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

Welcome to the 2023 Annual Meeting of the Vital Healthcare Property Trust. On behalf of the Board of the Manager and the management team, I'd like to extend a very warm welcome for those of you in the room here and online. My name is Graham Stuart, and I'm the Independent Chair of Vital Healthcare Property Trust. Vital's Supervisor has appointed me as the chair to this meeting. As you're aware, we are holding this meeting in person in Auckland, as well as via Computershare's virtual meeting platform. Unitholders, proxy holders and guests can attend the meeting in person or virtually. All attendees can watch live, the webcast of the meeting, and read the associated company documents. Holding this meeting in person and online provides our unitholders with a maximum ability to participate in the meeting from wherever they are located. During the meeting, I will invite questions in relation to 3 formal addresses. Vital's FY '23 accounts, the proposed reelection of Dr. Stanford as an independent director, and any general business that will arise. If you are a unitholder or a proxy holder attending in person and wish to ask a question, please wait until the relevant time and raise your hand. Please wait until you've been provided with a microphone, to ensure all those attending virtually can hear your question. If you are a unitholder or a proxy holder attending virtually, you can submit a written question during the live meeting at any time. Please select the Q&A tab on the right half of your screen, type your question into the field and press send. Your question will be immediately submitted. If you require assistance, you can type your query into the Q&A tab and Computershare will assist via the chat function. Alternatively, you can call Computershare on 0800 650034, that's 0800 650034. While you can submit questions from now on, I will not address them until the relevant time of the meeting. Your questions may be moderated, or if we receive multiple questions on the same topic, amalgamated. If we run out of time to answer any questions, we will answer them in due course via e-mail or by posting responses on our website. Voting today will be conducted by the way of a poll. Voting will shortly be opened online. Computershare will collect voting forms from those attending in person and will collate the results from those -- both voting methods. Results of the poll will be released to the NZX later today. The notice of the annual meeting has been circulated to all unitholders. It sets the scope of what we are scheduled to discuss today, and that includes the details of one resolution we are due to consider. I'm pleased to confirm now that there is a quorum present, and I hereby declare the 2023 Annual Meeting of Unitholders of Vital Healthcare Property Trust open. If you're eligible to vote in this meeting, you are now able to cast your vote under your Vote tab. To vote, simply select your voting direction from the options shown on the screen. Your vote has been cast when the green tick appears. To change your vote, simply select Change your vote. You can change your vote until I declare voting is closed. I will give you a warning before I declare and move to close voting. The order for today's meeting is as follows: first, there are 3 formal presentations. I will address you as the independent Chair, followed by Aaron Hockly, who leads the Vital's executive management team, and followed finally by Stuart Howard from Trustee Executives, the trust supervisor. I will then table the financial statements and invite questions on any matter regarding the trust or the presentations, other than Michael Stanford's reelection. We will then move to the formal business, being the proposed resolution that Michael Stanford be reelected as an independent Chair of Northwest Healthcare Properties Management Limited, Vital's Manager, and I will invite any questions on his proposed reelection. After voting is complete, we have an opportunity for general business, and I will invite you to ask any other relevant questions that you may have. We will then conclude the meeting. Copies of the minutes of last year's annual meeting are available on Vital's website. The full Board of the managers in attendance today, with all of my other board colleagues attending virtually. I would also like to welcome Vital's executive team, some in person on the stage, and the balance are attending virtually. Stuart Howard and Raveen Kaur from the Supervisor of the trust. Andrew Boivin and Rebecca Clark from the auditors of the Trust; Toby Sharpe from the legal adviser to the manager. It's been another a busy year for the trust, and it gives me great pleasure to deliver this address as the Independent Chair of the manager. The operating performance of the trust continues to be strong. However, the [ sharper ] rise in interest rates has impacted not only property values, but also funding costs and consequently, the unit price. We've responded to the changed economic environment by divesting a number of noncore properties to reduce debt levels, and by deferring and, in some cases, canceling developments planned at a time when interest rates were more favorable. These moves are to ensure that the trust continues to maintain a high-quality property portfolio with a sound capital structure and a suitable growth strategy. This gives the Trust the resilience needed for a more challenging economic environment and the ability to sustain a strong distribution flow. By remaining disciplined with our investment decisions and by staying focused on our tenant relationships, the Trust will continue to benefit from the very positive dynamics that the healthcare sector enjoys. We have a high proportion of our leases indexed to the CPI. We have quality tenants and a weighted average lease term of 19.4 years. Vital is a long-term investor. While economic changes such as those that we've seen in the last 24 months may require some course corrections, the overall thrust of our strategy remains the same. We look through market cycles and focus on investing in high-quality health care properties and attractive locations with strong and stable tenants. We have confidence in this strategy, and we will continue to deliver superior returns over time. Last year Vital paid $0.0975 per unit in distributions, up 1.3% on the prior year. We've provided guidance this year of at least $0.0975 per unit. The past 12 months have been an active period for your Board. The sharp rise in interest rates and the volatility in capital markets has underscored the importance of having a very disciplined approach to capital and investment. Earlier in the year, we embarked on a divestment strategy targeting at least $200 million of asset sales. To date, $155 million of these sales have been completed, with a further $70 million contracted and several more in the pipeline. This year the manager, supported by the Northwest teams in New Zealand, Australia and Canada, has continued to pursue our strategy in a disciplined and focused manner. In July 2022, we commenced construction of Stage 2 of the Playford Hub. In October, we commenced construction of the Ormiston Hospital expansion. In December last year, we completed a $96.5 million development of consulting suites at Epworth Eastern Hospital and approved AUD 140.7 million, 6 Star Green Star development in Queensland, referred to as the RDX facility. In March this year, we have completed a bank debt refinancing, extending our facility limits and the term of those facilities. We now have no facilities expiring before the 1st quarter 2025. Pleasingly, last month, the trust was recognized as the leading listed health care property fund globally by the ESG benchmark provider GRESB. This assessment is an investor-driven global ESG benchmark and reporting framework for property and infrastructure companies. Our top ranking confirms that we are on the right track in meeting global standards of environmental, social and governance practices. These activities represent a small part of the activity undertaken over the past year. Aaron will provide you greater detail in his report. In July Paul Dalla Lana was replaced as a Northwest Healthcare appointee to the Vital Board by Mike Brady. I would like to take this opportunity to acknowledge Paul's vast contribution to Vital, thank him for that, and wish him the best for the future. It's my pleasure now to introduce Vital's Fund Manager and Senior Vice President for Northwest, Aaron Hockly.

