THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
Starwood European Real Estate Finance Limited (the Company)
Proposals regarding discount control mechanism, investment management agreement and share issuance
Background
The board of directors of the Company (Board or Directors) have today announced proposals that relate to the discount-triggered realisation mechanism and realisation vote currently provided for in the Articles of incorporation (Articles), certain amendments to the investment management agreement with Starwood European Finance Partners Limited (Investment Manager) (Investment Management Agreement) and the replacement of the existing carried interest entitlement with a performance fee payable to the Investment Manager, together with a proposal to seek authorisation to allot new shares in the Company (Shares) and dis-apply pre-emption rights (together, the Proposals). The Proposals will not be implemented without, and are conditional upon, obtaining the necessary approvals from shareholders at an extraordinary general meeting of the Company (Extraordinary General Meeting) to be convened in due course.
The Proposals have been formulated in light of the following:
· the approaching fifth anniversary of the life of the Company on 17 December 2017 and the potential application of the current discount-triggered realisation mechanism and the realisation vote (which would currently be held before 28 February 2018);
· a review of the terms of the Investment Management Agreement after the initial five year period;
· facilitating a future restructuring of the underlying financing structure of the Group through the removal of the existing partnership which is situated between the Company and its Luxembourg holding company; and
· the objective of raising fresh capital, including through a placing programme (subject to the publication of a prospectus of the Company) and through opportunistic tap issues taking advantage of the recent implementation of the Prospectus Regulation which now enables issuers such as the Company (subject to obtaining the requisite Shareholder authorities) to issue up to 20 per cent. of the securities already listed by way of such issues over 12 months without any requirement to publish a prospectus (the previous limit having been 10 per cent.).
Shareholders will be asked to vote on the Proposals at the Extraordinary General Meeting, which will be convened by the publication of a circular (Circular) in due course. The reason why Shareholders will be asked to vote on the amendments to the Investment Management Agreement and the related proposed dissolution of the existing partnership is because the proposed changes constitute a related party transaction for the purposes of the Listing Rules. A further announcement will be made on the publication of the Circular.
Full details of the Proposals are set out below.
Summary of the Proposals
The Proposals comprise:
· an amendment to the Articles which would defer the current provisions relating to a realisation offer and realisation vote mechanisms (Realisation Offer and Realisation Vote respectively). The current provisions provide that the Directors have discretion to implement a Realisation Offer, if certain discount-related conditions are met, or to propose a Realisation Vote by no later than 28 February 2018 in the event that such conditions are not met. It is proposed that the provisions relating to the Realisation Offer will first apply by reference to the last six months of the financial year ending 31 December 2022 and that the Realisation Vote mechanism would apply (where the discount-triggered realisation mechanism has not been activated) by no later than 28 February 2023, and in each case on successive five year anniversaries of such dates;
· an amendment to the Investment Management Agreement to enable the Company to terminate the agreement in the event of a change of control of the Investment Manager, following a consultation process with the Investment Manager;
· amendments to the circumstances where the Company can summarily terminate the Investment Management Agreement, to provide additional clarity around the meaning of "material breach" by the Investment Manager;
· an amendment to the base management fee provided in the Investment Management Agreement such that in calculating such fee, there shall be excluded the un-invested portion of the cash proceeds of any new issue of Shares until at least 90 per cent. of such proceeds are invested in accordance with the Company's investment policy (or deployed to repay borrowings under any revolving credit facility of the Company or other liabilities of the Company) for the first time;
· the proposed removal of the existing partnership (Partnership) from the Company's group (Group) structure and the replacement of the entitlement of Starfin Carry L.P. (Special Limited Partner) to receive carried interest (Existing Carried Interest Entitlement) with a performance fee at the Investment Management Agreement level (Performance Fee), calculated substantially on the same basis as the Existing Carried Interest Entitlement but subject to a change in the measurement period for the calculation thereof from a five year period to two years; and
· authorisation to allot new Shares and to dis-apply pre-emption rights in respect of up to 20 per cent. of the issued share capital on the date of the Extraordinary General Meeting. These authorities are in substitution for the 10 per cent. authorities taken at the 2017 Annual General Meeting of the Company and are supplemental to the authorities taken in respect of the placing programme of the Company.
