Proposed amendment of Investment Policy

5 October 2020

Alternative Income REIT PLC

("AIRE", the "Company" or the "Group")

Proposed amendment of Investment Policy

The Board of Directors of Alternative Income REIT PLC (ticker: AIRE), the owner of a diversified portfolio of UK commercial property assets predominantly let on long leases, today sets out the background to and summary of proposed amendments to its investment policy which are subject to consultation with shareholders.

As stated in the Company's trading update on 6 August 2020, the Board has been working closely with its investment adviser, M7 Real Estate Limited ("M7"), to identify a clear path to both expand the Company and enhance its performance. Since this announcement, rent collections have been very encouraging and a further announcement in relation to the September quarter will be made shortly.

Background

As announced on 7 August 2019, the Board received, as part of last year's strategic review, several proposals from various parties, which it reviewed carefully in consultation with the Company's then financial adviser. Following meetings with each of these parties and consultation with major shareholders, the Board concluded that none of the proposals reflected the true value of the Group and were not in the best interests of shareholders.

The Board also considered the sale of the assets within the Company's portfolio in order to return the net proceeds to shareholders. However, the Board concluded that this would not deliver best value to its shareholders on account of a combination of the property disposal costs and the significant costs that would be incurred on early repayment of the Company's loan facility, which would in aggregate represent a material sum.

The Group has a fully utilised £41.0 million loan facility with Canada Life Investments with a fixed interest rate of 3.19%, which is repayable on 20 October 2025. As noted above, prior to this date, the loan terms include significant early repayment fees, typical of fixed rate facilities. Furthermore, the loan terms also state that, where the net proceeds from any sale are not redeployed into new investments, then the lender can require full repayment from the net proceeds from the asset sales until both its debt has been repaid and the early repayment penalties have been settled ahead of shareholders receiving any benefit from the net proceeds from disposals.

In addition, during the time it would take for the Company to sell its assets and pay back both the debt and the early repayment penalties to the lender prior to distributing the remaining net proceeds, shareholders would also not benefit from the c.2.7% spread between the Company's passing rental income and the fixed cost of its debt, which would significantly reduce the ability to maintain dividends at previous levels and negatively impact shareholder returns.

The Board therefore remains of the view that the potential sale of all the Company's assets would not deliver best value to its shareholders.

Recent actions

Since the conclusion of last year's strategic review, the Company has undergone a transformation:

·     The Board has concentrated on reducing the Group's expenditure in order to achieve a level of net income that will cover its dividend with cash earnings, in line with the original target at the time of the IPO.

·     The Company made the necessary changes to its support team without major dislocation or interruption achieving a reduction in its total overhead of almost 50% on an annualised basis during the final quarter of the year ended 30 June 2020, after excluding the one-off costs as a result of the transfer to new service providers.

·    The principal change, following an extensive search involving a number of managers, has been the appointment of M7 as the Company's Investment Adviser from 14 May 2020. So far, the change been delivered seamlessly and at significantly lower cost.

·    M7 is providing the Group with access to significant expertise and resource as well as a substantial stream of potential investment opportunities.

Following M7's appointment, the investment adviser has completed a review of the Company's portfolio and an in-depth analysis of each of the Group's assets. The early result of this analysis includes the recent sale of Wet 'n' Wild Water Park, North Shields, at a 9.7% uplift to purchase price and 12.4% premium to latest book value. In addition, asset management initiatives are underway at several of the Group's other assets.

Following this review, the Board invited M7 to appraise the Company's investment policy and to make recommendations to update the Company's investment strategy with a view to enhancing shareholder value.

Attractive market opportunities

M7 believes that a greater emphasis should be placed by the Company on benefiting from a rapidly changing property environment in which the quality, use and flexibility of physical assets are expected to be of paramount importance. M7 is identifying opportunities at an attractive entry yield that are expected to benefit from the significant and accelerating movement away from high street retail to online shopping, a substantial shift in sentiment in the business space market and changes in the credit environment.

In this regard, M7 has identified opportunities for the Company which it believes will deliver higher value and earnings, strong and secure cashflow and contribute to a stable and growing dividend whilst maintaining a relatively long weighted average unexpired lease term ("WAULT"), albeit not as long as envisaged at the Company's IPO in 2017. As a result, M7 is recommending to the Board some amendments to the investment policy to allow the Company to reposition the portfolio and take advantage of the opportunities that M7 believes exist and that it expects will achieve enhanced value for shareholders.