[Foreign Language]. It gives me great pleasure to present to this, my fourth annual meeting as the Trust's Fund Manager. As Graham has highlighted, Vital's strategy has not changed, and I believe is well understood. We buy, own and develop health care property across Australia and New Zealand as a means to provide income and capital growth to Vital's unitholders. We are adjusting our tactics in light of changing market conditions, but our strategy remains the same. At 30 September, Vital owned $3.3 billion of real estate, comprising 43 income-producing properties across Australia and New Zealand, as well as strategic land in both countries. Approximately 70% of Vital's assets are located in Australia and 30% in New Zealand, with a focus on the major existing and emerging health care precincts in both countries. The income-producing properties have a weighted average lease expiry term of 19.4 years, the longest in our sector. We are targeting growing AFFO and distributions by 2% to 3% per unit per annum over the medium term. This target is supported by a strong linkage between Vital's rent reviews and CPI, evidenced through like-for-like net property income growing by 5.3% for the 2023 financial year. This has continued in FY '24, with Q1 results released this morning showing like-for-like income growth of over 4% versus the prior comparative quarter. Over the past 2 decades, Vital's team has acquired and developed a high-quality portfolio of health care real estate from Ascot Hospital here in Auckland, developed over 20 years ago by Vital, to Wakefield Hospital in Wellington, which is in the final stretch of a 5-year rebuild. We have focused on a number of targeted portfolio-enhancing initiatives over the last year, notably the sale of noncore assets, with around $220 million sold or under contract to date. Sales proceeds are initially used to repay debt, but will ultimately fund Vital's development pipeline. The combination of asset sales and developments will enhance the age, diversity, quality and resilience of Vital's property portfolio, which should lead to enhanced returns for unitholders in future periods. We have continued to focus on leasing extensions for potential expiries in future years to lock in our defensive and predictable cash flows over the medium to long term. We were proud to be ranked 1st place by GRESB globally for listed healthcare, and 3rd place for all listed entities in Oceania for standing investments. GRESB is the benchmark for over USD7.2 million -- 2 trillion, I'm sorry, of investments, and is the leading global benchmarking tool for sustainability for real estate and infrastructure entities. These achievements reflect the efforts of our facilities and asset management teams as well as our wider sustainability team in improving the environmental monitoring and performance of Vital's assets. Here in New Zealand, this has included 10 assets being rated for Green Star performance, and all assets having undertaken energy audits to identify energy efficiency measures. Work continued on Vital's 11 development projects across Australia and New Zealand. These include Ormiston Hospital in Auckland, Grace Hospital in Tauranga and Wakefield Hospital in Wellington. At 30 September, Vital had NZD 258 million left to be spent on committed developments. This committed development pipeline is expected to be funded by asset sales and existing debt headroom over the next 3 years. In addition to this committed pipeline, Vital has a significant strategic landholding bank, which provide a potential development pipeline of around $2 million -- $2 billion once fully built. Whilst we continue to work on this potential pipeline, including obtaining development approvals, new developments will only be committed to where they add value for our unitholders. We were pleased to be ranked 1st by GRESB for health care development globally, and 2nd place for all listed entities in the Oceania region for our developments. And for a second year in a row, Vital was awarded a 5-star rating for developments. These achievements reflect work undertaken by our sustainability team and our development team. Debt tenure, capacity and hedging have all been enhanced over the last 12 months. At 30 September, Vital's balance sheet gearing was 36.6%, with 78% of drawn debt hedged and $193 million of debt headroom available. Vital has no debt expiring until March 2025, and