strategic leadership roles, in particular in public companies. He was the chief executive of FTSE 100 water company Severn Trent plc from 2007 to 2014, having joined its board in 2005. He has also held director roles within Transco and National Grid Transco, and was a member of the Water UK board. Tenure: 6 years and 11 months Committee membership E Executive Committee A Audit Committee R Remuneration Committee N Nominations Committee Committee Chairman Tenure is as at 30 September 2018. Skills, competence and experience: Andrew has substantial experience in senior finance positions in listed companies, particularly in the residential property sector. He also has wide- ranging experience as a non-executive director of public companies. Andrew is a Fellow of the Chartered Institute of Management Accountants and was group finance director at George Wimpey plc between 2001 and 2007. He has previously held senior finance roles at Courtaulds Textiles plc, Diageo plc, Bowater-Scott and Kodak. More recently, Andrew was executive chairman of Countryside Properties, where he led the refocus of the company’s strategy. Andrew stood down as a director of Countryside Properties in 2014. He has previously held non-executive directorships at Dairy Crest plc, Royal Mail Holdings, Venture Production and AWG. Tenure: 3 years and 6 months Rob Wilkinson A N R Non-Executive Director Appointment: Appointed to the Board in October 2015 Skills, competence and experience: Rob has substantial experience in real estate and corporate finance. He is a Chartered Accountant and the chief executive of AEW Europe, a leading European real estate investment manager. Prior to joining AEW Europe in 2009, Rob was a managing director with the Goodman Group and also held investment banking positions at UBS and Eurohypo. He is also chairman of the Green Rating Alliance. Tenure: 2 years and 11 months 43 Grainger plc Annual Report and Accounts 2018 Governance EFFECTIVENESS The standard Board schedule sets seven formal meetings throughout the year, one of which was specifically focused on a review of the Company’s longer-term strategy, and an additional meeting was held in the year to consider transactional matters. against strategic objectives and details of any issues arising. In addition, items that require formal Board approval are circulated in advance with all supporting paperwork to aid appropriate decisions. The Board has a list of matters reserved to it, and a rolling annual plan of items for discussion, agreed between the Chairman and the CEO. They review the list of reserved matters and annual plan regularly, to ensure they are properly covered, together with other key issues as required. At each Board meeting, the CEO provides a review of the business, setting out how it has been progressing The Board also spent time visiting sites in London, including our development schemes at Argo Apartments, Canning Town and Young Street, Chelsea. The Board also received a number of presentations from the Grainger team during the visits. The table below shows examples of the subjects and matters the Board debated and considered throughout the year: Board activity 1. Strategic 30% • Carried out an in-depth review of Grainger’s strategy, considering options for growth, the PRS market, development business and operational and financial strategy. • Received a presentation from Goldman Sachs regarding domestic and international real estate and equities markets, together with an update on merger and acquisition activity in the sector. • Considered competitor activity in the PRS sector. • Monitored the economic, legislative and geo-political landscape, including the development of government policy in relation to the residential property sector. • Reviewed the risk management framework, principal risks and appetite, in particular with regard to the future strategic options for this business, such as increasing development and M&A activity. How the Board spent its time 5 4 3 1 2 2. People and culture 15% • Considered the evaluation of the Board’s effectiveness. • Reviewed the culture of the business, the Board and employee engagement. This included the HR Director presenting the results of the annual staff survey to the Board. • Received a presentation from the HR Director on our ‘People’ strategy for the business, including the skills and resourcing required to achieve our strategic ambitions. • Considered the Gender Pay Gap for the business pursuant to the new legislation. 3. Financial 25% • Reviewed the Group’s debt and capital structure, including the launch of a new corporate bond. • Considered the Group’s financial performance throughout the year. • Agreed the continued application of the dividend policy. • Compared corporate and operating overheads to the business plan. • Monitored performance of the agreed KPIs for the business. • Considered the requirements of a REIT conversion, and the feasibility of this for our business. 44 5. Property transactions and operations 20% • Considered health and safety matters, including a presentation to the Board from the Health and Safety Director, and matters arising in the sector following the Grenfell Tower tragedy and the Dame Hackitt Review. • Considered material transactions and business opportunities including, among others, our build-to-rent schemes in Milton Keynes, Southampton and Sheffield, and the disposal of our interest in the Walworth joint venture. • Received reports on the progression of our existing development projects in the UK. • Considered management of our suppliers and our approach to procurement, with particular focus on key repair and maintenance arrangements. • Received reports on our customer service performance and other operational KPIs, including our customer service. • Monitored the progress of our technology change project. 4. Governance 10% • Received briefings on regulatory and governance issues, including the New Code issued by the FRC and the GDPR compliance programme. • Considered shareholder relations, in particular the feedback from investors and analysts in connection with the 2017 full year results and the 2018 interim results. • Received reports from the Nominations, Audit and Remuneration Committees. Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Information flow The Chairman and the Company Secretary ensure the Directors receive clear, timely information on all relevant matters. Board papers are circulated well in advance of meetings to ensure there is adequate time for them to be read and to facilitate robust and informed discussion. Access to independent advice All Directors have access to the advice and services of the Company Secretary, who ensures we follow Board processes and maintain high corporate governance standards. Any Director who considers it appropriate may take independent, professional advice at the Company’s expense. None of the Directors did so in the current year. The papers contain the CEO’s written report, high-level reports on each business area, key figures and papers on specific agenda items. Also, minutes of the Executive Committee meetings and detailed financial and other supporting information are provided. The Board also received presentations throughout the year from various departments, including HR, Legal, Investment, Corporate Finance and Health and Safety, and from external advisers on subjects including financing, regulatory issues for listed companies and business valuation. Time commitment The Board, supported by the Nominations Committee, carefully considered the external commitments of the Chairman and each of the Non-Executive Directors. The Board is satisfied that each Director committed enough time to be able to fulfil their duties, and has capacity to continue doing so. None of them has any conflict of interest not disclosed to the Board, in accordance with the Company’s Articles of Association. Grainger’s Non-Executive Directors take pride in not governing the business remotely. As part of its regular programme of site visits to get first-hand experience of the Company’s activities, in the past year the Board visited our developments at Young Street, Kensington and Argo Apartments, Canning Town. During the visits the Board was shown around the developments by staff leading the projects. This included highlighting the innovative features and tenant facilities incorporated at each site, noting that amenities of this nature form a key part of our strategic proposition in our development pipeline. At the Argo Apartments visit the Board took the opportunity to conduct a full Board Meeting in the amenity space included in the building which can be utilised by tenants to host dinner parties or other gatherings with friends. These visits provided the Board with an invaluable insight into how the Company’s strategy is being put into practice. Engagement with stakeholders How we engage and interact with our stakeholders is integral to our business. In order to achieve our aim of being the UK’s leading residential landlord, we keep in close contact with our employees, customers and investors to ensure that we are aware of each other’s key drivers and act in such a way as to maximise our mutual interests. We seek to develop and improve our stakeholder engagement, through regular communication and continuous improvement in our processes and practices. You can find further details of our engagement with stakeholders at pages 55 to 58 of this report. Induction and professional development No new Board members were appointed during the year, but in any event and in accordance with the Code, Grainger’s policy is that the Chairman, supported by the Company Secretary, is responsible for ensuring that each Director receives a comprehensive and tailored induction. The Board is updated on a range of matters throughout the year. Subjects include the business of the Group, legal and regulatory responsibilities of the Company (including updates to the legislative landscape) and changes to accounting requirements. This takes the form of presentations by Grainger senior management and external advisers, and Board papers and briefing materials. We also expect individual Directors to identify their own training needs, and to ensure they are adequately informed about the Group and their responsibilities as a Director. The Board is confident that all its members have the knowledge, ability and experience to perform the functions required of a director of a listed company. 45 Grainger plc Annual Report and Accounts 2018 Governance EFFECTIVENESS CONTINUED Performance evaluation The annual evaluation of the Board and its Committees for 2018 was led by the Chairman and the Company Secretary through completion of a detailed questionnaire, followed by individual meetings between the Chairman and each of the Directors. The Company Secretary collated the results of the questionnaire and these were considered by the Chairman and reported to the Board as a whole. The overall results were positive and indicated that the Board, its Committees and the individual Directors were all operating effectively and demonstrated a commitment to the role. A selection of the key findings arising from the evaluation are summarised below: • Board meetings are conducted in an effective manner which encourages open discussions, with appropriate time allocated to key issues and strategy in particular. • Committees are performing to a high standard. • Input from each of the Directors regarding the strategic review was effective and constructive. • The Board would benefit from a new Non-Executive Director with customer-facing skills, good operational experience and a personality that helps drive the diversity of thinking. • More opportunities should be created for the Non-Executive Directors to interact with the business and its employees more frequently. • The Board should gain more understanding of the intended customer philosophy and operational procedures that will underpin it. The Board and its Committees will monitor progress and continue their critical review of the Board’s effectiveness during the year ahead. In accordance with the Code, we intend the next external evaluation of the Board to be carried out in 2020. Re-election of Directors We continue to adopt the recommendations of the Code that all Directors offer themselves for re-election annually, even though the Company’s Articles of Association only require this every three years. Therefore all current Directors, with the exception of Tony Wray who is retiring, will stand for re-election at the 2019 AGM. In light of the performance evaluation, the Board recommends that all Directors proposed are so re-elected. External Board evaluation cycle Year 1 2017 External Year 2 2018 Internal Year 3 2019 Internal Year 4 2020 External 46 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Governance EFFECTIVENESS: NOMINATIONS COMMITTEE REPORT Mark Clare Committee Chairman Attendance table Committee member Mark Clare (Committee Chairman) Belinda Richards Tony Wray Andrew Carr-Locke Rob Wilkinson Justin Read Member since February 2017 Meetings attended 2 Meetings eligible to attend 2 February 2014 February 2014 March 2015 May 2017 March 2017 1 2 2 2 2 1 2 2 2 2 How the Committee spent its time 30% 15% 25% 30%  Non-Executive Director succession and balance of skills 30%  Executive and senior management succession and pipeline 30%  Committee composition 25%  Governance 15% The Nominations Committee currently comprises the Chairman of the Board and four independent Non-Executive Directors. Dear shareholders, I am pleased to present the Nominations Committee report for 2018 which details the main activities we undertook during the year. The Nominations Committee plays a fundamental role in ensuring we select and recommend strong candidates for appointment to the Board. The Committee monitors the balance of skills, experience, independence and knowledge of the Board and its Committees, with any changes recommended to the Board for its review and decision. The Committee is also responsible for succession planning, and monitors talent development at senior management level. 2017 was a particularly busy year for the Nominations Committee with significant change to the Board and its Committees. Consequently, 2018 has been about embedding these changes whilst focusing on the future make-up of the Board. Although it is not yet in force, the Committee is also mindful of the New Code and the changes that will flow to the work of the Board and its Committees. In this regard, in May 2018 the Committee reviewed those areas which specifically relate to the Nominations Committee. We will continue to monitor best practice under the new Code as it is implemented. Key responsibilities The key responsibilities of the Committee are to: • review the size, balance and constitution of the Board, including the diversity and balance of skills, knowledge and experience of the Non-Executive Directors; • consider succession planning for Directors and other senior executives; • identify and nominate, for the approval of the Board, candidates to fill Board vacancies; • review annually the time commitment required of Non-Executive Directors; and • make recommendations to the Board, in consultation with the respective Committee Chairmen, regarding membership of the three Board Committees. 47 Grainger plc Annual Report and Accounts 2018 Governance EFFECTIVENESS: NOMINATIONS COMMITTEE REPORT CONTINUED Process for Board appointments Before making an appointment, the Nominations Committee will evaluate the balance of skills, knowledge and experience currently on the Board. Following this a specification of the personal attributes, experience and capabilities required to perform the relevant appointment is produced. In circumstances where external recruitment or benchmarking of an internal candidate is appropriate, an independent external search consultancy will be engaged to help identify appropriate candidates for the role. A recommendation is then made to the Board concerning the appointment of any Director. The Committee also supports the Board in the appointment of the Company Secretary when required. Tony Wray has served on the Board for over six years at the date of this report, and therefore will be stepping down from the Board at the February 2019 AGM. On behalf of the Board and the Committee I would like to thank Tony for his significant contribution to Grainger over a period of such strategic and operational change. As reported last year, Belinda Richards was due to retire from the Board at the February 2018 AGM, and consequently Andrew Carr-Locke was to take on the role of Senior Independent Director and Justin Read was to become Chairman of the Remuneration Committee, being positions previously held by Belinda. It is confirmed that these changes duly took place in February 2018 as planned. Main activities of the Committee during the year The Committee met formally twice during the year to 30 September 2018, supplemented by other discussions to support the work of the Committee. At the formal meetings the Committee considered a number of standing agenda items relating to its key responsibilities detailed above. In applying those responsibilities, the Committee made decisions on a range of matters during the year, the most significant of which are detailed below. Invitations to attend Committee meetings extend to the CEO, HR Director and others as necessary and appropriate. Executive succession planning The Committee received a detailed presentation from the HR Director in relation to our succession plans for key staff in the business and related retention strategies for them. Specifically with regard to succession planning of senior executives, the search for a Director of Land and Development was carried out during the year, and the Committee and Board were kept informed of progress with this search by the Chief Executive. This search was successfully concluded during the year with the appointment of Mike Keaveney to the role. Non-Executive Directors As mentioned in the 2017 Committee report, it was agreed that an additional Non-Executive Director would be recruited to add retail consumer-facing skills to the Board, recognising the changing nature of Grainger’s business as it delivers its PRS-focused strategy. To assist with the appointment, three independent executive search consultancies were invited to pitch for the engagement to carry out the search. This involved the consultancies making presentations to a Grainger panel comprised of the Chairman, Chief Executive and HR Director. Following this process, the panel recommended the appointment of a consultancy which it considered had the optimal capability for the instruction. The consultancy was subsequently engaged. It is confirmed that the relevant consultancy is not connected with the Company in any other way. In this search process the Committee will base the prospective appointment on merit but also have regard to the benefits of diversity on the Board. This appointment process is still under way and we look forward to reporting further in due course once the appointment is agreed and made. External non-executive directorships During the year, both Helen Gordon and Vanessa Simms were appointed as non-executive directors of other listed companies. Helen was appointed to the board of Derwent London plc and Vanessa to Drax Group plc. In considering whether to give approval for the appointments, after close consideration, the Committee was satisfied that the time commitment required for the appointments would not jeopardise the capacity for Helen and Vanessa to perform their roles at Grainger, and that there was no immediate conflict of interest arising. Further, the Committee considered that the experience and insight that would be gained from these directorships would be beneficial for them both, and in turn for the Company. Helen and Vanessa are entitled to retain their fees in respect of these directorships. 48 Grainger plc Annual Report and Accounts 2018Experience of the Board Property experience 86% Financial experience (leadership or audit capacity) 86% Retail consumer business experience 29% Diversity The Directors are committed to having a balanced Board which includes diversity of perspectives, skills, knowledge and background. For gender diversity specifically, the Board supports the aspiration of the Hampton-Alexander Review to promote greater female representation on listed company boards, and notes the significant progress made in this area in FTSE 350 companies since the original Lord Davies report of 2010. We make all appointments to the Grainger Board on merit, and within this context the Directors will continue to follow best practice on the issue of diversity as it develops further. At the date of this report, female representation at Board level was 29%, which is lower than the 38% reported in 2017. This reduction is owing to Belinda Richards’ retirement during the year with no further appointments having been made. The current percentage is also slightly below the 33% level recommended by the Hampton-Alexander Review. The objective for the Board and the Committee is to consistently have at least one-third of the Board being female Directors, and the Board aims to return to a composition which exceeds this threshold in 2019. Page 29 contains further details of diversity matters across Grainger. The Board is also mindful of the Parker Review regarding ethnic diversity on UK boards that was published in 2017. The Review recommends that each FTSE 250 board should have at least one director of colour by 2024. The Committee will work with the Board with a view to complying with this recommendation assuming suitable candidates can be found. Balance of knowledge, skills and experience The Directors have wide-ranging experience as senior business people. The Board has particular expertise in finance, property and the listed company environment. As mentioned above, we are looking to enhance the blend of skills and experience of the Board by adding an individual with retail consumer-facing skills. Mark Clare Chairman of the Nominations Committee 13 November 2018 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 49 Grainger plc Annual Report and Accounts 2018 Governance ACCOUNTABILITY: AUDIT COMMITTEE REPORT The Audit Committee currently comprises four independent Non-Executive Directors. Dear shareholders, This is my third year of chairing Grainger’s Audit Committee, and I am pleased to present the Audit Committee report for the year ended 30 September 2018. During the year, the Committee has continued to carry out a key role within the Company’s governance framework, supporting the Board in risk management, internal control and financial reporting. This report provides an overview of the significant issues the Committee considered, and its assessment of the Annual Report and Accounts as a whole, including how we have reviewed the narrative reporting to ensure it is an accurate reflection of the financial statements. As a matter of course, the Committee considers its terms of reference each year, taking into account changes to Grainger and to external governance requirements. During the course of the year we have been mindful of the consultation and finalisation of the New Code. In addition, we develop a clear work plan through the year to ensure we fulfil all our responsibilities. At the heart of those responsibilities is ensuring that the Company operates an effective risk assessment and management process, and has an appropriate control framework in place. We are helped by the Internal Audit team at Deloitte, which reports directly to us, and which works to an agreed plan to ensure controls are effective. Grainger is continuing to undergo significant change. Implementing the PRS strategy requires the introduction of new processes and new systems, much of it via our IT restructure. Therefore, this year the Committee has focused on assessing the risks and controls regarding this changing environment. I also anticipate that over the next two years the work of the Committee will include giving close attention to reviewing the new technological and automated systems and preventative controls to be established. We have also carefully considered the risk management framework to assess its relevance for an increasingly PRS-focused business . The Committee has supported the Board in considering the principal risks and appetite of the Company. We provide details of the risk management framework, principal risks and key mitigants on pages 32 to 36. The issue of security of personal information is of increasing concern to the public, and Grainger’s current and future customers likewise want comfort that their personal data is safe and secure. In this regard the Committee and the Board have closely monitored Grainger’s preparations for the regulatory change brought about by the GDPR that came into force in May 2018. This oversight of data protection compliance will continue in 2019 as the change embeds. One of the Committee’s other key responsibilities which we carried out during the year is ensuring the Group’s published financial statements show a true and fair view and are consistent with accounting and governance requirements. We also considered Andrew Carr-Locke Committee Chairman Attendance table Committee member Andrew Carr-Locke (Committee Chairman) Tony Wray Rob Wilkinson Justin Read Member since March 2015 Meetings attended 4 Meetings eligible to attend 4 November 2011 February 2016 March 2017 4 4 4 4 4 4 How the Committee spent its time 10% 40% 25% 25%  Financial reporting 40%  Internal control and audit 25%  Risk management and compliance 25%  Governance 10% 50 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n the viability statement closely, having regard to the continued progress of the implementation of our PRS strategy and the overall strategic horizon. This included interrogating the financial models and related sensitivity analysis of various economic scenarios. In addition, we have concentrated on the fair, balanced and understandable requirements for the Annual Report. In this regard, we are helped by receiving a number of appropriate papers from the Chief Financial Officer and her team, and by the independent work of our internal and external auditors. As well as our planned work programme, we respond to key matters as they arise. An example of this during the year was to consider the impact upon the Company’s statutory income statement, statutory statement of financial position and the EPRA NNNAV of the forthcoming amendment to IAS 40 in relation to the scope for transfers to and from investment property. plans arising from the mixed findings of the Report. The Committee will closely monitor progress against these plans. Specifically in relation to their work for Grainger, the Committee was satisfied with the work of KPMG and recommends its reappointment. I believe the regular challenge and engagement with management, the external auditor and the Internal Audit team, together with the timely receipt of high-quality reports and information from them, has enabled the Committee to discharge its duties and responsibilities effectively, a conclusion endorsed by the Board appraisal process. I would like to record my thanks for the support of the other members of the Committee, to Grainger’s Finance and Legal teams, and to our internal and external auditors for their thorough approach. Whilst there was no specific FRC review of Grainger’s audit this year, the Committee discussed with KPMG the results of its FRC Audit Quality Inspection Report and the proposed improvement Andrew Carr-Locke Chairman of the Audit Committee 13 November 2018 Significant matters relating to the Group’s 2018 financial statements The most significant matters considered by the Committee and discussed with the external auditor in relation to the Group’s 2018 financial statements were as follows: 1 Property valuations We received reports and presentations directly from the valuers and management on the assumptions utilised in valuing the Group’s property assets, the suggested discount rates for reversionary assets and the valuations. We considered the prevailing valuation methodology and process. As detailed in the 2017 report certain revisions to the valuation process were introduced last year and therefore this is the second year in which the adopted process has been carried out. We were content, after close scrutiny and debate, with the assumptions and judgements applied to the valuations. We also considered that the external valuers were sufficiently independent and report directly to the Committee. KPMG also independently reviews the valuation process and results. The results of the valuations form the basis of management’s assessment to support the carrying value of investments in subsidiary companies by the parent company. 2 Recoverability of inventories Management utilise the valuation information referred to above to perform an assessment of recoverability of inventories. The valuations include references to comparable market evidence of similar transactions along with the Group’s own evidence and experience in sales of similar assets. Along with our assessment of property valuations we have considered management’s assessment of recoverability of inventories and are satisfied that the approach adopted and results are appropriate. Invitations to attend meetings There is a standing invitation to the Chairman of the Board and the Executive Directors, who in turn attended all of the Committee’s meetings during the year. The Director of Group Finance and representatives of the internal and external auditors also attended all meetings of the Committee, and both sets of auditors met privately with the Committee during the year. Role, responsibilities and experience The Committee’s role and responsibilities are concerned with financial reporting, narrative reporting, whistleblowing and fraud, internal control and risk management systems, internal audit and external audit. Andrew Carr-Locke, Rob Wilkinson and Justin Read have recent and relevant financial experience as required by the Code. The Committee as a whole has the competence relevant to the 51 Grainger plc Annual Report and Accounts 2018 Governance ACCOUNTABILITY: AUDIT COMMITTEE REPORT CONTINUED sector in which it operates. Please refer to pages 42 and 43 for skills and experience of the Directors and page 49 of the Nominations Committee report. draft Annual Report. The Committee, and subsequently the Board, were satisfied that, taken as a whole, the 2018 Annual Report and Accounts is fair, balanced and understandable. Terms of reference The Committee’s terms of reference are approved by the Board. We review them at least annually and last reviewed them at the Committee’s meeting in February 2018. The Committee’s terms of reference comply with the Code and they can be found on the Group’s website. Objectives The Board has delegated authority to the Committee to oversee and review the: Going concern and financial viability The Committee reviewed the appropriateness of adopting the going concern basis of accounting in preparing the full year financial statements and assessed whether the business was viable in accordance with the requirements of the Code. The assessment included a review of the principal risks facing the Group, their financial impact, how they were managed, the availability of finance and covenant compliance together with a discussion as to the appropriate period for assessment. The Group’s viability statement is on page 37. • Group’s financial reporting process; • system of internal control and management of business risks; • internal audit process; • external audit process and relationship with the external auditor; and • Company’s process for monitoring compliance with applicable laws and external regulations. Final responsibility for financial reporting, compliance with laws and regulations and risk management rests with the Board, to which the Committee reports regularly. The Committee understands and, where required, challenges any materiality and unadjusted errors that occur during the year and considers how best to engage with investors on any materiality and adjusted or unadjusted differences. Meetings The Committee’s main work follows a structured programme of activity agreed at the start of the year. As well as its main work, the Committee undertakes additional work in response to the evolving audit landscape. The following page shows a non-exhaustive list highlighting the Committee’s work during the year under review. Fair, balanced and understandable The Committee has undertaken a detailed review in assessing whether the 2018 Annual Report and Accounts is fair, balanced and understandable, and whether it provides the necessary information to shareholders to assess the Group’s performance, business model and strategy. The Committee reviewed and made suggestions about the processes put in place by management to provide the necessary assurance that they have made the appropriate disclosures. The Committee considered management’s assessment of items included in the financial statements and the prominence given to those items. This review also included receiving a near final draft of the Annual Report in advance of the November 2018 Committee meeting. This was accompanied by a reminder of the areas the Committee should focus on having regard to the Audit Committee Institute guidance, and how it can be applied to the External auditor objectivity and independence The objectivity and independence of the external auditor are critical to the integrity of the Group’s audit. During the year, the Committee reviewed the external auditor’s own policies and procedures for safeguarding its objectivity and independence. There are no contractual restrictions on the Group appointing an external auditor. On three occasions during the year the audit engagement partner made representations to the Committee as to the external auditor’s independence. This also confirmed that KPMG’s reward and remuneration structure includes no incentives for him to cross-sell non-audit services to audit clients. KPMG duly applies the requirement to rotate audit partners every five years, and this rotation will be due for the 2020 audit. The Committee and KPMG have commenced discussions on audit partner succession to ensure there is an orderly and timely handover of responsibilities. The Committee appraised KPMG’s performance by assessing its audit plan, the quality and consistency of its team and reports received and discussions held with the Committee. In addition, we received feedback from the finance team. We also considered the tone of KPMG’s relationship with the Executive, which we assessed as constructive and professional yet independent and robust. In respect of KPMG’s independence, the Committee applies its policy for the use of external auditors for non-audit services. This policy substantially restricts the types of non-audit services that can be rendered and specifies the limited circumstances in which an engagement can be made. Services the external auditor is prohibited from providing to the Group include, amongst others: • bookkeeping and preparing financial information; • the design, supply or implementation of financial information systems; • appraisal or valuation services; • internal audit services; and • actuarial services. 