Background to the Company's existing Investment Policy

The Company was launched in 2017 with a focus on constructing a diversified portfolio of assets in the alternative and specialist sectors with a WAULT of 18 years and inflation linkage on at least 85% of the portfolio's gross passing rent.

The strategy of buying smaller lot sized assets on very long let leases is seeing increasing competition and has resulted in acquisitions that, whilst meeting the Company's investment policy, provide limited scope for rental growth or asset management led value enhancement. Indeed, in a constantly changing landscape, many of the key features of investment quality, notably tenant credit, cannot be guaranteed to remain unchanged. Therefore, from a valuation standpoint, M7 believes that the practice of buying very long leases in an increasingly competitive market is expected to lead to further premium pricing and will not necessarily deliver best value for shareholders.  Whereas a more balanced approach between security of tenure and asset management led opportunity in sectors that are increasingly benefiting from ongoing market shifts is expected to achieve more attractive income returns and capital growth.

Although the income from the portfolio, as at 30 June 2020, was 88% inflation linked to the Retail Price Index ("RPI") or Consumer Price Index ("CPI"), this focus limits the investment opportunities available to the Company and potentially limits its growth. As interest rates have declined significantly in recent times, the demand for inflation linked real estate income has increased to the point where potential buyers far outweigh sellers. The momentum towards higher prices for index linked leases is very evident and, when aligned to a tendency amongst landlords to extract longer leases from less creditworthy tenants, has taken pricing to unsustainable levels. These trends have emerged in a market in which a cohort of investors, notably open-ended funds, have also driven prices upwards.

The current investment policy was constructed with a detailed set of restrictions, including specific sector exposures. Many of these were required to differentiate the Company's investment policy from that of other investment vehicles managed by the Company's former investment manager, AEW UK Investment Management LLP. The Board believes that, in light of this, the ongoing changes to the property markets and the opportunities that M7 has identified, that the Company will be best placed to deliver significant added value to shareholders with less restrictive investment parameters.

Proposed amendments to Investment Policy

The Board is consulting with the Company's shareholders on certain proposed amendments to the investment policy of the Company in order to ensure that M7 can take advantage of current market opportunities, the most significant being:

·     A reduction in the minimum WAULT of the portfolio to 12 years;

·     Removal of the requirement for leases representing 85% of gross passing rent to be linked to inflation (RPI or CPI); and

·    Removal of the restrictions relating to permitted sectors, including the differentiation between traditional and non-traditional sectors.

It is not proposed to make any other material changes to the investment policy in order to ensure that the Company can invest and manage its assets with the object of spreading risk.  

Subject to the feedback from shareholders, it is intended that the Company will seek the relevant regulatory approvals and formal shareholder approval to amend the Company's investment policy in due course.

Future Growth

In order to take full advantage of these opportunities, and in line with the aspirations outlined above, the Board is also consulting with existing and potential new shareholders on the level of support for a fundraising, at the appropriate juncture.

ENQUIRIES

The Company's LEI is 213800MPBIJS12Q88F71.

Further information on Alternative Income REIT plc is available at www.alternativeincomereit.com¹

NOTES

Alternative Income REIT PLC aims to generate a sustainable, secure and attractive income return for shareholders from a diversified portfolio of UK property investments, predominately in alternative and specialist sectors. The majority of the assets in the Group's portfolio are let on long leases which contain inflation linked rent review provisions.

The Company's investment adviser is M7 Real Estate Limited ("M7"). M7 is a leading specialist in the pan-European, regional, multi-tenanted real estate market. Majority owned by its senior managers, it has over 200 employees in 14 countries across Europe. The team manages over 835 properties with a value of circa €5.1 billion.

¹Neither the content of the Company's website, nor the content on any website accessible from hyperlinks on its website or any other website, is incorporated into, or forms part of, this announcement nor, unless previously published on a Regulatory Information Service, should any such content be relied upon in reaching a decision as to whether or not to acquire, continue to hold, or dispose of, securities in the Company.