we are well within our banking covenant requirements. We were honored to be a finalist for the INFINZ 2022 Equity Raising of the year, reflecting our ongoing efforts to both strengthen Vital's balance sheet and respond to investor feedback. In our 2023 annual report, Vital again disclosed our compliance with the NZX Corporate Governance Code, despite the code not applying to us as a fund issuer. Unitholders will note that Vital has complied with all relevant principles of the code, and we have clearly explained why some principles are not applicable to us. We continue to improve our overall corporate governance through enhancements to our policies and procedures, such as revisions to our Code of Conduct and the release of our third modern slavery statement, as well as continuing to undertake investor engagements across several cities and towns in New Zealand, as well as in Melbourne, Sydney, Hong Kong and Singapore. We were proud to be a finalist for the Communications Award as part of the Australasian Reporting Awards in 2023 and to be awarded a silver overall for our 2022 annual report. This reflects work undertaken over the last 4 years to improve our communications with our investors. A number of sustainability initiatives have been introduced over the last 3 years across environmental, social and governance areas. Initiatives include energy audits, increased Green Star accreditation, solar power being deployed at a number of our facilities, climate change assessments being undertaken on all facilities, educational scholarships provided to University of Auckland property students via Keystone, donations to children's hospitals in Auckland and Christchurch and Hospice in Auckland, and staff volunteering across Australia and New Zealand. These initiatives were recognized last month with Vital being named sector leader for listed health care property globally by GRESB. We're now working our way through short-, medium- and long-term sustainability targets, including a commitment to net 0 emissions by 2050 and the release of our first climate-related disclosure report in October 2024. Like all investors, our unitholders seek a return on their investment in Vital. So it is always disappointing when positive returns are not achieved. Although Vital's long-term performance remains ahead of both the REIT index and the NZX 50 Index, we remain focused on continually improving our returns. As you will appreciate, there are some things we cannot control fully, particularly Vital's unit price, which has a high correlation with the local 10-year government bond rates. However, there are a number of things that we can do and which we are focused on doing to deliver returns for our unitholders. These include, continuing to deliver on asset management, the core of our business, including maintaining high occupancy, undertaking lease extensions well in advance of their expiry, and remaining the landlord of choice to the leading health care providers across Australia and New Zealand, maintaining a strong and prudent balance sheet, underpinned by a high level of interest rate hedging and weighted average debt maturities of around 4 years, focusing on net cash flows with the aim of increasing earnings and distributions by 2% to 3% per unit per annum over the medium term. And this in turn should support Vital's unit price into the future. Embedding sustainability across all parts of our business, which is expected to support property valuations as well as reduce future costs. Continuing the sale of noncore assets to reduce debt, fund the development pipeline and improve the overall quality of the property portfolio.. Committing to new developments only where they add value for our unitholders, as well as looking at alternative ways of funding developments, which could include the partial sale of existing core assets. Being accessible to unitholders in a variety of locations and through a variety of different methods. And continuing to provide a transparent picture of past results as well as our future strategy, to help current and potential unitholders understand the true value of an investment in Vital. As I noted at the start of this address, the above is in the context of continuing our strategy of owning and developing high-quality health care real estate, albeit whilst suggesting tactics to align with market conditions. Thank you for your ongoing support for Vital.

