Private equity firm PAG launched a HK$5.24 billion ($670.8 million) hostile takeover to acquire all the units it doesn’t already own of Hong Kong-listed Spring REIT on Monday, at a price of HK$4.85 per unit.
The announcement sent the Hong Kong-listed real estate investment trust’s (REIT) shares up 34.67 percent to close at HK$4.04 today, from a previous close of HK$3 and above the 2013 IPO price of HK$3.81 for the first time.
“What we’re dealing with is material underperformance,” PAG Real Estate Partner Broderick Storie told Mingtiandi. “Our perspective is that we can do something to try to institute positive change,” he added. Spring REIT has underperformed the Hang Seng REIT Index by 41.6 percent since its IPO.
“We want a thorough strategic review to determine the right path [for the REIT],” he added. Should it gain a majority stake in the REIT, PAG’s RE Strategic Investments intends to call an EGM to vote on appointing a new manager, which would be an affiliated company of PAG Real Estate.
Once in control, the new manager would conduct a strategic review to consider all options which could include asset disposals and/or termination of Spring REIT as well as acquisitions of assets, asset enhancement, changes in capital structure, refinancings or mergers.
A Premium Offer at a Discount to NAV
While the offer at HK$4.85 per unit represents a 61.7 percent premium to Spring REIT’s previous closing price it is still a 19.8 percent discount to the trust’s audited net asset value (NAV) of HK$6.05 at end June 18.
Buying REITs trading at a deep discount to NAV and then selling off their assets is a common strategy pursued by PE managers in developed markets. PAG’s gambit would mark the first voluntary offer for a Hong Kong-listed REIT, if it is approved by the regulator.
The offer document for the voluntary conditional cash offer to acquire all Spring REIT’s 1.269 billion issued units is presently with the regulator and has to be despatched to unitholders within 21 days according to the rules.
Buying the REIT units would give PAG ownership of a pair of grade A office buildings in the China Central Place complex in Beijing’s CBD along with a set of 84 UK car maintenance facilities which Spring REIT acquired last year from a company controlled by Itochu Corporation. The Japanese conglomerate is also one of the principal investors in the REIT’s manager.
Huizhou Mall Deal Could Be Nixed
On 19 September, Spring REIT entered into an agreement to acquire a shopping mall in Huizhou, Guangdong for RMB 1.65 billion from an affiliate of mainland commercial property developer Beijing Huamao Property.
One of the conditions of PAG’s offer is that the Huizhou acquisition not be approved at an EGM on the matter, due be called on or before 28 September. The second condition is that the acceptances received result in the offeror holding more than 50 percent of the REIT’s units.
While the offer was “in the works” before the latest acquisition, the deal “reaffirmed the rationale” Storie explained.
PAG Ramped Up Stake After UK Acquisition
PAG held approximately 14.818 percent of Spring REIT’s issued units (or 188 million of 1.269 billion units in total) at the time of launching the offer. It is the second largest shareholder after RCAC – a fund controlled by Mercuria Investment, which is the controlling shareholder of the REIT manager – which owned 27.45 percent according to the latest disclosures.
PAG’s SCREP V LP fund owned 5.044 percent (64.01 million shares) via BT Cayman while its SCREP VI Holdings LP vehicle owned 9.773 percent (124.0214 million shares) via Spirit Cayman.
The PAG-managed entities started acquiring units in the REIT in early 2016, with its stake passing the 5 percent level in June that year. At the time, the REIT only owned the Beijing office assets, with Spring REIT announcing that it had signed a letter of intent to acquire the UK retail assets in December 2016.
PAG then increased its stake after its November 2017 call for a change in the REIT’s manager and external strategic review was defeated at an EGM last year. In the six months prior to launching the takeover – between March and July this year – Spirit Cayman acquired 8.279 million of the shares it now owns in the REIT.
A further 21 million shares changed hands today, after the announcement, well above the average daily turnover of 457,688 over the past twelve months.
Dilution Proves Unpopular
PAG Real Estate’s Storie describes the acquisition strategy being pursued by Spring REIT’s manager as “increasingly erratic and dilutive”.
Last year’s UK retail acquisition was partly funded by the placement of new units, at a discount of 45.4 percent to NAV. Spring REIT has announced that the proposed Guangdong shopping mall acquisition will also be partly funded by the issuance of news units, “which will significantly dilute minorities’ current interests and further increase the relative ownership of insiders,” according to the offer announcement.
The average distribution made by the REIT has been flat at HK$0.24 cents since it paid its first interim dividend in September 2014.
Spring REIT did not respond to requests for comment.