TIDMGRIO
RNS Number : 8137G
Ground Rents Income Fund PLC
29 July 2021
29 July 2021
Half Year Report
Ground Rents Income Fund plc hereby submits its Half Year Report
for the period ended 31 March 2021.
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 webpages
http://groundrentsincomefund.com.
Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/8137G_1-2021-7-28.pdf
Enquiries:
Matthew Riley
Schroder Investment Management Limited
Tel: 020 7658 6596
___________________________________________________________________________________
Ground Rents Income Fund plc
Half Year Report and Condensed
Consolidated Interim Financial Statements
For the six months ended 31 March 2021
Chairman's Statement
Overview
This is my first interim results as Chairman of Ground Rents
Income Fund plc (the "Company"), covering the six-month period to
31 March 2021. During the period, the Company's net asset value
("NAV") fell by 1.1% to GBP101.4 million which, together with
dividends paid of GBP1.92 million or 1.98 pence per share ("pps"),
resulted in a NAV total return of 0.7%.
Whilst the wider economy and traditional real estate sectors
have demonstrated volatility as a result of the Covid-19 pandemic,
the value of the Company's underlying portfolio has remained stable
within a functioning investment market. Importantly, our ground
rent income collection rates are comparable with our pre-pandemic
levels. This performance illustrates the resilience of the
portfolio's underlying cashflows, but associated ancillary income
has reduced and resulted in lower dividend coverage.
The financial performance of the Company over the period
continued to be adversely impacted by the complex and long running
litigation at Beetham Tower in Manchester. During the period,
litigation and related fees totalling GBP0.2 million were incurred.
In addition, the NAV at the period end continued to be negatively
impacted by an accounting adjustment which reflects a net cost
estimate to deliver the remedial works of GBP2.9 million.
Concluding the litigation at Beetham Tower is a strategic priority
and the Board and Investment Manager are focused on delivering a
solution as soon as practicably possible which we expect will allow
the negative NAV adjustment of GBP2.9 million to be reversed,
although approximately GBP0.3 million of further sale or
liquidation costs are expected to be incurred.
Building safety reform
It has been a period of intense operational activity supporting
the day-to-day requirements of our leaseholders. Emerging and
complex building safety issues have dramatically increased the
Board and Investment Manager's workload and required specialist
third party advice.
The Investment Manager is proactively dealing with all
stakeholders on remediation projects and has taken steps to
protect, as far as is reasonably practicable, leaseholders from the
financial implications of the building safety crisis, by making
qualifying applications to both the Government's Building Safety
Fund and the Waking Watch Relief Fund. We will release more
information on this critically important work as further progress
is made.
During the period, significantly enhanced insurance requirements
have led to an accelerated collation of building design information
ahead of the introduction of the Building Safety Bill (as described
more fully on the inside front cover). This process will support
our desired delivery of best-in-class residential asset management,
whilst contributing to satisfying the increasingly demanding due
diligence requirements of ground rent investors.
Leasehold reform
The Government's leasehold reforms announced in January 2021 may
well have significant consequences over time for both leaseholders
and investors by, inter alia, facilitating a one-time transfer of
wealth from freeholders with legitimate property interests, to
leaseholders. The proposals may also have the unintended
consequence of reducing housing supply, and creating a two-tier
market for home owners between properties subject to ground rents
and those not.
The Investment Manager continues to engage with Government and
relevant agencies to ensure that all relevant property stakeholders
are carefully considered in any proposed reform, whilst emphasising
the peaceful enjoyment requirements of Article 1 of Protocol No. 1
of the European Convention on Human Rights to give appropriate
compensation to asset owners. We are working, with legal advice, to
determine what steps we may need to take to protect our
shareholders' interests.
In June 2019, the Competition and Markets Authority ("CMA")
launched an investigation into potential breaches of consumer law
in the leasehold housing market. In September 2020, the CMA
confirmed that, whilst it was taking action against some of the
country's biggest residential housing developers, no action has
been taken against the Company. In July 2021, the CMA announced
that it had agreed an undertaking with a large institutional owner
of ground rents that included removing onerous terms and
compensation to leaseholders. Approximately 3.1% of the Company's
portfolio by ground rent income contains terms that may generally
be considered onerous, that is where residential ground rents
double more frequently than every 20 years. Since 2017, affected
leaseholders have been offered alternative terms, with 34% take-up.
We will continue to closely monitor the CMA's investigations and
announcements over the coming period.
Vision and strategy
The Board recently determined that our vision is to support and
oversee a high quality team diversifying and de-risking, where
needed, the Company's assets into a more sustainable and profitable
portfolio. We are actively evaluating a range of options to enhance
shareholder returns that, alongside final resolution of the Beetham
Tower litigation, we believe should address the current share price
rating. The Company's key investment objective remains to provide
secure, long-term, inflation-protected returns through investment
in long-dated UK residential and commercial ground rents.
The Board is acutely aware of the Continuation Vote which is to
take place by August 2023. The Board and Investment Manager are
also considering whether the strategy might be expanded to include
other complementary asset types offering the same defensive,
inflation-protected cashflows. Any significant changes to the
Company's strategy will be undertaken in consultation with
shareholders.
Dividends
During the period, the Company paid two dividends totalling
GBP1.92 million or 1.98 pps. Principally due to the impact of
Beetham Tower litigation and expenses, dividends were not covered
by distributable earnings which totalled GBP1.28 million, falling
short by some GBP640,000. Excluding non-recurring costs, the
dividend was 79% covered by recurring distributable earnings.
Whilst Beetham Tower is the key reason for reduced earnings,
responding to the headwinds arising from leasehold and building
safety reform has increased the costs associated with owning and
managing a large portfolio of ground rent assets.
Based on these considerations, the Board has taken the decision
to reduce the annualised dividend by 24% to 3.0 pps per annum. At
this level we expect the dividend to be fully covered by recurring
earnings during the full year ending September 2022. This takes
into account a provision for costs in relation to building safety
reform and increased external management costs. At this level we
would expect to adopt a progressive dividend policy as rent reviews
increase ground rent income. The Company's ground rent income
currently totals GBP4.93 million per annum, with 47% of ground rent
income due to be formally reviewed in the next five years, and in
aggregate 72% to be formally reviewed within the next ten
years.
Share buybacks
The Company's share price discount to NAV per share has
persisted since the onset of leasehold reform in 2017. The Board
monitored the discount throughout the year and received input from
the Company's broker and the Investment Manager on a frequent
basis. The Board believes that the best way to close the discount
on a long-term basis is by increasing demand for the Company's
shares through effectively implementing the Company's investment
strategy.
At the Company's last AGM in March 2021, the Company was given
the authority to purchase up to 14.99% of its issued share capital.
Following the release of these interim results, the Board and
Investment Manager believe that investment in the Company's shares
at the prevailing price and discount to NAV offers attractive value
for shareholders. The Company will therefore commence an open
market share buyback programme with immediate effect as we look to
deliver shareholder value and narrow the discount to NAV.
Board composition
I joined the Board in February this year, and succeeded Malcolm
Naish as Chairman at the March 2021 Annual General Meeting. On
behalf of the whole Board, the Investment Manager, and our
shareholders, I would like to thank Malcolm for his sterling
commitment and stewardship of the Company since launch in 2012.
