Vital Healthcare Property Trust's management fees jumped to $22.1 million in the six months ended December, up nearly 75 per cent from a year earlier, at the same time as net distributable income fell 18.7 per cent.
Canada-based NorthWest Healthcare Properties Real Estate Investment Trust, which owns Vital's manager, is charging it A$8.2 million ($8.5m) as an acquisition fee relating to its proposed participation in the purchase of A$1.26 billion worth of property currently owned by Australian-listed Healthscope.
Although Vital has lent its manager A$81m to help facilitate the deal, Vital isn't yet party to the transaction, which is contingent on property giant Brookfields succeeding in its takeover of Healthscope.
Healthscope's board is backing the takeover via a scheme of arrangement, so it's likely to succeed.
Notes to Vital's accounts show only A$5.2m of that fee will be refundable if Vital doesn't become a party to the transaction.
That fee is on top of the $6.9m base management fee Vital paid NorthWest for the six months ended December and the $5.1m in incentive fees Vital has paid in addition to the base fee.
That's partly why net profit attributable to Vital's investors fell 11.5 per cent to $46.8m for the six months through December, with net distributable income falling 18.7 per cent to $18.5m.
Nevertheless, NorthWest, which owns almost 25 per cent of Vital's units, has decided Vital will pay a first-half distribution of 4.38 cents per unit, or 104 per cent of distributable income per unit.
The previous first-half distribution of 4 cents per unit represented 81 per cent of distributable income.
Vital's portfolio of hospitals and other health-related properties performed well in the six months with net rental income rising 13.2 per cent to $48.8m.
Management company chair Claire Higgins says she and the other independent directors see participating in the Healthscope purchase "as potentially an attractive opportunity" and "are optimistic they will be able to agree terms with NorthWest that sees Vital participate in the Healthscope transaction to the benefit of unitholders."
NorthWest's management and incentive fees are based on the gross value of Vital's portfolio which rose to $1.77b at December 31, up 2 per cent from a year earlier.
"Discussions with NorthWest remain ongoing and a non-binding term sheet is well advanced. However, there can be no guarantee that an agreement will be able to be reached," Higgins says in a statement.
The management company's board has two other independent directors and two NorthWest directors. Since it is owned by NorthWest and Vital itself has no officers or directors, NorthWest is essentially negotiating with itself.
While Vital's trust deed gives NorthWest the right to fire the independent directors at will, it has suspended this right while the entire board conducts a review of the management fees – that's contrary to the board's charter which says such a review should be carried out by the independent directors only.
Higgins says the board expects to announce both the outcome of the fee review and the Healthscope negotiations by March 31.
But Vital's latest accounts make it clear Vital would need to raise more capital to participate in the Healthscope transaction.
Its gearing under its bank covenant rose to 43.7 per cent at December 31 from 38.7 per cent at June 30. NorthWest has already committed Vital to spending $223m on developments within its existing portfolio over the next three years, including $80m before June 30.