TIDMGRIO
RNS Number : 7405W
Ground Rents Income Fund PLC
12 December 2019
12 December 2019
Ground Rents Income Fund plc (the 'Company')
Annual Report and Accounts
The Company today announces its audited full year results for
the year ended 30 September 2019.
The Company's annual report and accounts for the year ended 30
September 2019 are also being published in hard copy format and an
electronic copy will shortly be available to download from the
Company's webpages www.groundrentsincomefund.com/.
Financial overview
-- Net Asset Value ("NAV") of GBP108 million or 111.3 pence per
share ("pps") as at 30 September 2019 reflecting a 4.6% decline
over the financial year
-- NAV decline driven by 3.6% reduction in the independent
valuation of the underlying portfolio, principally due to
uncertainty relating to leasehold reform
-- Dividend policy changed to move in line with industry
practice of paying quarterly in arrears. Three dividends paid over
the financial yield totalling GBP2.85 million resulting in NAV
total return of -2.1%
-- Consolidated net loan-to-value ratio of 10.9%
Operational highlights
-- Schroder Real Estate Investment Management Limited appointed
as the new Investment Manager in May 2019 which combined retention
of the former management team with Schroders' broader real estate
expertise
-- Bill Holland appointed as a new non-executive director
bringing additional strength and depth to the Board
-- Completed a review of the strategy focused on key areas
including the Group's investment objective, leasehold and
regulatory reform, the Beetham Tower litigation and sustainable
dividend policy
-- Progress implementing strategic objectives which are focussed
on growing net income, demonstrating best-in-class residential
asset management and ensuring shareholders interests are fairly
represented in leasehold and regulatory reform
-- Attractive long-term income stream generated by the
underlying portfolio with 70% of ground rents linked to RPI
Commenting, Malcolm Naish, Chairman of the Board, said:
"The short-term outlook for the Group will be influenced by
further developments in the current leasehold reform which could,
in turn, be impacted by a change in government policy. While we
support reform that addresses unfair leasehold terms and practices,
we will continue to advocate for leasehold reform that strikes a
fair balance for all stakeholders in the sector, supports the
legitimate value of the Group's portfolio and continues to provide
differentiated and attractive returns to shareholders."
James Agar, Fund Manager for Ground Rents Income Fund plc,
added:
"The Group's strategy is to invest in long-dated UK ground rents
which have historically had a low correlation to mainstream 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.
Whilst there are headwinds facing the sector arising from
leasehold reform and regulatory change we have a clear strategy
focussed on delivering best in class residential asset management
and sustainable shareholder total returns."
Contacts
Schroder Real Estate Investment Management Limited
James Agar / Matthew Riley
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
01534 888 777
Overview
About Us
Ground Rents Income Fund plc (the 'Company') invests in
long-term, income-generating assets across the United Kingdom.
Company summary
The Company is a closed-ended real estate investment trust
incorporated on 23 April 2012. The Company has been listed on The
International Stock Exchange ("TISE") and traded on the SETSqx
platform of the Stock Exchange since 13 August 2012.
At 30 September 2019 the Company had 97,006,497 shares in issue
and had 40 active subsidiaries and eight dormant subsidiaries
which, together with the Company, form the Group ("GRIO"). The
Company is a Real Estate Investment Trust ("REIT"). Accordingly, it
will distribute at least 90% of its distributable profits by way of
dividends.
The Company's Alternative Investment Fund Manager ("AIFM") is
Schroder Real Estate Investment Management Limited ("the Investment
Manager", "Schroders"). The Investment Manager took over as AIFM on
13 May 2019 and has completed a strategic review of the Group with
the Board and external advisors. The Board is pleased that the
Group is able to draw on the experience and specialist skills of
the wider Schroders business.
Sector reform
The Government has launched a number of consultations since 2017
focused on reforming the residential leasehold sector. We welcome
the Government's efforts to work with industry to improve the
leasehold system and protect consumers. In March 2019 the Company
signed the Government's 'Public Pledge for Leaseholders', which we
believe is an important step towards positive change reflecting our
desire to bring about sensible, well-thought-out reform. We are
also supportive of the Law Commission's efforts to make the
enfranchisement process simpler and more effective. Improvements to
building safety standards are also a critical issue that needs to
be quickly and definitively addressed.
The timescale and outcome of leasehold reform is uncertain, but
current proposals include a ban on the sale of leasehold houses and
restricting future ground rents on apartments to zero. Legislation
implementing these proposals could adversely impact the Group. But
any potential reform may be subject to an economic impact
assessment and 'sufficient' compensation paid to landlords. We
continue to engage with ministers and policymakers in order to work
towards meaningful reform that protects all stakeholders in the
sector.
Investment objective
The Company has been established to provide secure long-term
performance through investment in long dated UK ground rents, which
have historically had little correlation to traditional property
asset classes and have seen their value remain consistent
regardless of the underlying state of the economy.
The Company will give investors the opportunity to invest,
through the Company, in a portfolio of ground rents. The Company
will seek to acquire a portfolio of assets with the potential for
income generation from the collection of ground rents. These
investments also have the potential for capital growth, linked to
contractual increases in ground rents over the long-term.
The Company will seek to generate consistent income returns for
shareholders by investing in a diversified portfolio of ground
rents including freeholds and head leases of residential, retail
and commercial properties located in the United Kingdom.
Investment strategy
The Group's strategy is to invest in a diversified portfolio of
residential and commercial freeholds and head leases offering the
potential for income generation from ground rents that are hedged
against inflation and for capital growth from active asset
management.
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 Group'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 ground rent income is indexed-linked,
predominantly to the Retail Prices Index ("RPI")
-- Long-term income with weighted average lease duration of 344 years
-- 34.4% of the portfolio ground rent income is due to be
reviewed over the next five years. Assuming future RPI inflation of
3.0% per annum, ground rent income should increase by approximately
35.3% over the next 10-year period, or by an annualised figure of
3.1%
Asset class and geographic restrictions
The Group intends that no single ground rent property should
represent more than 25% of the gross asset value of the Group at
the time of investment.
Other restrictions
The Group does not expect to engage in any hedging transactions,
save for interest rate hedging. At the sole discretion of the
directors, the Group may use hedging, financial and money market
instruments in the management of its assets and risk. The Group may
reinvest both realised invested capital and any profits that have
not been distributed, subject to distributing 90% of distributable
income profits arising from the Group's Qualifying Property Rental
Business in each accounting year in order to comply with the
Group's REIT obligations.
Borrowing policy
The Group may make use of structural or long-term debt
facilities for investment purposes, and, if a portfolio of assets
was available to be acquired in a corporate structure which has
some existing borrowings within its corporate vehicles, these may
be retained. In all cases the borrowing anticipated would be
limited in scale to no more than 25% of the gross assets of the
Group.
Portfolio at a glance
Number of investment Total investment Percentage of Percentage of
units property value the portfolio the ground rent
value comprised income to be reviewed
of top ten properties in the next five
years
19,000+ GBP122.9 million 28.7% 34.4%
----------------- ----------------------- -----------------------
Top 10 properties by value
Property Valuation at September 2019 (%)
(GBPm) Property type
----------------------------- ------------------------------------------ --------------- --------------------------
The Student Village, York 7.9 6.5 Student
----------------------------- ------------------------------------------ --------------- --------------------------
Masshouse Plaza, Birmingham 3.9 3.2 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
The Gateway, Leeds 3.6 2.9 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
One Park West, Liverpool 3.4 2.8 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
Wiltshire Leisure Village 3.2 2.6 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
Ladywell Point, Manchester 3.2 2.6 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
Rathbone Market, London 3.1 2.5 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
First Street, Manchester 2.7 2.2 Student
----------------------------- ------------------------------------------ --------------- --------------------------
Richmond House, Southampton 2.3 1.9 Student
----------------------------- ------------------------------------------ --------------- --------------------------
City Island, Leeds 1.9 1.5 Residential
----------------------------- ------------------------------------------ --------------- --------------------------
Chairman's Statement
Overview
The residential ground rent sector continues to be negatively
impacted by uncertainty relating to leasehold reform. Against this
background the Group experienced a 3.6% decline in the value of the
underlying portfolio over the year. This contributed to a 4.6%
decline in the Group's net asset value ("NAV") to GBP108 million or
111.3 pence per share ("pps") as at 30 September 2019, which
compares with GBP113.2 million or 116.6 pps at the start of the
financial year.
The Group's underlying earnings of GBP5.6 million were
negatively impacted by the recognition of exceptional costs of
GBP1.4 million that principally related to litigation at Beetham
Tower in Manchester. These exceptional items mean that the dividend
was uncovered by earnings. Further details are included above.
Total dividends of GBP2.85 million were paid during the year
resulting in a NAV total return of -2.1%.
Further steps were taken this year to meet the headwinds facing
the Company, including the appointment of Schroders, the
appointment of a new director to the Board and a review of the
strategy, which resulted in a high level of activity focused on
reducing risk, growing income and demonstrating best-in-class
residential management.
Appointment of Schroders
In May 2019 Schroders replaced Brooks Macdonald Funds Limited as
the AIFM for the Company. The appointment combined retention of the
existing management team with Schroders' broader real estate
expertise to support complex situations such as the Beetham Tower
litigation, as well as to meet increasingly demanding risk
management requirements arising from regulatory change.
Schroders' appointment is for an initial period of three years
following which it may be terminated at any time by one year's
notice. Schroders is paid a simplified, tiered annual fee
comprising 1% of NAV up to GBP200 million; 0.9% of NAV between
GBP200 million and GBP400 million; and 0.8% of NAV above GBP400
million. For the initial 12-month period, the fee will be 0.9% of
NAV with the potential to increase up to 1% of NAV subject to the
delivery of income-enhancing initiatives. The Board believes the
revised fee structure is in line with comparable real estate funds
and better aligns Schroders' remuneration to long-term shareholder
value.
Board composition
On 1 September 2019, Bill Holland was appointed as an
independent non-executive director of the Company and as Chairman
of the Audit, Valuation and Risk Committee of the Board (the 'Audit
Committee'). Bill brings extensive audit and accounting experience
to the Board as a former partner of the KPMG real estate practice
and former representative of KPMG on the British Property
Federation's finance committee.
Simon Wombwell retired from the Board on 1 September 2019 and we
are grateful for the significant contribution he made since the
Company's inception in 2012.
Review of strategy
Following Schroders' appointment, the Board and the Investment
Manager undertook a review of strategy to determine the best course
to maximise sustainable shareholder returns during challenging
market conditions. The review focused on key areas including the
Group's investment objective, leasehold and regulatory reform, the
Beetham Tower litigation and sustainable dividend policy. The
results of this review are summarised below:
Investment objective
The Group's investment objective is to provide secure, long-term
performance through investment in long-dated UK ground rents, which
historically have had little correlation to returns in mainstream
real estate sectors. This is reflected in the current portfolio
where approximately 70% of the underlying ground rent income is
index-linked, predominantly to the RPI, with a weighted average
lease term of 344 years.
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 and Investment Manager
believe the weakness in the Company's share price rating
principally relates to leasehold reform, and the Company is taking
the steps outlined below to ensure that shareholders' interests are
fairly represented in this ongoing legislative process.
Leasehold and regulatory reform
Leasehold reform is focused on improving consumer protections in
ground rents and, more broadly, in areas such as onerous lease
terms, tenant rights, service charges and health and safety. We
welcome any reform that delivers a more equitable, transparent and
better experience for homeowners.
As part of the Company's commitment to be a best-in-class
operator in the sector we took part in the Public Pledge for
Leaseholders (the "Pledge"). The Pledge was published by the
Ministry of Housing, Communities and Local Government ("MHCLG") in
March 2019 and was signed by a large cross-section of freeholders,
housebuilders and developers. The Pledge commits signatories to
take steps to assist leaseholders with lease terms deemed to be
onerous or unfair and should be an important step towards positive
change in the sector. We believe it reflects desires in the wider
professional investor community to bring about meaningful, sensible
and well-thought-out reform.
In addition, the AIFM, on behalf of the Company, is currently
assisting the Competition and Markets Authority to develop its
understanding of the leasehold market and, in particular, the
consequences of certain terms in long leases for homeowners.
The final outcome of the ongoing leasehold reform activity is
uncertain and greater clarity is not expected until draft
legislation is published in 2020. The following features of the
underlying portfolio, as well as other pro-active steps outlined
below, should help mitigate the risk to the Company:
-- 96% of ground rent income review mechanisms are index-linked,
fixed, flat (no review) or double less frequently than every 20
years and are, therefore, not deemed 'onerous' by the leasehold
reform review
-- Since 2017 we have proactively offered all leaseholders with
doubling ground rent review provisions the opportunity to convert
their review mechanism to the lesser of doubling or RPI inflation
(consistent with the approach subsequently mandated by the
Pledge)
-- Exposure to leasehold houses, which are a focus of the
review, generates only 11% of total ground rent income
The Investment Manager's report provides a more detailed review
of activity in response to the proposed leasehold reform.
Alongside leasehold reform we have also responded to the
Government's consultation on high-rise building safety which
followed the Grenfell Tower tragedy. This consultation introduces
the concept of a 'golden thread' documenting the life of a building
from its design and construction through to its use and subsequent
repairs and maintenance. It also introduces the concept of a
responsible duty-holder accountable for building safety and
regulatory compliance. The discharging of these duties will become
a major focus for property managers and investors. Against this
backdrop, we generally believe that institutional landlords with
fair ground rent entitlements have the necessary incentive,
expertise and resource required to perform these duty-holder
obligations.
Beetham Tower, Manchester
The freehold title of Beetham Tower, a prominent residential and
hotel building in Manchester city centre, is owned by the Company's
wholly-owned subsidiary, North West Ground Rents Limited ("NWGR").
In January 2019, the High Court determined that NWGR was liable for
certain building defects and related damages and also ordered it to
carry out external repairs to the building. NWGR's liability for
repair follows the failure of the contractor, Carillion
Construction Limited (in Liquidation) ("Carillion"), which fell
into liquidation while in the process of rectifying these building
defects. NWGR recognised litigation-related expenses of GBP1.4
million over the financial year and, due to uncertainty in the
recovery of these sums or any costs associated with the repairs,
the value of the Company's investment in NWGR has been written down
to nil. NWGR continues to pursue Carillion's insurers and
sub-contractor under collateral warranties, as well as proactively
engage with all relevant parties in order to find a commercial
resolution. Additional detail on this asset is provided in the
Investment Manager's Review.
