8 July 2013
Local Shopping REIT plc ("LSR" or the "Company")
STRATEGIC REVIEW UPDATE
Appointment of new manager, proposed change of investment policy,
closure of Formal Sale Process and termination of Offer Period
The Board of LSR announced on 12 November 2012 that, given the Company's rating, due in part to its size and capital structure, and the challenge of creating a scaleable business, it was in the interests of shareholders as a whole to review options open to the Company.
The committee of the Board (the "Committee") has considered several options including preserving the status quo, externalisation of the Company's management and certain corporate transactions. It has concluded that, due to the continuing challenges faced by the Company, a change of investment policy allowing the orderly liquidation of assets, the repayment of debt and the return of the remaining capital to shareholders over a period of time is in the best interests of all shareholders.
Appointment of new manager
The Committee received several proposals from third party managers. Following a rigorous selection process the Board has appointed INTERNOS Global Investors Limited ("INTERNOS") as Investment Manager.
INTERNOS currently has a total of £1.5 billion under management including six "manager replacement" mandates. The Board has appointed Steve Faber, an employee of INTERNOS, as a director of the Company; he is designated investment manager to LSR. Steve has extensive experience of UK property including at Tesco Stores, Land Securities Trillium and, most recently, at RREEF where he was Head of UK Asset Management and responsible for £2 billion of property with experience in many towns and cities in the UK.
Under the management agreement (the "IMA"), the Company has agreed to grant INTERNOS the following fees in respect of investment management, asset management, administration and ancillary services:
a) an Asset Management Fee of 0.70% of "Gross Asset Value" per annum calculated from the Effective Date, subject to certain minimum amounts;
b) an Annual Performance Fee comprising 20% of recurring operating profits for each financial year of the Company (after disregarding any redundancy or other staff termination costs incurred by the Company) above an annually agreed hurdle, rebased quarterly downwards on a pro rata basis to reflect sales;
c) a Sales Fee payable on the disposal of assets, subject to a ratcheted scale (0.0% for less than £50 million, 0.5% for £50-150 million and 1.0% for £150 million or greater of aggregate sales); and
d) a Terminal Fee, calculated as 5.7% of any cash returned to the Company's shareholders above the "Terminal Fee Hurdle", calculated at 36.1 pence per Company share in cash returned to the Company's shareholders per annum from the Effective Date, excluding dividend payments from recurring operating profits, rising by 8% per annum after the first year, reducing on a pro rata daily basis each time equity is returned to the Company's shareholders above any dividend payments from recurring operating profits.
The fee structure is designed to reduce the basic administration cost of the Company, such reduction estimated to be approximately £600,000 per annum. In addition, INTERNOS are incentivised to sell assets whilst maximising returns to shareholders.
A six month notice period is required for the termination of the IMA with INTERNOS under the terms of the IMA.
Consent to a change of management from Indus (Eclipse 2007 1) plc (an affiliate of Barclays Bank plc) ("Indus"), the service provider to loans in two of the subsidiaries (for loans totalling £69.2m) is required and has been received. In connection with the consent, the Company agreed to amortisation on the facilities in the amount of £300,000 per quarter. These loans are due to be repaid in January 2017.
HSBC Bank plc ("HSBC") is the provider of loans to two remaining subsidiaries (for an aggregate amount of £66.3 million). These loans have been extended, to expire in April 2018, in return for certain amendments to the financing arrangements including: (a) an increase in the margin to 200bps; (b) as from 2015, an additional PIK margin, which will accrue and become payable on repayment of the loans (at the rate of 1% per annum from 1 January 2015, 1.5% per annum from 1 January 2016, and 2% per annum from 1 January 2017); and (c) amortisation instalments of 0.45% of the loans being paid on each interest payment date.
HSBC and Capita Asset Services (London) Limited ("Capita"), Indus' agent, as a condition to granting consent to the INTERNOS appointment, required that INTERNOS entered into a duty of care agreement. The agreements grant HSBC and Capita certain rights in relation to the termination of the IMA.
Under both original banking arrangements, whilst they do not have traditional parent company guarantees, due to the structure of the arrangements, they do have effective pledges from the Company.
These banking arrangements should now give the Company sufficient time to effect an orderly disposal of its assets.
Proposed new strategy
Subject to the approval by shareholders of the proposed revised investment policy at a General Meeting, it is the Company's intention that all existing properties will be sold as expeditiously as is consistent with the protection of value, with an initial focus on those properties already optimised for sale and those in areas where the Company has few assets, so as to reduce property management costs. A circular, which provides further information in relation to the proposed new strategy and attaches a notice convening a General Meeting, will be posted to shareholders shortly.
The pace of the sale of assets will be dictated by market conditions but also initially by the impediment of interest rate hedges and fixed rate loans. These instruments and arrangements terminate in 2016.
It is too early to give any clear guidance on the length of this process. Similarly, the Committee hopes that INTERNOS will be able to give more information on the amounts that may be returned to shareholders, in due course.
The Company will have increased cash flow constraints due, in part, to the requirement to amortise loans and, in part, due to an anticipated reduction in rental income commensurate with the proposed disposal strategy.
The Board also believes that the imperative for the Company is to reduce debt to a more sustainable level.
Accordingly, the Board will not be recommending the payment of dividends for the time being. This will remain under review and a return to the payment of dividends will be made when it is sustainable and desirable.
The Company has received advice that, for the time being, that this will not affect the Company's REIT status.
