Debt Mod, Portfolio Sale & 2025 Continuation Vote

17 December 2024

Phoenix Spree Deutschland Limited

("PSD" or the "Company")

DEBT MODIFICATION, PORTFOLIO SALE, AND UPDATE ON 2025 CONTINUATION VOTE

Phoenix Spree Deutschland (LSE: PSDL.LN), the Berlin residential real estate specialist, announces a significant strategic transaction and updates shareholders on the Company's future direction ahead of the 2025 Continuation Vote.

Strategic Overview

The Company has agreed amended financing terms with the Company's principal lender, which enables the Company to accelerate significantly its condominium sales programme, targeting annualised sales of €50 million from 2025. In order to achieve this amendment, the Company has agreed to a strategic disposal of 16 buildings, comprising 385 units.

This enhanced strategy represents a carefully managed Portfolio realisation programme designed to maximise shareholder value. Given these strategic developments, the Board intends to bring forward the date of the Company's Continuation Vote and will propose amendments to the Investment Objective and Policy to facilitate an orderly Portfolio liquidation that balances timely capital returns with value optimisation.

Key Highlights:

·    Enhanced Financing Structure: Modified debt terms agreed with the Company's principal lender to allow for accelerated condominium sales.

·    Expanded Condominium Sales Potential Unlocked: This will increase the number of buildings permitted under PSD's existing debt facility to be sold as condominiums at any one point in time from 6 to 40, currently representing 950 units.

·    Valuation Impact: For the financial year ending 31 December 2024, over 50 per cent of buildings in the Portfolio are expected to be valued on a condominium sales basis.

·    Value Realisation Strategy: Implementation of accelerated sales programme to maximise shareholder returns through targeted condominium sales. There will be restrictions on cash returns to shareholders until the Company's principal debt facility is repaid or refinanced.

·    Strategic Disposal: Debt amendment facilitated through the sale of an SPV owning 16 rental buildings (385 units) to funds managed by Partners Group for €75.9 million.

·    Strengthened Balance Sheet: €58.8 million debt reduction from €316.7 million to €257.9 million as at 30 June 2024 on a pro forma basis, resulting in a reduction in net LTV from 46.5 per cent to 42.7 per cent.

·    Strategic Direction: The Board has explored a range of strategic options, including a possible sale of the Company, to address proactively the Company's share price discount to EPRA net asset value and to maximise value for shareholders. The Board believes the accelerated condominium sales strategy represents the best outcome for shareholders and is no longer actively exploring a possible sale of the Company.

·    Continuation Vote: The Board proposes to bring forward the Company's upcoming Continuation Vote and will recommend that shareholders vote in favour of continuation. This will allow the sale of condominiums and PRS assets to be implemented over time, offering greater optionality to deliver shareholder value.

Robert Hingley, Chairman of Phoenix Spree Deutschland, commented:

"The announcement of our agreement to sell a portfolio of 16 buildings marks a crucial step in advancing our value realisation strategy. This transaction has enabled us to secure revised lending terms that will facilitate a significant increase in condominium sales.

The Board recognises the importance of next year's Continuation Vote in determining the Company's future strategic direction. Following consultation with our major shareholders, we believe that a managed Portfolio realisation, primarily through condominium sales, offers the optimal path to maximising shareholder value.

We look forward to providing shareholders with detailed information about this proposal in a circular to be published on or before 17 February 2025."

Strategic Context and Implementation

Since the market downturn began in 2022, the Board has observed that PSD's share price has not reflected the inherent value of the Portfolio's condominium potential, resulting in the shares trading at a significant discount to EPRA Net Asset Value. The Board and Property Advisor have worked actively to address this value gap through various initiatives.

The Company demonstrated its commitment to shareholder value by undertaking share buybacks, having repurchased 8.9 per cent of its initial issued share capital since 2019. The April 2024 strategy update focused on unlocking value through increased condominium sales, recognising the substantial premium that individual condominium sales command compared to disposals of whole PRS buildings.

Enhanced Sales Strategy and Portfolio Sale

The portfolio sale to funds managed by Partners Group has unlocked an opportunity to renegotiate our principal debt facility, which will enable a step-change in permitted condominium sales and value-enhancing capital expenditure. In support of the new strategy, the Company has strengthened its sales capability, having engaged the services of two leading condominium sales platforms, Engel & Völkers and Lübke Kelber. Current market evidence supports achievable values of approximately €5,000 per sqm for vacant units and €3,500 for tenanted units.

Condominium Sales Programme

Following the disposal, the Company's remaining Portfolio comprises 61 buildings (or 1,689 units) approximately 80 per cent of which are legally split for condominium sales and a further 14 PRS buildings (480 units) which are not legally split.

The strategic transaction and debt facility amendment announced today will accommodate:

·    Increase from 6 to 40 buildings permitted for condominium sales at any point in time.

·    Initial condominium sales phase of 16 buildings (including the current sales inventory of 6), increasing available units for sale from 117 to 375 by end-2024.

·    A further 24 buildings, representing a further 576 units, are scheduled for marketing in H1 2025.

·    Potential for further buildings to be added, subject to future refinancing arrangements.

Condominium sales continue to demonstrate significant value uplift:

·    Average achieved price of €4,122 per sqm year-to-date.

·    19 per cent premium to H1 2024 JLL Portfolio valuation.