52 Grainger plc Annual Report and Accounts 2018Governance KEY ACTIVITIES November 2017 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i • Received a presentation from the independent external valuer of Grainger’s reversionary assets. • Considered and received matters relating to the 2017 full year, including: » management’s summary of the accounting positions; » KPMG’s year end audit report; » going concern review of the business; and » the draft Annual Report and Accounts. • Noted the tax impact and treatment of the full year results and also that the Company maintained its HMRC ‘low risk’ status. • Reviewed the effectiveness of the Committee’s performance. • Considered KPMG’s independence and recommended to the Board KPMG’s re-appointment. • Received an Internal Audit report on service charge, a review of Risk and Control Matrices ‘RACM’ and reviewed the Internal Audit plan. February 2018 • In respect of risk, considered the Group’s: • On Internal Audit matters: » risk management framework, principal risks and mitigants; » assurance map against principal risks; and » the revised version of the risk management policy. • Reviewed Grainger’s whistleblowing arrangements. • Considered KPMG’s plan for its review of the 2018 half year results. • Carried out a detailed evaluation of the performance of the internal and external auditors. Considered them to be effective and also identified certain areas for future improvement » considered the five-year core assurance Internal Audit plan; and » received Internal Audit reports on penetration testing and the Company’s development and refurbishment operations. • Received a presentation and paper on Grainger’s compliance with and preparations for the GDPR. • Reviewed the Audit Committee terms of reference. May 2018 • Considered issues regarding the 2018 half year results, including: » the draft half year financial statements and announcement; » management’s judgements and assessment; and » KPMG’s half year review report. • Received Internal Audit reports on: » property management and customer care; » health and safety; » lettings and on-boarding; » the progress of ongoing actions from previous Internal Audit reports; and » progress of the RACM spot check programme. September 2018 • Received an update on Accounting Standards. • Considered the 2018 draft viability statement and related analysis. • Considered KPMG’s audit strategy memorandum and engagement regarding the audit for the full year 2018. • Considered and approved the forward Internal Audit plan. • Received Internal Audit reports on: • Reviewed reports on: » internal controls; » the risk management framework and the application of the ‘three lines of defence’ model; » the development of ‘key risk indicators’ for parts of the business; and » Governance review of Grainger’s IT change programme » principal risks and risk appetites. ‘Connect’; • Received an update on compliance, including GDPR, anti-bribery » RACM ‘spot checks’; and » progress of completing actions from previous internal audits. and financial crime legislation, and our programme of compliance with corporate tax evasion legislation. • Considered FRC AQR Report on KPMG and its proposed • Considered the potential impact of the forthcoming revisions remedial actions. to IAS 40 in relation to investment property. s t a t e m e n t s O t h e r i n f o r m a t i o n 53 Grainger plc Annual Report and Accounts 2018 Governance ACCOUNTABILITY: AUDIT COMMITTEE REPORT CONTINUED Regarding potentially permitted non-audit services, key criteria that must be evidenced to the Committee’s satisfaction is that the external auditor is best suited to undertake the relevant services and that the engagement will not jeopardise external auditor independence. The engagement of KPMG for the provision of non-audit services requires prior approval from the Audit Committee Chairman. In 2018 there was an increase in the level of non-services provided by KPMG. The non-audit services rendered in 2018 are specified in the table below and in each case, after close consideration, the Committee was duly satisfied that the: • key criteria noted above had been satisfied; • non-audit services policy had been applied; and • appointments were in the best interests of the Company and its stakeholders. Schedule of fees paid to KPMG Statutory audit of Grainger Group Total audit fees Half year review Reporting accountant – corporate bond Corporate finance activity Non-statutory certificate on Berewood Development site Total non-audit fees Year ended 30 September 2018 £ 241,500 241,500 32,000 35,000 135,000 5,000 207,000 The Committee was also satisfied that the overall levels of audit related and non-audit fees were not of a material level relative to the income of the external auditor firm as a whole. External auditor tenure The Company confirms that it has complied with the Competition and Markets Authority’s Order for the year. Due to the relatively recent appointment of KPMG in 2015, the Committee was satisfied that it was not optimal to tender external audit services in the current year. The Committee noted that a competitive tender for the external auditor must be held no later than 2025. The Committee monitors the performance of the external auditor, providing an in-depth evaluation of its performance following the external audit, and then makes a recommendation to the Board. When considering the appropriateness of the re-appointment of KPMG, we considered in our review, the ratio of audit to non-audit fees and the effectiveness of the audit process, together with other relevant review processes. We were satisfied that we should recommend the re-appointment of KPMG. Internal controls The Board, assisted by the Audit Committee, is responsible for reviewing the operation and effectiveness of the Group’s internal controls. This internal control system is designed to manage risks as far as possible, acknowledging that no system can eliminate the risk of failure to achieve business objectives entirely. The Board did not identify any significant failings or weaknesses in the year. The Board is also responsible for ensuring that appropriate systems are in place to enable it to identify, assess and manage key risks. The preparation of financial statements and the wider financial reporting process and control system are monitored by the adoption of an internal control framework to address principal financial reporting risks. This includes risks emerging as a result of changes to the business or accounting standards. The effectiveness of the controls is evaluated by a combination of review by all of the Grainger management committees and boards, and the internal and external auditors. A key project in the year was the GDPR compliance project. Both the Board and the Committee received regular updates from senior management. In 2019 an Internal Audit report will provide further assurance in relation to our actions in this area. Internal Audit Deloitte is appointed by the Company as Internal Auditor. Internal Audit focuses on the areas of greatest risk to the Company. Audits are considered during an annual audit planning cycle. This is informed by the results of current and previous audit testing, the Company’s strategy, performance and the risk management process. Additional audits may be identified during the year in response to changing priorities and requirements. The Committee approves the plan and monitors progress accordingly. All Internal Audit findings are graded, appropriate remedial actions agreed, and progress monitored and reported to the Committee. Internal Audit has a direct reporting line to the Chairman of the Audit Committee. We assess the effectiveness of Internal Audit by reviewing its reports, feedback from the Chief Financial Officer, and through meetings with the Chairman of the Audit Committee without management being present. The Internal Audit programme for 2018 gave attention to the Group’s core operational processes and the risk and controls in that regard. The plan for 2019 and thereafter has been designed to align with the implementation programme for the PRS focused strategy. This approach will give attention to providing assurance, process improvement and insights for Grainger’s core processes, complemented by an appropriate number of targeted risk reviews on principal risks or areas of management concern. 54 Shareh old ers S u p p l i e r s L o c a l C o m m u n i t i e s G o vern m ent Grainger plc Annual Report and Accounts 2018 Governance RELATIONS WITH STAKEHOLDERS How does the Board consider shareholder and stakeholder views? Customers Shareh old ers • Reviewed and considered reports of meetings with investors • Considered questions and comments from analysts • Met with shareholders at the AGM in Newcastle • More detail on Grainger’s engagement with shareholders is included on page 24 • Reviewed customer service survey results • Reviewed focus group feedback • Reviewed and fed back on plans to improve customer service • More detail on how Grainger delivered for its customers is included on page 24 • Considered reports on key supplier relationships and performance • Oversaw development of Grainger’s policies and approach to anti-bribery, anti-corporation tax evasion and modern slavery • More detail on Grainger’s engagement with suppliers is included on page 25 Shareholders Customers Suppliers GRAINGER PLC BOARD Local Communities Employees Government • Reviewed reports on Grainger’s engagement with local communities • Considered schemes in which Grainger participated • at development sites • More detail on Grainger’s engagement with local communities is included on page 24 S u p p l i e r s • Monitored employee engagement survey results • Considered talent management and succession planning issues • Monitored progress against diversity targets and plans • Engagement with employees at office and site visits • More detail on Grainger’s engagement with employees is included on page 25 • Considered reports on Grainger’s contributions to government matters • Oversaw Grainger’s relationships with key local authority partners • Reviewed reports on meetings with government, shadow government and party officials • More detail on Grainger’s engagement with public bodies is included on page 25 G o vern m ent Employees i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n L o c a l C o m m u n i t i e s 55 Grainger plc Annual Report and Accounts 2018 Governance RELATIONS WITH STAKEHOLDERS CONTINUED Key shareholder events 2017/18 An ongoing dialogue with our shareholders is fundamental to ensuring that there is an understanding of the strategy and governance of the business, and that the Board is aware of the issues and concerns of our investors. In this section of the report we highlight the key activities of our shareholder engagement programme throughout the year. October 2017 November/December 2017 January 2018 Two investor conferences London Full year results presentation London Full year investor roadshow London and Edinburgh Two investor property tours London Investor conference London March 2018 February 2018 Two US investor conferences Miami and New York Full year investor roadshow Amsterdam Investor conference London Property tour London Investor property tour London AGM May 2018 June 2018 Two investor conferences London Half year investor roadshow Amsterdam Half year results presentation London Half year investor roadshow London and Edinburgh Property tour London Property tour Manchester Investor conference Paris Property tour London September 2018 Investor conferences London Investor conference Berlin Investor presentation and lunch Argo Apartments, London 56 Grainger plc Annual Report and Accounts 2018Substantial shareholdings At 30 September 2018 and 31 October 2018 (being the latest practicable date prior to the date of this report), the Company is aware of the following interests amounting to 3% or more in the Company’s shares.. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i BlackRock Inc. Schroder Investment Management Ltd Aberdeen Standard Investments The Vanguard Group Inc Columbia Threadneedle Investments Aberforth Partners LLP Norges Bank Investment Management M&G Investment Management Ltd Legal & General Investment Management Limited Highclere International Investors LLP 30 September 2018 31 October 2018 Holding million Holding % Holding million Holding % 32.1 27.5 23.1 15.5 15.5 15.4 14.7 14.2 13.7 12.9 7.7% 6.6% 5.5% 3.7% 3.7% 3.7% 3.5% 3.4% 3.3% 3.1% 32.2 27.3 24.1 15.6 15.4 15.4 14.7 14.2 13.4 12.9 7.7% 6.5% 5.8% 3.7% 3.7% 3.7% 3.5% 3.4% 3.2% 3.1% s t a t e m e n t s O t h e r i n f o r m a t i o n Frequently asked questions The market What is the competitive landscape like at the moment? Outlook What is the scale of your PRS investment ambitions? Overheads Overheads have been reduced a lot, but are they going to increase again as you grow? Affordability Are you concerned about your customers’ ability to afford rising rents and housing costs? Operational platform You have the market leading operational platform. Will you leverage off it and seek to offer your operational platform to others entering the market? Demand for renting continues to outstrip supply. The PRS continues to attract significant interest among institutional investors. However, it is estimated that the PRS will grow from 4.7m households to 7.2m by 2025, and the current supply of new purpose built PRS stock is c.130,000 units. We have over 4,500 operational PRS units, with an anticipated pipeline of a further c.5,300 units, positioning us as one of the largest players in the market. We have demonstrated our ability to deliver on our strategy through the success of securing PRS investments. Grainger’s intention has always been to grow beyond the £850m target, which was an initial metric set out along with our PRS strategy in January 2016. Scale is important in the PRS market, and the opportunity for growth, supported by growing demand, is vast. We will continue to invest at pace and in a disciplined manner, supported by our established asset recycling programme, gearing (within our target range of 40-45% LTV) and the resilient cash flow generated from our regulated tenancy business. Overheads have been reduced by 25% since January 2016. We have restructured the business to this level in order to support our growth plans. Therefore we do not expect to see overheads materially rise as we increase our portfolio, with the exception of wage inflation due to our investment in our operational platform. As part of our investment process, we undertake detailed mapping of the local consumer market including job profiles, personal income levels, commuting patterns and economic growth forecasts. When underwriting and pricing our properties, we aim to set rents within levels that are affordable to those living locally with average incomes. This mid-market approach ensures that are properties are accessible to the widest range of people. We continue to invest in our operational platform, which provides us with significant competitive advantage, including investing in technology to enable us to increase our scalability and enhance our customer experience. We are not seeking to offer our operational platform to third parties but are actively pursuing partnerships where the third party can bring a PRS development opportunity we could not otherwise acquire. A good example is our newly established partnership with the London Borough of Lewisham, where we are working together to develop c.300 new homes on land owned by the Borough. 57 Grainger plc Annual Report and Accounts 2018 Governance RELATIONS WITH STAKEHOLDERS CONTINUED Hosted at Grainger’s latest PRS offering, Argo Apartments, which was launched in January 2018, the presentation gave investors the opportunity to view the building’s amenity space and apartments. The presentation was attended by over 20 top investors and sell side analysts, with positive feedback received. Attendance at key investor meetings Chief Executive Chief Financial Officer Senior executive 95% 92% 89% Shareholders by region 10% 57% 8% 9% 16%  UK (excluding Scotland) 57%  North America 16%  Rest of Europe 9%  Scotland 8%  Other 10% Case study of investor presentation at Argo Apartments Objective To provide investors and prospective investors with an insight into the work undertaken by Grainger’s development division and how development adds value to the business. Presented by Grainger’s Executive management and senior development team, this provided progress to date on current projects and outlined future opportunities, with a focus on three strands of development: • Forward funding • Direct development • Land The Group’s website includes a comprehensive investor relations section, containing all RNS announcements, share price information, annual documents available for download and similar materials. All the Directors standing for re-election intend to attend the 2019 AGM and be available to answer questions. All shareholders can attend the AGM, which is a means of communication with smaller and private shareholders. We send out the notice of meeting and Annual Report and Accounts at least 20 working days before the meeting. We hold separate votes for each proposed resolution. A proxy count is given in each case after the voting on a show of hands. Grainger includes, as standard, a ‘vote withheld’ category, in line with best practice. Shareholders can also lodge their votes through the CREST system. The Board believes that understanding the views of its shareholders is a fundamental principle of good corporate governance. Strong engagement with stakeholders and investors is key to achieving this. Investor relations are based on the financial reporting calendar, with additional engagement when considered beneficial to the Company. We have held more than 230 engagements with shareholders, analysts and potential investors in the year. Helen Gordon and Vanessa Simms held the vast majority of these meetings, and manage the Group’s investor relations programme with the Director of Corporate Affairs. We always seek feedback at these meetings and present it to the Board. In addition, the Company Secretary engaged with a combination of fund managers and corporate governance officers of the Company’s major shareholders before the 2018 AGM. We anticipate a similar pre-AGM engagement process will take place in 2019. 58 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Governance REMUNERATION COMMITTEE REPORT Justin Read Committee Chairman 1. Single total figure of remuneration for each Director – 2017 and 2018 2. Annual bonus awards – performance assessment for 2018 LTIP awards – performance assessment for 2018 Share scheme interests awarded during the year Payments for loss of office and to past Directors 3. 4. 5. 6. Directors’ shareholdings and share interests 7. 8. 9. Performance graph and table – total shareholder return Chief Executive single figure Percentage change in remuneration of Chief Executive and employees 10. Relative importance of spend on pay 11. Statement of implementation of Remuneration Policy for 2019 12. Directors’ service agreements and letters of appointment 13. Details of the Remuneration Committee, advisers to the Committee and their fees 14. Statement of voting at general meeting 66 67 69 70 70 71 72 73 73 73 74 76 76 76 How the Committee spent its time 10% 25%  Governance, investor relations 20% and reporting 25%  Remuneration policy 20%  Executive share plans 15%  Performance monitoring and review 30%  Senior management remuneration and retention 10% 30% 15% Dear shareholders, This is my first year as Chairman of the Remuneration Committee and I am pleased to present, on behalf of the Board, the 2018 Directors’ Remuneration report. What is in this report? This Directors’ Remuneration report sets out a summary of the Remuneration Policy approved by shareholders at the Company’s Annual General Meeting (‘AGM’) on 8 February 2017. It took effect on that date and will continue to apply for another year. You can find a full copy of the policy in the 2016 Annual Report or on our website. This statement and report will be subject to an advisory vote at the AGM on 6 February 2019. This report also discloses the amounts paid to our Executive and Non-Executive Directors for the year ended 30 September 2018. The report complies with the provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. We have prepared it in line with the recommendations of the Code and the requirements of the UKLA Listing Rules. Our approach to remuneration As detailed in the Strategic report, our focus continues to be on growing rental income, simplifying and focusing the business and building on our experience to position the Company for future long-term growth. All of these factors are supported by our focus on continuously improving our customers’ experiences with us. How successful we are in executing our strategy for the benefit of our stakeholders is measured by the long-term value we create as a business. This value is underpinned by the income growth we achieve through retaining and growing our customer base whilst also generating capital returns. These metrics form part of our key performance indicators that are tracked through to our incentives. The long-term focus in our strategy is supported through our Long-Term Incentive Plan (‘LTIP’) under which our performance is tested over three years and, as a minimum, the after tax number of vested shares must be held for a period of five years. Our annual bonus plan rewards for delivering our short-term financial and operational goals, with part of any bonus earned deferred into the Company’s shares for a period of three years. Incentive out-turns are then linked to share ownership guidelines that require a shareholding of equal value to 200% of salary to be built. 59 Grainger plc Annual Report and Accounts 2018 Governance REMUNERATION COMMITTEE REPORT CONTINUED The performance metrics used in our incentive programmes include shareholder return metrics alongside earnings growth and strategic targets. These are reviewed periodically to ensure they continue to support our strategy and, in particular, that the range of targets set remain appropriate for current commercial circumstances. The above policy will be subject to a review in 2019 in line with the relevant regulations that require us to seek shareholder approval for a new remuneration policy at the 2020 AGM, being three years since our current policy was approved by shareholders. A review of policy is timely given ongoing developments in market practice and best practice, including the recent updated recommendations included in the New Code. We would note that we go into a policy review year from a position of strength with over 98% of our shareholders approving our 2017 application of remuneration policy at the 2018 AGM. With our LTIP, the 2016 awards will vest in January 2019. The 2016 LTIP award was delayed by a month due to a closed period during December 2015 and this was made in January 2016. The performance targets for this award related to EPRA NNNAV (50% of award) and absolute total shareholder return (‘TSR’) (50% of award). For the performance period ended 30 September 2018, EPRA NNNAV has increased by 20% against the 11% increase in the Halifax and Nationwide House Price indices. This will result in 15.8% vesting of this part of the award. TSR up to 22 October 2018 was an annualised compound increase of approximately 10% over the three-year performance period (ending 11 January 2019). If this level of TSR is maintained for the reminder of the period it will, subject to that share price performance, result in 50.3% of this part of the award vesting. In aggregate, therefore, the estimated vesting of the total award is in the region of 33%. Actual vesting levels will be determined in January 2019 and included in next year’s Annual Report on Remuneration. 2018 performance and reward In 2018, supporting our strategy and aligned with the overview noted above, the majority of the annual bonus was subject to a combination of adjusted earnings and ROSE targets. These measures combined to ensure that Executive Directors focused on improving profit from their day-to-day activities, at the same time as maximising the value of Grainger’s underlying assets. In addition, we based a minority of the bonus opportunity on how well each of our Executive Directors performed on an individual scorecard of key performance objectives. In light of the strong performance achieved over the relevant performance periods, and in particular the returns generated for our shareholders, the Committee is comfortable, overall, with the level of variable pay earned and the forecast for the 2016 LTIP. Implementing the policy for 2019 For the 2018/19 period, the base salaries of the Executive Directors will be increased with effect from 1 January 2019, in line with the typical increase given to the wider employee population. See page 73 for more details. With regard to the performance during the year, we achieved adjusted earnings of £94m and ROSE of 6.1%. The performance against adjusted earnings was £16.6m ahead of the target set for the year of £77.4m, and ROSE was in the lower half of the 4.5% – 12% performance range. When we combined these figures with the strategic targets, annual bonuses were calculated at c.72% of the maximum available. Full disclosure of the actual targets set, and performance towards those targets, is on pages 67 to 69. It is proposed that in applying the Remuneration Policy for the forthcoming year, we will retain the same broad structure and performance measures as was the case for 2018. In support of the Company’s current strategy, Executive Directors will continue to earn the annual bonus based on performing to a combination of challenging adjusted earnings and ROSE targets, with a small but significant proportion of the total bonus opportunity reserved for achieving tailored strategic personal objectives. One-quarter of any bonus earned will continue to be subject to deferral into the Company’s shares, to provide a link between attaining short-term objectives and longer-term performance. In addition, recovery and withholding provisions will continue to apply to any bonus earned in relation to 2019. 60 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n For the LTIP the three-year performance targets will, as per the prior year, relate to an equal combination of total property return (‘TPR’) and relative TSR compared to our sector peers. As with the annual bonus, strict recovery and withholding provisions apply, along with a two-year holding period on any shares that vest. Corporate governance developments The Committee has considered recent changes in corporate governance best practice (introduced by the New Code and new secondary legislation). In relation to the New Code, whilst noting that the new disclosure requirements become effective for companies with financial years commencing on or after 1 January 2019, we already comply with some of the new recommendations and intend to consider more of the detail as part of our forthcoming policy review. In relation to how best to take into account employee feedback on Directors’ remuneration, the Committee is overseeing an audit of the current practices within Grainger on taking employees’ views into consideration. The audit will, once complete, be provided to the Committee for review and in order to agree the most appropriate approach going forward for Grainger. This will form part of a broader Board exercise as to how to best consider stakeholder views more generally. The Board will conclude this process, along with its work on the requirements of the new secondary legislation, well before these new corporate governance developments require Grainger to comply in the 2019/20 financial year. Shareholder engagement The Committee is committed to maintaining an ongoing dialogue with shareholders and other stakeholders on the issue of executive remuneration, and we welcome any feedback you may have. We look forward to your support on the resolution relating to remuneration at the AGM on 6 February 2019. Justin Read Chairman of the Remuneration Committee 13 November 2018 For 2019, our general approach to target setting in respect of adjusted earnings and strategic targets will remain consistent with the approach taken in 2018. Details of the 2019 bonus structure are included on page 74 and the Committee is comfortable that the degree of stretch in the overall bonus is no less challenging than the structure in place for 2018, giving appropriate allowance for current circumstances. The choice of metrics is considered to remain fully aligned with our PRS-led strategy and overall objective of maximising suitable shareholder returns. In line with best practice, the Committee also retains the discretion to override incentive plans’ formulaic outcomes if it considers there to be an inconsistency between performance and reward. As a result of ongoing developments in market practice, specifically in relation to the enforceability of clawback and the use of Committee discretion, a review of the Company’s annual bonus and LTIP documentation was completed during the year. While the conclusion of the review was that the current documentation was in line with current good practice, the Committee made a number of minor amendments to bring current processes into line with best practice (e.g. introducing the requirement for directors to countersign acceptance of incentive plan terms, including the malus and clawback provisions and incentive plan override). In addition, I would highlight that Grainger continues to operate the SAYE and SIP share schemes in line with the principle of broad employee share ownership and regularly encourages employees to become owners in the Company, by providing frequent awareness sessions, annual presentations, Q&A sessions and assistance in joining available share schemes. Board changes Belinda Richards retired from the Board on 7 February 2018, having completed six years of service as a Non-Executive Director and having chaired the Audit, Risk and Remuneration Committees, as well as being the Company’s Senior Independent Director during her appointment. In line with the terms of her letter of appointment, Belinda received a pro-rata payment of fees for the period in office. 61 Grainger plc Annual Report and Accounts 2018 Governance REMUNERATION POLICY SUMMARY Overview of the Executive Directors’ Remuneration Policy Our Executive Directors’ Remuneration Policy was approved by shareholders at the AGM on 8 February 2017 and it is intended to apply for the full three-year period permitted by the applicable regulatory regime. You can find the full policy on our website. Below is a summary of the policy. Details of the remuneration arrangements for the Non-Executive Directors are on page 75. Base salary Purpose and link to strategy Operation To enable the recruitment and retention of individuals of the calibre necessary to execute the Company’s business strategy. Reviewed annually and effective from 1 January. Decision may be influenced by the following factors: • role, experience and personal performance; • average change in total workforce salary; • total organisational salary budgets; and • Company performance and other economic conditions. Salaries are benchmarked periodically to companies of a similar size and complexity. Opportunity Salaries will be eligible for increases during the three-year operational period, in line with percentage increases granted to the wider workforce. Increases beyond these may be awarded in certain circumstances, such as a change in responsibility or experience, or a significant increase in the scale of the role, or size, value or complexity of the Group. Where new joiners or recent promotions have been placed initially on pay below market rate, a series of percentage increases above those granted to the wider workforce may be considered, subject to individual performance and development in the role. Framework to assess performance The Committee considers individual salaries at the appropriate meeting each year, after considering the factors noted in operating the salary policy. Benefits Purpose and link to strategy Operation To aid recruitment and retention of high-quality executives. Car allowance, private medical insurance, life assurance, ill health income protection, travel insurance, health check-ups. Other ancillary benefits, including relocation expenses, as required. Opportunity The value of benefits may vary from year to year depending on the cost from providers. Savings related share schemes Purpose and link to strategy Operation Opportunity To encourage employees to make a long-term investment in the Company’s shares. All employees, including the Executive Directors, are eligible to participate on the same terms in the Company’s SAYE scheme and Share Incentive Plan (‘SIP’), both of which are approved by HMRC and subject to the limits prescribed. SAYE: Participants may invest up to £500 a month (or other amount permitted by HMRC from time to time) for three or five-year periods, in order to purchase shares at the end of the contractual period at a discount of up to 20% of the market price of the shares at the commencement of the saving period. SIP: Participants can invest up to £150 a month (or other amount permitted by HMRC from time to time) in shares in the Company, and the Company matches that investment. The Company may also allocate free shares annually on a percentage of basic pay, subject to a maximum of £3,600 (or other amount permitted by HMRC from time to time). Dividend payments on SIP shares are reinvested into shares. 62 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Pension Purpose and link to strategy Operation To aid recruitment and retention of high-quality executives and enable long-term savings through pension provision. The Company may contribute directly into an occupational pension scheme (an Executive Director’s personal pension) or pay a salary supplement in lieu of pension. If appropriate, a salary sacrifice arrangement can apply. Opportunity The value of benefits may vary from year to year depending on the cost from providers. Framework to assess performance The pension contribution or allowance is based on 15% of basic salary. Annual bonus Purpose and link to strategy Operation To incentivise achievement of annual targets. Compulsory deferral of 25% of any bonus paid into shares for three years, with the balance of the bonus paid in cash. Deferred shares typically vest after three years and are normally subject to continued employment. Dividend-equivalent payments may be made in cash or shares, on deferred shares at the time of vesting, and may assume the reinvestment of dividends. Bonus will be predominantly based on demanding financial targets (for example, ROSE and adjusted earnings) and a minority of other performance targets (for example, strategic targets). Opportunity Maximum bonus potential is capped at: • 140% of salary for the Chief Executive; and • 120% of salary for the other Executive Directors. Framework to assess performance Details of the performance measures used for the current year, and targets set for the year under review and performance against them, are provided in the Annual Report on Remuneration. Malus and clawback provisions apply and withholding provisions may apply for three years from the date of payment of any bonus. Long-term incentive plans Purpose and link to strategy Operation To incentivise sustained performance over the longer term. To encourage greater shareholder alignment through personal investment in the Company’s shares. Long-term incentive plans are provided under the 2007 LTIP and the 2017 LTIP (collectively referred to as ‘LTIP’). LTIP provides for awarding share options (i.e. either conditional shares or nil-cost options), normally made annually, which are eligible to vest after three years, subject to continued service and the achievement of demanding performance conditions. Shares are subject to a two-year post-vesting holding period for awards granted under the 2017 LTIP. Dividend- equivalent payments may be made (in cash or shares) on LTIP shares at the time of vesting on vested shares, and may assume the reinvestment of dividends. Opportunity Annual awards are capped at: • 175% of salary for the Chief Executive; and • 130% of basic salary for the other Executive Directors. The Committee may grant awards at up to 200% of salary in exceptional circumstances (e.g. recruitment to compensate for value forfeited from a previous employer). Framework to assess performance Granted subject to a blend of demanding financial (for example, TPR) and TSR performance targets, tested over three years. 25% of awards will vest for threshold performance, with full vesting taking place for equalling, or exceeding, the maximum performance targets. No awards vest for performance below threshold. A graduated vesting scale operates between threshold and maximum performance levels. Malus and clawback provisions apply. 63 Grainger plc Annual Report and Accounts 2018 Governance REMUNERATION POLICY SUMMARY CONTINUED Shareholding guidelines The Executive Directors are expected to build up a shareholding of equivalent value to 200% of their base salary. As a minimum, half the after-tax number of vested LTIP shares granted from 2018 must be retained towards satisfaction of this guideline, which is expected to be met within five years of its introduction (subject to personal circumstances). How the Executive Directors’ Remuneration Policy relates to the wider Group As the Executive Directors have the greater potential to influence overall Group performance, their Remuneration Policy is more heavily weighted towards variable pay than that for other employees. The Committee considers any general basic salary increase for the broader Company when determining the annual salary review for the Executive Directors. How the views of employees and shareholders are taken into account The HR Director attends and reports to the Remuneration Committee regularly and in doing so takes into consideration and reports on the employees’ views collected via staff-wide surveys and other cascade/feedback sessions. This process will be reviewed once the current FRC consultation into remuneration committee engagement with the wider workforce is complete. The Remuneration Committee considers shareholder feedback received from the AGM, along with guidance from shareholder representative bodies and any feedback received during meetings with shareholders, as part of its ongoing review of remuneration policy. Approach to recruitment remuneration When setting the remuneration package for a new Executive Director, the Committee will apply the principles in the Remuneration Policy. For appointments from outside the Company, the Remuneration Committee may offer compensation that it considers appropriate and reasonable for awards and benefits forfeited from a previous position. This would reflect the performance requirements, timing and other specific matters the Committee considers relevant, and could be in cash or share awards. The policy is that the maximum payment under any such arrangements (which may be in addition to the normal variable remuneration) should be no more than the Committee considers is required to provide reasonable compensation to the incoming Executive Director. In the case of an employee who is promoted to the position of Executive Director, it is the Company’s policy to honour the terms of existing award commitments. Directors’ service contracts and provision on payment for loss of office The Company can terminate Executive Directors’ service contracts with up to one year’s notice, and the Director can terminate it with at least six months’ notice. If an Executive Director’s employment is to be terminated, and in the absence of a breach of the service agreement by the Executive Director, the Committee’s policy is to agree a termination payment based on the base salary and contractual pension amounts and benefits that would have accrued during the notice period. The departing Executive Director may work, or be placed on leave, for all or part of their notice period, or receive a payment in lieu of notice in accordance with the service agreement. Depending on the circumstances, the Committee may also apply the principle of mitigation, to reduce any termination payment. In addition, the Committee may also make payments in relation to any statutory entitlements, to settle any claim against the Company (e.g. in relation to breach of statutory employment rights or wrongful dismissal) or make a modest provision in respect of legal costs or outplacement fees. The Company has an enhanced redundancy policy allowing redundancy amounts to be calculated by reference to actual basic weekly salary, and the policy may be extended to Executive Directors where relevant. With regard to annual bonus for a departing Executive Director, if employment ends due to redundancy, retirement with the agreement of the Company, ill health, disability or death, or any other reason as determined by the Committee (i.e. the individual is a good leaver), the Executive Director may be considered for a bonus payment. If the termination is for any other reason, any entitlement to bonus would normally lapse. Under any circumstance, it is the Committee’s policy to ensure any bonus payment reflects the departing Executive Director’s performance and behaviour towards the Company. 