Ground Rents Inc Fnd - Circular and Notice of EGM

Ground Rents Income Fund

24/10/2024 17:00

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RNS Number : 5338J  Ground Rents Income Fund PLC  24 October 2024

 

Ground Rents Income Fund plc

("the Company")

 

CIRCULAR AND NOTICE OF EXTRAORDINARY GENERAL MEETING

 

Following the announcement of 11 October 2024, the Ground Rents Income Fund
plc ("GRIO" or the "Company") has today written to Shareholders with a
Circular and Notice of Extraordinary General Meeting ("EGM") in relation to
the continuation vote of the Company to be held at 1 London Wall Place,
London, EC2Y 5AU on Monday, 18 November 2024, at 12:30 pm. The letter from the
independent non-executive Chair included within the Circular is set out below.
Unless otherwise indicated, all defined terms in this announcement shall have
the same meaning as described in the Circular.

The circular can be viewed on the Company's website at
www.groundrentsincomefund.com (http://www.groundrentsincomefund.com) .

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Letter from the Independent Non-Executive Chair

Dear Shareholder,

PROPOSAL REGARDING THE CONTINUATION OF THE COMPANY

1.     Context

I am writing to inform you that an EGM of the Company will be held at 1 London
Wall Place, London, England, EC2Y 5AU on Monday 18 November at 12.30 pm. The
formal Notice of EGM and the Resolution to be proposed are set out in Part 3
of the circular.

The purpose of my letter is to explain the business to be considered at the
EGM relating to the proposed continuation of the Company.

2.     Strategy update

On 11 October 2024, the Company provided Shareholders with the following
update (the "11 October Update") on activity implementing the New Investment
Policy (set out in Appendix 1), the steps being taken to optimise returns in a
challenging operating environment, and the unaudited portfolio valuation as at
30 September 2024 :

As set out in the recent interim accounts to 31 March 2024
(https://schro.link/griohyr2024 (https://schro.link/griohyr2024) ), the key
strategic steps required to deliver the Investment Policy are as follows:

·      Sell assets where possible to optimise the net realisation value
of the Company's investments, whilst repaying debt and improving the liquidity
of the remaining portfolio;

·      Continue to engage positively with the UK Government of the day
('the Government') to advocate for leasehold reform that fairly balances the
interests of our shareholders and our leaseholders;

·      Work with the Company's independent valuer, Savills, to ensure
they have all relevant available information concerning building safety
remediation projects and leasehold reform related issues to reduce valuation
uncertainty; and

·      Maintain a robust balance sheet, whilst also minimising expenses
to maximise free cash.

Further detail on the progress implementing these steps is set out below:

Sell assets where possible to optimise the net realisation value of the
Company's investments, whilst repaying debt and improving the liquidity of the
remaining portfolio

On 22 February 2024, the Company sold two freehold ground rent interests in
Bristol and Exeter for £3.45 million, which represented a 4% premium to the
independent valuation of £3.3 million as at 30 September 2023.  The assets
were let to a single institutional leaseholder and operated by Vita Student
Management Limited as purpose-built student accommodation.  These freehold
assets were acquired by the Company's long leaseholder.

Further disposals are in progress and others in pre-marketing preparation,
with significant work ongoing to improve the liquidity of the underlying
portfolio, such as enhanced legal due diligence and managing legacy issues.
Uncertainty relating to building safety and leasehold reform means
transactional volumes are very low across the ground rent market.  Future
disposal proceeds are likely to be used to repay debt in the first instance,
to help to reduce the effect on interest payable following the expiry of
current hedging instruments in January 2025.

Continue to engage positively with the Government to advocate for leasehold
reform that fairly balances the interests of our shareholders and our
leaseholders

In May 2024, the previous Government introduced the Leasehold and Freehold
Reform Act (the 'Act').  This new legislation was introduced as part of the
'wash up' process immediately before the dissolution of Parliament and the
General Election.

The Act represents a better outcome for the Company than contemplated in that
Government's November 2023 Consultation (the 'Consultation') that sought views
on restricting existing residential ground rents payable, but without
compensation paid to freeholders adversely affected.  However, the Act also
contains provisions relating to the enfranchisement process that are
potentially unlawful and could negatively impact the portfolio value
further.  Many of the Act's key provisions will only come into force once the
Secretary of State passes additional secondary legislation.

The Government has confirmed it will seek to implement provisions within the
Act and further reform the leasehold system, including to tackle 'unregulated
and unaffordable' ground rent, via a new Leasehold and Commonhold Reform Bill.

The Company, working with advisers, institutional freeholders, and other
stakeholders, continues to advocate for leasehold reform that fairly balances
the interests of our shareholders and our leaseholders.  This includes
informal engagement with the Government alongside formal legal action.  We
are aware of other institutional freeholders who are engaging on the same
basis.

Work with the Company's independent valuer, Savills, to ensure they have all
relevant available information concerning building safety remediation projects
and leasehold reform related issues to mitigate valuation uncertainty

The Company's advisers have worked closely with the independent valuer,
Savills, to ensure that they have all available information relating to
building safety remediation projects and leasehold reform.  Savills have also
liaised with peers and the Royal Institution of Chartered Surveyors ('RICS')
as part of preparing their valuation.

Following this process, Savills have confirmed an unaudited independent
portfolio valuation as at 30 September 2024 of £71.5 million, representing a
like-for-like reduction (net of disposals) of £31.3 million or 30.5% over the
financial year to 30 September 2024 (valuation as at 30 September 2023:
£106.1 million or £102.8 million on a like-for-like basis).  Over the
six-month period to 30 September 2024, this represents a fall of £10.1
million or 12.4% (valuation as at 31 March 2024: £81.5 million).  The
detailed unaudited valuation movements are set out in Appendix 2.

This reduction is principally due to the previous Government's approach to
leasehold reform in November 2023, including as set out in the Consultation.
Savills, in discussion with peers and the RICS, continue to adopt a Material
Valuation Uncertainty Clause ('MUC') that (we are told by Savills and other
valuers) applies across the entire residential ground rent market because of
uncertainty relating to leasehold reform and the resultant lack of
transactional evidence.  This MUC affects 97% of the Company's portfolio by
value as at 30 September 2024 (31 March 2024: 97%).

A separate MUC also applies to assets impacted by building safety related
defects, noting that the building remediation projects carried out across the
portfolio have reduced the negative impact on the unaudited valuation.

Further detail relating to the independent portfolio valuation and the
resultant impact on the Company's net asset value ('NAV') will be included in
the forthcoming full year results to 30 September 2024.

Maintain a robust balance sheet whilst also minimising expenses to maximise
free cash

In March 2024, the Company completed an important refinancing with Santander,
with disposal proceeds used to reduce the loan to £19.5 million from £21.0
million.  The loan term was also extended from January 2025 to July 2026.
This provides the Company with more time to execute its Investment Policy.
Based on the unaudited Savills valuation as at 30 September 2024 of assets
charged to Santander totalling £39.0 million, the Loan to Value ('LTV') is
49.9% compared with a LTV covenant ratio of 50%.  Note that the independent
valuation obtained by the bank for the charged assets in March 2024 was £53.6
million, which reflected a LTV of 36.4%.  The Company is compliant with loan
covenants and, alongside planned disposals, has cash of £5.5 million with the
ability to repay debt, if required.

The new loan has a margin of 2.75% which, together with the interest rate
hedging in place until January 2025, results in a total interest rate of 3.96%
and an Interest Cover Ratio ('ICR') of 318%, compared with a current ICR
covenant ratio of 200%.  Following expiry of the interest rate hedging,
before any further disposals and debt repayment, and assuming the current
SONIA rate of 5.1%, the Company's total interest rate would increase to 7.85%
in January 2025.  As part of the recent refinancing, the ICR covenant level
will, at the same time, reduce from 200% to 160%.  On the same basis and
before any new hedging arrangements, the ICR in January 2025 is forecast to
fall to 160%.

Based on the total unaudited independent portfolio valuation as at 30
September 2024 for charged and uncharged assets, the Group LTV, net of cash,
is 19.6% (31 March 2024: 17.9%).

Alongside the expected increase in the loan interest rate, the Company
continues to incur elevated non-recoverable legal and other professional fees
and expenses relating to leasehold reform and building safety, also including
additional fees paid to the Manager and non-executive directors relating to
out-of-scope work as demonstrated in the recent interim accounts.  These
out-of-scope payments are rigorously scrutinised, assessed and mitigated where
possible, noting also that they do not reflect the full resource commitment
from either the Manager, or Board Directors.

