Last checked at 16 Jul 2010 14:06
16 July 2010
Recommendation to Shareholders
Recommendation to Shareholders to vote IN FAVOR of Resolutions 1 to 5 at the upcoming EGM of Sirius Real Estate Limited to be held 30 July 2010.
Dear Fellow Shareholders,
We are writing to ask for your support in voting for our proposed changes to the Board of Directors of Sirius Real Estate Limited ("Sirius" or "the Company") to be put to shareholders at the upcoming Extraordinary General Meeting to be held 30 July 2010.
As you may know, funds managed by Weiss Asset Management LP ("Weiss") currently own an aggregate of 20.67% of the outstanding shares of Sirius. As the largest shareholder of Sirius, we want to ensure that the Board of Sirius acts in the best interests of all shareholders and with a view to maximizing the value of the Company's shares.
Proposed Strategy
In order to maximize value, it is necessary to improve the operating performance and profitability of the Company by focusing on the following goals:
·; Drive growth in occupancy and rental rates;
·; Reduce and control costs at all levels of the Company - property expenses, administrative expenses, management, legal and professional fees, among others;
Ø Total corporate costs and overheads totaled €11.0 million for the year-ending March 2010
·; Improve recoverability of service charge expenses;
Ø Service charge irrecoverables and non-recoverable maintenance totaled €9.4 million for the year-ending March 2010
·; Manage allocation of cash resources and unencumbered assets to maximize returns for shareholders, which includes a review of capital expenditure plans to ensure most effective capital allocation;
·; Ensure that applicable costs are being appropriately billed to the asset manager and not the Company; and
·; Review incentive structures currently in place for the asset manager to make them more aligned with shareholder interests;
We would like to work with the current management team to achieve these goals; we are not seeking to gut the Company. We believe there is value in Sirius or we would not have invested in the Company. However, we feel strongly that our proposed Directors have the demonstrated expertise to complement the strengths of the existing asset management team led by Kevin Oppenheim. Given the Company's recent press releases, it appears that the management team is optimistic that they will be able to turn around the Company, and we are hopeful that the future will to live up to their expectations. Nevertheless, it is clearly in the best interests of shareholders for the management team to set concrete targets and timetables based on factors such as free cash flow, occupancy, and distributable income. Moreover, it is crucial for a strong Board to be in place to hold the management team accountable to meeting these targets.
Takeover Panel and City Code
Since 18 June when we requisitioned the EGM to replace some (but not all) of the Directors, a few significant things have happened. Most dramatic was the ruling by the Takeover Panel on 14 July that Brian Myerson is a person "not likely to comply with the Code." As a result of this ruling, we openly called for Mr. Myerson to resign. We are pleased that he responded and did resign from the Board of Directors.
The proceedings against Mr. Myerson by the Takeover Panel are all the more surprising given the Chairman's statement that was reproduced in the Company's announcement on 12 July regarding the upcoming EGM. In that statement, it seems that one of the Company's primary arguments against our proposals is that it is possible (but not certain) that if the Board is reconstituted with the Directors that we have proposed, then the Code might not apply to the Company going forward. This argument is manifestly nothing but a smoke-screen and can be easily addressed: in the unlikely event that the Code is found not to apply to the Company after our proposed Directors are seated, we will put forth resolutions to shareholders that seek to amend the Company's Memorandum and Articles to put in the relevant protections found in the Code. Our proposals in the upcoming EGM are not part of some elaborate ruse or trickery to hurt shareholders. We are the largest shareholder of the Company and we want to take actions that will accrue value to all shareholders.
German Tax and Director Independence
Similarly, with respect to the Chairman's speculative assertions regarding the Company's German tax positions and assets, you can be assured that as the largest shareholders of Sirius, we have absolutely no desire to take any action that would negatively impact the financial position of the Company and its shareholders.
We would also like to point out that two of the proposed new Directors, Mr. Elgeti and Mr. Neubürger, are independent of Weiss. Prior to their roles with Treveria PLC (another company in which we are invested), Weiss had no affiliation or association with either Mr. Elgeti or Mr. Neubürger. In fact, both Rolf and Michael were recommended to their respective roles at Treveria by shareholders other than Weiss. We have subsequently been extremely impressed by their intellect, knowledge and expertise, and we have seen them have positive impacts at Treveria; we are confident their expertise and skill will be valuable to Sirius as well.
