Vital to put new fees and changes to AGM after investors, analysts raise concerns

Vital Healthcare has a revised fee structure to put to investors. Photo / Dean Purcell

NZX listed property specialist Vital Healthcare Property Trust, with a $1.2 billion market capitalisation, will put a revised fee structure and other changes to investors at the end of this month.

The business told the NZX this morning it will hold its AGM at 10.30am at Eden Park's southern stand on Thursday, October 31.

Vital owns 42 properties valued at $1.8b on June 30 this year but hit controversy with the actions of its manager, Canada's NorthWest Healthcare Properties Management.

The Herald has reported how NorthWest bought Vital's management contract for $11.5 million in 2011 and has since collected well over $100m in fees, including $22.1 million in the six months ended December.

Today, manager NorthWest released a summary of changes on the fees, governance, powers over independent directors and changes to the out-dated trust deed which was written in 1994. The changes are more comprehensive than those proposed on April 1 this year.

NorthWest has now claimed a lower base fee would increase earnings and a tiered base fee structure would create "value for all stakeholders". The incentive fee will be lowered and based on net, not gross assets.

Independent directors recommend unit holders back the proposal and vote in favour at the AGM. Changes include barring NorthWest from firing independent directors.

But analysts raised concerns about the structure of the business recently.

Nick Mar of Macquarie Research referred to Vital "continuing to lack an independent chair or majority of independent directors."

Total fees paid to the manager "continue to be a significant impact on net tangible assets," Mar said in early August before today's announcement.

"The proposed changes to the fee structure including lower base fees but higher activity fees will be put to the vote at the AGM. It does not sound like there will be an independent appraisal report but will be an independent review of the mechanics of the proforma fee differentials," Mar wrote on August 8, analysing Vital's annual result but then examining the business in a wider context.

Graham Stuart, an independent director, today agreed that there were circumstances where the trust could pay more activity fees "but that would only be where there's a lot of development activity occurring."

On the lack of an independent chairman, Stuart said a new independent director would be appointed before Christmas and the board would then appoint a chair. The other independent director is Andy Evans but Vital lost Claire Higgins as its chairperson in May when she resigned. Graham Horsley resigned last year as chairman.

The change in the fee structure follows agitation from Vital's unitholders who accused NorthWest of treating Vital like a piggy-bank.

NorthWest says it will reduce its base fee from 0.75 per cent of gross assets to 0.65 per cent for the first $1b, to 0.55 per cent for the second billion and 0.45 per cent for the third billion.

It will charge a flat 0.4 per cent for assets above $3b. It is also changing its incentive fee to 10 per cent of the increase in net assets – previously it was charged on gross assets in the previous three years with the total of the base and incentive fees capped at 1.75 per cent of gross assets.

Institutional investors ACC, ANZ and Mint Asset Management banded together to try to get a better deal for unitholders.

Mint's Rebecca Thomas said that was successful: "We were part of the group that put up the non-binding resolutions to the AGM which were passed."

Craig Tyson of ANZ. Photo / Dean Purcell

Craig Tyson, head of Australasian property securities for ANZ in Auckland, said today: "The AGM coming up. We are a little disappointed that there is not going to be a full independent review of the proposed fee structure to be voted on at the AGM but on the whole, we're happy that the manager is taking steps to address long-standing issues: governance, fees and disclosure."

On August 8, Credit Suisse research analyst Owen Batchelor said: "The upcoming vote in October to approve the proposed management fee and governance changes is a clear positive for unitholders."

Jeremy Simpson, Forsyth Barr analyst said: "Governance fees have overhung Vital and it is now, hopefully, time for back to basics and for Vital's high-quality portfolio to do the talking. Our rating is outperform."

Christopher Byrne and Adam Lilley of Deutsche Bank Research referred to fees paid in script and being non-cash but said "we continue to deduct these fees when analysing underlying distributable earnings per share and adjusted funds from operation as they are a true cost to unitholders."

Miles Wentworth, Vital's interim manager, said today the trust paid NorthWest $25.4m total annual fees in the year to June 30, 2017, $28.1m in the year to June 30, 2018 and $31.2m in the year to June 30, 2019.