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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMN-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number811-23408
Clarion Partners Real Estate Income Fund Inc.
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 49th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (888)777-0102
Date of fiscal year end: December 31
Date of reporting period: December 31, 2019
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ITEM 1. | REPORT TO STOCKHOLDERS. |
TheAnnual Report to Stockholders is filed herewith.
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Annual Report | December 31, 2019 |
CLARION PARTNERS
REAL ESTATE INCOME FUND INC.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
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Fund objective
The Fund’s investment objective is to provide current income and long-term capital appreciation.
The Fund invests primarily in a portfolio of private commercial real estate and publicly traded real estate securities.
Dear Shareholder,
We are pleased to provide the annual report of Clarion Partners Real Estate Income Fund Inc. for the period since the Fund’s inception on September 27, 2019 through December 31, 2019.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com. Here you can gain immediate access to market and investment information, including:
• | Fund net asset values and performance, |
• | Market insights and commentaries from our portfolio managers, and |
• | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
January 31, 2020
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Q. What is the Fund’s investment strategy?
A. The Fund’s investment objective is to provide current income and long-term capital appreciation. The Fund is aclosed-end management investment company that continuously offers its common stock. The Fund intends under normal market conditions to invest at least 80% of its net assets (plus the amount of borrowings for investment purposes) in a portfolio of private commercial real estate and publicly traded real estate securities. Investments may consist of (i) privately owned commercial real estate, in the form of equity and debt (“Private CRE”) and (ii) publicly traded real estate debt and equity securities (“Publicly Traded Real Estate Securities”).
Clarion Partners, LLC (“Clarion Partners”), the Fund’s subadviser, will seek to select investments across property types, geographic regions and metropolitan areas in order to generate attractive current income with the potential for long-term appreciation and favorable risk-adjusted returns. It is expected that a majority of the Fund’s underlying investments in real estate will be located in the United States, although the Fund may also make investments internationally. Clarion Partners will utilize the fixed income expertise of Western Asset Management Company, LLC (“Western Asset”), an affiliate of Clarion Partners. Western Asset will be the securitiessub-adviser and haveday-to-day responsibility for managing the portion of the Fund’s Publicly Traded Real Estate Securities investments that Clarion Partners allocates to Western Asset, within investment guidelines set by Clarion Partners.
Clarion Partners’ robust investment and asset management process is anchored by the dedicated Investment Research Group’s analysis, which is incorporated into all investment decisions, before, during and after investments are made, with primary focus on, among other things: general economic conditions, which markets will outperform, which sectors will outperform, types of buildings and locations users of real estate demand, where pricing is relative to alternatives and replacement cost, which investments perform best over time, how risk is being priced in the market, and how demographics and societal trends affect real estate. As the Fund’ssub-adviser, Clarion Partners intends to optimize the portfolio construction by targeting investments in large andmedium-sized metropolitan areas that it believes have attractive growth prospects and healthy supply/demand dynamics.
Clarion Partners will utilize the breadth and scale of its national real estate platform, research-based process and acquisition and management expertise to evaluate market conditions and potential investment opportunities for the Fund. Clarion Partners will take into account real estate cycles across property types and markets in an effort to reduce portfolio volatility and enhance returns. As an additional risk management measure, Clarion Partners will primarily consider markets that it believes have attractive growth prospects and healthy supply/demand dynamics.
Effective February 3, 2020, the investment professionals at Clarion Partners who have primary responsibility for theday-to-day portfolio management of the Fund (including Private CRE) are Richard Schaupp, Onay Payne, Jason Glasser and Janis Mandarino. Clarion
Clarion Partners Real Estate Income Fund Inc. 2019 Annual Report | 1 |
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Fund overview (cont’d)
Partners utilizes a team approach, with decisions derived from interaction among various investment management sector specialists. Under this team approach, management of the Fund’s portfolio will reflect a consensus of interdisciplinary views. The individuals at Western Asset that haveday-to-day responsibility for managing the portion of the Fund’s Publicly Traded Real Estate Securities investments that Clarion Partners allocates to Western Asset are S. Kenneth Leech, Greg E. Handler, and Harris A. Trifon.
Thank you for your investment in Clarion Partners Real Estate Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Clarion Partners, LLC
February 4, 2020
RISKS: The Fund is anon-diversified,closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Fund is newly organized, with a limited history of operations. An investment in the Fund involves a considerable amount of risk. The Fund should be viewed as inherently illiquid and suitable only for investors who can bear the risks associated with the limited liquidity of the Fund. Limited liquidity is provided to shareholders only through the Fund’s quarterly repurchase offers. There is no guarantee these repurchases will occur as scheduled, or at all. Shares will not be listed on a public exchange, and no secondary market is expected to develop. Shareholders may not be able to sell their shares in the Fund at all or at a favorable price. Because the Fund isnon-diversified, it may be more susceptible to economic, political or regulatory events than a diversified fund. The Fund’s investments are highly concentrated in real estate investments, and therefore will be subject to the risks typically associated with real estate, including but not limited to local, state, national or international economic conditions; including market disruptions caused by regional concerns, political upheaval, sovereign debt crises and other factors. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates rise, the value of fixed income securities fall. High yield bonds possess greater price volatility, illiquidity, and possibility of default. The Fund may employ leverage, which increases the volatility of investment returns and subjects the Fund to magnified losses if an underlying fund’s investments decline in value. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadviser. Please see the Fund’s prospectus for a more complete discussion of these and other risks and the Fund’s investment strategies.
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Investment breakdown(%) as a percent of total investments
† | The bar graph above represents the composition of the Fund’s investments as of December 31, 2019. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time. |
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Consolidated schedule of investments
December 31, 2019
Clarion Partners Real Estate Income Fund Inc.
Security | Rate | Maturity Date | Face Amount | Value | ||||||||||||
Investments in Real Estate Loans — 83.5% | ||||||||||||||||
Aertson Midtown Mezzanine B Loan (Cost — $18,000,000) | 9.140 | % | 10/1/25 | $ | 18,000,000 | $ | 18,000,000 | (a)(b) | ||||||||
Collateralized Mortgage Obligations(c)— 16.9% | ||||||||||||||||
BHMS Mortgage Trust, 2018-ATLS C (1 mo. USD LIBOR + 1.900%) | 3.640 | % | 7/15/35 | 400,000 | $ | 400,298 | (d)(e) | |||||||||
CSMC Trust,2014-USA F | 4.373 | % | 9/15/37 | 420,000 | 380,840 | (d) | ||||||||||
CSMC Trust,2019-RIO B | 8.740 | % | 12/15/21 | 1,000,000 | 1,001,240 | (d) | ||||||||||
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-DNA3 B1 (1 mo. USD LIBOR + 3.900%) | 5.692 | % | 9/25/48 | 370,000 | 397,699 | (d)(e) | ||||||||||
Federal National Mortgage Association (FNMA) — CAS,2018-C06 1B1 (1 mo. USD LIBOR + 3.750%) | 5.542 | % | 3/25/31 | 350,000 | 370,917 | (e) | ||||||||||
GS Mortgage Securities Corp. II, 2018-SRP5 C (1 mo. USD LIBOR + 3.750%) | 5.490 | % | 9/15/31 | 300,000 | 300,354 | (d)(e) | ||||||||||
Hawaii Hotel Trust, 2019-MAUI F (1 mo. USD LIBOR + 2.750%) | 4.490 | % | 5/15/38 | 400,000 | 401,188 | (d)(e) | ||||||||||
PMT Credit Risk Transfer Trust,2019-3R A (1 mo. USD LIBOR + 2.700%) | 4.614 | % | 10/27/22 | 378,487 | 381,457 | (d)(e) | ||||||||||
Total Collateralized Mortgage Obligations (Cost — $3,623,920) |
| 3,633,993 | ||||||||||||||
Asset-Backed Securities — 1.4% | ||||||||||||||||
Cascade MH Asset Trust,2019-MH1 M (Cost — $299,996) | 5.985 | % | 11/25/44 | 300,000 | 302,420 | (d)(e) | ||||||||||
Total Investments before Short-Term Investments (Cost — $21,923,916) |
| 21,936,413 | ||||||||||||||
Shares | ||||||||||||||||
Short-Term Investments — 0.5% | ||||||||||||||||
Dreyfus Government Cash Management, Institutional Shares (Cost — $104,575) | 1.522 | % | 104,575 | 104,575 | ||||||||||||
Total Investments — 102.3% (Cost — $22,028,491) |
| 22,040,988 | ||||||||||||||
Liabilities in Excess of Other Assets — (2.3)% | (502,490 | ) | ||||||||||||||
Total Net Assets — 100.0% |
| $ | 21,538,498 |
See Notes to Consolidated Financial Statements.
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Clarion Partners Real Estate Income Fund Inc.
(a) | Security is valued in good faith in accordance with procedures approved by the Board of Directors (Note 1). |
(b) | Security is valued using significant unobservable inputs (Note 1). |
(c) | Collateralized mortgage obligations are secured by an underlying pool of mortgages or mortgage pass-through certificates that are structured to direct payments on underlying collateral to different series or classes of the obligations. The interest rate may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators and may be subject to an upper and/or lower limit. |
(d) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors. |
(e) | Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
Abbreviations used in this schedule: | ||
CAS | — Connecticut Avenue Securities | |
LIBOR | — London Interbank Offered Rate | |
USD | — United States Dollar |
See Notes to Consolidated Financial Statements.
Clarion Partners Real Estate Income Fund Inc. 2019 Annual Report | 5 |
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Consolidated statement of assets and liabilities
December 31, 2019
Assets: | ||||
Investments, at value (Cost — $22,028,491) | $ | 22,040,988 | ||
Cash | 25,996 | |||
Deferred offering costs | 1,009,545 | |||
Receivable from investment manager | 194,951 | |||
Interest receivable | 150,581 | |||
Prepaid expenses | 1,690 | |||
Total Assets | 23,423,751 | |||
Liabilities: | ||||
Payable to investment manager (Note 2) | 1,524,040 | |||
Deferred origination fees | 135,916 | |||
Directors’ fees payable | 1,046 | |||
Service and/or distribution fees payable | 84 | |||
Accrued expenses | 224,167 | |||
Total Liabilities | 1,885,253 | |||
Total Net Assets | $ | 21,538,498 | ||
Net Assets: | ||||
Par value (Note 7) | $ | 2,157 | ||
Paid-in capital in excess of par value | 21,532,161 | |||
Total distributable earnings (loss) | 4,180 | |||
Total Net Assets | $ | 21,538,498 | ||
Net Assets: | ||||
Class S | $50,717 | |||
Class T | $50,717 | |||
Class D | $50,795 | |||
Class I | $21,386,269 | |||
Shares Outstanding: | ||||
Class S | 5,079 | |||
Class T | 5,079 | |||
Class D | 5,086 | |||
Class I | 2,141,545 | |||
Net Asset Value: | ||||
Class S | $9.99 | |||
Class T | $9.99 | |||
Class D | $9.99 | |||
Class I | $9.99 |
See Notes to Consolidated Financial Statements.
