Activist investor Starboard Value has taken a significant stake in Healthcare Realty Trust (HR), sending ripples through the healthcare real estate sector. This move comes at a critical time for HR, following a recent CEO transition and underperformance against industry peers. The situation presents two potential paths forward: a significant operational turnaround or a sale of the company. Starboard’s involvement, coupled with HR’s current challenges, sets the stage for a fascinating development in the coming weeks and months, with significant implications for shareholders.
Healthcare Realty Trust Faces Activist Pressure Amidst Underperformance
Key Takeaways:
- Starboard Value LP, a highly successful activist investor, has acquired a 5.90% stake in Healthcare Realty Trust (HR). This signals potential for significant changes at the company.
- HR, a real estate investment trust (REIT) focused on medical outpatient buildings, has underperformed recently, lagging behind its peers in key metrics like property operating expenses and FFO yield.
- The recent departure of HR’s long-time CEO, Todd Meredith, further adds to the uncertainty surrounding the company’s future.
- Two key paths lie ahead for HR: either a substantial operational restructuring or a sale to a larger strategic acquirer. Starboard’s influence will likely play a pivotal role in determining the chosen path.
- Potential acquirers include Welltower, Healthpeak, and Ventas, who could benefit from consolidating HR’s portfolio. A sale could generate a significant premium for HR shareholders.
Healthcare Realty Trust: An Overview
Healthcare Realty Trust (HR) is a self-managed and self-administered real estate investment trust (REIT) specializing in the ownership and operation of medical outpatient buildings. These properties are predominantly situated on or near hospital campuses, strategically positioned within 15 high-growth markets. HR boasts a diverse tenant base encompassing over 30 physician specialties and a portfolio of nearly 700 properties exceeding 40 million square feet. Prior to Starboard’s involvement, the company’s stock market valuation was approximately $6.38 billion. ($17.99 per share).
Starboard Value: The Activist Investor
Starboard Value LP is a prominent activist investor known for its successful track record in driving operational improvements and enhancing shareholder value. With an impressive history of over 155 activist campaigns, Starboard boasts an average return of 23.37%, significantly exceeding the 14.29% average return of the Russell 2000 index over the same period. Their average cost for HR shares is $17.14. This successful history suggests Starboard likely believes significant value can be unlocked at HR, and therefore their acquisition will be impactful.
The Catalyst for Change: Recent Events at HR
The recent filing of a 13D by Starboard on November 26th, disclosing their significant 5.90% stake, marked a pivotal moment for HR. This overt move follows a period of relative underperformance for the company. In February 2022, HR completed a merger with Healthcare Trust of America (HTA), a deal that, despite strong shareholder approval (92% of votes cast), proved somewhat dilutive. The merger implied a sub-5% cap rate, a figure already below HR’s market rate at the time. The hope was that synergies from bringing the two companies together would bring the combined cap rate down; however, this did not happen. It is noteworthy that the merger was, in fact, opposed by another activist fund, Land and Buildings. The firm had preferred the takeover bid by Welltower that was available months prior to the merger’s finalization.
Operational Challenges and Managerial Turnover
In the wake of the merger, several concerning trends emerged. Property operating expenses within HR’s portfolio increased notably, rising from 31% to 37%—a difference substantial enough to lead to significant underperformance against peers. Funds from operations (FFO) yield currently sits at 9%, significantly higher than the 5-6% range observed among industry peers, suggesting operational inefficiency. The company’s cap rate stands at 7%, reflecting further financial inconsistencies. Adding to the mounting pressures, the company’s long-term CEO, Todd Meredith, recently stepped down in November 2024 after 23 years with the company; this raises questions about succession strategy and leadership. This culmination of underperformance, high operating costs, and managerial change positions HR at a juncture where decisive action is necessary.
Two Paths Forward: Restructuring or Sale?
The current situation presents two distinct paths forward for HR:
Path 1: Operational Turnaround
HR could pursue a path of operational restructuring. This would entail a complete overhaul of the company’s operations, focusing on cost reduction to better align HR with industry benchmarks, and improving its cap rate. A key component of this would be the appointment of a new CEO to enact necessary operational change and to lead this initiative. The success of this path heavily relies on the board enacting the necessary reforms to lead this restructuring. A significant hurdle in the path of restructuring is potential friction with the board of directors. Given the underperformance under the current board and the previous less-than-optimal merger decision, stockholder faith in the current board remains a major factor. While it’s possible, it would greatly benefit this path to include Starboard’s input and/or a board refresh.
Path 2: Sale to a Strategic Acquirer
A more swift and potentially lucrative path would involve the sale of HR to a larger strategic buyer. The entrance of an activist investor and the departure of a long-tenured CEO increase the likelihood of an acquisition. Several large players in the healthcare real estate sector, including Welltower, Healthpeak, and Ventas, could potentially be interested in acquiring HR. These companies possess lower costs of capital and cap rates, making the acquisition financially attractive and leading towards higher shareholder value. A precedent exists in Welltower’s previous bid for HR at $31.75 per share, reflecting the potential financial gains that could be realized through a sale. This would be a particularly attractive option for Starboard, given their average cost at $17.14.
Starboard’s Role and Potential Outcomes
The involvement of Starboard Value adds a significant layer of complexity and intrigue to the unfolding situation. While Starboard’s reputation is primarily that of a constructive activist who works collaboratively with management, their ultimate goal is always to maximize shareholder value. This means, that they will examine and weigh both options. They may initially pursue a path toward operational improvements and a board refresh, however, if a highly attractive acquisition offer emerges—a “too good to refuse” scenario where an enormous shareholder premium is available, mirroring their 2018 Forest City Realty Trust acquisition—they would likely support such a transaction. Starboard’s involvement adds a degree of certainty to the situation; they offer more flexibility in approaching these situations and more assurance they’ll be able to see the company through its next steps.
While a settlement with the current board remains a possibility before the December 10th deadline for director nominations, the potential for Starboard to nominate its own slate of directors to the board to aid in the decision-making process cannot be discounted, ensuring that shareholders’ interests are prioritized; Starboard has a reputation of putting their money where their mouth is. The coming weeks will be critical in determining the future direction of Healthcare Realty Trust, ultimately shaping the value generated for its shareholders.
