Ground Rents Income Fund plc - Interim results for the six months to 31 March 2020 James Agar, Fund Manager - Schroders
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Ground Rents Income Fund plc Interim results for the six months to 31 March 2020 James Agar, Fund Manager Marketing material for professional investors or advisers only. July 2020 Throughout this presentation Ground Rents Income Fund plc will be referred to as ‘GRIO’.
Agenda 01 Overview 02 Income analysis 03 Market overview 04 Leasehold and regulatory reform 05 Beetham Tower 06 Summary 07 Appendix 1
Investment case Inflation linked returns Ground Rents Income Fund Plc Illustrative ground rent revenue – RPI sensitivity £m – Highly-diversified, long-term portfolio of approximately 19,000 7.5 Diversified units across 400 assets with a low default risk 7.0 – Upwards only rental increases over all durations given the Predictable 6.5 fundamentals of the instruments 6.0 Long-term – Weighted average unexpired lease term of 345 yrs 5.5 5.0 Non-correlative – Uncorrelated to – residential, commercial or alternative assets 4.5 – c.70% of the portfolio is index-linked, of which c.90% is RPI Inflation-hedged 4.0 – Embedded growth – 40% of the portfolio will be reviewed by 2025 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Income – 3.96p per share dividend -2% RPI -1% RPI 0% RPI 1% RPI 2% RPI 3% RPI 4% RPI 5% RPI Assuming future RPI inflation of 2.5% per annum, ground rent income should increase c.16% over next 6 years or an annualised figure matching that of RPI at 2.5% Source: Schroders, ONS (figures as at 28 February 2019), June 2019. Chart for illustrative purposes only. 3
GRIO interim results to 31 March 2020 Summary Company strategy Performance Asset management Balance sheet NAV 31 March 2020 Restructuring of head-leases with Termed Loan refinanced and Defensive, long dated secure, £106.8 million or 110.1 pps VITA Group, delivering £1.0 million extended to 2025 at a margin inflation index linked income in additional revenues with reduced of 2.8% vs. 3.4% A decrease of 1.2 pps or 1.0% operational risk £25 million loan comprising Ensure shareholders interest 40% of ground rent income to be Beetham Tower, Manchester – £12.5 million term and £12.5 million are represented in leasehold reviewed in the next five years Planning consent granted RCF – £19.5 million drawn with and regulatory reform capacity operational flexibility MHCLG Building Safety Team 24.4% LTV on charged assets Two quarterly dividends paid (£19.5m), vs. covenant LTV 50% Demonstrate Best in Class in line with full year target Building Safety Fund residential asset management Portfolio net LTV 11.4% Robust covid-19 income collection Clear Covid-19 strategy ICR of 475% vs 270% Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Source: Schroders, July 2020. 4
Strategic focus Focus on growing net income, risk management and longer term strategy Actions COMPLETED Refinance Reduced cost and extended term providing financial and operational flexibility Ongoing review of strategy given rating Strategic review RPI consultation Building Safety Bill Actions Ongoing Actions COMPLETED Rerating the shares Additional Income Working to close VITA Headlease discount to NAV Supplier Agreements Covid-19 – income and cost analysis Best-in-class management Resolve Beetham Manchester Delivering value to consumers Actions Ongoing Leasehold Reform Interaction with Government, Law Commission and CMA Strategy to increase shareholder total returns and deliver a fully covered dividend Source: Schroders May 2020. Shown for illustrative purposes only and should not be viewed as a recommendation to buy or sell. 5
Valuation and NAV at 31 March 2020 31 March 2020 12 month NAV return +0.7% – Portfolio valuation of £122.6 million representing a fall in value of £0.3 million or -0.2% compared to September 2019 – Benchmark years purchase (‘YP’) remained unchanged with 10 and 25 year RPI valued at 28.0 YP and 25.0 YP respectively and 25 year doubling at 24.0 YP – NAV decrease of 1.1% to £106.8 million or 110.1 pps £m pps % Comments NAV as at 30 September 2019 108.0 111.3 Investment property valuation (0.4) (0.3) (0.3) Bi-annual valuation decrease as at 31 March 2020 EPRA earnings¹ 1.1 1.1 1.0 EPRA earnings for the 6 months to 31 March 2020 Dividends paid (1.9) (2.0) (1.8) 2 distributions: Q4 FY2019 and Q1 FY2020 NAV as at 31 March 2020² 106.8 110.1 (1.1) Reflects ordinary shares of 97,006,497 Source: Schroders July 2020. ¹EPRA earnings being operating profits attributable to shareholders excluding property gains/losses. ²Valuation included industry standard Market Uncertainty clause which has subsequently been removed. 6