The Board continues to review its own composition against best
practice and the need for orderly succession. The Board is
currently well advanced in a recruitment process to identify a new
director to replace Paul Craig, who has served as a director of the
Company for nine years and will be standing down in September this
year.
Outlook
The Company continues to operate in a complex regulatory
environment with a high level of political and media scrutiny
following the Grenfell Tower tragedy, and the Government's
leasehold reform programme, which, disappointingly, still lacks
areas of fundamental clarity. In spite of these uncertainties, the
Board and Investment Manager are highly focussed on demonstrating
operational excellence in these areas, whilst also ensuring
shareholder interests are protected as part of building safety and
leasehold reform proposals.
The portfolio continues to offer attractive characteristics due
to its long-dated and secure underlying cashflows, a high yield
premium compared with comparable fixed income assets and embedded
inflation hedging. Whilst the final leasehold reform legislation
could adversely impact values, it could equally have a more neutral
impact, and a possible Government imposed ban on future new ground
rents could potentially increase demand for a finite pool of
assets.
Despite these prevailing headwinds and the continuing challenges
presented by Beetham Tower which we must resolve, progress has been
made during the period responding to the changing regulatory
landscape and supporting our leaseholders.
It is true that some elements of regulation and the market are
outside of our control, and the Board has agreed clear objectives
with the Investment Manager to explore all options for delivering
optimum value for shareholders, leading up to the Continuation
Vote.
As your new Chairman, I expect to report further progress during
the rest of this financial year and beyond.
Barry Gilbertson
Chairman
28 July 2021
Investment Manager's Report
Protecting shareholders, and addressing building safety and
leasehold reform headwinds
Performance
The Group's Net Asset Value ("NAV") was GBP101.4 million or
104.5 pence per share ("pps") as at 31 March 2021, which compares
with GBP102.6 million or 105.7 pps at 30 September 2020. This
reflected a NAV decline of 1.2 pps or -1.1%, and a NAV total
return, including total dividends paid over the period of GBP1.92
million, of 0.7%. The movement in NAV is set out in the table
below:
Pence per
GBP million share
----------------------------------------------------------- ----------- ---------
NAV as at 30 September 2020 102.6 105.7
----------------------------------------------------------- ----------- ---------
Total distributable earnings (earnings before revaluation) 1.2 1.3
----------------------------------------------------------- ----------- ---------
Revaluation loss -0.5 -0.5
----------------------------------------------------------- ----------- ---------
Dividends paid -1.9 -2.0
----------------------------------------------------------- ----------- ---------
NAV as at 31 March 2021 101.4 104.5
----------------------------------------------------------- ----------- ---------
The independent portfolio valuation as at 31 March 2021 of
GBP123.6 million represented a small decrease in value of
GBP600,000 compared to 30 September 2020. The NAV was impacted by
the uncovered dividend, and by costs relating to Beetham Tower
totalling GBP230,000. Dividend cover excluding non-recurring costs
was 79%.
Income collection
As a result of Covid-19 and the potential financial impact on
our leaseholders, we have implemented more flexible revenue
collection processes including, for example, extending the length
and increasing the flexibility of the arrears process. Despite
these updated processes, and the restrictions of the Coronavirus
Act 2020, ground rent collection rates have remained robust.
Ancillary income has, however, been negatively impacted by lower
insurance commissions and lower consent fees as a result of the
subdued apartment transactional market. As a result of these
factors, ancillary income in the period was GBP383,712 compared to
GBP704,555 in the six months to 31 March 2020. Further background
to current insurance market conditions is set out below.
Market overview
The residential ground rent investment market continues to see a
steady number of transactions taking place at stable pricing, but
transaction volumes have remained low since 2018 due to leasehold
reform uncertainty. Market activity in the period was punctuated by
the January 2021 leasehold reform announcement and the
implementation of enhanced building safety legislation, however,
several participants continue to transact, funded by annuity
providers and pension schemes.
The market has polarised into institutional quality assets,
which are mainly well-constructed, free of building safety concerns
and provide index-linked ground rent income, and the rest.
Transactions have continued to occur at both ends of the market,
but investors are more cautious during the due diligence process,
with a particular focus on building safety and the affordability of
ground rents versus the underlying property value.
The depth of the investment market remains thin as most
institutional investors await the outcome of leasehold reform.
Liquidity is expected to remain limited until there is greater
clarity from Government about its proposed enfranchisement premium
calculation.
Commercial ground rents continue to benefit from operator and
investor demand. Owners of operational real estate are attracted by
the opportunity to release value from their portfolio, reduce their
cost of capital and increase balance sheet flexibility, whilst
investors are attracted to the long-term, low volatility, heavily
collateralised index-linked income.
Given the uncertainty surrounding residential ground rents and
shareholder feedback in relation to the size of the Company, we are
exploring complementary asset classes. Any changes to the Company's
strategy will be undertaken in consultation with shareholders.
Inflation & Retail Price Index reform
The success of the UK's vaccine rollout has contributed to the
easing of lockdown restrictions and boosted consumer confidence,
both of which are likely to lead to a rebound in spending. The Bank
of England ("BoE") expects the economy to expand by more than 7%
this year with extra Government spending and the extension of the
furlough scheme to September 2021 helping to limit job losses.
Inflation as measured by the Retail Prices Index ("RPI") rose
from 1.5% in March to 2.9% in April, on the back of rising energy
costs and the expiry of emergency cuts to VAT, and continued to
rise further in the following months to 3.9% in June.
Inflation over the BoE's Consumer Prices Index target of 2% is
likely to be tolerated during the pandemic recovery, which should
translate positively into the Company's income performance over the
medium term. 47% of the Company's income is due to be reviewed in
the next five years and 72% in the next ten, meaning the Company is
well positioned to capture this forecast inflation.
In 2019, the Government pledged to bring RPI in line with the
Consumer Prices Index including owner-occupiers' housing costs, a
measure called CPIH. Following a joint consultation with the UK
Statistics Authority to which we responded in detail, the
Government has announced that RPI will be aligned with CPIH no
earlier than February 2030.
Leasehold & building safety reform
Leasehold Reform
The Queen's Speech in May 2021 began the process of
crystallising leasehold reform following the Government's January
2021 reform announcement.
As clarified previously, the proposed abolition of "Marriage
Value" does not impact the Company's portfolio. However, if
enacted, the proposals to prescribe capitalisation rates (if below
market rate) and/or capping the treatment of ground rent in the
premium calculation at 0.1% of the property's value, could
facilitate a one-time transfer of wealth from private and pension
fund investors with legitimate interests in this sector, to
leaseholders. The unintended consequences of the current drafting
of these proposals may therefore be reduced consumer choice and the
creation of a financial hurdle for leaseholders.
We therefore welcome the creation of a working group with the
Royal Institute of Chartered Surveyors ("RICS") to consider the
important detail relating to enfranchisement premium calculation.
We support measures to improve the process for enfranchisement and
lease extension, saving time and expense for all parties, but
without negatively impacting the legitimate property interests of
landlords.
