Activist Starboard has a stake in Healthcare Realty Trust. Two ways to create value are born

work: healthcare real estate trust is a self-managed real estate investment trust that owns and operates medical outpatient buildings primarily located around hospital campuses. The company selectively expands its portfolio through real estate acquisition and development. Its portfolio includes approximately 700 properties totaling more than 40 million square feet, concentrated in 15 growth markets. The company's properties are located in high-growth markets and have a broad tenant mix that includes more than 30 physician specialties.

Stock market value: $6.38 billion ($17.99 per share)

Ownership: 5.90%

Average cost: $17.14

Activist Comment: Starboard is a highly successful activist investor with extensive experience helping companies focus on operational efficiency and profitability. Starboard has run a total of 155 activist campaigns in its history, with an average return of 23.37%; russell 2000 over the same period.

On November 26, Starboard filed a 13D with the U.S. Securities and Exchange Commission disclosing a 5.90% position in Healthcare Realty Trust.

Healthcare Realty Trust (HR) is a real estate investment trust that owns and operates medical outpatient buildings primarily located on or around hospital campuses. On February 28, 2022, the company entered into an agreement to merge with Healthcare Trust of America (HTA) in a deal valued at approximately $18 billion. Although HR shareholders showed strong support with 92% of the vote, the merger was somewhat dilutive for HR shareholders as HR's transaction at the time implied a cap rate of less than 5%.

However, management has an opportunity to exercise wisdom in the acquisition by combining the two businesses, recognizing synergies to reduce costs, and lowering the cap rate below the blended cap rate of 4.85% implied in the merger. Got it. That didn't happen. In just over two years, real estate operating expenses rose from 31% to 37%, several percentage points higher than its peers. Additionally, its Funds From Operations (“FFO”) yield is 9%, which is significantly higher than its peers, which range from 5% to 6%. Finally, the cap rate is 7% and the stock is down over 15%, while the Russell 2000 is up 33%. About three weeks ago, the company's longtime CEO, President and CEO Todd Meredith resigned after eight years with Healthcare Realty, for a total of 23 years.

Support in the form of Starboard Value is in the works (though I'm not sure what the company thinks of that). Nevertheless, healthcare real estate is currently at a critical inflection point, where there are two paths to unlocking value. The first is to remain an independent company, which requires hiring a new CEO, the board's most important role. But after concluding questionable acquisitions and overseeing an underperforming management team, shareholders would be well within their rights to question the suitability of the board to embark on this important investigation. Navigating this path in a way that creates value for shareholders will therefore require board renewal. Starboard is expected to want at least one of these seats to help make this decision. From there, the company is in much need of a turnaround to address its bloated cost structure and bring Healthcare Realty more in line with its peers, something Starboard has expertise at the board level. This is another thing that shows that you have . This is a long and uncertain journey, but with the right board and management team it is definitely doable.

This brings us to the second, shorter and more reliable path: selling Healthcare Realty. There are two things that can put a company into a simulated situation: the arrival of an activist and the departure of the CEO. This company has both. The company has several potential strategic acquirers. Specifically, large companies with low cost of capital and low cap rates. well tower, health peak and ventuswhose cap rate is about 5% to 5.5%. This is not just an academic hypothesis. Interest from strategic buyers has already been demonstrated. About a month after Healthcare Realty and Healthcare Trust of America agreed to a merger, Welltower is purchasing Healthcare Realty for $31.75 per share in an all-cash bid of nearly $5 billion. (The company closed trading on Friday at $17.99 per share). Interestingly, when the Healthcare Trust of America merger was approved, the activist fund Land & Buildings opposed the deal in favor of Welltower's proposal, which ended in failure. be.

Boards of directors and management teams generally cringe at the thought of activists. But the board should welcome Starboard. It's not just Starboard's reputation as a constructive activist who works with management to create value. This is because it is at the point. Get a new long-term CEO or consider selling. In either case, it is beneficial to involve a shareholder representative like Starboard. Starboard is a leading operational and corporate governance activist. If the first path of finding a new CEO is the right path for shareholders, there is no one better suited to work with the board in executing that plan. The company is the furthest thing from an activist who “sells the company,” but it is also a fiduciary and an economic animal that will do whatever it takes to benefit its shareholders. Additionally, if there is an opportunity to sell the company, you will weigh that against your plans to find a new CEO. This is very similar to what the company has done in previous activist campaigns. In 2018, a similar dual-path situation occurred at Forest City Realty Trust. Initially, Starboard took a long-term value creation path, revamped its board of directors, and focused on improving the company's cost structure. However, during this process, Brookfield Asset Management came forward with an offer to acquire Forest City Realty at a hefty premium of $25.35 per share. This was an offer Starboard couldn't refuse, and Starboard emerged from this situation with a 47.27% gain compared to the Russell 2000's 7.2% loss over the same period.

While we believe management should welcome Starboard at this critical time, we have been surprised by management before. Starboard has not yet formally named any directors, and the company has until Dec. 10 to do so. It may not take long for a settlement to be agreed upon, and Starboard may nominate a candidate just to maintain options going forward.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Healthcare Realty Trust is an investor in the fund.