Dividend policy
A key focus for the review of strategy was to determine a
sustainable level of dividend in the context of the current
shortfall in dividend cover and ongoing expenses relating to both
the Beetham Tower litigation to meet the challenges of leasehold
and regulatory reform. While these and other factors are expected
to dilute net income over the next financial year, the visibility
of ground rent increases and asset management activity has enabled
the Board to maintain the current level of dividend to date. This
approach will be kept under review as further developments in these
key areas, and profitability, take shape.
With effect from 1 July 2019, dividends are no longer paid in
advance of a quarter end and will instead be paid once the results
of each quarter are known, bringing the Company in line with
industry practice.
General meetings of the ordinary shareholders and warrantholders
were held on 8 November 2019 to approve the conversion of the
Company's share premium account into distributable reserves. Both
resolutions passed and the related court process to permit the
reduction of the share premium account has now been completed. As a
result, the fourth quarter dividend is to be announced before 31
December 2019 and paid in January 2020.
Outlook
The short-term outlook for the Group will be influenced by
further developments in the current leasehold reform which could,
in turn, be impacted by a change in Government policy. While we
support reform that addresses unfair leasehold terms and practices,
we will continue to advocate for leasehold reform that strikes a
fair balance for all stakeholders in the sector, supports the
legitimate value of the Group's portfolio and continues to provide
differentiated and attractive returns to shareholders.
Malcolm Naish
Chairman
12 December 2019
Investment Manager's Review
Focused on long-term shareholder value
Dividend maintained and initiatives implemented to deliver
sustainable returns
Performance
The Group's NAV as at 30 September 2019 was GBP108.0 million or
111.3 pence per share ("pps") compared with GBP113.2 million or
116.6 pps as at 30 September 2018. This reflected a decrease of 5.3
pps or 4.5%, with the underlying movement in NAV per share set out
in the table below:
GBP million Pence per share
("pps")
-------------------------------- ------------ ----------------
NAV as at 30 September 2018 113.2 116.6
-------------------------------- ------------ ----------------
Unrealised change in valuation (4.9) (5.0)
-------------------------------- ------------ ----------------
Realised gains on disposal 0.5 0.5
-------------------------------- ------------ ----------------
Net revenue 2.1 2.2
-------------------------------- ------------ ----------------
Dividends paid (2.9) (3.0)
-------------------------------- ------------ ----------------
NAV as at 30 September 2019 108.0 111.3
-------------------------------- ------------ ----------------
The 4.5% NAV decline was driven by a 3.6% decline in the
independent valuation of the underlying portfolio to GBP122.9
million. The NAV total return, including dividends paid of GBP2.85
million, was -2.1%.
Dividend payments
During the year the Company moved to the industry-standard
practice of paying dividends in arrears. This change resulted in
one less dividend being paid during the financial year. The Company
declared and paid the following interim dividends to its ordinary
shareholders:
Dividend for quarter Date paid Rate
1 October 2018 - 31 December 9 January 2019 0.98 pence per share
2018
--------------- ---------------------
1 January 2019 - 31 March 1 April 2019 0.98 pence per share
2019
--------------- ---------------------
1 April 2019 - 30 June 28 June 2019 0.98 pence per share
2019
--------------- ---------------------
Paying three rather than four dividends during the year boosted
dividend cover from 67%(1) to 91%(2) . Dividend cover, excluding
non-recurring asset specific items such as Beetham Tower expenses
was 123%(3) , or 91%(2) had the Company paid four dividends.
A dividend for the period July to September 2019 is expected be
paid in January 2020.
(1) Based on the Company maintaining its current level of
dividends of 3.96p per share per annum.
(2) This is calculated as (full profit for the year / three
dividend payments during the year).
(3) Adjusting for asset-specific expenses, including the Beetham
Tower, Manchester, ongoing expenses.
The Company's anticipated interim dividend timetable for 2020 is
as follows:
Period Expected payment
date
October - December 2019 February 2020
January - March 2020 May 2020
-----------------
April - June 2020 August 2020
-----------------
July - September 2020 November 2020
-----------------
Strategy
Following the appointment of Schroders as the Company's AIFM,
the Board announced its intention to undertake a strategy review to
determine the best course to maximise sustainable shareholder total
returns, including a review of the dividend policy.
A detailed review was undertaken and the output from that
process was announced on 7 August 2019 as follows:
-- The Board and Investment Manager will continue to engage with
Government, the Law Commission and other stakeholders regarding
reform of the leasehold sector and building safety
-- The Group, as an institutional landlord, has the expertise,
resource and experience needed to provide the required risk,
governance and health and safety oversight
-- The Board believes the investment objective and policy
remains differentiated and viable. While the Government review of
the residential leasehold sector is ongoing, the Group is assessing
other complementary assets that generate long-term, secure and
inflation-protected income
-- 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 reverting to paying dividends in
arrears. While exceptional asset-specific expenses, including costs
relating to the Beetham Tower litigation, will continue to
negatively impact dividend cover in the near term, we are focused
on delivering asset management and financing initiatives to
increase net income
Progress has been made since the strategy review including:
-- Active management approach to increase net income, including
restructure of the head-lease with Vita Group ("Vita") in relation
to six of the Group's purpose-built student accommodation ground
rent assets, which delivered a GBP1.0 million staged payment and
increased the rent paid by Vita from GBP305,000 to GBP320,000 per
annum
-- Review of key supplier agreements to drive operational
efficiencies, including renegotiating the Company's agreement with
its principal property manager which generated additional net
income of approximately GBP115,000 per annum
-- Integration of the management team into Schroders Group with
operational projects completed to enhance risk management and
governance. This has included:
o A compartmentalisation audit covering fire doors, riser
cupboards and automatic opening vents
o Digitisation of fire strategy and fire safety
documentation
o Façade investigation in accordance with the latest Government
guidance (note section on Advice Note 14 below)
o Engagement with management company directors and agents in the
non-managed estate
o Harmonisation of the Group's insurance arrangements with the
wider Schroder real estate portfolio.
-- Assessing the potential to refinance the Group's debt given
the low interest rate environment
-- Evolving the residential management strategy to incorporate
'positive impact' and Environmental, Social and Governance ("ESG")
considerations
Looking forward, the key objectives remain unchanged from the
strategy review and we are focused on executing on these
initiatives to deliver attractive income returns from our
highly-diversified, long-term and index-linked portfolio of ground
rents.
Leasehold reform
The Group is engaging with the Ministry of Housing, Communities
and Local Government ("MHCLG") and 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 exceptions.
The Government responded to the Housing, Communities and Local
Government Select Committee's report on Leasehold Reform in July
2019 and noted that leasehold remains a "legitimate form of home
ownership" and "leasehold can be an effective tool for making
multiple ownership more straightforward, such as in blocks of flats
with shared fabric and common areas".
As we have articulated through the reform process, we believe
professional investors with an economic interest in fair,
transparent ground rents have a clear incentive to participate in
the underlying management of their portfolios. In their response to
the Select Committee the Government commented that in complex,
mixed-use developments and retirement properties, significantly
higher level of oversight and customer service are evident.
This echoes many of the stewardship arguments made to ministers
and civil servants at MHCLG over the past 24 months and accords
with our own experience in the sector. We and other major
institutional investors believe this provides an opportunity for
the industry to make a clear and demonstrable case for an exemption
from zero grounds rents for complex and mixed-use developments.
The Company and Investment Manager's commitment to be 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, house-builders and developers,
including the Group.
Both the Board and the Investment Manager believe 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. It is encouraging to find many
similarities between the requirements of the Pledge and the 'Asset
Management Plan' initiated by the Group in 2017.
We fully support the Government's proposals to establish a New
Homes Ombudsman, whilst encouraging meaningful changes to
Solicitors Regulation Authority's code of conduct to ensure there
is greater emphasis on clear independent legal advice to consumers
during the home purchase process.
The Government and Law Commission have, at various times, stated
that any legislative reform will be subject to both economic impact
assessments and a requirement that, if required, 'fair' or
'sufficient' compensation be paid to landlords. Any changes in
legislation should also be compliant with Article 1 Protocol 1 of
the European Convention on Human Rights and the principle of legal
certainty.
Market overview
Transactional volumes have fallen over the year due to
uncertainty relating to leasehold reform. Interest in commercial
ground leases has increased since the beginning of residential
leasehold reform in mid-2017, with a number of large transactions
taking place. This in part reflects strong demand for real estate
investments offering similar, annuity-style cash flows, and we
expect this to continue.
The annual RPI slowed to 2.1% in October 2019 from a peak of
4.1% at the end of 2017. Most of the deceleration has been due to
the fading impact of sterling's depreciation in 2016, which
followed the UK's vote to leave the EU. The forthcoming UK general
election and resultant spending plans are likely to impact the
inflation outlook. In the scenario that the UK makes an orderly
exit from the EU in early 2020, RPI is expected to remain between
2.5% and 3.0% through 2019-2020. The Group remains well hedged to
inflation with approximately 70% of the portfolio ground rent
reviews being index-linked.
The UK Statistics Authority has agreed to compile RPI for at
least another five years and there will be a consultation next year
on what might happen after 2025.
The yield on conventional 10-year gilts fell to a record low of
0.4% in August but has since risen to around 0.75% as the
perception of the risk of a no-deal Brexit has receded. The yield
on 40-year index linked gilts is currently negative at -1.7% (as at
27 November 2019). By comparison the dividend yield on GRIO is 4.3%
(as at 10 December 2019).
Real estate portfolio
As at 30 September 2019 the portfolio comprised approximately
19,000 units across 400 assets valued at GBP122.9 million. The top
ten properties comprised 28.7% of the portfolio value. The
portfolio produced a ground rent income of GBP4.82 million per
annum, reflecting an average Years Purchase ("YP") of 25.5 or a
gross income yield of 3.9%. The median annual ground rent charge
was GBP110 for houses and GBP250 for apartments (excluding student
assets). During the year the Group acquired one asset in Manchester
for GBP270,000. Ground rent assets under contract at the year end
are expected to cost an additional GBP2.47 million to complete.
The portfolio's weighted-average lease term as at 30 September
2019 was 344 years, with 93% of the ground rent income subject to
indexed or fixed increase review mechanisms. This is broken down in
the table below and, for illustrative purposes only, if the RPI
were to be 3.0% per annum over the next 10 years, all other things
being equal, the like-for-like portfolio ground rent income would
increase by approximately 3.1% per annum.
Location Ground Rent Income
(%)
------------------ -------------------
North West 30.4%
------------------ -------------------
North East 29.6%
------------------ -------------------
Midlands 12.1%
------------------ -------------------
London 10.8%
------------------ -------------------
South West 10.4%
------------------ -------------------
South East (exc.
London) 5.2%
------------------ -------------------
Wales 1.5%
------------------ -------------------
Total 100.0%
------------------ -------------------
Review type Ground Rent Income
(%)
------------- -------------------
RPI 69.8%
------------- -------------------
Doubling 16.1%
------------- -------------------
Fixed 7.1%
------------- -------------------
Flat 7.0%
------------- -------------------
Total 100.0%
------------- -------------------
During the year to 30 September 2019, 6.8% of ground rents were
subject to review, which realised an average uplift of 12.2%. This
increased portfolio-level ground rents by 0.8%. The rent review
profile is shown in the table below with 34.4% of the ground rent
income due for review over the next five years:
Years to next review Ground rent income
(%)
--------------------- -------------------
0-5 34.4
--------------------- -------------------
5-10 30.0
--------------------- -------------------
10-15 18.7
--------------------- -------------------
15-20 7.6
--------------------- -------------------
Over 20 2.3
--------------------- -------------------
Flat (no review) 7.0
--------------------- -------------------
Total 100.0
--------------------- -------------------
The top 10 assets by value represent 28.7% of the total
portfolio valuation as at 30 September 2019:
Property Valuation at September (%)
2019 (GBPm)
----------------------------- ----------------------- -----
The Student Village,
York 7.9 6.5
----------------------------- ----------------------- -----
Masshouse Plaza, Birmingham 3.9 3.2
----------------------------- ----------------------- -----
The Gateway, Leeds 3.6 2.9
----------------------------- ----------------------- -----
One Park West, Liverpool 3.4 2.8
----------------------------- ----------------------- -----
Wiltshire Leisure Village 3.2 2.6
----------------------------- ----------------------- -----
Ladywell Point, Manchester 3.2 2.6
----------------------------- ----------------------- -----
Rathbone Market, London 3.1 2.5
----------------------------- ----------------------- -----
First Street, Manchester 2.7 2.2
----------------------------- ----------------------- -----
Richmond House, Southampton 2.3 1.9
----------------------------- ----------------------- -----
City Island, Leeds 1.9 1.5
----------------------------- ----------------------- -----
Total 35.2 28.7
----------------------------- ----------------------- -----
The geographic spread of the portfolio as at 30 September 2019
is shown in the chart below:
Location % of Ground Rent Income % of valuation at September
2019
------------------ ------------------------ ----------------------------
North West 30.4% 28.7%
------------------ ------------------------ ----------------------------
North East 29.6% 29.6%
------------------ ------------------------ ----------------------------
Midlands 12.1% 13.1%
------------------ ------------------------ ----------------------------
London 10.8% 10.6%
------------------ ------------------------ ----------------------------
South West 10.4% 11.2%
------------------ ------------------------ ----------------------------
South East (exc.
London) 5.2% 5.2%
------------------ ------------------------ ----------------------------
Wales 1.5% 1.5%
------------------ ------------------------ ----------------------------
Total 100.0% 100.0%
------------------ ------------------------ ----------------------------
North West Ground Rents Limited - Beetham Tower, Manchester
The Company acquired North West Ground Rents Limited ("NWGR"),
the freeholder of Beetham Tower, in August 2012, which consists of
219 residential leases that now produce ground rent income of
GBP33,250 per annum and a single lease of the hotel, now owned by
Blue Manchester ("BML"), for a 999-year term that now produces
GBP30,902 per annum. The BML hotel lease expressly prohibits the
freeholder from recovering costs that relate to a failure in the
original design and construction. This prohibition does not feature
in the residential leases.
