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Governance

PAG moves to convene Spring REIT unitholder meeting to replace manager, bolster governance

PAG Real Estate, a Hong Kong-based alternatives manager, moved Wednesday to convene an extraordinary meeting of the unitholders of HK$4.42 billion ($565 million) Spring Real Estate Investment Trust, with the goal of replacing the REIT's manager and bolstering its governance structure.

Broderick Storie, a partner and managing director of PAG Real Estate, said in an interview Thursday that the move to replace Hong Kong-based Spring Asset Management followed more than a year of ineffectual engagement aimed at narrowing the unit price's more than 40% discount to its net asset value.

In Hong Kong trading Thursday, Spring REIT's unit price rose 4.12% to HK$3.54, even as the territory's Hang Seng stock market index was slipping 0.44%.

A Spring REIT statement Thursday acknowledged the request to convene an extraordinary general meeting, which Hong Kong stock exchange rules allow holders of more than 10% of a listed company's outstanding shares or units to make.

Two investment vehicles controlled by PAG Real Estate hold a combined 157.2 million units, or 12.5%, of the REIT.

An external spokesman for Spring REIT said in an email that a further response will be forthcoming after Spring Asset Management has completed a legal review and decided how to proceed.

Mr. Storie said PAG Real Estate began investing in Spring REIT at the start of 2016, figuring the high quality of the REIT's two Beijing-based office towers would at some point prompt a re-rating, narrowing its units' 45% discount to net asset value.

Then, toward the end of 2016, Spring REIT began moving to acquire a collection of 84 U.K.-based properties from parties connected with the manager's owners, said Mr. Storie.

Spring Asset Management is a subsidiary of Tokyo-based private equity manager Mercuria Investment Co., which in turn counts Osaka-based trading company Itochu Corp. as a major shareholder.

The 84 car servicing centers in the U.K. that Spring REIT ultimately purchased in March 2017 were operated by a local company, Kwik Fit, which Itochu acquired in 2011.

Mr. Storie said PAG Real Estate redoubled its engagement efforts with Spring Asset Management to campaign against a move by the REIT to expand into a market he contended it had no experience in or familiarity with. In the end, PAG couldn't prevent the deal.

He noted that the REIT doesn't have its own, independent board, and unitholders have no input regarding the manager's board directors. PAG's "notice of requisition" to call an extraordinary general meeting concluded that "this means that the directors are not directly accountable to unitholders and ultimately serve at the pleasure of Mercuria Investment Co."

The PAG notice said resolutions should be put before unitholders to:

  • remove Spring Asset Management as Spring REIT's manager as soon as possible;
  • establish an internal, wholly owned management subsidiary with a board answerable to unitholders;
  • that the board of any manager appoint Mr. Storie as a non-executive director; and
  • that independent experts be appointed to review strategy, performance and governance.

Spring REIT said in its statement that after completing its legal review and formulating its response, it will "inform unitholders whether the manager will proceed with an EGM, and if so, the classification and form of resolutions be approved at the EGM."

Mr. Storie said it's his understanding that, under Hong Kong stock exchange rules, Spring REIT must convene an EGM in response to PAG's notice of requisition.