PAG Blasts Spring REIT Management on Discounted Sino-Ocean Deal

PAG Real Estate has renewed its offensive against the management of Hong Kong-listed Spring REIT, just over a year after the firm failed in a bid to take control of the real estate investment trust.

The property arm of the Hong Kong-based private equity firm has accused the REIT manager – Spring Asset Management – of not acting in the best interests of unitholders, and therefore being in breach of its fiduciary duty, by refusing to address concerns over conflicts of interest in a series of related party transactions.

In a letter issued to Hong Kong’s Securities and Futures Commission, PAG said that these actions have “resulted in the destruction of value for Spring REIT’s unitholders”.

Big Fees for an Underperforming Manager

PAG, which holds 18 percent of Spring REIT, noted that the trust remained “the worst performing general REIT on the Hong Kong Stock Exchange” since its initial public offering in 2013.

The commercial property trust, which owns a pair of premium grade office towers in Beijing and a portfolio of auto repair facilities in the UK, closed on Monday at HK$3.15 ($0.41) — which represents a 17 percent discount on the trust’s IPO price.

Despite this underperformance, Spring Asset Management – a subsidiary of Tokyo-listed Mercuria Investment – receives the highest management fee percentages among Hong Kong-listed REITs, according to PAG.

PAG has raised concerns over the structure of the REIT manager, noting that 75 percent of its key personnel are directly associated with Mercuria Investment, while the chairman of the manager – Toshihiro Toyoshima – also serves as the Tokyo-listed company’s CEO.

Toyoshima has a 5.4 percent stake in Mercuria Investment, while owning a 0.7 percent stake in Spring REIT, according to PAG.

Issuing Bonds to Sino-Ocean Group Holdings

In PAG’s letter, the firm said that the most recent of the REIT manager’s questionable acts took place on 27 November when it issued HK$585 million in convertible bonds to a consortium led by Sino-Ocean Group Holdings without providing any “satisfactory explanation of its rationale” for the sale or any “clear guidance on how these funds will be used”.

Less than two weeks ago the Sino-Ocean consortium converted these bonds to equity at a 36.6 percent discount to net asset value, triggering a dilution of both the trust’s NAV and distributions per unit.

PAG said that when the REIT Manager issued the convertible bonds it failed to disclose that Sino-Ocean Group is a joint venture partner of Huamao Property Holdings, a mainland investment house which took a 9.8 percent stake in the REIT manager just under five years ago. In China Sino-Ocean has jointly invested in property development projects with Beijing Guohua Real Estate, which is 87 percent owned by Huamao.

“Based on the evidence we have presented and the refusal of Spring REIT’s management to address the fair and reasonable concerns of unitholders, we conclude that the manager is acting in the best interests of Mercuria Investment instead of the best interests of all of Spring REIT’s unitholders, and is therefore in breach of the fiduciary duty owed to unitholders of Spring REIT,” said PAG Real Estate partner, Broderick Storie.

Engaging in Highly Dilutive Actions

PAG has raised several instances of questionable governance by Spring Asset Management that include the REIT manager’s proposal to acquire the Huamao Place shopping mall in Huizhou from Huamao Focus, which is a unit of Huamao Property Holdings, for RMB 1.65 billion ($240 million) just over a year ago.

The manager withdrew its proposal when two independent proxy advisors, ISS and Glass Lewis, recommended that Spring REIT’s unitholders should reject the acquisition.

PAG noted that Mercuria’s proposed shopping centre transaction would have involved the issuance of shares at a 44.3 percent discount to NAV, resulting in an NAV dilution of 8.1 percent.

The Hong Kong private equity firm has asked for a suitable explanation for why the REIT manager advised unitholders to reject PAG’s voluntary general offer of HK$5.30 per unit, which represented a 77 percent premium to the unit price prior to the offer.

Acquiring a Portfolio of Garages

PAG has also said that the REIT’s £73.5 million ($96 million) acquisition of 84 commercial properties in the UK, which are leased to car servicing chain Kwik Fit, was a “radical departure” from the REIT’s existing portfolio of grade A office towers in Beijing.

Itochu Corporation, which owns Kwik Fit, also holds a 13.8 percent stake in Mercuria Investment.

“Engaging in highly dilutive transactions that unfairly prejudices existing unitholders and entrenches the control of the manager and its affiliates is a direct abuse of the management role the Manager is paid handsomely for,” Storie said.

A Spring Asset Management spokesperson told Mingtiandi that it was aware of PAG’s press release but did not “consider the content of the press release to represent a fair and balanced view”.