Manager lobbies Govt in Vital fees fight

ACC’s bid to rein in management fees upset Canadian company

It is unfair and inequitable for ACC to agitate for changes that undermine the basis of overseas investment in NZ.

Letter from NorthWest Healthcare

The Canadian-based manager of NZX-listed Vital Healthcare tried to lobby a senior minister to curb what it described as “aggressive tactics” by ACC to lower management fees.

The move has been condemned by the New Zealand Shareholders’ Association, which said NorthWest Healthcare’s December 1 letter to ACC Minister Iain Lees-Galloway was “unwelcome” and unnecessary. A Treasury report, obtained by the

Herald under the Official Information Act, revealed the letter to LeesGalloway, which was subsequently forwarded to Finance Minster Grant Robertson to deal with.

The report detailed elements of the recent stoush between ACC and

Toronto Stock Exchange-listed NorthWest, which owns 25 per cent of Vital — a unit trust that invests in healthcare and medical-related properties in New Zealand and Australia.

The report, dated January 28, revealed the letter in which the Canadian company said ACC was using “aggressive tactics to attempt to create leverage” over NorthWest to lower Vital’s management fees and the extent of control it had over board composition.

“ACC’s conduct goes beyond the type of activity necessary to perform its statutory function,” NorthWest wrote in its letter to Lees-Galloway.

“It is unfair and inequitable for ACC to agitate for changes that undermine the basis of overseas investment in NZ.” The letter came after ACC — with ANZ and Mint Asset Management — actively criticised the way in which Vital was being managed, specifically taking aim at the management fees they said were unfair to unitholders.

In the six months to December, the fees NorthWest charged Vital jumped to $22.1 million, up almost 75 per cent from $12.7m in the same six months a year earlier.

The lowering of management fees was one of five recommendations that ACC, ANZ and Mint — which together own 10 per cent of Vital — put forward at the company’s annual meeting in late December.

Finally, on April 1, Vital announced it would change its governance and fees structure, albeit still not to the satisfaction of all unitholders.

In its letter to Galloway, NorthWest said it was upset about ACC’s role because ACC was “increasingly positioning itself as an activist investor”.

It was not appropriate, the letter went on to say, for a public entity to exercise its influence to modify an already heavily regulated governance model.

But in response, ACC disagreed and said the importance of a governance role in active investment management was “well established”.

“ACC is expected to invest as if it were a trustee, and we believe that this includes an obligation to work to try to achieve the best possible governance outcomes for our investments.

“The ACC’s move to propose the resolutions has received validation through the support from both [governance advisory consultancy] Institutional Shareholder Services Inc and the Shareholders’ Association.”

The Shareholders’ Association chief executive Michael Midgley said NorthWest’s attempts to try to apply pressure on the ACC Minister were “unwelcome when good governance is at issue”.

“NZSA fully supports the arguments submitted by ACC in its response to Northwest’s letter to the Minister.” Finance Minister Robertson,

to whom the letter was referred, said while he noted the concerns, “this is an operational matter for which ACC’s board and executives have responsibility”.

He encouraged NorthWest to “work with ACC to resolve any issues you may have, and ensure your joint investments are appropriately governed”.

A spokesman for NorthWest said the debate had moved on “considerably” since the letter was sent to LeesGalloway.

“A new fees and governance structure has been agreed between NorthWest’s parent company and its independent directors, and subsequently announced to the market.” The spokesman said NorthWest would not be offering any further comment.

NorthWest Healthcare Properties Real Estate Investment Trust bought Vital’s management contract for $11.5m in 2011 and has since collected well over $100m in fees, including the $22.1m in the six months ended December.

Under the new fee structure, NorthWest says it will reduce its base fee from 0.75 per cent of gross assets to 0.65 per cent for the first $1 billion, to 0.55 per cent for the second billion dollars and 0.45 per cent for the third billion.

It will charge a flat 0.4 per cent for assets above $3b.

It is also changing its incentive fee to 10 per cent of the increase in net assets. Previously it was charged on gross assets in the previous three years, with the total of the base and incentive fees capped at 1.75 per cent of gross assets.

However, there has been little change to NorthWest’s incentive fee at 10 per cent of any annual average increase in net tangible assets, which had been based on gross assets under the previous structure.

Analysts say the new fee structure will result in a rise of about 3.5 per cent in annual per-share earnings for managing Vital.

Vital owns hospital buildings across the country, including Bowen and Wakefield hospitals in Wellington, and Boulcott in Lower Hutt.

It also owns the Royston Hospital in Hawkes’s Bay and Ascot Hospital in Auckland.

Vital leases out its building to healthcare operators.