Further details of the Proposals
Changes to the discount-triggered realisation mechanisms
The existing Articles currently provide for a discretionary discount-triggered realisation mechanism (Article 49) and, save where the discount-triggered realisation mechanism has been activated, the discretion to hold a realisation vote (Article 50), which are summarised in more detail below.
Realisation Offer
The current position in Article 49 is that if the Ordinary Shares trade at an average discount to Net Asset Value per Share of five per cent. or more during the six month period ending 31 December 2017, the Directors at their absolute discretion may put the Realisation Offer to Shareholders, subject to applicable legal requirements. The terms of such Realisation Offer would provide, broadly, that Shareholders may request for up to 75 per cent. of their Ordinary Shares to be realised for cash.
In the event that a Realisation Offer is made, the Company will cease investment (except in limited circumstances) in respect of Ordinary Shares the subject of valid realisation requests and will return capital to holders of such Ordinary Shares over time, net of costs, as investments mature or are otherwise realised. It was anticipated that a complete return of redeeming investors' pro rata share of available capital, if any, in this manner may take several years, depending on the remaining maturities of the investments held at the time and whether, in the opinion of the Investment Manager, any such investments require restructuring or the extension of maturities in order to maximise value for Shareholders.
Realisation Vote
In the event that the discount-triggered realisation mechanism is not activated, the current position in Article 50 is that the Directors shall exercise their discretion under Article 50 to put forward the Realisation Vote (as an ordinary resolution) to Shareholders by no later than 28 February 2018.
If Shareholders vote in favour of this resolution then the Company will procure that a realisation offer on substantially the same terms as the Realisation Offer described above is offered to Shareholders. Following the receipt of all elections, if either: (i) more than 75 per cent of the Ordinary Shares then in issue were elected for realisation; or (ii) the NAV of the Company following the realisation would be less than £100 million, the Directors may exercise their discretion not to proceed with the Realisation Offer and instead put forward alternative proposals which are no less favourable to electing Shareholders and which may include the reorganisation or winding up of the Company.
If Shareholders vote against this realisation resolution, then the Company will continue in existence as it is then constituted without any liquidity event for Shareholders.
Proposed amendments to the Articles
The Directors are proposing that Article 49 (Realisation Offer) and Article 50 (Realisation Vote) be amended at the Extraordinary General Meeting. It is proposed that the discount-triggered realisation mechanism set out in Article 49 (Realisation Offer) will be changed such that the existing provisions relating to a Realisation Offer which are calculated by reference to the discount over the six month period ending 31 December 2017 shall not apply as of that date but shall first apply by reference to the last six months of the financial year ending 31 December 2022 and (subject to not being previously activated) on successive five year anniversaries of the same. Further it is proposed that Article 50 (Realisation Vote) will apply (where the discount-triggered realisation mechanism has not been previously activated) by no later than 28 February 2023 and on successive five year anniversaries of such date.
In assessing this change Shareholders should note that the Shares are currently trading at a premium to Net Asset Value, and whilst this cannot be assured, it is questionable whether the existing discretionary discount related realisation mechanism set out in the Articles and which applies to the last six months of the current financial year will actually be triggered under the existing scenario.
If the relevant resolution is not approved by Shareholders, the current provisions contained in the Articles will remain in force and in the event that the conditions for making a Realisation Offer are not triggered, a Realisation Vote will be put forward to Shareholders by no later than 28 February 2018.
Proposed amendments to the Investment Management Agreement and conditional termination of the Special Limited Partner's carried interest entitlement
As part of the Proposals, the Directors are also proposing that certain changes be made to the Investment Management Agreement. These changes, which comprise a related party transaction, are subject to the passing of the necessary resolution at the Extraordinary General Meeting with the Investment Manager and any members of its group (as related parties) abstaining from voting on such resolution.
Termination provisions
Save in certain fault based scenarios, the Investment Management Agreement is currently terminable by either the Investment Manager or the Company giving to the other not less than 12 months' written notice. The terms of the Investment Management Agreement provide that such notice could not have been given before the fourth anniversary of the IPO Admission (being 17 December 2016) and therefore the original term of the Investment Management Agreement was for a minimum initial five year period.
Certain changes to the termination provisions are now being proposed.