The Government must work collaboratively with industry to shape
the current legislative proposals and carefully consider how
sufficient compensation will be paid to landlords in line with the
peaceful enjoyment requirements of Article 1 of Protocol No. 1 of
the European Convention on Human Rights.
We are aligned with other institutional investors who want to
work collaboratively with the Government to protect consumers and
ensure a fair and sustainable residential leasehold property
sector. Legislative reform which disproportionally impacts one
group of consumers over another will likely lead to legal challenge
from stakeholders with legitimate interests in the sector and we
are therefore seeking legal advice on what steps the Company may
need to take to protect shareholders' interests.
Leasehold Reform (Ground Rent) Bill
The Bill, which is expected to be enacted in 2021, introduces
legislation requiring that ground rents in new residential long
leases have no financial value.
We and other stakeholders in the sector are concerned that
variations to existing leases, including non-statutory lease
extensions, may be captured in the proposed legislation. Under
current legislation, non-statutory lease extensions retaining the
current ground rent and review provisions, can provide leaseholders
with security of tenure at minimal cost. The unintended consequence
of the current drafting may therefore be reduced consumer choice
and the creation of a financial hurdle for leaseholders to extend
their leases.
Building safety reform
The draft Building Safety Bill ("BSB") implements many of the
initial recommendations from the Grenfell Tower Inquiry and the
Hackitt Review. It aims to introduce greater accountability and
strengthen the regulatory system, making it clear where the
responsibility for managing safety risks lies throughout the
design, construction and occupation of in scope residential
buildings.
As part of these reforms the Government is also seeking to amend
Landlord and Tenant legislation to include a new Building Safety
Charge to ensure more efficient and transparent recovery of costs
incurred when introducing fire safety measures. This new charge
will be separate from the service charge regime and will create a
mechanism to recover the costs of compliance with the proposed
legislation. The mechanism will however no longer extend to the
costs of remedying historic defects.
In April 2021, the Fire Safety Act 2021 received royal assent
following considerable debate in both Houses of Parliament. The act
amends the Regulatory Reform (Fire Safety) Order 2005 ("FSO"),
improving fire safety in multi-occupancy residential buildings, by
bringing within the scope of the FSO flat entrance doors and the
structure and exterior of buildings. An attempt to introduce a
provision which would have prevented the costs from being passed on
to leaseholders as a service charge was defeated.
In February 2021, the Housing Secretary provided GBP3.5 billion
of additional funding (GBP5.0 billion in total) for the Building
Safety Fund ("BSF") for residential buildings over 18 metres and
confirmed that the Government will fully fund the cost of replacing
unsafe cladding for all leaseholders in such buildings in England.
This additional funding supplements the Social Sector Cladding
Remediation Fund (GBP400m), the Private Sector Cladding Remediation
Fund (GBP400 million) and the BSF for non-ACM cladding (GBP1
billion).
For buildings under 18 metres, a long-term, low interest,
Government-backed loan scheme will be created with no leaseholder
needing to pay more than GBP50 per month towards the removal of
unsafe cladding. These announcements followed the establishment of
a GBP30 million Waking Watch Relief Fund ("WWRF") to pay for the
costs of installing alarm systems in buildings with unsafe
cladding.
We support the Government's steps to address the industry wide
cladding issues and specifically to limit the financial impact on
leaseholders. The current scope and level of funding is however
unlikely to be sufficient to resolve the systemic failure of
building standards which we have seen in the UK.
Portfolio Activity
It has been a period of significant operational activity across
the portfolio with specific focus on building safety, which has led
to increased non-recurring external management costs. Since the
start of the period, further incremental steps have been taken to
enhance risk and governance processes and deliver best-in-class
residential asset management. These included the following
actions;
-- External Wall Surveys ("EWS1") instructed for all qualifying
managed estate ("MEST") buildings.
-- Applications made to BSF on all qualifying MEST assets.
-- Intrusive, Type 4 Fire risk assessments instructed across the
MEST, with specific focus on buildings under 18 meters as we await
details of the Government's proposed loan scheme.
-- Provision of significantly enhanced information about
external walls to underwriters as part of 2021 insurance renewal
requirements for external walls.
-- Digitisation of documentation as early adopters of the anticipated BSB.
-- Regular engagement with residents' management company
directors in the non-managed estate.
-- Acceleration of 2021 and 2022 Fire Reinstatement Valuations-
Requirements enhanced by the Fire Safety Act 2021 and dovetailed
with wider insurance requirements.
-- Updated Property Management Agreements to enhance governance
and risk management and expand environmental, social and governance
("ESG") obligations.
The Company has made qualifying applications to both the BSF and
the Government's WWRF to protect leaseholders from the financial
implications of the building safety crisis. We continue to work
collaboratively with leaseholders, Government and other
stakeholders to remediate effected developments.
2021 insurance renewal
The 2021 insurance renewal was extremely challenging, mainly as
a result of restricted underwriting capacity within the residential
insurance market, resulting in significantly lower income to the
Company. This is due to a broad range of factors, including the
widely reported building safety issues and more frequent severe
weather events across the UK.
To provide value for leaseholders and satisfy increasingly
comprehensive insurance due diligence requirements, we are carrying
out extensive work to provide detailed building information on
specific external wall systems to obtain comprehensive policy
coverage on competitive terms. This significant workload has
required specialist external surveying support, which has
contributed to the rising non-recurring external management costs
referred to above.
The comprehensive information requirements of insurers follow
the concept of the Golden Thread, set out in the proposed BSB. The
information will assist our delivery of best-in-class residential
asset management, whilst satisfying increasingly demanding due
diligence requirements of ground rent investors.
Competition and Markets Authority
In September 2020 the Competition and Markets Authority ("CMA")
announced its intention to bring enforcement action against four
leading housing developers in relation to possible instances of
mis-selling and potential unfairness of certain leasehold contract
terms. The CMA also confirmed that, at that time and in line with
their prioritisation principles, it was not taking enforcement
action against the Company.
As part of its ongoing review of the leasehold sector, the CMA
has continued to investigate certain firms, such as investment
companies, which bought freeholds from these developers and have
continued to use the same leasehold contract terms. As noted in the
Chairman's Statement, in July 2021, the CMA announced that it had
agreed an undertaking with a large institutional owner of ground
rents that included removing onerous terms and compensation to
leaseholders.
We have sought to address the concerns highlighted by the CMA
through clear, publicly available information and policies relating
to the fair treatment of consumers.
The chart on page 6 of the 2021 Half Year Report demonstrates
the forecast ground rent income performance based on various levels
of RPI. RPI inflation over the five years to and including March
2021 was 2.6% per annum.
We have updated the Company's processes so that it will not seek
possession for rent arrears using the Housing Act 1988 under any
circumstance. The 2017 Asset Management Plan was extended
indefinitely by our participation in the Government's 2019 Public
Pledge for Leaseholders, which continues to offer residential
leaseholders the opportunity to convert their existing doubling
rent review mechanism to the lesser of inflation, as measured by
RPI, or doubling, while retaining their existing review cycle.
We will continue to monitor the CMA's ongoing investigation,
including the enforcement action cases, and will review the
Company's position in the light of any further developments.