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Consolidated statement of operations
For the Period Ended December 31, 2019†
Investment Income: | ||||
Interest | $ | 456,997 | ||
Other income | 4,484 | |||
Total Investment Income | 461,481 | |||
Expenses: | ||||
Offering costs (Note 1) | 337,200 | |||
Organization costs (Note 1) | 127,294 | |||
Transfer agent fees (Note 5) | 117,833 | |||
Audit and tax fees | 97,500 | |||
Investment management fee (Note 2) | 65,985 | |||
Franchise taxes | 41,000 | |||
Legal fees | 38,219 | |||
Real estate investment administration fees | 22,169 | |||
Fund accounting fees | 17,225 | |||
Shareholder reports | 15,000 | |||
Directors’ fees | 1,544 | |||
Registration fees | 1,482 | |||
Custody fees | 943 | |||
Service and/or distribution fees (Notes 2 and 5) | 250 | |||
Miscellaneous expenses | 2,655 | |||
Total Expenses | 886,299 | |||
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5) | (750,444) | |||
Net Expenses | 135,855 | |||
Net Investment Income | 325,626 | |||
Realized and Unrealized Gain on Investments (Notes 1 and 3): | ||||
Net Realized Gain From Investment Transactions | 375 | |||
Change in Net Unrealized Appreciation (Depreciation) From Investments | 12,497 | |||
Net Gain on Investments | 12,872 | |||
Increase in Net Assets From Operations | $ | 338,498 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
See Notes to Consolidated Financial Statements.
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Consolidated statement of changes in net assets
For the Period Ended December 31, 2019† | 2019 | |||
Operations: | ||||
Net investment income | $ | 325,626 | ||
Net realized gain | 375 | |||
Change in net unrealized appreciation (depreciation) | 12,497 | |||
Increase in Net Assets From Operations | 338,498 | |||
Distributions to Shareholders From (Notes 1 and 6): | ||||
Total distributable earnings | (378,001) | |||
Decrease in Net Assets From Distributions to Shareholders | (378,001) | |||
Fund Share Transactions (Note 7): | ||||
Net proceeds from sale of shares | 21,200,000 | |||
Reinvestment of distributions | 378,001 | |||
Increase in Net Assets From Fund Share Transactions | 21,578,001 | |||
Increase in Net Assets | 21,538,498 | |||
Net Assets: | ||||
Beginning of period | — | |||
End of period | $ | 21,538,498 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
See Notes to Consolidated Financial Statements.
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Consolidated statement of cash flows
For the Period Ended December 31, 2019†
Increase (Decrease) in Cash: | ||||
Cash Provided (Used) by Operating Activities: |
| |||
Net increase in net assets resulting from operations | $ | 338,498 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities: | ||||
Purchases of portfolio securities | (22,345,624) | |||
Sales of portfolio securities | 421,887 | |||
Net purchases, sales and maturities of short-term investments | (104,575) | |||
Net amortization of premium (accretion of discount) | 196 | |||
Increase in interest receivable | (150,581) | |||
Increase in prepaid expenses | (1,690) | |||
Increase in receivable from investment manager | (194,951) | |||
Increase in deferred offering costs | (1,009,545) | |||
Increase in payable to investment manager | 1,524,040 | |||
Increase in deferred origination fees | 135,916 | |||
Increase in Directors’ fees payable | 1,046 | |||
Increase in accrued expenses | 224,167 | |||
Increase in service and/or distribution fees payable | 84 | |||
Net realized gain on investments | (375) | |||
Change in net unrealized appreciation (depreciation) of investments | (12,497) | |||
Net Cash Used by Operating Activities | (21,174,004) | |||
Cash Flows From Financing Activities: | ||||
Proceeds from sale of shares | 21,200,000 | |||
Net Cash Provided in Financing Activities | 21,200,000 | |||
Net Increase in Cash and Restricted Cash | 25,996 | |||
Cash and restricted cash at beginning of period | — | |||
Cash and restricted cash at end of period | $ | 25,996 |
The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Statement of Assets and Liabilities that sums to the total of such amounts shown on the Consolidated Statement of Cash Flows. |
December 31, 2019 | ||||
Cash | $ | 25,996 | ||
Restricted cash | — | |||
Total cash and restricted cash shown in the Consolidated Statement of Cash Flows | $ | 25,996 | ||
Non-Cash Financing Activities: | ||||
Proceeds from reinvestment of distributions | $ | 378,001 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
See Notes to Consolidated Financial Statements.
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Consolidated financial highlights
For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted: | ||||
Class S Shares1 | 20192 | |||
Net asset value, beginning of period | $10.00 | |||
Income from operations: | ||||
Net investment income | 0.14 | |||
Net realized and unrealized gain | 0.01 | |||
Total income from operations | 0.15 | |||
Less distributions from: | ||||
Net investment income | (0.16) | |||
Total distributions | (0.16) | |||
Net asset value, end of period | $9.99 | |||
Total return3 | 1.47 | % | ||
Net assets, end of period (000s) | $51 | |||
Ratios to average net assets: | ||||
Gross expenses4 | 260.63 | % | ||
Net expenses4,5,6 | 3.39 | |||
Net investment income4 | 5.34 | |||
Portfolio turnover rate | 2 | % |
1 | Per share amounts have been calculated using the average shares method. |
2 | For the period September 27, 2019 (inception date) to December 31, 2019. |
3 | Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
4 | Annualized. |
5 | Reflects fee waivers and/or expense reimbursements. |
6 | As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities, interest, brokerage, tax and extraordinary expenses, to average net assets of Class S shares did not exceed 2.60%. This expense limitation arrangement cannot be terminated prior to December 31, 2021 without the Board of Directors’ consent. |
See Notes to Consolidated Financial Statements.
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For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted: | ||||
Class T Shares1 | 20192 | |||
Net asset value, beginning of period | $10.00 | |||
Income from operations: | ||||
Net investment income | 0.14 | |||
Net realized and unrealized gain | 0.01 | |||
Total income from operations | 0.15 | |||
Less distributions from: | ||||
Net investment income | (0.16) | |||
Total distributions | (0.16) | |||
Net asset value, end of period | $9.99 | |||
Total return3 | 1.47 | % | ||
Net assets, end of period (000s) | $51 | |||
Ratios to average net assets: | ||||
Gross expenses4 | 260.63 | % | ||
Net expenses4,5,6 | 3.39 | |||
Net investment income4 | 5.34 | |||
Portfolio turnover rate | 2 | % |
1 | Per share amounts have been calculated using the average shares method. |
2 | For the period September 27, 2019 (inception date) to December 31, 2019. |
3 | Performance figures, exclusive of sales charges and dealer manager fees, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
4 | Annualized. |
5 | Reflects fee waivers and/or expense reimbursements. |
6 | As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities, interest, brokerage, tax and extraordinary expenses, to average net assets of Class T shares did not exceed 2.60%. This expense limitation arrangement cannot be terminated prior to December 31, 2021 without the Board of Directors’ consent. |
See Notes to Consolidated Financial Statements.
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Consolidated financial highlights (cont’d)
For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted: | ||||
Class D Shares1 | 20192 | |||
Net asset value, beginning of period | $10.00 | |||
Income from operations: | ||||
Net investment income | 0.15 | |||
Net realized and unrealized gain | 0.01 | |||
Total income from operations | 0.16 | |||
Less distributions from: | ||||
Net investment income | (0.17) | |||
Total distributions | (0.17) | |||
Net asset value, end of period | $9.99 | |||
Total return3 | 1.62 | % | ||
Net assets, end of period (000s) | $51 | |||
Ratios to average net assets: | ||||
Gross expenses4 | 228.69 | % | ||
Net expenses4,5,6 | 2.80 | |||
Net investment income4 | 5.94 | |||
Portfolio turnover rate | 2 | % |
1 | Per share amounts have been calculated using the average shares method. |
2 | For the period September 27, 2019 (inception date) to December 31, 2019. |
3 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
4 | Annualized. |
5 | Reflects fee waivers and/or expense reimbursements. |
6 | As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities, interest, brokerage, tax and extraordinary expenses, to average net assets of Class D shares did not exceed 2.00%. This expense limitation arrangement cannot be terminated prior to December 31, 2021 without the Board of Directors’ consent. |
See Notes to Consolidated Financial Statements.
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For a share of each class of capital stock outstanding throughout each year ended December 31, unless otherwise noted: | ||||
Class I Shares1 | 20192 | |||
Net asset value, beginning of period | $10.00 | |||
Income from operations: | ||||
Net investment income | 0.16 | |||
Net realized and unrealized gain | 0.01 | |||
Total income from operations | 0.17 | |||
Less distributions from: | ||||
Net investment income | (0.18) | |||
Total distributions | (0.18) | |||
Net asset value, end of period | $9.99 | |||
Total return3 | 1.69 | % | ||
Net assets, end of period (000s) | $21,386 | |||
Ratios to average net assets: | ||||
Gross expenses4 | 15.08 | % | ||
Net expenses4,5,6 | 2.57 | |||
Net investment income4 | 6.17 | |||
Portfolio turnover rate | 2 | % |
1 | Per share amounts have been calculated using the average shares method. |
2 | For the period September 27, 2019 (inception date) to December 31, 2019. |
3 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
4 | Annualized. |
5 | Reflects fee waivers and/or expense reimbursements. |
6 | As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities interest, brokerage, tax and extraordinary expenses, to average net assets of Class I shares did not exceed 1.75%. This expense limitation arrangement cannot be terminated prior to December 31, 2021 without the Board of Directors’ consent. |
See Notes to Consolidated Financial Statements.
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Notes to consolidated financial statements
1. Organization and significant accounting policies
Clarion Partners Real Estate Income Fund Inc. (the “Fund”) is anon-diversified,closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”), that continuously offers its shares. The Fund is a Maryland corporation and has elected to be taxed as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”). The Board of Directors authorized 400 million shares of $0.001 par value common stock. The Fund’s investment objective is to provide current income and long-term capital appreciation.
The Fund seeks to achieve its objective by investing primarily in a portfolio of private commercial real estate and publicly traded real estate securities.
Generally, all investments made by the Fund in private commercial real estate, including real property and investments in real estate loans, will be made through individual special purpose vehicles (“SPV”). Unless otherwise noted, each SPV is wholly-owned by the Fund and these financial statements are consolidated financial statements of the Fund and each SPV. All interfund transactions have been eliminated in consolidation.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation.The Fund calculates its net asset value by subtracting liabilities (including accrued expenses or distributions) from the total assets of the Fund (the value of investments, plus cash or other assets, including interest and distributions accrued but not yet received). The Fund’s assets and liabilities are valued in accordance with GAAP and the principles set forth below.
