Private equity group PAG, criticizes Spring REIT failures, conflicts of interestBusiness | 12 Feb 2020 6:22 pm
PAG Real Estate, which holds an 18.2 percent interest in Spring Real Estate Investment Trust (1426), has issued a formal complaint to the Securities and Futures Commission against the Spring REIT regarding sub-standard corporate governance, conflicts of interest and the consistent failure of its manager to uphold its fiduciary duties to unitholders.
PAG said the REIT has remained the worst-performing general REIT listed on the Hong Kong Stock Exchange since its initial public offering in December 2013.
The REIT closed at HK$3.19 per unit on February 11, 16.3 percent below its IPO price.
Also, despite Spring REIT’s sustained financial underperformance, its manager, Spring Asset Management, a subsidiary of Tokyo-listed Mercuria Investment, receives the highest management fee percentages among its Hong Kong-listed peers, said PAG.
PAG said 75 percent of the manager’s key people are also directly associated with Mercuria Investment, highlighting the conflict of interest concerns.
The chairman of Spring REIT also serves as the chief executive of Mercuria Investment, in which he has a personal 5.39 percent stake, but owns only a 0.7 percent stake in Spring REIT.
Recently, the REIT has attempted several related party transactions, at least one of which was withdrawn in the face of inadequate disclosure, said PAG.
It has rejected a voluntary general offer that would have provided a 76.9 percent premium for unitholders, and it has engaged in several share placements that have diluted the value and voting rights of unitholders.
PAG further criticized that the manager issued HK$585 million in convertible bonds in November last year, which was then converted into equity on February 2, representing a 36.6 percent discount to net asset value and further dilution of Spring REIT Unitholders by 3.8 percent on NAV and 3 percent on distributions per unit.
"The manager has not provided any satisfactory explanation of its rationale for the convertible bonds 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." PAG's 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.”