64 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Any bonus payment will normally be delayed until the performance conditions have been determined for the relevant period and be subject to a pro-rata reduction for the portion of the relevant bonus year the individual was employed. Share-based incentives granted to an Executive Director will be based on the relevant plan rules. The default treatment will be for outstanding awards to lapse on cessation of employment. For awards granted under the Company’s LTIPs, in certain prescribed circumstances, such as injury or disability, redundancy, transfer or sale of the employing company, retirement with the Company’s agreement or other circumstances at the discretion of the Committee (reflecting the circumstances that prevail at the time), good leaver status may be applied. If treated as a good leaver, awards will be eligible to vest subject to performance conditions, which will be measured over the original performance period (unless the Committee elects to test performance to the date of cessation of employment) and be subject to a pro-rata reduction (unless the Committee considered it inappropriate) to reflect the proportion of the vesting period actually served. With regard to the deferral of annual bonus, deferred share bonus awards will normally lapse on cessation of employment other than where an Executive Director is a good leaver, with awards then vesting on the normal vesting date. It is the Company’s policy to honour pre-existing award commitments. Where the Executive Director participates in one or more of the Company’s HMRC-approved share plans, awards may vest or be exercisable on, or following, termination of employment in certain good leaver circumstances, where permissible, in accordance with the rules of the plan and relevant legislation. External appointments Executive Directors are permitted to accept external non-executive appointments with the prior approval of the Board. It is normal practice for Executive Directors to retain fees provided for non-executive appointments. Non-Executive Directors’ fees The policy on Non-Executive Directors’ fees is set out below: Non-Executive Directors Purpose and link to strategy Operation To provide a competitive fee which will attract high-calibre individuals who, through their experience, can further the interests of the Group. The fees for Non-Executive Directors (including the Chairman) are typically reviewed every second year, or more frequently if required. The Chairman and Non-Executive Directors receive an annual fee paid in cash. They do not participate in any of the Company’s incentive arrangements or receive any pension provision. The Non-Executive Directors receive a basic Board fee, with additional fees for chairing the Company’s key committees or for performing the Senior Independent Director role. Non-Executive Directors are reimbursed for travel and related business expenses reasonably incurred in performing their duties. The Committee (without the Chairman) determines the Chairman’s fee and recommends it to the Board. The Chairman and Executive Directors determine the Non-Executive Directors’ fees. Opportunity Fee levels can be increased to ensure they continue to recognise the time commitment of the role, fee levels for Non-Executive Directors in general, and fee levels in companies of a similar size and complexity. Non-Executive Directors’ letters of appointment The Chairman and Non-Executive Directors have letters of appointment for an initial fixed term of three years, subject to earlier termination by either party on written notice. In each case, this term can be extended by mutual agreement. Non-Executive Directors have no entitlement to contractual termination payments. The dates of the initial appointments of the Non-Executive Directors are set out in the Annual Report on Remuneration. 65 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION 1. Single total figure of remuneration for each Director The details set out in Notes 1 to 7 on pages 66 to 72 of this report have been audited by KPMG LLP. 2018 Executive Directors Helen Gordon Vanessa Simms Non-Executive Directors8 Mark Clare Tony Wray Andrew Carr-Locke Rob Wilkinson Justin Read8 Former Non-Executive Director Belinda Richards9 Totals a b c d e f Salary and fees1 £’000 Taxable benefits2 £’000 Share incentive Plan £’000 Annual bonus3 £’000 LTIP awards4 £’000 Pension benefits5 £’000 Other6 £’000 Total7 £’000 468 325 793 165 47 61 47 53 373 23 1,189 16 16 32 – – – – – – – 32 4 4 8 – – – – – – – 8 474 290 764 – – – – – – 346 143 489 – – – – – – 70 49 119 – – – – – – 74 – 74 – – – – – – 1,452 827 2,279 165 47 61 47 53 373 – 764 – 489 – 119 – 74 23 2,675 1 The salaries awarded to the Executive Directors during the year under review increased by 2.2% in line with the wider employee population. Helen Gordon’s base salary is £470,120 and Vanessa Simms’ base salary is £327,040, both with effect from 1 January 2018. 2 Taxable benefits include a car allowance and private medical insurance. 3 In line with the 2017 Remuneration Policy, 25% of the bonus is deferred into shares for three years. 4 In line with the requirements of the Remuneration Reporting Regulations, the 2018 LTIP vesting values are based on the forecast value of the awards due to vest on 11 January 2019 (50% of the award is based on EPRA NNNAV performance measured over the three years to 30 September 2018, and 50% of the award is based on absolute TSR measured over the three-year period to 11 January 2019). The growth in Grainger’s EPRA NNNAV over the three-year period to 30 September 2018 was 1.7 times the increase in the Halifax and Nationwide House Price indices over the same period. For this part of the award, this results in 15.8% being eligible to vest. Absolute TSR performance based on an assessment period measured to 22 October 2018 results in an annualised TSR of 10.03%. This in turn results in a projected vesting level of 50.3%, for this part of the award. In aggregate, this results in current estimated vesting being 33.1% of the total award. The applicable performance period is due to end on 11 January 2019. The share price for valuing the award is the three-month average share price to 28 September 2018 (303.6p) for the TSR element. This value will be trued up in next year’s report to reflect the actual level of vesting and share price at the vesting date. In addition, the total LTIP value of the award vesting in January 2019 in respect of Nick Jopling is £172,607, Nick, being a former Director of Grainger. The 2017 LTIP value has been restated and reflects the actual value of the awards that vested in December 2017. 5 The pension benefits are based on 15% of base salary. 6 Please see Note 6 on page 71 in relation to the vesting of the Tranche 3 buy-out award made to Helen Gordon. 7 With regard to the single total figure of remuneration for each Director in relation to the year under review, the Committee was comfortable with the amounts payable given the performance achieved. In forming this view the Committee noted the achievement of a ROSE of 6.1% and adjusted earnings of £94m in a challenging market context. In addition, substantial strategic progress was also made with the PRS strategy being delivered and embedded in the business. 8 The salaries for Non-Executive Directors reflect payments in relation to any chairmanship roles (as applicable during the year under review or the preceding year) and in some cases pro-rata adjustments are made to reflect the changes in respect of such roles being taken part way through the relevant year. 9 On 7 February 2018 Belinda Richards retired from the Board. 66 Grainger plc Annual Report and Accounts 2018a b c d e f Salary and fees1 £’000 Taxable benefits2 £’000 Share Incentive Plan £’000 Annual bonus3 £’000 LTIP awards4 £’000 Pension benefits5 £’000 Other6 £’000 Total7 £’000 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i 460 320 780 357 104 62 45 54 45 28 338 53 1,528 16 17 33 16 – – – – – – – – 49 1 1 2 5 – – – – – – – – 7 390 240 630 236 – – – – – – – – – – 344 – – – – – – – 69 48 117 54 – – – – – – – 49 – 49 – – – – – – – – s t a t e m e n t s O t h e r i n f o r m a t i o n 985 626 1,611 1,012 104 62 45 54 45 28 338 – 866 – 344 – 171 – 49 53 3,014 2017 Executive Directors Helen Gordon Vanessa Simms Former Executive Director4 Nick Jopling Non-Executive Directors8 Mark Clare Belinda Richards Tony Wray Andrew Carr-Locke Rob Wilkinson Justin Read Former Non-Executive Director Margaret Ford Totals 2. Annual bonus awards – performance assessment for 2018 Actual performance against the targets set for 2018 are listed below (straight-line pay outs occur between the relevant performance points). All Executive Directors during the year of review were eligible to participate in the 2018 annual bonus plan. Below are the financial targets set at the start of the year (which were considered as challenging as those set in prior years and detailed in last year’s Directors’ Remuneration report) and performance achieved against them, together with the personal targets and the extent of achievement against these. Measure Weighting Adjusted earnings 40% Threshold (0% out-turn) 90% of budget (£69.7m) Target (60% out-turn) Maximum (100% out-turn) 2018 performance 100% of budget (£77.4m) 120% of budget (£92.9m) 121.4% of budget (£94m) Measure Weighting Threshold (0% out-turn) (10% out-turn) Target (60% out-turn) Maximum (100% out-turn) 2018 performance ROSE 40% 4.5% 4.75% 7% 12% 6.1% Out-turn (% of max element) Bonus 100% Out-turn (% of max element) Bonus 40% The ROSE as detailed above at 6.1% was calculated from the closing EPRA NNNAV of 316p per share plus the dividend of 5.26p per share for the year, divided by the opening EPRA NNNAV per share of 303p. In respect of the personal performance targets set for each Executive Director, these were set against a range of strategic targets at the start of the year. The targets set were aligned to Grainger’s corporate objectives having due regard to the refocused strategy being the key overarching deliverable during the year. 67 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION CONTINUED 2. Annual bonus awards – performance assessment for 2018 continued Chief Executive Measure Asset recycling Plan to release £250m over three years with 2018 releasing: • £60m = 3% • £90m = 5% Customer service • Improve response time to customer complaints. • Reduce number of outstanding complaints at year end as a percentage of the number of units in the portfolio at year end. • Implement measurement of quality of response as measured by customer feedback. Objective Design a clear action plan and steps for further simplification and focus of the portfolio to release capital for further PRS investment. Develop improvement in customer service culture with a clear action plan and initiatives to achieve a step change in the organisation. Joint Ventures/Partnerships Simplification of joint ventures or similar arrangements. Further business simplification in the form of exiting and/or restructuring arrangements with partners. Investment pipeline • 5% if achieved by 31 August 2018, Achieve £850m secured pipeline. 3% thereafter. Performance assessment Achieved in full with the release of £157.3m of capital from the recycling of assets for PRS investment. Achieved in part with: • an 84% reduction in average time to resolve and close customer complaints over the year under review; • a reduction in the number of complaints as a percentage of the portfolio from 6.3% to 5.8%; and • an improvement of the Net Promoter Score (c.6%) which is embedded in the organisation as a key measure of customer satisfaction . Achieved in full pursuant to the execution of transactions, including: • sale of interest in WIP; and • RBKC partnership conclusion. Achieved in respect of the 3% measure. Pursuant to the above assessment, the Committee determined that the payment of 16% of the maximum 20% of this part of the bonus would be payable and was appropriate in the circumstances. Chief Financial Officer Measure Asset recycling Plan to release £250m over three years with 2018 releasing: • £60m = 3% • £90m = 5% Customer service • Improve response time to customer complaints. • Reduce number of outstanding complaints at year end as a percentage of the number of units in the portfolio at year end. • Implement measurement of quality of response as measured by customer feedback. Joint Ventures/Partnerships Simplification of joint ventures or similar arrangements. Corporate finance – bond Completion of the transaction. Objective Design a clear action plan and steps for further simplification and focus of the portfolio to release capital for further PRS investment. Develop improvement in customer service culture with a clear action plan and initiatives to achieve a step change in the organisation. Further business simplification in the form of exiting and/or restructuring arrangements with partners. Secure a transformational financing transaction to improve capital structure. Performance assessment Achieved in full with the release of £157.3m of capital from the recycling of assets for PRS investment. Achieved in part with: • an 84% reduction in average time to resolve and close customer complaints over the year under review; • a reduction in the number of complaints as a percentage of the portfolio from 6.3% to 5.8%; and • an improvement of the Net Promoter Score (c.6%) which is embedded in the organisation as a key measure of customer satisfaction. Achieved in full pursuant to the execution of transactions, including: • sale of interest in WIP; and • RBKC partnership conclusion. Achieved in full with successful launch of a £350m corporate bond with a coupon of 3.375% for 10 years. Pursuant to the above assessment, the Committee determined that the payment of 18% of the maximum 20% of this part of the bonus would be payable and was appropriate in the circumstances. The total bonuses earned, therefore, were 72% and 74% of the maximum bonus opportunity for each of the Chief Executive and Chief Financial Officer respectively. 68 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Out-turn (% of max element) LTIP 50.3% 3. LTIP awards – performance assessment for 2018 The awards made to Executive Directors in January 2016, and which are due to vest in January 2019, are based on EPRA NNNAV and absolute TSR targets measured over a three-year period. Performance against the vesting schedule can be summarised as follows: LTIP awards vesting in January 2019 Measure Weighting Threshold Maximum Actual/forecast performance Three-year growth in TSR (annual compound)1 EPRA NNNAV (increase over three years relative to HPI, as measured by Halifax and Nationwide)2 50% 50% 5% 1.5% 15% 10.03% 3.0% 1.7% 15.8% 1 The applicable performance measurement period is the three years to 11 January 2019. The performance reported above, therefore, is a forecast based on performance measured to 22 October 2018 (using the three month average share price to this date for the purposes of calculating the annualised TSR). The 22 October 2018 was chosen as the performance measurement date since it is the latest practicable date for running the analysis for 2018 reporting purposes. Actual performance for the TSR element of the award will be determined once the performance period concludes and the actual vesting result will be included in a restated 2018 single figure total in next year’s Annual Report on Remuneration. 2 Performance measurement period three years to 30 September 2018. EPRA NNNAV increased by 20% between September 2015 and September 2018 while the average increase in the Halifax and Nationwide House Price indices over the same period was 11%. The forecast vesting value of the awards made in January 2016, subject to the above performance targets, is included in the 2018 single figure table above. The awards made to Executive Directors in December 2014, and which vested in December 2017, were based on EPRA NNNAV and absolute TSR targets measured over a three-year period. Performance against the vesting schedule can be summarised as follows: LTIP awards vested in December 2017 Measure Weighting Threshold Maximum Actual performance Three-year growth in TSR (annual compound)1 EPRA NNNAV (increase over three years relative to HPI, as measured by Halifax and Nationwide)2 50% 50% 5% 1.5% 15% 3.0% 15.3% 1.6% Out-turn (% of max element) LTIP 100% 6% 1 Performance measurement period three years to 16 December 2017. Actual performance over the performance period, at 15.3%, was higher than the forecast included in last year’s Directors’ Remuneration report which had been estimated at 14%. This in turn resulted in an increase in the vesting result from 90% to 100% which has been included in a restated 2017 single figure table on page 73. 2 Performance measurement period three years to 30 September 2017. 69 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION CONTINUED 4. Share scheme interests awarded during the year Helen Gordon Vanessa Simms LTIP share awards DBSP share awards Number 285,825 147,706 Face value £’000 805 416 Number 34,051 20,974 Face value £’000 98 60 The face value of LTIP share awards for Helen Gordon and Vanessa Simms is based on a price of 281.64p, being the average share price for the five business days immediately preceding the award being made on 11 December 2017. The face value of performance shares awarded was 175% of salary for Helen Gordon and 130% of salary for Vanessa Simms. The awards will be eligible to vest in three years, dependent upon continued employment and satisfying the performance criteria. Half of the award is subject to a relative TSR growth condition (versus FTSE 350 Real Estate Supersector constituents) with the other half subject to a TPR condition (both measured over three financial years, starting with the financial year the award was granted in). The relative TSR performance condition requires Grainger’s three-year relative TSR performance versus the comparator group to be at least at median for 25% of this part of the award to vest, with vesting then increasing on a straight-line basis to 100% for upper quartile relative TSR performance or better. The TPR performance condition requires three-year growth in TPR to be above 5% for 25% of this part of the award to vest, with vesting then increasing on a straight-line basis to 100% for 9% growth or better. Following vesting, a two-year holding period is applied on vested shares. The face value of the deferred bonus share plan (‘DBSP’) share awards for Helen Gordon and Vanessa Simms, relating to a 25% deferral of the 2017 annual bonus into Company shares, is based on a price of 286.5p, being the closing share price on the business day immediately preceding the award being made on 11 December 2017. The awards will be eligible to vest in three years subject to continued employment as set out in the policy on page 63. 5. Payments for loss of office and to past Directors Belinda Richards retired from the Board on 7 February 2018, having completed six years of service as a Non-Executive Director and having chaired the Audit, Risk and Remuneration Committees, as well as being the Company’s Senior Independent Director during her appointment. In line with the terms of her letter of appointment, Belinda received a pro-rata payment of fees for the period in office. 70 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 6. Directors’ shareholdings and share interests Performance share awards Helen Gordon Buy-out awards (three tranches)2 Awards granted 12 Jan 16 Maximum award Number 50,045 Awards vested Number 26,524 Awards lapsed Number 23,521 LTIP shares Matching shares LTIP shares LTIP shares DBSP Vanessa Simms LTIP shares Matching shares LTIP shares LTIP shares DBSP 11 Jan 16 11 Jan 16 09 Feb 17 11 Dec 17 11 Dec 17 11 Feb 16 11 Feb 16 09 Feb 17 11 Dec 17 11 Dec 17 287,117 57,423 329,162 285,825 34,051 130,995 11,750 170,101 147,706 20,974 – – – – – – – – – – – – – – – – – – – – Maximum outstanding awards at 30 Sep 2018 Number – 287,117 57,423 329,162 285,825 34,051 130,995 11,750 170,101 147,706 20,974 Market price at date of vesting (p) 232.5 254.8 280.2 – – – – – – – – – – Vesting date1 19 May 16 07 Mar 17 09 Mar 18 11 Jan 19 11 Jan 19 09 Feb 20 11 Dec 20 11 Dec 20 11 Jan 19 11 Jan 19 09 Feb 20 11 Dec 20 11 Dec 20 1 The performance conditions that apply to awards granted in the year under review are set out on pages 74 and 75, and for the previous financial year were set out in full in the previous Annual Report and Accounts. 2 As previously disclosed, Helen Gordon received a buy-out award on joining the Company. The award was structured in three tranches. Tranche 1 included 33,122 shares, of which 5,520 shares vested in May 2016 and 27,602 lapsed at the same time. Tranche 2 included 69,328 shares, of which 21,353 vested in March 2017 and 47,975 shares lapsed at the same time. Tranche 3, included 50,045 shares, of which 26,524 shares vested in March 2018 and 23,521 lapsed at the same time. The number of shares vesting in relation to Tranches 1 to 3 related to the Committee’s assessment of the value forfeited having had regard (where relevant) to the performance targets applying to the awards originally granted (i.e. the adjustments reflected the Committee’s assessment of the number of shares that would have vested in her previous employment, following application of the performance conditions attached to the relevant awards, with the assessment made based on publicly disclosed information by her previous employer). The total number of shares included in the table above is the opening number of shares at the start of the year under review that remained eligible to vest (i.e. relating to Tranche 3), and the movement during the year related to the vesting and lapsing of Tranche 3 shares. There is now a nil balance for this award. Share options Granted in year Lapsed in year Exercised during year Share options at 1 Oct 2017 Number Helen Gordon Vanessa Simms SAYE 10,791 SAYE 8,563 – – Grant price (p) – – Exercise price (p) Market price on exercise (p) Gains on exercise of share options (£) Share options at 30 Sep 2018 Exercise price (p) Earliest exercise date Latest exercise date Number Number – – – – – – – – – – 10,791 166.8 01 Sep 19 01 Mar 20 8,563 210.2 01 Sep 20 01 Mar 21 The closing trade share price on 28 September 2018 was 300p. The highest trade share price during the year was 322p and the lowest was 267.4p. 71 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION CONTINUED 6. Directors’ shareholdings and share interests continued Directors’ shareholdings Executive Directors Helen Gordon Vanessa Simms Ordinary shares of 5p each (thousands) 1 Oct 2017 Shares 103 12 30 Sep 20181 shares 140 23 Value at 30 Sep 2018 £’000 421 68 % Current salary2 89% 21% 1 Since 30 September 2018, Helen Gordon and Vanessa Simms acquired shares in the Company through the Grainger Employee Share Incentive Scheme (1,246 ordinary 5p shares each). 2 The Company’s share ownership guidelines require Executive Directors (subject to personal circumstance) to build a share ownership of equal value to 200% of salary over five years. The value of shares held (calculated as at 28 September 2018 when the share price was 300p) are detailed in the table above. The current levels of share ownership reflect the length of service for each Executive Director, with the Chief Executive having served two years and 10 months and the Chief Financial Officer having served two years and seven months. These values do not include any shares that are scheduled to vest on 11 January 2019. The salary percentage if the share options currently held under the DBSP share plan (subject to continued employment only) were to be included in the above calculation would increase the share ownership guideline to 111% in the case of Helen Gordon and 41% in the case of Vanessa Simms. Non-Executive Directors Tony Wray Andrew Carr-Locke Rob Wilkinson Mark Clare Justin Read Ordinary shares of 5p each (thousands) Beneficial 1 Oct 17 10 10 10 100 14 30 Sep 18 10 10 14 100 14 7. Performance graph and table Total shareholder return This graph shows the percentage change by 30 September 2018 of £100 invested in Grainger plc on 30 September 2008 compared with the value of £100 invested separately in both the FTSE 250 Index and the FTSE 350 Real Estate Supersector Index. 350% 300% 250% 200% 150% 100% 50% 0% 72 30/09/2008 30/09/2009 30/09/2010 30/09/2011 30/09/2012 30/09/2013 30/09/2014 30/09/2015 30/09/2016 30/09/2017 30/09/2018 Grainger plc FTSE 250 Total Return Index FTSE 350 Real Estate Supersector Total Return Index Source: Datastream (Thomson Reuters) Grainger plc Annual Report and Accounts 2018 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n 8. Chief Executive single figure 2018 2017 20161 2016 2015 2014 2013 2012 2011 2010 20092 Helen Gordon Helen Gordon Helen Gordon (from 4 January 2016) Andrew Cunningham (to 4 January 2016) Andrew Cunningham Andrew Cunningham Andrew Cunningham Andrew Cunningham Andrew Cunningham Andrew Cunningham Andrew Cunningham Chief Executive single figure of total remuneration £’000 1,452 985 882 376 2,185 2,477 2,519 733 1,083 777 583 Annual variable element award rates against maximum opportunity % 72 61 73 – – 64 63 19 50 43 22 Long-term incentive vesting rates against maximum opportunity % 33 N/A N/A – 98 100 100 – 16 – – 1 Helen Gordon’s single figure of total remuneration includes a period when she was Chief Executive designate, during which Andrew Cunningham was Chief Executive. Accordingly, there is an element of double counting in her single figure of total remuneration for 2016. 2 Andrew Cunningham was acting Chief Executive for most of 2009 due to the absence through illness of Rupert Dickinson. 9. Percentage change in remuneration of Chief Executive and employees The percentage change in remuneration between 2017 and 2018, excluding LTIP and pension contributions, for the Chief Executive and for the average of all other employees in the Group was as follows: Chief Executive1 Employee population2 Percentage change 2017–18 Base salary 2% 0% Taxable Benefits 0% 5% Annual bonus 22% 0% 1 The base salary for the Chief Executive has increased with effect from 1 January 2018 by 2.2% in line with the wider population. The bonus opportunity and other benefits for the Chief Executive have remained unchanged in 2018. 2 The 2017 figures for the employee population included the amounts paid to an executive director who has since left the business. If these payments were excluded from the 2017 figures, the year on year changes to 2018 would be 2% for the base salary, 8% for the taxable benefits and 12% for the annual bonus. 10. Relative importance of spend on pay The difference in actual expenditure between 2017 and 2018 on remuneration for all employees, in comparison to profit before tax – continuing operations and distributions to shareholders by way of dividend, is set out in the charts below. Profit before tax is considered to be an appropriate financial metric as it is not impacted by changes in tax rates which are outside of the direct control of the Company. Profit before tax – continuing operations (£m) Dividend (£m) +£14.4m +16.7% 2018: £100.7m (2017: £86.3m) +£1.7m +8.4% 2018: £21.9m (2017: £20.2m) Total employee pay (£m) -£1.2m –0.6% 2018: £17.6m (2017: £18.8m, which includes £0.8m termination payments following restructure) 73 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION CONTINUED 11. Statement of implementation of Remuneration Policy for 2019 Base salary In line with the typical increase given to the wider employee population, the Remuneration Committee determined that the base salaries for the two Executive Directors should be increased by 2.5% with effect from 1 January 2019. Annual bonus As detailed in the Annual Statement and Summary Remuneration Policy, the structure and metrics to operate for the 2019 annual bonus are as follows: • Chief Executive: 140% of salary • Chief Financial Officer: 120% of salary With regard to the level of bonus earned, 25% will be deferred into Grainger shares for three years. The range of targets to apply to the 2019 annual bonus are to remain the same as in 2018 for both the adjusted earnings element (i.e. the same performance range around budget is being retained) and level of returns targeted under the ROSE element. However, reflecting that the 2019 budget includes lower levels of forecast asset sales (which is consistent with our increased focus on delivering greater certainty of income returns), the absolute level of adjusted earnings required at the target performance level has not been set at a premium to the 2019 actual result. Full retrospective disclosure of the actual targets will be included in next year’s Directors’ Remuneration report (subject to considering any perceived areas of commercial sensitivity). The Committee is comfortable that the targets set for 2019 and summarised below are at least as challenging as the targets set in 2018 in light of our forward planning and the wider economic context. The table below sets out the performance targets and their respective weightings for 2019: Metric Weighting Adjusted earnings 40% Rationale and description Incentivises operational success in achieving rental growth, income from sales and reduction in operational and finance costs relative to a challenging budget. ROSE 40% Budget 90% 100% 120% Performance level Threshold Target Maximum Straight line between performance points. Incentivises the delivery of targeted levels of return from our property portfolio which is aligned with a strong balance sheet in respect of the EPRA NNNAV performance and dividend level. Performance level Payout 0% 60% 100% Payout 4.50% 4.75% 7% 12% 0% 10% 60% 100% Strategic personal objectives 20% A graduated vesting scale operates between performance points. Each of the headline metrics is underpinned by defined measurable milestones or a range of targets set with reference to budgeted objectives. These are consistent with the strategy and targeted objectives for the year agreed by the Board. Due to matters of commercial sensitivity it would not be in the interests of the Company to disclose the precise personal targets for the annual bonus at the date of production of this report. Details of the objectives and the performance achieved will be disclosed retrospectively in the 2019 Annual Report. 74 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i LTIP It is expected that the LTIP awards to be made to the Executive Directors in the year ending 30 September 2019 will be at the levels detailed below and subject to a two-year holding period: • Chief Executive: 175% of salary • Chief Financial Officer: 130% of salary The performance measures to apply for 2019 will be as follows: Metric TSR (versus FTSE 350 Real Estate Supersector constituents) TPR Targets Ranking Below median Median Upper quartile Straight line between performance points. Budget 0% 25% 100% Performance level Threshold Target TPR <5% 5% Payout 0% 25% 9% Maximum Straight line between performance points, three-year average. 100% s t a t e m e n t s O t h e r i n f o r m a t i o n Rationale for metric Incentivises executives to achieve above median sector TSR, which is a targeted outcome of an effective execution of our strategy. Rewards for achieving the key pillars of our long-term strategy – income growth and capital returns. As detailed in the Remuneration Policy, strict recovery and withholding provisions apply to both LTIP and annual bonus awards, which will enable the Committee to reclaim or adjust future variable pay awards if there is a misstatement of the Company’s results, any errors in calculation of actual performance against a target set, or in the event of misconduct. Furthermore, the Committee will retain the right to reduce overall pay outcomes if it considers the variable pay result does not reflect broader Company performance over the relevant performance periods. Non-Executive Directors’ fees The Non-Executive Directors’ fee levels have not increased since 1 October 2017. Current fee levels are as follows: • Basic Non-Executive Director fee: £47,000 • Additional fee for chairing Board Committee: £9,500 • Additional fee for Senior Independent Director duties: £8,000 • Chairman’s fee: £165,000 In respect of Helen Gordon’s and Vanessa Simms’ appointments as non-executive directors of Derwent London plc and Drax Group plc respectively, it is noted that the Board approved that the fees payable pursuant to these directorships may be retained by the individuals. 75 Grainger plc Annual Report and Accounts 2018 Governance ANNUAL REPORT ON REMUNERATION CONTINUED 12. Directors’ service agreements and letters of appointment Executive Directors Helen Gordon Vanessa Simms Contract commencement date Notice period November 2015 February 2016 12 months 6 months Non-Executive Directors Mark Clare Tony Wray Andrew Carr-Locke Rob Wilkinson Justin Read Former Non-Executive Director Belinda Richards Date of initial appointment February 2017 October 2011 March 2015 October 2015 February 2017 April 2011 13. Details of the Remuneration Committee, advisers to the Committee and their fees The Remuneration Committee currently comprises five independent Non-Executive Directors including the Company Chairman. Details of the Directors who were members of the Committee during the year are as follows: Committee member Justin Read (Committee Chairman since February 2018) Belinda Richards (Committee Chairman until February 2018) Mark Clare Tony Wray Andrew Carr-Locke Rob Wilkinson Member since May 2017 March 2015 May 2017 February 2016 April 2015 May 2017 Meetings attended 3 1 3 3 3 3 Meetings eligible to attend 3 1 3 3 3 3 The Company Secretary, the HR Director and other members of the senior management team may be invited to attend Committee meetings as appropriate. No Directors are involved in deciding their own remuneration. The Committee appointed Korn Ferry Hay Group (‘KFH’) as advisers. Their role is to keep the Committee informed of developments in the market and best practice, and to support the Committee in implementing the Remuneration Policy. Total fees paid or payable (as applicable) to KFH for services to the Committee during the 2018 financial year were £46,769 (2017: £33,840). KFH are signatories to the Remuneration Consultants’ Group Code of Conduct and any advice provided is governed by that Code. The Committee reviews the adviser relationship periodically and remains satisfied that the advice it receives from its advisers is independent and objective. 14. Statement of voting at general meeting At the AGM held on 7 February 2018, the Directors’ Remuneration report received the following votes from shareholders: For Against Total votes cast (for and against) Votes withheld 76 Directors’ Remuneration report Total number of votes % of votes cast 306,176,534 3,580,060 309,756,594 13,691 98.84 1.16 100 – Grainger plc Annual Report and Accounts 2018 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n Governance DIRECTORS’ REPORT In accordance with the UK Financial Conduct Authority’s Listing Rules (‘LR’), the information to be included in the Annual Report and Accounts, where applicable under LR 9.8.4, is set out in Note 16 to the financial statements on page 112 in relation to the dividend waiver arrangements. Information incorporated by reference The Corporate Governance Statement on pages 38 to 80 forms part of this Directors’ report and is incorporated into this Directors’ report by reference. Directors’ interests in significant contracts No Directors were materially interested in any contract of significance. Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (‘EU IFRS’) and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards, including FRS 101 Reduced Disclosure Framework. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant and reliable; • for the Group financial statements, state whether they have been prepared in accordance with EU IFRS; • for the parent company financial statements, state whether applicable UK Accounting Standards have been followed; • assess the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors’ report, Directors’ Remuneration report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and • the Strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. 77 Grainger plc Annual Report and Accounts 2018 Governance DIRECTORS’ REPORT CONTINUED We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. Financial risk management Details are included in Note 28 to the financial statements. Directors’ indemnities and insurance The Company has in place contractual entitlements for the Directors of the Company and its subsidiaries to claim indemnification by the Company for certain liabilities they might incur in the course of their duties. We have established these arrangements, which constitute qualifying third-party indemnity provision and qualifying pension scheme indemnity provision, in compliance with the relevant provisions of the Companies Act 2006. They include provision for the Company to fund the costs incurred by Directors in defending certain claims against them in relation to their duties. The Company also maintains an appropriate level of Directors’ and officers’ liability insurance. Sustainability A full breakdown of Environmental, Social and Governance performance for the company and our property portfolios in alignment with the EPRA Sustainability Best Practices Recommendations is available on our website at www.graingerplc.co.uk/responsibility. Scope 1 and 2 Global GHG emissions data for period 1 October 2017 to 30 September 2018 Emissions from Combustion of fuels and operation of facilities Electricity, heat, steam and cooling for own use Total footprint Company’s chosen intensity measurement: Emissions reported above per £m value of assets under management1 Emissions reported above per owned unit2 Emissions reported above per employee3 Tonnes of CO2e 2017 location- based 771 698 1,469 2018 location- based 697 747 1,444 Trend location- based –10% 7% –2% 2017 market- based 771 229 1,000 0.54 0.24 6.83 0.58 0.24 5.71 7% –1% –16% 0.37 0.17 4.65 Scope 3 Global GHG emissions data for period 1 October 2017 to 30 September 2018 Emissions from Electricity transmission and distribution losses Business travel (air, rail and vehicles) Estimated tenant energy use (tCO2)4 Grainger office occupation (landlord-obtained) 2017 65 97 29,381 N/R5 2018 market- based 697 362 1,059 0.43 0.18 4.18 2018 70 90 27,295 31 Trend market- based –10% 58% 6% 15% 7% –10% Trend 8% –7% -7% – 1 Value of assets under management (‘AUM’) on the last day of the financial year, expressed in £m. 2 Number of owned units on the last day of the financial year within the scope of data collection. 3 Total number of employees of Grainger plc on the last day of the financial year. 4 This has been estimated based on a sample of Energy Performance Certificates (‘EPCs’) and reported in CO2 only. 5 N/R = Not Reported. Includes landlord-obtained emissions for London Bridge office only. Data was not available in 2017 due to metering changes. Summary Grainger complies with the greenhouse gas (‘GHG’) emissions reporting requirements of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Grainger reports all material GHG emissions using ‘tonnes of CO2 equivalent’ (‘tCO2e’) as the unit of measurement. Our reporting period for GHG emissions is 1 October 2017 to 30 September 2018 and we report emissions for the previous year to demonstrate the trend. 