Private commercial real estate
The fair values of investments in real estate loans are generally determined by discounting the future contractual cash flows to the present value using a current market interest rate. The market rate is determined by considering one or more of the following criteria as appropriate: (i) interest rates for loans of comparable quality and maturity, (ii) the value of the underlying collateral and (iii) the prevailing state of the debt markets. The valuations of investments in real estate loans are prepared by independent external appraisers. The significant unobservable inputs used in the fair value measurement of the Fund’s investment in real estate loans are the selection of certain credit spreads and the loan to value ratios.
The fair values of real estate investments are generally determined by considering the income, cost and sales comparison approaches of estimating property value. The income
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approach estimates an income stream for a property (typically 10 years) and discounts this income plus a reversion (presumed sale) into a present value at a risk adjusted rate. Yield rates and growth assumptions utilized in this approach are derived from market transactions as well as other financial and industry data. The cost approach estimates the replacement cost of the building less physical depreciation plus the land value. Generally, this approach provides a check on the value derived using the income approach. The sales comparison approach compares recent transactions to the appraised property. Adjustments are made for dissimilarities that typically provide a range of value. The discount rate and the exit capitalization rate are significant inputs to these valuations. These rates are based on the location, type and nature of each property, and current and anticipated market conditions.
Many factors are also considered in the determination of fair value including, but not limited to, the operating cash flows and financial performance of the properties, property types and geographic locations, the physical condition of the asset, prevailing market capitalization rates, prevailing market discount rates, general economic conditions, economic conditions specific to the market in which the assets are located, and any specific rights or terms associated with the investment. Because of the inherent uncertainties of valuation, the values reflected in the consolidated financial statements may materially differ from the values that would be determined by negotiations held between parties in a sale transaction.
The valuations of real estate investments are prepared by independent external appraisers. Since appraisals consider the estimated effect of physical depreciation, historical cost depreciation and amortization on real estate related assets have been excluded from net investment income.
Investments innon-consolidated joint ventures are stated at fair value. The Fund’s ownership interests are valued based on the fair value of the underlying real estate and any related mortgage loans payable using the same techniques as described within this Note. Any other factors, such as ownership percentage, ownership rights, buy/sell agreements, distribution provisions, and capital call obligations are also considered. Upon the disposition of all investments in joint ventures by an investee entity, the Fund will continue to state its equity in the remaining net assets of the investee entity during the wind down period, if any, that occurs prior to the dissolution of the investee entity.
The fair values of mortgage and senior notes payable are generally determined by discounting the difference between the contractual interest rates and estimated market interest rates considering changes in credit spreads, as applicable. The debt valuations for the Fund are prepared by an independent third-party service provider. The significant unobservable inputs used in the fair value measurement of the Fund’s mortgage notes payable are the selection of certain credit spreads and the loan to value ratios. The significant unobservable inputs used in the fair value measurement of the Fund’s senior notes payable are the selection of certain credit spreads.
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Notes to consolidated financial statements (cont’d)
Real estate securities
The valuations for fixed income securities (which may include, but are not limited to, corporate bonds, mortgage-backed and asset-back securities, and collateralized mortgage obligations) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments inopen-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
Valuation oversight
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount
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from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
• | Level 1 — quoted prices in active markets for identical investments |
• | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
• | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
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Notes to consolidated financial statements (cont’d)
The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:
ASSETS | ||||||||||||||||
Description | Quoted Prices (Level 1) | Other Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Long-Term Investments†: | ||||||||||||||||
Investments in Real Estate Loans‡ | — | — | $ | 18,000,000 | $ | 18,000,000 | ||||||||||
Collateralized Mortgage Obligations | — | $ | 3,633,993 | — | 3,633,993 | |||||||||||
Asset-Backed Securities | — | 302,420 | — | 302,420 | ||||||||||||
Total Long-Term Investments | — | 3,936,413 | 18,000,000 | 21,936,413 | ||||||||||||
Short-Term Investments† | $ | 104,575 | — | — | 104,575 | |||||||||||
Total Investments | $ | 104,575 | $ | 3,936,413 | $ | 18,000,000 | $ | 22,040,988 |
† | See Consolidated Schedule of Investments for additional detailed categorizations. |
‡ | Investments in real estate loans are valued at cost as of December 31, 2019 in accordance with procedures approved by the Board of Directors. |
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
Investments in Securities | Balance as of September 27, 2019 (inception date) | Accrued premiums/ discounts | Realized gain (loss) | Change in unrealized appreciation (depreciation) | Purchases | |||||||||||||||
Investments in Real Estate Loans | — | — | — | — | $ | 18,000,000 | ||||||||||||||
Total | — | — | — | — | $ | 18,000,000 | ||||||||||||||
Investments in Securities (cont’d) | Sales | Transfers into Level 3 | Transfers out of Level 3 | Balance as of December 31, 2019 | Net change in unrealized appreciation (depreciation) for investments in securities still held at December 31, 2019 | |||||||||||||||
Investments in Real Estate Loans | — | — | — | $ | 18,000,000 | — | ||||||||||||||
Total | — | — | — | $ | 18,000,000 | — |
(b) Private commercial real estate.The Fund’s investments in private commercial real estate (“CRE”) may include whole or partial interests in real properties, mortgage debt and mezzanine debt. The investments typically depend on the generation of cash flows, such as
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mortgage interest and rental and lease payments. Changes in broad market and economic conditions such as prevailing interest rates, as well as property specific delinquencies, fluctuations in underlying property values, and lease defaults may all impact the valuation of these investments.
(c) Cash flow information.The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Consolidated Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Consolidated Statement of Cash Flows.
(d) Security transactions and investment income.Security transactions are accounted for on a trade date basis. Interest income (including interest income frompayment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Origination fees received in connection with CRE investments are deferred and recognized as income over the life of each respective investment. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(e) Distributions to shareholders.Distributions from net investment income of the Fund, if any, are declared and paid on a quarterly basis. Distributions of net realized gains, if any, are declared annually. Distributions to shareholders of the Fund are recorded on theex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP. For tax purposes, a distribution that for purposes of GAAP is composed of return of capital and net investment income may be subsequentlyre-characterized to also include capital gains. Shareholders will be informed of the tax characteristics of the distributions after the close of the 2019 fiscal year.
(f) Share class accounting.Investment income, common expenses and realized/ unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.
(g) Compensating balance arrangements.The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(h) Organization costs.Organization costs associated with the establishment of the Fund are charged to expense as they are incurred.
(i) Offering costs.Costs incurred by the Fund in connection with the commencement of the Fund’s operations are being amortized on a straight line basis over twelve months.
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Notes to consolidated financial statements (cont’d)
(j) Federal and other taxes.The Fund has elected to be taxed as a REIT. The Fund’s qualification and taxation as a REIT depend upon the Fund’s ability to meet on a continuing basis, through actual operating results, certain qualification tests set forth in the U.S. federal tax laws. Those qualification tests involve the percentage of income that the Fund earns from specified sources, the percentage of the Fund’s assets that falls within specified categories, the diversity of the ownership of the Fund’s shares, and the percentage of the Fund’s taxable income that the Fund distributes. No assurance can be given that the Fund will in fact satisfy such requirements for any taxable year. If the Fund qualifies as a REIT, the Fund generally will be allowed to deduct dividends paid to shareholders and, as a result, the Fund generally will not be subject to U.S. federal income tax on that portion of the Fund’s ordinary income and net capital gain that the Fund annually distributes to shareholders, as long as the Fund meets the minimum distribution requirements under the Code. The Fund intends to make distributions to shareholders on a regular basis as necessary to avoid material U.S. federal income tax and to comply with the REIT distribution requirements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2019, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
However, management has concluded that the Fund is subject to state income and franchise taxes in certain states as a result of its current shareholder base. The Fund has accrued $41,000 for these taxes for the period ended December 31, 2019.
(k) Reclassification.GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current period, the following reclassifications have been made:
Total Distributable Earnings (Loss) | Paid-in Capital | |||||||
(a) | $ | 43,683 | $ | (43,683) |
(a) | Reclassifications are due tonon-deductible offering costs paid by the Fund. |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. LMPFA is a wholly-owned subsidiary of Legg Mason, Inc. (“Legg Mason”).
Clarion Partners, LLC (“Clarion Partners”) is the Fund’s investment subadviser. Clarion Partners, an affiliate of Legg Mason, is a registered investment adviser and is responsible for theday-to-day portfolio management of the Fund subject to the supervision of the Fund’s Board of Directors and LMPFA. For its services, the Fund pays LMPFA a management fee, payable monthly, in an amount equal to 1.25% of the Fund’s average daily net assets.
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LMPFA has agreed to waive its management fee effective December 4, 2019 through June 30, 2020. The management fee waiver is not subject to recapture provision discussed below. Clarion Partners receives an annual subadvisory fee, payable monthly, from LMPFA in an amount equal to 70% of the management fee paid to LMPFA, net of expense waivers and reimbursements. No subadvisory fee is paid by the Fund directly to Clarion Partners.
Western Asset Management Company, LLC (“Western Asset”) is the Fund’s securitiessub-adviser. Western Asset, a wholly-owned subsidiary of Legg Mason and an affiliate of LMPFA and Clarion Partners, is a registered investment adviser and hasday-to-day responsibility for managing the portion of the Fund’s securities investments allocated to it by Clarion Partners, including Publicly Traded Real Estate Securities and investments in cash, cash equivalents and other short-term investments to facilitate liquidity for the quarterly repurchases of Common Stock. LMPFA, and not the Fund, pays Western Asset a fee based on the assets of the Fund allocated to Western Asset by Clarion Partners.
LMPFA has agreed to waive fees and/or reimburse the expenses (including organizational and offering expenses, but excluding property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities, expenses relating to borrowings on the issuance of preferred stock, interest, brokerage, tax, acquired fund fees and expenses and extraordinary expenses) to the extent necessary to ensure that the total annual Fund operating expenses attributable to Class S Shares, Class T Shares, Class D Shares and Class I Shares did not exceed 2.60%, 2.60%, 2.00% and 1.75%, respectively, of average net assets of that class per year. These arrangements cannot be terminated prior to December 31, 2021 without the consent of the Board of Directors of the Fund.
During the period ended December 31, 2019, fees waived and/or expenses reimbursed amounted to $750,444.
LMPFA is permitted to recapture amounts waived and/or reimbursed to a class within three years after the fiscal year in which LMPFA earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.
Pursuant to these arrangements, at December 31, 2019, the Fund had remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA and respective dates of expiration as follows:
Class S | Class T | Class D | Class I | |||||||||||||
Expires December 31, 2022 | $ | 32,953 | $ | 32,953 | $ | 28,953 | $ | 635,013 | ||||||||
Total fee waivers/expense reimbursements subject to recapture | $ | 32,953 | $ | 32,953 | $ | 28,953 | $ | 635,013 |
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Notes to consolidated financial statements (cont’d)
For the period ended December 31, 2019, LMPFA did not recapture any fees.
At December 31, 2019, $1,524,040 was payable to LMPFA by the Fund for reimbursement of organization and offering costs paid by LMPFA on behalf of the Fund.
Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, is the principal underwriter and distributor of the Common Stock pursuant to a distribution agreement with the Fund.
There is a maximum initial sales charge of 3.50% for Class S shares and a maximum initial sales charge of 3.00% and a dealer manager fee of 0.50% for Class T shares. Certain participating broker-dealers may offer Class T shares subject to a dealer manager fee of up to 1.50%, provided that the sum of the sales load and dealer manager fee will not exceed 3.50% of the total purchase price. These purchases do not incur an initial sales charge.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
As of December 31, 2019, Legg Mason and its affiliates owned 100% of the Fund.
3. Investments
During the period ended December 31, 2019, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:
Investments | U.S. Government & Agency Obligations | |||||||
Purchases | $ | 21,582,245 | $ | 763,379 | ||||
Sales | 421,887 | — |
At December 31, 2019, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation | |||||||||||||
Securities | $ | 22,034,596 | $ | 13,038 | $ | (6,646) | $ | 6,392 |
4. Derivative instruments and hedging activities
During the period ended December 31, 2019, the Fund did not invest in derivative instruments.
5. Class specific expenses, waivers and/or expense reimbursements
The Fund has adopted a Distribution and Service Plan and under that plan the Fund pays service and/or distribution fees with respect to its Class S, Class T and Class D shares calculated at the annual rate of 0.85%, 0.85% and 0.25% of the average daily net assets of each class, respectively. Service and/or distribution fees are accrued daily and paid monthly.
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For the period ended December 31, 2019, class specific expenses were as follows:
Service and/or Distribution Fees† | Transfer Agent Fees† | |||||||
Class S | $ | 109 | $ | 31,458 | ||||
Class T | 109 | 31,458 | ||||||
Class D | 32 | 27,458 | ||||||
Class I | — | 27,459 | ||||||
Total | $ | 250 | $ | 117,833 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
For the period ended December 31, 2019, waivers and/or expense reimbursements by class were as follows:
Waivers/Expense Reimbursements† | ||||
Class S | $ | 33,001 | ||
Class T | 33,001 | |||
Class D | 29,002 | |||
Class I | 655,440 | |||
Total | $ | 750,444 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
6. Distributions to shareholders by class
Period Ended December 31, 2019† | ||||
Net Investment Income: | ||||
Class S | $ | 784 | ||
Class T | 784 | |||
Class D | 860 | |||
Class I | 375,573 | |||
Total | $ | 378,001 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
7. Capital shares
At December 31, 2019, the Fund had 400 million shares of capital stock authorized with a par value of $0.001 per share. Transactions in shares of each class were as follows:
Period Ended December 31, 2019† | ||||||||
Shares | Amount | |||||||
Class S | ||||||||
Shares issued | 5,000 | $ | 50,000 | |||||
Shares issued on reinvestment | 79 | 784 | ||||||
Value of withdrawals | — | — | ||||||
Net increase | 5,079 | $ | 50,784 |
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Notes to consolidated financial statements (cont’d)
Period Ended December 31, 2019† | ||||||||
Shares | Amount | |||||||
Class T | ||||||||
Shares issued | 5,000 | $ | 50,000 | |||||
Shares issued on reinvestment | 79 | 784 | ||||||
Value of withdrawals | — | — | ||||||
Net increase | 5,079 | $ | 50,784 | |||||
Class D | ||||||||
Shares issued | 5,000 | $ | 50,000 | |||||
Shares issued on reinvestment | 86 | 860 | ||||||
Value of withdrawals | — | — | ||||||
Net increase | 5,086 | $ | 50,860 | |||||
Class I | ||||||||
Shares issued | 2,103,912 | $ | 21,050,000 | |||||
Shares issued on reinvestment | 37,633 | 375,573 | ||||||
Value of withdrawals | — | — | ||||||
Net increase | 2,141,545 | $ | 21,425,573 |
† | For the period September 27, 2019 (inception date) to December 31, 2019. |
8. Tender offer
The Fund announced on December 19, 2019 that the Fund’s Board of Directors had approved a tender offer for up to 5.0% of the Fund’s aggregate net asset value (“NAV”), subject to the right to purchase additional shares representing up to 2.0% of the Fund’s NAV without amending or extending the offer. The tender offer was conducted at a price equal to the Fund’s NAV per share of common stock on the day on which the tender offer expired. The tender offer expired on January 21, 2020, subsequent to the period end. No shares of the Fund were duly tendered.
9. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal period ended December 31, 2019, was as follows:
2019 | ||||
Distributions paid from: | ||||
Ordinary income | $ | 378,001 |
As of December 31, 2019, the components of distributable earnings (loss) on a tax basis were as follows:
Undistributed ordinary income — net | $ | 4,625 | ||
Other book/tax temporary differences(a) | (6,837) | |||
Unrealized appreciation (depreciation)(b) | 6,392 | |||
Total distributable earnings (loss) — net | $ | 4,180 |
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(a) | Other book/tax temporary differences are attributable to book/tax differences in the timing of the deductibility of various expenses. |
(b) | The difference between book-basis andtax-basis unrealized appreciation (depreciation) is attributable to the realization for tax purposes of unrealized gains (losses) on certain mortgage obligations. |
10. Subsequent events
On January 9, 2020, the Fund completed a private placement of 125 shares of 12.00% Cumulative Preferred Stock (the “Preferred Shares”). The Fund has elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2019. To qualify as a REIT for the year 2019, the Fund must have at least 100 shareholders of record by January 30, 2020.
Preferred Share dividends accrue on a daily basis and are payable semi-annually in arrears on or before June 30 and December 31 of each year. No dividends on Preferred Shares may be declared by the Fund or paid or set apart for payment by the Fund at such time as the terms and provisions of any written agreement between the Fund and any party that is not an affiliate, as defined by the Fund’s Articles Supplementary relating to the Preferred Shares, of the Fund, including any agreement relating to its indebtedness, prohibit such declaration, payment or setting apart for payment or provide that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
The Preferred Shares are callable with a premium based on the period of time the interests have been outstanding. The call premium is 10% of the original purchase price through December 31, 2021 after which there will be no premium. Each holder of Preferred Shares is entitled to a liquidation preference of $1,000 per share, plus any cumulative dividends, and, if applicable, the redemption premium described above. With respect to distributions, including the distribution of the Fund’s assets upon dissolution, liquidation, or winding up, the Preferred Shares will be senior to all other classes and series of shares.
The holders of the Preferred Shares have one vote per share and vote together with the holders of common stock of the Fund as a single class except on matters affecting only the holders of the Preferred Shares or the holders of common stock. Pursuant to the 1940 Act, holders of the Preferred Shares have the right to elect two Directors of the Fund, voting separately as a class. The Preferred Shares have not been, and will not be, registered (or qualified) under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemption provided by Section 4(a)(2) thereof and Rule 506 promulgated thereunder. Therefore, these securities are “restricted securities” for purposes of the Securities Act.
* * *
The Fund announced on February 14, 2020 that the Fund’s Board of Directors had approved a tender offer for up to 5.0% of the Fund’s aggregate net asset value (“NAV”), subject to the right to purchase additional shares representing up to 2.0% of the Fund’s NAV without amending or extending the offer. The tender offer will be conducted at a price equal to the
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Notes to consolidated financial statements (cont’d)
Fund’s NAV per share of common stock on the day on which the tender offer expires. The Fund intends to commence its tender offer on or about March 18, 2020, with the expiration of the tender offer currently expected to be April 16, 2020.
* * *
Effective April 1, 2020, distributions from net investment income of the Fund, if any, will be declared and paid on a monthly basis. Distributions to shareholders of the Fund are recorded on theex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
* * *
On February 18, 2020, Franklin Resources, Inc. (“Franklin Resources”) and Legg Mason, Inc. (“Legg Mason”) announced that they have entered into a definitive agreement for Franklin Resources to acquire Legg Mason in anall-cash transaction. As part of this transaction, the Fund’s investment adviser (the “Manager”), currently an indirect wholly owned subsidiary of Legg Mason, would become an indirect wholly owned subsidiary of Franklin Resources. The transaction is subject to approval by Legg Mason’s shareholders and customary closing conditions, including receipt of applicable regulatory approvals. Subject to such approvals and the satisfaction of the other conditions, the transaction is expected to be consummated later this year.
Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the Fund’s investment management contract with the Manager, and any relatedsub-advisory contract(s), where applicable. Therefore, the Fund’s Board is expected to be asked to approve a new investment management contract between the Fund and the Manager (and a newsub-advisory contract(s), if applicable). If approved by the Board, the new investment management contract (and the newsub-advisory contract(s), if applicable) is expected to be presented to the shareholders of the Fund for their approval.
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Report of independent registered public accounting firm
To the Board of Directors and Shareholders of Clarion Partners Real Estate Income Fund Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Clarion Partners Real Estate Income Fund Inc. (the “Fund”) as of December 31, 2019, and the related consolidated statements of operations, changes in net assets, and cash flows, including the related notes, and the consolidated financial highlights for the period September 27, 2019 (inception date) through December 31, 2019 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2019, and the results of its operations, changes in its net assets, its cash flows and the financial highlights for the period September 27,2019 (inception date) through December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2019 by correspondence with the custodian and borrower of the real estate loan. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
February 26, 2020
We have served as the auditor of one or more investment companies in Legg Mason investment company group since at least 1973. We have not been able to determine the specific year we began serving as auditor.
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Board approval of management and subadvisory agreements(unaudited)
A telephonic meeting of the Board of Directors (the “Board”) of Clarion Partners Real Estate Income Fund Inc. (the “Fund”) was held on December 18, 2018 (the “Telephonic Meeting”). During the Telephonic Meeting, the sole Director received a proposal from Legg Mason, Inc. (“Legg Mason”) to launch anon-diversified,closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”) and approved the organization of the Fund. During a subsequentin-person meeting held on February 14, 2019 (the “Contract Evaluation Meeting” and with the Telephonic Meeting, the “Organization Meetings”), the Board ratified and approved the actions taken by the sole Director with respect to the organization of the Fund and considered the initial approval of the Fund’s management agreement (the “Management Agreement”), pursuant to which Legg Mason Partners Fund Advisor, LLC (the “Manager”) would provide the Fund with investment advisory and administrative services for atwo-year period. At the Contract Evaluation Meeting, the Board also approved asub-advisory agreement (the “ClarionSub-Advisory Agreement”) with the Manager’s affiliate, Clarion Partners, LLC (“Clarion Partners”). The Board further approved asub-subadvisory agreement (the “Western AssetSub-Advisory Agreement” and with the ClarionSub-Advisory Agreement, the“Sub-Advisory Agreements”) with Western Asset Management Company, LLC (“Western Asset” and with Clarion Partners, the“Sub-Advisers”). TheSub-Advisers would provide investmentsub-advisory services to the Fund pursuant to theSub-Advisory Agreements. The Manager and Western Asset are wholly-owned subsidiaries of Legg Mason, and Clarion Partners is a majority-owned subsidiary of Legg Mason.
