Vital Healthcare Property Trust (VHP) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to the reconvened special meeting of Vital Healthcare Property Trust. Called to consider a proposal to restructure Vital to facilitate a listing on the Australian Stock Exchange. My name is Bernard Crotty. I am the Chair of the Board and the Manager and have been appointed by the Trust's supervisor to act as the Chair of the meeting. This special meeting was originally opened on Tuesday, March 31. As explained at that time and also by an NZX announcement on Tuesday, the special meeting was adjourned in light of the COVID-19 outbreak during the notice period and notably because several stakeholders requested more time to prepare and participate in the virtual meeting, which replaced a physical meeting due to COVID-19. Also, we had some investors who had previously claimed to have submitted proxy forms, but their forms were not received by the time of the original meeting, which we assume related to COVID-19, leading to delays with custodians lodging their votes. Several of these were received yesterday. It is important that all investors have an opportunity to participate. Thank you for joining us at this revised meeting time. Before commencing, I will allow a representative of the Trustees Supervisor, Justine Wealleans, to read a statement to unitholders.

Good morning. This is Justine Wealleans of Trustees Executors Ltd. We have received legal advice that there may be a technical irregularity given the Notice of Meeting contemplated this meeting being held in person, but that it has subsequently been moved to being held on a virtual-only basis. Under the FMC Regulations, any such irregularity can be waived if the Supervisor indicates at the meeting that the supervisor is satisfied that the irregularity has not resulted in and is unlikely to result in, any material prejudice to the unitholders. I confirm that the Supervisor has taken into account that the notice of meeting specified the meeting would be held at the Pullman Hotel, and is now being held by virtual means only. The Supervisor is satisfied that this issue has been resolved and is unlikely to result in, any material prejudice to unitholders.

Thank you, Justine. The order for the meeting is as follows: I will shortly say a few words in relation to the proposal. We will then have an opportunity for unitholders to ask questions via the virtual meeting web page or app. We will then move to the formal business being voting on whether or not to approve the proposal. Voting is also enabled via the virtual meeting web page or app. I would like to thank you for joining us for this meeting through this virtual platform. As noted, the COVID-19 virus and New Zealand Government's Alert Level 4 restrictions, require that this meeting is being held through the use of technology that allows for virtual participation. That technology has been very useful in allowing unitholders to attend, engage with us and vote without having to be here in person. I expect that will become central feature in public meetings this year. If you are having any difficulties with the technology at any point, there is a team on standby at Computershare to assist you if you call ?488-8777. I will also now run through a few instructions to assist you with using this technology. At present, you should see on your screen, our presentation slides. The slides will show on your screen when you click on or tap the black broadcast bar at the bottom of the screen. Please also ensure the volume on your computer, laptop or device is turned up. To submit questions, there is an icon at the top right of the screen. The icon looks like 2 speech bubbles. You may submit questions at any time and they will be read out and address later in the meeting. You will also be able to vote via this application during the meeting. If you have not already lodged your proxy. The icon for voting will appear on the top right-hand side of the screen when voting is opened later in the meeting. Thank you to all of those unitholders who have taken the time to work out how to use the technology to allow you to attend today. I have each of my fellow directors joining us on the line today. I'll give each of them a moment to say, hello. Graham Stuart.

Yes, hello.

Andrew Evans.

Good morning, everybody, and welcome.

Dr. Michael Stanford.

Good morning, everyone.

Paul Dalla Lana.

Good morning, everyone.