Existing management team
Michael Riley, Nicholas Gregory and Victoria Whitehouse have resigned from the Board and they have entered into compromise agreements terminating their employment with the Company. The Company's existence as a public company has been a challenging one, however the Board acknowledges the efforts made by the executive team led by Mike Riley and Nick Gregory and thanks them for their endeavours. The strategic review and subsequent restructuring has been complex and difficult and their cooperation has been most helpful.
The remainder of the employees will transfer to INTERNOS under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE"). Should any of those transferred not remain with INTERNOS, INTERNOS will be reimbursed the termination costs, provided INTERNOS retains a minimum of five transferring employees. The appointment of INTERNOS will become effective when the statutory consultation process under TUPE is completed.
It is anticipated that total costs of the Strategic Review will amount to c. £2.25 million, the majority of which is constituted by staff termination costs of c. £950,000 pursuant to legal obligations and fees to the Company's lenders of c. £400,000.
In order to (i) effect an orderly transition of the Joint Ventures ("JVs") on behalf of the Company and the respective JV partners and (ii) extract best value for the Company, each JV has entered into management arrangements with a new fund manager (not, for the avoidance of doubt, INTERNOS) established by Michael Riley and Nicholas Gregory. The Group has disposed of its interests in one of the JVs for £725,000. Details of a further disposal of the interest in an additional joint venture are set out below. It is anticipated that the Group's interest in a third Joint Venture will be liquidated in due course.
Joint Venture transaction
LSR Asset Services Limited ("LSRAS"), a 100% subsidiary of the Company, holds a 20% interest in a joint venture, Local Parade Investments LLP (the "JV"). The Company provided an intercompany loan to LSRAS in respect of the JV. The interest in the JV is the main asset of LSRAS. The principal activity of the JV is the acquisition and management of retail properties in the United Kingdom.
The Company has agreed to dispose of: (i) the entire issued share capital of LSRAS (the "Shares"); and (ii) the receivable due to the Company from LSRAS under the intercompany loan (the "Receivable"), to: (a) Anglo Securities Investments Limited, (b) Michael Riley, (c) Nicholas Gregory; and (d) in the case of the Shares, PPF Local Parade Investments LP and, in the case of the Receivable, PPF Shopping Finance S.à r.l.(the "Transaction").
The aggregate consideration for the Shares and the Receivable is £2.8 million, which is payable in cash on completion of the Transaction.
LSRAS had a gross asset value, as at 31 March 2013, of £3.5 million and LSRAS' profits for the financial year ended 30 September 2012 were £0.17 million.
The effect of the Transaction on the Company is to enable the Company to exit from the JV, providing cash to meet its working capital requirements and reduce its outstanding debt facilities.
The Strategic Review has been a long and complex process however, as intended, the Board has had the opportunity of considering a wide range of solutions for the Company.
The Board believes that the route chosen ought to give Shareholders the best chance of maximising value as it should:
· Give sufficient time to dispose of the Group's properties in an orderly manner
· Minimise the adverse impact of the Group's extensive hedging arrangements
· Reduce the refinancing risk
· Reduce the administration cost and allow that cost to taper down with the reduction in the Group's property portfolio
· Put in place a management structure better aligned with a liquidation strategy
There remains significant execution risk but set against some signs of a stabilisation, and maybe even some improvement, in secondary and tertiary property markets, it is hoped that a satisfactory outcome may be achieved for shareholders.
Closure of Formal Sale Process and termination of offer period
In the announcement of 12 November 2012 it was explained that any discussions in relation to a merger with a third party or a sale of the Company would take place within the context of a "formal sale process", as defined in the City Code on Takeovers and Mergers (the "Code") in order to enable conversations to take place with parties interested in making such a proposal on a confidential basis. During this process, the Company received several indicative proposals and potential offerors were provided with access to management and detailed due diligence information. Following careful consideration, the Committee has concluded that a sale of the Company at this time is unlikely to gain sufficient recognition for the underlying value of the business or to deliver best value for shareholders, in part due to the current negative impact of the mark to market liability on the hedging arrangements. As a consequence, the Committee has decided to terminate the formal sale process and the Company is no longer deemed to be in an Offer Period as defined in the Code.
J.P. Morgan Cazenove 020 7742 4000
FTI Consulting (PR to LSR) 020 7831 3113
INTERNOS Global Investors LLP 020 7355 8800
Tavistock Communications (PR to INTERNOS) 020 7920 3150
Background information on INTERNOS
INTERNOS is a real estate fund management specialist with significant experience of taking over portfolios and managing realisation strategies. Headquartered in Mayfair, London, INTERNOS has four offices in continental Europe and a team of 70 people. Funds managed by INTERNOS collectively own more than 250 commercial property investments, predominantly located in Germany, France and The Netherlands. It is proposed that asset management and transactions would be handled on a day-to-day basis by the team transferred from LSR, under the direction of Steve Faber (Head of UK Markets, INTERNOS).
This Announcement has been issued by, and is the sole responsibility of, the Company. No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by J.P. Morgan Limited or any of its respective affiliates or agents as to or in relation to, the accuracy or completeness of this Announcement or any other written or oral information made available to or publicly available to any party or its advisers, and any liability therefore is expressly disclaimed. J.P. Morgan Limited is authorised and regulated by the FCA in the United Kingdom.
J.P. Morgan Limited is acting exclusively for the Company and no-one else in connection with the proposed change of investment policy and is not, and will not be, responsible to anyone other than the Company for providing the protections afforded to their clients or for providing advice in relation to the proposed change of investment policy or any other matter referred to therein.
J.P. Morgan Limited conducts its UK investment banking activities as J.P. Morgan Cazenove.