78 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i s t a t e m e n t s O t h e r i n f o r m a t i o n In 2018 we increased the scope of our GHG reporting to include emissions from the following assets and portfolios: • Grainger‘s portfolio of affordable homes which was not previously captured in our reporting. • Newly developed PRS asset Argo Apartments and recent acquisitions in the GRIP REIT portfolio. • Recent Grainger acquisitions, including a large portfolio of acquired properties in Liverpool, Leeds and Manchester which was not previously captured in our reporting. • The Aldershot office located on Grainger’s Wellesley development site. This change in boundary has resulted in an increase of 13% in the Company’s GHG emissions from property portfolios. However, emissions for those assets under Grainger’s control in 2017 and 2018 have decreased by 6%. In addition, emissions relating to Grainger’s owned fleet have reduced by 47% due to a reduction in the number of vehicles and mileage travelled. Grainger’s market-based emissions have increased by 58% due to the number of PRS acquisitions now included, many of which are yet to transfer onto renewable energy contracts. Some of these properties were acquired before the reporting year but data was not available to enable prior reporting. Methodology Grainger follows the GHG Protocol Corporate Standard (revised edition), DEFRA Environmental Reporting Guidelines and ISO 14064: Part 1 standard for its reporting. We have used the UK Government conversion factors 2018 for location-based reporting and the Association of Issuing Bodies European Residual Mixes 2017 for market-based reporting for calculating 2018 emissions. We have reported on all emissions sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. We have used the operational control consolidation method. These sources fall within our consolidated financial statements. For market-based emissions Grainger has used contractual instruments where there is data readily available. We purchase 100% renewable electricity tariffs for 78% of applicable properties, which has resulted in lower Scope 2 emissions using the market-based approach compared with the location based approach. Where no contractual data is available we use residual mix factors. Scope 1 data This includes landlord-obtained gas consumed in common areas and by tenants on an unmetered basis as well as gas consumed in Grainger’s offices and fuel consumption in vehicles owned or leased by Grainger. Fugitive emissions are not included as they have been assessed to be immaterial. Scope 2 data This includes landlord-obtained electricity consumed in common areas and by tenants on an unmetered basis as well as electricity consumed by Grainger in its own offices. Scope 3 data This includes estimated emissions from electricity used by Grainger’s tenants in its buildings based on EPC analysis and extrapolation. Emissions from the transmission and distribution of Grainger’s Scope 2 electricity are included. Also reported are emissions from business travel and electricity recharged to Grainger for one office (London Bridge) where it is a tenant. A more detailed breakdown of our carbon footprint for our property portfolios and the methodology used is available in our EPRA Sustainability Performance Measures Report, available on our website at www.graingerplc.co.uk/responsibility. Restatements and estimation We have recalculated emissions for 2017 as we are able to report more accurate and complete data for Scope 1 and Scope 2 emissions from energy consumption in our property portfolios and occupied offices. Our Scope 2 market-based emissions for 2017 have also been restated, as although our renewable energy contract has been in place since 2016 this was not reported fully last year. We have also restated our associated Scope 3 emissions from electricity transmission and distribution losses, estimated tenant emissions and business travel. Our restated estimated tenant emissions are significantly higher than reported last year due to an improvement in the accuracy of our estimation methodology and the inclusion of Grainger’s affordable housing portfolio, previously not reported. Our 2017 Scope 1 and 2 emissions were previously reported as 1,450 tCO2e and our Scope 3 emissions as 17,311 tCO2e. Where Grainger-obtained utility consumption data is partially unavailable or unreliable for an asset, estimation has been undertaken by extrapolating actual data to fill gaps in consumption. For 2018 13% of Scope 1 emissions and 19% of Scope 2 emissions have been estimated. For more information on restated data and the estimation methodology used, please refer to Grainger’s EPRA Sustainability Performance Measures Report. 79 Grainger plc Annual Report and Accounts 2018 Governance DIRECTORS’ REPORT CONTINUED Intensity metrics We have used three intensity metrics: emissions by market value of AUM (tCO2e/£m value of AUM), emissions per the number of owned units (tCO2e/owned unit) and emissions per number of employees in line with our financial reporting (tCO2e/employee). Third party review The energy consumption and associated GHG emissions data reported in this statement has been reviewed and analysed by JLL (note: this does not represent formal assurance) with calculations carried out in line with best practice (see methodology section). Health and safety Grainger has a well-developed health and safety management system for the internal and external control of health and safety risks, managed by the Health and Safety Director. This includes using online risk management systems for identifying, mitigating and reporting real time health and safety management information. The Health and Safety Committee is responsible for overseeing health and safety management. It consists of members of staff from across the organisation. The Committee continues to monitor legal compliance in health and safety through audit and implementation of improvements, to enable the Group to become ‘best in class’. Further oversight is also carried out by the Operations Board. In addition, a health and safety report is provided to each meeting of the Board of Directors, and the Health and Safety Director gives a presentation to the Board at least once a year. Employment of disabled persons The Company gives full and fair consideration to applications for employment made by disabled persons, having regard to their particular aptitudes and abilities. In the event of an employee becoming disabled, every effort is made to ensure their employment within the Company continues, and that we arrange appropriate training where necessary. It is Company policy that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Employee engagement The Group places considerable value on the engagement of its employees and has continued its practice of keeping them informed on and involved in business and strategic matters, for example through team meetings, presentations by senior management and regular all-staff conference calls hosted by the Executives. For more information on our people, see page 28. Independent auditor and disclosure of information to auditor As far as each Director is aware, there is no relevant audit information of which the Company’s auditor is unaware. Each Director has taken the steps they ought to have taken as Directors, to make themselves aware of any relevant audit information, and to establish that the Company’s auditor is aware of that information. Political donations In accordance with the Company’s policy, we made no political donations in 2018 (2017: £nil). Takeover directive On a change of control, the main bank facility (included in Note 27 to the financial statements) will become repayable should alternative terms for continuing the facilities not be agreed with the lenders within 45 days. In addition, the corporate bond (also referred to in Note 27) may become repayable following a change of control. There are no other material matters relating to a change of control of the Company following a takeover bid. The Directors have confirmed approval of the Directors’ report. By order of the Board. Adam McGhin Company Secretary 13 November 2018 80 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Financial statements INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRAINGER PLC 1. Our opinion is unmodified We have audited the financial statements of Grainger plc (“the Company”) for the year ended 30 September 2018 which comprise the Consolidated Income Statement, the Consolidated Statement of Other Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Parent Company Statement of Financial Position and the Parent Company Statement of Changes in Equity, and the related notes, including the accounting policies. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30 September 2018 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and • the financial statements have been prepared in accordance with the requirements of the • Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were appointed as auditor by the shareholders on 6 February 2015. The period of total uninterrupted engagement is for the four financial years ended 30 September 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. Overview Materiality: Group financial statements as a whole Coverage Risks of material misstatement Recurring risks £18.0m (2017: £16.0m) 1% (2017: 1%) of total assets 100% (2017: 100%) of Group total assets Valuation of investment properties Recoverability of inventories vs 2017 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, unchanged from 2017, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. 81 Grainger plc Annual Report and Accounts 2018 Financial statements INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRAINGER PLC CONTINUED Valuation of investment properties (£589.7m; 2017: £391.0m) Refer to page 51 (Audit Committee Report), pages 96 to 100 (critical accounting estimates and judgements), page 113 (accounting policy and financial disclosures). The risk Subjective valuation The valuation approach adopted by the Directors varies between portfolios: • For properties let into the private rental market and the majority of affordable housing properties, valuation is derived by applying a gross initial yield to the estimated rental value of the property. Yield is based on market evidence and an inherently unobservable judgement in respect of rental growth. There is a risk that applying an inappropriate yield could lead to a material difference in valuation. • Property held in residential portfolios is valued by determining vacant possession (“VP”) value and applying a discount to reflect the fact that the property is tenanted. Both VP value and the discount applied are estimated with reference to comparable market evidence and the Group’s own experience, which in some cases may be limited. This means that the valuation is inherently subjective and susceptible to misstatement. • For the Tricomm portfolio, valuation is based on a discounted cash flow model produced by an external valuer. There is a risk that the assumptions of house price inflation (“HPI”) and discount rates could be inappropriate which could lead to a material misstatement in valuation; Our response Our procedures in respect of all property types identified included: • Methodologies and key assumptions: sought assistance from our own property valuation specialists to assess the methodologies and key assumptions used in the valuations adopted by the Directors for use in the financial statements; and • Sensitivity analysis: performing sensitivity analyses over the assumptions and considering the outcomes with reference to benchmarks to identify the key assumptions affecting the valuation. Our additional procedures in respect of the private rented sector properties and affordable housing properties included: • Yield rates: assessed the yield rates applied using our understanding of the nature of the assets and comparing to available market data. Our additional procedures in respect of property held in UK residential portfolios included: • Control design: assessed the design of the Directors’ valuation process and observed that supporting evidence for a sample of properties; • Attended Group valuation meetings as observers: attended, as observers, the Group’s regional valuation meetings with their external valuer, and observed the degree of challenge by the external valuer to valuation inputs and the evidence presented by management; and • Comparing valuations: challenged the inputs used in the valuations and compared to comparable transactions. Our additional procedures in respect of the Tricomm portfolio included: • Benchmarking assumptions: compared the HPI assumption included in the discounted cash flow model to market indices and the discount rates to market information including gilts and benchmarked risk premiums. • Assessing transparency: assessed whether the Group’s disclosures about the sensitivity of fair values to changes in key assumptions reflected the uncertainties inherent in the property valuations. • Data integrity: assessed the completeness and accuracy of the property information provided by the Group to the external valuers by agreeing key inputs, such as address, rental income, occupancy and current tenancy details to property contracts on a sample basis. Our results We found the valuation of investment properties to be acceptable. 82 Grainger plc Annual Report and Accounts 2018Recoverability of inventories (trading properties) (Inventories – trading properties: £799.3m; 2017: £841.3m) The risk Subjective valuation: Inventory is carried at the lower of cost and net realisable value (“NRV”). The Directors’ assessment of NRV of inventory differs between residential properties and developments: Refer to page 51 (Audit Committee Report), pages 96 to 100 (critical accounting estimates and judgements), page 118 (accounting policy and financial disclosures). • For residential trading property NRV is based on vacant possession (“VP”) value which is estimated with reference to comparable market evidence and the Group’s own experience, which in some cases may be limited. This means that the VP valuation is inherently subjective and susceptible to misstatement. • For development trading property where the intention is to develop further prior to sale, NRV is the forecast selling price less the remaining costs to complete and sell. There is a risk that the total forecast profits on a development may be overestimated and an impairment may not be recorded. This risk is highest for developments where the current carrying value exceeds the current market value. Subjective valuation: The carrying amount of the parent company’s investments in subsidiaries represents 87.2% (2017: 92.3%) of the Company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit. Recoverability of parent company’s investment in subsidiaries (£846.1m; 2017: £899.6m) Refer to page 51 (Audit Committee Report), page 142 (accounting policy) and page 143 (financial disclosures). Our response In addition to the procedures set out in respect of UK residential portfolio investment properties, our procedures for residential properties included: • Historical comparisons: Comparing the year end valuation with the sales prices achieved for property sales after the year end date; For development trading properties our procedures included: • Benchmarking assumptions: challenging the key assumptions in the Group’s plans and forecasts using third party data and the Group’s historic experience of costs and revenues; • Sensitivity analysis: performing sensitivity analyses on estimated future costs and sales prices to assess the headroom before an adjustment to the carrying value is required; and • Comparing valuations: where the intention is to sell without further development, comparing the carrying value of inventory to the market value of the site in its current condition as determined by the Group’s external valuer. Our results We found the carrying value of residential and development trading properties to be acceptable. Our procedures included: • Tests of detail: comparing the carrying amount of 100% of investments with the relevant subsidiaries’ prior year financial statements and current year draft balance sheets to identify whether their net assets, being an approximation of their recoverable amount, were in excess of their carrying amount. Our results We found the Group’s assessment of the recoverability of the investments in subsidiaries to be acceptable. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 83 Grainger plc Annual Report and Accounts 2018 Financial statements INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRAINGER PLC CONTINUED Group total assets £1,890.2m (2017: £1,767.0m) Group materiality £18.0m (2017: £16.0m)  Group total assets £1,890.2m  Group materiality £18.0m £18.0m Whole financial statements materiality (2017: £16.0m) £0.54m Misstatements reported to the Audit Committee (2017: £0.48m) 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £18.0m (2017: £16.0m), determined with reference to a benchmark of Group total assets of which it represents approximately 1% (2017: 1%). In addition, we applied lower materiality of £3.4m (2017: £3.0m ) to specific income statement accounts, namely net rental income, profit on disposal of trading properties, administrative expenses, fees and other income, other expenses, income from financial interest in property assets, finance costs, finance income, share of profit of associates and share of profit of joint ventures. This has been calculated as 5% of Adjusted Earnings (being profit before tax, valuation movements and other adjustments for “one-off” items as set out in note 4). We believe misstatement of these specific income statement item s of a lesser amount than materiality for the financial statements as a whole could reasonably be expected to influence the Company’s members’ assessment of the financial performance of the Group. Materiality for the parent company financial statements as a whole was set at £15.0m (2017: £16.0m) determined with reference to a benchmark of company net assets, of which it represented approximately 3% (2017: 5%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.54m (2017: £0.48m), in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit was performed using the materiality levels set out above and covered 100% of Group revenue, Group profit before tax and Group total assets (2017: 100% of Group revenue, Group profit before tax and Group total assets). 4. We have nothing to report on going concern We are required to report to you if: • we have anything material to add or draw attention to in relation to the directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or • if the related statement under the Listing Rules set out on page 37 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. 84 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006 . Directors’ remuneration report In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: • the Directors’ confirmation within the Viability Statement on page 37 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; • the Principal Risks and Uncertainties disclosures describing these risks and explaining how they are being managed and mitigated; and • the Directors’ explanation in the Viability Statements of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the Directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or • the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 85 Grainger plc Annual Report and Accounts 2018 Financial statements INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRAINGER PLC CONTINUED 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 77, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. Irregularities – ability to detect We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence. We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation), and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items. In addition we considered the impact of laws and regulations in the specific areas of regulations applicable to landlords and health and safety recognising the nature of the group’s activities. With the exception of any known or possible non- compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. As with any audit, there remained a higher risk of non-detection irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Bill Holland (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square Canary Wharf London E14 5GL 13 November 2018 86 Grainger plc Annual Report and Accounts 2018Financial statements CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER Group revenue Net rental income Profit on disposal of trading property Profit on disposal of investment property Income from financial interest in property assets Fees and other income Administrative expenses  Other expenses Profit on disposal of joint venture Impairment of inventories to net realisable value Reversal of impairment/(impairment) of joint venture Operating profit before net valuation gains on investment property Net valuation gains on investment property Operating profit after net valuation gains on investment property Change in fair value of derivatives Finance costs Finance income Corporate bond redemption Share of profit of associates after tax Share of profit of joint ventures after tax Profit before tax – continuing operations Tax charge for the year – continuing operations Profit after tax – continuing operations Discontinued operations Profit after tax for the year for discontinued operations Profit for the year attributable to the owners of the Company Basic earnings per share Diluted earnings per share Basic earnings per share – continuing operations only Diluted earnings per share – continuing operations only Notes 6 7 8 9 21 10 20 23 20 17 28 13 13 13 19 20 12 14 3 33 16 16 16 16 2018 £m 270.7 43.8 81.2 1.4 6.5 7.1 (27.9) (1.1) 7.0 (0.5) 5.5 123.0 22.6 145.6 (0.2) (27.2) 2.1 (27.4) 7.2 0.6 100.7 (13.3) 87.4 – 87.4 21.0p 20.9p 21.0p 20.9p i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 £m 264.7 40.4 73.7 2.2 5.3 5.1 (27.2) (3.9) – (5.4) (3.6) 86.6 18.0 104.6 0.2 (29.1) 2.1 – 4.3 4.2 86.3 (12.8) 73.5 1.2 74.7 18.0p 17.9p 17.7p 17.6p 87 Grainger plc Annual Report and Accounts 2018 Financial statements CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER Profit for the year – continuing operations Items that will not be transferred to the consolidated income statement: Actuarial gain on BPT Limited defined benefit pension scheme  Items that may be or are reclassified to the consolidated income statement:  Fair value movement on financial interest in property assets  Exchange differences on translating foreign operations Changes in fair value of cash flow hedges  Other comprehensive income and expense for the year before tax – continuing operations Tax relating to components of other comprehensive income: Tax relating to items that will not be transferred to the consolidated income statement Tax relating to items that may be or are reclassified to the consolidated income statement Total tax relating to components of other comprehensive income – continuing operations Other comprehensive income and expense for the year after tax – continuing operations Total comprehensive income and expense for the year after tax – continuing operations Profit after tax – discontinued operations Total comprehensive income and expense for the year attributable to the owners of the Company Notes 4 29 21 14 14 3 2018 £m 87.4 0.5 (0.5) – 3.2 3.2 (0.1) (0.5) (0.6) 2.6 90.0 – 90.0 2017 £m 73.5 4.6 (1.0) (0.2) 11.9 15.3 (0.8) (1.8) (2.6) 12.7 86.2 1.2 87.4 88 Grainger plc Annual Report and Accounts 2018Financial statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Notes 2018 £m 2017 £m 17 18 19 20 21 29 14 22 23 24 28 28 27 29 25 14 27 26 25 28 30 32 32 32 33 589.7 0.3 134.0 11.6 82.2 0.9 3.4 4.7 826.8 799.3 150.4 4.4 109.3 1,063.4 1,890.2 960.1 – 1.3 29.9 991.3 1.1 70.7 0.7 7.4 3.4 83.3 1,074.6 815.6 20.9 111.4 20.1 0.3 0.5 6.0 656.4 815.6 391.0 0.7 123.2 74.4 86.1 – 9.7 2.4 687.5 841.3 145.9 3.4 88.9 1,079.5 1,767.0 924.6 0.2 1.3 32.6 958.7 1.1 48.8 0.8 7.4 4.9 63.0 1,021.7 745.3 20.9 111.1 20.1 0.3 (2.1) 6.5 588.5 745.3 ASSETS Non-current assets Investment property Property, plant and equipment Investment in associates Investment in joint ventures Financial interest in property assets Retirement benefits Deferred tax assets Intangible assets Current assets Inventories – trading property Trade and other receivables Derivative financial instruments Cash and cash equivalents Total assets LIABILITIES Non-current liabilities Interest-bearing loans and borrowings Retirement benefits Provisions for other liabilities and charges Deferred tax liabilities Current liabilities Interest-bearing loans and borrowings Trade and other payables Provisions for other liabilities and charges Current tax liabilities Derivative financial instruments  Total liabilities NET ASSETS EQUITY Issued share capital Share premium account Merger reserve Capital redemption reserve  Cash flow hedge reserve Available-for-sale reserve Retained earnings TOTAL EQUITY The financial statements on pages 87 to 139 were approved by the Board of Directors on 13 November 2018 and were signed on their behalf by: Helen Gordon Director Company registration number: 125575 Vanessa Simms  Director 89 Grainger plc Annual Report and Accounts 2018 Financial statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Issued share capital £m Share premium account £m Merger reserve £m Capital redemption reserve £m Cash flow hedge reserve £m Available- for-sale reserve £m Retained earnings £m Non- controlling interests £m 20.9 – 110.8 – 20.1 – 0.3 – (12.0) – – – – – – – – – 20.9 – – – – – – – – – – 0.3 – – – – 0.3 111.1 – – – 0.3 – – – 0.3 – – – – – – – – – – – – – – – – 20.1 – 0.3 – – – – – – – – – – – – – – – 9.9 9.9 – – – – – – (2.1) – 2.6 2.6 – – – – – 527.7 74.7 3.6 78.3 – (0.3) 2.1 – (19.3) 7.3 – (0.8) (0.8) – – – – – – 6.5 – 588.5 87.4 (0.5) 0.5 (0.5) – – – – – 87.9 – (0.3) 1.1 (20.8) (20.0) 20.9 111.4 20.1 0.3 0.5 6.0 656.4 (0.1) – (0.1) (19.3) (17.5) (0.1) (17.3) Total equity £m 675.2 74.7 12.7 87.4 0.3 (0.3) 2.1 0.1 – – – – – – – – – – – – – – – – 745.3 87.4 2.6 90.0 0.3 (0.3) 1.1 (20.8) (19.7) 815.6 Notes 33 30 30, 33 31 15 33 30 30, 33 31 15 Balance as at 1 October 2016 Profit for the year Other comprehensive income/(loss) for the year Total comprehensive income Award of SAYE shares Purchase of own shares Share-based payments charge Elimination of non- controlling interests Dividends paid  Total transactions with owners recorded directly in equity Balance as at 30 September 2017 Profit for the year Other comprehensive income/(loss) for the year Total comprehensive income Award of SAYE shares Purchase of own shares Share-based payments charge Dividends paid  Total transactions with owners recorded directly in equity Balance as at 30 September 2018 90 Grainger plc Annual Report and Accounts 2018  Financial statements CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER Cash flow from operating activities Profit for the year Depreciation and amortisation Net valuation gains on investment property Net finance costs Corporate bond redemption Share of profit of associates and joint ventures Profit on disposal of investment property Share-based payments charge  Change in fair value of derivatives (Reversal of impairment)/impairment of joint venture Profit on disposal of joint venture Income from financial interest in property assets Tax Cash generated from operating activities before changes in working capital Increase in trade and other receivables Increase in trade and other payables Decrease in provisions for liabilities and charges Decrease in inventories Cash generated from operating activities Interest paid Tax paid Payments to defined benefit pension scheme Net cash inflow from operating activities  Cash flow from investing activities  Proceeds from sale of investment property  Proceeds from sale of joint venture Proceeds from financial interest in property assets Dividends received Investment in associates and joint ventures Loans advanced to associates and joint ventures Loans repaid by associates and joint ventures Acquisition of investment property  Acquisition of property, plant and equipment and intangible assets  Net cash outflow from investing activities Cash flow from financing activities  Awards of SAYE shares Purchase of own shares Corporate bond redemption Proceeds from new borrowings  Payment of loan costs  Repayment of borrowings Dividends paid Net cash (outflow)/inflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Net exchange movements on cash and cash equivalents Cash and cash equivalents at the end of the year i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 £m 74.7 0.9 (18.0) 27.0 – (8.5) (2.2) 2.1 (0.2) 3.6 – (5.3) 13.1 87.2 (78.8) 15.5 (0.2) 61.2 84.9 (27.1) (11.8) (0.5) 45.5 9.4 – 11.3 4.8 (8.8) (9.5) 5.0 (118.9) (0.8) (107.5) 0.3 (0.3) – 320.0 (3.1) (237.6) (19.3) 60.0 (2.0) 90.7 0.2 88.9 Notes 12 17 13 13 19, 20 9 31, 33 28 20 20 21 14 29 20 21 19, 20 19 19, 20 19, 20 17 30 30, 33 13 15 28 28 2018 £m 87.4 0.9 (22.6) 25.1 27.4 (7.8) (1.4) 1.1 0.2 (5.5) (7.0) (6.5) 13.3 104.6 (3.0) 23.9 (0.1) 42.0 167.4 (30.4) (10.2) (0.5) 126.3 5.0 67.0 9.9 2.3 (5.2) (5.4) 14.0 (179.7) (2.9) (95.0) 0.3 (0.3) (25.8) 650.3 (3.0) (611.6) (20.8) (10.9) 20.4 88.9 – 109.3 The consolidated statement of cash flows above includes cash flows from both continuing and discontinued operations. Cash flows from discontinued operations are set out in Note 3 to the financial statements. 91 Grainger plc Annual Report and Accounts 2018 Financial statements NOTES TO THE FINANCIAL STATEMENTS 1. Accounting policies Accounting policies applicable throughout the financial statements are shown below. Accounting policies that are specific to a component of the financial statements have been incorporated in the relevant note.  (a) Basis of preparation Grainger plc is a company incorporated and domiciled in the UK. It is a public limited liability company listed on the London Stock Exchange. 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 the Group. The Group financial statements for the year ended 30 September 2018 have been prepared in accordance with EU endorsed International Financial Reporting Standards (‘EU IFRS’), IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company has prepared its company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’), which are presented on pages 140 to 148. The accounting policies set out below and in the notes to the financial statements have, unless otherwise stated, been applied consistently to all periods presented in the Group financial statements. No new accounting policies have been adopted in the year and there has been no change to the basis of accounting estimates in the year. The Group financial statements have been prepared under the historical cost convention except for the following assets and liabilities, and corresponding income statement accounts, which are stated at their fair value: investment property; derivative financial instruments; and financial interest in property assets. The preparation of financial statements in conformity with EU 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. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 2. Going concern The Directors are required to make an assessment of the Group’s ability to continue to trade as a going concern for the foreseeable future. The Directors have given this matter due consideration and have concluded that it is appropriate to prepare the Group financial statements on a going concern basis. The main considerations were as follows: i) Covenant compliance – The Directors have reviewed the Group’s financial projections covering a minimum period of at least 12 months beyond the date of signing of these financial statements, which include covenant compliance forecasts. These projections show that the Group will meet its covenant requirements. ii) Banking facilities – The Directors have reviewed the available headroom on the Group. Cash flow projections confirm that the Group will remain within its facilities for a minimum period of at least 12 months beyond the date of signing of these financial statements. On this basis the Directors consider the Group will be able to meet its liabilities as they fall due for a period of at least 12 months from the date these financial statements were approved and have prepared the financial statements on a going concern basis. (b) Basis of consolidation i) Subsidiaries – Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date control ceases.  Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 92 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n ii) Joint ventures and associates – Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Where the Group owns less than 50% of the voting rights but acts as property and/or asset manager an assessment is made as to whether or not the Group has de facto control over an investee. This includes a review of the Group’s rights relative to those of another investor or investors and the ability the Group has to direct the investees’ relevant activities (further detail is provided in Note 19). Investments in joint ventures and associates are accounted for by the equity method of accounting and are initially recognised at cost, and the carrying amount is increased or decreased to recognise the Group’s share of the profit or loss after the date of acquisition.  The joint venture and associate results for the 12 months to 30 September 2018 and the financial position as at that date have been equity accounted in these financial statements. The Group’s share of its joint ventures’ and associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in other comprehensive income. Where the Group’s interest has been reduced to £nil, additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture or associate. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.  Unrealised gains on transactions between the Group and its joint ventures and associates are eliminated to the extent of the Group’s interest in joint ventures and associates. The accounting policies of joint ventures and associates have been changed where necessary to ensure consistency with the policies adopted by the Group. iii) Business combinations – At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group accounts for an acquisition as a business combination where an integrated set of activities are acquired in addition to the property. When the acquisition of a subsidiary does not represent a business, it is accounted for as an acquisition of assets and liabilities. The cost of acquisition is allocated to the assets and liabilities acquired based on their fair values, and no goodwill or deferred tax is recognised. iv) Goodwill and impairment – Business combinations are accounted for using the acquisition method. The cost of the acquisition is measured as the fair value of the assets given and equity instruments issued. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the date of acquisition. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the 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. Costs attributable to an acquisition of a business are expensed in the consolidated income statement under the heading ‘Other expenses’. Goodwill on acquisition of subsidiaries is included within this caption in the consolidated statement of financial position. Goodwill on acquisition of joint ventures and associates is included in investments in joint ventures and associates.  Goodwill is allocated to cash generating units for the purpose of impairment testing and is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. 