Performance of Sirius
We have put forward proposals to appoint Rolf Elgeti, Michael Neubürger, and Eitan Milgram as non-executive Directors of the Company. We believe that their addition will both strengthen the Board of Directors and make the Board more aligned with shareholders. We have chosen these nominees based on their combined expertise in German property, finance, and corporate governance. We believe their presence on the Board will improve the performance of the Company, which to date has surely been disappointing to shareholders.
The Sirius Business Model detailed within the Company's presentation at the time of the initial public offering included a "Value Creation Process" that would "rapidly increase and sustain high occupancy". The actual outcome for Sirius has been extraordinarily high vacancy rates - currently close to 30% as at 31 March 2010. These high vacancy rates persist despite development expenditure of €53.6 million since IPO. Note that this development expenditure is equal to almost two-thirds of the current market capitalization of Sirius. It would seem that this development expenditure, which was approved by the Board, has not been favorably received by either the market or by potential tenants.
To date, the operating performance of the property portfolio has been overwhelmingly disappointing. Based on the Final Results for the year ended 31 March 2010, service charge expenditure and other property costs totaled €41.7 million against service charge income of just €26.6 million, leading to irrecoverable property costs of €15.2 million. These cash flow woes have led to a breach of the cash trap provisions of the loan facility with RBS.
Despite the poor operating performance and otherwise disappointing results since the Company's IPO, we still believe that there is the potential to create significant long-term value for shareholders from the Company's existing property portfolio. It is absolutely imperative, however, for the Company to dramatically improve its operational performance in the near term to enable this long-term value to be achieved. Absent any substantive improvement and given the current economic and credit conditions across Europe, Sirius may find it exceedingly difficult to refinance its two property financing facilities when they mature in 2012 and 2013, or in any case may find it difficult to do so without being forced to accept disadvantageous terms.
Proposed Directors
We feel strongly that shareholders are entitled to a Board of Directors that sufficiently represents the interests of all shareholders. Currently, the Sirius Board does not have an Independent Director who has been nominated by shareholders. Mr. Brian Myerson had been sitting on the Board as a non-Independent Director of the Company representing the interests of the Company's external asset manager, Principle Capital Sirius Real Estate Asset Management Limited. As noted above, we called for Mr. Myerson's resignation given the recent ruling of the Takeover Panel. Whether or not the Company's external manager is represented on the Board, however, we believe that shareholders should be entitled to adequate representation.
In the past few months we have repeatedly addressed our concerns to the Board and made clear our strong view that shareholders should be given the opportunity to decide on the future composition of the Board. To this effect, we proposed candidates who we considered would strengthen the Board and bring the necessary level of shareholder representation that the Board currently lacks, and asked the Board to consult with the other largest shareholders in order to determine other possible candidates that could also be put forward for election. Despite our best efforts and intentions, the Board has systematically rebuffed all our approaches. They even refused our request for Rolf Elgeti to be a single addition to the Board. Only after we submitted our current requisition for the appointments of Messrs. Elgeti, Neubürger and Milgram did they offer to allow Mr. Elgeti to join the Board… if we withdrew the requisition request.
Given the reasons that we have outlined above, Weiss has therefore decided to requisition an Extraordinary General Meeting to give shareholders the opportunity to decide upon the future composition of the Board of Directors. We at Weiss believe that new directors should be chosen based on their demonstrated expertise in the critical issues now facing the Company. Weiss therefore supports the appointments of Rolf Elgeti, Michael Neubürger, and Eitan Milgram to the Board as non-executive Directors. We strongly believe that their combined skills and experience will place the Board in a better position to maximize value for all shareholders. We hope shareholders will agree, and present further information on the background of the three proposed Directors below:
Rolf Elgeti is currently the Chief Executive Officer of TAG Immobilien AG, a listed German property company with €770 million of gross property assets. He has also managed private property investments and developments through Elgeti Ashdown Advisers and is currently a Non-Executive Director of Treveria PLC, a London-listed property company invested in German commercial real estate. Prior to Elgeti Ashdown, Rolf was a European macro analyst and equity strategist focusing on Germany, at UBS, Commerzbank Securities and ABN Amro.
