Chairman's Statement

Overview

I am pleased to present the annual audited results of Ground Rents Income Fund plc ('GRIF' or the 'Group') for the year ended 30 September 2017.

As uncertainty continues to surround the implications of the EU referendum result, market volatility and political events present an interesting and challenging macro-economic environment.

During the financial year, companies within the Group completed ground rent asset purchases for a total cost of £11.1 million. These were mainly development-based purchases, agreed historically at attractive pricing, with completion at practical completion of construction. I am pleased that the decision we took to implement a forward-funded strategy has delivered value and scale of operation for shareholders.

The value of the Group's investment property portfolio rose by 10.7% and the overall ground rent yield remained at 3.2%. This was in comparison to a 13 basis point increase in the UK 10-year government bond yield to 1.38% over the same period. Ground rents continue to demonstrate their defensive characteristics, providing stable quasi-inflation-linked, asset-backed income.

The resilience of the portfolio is encouraging in light of the government focus on improving standards, tackling unfair practices and protecting leaseholders within the leasehold system, which led to the recent consultation launched by the Department for Communities and Local Government ('DCLG').

In November 2016, the Group secured a larger and longer-term loan facility with Santander UK plc for £19.5 million, an increase of £11.5 million from the previous £8.0 million short-term facility. This new facility is held within a Group company and secured against a number of investment properties. It is for a period of up to five years and was fully drawn down at the year-end date. The proceeds have been utilised during the year to purchase new ground rents and will fund a pipeline of acquisitions during the new financial year.

Also during November 2016, the Group published a Supplementary Information Memorandum ('SIM'). This included a revised investment policy, borrowing restrictions under the Real Estate Investment Trust ('REIT') regime and the requirement for the Group to appoint a full scope Alternative Investment Fund Manager ('AIFM') under the AIFM Directive ('AIFMD').

Finally, from a capital perspective, the Group raised a further £3.3 million in September 2017 through the issuance of new Ordinary Shares, converted from warrants held by existing warrant holders.

Financial results

Our financial results reflect the continued application of our defensive investment policy against a backdrop of uncertain political and economic conditions, for both the UK and the ground rents sector.

Under International Financial Reporting Standards ('IFRS') our operating profit for the year to 30 September 2017 was £5.3 million (30 September 2016: £20.5 million), with total comprehensive income of £4.7 million (30 September 2016: £20.2 million), reflecting a lower level of revaluation gains in the current year. Revenue for the year to 30 September 2017 was £5.1 million (30 September 2016: £4.8 million). Basic earnings per share ('EPS') for the year were 4.98 pence (30 September 2016: 21.66 pence).

The audited basic net asset value ('NAV') per share as at 30 September 2017 was 131.72 pence (30 September 2016: 131.83 pence).

The Group had ongoing charges of 0.97% (30 September 2016: 0.90%) for the year. The drivers of the increase in ongoing charges during the current year were the rise in the management fee derived from the increased market capitalisation for a period of the year, in addition to a number of unexpected costs relating to the Group's DCLG consultation response and the implementation of the subsequent asset management programme. These costs are likely to impact Group profits going into the new financial year.

Financial results (continued)

The Group's property portfolio has been independently valued by Savills Advisory Services Limited ('Savills') in accordance with the RICS Valuation - Professional Standards (the 'Red Book'). As at 30 September 2017, the portfolio had a fair value of £139.1 million, compared with £125.7 million as at 30 September 2016 (excluding purchase costs), an increase of £13.4 million or 10.7%. On a like-for-like basis, the Group's investment property portfolio value remained broadly stable during the financial year.

Financing

On 14 November 2016, the Group amended the terms of its loan facility with Santander UK plc to increase the facility limit from 6.5% to 15.8% of NAV measured at drawdown.

There were two utilisation requests during the year: an initial £15 million in November 2016 and a further £4.5 million in March 2017.

The loan attracts interest on a fixed-rate basis at a composite rate of 3.371%, which includes a 2.3% margin.

As at 30 September 2017, the unexpired term of the facility was 4.1 years and the borrowing ratio was 13.7% of the value of the investment properties (gross assets).

Dividends

The Group continued to deliver its target of at least maintaining the dividend per Ordinary Share. During the financial year, the Group declared and paid four Property Income Distribution ('PID') dividends, totalling 3.964 pence per share.

On 16 November, the Board declared a PID dividend of 0.98 pence per Ordinary Share in respect of the period from 1 September to 31 December 2017.

