Strategy Update, Valuation and Consultation
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF EU REGULATION 596/2014 (WHICH FORMS PART OF DOMESTIC UK LAW PURSUANT TO THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 ("EUWA")) ("UK MAR"). UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA A REGULATORY INFORMATION SERVICE, SUCH INSIDE INFORMATION (AS DEFINED IN UK MAR) IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN.
11 October 2024
Ground Rents Income Fund plc ('GRIO' or the 'Company')
STRATEGY UPDATE, UNAUDITED PORTFOLIO VALUATION AS AT 30 SEPTEMBER 2024, AND SHAREHOLDER CONSULTATION PRIOR TO CONTINUATION VOTE
Introduction
On 24 April 2023, and following an extensive consultation, shareholders gave strong support to change the Company's Investment Policy to adopt a strategy of realising the Company's assets in a controlled, orderly and timely manner. Shareholders also approved a change to the Company's Articles to replace the obligation to hold a vote on a wind-up resolution with an obligation to hold a continuation vote before 31 December 2024. The new Continuation Vote mechanism requires a simple majority of votes cast to pass, with subsequent continuation votes to be held at three yearly intervals beyond 2024.
In light of the forthcoming Continuation Vote, the Company today provides shareholders with an update on activity implementing the Investment Policy, the steps being taken to optimise returns in a challenging operating environment, the unaudited portfolio valuation as at 30 September 2024, and notice of the commencement of a shareholder consultation (see more information below) prior to publication of a Circular containing notice of an Extraordinary General Meeting and the continuation resolution, expected to be sent out around the end of October 2024.
Strategy update
As set out in the recent interim accounts to 31 March 2024 (https://schro.link/griohyr2024), the key strategic steps required to deliver the Investment Policy are as follows:
· Sell assets where possible to optimise the net realisation value of the Company's investments, whilst repaying debt and improving the liquidity of the remaining portfolio;
· Continue to engage positively with the UK Government of the day ('the Government') to advocate for leasehold reform that fairly balances the interests of our shareholders and our leaseholders;
· Work with the Company's independent valuer, Savills, to ensure they have all relevant available information concerning building safety remediation projects and leasehold reform related issues to reduce valuation uncertainty; and
· Maintain a robust balance sheet, whilst also minimising expenses to maximise free cash.
Further detail on the progress implementing these steps is set out below:
Sell assets where possible to optimise the net realisation value of the Company's investments, whilst repaying debt and improving the liquidity of the remaining portfolio
On 22 February 2024, the Company sold two freehold ground rent interests in Bristol and Exeter for £3.45 million, which represented a 4% premium to the independent valuation of £3.3 million as at 30 September 2023. The assets were let to a single institutional leaseholder and operated by Vita Student Management Limited as purpose-built student accommodation. These freehold assets were acquired by the Company's long leaseholder.
Further disposals are in progress and others in pre-marketing preparation, with significant work ongoing to improve the liquidity of the underlying portfolio, such as enhanced legal due diligence and managing legacy issues. Uncertainty relating to building safety and leasehold reform means transactional volumes are very low across the ground rent market. Future disposal proceeds are likely to be used to repay debt in the first instance, to help to reduce the effect on interest payable following the expiry of current hedging instruments in January 2025.
Continue to engage positively with the Government to advocate for leasehold reform that fairly balances the interests of our shareholders and our leaseholders
In May 2024, the previous Government introduced the Leasehold and Freehold Reform Act (the 'Act'). This new legislation was introduced as part of the 'wash up' process immediately before the dissolution of Parliament and the General Election.
The Act represents a better outcome for the Company than contemplated in that Government's November 2023 Consultation (the 'Consultation') that sought views on restricting existing residential ground rents payable, but without compensation paid to freeholders adversely affected. However, the Act also contains provisions relating to the enfranchisement process that are potentially unlawful and could negatively impact the portfolio value further. Many of the Act's key provisions will only come into force once the Secretary of State passes additional secondary legislation.
The Government has confirmed it will seek to implement provisions within the Act and further reform the leasehold system, including to tackle 'unregulated and unaffordable' ground rent, via a new Leasehold and Commonhold Reform Bill.
The Company, working with advisers, institutional freeholders, and other stakeholders, continues to advocate for leasehold reform that fairly balances the interests of our shareholders and our leaseholders. This includes informal engagement with the Government alongside formal legal action. We are aware of other institutional freeholders who are engaging on the same basis.
Work with the Company's independent valuer, Savills, to ensure they have all relevant available information concerning building safety remediation projects and leasehold reform related issues to mitigate valuation uncertainty
The Company's advisers have worked closely with the independent valuer, Savills, to ensure that they have all available information relating to building safety remediation projects and leasehold reform. Savills have also liaised with peers and the Royal Institution of Chartered Surveyors ('RICS') as part of preparing their valuation.
Following this process, Savills have confirmed an unaudited independent portfolio valuation as at 30 September 2024 of £71.5 million, representing a like-for-like reduction (net of disposals) of £31.3 million or 30.5% over the financial year to 30 September 2024 (valuation as at 30 September 2023: £106.1 million or £102.8 million on a like-for-like basis). Over the six-month period to 30 September 2024, this represents a fall of £10.1 million or 12.4% (valuation as at 31 March 2024: £81.5 million). The detailed unaudited valuation movements are set out in the Appendix.
