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China property

Alternative investment firm PAG offers to buyout Hong Kong real estate trust Spring Reit for US$670 million

PAG Real Estate is also demanding the removal of Spring Reit manager, Spring Asset Management

PUBLISHED : Wednesday, 26 September, 2018, 6:59pm
UPDATED : Wednesday, 26 September, 2018, 11:01pm

Alternative investment management company PAG Real Estate on Wednesday filed a take over bid for locally listed real estate investment trust Spring Reit, a first for Hong Kong, in a deal that will cost HK$5.24 billion (US$670.75 million).

Citing underperformance by Spring Reit’s existing asset manager, PAG has made a buyout offer of HK$4.85 for each unit of Spring Reit. The company already owns a 14.818 per cent stake in Spring Reit through RE Strategic Investments, an associate entity, and the offer is for the remaining 85.182 per cent, according to a filing with the Hong Kong stock exchange.

PAG reports Spring Reit manager to watchdog for ‘inaccuracies’ in circular to unit holders

The offer represents a 61.7 per cent premium over the closing price of HK$3 per unit on September, 24. On Wednesday, shares in Spring Reit, which owns two office towers in Beijing and 84 retail properties in various locations in England and Wales, closed at HK$4.04, 34.67 per cent higher than Monday after the take over announcement by PAG.

“We’ve taken this step after no longer being able to tolerate the persistent inability of Spring Reit’s current manager to address the ongoing poor unit price, and a failure to take concrete steps to improve this, or even adopt a clear strategy or coherent business plan, despite our numerous attempts over several years to effect positive change,” said Broderick Storie, a partner at PAG.

Spring Reit holders have to weigh up this tremendous cash premium against the downside risks and uncertainty of remaining invested with Spring Reit’s current manager
PAG Real Estate

PAG said the units had underperformed against the Hang Seng Reit Index by about 41.6 per cent and the Hang Seng Index by about 32.1 per cent since Spring Reit’s initial public offering in December, 2013.

The company has also demanded the removal of Spring Reit manager, Spring Asset Management, which is chaired by Toshihiro Toyoshima. It said it would appoint a new one, subject to the approval of unit holders in a general meeting. The new manager will then conduct a strategic review of Spring Reit.

Spring Asset Management is 90.2 per cent owned by Tokyo listed Mercuria Investment, with notable shareholders including the Development Bank of Japan, Itochu Corporation and Sumitomo Mitsui Trust Bank. PAG said the manager had made questionable decisions, such as acquiring 84 commercial properties in 2017 involving leases with an indirect wholly-owned subsidiary of Itochu Corporation, a related party, in the UK.

For the six months to June, Spring Reit said its net property income jumped by 24 per cent to US$32.7 million. It distributed 12 HK cents per unit in the first-half of 2018, up 26.3 per cent from 9.5 HK cents a year ago.

Spring Reit holds the largest amount of grade A office stock in Beijing, amounting to 1.82 million square metres as of the end of the first half of 2018. This accounts for 22 per cent of the city’s total grade A office space of 8.26 million square metres, according to the company.

PAG said it intends to maintain the listing of the units on the stock exchange, but the new manager of Spring Reit could recommend a disposal of assets and the termination of the company, which would result in a delisting.

“Spring Reit holders have to weigh up this tremendous cash premium against the downside risks and uncertainty of remaining invested with Spring Reit’s current manager, particularly amid general stock market conditions and an increasingly erratic and dilutive acquisition strategy being pursued by Spring Reit’s manager.

“Put simply, holders in Spring Reit may have to wait eight years or more for the cumulative value of their distributions to exceed the immediate cash premium now available to them under our offer, subject to the conditions of our offer being met,” said PAG.

Spring Reit asset manager says it will prevail at upcoming unit holder meeting

In November, 2017, PAG had asked Hong Kong’s Securities and Futures Commission to take action against the reit’s manager for presenting inaccurate information that could prevent unit holders from making a well-informed voting decision before a motion to have the manager replaced.

The board of Spring Reit said it had received the letter from PAG stating its intention to take over the trust. It said the acquisition may or may not be completed as it was subject to the approval of a general meeting. It said unit holders are advised to exercise caution when dealing in its units.

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