First, an additional termination right for the Company. The Company will be able to terminate the appointment of the Investment Manager in the event of a change of control of the Investment Manager (as described further and in the manner set out below).
The proposed amendment provides that at any time within 90 days following a change of control of the Investment Manager (as more particularly described below), the Company shall be entitled to give 90 days' written notice to the Investment Manager (Review Period) during which time the Investment Manager shall seek to satisfy the Board as to the ability of the Investment Manager to properly carry out its duties to the Company as set out in the Investment Management Agreement in a manner that is in the best interests of the Shareholders as a whole. In the event that at the end of the Review Period, the Board (acting reasonably) is not satisfied about the continuing ability of the Investment Manager to carry out its duties as set out in the Investment Management Agreement in a manner that is in the best interests of the Shareholders as a whole, the Board shall be entitled to terminate this agreement by immediate notice in writing to the Investment Manager without compensation.
The Investment Manager is licensed by the Guernsey Financial Services Commission (GFSC) to carry on controlled investment activities. Under the Protection of Investors Law, the approval of the GFSC is required for any change of control of the licensed entity, in this case the Investment Manager. A change of control shall be deemed to occur where a person acquires a direct or indirect interest in the Investment Manager and which is calculated by reference to 15 per cent. or more of the voting rights. Any such change of control shall require the making of a prior notification to the GFSC under section 28A of the Protection of Investors Law and for the GFSC to notify or be deemed to notify its non-objection to such transaction.
A change of control triggering the application of the above provision shall be deemed to occur when there has been a change of control pursuant to the Protection of Investors Law, as summarised above.
Secondly, the Company and the Investment Manager propose that certain breaches of the Investment Management Agreement should be deemed to be material breaches which entitle the Company summarily to terminate the Investment Management Agreement. In particular, any failure by the Investment Manager to act in good faith with the due skill, care and diligence which would reasonably be expected from an experienced manager in the sector and to exercise appropriate prudence in the management of the Company's portfolio would constitute a material breach.
For the avoidance of doubt, save as set out above, all of the other grounds for termination of the Investment Management Agreement will remain unaltered.
Management fee
The base management fee is currently 0.75 per cent. per annum of the Net Asset Value attributable to the Ordinary Shares. The Directors and the Investment Manager have determined that, in the light of further planned equity capital raisings of the Company, in calculating such fee, there shall be excluded from the Net Asset Value attributable to the Ordinary Shares the uninvested portion of the cash proceeds of any new issue of Shares (or C Shares) until at least 90 per cent. of such proceeds are invested in accordance with the Company's investment policy (or deployed to repay borrowings under any revolving credit facility of the Company or other liabilities of the Group) for the first time.
Performance fee
The Company is proposing certain changes to the incentive arrangements for the Investment Manager and affiliates. It is proposed that:
· the Investment Management Agreement will be amended to incorporate the Performance Fee payable to the Investment Manager; and
· the Existing Carried Interest Entitlements of the Special Limited Partner (which is an affiliated company of the Investment Manager) will be terminated and, as described further below under "Proposed Changes to Group Structure", the Partnership is intended to be subsequently dissolved under the Restructuring.
These related changes, which are described in more detail below, together form part of a related party transaction (as described further below under "Related party transaction") and are conditional upon the passing of an ordinary resolution at the Extraordinary General Meeting.
The provisions relating to the Performance Fee will apply from 1 January 2018 or from such later date on which the partnership agreement has been dissolved or amended to remove the carried interest entitlement of the Special Limited Partner (in such latter case to take effect as if made on 1 January 2018).
The Company and the Investment Manager do not believe that any Existing Carried Interest Entitlement will be earned by the Special Limited Partner in respect of the five year period to 31 December 2017.
Currently, as described in the ongoing expenses sections of the original IPO prospectus and the prospectus of the Company issued in 2015 in connection with the then placing programme, for successive five year periods commencing 1 January 2018, the Hurdle Total Return will be calculated by reference to the NAV at the start of each such five year period (instead of at IPO Admission) and to the dividends paid and payable in respect of such period.