Representatives from management are also present by phone and online, in particular, Aaron Hockley, Fund Manager of Vital; and Michael Groth, Regional CFO. Also attending by telephone and online are Justine Wealleans, from Trustees Executors Limited, Vital Supervisor; Ross McKinley from KPMG, our tax advisers, Toby Sharpe from Bell Gully, our New Zealand legal advisers; John Brewster from Ashurst strategy, Australian legal advisers; and Sylvio Bruinsma from Deloitte's, who are scrutineers for this vote. I'm pleased to confirm that there is a quorum present. The quorum for today's meeting includes all unitholders participating today, whether virtually or by proxy. A notice of meeting was sent to unitholders on 28 February 2020. It sets the scope of what we are scheduled to discuss today and includes the details of the proposal that we are due to consider. This is not an annual general meeting, and there is only 1 order of business, being the restructuring proposal described in the notice of meeting. We will meet again later in the year when we hold our Annual General Meeting, which is when we will consider matters such as director appointments. The proposal that we are putting in front of you as unitholders today is an important step in repositioning Vital as an investment proposition and establishing an efficient long-term structure for Vital going forward. The Board of the manager and the management team have spent an extensive amount of time and effort in developing this proposal, in order to ensure it is in the best interest of all unitholders, and it provides the optimal structure for Vital to deliver incremental value to unitholders going forward. The proposal involves a restructuring of Vital to facilitate adding a foreign exempt listing on the Australian Stock Exchange, while retaining the primary listing on the NZX. The restructuring includes separating Vital's New Zealand and Australian properties into separate trust, namely Vital New Zealand and Vital Australia. Vital New Zealand will remain a PIE entity and Vital Australia will be an Australian Managed investment scheme. These trusts will be stapled together. Unitholders that hold 1 unit in Vital Property Trust today will hold 1 unit in Vital New Zealand and 1 unit in Vital Australia after the proposal. The units will be linked together so that they must be traded together. As part of the proposal, Vital's payout ratio will be amended to 95% to 100% of the adjusted funds from operations, bringing Vital in line with market practices across Australian -- Australasian property vehicles. The Board unanimously recommends that unitholders vote in favor of the proposal, and this is supported by 3 independent parties recommending the proposal. Grant Samuel, the independent adviser, has concluded that the proposal on the best -- is in the best interest of unitholders and proxy advisers, ISS and CGI Glass Lewis have recommended unitholders vote for the proposal. NorthWest as Manager is unable to vote on the proposal for technical reasons. The proposal will deliver a range of immediate and long-term benefits to unitholders. It establishes an efficient long-term structure in order to enable access to a broader range of capital sources with an efficient cost of capital. This, in turn, will ensure Vital is more competitively positioned for future acquisition and development opportunities to drive earnings growth. Immediate benefits of the proposal include an increase in distribution for all unitholders and $1.8 per unit onetime tax benefit for New Zealand holders who use the annual FDR method. The enhanced structure and addition of the ASX foreign exempt listing also provides the potential for the value and liquidity of Vital units to increase. We plan to actively target S&P/ASX index inclusion to further support this. Vital structure has served unitholders well over the last 20 years. This proposal is about setting vital up for the next 20 years. It brings Vital in line with the majority of its NZX 50 peers and has benefits across operating costs, debt and equity. Importantly, your underlying investment in Vital remains unchanged by this proposal. It does not involve changing Vital specialist health care property strategy or property assets. There is no change to the NZX primary listing and PIE status will be retained for the New Zealand assets. There is no change to Board members or management, and there is no impact on the fee and governance arrangements approved in 2019. We believe that the proposal is a compelling opportunity to position Vital for the future. Ladies and gentlemen, I would now like to move to the formal business of the meeting. As mentioned, we have just 1 matter to consider today. The full text of the resolution is set out in the notice of meeting. It relates to the approval of a proposal to restructure Vital to facilitate it ASX listing. As we have heard, this is an important decision for the future of Vital, and I'm keen that we are able to facilitate a good dialogue between unitholders and the managers, despite circumstances. I would now like to open up to questions from unitholders. Unitholders can submit questions online through the web page or app that you are using to participate in the meeting. The question icon is at the top of the screen on the right-hand side. The icon looks like 2 speech bubbles. When you click on this icon, there is a question box at the bottom of your screen where you can type in a question. Those questions will go through to a moderator and then will appear on the question screen while I read them out. In the off chance that we get more questions than we can practically answer during the meeting, we can follow-up on any unanswered questions after the meeting. We are keen for an open dialogue. The only parameters I propose to set are: To ask that people try to keep their questions as concise as possible, recognizing that they will need to be read out for you; and also to be considerate to other unitholders wishing to ask questions. Questions or comments must relate to the proposal being considered at today's meeting and not other matters. Please note that only unitholders or proxy holders are permitted to submit questions at this meeting. Now we'll open up for question and answer.I'll read out the first question I have from Shane Solly. The question is, what is Vital's optimal gearing level? How will Vital reduce gearing if the proposals do not proceed? Perhaps I can ask Aaron Hockly to address Mr. Solly's question.

Thanks, Bernie. Look, I think overall gearing needs to be considered in context, and it needs to be considered in light of Vital's 18-year weighted average lease profile, the quality of our earnings, market conditions at the time, which are obviously quite different today than they were a month ago and a debt maturity profile and a few other factors. So pre Corona virus, I would have said that below 40 as we, as a Board and management team are comfortable, and we're currently working through the Board -- with the Board now about what the appropriate level is going forward in the current context.

Thanks, Aaron. I See another question here from [ Mr. Phillip Sermon ] and [ Ms. Angela Deffanie Sermon ]. The question is, are there any disadvantages from the proposal to NZ unitholders PIE tax regime advantages currently available? That's probably a pretty technical question. And there's a lot of disclosure on that in the norm. But that being said, perhaps I might ask Ross McKinley, of KPMG, to perhaps speak to that question in general terms.

Ross McKinley here. Look, the only real disadvantage is the fact that any individual investor, who's got a tax rate of higher than 28% will be taxed on the income from Australia at the adviser tax rate. But that also needs to be sort of acted against the other benefit referred to in the notice of meeting, where if you're an annual investors, then you effectively gets up to years -- effectively holiday with no tax on FDR, so it's really just benefiting those 2 items.

Thank you, Ross. Another question here from Melville, MIS Limited, I'll just read it. It says, in February, the owner of the manager announced that it had a path towards investment-grade credit metrics by divesting assets held directly in Australia, for which it did not receive management fees. In the VHP interim results, you reported the 3 aged care facilities would be transferred from the manager's owner to VHP. If the proposal goes ahead, in order to improve the manager's owners leveraging and to enable the manager to charge fees to manage assets due to transfer more of the assets held directly by the owner of the manager to VHP. So I think that, obviously, this is a Vital meeting, and I think I can maybe tackle that question. In relation to Vital, there are no other asset transactions that we have to speak about at this point in time. I have another question from Shane Solly. It says if the proposal is not successful, will Vital be able to grow its dividends in the same -- to the same extent it has over the preceding 5 to 10 years? Again, perhaps, Aaron, I might ask you to speak to this one, please.

Thanks, Bernie. Thanks, Shane. Look, I guess, it is always difficult to predict, and you need the earnings to base your distributions on, I think the key thing from the proposal was really enabling us to increase the payout ratio in line with how it appears on the market, so up to 95% to 100%. And the proposal overall had the support of the independent Board and Grant Samuel, local management, et cetera. But all concluded that this is the best structure for us to be able to grow total shareholder return over time.

Thank you, Aaron. I have another question from [ Jonathan Ted Giulia ]. I apologize if I didn't get the pronunciation correct. The question is, could you please explain again what happens with my current Vital stock if this proposal progresses? Perhaps I can take a stab at that one. If the proposal proceeds, currently, you have 1 unit of Vital Trust. If the proposal proceeds, there will now be 2 trusts, 1 trust holding the New Zealand assets, 1 trust holding the Australian assets. You would receive 1 unit in each of those trusts. And those units will be stapled together to form an economic unit. And there's lots and lots of discussion of that in the notice of meeting, of course. I see there's another question here from Mr. Solly. If the proposal is not successful, will VHP unitholders incur the costs or the process of working to the dual listing? If so, what will those amounts be? And Aaron, again, perhaps I could ask you to speak to that item.

Thanks, Bernie. So the short answer is, it’s voted down, all the costs will need to be expensed during this half. So that will mean a direct cost to unit holders is approved, that will be treated as the cost of raising equity as per normal. So there'll be no direct expense. Total costs are expected to be about $8 million. Its voted down.

I don't see any additional questions on my screen, but maybe I'll just pause for a moment to allow an opportunity for any additional questions. Just give it a few more seconds. Okay. I propose that we move to voting on the resolution at hand. The proposal will be approved if the resolution is passed by special resolution. Being a resolution passed by unitholders with a combined value of not less than 75% of the value of the units held by those persons who are entitled to vote and voting on the resolution. While there is no change to the substance of the management arrangements or management fees payable by Vital, for technical reasons, NorthWest and its associate parties are prevented from voting on the proposal under the Financial Markets Conduct Act. The details of the proxies received on this resolution should now appear on your screen. We will now open the application for voting. On your screen, you will now see a voting icon at the top of your screen to the right of the question's icon. When you click on this icon, it will take you to the voting screen where you can submit your vote. Please can I ask you now to cast your vote by clicking or tapping the button on the voting screen to reflect your vote. Voting will now be open for 2 minutes. I will now pause for 2 minutes to allow voting to complete. [Voting]

Thank you. The 2-minute period is now completed. Voting has now been closed. This now concludes the formal business of the meeting. Once the votes have been completed and the results of the polls are available, the outcomes will be notified to the Supervisor and Manager of the Trust and released via an NZX announcement following verification by Computershare in Deloitte. Thank you for participating in this important meeting for Vital Healthcare Property Trust. And for taking the time to use this virtual meeting format given the current difficult COVID-19 environment. We hope you all remain safe. Thank you.