Healthcare Realty Trust (HR) is a vital piece of the real estate investment trust (REIT) sector, focusing on properties that cater to healthcare services. With almost 700 properties and over 40 million square feet under its management, HR has positioned itself strategically around hospital campuses in key growth markets. However, this sector isn’t just about land and buildings; it’s also about how effectively that space is managed while responding to investor and market demands.
As of 2024, the market capitalization of Healthcare Realty Trust stands at approximately $6.38 billion, with share prices hovering around $17.99. A significant challenge has emerged for the company, particularly following a controversial merger with Healthcare Trust of America (HTA) worth about $18 billion, which took place in early 2022. Despite a 92% shareholder approval, the merger turned out to be somewhat detrimental to HR’s existing shareholders, as it implied a cap rate below what HR was trading at before the deal.
The influence of activist investors can be a double-edged sword, capable of offering both opportunities and challenges. Starboard Value, renowned for its successful shareholder activism, recently acquired a 5.90% stake in Healthcare Realty Trust, catalyzing renewed scrutiny of management’s decisions. Historically, Starboard’s campaigns have yielded impressive returns, averaging over 23% compared to the Russell 2000’s performance. Their methodology involves sharpening operational efficiencies and improving margins, and their involvement may well be a turning point for Healthcare Realty.
Starboard Value’s entry at a time when Healthcare Realty’s long-standing CEO, Todd Meredith, has stepped down indicates a pivotal moment for the company. The burden of operational inefficiencies has now become a pressing concern, as property operating expenses have surged from 31% to 37%, which is significantly higher than industry peers. Moreover, the company’s funds from operations (FFO) yield stands at 9%, starkly contrasted with the average of 5% to 6% from similar entities.
Healthcare Realty Trust now finds itself at a crucial juncture, with two possible paths to navigate its future: a commitment to standalone operation or a potential sale. The first avenue involves the difficult process of selecting a new CEO and addressing the board’s overall effectiveness. Given the recent unsettling history of the merger and operational nature of the company, stockholders could justifiably contend that board refreshment is necessary. This pathway also demands a significant focus on streamlining organizational costs to align better with competitors.
However, whether the existing board possesses the acumen to take HR in a positive direction is a valid concern. Starboard’s probable push for at least one board seat is likely to be a necessary step in this process. Should HR opt for this route, a turnaround to improve operational performance is essential.
Alternatively, the second pathway would be to explore a sale. The confluence of an incoming activist investor and a departing CEO serves to heighten the likelihood of this scenario. The power dynamics shift notably in such situations, and there are larger firms like Welltower, Healthpeak, and Ventas—each with lower capital costs and cap rates in the vicinity of 5% to 5.5%—that may find significant strategic value in acquiring Healthcare Realty.
Interestingly, less than a month after HR announced its merger with HTA, Welltower extended an offer of $31.75 per share for HR, which represents a substantial premium over its existing share price. Such interest from larger real estate firms underscores the perceived value that Healthcare Realty holds in the market.
As Healthcare Realty deliberates on its options, the role of strategic decision-making assumes paramount importance. Regardless of the path chosen—whether it be a leadership overhaul or a sale—it is undeniably beneficial to involve a shareholder representative like Starboard during this period of uncertainty. Their experience in corporate governance and operational strategy could be invaluable in steering the company toward a path of sustained success.
The case of Forest City Realty Trust, where Starboard initially targeted operational enhancements but eventually accepted a buyout offer that yielded significant gains, provides a precedent worth considering. The dynamics between activist investors and corporate management can be complex, but when managed well, they can yield substantial benefits for stakeholders.
As Healthcare Realty Trust stands on this precipice, the coming weeks will be critical. Will they seek to rebuild and fortify management and operations or will they capitalize on enticing acquisition offers? Whatever choice they make, the path forward must be navigated with careful consideration of shareholder interests and market conditions.