PAG Real Estate (“PAG RE”), one of Asia’s largest real estate investment and asset management platforms with over US$29 billion in investments across the region, issued a formal complaint to Hong Kong’s Securities and Futures Commission (“SFC”) against Hong Kong-listed Spring Real Estate Investment Trust (“Spring REIT”), stock code 1426 HK, regarding sub-standard corporate governance, conflicts of interest and the consistent failure of Spring REIT’s manager to uphold its fiduciary duties to Unitholders.
Since its initial public offering in December 2013, Spring REIT has remained the worst performing general REIT listed on the Hong Kong Stock Exchange. As of the close of 11 February 2020, Spring REIT’s unit price was HK$3.19 per unit, representing 16.3% below its 2013 IPO price of HK$3.81.
Despite Spring REIT’s sustained financial underperformance, its manager, Spring Asset Management Limited (“the Manager”), a subsidiary of Tokyo-listed Mercuria Investment Co Ltd (“Mercuria Investment”), receives the highest management fee percentages among its Hong Kong-listed peers.
PAG RE’s complaint to Hong Kong’s regulator outlines how, in the opinion of PAG RE, the actions of the Manager have resulted in the destruction of value for Spring REIT’s unitholders and are in breach of General Principle 6 of the Hong Kong REIT Code, among others, which states that a REIT manager “shall act in the best interests of the REIT’s holders, to whom it owes a fiduciary duty.”
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 5.39% stake, while owning just a 0.7% stake in Spring REIT.
Conflicts of interest, related party transactions and corporate governance concerns are an inherent issue with Spring REIT and its management. Recently, it has attempted several related party transactions, at least one of which was withdrawn in the face of inadequate disclosure; it has rejected a voluntary general offer (VGO) that would have provided a 76.9% premium for unitholders; and it has engaged in several share placements that have diluted the value and voting rights of unitholders. Its actions have been met with criticism from its unitholders and from globally recognized third parties, including both leading proxy advisors, Glass Lewis and Institutional Shareholder Services (“ISS”).
In the most recent incident, the Manager issued HKD585 million in Convertible Bonds (CB) on 27 November 2019, which was then converted into equity on 5 February, representing a 36.6% discount to Net Asset Value (NAV) and further dilution of Spring REIT Unitholders by 3.8% on NAV and 3.0% on Distributions Per Unit (DPU). 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. Choosing to simply refinance with bank debt would have improved DPU, not decreased it.
The steep discount to NAV of the bonds’ conversion price is also highly unusual and stands in stark contrast to recent CB issuances by listed REITs in Hong Kong and Singapore. Precedent issuances, including Link REIT (823.HK) and Keppel REIT (K71U.SI), carry conversion prices that are at a premium to NAV, not at a discount.
PAG Real Estate Partner Broderick Storie commented, “Based on the evidence we have presented and the refusal of Spring REIT’s management to address the fair and reasonable concerns of unitholders, we conclude that the Manager is acting in the best interests of Mercuria Investment instead of the best interests of all of Spring REIT’s unitholders, and is therefore in breach of the fiduciary duty owed to unitholders of Spring REIT.”
“Engaging in highly dilutive transactions that unfairly prejudices existing Unitholders and entrenches the control of the Manager and its affiliates is a direct abuse of the management role the Manager is paid handsomely for.”
BT Cayman Ltd. and Spirit Cayman Ltd, investment vehicles managed by PAG Real Estate, are Unitholders of Spring Real Estate Investment Trust (“Spring REIT”) collectively holding 233,562,089 units, representing approximately 18.2% of the total outstanding units (prior to the dilution with the CB conversion), as of the date hereof.