Vital Healthcare Property dissidents show muscle, and their arguments may yet hold sway

Dissident corporate unitholders in the Vital Healthcare Property Trust got majority support for 3 of their 5 proposals put to the annual meeting yesterday, but failed in the bid to get their nominee elected to the management company board.

Nevertheless, the support the trio of corporate dissidents amassed may be enough to reshape a review sought by the manager, and start the rebalancing they advocate between returns to the manager & distributions to unitholders.

Under the NZX structure for listed trusts, investors hold units in the trust but control lies with the manager. At Vital, the manager is NorthWest HealthcareProperties Management Ltd, a 100% subsidiary of the NorthWest group of Toronto headed by Paul Dalla Lana. Although the annual meeting was of unitholders in the trust, the board they vote directors to is the board of the manager.

Dissidents tried to get a director elected yesterday, and put 5 proposals which the board declared would be non-binding.

The broad outcomes:

  • Management board candidate Graham Stuart, appointed to the board in November, was re-elected
  • The dissidents wanted the board enlarged to 6 members, the manager & current board resisted. Dissidents’ candidate Paul Mead lost the vote to Mr Stuart, and the dissidents’ proposal to enlarge the board was also defeated
  • Although the dissidents’ 5 proposals were put as part of the business of the meeting, the board had decreed that they’d be non-binding and recommended unitholders vote against the resolutions
  • NorthWest scored marginal support for the first 2 relating to unilateral removal of directors & unilaterally altering the management fee. The third, to realign returns to manager & unitholders, was won 50.5% v 49.5% by the dissidents. The fourth & fifth, to enlarge the board and amend the conflicts of interest policy & board charter, gathered more opposition and were defeated.

The meeting was unusual. The board, having started a review of how Vital’s run and wanting to continue with it, had declared its position in the meeting documents but didn’t push its case, except for management company chair (and thereby trust chair) Claire Higgins saying directors wanted to get on with the review in the way they’d planned it.

Ms Higgins, a Vital/NorthWest director since 2012, succeeded Graeme Horsley as chair in May. After the meeting, but before the votes had been counted, Ms Higgins told me: “I don’t like to get into the trenches. I like to work with people. We’ve got to get NorthWest to agree to the changes, things we brought as independent directors to them.”

She thought NorthWest of Toronto would be receptive to the appointment of another independent director but, as with reviewing policies, “you have to do it in the right way”.

NorthWest’s vote questioned

The ability of NorthWest of Toronto to vote at all was called into question at the meeting because of allegations of conflict, but Ms Higgins said that although that question of law hadn’t been fully resolved, NorthWest’s units would be voted.

Excluding the Toronto holding of 110.8 million units (just under 25% of the total) would have meant NorthWest’s candidate for the board would have been defeated and all 5 proposals put by the dissident corporates would have been carried, though they would still have been non-binding.

The question of conflict has arisen often throughout the 30-odd years that externally managed trusts like Vital have been listed on the NZX, and most of them have changed their ownership & management models.

Vital, and just one other NZX-listed property trust, Goodman, have maintained the model of a trust managed by an external manager, both with large cornerstone unitholdings by the manager’s parent. Goodman parent, trust & unitholders have forged a good relationship in which the Australian parent has at times partnered with the NZ trust, and their transactions have been clearly visible.

The Canadian controlling interest in Vital & its manager has expanded the business exponentially from what, in its first couple of years as the Calan Healthcare Properties Trust, was a rickety, inadequately capitalised listed entity, and under ING and then ANZ Bank control remained a minor entity.

Ironic dissidence

But dissident unitholders at Vital’s annual meeting pointed to the widening discrepancy between returns to the manager and returns to unitholders.

That was ironic, because one of the leading trio of dissidents, ANZ Bank funds management, is a successor to OnePath (NZ) Ltd, the business that sold the Vital management contract to NorthWest in 2011.

And more ironic, because the entity that made that handover possible was another 2018 dissident, the Accident Compensation Corp, which had been calling for Vital’s ANZ-owned manager to be sacked in 2011 but then sold nearly half its 9.1% stake to an ANZ subsidiary.

