Continuation Vote
The Ground Rents Income board is required to convene a general meeting no later than 13 August 2023 at which it must table a proposal for shareholders to vote on a resolution for a voluntary wind-up and subsequent liquidation of the company. The vote is structured in such a way that if any single shareholder votes for a wind-up, the vote passes. If the wind-up resolution is not passed, then the process is to be repeated every five years.
The board can be released from its obligations to propose a wind-up resolution if shareholders approve a special resolution blocking the proposal. It plans to consult larger shareholders on possible options in January 2023. The key points to be discussed in the consultation are set out in the following extract from today’s announcement.
Market context and shareholder feedback to date
As outlined, the company faces continuing headwinds relating to building safety and leasehold reform that are largely outside of our control, which have led to falling capital values and weak sentiment in the ground rent market sector more broadly. Whilst the company has a clear strategy for managing the risks associated with these headwinds, until market conditions and liquidity improve, we believe that the portfolio may not be realisable on acceptable terms. Consequently, whilst progress is being made to improve liquidity of the underlying assets to satisfy more demanding buyer due diligence requirements, there is no certainty that the portfolio could be made ‘ready for sale’ to achieve optimum pricing over the short to medium term.
The Board and Manager also recognise that, based on recent shareholder feedback and the prevailing share price discount, a liquidity event more reflective of true net asset value would be attractive to shareholders. As part of assessing the options available, we are assuming that any extension to the term of the Company granted by the release of the need to propose a Wind-up Resolution by 23 August 2023 will be used to improve liquidity and crystallise the optimum return for all shareholders.
Consequences of the Wind-up Resolution
In the absence of an alternative, special resolution, a single shareholder voting in favour of the Wind-up Resolution will lead to the immediate winding up of the Company. If a Wind-up Resolution is passed, the Company would cease activities and all management powers would pass from the Board to an appointed Liquidator with immediate effect, which would constitute an event of default under the Company’s loan facility with Santander. Given general market uncertainty, and based on the views from the Company’s advisors, the impact would likely be a forced sale of the underlying portfolio (in whole or in parts) at depressed prices.
Alternative proposals to the Wind-up Resolution
Given the risks associated with the Wind-up Resolution, the Board and Manager intend to consult with shareholders on alternative options, summarised as:
- Postponing the Company’s obligation to hold a vote on the Wind-up Resolution by the current deadline of 13 August 2023 to 31 December 2025 (‘Option 1’); or
- Removing the Company’s obligation to hold a vote on the Wind-up Resolution and replacing it with an alternative proposal and vote before 31 December 2025 to decide whether the life of the Company should continue (a ‘Continuation Vote’) which requires either (i) a simple majority of votes cast to pass; or (ii) a majority of not less than 75% of votes cast to pass. If this Continuation Vote is not passed, then the Board would be required to present alternative proposals to shareholders within an expedited timeframe (‘Option 2’).
The points we would like shareholders to consider in relation to these options are:
Option 1
- The principle of one shareholder being able to trigger a liquidation remains; and
- The deadline for the vote on the Wind-up Resolution being extended to 31 December 2025. Given the Company’s loan maturity in January 2025, and the work and cost associated with a possible short-term refinancing, the Board considers this date to be the most appropriate in the circumstance.
Option 2
- Removing the need for the vote on the Wind-up Resolution in its entirety and providing the Board instead with an obligation to hold a Continuation Vote by 31 December 2024. Such a vote would act as a milestone for the Board to provide shareholders with an update on progress in implementing the strategy determined following the consultation; and
- Question whether the vote be passed by a simple majority of not less than 50%, or a majority of not less than 75% (in both cases as a percentage of votes cast)
Given the impact of these options on the strategy of the Company, the Board also wishes to consult on amendments to the investment objective and policy, which is currently:
“The Company has been established to provide secure long-term performance through investment in long dated UK ground rents, which have historically had little correlation to traditional property asset classes and have seen their value remain consistent regardless of the underlying state of the economy.
