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Vital won't participate in Healthscope purchase

Friday 10th May 2019

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Vital Healthcare Property Trust’s manager says it won’t proceed with the Healthscope purchase and the manger’s chief executive, David Carr, has resigned.

Carr will be replaced by Miles Wentworth who had managed the NZX-listed Vital when it was called Calan Healthcare Properties Trust for 10 years until 2006.

It also appears that the manager, Canada-based NorthWest Healthcare Property Real Estate Investment Trust, won’t charge Vital the $3 million fees it previously said it would keep if Vital didn’t participate in the Healthscope purchase. Vital units rose 5.4 percent to $2.235.

These decisions vindicate the stance of three dissident institutional investors, ANZ Investment Funds, Mint Asset Management and ACC, who together own 10 percent of Vital’s units.

These institutional investors were backed by many of Vital’s retail investors at last December’s annual meeting when NorthWest was accused of exploiting Vital as if it was its own piggybank.

In early February, NorthWest agreed to pay A$1.258 billion for 11 freehold hospital properties from ASX-listed Healthscope, conditional on fellow Canadian company Brookfields successfully taking over Healthscope.

Since the price NorthWest agreed to pay for the 11 properties represented a weighted average capitalisation rate of 5 percent, and Vital’s cost of capital is about 6 percent, it always looked like a tall order for NorthWest to be able to say that participating in the purchase was in the best interests of Vital’s non-NorthWest investors – NorthWest owns nearly 25 percent of Vital’s units.

The already highly geared Vital would have also had to raise fresh capital if it was going to participate in the Healthscope purchase.

While clearly bad for the non-NorthWest investors, the purchase would have greatly boosted the fees NorthWest is able to extract from Vital, even under a proposed restructuring of the fees.

“Unfortunately, despite the board’s collective view earlier in calendar 2018 that the Healthscope real estate opportunity was in line with Vital’s strategy, we were unable to see that the opportunity met all the overall investment objectives for the trust,” say the two independent directors on the board of the NorthWest subsidiary that manages Vital, Graham Stuart and Andrew Evans, in a statement.

“Further, management and directors have also listened carefully to a range of investor feedback over the last few weeks and it has factored heavily into our conclusion,” they say.

“Turning away from a quality and scale portfolio opportunity can be a difficult decision but, for Vital in this instance, we are satisfied it is the right decision at this time in light of the broadest range of applicable considerations,” the two independent directors say.

The statement says that if the Healthscope purchase settles as expected, “it has been agreed with NWH REIT that … fees and third party due diligence costs relating to the Healthscope real estate opportunity will not be borne by Vital.

“Vital will still participate in 50 percent of NWH REIT’s derivative position in Healthscope shares, including the payment of associated fees.”

NorthWest had borrowed the money from Vital to pay for the Healthscope derivative position, starting in May last year, although that borrowing wasn’t revealed until August last year and by December it totalled A$81 million.

NorthWest’s stated entry cost into the derivative position was A$2.36 per share, or 14 cents per share below the A$2.50 per share Brookfields offer.

NorthWest provides figures in the statement showing that Vital has received $7.3 million in dividend income from the Healthscope position for the nine months ended March, has been paid $1.8 million in interest on the loan to NorthWest and that it has a $7.26 million unrealised capital gain on the Healthscope position.

With net costs of $10.9 million, Vital’s net realised and unrealised gain was $1.8 million at March 31.

The statement says Vital’s Dec. 31 accounts recorded capitalised costs of $9 million plus net charges through the income statement of $3.6 million.

“It is forecast that Vital’s financial statements to June 30, 2019 will show that the net expense from Dec. 31, 2018 will improve by approximately $1 million and there will be no costs remaining on the balance sheet,” it says.

However, this information still leaves unanswered questions about the fees NorthWest charged Vital in the six months ended December. In aggregate, gross fees charged against income jumped nearly 75 percent to $22.1 million compared with $12.7 million in the same six months a year earlier.

About $12 million of those fees were for the manager’s base and incentive fees and $10.1 million were for other NorthWest fees and expenses.

If Vital is getting $3.6 million of that back, that leaves unexplained $6.5 million plus another $0.5 million of unexplained fees that were capitalised.

The latest information doesn’t marry very well with what NorthWest previously said about the Healthscope fees it was charging Vital. Then, it said it had charged a total of $8.2 million related to that specific transaction and that it would refund $5.2 million of that if Vital didn’t participate in the Healthscope acquisition.

Investors are likely to welcome Wentworth as the manager’s new chief executive because of how well Calan performed for investors under his management.

He went to Melbourne after his resignation and founded the then ASX-listed Generation Healthcare REIT and, after NorthWest took that over in conjunction with the Singapore government’s investment arm, he became a director and advisor of NorthWest.

Bernard Crotty, president of NWH REIT, took over as chairman of the New Zealand subsidiary after Claire Higgins resigned at the beginning of April.

“After 13 years of service, David (Carr) has decided that he would like to take a well-earned break and to look at new opportunities,” Crotty says in today’s statement.

Healthscope’s investors will vote on May 22 on a scheme of arrangement to sell the company to Brookfields.

NorthWest says Vital’s investors will get to vote on the proposed new fees structure at a meeting that will be held before the end of October. It also confirmed that it will not vote its units at that meeting.

In March this year, NorthWest was forced by Vital’s trustee, Trustees Executors, to restate the results of voting at the December meeting because it had voted its units despite having a conflict of interest.

NorthWest has also said Vital will pay a third-quarter distribution of 2.1875 cents per unit, an increase of 2.9 percent on the previous third-quarter payout. It didn't say whether Vital will have to borrow to pay the increase - the trust, whose distributable income fell 18.7 percent, did have to borrow to cover the increased first half distributions.


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