Orchos Licence Agreement

 
TIDMARTO 
 
Arteon PLC / Index: AIM / Epic: ARTO 
 
27 October 2009 
 
                    Arteon PLC (`Arteon' or `the Company') 
 
                           Orchos Licence Agreement 
 
Highlights 
 
  * The Orchos licence agreement is a major milestone in the Company's 
    implementation of its Investing Policy, as it prepares to become, via 
    subsidiaries, asset manager to a new breed of property funds and vehicles. 
 
  * By deploying the Orchos platform on behalf of newly formed funds which 
    invest in individual property assets to be held in Asset Transparent 
    Vehicles (`ATVs'), the Directors believe that Arteon will have a unique 
    proposition as an asset manager. 
 
  * Arteon intends to generate initial revenues by providing asset management 
    and related services to funds using the platform. No licence fees are 
    payable by Arteon under the Licence Agreement until revenues from these 
    activities exceed GBP2 million per annum. 
 
  * Talks are underway with qualified investors interested in establishing an 
    initial independent showcase fund using the platform in which Arteon's main 
    role is likely to be as asset manager rather than investor. 
 
Arteon PLC, the AIM traded real estate investment and services company, 
announces that on 27 October 2009 it signed an agreement (`the Agreement' or 
`the Transaction') with Real Estate Innovations Holdings Ltd (`REIH') to 
licence `Orchos', a proprietary technology platform. The Directors believe this 
platform should assist the Company in establishing and operating a new breed of 
transparent, efficient and cost effective real estate investment vehicles. The 
Agreement is perpetual, but may be terminated upon six months' notice by the 
Company after a minimum term of seven years. The key terms and fees payable 
under the Agreement are set out below. 
 
Background 
 
Orchos has been in development since early 2007 and will offer Arteon a 
flexible framework with which to service property funds and their underlying 
assets. The platform is designed to hold investment properties individually in 
specialised ATVs and employs a specialised and fully integrated reporting 
mechanism to deliver greater transparency for investors than has been possible 
to date. Arteon investment managers could potentially increase intra-fund 
liquidity, and, at the ATV level, qualified investors and institutions can 
optimise portfolios, targeting income and growth at a granular level - for 
example a city, postcode, sector, street or individual asset. This potential to 
offer "exposure on demand" is a key feature of the Orchos platform which could 
be used to aid rapid diversification or to hedge existing positions. 
 
The Property Investment Market 
 
The Directors believe that inconsistency in valuation between collective 
property investments and their underlying private assets class has been a 
factor inhibiting indirect property investments in the past, particularly near 
market turning points. The Orchos platform addresses these `parallel asset 
market' issues directly by holding and reporting participations at the level of 
an individual property, and therefore narrows the gap between securitised 
investments and the underlying cash market while offering enhanced transparency 
at all stages. 
 
Recent developments in property derivatives are evidence of continuing demand 
for innovation, and highlight the need for portfolio optimisation and risk 
management. Transparency and liquidity are major issues for both property and 
financial markets, particularly in the wake of a crisis precipitated by a 
dysfunctional secondary marketplace (sub-prime mortgages). The Directors 
believe that successful implementation of the Orchos platform could open 
significant opportunities for the Company, providing a distinct competitive 
advantage as an asset manager and service provider for a new range of 
transparent specialist funds and vehicles - whether private and exchange 
traded. 
 
Revenue Model and Showcase Fund 
 
The Company intends to generate revenues by providing (through specialised 
subsidiaries) asset management and related services to newly formed real estate 
funds, in respect of which it anticipates it will charge annual fees of 
approximately 0.6 per cent. of gross assets under management (`Relevant 
Revenues') in addition to any acquisition or take-on fees. 
 
