PAG Calls for Strategic Review of Spring REIT

Toshihiro Toyoshima Spring REIT

Toshihiro Toyoshima, chairman of Spring REIT Asset Management Limited

Alternative investment manager PAG Real Estate is calling for an external strategic review of Spring REIT by January 2018, following a failed effort to remove the REIT’s manager at an extraordinary general meeting held last week.

The move comes less than two weeks after PAG urged Hong Kong regulators to take legal action over what it labelled as misleading statements by Spring REIT’s manager, and opens a new phase in the firm’s escalating campaign against the management of the troubled investment vehicle.

Spring REIT’s manager first drew the ire of the Hong Kong-based private equity firm, one of the trust’s biggest investors, when it decided earlier this year to supplement the REIT’s portfolio of premium office assets in Beijing by snapping up a chain of 84 auto repair shops in Britain.

PAG Calls for a New Chapter for Spring REIT

PAG, which through its investment vehicles owns around 12 percent of the REIT, had requested the extraordinary general meeting (EGM) to vote on removing Spring Asset Management Limited as the trust’s manager, citing concerns about the REIT’s financial underperformance, corporate governance issues and potential conflicts of interest. The proposal to remove the manager garnered the support of only 19.3 percent of the votes at the EGM held on November 10 – less than the minimum of 50 percent required to pass the resolution.

In a statement released today, however, PAG argues that the outcome is unsurprising given that at least 34 percent of the REIT’s total units are held by the manager and its “friendly parties.” PAG reckons that only 28.9 percent of “independent unitholders” voted with the manager, while 21.2 percent of the total unit holders did not cast a vote, indicating minimal support for the REIT’s manager among independent parties.

“Friday’s results demonstrate that there is broad support among Spring REIT’s independent unitholders to resolve the issues we have raised,” commented Broderick Storie, Managing Director and Partner of PAG Real Estate in the statement. “We are hopeful the Manager will now listen to its unitholders and agree it is time for a new chapter at Spring REIT.”

“There is no valid reason why the Manager should deny all unitholders the opportunity to benefit from a strategic review, a process which has delivered proven value for unitholders in other REITs time and again,” Storie added.

Hong Kong’s largest real estate investment trust, Link REIT said in July that it was undertaking its own strategic review. Now the Hong Kong-listed trust is said to be entertaining bids from Blackstone, KRR and other investors for a $14.5 billion portfolio of shopping centres in the city.

Investor’s Battle with REIT Manager Rages On

The REIT owns a pair of premium office towers in Beijing’s China Central Place

Besides calling for the appointment of independent experts to review the REIT’s strategy, performance and governance, the firm has also previously proposed that Spring REIT’s management function be internalised and that Storie be appointed as a non-executive director.

PAG did not comment on what the proposed strategic review of Spring REIT might involve, but the investment firms complaints primarily centre around what it sees as the reckless acquisition of the 505,381 square foot (46,951 square metre) UK portfolio in July for $93.3 million, which also raised questions about a possible conflict of interest. The car servicing stations that make up the portfolio are leased to the Kwik-Fit Group, which is owned by Japan’s Itochu – one of the principal investors in Mercuria Investment Co, parent of the REIT’s manager.

Tokyo-listed Mercuria Investment Co owns 90.2 percent of Hong Kong-incorporated Spring Asset Management Limited. Itochu, which holds a 19.5 percent stake in Mercuria, acquired a 100 percent interest in the Kwik-Fit Group in 2011.

Adding to the drama, on November 1, PAG wrote to Hong Kong’s Securities & Futures Commission and the Stock Exchange of Hong Kong to demand “appropriate action” against the REIT’s manager over the circular announcing last week’s EGM, saying the statement contained material inaccuracies.

For its part, Spring REIT’s manager said in its filing to the Hong Kong exchange last Friday: “Going forward, the Manager will stay fully committed to providing Unitholders with stable distributions with sustainable growth potential and enhancement in the value of the portfolio of real estate assets, and will continue to act in the best interests of the Unitholders and Spring REIT as a whole within the regulatory framework applicable to Spring REIT.”