Save Spring REIT (1426 HK)

Urgent action is needed to prevent the continued value destruction of Spring REIT 

The Manager of Spring REIT has lost value for Unitholders through its poor decisions and corporate governance failures

  • Spring REIT continues to be the worst performing REIT in Hong Kong
  • The Manager continues to pursue measures that dilute Unitholders’ interests and entrench the control of related parties
  • The Manager’s conflict of interest with Mercuria Investment creates misalignment with its fiduciary duty owed to Spring REIT unitholders
  • The Manager continues to ignore the concerns raised by Unitholders and globally recognized shareholder advisors

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.

Trapped Value

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

Just 3 (out of 7) Independent Directors on Spring REIT’s Board

TOSHIHIRO TOYOSHIMA

Chairman Of Spring REIT’s Manager

CEO of Mercuria Investment

HIDEYA ISHINO

Non-Executive Director Of Spring REIT’s Manager

Executive Director at Mercuria Investment

NOBUMASA SAEKI

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%

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

2013

IPO of Spring REIT on the Hong Kong Stock Exchange at HK3.81 per unit. As of 28 February 2020, Spring REIT’s closing price was HK$2.94 per unit, 22.8% below its 2013 IPO price. Other comparable Hong Kong-listed REITs have appreciated as much as 89% during that period.

2017

Spring REIT acquired 84 properties rented by suburban car servicing chain Kwik Fit in the UK that diluted unitholders’ interests and involved conflicts of interest and related parties due to the relationship of the Manager and Mercuria Investment with Itochu, which owns Kwik Fit.

2017

Spring REIT placed 114,884,000 units, representing 10.1% of the total units then outstanding, to China Orient Stable Value Limited, a private company. The placement was completed at HK3.25 per unit, representing a substantial discount to NAV of 45.4% and resulting in a DPU dilution of 9.1% and NAV dilution of 4.4%.

2018

The Manager attempted another related-party transaction, this time to acquire a retail property in the second-tier city of Huizhou, China. This transaction would have involved the issuance of shares at a 44.3% discount to NAV, resulting in a NAV dilution of 8.1%. The debt issuance would have valued Spring REIT at just HK$3.372 per Unit. The acquisition failed in the face of criticism from third parties and Spring REIT incurred significant expenses as a result of this failed acquisition, for which no satisfactory explanation was provided by the Manager.

2019

HK$585 million of convertible bonds (CB) issuance to an investment consortium related to Sino Ocean Group at HK$3.64 per unit which entailed a substantial 36.6% discount to NAV and diluted other minority unitholders by 11.1%. The Manager has not provided any satisfactory explanation of its rationale for the CB issuance, nor provided any clear guidance on how these funds will be used.

The Manager also failed to provide sufficient information on the ultimate beneficial owners of the subscriber of the convertible bonds. Based on the disclosure of interest filings, the subscriber is only 50% held by Sino-Ocean Group. It is inaccurate and misleading for the Manager to only include Sino-Ocean Group in its announcement, but failed to describe the other 50% shareholder, despite the fact that upon conversion, the subscriber became the holder of more than 11% of the total units, and became a substantial unitholder and connected person of Spring REIT.

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.

A summary of findings from the strategic review can be viewed here.

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.

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