Hong Kong property

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

Toshihiro Toyoshima, chairman of Spring Asset Management says it has the needed support of unit holders to quash replacement motion to be heard at November 10 extraordinary general meeting

PUBLISHED : Tuesday, 31 October, 2017, 1:33pm
UPDATED : Tuesday, 31 October, 2017, 8:08pm

The asset management team at Spring Reit says it has the support from a majority of unit holders to quash an upcoming motion on whether it should be replaced, drawing battle lines with an investment manager calling for changes that include replacing the existing manager and improving the governance structure.

Hong Kong-based alternative investment manager PAG, which owns about 12.4 per cent of the reit, has led a campaign to replace the manager, citing what it says is the reit’s underperformance relative to peers, poor decision making, conflicts of interest and lack of a growth strategy.

Toshihiro Toyoshima, chairman of Spring Asset Management, told the South China Morning Post that it had acted in the best interest of unit holders and enjoyed widespread support.

“We have secured written confirmations from certain unit holders with more than 50 per cent of voting rights to support the existing manager,” said Toyoshima, ahead of the exceptional general meeting on November 10 on whether the reit should replace the asset manager.

Toyoshima said he did not agree with the claims made by PAG, but acknowledged the unit holder has the right to express concerns.

Spring Reit to hold meeting in November on whether to remove asset manager

“As a [reit] manager, our business is not to refuse PAG. Our business is to concentrate in managing our property portfolio and look for opportunity,” said Toyoshima, in his first public remarks since PAG proposed replacing the manager in August.

“We will explain to institutional investors if they approach us and we will ask for their support. But most shareholders in general will not appreciate if [we] spend too much time and money in fighting with shareholders.”

He said the reit has paid out 104 per cent of its distributable income since it was listed in 2013.

In mid-afteroon trading on Tuesday, units of the Spring Reit were up 0.9 per cent to HK$3.44, even as the Hang Seng Index was lower by 0.1 per cent.

According to listing requirements for reits, at least 90 per cent of distributable income must to be given to unit holders as dividends.

“We are making good distribution [to our unit holders],” Toyoshima said.

Spring Reit’s recent acquisition of 84 retail properties across the UK, which were leased to UK leading car servicing provider Kwik Fit, was criticised by PAG as a radial departure from the existing portfolio.

However, Toyoshima said the acquisition of the UK properties, accounting for 7 per cent of Spring Reit’s portfolio value, would produce an annual rental yield of 6.1 per cent.

The lease for Kwik Fit will last until 2032, providing the reit 15 years of guaranteed rental income, he said.

“The lease will be up for review every five years. The acquisition will contribute attractive cash flow to us,” Toyoshima said.

Before the UK property acquisition, Spring Reit’s main assets were two office towers at China Central Properties in Beijing, under lease to Deutsche Bank, Conde Nast, EPSON, Richmont, Johnson & Johnson Group.

These two office towers accounted for 93 per cent of the reit’s portfolio in terms of value.

He said the revenue increased at a 7.6 per cent compound annual growth rate from 2013 through June 2017, while maintaining an occupancy rate above 94 per cent throughout the period.

Spring Reit’s board has recommended unit holders to vote against the resolution at the upcoming general meeting.

Meanwhile, proxy adviser ISS, a leading provider of corporate governance and responsible investment solutions for asset owners, issued a report on Monday advising unit holders to stick with the current manager and vote against the motion.

PAG, however, said it was not satisfied by the response from Spring Reit regarding its August proposal.

“We are disappointed that the manager has still failed to adequately address the concerns that unit holders have raised – namely the continued financial underperformance of Spring Reit and the significant corporate governance failures by the manager, both of which are costing us all money.”

Spring Reit said that its unit price and 45 per cent discount to net asset value are not representative performance indicators, and that distributions are the most important parameter in assessing performance, according to a statement on October 27.

“These are shocking statements when distributions per unit (DPU) are down 27 per cent in the last 12 months and the interim DPU for the financial year 2017 was the smallest in the history of Spring Reit. No prudent investor would be satisfied with this kind of financial underperformance,” PAG said in a statement.

Spring Reit has cut its DPU to 9.5 HK cents for the six months to June, from 13 HK cents a year earlier.