The board of PRS REIT (PRSR) has formed a sub-committee to engage with shareholders and lead its response to the requisition notice published last week calling for chairman Stephen Smith and director David Francis be replaced. The sub-committee comprises the three independent non-executive directors who are not the subject of the requisition, being: Geeta Nanda, Rod MacRae and Karima Fahmy.

The sub-committee said that there had only been limited discussions with the requisitioning shareholders (made up of Harwood Capital, Waverton Investment Management Limited, CCLA Investment Management Limited, Alder Investment Management Limited, CG Asset Management Limited) and questioned the necessity of requisitioning a general meeting shortly before its 2024 AGM (due to take place in early December).

The sub-committee added that it believes there are important areas of alignment between the board and the requisitioning shareholders and will seek a resolution. It said that immediate disposals would be value destructive and that future disposals must be balanced against income loss, dividend coverage and the benefits of portfolio scale including further potential investor interest.

However, the board added that it expects the market conditions that may allow selected asset disposals to improve in 2025 as the interest rate environment further ameliorates. It has appointed Rothschild & Co to advise on strategy and value maximisation for shareholders.

Following the board’s announcement this morning, shareholder AVI (which supports the requisitionists’ proposals) said that it was the board’s lack of shareholder consultation over the extension of the manager’s contract (announced in July) by 2.5 years in return for a “token” fee reduction that has led to this point.

It added that the requisitionists attempted to engage with the board and its advisers but it had been met with “intransigence”.

“It is truly extraordinary that the board deem it necessary to appoint a third expensive adviser, Rothschild, alongside the existing roster of Singers and Jefferies, to speak to their own shareholders”, AVI added.

“We also note that Rothschild acted as Rule 3 adviser on the sale of Sigma Capital Group, the company’s investment adviser, to Pinebridge. This raises serious questions as to in whose interests Rothschild will be acting – those of shareholders or those of the manager?”

AVI said that shareholders “will be asking the board to disclose the fees Rothschild have been paid by Sigma, the investment adviser, over the life of the company, have been paid by the company directly, and have agreed with the company for protecting the board’s position, including any fee agreements in relation to the subsequent sale of assets or the whole company”.

Robert Naylor and Christopher Mills, who the requisitionists propose to replace Stephen Smith and David Francis on the board said they met with Smith and Geeta Nanda on 27 August 2024, having made the board aware of the draft requisition on 21 August 2024.

They added: “At that meeting we urged them….that a requisition of an EGM was not in anyone’s best interests and that the current situation could be resolved by our appointment to the Board. …there seemed no common ground….we asked them to reconsider their position at the Board meeting that they were having that evening. The deafening silence that subsequently occurred made it clear to us that the board had no wish to have constructive private discussions and that there was nothing to be garnered by delaying the requisition notice.

“The board in a Damascene-like conversion now wishes to listen to shareholders, eliminate the discount and maximise shareholder value. The board will no doubt argue our motivation is short-term in nature; we can assure investors that that is not the case. When we commenced this process, we had seven institutions supporting us. We now have more than 16, accounting for more than 30% of the issued share capital and we anticipate this number to further increase. Most of the institutions are very long-term holders in PRS REIT and our actions are to give voice to and create change for shareholders who are outraged at the extension of the management contract to four years and frustrated by the Board’s failure to engage and to address their legitimate concerns.”

In an open letter, CCLA said: “CCLA, via one of its advisers, requested a meeting with the board on 10 June 2024, which was arranged for 28 June 2024. CCLA requested this meeting to discuss the valuation of the company’s shares, and lack of action from the Board to address this. CCLA was unaware of any proposed changes to the Investment Advisory & Development Management Agreements, until the day before the meeting that we requested. CCLA was displeased with the proposed amendments to the Investment Advisory & Development Management Agreements, and CCLA proposed several revisions.

“The clear disregard for shareholder input and awarding of an overly generous five-year contract for the Investment Manager, Sigma PRS Management Ltd, suggests governance issues between the Board, Investment Manager, and shareholders.”

“The Board announced the new terms of the Investment Advisory & Development Management Agreements on 9 July 2024. In that announcement the Board claimed to have consulted with major shareholders – something CCLA, from its experience, believes not to be true. Following this announcement, CCLA conveyed its concerns to the Board in a letter, delivered on 19th July 2024.”

“The letter also emphasised that CCLA was not ‘consulted’ on the amendments to the Investment Advisory & Development Management Agreement, due to the limited timeframe and the dismissal of all CCLA’s suggestions.”

“This morning, 2 September 2024, CCLA was surprised to see that the Board has appointed a third adviser, Rothschild, especially given that Jefferies International Limited was appointed as joint corporate broker alongside Singer Capital Markets less than twelve months ago. We question why the Board has appointed Rothschild, given the resulting additional costs for shareholders. Additionally, the appointment of Rothschild raises further questions around the independence of the Board, as Rothschild advised Sigma Capital Group Limited on their sale to PineBridge Investments.”

“CCLA believes that the actions of the Board subsequent to the requisition letter being served, including the appointment of a third adviser, who in our view may not be independent, will now likely result in the shares trading at a structural discount.”

“We encourage all other shareholders in the company to vote in favour of the resolutions to be proposed at the EGM.”