This reduction is principally due to the previous Government's approach to leasehold reform in November 2023, including as set out in the Consultation. Savills, in discussion with peers and the RICS, continue to adopt a Material Valuation Uncertainty Clause ('MUC') that (we are told by Savills and other valuers) applies across the entire residential ground rent market because of uncertainty relating to leasehold reform and the resultant lack of transactional evidence. This MUC affects 97% of the Company's portfolio by value as at 30 September 2024 (31 March 2024: 97%).
A separate MUC also applies to assets impacted by building safety related defects, noting that the building remediation projects carried out across the portfolio over the financial year have reduced the negative impact on the unaudited valuation.
Further detail relating to the independent portfolio valuation and the resultant impact on the Company's net asset value ('NAV') will be included in the forthcoming full year results to 30 September 2024.
Maintain a robust balance sheet whilst also minimising expenses to maximise free cash
In March 2024, the Company completed an important refinancing with Santander, with disposal proceeds used to reduce the loan to £19.5 million from £21.0 million. The loan term was also extended from January 2025 to July 2026. This provides the Company with more time to execute its Investment Policy. Based on the unaudited Savills valuation as at 30 September 2024 of assets charged to Santander totalling £39.0 million, the Loan to Value ('LTV') is 49.9% compared with a LTV covenant ratio of 50%. Note that the independent valuation obtained by the bank for the charged assets in March 2024 was £53.6 million, which reflected a LTV of 36.4%. The Company is compliant with loan covenants and, alongside planned disposals, has cash of £5.5 million with the ability to repay debt, if required.
The new loan has a margin of 2.75% which, together with the interest rate hedging in place until January 2025, results in a total interest rate of 3.96% and an Interest Cover Ratio ('ICR') of 318%, compared with a current ICR covenant ratio of 200%. Following expiry of the interest rate hedging, before any further disposals and debt repayment, and assuming the current SONIA rate of 5.1%, the Company's total interest rate would increase to 7.85% in January 2025. As part of the recent refinancing, the ICR covenant level will, at the same time, reduce from 200% to 160%. On the same basis and before any new hedging arrangements, the ICR in January 2025 is forecast to fall to 160%.
Based on the total unaudited independent portfolio valuation as at 30 September 2024 for charged and uncharged assets, the Group LTV, net of cash, is 19.6% (31 March 2024: 17.9%).
Alongside the expected increase in the loan interest rate, the Company continues to incur elevated non-recoverable legal and other professional fees and expenses relating to leasehold reform and building safety, also including additional fees paid to the Manager and non-executive directors relating to out-of-scope work as demonstrated in the recent interim accounts. These out-of-scope payments are rigorously scrutinised, assessed and mitigated where possible, noting also that they do not reflect the full resource commitment from either the Manager and Board Directors.
Considering these elevated expenses, the Company's size and the remaining strategic steps necessary to execute the Investment Policy, the Board considers it is both timely and appropriate to reduce the number of Directors (all non-executive) from four to three. Jane Vessey will retire from the Board with effect from 31 December 2024. Jane joined the Board in September 2021 and has made significant positive contributions to the Company, and to the work of the Board, including overseeing the establishment and monitoring of new building & fire safety and ESG-related management processes. The Board and Manager sincerely thank Jane for her valuable contribution.
The increased expenses are continuing to dilute earnings, noting that the Company is currently prevented from paying dividends due to the Modified Auditors Reports relating to the full year results to 30 September 2022 and 2023. It is not yet clear whether this Modification will continue to apply to the forthcoming September 2024 year end results, but the Company is likely to take a cautious approach to future dividend payments given prevailing uncertainty and the loan maturity in July 2026.
Timing and next steps
Following release of this update, Singer Capital Markets will be contacting larger shareholders requesting initial consultation meetings to be held in October. Following these meetings the Company aims to publish a shareholder circular around the end of October, with an Extraordinary General Meeting taking place in November 2024 for the Continuation Vote.
Preparation for, and the audit of the Company's full year accounts for the year to 30 September 2024 are running in parallel with the Continuation Vote process, with the aim of releasing the year end results during December.