One of our large and long-standing unitholders has requested that the supervisor address the meeting today, and we are more than pleased to ask Stuart Howard from Trustee Executors to come and tell you what he does. So Stuart, I'll hand the podium over to you.

Good morning. My name is Stuart Howard. I'm a Senior Client Manager at Trustees Executors, who is the supervisor for the Vital Healthcare Property Trust. Thank you for inviting me along today. I'm really excited about providing some insight into what the role of the supervisor is. So Trustees Executors is a long-standing New Zealand company, incorporated in 1881. It was also New Zealand's first trustee company. Trustees Executors is ultimately owned by Sterling Grace New Zealand Limited. And in turn, the custodian entity for Vital, T.E.A. Custodians, is wholly owned by Trustees Executors Limited. In terms of the services that Trustee Executors provides, we do Corporate Trustee Services, which is the business unit that I'm involved in. We also provide private wealth and fund administration services. Now this slide shows the relationship between Trustees Executors, who is licensed as a supervisor by the Financial Markets Authority under the Financials Supervisors Act 2011, as well as to the Reserve Bank of New Zealand, depending on the type of supervised entity that we supervise. TE is a frontline regulator for supervised entities to help ensure the best outcomes for investors. Now you may not be able to read the detail on that, but I'll explain it. This slide shows the different types of products and services that we provide for different types of structures. We provide services to Managed Investment Schemes or MIS such as Vital, nonbank deposit takers, debt issuers, retirement villages as well as asset securitization and stand-alone custodial services. Depending on the product, Trustees Executors could be the supervisor, the trustee, the security trustee, paying agent, escrow agent or custodian. In the case of Vital, we are the supervisor and custodian. As I mentioned, Trustees Executors is licensed as a supervisor by the Financial Markets Authority under the Financial Markets Supervisors Act. This slide highlights the purposes of being a licensed supervisor in respect to protecting the interests of investors. And that is by way of requiring persons who wish to be appointed as supervisors to be capable of effectively performing the functions of a supervisor, requiring supervisors to perform their functions effectively, and enabling supervisors to be held accountable for any failure to perform their functions effectively. In order to perform our functions effectively, a supervisor will need to be empowered. The FMA put out a guidance note back in 2013 in terms that set out what their expectations were of supervisors in undertaking their role. We must be sufficiently empowered to do our job. We have a duty to provide a professional standard of care and act in the best interests of investors. And that means that we have a number of items that we need to have. We need to have governing documents that are fit for purpose. Governing documents include trust deeds, deeds of participation, deeds of supervision, custodian agreements. And it also means that our staff need to have the necessary skills and experience to undertake the role of the supervisor, have an inquiring mind, employ professional skepticism, and look at monitoring of supervised entities through a risk-based lens. We need to monitor and report compliance breaches to the regulators. That's where we identify compliance breaches or where we are advised of compliance breaches. We also must ensure our actions and decisions are not influenced by our own commercial interests. The supervisory framework that we have in place for Northwest includes having a number of reports and information provided under the legislative requirements. As I mentioned before, we are licensed supervisors under the Financial Market Supervisors Act of 2011. Northwest, as the Manager of Vital, is a licensed manager under the Financial Markets Conduct Act 2013 and its regulations. Trustees Executors have been the supervisor and previously the trustee for Vital since 1994. The reports and information that we receive from Vital are either as a result of legislative requirements or supervisory requirements that we put in place. In order to fulfill our supervisory requirements, we sometimes request additional information. For example, if we're undertaking a thematic review across a number of different MIS managers or [ there are ] initiatives driven by the regulator, the FMA. As supervisor for Vital, we have regular engagement with Northwest as manager, over and above the regular monitoring activities. This could include the review and approval of new or amended financing arrangements, acquisitions and divestments of scheme assets, and in our role as custodian, we also approve payments out of the bank accounts that are held on behalf of Vital to pay scheme expenses. In terms of what we think clients expect of the supervisor. We expect that -- the clients expect that we go beyond just pure compliance. It's not a tick-box exercise We also seek to help clients meet their legislative obligations. So we need to be conversant with those legislative and regulatory obligations. We seek to be a trusted adviser and partner to their business. In undertaking our monitoring and supervision activities, be proportionate and risk-based in our expectations and treatments. So that means focusing on higher risk-related items rather than the lower ones. We can assist clients by passing on industry guidance, insights from interactions with regulators, and upcoming changes to legislation and regulation. We also liaise with the regulators, being the FMA and also Reserve Bank of New Zealand, to align with their expectations and avoid duplication of effort and confusion about what is expected. In turn, what do we expect from our supervised entities. We like to take a partnership approach and work together with our clients. We expect that supervised entities understand the role of the supervisor, and that we need to work together. We expect a no-surprises approach and will assist wherever possible in the resolution of issues. The FMA expects all of us, supervisors and managers, to voluntarily raise standards, not just to do the bare minimum. Northwest as Manager, in their relationship with Trustees Executors, we have found them to be a willing complier, willingly giving us the items that we ask for, when we ask for it, and proactively making us aware of issues or items that have come up as they arise. And when they do, we constructively work together towards a resolution.

Thank you, Stuart. The supervisor plays a key role in the Fund's governance. The Board is very conscious of this. So we try hard to engage in a partnership relationship with the supervisor, and we recognize, of course, that the supervisor plays an [ intimately ] vital part in the Board and the Fund, sustaining investor and regulator confidence. So thank you, Stuart. The annual report and financial statements for the year ending 30th of June have been circulated to all unitholders, and they're now formally tabled at this meeting. If there are any questions relating to the Trust or the presentations, now is your opportunity to raise them. Only unitholders or proxy holders are permitted to ask questions. You may ask questions through the Computershare platform if attending virtually, or raise your hand in the room and ask for a microphone to be given to you. Those waiting to ask questions online, please do so as early as possible to ensure that it's received and answered. In consideration for other unitholders, we ask that any questions that relate to your personal situation or unit holding be dealt with outside of this meeting by management, through e-mail or phone. Repeated questions or questions that have already been answered, may not be put to the meeting again. So I'll open the floor for questions.

