Three institutions are challenging the lucrative fees and extraordinary – but legal – rights of the manager of Vital Healthcare Property Trust.
The manager, Canada-based Northwest Healthcare Properties Management, is resisting this attempt to abridge its current sweet deal.
Northwest has appointed Graham Stuart to the board but unitholders have nominated Paul Mead and proposed five other resolutions which have been included in the trust’s notice of its annual meeting. Stuart was chief executive of Sealord Group for seven years and chief financial officer at Fonterra before that.
The rebel investors want the trust deed altered to remove Northwest’s current right to sack any so-called ‘independent’ director at will and for any reason.
Mint Asset Management, Accident Compensation Corp and ANZ New Zealand Investments also want to remove another clause in the trust deed that allows Northwest to unilaterally alter its fees.
The three institutions say the trust deed gives Northwest “an unacceptable imbalance of power” in managing Vital’s affairs.
Northwest bought Vital’s management contract in 2011 for $11.5 million and has pocketed about $100 million in gross fees since then, an almost 870 percent return on investment over that period.
Over that same period, distributions to unitholders have risen from 8.1 cents per unit to 8.56 cents, a 5.7 percent increase.
The rebels want to alter Northwest’s fees so that they align better with the interests of unitholders and to amend all policies and procedures to ensure that the board’s primary duty is to unitholders, not the manager, as at present.
And the rebels also want the size of the five-person board increased to six directors with a minimum of four truly independent directors, at least two of whom must be elected by unitholders.
Northwest correctly says in the notice of meeting that none of this can happen unless it agrees to it.
“The nature of the matters raised in the proposals cannot be determined by a unitholder vote. They require the agreement of others and this can only be achieved through reasoned commercial dialogue.”
Northwest says over the course of this year “we have engaged in good faith on multiple occasions to address the concerns raised by the proposing unitholders” and that it has made a number of changes to its core governance documents as a result.
It has also voluntarily suspended its right to sack “independent” directors or to alter its fees until March 31 next year, assuming no material change in circumstances, while “independent” chair Claire Higgins leads a review of the fee structure.
But the three unitholders, who collectively hold less than 10 percent of Vital’s units, “have sought to dictate the terms of our fee review, including proposing terms that go well beyond what a reasonable board would accept.”
Higgins points out that these unitholders “have significantly diverted the time and resources of the board and senior management team away from running the core activities” of managing Vital.
Vital’s structure has in no way impeded total returns to investors, she says, citing figures showing Vital’s returns to shareholders over five years at 104.1 percent and over 10 years at 284.3 percent.
That compares with the 71.8 percent return from NZX’s all real estate index over five years and 175 percent over 10 years.
However, the price of Vital units has fallen 3.9 percent in the past 12 months while the NZX50 Index has gained 8 percent.
Higgins says Vital’s structure is “an appropriate, valid and common business structure for a business like ours. Indeed, two of the proposing unitholders themselves operate externally managed funds.”
She also raises a previous investor revolt in 2011, led by ACC, which tried to alter Vital’s structure.
“That resolution was voted down by a significant majority.” She notes that ACC had largely sold its Vital stake by the time of that vote and has since rebuilt its investment in Vital “although at no point has our structure changed.”
In fact, ACC’s actions were instrumental in rejecting a proposal to buy Vital’s management contract from the former manager, ANZ-owned ING, for $14 million, a sum Vital’s then independent directors managed to beat down to $8 million.
At that point, two other institutions, the New Zealand Superannuation Fund and Westpac, still thought that was too much, opening the door for NorthWest to swoop in and snatch the contract from under their noses.
“We note that a number of the externally managed trust funds operated by the proposing unitholders pay fees that are broadly analogous to Vital’s fees,” Higgins concludes in her letter to unitholders.
Northwest owns nearly 25 percent of Vital’s units, making it practically impossible for unitholders to vote in favour of removing it as Vital’s manager – such a vote would require 75 percent of those voting to succeed.