TIDMGRIO
RNS Number : 0474S
Ground Rents Income Fund PLC
06 July 2020
For release 6 July 2020
Ground Rents Income Fund plc
("GRIO"/ the "Company" / the "Group")
HALF YEAR RESULTS FOR THE PERIODED 31 MARCH 2020
ROBUST INCOME COLLECTION, STRONG BALANCE SHEET, LONG TERM DEBT
AND LOW LOAN TO VALUE
Ground Rents Income Fund plc, the REIT investing in long-term,
income generating real estate assets across the United Kingdom,
today announces its half year results for the six months ended 31
March 2020.
Balance sheet strength and defensive income characteristics
-- Diversified portfolio of 19,000 investment units, of which
87.8% are residential, 10.5% are student accommodation and 1.7% are
commercial.
-- New five-year, GBP25 million facility agreed including a
Revolving Credit Facility ("RCF"), providing valuable operational
flexibility.
-- Significant headroom to debt and interest cover ratio
covenants; as at 31 March 2020, Loan to Value ("LTV") over secured
assets was 24.4% with headroom of GBP32.6 million and LTV at a
portfolio level was 11.4%.
-- Clear strategy for dealing with Covid-19 related risks, with
88.5% of rent collected due for the period from 1 October 2019 to
31 May 2020, comparing favourably with 87.9% over the equivalent
period to 31 May 2019.
Key financial highlights
-- Net Asset Value ('NAV') as at 31 March 2020 was GBP106.8
million or 110.1 pence per share ("pps"), compared with GBP108.0
million or 111.3 pps as at 30 September 2019.
-- The independent portfolio valuation as at 31 March 2020
broadly flat at GBP122.6 million (30 September 2019: GBP122.9
million)
-- The material valuation uncertainty clause included in the
March 2020 valuation, as a result of the Covid-19 pandemic, has
been removed for long dated ground rent valuations going
forward.
-- Dividend unchanged with GBP1.9 million of dividends paid
during the period comprising two dividends of 0.99 pps each, in
line with the full year target.
Key operational highlights
-- Restructuring of six head-leases with VITA Group delivering
GBP1.0 million in additional revenues, spread over three years, and
increased operational efficiency.
-- Renegotiation of key supplier agreements generating
additional net income of approximately GBP115,000 per annum.
-- Leaseholders continued to be offered the opportunity to
convert 'doubling' ground rents to be linked to RPI.
-- Implementation of a revised health and safety policy to take
into account the conclusions of the Hackitt Review and ongoing
Grenfell Tower enquiry.
-- The Manager is working closely with managing agents and
delivery partners to mitigate the impacts of the Covid-19 pandemic,
to ensure the safety and wellbeing of our residents, suppliers and
other stakeholders, while protecting shareholders' long-term
interests.
Malcolm Naish, Chairman of the Board, commented:
"Whilst the outlook for the UK real estate market in light of
the Covid-19 pandemic is uncertain, the Company has a diversified
portfolio of assets with defensive income characteristics and a
strong balance sheet with low gearing. The granular, diversified,
defensive nature of the portfolio, will assist in delivering the
unchanged, long-term, strategic objectives.
"The near-term outlook for the Company will be influenced by the
conclusion of the ongoing reviews by Government, the Law Commission
and the Competition and Markets Authority. The Board and Manager
support reform which addresses historically imbalanced practices
and delivers a rational, simplified and transparent leasehold
market for all consumers and differentiated and attractive returns
to shareholders."
James Agar, Fund Manager, added:
"Since the on-set of the Covid-19 pandemic our focus has been on
the safety and wellbeing of our residents and managing agents,
their on-site staff and other stakeholders. This has required an
immediate focus on implementing new property management procedures
and reducing risk to ensure residents are safe in their homes.
"Against this uncertain backdrop the Company is benefiting from
its defensive, index-linked income characteristics and total
returns that are uncorrelated to the state of the underlying
economy. Rent collection despite the onset of Covid-19 has remained
robust which enabled the Company to pay its full dividend in May.
The accretive refinance and commercial headlease transactions
demonstrate our focus on growing net recurring income and reducing
operational risk."
The Half Year Report is also being published in hard copy format
and an electronic copy of that document will shortly be available
to download from the Company's webpage
www.groundrentsincomefund.com. Please click on the following link
to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/0474S_1-2020-7-3.pdf
For further information:
Schroder Real Estate Investment Management
James Agar / Matthew Riley 020 7658 6000
N+1 Singer (Broker)
James Maxwell / Ben Farrow 020 7496 3000
Appleby Securities (Channel Islands)
Limited (Sponsor)
Andrew Weaver 01534 888 777
FTI Consulting
Dido Laurimore / Richard Gotla /
Meth Tanyanyiwa 020 3727 1000
Half Year Report and Condensed Consolidated Interim Financial
Statements for the six months ended 31 March 2020
Chairman's statement
I am pleased to present the unaudited interim results of the
Ground Rents Income Fund plc ("GRIO" or the "Company") for the
six-month period ended 31 March 2020.
Overview
The period was defined by the emergence of Covid-19 in the
United Kingdom in March 2020. This has led to a sharp economic
downturn and global market volatility. The immediate impact on the
real estate sector has been a reduction in liquidity and
transactional activity, resulting in material valuation uncertainty
clauses being included in valuations across all property investment
sectors. This has been removed for long dated ground rent
valuations going forward.
The Board's primary concern during the pandemic has been the
safety of our leaseholders, managing agents, on-site staff and
members of the public, as we all endeavour to mitigate the impact
of the pandemic on our lives and communities. Our asset management
focus has been on income collection and implementing updated best
practice property management procedures to ensure leaseholders are
safe in their homes.
Whilst the commercial real estate sector has experienced
significant challenges during the period, the Company's granular
and secure underlying cash flows mean that income over the period
and since the period end has been maintained. This enabled the
Company to pay its dividend in May as planned, illustrating the
defensive qualities of the portfolio and the benefits of its
strategy that is less correlated to mainstream real estate
sectors.
Notwithstanding these characteristics, sentiment towards the
Company, as evidenced by the share price discount to net asset
value ("NAV"), continues to be primarily affected by uncertainty
around leasehold reform and the ongoing Competition and Markets
Authority investigation.
The Company's unaudited NAV as at 31 March 2020 was GBP106.8
million or 110.1 pence per share ("pps"), compared with GBP108.0
million or 111.3 pps as at 30 September 2019. The independent
portfolio valuation as at 31 March 2020 of GBP122.6 million
included a material valuation uncertainty clause as a result of the
Covid-19 pandemic and represented a decrease on a like for like
basis of GBP0.36 million or -0.3% compared to the 30 September 2019
valuation.
Strategy
The Company's strategy is focussed on growing net income,
demonstrating best-in-class residential asset management and
ensuring shareholders' interests are fairly represented in
leasehold and regulatory reform.
Whilst ground rent income growth was modest over the period, 43%
of leases as a percentage of income are due to be reviewed over the
next six years. Actual cash dividend cover was 59% over the period
which was negatively impacted by the costs associated with the
ongoing litigation at Beetham Tower, the freehold to which is held
by the Company's wholly owned subsidiary, North West Ground Rents
Limited. Dividend cover ignoring the non-recurring costs associated
with Beetham Tower was 90%.
North West Ground Rents Limited is seeking to achieve an
acceptable outcome at Beetham Tower that protects shareholders and
considers wider stakeholders. Although some progress has been made
over the period, litigation continues and the outcome remains
highly uncertain. In the event that a suitable outcome cannot be
reached, the Board will have to consider whether it is appropriate
to continue to provide funding to North West Ground Rents Limited
when requested to do so. Further detail can be found within the
Investment Manager's Review.