Once the new arrangement is implemented, the Carried Interest Entitlement will be replaced by the Performance Fee payable to the Investment Manager. As with the Existing Carried Interest Entitlement, the amount of such Performance Fee will continue to be 20 per cent. of the excess (if any) of the returns generated by the Company over the Hurdle Total Return (described below). In addition, however, the measurement period over which the Performance Fee will be calculated will be shortened from five years under the Existing Carried Interest Entitlement to two years, with the payment of any performance fee earned being made at the end of each such two year period. The other material terms of the Existing Carried Interest Entitlement will be substantially grandfathered into the Performance Fee (with appropriate changes to reflect the modification from a limited partnership interest to a contractual payment mechanism under the Investment Management Agreement).
Accordingly following the proposed change, the Hurdle Total Return will be achieved in respect of the Performance Fee when the NAV of the Company at the end of the two year period, plus the total of all dividends declared and paid to Ordinary Shareholders in that two year period, is equal to the NAV of the Company at the start of each two year measurement period, as increased by 8 per cent. per annum, on a simple interest basis (but excluding performance fees accrued and deemed as a creditor on the balance sheet at the start of the two year measurement period). No performance fee will be payable in relation to performance that recoups previous losses (if any).
To the extent that the Company makes further issues of Ordinary Shares and/or repurchases or redeems Ordinary Shares, the Hurdle Total Return will be adjusted accordingly, by reference to the issue proceeds of such further issues and dividends declared subsequent to such issues. Other corporate actions will also be reflected as appropriate in the calculation of the Hurdle Total Return.
Authorities to allot New Shares and dis-apply pre-emption rights
In addition to obtaining the placing programme authorities at the 2017 Annual General Meeting, the Company was granted authority from Shareholders to allot new Shares and partially dis-apply the pre- emption rights contained in the Articles in order to allow the Company to issue new Shares and/or sell such new Shares out of treasury by way of tap issues without first offering them to existing Shareholders on a pro rata basis. Such authorities were obtained in respect of up to 10 per cent. of the Shares in issue as at the date of the Annual General Meeting.
At the time of the Annual General Meeting there was an exemption from the requirement to publish a prospectus in respect of an application for admission to trading for shares representing, over a period of 12 months, less than 10 per cent. of the securities already admitted to trading. Following the implementation of the Prospectus Regulation in the United Kingdom on 20 July 2017, this threshold was increased from 10 per cent. to 20 per cent. and this now enables issuers such as the Company (subject to obtaining the requisite Shareholder authorities) to issue up to (but not including) 20 per cent. of the securities already admitted to trading over 12 months by way of tap issues without any requirement to publish a prospectus.
The Investment Adviser continually monitors and sources suitable investment opportunities for the Company and these may exceed the capital available to the Company. The Directors wish to take advantage of the enlarged exemption in order to allow the Company to carry out larger tap issues and pursue larger investment opportunities in a timely manner as they arise in the future without the requirement to publish a prospectus and incur the associated advisory costs.
The Board will therefore be seeking Shareholder authorities to allot new Shares and dis-apply the pre-emption rights contained in the Articles in respect of up to 20 per cent. of the Shares in issue at the date of the proposed Extraordinary General Meeting. These authorities will replace the existing tap issue authorities.
The Company will only allot new Shares (or sell such shares out of treasury) at a premium to the prevailing Net Asset Value per Share and when there is sufficient demand for the Shares.
The proceeds of any share issuance and sales out of treasury, implemented pursuant to this power will be invested in accordance with the Company's investment policy or deployed to repay borrowings under any revolving credit facility of the Company or other liabilities of the Group.
The existing placing programme authorities will not be affected by the passing of the enlarged tap issuance authorities.
Proposed changes to Group structure
The Company is proposing that the internal structure of the Group will be reorganised in due course to facilitate greater flexibility for the way in which the Company finances the investments it makes (Restructuring).
The Partnership currently sits between the Company and its Luxembourg subsidiary (Luxco). As a preliminary step under the Restructuring, it is proposed that the Partnership will be dissolved (with the Investment Management Agreement being amended accordingly as described above).
It is intended that the Company will then replace the Partnership with a new wholly-owned entity (New Intermediate Company). Under the Restructuring it is also envisaged that a parallel investment structure to the New Intermediate Company and Luxco will also be established under the Company.