93 Grainger plc Annual Report and Accounts 2018 1. Accounting policies continued (c) Adoption of new and revised International Financial Reporting Standards and interpretations An amendment to IAS 7 Statement of Cash Flows was issued by the International Accounting Standards Board (‘IASB’) in January 2016 and came into effect for the Group in the current financial year. Under the new guidelines, the Group is required to provide a reconciliation between the opening and closing balances for liabilities arising from financing activities. This reconciliation has been presented in Note 27. In accordance with IAS 7, no comparative information for preceding periods is required upon first application of the new requirements. A number of new standards and amendments to standards have been issued but are not yet effective for the Group. The most significant of these, and their potential impact on the Group’s accounting, are set out below: i) IAS 40 Investment Property (effective 1 October 2018) The amendment to IAS 40 widens the scope for transfers to and from investment property. Previously the standard provided an exhaustive list to evidence a change in use that would permit a transfer. This is now a non-exhaustive list of examples of circumstances that could represent a property’s change in use. A change in management’s intention does not alone constitute a change in use. Transfers to and from investment property can only occur when the property meets or ceases to meet the definition of an investment property and there is evidence of change in use. On transition, the Group is required to assess property classifications across its entire portfolio held at the effective date (1 October 2018) and, if applicable, reclassify property to reflect the conditions as at that date. A review of the Group’s property portfolio held as at 30 September 2018 has been undertaken. Trading property with a cost of £75.9m and market value of £78.8m has been identified as requiring reclassification to investment property. There have been no properties identified that are classified as investment property that would be reclassified as trading property. There will be limited impact to the market value balance sheet and related metrics including EPRA NAV, EPRA NNNAV and LTV as these already reflect the market value of properties. There will however be a valuation uplift of £2.9m taken through the statutory income statement, impacting statutory net profit before and after tax, as well as statutory earnings per share. The adjusted earnings of the Group, a non-statutory measure, will not be impacted. ii) IFRS 9 Financial Instruments (effective 1 October 2018) IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement, which is currently used by the Group. The new standard sets out the classification, recognition and measurement requirements for financial assets and liabilities, impairment provisioning and general hedge accounting. The key changes that will follow the adoption of this standard are: • classification of financial assets according to their contractual cash flow characteristics; • impairments of financial assets based on prospective expected credit losses rather than retrospective objective evidence of impairment; • changes to hedge accounting effectiveness testing; and • changes to disclosures 94 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Classification, recognition and measurement of financial assets and liabilities The standard applies to the Group’s financial assets consisting of CHARM, receivables, derivatives and cash, as well as financial liabilities consisting of borrowings, payables and derivatives. IFRS 9 retains almost all of the existing classification, recognition and measurement requirements of IAS 39 on financial liabilities and will not have an impact on the Group’s financial liabilities for financial results and reporting. For financial assets, the permissible measurement bases are now amortised cost, fair value through other comprehensive income (‘FVOCI’) and fair value through profit and loss (‘FVTPL’). IFRS 9 has abolished the held to maturity loans and receivables and available-for-sale classifications that were previously available under IAS 39. CHARM is therefore impacted by this change as it is currently classified as an available-for-sale asset. As a result, CHARM will need to be reclassified from available-for-sale to FVTPL. The implication of the reclassification is that the fair value difference between the updated projected cashflows using the effective interest rate applicable at acquisition compared to the year-end effective interest rate will now be taken through the statutory income statement as opposed to other comprehensive income. This will impact statutory net profit before and after tax, as well as statutory earnings per share. This will not impact the Group’s adjusted earnings, statutory net assets, EPRA NAV, EPRA NNNAV or LTV as the fair value and deferred tax positions remain unchanged. IFRS 9 has retrospective application, which requires the new standard to be applied to transactions as if those requirements had always been applied. There are however exceptions from the requirement to restate comparatives, allowing the accounting to be reflected in the year of adoption which the Group will utilise. Effective 1 October 2018, the Group will transfer £6.0m from the available-for-sale reserve to retained earnings, on transition to the new standard. Expected credit loss model of impairment The new standard no longer requires a loss event to occur before an impairment to financial assets is recognised. IFRS 9 requires an entity to recognise an expected credit loss, being the present value of all cash shortfalls over the expected life of the entity’s various financial assets. Of the Group’s financial assets, the standard will apply to trade receivables. Trade receivables held at 30 September 2018 were £2.3m, with an impairment provision recognised under IAS 39 of £0.5m. Management have assessed the impact of impairment losses were the new standard to be applied at 30 September 2018, utilising both historical data and forward-looking macro-economic information. Based upon this assessment, the Group would have recognised an impairment provision of £0.5m at 30 September 2018 under IFRS 9. Given that the provision is broadly consistent on transition, the expected credit loss model will not have a material effect on the remainder of the financial assets held by the Group. Hedge accounting Hedge accounting continues to be optional under the new standard, though the removal of the ‘80-125% test’ in favour of a more principles-based approach allows greater scope for entities to hedge account. The current hedge relationships in place for the Group as at 30 September 2018 for interest rate swaps will qualify as continuing hedges upon adoption of the new standard. No other derivative instruments are expected to be designated as hedging relationships under IFRS 9. As a result, there will be no quantitative impact on the results of the Group. Disclosures IFRS 9 will require new disclosures, particularly around credit risk and expected credit losses. The relevant disclosures will be presented in the notes to the financial statements upon adoption of the new standard. 95 Grainger plc Annual Report and Accounts 2018 1. Accounting policies continued iii) IFRS 15 Revenue from Contracts with Customers (effective 1 October 2018) IFRS 15 replaces IAS 11 Construction Contracts and IAS 18 Revenue, both of which are currently used by the Group. The new standard sets out a five-step model for the recognition of revenue and establishes the principles to apply to the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The key changes that will follow the adoption of this standard are: • identifying performance obligations based on contracts with customers and recognising revenue either at a point in time or over time in accordance with the performance obligations; and • increased revenue disclosures that arise from contracts with customers. Revenue recognition This standard applies to Grainger’s revenue including proceeds from disposal of trading and investment property, property and asset management fees and revenue from construction contracts. It does not apply to gross rental income or CHARM revenue which as at the date of reporting are covered by IAS 17 and IAS 39 respectively. The revenue recognition point for the Group’s revenue streams impacted by the standard is not expected to differ following the adoption of the new standard. As a result, the effects of the new standard will be immaterial to the Group’s financial results. Disclosures IFRS 15 will require new qualitative disclosures and the relevant disclosures will be presented in the notes to the financial statements upon adoption of the new standard. iv) IFRS 16 Leases (effective 1 October 2019) IFRS 16 replaces IAS 17 Leases which is currently used by the Group. The standard sets out the criteria to recognise, measure, present and disclose leases. The key changes that will follow the adoption of this standard are: • a single lessee accounting model that removes the distinction between operating and finance leases. The previous off-balance sheet financing permitted by operating leases will now be brought on balance sheet by recognising the asset and corresponding liability; and • the standard includes two recognition exemptions for lessees – leases of ’low-value’ assets and short-term leases. As a lessor, the Group’s position is substantially unchanged. As a lessee of office space, the assets and the corresponding lease liabilities will now be required to be measured and presented on the balance sheet and in the notes to the financial statements. Although these leases are currently off-balance sheet, they will have an immaterial impact on the overall net assets and the consolidated income statement of the Group. Of the other IFRSs that are available for early adoption, none are expected to have a material impact on the financial statements. 2. Critical accounting estimates and judgements The Group’s significant accounting policies are stated in the relevant notes to the Group financial statements. The preparation of financial statements requires management to exercise judgement in applying the Group’s accounting policies. It also requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis with revisions recognised in the period in which the estimates are revised and in any future periods affected. The areas involving a higher degree of judgement or complexity are set out below. 96 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Estimates  1) Valuation of property assets Residential trading property is carried in the statement of financial position at the lower of cost and net realisable value and investment property is carried at fair value. The Group does, however, in its principal non-GAAP net asset value measures, EPRA NAV and EPRA NNNAV, include trading property at market value. The adjustment in the value of trading property is the difference between the statutory book value and its market value as set out in Note 5. For investment property, market value is the same as fair value. In respect of trading properties, market valuation is the key assumption in determining the net realisable value of those properties. The results and the basis of each valuation and their impact on both the statutory financial statements and market value for the Group’s non-GAAP net asset value measures are set out below: Trading property  Investment property Financial asset (CHARM) Total statutory book value Trading property Residential GInvest Developments Total trading property Investment property Residential Tricomm Housing Affordable housing PRS build to rent Total investment property Financial asset (CHARM)1 Total assets at market value Statutory book value Market value adjustment2 Total assets at market value Net revaluation gain recognised in the income statement for wholly-owned properties Net revaluation gain relating to joint ventures and associates3 Net revaluation gain recognised in the year3 Notes Residential £m 756.5 589.7 – 1,346.2 Development  £m 42.8 – – 42.8 Others £m – – – – Financial assets  £m – – 82.2 82.2 Total £m  799.3 589.7 82.2 1,471.2 % of properties for which external valuer provides valuation Valuer (i) (ii) (iii) (i) (iv) (v) (vi) (vii) (viii) 952.6 369.5 38.1 1,360.2 153.9 121.4 50.8 263.6 589.7 – 1,949.9 1,346.2 603.7 1,949.9 22.6 – 22.6 – – 46.2 46.2 – – – – – – 46.2 42.8 3.4 46.2 – – – – – – – – – – – – – – – – – – 5.1 5.1 – – – – – – – – – 82.2 82.2 82.2 – 82.2 – – – 952.6 369.5 Allsop LLP Allsop LLP 84.3 CBRE Limited 1,406.4 153.9 121.4 50.8 Allsop LLP Allsop LLP Allsop LLP 263.6 CBRE Limited 71% 100% 83% 71% 100% 100% 98% Allsop LLP 589.7 82.2 2,078.3 1,471.2 607.1 2,078.3 22.6 5.1 27.7 1 Allsop provide vacant possession values used by the Directors to value the financial asset in accordance with the accounting policy set out in Note 21. 2 The market value adjustment is the difference between the statutory book value and the market value of the Group’s properties. Refer to Note 5 for market value net asset measures. 3 Includes the Group’s share of joint ventures and associates revaluation gain after tax.  97 Grainger plc Annual Report and Accounts 2018 2. Critical accounting estimates and judgements continued i) Residential – The Group’s own in-house qualified team provided a vacant possession value for the majority of the Group’s UK residential properties as at 30 September 2018. A structured sample of these in-house valuations was reviewed by Allsop LLP, an external independent valuer. Valuing the large number of properties in this portfolio is a significant task. For this reason it is undertaken on an external inspection basis only. Invariably, when the in-house valuations are compared with those of the external valuer, around 72% of the valuations are within a small acceptable tolerance. Where the difference is more significant, this is discussed with the valuer to determine the reasons for the difference. Typically, the reasons vary, but it could be, for example, that further or better information about internal condition is available or that respective valuers have placed a different interpretation on comparable sales. Once such reasons have been identified, the Group and the valuer agree the appropriate valuation that should be adopted as the Directors’ Valuation. Allsop LLP has provided the Directors with the following opinion on the Directors’ Valuation. Property held in the Residential Portfolio was valued as at 30 September 2018 by Grainger’s in-house surveyors. These valuations were reviewed and approved by the Directors. Allsop LLP has undertaken a comprehensive review of the Directors’ Valuation and they are satisfied with the process by which the in-house valuations were conducted. Allsop LLP valued approximately 80% of the Residential Portfolio, independently of the Group. Based on the results of that review, Allsop LLP has concluded that they have a high degree of confidence in those Directors’ Valuations.  Allsop LLP also recommends a discount to apply to the vacant possession valuations to establish the market value of each property. For property in the Residential Portfolio, the discounts are established by tenancy type and are based on evidence gathered by Allsop LLP from recent transactional market evidence. The Directors have adopted the discounts recommended by Allsop LLP. ii) GInvest – All of the property owned by the Group in the GInvest portfolio was valued as at 30 September 2018 by Allsop LLP.  The market value of the properties subject to the assumption that the dwellings would be sold individually, which is deemed to be the highest and best use, in their existing condition, and subject to any existing leases or tenancies was provided by Allsop LLP. The valuer’s opinion of market value was primarily derived using comparable recent market transactions on arm’s-length terms. iii) Developments – The current market value of the Group’s land and property held within the development segment has been assessed by CBRE Limited, external independent valuers. Their valuation, representing 83% of the total value of development trading stock, is on the basis of fair value as defined in the RICS Professional Valuation Standards where fair value is the same as market value. The remaining 17% of the portfolio is a Directors’ Valuation. iv) Tricomm Housing – Allsop LLP provided an investment valuation as at 30 September 2018 for the property assets owned by the Group and let under a long-term lease arrangement with the Secretary of State for Defence under a PFI project agreement. The investment valuation is in accordance with RICS Professional Valuation Standards, and is based on a discounted cash flow model. Significant unobservable inputs within the valuation relate to assumptions for house price inflation and the discount rates to apply to the cash flows. The assumptions adopted for house price inflation are 2.00% in 2019, 2.75% in 2020, 3.00% in 2021, 2022 and 2023 and 2.75% thereafter. The discount rates applied to the cash flows range between 3.55% and 8.75%. v) Affordable housing – For properties let on affordable rents, social rents or sold on shared ownership leases, Allsop LLP valued the assets on the basis of Existing Use Value for Social Housing (‘EUV-SH’) in line with RICS Global Standards. Properties subject to intermediate rents have been valued at market value as these assets are not restricted as social housing in perpetuity. 98 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n vi) PRS build-to-rent assets – CBRE Limited assessed the fair value of the completed assets and assets in the course of construction. The principal approach was to value the apartments on an income capitalisation basis, having regard to prevailing market conditions and evidence, and with close regard to the relativity between the market value and the aggregate vacant possession value. Where applicable, estimated costs required to complete construction have been taken into account. The valuation has been prepared in accordance with RICS Professional Valuation Standards where fair value is the same as market value. vii) Financial asset (CHARM) – The valuation methodology adopted for the CHARM asset is set out in Note 21 to the financial statements. The key assumptions affecting the carrying value are house price inflation and the discount rate. The assumptions used to value the  asset adopt an increase in house prices of between 2.85% and 3.85% per annum. A discount rate of 3.5% has been applied to the interest income and a rate of 6.5% has been applied to the projected proceeds from sales of the underlying properties, reflecting the risk profile of each individual income stream.  The fair value of the interest changes as cash flows are realised and a decrease of £0.5m (2017: £1.0m) in the fair value has been recognised in the statement of other comprehensive income and the available-for-sale reserve. Credit risk arises from the credit exposure relating to cash receipts from the financial instrument. All of the cash receipts are payable by the Church Commissioners, a counterparty considered to be low risk as they have no history of past due or impaired amounts and there are no past due amounts outstanding at the year end. viii) Joint ventures and associates – Property assets in the associate GRIP REIT PLC were valued at 30 September 2018 by CBRE Limited. The market value of the properties takes into account whether the block is managed as a whole or as a group of individual units and valued accordingly. Valuation on the basis of how the properties are managed is deemed to be the highest and best use of property. The valuation of properties under construction assesses the market value of the property upon completion less estimated cost of work to complete and where appropriate, an adjustment to take into account the remaining construction and stabilisation risks. The Directors consider the valuations provided by external valuers to be representative of fair value. As required by RICS Professional Valuation Standards, the external valuers in the UK mentioned above have made full disclosure of the extent and duration of their work for, and fees earned by them from, the Group, which in all cases are less than 5% of their total fees. 2) Net realisable value of trading property The Group’s residential trading properties are carried in the consolidated statement of financial position at the lower of cost and net realisable value. Net realisable value is the net sales proceeds which the Group expects on sale of a property with vacant possession. The Group has a net realisable value provision of £7.8m as at 30 September 2018 (2017: £8.1m). The provision includes specific properties which are vacant and properties expected to become vacant in the future. 3) Derivative financial instruments Fair value measurements for derivative financial instruments are obtained from quoted market prices and/or valuation models as appropriate. When not directly observable in active markets, the fair value of derivative contracts are computed internally based on internal assumptions as well as directly observable market information, including forward and yield curves for commodities, currencies and interest. Changes in internal assumptions and forward curves could materially impact the internally computed fair value of derivative contracts, particularly long-term contracts, resulting in a corresponding impact on income or loss in the consolidated income statement. 99 Grainger plc Annual Report and Accounts 2018 2. Critical accounting estimates and judgements continued Changes to key assumptions could impact both income and financial position. The impact of changes to key assumptions is considered for assets using a range of reasonable changes. The Group measures its market risk exposure internally by running various sensitivity analyses. The Directors consider that the range of potential movements set out in the table below represent reasonable possible changes. The table below sets out potential impacts that may result from changes to certain assumptions: Increase of 2% in house prices Decrease of 2% in house prices Increase of 2% in house prices Decrease of 2% in house prices Increase of 25bps in HPI rate Decrease of 25bps in HPI rate Increase of 1% in discount rate Decrease of 1% in discount rate Increase of 25bps in discount rate Decrease of 25bps in discount rate Increase of 25bps in HPI rate Decrease of 25bps in HPI rate Increase of 25bps in gross yield Decrease of 25bps in gross yield GRIP GRIP NRV provision NRV provision CHARM CHARM CHARM CHARM Tricomm Housing Tricomm Housing Tricomm Housing Tricomm Housing PRS build-to-rent PRS build-to-rent 2018 2017 Income statement impact £m 3.4 (3.4) 0.9 (1.1) 0.2 (0.2) – – (2.2) 2.3 1.9 (1.8) (2.9) 3.3 Statement of financial position impact £m 3.4 (3.4) 0.9 (1.1) 1.2 (1.2) (5.5) 6.2 (2.2) 2.3 1.9 (1.8) (2.9) 3.3 Income statement impact £m 3.4 (3.4) 1.0 (1.1) 0.2 (0.2) – – (2.3) 2.3 1.7 (1.7) (1.3) 1.4 Statement of financial position impact £m 3.4 (3.4) 1.0 (1.1) 1.3 (1.3) (5.9) 6.6 (2.3) 2.3 1.7 (1.7) (1.3) 1.4 Judgements  1) 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 either to 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. The classification of the Group’s properties is a significant judgement which directly impacts the statutory net asset position, as trading properties are held at the lower of cost and net realisable value, whilst investment properties are held at fair value, with gains or losses taken through the consolidated income statement. 2) Adjusted earnings Adjusted earnings is one of Grainger’s key performance indicators. The metric is utilised as a key measure to aid understanding of the performance of the continuing business and excludes valuation movements and other adjustments that are considered to be one-off in nature, which do not form part of the normal ongoing revenue or costs of the business and, either individually or in aggregate, are material to the reported Group results. The classification of other adjustments is a significant judgement made by management and is a matter referred to the Audit Committee for approval. Other adjustments in 2018 comprise costs in relation to the redemption of the previous corporate bond of £27.4m, being £25.8m gross prepayment cost and £1.6m expense of unamortised costs. In 2017, £2.8m other adjustments were recorded, being a provision for historic non-core businesses of £1.6m and costs in relation to the implementation of strategic operations of £1.2m. 100 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 20183. Discontinued operations Accounting policy A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: • represents a separate major line of business or geographical area of operations; • is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or • is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale. For the discontinued operation, the comparable income statement and other comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. The 2017 comparatives presented represent activities relating to the disposal of the remaining assets and in winding down the remaining business in Germany. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Discontinued operations For the year ended 30 September Group revenue Net rental income Profit on disposal of trading property, investment property and assets held-for-sale Fees and other income Administrative expenses Profit before tax Current tax Current tax on discontinued operations Profit after tax Basic earnings per share – discontinued operations Diluted earnings per share – discontinued operations Cash flow from discontinued operations: Net cash outflow from operating activities Net cash outflow from investing activities Net cash outflow from financing activities Net cash outflow Notes 14 2018 £m – – – – – – – – – – – 2018 £m – – – – 2017 £m 0.4 0.2 0.7 0.8 (0.2) 1.5 (0.3) 1.2 0.3p 0.3p 2017 £m (0.4) (0.8) (5.1) (6.3) 101 Grainger plc Annual Report and Accounts 2018 4. Analysis of profit before tax The table below provides adjusted earnings, which is one of Grainger’s key performance indicators. The metric is utilised as a key measure to aid understanding of the performance of the continuing business and excludes valuation movements and other adjustments (previously non-recurring), that are one-off in nature, which do not form part of the normal ongoing revenue or costs of the business and, either individually or in aggregate, are material to the reported Group results. £m Group revenue Net rental income Profit on disposal of trading property Profit on disposal of investment property Income from financial interest in property assets Fees and other income Administrative expenses Other expenses Profit on disposal of joint venture Impairment of inventories to net realisable value Reversal of impairment/(impairment) of joint venture Operating profit before net valuation gains on investment property Net valuation gains on investment property Operating profit after net valuation gains on investment property Change in fair value of derivatives Finance costs Finance income Corporate bond redemption Share of profit of associates after tax Share of profit of joint ventures after tax Profit before tax – continuing operations Tax charge for the year – continuing operations Profit after tax – continuing operations Discontinued operations – profit before tax Tax charge for the year – discontinued operations Profit for the year attributable to the owners of the Company 2018 2017 Statutory Valuation – – 270.7 43.8 Other adjustments – – Adjusted earnings 270.7 43.8 Statutory Valuation – – 264.7 40.4 Other adjustments – – Adjusted earnings 264.7 40.4 81.2 1.4 6.5 7.1 (27.9) (1.1) 7.0 (0.5) (0.8) – (0.7) – – – – 0.5 5.5 (5.5) (6.5) (22.6) (29.1) 0.2 – – – (5.0) (0.2) (34.1) 123.0 22.6 145.6 (0.2) (27.2) 2.1 (27.4) 7.2 0.6 100.7 (13.3) 87.4 – – 87.4 – – – – – – – – – – – – – – – 27.4 – – 27.4 80.4 1.4 5.8 7.1 (27.9) (1.1) 7.0 – 73.7 2.2 5.3 5.1 (27.2) (3.9) – (5.4) (0.8) – 0.9 – – – – 5.4 – (3.6) 3.6 116.5 – 116.5 – (27.2) 2.1 – 2.2 0.4 94.0 9.1 (18.0) (8.9) (0.2) – – – (1.8) (3.8) (14.7) 86.6 18.0 104.6 0.2 (29.1) 2.1 – 4.3 4.2 86.3 (12.8) 73.5 1.5 (0.3) 74.7 – – – – – 2.8 – – – 2.8 – 2.8 – – – – – – 2.8 72.9 2.2 6.2 5.1 (27.2) (1.1) – – – 98.5 – 98.5 – (29.1) 2.1 – 2.5 0.4 74.4 Diluted earnings per share – adjusted 18.2p 14.3p Income from financial interest in property assets (‘CHARM’) comprises income from the asset calculated at the effective interest rate shown as adjusted earnings, and any movements in future cash flow projections related to the asset are shown within valuations. Further details are included in Note 21. Profit before tax in the adjusted columns above of £94.0m (2017: £74.4m) is the adjusted earnings of the Group. Adjusted earnings per share assumes tax of £17.9m (2017: £14.5m) in line with the current effective rate of 19.0% (2017: 19.5%), divided by the weighted average number of shares as shown in Note 16. Other adjustments in 2018 comprises costs in relation to the previous corporate bond of £27.4m, being £25.8m gross prepayment cost and £1.6m expense of unamortised costs. In 2017, £2.8m other adjustments were recorded, being a provision for historic non-core businesses of £1.6m and costs in relation to the implementation of strategic operations of £1.2m. 102 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 5. Segmental information Accounting policy IFRS 8 Operating Segments requires operating segments to be identified based upon the Group’s internal reporting to the Chief Operating Decision Maker (‘CODM’) so that the CODM can make decisions about resources to be allocated to segments and assess their performance. The Group’s CODM is the Chief Executive. The three significant segments for continuing operations are Residential, Development and Funds. The title ‘Other’ has been included in the tables below to reconcile the segments to the figures reviewed by the CODM and includes certain central costs that cannot be allocated to the operating segments. The key operating performance measure of profit or loss used by the CODM is adjusted earnings before tax, valuation and other adjustments. The CODM reviews by segment two key statement of financial position measures of net asset value. These are EPRA Net Asset Value (‘EPRA NAV’) and EPRA Triple Net Asset Value (‘EPRA NNNAV’). Information relating to the Group’s operating segments is set out in the tables below. The tables distinguish between adjusted earnings, valuation and other adjustments and should be read in conjunction with Note 4.  2018 Income statement £m Group revenue Segment revenue – external Net rental income Profit on disposal of trading property Profit on disposal of investment property Income from financial interest in property assets  Fees and other income  Administrative expenses Other expenses Profit on disposal of joint venture Net finance costs Share of trading profit of joint ventures and associates after tax Adjusted earnings Valuation movements Other adjustments Profit before tax – continuing operations 2017 Income statement – continuing operations Residential Development Funds Other Total 201.4 43.5 68.7 1.4 – 0.2 (7.0) (0.1) – (27.3) – 79.4 64.2 0.3 11.7 – – 1.8 (1.7) (1.0) – 3.6 (0.1) 14.6 4.6 – – – – 4.6 (0.6) – 7.0 (1.4) 2.7 12.3 0.5 – – – 5.8 0.5 (18.6) – – – – (12.3) 270.7 43.8 80.4 1.4 5.8 7.1 (27.9) (1.1) 7.0 (25.1) 2.6 94.0 34.1 (27.4) 100.7 £m Residential Development Funds Other Total Group revenue Segment revenue – external Net rental income Profit on disposal of trading property Profit on disposal of investment property Income from financial interest in property assets  Fees and other income  Administrative expenses Other expenses Net finance costs Share of trading profit of joint ventures and associates after tax Adjusted earnings Valuation movements Other adjustments Profit before tax – continuing operations 179.2 40.3 58.2 2.2 – 0.3 (6.1) (0.6) (26.6) – 67.7 81.3 0.1 14.7 – – 0.7 (1.6) (0.3) 1.2 0.1 14.9 4.1 – – – – 4.1 (0.6) (0.1) (1.6) 2.8 4.6 0.1 – – – 6.2 – (18.9) (0.1) – – (12.8) 264.7 40.4 72.9 2.2 6.2 5.1 (27.2) (1.1) (27.0) 2.9 74.4 14.7 (2.8) 86.3 103 Grainger plc Annual Report and Accounts 2018 5. Segmental information continued Segmental assets The two principal net asset value measures reviewed by the CODM are EPRA NAV and EPRA NNNAV. These measures reflect the current market value of trading property owned by the Group rather than the lower of historical cost and net realisable value. These measures are considered to be a more relevant reflection of the value of the assets owned by the Group (see EPRA performance measures on page 149 for definitions). These measures are set out below by segment along with a reconciliation to the summarised statutory statement of financial position:  2018 Segment net assets £m Total segment net assets (statutory) Total segment net assets (EPRA NAV) Total segment net assets (EPRA NNNAV) Residential 485.5 1,115.8 986.1 Development 136.0 139.4 139.3 Funds 86.9 87.3 86.9 Other 107.2 114.6 111.4 Total 815.6 1,457.1 1,323.7 Continuing Pence per share – 348 316 ‘Other’ includes CHARM assets. 2018 Reconciliation of EPRA NAV measures £m Investment property Investment in joint ventures and associates Financial interest in property assets Inventories – trading property Cash and cash equivalents Other assets Total assets Interest-bearing loans and borrowings Deferred and contingent tax liabilities Other liabilities Total liabilities Net assets Statutory balance sheet 589.7 145.6 82.2 799.3 109.3 164.1 1,890.2 (961.2) (29.9) (83.5) (1,074.6) 815.6 Adjustments to market value, deferred tax and derivatives – 0.4 – 607.1 – 2.7 610.2 – 27.9 3.4 EPRA NAV balance sheet 589.7 146.0 82.2 1,406.4 109.3 166.8 2,500.4 (961.2) (2.0) (80.1) Deferred and contingent tax – – – – – – – – (131.1) – Derivatives/ fixed rate debt – (0.4) – – – 4.9 4.5 (3.4) – (3.4) EPRA NNNAV balance sheet 589.7 145.6 82.2 1,406.4 109.3 171.7 2,504.9 (964.6) (133.1) (83.5) 31.3 641.5 (1,043.3) 1,457.1 (131.1) (131.1) (6.8) (2.3) (1,181.2) 1,323.7 In order to provide further analysis, the following table sets out EPRA NNNAV assets and liabilities by segment: £m EPRA NNNAV assets Investment property Investment in joint ventures and associates Financial interest in property assets Inventories – trading property Cash and cash equivalents Other assets Total segment EPRA NNNAV assets EPRA NNNAV liabilities Interest-bearing loans and borrowings Deferred and contingent tax liabilities Other liabilities Total segment EPRA NNNAV liabilities Net EPRA NNNAV assets 104 Residential Development Funds Other Total 589.7 12.2 – 1,360.2 43.7 5.6 2,011.4 (890.4) (131.0) (3.9) (1,025.3) 986.1 – (0.6) – 46.2 5.7 140.2 191.5 (21.0) (0.1) (31.1) (52.2) 139.3 – 134.0 – – – 2.7 136.7 (49.8) – – (49.8) 86.9 – – 82.2 – 59.9 23.2 165.3 (3.4) (2.0) (48.5) (53.9) 111.4 589.7 145.6 82.2 1,406.4 109.3 171.7 2,504.9 (964.6) (133.1) (83.5) (1,181.2) 1,323.7 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 Segment net assets £m Total segment net assets (statutory) Total segment net assets (EPRA NAV) Total segment net assets (EPRA NNNAV) ‘Other’ includes CHARM assets. 2017 Reconciliation of EPRA NAV measures £m Investment property Investment in joint ventures and associates Financial interest in property assets Inventories – trading property Cash and cash equivalents Other assets Total assets Interest-bearing loans and borrowings Deferred and contingent tax liabilities Other liabilities Total liabilities Net assets Continuing Residential 394.5 1,069.0 932.3 Development 135.9 133.6 134.7 Funds 113.5 122.0 112.7 Other 101.4 109.9 88.5 Total Pence per share – 343 303 745.3 1,434.5 1,268.2 Statutory balance sheet 391.0 197.6 86.1 841.3 88.9 162.1 1,767.0 (925.7) (32.6) (63.4) (1,021.7) 745.3 Adjustments to market value, deferred tax and derivatives – 8.5 – 645.8 – 3.6 657.9 – 26.4 4.9 31.3 689.2 EPRA NAV balance sheet 391.0 206.1 86.1 1,487.1 88.9 165.7 2,424.9 (925.7) (6.2) (58.5) (990.4) 1,434.5 Deferred and contingent tax – (7.7) – – – – (7.7) – (136.1) – (136.1) (143.8) Derivatives/ fixed rate debt – (0.8) – – – 8.0 7.2 (24.8) – (4.9) (29.7) (22.5) EPRA NNNAV balance sheet 391.0 197.6 86.1 1,487.1 88.9 173.7 2,424.4 (950.5) (142.3) (63.4) (1,156.2) 1,268.2 In order to provide further analysis, the following table sets out EPRA NNNAV assets and liabilities by segment: £m EPRA NNNAV assets Investment property Investment in joint ventures and associates Financial interest in property assets Inventories – trading property Cash and cash equivalents Other assets Total segment EPRA NNNAV assets EPRA NNNAV liabilities Interest-bearing loans and borrowings Deferred and contingent tax liabilities Other liabilities Total segment EPRA NNNAV liabilities Net EPRA NNNAV assets Residential Development Funds Other Total 391.0 15.8 – 1,445.7 34.1 17.4 1,904.0 (819.9) (141.2) (10.6) (971.7) 932.3 – (0.5) – 41.4 8.0 124.8 173.7 (34.4) 1.1 (5.7) (39.0) 134.7 – 182.3 – – 0.4 2.0 184.7 (71.2) (0.8) – (72.0) 112.7 – – 86.1 – 46.4 29.5 162.0 (25.0) (1.4) (47.1) (73.5) 88.5 391.0 197.6 86.1 1,487.1 88.9 173.7 2,424.4 (950.5) (142.3) (63.4) (1,156.2) 1,268.2 105 Grainger plc Annual Report and Accounts 2018 6. Group revenue Accounting policy Revenue is measured at the fair value of the consideration received or receivable and is stated net of sales taxes and value added taxes. Gross rental income (Note 7) Gross proceeds from disposal of trading property (Note 8) Fees and other income (Note 10) 7. Net rental income 2018 £m 59.2 204.4 7.1 270.7 2017 £m 54.6 205.0 5.1 264.7 Accounting policy Gross rental income is recognised on a straight-line basis over the lease term on an accruals basis. Directly attributable property repair and maintenance costs are deducted from gross rental income to determine net rental income. Gross rental income Property operating expenses 8. Profit on disposal of trading property 2018 £m 59.2 (15.4) 43.8 2017 £m 54.6 (14.2) 40.4 Accounting policy Property is regarded as sold when the significant risks and returns have been transferred to the buyer. This is deemed to be on legal completion. Profits or losses are calculated by reference to the carrying value of the property sold. For a development property this is assessed through the use of a gross margin for the site as a whole or such other basis that provides an appropriate allocation of costs. Contract revenue and expenses from construction contracts is recognised in the consolidated income statement in accordance with the stage of completion of the contract. Revenues are recognised as amounts recoverable on contracts in trade and other receivables (Note 24) and will be recovered on completion of the development. Proceeds from disposal of trading property Revenue from construction contract Gross proceeds from disposal of trading property Selling costs Net proceeds from disposal of trading property Carrying value of trading property sold Carrying value of construction contract expenses 2018 £m 160.5 43.9 204.4 (4.1) 200.3 (85.1) (34.0) 81.2 2017 £m 169.1 35.9 205.0 (3.8) 201.2 (100.6) (26.9) 73.7 Amounts relating to the construction contract included in the table above relate to the Group’s development of properties in the arrangement with the Royal Borough of Kensington and Chelsea. The Group is managing and funding the construction of a number of sites and is receiving a developer’s priority return at a fixed rate margin recoverable from the sale of units to third parties as they are completed. The construction contract is being accounted for as a cost plus contract in line with IAS 11 Construction Contracts, and is expected to conclude in early 2019. 106 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 20189. Profit on disposal of investment property Accounting policy Investment property is regarded as sold when the significant risks and returns have been transferred to the buyer. This is deemed  to be on legal completion. Profits or losses are calculated by reference to the carrying value of the property sold. Gross proceeds from disposal of investment property Selling costs Net proceeds from disposal of investment property Carrying value of investment property sold (Note 17) 10. Fees and other income Property and asset management fee income Other sundry income 11. Employees Wages and salaries Termination benefits Social security costs Other pension costs – defined contribution scheme (Note 29) Share-based payments (Note 31) 2018 £m 5.1 (0.1) 5.0 (3.6) 1.4 2018 £m 6.5 0.6 7.1 2018 £m 14.1 – 1.5 0.9 1.1 17.6 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 £m 9.5 (0.1) 9.4 (7.2) 2.2 2017 £m 5.1 – 5.1 2017 £m 13.3 0.8 1.7 0.9 2.1 18.8 The average monthly number of Group employees during the year (including Executive Directors) was: Residential Development Shared services Group 2018 Number 2017 Number 136 13 70 11 230 121 8 75 11 215 Details of Directors’ remuneration, including pension costs, share options and interests in the LTIP, are provided in the audited section of the Remuneration Committee report on pages 66 to 72. Information about benefits of Directors The following amounts are disclosed in accordance with Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. Aggregate Directors’ remuneration Aggregate amount of gains on exercise of share options Aggregate amount of money or assets received or receivable under scheme interests 2018 £’000 2,097 – 74 2,171 None of the Directors (2017: none) were members of the Group defined benefit scheme or the defined contribution scheme.  