The January 2020 debt refinance was a positive step with a new
five-year, GBP25 million facility with Santander UK plc including a
Revolving Credit Facility ("RCF") that provides valuable
operational flexibility. The refinancing extends the debt maturity
profile and reduces interest costs. The current portfolio level
loan to value ratio, net of cash, is 11.4%.
The Company has a stated objective of providing shareholders and
consumers with best-in-class residential asset management. Health
and safety, specifically fire safety, is fundamental to delivering
this objective and we are working to raise standards across our
portfolio as well as the wider residential sector by working with
Government and other professional investors.
During the period contrasting reports from the Law Commission
("LC") and the CMA concerning leasehold reform and regulatory
change contributed to continued uncertainty regarding the sector
outlook.
The LC recommendations to Government on enfranchisement in
January 2020 were generally positive in promoting a more equitable,
transparent system for consumers, whilst considering the interests
of all stakeholders in the sector.
However, this was followed in February by the CMA investigation,
which highlighted concerns including assured tenancies under the
Housing Act 1998 and doubling ground rents. The Company has sought
to address these risks through clear, publicly available policies
relating to the fair treatment of consumers. The Company will not
ordinarily seek possession using the Housing Act 1988 and the 2017
Asset Management plan offers residential leaseholders the
opportunity to convert their existing review mechanism to the
lesser of inflation, as measured by the Retail Prices Index
("RPI"), or doubling, while retaining their existing review cycle.
We will continue to monitor the CMA's ongoing investigation and
next steps closely.
The Company and the Investment Manager are committed to working
with all interested parties involved in the reform process,
including the Government, the LC and the CMA. Given prevailing
uncertainty the Board and Investment Manager continue to
investigate other complementary real estate assets which provide
similar defensive, secure, counter-cyclical, index-linked income
characteristics.
Dividend
Two dividends amounting, in total, to 1.98 pps have been paid in
respect of the period from 1 October 2019 to 31 December 2019, and
1 January 2020 to 31 March 2020. The Manager is closely monitoring
ground rent and service charge arrears which do not currently
differ materially from prior years. Future dividends will be
reviewed in light of income collection and any Covid-19 related
impact on net income.
Responsible and Impact Investment
Responsible and Impact Investment is a priority for the Company
and the Manager has a clear strategy on the implementation of ESG
and Impact investing. Within the period we have moved to renewable
energy in all communal areas, as we prioritise environmental
credentials in the portfolio.
Board succession
The Board continues to review its composition against best
practice, considering the size of the Company and the desire for
orderly succession alongside the UK Corporate Governance code
provisions on tenure. In order to achieve orderly succession, a new
Director will be identified to take on the role of Chairman of the
Company in the next six months, before replacing me when I retire
in advance of the Annual General Meeting in 2021.
Outlook
Whilst the outlook for the UK real estate market in light of the
Covid-19 pandemic is uncertain, the Company has a diversified
portfolio of assets with defensive income characteristics and a
strong balance sheet with low gearing.
The near-term outlook for the Company will be influenced by the
conclusion of the ongoing reviews by Government, the LC and the
CMA. The Board and Investment Manager support reform which
addresses historically imbalanced practices and delivers a
rational, simplified and transparent leasehold market for all
consumers and differentiated and attractive returns to
shareholders.
Robert Malcolm Naish
Chairman
3 July 2020
Investment Manager's review
The Company's Unaudited Net Asset Value ("NAV") as at 31 March
2020 was GBP106.8 million or 110.1 pence per share ("pps") compared
with GBP108.0 million or 111.3 pps as at 30 September 2019. This
reflected a decrease of 1.2 pps or 1.0%, with the underlying
movement in NAV set out in the table below:
GBP million pps
------------------------------------- ------------ ------
Audited NAV as at 30 September 2019 108.0 111.3
------------------------------------- ------------ ------
Revaluation (0.4) (0.3)
------------------------------------- ------------ ------
Net revenue 1.1 1.1
------------------------------------- ------------ ------
Dividends paid (1.9) (2.0)
------------------------------------- ------------ ------
Unaudited NAV as at 31 March 2020 106.8 110.1
------------------------------------- ------------ ------
The independent portfolio valuation as at 31 March 2020 of
GBP122.6 million represented a very slight decrease in value of
GBP0.3 million or -0.3% compared to 30 September 2019. The
like-for-like decrease, adjusting for a small purchase as part of
the VITA Group ("VITA") head-lease deal, was GBP0.4 million or
-0.3%. As a result of the Covid-19 pandemic, the independent
valuation of the portfolio at 31 March 2020 included an
industry-wide statement highlighting material valuation
uncertainty, which has subsequently been removed for long dated
ground rent valuations .
During the period the Company paid two dividends totalling
GBP1.9 million or 1.98 pps, reflecting dividend cover of 59%.
Dividend cover excluding non-recurring costs which include the
litigation at Beetham Tower was 90%.
Progress continues to be made delivering on the objectives
agreed in the Strategy Review following the Investment Manager's
appointment in April 2019. These include:
-- Refinancing the Company's GBP19.5 million term loan with a
new five-year, GBP25.0 million facility comprising a GBP12.5
million term loan and a GBP12.5 million Revolving Credit Facility
("RCF").
-- Restructuring six head-leases with VITA Group ("VITA")
delivering GBP1.0 million in additional revenues spread over three
years.
-- Renegotiation of key supplier agreements including with the
principal property manager to generate additional net income of
approximately GBP115,000 per annum.
-- Continued engagement with Government, the Law Commission (the
"LC") and other stakeholders regarding reform of the leasehold
sector and building safety.
-- Extensive engagement with the parties to the Beetham Tower
litigation to deliver a solution in all stakeholders' interests.
This included applying for, on NWGR's behalf, and subsequently
being granted, planning consent for a more viable repair scheme,
which now requires the approval of the Court.
Since the onset of the Covid-19 pandemic our focus has been on
the safety and wellbeing of our leaseholders and managing agents,
their on-site staff and other stakeholders. Unlike other mainstream
real estate sectors, ground rent collections have remained in line
with pre-Covid-19 rates with 88.5% of rents collected as at 31 May
2020 comparing favourably with 87.9% over the equivalent period in
2019.
This enabled the Company to pay its dividend in May as planned.
We will continue to monitor collection processes and performance
closely, in line with industry best practice and guidance from The
Association of Residential Managing Agents ("ARMA").
Market overview
The UK economy is in recession following the Covid-19 lockdown
imposed by the Government on 23 March 2020. Consumer spending and
investment has fallen sharply as people stay at home and businesses
conserve cash. The Bank of England has cut the base rate to 0.1%
and the Government has announced a number of state-guaranteed
loans, grants, tax holidays and wage supplements designed to
support consumers and employers.
Despite strong demand for annuity-style cash flows, residential
ground rent transactional volumes have remained low since 2018
mainly due to the threat of leasehold reform. Asset pricing has
reduced over the past two years, as reflected in the Company's
NAV.
Clarity from the LC on enfranchisement in January 2020 saw some
confidence return to the sector with a number of large-scale
portfolios being privately marketed. Several participants continue
to be active, with sub-institutional buyers transacting during
lockdown, underpinning values and the Company's NAV.
Some institutional investors awaiting the outcome of reform have
pivoted into commercial ground rents which have become increasingly
popular over the past 24 months, experiencing strong demand from
institutional investors seeking long-dated, inflation protected
income streams.
In September 2019 the Government responded to the UK Statistics
Authority ("UKSA") proposals to either cease publishing RPI or to
bring RPI in line with Consumer Prices Including Housing Costs
("CPIH").
A consultation on when and how reform should be made before 2030
has begun and will close on 21 August 2020. Government and UKSA
were expected to respond to the consultation before the summer
recess, however this is likely to be deferred given the Covid-19
pandemic. The Investment Manager has responded to the consultation
in detail and will provide an update on developments on this topic
in future.