The Fund’s investment objective is to provide current income and long-term capital appreciation. The Fund intends to pursue its investment objective by investing, under normal market conditions, at least 80% of its total managed assets in a portfolio of private commercial real estate and publicly traded real estate debt and equity securities. It is expected that a majority of the Fund’s underlying investments in real estate will be located in the United States. The Board noted that the Fund’s shares would be continuously offered and would not be listed on a stock exchange, and that the Fund intends, but is not obligated, to offer liquidity through regular quarterly tender offers for up to 5% of the outstanding common stock of the Fund.
The Directors of the Board who are not “interested persons” (as defined in the 1940 Act) (the “Independent Directors”) of the Fund were assisted in their review of the Management Agreement and theSub-Advisory Agreements by Fund counsel and independent legal counsel and met with independent legal counsel in executive session at the Contract Evaluation Meeting separate from representatives of the Manager and theSub-Advisers. Prior to the Contract Evaluation Meeting, the Independent Directors requested and received information from the Manager and theSub-Advisers that they deemed reasonably necessary for their review of the Management Agreement and theSub-Advisory Agreements. The discussion below reflects all of these reviews.
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Nature, Extent and Quality of the Services to be provided to the Fund under the Management Agreement and theSub-Advisory Agreements
The Board received and considered information regarding the nature, extent and quality of the respective services to be provided to the Fund and its stockholders by the Manager and theSub-Advisers under the Management Agreement and theSub-Advisory Agreements, respectively, and Clarion Partner’s supervisory responsibilities with respect to Western Asset. The Board also considered the Manager’s supervisory responsibilities with respect to theSub-Advisers. The Board noted that the Fund is newly-organized and has no operating history but took into consideration its knowledge gained and information received at regular meetings throughout the year related to the services rendered by the Manager in its management of otherclosed-end funds in the same complex under the Board’s purview, including the Manager’s coordination and oversight of the activities ofsub-advisers and other service providers to those funds. The Board reviewed information received from the Manager and the Fund’s Chief Compliance Officer (the “CCO”) regarding the compliance policies and procedures established pursuant to the 1940 Act and reviewed the investment program of Clarion Partners with the CCO. The Board also reviewed information from the CCO regarding the compliance policies and procedures established by Clarion Partners pursuant to the 1940 Act.
As a newly-organized fund, the Fund had no historical performance information available at the time of the Organization Meetings for the Board to consider in its evaluation of the terms and conditions of the Management Agreement and theSub-Advisory Agreements. The Board reviewed the investment objectives and policies of the Fund with the Manager and Clarion Partners and the qualifications, backgrounds and responsibilities of the senior personnel of the Fund and the portfolio management team who would be primarily responsible for theday-to-day portfolio management of the Fund’s assets. The Board members discussed with representatives of the Manager and Clarion Partners the experience and capabilities of Clarion Partners in the management of funds and investment vehicles comparable to the Fund and also discussed Clarion Partners’ compliance capabilities. The Board also considered, based on its knowledge of the Manager and the Manager’s affiliates, the financial resources available to be employed by Legg Mason for the benefit of the Fund.
The Board reviewed the services to be provided by Western Asset as the Fund’ssub-adviser with respect to publicly-traded real estate securities with representatives of Western Asset and the experience, qualifications, background and responsibilities of Western Asset’s personnel who would be primarily responsible for such services, as well as the financial and other resources available to Western Asset to support its activities in respect of the Fund. The Board reviewed with the CCO the compliance policies and procedures established by Western Asset pursuant to the 1940 Act.
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Board approval of management and subadvisory agreements(unaudited) (cont’d)
The Board also considered the division of responsibilities of the Manager and theSub-Advisers under the Management Agreement andSub-Advisory Agreements, respectively, including the Manager’s coordination and oversight of services to be provided to the Fund by theSub-Advisers and other fund service providers and Clarion Partners’ coordination and oversight of services to be provided by Western Asset. The Manager does not provideday-to-day portfolio management services to the Fund. Rather, under the ClarionSub-Advisory Agreement, Clarion Partners will be responsible for theday-to-day management of the Fund’s portfolio, subject to the supervision of the Board and the Manager. Clarion Partners will have the ability to allocate the Fund’s portfolio between private commercial real estate and publicly traded real estate securities and to determine the portion of the publicly traded real estate securities and/or cash equivalents that will be managed by Western Asset.
The ClarionSub-Advisory Agreement permits Clarion Partners to delegate certain of Clarion Partners’ responsibilities to one or more companies that Clarion Partners controls, is controlled by, or is under common control with, or to specified employees of any such companies, including its investmentsub-advisory duties thereunder, provided that Clarion Partners in each case will supervise the activities of each such entity or employees thereof as the delegee.
Pursuant to the Western AssetSub-Advisory Agreement among the Manager, Clarion Partners and Western Asset, Western Asset will haveday-to-day responsibility for managing the portion of the Fund’s securities investments allocated to it by Clarion Partners, including publicly traded real estate securities and investments in cash, cash equivalents and other short-term investments to facilitate liquidity for quarterly repurchases of the Fund’s common stock.
The Board concluded that, overall, it was satisfied with the nature, extent and quality of the respective services expected to be provided by the Manager under the Management Agreement, by Clarion Partners assub-adviser under the ClarionSub-Advisory Agreement, and by Western Asset assub-adviser under the Western AssetSub-Advisory Agreement.
Management andSub-Advisory Fees, Expense Ratios and Manager Profitability
The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager under the Management Agreement and the contractual management fees (the “ContractualSub-Advisory Fees”) payable by the Manager to theSub-Advisers under the respectiveSub-Advisory Agreements in view of the nature, extent and quality of the management andsub-advisory services expected to be provided by the Manager and theSub-Advisers to the Fund. The Contractual Management Fee is an annual fee, payable monthly, in an amount equal to 1.25% of the Fund’s average daily managed assets. The Board noted that the Manager, and not the Fund, is responsible for payment of the ContractualSub-Advisory Fee to Clarion Partners and, accordingly, that the retention of Clarion Partners would not increase the fees and expenses to be incurred
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by the Fund’s stockholders. Similarly, the Board noted that the Manager, and not the Fund, is responsible for payment of the ContractualSub-Advisory Fee to Western Asset and, accordingly, that the retention of Western Asset would not increase the fees and expenses to be incurred by the Fund’s stockholders. The Board also noted that the Manager will provide the Fund with regulatory compliance and administrative services, office facilities and officers (including the chief financial, chief legal and chief compliance officers), and that the Manager will coordinate and oversee the provision of services to the Fund by other fund service providers, including theSub-Advisers.
The Board received and considered information comparing the Contractual Management Fee on a gross basis with those of a group of comparable funds and investment vehicles. The Board obtained confirmation from the Manager that the fees and expenses of the Fund are in line with those of comparable funds and investment vehicles. The Board noted that during periods when the Fund is using leverage through borrowings or the issuance of preferred stock, the fees paid to the Manager and theSub-Advisers for management and advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund’s managed assets, which includes the principal amount of any Fund borrowings and any Fund assets attributable to the issuance of preferred stock. The Manager discussed the expected expense ratio of the Fund, which reflects the agreement by the Manager to waive fees and/or reimburse the expenses (including organizational and offering expenses, but excluding property management, acquisition, disposition expenses, any other expenses related to investments in real property, debt and real-estate related securities, interest, brokerage, tax and extraordinary expenses) to the extent necessary to ensure that the total annual Fund operating expenses attributable to Class S shares, Class T shares, Class D shares and Class I shares will not exceed 2.60%,
2.60%, 2.00% and 1.75%, respectively, of the net asset value of the Fund’s common stock, subject to recapture. These arrangements cannot be terminated prior to December 31, 2020 without the Board’s consent. The Manager is permitted to recapture amounts forgone or reimbursed within three years after the fiscal year in which the Manager earned the fee or incurred the expense if the total annual Fund operating expenses have fallen to a level below the expense limit. In no case will the Manager recapture any amount that would result, on any particular business day of the Fund, in a relevant share class’s total annual operating expenses exceeding the applicable limits described above or any other lower limit then in effect. The Manager also discussed with the Board the Fund’s proposed underwriting arrangements with respect to each share class, including applicable sales loads and distribution and shareholder service fees. The Board noted that the Fund’s shares would be offered on a continuous basis, similar to anopen-end fund. The Board also noted that Legg Mason Investor Services, LLC (the “Distributor”) would serve as the principal underwriter and distributor of the Fund’s common stock and serve in that capacity on a best efforts
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Board approval of management and subadvisory agreements(unaudited) (cont’d)
basis, subject to various conditions and that other broker-dealers may be appointed by the Distributor to assist in the sale of the Fund’s common stock on a best efforts basis.
Taking all of the above into consideration, the Board determined that the Contractual Management Fee and the ContractualSub-Advisory Fees were reasonable in view of the expense information presented and the nature, extent and quality of the services expected to be provided under the Management Agreement and theSub-Advisory Agreements, respectively.
As a newly-organized fund, the Board noted that the Fund had no historical profitability information available for the Board to consider at the time of the Organization Meetings, and the Manager explained there was significant uncertainty concerning the components of a profitability analysis for a new fund so pro forma information regarding the projected profitability to the Manager of its services to the Fund was not available. The profitability to theSub-Advisers was not considered to be a material factor in the Board’s consideration since such fees are paid by the Manager. Under the circumstances, the Board concluded that the profitability to the Manager was not expected to be excessive, particularly in view of the Manager’s agreement to waive fees and/or reimburse certain expenses through December 31, 2020 but did not give such information significant weight in its evaluations.
Economies of Scale
The Manager stated that as the Fund’s assets increase over time, the Fund and its stockholders might realize economies of scale as certain expenses, such as fixed fund fees, become a smaller percentage of overall assets. However, the Board noted that the Manager, in the Contractual Management Fee, incorporates no breakpoints to reflect the potential for reducing the Contractual Management Fee or the ContractualSub-Advisory Fees as the Fund’s assets increase. The Board considered that, as a newly-organized fund, there was uncertainty regarding the ability of the Fund to attract assets and the rate of asset growth that will be achieved. In view of the uncertainty as to the growth of assets, and taking into account the Manager’s agreement to waive fees and/or reimburse certain expenses through December 31, 2020, the Board concluded that the Contractual Management Fee and the ContractualSub-Advisory Fees structures are each appropriate at this time.
Other Benefits to the Manager
The Board considered other benefits expected to be received by the Manager and its affiliates, including theSub-Advisers, as a result of the Manager’s relationship with the Fund. In view of the expected costs of providing investment management and other services to the Fund and the Manager’s commitment to the Fund, the other ancillary benefits that the Manager and its affiliates expect to receive were not considered excessive.
* * * * * *
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In view of all of the foregoing and other relevant factors, the Board determined, under the circumstances, that approval of the Management Agreement and theSub-Advisory Agreements would be consistent with the interests of the Fund and its stockholders and unanimously voted to approve each Agreement for an initialtwo-year period. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and theSub-Advisory Agreements, and each Board member may have attributed different weights to the various factors.