In 2014, routine maintenance identified that the structural bond
used to fix certain glass cladding panels to the frame was failing.
NWGR notified the original main contractor, Carillion, which
subsequently installed fixings to secure the glazing. This was
intended to be a temporary solution while Carillion and its
specialist cladding subcontractor, BUG Alutechnik GmbH ("BUG"),
developed a permanent solution. Despite reassurances that Carillion
and BUG were working on a solution, progress was limited and
Carillion fell into liquidation in 2018.
Due to health and safety concerns at that point, NWGR
implemented a maintenance regime that recorded the condition of the
Carillion fixings. Following an application under Section 20ZA of
the Landlord and Tenant Act 1985, the First tier Tribunal ("FtT")
unconditionally approved these costs on 28 March 2019, which have
been paid via the service charge in subsequent years by the
residential leaseholders.
In January 2019, BML obtained a High Court ruling that NWGR must
implement a permanent solution and complete the works by July 2020.
The Court also awarded BML as yet unspecified damages and costs
against NWGR.
The works directed by the High Court include removing affected
glazing units from the frames, removing the defective structural
bond and then re-fixing to the building. NWGR is advised that this
solution is technically very challenging to deliver with
significant risk from weather-related delays. Alternative repair
strategies are being considered that could reduce the costs of the
works.
NWGR commenced proceedings against Carillion's insurer, BUG and
the original architect, SimpsonHaugh, under collateral warranties
that may enable recovery of costs if NWGR can prove a failure in
the original design. BML has also claimed on warranties it has from
the original construction. The residents of Beetham Tower do not
benefit from these warranties. To date NWGR has incurred costs
pursuing these parties and in August 2019 a notice pursuant to
Section 20B(2) of the Landlord and Tenant Act, 1985 (as amended)
was issued, advising leaseholders of a proportion of these costs
(GBP0.7 million) to be paid via the service charge. This forms part
of a broader communication strategy with the residents and their
association to ensure a high level of transparency.
All parties are currently engaged in a mediation process to
achieve a resolution to the dispute and, while there is no
guarantee of success, NWGR views this as a positive step.
The Company has stated that it wants an outcome that is in the
interests of stakeholders, including its shareholders, residents
and BML.
NWGR is reliant on the financial support of the Company to
finance all legal action and comply with the January 2019 High
Court Judgment. Due to litigation and uncertainty the value of
NWGR's total investment in Beetham Tower has been written down to
nil. At the present time, it is the intention of the Board to
continue to support NWGR in achieving an outcome which does not
have a negative outcome for the stakeholders described above,
including the Company's shareholders. If the financial support
provided by the Company is withdrawn, the director of NWGR would
need to assess the ongoing viability of NWGR at that time.
In the event that NWGR was placed into liquidation there would
be no material impact on the Group's consolidated NAV. All of the
legal and professional costs incurred to date have been expensed in
full, and the valuation of the property has been written down to
nil.
Responsible and positive impact investing
The Investment Manager believes that corporate social
responsibility is key to the long-term future success of the
Company and that a sustainable investment programme should deliver
enhanced returns to investors, improved business performance to
tenants and tangible positive impacts to local communities, the
environment and wider society.
We are working to integrate the Company within Schroders'
sustainability framework. Among our first actions was to start to
assess the potential to switch to renewable energy tariffs for
electricity and LED lighting for those parts of the portfolio where
we have management control.
Asset management
Schroders has a stated objective of providing shareholders and
consumers with best-in-class residential asset management. Health
and safety considerations, specifically fire safety, are central to
delivering this objective.
All identified cladding and façade matters are being actively
addressed, and proposals for site rectification are under close
analysis and management. We have engaged with developers, building
contractors and other professionals to deliver appropriate,
permanent solutions to affected sites, providing input into
legislative requirements and operational diligence to managing
agents, resident management companies and leaseholders.
Following recommendations from Dame Judith Hackitt's Independent
Review of Building Regulations and Fire Safety and the Government's
recent consultation "Building a safer future: proposals for reform
of the building safety regulatory system", we have taken a number
of active steps to protect the Group and leaseholders within the
portfolio.
We have continued our regular correspondence with the directors
of resident management companies and their managing agents across
the non-managed estates in the portfolio. This interaction is
designed to drive awareness and standards in the industry and to
encourage high levels of governance from the sharing of regulatory
requirements and best practice.
A digitisation exercise is ongoing relating to operation and
maintenance manuals, fire strategy and fire risk assessments, in
keeping with the "golden thread" principle. Fire doors have also
been a focus in the past six months, with a detailed audit
undertaken of all directly-managed assets. The Group has
subsequently instructed service providers on a fire door repair and
remedial works programme.
The Grenfell Tower fire had a major impact on building safety
regulation, particularly for high-rise residential structures.
After focusing largely on Aluminium Composite Material ("ACM")
cladding in the immediate aftermath, the scope of the Government's
investigation has widened. In December 2018, the Government
published Advice Note 14 ("AN14"), aimed at providing clear
guidance for building owners on what steps to take with regard to
non-ACM materials on the external walls of high-rise buildings.
AN14 also requires the building owner or "responsible person" to
have an up-to-date fire risk assessment for their building and
states that building owners should check the external wall systems
to ensure that their buildings are safe. There are expectations in
the industry that AN14 will be included in a new building safety
bill, which will include the creation of a new building safety
regulator. We await further clarity on this issue from the
Government and will in the meantime continue to work with our
managing agents across the portfolio for buildings higher than 18
metres to ensure proactive risk management with reference to
AN14.
Finance
The Group has bank debt funding provided by Santander of GBP19.5
million at an average fixed interest rate of 3.37% maturing in
November 2021. The loan-to-value ratio of the assets charged to
Santander of 30.5% compares with the Group's consolidated net
loan-to-value ratio of 10.9%. The table below shows the Santander
loan position at the end of the year.
Lender Loan Maturity Interest Loan to LTV ratio Interest ICR ratio Forward Forward
(GBPm) rate (%) Value covenant cover covenant looking looking
("LTV") (%) ratio (%) ICR ratio ICR
ratio(1) (%)(2) (%)(3) ratio
(%) covenant
(%)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Santander GBP19.5m Nov 2021 3.37 30.5 40.0 320.8 270.0 320.8 270.0
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
The level, structure and cost of debt is being assessed as part
of the ongoing output from the strategy review.
Summary
The Group's strategy is to invest in long-dated UK ground rents
which have historically had a low correlation to mainstream 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.
While there are headwinds facing the sector arising from
leasehold reform and regulatory change, we have a clear strategy
focused on delivering best-in-class residential asset management
and sustainable shareholder total returns.
James Agar
Fund Manager
Schroder Real Estate Investment Management Limited
12 December 2019
(1) Loan balance divided by Santander secured portfolio bank
valuation as at 30 September 2019.
(2) For the quarter preceding the Interest Payment Date ("IPD"),
(aggregate rental income received/interest paid).
(3) For the four quarters following the IPD, (aggregate rental
income to be received/interest paid).
Business Model
Company's business
The Company carries on business as a real estate investment
trust. It has been approved by HM Revenue and Customs as an
investment trust in accordance with section 1158 of the Corporation
Tax Act 2010, by way of a one-off application and it is intended
that the Company will continue to conduct its affairs in a manner
which will enable it to retain this status.
The Company is domiciled in the UK and is an investment company
within the meaning of section 833 of the Companies Act 2006. The
Company is not a close company for taxation purposes.
It is not intended that the Company should have a limited life.
The Articles of Association contain provisions for a continuation
vote at specified intervals. The next such continuation vote is to
be put forward at the Annual General Meeting in 2023.
As at the date of this Report, the Company had 48 subsidiaries,
details of which are set out in note 5 below.
Purpose
The Company has been established to provide secure, long-term
performance through investment in long-dated UK ground rents, which
have historically had little correlation to traditional property
asset classes.
Portfolio
The Group's portfolio of ground rents includes freeholds and
head leaseholds of well-located residential and commercial
properties located throughout the United Kingdom. The Group
generates income primarily from the collection of such ground
rents, approximately 70% of which rise in line with inflation. It
generates additional income from other commercial relationships and
fees for performing specific obligations under individual
leases.
Management
Schroders performs specific duties in line with the Investment
Managers Agreement including, but not limited to, recommending
purchases and sales of freeholds (and head leases), and overseeing
the collection of ground rents from approximately 19,000 individual
units and where appropriate insurance premiums.
Schroders also undertakes active asset management activities
across the portfolio including overseeing managing agents and
engaging with leaseholders and tenants' associations, with a
detailed focus on Health & Safety and risk management. In
addition to this Schroders oversees property management matters
ranging from issuing service charge budgets and year end accounts,
to more complex situations such as assisting managing agents and
Residents Management Companies in the management of remedying
building defects. Further details of the Investment Manager's
duties are described below.
Oversight
The Board of the Company oversees the activities of the
Investment Manager and monitors the Group's risks and investment
performance as described later in this section.
Income
The ground rents and other income sources generate income which
is paid out as dividends to shareholders.
Investment objective and strategy
Details of the Group's investment objective and strategy may be
found on the inside front cover and page 1.
The Board has appointed the Investment Manager to implement the
investment strategy and to manage the Group's assets in line with
the appropriate restrictions placed on it by the Board, set out
further below.
Investment strategy
Details of the Group's investment strategy are set out on the
inside front cover.
Diversification and asset allocation
Details of the Group's policy in relation to diversification and
asset allocation are set out below.
Borrowing
The Group utilises gearing with the objective of improving
shareholder returns. Details of the Group's policy in relation to
borrowing are set out in note 11 below.
Investment restrictions and spread of investment risk
The Group invests and manages its assets with the objective of
spreading risk and in accordance with its published investment
policy. The Group ensures that the objective of spreading risk has
been achieved by investing in a diversified portfolio of ground
rents including freeholds and head leases of residential and
commercial properties located in the United Kingdom. The properties
described in the Investment Manager's report demonstrates how the
objective of spreading risk has been achieved.
Promotion
The Company promotes its shares to a broad range of investors
which have the potential to be long-term supporters of the
investment strategy. The Company seeks to achieve this through its
Investment Manager and its corporate broker which promote the
shares of the Company through regular contact with both current and
potential shareholders.
Promotion is focused via three channels:
- Discretionary fund managers. The Investment Manager promotes
the Company via both London and regional sales teams. This market
is the largest channel by a significant margin.
- Execution-only investors. The Company promotes its shares via
engaging with platforms and through its web page. Volume is smaller
but platforms have experienced strong growth in recent times and
are an important focus for the Investment Manager.
- Institutional investors. These activities consist of investor
lunches, one-on-one meetings, regional road shows and attendances
at conferences for professional investors. In addition, the
Company's shares are supported by the Investment Manager's wider
marketing of investment companies targeted at all types of
investors; this includes maintaining close relationships with
adviser and execution-only platforms, advertising in the trade
press, maintaining relationships with financial journalists and the
provision of digital information on Schroders' website.
The Board also seeks active engagement with investors and
meetings with the Chairman are offered to professional investors
where appropriate.
Key performance indicators
The Board measures the development and success of the Group's
business through achievement of the Group's investment objective,
set out on the inside front cover, which is considered to be the
most significant key performance indicator for the Group. Comment
on performance against the investment objective can be found in the
Chairman's statement.
The Board continues to review the Group's ongoing charges to
ensure that the total costs incurred by shareholders in the running
of the Group remain competitive when measured against peer group
funds. An analysis of the Group's costs, including management fees,
directors' fees and general expenses, is submitted to each Board
meeting. The management fee is reviewed at least annually.
Corporate and social responsibility
Board gender diversity
As at 30 September 2019, the Board comprised three men. The
Board's approach to diversity is that candidates for Board
vacancies are selected based on their skills and experience, which
are matched against the balance of those of the overall Board,
taking into account the specific criteria for the role being
offered.
Candidates are not specifically selected on the grounds of their
gender but this is taken into account in terms of overall balance,
skillset and experience. Further information about the Board and
their biographical details can be found below.
Responsible investment policy
The Company delegates to its Investment Manager the
responsibility for taking environmental, social and governance
("ESG") issues into account when assessing the selection,
retention, management and realisation of investments. The Board
expects the Investment Manager to engage with stakeholders on these
issues and to promote best practice.
A description of the Investment Manager's policy on these
matters can be found on the Schroders website at:
www.schroders.com/ri.
The Board monitors the implementation of this policy through
regular reporting by the Investment Manager on its engagement
activity.
Corporate responsibility
The Group is committed to carrying out its business in a
responsible manner and has appropriate policies in place relating
to the key areas of corporate responsibility, including in respect
of anti-bribery and corruption and the prevention of the
facilitation of tax evasion.
Greenhouse gas emissions
The Group is outside of the scope of the greenhouse gas
emissions reporting regime.
Key Information Document (KID)
KIDs for the Company's ordinary shares and warrants were
published by the Investment Manager in October 2019, in accordance
with the Packaged Retail and Insurance-Based Investment Products
Regulations. The calculation of figures and performance scenarios
contained in the KIDs have been neither set nor endorsed by the
Board nor the Investment Manager.
Principal risks and uncertainties
The Board is responsible for the Group's system of risk
management and internal control and for reviewing its
effectiveness. The Board has adopted a detailed matrix of principal
risks affecting the Group's business as a REIT and has established
associated policies and processes designed to manage and, where
possible, mitigate those risks, which are monitored by the Audit
Committee on an ongoing basis. This system assists the Board in
determining the nature and extent of the risks it is willing to
take in achieving the Group's strategic objectives. The principal
risks, emerging risks and the monitoring system are also subject to
robust assessment at least annually. The last assessment took place
in December 2019.