Appendix
Portfolio
|
|
30-Sep-23 |
31-Mar-241 |
30-Sep-241 |
|
Ground rent income (£million) |
5.2 |
5.2 |
5.3 |
|
Portfolio valuation (£million) |
106.1 |
81.5 |
71.5 |
|
Years Purchase ('YP') |
20.4 |
15.6 |
13.4 |
|
Gross Initial Yield ('GIY') |
4.9% |
6.4% |
7.4% |
|
Portfolio valuation adjustments |
|
|
|
|
Building Safety Act adjustment (£million) |
-9.1 |
-7.2 |
-6.1 |
|
Leasehold Reform adjustment (£million) |
-4.2 |
-4.9 |
-5.8 |
|
Total adjustment (£million): |
-13.3 |
-12.1 |
-11.9 |
|
Building safety MUC |
|
|
|
|
No. of assets |
24 |
24 |
22 |
|
% of valuation |
18% |
13% |
13% |
1 Unaudited.
Financing
|
|
Pre refinance, 30-Sep-23 |
Post refinance, 31-Mar-24 |
Latest year end, 30-Sep-24 |
Expiry of hedging, 31-Jan-25 |
|
Santander loan drawn (£million) |
21.0 |
19.5 |
19.5 |
19.5 |
|
|
|
|
|
|
|
Annual interest expense (£million) |
0.70 |
0.77 |
0.77 |
1.53 |
|
Annual interest expense |
3.33% |
3.96% |
3.96% |
7.85% |
|
|
|
|
|
|
|
Group LTV, net of cash |
18.3% |
17.9% |
19.6% |
19.6% |
|
Group LTV covenant |
25.0% |
25.0% |
25.0% |
25.0% |
|
|
|
|
|
|
|
Bank LTV (based on relevant bank value) |
41.8% |
36.4% |
36.4% |
36.4% |
|
Bank LTV covenant |
50.0% |
50.0% |
50.0% |
50.0% |
|
|
|
|
|
|
|
Bank LTV (based on latest portfolio value) |
44.2% |
45.8% |
49.9% |
49.9% |
|
Bank LTV covenant |
50.0% |
50.0% |
50.0% |
50.0% |
|
|
|
|
|
|
|
Bank ICR |
3.5x |
3.1x |
3.2x |
1.6x |
|
Bank ICR covenant |
2.7x |
2.0x |
2.0x |
1.6x |
Note: All scenarios assume current SONIA rate of 5.1% and Bank ICR utilises current figures rather than 12 months rolling. For illustrative purposes only.
-----------------
Enquiries:
Schroder Real Estate Investment Management Limited
Matthew Riley / Chris Leek / Nick Montgomery
020 7658 6000
Singer Capital Markets (Broker)
James Maxwell / Alaina Wong (Investment Banking)
Sam Greatrex (Sales)
020 7496 3000
Appleby Securities (Channel Islands) Limited (Sponsor)
Andrew Weaver / Michael Davies
01534 888 777
FTI Consulting
Richard Gotla / Oliver Parsons
0203 727 1000
------------------
Notes to editors:
Ground Rents Income Fund plc is a closed-ended real estate investment trust, listed on The International Stock Exchange and traded on the SETSqx platform of the London Stock Exchange.
Schroder Real Estate Investment Management Limited (the 'Manager') was appointed as the Company's Alternative Investment Fund Manager in May 2019 to support the Company's Board with the headwinds related to building safety and leasehold reform.
During the first half of 2023 the Board and Manager carried out an extensive shareholder consultation on proposals to change the Continuation Vote mechanism included in the Articles dating from 2012, as well as proposed changes to the Investment Policy. These proposals received strong support from shareholders and resulted in a new Continuation Resolution and Investment Policy. The new Investment Policy adopts a strategy of realising the Company's assets in a controlled, orderly and timely manner for shareholders, whilst continuing to deliver best-in-class residential asset management including fairness, transparency, and affordability for leaseholders.
In November 2023 the previous Government published a consultation on restricting existing residential ground rents payable, without compensation to freeholders (the 'Consultation'). This represented a significant shift in the Government's approach to leasehold reform and led the Company's independent valuer, Savills, in conjunction with other valuers and the Royal Institution of Chartered Surveyors, to adopt a Material Valuation Uncertainty Clause ('MUC') across the entire residential ground rent market. The Company submitted a comprehensive response to the Consultation in January 2024 and has kept shareholders informed of the Government's leasehold reform agenda, including various regulatory announcements, which can be found at: www.groundrentsincomefund.com
Since November 2023, political upheaval resulted in an accelerated Leasehold and Freehold Reform Act 2024 (the 'Act'), enacted in May, which may represent a better outcome than the worst-case scenarios contemplated in the Consultation.
In July 2024, the new Government set out its legislative priorities in the King's Speech, including a draft Leasehold and Commonhold Reform Bill. Largely based on the Labour Party's manifesto commitments, the new Government will seek to implement the provisions within the Act and further reform the leasehold system, including enacting the remaining Law Commission recommendations relating to enfranchisement and Right to Manage, regulate existing ground rents and, following consultation, ban the sale of new leasehold flats so a reinvigorated commonhold legal framework becomes the default tenure.
The potential outcome and timing of legislative changes remains uncertain, and the Board and Manager are working closely with the Company's advisers and other institutional owners to better understand the Act and the King's Speech and are engaging positively with the new Government to advocate for reform that fairly balances the interests of the Company's shareholders and leaseholders.
The new Continuation Vote mechanism requires the Company to hold a Continuation Resolution before 31 December 2024, and at three-year intervals thereafter. At each Vote, the Resolution proposed will need a simple majority of votes cast to pass. In November 2024, the Company expects to convene an Extraordinary General Meeting for the Continuation Vote.
See the Company's website for more information:
The person responsible for arranging the release of this announcement on behalf of the Company is Matthew Riley, a member of Company Secretarial team of the Company.
Ends.
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