The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Evaluation Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with the Board’s consideration of the Management Agreement and theSub-Advisory Agreements. Prior to voting, the Independent Directors also discussed the proposed approval of the Management Agreement and theSub-Advisory Agreements in private sessions with their independent legal counsel at which no representatives of the Manager or theSub-Advisers were present.
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Additional information(unaudited)
Information about Directors and Officers
The business and affairs of Clarion Partners Real Estate Income Fund Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.
The Fund’s Statement of Additional Information includes additional information about Directors and is available, without charge, upon request by calling the Fund at1-888-777-0102.
Independent Directors† | ||
Robert D. Agdern | ||
Year of birth | 1950 | |
Position(s) held with Fund1 | Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002 to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | None | |
Carol L. Colman | ||
Year of birth | 1946 | |
Position(s) held with Fund1 | Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | President, Colman Consulting Company (consulting) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | None |
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Independent Directors†cont’d | ||
Daniel P. Cronin | ||
Year of birth | 1946 | |
Position(s) held with Fund1 | Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | None | |
Paolo M. Cucchi | ||
Year of birth | 1941 | |
Position(s) held with Fund1 | Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014) at Drew University | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | None | |
William R. Hutchinson | ||
Year of birth | 1942 | |
Position(s) held with Fund1 | Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | Director(Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994) |
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Additional information(unaudited) (cont’d)
Information about Directors and Officers
Independent Directors†cont’d | ||
Eileen A. Kamerick | ||
Year of birth | 1958 | |
Position(s) held with Fund1 | Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | National Association of Corporate Directors Board Leadership Fellow (since 2016) and financial expert; Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and University of Iowa law schools (since 2007); formerly, Senior Advisor to the Chief Executive Officer and Executive Vice President and Chief Financial Officer of ConnectWise, Inc. (software and services company) (2015 to 2016); Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | Trustee of AIG Funds and Anchor Series Trust (since 2018); Hochschild Mining plc (precious metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (2003 to 2016) | |
Nisha Kumar | ||
Year of birth | 1970 | |
Position(s) held with Fund1 | Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign Relations | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
Other board memberships held by Director during the past five years | Director of the India Fund, Inc. (since 2016); GB Flow Investment LLC; EDAC Technologies Corp.; Nordco Holdings, LLC; and SEKO Global Logistics Network, LLC; formerly, Director of Aberdeen Income Credit Strategies Fund (2017 to 2018); Director of The Asia Tigers Fund, Inc. (2016 to 2018) |
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Interested Director and Officer | ||
Jane Trust, CFA2 | ||
Year of birth | 1962 | |
Position(s) held with Fund1 | Director, Chairman, President and Chief Executive Officer | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Senior Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2018); Managing Director of Legg Mason & Co. (2016 to 2018); Officer and/or Trustee/Director of 145 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 142 | |
Other board memberships held by Director during the past five years | None | |
Additional Officers | ||
Todd F. Kuehl Legg Mason 100 International Drive, 9th Floor, Baltimore, MD 21202 | ||
Year of birth | 1969 | |
Position(s) held with Fund1 | Chief Compliance Officer | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Managing Director of Legg Mason & Co. (since 2011); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2010); formerly, Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002 to 2006) | |
Jenna Bailey Legg Mason 100 First Stamford Place, 5th Floor, Stamford, CT 06902 | ||
Year of birth | 1978 | |
Position(s) held with Fund1 | Identity Theft Prevention Officer | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013) |
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Additional information(unaudited) (cont’d)
Information about Directors and Officers
Additional Officers cont’d | ||
Robert I. Frenkel Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
Year of birth | 1954 | |
Position(s) held with Fund1 | Secretary and Chief Legal Officer | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2006); Managing Director and General Counsel — U.S. Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) | |
Thomas C. Mandia Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
Year of birth | 1962 | |
Position(s) held with Fund1 | Assistant Secretary | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers) | |
Christopher Berarducci Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
Year of birth | 1974 | |
Position(s) held with Fund1 | Treasurer and Principal Financial Officer | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain mutual funds associated with Legg Mason & Co. or its affiliates; Director of Legg Mason & Co. (since 2015); formerly, Vice President of Legg Mason & Co. (2011 to 2015); Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) |
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Additional Officers cont’d | ||
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
Year of birth | 1951 | |
Position(s) held with Fund1 | Senior Vice President | |
Term of office1and length of time served | Since 2019 | |
Principal occupation(s) during the past five years | Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015) |
† | Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”). |
1 | Each member of the Board of Directors shall hold office until his or her removal, resignation or successor is duly elected and qualifies. The Fund’s executive officers are chosen each year, to hold office until their successors are duly elected and qualified. |
2 | Ms. Trust is an “interested person” of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its affiliates. |
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Other shareholder communications regarding accounting matters(unaudited)
The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 49th Floor
New York, New York 10018
Complaints may also be submitted by telephone at1-800-742-5274. Complaints submitted through this number will be received by the CCO.
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Dividend reinvestment plan(unaudited)
Unless you elect to receive distributions in cash (i.e.,opt-out), all dividends, including any capital gain dividends, on your Common Stock will be automatically reinvested in additional shares of Common Stock at the NAV determined on the reinvestment date. You may elect not to participate in the Fund’s Dividend Reinvestment Plan (the “Plan”) by contacting DST Asset Manager Solutions, Inc. (“the Plan Agent”). An election to receive cash may be revoked or reinstated at the option of the stockholder. If you do not participate, you will receive all distributions in cash. All distributions will be wired to your account. The Fund will not pay distributions via check.
Common Stock in your account will be held by the Plan Agent innon-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan.
You may withdraw from the Plan (i.e.,opt-out) by notifying the Plan Agent in writing at PO Box 219520 Kansas City, MO 64105 or by calling the Plan Agent at844-534-4627 between 8:00 am and 5:00 pm CT. Such withdrawal will be effective immediately if notice is received by the Plan Agent more than three business days prior to any dividend or distribution payment date for that dividend to be paid out in cash. If the notice is received less than three business days prior to any dividend or distribution payment date, then that dividend will be reinvested and all subsequent dividends or distributions will be paid out in cash. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board, the change is warranted. The Plan Agent’s service fee for handling distributions will be paid by the Fund. For participants holding shares directly with the Plan Agent, the Plan Agent will charge each participant a fee of $15.00 plus commissions upon any sale of shares accepted for tender by the Fund. Additional information about the Plan and your account may be obtained from the Plan Agent in writing at PO Box 219520 Kansas City, MO 64105 or by calling the Plan Agent at844-534-4627 between 8:00 am and 5:00 pm CT.
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Important tax information(unaudited)
The following information is provided with respect to the distributions paid during the taxable period ended December 31, 2019:
Record date: | 12/24/2019 | |
Payable date: | 12/26/2019 | |
Section 199A Dividends | 100.00% |
Represents qualified REIT dividends that may be eligible for the 20% qualified business income deduction under Section 199A of the Internal Revenue Code of 1986, as amended, that is available fornon-corporate taxpayers and is included in “Ordinary Dividends”.
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Clarion Partners
Real Estate Income Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Todd F. Kuehl
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
Robert I. Frenkel
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
Clarion Partners Real Estate Income Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Clarion Partners, LLC
Western Asset Management Company, LLC
Custodian
The Bank of New York Mellon
Transfer agent
DST Asset Manager Solutions, Inc.
2000 Crown Colony Dr.
Quincy, MA 02169
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal Counsel
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
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Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsoredclosed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
• | Personal information included on applications or other forms; |
• | Account balances, transactions, and mutual fund holdings and positions; |
• | Bank account information, legal documents, and identity verification documentation; |
• | Online account access user IDs, passwords, security challenge question responses; and |
• | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
• | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to government regulators; |
• | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds; |
• | Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
• | The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
• | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
NOT PART OF THE ANNUAL REPORT |
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Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Funds at1-888-777-0102.
Revised April 2018
NOT PART OF THE ANNUAL REPORT |
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Clarion Partners Real Estate Income Fund Inc.
Clarion Partners Real Estate Income Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, and the applicable rules thereunder, that from time to time the Fund may purchase shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on FormN-PORT. The Fund’s FormsN-PORT are available on the SEC’s website at www.sec.gov. To obtain information onForm N-PORT, shareholders can call the Fund at1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling1-888-777-0102, (2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Clarion Partners Real Estate Income Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.
DST Asset Manager Solutions, Inc.
2000 Crown Colony Dr.
Quincy, MA 02169
CLAR572661 2/20 SR20-3811
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ITEM 2. | CODE OF ETHICS. |
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Directors of the registrant has determined that Eileen A. Kamerick, a member of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to FormN-CSR to qualify as an “audit committee financial expert” and that she is independent for purposes of this item.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
(a)Audit Fees. The aggregate fees billed in the fiscal years ending December 31, 2019 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $62,500 in December 31, 2019.
(b)Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in December 31, 2019.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $0 in December 31, 2019. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that requiredpre-approval by the Audit Committee.
(d)All Other Fees. The aggregate fees for other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Western Asset Premier Bond Fund were $0 in December 31, 2019.
All Other Fees. There were no othernon-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Clarion Partners Real Estate Fund Inc. requiringpre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre—approval policies and procedures described in paragraph (c) (7) ofRule 2-01 of RegulationS-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissiblenon-audit services to be provided to the Fund and (b) all permissiblenon-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and
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financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approvenon-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissiblenon-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissiblenon-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions orcontribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissiblenon-audit services is not required so long as: (i) the aggregate amount of all such permissiblenon-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissiblenon-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissiblenon-audit services were not recognized by the Fund at the time of the engagement to benon-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Clarion Partners Real Estate Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% for December 31, 2019; Tax Fees were 100% for December 31, 2019; and Other Fees were 100% for December 31, 2019.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered Clarion Partners Real Estate Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Clarion Partners Real Estate Fund Inc. during the reporting period were $4,227,692 in December 31, 2019.
(h) Yes. Clarion Partners Real Estate Fund Inc.’s Audit Committee has considered whether the provision ofnon-audit services that were rendered to Service Affiliates, which were notpre-approved (not requiringpre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Clarion Partners Real Estate Fund Inc. or to Service Affiliates, which were required to bepre-approved, werepre-approved as required.
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
a) Registrant has a separately-designated standing Audit Committee established in accordance withSection 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
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Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar *
* Effective January 1, 2019, Ms. Kumar became a Director and Audit Committee member.
b) Not applicable
ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FORCLOSED-END MANAGEMENT INVESTMENT COMPANIES |
CLARION PARTNERS, LLC
PROXY VOTING POLICIES AND PROCEDURES
With the exception of certain investment strategies and products, Clarion does not typically acquire securities that require it to vote proxies on behalf of its clients. In the event that such securities are acquired or managed, the following procedure is designed to ensure that proxy matters are handled in the best interest of clients and as required by applicable law and pursuant to investment management agreements. Specific business divisions of Clarion may maintain tailored proxy voting sub procedures separate from, though complementary to, the below. Clarion will be responsible for proxy voting strictly for those clients whose investment management agreements explicitly so indicate.