Compliance disclosure requirement Performance-NAV to NAV (per share) plus dividends paid Property portfolio total returns1 12m to Mar 2020 12 m to Mar 2019 12 m to Mar 2018 12 m to Mar 2017 12 m to Mar 2016 Ground Rents Income Fund Plc +0.7 -6.0 -7.3 +20.1 +15.7 Ground Rents Income Fund Plc – Risk Considerations: The Company borrows for investment purposes. This will magnify any gains or losses made by the Company. The Company has no maturity date. The Company may only be terminated by a continuation vote, a shareholders’ voluntary liquidation or by a compulsory liquidation if the Company were unable to pay its debts. The Company owns a portfolio of assets with the income generated from the collection of ground rents. Potential legislative reform may impact the Company’s value and future income streams. However, any reform would be required to strike a fair balance between leaseholders and landlords with legitimate property interests. The Company invests in real estate which may be viewed as a higher risk and illiquid investment and may, therefore, be adversely affected by a decrease in market liquidity for the assets in which it invests. You may not be able to sell your product easily or you may sell at a price that significantly impacts on how much you get back. This product does not include any protection from future market performance so you could lose some or all of your investment. The Company will invest solely in property located in the UK. This can carry more risk than investments spread over a number of countries. The performance of the Company would be adversely affected by a downturn in the property market in terms of capital value or a weakening of rental yields. The Company invests in real estate which may be viewed as a higher risk and illiquid investment and may, therefore, be adversely affected by a decrease in market liquidity for the assets in which it invests. The Company has the ability to use gearing as part of its investment strategy. The use of gearing will increase the risk profile of the Company and the volatility of the value of Shares, and will amplify losses in the event of a decline in gross asset values. Gearing may create significant underperformance, particularly in times of a falling property market. Borrowing costs may, from time to time, exceed returns on property. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Source: Schroders, Refinitiv, 31 December 2019. ¹Schroders, NAV to NAV (per share) plus dividends paid. 7
Income analysis
Covid-19 rent collection – to 01 July 2020 £3.11m of Ground Rents collected in the financial year Ground rent collected and outstanding 18% – Income collection has remain robust and in line with 16% 2019 14% – No material increase in requests for forbearance or payment holidays 12% – Since 1 January 2020 64% of the current year’s total 10% ground rent has been collected – Of the remaining c£1.25m income in this financial year, 8% £0.7m relates to the eight VITA headleases 6% – External rent collection specialists have amended 4% Covid-19 collection processes in place – The company will review future dividends in light of 2% Covid-19 and its impact on income collection 0% performance Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Arrears % - 2018 Arrears % - 2019 Arrears % - 2020 Source: Rendall & Rittner, Schroders, July 2020. 9
Market overview
Covid-19 – Impact on UK real estate Record fall in UK monthly GDP Change in GDP in 2020 Q/Q – First Global Health Crisis in living history-outcome uncertain 20% – The UK economy is in recession following lockdown imposed on 15% 13% 23 March 2020 – Governments face a trade-off between getting the economy back 10% to work and the health risks Covid-19 5% – The key issue being scale to which the lockdown, and the ensuing 2% recovery, affects the economy and unemployment 0% -2% – Government borrowing to cushion unemployment impact and the -5% loss of income is unsustainable -10% – Reduction in real estate market liquidity and transactions, resulting -15% in valuers invoking Market Uncertainty clauses – Yield expansion likely across most traditional sectors as the -20% -17% economic outlook deteriorates -25% – Assets with short unexpired leases are likely to see a bigger fall in Q1 Q2 Q3 Q4 value than assets with secure, long-dated income 2020 – GRIO’s secure, long-dated, uncorrelated, index-linked portfolio Other professional forecasts Schroders expected to be relatively well positioned Source: Consensus Economics, ONS, Schroders. June 2020. 11
The Gateway, Leeds Residential ground rent market commentary Annuity-style cash flows vs. leasehold reform – Strong demand for annuity-style income, but residential ground rent transactional volumes have remained low since 2018 – Asset pricing has reduced and now stabilised, with 12 month NAV broadly flat – The Material Valuation Uncertainty clause included in the March 2020 valuation has been removed – Enfranchisement clarity saw some confidence return with large portfolios being marketed – Greater certainty required on Covid-19, leasehold reform and the CMA investigation – Several participants continue to be active during Covid-19 – Covid-19 will create opportunities, accelerating the polarisation between institutional quality assets and the rest of sector – Consider opportunities to invest the RCF headroom to support NAV and dividend cover Source: Schroders, July 2020. 12