Peter [ Weisberger ], unitholder. A couple of questions. One is, I noticed from the assets map, Australasia is involved, except for 2 states in Australia. The question is, Tasmania and Northern Territory, why have we not got assets there? Question two, the role of the supervisor, does that negate the need for an auditor? Or how does the, if we do have an auditor, how does the auditor work with us and the supervisor?

Sure. Perhaps I'll answer the first question and then Graham can take the second. It sounds a bit [ high grade ]. In relation to why we don't have any assets in Tasmania and Northern Territory, we acquired a parcel of land last year to develop a new facility with an operator. Unfortunately, the cost became prohibitive in the state. So we have canceled that development, so we're not proceeding there. We are still looking for potential opportunities. But as I noted in my address, generally, projects are on hold, and we're being much more cautious in this environment in terms of committing to new developments, and there isn't the sufficient scale of assets at the moment [ about a moment ] Tasmania has for us to acquire or own. In terms of Northern Territories, it's relatively small population. We typically target major metropolitan areas. So typically Eastern Seaboard, across Australia and the major centers in New Zealand. That's typically where we think we can add value and build facilities that have sufficient scale to meet our return requirements.

The supervisor and the auditor play very complementary roles. So the fund is managed by a series of governments' documents and regulations. It's sort of the top of the tree. We have the Financial Markets Conduct Act. Sitting underneath that, we have our Trustee. And of course, the Companies Act and a plethora of other governance documents and also quite a number of regulations. So the supervisor's role is to make sure that the conduct of the Fund Manager and managing the unitholders' funds is always complying with the requirements of those governments' documents. On the other hand, the auditor, they come along and inspect our financial records and make sure that we maintain appropriate financial records, and we prepare and present financial statements in a manner which is consistent with the regulations relating to financial reporting. So they're very complementary roles. And together, they give us quite a strong framework. And from a Board's point of view, yes, we interact with both in an appropriate way. To give you more time, so I'm not going to choose convenience one.

Edmund Stranahan, I am shareholder a unitholder. It seems to me that as far as Trustees are concerned, that they're not providing much by way of service to the unitholders, that the relationship seems to be between management and trustees. As far as they're concerned, I mean an issue that I've raised over the years and so on is about the corporatization of Vital Health. It seems to me that, that sort of concept would be contrary to the wishes and the interests of Trustees Executors. That's the first question. Could he elaborate on what they actually do to assist, protect or whatever, the unitholders? I mean I came along here today expecting to find a set of, well, an annual report, and there wasn't one available. I've got to rely on memory. I'm not too keen on having to do that, because it seems to me that so much of the reliance of Vital is on the revaluations of properties. And I think I'm right in saying that the revaluation was about $248 million up 1 year, and about the same amount down the next year. Does that mean they got it wrong in the first [ turn ]?

Thank you, Edward. There's a number of questions in there. Let me take a run at them, but I think you've also addressed one of those questions to Stuart. But let me take a run. First up, yes, investor coming into the unit, buying units in the fund, yes, has available to it the rules of the fund basically, which are the trust deed and the related documents that sit -- most of them are up on our website. So they are the rules by which the Board and the management operate the fund. Those rules are pretty black and white. And in the last several years, we've taken steps to make them clearer and tighten them up where we can. But it's not to say there isn't areas of discretion. So the supervisor's role is to make sure that we at all times comply with those rules. So you bought into a fund that was going to comply with those rules. Supervisor makes sure that -- so he's the referee on the park in that situation. There are some instances where the rules, they might have been crystal clear when we wrote them. But actually, there's areas where there could be interpretation. And that's where the manager will engage in a dialogue with the supervisor and work out what's the right thing to do for unitholders. So it's not just a passive referee, it's not as complex as a World Cup Rugby final. But I think the analogy of a referee on the park is a good one here. We're playing the game on behalf of unitholders, and the refs make sure that we're -- or the trustee in this case is making sure that we're complying with the rules. And when there is areas of discretion, then we engage in active dialogue, which comes along the line of those no surprises comment that Stuart made. So I'm happy to ask Stuart to elaborate on that answer if that's necessary, Edward?

The other issue that I think was most [ startling ], one that you would answer rather than him, is about the revaluation figure.

Yes. So first off, I apologize for not having a hard copy of the annual report here. We'll fix that next year -- oh, there you are up front, sorry.

It wasn't here when I arrived.