Real estate portfolio
As at 31 March 2021 the portfolio comprised approximately 19,000
units across 400 assets valued at GBP123.6 million. The portfolio
produces ground rent income of GBP4.93 million per annum,
reflecting an average Years Purchase ("YP") of 25.1 or a gross
income yield of 4.0%. The Company completed no acquisitions or
disposals during the period.
The portfolio's weighted-average lease term as at 31 March 2021
was 342 years, with 93% of ground rent income subject to upwards
only increases, primarily index-linked reviews. This is set out in
the table below:
Valuation Valuation
at at
Ground Ground 31 March 31 March
Rent Income Rent Income 2021 2021
Review Mechanism (GBP000) (%) (GBPm) (%)
----------------- ------------- ------------- --------- ---------
Index-linked 3,529 71.6 93.4 75.6
----------------- ------------- ------------- --------- ---------
Doubling 746 15.1 17.3 14.0
----------------- ------------- ------------- --------- ---------
Fixed 330 6.7 7.5 6.0
----------------- ------------- ------------- --------- ---------
Flat (no review) 323 6.6 5.4 4.4
----------------- ------------- ------------- --------- ---------
4,928 100.0 123.6 100.0
----------------- ------------- ------------- --------- ---------
The rent review profile is shown in the table below, with 46.8%
of the ground rent income due for review over the next five
years:
Valuation Valuation
at at
Ground Ground 31 March 31 March
Rent Income Rent Income 2021 2021
Years To Next Review (GBP000) (%) (GBPm) (%)
-------------------- ------------ ------------ --------- ---------
0-5 2,309 46.8 61.5 49.8
-------------------- ------------ ------------ --------- ---------
5-10 1,247 25.3 31.3 25.3
-------------------- ------------ ------------ --------- ---------
10-15 798 16.2 19.3 15.6
-------------------- ------------ ------------ --------- ---------
15-20 132 2.7 3.2 2.6
-------------------- ------------ ------------ --------- ---------
Over 20 119 2.4 2.6 2.1
-------------------- ------------ ------------ --------- ---------
Flat (no review) 323 6.6 5.7 4.6
-------------------- ------------ ------------ --------- ---------
4,928 100.0 123.6 100.0
-------------------- ------------ ------------ --------- ---------
Assuming future RPI inflation of 2.6% per annum, ground rent
income should increase approximately 16% over the next five years
or an annualised figure of 3.0%; ahead of the RPI inflation
assumption. As mentioned above, RPI is to be aligned with CPIH no
earlier than February 2030.
The portfolio comprises residential apartments, houses and
commercial units with median ground rents as summarised below.
The median annual ground rent charge is GBP110 for houses and
GBP250 for apartments, excluding student accommodation assets.
Median
ground Ground Ground
rent rent rent Valuation Valuation
Unit Type GBP (GBP000) % GBPm %
--------------------- ------ -------- ------ --------- ---------
Apartments 250 3,397 68.9 81.5 66.0
--------------------- ------ -------- ------ --------- ---------
Houses 110 531 10.8 13.3 10.8
--------------------- ------ -------- ------ --------- ---------
Residential subtotal 250 3,928 79.7 94.8 76.8
--------------------- ------ -------- ------ --------- ---------
Student 401 826 16.8 24.5 19.8
--------------------- ------ -------- ------ --------- ---------
Commercial 340 174 3.5 4.3 3.4
--------------------- ------ -------- ------ --------- ---------
250 4,928 100.0 123.6 100.0
--------------------- ------ -------- ------ --------- ---------
The top 10 assets by value represent 28.7% of the total
portfolio valuation as at 31 March 2021.
Ground Ground
Rent Rent Valuation Valuation
Property Location (GBP000) % GBPm %
------------------ ---------------------- -------- ------ --------- ---------
Lawrence Street York 274 5.6 8.3 6.7
------------------ ---------------------- -------- ------ --------- ---------
Masshouse Plaza Birmingham 132 2.7 3.7 3.0
------------------ ---------------------- -------- ------ --------- ---------
One Park West Liverpool 150 3 3.5 2.8
------------------ ---------------------- -------- ------ --------- ---------
The Gateway Leeds 138 2.8 3.5 2.8
------------------ ---------------------- -------- ------ --------- ---------
Wiltshire Leisure
Village Royal Wootton Bassett 113 2.3 3.4 2.8
------------------ ---------------------- -------- ------ --------- ---------
Rathbone Market London 122 2.5 3.2 2.6
------------------ ---------------------- -------- ------ --------- ---------
First Street Manchester 98 2 2.9 2.4
------------------ ---------------------- -------- ------ --------- ---------
Ladywell Point Salford 131 2.7 2.6 2.1
------------------ ---------------------- -------- ------ --------- ---------
Richmond House Southampton 86 1.7 2.5 2.0
------------------ ---------------------- -------- ------ --------- ---------
Bezier Apartments London 80 1.6 1.9 1.5
------------------ ---------------------- -------- ------ --------- ---------
1,324 26.9 35.5 28.7
----------------------------------------- -------- ------ --------- ---------
The geographic spread of the portfolio as at 31 March 2021 is
shown in the chart on page 7 of the 2021 Half Year Report:
Ground Ground Valuation Valuation
Rent (GBP000) Rent % GBPm %
----------- ------------- ------ --------- ---------
North East 1,432 29.1 36.2 29.3
----------- ------------- ------ --------- ---------
North West 1,469 29.8 34.4 27.8
----------- ------------- ------ --------- ---------
Midlands 579 11.8 15.5 12.5
----------- ------------- ------ --------- ---------
London 599 12.2 14.6 11.8
----------- ------------- ------ --------- ---------
South West 509 10.3 14.3 11.6
----------- ------------- ------ --------- ---------
South East 270 5.5 6.8 5.5
----------- ------------- ------ --------- ---------
Wales 70 1.4 1.8 1.5
----------- ------------- ------ --------- ---------
4,928 100.0 123.6 100.0
----------- ------------- ------ --------- ---------
Sustainability and responsible investment
Sustainability and responsible investment are integral to our
investment process. We believe that by understanding, managing and
measuring the impact of Environmental, Social and Governance
("ESG") considerations, we will deliver enhanced long term returns
for shareholders as well as deliver a positive impact to the
environment and the communities where the Company is investing.
Schroders' sustainability programme is continually evolving,
reflecting progression with industry sustainability targets,
available technologies and the Company's specific regulatory
environment. Our approach looks to consistently improve the
sustainability credentials of the Company's portfolio. There will
be focus on sustainability in the next financial year with our
investment and asset management teams incorporating sustainability
and impact credentials into all activities.
This is evident in our initial response to the Covid-19
pandemic, where our focus was on the safety and wellbeing of
leaseholders and managing agents. More recently, the Company has
made qualifying applications to both the BSF and the Government's
WWRF to protect leaseholders from the financial implications of the
building safety crisis.
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,
in December 2020 we published our pathway to achieving net zero
carbon across all assets by 2050. The publication of this pathway
follows Schroders becoming a founding signatory to the Net Zero
Asset Managers Initiative in December 2020, as well as the Net Zero
Commitment Schroder Real Estate made in September 2019 as part of
the UK Better Buildings Partnership Climate Commitment. This
commitment is an extension of our sustainability programme which
includes targets to reduce energy consumption and greenhouse gas
emissions.
