Reits and wrongs

Spring Offensive in Hong Kong

Powerful interests are taking sides over governance questions at a REIT.
Qilai Shen/Bloomberg
At Closing, April 20th
33.40 HKD

Activism in Hong Kong often doesn't work out, as Paul Singer's Elliott Management Corp. discovered after attempts to force changes at Bank of East Asia Ltd. PAG Asia Capital's campaign to "save" a Japanese-controlled REIT listed in Hong Kong will provide another test case this week.

The Asia-focused alternative-investment manager is trying to get Spring Real Estate Investment Trust -- which this year added 84 U.K. auto-repair shops to its two Beijing office buildings -- to remove the trust's manager and bring that role in-house. Shareholders will vote Friday on whether to oust Spring Asset Management Ltd.  

PAG's desire to shake up Spring REIT is understandable. While it has traded broadly in line with the Hang Seng Index over the past year, the units are well below their December 2013 IPO price and, according to PAG, trade at a 43.6 percent discount to net asset value.

Locked Out

On a dividend adjusted price basis, Spring REIT has underperformed the Hang Seng REIT Index since it listed

Source: Bloomberg

Note: Spring REIT debuted in Hong Kong in December 2013.

PAG blames the poor showing on Spring Asset, which is owned mainly by Tokyo-listed Mercuria Investment Co. That company also controls RCA Fund O1 LP, the single biggest shareholder in Spring REIT. And Mercuria, 19.5 percent-owned by the Japanese trading house Itochu Corp., shares many executives with Spring REIT's board.

PAG's argument is two-fold, centering on concern that conflicts of interest between the REIT and its manager led to the underperformance. It says Spring REIT pays Spring Asset excessive fees and questions the wisdom of the U.K. expansion.

In May, Spring REIT spent $46 million for those U.K. car-servicing stations, many of which are suburban and sit oddly alongside its high-end Beijing buildings. The U.K. properties are leased to Kwik-Fit, a chain that is itself owned by Itochu. PAG contends that the money would have been better spent on a buyback of units, raising distributions an estimated 15.5 percent -- something it says an internal manager would have done.

Japanese Flavor

Spring REIT's biggest shareholder is RCA Fund, which is part owned by Mercuria Investment Co.

Source: Bloomberg

Note: PAG owns its stakes in Spring REIT through Spirit Cayman and BT Cayman

In Spring REIT's defense, the U.K. leases do give attractive initial returns of 6.1 percent, and 84 percent of the company's shareholders -- including Mercuria -- approved the deal. Moreover, Spring Asset receives slightly more than 70 percent of its fees in shares, Spring REIT argues, aligning the manager's gains with the REIT's performance.

ISS, a proxy adviser, joined the battle on Spring REIT's side, pointing to the "absence of a clear strategy" by PAG to improve the trust's performance and its governance structure.

While it's hard to be sure that an internal manager would do a better job than an external one, the "conflicted" management structure underlined by Glass Lewis, another proxy adviser, in support of PAG does have merit.

If nothing else, the ties between Mercuria and Spring REIT should raise alarm bells in a city where minority shareholder rights are far from well protected.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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