2017 £’000 2,602 41 537 3,180 107 Grainger plc Annual Report and Accounts 2018 11. Employees continued Key management compensation Short-term employee benefits Post-employment benefits Share-based payments Payments for loss of office 2018 £m 6.7 0.4 0.7 – 7.8 2017 £m 5.9 0.4 1.6 0.1 8.0 Key management figures shown above include Executive and Non-Executive Directors and all internal directors of specific functions. 12. Profit before tax Profit before tax is stated after charging: Depreciation of fixtures, fittings and equipment Amortisation of IT software Bad debt expense Operating lease payments Auditor’s remuneration (see below) The remuneration paid to KPMG LLP, the Group’s principal auditor, is disclosed below: Auditor’s remuneration Fees payable to the Company’s auditor and its associates for the audit of the Company’s annual accounts Fees payable to the Company’s auditor and its associates for other audit services to the Group: The audit of the Company’s subsidiaries pursuant to legislation Group audit fees Audit related assurance services Reporting accountant – corporate bond Corporate finance activity Other services Other assurance services Non-audit fees Total fees 2018 £m 2017 £m 0.4 0.5 0.2 0.8 0.4 0.5 0.4 0.1 0.9 0.3 2018 £’000 95 2017 £’000 84 146 241 32 35 135 – 5 207 448 126 210 31 – – 41 9 81 291 Following the disposal of our share of Walworth Investment Properties Limited, the relevant proportion of amounts paid to the auditor for the audit of the financial statements of joint ventures is £nil (2017: £4,100). During the year the largest non-audit fees paid to KPMG LLP were £135,000 in relation to corporate finance activity, £35,000 in relation to the issue of a comfort letter on the issuance of the new corporate bond and £32,000 in relation to a review of the interim financial information included in the half yearly financial report. 108 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 201813. Finance costs and income Finance costs Bank loans and mortgages Non-bank financial institution Corporate bond Interest capitalised under IAS 23 Other finance costs Corporate bond redemption Finance income Interest receivable from associates and joint ventures (Note 35) Other interest receivable Net finance costs i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 £m 16.2 0.3 13.6 (3.4) 2.4 – – 29.1 (0.8) (1.3) (2.1) 27.0 2018 £m 17.2 2.0 13.2 (8.0) 2.8 27.2 27.4 54.6 (0.6) (1.5) (2.1) 52.5 During the year the Group refinanced its corporate bond, issuing a new 10 year £350m corporate bond at 3.375%. Prepayment costs of £25.8m were incurred and unamortised costs of £1.6m were expensed on redemption of the previous £275m bond, which was due to mature in 2020. 14. Tax Accounting policy The taxation charge for the year represents the sum of the tax currently payable and deferred tax. The charge is recognised in the income statement and statement of comprehensive income according to the accounting treatment of the related transaction. Current tax payable or receivable is based on the taxable income for the period and any adjustment in respect of prior periods and is calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period.  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 tax.  Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted at the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will give rise to a future tax liability against which the deferred tax assets can be recovered. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.  Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same tax authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 109 Grainger plc Annual Report and Accounts 2018 14. Tax continued The tax charge for the year of £13.3m (2017: £13.1m) recognised in the consolidated income statement comprises: Current tax Corporation tax on profit Adjustments relating to prior years Deferred tax Origination and reversal of temporary differences Adjustments relating to prior years Total tax charge for the year Tax charge for the year comprises: Tax charge in the income statement – continuing operations Tax from discontinued operations Total tax charge for the year 2018 £m 17.7 (7.4) 10.3 (0.5) 3.5 3.0 13.3 13.3 – 13.3 2017 £m 14.1 0.3 14.4 3.5 (4.8) (1.3) 13.1 12.8 0.3 13.1 The 2018 current tax adjustments relating to prior years include adjustments to recognise utilisation of tax losses and other reliefs available to the Group, which have been included in submitted tax returns, whilst deferred tax adjustments relate primarily to differences between the tax and accounting value of fixed assets. The Group works in an open and transparent manner and maintains a regular dialogue with HM Revenue and Customs. This approach is consistent with the ‘low risk’ rating we have been awarded by HM Revenue and Customs, and to which the Group is committed. The Group’s results for this year are taxed at an effective rate of 19.0% (2017: 19.5%). The tax charge for the year is different to the charge for the year derived by applying the standard rate of corporation tax in the UK of 19.0% (2017: 19.5%) to the profit before tax. The differences are explained below: Profit before tax including discontinued operations Profit before tax at a rate of 19.0% (2017: 19.5%) Expenses not deductible for tax purposes Share of joint ventures/associates after tax Revaluation of investment properties and indexation allowance Difference between tax and accounting profit on disposal of fixed assets and investments Adjustment in respect of prior periods Amounts recognised in the income statement 2018 £m 100.7 19.1 1.7 (1.0) (4.2) 1.6 (3.9) 13.3 2017 £m 87.8 17.1 1.7 (0.8) – (0.4) (4.5) 13.1 110 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n In addition to the above, a deferred tax charge of £0.6m (2017: £2.6m) was recognised within other comprehensive income comprising: Deferred tax Actuarial deficit on BPT Limited pension scheme Equity component of available-for-sale financial asset Fair value movement in cash flow hedges and exchange adjustments Amounts recognised in other comprehensive income Deferred tax balances comprise temporary differences attributable to: Deferred tax assets Accelerated capital allowances Short-term temporary differences Losses carried forward Actuarial deficit on BPT Limited pension scheme Fair value movement in derivative financial instruments and cumulative exchange adjustments Deferred tax liabilities Trading property uplift to fair value on business combinations  Investment property revaluation  Short-term temporary differences Equity component of available-for-sale financial asset Fair value movement in derivative financial instruments and cumulative exchange adjustments Total deferred tax 2018 £m 0.1 (0.1) 0.6 0.6 2017 £m 0.8 (0.2) 2.0 2.6 2018 £m 2017 £m – 3.1 – 0.3 – 3.4 (9.3) (18.6) (0.8) (1.1) (0.1) (29.9) (26.5) 0.3 4.2 4.5 0.2 0.5 9.7 (10.3) (20.7) (0.4) (1.2) – (32.6) (22.9) Deferred tax has been predominantly calculated at a rate of 17% (2017: 17%) in line with changes to the main rate of corporation tax from 1 April 2020 which have been substantively enacted.  In addition to the tax amounts shown above, contingent tax based on EPRA market value measures being tax on the difference between the carrying value of trading properties in the statement of financial position and their market value has not been recognised by the Group. This contingent tax amounts to £103.2m (2017: £109.8m).  It is not possible for the Group to identify the timing of movements in deferred tax between those expected within one year and those expected in a period greater than one year. This is because movements in the main balances, both assets and liabilities, will be determined by factors outside the control of the Group, namely the vacation date of properties and interest yield curve movements. However, given the long-term nature of our property ownership, we anticipate that the balance will predominantly be crystallised in a period greater than one year. 111 Grainger plc Annual Report and Accounts 2018 15. Dividends Accounting policy Dividends are recognised through equity when approved by the Company’s shareholders or on payment, whichever is earlier. Dividends paid in the year are shown below: Ordinary dividends on equity shares: Final dividend for the year ended 30 September 2016 – 3.05p per share Interim dividend for the year ended 30 September 2017 – 1.60p per share Final dividend for the year ended 30 September 2017 – 3.26p per share Interim dividend for the year ended 30 September 2018 – 1.74p per share 2018 £m – – 13.6 7.2 20.8 2017 £m 12.7 6.6 – – 19.3 Subject to approval at the AGM, the final dividend of 3.52p per share (gross) amounting to £14.7m will be paid on 11 February 2019 to shareholders on the register at the close of business on 14 December 2018. Shareholders will again be offered the option to participate in a dividend reinvestment plan and the last day for election is 18 January 2019. An interim dividend of 1.74p per share amounting to a total of £7.2m was paid to shareholders on 5 July 2018. 16. Earnings per share Accounting policy Basic earnings per share is calculated by dividing the profit or loss attributable to the owners 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 to meet its obligations under the Long-Term Incentive Plan (‘LTIP’), Deferred Bonus Plan (‘DBP’) and Save As You Earn (‘SAYE’) scheme, on which the dividends are being waived. Diluted earnings per share is calculated by adjusting the weighted average number of shares in issue by the dilutive effect of ordinary shares that the Company may potentially issue relating to its share option schemes and contingent share awards under the LTIP and DBP, based upon the number of shares that would be issued if 30 September 2018 was the end of the contingency period. Where the effect of the above adjustments is antidilutive, they are excluded from the calculation of diluted earnings per share 30 September 2018 30 September 2017 Profit for the year £m Weighted average number of shares (millions) Earnings per share (pence) Profit for the year £m Weighted average number of shares (millions) 87.4 416.3 21.0 74.7 415.6 – 2.1 (0.1) – 2.3 Earnings per share (pence) 18.0 (0.1) 87.4 418.4 20.9 74.7 417.9 17.9 87.4 416.3 – 2.1 21.0 (0.1) 73.5 415.6 – 2.3 17.7 (0.1) 87.4 418.4 20.9 73.5 417.9 17.6 Basic earnings per share – continuing and discontinued operations Profit attributable to equity holders  Effect of potentially dilutive securities Share options and contingent shares Diluted earnings per share – continuing and discontinued operations Profit attributable to equity holders Basic earnings per share – continuing operations only Profit attributable to equity holders Effect of potentially dilutive securities Share options and contingent shares Diluted earnings per share – continuing operations only Profit attributable to equity holders 112 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018    i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 17. Investment property Accounting policy Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the consolidated Group, is classified as investment property. Investment property is measured initially at its cost, including related transaction costs. After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specified asset. If this information is not available, the Group uses alternative valuation methods such as recent prices on less active markets or discounted cash flow projections. Investment property falls within Level 3 of the fair value hierarchy as defined by IFRS 13. Further details are given in Note 28. Subsequent expenditure is included in the carrying amount of the property when it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to the consolidated income statement during the financial period in which they are incurred.  Gains or losses arising from changes in the fair value of the Group’s investment properties are included in the consolidated income statement of the period in which they arise. Where specific investment properties are expected to sell within the next 12 months their fair value is shown under assets classified as held-for-sale within current assets. Any loss on the reclassification of these assets from investment properties to assets held-for-sale is charged to the consolidated income statement of the period in which this occurs. Opening balance  Additions Disposals (Note 9) Net valuation gains Closing balance 2018 £m 391.0 179.7 (3.6) 22.6 589.7 2017 £m 261.3 118.9 (7.2) 18.0 391.0 Information relating to the basis of valuation of investment property, the use of external independent valuers, and the judgements and assumptions adopted by management is set out in Note 2 ‘Critical accounting estimates and judgements’.  The historical cost of the Group’s investment property as at 30 September 2018 is £489.4m (2017: £307.2m).  Direct property repair and maintenance costs arising from investment property that generated rental income during the year were £2.8m (2017: £3.4m).  18. Property, plant and equipment Accounting policy Property, plant and equipment are stated at cost less residual value and depreciation and comprise fixtures, fittings and equipment. Depreciation is charged to the income statement on a straight-line basis over the estimated useful life ranging from 3–5 years. 113 Grainger plc Annual Report and Accounts 2018 19. Investment in associates Opening balance Share of profit for the year Dividends received Further investment1 Loans advanced to associates Loans repaid by associates Share of change in fair value of derivatives taken through other comprehensive income Closing balance 2018 £m 123.2 7.2 (2.2) 5.2 5.2 (4.9) 0.3 134.0 2017 £m 105.1 4.3 – 8.8 4.5 – 0.5 123.2 1 The Group invested a total additional £5.2m (2017: £8.8m) into GRIP REIT PLC in the year to enable further investment in PRS assets.  The closing balance comprises share of net assets of £109.2m (2017: £98.7m) and net loans due from associates of £24.8m (2017: £24.5m). As at 30 September 2018, the Group’s interest in associates was as follows: GRIP REIT PLC Vesta LP % of ordinary share capital/units held 24.9  20.0 Country of incorporation United Kingdom United Kingdom Accounting period end 31 December 30 September Although the Group acts as property and/or asset manager for GRIP REIT PLC, the remaining equity is held by a single investor. This investor is actively involved in the business and in controlling the key financial and operational activities of the business. Accordingly, the Group does not have de facto control of the entity. The accounting period end for GRIP REIT PLC is 31 December. The results for the 12 months to 30 September 2018 and financial position as at that date have been equity accounted in these financial statements. In relation to the Group’s investment in associates, the Group’s share of the aggregated assets, liabilities, revenues and profit or loss of associates is shown below: 2018 Summarised income statement £m Net rental income and other income Administration and other expenses Profit on disposal of properties Operating profit  Revaluation gains on investment property  Change in fair value of derivatives Interest payable Profit before tax Tax Profit after tax 2018 Summarised statement of financial position Trading and investment property Current assets Total assets Non-current liabilities Current liabilities Net assets 114 GRIP REIT PLC 4.9 (0.7) 0.2 4.4 4.9 0.1 (2.2) 7.2 – 7.2 Vesta LP – – – – – – – – – – 171.9 13.5 185.4 (53.3) (22.9) 109.2 4.6 2.0 6.6 – (6.6) – Total  4.9 (0.7) 0.2 4.4 4.9 0.1 (2.2) 7.2 – 7.2 176.5 15.5 192.0 (53.3) (29.5) 109.2 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 20182017 Summarised income statement £m Net rental income and other income Administration and other expenses Profit on disposal of properties Operating profit  Revaluation gains on investment property  Change in fair value of derivatives Interest payable Profit before tax Tax Profit after tax 2017 Summarised statement of financial position Trading and investment property Current assets Total assets Non-current liabilities Current liabilities Net assets 20. Investment in joint ventures Opening balance  Share of profit for the year Dividends received Reversal of impairment/(impairment) Loan interest received Loans advanced to joint ventures Loans repaid by joint ventures Disposal Exchange movements Share of change in fair value of derivatives taken through other comprehensive income Closing balance i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Total  4.9 (0.7) 0.2 4.4 1.6 0.2 (1.9) 4.3 – 4.3 168.0 11.5 179.5 (53.3) (27.5) 98.7 2017 £m 78.9 4.2 (4.8) (3.6) (0.4) 5.0 (5.0) – (0.1) 0.2 74.4 GRIP REIT PLC 4.9 (0.7) 0.2 4.4 1.6 0.2 (1.9) 4.3 – 4.3 166.7 11.5 178.2 (53.3) (26.1) 98.8 Vesta LP – – – – – – – – – – 1.3 – 1.3 – (1.4) (0.1) 2018 £m 74.4 0.6 (0.1) 5.5 – 0.2 (9.1) (60.0) – 0.1 11.6 The closing balance comprises share of net liabilities of £0.2m (2017: net assets of £54.6m) and net loans due from joint ventures of £11.8m (2017: £19.8m). On 2 May 2018, the Group disposed of its joint venture interest in Walworth Investment Properties Limited to the joint venture partner, Dorrington Investment plc. The consideration received was £67.0m, resulting in a profit on sale of £7.0m. The amounts shown in the income statement below represent the trading performance to the date of disposal. At 30 September 2018, the Group’s interest in joint ventures was as follows: Curzon Park Limited Helical Grainger (Holdings) Limited Lewisham Grainger Holdings LLP CCZ a.s. % of ordinary share capital/units held 50 50 50 50 Country of incorporation United Kingdom United Kingdom United Kingdom Czech Republic Accounting period end 28 February 31 March 30 September 30 September 115 Grainger plc Annual Report and Accounts 2018 20. Investment in joint ventures continued During the year, the Group was selected by Lewisham Borough Council as preferred partner on its Besson Street Build to Rent development opportunity to deliver up to 300 PRS homes on local authority owned land. Lewisham Grainger Holdings LLP was formed to undertake this development. Effective 28 August 2018, two of the three Czech Republic companies the Group had an interest in, being CCY a.s. and Prazsky Projeckt a.s., were liquidated. The Group’s remaining joint venture interest at 30 September 2018 is the holding in CCZ a.s. In relation to the Group’s investment in joint ventures, the Group’s share of the aggregated assets, liabilities, revenues and profit or loss are shown below: 2018 Summarised income statement £m Net rental income and other income Administration and other expenses Operating profit  Revaluation gains on investment property Change in fair value of derivatives Interest payable Profit before tax Tax Profit after tax 2018 Summarised statement of financial position Current assets Total assets Current liabilities Net liabilities 2017 Summarised income statement £m Net rental income and other income Administration and other expenses Profit on disposal of properties Operating profit  Revaluation gains on investment property Interest payable Profit before tax Tax Profit after tax Czech Republic combined*  – (0.1) (0.1) – – – (0.1) – (0.1) 0.4 0.4 (0.6) (0.2) Czech Republic combined*  0.1 – – 0.1 – – 0.1 – 0.1 Curzon Park Limited – – – – – – – – – 19.3 19.3 (19.3) – Curzon Park Limited – – – – – – – – – Helical Grainger (Holdings) Limited – – – – – – – – – 9.1 9.1 (9.1) – Helical Grainger (Holdings) Limited – – – – – – – – – Walworth Investment Properties Limited 1.3 – 1.3 0.2 0.1 (0.7) 0.9 (0.2) 0.7 – – – – Walworth Investment Properties Limited 2.0 (0.1) 0.1 2.0 3.8 (1.5) 4.3 (0.2) 4.1 Total 1.3 (0.1) 1.2 0.2 0.1 (0.7) 0.8 (0.2) 0.6 28.8 28.8 (29.0) (0.2) Total 2.1 (0.1) 0.1 2.1 3.8 (1.5) 4.4 (0.2) 4.2 116 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2017 Summarised statement of financial position £m Trading and investment property Current assets Total assets Non-current liabilities Current liabilities Net assets Czech Republic combined*  – 0.6 0.6 – (0.6) – Curzon Park Limited 17.4 0.1 17.5 – (22.0) (4.5) Helical Grainger (Holdings) Limited 4.3 1.1 5.4 – (5.4) – Walworth Investment Properties Limited 101.9 5.6 107.5 (40.0) (8.4) 59.1 Total 123.6 7.4 131.0 (40.0) (36.4) 54.6 * The results and financial position of the three Czech Republic companies to the date of liquidation of CCY a.s. and Prazsky Projekt a.s. have been aggregated in the above tables as individually they are not material and the Group manages its investment on an aggregate basis. 21. Financial interest in property assets (‘CHARM’ portfolio) Accounting policy The CHARM portfolio is a financial interest in equity mortgages held by the Church of England Pensions Board as mortgagee. It is accounted for under IAS 39 in accordance with the designation available-for-sale financial assets and is carried at fair value. It is initially recognised at fair value plus transaction costs and subsequently carried at fair value. Subsequent to initial recognition, the net change in value recorded is as follows: i) the carrying value of the assets is increased by the effective interest rate; ii) cash received from the instrument in the year is deducted from the carrying value of the assets; and iii) the carrying value of the assets is revised to the net present value of the updated projected cash flows arising from the instrument using the effective interest rate applicable at acquisition. The change in value arising from i) and iii) above is recorded through the consolidated income statement and is shown on the line ‘Income from financial interest in property assets’.  Differences between the updated projected cash flows using the effective interest rate applicable at acquisition compared to updated projected cash flows using a year end effective interest rate, assessed as the rate available in the market for an instrument with a similar maturity and credit risk, are taken through other comprehensive income with a corresponding adjustment to the carrying value of the assets. When gains or losses in the assets are realised, the accumulated fair value adjustments recognised in equity are included in the consolidated income statement as gains and losses from financial interest in property assets. Opening balance Cash received from the instrument Amounts taken to income statement Amounts taken to other comprehensive income before tax Closing balance 2018 £m 86.1 (9.9) 6.5 (0.5) 82.2 2017 £m 93.1 (11.3) 5.3 (1.0) 86.1 The CHARM portfolio is considered to be a Level 3 financial asset as defined by IFRS 13. The key assumptions used to value the asset are set out within Note 2 ‘Critical accounting estimates and judgements’, and the financial asset is included within the fair value hierarchy within Note 28. 117 Grainger plc Annual Report and Accounts 2018 22. Intangible assets Accounting policy Intangible assets comprise computer software and goodwill. Computer software is amortised on a straight-line basis over 5-7 years being the estimated useful lives of the assets, from the date they are available for use. Amortisation is charged to the consolidated income statement.  Goodwill is tested for impairment based on a value in use calculation at each reporting date. 23. Inventories  Accounting policy Tenanted residential properties held-for-sale in the normal course of business are shown in the financial statements as a current asset at the lower of cost and net realisable value. Cost includes legal and surveying charges and introducer fees incurred during acquisition together with improvement costs.  Land and property held within the development segment of the business are shown in the financial statements at the lower of cost and net realisable value. Cost represents the acquisition price including legal and other professional costs associated with the acquisition together with subsequent development costs net of amounts transferred to costs of sale. Net realisable value is the expected sales proceeds that the Group expects on sale of a property or current market value net of associated selling costs. Residential trading property Development trading property 2018 £m 756.5 42.8 799.3 2017 £m 797.6 43.7 841.3 It is not possible for the Group to identify which properties will be sold within the next 12 months. The size of the Group’s property portfolio does result in a relatively predictable vacancy rate. However, it is not possible to predict in advance the specific properties that will become vacant. Trading property is shown as a current asset in the consolidated statement of financial position. The Group has an obligation, under an agreement for sale in relation to its land at West Waterlooville, to pay further consideration should the site value exceed certain pre-agreed amounts. It also has an obligation under a profit sharing agreement to share profits above an agreed threshold. 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. However, our current best estimate is that the earliest payment under these arrangements will not be before October 2019 and any payments are likely to be spread over a number of years. Amounts relating to inventories that have been recognised as an expense in the consolidated income statement are as follows: Carrying value of trading property sold (Note 8) Carrying value of construction contract expenses (Note 8) Impairment of inventories to net realisable value 118 2018 £m 85.1 34.0 0.5 2017 £m 100.6 26.9 5.4 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 24. Trade and other receivables Accounting policy Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment in trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The movement in the provision is recognised in the consolidated income statement. Rent and other tenant receivables Deduct: Provision for impairment Rent and other tenant receivables – net Amounts recoverable on contracts Other receivables Prepayments  2018 £m 2.3 (0.5) 1.8 112.0 34.8 1.8 150.4 2017 £m 2.1 (0.6) 1.5 86.8 49.4 8.2 145.9 Amounts recoverable on contracts primarily relate to revenue receivable on the arrangement with the Royal Borough of Kensington and Chelsea (Note 8). Between the year end and the date of approval of these financial statements, £54.6m has been recovered on the contract in the form of cash receipts. Other receivables includes £15.6m (2017: £29.0m) due from land sales, which is receivable no later than July 2019. The fair values of trade and other receivables are considered to be equal to their carrying amounts. The credit quality of financial assets that are neither past due nor impaired is discussed in Note 28 ‘Financial risk management and derivative financial instruments’.  25. Provisions for other liabilities and charges Accounting policy Provisions are recognised when: i) the Group has a present obligation as a result of a past event; ii) it is probable that an outflow of resources will be required to settle the obligation; and iii) a reliable estimate can be made of the amount of the obligation. 26. Trade and other payables Accounting policy Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Deposits received Trade payables Tax and social security costs Accruals  Deferred income 2018 £m 3.1 20.6 0.5 44.4 2.1 70.7 2017 £m 3.2 14.6 9.1 19.9 2.0 48.8 119 Grainger plc Annual Report and Accounts 2018 27. Interest-bearing loans and borrowings Accounting policy Borrowings are initially recognised at the fair value of consideration received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the consolidated statement of financial position date. Current liabilities Non-bank financial institution Non-current liabilities Bank loans – Pounds Sterling Bank loans – Euros Non-bank financial institution Corporate bond Total interest-bearing loans and borrowings 2018 £m 1.1 1.1 533.4 0.9 79.8 346.0 960.1 961.2 2017 £m 1.1 1.1 637.7 6.2 7.6 273.1 924.6 925.7 (a) Bank loans  Sterling bank loans include variable rate loans bearing interest at rates between 1.6% and 1.8% above LIBOR and Euro bank loans include variable rate loans bearing interest at a rate of 1.6% above EURIBOR.  The weighted average variable interest rate on bank loans as at 30 September 2018 was 2.4% (2017: 2.0%). Bank loans are secured by fixed and floating charges over specific property and other assets of the Group. Unamortised costs in relation to bank loans of £6.6m (2017: £7.2m) will be amortised over the life of the loans to which they relate.  (b) Non-bank financial institution £7.6m is funded by a loan from Homes England and bears interest at 1% over the European Commission reference rate applicable to the UK. The remaining £75.0m is funded by a fixed rate loan from Rothesay Life PLC, at a rate of 2.8%.Unamortised costs in relation to the fixed rate loan of £1.7m (2017: £nil) will be amortised over the life of the loan. (c) Corporate bond A new £350.0m, 3.375% corporate bond was issued at 99.588% in April 2018. The discount on issuance is being amortised to the consolidated income statement using an effective interest basis. Unamortised costs and the outstanding discount in relation to the corporate bond are, in total, £4.0m and will be amortised over the remaining life of the bond.  The unamortised costs and the outstanding premium in relation to the previous £275.0m corporate bond were amortised up until the date of redemption at which point the remaining balance of £1.6m was expensed to the consolidated income statement. (d) Other loans and borrowings information The above analyses of loans and borrowings are net of unamortised loan issue costs and the discount on issuance of the corporate bond. As at 30 September 2018, unamortised costs totalled £10.9m (2017: £9.6m) and the outstanding discount was £1.4m (2017: a premium of £0.4m). 120 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n In accordance with IAS 7 Statement of Cash Flows, the Group is required to detail any changes in liabilities that arise from financing activities throughout the year. These changes are detailed below. Changes in liabilities from financing activities £m  Balance at 1 October 2017 Changes from financing cash flows Proceeds from loans and borrowings Repayment of borrowings Transaction costs related to loans and borrowings Corporate bond redemption Total changes from financing cash flows Other changes Amortisation of borrowing costs Interest payable Interest paid Corporate bond redemption Changes to fair value of derivatives through profit and loss Changes in fair value of derivatives through hedging reserve Total other changes Balance at 30 September 2018 Derivatives used for hedging the liabilities from financing activities Loans and borrowings 925.7 Assets (3.4) Liabilities 4.9 650.3 (611.6) (3.0) (25.8) 9.9 3.0 27.2 (30.4) 25.8 – – 25.6 961.2 – – – – – – – – – 0.2 (1.2) (1.0) (4.4) – – – – – – – – – – (1.5) (1.5) 3.4 28. Financial risk management and derivative financial instruments Accounting policies Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Derivative financial instruments  The Group uses derivative instruments to help manage its interest rate risk. In accordance with its treasury policy, the Group does  not hold or issue derivatives for trading purposes. Derivatives are classified as current assets and current liabilities.  The derivatives are recognised initially at fair value. Subsequently, the gain or loss on re-measurement to fair value is recognised immediately in the consolidated income statement, unless the derivatives qualify for cash flow hedge accounting, and have been designated as such, in which case any gain or loss is taken to equity in a cash flow hedge reserve via other comprehensive income.  In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument. The Group is also required to demonstrate that the hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecasted transaction is ultimately recognised in the consolidated 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 consolidated income statement. Fair value estimation The fair values of interest rate derivatives are based on a discounted cash flow model using market information. 121 Grainger plc Annual Report and Accounts 2018 28. Financial risk management and derivative financial instruments continued Derecognition of financial assets and liabilities Derecognition is the point at which the Group removes an asset or liability from its consolidated statement of financial position. 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 that the transfer of the asset also transfers the right to receive cash flows from the financial asset. When the transfer does not result in the Group transferring the right to receive cash flows from the financial asset but it does result 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.  Financial assets classified as available-for-sale are the financial interest in property assets.  Derivative financial instruments not in hedge accounting relationships are classified as fair value through profit and loss. Categories of financial instruments A summary of the classifications of the financial assets and liabilities held by the Group is set out in the following table: Loans and receivables/ cash and cash equivalents  Assets at fair value through profit and loss Derivatives used for hedging Available- for-sale Total book value Fair value adjustment  Fair value 2018 – 148.6 – 109.3 257.9 – – 0.2 – 0.2 – 82.2 82.2 – 4.2 – 4.2 – – – 82.2 148.6 4.4 109.3 344.5 – – – – – 82.2 148.6 4.4 109.3 344.5 Loans and receivables/ cash and cash equivalents Liabilities at fair value through profit and loss Derivatives used for hedging 2018 Other financial liabilities at amortised cost Total book value Fair value adjustment  Fair value – – – – – 257.9 – – – – – 0.2 – 960.1 960.1 3.4 963.5 – – 3.4 3.4 0.8 1.1 70.7 – 1,031.9 (949.7) 1.1 70.7 3.4 1,035.3 (690.8) – – – 3.4 (3.4) 1.1 70.7 3.4 1,038.7 (694.2) £m Non-current assets Financial interest in property assets Current assets Trade and other receivables excluding prepayments Derivative financial instruments Cash and cash equivalents Total financial assets £m Non-current liabilities Interest-bearing loans and borrowings Current liabilities Interest-bearing loans and borrowings Trade and other payables Derivative financial instruments Total financial liabilities Net financial assets/(liabilities) 122 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n £m Non-current assets Financial interest in property assets Current assets Trade and other receivables excluding prepayments Derivative financial instruments Cash and cash equivalents Total financial assets £m Non-current liabilities Interest-bearing loans and borrowings Current liabilities Interest-bearing loans and borrowings Trade and other payables Derivative financial instruments Total financial liabilities Net financial assets/(liabilities) Loans and receivables/ cash and cash equivalents  Assets at fair value through profit and loss – 137.7 – 88.9 226.6 – – 0.4 – 0.4 2017 Derivatives used for hedging Available- for-sale Total book value Fair value adjustment  Fair value – 86.1 86.1 – 3.0 – 3.0 – – – 86.1 – – – – – 86.1 137.7 3.4 88.9 316.1 Fair value adjustment  Fair value 137.7 3.4 88.9 316.1 Total book value Loans and receivables/ cash and cash equivalents Liabilities at fair value through profit and loss Derivatives used for hedging Other financial liabilities at amortised cost – – – – – 226.6 – – – – – 0.4 – 924.6 924.6 24.8 949.4 – – 4.9 4.9 (1.9) 1.1 48.8 – 974.5 (888.4) 1.1 48.8 4.9 979.4 (663.3) – – – 24.8 (24.8) 1.1 48.8 4.9 1,004.2 (688.1) The fair value difference relates to the Group’s corporate bond and the Rothesay Life loan, which are stated at amortised cost in the consolidated statement of financial position. The fair value of the bond is calculated as £345.5m (2017: £299.8m previous corporate bond) based on quoted prices in traded markets. The fair value of the Rothesay Life loan is calculated as £82.9m (2017: £nil) based on a discounted cash flow model using observable market rates. There is no requirement under IAS 39 to revalue these loans to fair value in the consolidated statement of financial position. Included in cash above is £14.4m (2017: £11.3m) relating to cash held on behalf of tenants, leaseholders and clients comprising service charge amounts, sinking fund balances, tenant deposits and cash held on behalf of joint ventures. These cash amounts are held by the Group in client bank accounts and are excluded from net debt. In addition, £35.6m (2017: £29.0m) of the cash balance is restricted in use by underlying financing arrangements comprising either reserve fund amounts or amounts where the release of cash is contingent upon proof of qualifying expenditure. The table below sets out the calculation of net debt and LTV: Gross debt Cash (excluding client cash) Net debt Market value of properties Other property related assets Total market value of properties and property related assets LTV 2018 £m 961.2 (94.9) 866.3 1,996.1 336.2 2,332.3 37.1% 2017 £m 925.7 (77.6) 848.1 1,878.1 372.4 2,250.5 37.7% 123 Grainger plc Annual Report and Accounts 2018          28. Financial risk management and derivative financial instruments continued Financial risk management The Group’s objectives for managing financial risk are to minimise the risk of adverse effects on performance and to ensure the ability of the Group to continue as a going concern while securing access to cost-effective finance and maintaining flexibility to respond quickly to opportunities that arise. The Group’s policies on financial risk management are approved by the Board of Directors and implemented by Group treasury. Written policies and procedures cover interest rate risk, credit risk, the use of derivative and non-derivative financial instruments and investment of excess liquidity. Group treasury reports to the Audit Committee. The Group uses derivative financial instruments to hedge its exposure to financial risk but does not take positions for speculative purposes. The sources of financial risk and the policies and activities used to mitigate each are discussed below and include credit risk, liquidity risk and market risk, which includes interest rate risk, credit availability risk, house price risk in relation to the Tricomm Housing portfolio, the CHARM portfolio and our financial interest in property assets, and capital risk. Financial risk factors  1) Credit risk Credit risk is the risk of financial loss due to a counterparty’s failure to honour its obligations. The Group’s principal financial assets include its financial interest in property assets, bank balances and cash, trade and other receivables. The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained. The Group’s financial interest in property assets (CHARM) relates to a financial interest in equity mortgages held by the Church of England Pensions Board. The Group’s cash receipts are payable by the Church Commissioners, a counterparty considered to be low risk as they have no history of past due or impaired amounts and there are no past due amounts outstanding at the year end.  