Portfolio overview
As at 31 March 2020 the portfolio comprised approximately 19,000
ground rent units across approximately 400 assets valued at
GBP122.6 million. The portfolio produces a ground rent income of
GBP4.85 million per annum, reflecting an average years' purchase
("YP") of 25.3 or a gross income yield of 4.0%. The median annual
ground rent charge is GBP110 for houses and GBP250 for apartments,
excluding student accommodation assets.
The portfolio's weighted average lease term as at 31 March 2020
was 343 years, with 93% of the ground rent income subject to
upwards only increases. This is analysed in the table below:
Review type Ground rent income % of ground rent total Market value (GBP % of market value
(GBP000 p.a.) million) total
------------------ ----------------------- ----------------------- ----------------------- -----------------------
Index-linked 3,425 70.6 90.6 73.8
------------------ ----------------------- ----------------------- ----------------------- -----------------------
Doubling 759 15.6 18.5 15.1
------------------ ----------------------- ----------------------- ----------------------- -----------------------
Fixed 333 6.9 7.7 6.3
------------------ ----------------------- ----------------------- ----------------------- -----------------------
Flat (no review) 335 6.9 5.8 4.8
------------------ ----------------------- ----------------------- ----------------------- -----------------------
Total 4,852 100.0 122.6 100.0
------------------ ----------------------- ----------------------- ----------------------- -----------------------
The rent review profile is shown in the table below:
Years to next review Ground rent income (%)
--------------------- -----------------------
0-5 40.2
--------------------- -----------------------
5-10 24.8
--------------------- -----------------------
10-15 21.6
--------------------- -----------------------
15-20 3.8
--------------------- -----------------------
Over 20 2.7
--------------------- -----------------------
Flat (no review) 6.9
--------------------- -----------------------
Total 100.0
--------------------- -----------------------
The portfolio comprises residential apartments, houses and
commercial units with median ground rents as summarised below:
Unit type No. of units Median ground rent (GBP) Ground rent income (%) % of portfolio
(%)
------------------------ -------------- ------------------------- ----------------------- ---------------
Apartments 73.2 250 68.5 66.3
------------------------ -------------- ------------------------- ----------------------- ---------------
Houses 14.6 110 10.8 10.6
------------------------ -------------- ------------------------- ----------------------- ---------------
'Residential' subtotal 87.8 250 79.3 76.9
------------------------ -------------- ------------------------- ----------------------- ---------------
Student 10.5 401 17.0 19.2
------------------------ -------------- ------------------------- ----------------------- ---------------
Commercial 1.7 340 3.7 3.9
------------------------ -------------- ------------------------- ----------------------- ---------------
Total 100.0 250 100.0 100.0
------------------------ -------------- ------------------------- ----------------------- ---------------
The top 10 assets represent 28.9% of the total portfolio
valuation as at 31 March 2020:
Property Current valuation (GBP million) % of portfolio
-------------------------------------------------- -------------------------------- ---------------
The Student Village, York 7.9 6.5
-------------------------------------------------- -------------------------------- ---------------
Masshouse Plaza, Birmingham (Hive and H&I) 3.8 3.1
-------------------------------------------------- -------------------------------- ---------------
The Gateway, Leeds 3.6 2.9
-------------------------------------------------- -------------------------------- ---------------
One Park West, Liverpool 3.4 2.8
-------------------------------------------------- -------------------------------- ---------------
Wiltshire Leisure Village, Royal Wootton Bassett 3.3 2.7
-------------------------------------------------- -------------------------------- ---------------
Ladywell Point, Manchester 3.3 2.7
-------------------------------------------------- -------------------------------- ---------------
Rathbone Market, London 3.0 2.5
-------------------------------------------------- -------------------------------- ---------------
First Street, Manchester 2.7 2.2
-------------------------------------------------- -------------------------------- ---------------
Richmond House, Southampton 2.4 2.0
-------------------------------------------------- -------------------------------- ---------------
Bezier Apartments, London 1.9 1.5
-------------------------------------------------- -------------------------------- ---------------
Total 35.3 28.9
-------------------------------------------------- -------------------------------- ---------------
The geographic spread of the portfolio as at 31 March 2020 is
shown in the chart below:
Asset location Portfolio ground rent income % of portfolio
(%)
---------------- ----------------------------- ---------------
North East 29.5 29.6
---------------- ----------------------------- ---------------
North West 30.3 28.4
---------------- ----------------------------- ---------------
Midlands 12.1 13.1
---------------- ----------------------------- ---------------
South West 10.4 11.5
---------------- ----------------------------- ---------------
London 10.9 10.4
---------------- ----------------------------- ---------------
South East 5.4 5.5
---------------- ----------------------------- ---------------
Wales 1.4 1.5
---------------- ----------------------------- ---------------
Total 100.0 100.0
---------------- ----------------------------- ---------------
Asset management
Doubling rent reviews
To protect residential consumers and preserve the Company's
socially responsible aims, the Manager has proactively sought to
modify doubling ground rents since its 2017 Asset Management Plan.
This offered all residential leaseholders with a doubling rent
review of any review cycle a simple deed of variation to amend that
review to the lesser of doubling or RPI on the same cycle.
314 out of a possible 2,855 leaseholders have completed the
process and a further 114 are in solicitors' hands. The
Government's 2019 Public Pledge for Leaseholders extends the Asset
Management Plan indefinitely and information relating to this
process is available for leaseholders on our website.
VITA Headlease restructure
Between September and November 2019, the Company completed a
headlease restructuring of six of the student accommodation assets.
The Company entered into new long headleases with VITA, who assumed
a direct relationship with 848 underlying tenants and removed the
Company's day-to-day repairing and maintenance
responsibilities.
The transaction generated GBP1.0 million in revenues, structured
as GBP0.4 million on completion and two further payments of GBP0.3
million payable on the first and second anniversaries of the
transaction.
Leasehold reform
We continue to engage with the Ministry of Housing, Communities
and Local Government ("MHCLG"), the LC, and the Competition and
Markets Authority regarding appropriate and considered reform of
the residential leasehold sector.
The Investment Manager and the Board welcome the Government's
aims to reform and simplify many aspects of residential leasehold
legislation and we recognise the need for a system that delivers a
more equitable, transparent and better service for homeowners. Any
reform should however strike a 'fair balance' and ensure that
sufficient compensation is paid to landlords for any resultant loss
in value, to be compliant with human rights legislation.
LC - Enfranchisement
The LC published their report on enfranchisement premium
valuation in January 2020. The LC was asked by Government to make
the process simpler, easier, quicker and cheaper, and reduce the
price payable, whilst ensuring sufficient compensation to landlords
for their legitimate property interests.
The LC's findings and recommendations were arguably positive for
the Company by rejecting arbitrary premium calculation
methodologies that could unfairly impact value.
Competition and Markets Authority
In June 2019, the CMA launched an investigation into whether
there had been breaches of consumer law in the leasehold housing
market. The investigation concerned two key areas:
-- Potential mis-selling: whether consumers were mis-sold
leasehold homes by some housing developers in the way that
information was provided to them during the sales process; and
-- Potentially unfair terms: whether leaseholders are subject to
unfair contract terms, in particular, with respect to
administration charges and ground rents.
The Company has engaged with the CMA during the investigation
and responded in detail to a formal information request in December
2019. The CMA published an update report in February 2020 with
three of the CMA's six areas of concern specifically relating to
ground rent, in particular:
-- High initial ground rents that may increase significantly over time;
-- High or escalating ground rents that mean a long-lease may
become an 'assured tenancy' under the Housing Act 1988; and
-- The appropriateness of RPI-linked increases to ground rent.