The Company and its major shareholders are in discussions with a number of 
suitable qualified investors who have indicated willingness in principle to 
support an initial, independent, showcase fund using the platform. The fund is 
likely to take the form of an offshore Exempt International Fund limited to 
sophisticated and qualified investors. It is anticipated that although such a 
fund would generate asset management and acquisition fees for Arteon in the 
near term, the size of the fund and the resulting revenues would not be such 
that payment of a licence fee to REIH would be due in the current year. It is 
envisaged that further funds could be established in due course, with the 
possibility of one or more (including potentially the showcase fund) seeking 
admission to trading on AIM in their own right. 
 
Arteon Non-executive Chairman Peter Hagerty said, "Our aim is to transform the 
playing field with regard to property investment. The Agreement is an important 
milestone for us - giving us exclusive access to a unique and innovative 
platform the benefits of which are self-evident in the current global 
environment. Through Orchos, qualified investors will be able to gain exposure 
to individual investment properties with minimal cost and delay, and Arteon, as 
a future asset manager, should be able to deliver a new level of transparency - 
with investors able to visualise risk and returns for underlying assets as they 
arise." 
 
The key terms of the Agreement are set out below: 
 
  * The Company has been granted worldwide exclusivity subject to achieving 
    Euro 300 million of assets under management or in the pipelines of relevant 
    funds by March 2011; 
 
  * Depending on Relevant Revenues the Company is to pay a licence fee of 
    between 9.5 per cent. and 12.5 per cent; 
 
  * First GBP2 million of Relevant Revenue in any year free of licence fee, 
    further details are set out in the table below; 
 
  * The Company has agreed to appoint Real Estate Innovation Ltd (`REI') (a UK 
    subsidiary of REIH) as preferred developer for a term of five years subject 
    to a minimum development charge of GBP24,000 per annum, which represents the 
    full extent of the annual financial commitment (excluding any licence fees) 
    taken on by Arteon under the Agreement; 
 
  * REIH has provided a one-off cash credit of GBP50,000 for the benefit of 
    Arteon under the preferred developer agreement to defray the costs of 
    implementing the first fund(s) on the platform; and 
 
  * The Company can deduct 50 per cent. of the cost of improvements and 
    extensions to the platform made under the preferred developer agreement, 
    together with certain other defined costs, from any licence fee payable by 
    the Company in a given year. 
 
Indicative Licence Fee Levels 
 
Estimated Gross Assets under      Arteon's Relevant      Indicative Licence Fee 
management                                 Revenue*             payable to REIH 
 
GBP170 million                             GBP2,000,000                        GBPnil 
 
GBP580 million                             GBP5,000,000                    GBP375,000 
 
GBP1,250 million                          GBP10,000,000                    GBP920,000 
 
GBP2,000 million                          GBP15,000,000                  GBP1,365,000 
 
* assumes Arteon's Asset Manager charges a fee of 0.6 per cent of Gross Assets 
under management and a 0.6 per cent one off fee at time the fund assets come 
under management on a fully invested basis. Excludes the effect of certain 
costs (including some development costs) which can be added to the threshold by 
Arteon under the agreement. 
 
Related Party Transaction 
 
REIH is a substantial shareholder in the Company, wholly owned by a trust of 
which Peter Hagerty, a director of the Company, and his immediate family are 
potential beneficiaries. The Transaction is a related party for the purposes of 
the AIM Rules. 
 
David Macfarlane (being the only director independent of the Transaction) 
considers, having consulted with the Company's Nominated Adviser, Astaire 
Securities, that the terms of the Transaction with REIH are fair and reasonable 
insofar as shareholders are concerned. 
 
                                  ** ENDS ** 
 
For further information visit www.arteonplc.com or contact: 
 
Peter Hagerty             Arteon PLC                   Tel: [phone] 
 
David Macfarlane          Arteon PLC                   Tel: [phone] 
 
Aaron Smyth               Astaire Securities PLC       Tel: [phone] 
 
Isabel Crossley           St Brides Media & Finance    Tel: [phone] 
                          Ltd 
 
Paul Youens               St Brides Media & Finance    Tel: [phone] 
                          Ltd 
 
 
 
END