·    Vacant units achieving a material premium to Portfolio valuation.

·    Strong market fundamentals supporting continued price premiums.

Portfolio Sale Details

As previously announced, the Company has been actively pursuing opportunities to sell individual assets and portfolios through various sales platforms and direct marketing initiatives. The assets in the portfolio sale, most of which were acquired in 2017, generate an average monthly rent per sqm of €9.8 compared to the remaining Portfolio average of €10.7 per sqm.

The portfolio, which is held in an SPV, is being acquired by funds managed by Partners Group, a leading global private markets firm as share deal. To facilitate the transaction, QSix is required to remain as Property Advisor for the portfolio and has undertaken to co-invest 2.5 per cent.

The portfolio sale is not subject to shareholder approval. It is expected to complete by the end of 2024 following receipt of regulatory approval.

Lazard & Co., Limited is acting as financial adviser to the Company in relation to the portfolio sale and the Continuation Vote.

Financial Impact

The Company has reached agreement in principle with the Company's main lender, Natixis, to modify the Company's principal lending facility (subject to documentation). The impacts of the combination of the amended financing terms and the disposal include:

·    €58.8 million debt reduction from €316.7 million to €257.9 million as at 30 June 2024 on a pro forma basis, resulting in an improvement in net LTV of 42.7 per cent from 46.5 per cent.

·    After debt repayment, €12.9 million of cash will be released, of which €9 million will be allocated for value-enhancing capital expenditure on condominium properties in order to enhance sales proceeds and velocity.

·    All in cost of debt following the modification rises from 2.58 per cent to 2.90 per cent.

·    The transaction is expected to dilute EPRA NTAPS by approximately 7.9 per cent. On a pro forma basis, EPRA NTAPS is expected to reduce from €3.68 to €3.39 per share (£3.12 to £2.85 per share).

·    A reduction in the annual asset management fees payable to the Property Advisor of approximately 7.9 per cent.

·    For the financial year ending 31 December 2024, in excess of 50 percent of buildings in the Portfolio are expected to be valued on a condominium sales basis, reflecting higher realisable values of condominium units versus PRS buildings).

As a result, the Company will be able to execute its accelerated condominium sales programme. Under the amended debt facility, the Company will not be able to make distributions, including dividends and share buybacks, while the facility is outstanding. The Natixis loan is due to mature in September 2026. However, subject to the Company's Continuation Vote being approved, the Company intends to seek alternative financing in order to accelerate distributions to shareholders ahead of this date. Any early repayment of existing debt would not trigger repayment penalties.

Shareholder Consultation and Strategic Direction

The Company is obliged, pursuant to its Articles, to propose a Continuation Vote no later than June 2025.

The Board, supported by Lazard, has explored a range of strategic options to address proactively the Company's material share price discount to EPRA Net Asset Value and to maximise value for shareholders. This included exploring the feasibility of a cash offer for the Company, an amendment of PSD's existing debt facility with Natixis to enable accelerated condominium sales and the sale of individual assets and portfolios of assets. Given current market pricing dynamics for individual condominium unit sales versus the alternative of whole building sales, the Board considers that the accelerated condominium sales strategy represents the best outcome for shareholders. Although the Board is no longer actively exploring a possible sale of the Company, this strategy would not rule out alternatives in the future should they appear feasible and provide higher returns for shareholders. The Board did not receive a firm proposal to acquire the whole Company.

Given these significant developments, the Board believes it is sensible to bring forward the Continuation Vote to allow shareholders to approve the strategy stated above and create certainty over the Company's future direction.

Accordingly, and having consulted with a number of major shareholders, the Board today announces that it is bringing forward the date of the Continuation Vote. Additionally, the Board proposes to amend the Investment Objective and Policy to pursue a managed process of condominium sales over time, balancing the need to return cash to shareholders promptly while maximising value. In effect this constitutes a managed wind down of the Company's Portfolio.

If the Continuation Vote is passed by shareholders, the Board will continue to undertake the accelerated condominium sales strategy, but within an extended timeframe that allows for greater control and flexibility to renegotiate debt facilities and to achieve better pricing for its assets.

Should the Continuation Vote not pass, the Board will be required to formulate proposals for the voluntary liquidation, reorganisation or reconstruction of the Company for consideration by shareholders at a general meeting to be convened by the Board for a date not more than six months after the date of the meeting at which the Continuation Vote was not passed.

The Board will recommend that shareholders vote in favour of the Continuation Vote to allow the sale of condominium and PRS assets to be implemented over time, offering greater optionality to deliver shareholder value. In the event that the Continuation Vote is passed, the Company will propose a further Continuation Vote no later than three years subsequently.

The posting of the circular to shareholders providing further details is expected on or before 17 February 2025.

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Disclaimer

Lazard & Co., Limited ("Lazard"), which is authorised and regulated by the FCA in the United Kingdom, is acting exclusively as financial adviser for Phoenix Spree Deutschland Limited and for no one else in connection with the matters described in this announcement and will not be responsible to anyone other than Phoenix Spree Deutschland for providing the protections afforded to clients of Lazard or for providing advice in connection any matter described in this announcement. Neither Lazard nor any of its affiliates (nor their respective directors, officers, employees or agents) owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Lazard in connection with this announcement, any statement contained herein, or otherwise.