NorthWest warns Vital investors: deal can be cancelled

NZSA will be conducting "a thorough analysis" of the new fee structure, chief executive Michael Midgley says.

Vital Healthcare Property Trust's manager is telling unitholders they must either accept its proposed new fee structure or it will revert to the existing extremely lucrative fee structure.

Canada-based NorthWest Healthcare Properties Real Estate Investment Trust is proposing to reduce its base fees, to calculate its incentive fee from Vital's net tangible assets rather than from gross assets, to permanently give up its right to fire independent directors at will as well as giving up its unilateral right increase its fees.

However, NorthWest is adding a raft of new fees not mentioned in the current trust deed, making it unclear whether overall fees will go up or down.

BusinessDesk has asked NorthWest how much in fees it would have collected in the six months ended December if the new fee structure had been in place. A NorthWest spokesman says applying the new structure to 2018 results would have reduced its base plus activity fees by $1-1.5 million and its incentive fees by another $1-1.5 million.

In a footnote to its statement announcing the new fee structure, NorthWest lists a number of situations that would cause it to cancel today's "agreement" – while NorthWest calls it an agreement, Vital has no officers or directors of its own so there's essentially only one party to that agreement.

The situations warranting cancellation include someone attempting to take over Vital, another unitholder gaining more than a 6 percent stake "where it is considered material and adverse," the "commencement of a co-ordinated campaign by unitholders to re-open the fees and governance review" or "the commencement of material regulatory intervention."

The regulator, the Financial Markets Authority, says it has been following developments involving Vital Healthcare but "we have been clear that we regard this issue as a dispute between market participants in which the FMA does not have a role.

"The FMA has, and will continue to engage with the supervisor to understand the work it is doing as the front-line regulator of Vital as a managed investment scheme and NorthWest as the MIS manager."

NorthWest owns nearly 25 percent of Vital's units. A March 7 substantial shareholder notice shows Forsyth Barr Investment Management owns just over 7 percent.

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

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

New Zealand Shareholders' Association chief executive Michael Midgley says that "at first sight, the new fee structure appears to be positive but a thorough reading of the announcement is disappointing."

He's particularly disappointed that independent chair of the management company, Claire Higgins, has resigned and has been replaced by NorthWest president Bernard Crotty. One of the two remaining independent directors on the five-person board is being given a casting vote.

NZSA will be conducting "a thorough analysis" of the new fee structure, Midgley says.

The just-completed fees and governance review was conducted by the management company's full board, at odds with its own board charter which says such a review should be conducted by a committee of independent directors.

Some of the additional new fees look as if they will be particularly lucrative for NorthWest.

For example, NorthWest has committed to buying A$1.26 billion worth of property currently owned by ASX-listed Healthscope, a transaction it will likely cause Vital to be part of.

Under the new fee structure, NorthWest would charge Vital 1.5 percent of the purchase price - it has already charged Vital $8.2 million for the Healthscope deal, even though Vital isn't part of that deal yet and even though Vital lent NorthWest A$81 million to secure a stake in Healthscope. If Vital isn't part of the Healthscope deal, NorthWest will refund Vital only $5.2 million of that $8.2 million.

Under the new fee structure, NorthWest would also charge Vital up to 20 percent of the annual rental on any new leases as well as leasing renewal fees, rent review fees, property management fees and a facilities management fee ranging from 1-2 percent of gross income.

NorthWest would also charge a development fee of 4 percent of committed spend as well as a project management fee of 2 percent of committed spend.

The manager has already committed Vital to spending $223 million on developments within its existing portfolio over the next three years, including $80 million before June 30.