REIT ASIAPAC
COVER STORY
INDEXED PRICE PERFORMANCE OF HK REITS (TO 24 SEP 2018)
PAG
Spring needs to disclose
related-party transactions and
improve performance
Broderick Storie,
PAG Real Estate Partner
PAG’s bid was narrowly
rejected despite a very
substantial premium. Why
do you think this was so? Would you continue to try to build this awareness
and then hopefully in six months or in a year
relaunch your bid or do you take the view that this
is just too hard, I might as well sell off my shares?
The Hong Kong market is unique
when you compare it to other
markets around the world – HK-
REITs typically have a sponsor
as an anchor investor. Sponsors
usually hold about a third of the
shares, or more, of a REIT, and
there is independent research
that will back this statistic. I wouldn't be a particularly prudent investor if I told you
everything that we were going to do. I won’t answer too precisely
except to say this – we've increased our stake in Spring REIT.
We've been in this vehicle now for almost three years. We've got
16.6% of the vehicle, and so we're a material unitholder. We plan
to stay focused on making sure that we protect our investment
and we are going to hold the manager accountable. And as
you've seen from what we did [in 2017] and what we've done
[last year], we have the resources both in terms of capital and
expertise to ensure that we can do the most we can to protect
our investment.
Specific to Spring REIT, we knew from the outset that there was
an entrenched sponsor stake and that stake is about 32%. This
“I think that ultimately we will need to see some level of regulatory reform.
I think it's very well documented that the general perception from large
global equity investors is that it's probably been one of the weaker major
markets from a governance perspective — both regarding how it's applied
by those vested with the responsibility to administer governance but
also in terms of the regulatory protections within the legislation.”
You have owned Spring REIT for about
three years now. Could you share what led
you to take such a significant stake?
created a very high hurdle for us to be successful. If you take out
the 32% sponsor stake, the acceptance rate was approximately
61.2% of third-party unitholders. So when you consider it from
that perspective, the bid’s result shows a vote of no confidence
in the manager.
PAG has about US$30 billion in assets under management. We
run three different strategies: traditional private equity, absolute
return – which has things like hedge funds and credit funds, and
our real estate private equity business. We have the option to go
into vehicles like this and build up a stake. That’s consistent with
the strategies that we run within our business. And this is not
the first example. About four years ago, we had close to 18.8%
of Forterra Trust.
The reality is it's always going to be challenging when you've
got such an entrenched stake, and we were aware of that from
the outset. But our action has continued to build a broader
unitholder consensus. We have brought attention to some of the
fundamental issues both from a performance and a governance
perspective, and we hope this will lead to change over the near
term.
6
April 2013
April 2014
April 2015
April 2016
April 2017
April 2018
Source: S&P Global Market Intelligence (as of 31 December 2018)
I recall that Forterra owned mostly commercial
properties in China, and there was a period
when its sponsor had certain solvency issues.
Was it an opportunistic play on your part? what we would consider questionable governance actions, we
decided to take action. We've got a much deeper track record
in real estate investing than the target. And we're also in a
position where we're well equipped to deal with these sort of
underperformance issues.
The best way to say this is we're an opportunistic deep value
investor. You're right it was under pressure because the sponsor
had certain debt pressures that were European driven and they
were looking for strategic options to deal with that situation. So
that's one example of what we do. To what extent can you really drive change in
Hong Kong’s capital markets? Do you think there
is room for improvement in its regulation?
I think that ultimately we will need to see some level of regulatory
reform. I think it's very well documented that the general
perception from large global equity investors is that it's probably
been one of the weaker major markets from a governance
perspective — both regarding how it's applied by those vested
with the responsibility to administer governance but also in
terms of the regulatory protections within the legislation.
Did you take a position in Spring REIT, as early
as three years ago, because you thought the
REIT was mismanaged and therefore there
was an opportunity for you to come in and
improve things? Or was the position taken on
the basis the REIT had growth potential and
the mismanagement came about later on?
I'll give you an anecdote. We run an alternatives business and
we invest our own money, and alongside us, we have some of
the world's largest sovereign wealth funds and pension plans.
From a governance perspective, we've got a very sophisticated
shareholder base. Let's take the Spring REIT example. Spring
was proposing to acquire an asset off a party that owns 9.8% of
the management vehicle of the REIT. In the institutional world
where we operate, this situation is a clear conflict of interest,
and we would have to not only disclose this but would also be
prevented from voting on approving the acquisition regardless of
We thought there was growth potential and at the time we took
the view that management would be able to deliver outcomes
that were relevant for ourselves and other independent
unitholders. Unfortunately, despite providing advice, guidance
and views about the company’s direction, they weren't able to
respond in a manner that we felt was beneficial for ourselves and
other unitholders. The management did not listen to suggestions
from ourselves and the market. And as a result of that as well as
7