Although the Board believes that it has a robust framework of
internal control in place this can provide only reasonable, and not
absolute, assurance against material financial misstatement or loss
and is designed to manage, not eliminate, risk. The principal risks
and uncertainties faced by the Group changed from those detailed in
the 2018 Annual Report and Accounts to those detailed below on 5
December 2019. Actions taken by the Board and, where appropriate,
its committees, to manage and mitigate the Group's principal risks
and uncertainties are set out in the table below.
Emerging risks and uncertainties
During the year, the Board also discussed and monitored risks
that could potentially impact the Group's ability to meet its
strategic objectives. The main emerging risk monitored was
political risk, specifically leasehold reform, which could
adversely impact the value of the Group's portfolio. Political risk
also includes Brexit and the Board continues to monitor
developments for the UK's departure from the European Union and to
assess the potential consequences for the Group's future
activities, but believes that the Group's business model's lack of
exposure to foreign exchange currency rates or other measures of
economic growth, positions the Group to be suitably insulated from
Brexit related risks.
Risk Mitigation and management
Political The Group would rely on Article 1, Protocol
Leasehold reform legislation 1 of the European Convention on Human Rights
may be enacted by the UK to ensure that it is not deprived of its
Government which forcibly assets at an undervalue. The Investment Manager
enfranchises tenants, depriving seeks to engage constructively with the Government
the Group of its assets. and the Law Commission in relation to leasehold
reform.
The Company is engaging with the Ministry
of Housing, Communities and Local Government
("MHCLG") and the Law Commission and other
stakeholders regarding potential reform of
the leasehold sector, including signing the
Pledge.
-----------------------------------------------------
Operational The Investment Manager reviewed and updated
In light of recommendations fire strategy decisions in the managed estate.
from Dame Judith Hackitt's Fire safety management policies and procedures,
Independent Review of Building risk assessments, and fire records were improved
Regulations and Fire Safety, in keeping with the "Golden Thread" principle
and the Government's recent of the Hackitt Review.
consultation 'Building a Maintenance regimes have been improved to
safer future: proposals for increase testing and planned preventative
reform of the building safety maintenance.
regulatory system" (the 'Hackitt We continue to work closely with The Ministry
Review'), heightened regulatory of Housing, Communities and Local Government,
requirements are recommended local fire authorities and fire safety experts
to protect the Company and to ensure fire safety and address any remedial
consumers. actions following Grenfell Tower learnings.
The Investment Manager engages in regular
correspondence with the directors of resident
management companies and their managing agents,
in the non-managed estate. There is a proposed
partnership between the Company and Greater
Manchester Fire and Rescue Service to provide
high-level advice and assistance in formulating
and implementing policy.
-----------------------------------------------------
Asset Insurance is maintained to cover against
The properties ultimately certain events. The Investment Manager has
owned by the Group are unable a monitoring programme in place to mitigate
to be used or deteriorate against certain types of asset risk. Other
in value as a result of structural than in exceptional circumstances, leaseholders
defects or other unforeseen are responsible for the costs of repair of
events. issues with the fabric of buildings.
-----------------------------------------------------
Valuation / liquidity The Group does not seek to actively trade
The market for the onward its assets, instead focusing on managing
sale of the Group's freeholds them responsibly and effectively.
is small and this may result External valuers provide independent valuation
in volatility in the price of all assets at least half-yearly.
achieved when selling or Members of the Audit Committee will meet
valuing assets. with the external valuers to discuss the
basis of their valuations and their quality
control processes on at least an annual basis.
-----------------------------------------------------
Investment policy and strategy The Board seeks to mitigate these risks by:
An inappropriate investment - Diversification of its property portfolio
strategy, or failure to implement through its investment
the strategy, could lead restrictions and guidelines which are monitored
to underperformance and the and reported on by the Investment Manager;
share price being at a larger - Determining borrowing policy, and ensuring
discount, or smaller premium, the Investment Manager operates within borrowing
to NAV. This fall in values restrictions and guidelines;
would be amplified by the - Receiving from the Investment Manager timely
Group's external borrowings. and accurate management information including
performance data, attribution
analysis, property level business plans and
financial projections;
- Monitoring the implementation and results
of the investment process with the Investment
Manager; and
- Reviewing marketing and distribution activity
and considering the use of a discount control
mechanism as necessary.
-----------------------------------------------------
Service provider Service providers are appointed subject to
The Group has no employees due diligence processes and with clearly-documented
and has delegated certain contractual arrangements detailing service
functions to a number of expectations.
service providers. Regular reports are provided by key service
Failure of controls and poor providers and the quality of services provided
performance of any service are monitored.
provider could lead to disruption, Review of annual audited internal controls
reputational damage or loss. reports from key service providers, including
confirmation of business continuity arrangements.
-----------------------------------------------------
Custody The depositary reports on the safe custody
Safe custody of the Group's of the Group's assets, including cash and
assets may be compromised portfolio holdings, which are independently
through control failures reconciled with the Investment Manager's
by the depositary, including records.
cyber hacking. Review of audited internal controls reports
covering custodial arrangements is undertaken.
An annual report from the depositary on its
activities, including matters arising from
custody operations is reviewed.
-----------------------------------------------------
Cyber Service providers report on cyber risk mitigation
The Group's service providers and management at least annually, which includes
are all exposed to the risk confirmation of business continuity capability
of cyber attacks. Cyber attacks in the event of a cyber attack.
could lead to loss of personal
or confidential information
or disrupt operations.
-----------------------------------------------------
Accounting, legal and regulatory Confirmation of compliance with relevant
In order to continue to qualify laws and regulations by key service providers.
as a REIT, the Group must Shareholder documents and announcements,
comply with the requirements including the Group's published annual report
of the REIT regime. are subject to stringent review processes.
Breaches of the TISE Listing Procedures have been established to safeguard
Rules, the Companies Act against disclosure of inside information.
or other regulations with
which the Group is required
to comply, could lead to
a number of detrimental outcomes.
-----------------------------------------------------
Risk assessment and internal controls
Risk assessment includes consideration of the scope and quality
of the systems of internal control operating within key service
providers, and ensures regular communication of the results of
monitoring by such providers to the Audit Committee, including the
incidence of significant control failings or weaknesses that have
been identified at any time and the extent to which they have
resulted in unforeseen outcomes or contingencies that may have a
material impact on the Group's performance or condition. No
significant control failings or weaknesses were identified from the
Audit Committee's ongoing risk assessment which has been in place
throughout the financial year and up to the date of this
Report.
Viability statement
The directors have assessed the viability of the Company over a
five year period, taking into account the Company's position at 30
September 2019 and the potential impact of the principal risks and
uncertainties it faces for the review period. A period of five
years has been chosen as the Board believes that this reflects a
suitable time horizon for strategic planning, taking into account
the investment policy, liquidity of investments, potential impact
of economic cycles, nature of operating costs and dividends.
In their assessment the directors have considered each of the
Group's principal risks and uncertainties detailed above and in
particular the impact of a significant fall in the value of the
Group's investment portfolio. The directors have also considered
the Group's income and expenditure projections and the GBP19.5
million term loan repayable in September 2021. Based on the
Investment Manager's discussions with a number of lenders ahead of
the expiry of this facility, the directors know of no reason that
an equivalent facility will not be in place by the expiry of this
credit facility.
Based on the Group's processes for monitoring operating costs,
the share price discount, the Investment Manager's compliance with
the investment objective, asset allocation, the portfolio risk
profile, gearing, counterparty exposure, liquidity risk and
financial controls, the directors have concluded that there is a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the five
year period to 30 September 2024. In reaching this decision, the
Board has taken into account the Company's next continuation vote,
to be put forward at the AGM in 2023. The directors have no reason
to believe that such a resolution will not be passed by
shareholders.
Going concern
The directors have examined significant areas of possible
financial risk and have reviewed cash flow forecasts and compliance
with the debt covenants, in particular the LTV covenant and
interest cover ratio. They have not identified any material
uncertainties which would cast significant doubt on the Group's
ability to continue as a going concern for a period of not less
than 12 months from the date of the approval of the financial
statements. The directors have satisfied themselves that the Group
has adequate resources to continue in operational existence for the
foreseeable future.
After due consideration, the Board believes it is appropriate to
adopt the going concern basis in preparing the financial
statements.
By order of the Board
Schroder Investment Management Limited
Company Secretary
12 December 2019
Board of Directors
Name: Malcolm Naish
Role: Independent Non-executive Chairman
Date of appointment: 11 July 2012
Experience: Malcolm was the director of real estate at Scottish
Widows Investment Partnership (SWIP) until June 2012 and was
responsible for overseeing its portfolio of commercial property
assets across the UK, Europe and North America.
He has more than 40 years' experience of working in the real
estate industry. Prior to joining SWIP, he was director and head of
DTZ Investment Management, where he was responsible for business
development in the UK and in international markets. He was also a
founding partner of Jones Lang Wootton Fund Management, and UK
managing director of LaSalle Investment Management. In 2002, he
co-founded Fountain Capital Partners, a pan-European real estate
investment manager and adviser.
He qualified as a chartered surveyor in 1976 and was Chairman of
the Scottish Property Federation from 2010 to 2011.
Committee membership: Audit Committee, Management Engagement
Committee (chair).
Current remuneration: GBP30,000 per annum.
Material interests in any contract which is significant to the
Group's business: none.
Shared directorships with any other director of the Company:
none.
Name: Paul Craig
Role: Independent Non-executive Director
Date of appointment: 11 July 2012
Experience: Paul is Portfolio Manager at Quilter Investors. He
has more than 20 years' investment experience, including 10 years
at Exeter Investment Group and six years at New Star Asset
Management, where he was a director of the asset management
subsidiary.
During the past 18 years, his focus has been multi-manager
products with an emphasis on closed-ended funds.
He is an Associate of the UK Society of Investment
Professionals.
Committee membership: Audit Committee, Management Engagement
Committee
Current remuneration: GBP25,000 per annum.
Material interests in any contract which is significant to the
Group's business: none.
Shared directorships with any other director of the Company:
none.
Name: Bill Holland
Role: Independent Non-executive Director
Date of appointment: 1 September 2019
Experience: Bill was a senior partner in KPMG's real estate
practice and was responsible for the audit of a wide range of
property companies and funds encompassing investors, developers,
housebuilders and surveyors in the listed and private sectors.
In his 32 year career with KPMG, he spent 25 years specialising
in the real estate sector, the last 19 years as partner. He also
sat on the finance committees of the British Property Federation
and INREV and on a working committee of The Association of Real
Estate Funds.
He is also a director of CLS Holdings plc and a governor at
Winchester College, chairing the estate committee and sitting on
the finance committee.
Committee membership: Audit Committee (chair), Management
Engagement Committee.
Current remuneration: GBP27,500 per annum.
Material interests in any contract which is significant to the
Group's business: none.
Shared directorships with any other director of the Company:
none.
Directors' report
The directors submit their report and the audited consolidated
financial statements for the Company and its subsidiaries for the
year ended 30 September 2019.
Dividend policy
The stated policy of the Company is to pay quarterly interim
dividends and details of the interim dividends paid during the year
are set out in Note 18 of the notes to the Group consolidated
financial statements.
In accordance with the directors' policy of paying all dividends
as interim dividends, the directors do not recommend payment of a
final dividend. In line with best practice, a resolution on the
Company's dividend policy will be put to shareholders at the
Company's next annual general meeting.
Listing requirements
Throughout the year ended 30 September 2019, the Group complied
with the conditions set out in the TISE Rules for Companies. The
directors monitor the compliance at Board meetings and take advice
from the Group's TISE Listing sponsor where required.
Directors and their interests
The following persons served as directors during the year and up
to the date of signing the financial statements:
Robert Malcolm Naish
Paul Anthony Craig
Simon Paul Wombwell served as a director during the year and
retired on 1 September 2019.
William Edward John Holland was appointed as a director on 1
September 2019.
Further information about the directors of the Company and their
biographical details can be found above. No director owns shares in
the Company.
Share capital
As at the date of this report, the Company had 97,006,497
ordinary shares of 50 pence each in issue. No shares are held in
treasury. Accordingly the total number of voting rights in the
Company at the date of this report is 97,006,497. The total number
of warrants outstanding was 4,423,876. Full details of the
Company's share capital are set out in note 15 of the 2019 Annual
Report and Accounts.
Substantial share interests
The Company has received notifications of the below interests in
5% or more of the voting rights attaching to the Company's issued
share capital:
30 September 2019 30 September 2019
no. of shares % of total voting
rights
Schroders 18,330,000 18.89
------------------ -------------------
Integrated Financial
Arrangements Ltd 9,737,956 10.04
------------------ -------------------
Quilter Plc 8,935,025 9.21
------------------ -------------------
IntegraLife (UK) Limited 7,782,419 8.02
------------------ -------------------
CG Asset Management 7,844,226 8.08
------------------ -------------------
Brooks Macdonald Group
plc 5,991,234 6.18
------------------ -------------------
NW Brown Group Limited 5,948,586 6.13
------------------ -------------------
Close Group 5,181,115 5.34
------------------ -------------------
There have been no notified changes to the above holdings since
the year end.
Political donations
Neither the Company nor its subsidiaries has made any political
donation or incurred political expenditure during the year.
Key service providers
The Investment Manager
The Company is an alternative investment fund as defined by the
AIFM Directive and appointed Schroder Real Estate Investment
Management Limited ("Schroders") as the Investment Manager on 13
May 2019 in accordance with the terms of an alternative investment
fund manager ("AIFM") agreement. Prior to this date, Brooks
Macdonald Funds Limited was appointed as the AIFM. The AIFM
agreement, which is governed by the laws of England and Wales, can
be terminated by either party on 12 months' notice or on immediate
notice in the event of certain breaches or the insolvency of either
party, subject to an initial three year term. As at the date of
this report no such notice had been given by either party.
Schroders is authorised and regulated by the FCA and provides
portfolio management, risk management, accounting and company
secretarial services to the Company under the AIFM agreement. The
Investment Manager also provides general marketing support for the
Company and manages relationships with key investors, in
conjunction with the Chairman, other Board members or the corporate
broker as appropriate. The Investment Manager has delegated company
secretarial services to another wholly owned subsidiary of
Schroders plc, Schroder Investment Management Limited. The
Investment Manager has appropriate professional indemnity insurance
cover in place.