See note 18 Dividends for further details.

Board and governance

As highlighted above, the shareholders approved a revised investment policy of the Group at an extraordinary general meeting on 26 October 2016. This was incorporated within the SIM, published in November 2016, along with borrowing restrictions under the REIT regime and AIFMD requirements.

Under the AIFMD the Investment Manager as AIFM has to ensure that the Group complies with the requirements in the AIFMD, including appointing a depositary, and the AIFM is subject to certain organisational, operational and transparency obligations.

Shareholder engagement

During the year, the Company continued to develop its relations with investors.

James Agar, the Head of Specialist Funds for the AIFM, met with the majority of institutional shareholders during June and July 2017 with the joint aims of improving communications and to seek their views and valuable input into the asset management programme.

It was important to be clear with shareholders regarding the options available to manage the media and political sentiment around the sector, the actions for which have subsequently been agreed.

Leaseholder engagement

In September 2017, we announced our intention to implement an asset management plan in response to the DCLG's launch of the aforementioned consultation on proposals to amend leasehold legislation.

In conjunction with the Investment Manager, the Board agreed to contact all residential leaseholders with doubling ground rents and offer them the opportunity to convert their existing review mechanism to the lesser of inflation, as measured by the Retail Prices Index ('RPI'), or doubling, while retaining their existing review cycle.

Outlook

The Board and the Investment Manager strive to continue to maintain returns for our shareholders, while ensuring we operate in an open and socially-responsible manner.

We recognise there are political and legislative hurdles facing the industry during the next financial year, but we continue to focus on growing the Group and, subject to market conditions, seek new acquisitions to increase the net asset value.

Malcolm Naish                  1 December 2017          

Chairman

Strategic Report

The Directors present their Strategic Report on the Group for the year ended 30 September 2017.

Our business

Ground Rents Income Fund plc is a closed-ended real estate investment trust ('REIT') incorporated in England and Wales on 23 April 2012, and tax resident in the United Kingdom. Its ordinary shares and warrants were admitted to the Official List of The International Stock Exchange ('TISE') (formerly the Channel Islands Stock Exchange (CISE)) and to trading on the SETSqx platform of the London Stock Exchange in August 2012.

Ground Rents Income Fund plc, together with its subsidiaries, operates a property investment and rental business. The Group invests in a diversified portfolio of ground rents.

A ground rent is the rent paid by the lessee of a property to the freeholder or a head leaseholder of the property. It represents the underlying interest in property, which is subject to a lease for a period of time usually between 99 and 999 years. Individual amounts payable as ground rents are usually nominal annual sums. Ground rents produce a secure, stable, low-risk and long-term income.

The Group's portfolio of ground rents includes freeholds and head leaseholds of well-located residential, retail and commercial properties located in the United Kingdom. The Group generates income primarily from the collection of such ground rents. It generates additional income from sources such as commissions on insurance policies.

Investment objective

The Group 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 regardless of the underlying state of the economy.

The Group gives investors the opportunity to invest in a portfolio of ground rents. The Group owns a portfolio of assets with the income generated 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 Group seeks 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.

Investment restrictions

The Group intends that no single ground rent property should represent more than 25 per cent of the gross asset value of the Group at the time of investment.

The Group does not expect to engage in any hedging transactions, although, at the sole discretion of the Directors, the Group may utilise hedging, financial and money market instruments in the management of its assets and risk.

The Group may reinvest both realised invested capital and any profits that have not been distributed, subject to distributing 90 per cent of distributable income profits arising from the Group's Qualifying Property Rental Business in each accounting year in order to comply with the Group's REIT obligations.

The Group may make use of structural or long-term debt facilities for investment purposes, and, if a portfolio of assets was available to be acquired in a corporate structure which had some existing borrowings within its corporate vehicles, these may be retained.

In all cases the borrowing anticipated would be limited in scale to no more than 25 per cent of the gross assets of the Group.

Our strategy

The Group has acquired and intends to continue to acquire portfolios of ground rents. These interests have and will have a pre-determined long-term income stream from the lease and, ultimately, when the lease comes to an end, a reversionary value.

The Group may also exploit other investment opportunities which provide the Group with ground rent income, but may not have the right to a reversionary value such as long-dated head leases. Collection of ground rents, as well as income from additional sources such as commissions on insurance premiums, is expected to provide predictable income streams.