The approach taken by the Company will be tailored to the nature
of the asset class, recognising the limitations to improving assets
due to the legislative landscape surrounding landlord - residential
tenant relationships.
Finance
The Company holds a five-year, GBP25 million facility with
Santander UK plc comprising a GBP12.5 million term loan and a
GBP12.5 million revolving credit facility ("RCF").
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 is approximately
2.42% per annum.
At 31 March 2021, GBP19.5 million was drawn on the Company's RCF
and term loan combined. The Loan to Value ("LTV") on the charged
pool of assets is 30.6% versus a covenant of 50%, and GBP5.5
million of the facility remains undrawn. The Company has GBP68.0
million of uncharged assets as per the independent portfolio
valuation and the Group level LTV based on gross assets is 15.8%
against a restriction of 25%.
Loan
to Forward
Value Forward looking
LTV ICR ICR
Interest ("LTV") ratio Interest ratio looking ratio
Loan cover ICR
drawn rate(1) Ratio(2) covenant ratio(3) covenant ratio(4) covenant
GBP
Lender Facility million Maturity (%) (%) (%) (%) (%) (%) (%)
---------- --------- --------- --------- -------- --------- --------- --------- --------- --------- ---------
GBP12.5
million
term
loan
GBP12.5
million GBP12.5m Jan
Santander RCF GBP7.0m 2025 2.42% 30.6 50 401.1 270 420.6 270
---------- --------- --------- --------- -------- --------- --------- --------- --------- --------- ---------
(1) Total 'all in' interest rate based on the LIBOR rate
applicable to the RCF as at 31 March 2021, inclusive of
non-utilisation fee.
(2) Loan balance divided by Santander secured portfolio bank valuation.
(3) For the quarter preceding the Interest Payment Date ("IPD"),
((rental income received - void rates, void service charge and void
insurance)/interest paid).
(4) For the four quarters following the IPD, ((rental income to
be received - void rates, void service charge and void
insurance)/interest payable).
Outlook
We are operating in a complex regulatory environment, which has
increased the Company's running costs and reduced non-ground rent
income. These headwinds have been compounded by the uncertainty
relating to the Government's ongoing leasehold reform.
We are highly focussed on resolving the Beetham Tower litigation
and addressing building safety and leasehold reform risks by
working with Government and other stakeholders to deliver fair and
transparent reform that protects leaseholders in their homes and
supports the legitimate value of the Company's portfolio.
Despite these operational and regulatory challenges, the Company
has a strong balance sheet and a portfolio of uncapped,
predominantly index-linked assets which is well placed to benefit
from rising inflation expectations.
James Agar
Fund Manager
Schroder Real Estate Investment Management Limited
28 July 2021
Directors' Report
Principal risks and uncertainties
The principal risks and uncertainties associated 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 12 to 14 of the Company's
published Annual Report and Consolidated Financial Statements for
the year ended 30 September 2020.
These risks and uncertainties have not materially changed during
the six months ended 31 March 2021. 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 has had 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
reduction 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 described more fully in note 1 to the financial
statements. It has 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.
Barry Gilbertson
Chairman
28 July 2021
Condensed Consolidated Interim Statement of Comprehensive
Income
For the six months ended 31 March 2021
Restated*
Unaudited Unaudited Audited
6 months
to 6 months year ended
31 March to 31 March 30 September
2021 2020 2020
Note GBP GBP GBP
------------------------------------ ---- ----------- ------------ ------------
Continuing operations
Revenue 2 2,853,484 3,130,679 6,066,125
------------------------------------ ---- ----------- ------------ ------------
Operating expenses 3 (1,303,519) (1,671,882) (6,775,027)
Profit on sale of investment
properties 28,180 879 315,270
Net revaluation loss on investment
properties 5 (516,220) (358,545) (537,301)
------------------------------------ ---- ----------- ------------ ------------
Operating profit/(loss) 1,061,925 1,101,131 (930,933)
------------------------------------ ---- ----------- ------------ ------------
Analysed as
Operating profit before exceptional
items 1,291,822 1,700,149 3,520,937
Disposal/litigation costs (229,897) (599,018) (1,551,870)
Provision for remedial works - - (2,900,000)
------------------------------------ ---- ----------- ------------ ------------
Operating profit/(loss) 1,061,925 1,101,131 (930,933)
------------------------------------ ---- ----------- ------------ ------------
Finance income 462 9,239 16,469
Finance expenses 4 (289,171) (353,144) (671,739)
------------------------------------ ---- ----------- ------------ ------------
Net finance expense (288,709) (343,905) (655,270)
------------------------------------ ---- ----------- ------------ ------------
Profit/(loss) before tax 773,216 757,226 (1,586,203)
Taxation - - -
------------------------------------ ---- ----------- ------------ ------------
Profit/(loss) after tax and total
comprehensive income/(loss) 773,216 757,226 (1,586,203)
------------------------------------ ---- ----------- ------------ ------------
Earnings/(losses) per share
Basic 8 0.80p 0.78p (1.64p)
Diluted 8 0.80p 0.78p (1.64p)
------------------------------------ ---- ----------- ------------ ------------
The accompanying notes on pages 13 to 19 of the 2021 Half Year
Report form an integral part of the unaudited condensed
consolidated interim financial statements.