The Restructuring will be subject to certain third party approvals which have not yet been obtained, including the consent of Lloyds Bank plc and the related amendment of the existing revolving credit facility of the Company.
The specific logistics of the Restructuring and its implementation will also be subject to tax and other advice. It is currently expected that the Restructuring will be implemented before the end of 2017.
Other than to the extent that it relates to the Investment Management Agreement and the Partnership Agreement or otherwise represents a related party transaction with the Investment Manager or its affiliates requiring the approval of Shareholders under the Listing Rules, the Restructuring is not expected to require the approval of Shareholders.
Benefits of the Proposals
The Board considers that the opportunity for non-bank, alternative lenders to extend debt financing to the real estate sector in Europe that Starwood Capital Group observed in 2012, resulting in the Company's launch, continues. The Investment Manager continues to identify new and attractive investment opportunities for the Company and with the terms outlined in this announcement, the Investment Manager and the Investment Adviser should be able to continue to further strengthen their European real estate debt platform, to the benefit of the Company.
The removal of any uncertainty relating to the application of the Realisation Offer and Realisation Vote in the near term is expected to provide the Company and the Investment Manager with a more stable platform for new investment and for future equity capital raisings, while the adoption of a set five year cycle of potential Realisation Offers and Realisation Votes should provide comfort to Shareholders and prospective investors in relation to the risk of a long-term discount emerging.
The Board believes that the changes proposed to the Investment Management Agreement provide greater clarity as regards the existing termination provisions and the consequences of such termination in these circumstances. The proposed two year measurement period for the Performance Fee is more appropriate given the typical duration of loans within the portfolio. These amendments should also enable the Investment Manager and the Investment Adviser to further strengthen their European real estate debt platform, to the benefit of the Company.
Increasing the number of new Shares which may be issued pursuant to tap issues and therefore taking advantage of the new prospectus exemption, will allow the Company to continue to issue (or sell) Ordinary Shares at a premium to the prevailing net asset value per Ordinary Share when there is sufficient demand for the Ordinary Shares, and thereby enable the Company to react quickly to secure new investment opportunities sourced by the Investment Manager as they arise.
In short, the Board believes that the expertise of Starwood Capital Group and its employees and their access to transactions continues to confer significant benefits on the Company in terms of the ability to source and underwrite attractive lending opportunities offering good risk adjusted returns that other lenders would not typically be in a position to provide. The Company has also benefited in its first five years from being able to co-invest with other funds managed by Starwood Capital Group, and this has made possible access to lending opportunities such as Centre Point, Aldgate Tower and Salesforce Tower that would otherwise have been too big for the Group. The Directors believe that this co-investment opportunity will continue to be beneficial to the Company.
The Board is of the view that with the continued involvement of the Investment Manager on the basis of the Proposals, the Company is in a strong position to meet its objectives over the medium to longer term.
Related party transaction
The Investment Manager and the Special Limited Partner are both "related parties" for the purposes of the Listing Rules and the proposed amendments to the Investment Management Agreement (and the related proposed amendments and dissolution of the Partnership) therefore will require Shareholder approval at the forthcoming Extraordinary General Meeting by the necessary enabling resolution, with the Investment Manager and any members of its group (as related parties) abstaining from voting on the relevant resolution.
Update on Current Performance
The Company expects to release its interim results for the 6 month period to 30 June 2017 on or about 11 September 2017. The Company continues to perform in line with the Board's expectations and the unaudited NAV as at 31 August 2017 is not expected to vary significantly from the unaudited NAV as at 31 July 2017, as announced by the Company on 14 August 2017.
Enquiries
Duncan MacPherson
Starwood Capital Europe Advisers, LLP
Tel: +44 20 7016 3650
Robert Peel
Fidante Capital
Tel: +44 20 7832 0983
Notes:
Starwood European Real Estate Finance Limited is an investment company listed on the main market of the London Stock Exchange with an investment objective to provide Shareholders with regular dividends and an attractive total return while limiting downside risk, through the origination, execution, acquisition and servicing of a diversified portfolio of real estate debt investments in the UK and the wider European Union's internal market. www.starwoodeuropeanfinance.com.
The Group is the largest London-listed vehicle to provide investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners Limited, an indirect wholly-owned subsidiary of the Starwood Capital Group.