The CMA is continuing its investigation and has stated that it
is preparing to take further action in relation to the areas
identified above. The Company has been reviewing the implications
of the CMA's latest findings and will continue to closely monitor
the CMA's next steps. Our response to the CMA highlighted the
following in response to the three points above:
-- The portfolio median ground rent is GBP110 for houses and
GBP250 for apartments, excluding student accommodation, which are
considered to be low and generally affordable levels of ground
rent. As noted above, the Company has also proactively sought to
address issues relating to doubling' ground rent terms;
-- The Company has a published policy in place which states that
it will not ordinarily seek possession using Schedule 2 of the
Housing Act 1988; and
-- With regards to the appropriateness of RPI as the relevant ground rent inflator, it is a well-established index commonly used across many investment sectors. As noted above, RPI is itself the subject of a government consultation and potential reform.
Building safety reform
On 20 January 2020, the Secretary of State for Housing,
Communities and Local Government, Robert Jenrick, announced new
measures to improve building safety standards. The reform will
include the creation of a new Building Safety Regulator within the
Health and Safety Executive, clarified and consolidated advice for
building owners and a consultation on extending the ban on
combustible materials to buildings below 18 metres.
The Board and The Investment Manager believe institutional and
professional investors have the expertise, resource and experience
needed to provide the risk, governance and health and safety
oversight, that is required as the housing market implements the
findings of Dame Judith Hackitt's Review of Building Regulations
and Fire Safety and the recommendations from the enquiry into the
Grenfell Tower tragedy.
In addition to the above a new Fire Safety Bill is under
consultation. The Bill is expected to result in greater clarity
over responsibility for fire safety in buildings, the digitisation
of a 'Golden Thread' of essential building documentation and
increased enforcement powers in areas such as cladding and building
facades, particularly in relation to aluminium composite material
("ACM").
Within the Company's portfolio there is one asset which has ACM
cladding, which was identified as part of a detailed audit shortly
after the Grenfell Tower tragedy. This asset is currently
undergoing remediation by the main contractor, at no financial cost
to either the leaseholders in the development or the Company, with
completion expected in 2021.
During the period a formal Health and Safety policy has been
approved and will be reviewed by the Board no less frequently than
annually. The policy is on the Company's website and is further
evidence of our commitment to delivering Best in Class residential
management across the portfolio.
Property management
Health and safety compliance remains a key focus as we assess
our own and suppliers' performance against industry best practice
and legislation.
In January 2020 MHCLG published a new building façade advice
note ("AN2020") that applies to all buildings, whilst the proposed
Fire Safety Bill will likely detail how building owners and
responsible persons must mitigate the fire risks from external
walls. Surveys based on AN2020 are underway across the managed
estate, but subsequent legislation may lead to increased costs to
the Company and consumers through increased insurance premiums and
service charge costs associated with enhanced risk assessments.
In March 2020, the Government announced a GBP1 billion Building
Safety Fund ("BSF"') to remove defective cladding from private
sector sites above 18 metres. The Company strongly supports the
Government's attempt to address the historical failure of building
standards across the United Kingdom, not least as it should reduce
the financial impact on consumers. However, the BSF terms need to
dovetail with MHCLG's guidance on all buildings, regardless of
height, and be sufficient to cover the costs of defective
developments nationally.
We continue to engage with the Royal Institution of Chartered
Surveyors ("RICS") and MHCLG on this issue to develop policy
makers' understanding and implementation strategy. We continue to
strive for a Secretary of State backed industry Code of Conduct to
implement health and safety requirements, whilst formally
regulating residential managing agents.
The Investment Manager continues the process of regular
communication to residents, management company directors and
managing agents in the non-managed estate, in an attempt to drive
standards in the residential management industry and provide
support to our leaseholders. Since the onset of the Covid-19
pandemic we have implemented a number of amended processes within
the managed estates in conjunction with our managing agents, taking
into account best practice guidance from ARMA and the RICS.
We are focussed on delivering industry leading residential
management and value to our consumers. We continue to market-test
consumer fees against best practice and industry peers, which
resulted in a reduction in ancillary income over the period. Over
the coming 12 months there will be further incorporation of
Environmental, Social and Governance ("ESG") factors within our
asset and property management strategy.
Beetham Tower, Manchester
In February 2019, the Company announced the High Court judgement
in connection with the case between the Company's wholly-owned
subsidiary, North West Ground Rents Limited ("NWGR"), and the hotel
leaseholder Blue Manchester Limited ("BML"), regarding the failure
of the façade sealant on the Building. The Court found the building
to be in disrepair and gave an order for NWGR to carry out
permanent remedial works by 31 July 2020.
Since February 2019 NWGR and its team of advisors have prepared
for the mobilisation of the Court directed repair. An all-parties
mediation took place in November 2019 without a successful
conclusion, and therefore NWGR continues to pursue Carillion's
insurers and sub-contractors under collateral warranties. The
tendered costs for the Court directed solution are over GBP8.0
million which is potentially financially unviable for NWGR and
carrying out these works also risks long term disruption to the
hotel and the residents.
Given this significant cost for NWGR and the residential
consumers under the terms of their leases, NWGR has explored
alternative options to achieve a satisfactory repair solution. NWGR
believes there is a more viable alternative scheme at a materially
lower cost. Following the submission of a planning application in
March 2020, planning permission was secured for the alternative
scheme in May. Having obtained support for the alternative scheme
from the residents, an application has been made to the Court for
permission to amend the timeline for the completion of remedial
work, and the repair method to the more viable alternative.
The Board and Schroders believe that NWGR securing both Court
and planning approval for the alternative repair solution could
benefit all stakeholders by establishing a more deliverable and
financially viable repair. BML is challenging the alternative
scheme on the basis that it does not return the development to the
originally designed state and therefore impacts its visual
amenity.
NWGR incurred an additional GBP0.5 million during the period,
increasing total costs to approximately GBP1.8 million in relation
to the judgement and will incur further sums as part of seeking to
comply with the remediation timetable and ongoing litigation. A
further GBP0.3 million has been expensed after the period end.
Beetham Tower is held at a fair value of GBPnil by NWGR,
reflecting the inherent uncertainty of the ongoing litigation. NWGR
is reliant on the financial support of the Company to fund its
working capital requirements, including all legal action and
compliance with the current Court directed repair. Further
financial support to NWGR will be considered having regard to the
prospects of resolving the litigation and the interests of the
Company's shareholders.
Responsible and positive impact investment
Responsible Investment is integral to how the Investment Manager
manages its investments. Together with the Board, we believe that
by understanding and managing the impact of ESG considerations we
can generate better long-term returns and tangible benefits for our
communities.
The Investment Manager's sustainability programme is continually
evolving, reflecting progression with industry sustainability
targets, available technologies and the regulatory environment.
There will be an increasing focus on sustainability in the next
financial year with our investment and asset management teams
incorporating sustainability and impact credentials, within the
parameters of residential legislation. This is evidenced by our
response to Covid-19, where a core part of protecting the long-term
value of our portfolio involves working to support leaseholders,
our managing agents and their on-site teams.
In relation to the environment, positive action is needed as the
built environment is generally accepted to be responsible for 40%
of global carbon emissions. In recognition of the role and
responsibilities of the real estate industry and property owners,
the Investment Manager signed the Better Buildings Partnership
Climate Commitment in September 2019. This initiative supports the
drive to net zero carbon emissions from buildings and the first
stage of this is to set out our pathway to net zero to 2050 by the
end of 2020.
Finance
In January 2020 the Company refinanced its previous GBP19.5
million loan with Santander UK plc with a new five-year, GBP25
million facility comprising a GBP12.5 million term loan and a
GBP12.5 million revolving credit facility ("RCF"). This removed
refinancing risk in 2021 and provided a flexible component of the
loan to potentially take advantage of opportunities in the market.
