Queries over Vital's management sale

Investor Paul Markham says the price of the proposed deal is unjustified. Photo / Paul Estcourt

Questions are being raised about the $14 million management-contract sale of NZX-listed Australasian medical landlord Vital Healthcare Property Trust.

Vital, with real estate valued at $517.5 million, owns 14 properties but has a market capitalisation of just $329 million, with units trading at $1.14.

Current management-contract owner OnePath (NZ) is proposing to internalise the contract by selling it to investors in Vital.

Paul Markham, of St Heliers, and Chris Byrne, of Deutsche Bank, criticised the proposed $14 million deal, particularly after Vital almost doubled the value of assets under management just six months ago, allowing the opportunity to inflate the sale price and raising $151 million from investors in a 1:1 rights issue which Markham said many could not afford.

In December, Vital expanded into Australia and went from a $302 million vehicle to its larger size by buying Essential Healthcare Trust from Orchard Funds Management for $238.9 million.

The sale of a management right is based on a percentage of the value of assets under control.

Markham holds 160,210 Vital units via a family trust and opposes the sale proposal from OnePath (NZ), which is wholly owned by ANZ National, saying it is not in unitholders' interests.

"As a general principle, selling the management is good provided it's going to cut costs and there's some payback from the $14 million they want upfront," he said.

"What we don't want is to pay the $14 million and get no change or very little change, which is what we're going to see happening."

Markham said the price was far too high after ING (now OnePath) paid only $7.8 million in 2006 to buy the management from Brian Freestone and Martin Lyttelton.

Markham said OnePath was now demanding nearly double the $7.8 million it paid Lyttelton and Freestone, a price which was unjustified.

His view is supported by Deutsche Bank's Byrne, whose research document, "Internalisation - at what price?", said $14 million appeared "to be high in our view given unitholders can vote with a 75 per cent majority to remove the manager at a cost of $2.3 million, albeit this would not be a riskless process, and similar transactions suggest a lower price".

Both Byrne and Markham said the management sale had come soon after Vital's big Australian property purchase.

"The trust doubled the size of assets under management in December via the acquisition of Essential Healthcare Trust, and while it may not have been the intention of management to do this simply to boost the value of the management contract, it could be construed this way," Byrne said.

He wanted the sale price lowered and not to reflect the huge boost in assets only six months ago.

Markham criticised the manager for not converting the trust into a company with better corporate governance rules, more transparency and stronger investor rights.

OnePath's proposal will be assessed by Grant Samuel & Associates, which is due to issue an independent report in the next few weeks.

Markham criticised Vital's net-tangible-asset backing and unit price, saying these indicated little confidence from the market in the business and its proposals.

Vital's internalisation proposal says the new model was preferred by the market because it aligns investor and manager interests and removes the perception of conflicts of interest.

Describing the deal as a unique opportunity too good to ignore, the document from the manager said the structure of the business would be enhanced and a key point of difference from the majority of listed property entities.

Jeremy Simpson, of Forsyth Barr, said the management sale was the most likely outcome since ANZ, owning managers of Vital and Argosy Property Trust, said on October 29 that the businesses were for sale.

Simpson also noted how Vital's proposal was not for a full corporatisation. Vital, the listed entity, would use debt to raise the $14 million to pay the manager, which would take gearing levels to around the board's targeted maximum of 40 per cent.