The Schroders Group manages GBP450.8 billion (as at 30 September
2019) on behalf of institutional and retail investors, financial
institutions and high net-worth clients from around the world,
invested in a broad range of asset classes across equities, fixed
income, multi-asset and alternatives.
The Investment Manager is responsible for operating the Group's
system of internal control and reviewing its effectiveness. Such a
system is designed to manage, rather than eliminate, the risk of
failure to achieve business objectives and can provide only
reasonable but not absolute assurance against material misstatement
or loss. The Audit Committee will review annually the Investment
Manager's approach to internal control to ensure it is working
effectively. There were no internal control breaches during the
year.
The management fee payable in respect of the year ended 30
September 2019 amounted to GBP562,000 (2018: GBP372,000).
Further details of the amounts payable to the Investment Manager
are set out in the Chairman's statement above.
The Board has reviewed the performance of the Investment Manager
and continues to consider that it has the appropriate depth and
quality of resource to deliver the Group's investment objectives
over the longer term. Thus, the Board considers that Schroders'
appointment under the terms of the AIFM agreement, details of which
are set out above, is in the best interests of shareholders as a
whole.
Depositary
INDOS Financial Limited which is authorised and regulated by the
Financial Conduct Authority, carries out certain duties of a
depositary specified in the AIFM Directive including, in relation
to the Company, as follows:
- safekeeping of the assets of the Group which are entrusted to
it;
- cash monitoring and verifying the Group's cash flows; and
- oversight of the Group and the Manager.
The Company, the Manager and the depositary may terminate the
depositary agreement at any time by giving three months' notice in
writing. The depositary may only be removed from office when a new
depositary is appointed by the Company.
Corporate Governance
The Board is committed to high standards of corporate
governance, which meet the statutory and regulatory requirements
for companies listed in Guernsey on The International Stock
Exchange ("TISE") and has implemented a framework for corporate
governance which it considers to be appropriate for a REIT. In this
respect, the Board has chosen to incorporate the principles of
corporate governance contained in the UK Corporate Governance Code
(the "UKCG Code"), noting that it is not required to fully comply
with or adhere to the UKCG Code. The UKCG Code is published by the
UK Financial Reporting Council and is available to download from
www.frc.org.uk.
The Board will consider its governance arrangements against the
revised 2018 UK Corporate Governance Code published in July 2018
which applies to financial years beginning on or after 1 January
2019 for the financial year beginning on 1 October 2019.
Compliance statement
The TISE Listing Rules require the Company to report against a
code of corporate governance, or explain the reasons for not doing
so. This Corporate Governance Statement, together with the
Statement of Directors' Responsibilities and the viability and
going concern statements of the 2019 Annual Report and Accounts,
indicate how the Company has complied with the UKCG Code's
principles of good governance and its requirements on internal
control.
The Board believes that the Company has, throughout the year
under review, complied with all relevant provisions set out in the
UKCG Code, save in respect of the appointment of a senior
independent director, where departure from the UKCG Code is
considered appropriate given the Company's size and adoption of a
fully outsourced model. The Board has considered whether a senior
independent director should be appointed. As the Board comprises
entirely non-executive directors, the appointment of a senior
independent director is not considered necessary. However, the
Chairman of the Audit Committee effectively acts as the senior
independent director and is available to directors and/or
shareholders if they have concerns which cannot be resolved through
discussion with the Chairman.
Operation of the Board
Chairman
The Chairman is an independent non-executive director who is
responsible for leadership of the Board and ensuring its
effectiveness in all aspects of its role. The Chairman's other
significant commitments are detailed above.
Role and operation of the Board
The Board is the Company's governing body; it sets the Group's
strategy and is collectively responsible to shareholders for its
long-term success. The Board is responsible for appointing and
subsequently monitoring the activities of the Investment Manager
and other service providers to ensure that the investment
objectives of the Group continue to be met. The Board also ensures
that the Investment Manager adheres to the investment restrictions
set by the Board and acts within the parameters set by it in
respect of any gearing.
A procedure has been adopted for directors, in the furtherance
of their duties, to take independent professional advice at the
expense of the Company.
The Chairman ensures that all directors receive relevant
management, regulatory and financial information in a timely manner
and that they are provided, on a regular basis, with key
information on the Company's policies, regulatory requirements and
internal controls. The Board receives and considers reports
regularly from the Investment Manager and other key advisers and ad
hoc reports and information are supplied to the Board as
required.
The Board is satisfied that it is of sufficient size with an
appropriate balance of diverse skills and experience, independence
and knowledge of the Company, its sector and the wider REIT sector,
to enable it to discharge its duties and responsibilities
effectively and that no individual or group of individuals
dominates decision making.
Training and development
On appointment, directors receive a full, formal and tailored
induction. Directors are also regularly provided with key
information on the Company's policies, regulatory and statutory
requirements and internal controls. Changes affecting directors'
responsibilities are advised to the Board as they arise. Directors
also regularly participate in relevant training and industry
seminars.
Conflicts of interest
Directors are required to disclose all actual and potential
conflicts of interest to the Board as they arise for consideration
and approval. The Board may impose restrictions or refuse to
authorise such conflicts if deemed appropriate.
Directors' and officers' liability insurance and indemnity
Directors' and officers' liability insurance cover was in place
for the directors throughout the year under review. The Company's
articles of association provide, subject to the provisions of UK
legislation, an indemnity for directors in respect of costs which
they may incur relating to the defence of any proceedings brought
against them arising out of their positions as directors, in which
they are acquitted or judgement is given in their favour by the
court. This is a qualifying third-party indemnity and was in place
throughout the year under review and to the date of this
report.
Directors' attendance at meetings
Four Board meetings are usually scheduled each year to deal with
matters including: the setting and monitoring of investment
strategy; approval of borrowings and/or cash positions; review of
investment performance, the level of discount of the Company's
shares to underlying NAV per share and sales, marketing and PR
activities of the Company; and services provided by third parties.
Additional meetings of the Board are arranged as required.
The number of meetings of the Board and its committees held
during the financial year and the attendance of individual
directors is shown below. Whenever possible all directors attend
the AGM.
Director Board Audit Committee Management Engagement
Committee
Malcolm Naish 4/4 1/1 1/1
------ ---------------- ----------------------
Paul Craig 4/4 N/A 1/1
------ ---------------- ----------------------
Simon Wombwell(1) 4/4 1/1 1/1
------ ---------------- ----------------------
Bill Holland(2) - - -
------ ---------------- ----------------------
(1.) Simon Wombwell resigned as a director on 1 September
2019
(2.) Bill Holland was appointed as a director effective 1
September 2019. No quarterly Board meetings, Audit Committee or
Management Engagement Committee meetings took place between 1
September and 30 September 2019.
Shareholders
Shareholder relations are given high priority by both the Board
and the Investment Manager. The Company communicates with
shareholders through its webpages and the annual and half year
reports, which aim to provide shareholders with a clear
understanding of the Company's activities and its results.
The chairmen of the Board and its committees attend the AGM and
are available to respond to queries and concerns from
shareholders.
It is the intention of the Board that the annual report and
notice of the AGM be issued to shareholders so as to provide at
least 20 working days' notice of the AGM. Shareholders wishing to
lodge questions in advance of the AGM are invited to do so by
writing to the company secretary at the address given on the
outside back cover.
The Company has adopted a policy which ensures that shareholder
complaints and other shareholder communications addressed to the
company secretary, the Chairman or the Board are, in each case,
considered by the Chairman and the Board.
Board committees
The Board has established the Audit Committee and the Management
Engagement Committee. All directors sit on both committees.
The Audit Committee, chaired by Bill Holland (previously chaired
by Simon Wombwell), meets at least once a year and reviews the
financial reporting process and system of internal control and
management of financial risks. The Audit Committee is responsible
for overseeing the Group's relationship with the external auditors,
including making recommendations to the Board on the appointment of
the external auditors and their remuneration. The Audit Committee
considers the nature, scope and results of the auditors' work and
reviews. The Audit Committee primarily focuses on compliance with
legal requirements, accounting standards and the TISE Listing Rules
and ensures that an effective system of internal financial and
non-financial controls is maintained. The ultimate responsibility
for reviewing and approving the annual report and financial
statements remains with the Board.
The Management Engagement Committee is chaired by Malcolm Naish.
The committee meets a minimum of once a year. The function of the
committee is to ensure that the Investment Manager complies with
the terms of the Investment Management Agreement and that the
provisions of the agreement follow industry practice and remain
competitive and in the best interests of shareholders. The
Management Engagement Committee will also consider the appointment,
remuneration and performance of suppliers of services to the
Group.
The directors have not established remuneration or nomination
committees as they do not believe that such committees would be
appropriate given the nature of the Group's operations. The Board
annually reviews the remuneration of the directors and agrees the
level of non-executive fees. The Board actively considers future
succession plans as well as consideration as to whether the Board
has the skills required to manage the Group effectively. The
assessment of the performance of the Chairman is determined by the
other directors.
Statement of Directors' responsibilities
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the Group financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union and Company financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the European Union. 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 Company and of the profit or loss of the Group for that period.
In preparing the financial statements, the directors are required
to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable IFRSs as adopted by the European
Union have been followed for the Group financial statements and
IFRSs as adopted by the European Union have been followed for the
Company financial statements, subject to any material departures
disclosed and explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Company
will continue in business.
The directors are also responsible for safeguarding the assets
of the Group and Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable
them to ensure that the financial statements and the directors'
Remuneration Report comply with the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the IAS
Regulation.
The directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' confirmations
The directors consider that 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 and
Company's position and performance, business model and
strategy.
Each of the directors, whose names and functions are listed
earlier in the Directors' Report confirm that, to the best of their
knowledge:
-- the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and
loss of the Group;
-- the Company financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and
loss of the Company; and
-- the Directors' Report includes a fair review of the
development and performance of the business and the position of the
Group and Company, together with a description of the principal
risks and uncertainties that it faces.
In the case of each director in office at the date the
Directors' Report is approved:
-- so far as the director is aware, there is no relevant audit
information of which the Group and Company's auditors are unaware;
and
-- they have taken all the steps that they ought to have taken
as a director in order to make themselves aware of any relevant
audit information and to establish that the Group and Company's
auditors are aware of that information.
By order of the Board
Schroder Investment Management Limited
Company Secretary
12 December 2019
Ground Rents Income Fund plc
Consolidated Statement of Comprehensive
Income
for the year ended 30 September
2019
Note 2019 2018
GBP GBP
Continuing operations
Revenue 2 5,638,348 5,356,965
Administrative expenses 3 (2,809,134) (1,322,983)
Profit on sale of investment properties 485,145 165,469
Net revaluation loss on investment
properties 8 (4,876,845) (14,160,078)
Operating loss (1,562,486) (9,960,627)
Finance income 5 25,903 26,129
Finance expenses 6 (752,539) (753,539)
Net finance expense (726,636) (727,410)
Loss before tax (2,289,122) (10,688,037)
Taxation 7 - -
Loss after tax and total comprehensive
loss (2,289,122) (10,688,037)
------------ -------------
Losses per share
Basic 13 (2.36p) (11.05p)
Diluted 13 (2.36p) (11.05p)
The accompanying notes form an integral part of the consolidated
financial statements.
Ground Rents Income Fund
plc
Consolidated Statement
of Financial Position
as at 30 September 2019
Note 2019 2018
GBP GBP
Assets
Non-current assets
Investment properties 8 122,893,000 127,509,800
122,893,000 127,509,800
Current assets
Trade and other receivables 9 1,110,402 1,895,271
Cash and cash equivalents 6,136,854 5,566,561
7,247,256 7,461,832
Total assets 130,140,256 134,971,632
---------------- ----------------
Liabilities
Non-current liabilities
Financial liabilities
measured at amortised
cost 11 (19,304,928) (19,211,693)
(19,304,928) (19,211,693)
Current liabilities
Trade and other payables 10 (2,820,454) (2,604,005)
(2,820,454) (2,604,005)
Total liabilities (22,125,382) (21,815,698)
---------------- ----------------
Net assets 108,014,874 113,155,934
---------------- ----------------
Equity
Share capital 15 48,503,248 48,503,198
Share premium account 16 45,884,305 45,884,305
Retained earnings 17 15,916,443 29,456,468
Loss for the financial
year 17 (2,289,122) (10,688,037)
Total equity 108,014,874 113,155,934
---------------- ----------------
Net asset value per ordinary
share
Basic 14 111.3p 116.6p
Diluted 14 110.9p 115.9p
The financial statements were approved and authorised for issue by the
Board of Directors and signed on its behalf by:
Robert Malcolm Naish William Edward John Holland
Director Director
Ground Rents Income Fund
plc Ground Rents Income Fund plc
Company registered number:
08041022 Date: 12 December 2019
The accompanying notes form an integral part of the consolidated financial
statements.
Ground Rents Income Fund plc
Consolidated Statement of Cash Flows
for the year ended 30 September 2019
Note 2019 2018
GBP GBP
Cash flows from operating activities
Cash generated from operations 19 3,830,532 4,787,311
Interest paid on bank loan and bank
charges (659,304) (753,539)
Net cash generated from operating
activities 3,171,228 4,033,772
------------ ------------
Cash flows from investing activities
Interest received 25,903 26,129
Receipts from the sale of investment properties 513,221 452,350
Purchase of investment properties 8 (288,121) (2,628,828)
Net cash generated from/(used in)
investing activities 251,003 (2,150,349)
------------ ------------
Cash flows from financing activities
Net proceeds from issuance of shares 19 50 284,292
Dividends paid to shareholders 18 (2,851,988) (3,829,799)
Net cash used in financing activities (2,851,938) (3,545,507)
------------ ------------
Net increase/(decrease) in cash and
cash equivalents 20 570,293 (1,662,084)
------------ ------------
Net cash and cash equivalents at 1
October 2018/2017 5,566,561 7,228,645
Net cash and cash equivalents at 30
September 6,136,854 5,566,561
------------ ------------
The accompanying notes form an integral part of the consolidated
financial statements.