Once proxy voting forms are received by a Clarion portfolio manager, they will be handled in the following manner:
1. | Proxies will be reviewed by the portfolio manager to determine the accounts impacted. |
2. | The portfolio manager shall vote all proxies in accordance with product-specific proxy voting guidelines and keep a log of all such votes. The portfolio manager is not responsible for voting proxies not received; clients are advised to facilitate receipt of upcoming relevant proxy votes with their custodians. |
3. | If the proxy presents a potential conflict of interest (or the appearance of such a conflict), the portfolio manager will advise the Legal and Compliance Department and the appropriate Investment Committee(s) of the upcoming vote, the reason for the potential conflict of interest, and his or her related recommendation. The Legal and Compliance Department will advise the appropriate Investment Committee(s), who will make the final determination regarding the vote. The portfolio manager will then vote the affected proxy in accordance with that determination. |
4. | The Legal and Compliance Department shall review proxy voting records on a periodic basis to ensure compliance and adjust these procedures as necessary. |
A copy of this proxy voting policy shall be made available to clients upon request. Clients may also request a copy of the proxy voting record for their records.
Western Asset Management Company, LLC
Proxy Voting Policies and Procedures
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BACKGROUND
An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.
POLICY
As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)- 6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on acase-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
PROCEDURE
Responsibility and Oversight
The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at accountstart-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified atstart-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
1. | Proxies are reviewed to determine accounts impacted. |
2. | Impacted accounts are checked to confirm Western Asset voting authority. |
3. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
4. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a |
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mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
5. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on acase-by-case basis taking into the account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
6. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering, and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant toSection 204-2 of the Advisers Act and ERISA DOL Bulletin94-2. These records include:
a. | A copy of Western Asset’s policies and procedures. |
b. | Copies of proxy statements received regarding client securities. |
c. | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
d. | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
e. | A proxy log including: |
1. | Issuer name; |
2. | Exchange ticker symbol of the issuer’s shares to be voted; |
3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
4. | A brief identification of the matter voted on; |
5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
6. | Whether a vote was cast on the matter; |
7. | A record of how the vote was cast; and |
8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest.
Issues to be reviewed include, but are not limited to:
1. | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
2. | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
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3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
I. | Board Approved Proposals |
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
1. | Matters relating to the Board of Directors |
Western Asset votes proxies for the election of the company’s nominees for directors and for board- approved proposals on other matters relating to the board of directors with the following exceptions:
a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
d. | Votes are cast on acase-by-case basis in contested elections of directors. |
2. | Matters relating to Executive Compensation |
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on acase-by-case basis on board-approved proposals relating to executive compensation, except as follows:
a. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
b. | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
c. | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
d. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
3. | Matters relating to Capitalization |
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on acase-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
a. | Western Asset votes for proposals relating to the authorization of additional common stock. |
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b. | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
c. | Western Asset votes for proposals authorizing share repurchase programs. |
4. | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions |
Western Asset votes these issues on acase-by-case basis on board-approved transactions.
5. | Matters relating to Anti-Takeover Measures |
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
a. | Western Asset votes on acase-by-case basis on proposals to ratify or approve shareholder rights plans. |
b. | Western Asset votes on acase-by-case basis on proposals to adopt fair price provisions. |
6. | Other Business Matters |
Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
a. | Western Asset votes on acase-by-case basis on proposals to amend a company’s charter or bylaws. |
b. | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
II. | Shareholder Proposals |
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
a. | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
b. | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals. |
c. | Western Asset votes on acase-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
III. | Voting Shares of Investment Companies |
Western Asset may utilize shares of open orclosed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
1. | Western Asset votes on acase-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
2. | Western Asset votes on acase-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
IV. | Voting Shares of Foreign Issuers |
In the event Western Asset is required to vote on securities held innon-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
1. | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management. |
2. | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
3. | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of |
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U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
4. | Western Asset votes on acase-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights. |
RETIREMENT ACCOUNTS
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
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Western Asset Management Company Limited
Proxy Voting and Corporate Actions Policy
NOTE: Below policy relating to Proxy Voting and Corporate Actions is a global policy for all Western Asset affiliates. As compliance with the Policy is monitored by Western Asset Pasadena affiliate, the Policy has been adopted from US Compliance Manual and therefore all defined terms are those defined in the US Compliance Manual rather than UK Compliance Manual.
As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on acase-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
RESPONSIBILITY AND OVERSIGHT
The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
CLIENT AUTHORITY
The Investment Management Agreement for each client is reviewed at accountstart-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
PROXY GATHERING
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified atstart-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
PROXY VOTING
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
• | Proxies are reviewed to determine accounts impacted. |
• | Impacted accounts are checked to confirm Western Asset voting authority. |
• | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
• | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
• | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers |
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determine votes on acase-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
• | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
TIMING
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
RECORDKEEPING
Western Asset maintains records of proxies voted pursuant toSection 204-2 of the Advisers Act and ERISA DOL Bulletin94-2. These records include:
• | A copy of Western Asset’s policies and procedures. |
• | Copies of proxy statements received regarding client securities. |
• | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
• | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
• | A proxy log including: |
• | Issuer name; |
• | Exchange ticker symbol of the issuer’s shares to be voted; |
• | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
• | A brief identification of the matter voted on; |
• | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
• | Whether a vote was cast on the matter; |
• | A record of how the vote was cast; and |
• | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
DISCLOSURE
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
CONFLICT OF INTEREST
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
• | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
• | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
• | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
VOTING GUIDELINES
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
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Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
BOARD APPROVAL PROPOSALS
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
Matters relating to the Board of Directors – Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
• | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
• | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
• | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
• | Votes are cast on acase-by-case basis in contested elections of directors. |
Matters relating to Executive Compensation – Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on acase-by- case basis on board-approved proposals relating to executive compensation, except as follows:
• | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
• | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
• | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
• | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
Matters relating to Capitalization – The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on acase-by-case basis on board- approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
• | Western Asset votes for proposals relating to the authorization of additional common stock; |
• | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits); |
• | Western Asset votes for proposals authorizing share repurchase programs; |
• | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions; |
• | Western Asset votes these issues on acase-by-case basis on board-approved transactions; |
Matters relating to Anti-Takeover Measures – Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
• | Western Asset votes on acase-by-case basis on proposals to ratify or approve shareholder rights plans; |
• | Western Asset votes on acase-by-case basis on proposals to adopt fair price provisions. |
Other Business Matters – Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
• | Western Asset votes on acase-by-case basis on proposals to amend a company’s charter or bylaws; |
• | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
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SHAREHOLDER PROPOSALS
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
• | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans; |
• | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals; |
• | Western Asset votes on acase-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
VOTING SHARES OF INVESTMENT COMPANIES
Western Asset may utilize shares of open orclosed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
• | Western Asset votes on acase-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios; |
• | Western Asset votes on acase-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
VOTING SHARES OF FOREIGN ISSUERS
In the event Western Asset is required to vote on securities held innon-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
• | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management; |
• | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees; |
• | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated; |
• | Western Asset votes on acase-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights. |
RETIREMENT ACCOUNTS
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary.
Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
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CORPORATE ACTIONS
Western Asset must pay strict attention to any corporate actions that are taken with respect to issuers whose securities are held in client accounts. For example, Western Asset must review any tender offers, rights offerings, etc., made in connection with securities owned by clients. Western Asset must also act in a timely manner and in the best interest of each client with respect to any such corporate actions.
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Western Asset Management Company Ltd (“WAMJ”) Proxy Voting Policies and Procedures
POLICY
As a fixed income only manager, the occasion to vote proxies for WAMJ is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on acase-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, WAMJ will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
PROCEDURE
Responsibility and Oversight
The WAMJ Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Operations (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at accountstart-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority, WAMJ will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if WAMJ becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified atstart-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If WAMJ personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
a. | Proxies are reviewed to determine accounts impacted. |
b. | Impacted accounts are checked to confirm WAMJ voting authority. |
c. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
d. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and WAMJ obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle), WAMJ seeks voting instructions from an independent third party. |
e. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on acase-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, WAMJ may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
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f. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
WAMJ personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
WAMJ maintains records of proxies. These records include:
a. | A copy of WAMJ’s policies and procedures. |
b. | Copies of proxy statements received regarding client securities. |
c. | A copy of any document created by WAMJ that was material to making a decision how to vote proxies. |
d. | Each written client request for proxy voting records and WAMJ’s written response to both verbal and written client requests. |
e. | A proxy log including: |
1. | Issuer name; |
2. | Exchange ticker symbol of the issuer’s shares to be voted; |
3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
4. | A brief identification of the matter voted on; |
5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
6. | Whether a vote was cast on the matter; |
7. | A record of how the vote was cast; and |
8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in WAMJ’s offices.
Disclosure
WAMJ’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
1. | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
2. | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
WAMJ’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
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1b. | Board Approved Proposals |
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, WAMJ generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
1. | Matters relating to the Board of Directors |
WAMJ votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
d. | Votes are cast on acase-by-case basis in contested elections of directors. |
2. | Matters relating to Executive Compensation |
WAMJ generally favors compensation programs that relate executive compensation to a company’s long- term performance. Votes are cast on acase-by-case basis on board-approved proposals relating to executive compensation, except as follows:
a. | Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for stock option plans that will result in a minimal annual dilution. |
b. | WAMJ votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
c. | WAMJ votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
d. | Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
3. | Matters relating to Capitalization |
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, WAMJ votes on acase-by-case basis on board-approved proposals involving changes to a company’s capitalization except where WAMJ is otherwise withholding votes for the entire board of directors.
a. | WAMJ votes for proposals relating to the authorization of additional common stock. |
b. | WAMJ votes for proposals to effect stock splits (excluding reverse stock splits). |
c. | WAMJ votes for proposals authorizing share repurchase programs. |
4. | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions WAMJ votes these issues on acase-by-case basis on board-approved transactions. |
5. | Matters relating to Anti-Takeover Measures |
WAMJ votes against board-approved proposals to adopt anti-takeover measures except as follows:
a. | WAMJ votes on acase-by-case basis on proposals to ratify or approve shareholder rights plans. |
b. | WAMJ votes on acase-by-case basis on proposals to adopt fair price provisions. |
6. | Other Business Matters |
WAMJ votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
a. | WAMJ votes on acase-by-case basis on proposals to amend a company’s charter or bylaws. |
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b. | WAMJ votes against authorization to transact other unidentified, substantive business at the meeting. |
2b. | Shareholder Proposals |
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. WAMJ votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
a. | WAMJ votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
b. | WAMJ votes for shareholder proposals that are consistent with WAMJ’s proxy voting guidelines for board-approved proposals. |
c. | WAMJ votes on acase-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
3b. | Voting Shares of Investment Companies |
WAMJ may utilize shares of open orclosed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
• | WAMJ votes on acase-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
• | WAMJ votes on acase-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
4b. | Voting Shares of Foreign Issuers |
In the event WAMJ is required to vote on securities held innon-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
1. | WAMJ votes for shareholder proposals calling for a majority of the directors to be independent of management. |
2. | WAMJ votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
3. | WAMJ votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
WAMJ votes on acase-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.