The freehold interest in a ground rent is usually valued on a multiple of the ground rent receivable; the lower the multiple, the higher the yield. The multiples paid vary according to a number of factors, including the amount and timing of any contractual future increases in the ground rent, market sentiment, and the unexpired period of any leases.

Ground rents acquired

At 30 September 2017, the portfolio of ground rents was generally valued on multiples of between 18 and 40, which equates to gross yields of between 5.6% and 2.5%.

Values also reflect the quality of the income and the rent review profile. Ground rents that are flat and, therefore, have no reviews are the least desirable and produce the highest yields. At the other end of the scale are ground rents that are subject to frequent rent reviews that provide regular uplifts in the income stream. The most attractive of those investments are currently those linked to the Retail Prices Index (RPI), or those that have imminent rent reviews.

Most ground rents are subject to pre-determined rent reviews, which are documented in each lease granted by the freeholder or head leaseholder. Increases are linked to a variety of measures: they may be indexed to factors such as RPI, they may be subject to a periodic doubling or subject to fixed-sum increases. The review cycles vary between annual and 50 years, although 88% of the Group's ground rents are 20 years or less. The driver of movements in the valuation of a ground rent investment tends to be variations in yields, until the final few years before a review date.

As at 30 September 2017, the total net assets of the Group were £127.4 million (2016: £123.1 million), of which £139.1 million (2016: £125.7 million) was represented by investments in ground rents.

Current year activity

Acquisitions in the year ended 30 September 2017 included:

RPI-linked portfolio

A small site in Northumberland was purchased in October 2016, providing an additional £6,500 of ground rent linked to five year RPI at a cost of £0.2 million, giving an initial ground rent yield of 3.1%.

In November 2016, an additional student property in York was acquired on a forward-funding basis. The site is to be one of the highest-quality student accommodation schemes in the UK, consisting of 14 three and four-storey buildings and a converted convent in 6.3 acres of extensively-landscaped grounds within walking distance of both the University of York and York St John's University. The 643 beds across 527 flats generate £273,500 of total ground rent linked to five-year RPI. The Group paid £7.8 million for the freehold, giving an initial ground rent yield of 3.5%, or an initial total yield of 3.9% when forecast ancillary income is also included. It has, therefore, entered the portfolio as the largest single asset, and students have begun occupying the site from September 2017.

The acquisitions of two residential sites were completed in Bristol (November 2016) and Brentford (December 2016). Both sites are of high specification, and have been specially designed to be sympathetic to their surroundings and provide leaseholders with a sense of community. In total, the 263 units generate £84,400 of ground rent linked to 20-year RPI at a cost of £2.1 million, giving an initial ground rent yield of 4.1%.

In June 2017, the Group completed the acquisitions of a further two properties at the Millbay development in Plymouth, which is a site where the Group already owns investment properties. The acquisitions consisted of the leasehold interest in 150 units for £0.8 million, producing £31,700 of annual ground rent linked to 20-year review indices, giving an initial ground rent yield of 4.0%.

Finally, in August 2017, a further property was acquired in Salford, for £0.25 million. Another high-quality site forming part of Central Salford Urban Development Corporation's regeneration plans, it consisted of the freehold interest in 36 units, generating annual ground rents of £10,800 linked to 20-year RPI, giving an initial ground rent yield of 4.25%.

Asset management project

As a result of the DCLG consultation GRIF affirmed its commitment to being a socially-responsible and transparent landlord. With this in mind, the Directors and the AIFM Investment Committee approved an asset management project. The project will involve offering leaseholders with "onerous" doubling ground rents the opportunity to convert their existing review mechanism to RPI via a Deed of Variation, while retaining their present review cycle.

For assets with 20-year review cycles and more, leaseholders will be offered the option to have their ground rent review to "the lesser of 20/25/50 year doubling or 20/25/50 year RPI". This small but important variation removes any risk of the Group being seen to be transferring inflation risk to leaseholders through their review mechanisms.

There are three drivers for the project:

● Reduce reputation risk and enhance investor sentiment

● Manage the valuation risk regarding doubling ground rents, especially those on short-review cycles ● Protect long-term shareholder value by increasing the linkage of the Group's ground rents to RPI

It is expected that the project will enhance investor perception and lead to a recovery in the share price to its historic correlation to the Group's NAV.

Asset focus

The five most valuable assets and their respective locations as at 30 September 2017 are as follows: