The sale of the Vital Healthcare Property Trust’s management contract to NothWest Value Partners Inc on Monday was a disappointing outcome for investors as it means internalisation is now highly unlikely.  This announcement comes after seven months of internalisation negotiations between Vital’s independent directors and the Trust’s former manager ANZ.

NorthWest has entered into a conditional agreement to purchase the management contract from ANZ for $11.5 million.  It will also acquire ANZ’s 9% holding of Vital to give Northwest a total holding of 19.8%.  This stake can be used to protect the manager from investors attempting to remove the manager.  As Northwest has just acquired the management contract and 19.8% of the trust, they will not want to internalise the vehicle unless they were offered an amount far in excess of $11.5 million.

Earlier in the year internalisation looked likely as the independent directors negotiated the price of the management contract to $8m from the original $14m.  However the independent directors pushed too hard offering only $6m for the contract which led to ANZ ceasing negotiations.  It did not take long for ANZ to find another buyer and now investors have been left with an externally managed vehicle when it was clear at yesterday’s AGM the vast majority of investors, including Milford, would prefer the internal structure.  The internal structure is preferred due to better governance and lower costs in most cases.

Investors still had a chance to seek internalisation at yesterday’s AGM by passing resolution 1, which requested the trustee remove the manager.  However this resolution failed with 79,883,978 voting against and only 26,975,068 voting for.  Disappointingly most unit holders had sent in their proxies before the change in management was announced on Monday giving them no opportunity to change their decision in light of the management change.

At this stage we know little about NorthWest other than that it is the largest manager of healthcare properties in Canada and are also seeking to expand into Germany and Brazil as well as New Zealand and Australia.  NorthWest said it will retain the management staff for the time being and will look at important issues in an orderly fashion next year.  The hottest of these issues is whether it will carry through with the management fee reduction promised by ANZ if internalisation failed.

Rather than spend the summer relaxing happily with the knowledge that the trust is being managed in their best interests, unit holders will instead anxiously await details on NorthWest’s plans for the Trust early next year.

William Curtayne
Disclosure of interest: Milford is a shareholder of Vital Healthcare through our Funds