*See note 1 Exceptional items
Condensed Consolidated Interim Statement of Financial
Position
As at 31 March 2021
Unaudited Unaudited Audited
31 March 31 March 30 September
2021 2020 2020
Note GBP GBP GBP
----------------------------------- ---- ------------ ------------ ------------
Assets
Non current assets
Investment properties 5 123,628,000 122,635,000 124,190,000
----------------------------------- ---- ------------ ------------ ------------
123,628,000 122,635,000 124,190,000
----------------------------------- ---- ------------ ------------ ------------
Current assets
Trade and other receivables 2,532,323 2,558,806 1,852,415
Interest rate derivative contracts 7 27,380 21,888 14,158
Cash and cash equivalents 1,534,815 1,480,366 2,435,758
----------------------------------- ---- ------------ ------------ ------------
4,094,518 4,061,060 4,302,331
----------------------------------- ---- ------------ ------------ ------------
Total assets 127,722,518 126,696,060 128,492,331
----------------------------------- ---- ------------ ------------ ------------
Liabilities
Non current liabilities
Financial liabilities measured
at amortised cost 6 (19,051,283) (14,931,625) (18,991,454)
Provision for liabilities (2,900,000) - (2,900,000)
----------------------------------- ---- ------------ ------------ ------------
(21,951,283) (14,931,625) (21,891,454)
Current liabilities
Trade and other payables (4,360,635) (4,942,166) (4,042,765)
----------------------------------- ---- ------------ ------------ ------------
Total liabilities (26,311,918) (19,873,791) (25,934,219)
----------------------------------- ---- ------------ ------------ ------------
Net assets 101,410,600 106,822,269 102,558,112
----------------------------------- ---- ------------ ------------ ------------
Equity
Share capital 10 48,503,248 48,503,248 48,503,248
Retained earnings 52,134,136 57,561,795 55,641,067
Profit/(loss) for the financial
year 773,216 757,226 (1,586,203)
----------------------------------- ---- ------------ ------------ ------------
Total equity 101,410,600 106,822,269 102,558,112
----------------------------------- ---- ------------ ------------ ------------
Net asset value per ordinary
share
Basic 9 104.5p 110.1p 105.7p
Diluted 9 104.3p 109.7p 105.5p
----------------------------------- ---- ------------ ------------ ------------
The unaudited financial statements on pages 9 to 19 of the 2021
Half Year Report were approved and authorised for issue by the
Board of Directors and signed on its behalf by:
Barry Gordon Gilbertson William Edward John Holland
Director Director
28 July 2021
Ground Rents Income Fund plc
Company registered number: 08041022
The accompanying notes on pages 13 to 19 of the 2021 Half Year
Report form an integral part of the unaudited condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statement of Cash Flows
For the six months ended 31 March 2021
Unaudited Unaudited Audited
6 months 6 months Year ended
to 31 March to 31 March 30 September
2021 2020 2020
Note GBP GBP GBP
-------------------------------------- ---- ----------- ----------- ------------
Cash flows from operating activities
Cash generated from operations 12 1,192,205 2,146,340 2,671,395
Interest paid on bank loan and
bank charges (246,854) (311,451) (536,077)
-------------------------------------- ---- ----------- ----------- ------------
Net cash generated from operating
activities 945,351 1,834,889 2,135,318
-------------------------------------- ---- ----------- ----------- ------------
Cash flows from investing activities
Interest received 462 9,215 16,445
Receipts from the sale of investment
properties 73,972 13,856 347,203
Purchase of investment properties - (96,580) (1,861,466)
-------------------------------------- ---- ----------- ----------- ------------
Net cash generated from/(used
in) investing activities 74,434 (73,509) (1,497,818)
-------------------------------------- ---- ----------- ----------- ------------
Cash flows from financing activities
Bank loan receipts - - 4,000,000
Bank loan payments - (4,000,000) (4,000,000)
Debt issue costs - (417,387) (417,387)
Purchase of interest rate cap - (50,650) (50,650)
Dividends paid to shareholders 11 (1,920,728) (1,949,831) (3,870,559)
-------------------------------------- ---- ----------- ----------- ------------
Net cash used in financing activities (1,920,728) (6,417,868) (4,338,596)
-------------------------------------- ---- ----------- ----------- ------------
Net decrease in cash and cash
equivalents (900,943) (4,656,488) (3,701,096)
-------------------------------------- ---- ----------- ----------- ------------
Opening cash and cash equivalents 2,435,758 6,136,854 6,136,854
-------------------------------------- ---- ----------- ----------- ------------
Closing cash and cash equivalents 1,534,815 1,480,366 2,435,758
-------------------------------------- ---- ----------- ----------- ------------
The accompanying notes on pages 13 to 19 of the 2021 Half Year
Report form an integral part of the unaudited condensed
consolidated interim financial statements.
Condensed Consolidated Interim Statement of Changes in
Equity
For the period ended 31 March 2021
Share
Share premium Retained
capital account earnings Total
GBP GBP GBP GBP
-------------------------------- ---------- ------------ ----------- -----------
At 1 October 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 (45,884,305) 45,884,305 -
Dividends paid - - (1,949,831) (1,949,831)
-------------------------------- ---------- ------------ ----------- -----------
At 31 March 2020 (unaudited) 48,503,248 - 58,319,021 106,822,269
-------------------------------- ---------- ------------ ----------- -----------
Comprehensive loss
Loss for the period - - (2,343,429) (2,343,429)
-------------------------------- ---------- ------------ ----------- -----------
Total comprehensive loss - - (2,343,429) (2,343,429)
-------------------------------- ---------- ------------ ----------- -----------
Transactions with owners
Dividends paid - - (1,920,728) (1,920,728)
-------------------------------- ---------- ------------ ----------- -----------
At 30 September 2020 48,503,248 - 54,054,864 102,558,112
-------------------------------- ---------- ------------ ----------- -----------
Comprehensive income
Profit for the period - - 773,216 773,216
-------------------------------- ---------- ------------ ----------- -----------
Total comprehensive income - - 773,216 773,216
-------------------------------- ---------- ------------ ----------- -----------
Transactions with owners
Dividends paid - - (1,920,728) (1,920,728)
-------------------------------- ---------- ------------ ----------- -----------
At 31 March 2021 (unaudited) 48,503,248 - 52,907,352 101,410,600
-------------------------------- ---------- ------------ ----------- -----------
The accompanying notes on pages 13 to 19 of the 2021 Half Year
Report form an integral part of the unaudited condensed
consolidated interim financial statements.
Notes to the Condensed Consolidated Financial Statements
For the six months ended 31 March 2021
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 2021 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 2020 were
approved by the Board of Directors on 2 March 2021 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. 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 2020.
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 2020 and in accordance with International Accounting
Standards in conformity with the requirements of the Companies Act
2006 ("IFRS") and the applicable legal requirements of the
Companies Act 2006. The Group's consolidated financial statements
for the year ended 30 September 2020 refer to new Standards and
Interpretations, none of which had a material impact on these
condensed consolidated interim financial statements.
Basis of preparation
These condensed consolidated interim financial statements are
for the six months ended 31 March 2021 and have been prepared under
the historical cost convention, as modified by the revaluation of
investment properties and derivative financial instruments, which
have been measured at fair value. The functional and presentational
currency is sterling.
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, potential resulting falls in property
valuations, and the future implications of potential leasehold
reform. The Investment Manager has prepared detailed forward
looking cash flow forecasts and third party debt covenant
calculations, in particular the Loan to Value covenant and interest
cover ratios.
The Board and Investment Manager are closely monitoring the
potential ongoing impact the Covid-19 pandemic may have on the
Company's rental collection, which has remained strong during the
period and to the date of this report, and the requirement to
distribute dividends in accordance with REIT regulations. The
Company's dividend policy will be kept under constant review to
ensure the Company's liquid resources will be sufficient to cover
any working capital requirements. Further details can be found
within the Chairman's Statement on page 2 of the 2021 Half Year
Report and the Directors' Report on page 8 of the 2021 Half Year
Report.
The Group holds a loan facility with Santander. Half of the
facility is a GBP12.5 million fixed rate loan attracting a total
interest rate of 2.68% per annum. The Group also holds a GBP12.5
million revolving credit facility ("RCF") with Santander. As at the
period end, the undrawn capacity was GBP5.5 million. The RCF is an
efficient and flexible source of funding at an interest rate of
1.85% per annum plus three month LIBOR 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 condensed consolidated
interim financial statements.
In addition to the matters described above, in arriving at their
conclusion the Directors have also considered:
-- The current cash balance at 26 July 2021 of approximately GBP1.7 million.
-- The nature and timing of the Group's income and expenses;
-- Obligations for remedial works within the Group; and
-- That the Investment Manager continues to implement its
business continuity plans to help ensure the safety and well-being
of its staff thereby retaining the ability to maintain the Group's
business operations.
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 considers it is appropriate
to adopt the going concern basis in preparing the Group condensed
consolidated interim financial statements.
Use of estimates and judgements
The preparation of interim financial statements in accordance
with International Accounting Standards in conformity with the
requirements of the Companies Act 2006, 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 significant estimates are:
-- Carrying value of investment properties
Investment properties, as disclosed in note 5, 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.
