TIDMGRIO
RNS Number : 1371I
Ground Rents Income Fund PLC
07 August 2019
For release 7 August 2019
Ground Rents Income Fund plc
Company update following review of the strategy and dividend
policy
Following the appointment of Schroder Real Estate Investment
Management Limited ("Schroders" or the "Manager") as the Company's
Alternative Investment Fund Manager first announced on 11 April
2019, the Board of Ground Rents Income Fund plc ("GRIO" or the
"Company") announced its intention to undertake a review of the
strategy to determine the best course to maximise sustainable
shareholder total returns including a review of the dividend
policy.
Strategic focus
The Company's strategy is to invest in long-dated UK ground
rents which have historically had a low correlation to traditional
real estate sectors. In other parts of the real estate market there
is strong demand for investments offering similar, annuity-style
cash flows and we expect this demand to continue. The Board
believes that the Company's portfolio continues to provide
attractive revenues for a number of reasons:
-- Highly-diversified, long-term portfolio of approximately
19,000 units across 400 assets with a low default risk
-- Predictable revenue with upward-only rental increases, of
which 70% of the portfolio ground rent income is index-linked,
predominantly to the Retail Prices Index ("RPI")
-- Long-term income with weighted average lease duration of 345 years
-- 43% of the portfolio ground rent income is due to be reviewed
over the next six years (from the most recent half-year report as
at 31 March 2019). Assuming future RPI inflation of 2.5% per annum,
ground rent income should increase by approximately 16% over the
period, or an annualised figure matching that of RPI at 2.5%
The Board believes the principal reason for the Company's share
price rating is uncertainty relating to leasehold reform. The
Manager and Board are therefore taking steps to ensure that our
shareholders' interests are fairly represented in this reform
process which is outlined further below.
Ground rents sector update
Leasehold reform update
The review of the leasehold sector has focused on modernising
the leasehold system to improve consumer protections in ground
rents and more broadly in areas such as tenant rights, service
charges and health and safety. Schroders and the Company welcome
reform that delivers a more equitable, transparent and better
service for homeowners. Institutional landlords with significant
ground rents entitlements have the financial incentive, expertise
and resource required to input into the reform process on aspects
including risk, governance and health and safety oversight.
The Manager is engaging with the Ministry of Housing,
Communities and Local Government ("MHCLG"), the Law Commission and
other stakeholders regarding potential reform of the leasehold
sector. The proposed reforms include a ban on the sale of leasehold
houses and restricting future ground rents on apartments to zero
(with some limited exemptions). The government and Law Commission
have, at various times, emphasised that any potential legislative
reform will be subject to both economic impact assessments and a
requirement that, if required, 'fair' or 'sufficient' compensation
be paid to landlords.
The Company and Manager's commitment to being a best-in-class
operator in the sector is reflected in our commitment to the Public
Pledge for Leaseholders (the "Pledge"). The Pledge was published by
MHCLG in March 2019 and signed by a large cross section of
freeholders, housebuilders and developers, including the Company.
Both the Board and the Manager believe that the Pledge is an
important step towards positive and transparent change in the
residential leasehold sector and reflects the desire of the wider
professional investor community to bring about meaningful, sensible
and well-thought-out reform. The Pledge is published in full on the
MHCLG website:
www.gov.uk/government/publications/leaseholder-pledge/public-pledge-for-leaseholders
Portfolio exposure to leasehold reform
The final outcome of leasehold reform, and therefore its
potential impact on the Company, is uncertain. Greater clarity is
not expected until draft legislation is published in 2020. The
extent of any negative impact on the Company may be mitigated by
the following:
-- 96% of the Company's ground rent income reviews are
index-linked, fixed, flat (no review) or double less frequently
than every 20 years and are therefore not deemed 'onerous' by the
review. Of the remaining 4%, a de minimis proportion (i.e. less
than 0.1% of portfolio ground rent income) doubles in
perpetuity
-- The Company proactively introduced its Asset Management Plan
in 2017 to engage with all residential leaseholders with a doubling
ground rent, regardless of review cycle (from 10 to 50 years). The
Company offered such leaseholders the opportunity to convert that
review mechanism to the lesser of doubling or RPI inflation, while
retaining their existing review cycle. The Pledge made this
approach industry standard
-- The portfolio median ground rent is GBP250 per annum
-- The Company has limited exposure to leasehold houses which
generate 11% of total ground rent income and where the median
ground rent is GBP110 per annum
A more detailed overview of the portfolio as at 31 March 2019 is
included in the half-year report published on 28 June 2019.