I apologize for them not being here, but we'll make sure that they're there in a timely manner next year. Yes, so if you look back 3 years ago, to financials years ago, the revaluations, you require [ a wide ] order of magnitude, circa $200,000 upwards revaluation, reflecting at that time, as Aaron pointed out in his presentation. The macroeconomic environment, in particular, best represented properly by the indicator of the 10-year treasury. So at that time interest rates were going down, property yields were appropriately down and valuations were going up. And then as you're well aware, about 2 years ago the world changed. The whole interest rate environment got turned on its ear and we've seen a steady progression. So the valuations are simply just a rear vision mirror view of those yields reflecting back on the property values. That's not only happening to Vital, it's happening to all property. Not only the listed sector, but even privately held properties. So we're literally just in a little bit of a lag as the values reflect the valuations and the market conditions of the time. So the revaluations are undertaken by independent valuers. 100% of our portfolio is valued every year. We have policies around making sure that the guidelines for selecting those independent valuers. We consult with the supervisor around those policies. And we rotate the valuers, so it's not the same valuer valuing the same problems, year after year after year. So there's a series of rules and prudential protections that we have in place to ensure that those independent valuations are robust.

But I can't understand how interest rates can affect the value of bricks and mortar.

I'm not sure I can sort of take you through that one. I'm looking to Michael Groth to see if there is an easy answer for that one.

I don't think there is an easy answer for that one.

The value of bricks and mortar, simply put, is the rent that it can attract, and that rent's a cash flow. So that, so it's the value of the cash flow that comes to the fund from the rent, that, that bricks and mortar can attract. That is basically being discounted by our cost of capital, and that cost of capital is largely driven by interest rates.

But I think that's really a reflection of the value of the business, isn't it? And you don't own the businesses that are running -- that are operating in the buildings?

Yes. So, the Board and the management team have a very laser-like focus on AFFO per unit. That's the, that's the key financial indicator that we look at. So AFFO per unit is the amount of cash that's generated, surplus that can be distributed -- potentially can be distributed to unitholders by way of distribution. So the Fund is really worth the cash that the buildings can generate. In terms of [ why ] those buildings won't have any value other than the cash that they can generate. We've gone through a divestment process where we've divested a number of buildings. The buyers of those buildings are just looking at how much rent they can achieve from them. So it's purely driven by the cash flow, which reflects through our financial statements down into that AFFO per unit calculation, which we report and we highlight as being the key metric for the fund.

So this is using the issue of the discounted cash flow approach to it, which is two main things to that, and that's what the, shall we say, the income is from year to year. And the other thing is what the interest rate is from year to year. Are you going to tell us what the interest rate is going to be in 2 years' time?

No, but I can tell you the market thinks that the interest rate is going to be circa 5.3 over a 10-year treasury period. So that's why we say we use the 10-year treasury as being the indicator that most reflects -- if you track the 10-year treasury against the unit price, those are the 2 that, that's the best indicator that we can find at this point. So the market has a view on forward interest rates and it [ compounds ] that into the 10-year treasury yield. It's not a perfect science, and we've seen in the last 60 days, the market has gone very pessimistic and then suddenly become more optimistic. So we've seen changes in volatility in there, that we haven't seen for the last 2 decades. But -- yes?

So the figures you used 6 months ago might be wrong now?

What could be wrong in 6 months' time, could well be -- that's the nature of asset markets.

Because I mean natural factors with the way this goes, we're sort of looking to see that most of our return is coming from revaluations, as I recall from the P&L account, if I can call it that. Operating statement, whatever you want to call it. And that, that is the most significant item in it. Am I right in that, from memory? I couldn't get a copy of the account. So I can't...

You're right. In the last 2 years, the revaluations have dwarfed the operating income. In that sense, from a purely accounting point of view, you're right.

Because the actual unit price is on the share market, I mean, they're languishing and so they seem to be hanging there. And there doesn't seem to be anything that you people seem to be able to do, capable of doing to bring it up.

No, we've, Aaron's talked through in his presentation, the work we're doing to bring it up is to bring down our gearing. We're doing that by divesting assets. We've got a $200 million program. We're going to overachieve on that, which is a healthy thing. And we're being very disciplined around where we spend our development funds. So we've adjusted to the new interest rate environment. We're requiring better yields out of investments now. We've scrapped some projects that didn't meet the new criteria. And quite simply, the book value of assets at the moment, circa 290 a unit. 285 a unit. The market prices, as you well know. So there's a gap in there. We've taken a decision at this point in time that we don't want to raise equity. By raising equity, of course, we'd just be diluting the FO per unit, the amount available for distribution. So yes, we are adjusting. We're doing what we can do. I think we're acting appropriately in that regard. We're not panicking. We are maintaining our long-term strategy. And I referred to in my comments as a course adjustment and I think that's probably the most appropriate metaphor for what we're doing.

I seem to have had my share of time, but I seem to come along here with no questions. And then by the time I've listened to you people, I've got so many. But I've got no time to ask them all. So I'll leave it at that.

Yes, we'll have a cup of tea after, Edward, and you can chat then. But we do value your questions. Thank you.

