WHAT HAS GONE WRONG WITH SPRING REIT?
Unitholders’ investments in Spring REIT are worth considerably less than they should be due to its poor management. The Manager of Spring REIT, Spring Asset Management Limited (the “Manager”), which is a subsidiary of Tokyo-listed Mercuria Investment Co., Ltd. (“Mercuria Investment”), has refused to listen to unitholders to address a number of issues that must be resolved.
Continued Unit price underperformance
Spring REIT is the worst performing general REIT in Hong Kong. HK$10,000 invested in Spring REIT’s 2013 IPO would only be worth HK$11,488 by 28 February 2020, while the same amount invested in other Hong Kong listed REITs* could be worth over HK$17,930!
* assuming invested in the Hang Seng REIT Index
Total Unitholder Returns (%) Since IPO to 28-02-2020
Spring REIT’s Manager rejected a 76.7% premium cash offer in 2018
Spring REIT’s Manager recommended that unitholders reject a Cash Offer of HK$5.30 per unit. This offer would have allowed unitholders to realize over 9 years of cumulative distributions, which was equivalent to a 76.7% premium to the unit price prior to the offer and a 80.3% premium the unit price as at 28 February 2020.
Declining distributions per unit (DPU)
The Manager has pursued corporate actions that have been DPU and Net Asset Value (NAV) dilutive. Spring REIT Unitholders have suffered the worst DPU decline vs Hong Kong peers.
The value of Spring REIT’s underlying assets (NAV) are worth 95.2% more than its unit price of HK$2.94, as of 28 February 2020, representing a very high discount to its true value (48.8%). Comparable REITs are trading at an average discount to NAV of just 15.1%*. This discount reflects the markets’ lack of confidence in Spring REIT’s Manager and Spring REIT’s performance.
* Calculations based on comparing the unit price in the last 12 months with the then prevailing applicable NAV of respective Hong Kong REITs with Chinese assets, including Yuexiu REIT and Hui Xian REIT.
CONFLICTING PRIORITIES FOR SPRING REIT’S MANAGER
It is our conclusion that the Manager of Spring REIT is acting in the best interests of Mercuria Investment, instead of the best interests of all of Spring REIT’s unitholders, and creates a misalignment with its fiduciary duty owed to unitholders of Spring REIT.”
– PAG Real Estate
Spring REIT’s Management have conflicting priorities
75% of the Manager’s key personnel are also directly associated with Mercuria Investment, highlighting conflict of interest concerns. The Chairman of Spring REIT also serves as the CEO of Mercuria Investment, in which he has a personal 2.96% stake, while owning just a 0.06% stake in Spring REIT.
Mercuria Investment is also the Manager of RCA Fund, which is the largest investor in Spring REIT with a 25.1% holding.
Disproportionate control by one unitholder
Spring REIT’s Board of Directors and Committees has just 3 independent directors out of 7
Chairman Of Spring REIT’s Manager
CEO of Mercuria Investment
Non-Executive Director Of Spring REIT’s Manager
Executive Director at Mercuria Investment
Managing Director Of Spring REIT’s Manager
Executive Officer at Mercuria Investment
LEUNG KWOK HOE
Executive Director Of Spring REIT’s Manager
Excessively high management Fees
Despite Spring REIT’s sustained financial underperformance, its manager, a subsidiary of Tokyo-listed Mercuria Investment, receives the highest management fee percentages among its Hong Kong-listed peers. Spring REIT unitholders pay about HK$64 million for management fees every year, which is excessively high for the sustained financial underperformance.
With the lucrative management fees from Spring REIT, Mercuria Investment has been paying its employees well. Mercuria Investment was the highest paying employer of listed securities companies, and the third highest amongst all listed companies in Tokyo. Mercuria CEO (and Spring REIT Chairman) Toshihiro Toyoshima received JPY262.05 million (HK$18.3 million equivalent) in salary in 2018, making him one of the highest paid individuals among publicly listed companies in Japan.
Net Profit from Spring REIT47%
47% of Mercuria Investment’s net profit comes from its role as the Manager of Spring REIT, according to its FY2018 securities report*.
* Spring REIT management fees net profit: JPY 667,654,000;
Mercuria Investment’s total net profit: JPY 1,031,970,000
The Manager lacks a coherent strategy, apart from one that dilutes its own unitholders
…a recurring concern about [Spring REIT] management’s M&A activity is the involvement of related parties in the proposed deals.”
– Institutional Shareholder Services (ISS), one of the world’s leading proxy advisory firms
HOW CAN SPRING REIT BE SAVED?
PAG Real Estate has requested, numerous times, an independent strategic review of Spring REIT, which have been ignored. In light of this, PAG Real Estate has at its own expense engaged a reputable global investment bank to undertake a strategic review of Spring REIT for the benefit of all Unitholders.
This is in order to provide an independent and unbiased assessment of how best to address the serious issues with Spring REIT as outlined in a recent letter to its Board of Directors, and how to unlock Spring REIT’s tremendous underlying value.
Spring REIT Unitholders are encouraged to seek dialogue with the Managers of Spring REIT, urging them to assess this strategic review carefully and to seriously consider the proposals therein.