COMMENT: There are few instances where minority shareholders have less influence than they do with listed property funds operating under an external management structure.
So it's usually good news when institutional investors band together in a bid to bring beneficial change and level the playing field for all investors.
In the case of Vital Healthcare Property Trust, the current fight over management fees is rich with irony but it does provide an opportune time to review the company's governance structure.
Vital Healthcare is a unit trust that invests in healthcare and medical-related properties in New Zealand and Australia including hospital operators and other healthcare providers.
About 5000 investors own units in the trust, managed by Canadian firm Northwest Healthcare Properties Management, which also owns 25 per cent of Vital Healthcare.
Last week three institutional investors — Government-backed ACC, ANZ Investments and Mint Asset Management — ramped up their fight to change the way Vital is being managed, hitting out at increasing management fees that they say are inherently unfair to unitholders.
They have put forward five proposals to be voted on at Vital Healthcare's annual meeting to be held in Auckland on December 20.
• Removing the power of the manager to increase its fees.
• An independent review of the management fees.
• Requiring the manager to negotiate in good faith to lower fees.
• Altering the trust deed to give more power for unitholders to appoint and remove directors and less power to the manager.
• To vote for Paul Mead to be a new independent director on the board of the manager instead of Graham Stuart, who was appointed by the Vital board and is standing for re-election.
The three institutions say management fees have increased by 150 per cent over the last five years while earnings per unit, excluding performance fees, have increased by only 13 per cent. Including performance fees, the total fees paid to the manager have increased by 481 per cent, their analysis shows.
The amount of gross fees Northwest has accumulated since it bought the management contract in 2011 is reported to be around $100m. However that figure does not take into account the costs of running the business.
It is worth noting that Vital's market capitalisation today is $924m, up from approximately $340m in December 2011.
The issue is complicated due to Vital and Northwest recently increasing their investment in ASX-listed Healthscope to 13.4 per cent.
As part of the joint investment Vital has agreed to lend a further $A40m to NorthWest to acquire the Healthscope shares at $2.36 a share under a previously arranged option agreement provided by Deutsche Bank.
Healthscope, which owns 43 hospitals in Australia, is the subject of a takeover offer from property company Brookfield Capital at A$2.455 per share.
There is a potentially strong upside for Vital gaining a blocking stake in Healthscope and unitholders want to ensure their interests are aligned rather than those of the manager.
But the irony of ACC and ANZ fighting this fight cannot be overlooked.
Back in 2011 there was a plan on the table to internalise the management contract that was owned at the time by OnePath, a then unit of ANZ.
OnePath initially wanted $14m, but came down to $8m after pressure from institutional investors. But it did not seem prepared to bow further to the $6m proposed by Vital's independent directors.
ACC and other institutions were pushing for even less and groundwork was being laid to try and vote the trustee into dumping the manager for no cost.
However, that idea was effectively gazumped when ACC sold out to ANZ, leaving the manager in a much stronger position to ward off any unitholder action.
A short time later OnePath sold the contract to NorthWest for $11.5m, while the Canadian firm also bought a 9 per cent shareholding in Vital from ANZ.
Time may only tell whether the entity would have done better under an internal management structure. It has performed well as it is.
But it does seem pretty rich of ANZ and ACC to be complaining about the current structure when they played such a big part in creating it.
ANZ is effectively crying foul over a contract that it wrote itself.
And ACC completely sold out its fellow unitholders when internalisation was still a possibility.
When it comes to property trust's the world moves in mysterious circles.
The good news is Vital's directors have committed to undertaking reviews and they are getting on with it.
But there's more to be done and it would be a pity not to waste another opportunity to establish a more equitable structure that better lines up with unitholder interests.