The table below sets out the new loan terms:
Lender Facility Loan Maturity Interest Loan LTV Interest ICR Forward Forward
drawn rate to ratio cover ratio looking looking
(GBP (%) Value covenant ratio covenant ICR ICR
million) ('LTV') (%) (2) (%) (%) ratio ratio
ratio (3) (%) (3) covenant
(1) (%)
(%)
----------- ---------- ---------- ---------- --------- -------- --------- --------- --------- -------- ---------
Term GBP12.5
Santander loan million Jan 2025 2.65 24.4 50.0 475 270 460 270
----------- ---------- --------- -------- --------- --------- --------- -------- ---------
RCF GBP3.0
million
---------- ---------------------- ---------- --------- -------- --------- --------- --------- -------- ---------
(1) Loan balance divided by Santander secured portfolio bank valuation as at 31 March 2020.
(2) For the quarter preceding the Interest Payment Date ("IPD"),
((rental income received - void rates, void service charge and void
insurance)/interest paid).
(3) For the four quarters following the IPD, ((rental income to
be received - void rates, void service charge and void
insurance)/interest paid).
The interest payable on the term facility is fixed at 2.68% per
annum, while the RCF attracts a rate of 1.85% above 3-month LIBOR
per annum subject to a cap of 1.0% on GBP5.5 million of the total
GBP12.5 million. The total 'all-in' interest rate has therefore
reduced from 3.37% to approximately 2.80% per annum, generating an
interest rate saving of approximately GBP110,000 per annum (based
on the existing drawn funds of GBP15.5 million, 3 month LIBOR as at
31 March 2020 and including the non-utilisation fee on the undrawn
RCF).
Outlook
The Covid-19 pandemic is causing significant disruption to the
real economy and mainstream real estate assets are currently
experiencing falling income and capital values. Against this
uncertain backdrop the Company is benefiting from its defensive
income characteristics and total returns that are uncorrelated to
the state of the underlying economy. This enabled the Company to
pay its full dividend in May.
Whilst we expect real assets offering defensive income
characteristics to experience continued strong demand, the
prevailing headwinds from Government reform and the ongoing CMA
investigation continue to impact sentiment towards the Company. On
each matter we continue to actively engage with the relevant
parties to ensure the Company's interests are fairly represented in
leasehold and regulatory reform.
Whilst our focus remains on the current strategy and mitigating
the reform related risks, we continue to review whether the
strategy can be adapted to include alternative assets offering
complementary defensive, predictable, index-linked income.
James Agar
Fund Manager
Schroder Real Estate Investment Management Limited
3 July 2020
Directors' Report
Principal risks and uncertainties
The principal risks and uncertainties with the Company's
business fall into the following risk categories: political,
operational, asset, valuation/liquidity, investment policy and
strategy, service provider, custody, cyber, accounting, legal and
regulatory.
A detailed explanation of the risks and uncertainties in each of
these categories can be found on pages 11 and 12 of the Company's
published Annual Report and Consolidated Financial Statements for
the year ended 30 September 2019.
These risks and uncertainties have not materially changed during
the six months ended 31 March 2020. However, the Board has reviewed
the risks related to the Covid-19 pandemic and considers it to be a
major event with an ongoing impact on the likelihood and severity
of some of the Company's principal risks. Covid-19 is expected to
have a profound impact on many sectors of the economy, including
large parts of the real estate sector, affecting both asset
valuations and collection rates of payments due from tenants and
leaseholders. The Board believes that the Company's business model
is sufficiently distinguished from other parts of the real estate
sector such that the risk of non-collection of rents is much lower
and asset values are less likely to be as affected as other parts
of the sector. However, these risks are being monitored
closely.
The Board notes the Investment Manager's investment process is
unaffected by the Covid-19 pandemic. The Investment Manager
continues to focus on long-term fundamentals and detailed analysis
of current and future investments. Covid-19 also affected the
Company's service providers, who have implemented business
continuity plans and are working almost entirely remotely. The
Board continues to receive regular reporting on operations from the
Company's major service providers and does not anticipate a fall in
the level of service.
Going concern
The Board has examined significant areas of possible financial
risk and has reviewed cash flow forecasts and compliance with the
debt covenants, in particular the LTV covenant and interest cover
ratio, as set out more fully in note 1 to the financial statements.
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.
The Board has reviewed the impact on the risks as a result of
Covid-19, and where appropriate, action taken by the Company's
service providers in relation to those risks, and the Directors
consider it appropriate to adopt the going concern basis in
preparing the financial statements.
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge:
- The half year report and condensed consolidated interim
financial statements have been prepared in accordance with IAS 34
Interim Financial Reporting as adopted by the European Union;
and
- The Interim Management Report includes a fair review of the
important events that have occurred during the first six months of
the financial year, their impact on the condensed set of financial
statements, a description of the principal risks and uncertainties
for the remaining six months of the financial year and any relevant
related party transactions.
Condensed Consolidated Interim Statement of Comprehensive Income
for the six months ended 31 March 2020
Unaudited Unaudited Audited
6 months
6 months to to 31 year ended
31 March March 30 September
Note 2020 2019 2019
GBP GBP GBP
------------------------------------ ----- ------------ ------------ --------------
Continuing operations
Revenue 2 3,130,679 2,732,490 5,638,348
------------------------------------- ----- ------------ ------------ --------------
Administrative expenses 3 (1,671,882) (1,173,027) (2,809,134)
Profit on sale of investment
properties 879 6,500 485,145
Net revaluation loss on investment
properties 5 (358,545) (2,606,600) (4,876,845)
Operating profit/(loss) 1,101,131 (1,040,637) (1,562,486)
------------------------------------- ----- ------------ ------------ --------------
Finance income 9,239 12,905 25,903
Finance expenses 4 (353,144) (374,251) (752,539)
------------------------------------- ----- ------------ ------------ --------------
Net finance expense (343,905) (361,346) (726,636)
------------------------------------- ----- ------------ ------------ --------------
Profit/(loss) before tax 757,226 (1,401,983) (2,289,122)
------------------------------------- ----- ------------ ------------ --------------
Taxation - - -
------------------------------------ ----- ------------ ------------ --------------
Profit/(loss) after tax and total
comprehensive income/(loss) 757,226 (1,401,983) (2,289,122)
-------------------------------------------- ------------ ------------ --------------
Earnings/(losses) per
share
Basic 8 0.78p (1.45p) (2.36p)
Diluted 8 0.78p (1.45p) (2.36p)
------------------------------------- ----- ------------ ------------ --------------
Condensed Consolidated Interim Statement of Financial Position
as at 31 March 2020
Unaudited Unaudited Audited
31 March 31 March 30 September
Note 2020 2019 2019
GBP GBP GBP
-------------------------------- ----- ------------- ------------- -------------
Assets
Non current assets
Investment properties 5 122,635,000 125,196,000 122,893,000
-------------------------------- ----- ------------- ------------- -------------
122,635,000 125,196,000 122,893,000
-------------------------------- ----- ------------- ------------- -------------
Current assets
Trade and other receivables 2,558,806 1,815,586 1,110,402
Interest rate derivative
contracts 7 21,888 - -
Cash and cash equivalents 1,480,366 5,309,077 6,136,854
4,061,060 7,124,663 7,247,256
-------------------------------- ----- ------------- ------------- -------------
Total assets 126,696,060 132,320,663 130,140,256
-------------------------------- ----- ------------- ------------- -------------
Liabilities
Non current liabilities
Financial liabilities
measured at amortised
cost 6 (14,931,625) (19,258,310) (19,304,928)
-------------------------------- ----- ------------- ------------- -------------
(14,931,625) (19,258,310) (19,304,928)
-------------------------------- ----- ------------- ------------- -------------
Current liabilities