Considering these elevated expenses, the Company's size and the remaining
strategic steps necessary to execute the Investment Policy, the Board
considers it is both timely and appropriate to reduce the number of Directors
(all non-executive) from four to three.  Jane Vessey will retire from the
Board with effect from 31 December 2024.  Jane joined the Board in September
2021 and has made significant positive contributions to the Company, and to
the work of the Board, including overseeing the establishment and monitoring
of new building & fire safety and ESG-related management processes.  The
Board and Manager sincerely thank Jane for her valuable contribution.

The increased expenses are continuing to dilute earnings, noting that the
Company is currently prevented from paying dividends due to the Modified
Auditors Reports relating to the full year results to 30 September 2022 and
2023.  It is not yet clear whether this Modification will continue to apply
to the forthcoming September 2024 year end results, but the Company is likely
to take a cautious approach to future dividend payments given prevailing
uncertainty and the loan maturity in July 2026

The detailed unaudited valuation movements set out in the appendix to the 11
October Update are reproduced in full at Appendix 2 to this document.

3.     Consultation with shareholders

Following the release of the 11 October Update, the Chair, accompanied by the
Manager and the Company's broker, held a number of consultation meetings with
larger Shareholders. The Board is pleased with the general support to vote
'for' the continuation resolution from the shareholders who were consulted.

4.     Resolution

The Resolution set out in the Notice of EGM is being proposed to consider and
approve the continuation of the Company for the purpose of article 135.1 of
the Articles. In order for it to pass, a majority of the votes must be cast in
favour of the Resolution. As the vote on the Resolution will be conducted by
way of poll, in line with the article 135.3 of the Articles, Shareholders will
have one vote for each share held by them.

Our strategic actions to deliver the New Investment Policy have included asset
sales to optimise net realisation value, repayment of debt, and engagement
with the UK Government on leasehold reform. Significant progress has been
made, as evidenced by recent asset sales and progressing building safety
remediation  across the portfolio with the cost of such works being met by
third parties. Whilst the future is uncertain and headwinds remain for the
Company, the Board considers it to be in the best interests of the Company and
its Shareholders as a whole to continue to focus on realising assets in a
controlled and orderly manner in line with the New Investment Policy.

If the Resolution is not passed, then under article 135.5 of the Articles, the
Board will be required to formulate proposals for the voluntary liquidation,
or other form of reorganisation or reconstruction, of the Company, for
consideration by the Shareholders at a general meeting of the Company to be
held no later than 18 May 2025. If the Resolution is passed, under article
135.2 of the Articles, the next continuation vote will need to be held on or
before 17 November 2027.

5.     Action to be taken in respect of the EGM

Shareholders will receive a hard copy Form of Proxy for the EGM. There are
several ways to cast your vote, which are set out below.

·      Shareholders may vote by returning a completed Form of Proxy to
Equiniti, at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA in
accordance with the instructions printed on it no later than 12:30pm on 14
November 2024 (or, in the case of an adjournment, not later than 48 hours(1)
before the time fixed for the holding of the adjourned meeting).

·      Shareholders may vote electronically by visiting the website
www.shareview.co.uk and following the on-screen instructions, by no later than
12:30pm on 14 November 2024 (or, in the case of an adjournment, not later than
48 hours 1  before the time fixed for the holding of the adjourned meeting) to
submit their proxy voting instructions. In order to submit proxy voting
instructions using the website, Shareholders will need to create an online
portfolio using their Shareholder Reference Number. This information can be
found under the Shareholder's name on the Form of Proxy.

·      Shareholders who have already registered with Equiniti's online
portfolio service, Shareview, can appoint their proxy electronically by
logging on to their portfolio at www.shareview.co.uk using their user ID and
password. Once logged in, click "view" on the "My Investments" page. Click on
the link to submit your proxy voting instructions and follow the on-screen
instructions. Please note that to be valid, proxy voting instructions must be
received by Equiniti by no later than 12:30pm on 14 November 2024 (or, in the
case of an adjournment, not later than 48 hours(1) before the time fixed for
the holding of the adjourned meeting).

·      Shareholders who are members of CREST may alternatively be able
to use the CREST electronic proxy appointment service.