GRIO dividend yield vs Index-linked yields Current yield margin is 1.44x the five year average Yield 10 8 6 4 2 0 -2 -4 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Sep 15 Sep 16 Sep 17 Sep 18 Sep 19 Mar 15 Jun 15 Mar 16 Jun 16 Mar 17 Jun 17 Mar 18 Jun 18 Mar 19 Jun 19 Mar 20 Jun 20 Yield margin GRIO dividend yield 10 Year Index-linked Gilt Yield Source: Fixed Income Investor, Schroders. July 2020. 13
Covid-19 scenario probabilities Implications for 2021 RPI – W shaped economic recovery is the primary 11% risk (14%) from a ‘second wave’ of Covid-19. 2021 RPI – 3.4% 6% – V-shape recovery is the next likely (11%) as 9% the private sector responding to the lifting of lockdowns. 2021 RPI – 5% 55% 5% – A Eurozone debt crisis is third (9%) and with lower risks being attached to the remaining 14% scenarios. 2021 RPI – 4% Sharp global recovery (V) MMT fuelled fiscal expansion Eurozone debt crisis Private sector scarring (L) Coronavirus second wave (W) Baseline Source: Schroders Economics Group, 28 May 2020. 14
Leasehold and regulatory reform
Clapham One, London Leasehold reform Ministry of Housing, Communities & Local Government and enfranchisement – The Law Commission (‘LC’) published their report on enfranchisement premium valuation in January 2020 – Initial assessment was positive for GRIO with little impact on the long-dated ground rents – The LC’s three primary options involve the inclusion or not of marriage value or hope value – Potential impact on GRIO is minimal as the value of the ‘term’ and ‘reversion’ remain in all options – The report gives clear direction and removes uncertainty around value destructive elements of the process – Negative impact on the Company by reform may be mitigated by: – 345 Year Weighted Average Unexpired Lease Term – Median ground rent is £250 p.a. – 96% of the Company's ground rent reviews are not onerous – Project Pacific – Asset Management to amend doubling reviews – Next steps – Industry will shortly challenge the view that ground rents over 0.1% of the property value are onerous Source: Schroders, July 2020. 16
Brentford Lock, West London Competition and Markets Authority (‘CMA’) Leasehold mis-selling investigation – February 2020 CMA report focused on the mis-selling of leasehold houses and making few reference to apartments – Specific concern highlighted in relation to ground rent: – High initial ground rents that may increase significantly over time – High or escalating ground rents that mean a long-lease may become an ‘assured tenancy’ (Housing Act 1988) – Significant reservations about RPI linked increases to ground rent – The CMA is still carrying out its investigation and is “preparing to take enforcement action” – Doubling ground rent asset management plan –offering a variation to the lesser of doubling or RPI inflation – Assured tenancy policy – The Company does not ordinarily seek possession using the Housing Act 1988 – Leaseholder Pledge makes specific reference to RPI as the metric to which ‘onerous rents’ will be changed to – Next steps – Consideration being given to A1P1 in relation to any possible CMA action Source: Schroders and CMA, July 2020. 17
Beetham Tower, Manchester
Beetham Tower, Manchester North West Ground Rents Limited (‘NWGR’) Ongoing litigation – June 2014 – Issue identified regarding a failure of structural sealant – January 2019 – NWGR lost a High Court case and was ordered to repair the building in a specific manner (Option A) by 31/07/2020 – NWGR continues with the mobilisation for Option A, quotations ahead of expectation at £8 million due to weather risk – November 2019 – Mediation took place, without conclusion – May 2020 – NWGR granted planning consent for Option C and has made an application to the Court for permission to vary the type of repair and the timeline for completion – June 2020 – Option C decision deferred, trial in September 2020 – Securing court approval for Option C could benefit all stakeholders – NWGR is reliant on the support of GRIO to finance further legal action and to comply with the judgment – Without a resolution there is a risk that GRIO’s support will be withdrawn and NWGR may become insolvent Source: Schroders, June 2020. 19
Summary
