Attractive fundamentals and valuation make Grainger a long-term buy

The build-to-rent specialist has locked in growth for several years

GRAINGER (GRI)

Price: 256p Market cap: £1.9 billion

With UK mortgage rates having risen on top of energy and food costs, it is no surprise more people are delaying buying a house and choosing to rent a property instead.

Established in 1912, Grainger (GRI) is one of the UK’s largest professional landlords operating a portfolio of around 10,000 homes with an estimated market value of £3.2 billion.

Its private rented portfolio is 98.7% occupied, while like-for-like rental growth in the four months since the start of October was 6.1% against 3.2% in same period a year ago, keeping pace with wage inflation.

Rather than relying on outside contractors, Grainger builds its own properties, so it can choose the best locations with the best amenities, and it can make its buildings ESG-compliant. That means low maintenance costs and high sustainability, which are important factors for tenants nowadays.

The firm’s aim is to double the size of its portfolio in the next few years, and it already has a pipeline of 7,000 new build-to-rent homes with a value of £1.8 billion.

Of these, 1,640 homes are set to be completed this year across seven cities in England and Wales making 2023 a record year for development and investment.

Thanks to its ‘Connected Living’ joint venture with Transport for London, 1,240 homes will be built on land owned by TfL which already has full planning consent.

The firm mainly finances its development using debt, but reassuringly its loan-to-value position is just 33% while 97% of borrowings are hedged with an average interest cost of 3.1% and there are no maturities on debt before 2027 at the earliest so financially the firm is extremely solid.

It also part-finances new-build properties through the sale of older, vacant rental assets, and despite the challenges facing housebuilders there is a buoyant, liquid market for private rental homes.

For the year to September 2022, net rental income rose 22% to £86.3 million, ahead of market forecasts, while adjusted earnings rose 12% to £93.5 million and net tangible assets per share rose 7% to 317p or 33% more than the share price at the time.

‘Whilst the outlook is clearly clouded by macro and political uncertainties, the rental market remains exceptionally strong given an acute shortage of stock and strong demand — which will only be reinforced by the recent fall in house sales in response to the hike in mortgage costs. We therefore continue to see Grainger as a safe haven in an uncertain world,’ say the team at Numis.

Meanwhile, Andy Murphy at Edison argues the current price to book ratio of 0.99 is ‘substantially below historic value’ and implies inflationary headwinds and the macro-economic uncertainty are already priced in. [IC]