COMMENT:

The Vital Healthcare Property Trust annual meeting, which will be held in Auckland on December 20, could be extremely acrimonious.

This is because several large investors, including ACC, have proposed resolutions that are opposed by directors.

These resolutions raise long-standing issues about the management of the trust by an external company.

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These external management arrangements can be hugely disadvantageous for investors and Vital is the last listed NZX entity to retain this structure.

Vital has a particularly colourful history, including attempted murder and a jail term. The trust's history, and current issues, are mainly due to its external management structure which will be in the spotlight again at the forthcoming annual meeting.

Vital was previously called ING Medical Properties Trust and Calan Healthcare Properties Trust before that.

Calan was established in 1994 by Martin Lyttelton and Richard Ord.

The trust was controlled and managed by Calan Healthcare Properties, which was owned one third each by Lyttelton, Ord and Brian Freestone.

The management fees paid by the trust to the management company were as follows:
• An annual fee equal to the 0.75 per cent of the gross value of the trust
• An incentive fee equal to 10 per cent of the average annual increase in the gross value of the trust up to, but not exceeding, 1.75 per cent of the trust's total assets.

In addition, the management company was reimbursed for any additional costs incurred in leasing tenancies and in relation to the acquisition, development, custody, ownership and disposal of assets.

These external management structures were highly controversial in the 1990s and early 2000s and Calan was no exception.

The structures, which have inherent conflicts of interest, were usually established for retail investor dominated entities.

Calan's management structure received considerable media attention after the trust listed on the NZX in 1999.

The main point of contention was the $15 million of supplementary fees paid to the management company between 1997 and 2002, in addition to the $6.5m of base fees.

The 2002 and 2003 annual meetings were particularly acrimonious, as unit holders demanded to know who received the $15m of additional fees and what were they for.

Meanwhile, the trust acquired the Box Hill Gardens Medical Centre in Melbourne and established a separate Australian company to manage this asset. This was owned by Lyttelton and Freestone — without Ord's involvement — rather than the NZ management company.

Calan was back in the headlines in early 2006 when ING made a takeover offer for the listed trust at $1.25 a share. A successful offer, which would have terminated the management contract for a payment of $1.6m, was rejected after Ferrier Hodgson determined that the units were worth between $1.40 and $1.55 each.

Instead, ING purchased the management company for $7.8m. This was a far better deal for Lyttelton, Freestone and Ord than the $1.6m they would have received if ING's bid had been successful.

The three partners, particularly Lyttelton and Ord, had a dispute over the distribution of the $7.8m.

Lyttelton was obsessed by the issue and in April 2008, intended to kill Ord after entering his North Shore home with a shotgun and a skinning knife, a High Court judge found.

He shot Colleen Fenton, Ord's partner, in the left thigh, and during the struggle Ord suffered cuts to his hands.

After a trial, an appeal and a retrial, Lyttelton was convicted of attempted murder, of causing grievous bodily harm with intent to injure, and of aggravated burglary. He was sentenced to seven years' jail.

Lyttelton took legal action against his defence team, which included the recently appointed Fletcher Building director Cathy Quinn. However, this action was unsuccessful.

The Calan Trust/management company arrangement, including the Lyttelton/Ord dispute, highlighted the worst aspects of the external management structures of the early 2000s.
Calan changed its name to ING Medical Properties Trust in 2007 and dropped out of the media spotlight for several years.

In 2009, ANZ Bank purchased ING New Zealand and gained control of the trust's management company.

A year later ING Medical Properties Trust changed its name to Vital Healthcare Property Trust.

In 2011, a proposal to internalise the trust's management structure was introduced, a development that had received widespread investor approval as far as other property trusts were concerned.

ANZ initially wanted $14m for the management company, compared with the $7.8m paid in 2007, but reduced this to $8m after pressure from institutional investors. However, the ACC and other large investors wanted the listed trust to pay only $6m.

ANZ rejected the $6m offer and shortly afterwards sold the management contract to Canadian based NorthWest Value Partners for $11.5m. NorthWest also purchased ANZ's 9 per cent shareholding in Vital to take its stake to 19.9 per cent.

Vital has been a bonanza for the Canadian-owed management company, with the latter reporting a net profit after tax of $10.5m for the December 2017 year on revenue of $27.0m.

The fee structure remains largely unchanged since the structure outlined above was established in 1994. The management company received an incentive fee of $14.6m in 2017 which represented 10 per cent of the average annual increase in the gross value of the trust up to, but not exceeding, 1.75 per cent of the trust's total assets.

There will be two types of resolutions at Vital's annual meeting, binding and non-binding.

The only binding resolution is the election of one director, either Graham Stuart, who is supported by the management company, or Paul Mead, who has been proposed by unit holders.

Mead has been nominated by several large shareholders because they have board concerns following the unexpected resignation of chairman Graeme Horsley on May 1.

This was a surprise because Horsley had indicated at the October 2017 annual meeting, when he successfully stood for re-election to the board, that he would stay longer.

He has been replaced as chair by the Australian Claire Higgins.

Just seven days after Horsley stepped down, NorthWest revealed that it had acquired a 10 per cent economic interest in ASX-listed Healthscope through complex derivative contracts. Vital advanced A$40m to NorthWest to jointly finance this transaction.

This was a highly unusual transaction for the NZX-listed property trust and it seemed strange that it occurred shortly after the resignation of the highly-regarded chairman.

Unit holders are also concerned about the upcoming Vital fee review. They believe that an independent party should be involved but Higgins hasn't made a public commitment to a fully independent process.

Mead has been proposed by unit holders because he has property and derivative experience and will attempt to play an important role in ensuring that the fee review is truly independent.

The main objectives of the five non-binding resolutions are as follows:

1. To remove the Trust Deed clause that allows the manager to unilaterally remove independent directors and unilaterally remove the right of unit holders to nominate and vote on independent directors.
2. To remove the ability of the manager to unilaterally alter the manager's fee.
3. To request the manager to negotiate in good faith to bring current fees in line with market levels.
4. To increase the size of the management company board to six directors (the trust has no directors) with a minimum of four independent directors and a minimum of two independent directors elected by trust unitholders.
5. To require the manager to amend its policies to reflect resolutions 1, 2 and 4 and ensure that the primary duty of the board is to the unit holders of the trust.

Vital has had a relatively stable period after the drama of the early 2000s but Horsley's resignation, the Healthscope investment and the lack of commitment to a truly independent fee review indicates that the trust maybe entering a more turbulent period.

Unit holders should give a clear message to the management company, particularly through the ballot box, that this potential development is totally unacceptable.

- Brian Gaynor is an executive director of Milford Asset Management, which holds units in Vital Healthcare Property Trust on behalf of clients.