VITA First St, Manchester Summary Focus on closing the discount to NAV – Against an uncertain economic backdrop GRIO is benefiting from its defensive characteristics and uncorrelated returns – Strategic focus is growing reoccurring income and achieving full dividend coverage – Assets offering defensive income characteristics will continue to see strong demand – Dividend in line with strategy, future payments will be monitored in light of Covid-19 impact on rent collection – Headwinds from leasehold reform and the CMA investigation continue to impact the Company and discount to NAV – Key strategic objectives: – Close discount – emphasis on secure, defensive and differentiated strategy and dividend track record – Reform – continued interaction with Government, LC and CMA – NWGR – challenging and complex litigation – Industry Code of Conduct, Health & Safety policy, ‘Golden Thread’ and Fire Safety Bill Source: Schroders, July 2020. 21
Appendix
Rent profile Ground rent income £2,500,000 £2,250,000 £2,000,000 £1,750,000 £1,500,000 £1,250,000 £1,000,000 £750,000 £500,000 £250,000 £- January February March April May July August September October November December January February March April May June July August September October November December Monthly rent due ('000) £2,384,092 £73,990 £214,528 £483,529 £43,082 £99,238 £358,459 £73,990 £813,381 £138,342 £37,891 £95,063 Cumulative rent £2,384,092 £2,458,082 £2,672,611 £3,156,140 £3,199,222 £3,298,460 £3,656,919 £3,730,909 £4,544,290 £4,682,632 £4,720,523 £4,815,586 Cumulative % 49.51% 51.04% 55.50% 65.54% 66.43% 68.50% 75.94% 77.48% 94.37% 97.24% 98.03% 100.00% Source: R&R, Schroders July 2020. 23
GRIO portfolio Portfolio breakdown based on total portfolio ground rent income Asset location Type of ground rent review 1.5% 5.3% 7.0% 9.8% 7.2% 30.6% 10.9% 16.2% 12.2% 69.6% 29.7% North West North East Midlands London Index-linked Doubling Fixed Flat (no review) South West South East (exc. London) Wales Source Schroders July 2020. Shown for illustrative purposes only and should not be viewed as a recommendation to buy or sell. 24
GRIO share price and NAV Currently trading at a 26% discount to NAV1 145 20% 140 135 10% 130 125 January 2020 LC report on 120 0% enfranchisement 115 premiums 110 -10% 105 100 95 -20% 90 85 February 2017 December 2017 October 2018 Media coverage begins Tackling unfair Implementing -30% 80 practices in leasehold reforms to leasehold 75 70 -40% Apr 2016 Apr 2017 Apr 2018 Apr 2019 Apr 2020 Oct 2016 Jan 2017 Oct 2017 Jan 2018 Oct 2018 Jan 2019 Oct 2019 Jan 2020 Jul 2016 Jul 2017 Jul 2018 Jul 2019 Share price (LHS) NAV (LHS) Discount/Premium (RHS) Past performance is not a guide to future performance and may not be repeated. Source: Refinitiv, Schroders, 1 July 2020. 1Most recent NAV per ordinary share (undiluted) as at 30 June 2020, 110.1 pence; share price at 30 June 2020 82 pence. 25
HM Treasury Retail Price Index (RPI) Reforming the UK inflation measure – In September 2019 the Government agreed with the UK Statistics Authority (‘UKSA’) to reform RPI – The Chancellor pledged to bring RPI inline with consumer prices including housing costs (‘CPIH’) – Reform unlikely to take place before 2025 due to impact on the index-linked gilt market – The Chancellor rejected proposal from UKSA to cease publication of the RPI altogether – Investors holding RPI-linked assets or obligations likely to be impacted as CPIH is typically lower than RPI – 62% of GRIO ground rent income is directly linked to RPI – Retrospective action on current RPI linked contracts may be difficult to enforce without compensation – A consultation on whether reform should be made before 2030 has begun and will close on 21 August 2020 – The Government and UKSA will respond to the consultation before the parliamentary summer recess Source: Schroders, FT.com and HM Treasury, July 2020. 26
UK inflation UK CPI and RPI forecasts 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 May 2017 Sep 2017 May 2018 Sep 2018 May 2019 Sep 2019 May 2020 Sep 2020 May 2021 Sep 2021 May 2022 Sep 2022 Jan 2017 Jan 2018 Jan 2019 Jan 2020 Jan 2021 Jan 2022 Nov 2017 Nov 2018 Nov 2019 Nov 2020 Nov 2021 Nov 2022 Mar 2017 Mar 2018 Mar 2019 Mar 2020 Mar 2021 Mar 2022 Jul 2017 Jul 2018 Jul 2019 Jul 2020 Jul 2021 Jul 2022 RPI CPI – 40% of ground rent income due to be reviewed over the next five years – Sharp drop in near term inflation forecast due to falling energy prices and weaker consumer demand – Inflation forecast to rise and remain elevated as lockdown is lifted and demand is met by supply disruptions Source: ONS, Schroders July 2020 – Shown for illustrative purposes only and should not be viewed as a recommendation to buy or sell. 27
