PAG Demands Legal Action as REIT Goes Rogue

A feud between a Hong Kong-listed real estate investment trust and one its biggest unit holders is ramping up, with alternative investment manager PAG demanding action by Hong Kong regulators over what it deems to be misleading statements by the management of Hong Kong-listed Spring REIT.

PAG Real Estate has written to Hong Kong’s Securities & Futures Commission (SFC) and the Stock Exchange of Hong Kong (SEHK) to demand “appropriate action” against Spring REIT over a recent circular announcing the REIT’s upcoming extraordinary general meeting, according to an announcement today.

Hong Kong-based PAG is waging a campaign to “save” Spring REIT, after the trust manager decided to mix in a chain of 84 UK auto repair shops with its portfolio of premium office assets in Beijing. The escalating feud has seen PAG call for a meeting to vote on changing Spring REIT’s management in August, among other measures it said were necessary to boost the performance of the flagging REIT.

Investor Calls Out REIT Manager

“The letter submits that the Manager has presented material inaccuracies which are detrimental to the interests of Spring REIT unitholders and which could prevent unitholders from making properly informed voting decisions,” according to the PAG statement.

The statement refers to Spring REIT’s circular filed with the Hong Kong exchange on October 25th, announcing the upcoming meeting on November 10th. PAG alleges that the REIT failed to disclose potential conflicts of interest and offered implausible excuses for keeping Spring REIT’s manager in place.

“The practical objections that the management of Spring REIT has thrown at unitholders over their potential removal is a case of making mountains out of molehills,” commented Broderick Storie, partner and managing director with PAG Real Estate in the statement. “The hurdles raised are easily overcome and, in our experience, do not amount to insurmountable challenges.”

PAG’s investment vehicles collectively hold around 12.5 percent of the issued units of Spring REIT.

Spring REIT Responds to PAG Request

PAG Real Estate’s dissatisfaction with the REIT first made headlines on August 29, when it called for an extraordinary general meeting to vote on four proposals: to remove Spring REIT’s manager; internalise the management function; appoint Storie as a non-executive director; and appoint independent experts to review the REIT’s strategy, performance and governance.

In its October circular, Spring REIT’s manager advised against the first two of these proposed resolutions, rejecting PAG’s arguments and saying that the removal of the manager could trigger a loan default and create problems with finding replacement property management staff. (These points are summarized in an accompanying announcement.)

The second resolution, to internalise management of the REIT, would only be considered if the resolution to remove the REIT’s manager were passed, according to the circular. Spring REIT also blocked consideration of PAG’s third and fourth proposals, saying they will be tabled and considered at a future extraordinary general meeting only if the second resolution is passed.

“The Manager has received written confirmations from certain Unitholders (whose unitholdings in aggregate represent more than 50% of the voting rights of Spring REIT as at the Latest Practicable Date) stating that: (i) they are satisfied with the performance of the Manager in managing Spring REIT; (ii) have no intention to support any proposal to remove the Manager; and (iii) intend to vote against the First Request if proposed at an extraordinary general meeting of Unitholders,” according to the statement.

PAG Fires Back at REIT Statement

In its response, PAG points out that Spring REIT’s manager did not specify which entities it was referring to in claiming that “certain Unitholders” were happy with the manager’s performance. Of particular concern for PAG, the REIT’s statement fails to mention that at least 34 percent of Spring REIT’s units are controlled by the manager and what PAG deems to be “friendly parties.”

Tokyo-listed Mercuria Investment Co owns 90.2 percent of Spring REIT’s manager. According to PAG, 36 percent of Mercuria’s revenue comes from its management fees for Spring REIT, on which the company reaps a 62.3 percent profit margin. “It is therefore no surprise that they are saying they will use their units in Spring REIT to vote to lock themselves in as the Manager,” according to PAG.

PAG also rejects the REIT’s arguments about the technical hurdles to changing Spring REIT’s manager and moving to an internal management structure, saying there should be no issues with extending the current loan facility, seeking refinancing, or finding a replacement property management provider.

Moreover, PAG is irked by the manager’s apparent indifference to Spring REIT’s underperforming unit price and 45 discount to net asset value. “The huge discount to NAV is a real impost that all unitholders have suffered and cannot just be wished away as an inconvenient performance measure,” commented Storie. “The Manager continues to resist sensible and proven suggestions to unlock this value,” he added.

Car Shop Acquisition Raises Conflict of Interest Questions

Up until this year, Spring REIT’s portfolio consisted of a pair of prime office towers in Beijing’s China Central Place, covering 120,245 square metres, as well as 600 parking spaces. The REIT aroused PAG’s ire when – in a radical change of strategy – it bought a portfolio of car servicing centres leased to the Kwik-Fit brand in the UK suburbs for $93.3 million. The transaction completed in July marked the largest property investment by a Hong Kong REIT outside of Greater China.

Spring REIT is managed by Spring Asset Management Limited, a Hong Kong-incorporated subsidiary of Mercuria. Japan’s Itochu holds a 19.5 percent stake in Mercuria, along with having acquired a 100 percent interest in the Kwik-Fit Group in 2011.