Tuesday 2nd April 2019
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FNZC says the new fee structure for managing Vital Healthcare Property Trust will result in about a 3.5 percent uplift in annual per-share earnings.
“In our view, the base management fee and governance changes represent incremental positives for unitholders and more closely align Vital’s fees with other externally-managed New Zealand listed property vehicles while also improving acquisition economics,” FNZC analyst Owen Batchelor says.
Yesterday, Vital’s manager, owned by Canada-based NorthWest Healthcare Property Real Estate Investment Trust, unveiled a proposal to reduce its base and incentive fees, although it wants to increase a raft of others.
A NorthWest spokesman said yesterday that 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.
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.
Batchelor says governance changes, including removing the manager’s right to fire directors at will and its right to unilaterally alter its fees are "clear positives for unitholders.”
Under the new fee structure, NorthWest would reduce its base fee from 0.75 percent of total gross assets to 0.65 percent for the first $1 billion, to 0.55 percent for the second billion dollars and 0.45 percent for the third billion.
It will charge a flat 0.4 percent for assets above $3 billion.
“Based on the value of Vital’s portfolio as at Dec. 31, 2018, we estimate base fees would reduce by about $2.5 million a year, offset in part by the inclusion of about $1 million in property management and leasing fees,” Batchelor says, making his calculations in line with NorthWest’s estimate.
“In our view, a tiered base fee is an improvement on Vital’s previous flat fee of 75 basis points and will improve future acquisition and development economics,” he says.
“We consider this particularly relevant with Vital considering whether to participate in the acquisition of up to A$629 million of Healthscope assets.”
Being a trust, Vital has no officers or directors of its own so it will be NorthWest’s decision on whether Vital participates in the Healthscope acquisition.
That’s despite NorthWest already having charged it an $8.2 million fee for the Healthscope acquisition in the six months ended December and despite NorthWest causing Vital to lend it A$81 million to buy a stake in Healthscope.
Yesterday, NorthWest said Vital’s manager will now “potentially agree terms” on Vital’s participation in the Healthscope deal.
Batchelor says there will be little change to NorthWest’s incentive fee at 10 percent of any annual average increase in net tangible assets, calculated on a three-year rolling average basis.
He says that property revaluations remain “the primary driver of these fees. In our view, best practice would include a relative-based measure calculated on Vital’s unit price performance against its peers.”
However, Batchelor doesn’t mention that the new incentive fee would shift from being based on the increase in gross assets to NTA.
Vital’s gross assets at Dec. 31 were $1.88 billion while net assets were $998.5 million.
“Vital will pay additional fees for property management, leasing, rent reviews, acquisitions, disposals, facilities management and developments,” he says.
“In general, these fees sit broadly in line with other externally managed NZ LPVs, although development fees at 4 percent and acquisition fees at 1.5 percent sit about 50 basis points above others in the sector.”
Batchelor notes that the new fee structure needs to be approved by Vital’s supervisor, Trustees Executors, in the first instance. Failing that, the matter would be put to a vote of unitholders which would require 75 percent approval and at which NorthWest would be unable to vote its near 25 percent stake.
Among NorthWest’s conditions of the fee changes is that there be no “co-ordinated campaign by unitholders to re-open the fee and governance review.”
The changes were forced by unitholder agitation, led by three institutional unitholders, ANZ, ACC and Mint. A unitholder at December’s annual meeting accused NorthWest of treating Vital as its piggy bank.
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