The Group sometimes enters into land sales contracts within the Development division under which a proportion of the consideration is deferred and recognised within other receivables (Note 24). Each purchaser is subject to financial due diligence prior to sale. At 30 September 2018, £15.6m (2017: £29.0m) was outstanding. The Group also has credit risk relating to trade receivables. Where it is identified that recovery is doubtful, a provision for impairment is made. For all assured shorthold tenancies, credit checks are performed prior to acceptance of the tenant. Regulated tenants are incentivised through the benefit of their tenancy agreement to avoid default on their rent. Lifetime tenancies are generally at low or zero rent and hence suffer minimal credit risk. Rent deposits and personal guarantees are held in respect of some leases. Taking these factors into account, the risk to the Group of individual tenant default and the credit risk of trade receivables are considered low, as is borne out by the low level of trade receivables written off both in this year and in prior years. Tenant deposits of £2.6m (2017: £2.5m) are held that provide some security against rental arrears and property dilapidations caused by the tenant. The Group does not hold any other collateral as security. Of the net trade receivables balance of £1.8m, we consider £nil  to be not due and not impaired. All of the £34.8m other receivables balance and all of the £112.0m amounts recoverable on contracts are considered not due and not impaired. As at 30 September 2018, tenant arrears of £0.5m within trade receivables were impaired and fully provided for (2017: £0.6m). The individually impaired receivables are based on a review of outstanding arrears and an assessment of collectability. Impaired receivables and receivables not considered to be impaired are not material to the financial statements and, therefore, no further analysis is provided.  The credit risk on liquid funds and derivative financial instruments is managed through the Group’s policies of monitoring counterparty exposure, monitoring the concentration of credit risk through the use of multiple counterparties and the use of counterparties of good financial standing. At 30 September 2018, the fair value of all interest rate derivatives that had a positive value was £4.4m (2017: £3.4m). 124 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n At 30 September 2018, the combined credit exposure arising from cash held at banks, money market deposits and interest rate swaps was £100.5m (2017: £80.0m), which represents 5.3% (2017: 4.5%) of total assets. Deposits were placed with financial institutions with A- or better credit ratings. The Group has the following cash and cash equivalents: Pounds Sterling Euros 2018 £m 107.6 1.7 109.3 2017 £m 83.2 5.7 88.9 At the year end, £34.7m was placed on deposit (2017: £35.3m) at effective interest rates between 0.2% and 0.6% (2017: 0.2% and 0.3%). Remaining cash and cash equivalents are held as cash at bank or in hand.  The Group has an overdraft facility of £1.0m as at 30 September 2018 (2017: £1.0m). 2) Liquidity risk The Group ensures that it maintains continuity and flexibility through a spread of maturities. Although the Group’s core funding is subject to covenants requiring certain levels of loan to value with respect to the entities in the Group of obligors, and to maintaining a certain level of interest cover at the Group level, the loan is not secured directly against any property allowing operational flexibility. The Group has operated within its covenants during 2018 and as at 30 September 2018 (see Note 1 ‘Accounting policies – Going concern’). The Group ensures that it maintains sufficient cash for operational requirements at all times. The Group also ensures that it has sufficient undrawn committed borrowing facilities from a diverse range of banks and other sources to allow for operational flexibility and to meet committed expenditure. The business is highly cash generative from its sales of vacant properties, gross rents and management fees. In adverse trading conditions, tenanted sales can be increased and new acquisitions can be stopped. Consequently, the Group is able to reduce gearing levels and improve liquidity quickly. The following table analyses the Group’s financial liabilities and net-settled derivative financial liabilities at the consolidated statement of financial position date into relevant maturity groupings based on the remaining period to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows using yield curves as at 30 September 2018. £m At 30 September 2018 Interest-bearing loans and borrowings (Note 27) Interest on borrowings Interest on derivatives Trade and other payables At 30 September 2017 Interest-bearing loans and borrowings (Note 27) Interest on borrowings Interest on derivatives Trade and other payables Less than 1 year Between 1 and 2 years Between 2 and 5 years More than 5 years 1.1 28.0 1.6 70.7 1.1 29.3 2.4 48.8 1.1 29.7 0.5 – 1.1 31.5 1.3 – 537.6 76.5 (1.1) – 920.2 59.0 0.5 – 421.4 67.8 (2.1) – 3.3 0.1 (2.6) – The Group’s undrawn committed borrowing facilities are monitored against projected cash flows. Total 961.2 202.0 (1.1) 70.7 925.7 119.9 1.6 48.8 125 Grainger plc Annual Report and Accounts 2018 28. Financial risk management and derivative financial instruments continued Maturity of committed undrawn borrowing facilities Expiring: Between one and two years Between two and five years Over five years 2018 £m – 329.1 – 329.1 2017 £m – 218.8 – 218.8 3) Market risk The Group is exposed to market risk through interest rates, the availability of credit and house price movements relating to the Tricomm Housing portfolio and the CHARM portfolio. The approach the Group takes to each of these risks is set out below. The Group is not significantly exposed to equity price risk or to commodity price risk. Fair values IFRS 13 sets out a three-tier hierarchy for financial assets and liabilities valued at fair value. These are as follows: Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – unobservable inputs for the asset or liability. The following table presents the Group’s assets and liabilities that are measured at fair value: £m Level 3 CHARM Investment property Level 2 Interest rate swaps – in cash flow hedge accounting relationships Interest rate caps – not in cash flow hedge accounting relationships 2018 2017 Assets Liabilities Assets 82.2 589.7 671.9 4.2 0.2 4.4 – – – 3.4 – 3.4 86.1 391.0 477.1 3.0 0.4 3.4 Liabilities – – – 4.9 – 4.9 The significant unobservable inputs affecting the carrying value of the CHARM portfolio are house price inflation and the effective interest rate. Assumptions used are detailed in Note 2 and reconciliation of movements and amounts recognised in the consolidated income statement and other comprehensive income are detailed in Note 21. The investment valuations provided by Allsop LLP and CBRE Limited are based on the RICS Professional Valuation Standards, but include a number of unobservable inputs and other valuation assumptions.  The fair value of swaps and caps were valued in-house by a specialised treasury management system, using first a discounted cash flow model and market information. The fair value is derived from the present value of future cash flows discounted at rates obtained by means of the current yield curve appropriate for those instruments. As all significant inputs required to value the swaps and caps are observable, they all fall within Level 2. Interest rate swaps and caps are all classified as either current assets or current liabilities. The notional principal amount of the outstanding interest rate swap and cap contracts as at 30 September 2018 was £459.6m (2017: £460.9m).  126 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018    i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n In accordance with IAS 39, the Group has reviewed its interest rate hedges. In the absence of hedge accounting, movements in fair value are taken directly to the consolidated income statement. However, where cash flow hedges have been viewed as being effective, and have been designated as such, any gains or losses have been taken to the cash flow hedge reserve via other comprehensive income. The reconciliation between opening and closing balances for Level 3 is detailed in the table below: Assets – Level 3 Opening balance Amounts taken to income statement Other movements Closing balance 2018 £m 477.1 29.1 165.7 671.9 2017 £m 354.4 23.3 99.4 477.1 The following assets and liabilities are excluded from the above table as fair value is not the accounting basis for the Group’s financial statements, but is the basis for the Group’s EPRA NAV and EPRA NNNAV measures: £m Inventories – trading property Corporate bond Rothesay Life Loan Accounting basis Lower of cost and net realisable value Amortised cost Amortised cost Classification if fair valued Level 3  Book value 799.3 Fair value 1,406.4 Book value 841.3 Fair value 1,487.1 2018 2017 Level 1 Level 1 350.0 75.0 345.5 82.9 275.0 – 299.8 – (a) Interest rate risk – The Group’s interest rate risk arises from the risk of fluctuations in interest charges on floating rate borrowings. The Group mitigates this risk through the use of variable to fixed interest rate swaps and caps. This subjects the Group to fair value risk as the value of the financial derivatives fluctuates in line with variations in interest rates. However, the Group seeks to cash flow hedge account where applicable. The Group is, however, driven by commercial considerations when hedging its interest rate risk and is not driven by the strict requirements of the hedge accounting rules under IAS 39 if this is to the detriment of achieving the best commercial arrangement. Hedging activities are carried out under the terms of the Group’s hedging policies and are regularly reviewed by the Board to ensure compliance with this policy. The Board reviews its policy on interest rate exposure regularly with a view to establishing that it is still relevant in the prevailing and forecast economic environment. The current Group treasury policy is to maintain floating rate exposure of no greater than 30% of expected borrowing. As at 30 September 2018, 91% (2017: 79%) of the Group’s net borrowings were economically hedged to fixed or capped rates. Based on the Group’s interest rate profile at the statement of financial position date, a 1% increase in interest rates would decrease annual profits by £1.5m (2017: £2.0m). Similarly, a 1% decrease would increase annual profits by £1.5m (2017: £2.0m).  Based on the Group’s interest rate profile at the statement of financial position date, a 1% increase in interest rates would increase the Group’s equity by £16.5m (2017: £9.9m). Similarly, a 1% decrease would decrease the Group’s equity by £16.5m (2017: £9.9m).  Upward movements in medium and long-term interest rates, associated with higher interest rate expectation, increase the value of the Group’s interest rate swaps that provide protection against such moves. The converse is true for downward movements in the interest yield curve. Where the Group’s swaps qualify as effective hedges under IAS 39, these movements in fair value are recognised directly in other comprehensive income rather than the consolidated income statement. As at 30 September 2018, the market value of derivatives designated as cash flow hedges under IAS 39 is a net asset of £0.8m (2017: net liability of £1.9m). No amount is recognised within the income statement for ineffectiveness of cash flow hedges (2017: £nil). The fair value movement on derivatives not in hedge accounting relationships resulted in a charge of £0.2m (2017: a gain of £0.2m) in the consolidated income statement. 127 Grainger plc Annual Report and Accounts 2018  28. Financial risk management and derivative financial instruments continued At 30 September 2018, the market value of derivatives not designated as cash flow hedges under IAS 39 is a net asset of £0.2m (2017: £0.4m). The cash flows occur and enter in the determination of profit and loss until the maturity of the hedged debt. The table below summarises debt hedged: Hedged debt Hedged debt maturing: Within one year Between one and two years Between two and five years Over five years 2018 £m 2017 £m – – 459.6 – 459.6 – – 460.9 – 460.9 Interest rate profile – including the effect of derivatives and amortisation of issue costs Weighted average interest rate % 3.4 3.1 2.7 3.2 Average maturity years 9.5 5.5 2.3 5.7 2018 Sterling £m 425.0 459.6 88.0 972.6 Euros £m – – 0.9 0.9 Gross debt total £m 425.0 459.6 88.9 973.5 Weighted average interest rate % 5.2 2.9 2.3 3.4 Average maturity years 3.3 4.0 4.0 3.8 2017 Sterling £m 275.0 460.9 192.8 928.7 Euros £m – – 6.2 6.2 Gross debt total £m 275.0 460.9 199.0 934.9 Fixed rate Hedged rate Variable rate At 30 September 2018, the fixed interest rates on the interest rate swap contracts vary from 0.69% to 1.96% (2017: 0.69% to 1.96%); the weighted average rates are shown in the table above. (b) Credit availability risk – Credit availability risk relates to the Group’s ability to refinance its borrowings at the end of their terms or to secure additional financing where necessary. The Group maintains relationships with a range of lenders and maintains sufficient headroom through cash and committed borrowings. On 30 September 2018, the Group had available headroom of £388.6m.  (c) House price risk – The cash flows arising from the Group’s financial interest in property assets (CHARM) and the Tricomm Housing portfolio are related to the movement in value of the underlying property assets and, therefore, are subject to movements in house prices. However, consistent with the Group’s approach to house price risk across its portfolio of trading and investment properties, the Group does not seek to eliminate this risk as it is a fundamental part of the Group’s business model. (d) Capital risk management – The Board manages the Group’s capital through the regular review of: cash flow projections; the ability of the Group to meet contractual commitments; covenant tests; dividend cover; and gearing. The current capital structure of the Group comprises a mix of debt and equity. Debt is both current and non-current interest-bearing loans and borrowings as set out in the consolidated statement of financial position. Equity comprises issued share capital, reserves and retained earnings as set out in the consolidated statement of changes in equity. Group loans and borrowings have associated covenant requirements with respect to loan to value and interest cover ratios. The Board regularly reviews all current and projected future levels to monitor anticipated compliance and available headroom against key thresholds. Loan to value is reviewed in the context of the Board’s view of markets, the prospects of, and risks relating to, the portfolio and the recurring cash flows of the business. The Group deems a range of gearing of up to 45% to be appropriate in the medium term. The Group monitors its cost of debt and weighted average cost of capital (‘WACC’) on a regular basis. At 30 September 2018, the weighted average cost of debt was 3.2% (2017: 3.4%). Investment and development opportunities are evaluated using a risk adjusted WACC in order to ensure long-term shareholder value is created. 128 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 29. Pension costs Accounting policy 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 future accrual of benefits in 2003. The full deficit in the scheme was recognised in the statement of financial position as at 1 October 2004. An actuarial valuation of the scheme is carried out every three years. The cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each consolidated statement of financial position date by a qualified actuary, also under the Projected Unit Credit Method, for the purpose of determining the amounts to be reflected in the Group’s financial statements under IAS 19. The defined benefit obligation is valued by projecting the best estimate of future benefit outgoings (allowing for future salary increases for active members, revaluation to retirement for deferred members and annual pension increases for all members) and then discounting to the consolidated statement of financial position date. The pension scheme assets comprise investments in equities, bonds, insurance policies and cash, managed by Rathbones Investment Management Limited. These assets are measured at fair value in the statement of financial position. The amount shown in the statement of financial position is the net of the present value of the defined benefit obligation and the fair value of the scheme assets. When there is a surplus the Group consider the requirements of IFRIC 14 and whether there is economic benefit available as a refund of this surplus, or through a reduction in future contributions. When an unconditional right to future economic benefit exists, there is no restriction on the amount of surplus recognised. There are no current or past service costs as the scheme is closed to new members and future accrual. The net interest amount, calculated by applying the discount rate to the net defined benefit liability, is reflected in the income statement each year. Actuarial gains and losses net of deferred income tax are reflected in other comprehensive income each year. (a) 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. The Group has no legal or constructive obligations to pay further contributions if the funds do not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. Pension arrangements for Directors are disclosed in the report of the Remuneration Committee and the Directors’ Remuneration report on pages 59 to 76. The pension cost charge in these financial statements represents contributions payable by the Group. The charge of £0.9m (2017: £0.9m) is included within employee remuneration in Note 11.  (b) Defined benefit scheme In addition to the above, the Group also operates a final salary defined benefit pension scheme, the BPT Limited Retirement Benefits Scheme. The assets of the scheme are held separately in funds administered by Trustees and are invested with Rathbones Investment Management Limited, an independent investment manager. Pension benefits are linked to the members’ final pensionable salaries and service at their retirement date (or date of leaving if earlier). The Trustees are responsible for running the scheme in accordance with the scheme’s trust deed and rules, which sets out their powers. The Trustees of the scheme are required to act in the best interests of the beneficiaries of the scheme. There is a requirement that at least one-third of the Trustees are nominated by the members of the scheme.  There are three categories of pension scheme members: • Active members: currently employed by the Group. No benefits have accrued since 30 June 2003, although active members retain a final salary link. • Deferred members: former employees of the Group. • Pensioner members: in receipt of pension. 129 Grainger plc Annual Report and Accounts 2018 29. Pension costs continued The defined benefit obligation is valued by projecting the best estimate of future benefit payments (allowing for future salary increases for active members, revaluation to retirement for deferred members and annual pension increases for all members) and then discounting to the statement of financial position date. In the period up to retirement, benefits receive increases linked to Consumer Prices Index (‘CPI’) inflation (subject to a cap of no more than 5% p.a.). After retirement, benefits receive fixed increases of 5% p.a. The valuation method used is known as the Projected Unit Credit Method. The approximate overall duration of the scheme’s defined benefit obligation as at 30 September 2018 was 17 years. The IAS 19 calculations for disclosure purposes have been based upon the results of the actuarial valuation carried out as at 1 July 2016, updated to 30 September 2018, by a qualified independent actuary. i) Principal actuarial assumptions under IAS 19 (per annum) Discount rate Retail Price Index (‘RPI’) inflation Consumer Prices Index (‘CPI’) inflation Salary increases Rate of increase of pensions in payment Rate of increase for deferred pensioners ii) Demographic assumptions Mortality tables for pensioners  Mortality tables for non-pensioners  iii) Life expectancies 2018 % 2.80 3.05 2.05 3.55 5.00 2.05 2017 % 2.65 2.90 1.90 3.40 5.00 1.90 2018 100% of S2PA CMI 2015 model with a long-term rate of improvement of 1.50% p.a. for males and 1.00% for females As for pensioners 2017 100% of S2PA CMI 2015 model with a long-term rate of improvement of 1.50% p.a. for males and 1.00% p.a. for females As for pensioners Life expectancy for a current 65-year-old (years) Life expectancy at age 65 for an individual aged 45 (years) 30 September 2018 30 September 2017 Male 87.5 89.2 Female 88.8 90.0 Male 87.4 89.1 Female 88.7 89.9 130 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Risks Through the scheme, the Group is exposed to a number of risks: • Asset volatility: the scheme’s defined benefit obligation is calculated using a discount rate set with reference to corporate bond yields; however, the scheme also invests in equities. These assets are expected to outperform corporate bonds in the long term, but provide volatility and risk in the short term. • Changes in bond yields: a decrease in corporate bond yields would increase the scheme’s defined benefit obligation; however, this would be partially offset by an increase in the value of the scheme’s bond holdings.  • Inflation risk: some of the scheme’s defined benefit obligation is linked to inflation, therefore higher inflation will result in a higher defined benefit obligation (subject to the appropriate caps in place). The majority of the scheme’s assets are either unaffected by inflation, or only loosely correlated with inflation, therefore an increase in inflation would also increase the deficit. • Life expectancy: if scheme members live longer than expected, the scheme’s benefits will need to be paid for longer, increasing the scheme’s defined benefit obligation. The Trustees and Group manage risks in the scheme through the following strategies: • Diversification: investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. • Investment strategy: the Trustees are required to review their investment strategy on a regular basis.  Market value of scheme assets The assets of the scheme are invested in a diversified portfolio as follows: Equities Bonds Cash Insurance policies Total value of assets The actual return on assets over the year was  30 September 2018 30 September 2017 Market value £m 15.6 11.1 0.9 3.6 31.2 0.8 % of total scheme assets 50% 36% 3% 11% 100% Market value £m 15.4 11.1 0.4 3.9 30.8 1.8 % of total scheme assets 50% 36% 1% 13% 100% The assets of the scheme are held with Rathbones Investment Management Limited in a managed fund. All of the assets listed have a quoted market price in an active market with the exception of the insurance policy asset where its value has been set equal to the secured pensioner liability.  131 Grainger plc Annual Report and Accounts 2018 29. Pension costs continued The change in the market value of the scheme assets over the year was as follows: Market value of scheme assets at the start of the year Interest income Employer contributions Actuarial return on assets less interest Benefits paid Market value of scheme assets at the end of the year The change in value of the defined benefit obligation over the year was as follows: Value of defined benefit obligation at the start of the year Interest on pension scheme liabilities Actuarial gains: changes in financial assumptions Experience adjustment Benefits paid Value of defined benefit obligation at the end of the year Amounts recognised in the consolidated statement of comprehensive income Actuarial return on assets less interest Experience adjustment Actuarial gain on defined benefit obligation 2018 £m 30.8 0.9 0.5 (0.1) (0.9) 31.2 2018 £m 31.0 0.8 (0.6) – (0.9) 30.3 2018 £m (0.1) – 0.6 0.5 2017 £m 29.5 0.7 0.5 1.2 (1.1) 30.8 2017 £m 34.7 0.8 (1.6) (1.8) (1.1) 31.0 2017 £m 1.2 1.8 1.6 4.6 The gain shown in the above table of £0.5m (2017: £4.6m) has been included in the consolidated statement of comprehensive income on page 88.  Future funding obligation  The Trustees are required to carry out an actuarial valuation every three years. The last actuarial valuation of the scheme was performed by the Actuary for the Trustees as at 1 July 2016. This valuation revealed a funding shortfall of £3.6m. As a result of this valuation, the Group agreed a recovery plan with the Trustees to pay additional contributions to eliminate the deficit by 30 April 2022. Based on this plan, the Group expects to pay £0.6m p.a. to the scheme until 30 April 2022. The next actuarial valuation is due to be performed as at 1 July 2019. The plan asset has not been restricted as the Group has an unconditional right to a refund of the surplus. In line with paragraph 23 of IFRIC 14, no additional liability is recognised as the additional contributions under the funding plan will reduce the future contributions into the scheme. Sensitivity analysis Set out below is an analysis of how the scheme deficit would vary with changes to the key actuarial assumptions: Discount rate movement of 0.25% p.a. Salary movement of 0.25% p.a. Life expectancies movement of one year Increase/decrease in deficit of 4.6%/4.3% Increase/decrease in deficit of 0.1% Increase/decrease in deficit of 3% 132 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 30. Issued share capital Accounting policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Acquisition of and investment in own shares The Group acquires its own shares to enable it to meet its obligations under the various share schemes in operation. 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.  Where the Group buys back its own shares as treasury shares it adopts the accounting as described above. Where it subsequently cancels them, issued share capital is reduced by the nominal value of the shares cancelled and this same amount is transferred to the capital redemption reserve. Allotted, called-up and fully paid: 418,825,400 (2017: 418,611,685) ordinary shares of 5p each 2018 £m 20.9 2017 £m 20.9 During the year, The Grainger Employee Benefit Trust has not acquired any shares (2017: none acquired). The Group paid £0.3m (2017: £0.3m) to the Share Incentive Plan during the year for the purchase of matching shares and free shares in the scheme. The total cost of acquiring own shares of £0.3m (2017: £0.3m) has been deducted from retained earnings within Shareholders’ equity.  As at 30 September 2018, share capital included 828,576 (2017: 1,240,060) shares held by The Grainger Employee Benefit Trust and 1,506,300 (2017: 1,506,300) shares held by Grainger plc as treasury shares. The total of these shares is 2,334,876 (2017: 2,746,360) with a nominal value of £116,744 (2017: £137,318) and a market value as at 30 September 2018 of £7.0m (2017: £7.4m).  Movements in issued share capital during the year and the previous year were as follows: At 30 September 2016 Options exercised under the SAYE scheme At 30 September 2017 Options exercised under the SAYE scheme (Note 31) At 30 September 2018 Number 418,374,535 237,150 418,611,685 213,715 418,825,400 Nominal value £’000 20,918 12 20,930 11 20,941 133 Grainger plc Annual Report and Accounts 2018  31. Share-based payments  Accounting policy The Group operates a number of equity-settled, share-based compensation plans comprising awards under a Long-Term Incentive Plan (‘LTIP’), a Deferred Bonus Plan (‘DBP’), a Share Incentive Plan (‘SIP’) and a Save As You Earn (‘SAYE’) scheme. The fair value of the employee services received in exchange for the grant of shares and options is recognised as an employee expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares and options granted. For market- based conditions, the probability of vesting is taken into account in the fair value calculation and no revision is made to the number of shares or options expected to vest. For non-market conditions, each year the Group revises its estimate of the number of options or shares that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement with a corresponding adjustment to equity. Awards that are subject to a market-based performance condition are valued at fair value using the Monte Carlo simulation model. Awards not subject to a market-based performance condition are valued at fair value using the Black-Scholes valuation model. When options are exercised the proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium. Share awards Award date Number of shares on grant 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 (£) LTIP DBP SAYE 11 December 2017 Market based 295,988 – 3 11 December 2017 Non-market based 295,989 – 3 21 December 2017 Basic 35,525 – 1-3 21 December 2017 Enhanced 69,156 – 1-5 7 2.86 0.52 N/A 24.6 1.83 7 2.86 0.52 N/A 24.6 2.86 3 2.88 N/A 1.6 N/A 2.88 3 2.88 N/A 1.6 N/A 2.88 11 July 2018 3 year scheme 174,265 2.530 3 – 3.03 0.81 1.6 25.7 0.74 11 July 2018 5 year scheme 10,077 2.530 5 – 3.03 1.00 1.6 29.1 0.99 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 consolidated income statement is £1.1m (2017: £2.1m).  134 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n (a) LTIP scheme One-half of the awards under the LTIP scheme are subject to an absolute total shareholder return performance condition measured over three years from the date of grant and one-half are subject to annual growth in NNNAV compared to the average growth in the Halifax and Nationwide House Price indices all measured over three years from the date of grant.  The movement in LTIP awards during the year is as follows: Scheme LTIP 16 December 2014 11 January 2016 12 January 2016* 11 February 2016 8 February 2017 11 December 2017 Total Opening balance Awards granted Awards vested Awards lapsed Closing balance 570,484 593,387 50,045 142,745 688,948 – 2,045,609 – – – – – 591,977 591,977 (302,356) – (26,524) – – – (328,880) (268,128) (64,294) (23,521) – (133,437) – (489,380) – 524,093 – 142,745 555,511 591,977 1,819,326 * The grant of LTIP awards made on 12 January 2016 was made to Helen Gordon as replacement for awards made by her previous employer. The fair value of these awards is based on the assumptions relating to previous LTIP awards. Please see section 6 of the Remuneration report on page 71 for further details.  (b) DBP scheme Awards granted under the DBP scheme have no specific performance conditions other than the Company meeting its target for operating profit before valuation movements and other adjustments (‘OPBVM’) and employees in the scheme continuing to be employed. There is a three-year vesting period from the date of grant. One-third of the awards vest at the end of each year. Participants can choose to exercise their awards on vesting or to retain their awards within the plan until the end of the third year at which point a 50% matching element is added to their award entitlement.  In addition to the normal DBP scheme, an enhanced DBP scheme (‘EDBP’) is also provided. The enhanced scheme operates in exactly the same way as the normal DBP scheme except that if participants retain their awards within the plan until the end of the fifth year, a further additional 50% matching award is added to their award entitlement. Awards under the DBP/EDBP have been valued based on the share price at the date of the award less the dividend yield at the award date as there is no entitlement to dividends during the vesting period. The movement in DBP/EDBP awards during the year is as follows: Scheme DBP 9 December 2013 16 December 2014 12 January 2016 11 January 2017 21 December 2017 EDBP 16 December 2014 12 January 2016 11 January 2017 21 December 2017 Total Opening balance Awards granted Awards vested Awards lapsed Closing balance 3,333 44,640 35,535 33,765 – 97,696 57,616 94,606 – 367,191 – – – – 35,525 – – – 69,156 104,681 (3,333) (44,640) (4,852) (1,725) – (24,423) (1,560) (2,070) – (82,603) – – (6,068) (6,038) – (4,885) (7,800) (19,668) (19,884) (64,343) – – 24,615 26,002 35,525 68,388 48,256 72,868 49,272 324,926 135 Grainger plc Annual Report and Accounts 2018                    31. Share-based payments continued (c) SAYE share option scheme Awards under the SAYE scheme have been valued at fair value using a Black-Scholes valuation model. The number of shares subject to options as at 30 September 2018, the periods in which they were granted and the periods in which they may be exercised and the movement during the year are given below: Exercise price (pence) Exercise period Opening balance Awards granted Awards exercised Awards lapsed/ cancelled Closing balance SAYE scheme 2012 – 5 year 2013 – 5 year 2014A – 3 year 2014B – 3 year 2015 – 3 year 2016 – 3 year 2017 – 3 year 2018 – 3 year Weighted average exercise price (pence per share) 68.9 115.1 173.1 151.3 173.3 166.8 210.2 253.0 193.7 2015-18 2016-19 2017-20 2018-20 2018-21 2019-22 2020-23 2021-24 4,354 6,515 61,867 331,511 134,555 221,840 224,145 – 984,787 – – – – – – – 184,342 184,342 (4,354) (2,606) (7,277) (144,124) (53,561) (1,199) (594) – (213,715) – – – (31,988) (26,197) (36,927) (29,945) (711) (125,768) – 3,909 54,590 155,399 54,797 183,714 193,606 183,631 829,646 For those share options exercised during the year, the weighted average share price at the date of exercise was 282.9p (2017: 251.6p). For share options outstanding at the end of the year, the weighted average remaining contractual life was 1.8 years (2017: 2.1 years). There were 34,647 (2017: 11,631) share options exercisable at the year end with a weighted average exercise price of 199.5p (2017: 134.1p). (d) SIP scheme Awards under the SIP scheme have been based on the share price at the date of the award. 32. Changes in equity The consolidated statement of changes in equity is shown on page 90. Further information relating to reserves is provided below. Movements on the retained earnings reserve are set out in Note 33.  (a) Merger reserve The merger reserve arose when the Company issued shares in partial consideration for the acquisition of City North Group plc in the year ended 30 September 2005. The issue satisfied the provisions of Section 612 of the Companies Act 2006 (formerly Section 131 of the Companies Act 1985) and the premium relating to the shares issued was credited to a merger reserve. (b) 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 net of tax.  (c) Available-for-sale reserve The fair value movements in the valuation of the CHARM financial asset, net of tax, are taken to this reserve.  136 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 33. Movement in retained earnings The retained earnings reserve comprises various elements, including: Treasury shares bought back and cancelled Included within retained earnings at 30 September 2018 is a balance of £7.8m (2017: £7.8m) relating to treasury shares bought back and cancelled. Investment in own shares Included within retained earnings at 30 September 2018 is a balance of £8.4m (2017: £10.4m) relating to investments in own shares. 34. List of subsidiaries, joint ventures and associates A full list of all subsidiaries, joint ventures, associates and other related undertakings as at 30 September 2018 is set out in the notes to the parent company financial statements on pages 145 to 148. 35. Related party transactions During the year ended 30 September 2018, the Group transacted with its associates and joint ventures (details of which are set out in Notes 19 and 20). The Group provides a number of services to its associates and joint ventures. These include property and asset management services for which the Group receives fee income. The related party transactions recognised in the income statement and statement of financial position are as follows: £’000 GRIP REIT PLC Walworth Investment Properties Limited Vesta LP GRIP REIT PLC  Czech Republic combined Curzon Park Limited1 Helical Grainger (Holdings) Limited1 King Street Developments (Hammersmith) Limited2 Walworth Investment Properties Limited Vesta LP 2018 2017 Fees recognised 3,798 23 712 4,533 Year end balance 1,048 – – 1,048 Interest recognised £’000 647 (45) – – – – – 602 2018 Year end loan balance £m Interest rate % 18.2 Nil and 4.75 4.00 (0.4) Nil 21.9 Nil 7.5 0.3 – 6.6 54.1 Nil – Nil Interest recognised £’000 764 (99) – – – 156 – 821 Fees recognised 3,737 40 234 4,011 2017 Year end loan balance £m 23.1 (0.5) 21.9 9.9 – – 1.4 55.8 Year end balance 2,815 40 – 2,855 Interest rate % Nil and 4.75 4.00 Nil Nil – 7.00 Nil 1 The amount disclosed above is the gross loan amount. Some provisions have been made against the loans. 2 King Street Developments (Hammersmith) Limited is a wholly-owned subsidiary of Helical Grainger (Holdings) Limited in which the Group has a 50% joint venture interest. The Group’s key management are the only other related party. Details of key management compensation is provided in Note 11. 137 Grainger plc Annual Report and Accounts 2018 36. Operating leases Accounting policy i) Group as lessor – Rental income from operating leases is recognised on a straight-line basis over the lease term. The net present value of ground rents receivable is, in the opinion of the Directors, immaterial. Accordingly, ground rents receivable are taken to the consolidated income statement on a straight-line basis over the period of the lease. Properties leased out to tenants are included in the consolidated statement of financial position as either investment property or as trading property under inventories.  ii) Group as lessee – The Group occupies a number of its offices as a lessee. After a review of all of its occupational leases, the Directors have concluded that all such leases are operating leases. Payments, including prepayments, made under operating leases (net of any incentives from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (a) Group as lessor The future aggregate minimum lease payments due to the Group under non-cancellable operating leases are as follows: Operating lease payments due: Not later than one year Later than one year and not later than five years Later than five years 2018 £m 3.6 9.7 62.4 75.7 2017 £m 3.0 8.5 96.1 107.6 There are no contingent rents recognised within net rental income in 2018 or 2017 relating to properties where the Group acts as a lessor of assets under operating leases. A significant proportion of the Group’s non-cancellable operating leases relate to regulated tenancies under which tenants have the right to remain in a property for the remainder of their lives. It is therefore not possible to estimate the timing of future minimum lease payments in respect of these regulated tenancies and so these are excluded from the above analysis.  