The third of the corporate dissidents yesterday was Mint Asset Management Ltd.

The director vote

Re-election of Graham Stuart versus election of dissidents’ candidate Paul Mead as an independent director: Mr Stuart 184,312,438 (67.4%) votes in his favour, which exceeded the 89,023,333 (32.6%) votes cast in favour of Mr Mead. As they were contesting one board seat, Mr Stuart was elected.

Ms Higgins, Andy Evans & Mr Stuart are considered to be independent directors under the NZX listing rules. Chief executive David Carr was appointed to the board on 1 May and has been an executive director. He stood down from the board yesterday, reducing the board from a temporary 6 members to 5. The other 2 are Mr Dalla Lana & Bernard Crotty, of NorthWest in Toronto.

Although the argument looked at times a “them versus us” dispute, the wheels of change had been turning.

The manager confirmed in the meeting notice that it had already established a process to deal with the substance of the dissidents’ first 3 proposals, including a board-led review of management fees in the first quarter of 2019, with the manager’s rights in regard to election or removal of independent directors being suspended for the duration of that review.

Non-binding proposals passed: 
Proposal 1, relating to the election or removal of independent directors: 
For: 137,113,960 (53.9%) Against: 117,412,541 (46.1%) 
Proposal 2, relating to management fees:
For: 137,904,997 (54.2%) Against: 116,647,180 (45.8%) 
Proposal 3, also relating to management fees:
For: 128,475,755 (50.5%) Against: 126,067,548 (49.5%)

Non-binding proposals defeated: 
Proposal 4, relating to board composition:
For: 117,271,395 (46.1%) Against: 137,086,559 (53.9%) 
Proposal 5, relating to policies & procedures:
For: 117,437,126 (46.6%) Against: 134,721,703 (53.4%)

Background

In December 2011, the group Mr Dalla Lana controls, Toronto-based NorthWest Value Partners Inc, bought Vital’s management company from ANZ National Bank Ltd subsidiary OnePath (NZ) Ltd and held 19.66% of Vital’s units until April 2013, when he declared his intention to acquire up to 15.35 million units.

That proposal came 3 weeks after Vital obtained an Inland Revenue binding ruling which increased the limit a large unitholder could go to before the trust’s PIE (portfolio investment entity) status would be affected. Before that ruling, Vital management understood no unitholder could hold more than 20% of the units in the trust if it were to maintain its PIE status. The ruling lifted the limit to 25%.

According to Vital’s 2018 annual report, NorthWest held just under 106 million (24.26%) of Vital’s 437 million units at the 30 June balance date. Subsequent payments & acquisitions have lifted that stake to 110,823,292 units, or 24.91% of the trust.

In addition, NorthWest of Toronto owns Vital’s manager, renamed NorthWest Healthcare Properties Management Ltd in February.

Earlier stories:
6 December 2018: Vital doubles loan to NorthWest for Healthscope acquisition
25 November 2018: Vital Healthcare management fees up for review, new action at Healthscope
23 November 2018: Northwest increases Healthscope stake to 11.1%
9 May 2018: Vital Healthcare’s parent makes new Australian investment

28 February 2018: Vital Healthcare gets revaluation lift
4 December 2017: Vital Healthcare confirms 3 hospital acquisitions & development programme
31 January 2015: Ownership of Vital Healthcare manager moves to Canadian reit
11 October 2013: Dalla Lana lifts Vital stake to 24.11%
5 December 2011: Toronto healthcare specialist North West pays $11.5 million for Vital management, holds 19.8% of trust
21 November 2011: Vital unitholders get a pointless vote while major issues stay up in air
4 November 2011: Canadian investor Dalla Lana buys ACC out of Vital Healthcare
23 September 2011: ANZ halts Vital internalisation after lifting trust stake to 9%
27 April 2011: $14 million buyout price on Vital management contract

Attribution: Annual meeting, annual report, NZX documents.

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