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A Message from Vital Healthcare Management Ltd

02 August 2011

A Message from Vital Healthcare Management Ltd

Dear Unitholder

Bill Thurston and Graeme Horsley, the Independent Directors of Vital Healthcare Management Limited (“VHML”), the manager of Vital Healthcare Property Trust (“VHP” or “the Trust”) wish to update unitholders on the proposal to internalise the management of VHP.

Though it remains the strong desire of the Independent Directors to internalise the rights to manage the Trust, unfortunately negotiations with the current owner of the Manager, OnePath (NZ) Limited (“OnePath”) have thus far been unsuccessful. The sticking point has been over price rather than any lack of desire to internalise management.

To give you some background on the discussions that have taken place:

• Following recent feedback from investors, along with further commercial and legal advice, the Independent Directors advised OnePath some weeks back that the original negotiations and proposal to internalise management at a price of $14 million was not at a level they could recommend. To its credit OnePath recognised the concerns of investors around price, and still mindful of facilitating an orderly transition, re-entered further negotiations with the Independent Directors.
• Ultimately whilst OnePath was prepared to reduce its price from $14 million to $8 million, the Independent Directors remained of the view that whilst this may be where OnePath sees value, the price would still not likely be acceptable to unitholders (based on feedback), and therefore unlikely to be approved given the requirement for a 75% majority of those voting.
• The Independent Directors have chosen to disclose that they were and are of the view that a price of $6 million would be a fair price to support and facilitate an orderly transition. A price of $6 million would achieve the goal of internalising the Trust’s management on an equitable basis and lead to a seamless transition that substantively includes the existing management team, which would avoid any unnecessary risk and potential disruption to operations, tenant and financier relationships and future unitholder returns.

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So where to from here?

It is still possible for negotiations to recommence. Should that happen, any internalisation price and terms would still remain subject to an independent report by Grant Samuel & Associates Limited (“Grant Samuel”), who have been appointed, with NZX approval, to prepare an independent report for the benefit of unitholders. The proposal would then be submitted to a special meeting of unitholders for consideration and voting.

If an agreement cannot be reached, then the options are to retain the status quo which the Independent Directors believe would be unsatisfactory or to seek other ways available to unitholders to internalise management.

Notwithstanding that a price was not able to be agreed between the Independent Directors and OnePath, the Manager will now proceed to convene a special meeting of unitholders to consider the resolutions requisitioned by unitholders through both Ascot Property Management Limited (“Ascot”) and Accident Compensation Corporation and its associated interests (“ACC and others”), unless these requisitions are withdrawn.

The Independent Directors at this point do not support either requisitioner’s proposals. In their view, Ascot's proposal, which effectively involves a $1.4 million incentive payment for it to expedite an internalisation process, and replace the current management team with an Ascot lead group, exposes the Trust, its assets and unitholders to unacceptable levels of financial and operational risk.

The resolutions put forth by ACC and others to remove the Manager at no cost requires the Trustee to approve this and so far the Trustee has indicated that it has no grounds to do so. In spite of this, the special meeting for consideration of these resolutions must proceed at the expense of all unitholders and as such will take place in the latter part of August or early September 2011, subject to regulatory approvals. More information on these resolutions will be sent to you in due course.

The Independent Directors wish to reiterate their strongly held opinion that the removal of the existing manager and management team either via the Ascot or ACC and others proposals would potentially have material adverse consequences on the future performance of the Trust. They stress that VHP manages assets valued at approximately NZ$520 million comprising 25 properties and 131 tenants with complex and varying occupancy and operational requirements in multiple trans-Tasman jurisdictions.

Their view was supported by the Trustee of the Trust in its letter to unitholders on 22 July 2011 which stated “Importantly, in the context of the current proposals, we remain of the view that, at the present time and having regard to the information currently available to us, we see no basis for the Trustee to form the view that it is in the interests of unitholders that the Manager cease to hold office”. The Trustee went onto say “In our opinion, the Manager has proven specific healthcare property management skills which have always sat at the core of the Trust and, as far as we are able to determine in our capacity as Trustee, those skills have always been applied in the interests of unitholders. The Manager’s internalisation proposal is intended to retain these specific management skills”.

The Independent Directors strongly believe that an orderly transition at a figure of $6 million, rather than the $8 million currently proposed by OnePath, subject to Grant Samuel’s report, would be fair and in the best interests of unitholders. This would achieve a quick internalisation of management, retention of the existing management team and would build on hospital operator relationships to the benefit of all unitholders.

The Independent Directors or the Trustee will communicate further with unitholders as and when further information becomes available. In the interim unitholders can be assured that the Board of the Manager and the management team remain fully focussed on the operational activities of the Trust and look forward to releasing the year end results of the Trust late August 2011.

Yours sincerely,

Bill Thurston: Chairman

Graeme Horsley: Independent Director


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