-- Provision for repair works
The provision for the liability for the works required to repair
investment properties represents a shortfall between estimated
future payments and future receipts. The evaluation included
analysis of inputs and outputs such as: estimates for repair works,
and the probability and sum of expenditure recovery under leasehold
agreements and from other third parties. Further details can be
found in note 14 Provisions for liabilities.
-- Expected credit loss
IFRS 9 requires an impairment review to be made for certain
financial assets held on the Group's balance sheet using a
forward-looking expected credit loss model. Where any impairment is
required to be made, appropriate recognition is required within the
Group financial statements, together with appropriate
disclosures.
Exceptional items
The Group's Condensed Consolidated Interim Statement of
Comprehensive Income separately identifies exceptional items. Such
items are those that in the Directors' judgement are one-off in
nature and need to be disclosed separately by virtue of their size
or incidence. In determining whether an item should be disclosed as
an exceptional item, the Directors consider quantitative as well as
qualitative factors such as frequency, predictability of occurrence
and significance. This is consistent with the way the financial
performance is managed by the Investment Manager and reported to
the Directors. Disclosing exceptional items separately provides
additional understanding of the performance of the Group.
The Directors have retrospectively applied the policy to the
period ended 31 March 2020 (as presented within the restated
Condensed Consolidated Interim Statement of Comprehensive Income
and note 3 Operating expenses) and reclassified the GBP0.6 million
of period costs from operating expenses to exceptional items. This
enables the reader to identify the costs incurred in all financial
periods associated with the litigation in connection with and
expected disposal of Beetham Tower, Manchester, a mixed use
residential and hotel asset owned by the Group subsidiary, NWGR.
This follows the High Court finding in October 2020 against NWGR in
its application to vary the remedial work to the building and
subsequent requirement to recognise the future liability for the
remedial solution. Apart from this reclassification of exceptional
costs within the Condensed Consolidated Interim Statement of
Comprehensive Income, there is no other impact on the comparative
consolidated financial statements of the Group. Further details can
be found in note 3 Operating expenses and note 14 Provisions for
liabilities, and the year-end financial report.
2. Segmental information
The Directors are of the opinion that the Group is engaged in a
single segment of business, being the collection of ground rent
from its investment properties. The Group receives some ancillary
income to which it is entitled as a result of its position as
property freeholder or head leaseholder.
Schroders acts as adviser to the Board of Directors, who then
make management decisions following its recommendations. As such,
the Board is considered to be the chief operating decision maker. A
set of consolidated IFRS information is provided to the Board on a
quarterly basis.
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2021 2020 2020
GBP GBP GBP
----------------------------------------- --------- --------- ------------
By activity:
Ground rent income accrued in the period 2,469,772 2,426,124 4,855,924
Other income falling due within the
period 383,712 704,555 1,210,201
----------------------------------------- --------- --------- ------------
2,853,484 3,130,679 6,066,125
----------------------------------------- --------- --------- ------------
All income of the Group is derived from activities carried out
within the United Kingdom. The Group is not reliant on any one
property or group of connected properties for the generation of its
revenues.
3. Operating expenses
Restated*
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2021 2020 2020
GBP GBP GBP
---------------------------------------- --------- --------- ------------
Directors' salaries 70,977 66,606 93,772
Auditors' remuneration 105,981 73,695 145,000
Management fees 517,971 542,306 1,112,582
Professional fees excluding exceptional
items 185,023 220,875 600,398
Valuation fees 28,772 16,766 47,262
Insurance 12,072 11,269 49,517
Registrar fees 21,877 36,884 72,216
Sponsor fees 28,960 20,704 65,014
Listing fees 21,884 19,841 19,168
Public relations and printing costs 6,487 12,900 29,020
Other operating expenses 73,618 51,018 89,208
---------------------------------------- --------- --------- ------------
Operating expenses before exceptional
items 1,073,622 1,072,864 2,323,157
---------------------------------------- --------- --------- ------------
Disposal/litigation costs 229,897 599,018 1,551,870
Provision for remedial works - - 2,900,000
---------------------------------------- --------- --------- ------------
Total operating expenses 1,303,519 1,671,882 6,775,027
---------------------------------------- --------- --------- ------------
*See note 1 Exceptional items. Litigation costs have been
incurred in connection with the ongoing litigation within a wholly
owned subsidiary NWGR. The Group continues to incur disposal costs
associated with Beetham Tower, the investment property held by
NWGR. The provision for remedial works is a provision under IAS 37
"Provisions, Contingent Liabilities and Contingent Assets", again
in connection with NWGR.
4. Finance expenses
Unaudited Unaudited Audited
6 months 6 months
to to Year ended
31 March 31 March 30 September
2021 2020 2020
GBP GBP GBP
-------------------------------------- --------- --------- ------------
Loan interest 232,255 274,059 498,437
Amortisation of loan arrangement fees
and bank charges 70,138 50,323 136,810
-------------------------------------- --------- --------- ------------
302,393 324,382 635,247
-------------------------------------- --------- --------- ------------
Net change in fair value of financial
instruments (13,222) 28,762 36,492
-------------------------------------- --------- --------- ------------
289,171 353,144 671,739
-------------------------------------- --------- --------- ------------
Total capitalised loan arrangement and associated professional
fees of GBP0.45 million at the period end date are to be amortised
over the remaining loan term to January 2025. See note 6 for
further details.
5. Investment properties
Fair value GBP
--------------------------------------------------------- -----------
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
--------------------------------------------------------- -----------
Additions 1,760,666
Disposals (26,910)
Net loss recognised in statement of comprehensive income (178,756)
--------------------------------------------------------- -----------
At 30 September 2020 (audited) 124,190,000
--------------------------------------------------------- -----------
Disposals (45,780)
Net loss recognised in statement of comprehensive income (516,220)
--------------------------------------------------------- -----------
At 31 March 2021 (unaudited) 123,628,000
--------------------------------------------------------- -----------
The value of each of the properties has been assessed in
accordance with the relevant parts of the Royal Institution of
Chartered Surveyors Valuation - Global Standards 2020,
incorporating the IVSC International Valuations Standards (the "Red
Book Global Standards"), which is consistent with IFRS 13
measurement requirements. The RICS Red Book provides two
definitions of fair value. The one appropriate for the IFRS basis
of accounting is as follows:
"The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date".
The commentary under VPS 4 (1.5.3) of the Red Book states that,
for most practical purposes, fair value is consistent with the
concept of market value and there is no difference between the
two.
The Group's investment property was revalued at 31 March 2021 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. The
valuation of ground rent investment properties takes into account
external factors such as interest rates and the availability of
other fixed rate investments in the market.
The valuation of a ground rent investment property is
principally dependent on the aggregate income generated, and the
potential for this to increase in future through rent reviews. The
most valuable ground rent investment property assets are those
which are RPI linked with reviews every 10 years or less. Other
types of ground rents are 'doubling' where the rent doubles at a
fixed time interval and 'fixed increases' where the uplifts are
fixed and detailed in the lease. The least attractive ground rents
are those which are flat with no future rental increases which
attract the lowest Years Purchase ("YP") multiple and the highest
yield.
