PAG seeks shareholder support for REIT intervention

PERE spoke with Broderick Storie (pic), partner at PAG, on the perceived underperformance, style drift and poor governance issues facing Hong Kong-listed Spring REIT.

PAG Real Estate is trying to drum up support from investors in Hong Kong-listed Spring REIT after requesting the trust’s board to hold an extraordinary general meeting (EGM) to vote on resolutions to address underperformance and poor governance standards.

The Hong Kong-based alternatives investment manager is critical of the management of Spring REIT and that said in its request letter it was “deeply disappointed with the persistent unit price underperformance, which we feel in part results from the lack of a clear strategy.”

PAG wants unit holders to vote on four resolutions: that Spring Asset Management Limited be removed as the manager of Spring REIT; maintain existing management staff but effect the internalization of the REIT management function; appoint PAG partner, Broderick Storie, as a non-executive director and adopt certain corporate governance principles; and appoint an independent committee to conduct a strategic and governance review.

“At the time of starting to buy units Spring REIT was trading at quite a significant discount to NAV and had two very prime office towers in Beijing,” Storie told PERE. “We do a significant amount of direct investment in China, when we looked at what the book value was of the assets, the prime nature of them, and where demand was, we felt very comfortable that there was some unrealized value that could be realized in the circumstances of professional management.”

Spring REIT owns Towers 1 & 2 at China Central Place in Beijing, as well as a total of approximately 600 car parking spaces located in the underground levels of the two office buildings.

However, Storie said that performance has not improved and that Spring REIT’s units are trading at a substantial discount to NAV — 43.6 percent, while comparable REITs are trading at an average discount to NAV of 3.7 percent. The portfolio of Spring REIT was appraised at $1.33 billion at June 30, 2017 while its NAV stood at $940.75 million at 30 June 2017.

He pointed to Spring’s recent acquisition of 84 UK automotive repair shops as another area of concern.

“How is that relevant to strategy and how do you define strategy for the vehicle? What track record do you have in the market and what on the ground expertise do you have? Putting aside the geographic spread, what is a vehicle that owns prime Beijing offices doing buying car service centers in the UK?” said Storie.

“These are very simple questions as a professional investor you should be asking yourself in the context of measuring that against delivering a relevant outcome for unitholder value. It’s fair to say that was not obvious.”

However, he also said that equally troubling was the governance structure in place for Spring REIT and said the UK acquisition raised another red flag.

The UK car shops were leased to the Kwik-Fit brand which is controlled by Japan’s Itochu, one of the principal investors in Spring’s manager, Mercuria Investment. However, Itochu, which previously owned a 23 percent interest in Mercuria sold down its stake just days before a vote on the acquisition was to take place, bringing its ownership below the 20 percent threshold to be considered a related party of Spring.

“We started communicating with the manager to raise our concerns, unfortunately we didn’t get to a point where we influenced the decision sufficiently to stop the UK acquisition, albeit we tried. Obviously, ourselves and other unitholders did not react well to that transaction,” said Storie. “That pushed us into this position where we have now taken a different approach and are seeking measures to protect ourselves and other unitholders in the vehicle.”

The ball is now in Spring’s court and the REIT manager now must determine when the EGM will take place, while also having the chance to challenge PAG’s resolutions and decide what resolutions (and in what form) they are voted on.

Spring has already acknowledged the receipt of PAG’s request letter and said that “based on its preliminary review, the manager considers certain statements in the request letter to be misleading, and reserves the right to respond to such statements.”

Spring did not return a request for further comment by press time.
For PAG, which has a 12.5 percent stake in the REIT is not in a position to force the manager, but Storie said that PAG must build up consensus among other unit holders on a much broader basis so that it can put pressure on the manager to address these concerns.

“One of the issues is that we have to get to those moms and dads who have exposure to this vehicle. We do know from a shareholders meeting that some of those who made the effort to go have been quite vocal in their unhappiness. Its garnering all that together so we can build a consensus to formally do some of the things we are proposing,” said Storie.