The Company will give investors the opportunity to invest, through the Company, in a portfolio of ground rents. The Company will seek to acquire a portfolio of assets with the potential for income generation from the collection of ground rents. These investments also have the potential for capital growth, linked to contractual increases in ground rents over the long-term.
The Company will seek to generate consistent income returns for shareholders by investing in a diversified portfolio of ground rents including freeholds and head leases of residential, retail and commercial properties located in the United Kingdom.
The Group intends that no single ground rent property should represent more than 25% of the gross asset value of the Group at the time of investment. The Company has the ability to gear up to 25% loan to gross asset value.”
Should shareholders wish to proceed with one of the options alternative to the Wind-up Resolution, the Board, with the full support of the Manager, proposes amendments to the investment policy to enable a realisation of assets in a controlled, orderly and timely manner, with the objective of achieving a balance between periodically returning cash to shareholders and optimising the realisation value of the Company’s investments. The detail of this arrangement would be discussed as part of the consultation.
In addition to the legal and procedural points, there are additional, more commercial considerations on which we wish to consult with shareholders:
Current debt and potential refinancing
The Company’s external loan with Santander matures in January 2025. Alongside the measures described, we will consult on proposals to extend this facility for a short period of time.
Board and external advisor fees
Since Schroders’ appointment as Alternative Investment Fund Manager in mid 2019, the sustained headwinds facing the Company have led to the management team, and the Board, especially the Chair, to commit significantly more time and resource than could have been reasonably envisaged managing legacy issues. Resolving the complex legacy litigation at Beetham Tower in Manchester was very painful for our shareholders, but failure to deliver the outcome could have led to a significantly worse outcome for shareholders, leaseholders and other stakeholders. Despite the significant additional time and effort from both Schroders and the Board in bringing resolution to the Beetham Tower dispute, both Board and Manager felt the overall impact of the transaction on our shareholders meant it was inappropriate to charge additional fees for this work, despite being able to do so.
Looking forward, and as noted, the Board and management team continue to grapple with a range of legacy issues, as well as major new workstreams relating to building safety. This is critical work to support the strategy and improve portfolio liquidity. Whilst Schroders Alternative Investment Fund Management Agreement includes the ability to charge extra fees for out-of-scope work, the sheer range of projects means it is an inefficient mechanism. We would therefore like to consult with shareholders on the Manager’s current fee arrangement with a view to simplifying its terms and aligning the Manager’s interests with the interests of the Company’s shareholders.
The Board is also reviewing fees of the Company’s corporate broker and legal advisors for work associated with the matters set out.
Finally, given the increased workload and complexity of issues to be managed by the Board, particularly the Chair, and the potential for further work surrounding the Continuation Vote, we wish to consult shareholders on an increase in the Directors aggregate fee cap from the current level of £150,000 per annum. This also follows an increase in the size of the Board from three to four members in 2021, extending the range of experience and expertise of the Board, and creating a gender diversity ratio of 2:2.
Dividend policy
Although the Company benefits from growing underlying rental income, the headwinds relating to building safety and legacy issues across the portfolio are increasing frictional costs, and therefore diluting earnings. This scenario combined with the potential costs associated with the matters described and a rising interest rate environment, means the long term sustainability of the dividend may be impacted. This possible outcome is the final point for discussion with shareholders as part of the consultation.
Timing
Following release of this update, Singer Capital Markets (‘SCM’) will be contacting larger shareholders requesting initial consultation meetings to be held in January 2023, to be attended by SCM, by key members of the Schroders team and the Chair. Following this initial consultation, it is likely that the Board will refine the proposals and further consult prior to implementation.
Assuming this consultation process is concluded by the end of February 2023, and in the hope that a consensus can be found, the Company would aim to issue a shareholder circular before the end of March 2023, with a General Meeting taking place in May 2023, all in sufficient time before the deadline for presenting the winding-up resolution in August. Preparation of the Company’s audited accounts to 30 September 2022 will run in parallel with this process.
GRIO : Ground Rents Income considering its future