Ground Rents Income
Fund plc
Consolidated Statement of Changes
in Equity
for the year ended 30
September
2019
Share
Share premium Retained
capital account earnings Total equity
GBP GBP GBP GBP
At 1 October 2017 48,356,050 45,747,161 33,286,267 127,389,478
Comprehensive loss
Loss for the year - - (10,688,037) (10,688,037)
Total comprehensive
loss - - (10,688,037) (10,688,037)
Transactions with
owners
Issue of share
capital (note
15) 147,148 147,149 - 294,297
Share issue costs
(note 16) - (10,005) - (10,005)
Dividends paid (note
18) - - (3,829,799) (3,829,799)
At 30 September 2018 48,503,198 45,884,305 18,768,431 113,155,934
------------------ ------------------ ---------------- ----------------
At 1 October 2018 48,503,198 45,884,305 18,768,431 113,155,934
Comprehensive loss
Loss for the year - - (2,289,122) (2,289,122)
Total comprehensive
loss - - (2,289,122) (2,289,122)
Transactions with
owners
Issue of share
capital (note
15) 50 50 - 100
Share issue costs
(note 16) - (50) - (50)
Dividends paid (note
18) - - (2,851,988) (2,851,988)
At 30 September 2019 48,503,248 45,884,305 13,627,321 108,014,874
------------------ ------------------ ---------------- ----------------
The accompanying notes form an integral part of the consolidated
financial statements.
Ground Rents Income Fund plc
Notes to the Consolidated Financial
Statements
for the year ended 30 September
2019
1 Accounting policies
Ground Rents Income Fund plc (the 'Company') is registered in England
and Wales as a public company limited by shares. The Company's
registered address is 1 London Wall Place, London, EC2Y 5AU. The
consolidated financial statements of the Company comprise the Company
and its subsidiaries (together referred to as the 'Group').
Statement of
(a) compliance
The consolidated financial statements of the Group have been prepared
in accordance with International Financial Reporting Standards
("IFRSs") as adopted by the European Union ("EU") and interpretations
issued by the International Financial Reporting Interpretations
Committee ("IFRIC"), and therefore comply with Article 4 of the
EU IAS regulation, and in accordance with the Companies Act 2006.
Basis of
(b) preparation
The consolidated financial statements have been prepared under
the historical cost convention, as modified by the revaluation
of investment properties. They are presented in sterling, which
is the Group's functional currency.
At the year end date, the Group had a fully drawn down debt facility
of GBP19,500,000, expiring on 15 November 2021.
The directors continue to prepare the financial statements on a
going concern basis.
The accounting policies applied to the results, assets, liabilities
and cash flows of the entities included in the consolidated financial
statements are consistent with those of the previous year other
than as set out in note 1(c) below.
Adoption of new and
revised
(c) standards
During the year, the Group adopted the following standards:
IFRS 9 - Financial instruments
The new standard introduces an expected credit loss model, requiring
expected credit losses to be recognised on all financial assets
held at amortised cost.
The new IFRS 9 impairment model requires impairment allowances
for all exposures from the time a loan is originated, based on
the deterioration of credit risk since initial recognition. If
the credit risk has not increased significantly (Stage 1), IFRS
9 requires allowances based on twelve month expected losses. If
the credit risk has increased significantly (Stage 2) and if the
loan is 'credit impaired' (Stage 3), the standard requires allowances
based on lifetime expected losses. The assessment of whether a
loan has experienced a significant increase in credit risk varies
by product and risk segment. It requires use of quantitative criteria
and experienced credit risk judgement.
The expected credit risk model has been applied to the trade receivables
in the Group and amounts due to the Company from subsidiary companies.
IFRS 9 does not apply to any other asset held by the Group.
There is no material quantitative impact for the year ended 30
September 2019 upon application of this new accounting policy for
assessing asset impairment. The Group will continue to assess its
financial assets periodically using the credit loss model and recognise
an expected credit loss if required.
IFRS 15 - Revenue from contracts with customers
The new standard sets out a five-step model for the recognition
of revenue and establishes principles for reporting useful information
to users of financial statements about the nature, timing and uncertainty
of revenues and cash flows arising from an entity's contracts with
customers.
The new standard does not apply to rental income or other income
defined within leases which is in the scope of IAS 17, but does
apply to commission income and investment property disposals.
The adoption of IFRS 15 has not had a quantitative impact upon
the Group's financial statements.
IFRS 16 - Leases (not yet effective, for periods beginning on or
after 1 January 2019)
The new standard requires recognition on the balance sheet for
the head rent payable by a lessee over the lease term. For lessees,
it will result in almost all leases being recognised on the balance
sheet, as the distinction between operating and finance leases
will be removed.
1 Accounting policies (continued)
The accounting for lessors will not significantly change.
This standard does not impact the Group's financial position since
it is a lessor of investment properties.
There are no other standards or interpretations yet to be effective
that would be expected to have a material impact on the financial
statements of the Group.
(d) Dividend distribution
Dividend distribution to the Company's shareholders is recognised
as a liability in the Group's financial statements in the period
in which the dividends are approved by the Company's directors.
(e) Critical accounting estimates and judgements
The preparation of financial information requires the use of assumptions,
estimates and judgements about future conditions. Use of available
information and application of judgement are inherent in the formation
of estimates. Actual results in the future may differ from those
reported. In this regard, the directors believe that the accounting
policies where judgement is necessarily applied are those that
relate to valuations. The underlying assumptions are reviewed on
an ongoing basis.
The valuation of investment properties is dependent on external
factors such as the availability of fixed rate investments in the
market as well as factors specific to the nature of the investment.
While interest rates remain low, ground rents are viewed as attractive
investments due to the secure, fixed income streams. The value
is also dependent on the timing and amount of future rental uplifts,
the most attractive being those linked to RPI with rental cycles
of 10 years or less. The least attractive are those ground rents
which are flat with no future uplifts.
Property valuations often refer to the YP multiple, otherwise known
as Years Purchase (equivalent to the valuation divided by the current
ground rent).
Valuations are provided by an independent third-party valuer and
reviewed carefully by the directors before inclusion in the financial
statements. Further information about the qualifications of the
independent third-party valuer and the valuation methods can be
found in note 8.
(f) Basis of consolidation
The Group's financial statements comprise a consolidation of the
financial statements of the parent company (Ground Rents Income
Fund plc) and its subsidiaries. The financial statements of the
subsidiaries are prepared using consistent accounting policies.
Subsidiaries are entities controlled by the Group and control exists
when the Group has the power to govern the financial and operating
policies of an entity so as to obtain benefit from its activities.
The financial statements of the subsidiaries are included from
the date on which control is transferred to the Group. Financial
statements of subsidiaries are deconsolidated from the date on
which control ceases.
All intra-group transactions and balances are eliminated on consolidation.
(g) Revenue
Revenue represents the value of ground rent income due in the year
together with any supplementary income earned in the year, including
insurance income, tenant fees and other income.
Rental income, including fixed rental uplifts, from investment
property leased out under operating leases is recognised as revenue
on a straight-line basis over the lease term, apart from:
-- Any rent adjustments based on open market estimated rental values
or indexed-linked rent reviews which are recognised, based on management
estimates, from the rent review date in relation to unsettled rent
reviews; and
-- Contingent rents, being those lease payments that are not fixed
at the inception of the lease, which are recognised in the period
in which they are earned and as defined by the lease.
(h) Finance income and expenses
Finance income comprises interest receivable on bank deposits.
Finance expenses comprise interest and other costs incurred in
connection with the borrowing of funds. Finance income and expenses
are recognised in the income statement on an accruals basis in
the period to which they relate.
(i) Taxation
Tax on the profit for the year comprises current tax. Current tax
is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the year end
date.
(j) Deferred tax
Generally, the Group is not exposed to deferred tax because it
is a REIT. REITs do not pay tax on property income and gains.
1 Accounting policies (continued)
(k) Investment properties
Investment properties are carried in the statement of financial
position at their open market value. The directors have applied
the fair-value model in IAS 40 - Investment Property. Investment
properties are revalued at the statement of financial position
date by an independent valuer. The fair value also reflects estimated
future cash flows. Expenses that are directly attributable to the
acquisition of an investment property are capitalised into the
cost of investment. Gains and losses on changes in fair value of
investment properties are recognised in the income statement. The
directors instruct the independent valuers biannually and, in addition,
on acquisition of investment properties as the need arises. Gains
and losses on changes in fair value are recognised at the time
of each valuation.
(l) Cash and cash equivalents
Cash comprises of call deposits held with banks.
(m) Capital management
The capital managed by the Company consists of cash held across
different bank accounts in several banking institutions. The Group's
objectives when managing capital are to safeguard the Group's ability
to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maximise
the interest return on funds which have yet to be invested while
ensuring there is enough free cash to meet day to day liabilities.
In order to maintain or adjust the capital structure the directors
have the option to adjust the dividends paid to shareholders, return
cash to shareholders, sell assets or delay purchase of individual
assets. The Group monitors capital through cash and dividend forecasts
which are prepared and reviewed on a quarterly basis. The Group
has a fully drawn down GBP19,500,000 debt facility which expires
on 15 November 2021. See note 12 - Financial Instruments for further
information on the loan. Associated costs are capitalised and amortised
over the duration of the loan.
(n) Trade and other receivables
Trade and other receivables are initially recognised at fair value
and subsequently held at amortised cost less an allowance for any
uncollectable amounts.
(o) Trade and other payables
Trade and other payables are obligations to pay for services that
have been acquired in the ordinary course of business from suppliers.
They are classed as current liabilities if payment is due within
one year or less. They are initially recognised at fair value and
subsequently held at amortised cost.
(p) Deferred income
Deferred income arises because ground rents are usually billed
annually in advance. Deferred income is held in the deferred income
account within payables and released against the income statement
over the period to which it relates.
Amortisation of loan arrangement
(q) fees
Loan arrangement fees are capitalised and deducted from the amount
outstanding on the loan. They are expensed to the income statement
over the period of the loan facility. This loan amortisation is
included within finance expenses in the financial statements.
(r) Ordinary share capital
Ordinary share capital is classed as equity. Incremental costs
directly attributable to the issue of new ordinary shares are shown
in equity as a deduction from the share premium account.
(s) Warrants
Warrants were issued on a one for five basis with the issue of
the ordinary share capital in August 2012. Each warrant gives the
holder the right to subscribe for an ordinary share for GBP1 on
the anniversary of their issue for a period of ten years.
(t) Provisions
A provision is recognised in the consolidated statement of financial
position when the Group has a legal or constructive obligation
as a result of a past event and it is probable that an outflow
of economic benefits will be required to settle the obligation.
2 Segmental reporting
The directors are of the opinion that the Group is engaged in a
single segment of business, being the collection of ground rent
from its investment properties. The Group receives some ancillary
income to which it is entitled as a result of its position as property
freeholder or head leaseholder. Schroders acts as adviser to the
Board of Directors, who then make management decisions following
their recommendations. As such, the Board are considered to be
the chief operating decision maker. A set of consolidated IFRS
information is provided on a quarterly basis.
2019 2018
By activity: GBP GBP
Ground rent income 4,796,641 4,681,600
Other income 841,707 675,365
5,638,348 5,356,965
All income of the Group is derived from activities carried out
within the United Kingdom. The Group is not reliant on any one
property or group of connected properties for the generation of
its revenues.
3 Administrative expenses 2019 2018
GBP GBP
Directors' salaries 71,697 59,715
Auditors' remuneration - see
below 88,935 74,500
Management fees 562,234 372,210
Professional fees 1,730,289 472,727
Insurance 24,083 21,392
Sponsor fees 55,170 44,218
Valuation fees 95,559 69,149
Registrar fees 27,207 55,448
Listing fees 30,559 23,412
Public relations and printing costs 29,548 77,465
Other operating expenses 93,853 52,747
2,809,134 1,322,983
No direct operating expenses were incurred in relation to investment
property in the year (2018: GBPnil).
Services provided by the Company's auditors: 2019 2018
GBP GBP
Fees payable to the auditors for the audit
of parent company and consolidated financial
statements 32,000 20,000
Fees payable to the auditors for other services:
- The audit of the Group's subsidiaries 56,935 54,500
88,935 74,500
------------ -------------
4 Directors' emoluments
The Company does not have any employees other than the directors.
The services of Simon Paul Wombwell as a director of the Group
were provided by Brooks Macdonald Funds Limited and invoiced on
a monthly basis.
2019 2018
GBP GBP
Short term employee benefits paid as directors'
remuneration 69,364 59,715
Invoiced by Brooks Macdonald Funds Limited 14,000 24,000
83,364 83,715
Highest paid director:
Emoluments 30,000 30,000
30,000 30,000
Number Number
Monthly average number of directors during
the year 3 3
There were no post-employment benefits, other long-term benefits,
termination benefits or share-based payments accrued or paid out
in the year ended 30 September 2019 (2018: none).
5 Finance income
2019 2018
GBP GBP
Interest on bank deposits 25,903 26,129
------------ -------------
6 Finance expenses
2019 2018
GBP GBP
Loan interest 655,099 659,110
Amortisation of loan arrangement fees and
bank charges 97,440 94,429
752,539 753,539
------------ -------------
Loan set-up costs of GBP195,072 have been capitalised and deducted
from the total loan amount outstanding. These costs will be amortised
over 26 months to 15 November 2021.
7 Taxation
The Company applied to HMRC to join the REIT taxation regime on
14 August 2012. The REIT regime affords the Company a number of
potential efficiencies in its tax affairs including exemption from
UK corporation tax on profits and gains from its UK property rental
business. The Company intends to comply with the rules of the REIT
regime in order to achieve these potential benefits. No tax charge
arose in the year (2018: GBPnil).
2019 2018
GBP GBP
Loss before taxation (2,289,122) (10,688,037)
------------ -------------
Standard rate of corporation tax in the UK 19.0% 19.0%
GBP GBP
Loss before taxation multiplied by the standard
rate of corporation tax (434,933) (2,030,727)
Effects of:
Unrealised revaluation loss not taxable 926,601 2,690,415
Property profit not taxable under the REIT
regime (491,668) (659,688)
Total tax charge for year - -
------------ -------------
Deferred tax
No deferred tax arises on revaluation of investment properties
due to the REIT status of the Company. UK REITs are exempt from
Capital Gains Tax on property sales.
