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Vital Healthcare investors to vote on new fee structure

Thursday 3rd October 2019

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Vital Healthcare Property Trust's investors will be asked to vote on a new management fee structure that will reduce both the management and incentive fees and will make explicit a number of others.

The notice of meeting for the annual meeting on Oct. 31 lays out the impact of the new fee structure compared with the old structure and shows unitholders would have paid $1.9 million less in total fees in the 2018 financial year and $980,000 in 2019 under the new structure.

The savings that would have occurred had the new structure been in place for 2018 are in line with figures the manager, which is owned by Canada-listed NorthWest Healthcare Properties REIT, provided in April when it announced the proposed changes.

Under the changes, instead of collecting 0.75 percent of Vital's gross assets as fees, NorthWest will collect only 0.65 percent on the first $1 billion of assets and then declining percentages as Vital's assets increase, down to 0.4 percent of assets above $3 billion.

Vital's gross assets at June 30 were $1.93 billion.

The incentive fee will change from 10 percent of the average annual increase in Vital's gross assets to 10 percent of any increase in net tangible assets but with a three-year "highwater mark." That means the increase in NTA will have to exceed the highest NTA on the last business day for the previous three financial years.

"In essence, this means that, unlike the current fee regime, the manager will not be paid an incentive fee in a year where NTA grows if it is still below where it was on the last business day of the past three financial years," the notice of meeting says.

Other fees that weren't specified in the trust deed but were charged routinely will now be spelt out and include property management fees, rent review fees, acquisition fees, leasing fees, development management fees and project management fees.

The changes in fees would have increased Vital's net distributable income by 58 cents per unit, or 5.1 percent, in 2018 and by 48 cents per unit, or 4.1 percent, in 2019.

If approved by 75 percent of units voted, the new fee structure will be backdated to April 1. If the proposal succeeds, it will also remove from the trust deed NorthWest's power to fire independent directors at will.

The manager's board currently has two NorthWest representatives and two independent directors, Graham Stuart and Andrew Evans. The latter will be up for re-election at the AGM.

NorthWest will be barred from voting its 24.9 percent of Vital units on the fees resolution but it will be able to vote on Evans' re-election, which will be an ordinary resolution requiring only 50 percent of units voted to succeed.

As the voting results at last year's annual meeting showed, allowing NorthWest to vote on ordinary resolutions makes the outcome NorthWest desires almost certain.

Rebel investors had proposed the appointment of Paul Mead as a director but he only received 32.6 percent of the votes cast. However, if NorthWest had been unable to vote its units, Mead would have been elected with 54.8 percent of the vote.

Three of five other resolutions the rebels proposed did actually pass, even with NorthWest voting, but they were non-binding on the manager.

Two of the three that passed related to the manager's fees, in particular wanting the percentage fees to reduce as Vital's assets rise. The other was aimed at ending NorthWest's ability to fire independent directors at will so, in a sense, the rebels will have achieved at least some of their aims if the first resolution at this year's meeting is passed.

Acting chief executive of the manager, Miles Wentworth, says the management company has changed "remarkably from what it was last year," and that it would like to put the controversy behind it – "we're trying to put a line in the sand."

The manager is now focusing on earnings accretion and lifting Vital's value, Wentworth says.

The notice of meeting includes an independent assurance report from Deloitte, which essentially verifies that the manager has done its sums correctly, but it doesn't include the EY report the board commissioned to review the fee structure.

The meeting will be the meeting of the management company, not Vital's, since it has no officers or board, but Vital unitholders still get to vote on the management company's board and fees.

Vital units closed yesterday at $2.69 and have risen from $2.12 on May 9, the day before NorthWest announced Vital would not be participating in the purchase of Healthscope properties, a transaction the rebel investors had opposed.


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