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
2021 2020 2020
GBP GBP GBP
-------------------------------------- ---------- ---------- ------------
Borrowings repayable over one year 19,500,000 15,500,000 19,500,000
Capitalised loan arrangement fees net
of amortisation (448,717) (568,375) (508,546)
-------------------------------------- ---------- ---------- ------------
19,051,283 14,931,625 18,991,454
-------------------------------------- ---------- ---------- ------------
In January 2020, the 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
approximately 2.68% per annum, payable quarterly. The remaining
GBP7 million is held within a coterminous GBP12.5 million revolving
credit facility ("RCF"), which carries an interest rate per annum
of 1.85% plus three month LIBOR, 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 2021, 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 2021 the actual LTV over secured assets was 30.6% with
headroom of GBP24.6 million and interest cover was 401.1% with
headroom of GBP0.6 million.
7. Derivative financial instruments
The Company has an interest rate cap in place purchased for
GBP50,650 from Banco Santander SA 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 2021 the fair value of the interest cap was
GBP27,380 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
2021 2020 2020
GBP GBP GBP
----------------------------------------- --------- --------- ------------
Earnings/(losses) attributable to equity
shareholders of the Company 773,216 757,226 (1,586,203)
----------------------------------------- --------- --------- ------------
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 97,006,497 97,006,497
Basic earnings/(losses) per share 0.80p 0.78p (1.64p)
------------------------------------ ---------- ---------- ----------
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. There was no potential dilutive impact of
warrants at the beginning nor at the end of the period.
Diluted earnings/(losses) per share 0.80p 0.78p (1.64p)
------------------------------------ ----- ----- -------
9. Net asset value per ordinary share
The NAV calculates the net asset value per share in the
financial statements. The diluted NAV per ordinary share is
calculated after assuming the exercise of all outstanding warrants
at GBP1, which would increase the aggregated NAV by
GBP4,423,876.
Unaudited Unaudited Audited
31 March 31 March 30 September
2021 2020 2020
GBP GBP GBP
----------------------------------- ----------- ----------- ------------
Net assets 101,410,600 106,822,269 102,558,112
----------------------------------- ----------- ----------- ------------
Number Number Number
----------------------------------- ----------- ----------- ------------
Number of ordinary shares in issue 97,006,497 97,006,497 97,006,497
Outstanding warrants in issue 4,423,876 4,423,876 4,423,876
----------------------------------- ----------- ----------- ------------
Diluted number of shares in issue 101,430,373 101,430,373 101,430,373
----------------------------------- ----------- ----------- ------------
NAV per ordinary share - basic 104.5p 110.1p 105.7p
NAV per ordinary share - diluted 104.3p 109.7p 105.5p
----------------------------------- ----------- ----------- ------------
10. Share capital
Unaudited Unaudited Audited
31 March 31 March 30 September
2021 2020 2020
------------------------------------ ----------- ---------- ---------- ------------
Allotted, called up and fully paid:
Ordinary shares of GBP0.50 each Number 97,006,497 97,006,497 97,006,497
Amount GBP 48,503,248 48,503,248 48,503,248
------------------------------------------------ ---------- ---------- ------------
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.
At 31 March 2021 there were 4,423,876 warrants in issue.
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
2021 2020 2020
GBP GBP GBP
----------------------------------------- --------- --------- ------------
Dividends declared by the Company during
the period:
Dividends paid 1,920,728 1,949,831 3,870,559
----------------------------------------- --------- --------- ------------
Analysis of dividends by type:
Interim PID dividend of 1.02p per share - 989,467 989,467
Interim PID dividend of 0.99p per share - 960,364 960,364
Interim PID dividend of 0.99p per share - - 960,364
Interim PID dividend of 0.99p per share - - 960,364
Interim PID dividend of 0.99p per share 960,364 - -
Interim PID dividend of 0.99p per share 960,364 - -
----------------------------------------- --------- --------- ------------
1,920,728 1,949,831 3,870,559
----------------------------------------- --------- --------- ------------
Since the period ended 31 March 2021, the Company announced an
interim PID dividend of 0.99p per share (GBP960,364), with an
ex-dividend date of 6 May 2021. It was paid on 28 May 2021 to
shareholders on the register as at 7 May 2021.
12. Cash generated from operations
Unaudited Unaudited Audited
6 months 6 months
to to year ended
31 March 31 March 30 September
2021 2020 2020
GBP GBP GBP
------------------------------------------- --------- ----------- ------------
Reconciliation of profit/(loss) before
tax to cash generated from operations
Profit/(loss) before tax 773,216 757,226 (1,586,203)
------------------------------------------- --------- ----------- ------------
Adjustments for:
Net revaluation loss on investment
properties 516,220 358,545 537,301
Profit on sale of investment properties (28,180) (879) (315,270)
Net finance expenses 288,709 343,905 655,270
Exceptional items - provision for remedial
works - - 2,900,000
------------------------------------------- --------- ----------- ------------
Operating cash flows before movements
in working capital 1,549,965 1,458,797 2,191,098
Movements in working capital:
Increase in trade and other receivables (679,908) (1,448,405) (742,013)
Increase in trade and other payables 322,148 2,135,948 1,222,310
------------------------------------------- --------- ----------- ------------
Cash generated from operations 1,192,205 2,146,340 2,671,395
------------------------------------------- --------- ----------- ------------
13. Related party transactions
Transactions between the Company and its subsidiaries which are
related parties, have been eliminated on consolidation.
Schroder Real Estate Investment Management Limited ("Schroders")
is deemed to be a related party in that it acted as the Investment
Manager.
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
2021 2020 2020
GBP GBP GBP
------------------------------------- --------- --------- ------------
Investment management fee payable to
Schroders 517,971 542,306 1,112,582
------------------------------------- --------- --------- ------------
14. Provisions for liabilities
In October 2020, NWGR lost its application to vary an order
handed down by the High Court, for restoring its investment
property to its original condition (see note 24 of the financial
statements for the year ended 30 September 2020). At the year end
date, the Directors introduced a provision of GBP2.9 million that
reflects the increase in the estimate of the cost of remedial works
to be met by NWGR.
The provision of GBP2.9 million reflects tendered costs for the
remedial works ordered by the High Court of approximately GBP8.9
million, reduced by amounts that will be payable by leaseholders
and recoveries from third parties.
The provision of costs reflects the best estimate of the net
cost to NWGR of fulfilling the contract, reflecting all estimated
costs and recoveries. The Directors have estimated the future
recovery of costs from leaseholders and third parties based on
legal advice received and obligations under leasehold
contracts.
15. Other financial commitments and contingencies
The Company acts as guarantor for the payment of annual
insurance premiums through credit facilities for a number of
insured investment properties within its portfolio, where annual
premiums are over GBP30,000 per annum. Premiums guaranteed total
approximately GBP1.3 million at the period end date and the Company
expects all premiums to be met by the leaseholders in line with
lease terms.
Damages associated with the judgement against NWGR 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 the Group for the possible
obligations of these damages as these were not reliably measurable
at the period end.
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END
IR GZGZNVRNGMZM
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July 29, 2021 02:00 ET (06:00 GMT)
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