138 Financial statementsNOTES TO THE FINANCIAL STATEMENTS CONTINUEDGrainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n (b) Group as lessee The future aggregate minimum lease payments payable by the Group under non-cancellable operating leases are as follows: Operating lease payments due: Not later than one year Later than one year and not later than five years Later than five years 2018 £m 2017 £m 0.9 2.8 0.1 3.8 1.0 3.2 0.5 4.7 Operating lease payments represent the 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 one and ten years. Rent reviews generally take place every five years. Contract hire car leases generally have a three-year term. 37. Contingent liabilities The properties in certain subsidiary companies form a ‘guarantee Group’ with a market value of £1,279.7m provide the security for the Group’s core debt facility. Barclays Bank PLC and Lloyds Bank PLC have provided guarantees under performance bonds relating to the Group’s UK Development division. As at 30 September 2018, total guarantees amounted to £2.9m (2017: £3.1m). 38. Capital commitments The Group has current commitments under a number of its PRS projects totalling £607.5m as at 30 September 2018 (2017: £136.2m). 39. Post balance sheet events On 18 October 2018, the maturity date on £50m of sterling bank loans was extended by a further year, increasing weighted average debt maturity to 5.8 years. On 8 November 2018, the Group confirmed the signing of a joint venture agreement with Lewisham Borough Council to deliver up to 300 purpose-built PRS homes at Besson Street, New Cross Gate, for a cost to the Group of c.£51m. On 9 November 2018, the Group agreed to forward fund and acquire a PRS, build-to-rent development in Tottenham Hale, North London, comprising 108 private rental homes for £41m. 139 Grainger plc Annual Report and Accounts 2018 Financial statements PARENT COMPANY STATEMENT OF FINANCIAL POSITION  AS AT 30 SEPTEMBER Fixed assets Investments Current assets Trade and other receivables Cash at bank and in hand Creditors: amounts falling due within one year Net current assets/(liabilities) Total assets less current liabilities Creditors: amounts falling due after more than one year Interest-bearing loans and borrowings NET ASSETS Capital and reserves Issued share capital Share premium account Capital redemption reserve  Retained earnings TOTAL EQUITY Notes 2018 £m 2017 £m 2 3 4 5 6 846.1 899.6 94.6 30.0 124.6 (18.2) 106.4 952.5 (484.9) 467.6 20.9 111.4 0.3 335.0 467.6 46.1 28.8 74.9 (237.5) (162.6) 737.0 (411.9) 325.1 20.9 111.1 0.3 192.8 325.1 The financial statements on pages 140 to 148 were approved by the Board of Directors on 13 November 2018 and were signed on their behalf by: Helen Gordon Director Vanessa Simms  Director 140 Grainger plc Annual Report and Accounts 2018 Financial statements PARENT COMPANY STATEMENT OF CHANGES IN EQUITY Balance as at 1 October 2016 Loss for the year Award of SAYE shares Purchase of own shares Share-based payments charge Dividends paid Balance as at 30 September 2017 Profit for the year Award of SAYE shares Purchase of own shares Share-based payments charge Dividends paid Balance as at 30 September 2018 Issued share capital £m 20.9 – – – – – 20.9 – – – – – 20.9 Share premium £m 110.8 – 0.3 – – – 111.1 – 0.3 – – – 111.4 Capital redemption reserve £m 0.3 – – – – – 0.3 – – – – – 0.3 Retained earnings £m 229.2 (18.9) – (0.3) 2.1 (19.3) 192.8 162.2 – (0.3) 1.1 (20.8) 335.0 Total equity £m 361.2 (18.9) 0.3 (0.3) 2.1 (19.3) 325.1 162.2 0.3 (0.3) 1.1 (20.8) 467.6 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 141 Grainger plc Annual Report and Accounts 2018 Financial statements NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 1. Company accounting policies (a) Basis of preparation The financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’). The financial statements have been prepared on a going concern basis under the historical cost convention, in accordance with the Companies Act 2006. The application of FRS 101 has enabled the Company to take advantage of certain disclosure exemptions that would have been required had the Company adopted International Financial Reporting Standards in full. The exemptions that have been applied in the preparation of these financial statements are as follows: • A cash flow statement and related notes have not been presented. • Disclosures in respect of new standards and interpretations that have been issued but which are not yet effective have not been provided. • Disclosures in respect of transactions with wholly-owned subsidiaries have not been made. • Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instruments: Disclosures have not been made. The Company has taken the exemption allowed under Section 408 of the Companies Act 2006 from the requirement to present its own profit and loss account. The profit for the year was £162.2m (2017: loss of £18.9m). These financial statements present information about the Company as an individual undertaking and not about its Group. The following accounting policies have been applied consistently in dealing with items that are considered material in relation to the Company’s financial statements. (b) Investments Investments in subsidiaries are carried at historical cost less provision for impairment based upon an assessment of the net recoverable amount of each investment. To the extent that the assessment of the recoverable amount improves due to changes in economic conditions, impairment provisions are reversed, with all provision movements recognised in profit and loss. (c) Tax Corporation tax is provided on taxable profits or losses at the current rate. Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the end of the reporting period, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at that date. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the temporary differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is measured on a non-discounted basis. (d) Own shares including treasury shares Transactions of The Grainger Employee Benefit Trusts are included in the Company’s financial statements. The purchase of shares in the Company by each trust and any treasury shares bought back by the Company are debited direct to equity. (e) Share-based payments Under the share-based compensation arrangements set out in Note 31 to the Group financial statements, employees of Grainger Employees Limited have been awarded options and conditional shares in the Company. These share-based arrangements have been treated as equity-settled in the consolidated financial statements. In the Company’s financial statements, the share-based payment charge has been added to the cost of investment in subsidiaries with a corresponding adjustment to equity. 142 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 1. Company accounting policies continued (f) Borrowings Borrowings are initially recognised at the fair value of consideration received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date. 2. Investments Cost of investment At 1 October Additions Disposals At 30 September Impairment At 1 October Reversal of impairment provisions At 30 September Net carrying value 2018 £m 977.3 66.6 (126.0) 917.9 2018 £m 77.7 (5.9) 71.8 846.1 2017 £m 975.2 2.1 – 977.3 2017 £m 81.9 (4.2) 77.7 899.6 The Directors believe that the carrying value of the investments is supported by their underlying net assets. After an assessment of net recoverable value a net impairment reversal of £5.9m (2017: reversal of £4.2m) has been made. A list of the subsidiaries of the Company is contained within Note 8 on pages 145 to 148. 3. Trade and other receivables Amounts owed by Group undertakings Other receivables Amounts due in both 2018 and 2017 are all due within one year. 4. Creditors: amounts falling due within one year Amounts owed to Group undertakings Tax and social security costs Accruals and deferred income 2018 £m 92.5 2.1 94.6 2018 £m 12.8 – 5.4 18.2 2017 £m 46.1 – 46.1 2017 £m 225.0 8.3 4.2 237.5 Included in the prior year within amounts owed to Group undertakings was an unsecured loan with a year end balance totalling £nil (2017: £222.8m). The loan bore interest at LIBOR plus margin plus costs, which averaged 3.75% in the year (2017: 3.95%). Interest payable and similar charges for the year amounted to £4.2m (2017: £9.9m). All other amounts owed to Group undertakings are unsecured, bear no interest, and are repayable on demand. 143 Grainger plc Annual Report and Accounts 2018 Financial statements NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED 5. Interest-bearing loans and borrowings Variable rate – loans Unamortised issue costs Corporate bond Unamortised issue costs Unamortised bond (discount)/ premium Total interest-bearing loans and borrowings 2018 £m 140.0 (1.1) 138.9 350.0 (2.6) 347.4 (1.4) 484.9 2017 £m 140.0 (1.1) 138.9 275.0 (2.4) 272.6 0.4 411.9 The variable rate loans are secured by floating charges over the assets of the Group. The loans bear interest at rates between 1.6% and 1.8% (2017: Between 1.6% and 1.8%) over LIBOR. A new £350.0m, 3.375% corporate bond was issued at 99.588% in April 2018. The discount on issuance is being amortised to the income statement using an effective interest basis. Unamortised costs and the outstanding discount in relation to the corporate bond are, in total, £4.0m and will be amortised over the remaining life of the bond.  The unamortised costs and the outstanding premium in relation to the previous corporate bond were amortised up until the date of redemption at which point the remaining balance of £1.6m unamortised cost was expensed to the income statement. 6. Issued share capital Allotted, called-up and fully paid: 418,825,400 (2017: 418,611,685) ordinary shares of 5p each 2018 £m 20.9 2017 £m 20.9 Details of movements in issued share capital during the year and the previous year are provided in Note 30 to the Group financial statements on page 133. Details of share options and awards granted by the Company are provided in Note 31 to the Group financial statements on pages 134 to 136 and discussed within the Remuneration Committee’s report on pages 59 to 76. 7. Other information Dividends The Company’s dividend policy is aligned to our strategy to grow rental income, with 50% of net rental income being distributed. Around one-third of the payment is made through the interim dividend based on half year results, with the balance paid through the final dividend, subject to approval at the AGM. The Company has sufficient distributable reserves to support this policy. Information on dividends paid and declared is given in Note 15 to the Group financial statements on page 112. Directors’ share options and share awards Details of the Directors’ share options and of their share awards are set out in the Remuneration Committee’s report. 144 Grainger plc Annual Report and Accounts 2018 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 8. List of subsidiaries, associates and joint ventures A full list of the Group’s subsidiaries, associates, joint ventures and other related undertakings as at 30 September 2018 is set out below: 100% 50% 100% 67% 33% 50% 100% 100% 100% 100% 100% 100% 100% 50% 50% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% % effective holding Company 1 Ifield Road Management Limited 50% 12 Nevern Square (Management Company) Limited 25% 16 Beverley Terrace Limited 33% 16 Castlebar Road Management Company Limited 50% 19 Ifield Road Management Limited 31-37 Disbrowe Road Freehold Company Limited 36 Finborough Road Management Limited 45 Ifield Road Management Limited 86 Holland Park Freehold Limited 174 Bishops Road Limited1 Atlantic Metropolitan (U.K.) Limited BPT (Assured Homes) Limited BPT (Bradford Property Trust) Limited BPT (Residential Investments) Limited BPT (Residential Management Services) Limited BPT Limited Berewood Estate Management Limited1 Besson Street Limited Liability Partnership Besson Street Second Member Limited Brierley Green Management Company Limited Bromley No.1 Holdings Limited Bromley No. 1 Limited Bromley No.1 Holdings Limited Bromley Property Investments Limited Cambridge Place Management Company Limited CCZ a.s. Chrisdell Limited City North 5 Limited City North Group Limited City North Properties Limited Crofton Estate Management Company Limited Crossco (No. 103) Limited Curzon Park Limited Derwent Developments (Curzon) Limited Derwent Developments Limited Derwent Nominees (No 2) Limited Dorchester Court (Staines) Residents Association Limited Faside Estates Limited Frincon Holdings 1986 Limited Frincon Holdings Limited GIP Limited Globe Brothers Estates Limited Grainger (Aldershot) Limited Grainger (Clapham) Limited Grainger (Hadston) Limited Grainger (Hornsey) Limited Grainger (London) Limited Grainger (Octavia Hill) Limited 6% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Direct Indirect Registered office Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 1st Asset Management Limited, 7-9 Tryon Street, London, SW3 3LG 16 Beverley Terrace, North Shields, NE30 4NT 16a Castlebar Road, London, W5 2DP Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 102 Fulham Palace Road, London, W6 9PL Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 17 Kensington Place, London, W8 7PT Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Vězeňská 116/5, PSČ 110 00, Prague, Czech Republic Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 7a Howick Place, London, SW1P 1DZ Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 1a Dorchester Court, Greenlands Road, Staines, TW18 4LS 5 Atholl Place, Perth, PH1 5NE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 145 Grainger plc Annual Report and Accounts 2018 Financial statements NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED 8. List of subsidiaries, associates and joint ventures continued Company Grainger (Peachey) Limited Grainger Asset Management Limited Grainger Bradley Limited Grainger Developments Limited Grainger Employees Limited Grainger Enfranchisement No. 1 (2012) Limited Grainger Enfranchisement No. 2 (2012) Limited Grainger Enfranchisement No. 3 (2012) Limited Grainger Europe (No. 2) Limited Grainger Europe (No. 3) Limited Grainger Europe (No. 4) Limited Grainger Europe Limited Grainger European Ventures Limited Liability Partnership Grainger FRM GmbH Grainger Finance (Tricomm) Limited Grainger Finance Company Limited Grainger Homes (Gateshead) Limited Grainger Homes Limited Grainger Housing & Developments Limited Grainger Invest (No. 1 Holdco) Limited Grainger Invest No. 1 Limited Liability Partnership Grainger Invest No. 2 Limited Liability Partnership Grainger K&C Lettings Limited Grainger Kensington & Chelsea Limited Grainger Land & Regeneration Limited Grainger Maidenhead Limited Grainger Newbury Limited Grainger OCCC Limited Grainger Pearl Holdings Limited Grainger Pearl Limited Grainger Pearl (Salford) Limited Grainger Pimlico Limited Grainger Portfolio 3 GmbH Grainger Properties Limited Grainger Property Services Limited Grainger PRS Limited Grainger RAMP Limited Grainger Real Estate Limited Grainger REIT 1 Limited Grainger REIT 2 Limited Grainger REIT 3 Limited Grainger Residential Limited Grainger Residential Management Limited Grainger Rural Limited Grainger Serviced Apartments Limited Grainger Seven Sisters Limited Grainger Southwark Limited Grainger Treasury Property Investments Limited Partnership Grainger Treasury Property (2006) Limited Liability Partnership 146 % effective holding 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ Indirect Indirect Direct Indirect Direct Direct Indirect Indirect Indirect Direct Direct Direct Direct Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Direct Indirect Indirect Direct Indirect Direct Indirect Indirect Direct Indirect Indirect Indirect Indirect Direct Direct Indirect Indirect Indirect Indirect Registered office Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Grüneburgweg 58-62, 60322 Frankfurt am Main, Germany Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Grüneburgweg 58-62, 60322 Frankfurt am Main, Germany Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 100% Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 100% Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Grainger plc Annual Report and Accounts 2018Company Grainger Tribe Limited Grainger Trust Limited Grainger Unitholder No 1 Limited Greit Limited G:Res-Co 4 Limited GRIP Jersey Property Holdings (2016) Limited GRIP Nomco 1 Limited GRIP Nomco 2 Limited GRIP Nomco 3 Limited GRIP Nomco 4 Limited GRIP Nomco 5 Limited GRIP Nomco 6 Limited GRIP Nomco 7 Limited GRIP Nomco 8 Limited GRIP REIT PLC GRIP Unit Trust GRIP Unit Trust 1 GRIP Unit Trust 2 GRIP Unit Trust 6 GRIP UK Holdings Limited GRIP UK Property Developments Limited GRIP UK Property Investments Limited H I Tricomm Holdings Limited Harborne Tenants Limited Helical Grainger (Holdings) Limited Helical Grainger Limited Home SGO Properties Limited Infrastructure Investors Defence Housing (Bristol) Limited Ingleby Court Management Limited Jesmond Place Management Limited Kew Bridge Court Guernsey Limited % effective holding 100% 100% 100% 100% 24.9% 24.9% 24.9% 24.9% 24.9% 24.9% 24.9% 24.9% 22.4% 22.4% 24.9% 24.9% 24.9% 24.9% 22.4% 24.9% 24.9% 24.9% 100% 100% 50% 50% 100% 100% 100% 70% 24.9% 100% 100% King Street Developments (Hammersmith) Limited 50% Kings Dock Mill (Liverpool) Management Company Limited1 Langwood Properties Limited Lewisham Grainger Holdings Limited Liability Partnership Manor Court (Solihull) Management Limited Margrave Estates Limited Mariners Park Estate North Management Company Limited Mariners Park Estate South Management 11% Company Limited 100% N & D London Investments 100% N & D London Limited 100% N & D Properties (Midlands) Limited Northumberland & Durham Property Trust Limited 100% Oakleigh House (Sale) Management Company Limited 50% 100% 100% 100% 69% Direct/ Indirect Direct Indirect Direct Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Registered office Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 8 Sackville Street, London W1S 3DG 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 47 Esplanade, St Helier, Jersey, JE1 0BD 8 Sackville Street, London, W1S 3DG 8 Sackville Street, London, W1S 3DG 8 Sackville Street, London, W1S 3DG Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 5 Hanover Square, London, W1S 1HQ 5 Hanover Square, London, W1S 1HQ Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 1st and 2nd Floors, Elizabeth House, Les Ruettes Brayes, St Peter Port, Guernsey, GY1 1EW 5 Hanover Square, London, W1S 1HQ Indirect Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 5 Atholl Place, Perth, PH1 5NE Indirect Indirect Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Indirect Indirect Indirect Direct Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Indirect Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 147 Grainger plc Annual Report and Accounts 2018 Financial statements NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED 8. List of subsidiaries, associates and joint ventures continued Company Park Developments (Liverpool) Limited Park Estates (Liverpool) Limited Park Estates Investments (Liverpool) Limited PHA Limited Portland House Holdings Limited Redoubt Close Management Limited Residential Leases Limited Residential Tenancies Limited Rotation Finance Limited Sandown (Whitley Bay) Management Limited Sixty-Two Stanhope Gardens Limited Stagestar Limited Suburban Homes Limited The Bradford Property Trust Limited The Chancel Management Company Limited The Grainger Residential Property Unit Trust The Owners of the Middlesbrough Estate Limited The Sandwarren Management Company Limited Tricomm Housing (Holdings) Limited Tricomm Housing Limited Vesta (General Partner) Limited Vesta Limited Partnership Victoria Court (Southport) Limited Wansbeck Lodge Management Limited Warren Court Limited Warwick Square Management Company Limited Wellesley Residents Trust Limited1 West Waterlooville Developments Limited % effective holding 100% 100% 100% 100% 100% 3% 100% 100% 100% 51% 20% 25% 100% 100% 96% 24.9% 100% 100% 100% 100% 30% 20% 100% 100% 100% 100% 100% 100% Direct/ Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Registered office Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Portmill House, Portmill Lane, Hitchin, SG5 1DJ Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 31 Radipole Road, Parsons Green, Fulham, London, SW6 5DN Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE 47 Esplanade, St Helier, Jersey, JE1 0BD Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE Citygate, St James’ Boulevard, Newcastle upon Tyne, NE1 4JE All subsidiaries, associates and joint ventures are incorporated in the United Kingdom except where the registered office indicates otherwise. 1 Company limited by guarantee. 148 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n Financial statements EPRA PERFORMANCE MEASURES (UNAUDITED) 1. Introduction The EPRA Best Practices Recommendations (‘EPRA BPR’) were issued by EPRA’s Reporting and Accounting Committee in August 2011 and the guidance was subsequently updated in November 2016. Included within EPRA BPR are six EPRA performance measures deemed to be of key importance to investors in property companies and which aim to encourage more consistent and widespread disclosure. The EPRA performance measures are set out below: Performance measure 1) EPRA Earnings 2) EPRA NAV 3) EPRA NNNAV Definition Recurring earnings from core operational activities. This is a key measure of a company’s underlying operating results providing an indication of the extent to which current dividend payments are supported by earnings. Net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term property business model. This measure is consistent with NAV as defined and disclosed in the Financial review and in Note 5 to the Group financial statements. EPRA NAV adjusted to include the fair values of i) financial instruments, ii) debt and iii) deferred taxes. This measure is consistent with NNNAV as defined and disclosed in the Financial review and in Note 5 to the Group financial statements. 4i) EPRA Net Initial Yield (‘NIY’) Annualised rental income based on cash rents at the balance sheet date, less non-recoverable property 4ii) EPRA ‘topped-up’ yield 5) EPRA Vacancy Rate 6) EPRA Cost Ratios expenses, divided by the market value of the property, increased with (estimated) purchasers’ costs. This measure incorporates an adjustment to EPRA NIY in respect of the expiration of rent free periods (or other unexpired lease incentives such as discounted rent periods and step rents). Estimated Market Rent Value (‘ERV’) of vacant space divided by ERV of the whole portfolio. This measure includes all administrative and operating expenses including share of joint ventures’ overheads and operating expenses, net of any service fees, all divided by gross rental income. The Group is supportive of EPRA’s initiative and, in this report, is disclosing against six of the EPRA measures: EPRA Earnings, EPRA NAV, EPRA NNNAV, EPRA NIY, EPRA Vacancy Rate and EPRA Cost Ratios. The Group is predominantly a trading company and a significant portion of its cost base is related to trading activities. It is therefore not appropriate to eliminate profits on disposal of trading property as recognised on the consolidated income statement. An adjustment to profits on disposal of trading property has been made with reference to trading property revaluation gains previously recognised in EPRA NAV and EPRA NNNAV. This adjustment has been made to EPRA Earnings so that earnings are marked-to-market. This adjustment has also been applied to adjusted EPRA cost ratio to appropriately reflect the Group’s cost base. Summary Adjusted EPRA Earnings Adjusted EPRA Earnings per share EPRA NAV EPRA NAV per share EPRA NNNAV EPRA NNNAV per share EPRA NIY Adjusted EPRA NIY EPRA Vacancy Rate Adjusted EPRA Cost Ratio (including direct vacancy costs) Adjusted EPRA Cost Ratio (excluding direct vacancy costs) 2018 £33.1m 7.9p £1,457.1m 348p £1,323.7m 316p 2.6% 3.8% 2.6% 31.4% 30.6% 2017 £21.8m 5.2p £1,434.5m 343p £1,268.2m 303p 2.4% 3.8% 3.4% 35.7% 35.1% 149 Grainger plc Annual Report and Accounts 2018 Financial statements EPRA PERFORMANCE MEASURES (UNAUDITED) CONTINUED 2. EPRA Earnings Earnings per IFRS income statement – continuing operations Adjustments to calculate EPRA Earnings, exclude: i) Changes in value of investment properties, development properties held for investment and other interests ii) Profits or losses on disposal of investment properties, development properties held for investment and other interests iii) Profits or losses on sales of trading properties including impairment charges in respect of trading properties iv) Tax on profits or losses on disposals v) Negative goodwill/goodwill impairment vi) Changes in fair value of financial instruments and associated close-out costs vii) Acquisition costs on share deals and non-controlling joint venture interests viii) Deferred tax in respect of EPRA adjustments ix) Adjustments i) to viii) in respect of joint ventures x) Non-controlling interests in respect of the above Adjusted EPRA Earnings/Earnings per share 2018 2017 Earnings £m Shares millions Pence per share Earnings £m Shares millions Pence per share 100.7 418.4 24.0 86.3 417.9 20.6 (23.3) (1.4) (59.8) – – 27.6 – – (10.7) – 33.1 – – – – – – – – – – 418.4 (5.6) (17.1) (0.3) (2.2) (14.2) – – 6.6 – – (2.6) – 7.9 (45.8) – – (0.2) – – 0.8 – 21.8 – – – – – – – – – – 417.9 (4.1) (0.5) (11.0) – – – – – 0.2 – 5.2 Adjusted EPRA Earnings have been divided by the average number of shares shown in Note 16 to the Group financial statements to calculate earning per share. The Group has reviewed its EPRA performance measurement reporting and has revised its approach to EPRA Earnings disclosure to align itself closer to the EPRA BPR. Prior year EPRA earnings have been adjusted to report on a consistent basis. 150 Grainger plc Annual Report and Accounts 2018i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 3. EPRA NAV NAV from the financial statements Include: i.a) Revaluation of investment property i.b) Revaluation of investment property under construction i.c) Revaluation of other non-current investments ii) Revaluation of tenant leases held as finance leases iii) Revaluation of trading properties Exclude: v) Fair value of financial instruments v.a) Deferred tax v.b) Goodwill as a result of deferred tax Include/exclude: Adjustments i) to v) above in respect of joint venture interests EPRA NAV/EPRA NAV per share 4. EPRA NNNAV EPRA NAV Include: i) Fair value of financial instruments ii) Fair value of debt iii) Deferred tax EPRA NNNAV/EPRA NNNAV per share Net assets £m 815.6 2018 Shares millions 418.8 NAV pence per share 195 Net assets £m 745.3 2017 Shares millions 418.6 NAV pence per share 178 – – 7.0 – 607.1 (0.8) 27.9 – – – – – – – – – 0.3 1,457.1 – 418.8 Net assets £m 1,457.1 0.5 (2.8) (131.1) 1,323.7 2018 Shares millions 418.8 – – – 418.8 – – 2 – 145 – 6 – – 348 – – 7.4 – 645.8 1.2 26.4 – – – – – – – – – 8.4 1,434.5 – 418.6 – – 2 – 155 – 6 – 2 343 NAV pence per share 348 Net assets £m 1,434,5 – (1) (31) 316 (1.9) (20.6) (143.8) 1,268.2 2017 Shares millions 418.6 – – – 418.6 NAV pence per share 343 – (5) (35) 303 151 Grainger plc Annual Report and Accounts 2018 Financial statements EPRA PERFORMANCE MEASURES (UNAUDITED) CONTINUED 5. EPRA NIY Investment property – wholly owned Investment property – share of JVs/Funds Trading property (including share of JVs) Less: developments Completed property portfolio Allowance for estimated purchasers’ costs Gross up completed property portfolio valuation Annualised cash passing rental income Property outgoings Annualised net rents EPRA NIY Gross up completed property portfolio valuation Adjustments to completed property portfolio in respect of regulated tenancies Adjusted gross up completed property portfolio valuation Annualised net rents Adjustments to annualised cash passing rental income in respect of regulated tenancies Adjustments to property outgoings in respect of regulated tenancies Adjusted annualised net rents Adjusted EPRA NIY 6. EPRA Cost Ratio Administrative expenses Property operating expenses Share of Joint Ventures expenses Management fees Other operating income/recharges intended to cover overhead expenses Exclude: Investment property depreciation Ground rent costs EPRA Costs (including direct vacancy costs) Direct vacancy costs EPRA Costs (excluding direct vacancy costs) Gross rental income Less: ground rent income Add: share of Joint Ventures (gross rental income less ground rents) Add: Adjustment in respect of profits or losses on sales of properties Gross Rental Income Adjusted EPRA Cost Ratio (including direct vacancy costs) Adjusted EPRA Cost Ratio (excluding direct vacancy costs) B A A/B b a a/b A B C A/C B/C 2018 £m 589.7 173.2 1,406.4 (301.7) 1,867.6 15.7 1,883.3 66.9 (17.4) 49.5 2.6% 1,883.3 (1,107.4) 775.9 49.5 (27.4) 7.1 29.2 3.8% 2018 £m 27.9 15.4 3.8 (6.5) – – (0.1) 40.5 (1.0) 39.5 59.2 (0.6) 9.2 61.2 129.0 31.4% 30.6% 2017 £m 391.0 269.5 1,487.1 (137.6) 2,010.0 14.2 2,024.2 66.8 (17.4) 49.4 2.4% 2,024.2 (1,491.5) 532.7 49.4 (39.3) 10.3 20.4 3.8% 2017 £m 27.2 14.2 3.8 (5.1) – – (0.1) 40.0 (0.6) 39.4 54.6 (0.6) 10.1 48.0 112.1 35.7% 35.1% 152 Grainger plc Annual Report and Accounts 2018Financial statements FIVE YEAR RECORD FOR THE YEAR ENDED 30 SEPTEMBER 2018 Group revenue Gross proceeds from property sales Gross rental income Gross fee income Operating profit before valuation movements and other adjustments (‘OPBVM’) Profit before tax Profit after tax Dividends paid Basic earnings per share Dividends per share EPRA NAV per share EPRA NNNAV per share Share price at 30 September Return on capital employed (‘ROCE’) Return on shareholder equity (‘ROSE’) 2014 £m 319.1 267.2 57.4 12.3 107.5 81.1 74.7 8.5 Pence 18.1 2.5 Pence 290.6 242.0 185.5 % 17.0 25.6 2015 £m 193.1 149.3 46.7 5.0 79.5 51.4 44.0 10.4 Pence 10.7 2.8 Pence 319.0 263.4 238.0 % 11.0 10.0 2016 £m 219.9 164.8 51.9 5.9 88.7 84.2 74.5 14.7 Pence 18.0 4.5 Pence 329.7 286.7 230.0 % 8.4 10.6 2017 £m 264.7 214.5 54.6 5.1 98.5 86.3 73.5 19.3 Pence 17.7 4.9 Pence 342.6 302.8 268.2 % 5.2 7.3 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c i a l s t a t e m e n t s O t h e r i n f o r m a t i o n 2018 £m 270.7 209.5 59.2 6.5 116.5 100.7 87.4 20.8 Pence 21.0 5.3 Pence 347.9 316.0 300.0 % 5.3 6.1 The 2015 results in the table above have been restated in order to be comparable with future results following disposals completed in 2016. 2014 has not been restated. 153 Grainger plc Annual Report and Accounts 2018 Other information SHAREHOLDERS’ INFORMATION Financial calendar AGM Payment of 2018 final dividend Announcement of 2019 interim results Announcement of 2019 final results 6 February 2019 11 February 2019 May 2019 November 2019 Share price During the year ended 30 September 2018, the range of the closing mid-market prices of the Company’s ordinary shares were: Price at 30 September 2018 Lowest price during the year Highest price during the year 300.0p 267.4p 322.0p Daily information on the Company’s share price can be obtained on our website www.graingerplc.co.uk or by telephone from FT Cityline on 09058 171 690. Please note that FT Cityline is a chargeable service. Capital gains tax The market value of the Company’s shares for capital gains tax purposes at 31 March 1982 was 2.03p. Website Website address www.graingerplc.co.uk Shareholders’ enquiries All administrative enquiries relating to shareholdings (for example, notification of change of address, loss of share certificates, dividend payments) should be addressed to the Company’s registrar at: Link Asset Services Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0LA Share dealing service A share dealing service is available to existing shareholders to buy or sell the Company’s shares via Link Share Dealing Services. Online and telephone dealing facilities provide an easy to access and simple to use service. For further information on this service, or to buy or sell shares, please contact: www.linksharedeal.com – online dealing 0371 664 0445 – telephone dealing Please note that the Directors of the Company are not seeking to encourage shareholders to either buy or sell their shares. Shareholders in any doubt as to what action to take are recommended to seek financial advice from an independent financial adviser authorised by the Financial Services and Markets Act 2000. Company Secretary and registered office Adam McGhin Grainger plc Citygate St James’ Boulevard Newcastle upon Tyne NE1 4JE Company registration number 125575 154 Grainger plc Annual Report and Accounts 2018Other information GLOSSARY OF TERMS Property CHARM The CHARM portfolio is a financial interest in equity mortgages held by the Church of England Pensions Board as mortgagee. EPRA NNNAV EPRA NAV adjusted for deferred tax and those contingent tax liabilities which would accrue if assets were sold at market value and for the fair value of long-term debt and derivatives. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a l i Investment value or market value Open market value of a property subject to relevant tenancy in place. Private rented sector (‘PRS’) Housing tenure classification that relates to residential units owned by the private sector to provide rental accommodation. This excludes units owned by government authorities and housing associations. Regulated tenancy Tenancy regulated under the 1977 Rent Act. Rent (usually sub-market) is set by the rent officer and the tenant has security of tenure. Tenanted residential Activity covering the acquisition, renting out and subsequent sale (usually on vacancy) of residential units subject to a tenancy agreement. Vacant possession (‘VP’) value Open market value of a property free from any tenancy. Financial Adjusted earnings Profit before tax before valuation movements and other adjustments that are considered to be one-off in nature, which do not form part of the normal ongoing revenue or costs of the business. Cap Financial instrument which, in return for a fee, guarantees an upper limit for the interest rate on a loan. Contingent tax The amount of tax that would be payable should trading property be sold at the market value shown in the market value balance sheet. Dividend cover Earnings per share divided by dividends per share. Earnings per share (‘EPS’) Profit after tax attributable to shareholders divided by the weighted average number of shares in issue in the year. EPRA NAV Shareholders’ funds adjusted for the market value of property assets held as stock but before deduction for deferred tax on property revaluations and before adjustments for the fair value of derivatives. EU IFRS International Financial Reporting Standards, as adopted by the EU, mandatory for UK-listed companies for accounting periods ending on or after 31 December 2005. Gearing The ratio of borrowings, net of cash, to market net asset value. Goodwill On acquisition of a company, the difference between the fair value of net assets acquired and the fair value of the purchase price paid. s t a t e m e n t s O t h e r i n f o r m a t i o n Hedging The use of financial instruments to protect against interest rate movements. Interest cover 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 and property related assets. Operating profit before valuation movements (‘OPBVM’) Operating profit before valuation movements and other adjustments. Return on capital employed (‘ROCE’) Operating profit after net valuation movements on investment properties plus the share of results from joint ventures/associates plus the movement on the uplift of trading stock to market value as a percentage of opening gross capital defined as investment property, financial interest in property assets (CHARM), investment in joint venture/associates and trading stock at market value. Return on shareholder equity (‘ROSE’) Growth in NNNAV in the year plus the dividend per share relating to each year as a percentage of opening NNNAV. Swap Financial instrument to protect against interest rate movements. Total shareholder return (‘TSR’) Return attributable to shareholders on the 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. 155 Grainger plc Annual Report and Accounts 2018 Other information ADVISERS Registrars and transfer office Link Asset Services Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0GA Corporate addresses Newcastle Citygate St James’ Boulevard Newcastle upon Tyne NE1 4JE Tel: 0191 261 1819 London 1 London Bridge 3rd Floor East London SE1 9BG Tel: 020 7940 9500 Birmingham The Circle Harborne Birmingham B17 9DY Manchester St John’s House Barrington Road Altrincham Cheshire WA14 1TJ View our website www.graingerplc.co.uk Solicitors Freshfields Bruckhaus Deringer 65 Fleet Street London EC4Y 1HS Financial public relations Camarco 107 Cheapside London EC2V 6DN Banking Clearing Bank and Facility Agent Barclays Bank PLC HSBC UK Bank PLC Other bankers Aareal Bank AG AIB Group (UK) PLC HSBC Bank PLC Lloyds Bank Corporate Markets PLC National Westminster Bank PLC Nationwide Building Society Natwest Markets PLC Santander UK PLC Svenska Handelsbanken AB (publ) Independent auditor KPMG LLP Chartered Accountants 15 Canada Square Canary Wharf London E14 5GL Stockbrokers JP Morgan Cazenove Limited 25 Bank Street London E14 5JP Numis Securities Limited 10 Paternoster Square London EC4M 7LT 156 Grainger plc Annual Report and Accounts 2018This report has been printed on paper which supports the FSC (Forest Stewardship Council) chain of custody environmental sustainment programme. The material used throughout the report is biodegradable, fully recyclable and elemental chlorine free. Both the paper mill and printer involved in the production support the growth of responsible forest management and are both accredited to ISO 14001 which specifies a process for continuous environmental improvement. Vegetable- based inks were used throughout the production process. Corporate addresses Newcastle Citygate St James’ Boulevard Newcastle upon Tyne NE1 4JE Tel: 0191 261 1819 London 1 London Bridge 3rd Floor East London SE1 9BG Tel: 020 7940 9500 Birmingham The Circle Harborne Birmingham B17 9DY Manchester St John’s House Barrington Road Altrincham Cheshire WA14 1TJ www.graingerplc.co.uk 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 1 8 I G R A 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 1 8 

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