Factors affecting current and future tax
charges
The Government has announced that the corporation tax standard
rate is to be reduced to 17% with effect from 1 April 2020.
As a UK REIT, the Group is exempt from corporation tax on the profits
and gains from its property investment business, provided it meets
certain conditions as set out in the UK REIT regulations. For the
current year ended 30 September 2019, the Group did not have any
non-qualifying profits and accordingly there is no tax charge in
the year. If there were any non-qualifying profits and gains, these
would be subject to corporation tax.
8 Investment properties
2019 2018
Market value GBP GBP
At 1 October 2018 / 2017 127,509,800 139,088,000
Additions 288,121 2,628,828
Net revaluation loss recognised in statement
of comprehensive income (4,876,845) (14,160,078)
Disposals (28,076) (46,950)
At 30 September 2019 / 2018 122,893,000 127,509,800
------------- -------------
Fair value hierarchy
Non-financial assets carried at fair value, as is the case for
investment property held by the Group, are required to be analysed
by level depending on the valuation method adopted under IFRS 13
'Fair Value Measurement'.
The fair value hierarchy has the following levels:
Level 1: Quoted prices (unadjusted) in active market for identical
assets and liabilities.
Level 2: Inputs other than quoted prices included within Level
1 that are observable for the asset or liability either directly
(that is, as prices) or indirectly (that is, derived from prices).
Level 3: Inputs for the asset or liability that are not based on
observable market data (that is unobservable inputs).
There have been no transfers between levels of the fair value hierarchy
during the year.
All investment property held by the Group is classified as Level
3.
Key assumptions within the basis of fair value are:
The value of each of the properties has been assessed in accordance
with the relevant parts of the Royal Institution of Chartered Surveyors
Valuation - Global Standards 2017, incorporating the IVSC International
Valuations Standards (the 'RICS Red Book'), which is consistent
with IFRS 13 measurement requirements. The RICS Red Book provides
two definitions of fair value ("FV"). The one appropriate for the
IFRS basis of accounting is as follows:
"The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants
at the measurement date".
The commentary under VPS 4 (1.5.3) of the Red Book states that,
for most practical purposes, fair value is consistent with the
concept of market value and there is no difference between the
two.
The Group's investment property was revalued at 30 September 2019
by Savills Advisory Services Limited ("Savills"). The valuer has
confirmed to the directors that the fair value as set out in the
valuation report has been primarily derived using comparable recent
market transactions on an arm's length basis.
The valuer within Savills is a RICS Registered Valuer. Most of
the properties have previously been valued by Savills when they
were acquired and from time to time as requested by the directors.
The valuation of ground rent investment properties takes into account
external factors such as interest rates and the availability of
other fixed rate investments in the market.
The valuation of a ground rent investment property is principally
dependent on the aggregate income generated, and the potential
for this to increase in future through rent reviews. The most valuable
ground rent investment property assets are those which are RPI
linked with reviews every 10 years or less. Other types of ground
rents are 'doubling' where the rent doubles at a fixed time interval
and 'fixed increases' where the uplifts are fixed and detailed
in the lease. The least attractive ground rents are those which
are flat with no future rental increases which attract the lowest
Years Purchase (YP) multiple and the highest yield.
Information about fair value measurement using significant unobservable
inputs (Level 3):
8 Investment properties (continued)
Valuation Category - type of rent review
30 September 2019 Indexed Doubling Fixed increases Flat
Cost (GBP) 74,323,798 13,867,377 6,708,293 5,758,820
Fair value (GBP) 89,240,000 19,389,000 8,306,000 5,958,000
Gross rent roll
(GBP) 3,365,906 776,490 342,773 335,091
Rental yield on
purchase price 4.5% 5.6% 5.1% 5.8%
Rental yield on
fair value 3.8% 4.0% 4.1% 5.6%
30 September 2018 Indexed Doubling Fixed increases Flat
Cost (GBP) 74,053,798 13,867,377 6,708,293 5,758,820
Fair value (GBP) 93,294,800 20,173,000 8,400,000 5,642,000
Gross rent roll
(GBP) 3,328,050 782,360 339,174 323,589
Rental yield on
purchase price 4.5% 5.6% 5.1% 5.6%
Rental yield on
fair value 3.6% 3.9% 4.0% 5.7%
All categories of ground rent investment properties have been valued
by independent valuers using available market comparisons. During
the year, some assets held with doubling rent reviews transitioned
to a flat review profile.
The table below shows the principal sensitivity to the key valuation
metrics and the resultant change to the valuation.
+/- effect on
valuation Indexed Doubling Fixed increases Flat
Impact on fair
value of 1 YP
change (GBP) 3,365,906 776,490 342,773 335,091
The average YP across the portfolio is 25.5 (2018: 26.7).
Included within the Group portfolio valuation is a GBPnil value
for the investment property Beetham Tower, Manchester, held within
the North West Ground Rents Limited subsidiary undertaking. This
valuation reflects all future cash flows associated with the remediation
of the building as required. Estimated cash flows include those
for construction works and a share of recoverable monies from associated
leaseholders.
The directors are of the view that no further material irrecoverable
losses will arise in respect of the remediation of the investment
property at the date of these financial statements.
9 Trade and other receivables 2019 2018
GBP GBP
Trade receivables 679,576 1,251,146
Other receivables 381,847 588,213
Prepayments and accrued income 48,979 55,912
1,110,402 1,895,271
Included in Other receivables is GBP221,864 (2018: GBP221,864)
held in a client account at the Company's solicitors which was
for deals in progress to complete after the year end date, in addition
to an GBP83,000 deposit (2018: GBP83,000). The fair value of trade
and other receivables is equal to the book value.
The ageing analysis of trade receivables
is as follows: 2019 2018
GBP GBP
Up to 3 months 383,263 884,299
Over 3 months 296,313 366,847
679,576 1,251,146
Management consider the trade receivables to be fully collectable
due to the secure nature of the receipts. The directors believe
all financial assets that are neither past due nor impaired to
be fully recoverable as the amounts are represented by either cash
held at a secure client account at the Company's solicitors or
other trading amounts which are considered fully recoverable and
of good quality. Therefore no expected credit loss by ageing is
presented above. Neither is the movement in the provision allowable
for doubtful debts as this is GBPnil throughout the year.
10 Trade and other payables 2019 2018
GBP GBP
Trade payables 16,163 158,866
Other taxes and social security
costs 14,106 4,780
Other payables 124,764 1,759
Accruals 1,267,706 619,159
Deferred income 1,397,715 1,819,441
2,820,454 2,604,005
Trade payables and Other taxes and social security amounts fall
due within the next three months.
Financial liabilities measured at amortised
11 cost 2019 2018
GBP GBP
Bank loan repayable over one year 19,500,000 19,500,000
Capitalised loan arrangement fees net of
amortisation (195,072) (288,307)
19,304,928 19,211,693
------------- -------------
The loan facility is with Santander UK plc and has a termination
date of 15 November 2021. The rate of interest payable on the loan
is set in advance at 1.097% per annum for the first tranche of
GBP15 million and 0.986% per annum for the second tranche of GBP4.5
million. Both of these rates are to subject to an additional 2.300%
per annum margin, giving the fully drawn loan a composite rate
of 3.371%.
The loan facility is secured over assets held in group companies,
namely Admiral Ground Rents Limited, Clapham One Ground Rents Limited,
GRIF040 Limited, GRIF041 Limited, GRIF044 Limited, GRIF048 Limited,
Masshouse Block HI Limited, Masshouse Residential Block HI Limited,
OPW Ground Rents Limited, The Manchester Ground Rent Company Limited
and Wiltshire Ground Rents Limited.
No security or guarantee exists in relation to the facility over
any other Company or subsidiary company assets.
The loan facility includes loan-to-value and interest cover covenants
that are measured at a Group level and the Group has maintained
significant headroom against all measures throughout the financial
year. The Group is in full compliance with all loan covenants at
30 September 2019.
Borrowing restrictions
The Group has self-imposed borrowing restrictions of 25% of gross
assets, these being the Group's investment properties. At 30 September
2019, Group borrowings were 15.9% (30 September 2018: 15.3%) of
gross assets.
Leverage ratio
For the purposes of the AIFMD, leverage is any method which increases
the Company's exposure, including the borrowing of cash and the
use of derivatives.
It is expressed as a ratio between the Group's gross assets and
its NAV and is calculated under the gross and commitment methods,
in accordance with the AIFMD. This differs to the Group's borrowing
restriction which is expressed as an absolute measure as quoted
above.
The Group is required to state its maximum and actual leverage
levels, calculated as prescribed by the AIFMD as at 30 September
2019, and are as follows:
Leverage exposure Maximum Actual
limit exposure
Gross method 175% 115%
Commitment method 175% 120%
------------- -------------
The gross method represents the sum of the Group's positions (total
assets) after deducting cash balances. The commitment method represents
the sum of the Group's positions without deducting cash balances.
12 Financial instruments
The Group's financial instruments comprise cash and various items
such as trade and other receivables and trade and other payables
which arise from its operations.
Financial assets carried at amortised cost
The book value and fair value of the Group's financial assets,
other than non-interest bearing short-term trade and other receivables,
for which book value equates to fair value, were as follows:
2019 2018
Book value Fair value Book value Fair value
GBP GBP GBP GBP
Trade receivables 679,576 679,576 1,251,146 1,251,146
Other receivables 381,847 381,847 588,213 588,213
Cash at bank and
in hand 6,136,854 6,136,854 5,566,561 5,566,561
------------- ------------ ------------- -------------
As of 30 September 2019 no trade receivables (2018: GBPnil) were
impaired or provided for as detailed in note 9.
Financial liabilities carried at amortised
cost
The book value and fair value profile of the Group's financial
liabilities, other than non-interest bearing short-term trade and
other payables, for which book value equates to fair value, were
as follows:
2019 2018
Book value Fair value Book value Fair value
GBP GBP GBP GBP
Trade payables 16,163 16,163 158,866 158,866
Other payables and
accruals 1,406,576 1,406,576 625,698 625,698
Bank loan 19,304,928 19,304,928 19,211,693 19,211,693
------------- ------------ ------------- -------------
Financial risk management
The Group has identified the risks arising from its activities
and has established policies and procedures as part of a formal
structure of managing risk.
Capital risk management
The Group's objectives when managing capital are to safeguard the
Group's ability to continue as a going concern in order to provide
returns for shareholders and benefits for other stakeholders and
to maximise the interest return on funds which have yet to be invested
while ensuring there is enough free cash to meet day to day liabilities.
In order to maintain or adjust the capital structure the directors
have the option to adjust the dividends paid to shareholders, return
cash to shareholders, sell assets or delay purchase of additional
assets. The Group monitors capital through cash and dividend forecasts
which are prepared and reviewed on a quarterly basis.
A gearing ratio measures the proportion of a company's borrowed
funds to its equity. The Group's gearing ratio at the year end
date was as follows:
2019 2018
GBP GBP
Cash and cash equivalents 6,136,854 5,566,561
Total borrowings (note 11) (19,304,928) (19,211,693)
------------- -------------
Net debt (13,168,074) (13,645,132)
Total equity 108,014,874 113,155,934
Total capital 94,846,800 99,510,802
Gearing ratio 17.9% 17.0%
Credit risk
Cash deposits are placed with a number of financial institutions
whose financial strength and credit quality have been considered
by the directors based on advice received from the AIFM. The panel
of suitable counterparties is subject to regular review by the
Board.
12 Financial instruments (continued)
Interest rate risk
The Company places excess cash of the Group on deposit in interest-bearing
accounts to maximise returns.
Liquidity risk
Liquidity risk is the risk that the Group is unable to meet its
payment obligations associated with its financial liabilities when
they fall due. The directors, based on advice received from the
AIFM, manage and monitor short-term liquidity requirements to ensure
that the Group maintains a surplus of immediately realisable assets
over its liabilities, such that all known and potential cash obligations
can be met.
13 Loss per share
Basic loss per share
Losses used to calculate earnings per share in the financial
statements were:
30 September 30 September
2019 2018
GBP GBP
Loss attributable to equity shareholders
of the Company (2,289,122) (10,688,037)
-------------- -------------
Basic loss per share have been calculated by dividing losses by
the weighted average number of ordinary shares in issue throughout
the year.
Weighted average number of shares in issue
in the year 97,006,402 96,726,613
Basic loss per share (2.36p) (11.05p)
Diluted loss per share
Diluted loss per share is the basic loss per share, adjusted for
the effect of contingently issuable warrants in issue during the
year, weighted for the relevant periods.
2019 2018
GBP GBP
Loss attributable to equity shareholders
of the Company (2,289,122) (10,688,037)
-------------- -------------
2019 2018
Number Number
Weighted average number of shares - basic 97,006,402 96,726,613
Potential dilutive impact of
warrants - -
-------------
Diluted total shares 97,006,402 96,726,613
-------------- -------------
Diluted losses per share (2.36p) (11.05p)
Net asset value per ordinary
14 share
The NAV calculates the net asset value per share in the financial
statements. The diluted NAV per ordinary share is calculated after
assuming the exercise of all outstanding warrants at GBP1, which
would increase the aggregated NAV by GBP4,423,876.
2019 2018
GBP GBP
Net assets 108,014,874 113,155,934
-------------- -------------
Number Number
Number of ordinary shares in
issue 97,006,497 97,006,397
Outstanding warrants in issue 4,423,876 4,423,976
Diluted number of shares in
issue 101,430,373 101,430,373
-------------- -------------
NAV per ordinary share - basic 111.3p 116.6p
NAV per ordinary share - dilutive 110.9p 115.9p
15 Share capital
2019 2019 2018 2018
Number GBP Number GBP
Allotted, called up and fully
paid:
Ordinary shares
of GBP0.50 each 97,006,497 48,503,248 97,006,397 48,503,198
------------- ------------ ------------- --------------
2019 2019 2018 2018
Number GBP Number GBP
Shares issued during the year:
Ordinary shares
of GBP0.50 each 100 50 294,297 147,148
------------- ------------ ------------- --------------
Resolutions were passed at an annual general meeting on 24 July
2012 to authorise the directors to allot shares up to an aggregate
nominal amount of GBP65,000,000.