In just a year as CEO of TAG, Rolf has largely completed the restructuring and consolidation process of the group and strengthened the company decisively; the operational cash flow has risen from roughly negative €4 million per quarter to break-even in the space of three months, the share price more than doubled, the balance sheet was restructured, the vacancy rate was reduced from 14% to 5% in three quarters, and administration and general costs more than halved in the space of six months.
Michael Neubürger is currently the Chief Executive Officer of Treveria Asset Management GmbH, Treveria PLC's internal asset manager. Treveria is an AIM-listed German commercial property company with nearly €2 billion of gross property assets. Prior to Treveria, Michael served as Chief Financial Officer at Deutsche Wohnen AG and held multiple financial control positions at Deutsche Bank. He has also served as a non-executive Director of Treveria PLC.
During his time at both Deutsche Wohnen and Treveria, Michael has demonstrated an expertise within the German real estate industry. As CFO of Deutsche Wohnen, Michael organized its refinancing during the separation from the Deutsche Bank group and established a successful sales team. At Treveria, he has stabilized the company despite inheriting a business that faced troubling financing and covenant issues as well as significant operational weaknesses.
Eitan Milgram, an Executive Vice President at Weiss Asset Management, has advised numerous corporations on reorganizations and restructurings and has served on the Board of Directors of eleven publicly traded companies. He has helped to lead these companies through reorganization proposals, meaningful operational cost savings, and asset realization strategies.
We hope that you will agree that the appointments of Rolf Elgeti, Michael Neubürger, and Eitan Milgram to the Board as Non-Executive Directors are in the best interest of maximizing value for all shareholders, and recommend voting in favor of all resolutions at the Company's upcoming Extraordinary General Meeting. If you have any questions about our proposals, do please get in touch.
Sincerely,
Weiss Asset Management LP
Enquiries:
Weiss Asset Management LP
Boston, MA, United States
+1-617-778-7780
Biographies of Proposed Directors
You can read more about Rolf, Michael, and Eitan in their following biographies:
Rolf Elgeti
Rolf Elgeti is currently CEO of TAG Immobilien AG and Bau-Verein zu Hamburg AG, a German listed real estate group focused on residential and commercial real estate business in German metropolitan regions.Before joining as CEO in July 2009 he was already Member of the Supervisory Board of TAG Immobilien AG. Mr Elgeti also currently serves as a non-executive Director of Treveria PLC, a German retail focused real estate investment company. He was appointed in February 2009. Before his time at TAG, he worked as an independent real estate fund manager and co-founded Elgeti Ashdown Advisers Limited, a London-based property fund manager specialising in German property. Prior to Elgeti Ashdown, Mr Elgeti was founding and administrating many small German real estate investment firms.Before that he gained experience as a European macro analyst and equity strategist focusing on Germany, at UBS, Commerzbank Securities and ABN Amro. He was twice top-ranked for European Equity Strategy in the Extel survey among institutional equity investors. Mr Elgeti graduated with an MBA from the University of Mannheim, Germany, and received an MBA from ESSEC, Paris, in 1999.
Michael Neubürger
Michael Neubürger is an independent real estate financing and transaction consultant and CEO of Treveria Asset Management, the Asset Manager of Treveria PLC. Prior to which, from 2001 to 2007, he held senior positions at, and was latterly Chief Financial Officer on the Board of Deutsche Wohnen AG, Germany's second largest listed residential property company. He was responsible for financing, sales, portfolio management, accounting and risk management. Before joining Deutsche Wohnen, he held various senior financial control positions at Deutsche Bank from 1995 to 2000. Mr Neubürger has a Diplom-Kaufmann in Economics from the University of Cologne.
Eitan Milgram
Eitan Milgram is Executive Vice President of Weiss Asset Management, an investment manager in Boston. He graduated summa cum laude from Boston University where he won the Prize for Excellence in Economics. Eitan has worked at Weiss Asset Management since April 2000 as a Portfolio Manager, Head of Trading and Head of Operations. He is currently an Executive Vice President. Over the last ten years, he has served on the board of directors of eleven publicly traded corporations and has advised numerous corporations on reorganizations and restructurings.