Trade and other payables (4,942,166) (3,209,727) (2,820,454)
-------------------------------- ----- ------------- ------------- -------------
(4,942,166) (3,209,727) (2,820,454)
Total liabilities (19,873,791) (22,468,037) (22,125,382)
-------------------------------- ----- ------------- ------------- -------------
Net assets 106,822,269 109,852,626 108,014,874
-------------------------------- ----- ------------- ------------- -------------
Financed by:
Equity
Share capital 10 48,503,248 48,503,198 48,503,248
Share premium account - 45,884,305 45,884,305
Other distributable reserves 43,934,474 - -
Retained earnings 13,627,321 16,867,106 15,916,443
Profit/(loss) for the
financial year 757,226 (1,401,983) (2,289,122)
Total equity 106,822,269 109,852,626 108,014,874
-------------------------------- ----- ------------- ------------- -------------
Net asset value per ordinary
share
Basic 9 110.1p 113.2p 111.3p
Diluted 9 109.7p 112.7p 110.9p
-------------------------------- ----- ------------- ------------- -------------
Ground Rents Income Fund plc
Company registered number: 08041022
Registered in England and Wales
Condensed Consolidated Interim Statement of Cash Flows for the
six months ended 31 March 2020
Unaudited Unaudited Audited
6 months 6 months Year ended
to 31 March to 31 March 30 September
Note 2020 2019 2019
GBP GBP GBP
----------------------------------- ----- ------------- ------------- --------------
Cash flows from operating
activities
Cash generated from operations 12 2,146,340 2,244,532 3,830,532
Interest rate cap purchased (50,650) - -
Interest paid on bank loan
and bank charges (311,452) (327,296) (659,304)
Net cash generated from operating
activities 1,784,238 1,917,236 3,171,228
------------------------------------------ ------------- ------------- --------------
Cash flows from investing
activities
Interest received 9,215 12,905 25,903
Receipts from the sale of
investment properties 13,856 6,500 513,221
Purchase of investment properties (96,580) (292,800) (288,121)
Net cash (used in)/generated
from investing activities (73,509) (273,395) 251,003
----------------------------------- ----- ------------- ------------- --------------
Cash flows from financing
activities
Net proceeds of issuance of
shares - - 50
Bank loan payments (4,417,387) - -
Dividends paid to shareholders (1,949,831) (1,901,325) (2,851,988)
Net cash used in financing
activities (6,367,218) (1,901,325) (2,851,938)
----------------------------------- ----- ------------- ------------- --------------
Net (decrease)/increase in
cash and cash equivalents (4,656,488) (257,484) 570,293
----------------------------------- ----- ------------- ------------- --------------
Opening cash and cash equivalents 6,136,854 5,566,561 5,566,561
------------------------------------------ ------------- ------------- --------------
Closing cash and cash equivalents 1,480,366 5,309,077 6,136,854
------------------------------------------ ------------- ------------- --------------
Condensed Consolidated Interim Statement of Changes in Equity
for the period ended 31 March 2020
Share
Share premium Other distributable Retained
capital account reserves earnings Total
GBP GBP GBP GBP GBP
------------------------ ----------- ------------- -------------------- ------------- ------------
At 1 October 2018 48,503,198 45,884,305 - 18,768,431 113,155,934
------------------------ ----------- ------------- -------------------- ------------- ------------
Comprehensive loss
Loss for the period - - - (1,401,983) (1,401,983)
Total comprehensive
loss - - - (1,401,983) (1,401,983)
------------------------ ----------- ------------- -------------------- ------------- ------------
Transactions with
owners
Dividends paid (note
11) - - - (1,901,325) (1,901,325)
At 31 March 2019 48,503,198 45,884,305 - 15,465,123 109,852,626
------------------------ ----------- ------------- -------------------- ------------- ------------
Comprehensive loss
Loss for the period - - - (887,139) (887,139)
Total comprehensive
loss - - - (887,139) (887,139)
------------------------ ----------- ------------- -------------------- ------------- ------------
Transactions with
owners
Issue of share capital 50 50 - - 100
Share issue costs - (50) - - (50)
Dividends paid (note
11) - - - (950,663) (950,663)
At 30 September
2019 48,503,248 45,884,305 - 13,627,321 108,014,874
------------------------ ----------- ------------- -------------------- ------------- ------------
Comprehensive income
Profit for the period - - 757,226 757,226
Total comprehensive
income - - - 757,226 757,226
------------------------ ----------- ------------- -------------------- ------------- ------------
Transactions with
owners
Share premium account
reduction (note
10) - (45,884,305) 45,884,305 - -
Dividends paid (note
11) - - (1,949,831) - (1,949,831)
At 31 March 2020 48,503,248 - 43,934,474 14,384,547 106,822,269
------------------------ ----------- ------------- -------------------- ------------- ------------
Notes to the Condensed Consolidated Financial Statements for the
six months ended 31 March 2020
1. Significant accounting policies
Ground Rents Income Fund plc ("the Company") is a closed-ended
investment company 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 condensed consolidated
interim financial statements of the Company for the period ended 31
March 2020 comprise those of the Company and its subsidiaries
(together referred to as the "Group").These condensed consolidated
interim financial statements do not comprise statutory accounts
within the meaning of section 434 of the Companies Act 2006.
Statutory accounts for the year ended 30 September 2019 were
approved by the Board of Directors on 12 December 2019 and were
delivered to the Registrar of Companies. The report of the auditors
on those accounts was unqualified, did not contain an emphasis of
matter paragraph and did not contain any statement under section
498 of the Companies Act 2006.
Statement of compliance
The condensed consolidated interim financial statements have
been prepared in accordance with the Disclosure Guidance and
Transparency Rules of the United Kingdom Financial Conduct
Authority and IAS 34 Interim Financial Reporting as adopted by the
European Union ("EU"). They do not include all the information
required for the full annual financial statements and should be
read in conjunction with the consolidated financial statements of
the Group as at and for the year ended 30 September 2019.
The condensed consolidated interim financial statements have
been prepared on the basis of the accounting policies set out in
the Group's consolidated financial statements for the year ended 30
September 2019 and in accordance with International Financial
Reporting Standards ("IFRSs") as adopted by the EU and
interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC"). The Group's consolidated
financial statements for the year ended 30 September 2019 refer to
new Standards and Interpretations, none of which had a material
impact on these condensed consolidated interim financial
statements.
During the half year, derivative financial assets and
liabilities comprise an interest rate cap for hedging purposes
(economic hedge). This has been initially recognised at cost and
subsequently revalued to fair value, with the revaluation gains or
losses immediately recorded in the consolidated statement of
comprehensive income.
Basis of preparation
These condensed consolidated interim financial statements are
for the six months ended 31 March 2020 and have been prepared under
the historical cost convention, as modified by the revaluation of
investment properties and derivative financial instruments that
have been measured at fair value. The accounting policies have been
consistently applied to the results, assets, liabilities and cash
flow of the entities included in the condensed consolidated interim
financial statements and are consistent with those of the year-end
financial report.
Going concern
The Directors have examined significant areas of possible
financial risk including: the non-collection of rent as a result of
the Covid-19 pandemic; the potential resulting falls in property
valuations; and future implications of potential leasehold reform,
and have prepared detailed forward-looking cash flow forecasts and
third party debt covenant calculations, in particular the loan to
value covenant and interest cover ratios.
In January 2020 the Group completed a refinancing activity
relating to the facility held with Santander. This GBP12.5 million
fixed rate loan now attracts a total interest rate of 2.68% per
annum, compared to a previous 3.37%, resulting in an immediate cash
interest saving of GBP86,000 per annum.
As part of the refinance, the Group also arranged a GBP12.5
million RCF facility with Santander. As at 31 March 2020, the
undrawn capacity was GBP9.5 million. The RCF is an efficient and
flexible source of funding with a margin of 1.85% which can be
repaid and redrawn as often as required.