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Western Asset Management Company Pte. Ltd. (“WAMS”)
Compliance Policies and Procedures
Proxy Voting
WAMS has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and the applicable laws and regulations. In addition to SEC requirements governing advisers, our proxy voting policies reflect thelong-standing fiduciary standards and responsibilities for ERISA accounts.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on acase-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, WAMS will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
Procedure
Responsibility and Oversight
The Western Asset Legal and Compliance Department is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified atstart-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
1. | Proxies are reviewed to determine accounts impacted. |
2. | Impacted accounts are checked to confirm Western Asset voting authority. |
3. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. [See conflicts of interest section of these procedures for further information on determining material conflicts of interest.] |
4. | If a material conflict of interest exists, (4.1) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (4.2) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
5. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on acase-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for |
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different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
6. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (4) or (5) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant toSection 204-2 of the Advisers Act and ERISA DOL Bulletin94-2. These records include:
• | A copy of Western Asset’s policies and procedures. |
• | Copies of proxy statements received regarding client securities. |
• | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
• | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
• | A proxy log including: |
• | Issuer name; |
• | Exchange ticker symbol of the issuer’s shares to be voted; |
• | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
• | A brief identification of the matter voted on; |
• | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
• | Whether a vote was cast on the matter; |
• | A record of how the vote was cast; and |
• | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
• | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
• | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
• | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part 1 deals with proposals which have been approved and are recommended by a company’s board of directors; Part 2 deals with proposals submitted by shareholders for inclusion in proxy statements; Part 3 addresses issues relating to voting shares of investment companies; and Part 4 addresses unique considerations pertaining to foreign issuers
Part 1 - Board Approved Proposals
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The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
• | Matters relating to the Board of Directors. Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions: |
• | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
• | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
• | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
• | Votes are cast on acase-by-case basis in contested elections of directors. |
• | Matters relating to Executive Compensation. Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on acase-by-case basis on board-approved proposals relating to executive compensation, except as follows: |
• | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
• | Western Asset votes against stock option plans or proposals that permit replacing orre-pricing of underwater options. |
• | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
• | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
• | Matters relating to Capitalization. The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on acase-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors. |
• | Western Asset votes for proposals relating to the authorization of additional common stock. |
• | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
• | Western Asset votes for proposals authorizing share repurchase programs. |
• | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions. Western Asset votes these issues on acase-by-case basis on board-approved transactions. |
• | Matters relating to Anti-Takeover Measures. Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows: |
• | Western Asset votes on acase-by-case basis on proposals to ratify or approve shareholder rights plans. |
• | Western Asset votes on acase-by-case basis on proposals to adopt fair price provisions. |
• | Other Business Matters. Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting. |
• | Western Asset votes on acase-by-case basis on proposals to amend a company’s charter or bylaws. |
• | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
Part 2 - Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
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• | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
• | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals. |
• | Western Asset votes on acase-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
Part 3 – Voting Shares of Investment Companies
Western Asset may utilize shares of open orclosed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts 1 and 2 above are voted in accordance with those guidelines.
• | Western Asset votes on acase-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
• | Western Asset votes on acase-by-case basis all proposals that would result in increases in expenses (e.g. proposals to adopt12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
Part 4 – Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held innon-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
• | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management. |
• | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
• | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
• | Western Asset votes on acase-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not havepre-emptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders havepre-emptive rights. |
Retirement Accounts
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager. In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (1) the right to vote proxies has been reserved to a named fiduciary of the client, and (2) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
ITEM 8. | INVESTMENT PROFESSIONALS OFCLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
(a)(1):
NAME AND | LENGTH OF | PRINCIPAL OCCUPATION(S) DURING |
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ADDRESS | TIME SERVED | PAST 5 YEARS | ||
Richard Schaupp Clarion Partners 230 Park Avenue New York, NY, 10169 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; Managing Partner of Clarion Partners; has been employed more than 5 years with Clarion Partners. | ||
Onay Payne Clarion Partners 230 Park Avenue New York, NY, 10169 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; Managing Partner of Clarion Partners; has been employed more than 5 years with Clarion Partners. | ||
Jason Glasser Clarion Partners 230 Park Avenue New York, NY, 10169 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; Senior Vice President of Clarion Partners; has been employed more than 5 years with Clarion Partners. | ||
Janis Mandarino Clarion Partners 230 Park Avenue New York, NY, 10169 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; Senior Vice President of Clarion Partners; has been employed more than 5 years with Clarion Partners. | ||
S. Kenneth Leech Western Asset | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013;Co- Chief Investment Officer of Western Asset from 2013-2014. | ||
Greg E. Handler Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; research analyst/portfolio manager at Western Asset since 2002. | ||
Harris Trifon Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2019 | Responsible for theday-to-day management with other members of the Fund’s portfolio management team; employed by Western Asset as an investment professional since 2014; formerly, Director, Fixed Income Research at Deutsche Bank from 2009 to 2014. |
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(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the fund’s investment professionals for the fund. Unless noted otherwise, all information is provided as of December 31, 2019.
Other Accounts Managed by Investment Professionals
The table below identifies the number of accounts (other than the fund) for which the fund’s investment professionals haveday-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
Name of PM | Type of Account | Number of Accounts Managed | Total Assets | Number of Fee is | Assets Managed for Advisory Fee is Performance- | |||||
Richard Schaupp | Other Registered Investment Companies | None | None | None | None | |||||
Other Pooled Vehicles | 5 | $362 million | None | None | ||||||
Other Accounts | 3 | $1.9 billion | 2 | $1.4 billion | ||||||
Onay Payne | Other Registered Investment Companies | None | None | None | None | |||||
Other Pooled Vehicles | 2 | $101 million | None | None | ||||||
Other Accounts | 2 | $2.6 billion | 1 | $1.8 billion | ||||||
Jason Glasser | Other Registered Investment Companies | None | None | None | None | |||||
Other Pooled Vehicles | None | None | None | None | ||||||
Other Accounts | 3 | $3.6 billion | 2 | $2.2 billion | ||||||
Janis Mandarino* | Other Registered Investment Companies | None | None | None | None | |||||
Other Pooled Vehicles | None | None | None | None | ||||||
Other Accounts | 2 | $1.3 billion | None | None | ||||||
S. Kenneth Leech‡ | Other Registered Investment Companies | 94 | $150.3 billion | None | None | |||||
Other Pooled Vehicles | 227 | $81.0 billion | 11 | $2.2 billion |
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Other Accounts | 627 | $228.8 billion | 21 | $12.1 billion | ||||||
Harris Trifon‡ | Other Registered Investment Companies | 1 | $1.3 billion | None | None | |||||
Other Pooled Vehicles | 11 | $4.0 billion | 2 | $125 million | ||||||
Other Accounts | 16 | $544 million | 2 | $146 million | ||||||
Greg E. Handler ‡ | Other Registered Investment Companies | 1 | $1.3 billion | None | None | |||||
Other Pooled Vehicles | 11 | $4.0 billion | 2 | $125 million | ||||||
Other Accounts | 16 | $544 million | 2 | $146 million |
* Effective February 3, 2020, Ms. Mandarino became a portfolio manager of the Fund. The information presented in the table above is as of December 31, 2019.
‡ The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. He is responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.
(a)(3):Investment Professional Compensation
Clarion Partners
Under the guidance of the Clarion Partners’ compensation committee, Clarion Partners offers a compensation package to both investment andnon-investment professionals. Factors used to determine compensation include individual and team performance as well as overall Clarion Partners profitability. Individual performance is evaluated during Clarion Partners’ annual performance appraisal process and utilizes a quantitative and qualitative approach to measuring performance. Each employee meets with their supervisor during the annual performance appraisal to discuss the prior year’s performance, set future short and long-term goals, and ensure ongoing professional development.
Investment professionals are measured on their financial contribution to Clarion Partners through a number of factors, including: individual impact on investment performance; performance relative to specific industry indices; performance relative to select peer groups and other factors. The results are incorporated in developing competitive total remuneration package for all positions. Key elements of the compensation program include: short-term components, including base salary and bonus; long-term components subject to vesting, including retirement benefits, Clarion Partners equity ownership, and participation in Clarion Partners and investment product promotes. Compensation is quantitatively and qualitatively linked to both individual and portfolio performance, aligning the interests of each senior professional with those of its clients.
Western Asset
With respect to the compensation of the investment professionals, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and
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ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function andpre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure an investment professional’spre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Potential Conflicts of Interest
Potential conflicts of interest may arise when the Fund’s portfolio managers also haveday-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the Fund’s portfolio managers.
Clarion Partners and Western Asset have adopted compliance policies and procedures that are designed to address various conflicts of interest that may arise for Clarion Partners, Western Asset and the individuals that each employs. For example, Clarion Partners and Western Asset each seek to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. Each Adviser also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the Advisers will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention.A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities.If a portfolio manager identifies an investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity or may be allocated away from a fund entirely pursuant to a rotational allocation policy.
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Pursuit of Differing Strategies.At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
Selection of Broker/Dealers.In addition to executing trades, some broker/dealers provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others.
Variation in Compensation.A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the Legg Mason Partners Fund Advisor’s management fee (and the percentage paid to Clarion Partners and Western Asset) and/or the portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
a)(4):Investment Professional Securities Ownership
The table below identifies the dollar range of securities beneficially owned by each investment professional as of December 31, 2019.
Portfolio Manager(s) | Dollar Range of | |
Richard Schaupp | A | |
Onay Payne | A | |
Jason Glasser | A | |
Janis Mandarino | A | |
S. Kenneth Leech | A | |
Harris Trifon | A | |
Greg E. Handler | A |
Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
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D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million
ITEM 9. | PURCHASES OF EQUITY SECURITIES BYCLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS |
Not applicable.
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
ITEM 11. | CONTROLS AND PROCEDURES. |
(a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule30a-3(b) under the 1940 Act and15d-15(b) under the Securities Exchange Act of 1934. |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting |
ITEM 12. | DISCLOSURE OF SECURITIES LENDING ACTIVITIES FORCLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
ITEM 13. | EXHIBITS. |
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Clarion Partners Real Estate Income Fund Inc. | ||
By: | /s/ Jane Trust | |
Jane Trust | ||
Chief Executive Officer | ||
Date: | March 03, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ Jane Trust | |
Jane Trust | ||
Chief Executive Officer | ||
Date: | March 03, 2020 | |
By: | /s/ Christopher Berarducci | |
Christopher Berarducci | ||
Principal Financial Officer | ||
Date: | March 03, 2020 |