Tony Sullivan, unitholder. Now I understand why property, commercial property goes down. Because the yield required goes up and therefore, the value of the property goes down. However, one of your slides showed that the drop in the share price of Vital was considerably greater than the other property-owning companies. And I find that very curious, because your customers are probably less affected by economic ups and downs than the retail market and the industry market, which is the very reason why I invested in the company. Now I'm just wondering whether there isn't something in behind what we've heard today, which has caused the share price of Vital to move from, I think, something like $2.70 down to $2, a considerably steeper drop than the other property owning companies. In New Zealand anyhow, I don't know about Australia.

Yes. I think year-to-date, we're down about 10 against the market average of 8%. So that's relative to the market average across the 12 or so listed property vehicles available in the market. Yes, I'm not going to be drawn into speculating on how people price units or shares, but what I can say, there's characteristics around models, which we think are attractive and you obviously thought attractive and hopefully still do, when you invested in us, that could explain why we've underperformed in this last 2-year period. Because if you look out over 5 and 10 years, we've overperformed and outperformed the market. But in the more recent time, we've underperformed. There's a whole myriad of things that could add up to sentiment. I'm not going to open that Pandora's box. We have a long [ way on ]. We have a close to 80% of our total portfolio is indexed on CPI, but there's a lag between when that CPI increase comes through and when we actually experience the impact of CPI and, of course, a higher interest rate. So that's decreased our earnings per unit. So there's a number of factors like that, that would differentiate ourselves from some of those other vehicles, that may be able to explain this. But I don't have a crystal ball into what's driving the share price. But yes, from time to time, I think a longer [ wow ] portfolio such as ours might under or overperform short or [ wow ] investments, different quality assets.

Michael Bowden, a unitholder. For the benefit of unitholders, what's the total fees that Northwest has taken in the past financial year? I understood it's something like $44 million.

Yes, I'm going to refer this one to Michael Groth.

Let me see if I can make the technology work. So we disclose in our annual report in a note, just flipping to the right page. In Note 22, all the related party transactions that Northwest have with Vital Trust. So in aggregate, there is for the year ended 30 June '23, a total of $44.8 million that has been charged to the Vital Trust. It's in a combination of both some value-add services in regards to the development activity that is managed by Northwest through that process, as well as the base level fees that go for managing the day-to-day activities of the Trust.

Could you give us, what is that as a percentage of the assets that you've got? The value of the assets you've got?

I don't have the arithmetic in my head at the moment. So the value of the assets of the vehicle at 30 June totals approximately $3.4 billion.

So it's got around about 1.3%, if you -- $44 million over $3.3 billion. What have we got online?

No, no questions.

Okay. No further questions in the room? Thank you for your questions and comments. I'd now like to move to the formal business of the meeting, the proposed reelection of Michael Stanford. The vote will be conducted by a poll, comprising proxies lodged in advance of the meeting and votes lodged through the [ forms ] and those in the room and via the Computershare platform. Michael's nomination has the unanimous support of the Board. The details of the proxies received on this election are on the screen. And if I've been appointed as a proxy to vote and not directed on how to vote, I will vote in favor of this resolution. If you're attending virtually, please cast your vote by checking for or against or abstain through the Computershare platform. Your vote has been cast when the green tick appears. To change your vote, simply select change your vote. You can change your vote until I declare the voting closed. I'll remind you, you'll be giving 10 seconds on the screen before I close voting. Once voting is closed, you will not be able to amend your vote. If you're attending in person, please pass your completed form to a Computershare representative. I will now pause for voting to occur. Voting is now closed. The results of these votes will be released to the NZX later today. I'll now open the meeting for any general business.

Yes. I noticed you noted that the -- you've got $220 million of property that's either been sold or under contract to be sold. And this is being sold at I think an 8.1% discount to book value. Does that mean that you've lost 8.1% on the sale of these assets? Or what's the story? And how much is that in absolute terms and -- in dollar terms?

Yes, short answer from an accounting perspective. They've been carried in the books at $155 million times $1.08, and being sold for $155 million, so 8% of -- so circa $12 million thereabouts make 13, that sort of will flow through the financial statements as a loss on sale of those properties. What I can say is...

So what was the dollar loss? How much?

8% of $155 million, which is the -- yes. The -- what I can say though is that through the sale of those assets and the consequent debt reduction, so we're losing rent on one side. On the other side, we're actually paying less interest. So when it comes through from an FFO per unit point of view, we're about [ washing out face ]. Yes. So remember, the FO per unit is kind of the laser focus of the management team and the Board. That's -- so in that sense, it's not as dilutive for unitholders.

I think it's also worth bearing in mind that there's an 8% book loss on what was carried in the books as at 30 June, but it's not a loss in terms of what we acquired it for. So all of the... So actually, over time, our unitholders have benefited from a gain in value, I think, on every one of those assets.