Warrants were issued for GBPnil consideration on the basis of one
warrant for every five subscription shares in August 2012. Warrant-holders
have the right to subscribe GBP1 per share for the number of ordinary
shares to which they are entitled on 31 August in each year following
admission up to and including 31 August 2022. 294,297 warrants
were exercised and ordinary shares issued in September 2018. 100
warrants were exercised and ordinary shares issued in September
2019. At 30 September 2019 there were 4,423,876 warrants in issue.
16 Share premium account 2019 2018
GBP GBP
At 1 October 2018 / 2017 45,884,305 45,747,161
Shares issued 50 147,149
Expenses of issue (50) (10,005)
At 30 September 45,884,305 45,884,305
------------- --------------
17 Retained earnings 2019 2018
GBP GBP
At 1 October 2018 / 2017 18,768,431 33,286,267
Dividends paid (2,851,988) (3,829,799)
Retained earnings 15,916,443 29,456,468
------------- --------------
Loss for the financial year (2,289,122) (10,688,037)
At 30 September 13,627,321 18,768,431
------------- --------------
18 Dividends
It is the policy of the Group to pay quarterly interim dividends
to ordinary shareholders. The interim dividend relating to the
fourth quarter of the year is due to be paid before the end of
December 2019.
2019 2018
GBP GBP
Dividends declared and paid by the Company
during the year 2,851,988 3,829,799
2,851,988 3,829,799
Analysis of dividends by type:
Interim PID dividend of 0.98p
per share - 947,778
Interim PID dividend of 0.98p
per share - 947,779
Interim PID dividend of 0.98p
per share - 947,779
Interim PID dividend of 1.02p
per share - 986,463
Interim PID dividend of 0.98p
per share 950,663 -
Interim PID dividend of 0.98p
per share 950,662 -
Interim PID dividend of 0.98p
per share 950,663 -
2,851,988 3,829,799
Since the year end, the following dividends have been
announced:
Interim PID dividend of 0.98p per share -
announced 950,663
--------------
19 Cash generated from operations
Reconciliation of operating loss to net cash inflow from
operating activities
2019 2018
GBP GBP
Loss before income tax (2,289,122) (10,688,037)
Adjustments for:
Non-cash revaluation movement 4,876,845 14,160,078
Profit on sale of ground rent assets and
leasehold property (485,145) (165,469)
Net finance expense 726,636 727,410
Operating cash flows before movements in
working capital 2,829,214 4,033,982
------------ ----------------
Movements in working capital:
Decrease in trade and other
receivables 784,869 690,738
Increase in trade and other
payables 216,449 62,591
Net cash generated from operations 3,830,532 4,787,311
------------ ----------------
Proceeds of share issue
The proceeds from issue of shares is as follows:
2019 2018
GBP GBP
Warrants converted on 14 September
2018 - 294,297
Warrants converted on 13 September
2019 100 -
Share issue costs associated with issue of
ordinary shares (50) (10,005)
------------ ----------------
50 284,292
------------
Analysis of changes in net
20 cash
At 1 October Cash Non-cash At 30 September
2018 flows changes 2019
GBP GBP GBP GBP
Cash at bank
and in hand 5,566,561 570,293 - 6,136,854
Total 5,566,561 570,293 - 6,136,854
---------------- -------- ------------ ----------------
21 Related party transactions
The Company's balances with fellow group companies at 30 September
2019 are set out in note 14 to the Company's financial statements.
Simon Paul Wombwell was also a director of Brooks Macdonald Funds
Limited ("BMF"), which provided services to the Company during
the financial year.
BMF provided investment management and administration services
to the Company up until 12 May 2019, the fees for which were 0.55%
per annum of the market capitalisation of the Company. In addition,
BMF was entitled to an agency fee of 2% of the purchase price of
any property acquired by the Company, where no other agency fee
was payable. Where a third party agency fee was less than 2% of
the purchase price, BMF was entitled to an agency fee of 50% of
the difference between 2% of the purchase price and the third party
agency fee. BMF also received a share of event fees from an unrelated
party Braemar Estates Limited.
Transactions between BMF and Ground Rents Income Fund plc during
the financial year were as follows:
2019 2018
GBP GBP
Investment management fee paid to BMF 208,039 417,912
Acquisition fees paid to BMF - 28,759
Other amounts paid to BMF 42,165 39,080
Directors fees paid to BMF 14,000 24,000
264,204 509,751
No amounts were due from the Company to BMF at the year end date
(2018: GBP60,000).
Schroder Real Estate Investment Management Limited ("Schroders")
is also deemed to be a related party in that it acted as the Investment
Manager from 13 May 2019.
Transactions with Schroders during the year 2019 2018
were as follows:
GBP GBP
Investment management fee 132,726 -
132,726 -
No amount was due from the Company to Schroders at the year end
date (2018: GBPnil).
During the prior year, Braemar Estates Limited (formerly Braemar
Estates (Residential) Limited) ("Braemar Estates") was also a related
party by virtue of being under common control with BMF until 1
December 2017, from when control passed to an unrelated party Rendall
& Rittner Limited. Transactions between Braemar Estates and the
Company during the financial year were as follows:
2019 2018
GBP GBP
Other amounts paid to Braemar Estates while
under common control - 1,980
---------- ---------
- 1,980
---------- ---------
No amounts were due from the Company to Braemar Estates at the
year end date (2018: GBPnil).
22 Other financial commitments and contingencies
The Group has a number of investment property acquisitions in the
pipeline. At 30 September 2019, the Group had GBP221,864 of cash
held at solicitors for acquisitions which were in progress to complete
after the year end date (see note 9) (2018: GBP221,864). The ground
rent deals are expected to cost GBP2,470,650 to complete.
In January 2019 a High Court Judgment was handed down against North
West Ground Rents Limited ("NWGR"), a wholly owned subsidiary of
the Company, concerning the repair of Beetham Tower, Manchester,
held as an investment property by NWGR. All key parties are currently
engaged in a mediation process to determine the mechanics of repairing
the building and the contributions to be paid by various parties
involved.
The investment property valuation of GBPnil reflects estimated
cash flows for construction works and recoverables from leaseholders.
See note 8 for further details.
The damages associated with this Judgment are still to be determined
in a separate hearing, for which a date has not yet been set. In
line with IAS 37 - Provisions, Contingent Liabilities and Contingent
Assets, no provision has been made in NWGR for the possible obligations
of these damages as these are, as yet, not reliably measurable.
All costs and recoverable contributions, from both leaseholders
and third party contractors, and any potential damages, are subject
to the ongoing mediation process. While there is no guarantee of
success, the Board of NWGR is seeking to reach a solution agreeable
to all parties which does not have any further material impact
on the Group NAV (although some reimbursable costs of repair may
occur).
The Company has stated that it wants to deliver a solution that
is in the interests of stakeholders, including its shareholders
and leaseholders at no further material net cost to the Group.
NWGR is reliant on the financial support of the Company to finance
further legal action and to comply with the Judgment. If financial
support for NWGR is withdrawn, the director of NWGR would need
to assess the ongoing viability of NWGR at that time. If that then
ultimately led to the administration or liquidation of NWGR, then
such a process would not be expected to have any material impact
on the Group NAV, with the exception of the expense of reasonable
associated professional fees.
23 Events after the year end date
Following the approval by shareholders and warrantholders at a
General Meeting held in November 2019, the Company cancelled its
share premium account in order to create distributable reserves
to better facilitate the payment of future dividends.
Glossary
AGM means the Annual General Meeting of the Company.
Articles means the Company's Articles of Association, as amended
from time to time.
Companies Act means the Companies Act 2006.
Company is Ground Rents Income Fund plc.
Directors means the directors of the Company as at the date of
this document and their successors and 'director' means any one of
them.
Disclosure Guidance and Transparency Rules means the disclosure
guidance and transparency rules made by the FCA under Part VII of
the UK Financial Services and Markets Act 2000, as amended.
Earnings per share ("EPS") is the profit after taxation divided
by the weighted average number of shares in issue during the
year.
FCA is the UK Financial Conduct Authority.
Gearing is the Group's net debt as a percentage of net
assets.
Group is the Company and its subsidiaries.
Initial yield is the annualised net rents generated by the
portfolio expressed as a percentage of the portfolio valuation.
Interest cover is the number of times Group net interest payable
is covered by Group net rental income.
IPO is the initial placing and offer made pursuant to a
prospectus dated 24 July 2012.
TISE is The International Stock Exchange, headquartered in
Guernsey.
Loan to value ("LTV") is a ratio which expresses the gearing on
an asset or within a company or group by dividing the outstanding
loan amount by the value of the assets on which the loan is
secured.
LSE is the London Stock Exchange.
Net asset value ("NAV") is the value of total assets minus total
liabilities.
NAV total return is calculated taking into account the timing of
dividends, share buybacks and issuance.
Net rental income is the rental income receivable in the year
after payment of ground rents and net property outgoings. This
excludes rental income for rent free periods currently in operation
and service charge income.
Shareholder information
Web pages and share price information
The Company has dedicated web pages, which may be found at
http://www.groundrentsincomefund.com/. The web pages have been
designed to be utilised as the Company's primary method of
electronic communication with shareholders. They contain details of
the Company's ordinary share price and copies of Report and
Accounts and other documents published by the Company as well as
information on the directors, terms of reference of Committees and
other governance arrangements. In addition, the web pages contain
links to announcements made by the Company to the market.
Share price information may be found in the Financial Times and
on the Company's web pages.
Individual Savings Account ("ISA") status
The Company's shares are eligible for stocks and shares
ISAs.
Non-mainstream pooled investments status
The Company currently conducts its affairs so that its shares
can be recommended by IFAs to ordinary retail investors in
accordance with the UK Financial Conduct Authority's ("FCA's")
rules in relation to non-mainstream investment products and intends
to continue to do so for the foreseeable future. The Company's
shares are excluded from the FCA's restrictions which apply to
non-mainstream investment products because they are shares in an
investment trust.
Financial calendar (2020)
First interim dividend February
paid
Annual general meeting February
------------------
Second interim dividend May
paid
------------------
Half-year results announced June
------------------
Third interim dividend August
paid
------------------
Financial year end 30 September
------------------
Fourth interim dividend November/December
paid
------------------
Annual results announced December
------------------
Alternative Investment Fund Managers Directive ("AIFMD")
Disclosures
The AIFMD, as transposed into the FCA Handbook in the UK,
requires that certain pre-investment information be made available
to investors in Alternative Investment Funds (such as the Company)
and also that certain regular and periodic disclosures are made.
This information and these disclosures may be found either below,
elsewhere in this Annual Report, or in the Company's AIFMD
information disclosure document published on the Company's web
pages.
Remuneration disclosures
The information required under the AIFMD to be made available to
investors in the Company on request in respect of remuneration paid
by the AIFM to its staff, and, where relevant, carried interest
paid by the Company, can be found on the Company's web pages.
Publication of Key Information Document ("KID") by the AIFM
Pursuant to the Packaged Retail and Insurance-Based Investment
Products ("PRIIPs") Regulation, the Investment Manager, as the
Company's AIFM, is required to publish a short KID on the Company.
KIDs are designed to provide certain prescribed information to
retail investors, including details of potential returns under
different performance scenarios and a risk/reward indicator. The
Company's KID is available on its web pages.
Corporate information
Directors
Robert Malcolm Naish
Paul Anthony Craig
William Edward John Holland
Investment Manager
Schroder Real Estate Investment Management Limited
1 London Wall Place
London EC2Y 5AU
Registered Office
1 London Wall Place
London EC2Y 5AU
Depositary
INDOS Financial Limited
St Clements House
27 Clements Lane
London
EC4N 7AE
Company Secretary
Schroder Investment Management Limited
1 London Wall Place
London EC2Y 5AU
Solicitors to the Company
CMS Cameron McKenna Nabarro Olswang LLP
1 The Avenue
Manchester
M3 3AP
Auditors
PricewaterhouseCoopers LLP
No 1 Spinningfields
Hardman Square
Manchester
M3 3AB
Property Valuers
Savills Advisory Services Limited
33 Margaret Street
London
W1G 0JD
Tax Advisers
Deloitte LLP
2 New Street Square
London
EC4A 3BZ
Corporate Broker
N+1 Singer Capital Markets Limited
One Bartholomew Lane
London EC2N 2AX
TISE Listing Sponsor
Appleby Securities (Channel Islands) Limited
PO Box 207
13-14 Esplanade
St Helier
Jersey JE1 1BD
Registrar
Link Market Services Limited
The Registry
34 Beckenham Road
Kent
BR3 4TU
Dealing codes
Ordinary shares:
ISIN: GB00B715WG26
SEDOL: B8K0LM4
Ticker (LSE SETSQX): GRIO
Ticker (TISE): GRI
Warrants:
ISIN: GB00B8N43P05
SEDOL: B8K0RP9
Ticker (LSE SETSQX): GRIW
Ticker (TISE): GRIw
Global Intermediary Identification Number (GIIN):
RY6D8C.99999.SL.826
Legal Entity Identifier (LEI):
213800SL3SN8P6XCLM37
Status of announcement
2018 Financial Information
The figures and financial information for 2018 are extracted
from the published annual report and accounts for the year ended 30
September 2018 and do not constitute the statutory accounts for
that year. The 2018 annual report and accounts have been delivered
to the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2019 Financial Information
The figures and financial information for 2019 are extracted
from the annual report and accounts for the year ended 30 September
2019 and do not constitute the statutory accounts for the year. The
2019 annual report and accounts include the Report of the
Independent Auditors which is unqualified and does not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2019 annual report and accounts will be
delivered to the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents
of any website accessible from hyperlinks on the Company's webpages
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KMMMZVZKGLZM
(END) Dow Jones Newswires
December 12, 2019 12:30 ET (17:30 GMT)
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