 

If Shareholders have any questions in respect of the EGM, please contact
Equiniti on +44 (0)800 032 0641. Please use the country code when calling from
outside the UK. The helpline is open between 8.30 a.m. to 5.30 p.m., Monday to
Friday excluding public holidays in England and Wales. Calls from within the
UK are charged at the standard geographic rate and will vary by provider.
Calls from outside the UK will be charged at the applicable international
rate. The helpline cannot provide advice nor give any financial, legal or tax
advice.

Completion and return of a Form of Proxy (or the electronic appointment of a
Proxy) will not preclude a Shareholder from attending and voting at the EGM
should they so wish.

The Board strongly encourages all Shareholders to vote on the Resolution by
submitting proxy votes in advance of the EGM and appointing the Chair of the
EGM as a Proxy.

6.     Recommendation

The Board considers that the Resolution is in the best interests of the
Company and its Shareholders as a whole. Accordingly, the Board unanimously
recommends that Shareholders vote in favour of the Resolution at the EGM, as
all of the Directors who own Ordinary Shares intend to do so in respect of
their holdings.

Yours faithfully,

Barry Gilbertson

Independent Non-Executive Chair

For and on behalf of

Ground Rents Income Fund plc

 

 For further information: 
 Schroder Real Estate Investment Management Limited           020 7658 6000 

 Matthew Riley 
 Singer Capital Markets (Broker)                              020 7496 3000 

 James Maxwell / Alaina Wong
 Appleby Securities (Channel Islands) Limited (Sponsor)       01534 888 777 

 Andrew Weaver / Michael Davies
 FTI Consulting                                               020 3727 1000 

 Dido Laurimore / Richard Gotla / Meth Tanyanyiwa              

 

------------------

Notes to editors:

Ground Rents Income Fund plc is a closed-ended real estate investment trust,
listed on The International Stock Exchange and traded on the SETSqx platform
of the London Stock Exchange.

 

Schroder Real Estate Investment Management Limited (the 'Manager') was
appointed as the Company's Alternative Investment Fund Manager in May 2019 to
support the Company's Board with the headwinds related to building safety and
leasehold reform.

During the first half of 2023 the Board and Manager carried out an extensive
shareholder consultation on proposals to change the Continuation Vote
mechanism included in the Articles dating from 2012, as well as proposed
changes to the Investment Policy.  These proposals received strong support
from shareholders and resulted in a new Continuation Resolution and Investment
Policy.  The new Investment Policy adopts a strategy of realising the
Company's assets in a controlled, orderly and timely manner for shareholders,
whilst continuing to deliver best-in-class residential asset management
including fairness, transparency, and affordability for leaseholders.

 

In November 2023 the previous Government published a consultation on
restricting existing residential ground rents payable, without compensation to
freeholders (the 'Consultation').  This represented a significant shift in
the Government's approach to leasehold reform and led the Company's
independent valuer, Savills, in conjunction with other valuers and the Royal
Institution of Chartered Surveyors, to adopt a Material Valuation Uncertainty
Clause ('MUC') across the entire residential ground rent market. The Company
submitted a comprehensive response to the Consultation in January 2024 and has
kept shareholders informed of the Government's leasehold reform agenda,
including various regulatory announcements, which can be found at:
www.groundrentsincomefund.com (http://www.groundrentsincomefund.com/)

 

Since November 2023, political upheaval resulted in an accelerated Leasehold
and Freehold Reform Act 2024 (the 'Act'), enacted in May, which may represent
a better outcome than the worst-case scenarios contemplated in the
Consultation.

In July 2024, the new Government set out its legislative priorities in the
King's Speech, including a draft Leasehold and Commonhold Reform Bill. Largely
based on the Labour Party's manifesto commitments, the new Government will
seek to implement the provisions within the Act and further reform the
leasehold system, including enacting the remaining Law Commission
recommendations relating to enfranchisement and Right to Manage, regulate
existing ground rents and, following consultation, ban the sale of new
leasehold flats so a reinvigorated commonhold legal framework becomes the
default tenure.

The potential outcome and timing of legislative changes remains uncertain, and
the Board and Manager are working closely with the Company's advisers and
other institutional owners to better understand the Act and the King's Speech
and are engaging positively with the new Government to advocate for reform
that fairly balances the interests of the Company's shareholders and
leaseholders.

 

See the Company's website for more information:

www.groundrentsincomefund.com (http://www.groundrentsincomefund.com/)

 

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