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Vital trustee's fees highlight manager's even richer gravy train

Tuesday 8th January 2019

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Management fees charged to Vital Healthcare Property Trust are not only out of whack with market norms, they’re also at odds with the way its own trustee’s fees are structured.

Even so, Vital’s trustee, Trustees Executors, is paid about 63 percent more than the trustee of the only other remaining property trust listed on NZX - Goodman Property Trust - which has 52 percent more in total assets than Vital.

Trustees Executors is paid 0.1 percent of Vital’s gross assets per year for the first $100 million, 0.075 percent for the next $25 million, 0.05 percent for the next $25 million and then 0.03 percent for any amount over $150 million.

In other words, the bigger Vital grows, the smaller the slice of the bigger pie the trustee takes.

Based on Vital’s gross assets of $1.79 billion at June 30 last year, Trustees Executors was paid $491,000 for that year, up from $390,000 the previous year.

Mind you, you won’t find this in Vital’s annual report; the information was supplied by Trustees Executors in response to BusinessDesk’s questions.

By contrast, Vital’s manager, Canada-based NorthWest Healthcare Properties Management, charges a base fee of 0.75 percent of gross assets, regardless of how much those assets grow.

On top of that, the trust deed also gives NorthWest the power to charge an “incentive” fee of up to 10 percent of any capital gains up to a maximum of another 1 percent of gross assets, giving it an incentive to both increase Vital’s assets and the amount it borrows.

Vital’s gross assets have more than tripled from $533.4 million in June 2011 before NorthWest bought the management contract later that year for $11.5 million. Gearing has risen a little to 38.7 percent at June 30, from 36.9 percent in 2011, although borrowing has increased significantly since balance date, including an A$81 million loan to NorthWest. 

But the manager’s fees have risen from $4.1 million in the year ended June 2012 to $25 million in the 2018 financial year.

Goodman Property Trust is a much leaner gig for both its manager and its trustee, Covenant Trustee Services, than for Trustees Executors' role at Vital.

Covenant's fee shown in the latest annual report was $0.3 million for the year ended March 2018 and the previous year, although both figures are rounded to the nearest $100,000, says Goodman chief financial officer Andy Eakin.

He says the exact terms of Covenant’s contract are commercially sensitive, but it’s made up of a fixed base fee below which it cannot fall in order to cover Covenant’s fixed costs. Another component is based on gross assets.

Covenant's lower fee is despite the Goodman Trust’s gross assets of $2.72 billion being almost $1 billion more than those of Vital’s.

Goodman itself also takes a much smaller slice of unitholders’ funds. Although the base fee is calculated on gross assets, it is set at 0.5 percent for the first $500 million and 0.4 percent thereafter compared with Vital’s flat 0.75 percent fee.

And Goodman’s incentive fee really does provide an incentive to better returns to unitholders, in stark contrast to Vital’s which completely ignores returns to unitholders.

Goodman’s manager has to see that trust’s units outperform the benchmark index of similar listed property entities before it can collect any incentive fees.

And any under-performance is cumulative – the units can’t just outperform one year to allow the manager to collect a fee if the units underperformed the previous year. There’s also a cap of 5 percent of any outperformance.

The full board of NorthWest Healthcare Properties Management is currently reviewing the fees Vital pays although that contravenes its own board charter which requires such reviews to be led by a committee of independent directors.

NorthWest has undertaken not to exercise its right to fire the independent directors at will for the duration of the fee review.


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