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.

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

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), 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 hours¹ 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 hours¹ 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

------------------ 

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 

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