Leasehold reform timeline Past, present and future – Feb: Government Housing White Paper – Apr: Government responds to consultation 2 – Mar: Select Committee report on leasehold – Jan 20: Law Commission published their published (proposes regulation of managing agents) reform (recommends a cap on existing report on enfranchisement – Jun: Grenfell Tower tragedy – May: Hackitt review published (proposes ground rents of £250/0.1%, zero future – Positive for GRIO – little impact on the new regulatory framework, including ground rents, and review by Competition long-dated ground rents – Jul: Hackitt Review; and Government and Markets Authority (CMA)) Reform timeline leasehold consultation (1) Duty holders) – Feb 20: CMA investigation into – Sep: Law Commission leasehold – Jun/Jul: Government building safety leasehold housing market – Oct: Government managing agent consultation (4); consultation (2) enfranchisement consultation – March 20: BPF working group on – Oct: Government leasehold reform – CMA begins review into home buying process Enfranchisement strategy with LC – Dec: Government responds to consultation 1 (proposes zero future ground rents and consultation (3) – Government responds to Select Committee – May 20: Government announces £1bn banning sale of leasehold houses) – Dec: Law Commission Commonhold (leasehold remains a legitimate form of home Building Safety Fund to remediate consultation ownership, rebuffs retrospective legislation) unsafe non-ACM sites over 18 metres – June 2020: BPF Cladding Safety working group 2017 2018 2019 2020 and beyond – Sep: GRIO launches doubling ground rents – Apr: Leasehold Reform Group (LRG) formed – Feb: GRIO attends Law Commission – 2020: Fire Safety Bill asset management – Jun: GRIO meets civil servant leading the symposium on proposals to reform – Continued interaction with Government, – Oct: GRIO and other large scale freeholders Government’s leasehold project Commonhold CMA and Law Commission and developers meet the then Secretary of – Jul: GRIO attends Industry Roundtable – Mar: GRIO and other large scale freeholders – Detailed response to CMA with advice State, Sajid Javid MP, to discuss leasehold with the then Secretary of State, meet with the then Housing Minister, from CMS GRIO action reform proposals James Brokenshire MP Heather Wheeler MP – Meeting with Housing Minister – Jul: GRIO attends LRG and Winckworth – Feb: GRIO attends LRG seminar on draft Code of Conduct – RPI Reform Consultation Sherwood seminar on leasehold reform – May: Schroders appointed as AIFM – Industry Code of Conduct – Oct: Representations by GRIO and LRG to Government and Select Committee – Jun: GRIO signatory of Government’s – Continue with doubling ground rents Public Pledge for Leaseholders asset management – Aug: Announcement of review of the – Best-in-class asset management – Company’s strategy Golden thread, digitisation of O&Ms Source: Schroders, May 2020. 28
Wapping Wharf, Bristol Project Pacific and leasehold pledge Doubling ground rent asset management Project Pacific (PP) – Offers were initially made to relevant leaseholders in May 2018, with further letters in September 2018 and March 2019 – At 1 May 2020, 513 offers across 30 sites have been taken up: – 332 offers have been completed with the necessary Deeds of Variation recorded at Land Registry – 144 uncompleted offers are ‘live’ – The remaining 37 offers are where the leaseholders solicitor has stopped responding to GRIO – Considering amending offer from RPI to CPIH given comments in the CMA investigation Leasehold pledge – Public Pledge for Leaseholders effectively extends PP indefinitely. Pledge viewed as a first step towards establishing a legally enforceable Code of Practice – The Pledge makes specific reference to RPI as the metric to which ‘onerous rents’ will be changed to Source: Schroders, July 2020. 29
Important information For professional investors only. Not suitable for retail clients Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Schroders has expressed its own views and opinions in this document and these may change. This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Information herein is believed to be reliable but we do not warrant its completeness or accuracy. Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy or on request should you not have access to this webpage. The forecasts stated in the presentation are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic, and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today's date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change. This product is listed on the London Stock Exchange and is governed by its Board of Directors. The Board has appointed Schroder Real Estate Investment Management Limited as its investment manager and accounting agent. Schroder Real Estate Investment Management Limited was appointed on 13 May 2019. Schroder Real Estate Investment Management Limited is a member of the Schroders Group and is authorised and regulated by the Financial Conduct Authority (FCA). Issued in July 2020, Schroder Real Estate Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 1188240 England. Authorised and regulated by the Financial Conduct Authority. UK001083. 30
You can also read