The Directors 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 twelve
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 condensed
consolidated interim financial statements.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS,
as adopted by the EU, requires management to make judgements,
estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and
expenses. These estimates and associated assumptions are based on
historical experience and various other factors that are believed
to be reasonable under the circumstances, the results of which form
the basis of making judgements about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. The estimates and
underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The most significant estimates made in preparing the condensed
consolidated interim financial statements relate to the carrying
value of investment properties (as disclosed in note 5), which are
stated at fair value. Fair value is inherently subjective because
the valuer makes assumptions which may not prove to be accurate.
The Group uses external professional valuers to determine the
relevant amounts.
In response to the uncertainty caused by Covid-19 the
independent property valuer, Savills Advisory Services Limited
("Savills"), issued a material valuation uncertainty clause for the
31 March 2020 valuation of the investment property portfolio. On 27
May 2020, the Group received confirmation from Savills that the
clause has now been removed for valuations of its investment
property portfolio going forward from that date.
2. Segmental information
The Group is mainly concerned with the collection of ground
rent. The Group receives ancillary income to which it is entitled
as a result of its position as property freeholder or head
leaseholder.
Unaudited Unaudited Audited
6 months 6 months year ended
to to 30 September
31 March 31 March
2020 2019 2019
GBP GBP GBP
---------------------------- ---------- ---------- --------------
By activity:
Ground rent income accrued
in the period 2,426,124 2,390,649 4,796,641
Other income falling due
within the period 704,555 341,841 841,707
----------------------------- ---------- ---------- --------------
3,130,679 2,732,490 5,638,348
---------------------------- ---------- ---------- --------------
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. The Board is the chief operating decision maker and runs
the business as one segment.
3. Administrative expenses
Unaudited Unaudited Audited
6 months 6 months year ended
to to 30 September
31 March 31 March
2020 2019 2019
GBP GBP GBP
-------------------------- ---------- ---------- --------------
Directors' salaries 66,606 40,711 71,697
Auditors' remuneration 73,695 46,509 88,935
Management fees 542,306 146,406 562,234
Professional fees 832,793 780,588 1,730,289
Insurance 11,269 13,478 24,083
Sponsor fees 20,704 28,297 55,170
Valuation fees 16,766 28,560 95,559
Registrar fees 36,884 15,384 27,207
Listing fees 19,841 16,449 30,559
Other operating expenses 51,018 56,645 123,401
--------------------------- ---------- ---------- --------------
1,671,882 1,173,027 2,809,134
-------------------------- ---------- ---------- --------------
4. Finance expenses
Unaudited Unaudited Audited
6 months 6 months
to to Year ended
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
--------------------------------------- ---------- ---------- --------------
Loan interest 274,059 327,296 655,099
Amortisation of loan arrangement fees
and bank charges 50,323 46,955 97,440
Net change in fair value of financial
instruments 28,762 - -
------------------------------------------ ---------- ---------- --------------
353,144 374,251 752,539
--------------------------------------- ---------- ---------- --------------
Following the amendment to the loan facility during the period,
additional loan arrangement and associated professional fees of
GBP0.25 million have been capitalised and deducted from the total
loan amount outstanding. These costs are being amortised over 58
months to January 2025. See note 6 for further details.
5. Investment properties
Fair value GBP
At 30 September 2018 (audited) 127,509,800
--------------------------------- ------------
Additions 292,800
Disposals -
Net loss recognised
in statement of comprehensive
income (2,606,600)
At 31 March 2019 (unaudited) 125,196,000
--------------------------------- ------------
Additions (4,679)
Disposals (28,076)
Net loss recognised
in statement of comprehensive
income (2,270,245)
At 30 September 2019 (audited) 122,893,000
--------------------------------- ------------
Additions 100,800
Disposals (255)
Net loss recognised
in statement of comprehensive
income (358,545)
At 31 March 2020 (unaudited) 122,635,000
--------------------------------- ------------
The Group's investment property was revalued at 31 March 2020 by
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 considers
external factors such as interest rates and the availability of
other fixed rate investments in the market.
Due to the spread of Covid-19 the Group's valuer has included
the following 'Material Valuation Uncertainty' clause in its
valuation report as at 31 March 2020:
"The outbreak of the Novel Coronavirus (Covid-19), declared by
the World Health Organisation as a "Global Pandemic" on 11th March
2020, has impacted global financial markets. Travel restrictions
have been implemented by many countries and most are now in some
form of lockdown.
Market activity is being impacted in many sectors and at the
valuation date we do not consider that we can rely upon previous
market evidence to fully inform opinions of value. Indeed, the
current response to Covid-19 means that we are faced with an
unprecedented set of circumstances on which to base a
judgement.
Our valuations are therefore reported on the basis of 'material
valuation uncertainty' as per VPS 3 and VPGA 10 of the RICS Red
Book Global. Consequently, less certainty - and a higher degree of
caution - should be attached to our valuation than would normally
be the case. Given the unknown future impact that Covid-19 might
have on the real estate market we recommend that you keep the
valuation of this portfolio under frequent review."
On 27 May 2020, the Group received confirmation from Savills
that the clause has now been removed for valuations of its
investment property portfolio going forward from that date.
The properties have been valued individually and not as part of
a portfolio.
All investment properties are categorised as Level 3 fair values
as they use significant unobservable inputs. There have not been
any transfers between levels during the period.
6. Financial liabilities measured at amortised cost
Unaudited Unaudited Audited
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
--------------------------------------- ----------- ----------- -------------
Borrowings repayable over
one year 15,500,000 19,500,000 19,500,000
Capitalised loan arrangement fees net
of amortisation (568,375) (241,690) (195,072)
------------------------------------------ ----------- ----------- -------------
14,931,625 19,258,310 19,304,928
--------------------------------------- ----------- ----------- -------------
On 10 January 2020, the existing loan facility with Santander UK
plc was amended and split into two facilities totalling GBP25
million.
Of the total amount drawn GBP12.5 million is held as a term loan
and matures on 10 January 2025 and carries a fixed interest rate of
2.68% payable quarterly.
The remaining GBP3 million held within a coterminous GBP12.5
million Revolving Cash Facility ("RCF") carries an interest rate of
1.85% plus LIBOR three months per annum payable quarterly.
An additional fixed fee of 0.74% per annum is payable on amounts
undrawn under the RCF.
The facility was subject to a GBP0.25 million arrangement fee
which is being amortised over the period of the loan.
The lender has charges over investment property owned by the
Group with a value of GBP63.6 million. A pledge of all shares in
the borrowing Group company and loan obligor companies is in
place.
As at 31 March 2020, the loan facility was 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 Group assets or assets within the parent company.
The combined amended facility has a loan-to-value ('LTV')
covenant of 50% and interest cover covenant of 270%. The Group was
in full compliance with the covenants throughout the period. As at
31 March 2020 the actual LTV over secured assets was 24.4% with
headroom of GBP32.6 million and interest cover was 474.8% with
headroom of GBP0.8 million.
7. Derivative financial instruments
The Company has an interest rate cap in place purchased for
GBP50,650 from Banco Santander SA on 17 February 2020 in connection
to the GBP12.5 million RCF drawn from Santander UK plc with a
maturity date of 10 January 2025. The cap interest rate is 1.00%
with a floating rate option being LIBOR three months. In line with
IFRS 9 this derivative is reported in the financial statements at
its fair value. As at 31 March 2020 the fair value of the interest
cap was GBP21,888 reflecting a decline in the interest rate curve
since the interest rate cap was purchased.
8. Basic and diluted earnings/(losses) per share
Basic earnings/(losses) per share
Earnings/(losses) used to calculate earnings/(losses) per share
in the financial statements were:
Unaudited Unaudited Audited
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
------------------------------------- ----------- ------------ -------------
Earnings/(losses) attributable to
equity shareholders of the Company 757,226 (1,401,983) (2,289,122)
---------------------------------------- ----------- ------------ -------------
Basic earnings/(losses) per share have been calculated by dividing
earnings/(losses) by the weighted average number of shares in issue
throughout the period.
