ANZ New Zealand Investments has voted against a plan to restructure Vital Healthcare Property Trust and list it on the ASX because the economics don't work for its investors.
And Craigs Investment Partners analyst Adam Lilley has said the plan will mean those on 28 percent or higher tax rates will have to pay more tax, something Macquarie analyst Nick Mar has also said.
Lilley said in a note published Wednesday that the manager's aim of keeping Vital's gearing at about 40 per cent would require "either disposals or raising new equity capital, both of which are somewhat difficult in the current environment."
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The proposal will increase Vital's pro forma gearing to 38 percent and developments it is committed to will take that to 42.4 percent in the year ending June 2021. Lilley estimates Vital will need to sell about $80 million worth of property or raise about $50 million of equity to meet the 40 percent gearing target.
ANZ Investments' head of Australasian property securities, Craig Tyson, said the main reason he voted against the proposal was because "it doesn't work for our investors on the numbers. It's not accretive for our investors and it's very expensive to implement."
Vital's manager, owned by Canada-based NorthWest Healthcare Real Estate Investment Trust, is proposing to split the trust in two, with 24 percent of its assets remaining in a New Zealand trust. That would remain a portfolio investment entity - PIE - for tax purposes, as all of Vital currently is.
The other 76 per cent of the assets, all in Australia, will be transferred to an Australian investment vehicle, exposing New Zealand-based investors to either New Zealand's foreign investment fund fair dividend rate tax rules or tax on those dividends from Vital Australia.
Units in both entities will be stapled and won't be able to be traded separately, with NZX remaining their home listing. They will also be listed on the ASX with foreign exempt status.
ANZ owns 3.4 percent of Vital and the proposal requires 75 percent approval. A special meeting is scheduled for March 31, with unitholders able to participate online.
NorthWest owns nearly 25 percent of Vital's units, but it can't vote because it will be a major beneficiary of the restructuring.
At the moment, NorthWest can't take advantage of NZ's PIE regime, which means its Vital holding is tax inefficient. Under the new structure, the value of its net distributions would rise an estimated 38 percent.
The proposal will cost Vital $8 million to implement.
Tyson said that isn't the full cost because Vital had already spent $1.5 million advancing the proposal in the year ended June 2019 and there will be other costs.
"There's a tax charge for moving debt to Australia. There's a crystalisation of tax as a result of this." He estimated that cost at about $15 million.
Tyson said he disregarded any benefits from closing out $50 million of out-of-the-money interest rate swaps. While necessary to facilitate the restructuring, all it did was bring forward what would otherwise have occurred over the life of the swaps.
He compared it to breaking a fixed-rate mortgage to refinance at a lower interest rate. That brings the interest one would have paid forward as the cost of the break.
"It's value neutral," Tyson said. "Your interest costs have fallen but you've had to write a cheque for it."
At best, the restructuring is neutral, depending on each investor's tax rate, "and we think it's slightly dilutive," he said.
The governance structure will also be weakened because 76 percent of the assets will be subject to Australian law and only 24 percent will remain in New Zealand and governed by NZ law, Tyson said.
Craigs' Lilley said that despite independent expert Grant Samuel concluding the restructuring is in the best interests of all unitholders, "we emphasise the unitholders must consider how the proposal impacts them."
While Grant Samuel had counted as benefits the access to a larger pool of investors and a potential increase in the value and liquidity, or ease of trading Vital's units, Lilley said listing on the ASX was "not an automatic ticket to outperformance."
The NZ property index has outperformed the ASX 200 property index both year to date and over a three-year horizon, he said.
"We also observe that Vital has slightly underperformed the NZ property index year to date, which is surprising given the defensive nature of its portfolio, but perhaps indicates the market may have some concern with Vital's higher gearing levels relative to the wider sector."
Precinct Properties said on Tuesday that, on a fully committed basis after allowing for all committed projects, its gearing is 31 percent while Kiwi Property said the same day that it has $303 million in undrawn credit lines and a current gearing ratio of 29.2 percent.
Lilley said Vital has the most leveraged balance sheet in the sector and its weighted average debt duration is 2.1 years, below the sector average excluding Vital of 3.2 years.
"While Vital has signalled its intention to extend its debt duration following restructure, we note the heightened risk of its current position due to the uncertain economic climate."
But working in Vital's favour is the defensive nature of its portfolio, its large number of non-discretionary tenants, such as hospitals, and long lease terms.
Vital's weighted average lease term at Dec. 31 was 17.9 years and will be slightly reduced after the purchase of $60.1 million of aged care assets with WALTs between 16.5 and 16.8 years.
Vital units closed yesterday at $2.355, up 15 cents, or 6.8 percent, but their value is down 47.8 percent year to date. Net asset backing at December 31 was $2.36.