Ground Rents Income Fund (GRIO) EGM Proposals
April 2023
Overview
GRIO's strategy is to invest in a diversified portfolio of residential and commercial freeholds and head leases offering the potential for income generation from ground rents that are hedged against inflation and for capital growth from active asset management.
The residential ground rents sector is currently subject to uncertainty relating to leasehold and building safety reform. The Investment Manager’s current strategy is focused on mitigating the risks and consequences associated with this. The portfolio benefits from a highly-diversified, long-term portfolio of approximately 19,000 units across 400 assets with a low default risk, and predictable revenue with upward-only rental increases, of which 71% of the ground rent income is indexed-linked, predominantly to the Retail Price Index (“RPI”). You can discover more about the fund here: https://www.schroders.com/en-gb/uk/individual/funds-and-strategies/investment-trusts/ground-rents-income-fund-plc/
Chesterton House Analysis
The fund has faced a number of headwinds over recent years, the most significant being leasehold reform legislation and building safety reform.
Whilst the impact of these on the valuation of the fund’s assets has been relatively modest, market sentiment has been impacted and this has resulted in the share price trading down to a significant discount to the value of the fund’s assets.
The chart and table below show how the share price total return has diverged from the net asset value total return since the government announced changes to leasehold legislation and more recently when building safety reforms were enacted.
In the light of the persistent weakness in the share price, we have been working with the independent Board of Directors and Investment Manager for this fund to agree on the best way to extract maximum value for our clients invested in the fund.
Our ultimate aim is for our clients to be able to realise their investment in the fund at a price which reflects as close as possible the value of the underlying assets, which is currently estimated to be around +140% higher than the current share price (93.9 pence per share vs 39.2 pence per share as at 31-03-2023).
It is also worth noting that the most recent valuation of the company’s assets at 93.9 pence per share, already takes into account downward adjustments relating to the impact of new leasehold legislation and building safety reforms.
Whilst there is no guarantee relating to the potential price achieved if the investment is realised, there is a high probability that the price would be substantially higher than the current share price.
With all this in mind, the fund has scheduled an Extraordinary General Meeting (EGM) for 24th April 2023. The purpose of this meeting will be to allow investors to vote on three proposals which we, along with the Board and Investment Manager, believe will provide the optimal basis on which to extract maximum value for our clients invested in the fund.
The proposals are as follows:
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Amend the Wind-up Resolution provisions such that the next continuation vote, due on 13th August 2023, will be postponed to no later than 31st December 2024, and three yearly thereafter, with a simple majority required to pass.
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Amend the Investment Policy to enable a realisation of the fund’s assets in a controlled, orderly and timely manner, with the objective of achieving a balance between periodically returning cash to investors and optimising the net realisation value of the fund’s assets.
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Increase the Board fee cap from £150,000 per annum to £200,000 per annum, to take account of the new Board member and additional work involved in navigating leasehold legislation and building safety reform.
We believe these proposals to be in the best interests of our clients invested in the fund.
They will allow the Investment Manager more time ahead of the next continuation vote to be able to complete outstanding works on buildings to comply with building safety requirements and recoup the costs associated with these works from the original developers or via the Government’s Building Safety Fund.
Furthermore, it is likely the Government will have published the changes to leasehold legislation applicable to existing leases, which will finally lift the cloud of uncertainty which has been hanging over the sector since reforms were first announced.
Once the outstanding building works are complete and the market has more certainty around valuations based on the new legislation governing existing leases, the fund will be in a strong position to prepare the assets for sale with a view to maximising value for shareholders.
We intend to vote on your behalf in favour of the above proposals unless you contact us by phone, email, or in writing to confirm otherwise. We are planning to begin submitting votes on Monday 17th April 2023, so please contact us by 5pm on Friday 14th April 2023 if you wish to abstain from the vote or vote against the proposals.
If you are happy to take our advice on this matter and agree with the proposals, then you don’t need to contact us or take any further action, as we will deal with it on your behalf.
If you have any questions, or wish to contact us to change your vote as above, please contact John Genovese at our office who has been dealing with this matter. His email address is john.genovese@chestertonhouse.co.uk or you can call John on 01509 610472.