Weighted average number
of shares - basic 97,006,497 97,006,397 97,006,402
Basic earnings/(losses)
per share 0.78p (1.45p) (2.36p)
-------------------------------------- ----------- ------------ -------------
Diluted earnings/(losses) per share
Diluted earnings/(losses) per share is the basic
earnings/(losses) per share, adjusted for the effect of
contingently issuable warrants in issue in the period, weighted for
the relevant periods.
Unaudited Unaudited Audited
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
------------------------------------------ ----------- ------------ -------------
Earnings/(losses) attributable to equity
shareholders of the Company 757,226 (1,401,983) (2,289,122)
--------------------------------------------- ----------- ------------ -------------
Number Number Number
Weighted average number of shares -
basic 97,006,497 96,006,397 97,006,402
Potential dilutive effect
of warrants - - -
------------------------------------------- ----------- ------------ -------------
Diluted total shares 97,006,497 97,006,397 97,006,402
--------------------------------------------- ----------- ------------ -------------
Diluted earnings/(losses) per share 0.78p (1.45p) (2.36p)
--------------------------------------------- ----------- ------------ -------------
9. Net asset value per ordinary share
The NAV per ordinary share represents the total NAV of the
Company divided by the number of ordinary shares in issue at the
period end. The diluted NAV per ordinary share is calculated after
assuming the exercise of all outstanding warrants.
Unaudited Unaudited Audited
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
--------------------------- ------------ ------------ -------------
Net assets 106,822,269 109,852,626 108,014,874
------------------------------ ------------ ------------ -------------
Number Number Number
Number of ordinary shares
in issue 97,006,497 97,006,397 97,006,497
Outstanding warrants
in issue 4,423,876 4,423,976 4,423,876
---------------------------- ------------ ------------ -------------
Diluted number of shares
in issue 101,430,373 101,430,373 101,430,373
---------------------------- ------------ ------------ -------------
NAV per ordinary share
- basic 110.1p 113.2p 111.3p
NAV per ordinary share
- diluted 109.7p 112.7p 110.9p
---------------------------- ------------ ------------ -------------
10. Share capital
Unaudited Unaudited Audited
31 March 31 March 30 September
2020 2019 2019
-------------------- -------- ----------- ----------- -------------
Allotted, called up and
fully paid:
Ordinary shares of
GBP0.50 each Number 97,006,497 97,006,397 97,006,497
Amount
GBP 48,503,248 48,503,198 48,503,248
---------- ------------------ ----------- ----------- -------------
Shares issued during the
period:
Ordinary shares of
GBP0.50 each Number - - 100
Amount
GBP - - 50
---------- ------------------ ----------- ----------- -------------
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 million.
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
each year following admission up to and including 31 August 2022.
100 warrants were exercised and issued in September 2019. At 31
March 2020 there were 4,423,876 warrants in issue.
On 8 November 2019 a reduction of share premium of GBP45,884,305
was approved. Further details can be found in the year-end
financial report.
11. Dividends
It is the policy of the Company to pay quarterly dividends to
ordinary shareholders.
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
------------------------------------------ ---------- ---------- --------------
Dividends declared by the Company during
the period:
Dividends paid 1,949,831 1,901,325 2,851,988
--------------------------------------------- ---------- ---------- --------------
Analysis of dividends
by type:
Interim PID dividend of
0.98p per share - 950,662 950,662
Interim PID dividend of
0.98p per share - 950,663 950,663
Interim PID dividend of
0.98p per share - - 950,663
Interim PID dividend of
1.02p per share 989,467 - -
Interim PID dividend of
0.99p per share 960,364 - -
1,949,831 1,901,325 2,851,988
------------------------------------------ ---------- ---------- --------------
Since the period ended 31 March 2020, the Company announced an
interim PID dividend of 0.99p per share (GBP960,364), with an
ex-dividend date of 7 May 2020. It was paid on 29 May 2020 to
shareholders on the register as at 11 May 2020.
12. Cash generated from operations
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
---------------------------------------- ------------ ------------ -------------
Reconciliation of profit before tax to cash generated
from operations
Profit/(loss) before tax 757,226 (1,401,983) (2,289,122)
------------------------------------------- ------------ ------------ -------------
Adjustments for:
Net revaluation loss on
investment properties 358,545 2,606,600 4,876,845
Movement in fair value of derivative
interest rate contracts 28,762 - -
Profit on sale of investment
properties (879) (6,500) (485,145)
Net finance expenses excluding
movement in fair value
of derivative interest
rate contacts 315,143 361,346 726,636
Operating cash flows before movements
in working capital 1,458,797 1,559,463 2,829,214
Movements in working capital:
(Increase)/decrease in trade and other
receivables (1,448,405) 79,685 784,869
Increase in trade and
other payables 2,135,948 605,384 216,449
Cash generated from operations 2,146,340 2,244,532 3,830,532
----------------------------------------- ------------ ------------ -------------
13. Related party transactions
Transactions between the Company and its subsidiaries which are
related parties, have been eliminated on consolidation.
During the six months to 31 March 2019, Brooks Macdonald Funds
Limited ("BMF") provided investment management and administration
services to the Group as the Alternative Investment Fund Manager
("AIFM"), the fees for which were 0.55% per annum of the market
capitalisation of the Group. In addition, BMF was entitled to an
agency fee of 2% of the purchase price of any property acquired by
the Group, 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.
Transactions between BMF and the Group during the financial
period were as follows:
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
------------------------------- ----------- ---------- -------------
AIFM fee payable to BMF - 181,518 208,039
Other amounts payable to BMF - 14,252 42,165
Directors fees payable to BMF - 12,000 14,000
---------------------------------- ------------ ---------- -------------
- 207,770 264,204
------------ ------------------------------ ---------- -------------
Schroder Real Estate Investment Management Limited ("Schroders")
replaced BMF as AIFM on 13 May 2019 and is also deemed to be a
related party in that it acted as the Investment Manager from that
date.
Transactions between Schroders and the Company during the
financial period were as follows:
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2020 2019 2019
GBP GBP GBP
------------------------------- ---------- ---------- -------------
AIFM fee payable to Schroders 542,306 - 132,726
---------------------------------- ---------- ---------- -------------
542,306 - 132,726
------------------------------- ---------- ---------- -------------
14. Other financial commitments and contingencies
The Group has a number of investment property acquisitions in
the pipeline. At 31 March 2020, the Group had GBP0.2m of cash held
at solicitors for acquisitions which were in progress to complete.
The transactions are expected to cost GBP2.5 million to
complete.
Damages associated with the previously disclosed judgement
against North West Ground Rents Limited ("NWGR"), a wholly owned
subsidiary of the Company, are still to be determined by the High
Court at a future date. In line with IAS37 - 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 in connection with a
remedial solution for Beetham Tower, Manchester, from both
leaseholders and third-party contractors, and any potential
damages, are subject to an 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).
NWGR continues to be reliant on the financial support of the
Company to finance further legal action and to comply with the
judgement. 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 incur reasonable
associated professional fees.
15. Events after the period end date
On 27 April 2020 an amount of GBP4 million was drawn down on the
Santander RCF facility and is being held in a deposit account.
In June 2020, NWGR received the approval of the High Court to
continue its application for an alternative remedial solution at
Beetham Tower, Manchester, that can satisfy its responsibilities
under the High Court judgement from January 2019. This followed the
successful planning application for, and subsequent approval
granted from Manchester City Council for the alternative remedial
solution. Representatives of NWGR are due to attend an
evidence-based Court hearing in September 2020, at which they will
present NWGR's case for the alternative solution.
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
IR FZGGNVFGGGZM
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