Beetham Tower, Manchester
Beetham Tower in Manchester (the "Building") has been part of
the Company's strategy review due to ongoing litigation expenses
which are negatively impacting returns. The freehold interest of
the Building is owned by the Company's wholly-owned subsidiary,
North West Ground Rents Limited ("NWGR"), and NWGR is liable for
repairs and damages following the liquidation of the contractor,
Carillion Construction Limited ("Carillion"). NWGR continues to
pursue Carillion's insurers and sub-contractors under collateral
warranties. The freehold interest of the Building has been written
down to GBP100,000 in NWGR's accounts, but costs relating to the
litigation, totalling GBP1.1 million, were expensed over the recent
half-year reporting period to 31 March 2019. NWGR is reliant on the
financial support of the Company (as its parent) to finance legal
action, and any decision on future funding requests will have
regard to the outcome of legal mediation planned for late 2019 and
the prospects for recovering related expenses. Apart from the
finance provided by its parent company formally documented under a
loan agreement, NWGR has no external third-party liabilities other
than expenses incurred in the normal course of trading and is
ring-fenced from the Company's wider group.
Further detail on the background to the Building is included in
the Company's half-year report published on 28 June 2019.
The Board and Manager continue to believe that seeking
resolution to the Building's litigation remains in shareholders'
and other stakeholders' best interests. This is based on the
potential value to be recovered, although the outcome remains
highly uncertain.
These litigation expenses were the principal reason for the
reduced dividend cover of 63% over the half-year reporting period
to 31 March 2019 (H1 2018: 83%). Dividend cover over the same
period excluding these expenses was 94% (H1 2018: 88%).
Corporate Governance
As announced on 11 April 2019, Simon Wombwell will step down as
a non-executive director of the Company no later than 30 September
2019. We are pleased that Bill Holland has agreed to join the Board
as his replacement as an independent non-executive director and
Chairman of the Audit Committee, with effect from 1 September 2019.
Bill will bring significant expertise as a former partner of KPMG's
real estate practice and KPMG's former representative to the
British Property Federation's Finance Committee.
The directors will continue to take appropriate measures to
ensure that the Company complies with the UK Code on Corporate
Governance to the appropriate extent, taking into account the size
of the Company and its nature of business.
Outcome of the review of the strategy and dividend policy
The following is the summary of the Board's strategy review:
-- The Board and Manager will continue to engage with
government, the Law Commission and other stakeholders regarding
reform of the leasehold sector and building safety
-- The Board believes the investment objective and policy
remains differentiated and relevant. While the government review of
the residential leasehold sector is ongoing, the Company is
assessing other complementary assets that generate long-term,
secure and inflation-protected income
-- The Company, as an institutional landlord, has the expertise,
resource and experience needed to provide the required risk,
governance and health and safety oversight
-- The Board has decided to maintain the current dividend policy
of paying 3.96 pence per share per annum, with the level kept under
review on a periodic basis. While asset-specific expenses,
including Beetham Tower in Manchester will continue to negatively
impact dividend cover in the near term, the Manager is focused on
delivering asset management and financing initiatives to increase
net income
-- To bring the Company in line with established practice in the
sector, the Board intends to distribute the next interim dividend
for the period from 1 July 2019 to 30 September 2019 during
November 2019
Contacts
Schroder Real Estate Investment Management Limited
James Agar / Chris Leek
020 7658 6000
N+1 Singer (Broker)
James Maxwell / Ben Farrow
020 7496 3000
Tavistock (Media)
James Whitmore / Jeremy Carey
020 7920 3150
Appleby Securities (Channel Islands) Limited (Sponsor)
Andrew Weaver / Zim Ceko
01481 755 600
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END
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