Ground Rents Income Fund has reported a NAV of 59.0p per share in full year results for the year ended 30 September 2024. This means that the possible offer price for the company of 34.0p announced last week is at a 42.4% discount to NAV.

The NAV was down 34.5% over the year (from 90.1.p on 30 September 2023) and the company highlighted that the scale of non-recoverable remediation costs in relation to leasehold reform and outstanding building safety remediation projects is unclear. Low levels of transactional evidence across the residential ground rent market was also a valuation factor. Furthermore, 97% of the portfolio valuation (which was down 30.5% over the year to £71.5m) remains subject to an industry-wide Material Uncertainty Clause.

If an offer is made for the company, shareholders need to weigh up the offer price and certainty this gives with how much capital is likely to be returned in the company’s winding up process (which is extremely difficult due to the unknown costs involved) and the timescale of any return. 

Other highlights from the annual results

• The company sold two freehold ground rent interests in Bristol and Exeter in February 2024 for £3.45m to a special purchaser, at a 4% premium to the latest independent valuation;
• Post year-end, the company sold its largest asset, a freehold ground rent interest in York, also to a special purchaser, for a price of £7.9m, in line with the latest independent portfolio valuation. The company said that further disposals have either completed or are in progress post year end.
• The group refinanced existing £25m loan facility with Santander UK plc in March 2024, which was due to expire in January 2025. The refinanced £19.5m facility extended the loan term from January 2025 to July 2026 and has a margin of 2.75% per annum.
• Since year-end, the sale of the York asset enabled the company to repay a further £7.5m of debt, giving a current loan balance of £12.0m, resulting in a Loan to Value (LTV) of 38.6%.
• Revenue increased by 6.7% to £6.1m (30 September 2023: £5.7m), primarily driven by a 4.6% increase in rental values across the portfolio (on a like-for-like-basis, net of disposals). 51% of the company’s ground rent income is due for review in the next five years.
• As a result of increased operating expenses, including one-off costs associated with the leasehold reform process, increased frictional costs from complying with building safety legislation and higher financing expenses due to the higher interest rates environment, the company experienced an 11.8% overall decline in earnings to £1.5m (30 September 2023: £1.7m), excluding property revaluation and profit/loss on sales.

Barry Gilbertson, chair, commented:

“The company continues to satisfactorily manage the challenges presented by leasehold reform legislation and building safety legislation. Combined, these challenges have engendered negative market sentiment towards the residential ground rent sector generally, resulting in low levels of market liquidity. Although the outlook remains uncertain, we have a clear strategy to manage these challenges, which recently received strong support from shareholders, and are encouraged by the progress being made delivering our Investment Policy.”