So that is positive in a sense?

That's right. From a cash in, cash out point of view it's positive.

Allen King, a unitholder. Northwest fees are based on total assets. And the total assets have been 8 million -- 12 million on this one building alone overpriced. Are we paying too much to Northwest due to this overvaluation?

We're paying the manager the fees in accordance with the fee schedule of the trust deed, basically. So that's the contract set out in the trust deed, it's reasonably straightforward. So whether it's too much or too little, with contracts a contract is a judgment. It's a value judgment. On whether you might think it's too much or too little, I think if you look at our fees overall and compare them to other listed property entities, we're not the highest and we're not the lowest -- so. The fees were adjusted, the trust deed was adjusted just over 3 years ago. It was brought more in line with market conditions at that time. So that's the answer I can give you.

Do we have a clawback on the fees we paid for overpayment of the, because of the over valuation, definitely overpayment, can we claw that back from them?

We don't have a claw back per se, but we have a high tide mark. So they don't, they manage the -- Northwest don't get a 2x payment. They get a payment on the incentive fee on property revaluations upwards, and then property revalued downwards. They don't get another incentive fee when it goes up to that mark. So it's got to get back to that mark before it goes forward. So not strictly a clawback, but something that's consistent with other externally managed funds, we have a high tide mark that sits in there.

I think your question is just relating back to base management fees, which is the principal way the manager is remunerated. So that's why it's so important that we continually revalue the trust and valuations are a point in time. And as Graham has pointed out, that is highly influenced by interest rates at that point in time. So we're confident that the valuations were correct as at 30 June. We released updated essentially valuations voluntarily this quarter, which included some movement, negative movement in valuations. That does result in lower management fees that are paid by Vital's unitholders. So it is a key benefit of the structure that as asset values decline, notwithstanding that the cash that unitholders are receiving remains the same, The fees that are payable to the external manager reduce proportionately. So it's gone up over time as valuations have increased, and it's been going down more recently, and we expect it probably to continue to decline as asset values decline, if the bond rates are correct, forward-looking bond rates. Does that answer the question?

I'm still concerned that the cash is in Northwest's hands. Overpriced.

It's not overvalued at that point in time. So as at 30 June, we had them independently valued. The value was ascribed, valuation for each of our 43 income-producing properties. That's the basis on which the management fee under the trust deed is calculated. That's verified by the auditors and by the supervisor, and that's the basis of the fees. We've released new valuations as at today. And that's the basis on which the management fees as at today are charged. At 31 December, there will be new valuations. Depending on where they go, will be the basis on which the management fees are paid at that point in time.

Allen, I'm sensing we haven't answered that question to your satisfaction.

No. I'll just have a, make a statement. The true value is the value you can sell it for, which is less than what you've got paid for.

Great. Accept that as a statement.

Tony Sullivan again, shareholder. Could I ask that in future directors who are seeking election or reelection actually come here and talk to us? It seems to me a bit arrogant just to not turn up at all, either in person or even a recorded speech.

Yes. Tony, I note that, and thank you. We have Board members in New Zealand, Australia and Canada. And we would, in the normal course of things, always require a Board member to be here. But particularly in the case of the independent Board meetings, Board members, we go for people that have strong credentials and good backgrounds. And that often means that they also have other directorships and conflicting duties. And in this particular case, we had quite a discussion with Michael, but he is actually conflicted by a meeting that was set up before we'd actually scheduled this meeting. So in the normal course, he would have been here. I'm sure he'll be here next year. But on behalf of Michael and the Board, I'll apologize. But our policy would be for the independent directors, each of us that stands on a 3-year rotation now, will be in front of you to address you in the meeting.

Just wondering about the nature of the relationship or the relationship with Northwest, is the trust kind of locked in with Northwest? I mean is there a an opportunity to terminate the contract with Northwest? Or what is the story?

So the -- Northwest owns the management contract, which is represented through the trust deed basically, in terms of the management contract it's reflected in the trust deed. So the event where there would be an opportunity to terminate that management contract would have to result in an uncorrected yes, poor actions on behalf of the trustee or action of the trustees and the government's documents. But otherwise, that's a contract that's in place, and it's not able to be varied other than by mutual consent between Northwest and the fund.

If enough unitholders voted to terminate that contract, would that be a possibility or not?

Yes, it would be. Bearing in mind, though, that Northwest are a significant unitholder in their own right. So the threshold in a practical sense -- I probably shouldn't step out this far. In the practical sense, that threshold is probably not attainable with Northwest's current unit holding. Also bearing in mind, if you did terminate that contract, you'd have to go to the expense of installing a management team and incurring a lot of costs. Well there being no further questions, I will now declare the meeting over. Thank you, everyone, for attending today. Management and myself will be around to ask any questions from those in the room in an informal manner if that's -- all the best.