Healthcare Trust of America (NYSE: HTA) is the newest target of activist investor Elliott Investment Management. The firm sent a letter to the healthcare REIT's (real estate investment trust) board of directors, urging them to conduct a strategic review. It believes this process will show the board what Elliott already knows: The best way to maximize shareholder value is to sell the company.
Actively pressing for change
Elliott is an investment firm that has made headlines over the years by actively pushing companies to make changes that would enhance shareholder value. For example, it's advocating that utility giant Duke Energy (NYSE: DUK) consider splitting into three companies. Meanwhile, it's working with data center operator Switch (NASDAQ: SWCH) to convert into a REIT. Some management teams chose to work with Elliott -- Switch is evaluating converting into a REIT -- while others, like Duke, believe they're already on the best path to create shareholder value.
The investment manager finds underperforming companies that would benefit from a change in management, strategy, or ownership. That's what's drawing Elliott to HTA. It noted that despite being the largest pure-play healthcare REIT on medical office buildings (MOBs), HTA had underperformed its peers, broader REIT indices, and the Russell 3000, a general market index benchmark for companies of its size. It doesn't believe HTA will improve its performance if it stays on its current path.
What Elliott Management wants
HTA has already made one big change recently: Chairman and CEO Scott Peters resigned in August, which immediately took effect. Board member Peter Foss took over as interim CEO.
Elliott appreciated the "abrupt and unexpected" resignation of the former CEO. However, it doesn't want the board to waste an opportunity to make an even more impactful change. It believes the REIT should hire external advisors to assist it with a formal strategic review process.
The investment firm believes that this process will show the board that its best course of action is to put HTA up for sale. For starters, it noted that the REIT simply couldn't compete for acquisitions in the current market environment. It no longer has a cost-of-capital advantage over private buyers like non-traded REITs and real estate investment funds.
Further, its diversified public REIT peers trade at higher cap rates and net asset values (NAV) than HTA. As a result, they can buy MOBs at 20% to 25% higher prices than HTA.
Because of their cost-of-capital advantages and higher valuations, buyers could also pay a substantial premium to acquire HTA. Elliott believes that due to the potentially large buyer pool that includes private equity, non-traded REITs, and strategic players like other publicly traded REITs, HTA should receive several compelling offers by creditable bidders. Elliott specifically noted that non-traded REITs are pulling in $1.5 billion of capital each month, giving them lots of liquidity to make acquisitions.
We've already seen a lot of transactions in the space this year. Fellow MOB-focused healthcare REIT Physicians Realty Trust (NYSE: DOC) recently returned to growth mode in a big way, buying a MOB portfolio for $764.3 million. Meanwhile, KKR (NYSE: KKR) and Cornerstone recently formed a joint venture to acquire more than $1 billion of healthcare assets (primarily MOBs) over the next few years. Given the relatively stable nature of these assets, we should see more deals in the future.
An interesting boardroom battle to watch
HTA's acquisition-driven growth strategy hasn't paid off for investors over the years and likely won't in the future, given the REIT's cost-of-capital disadvantages compared to rivals. Because of that, Elliott believes that the best course of action is to pursue a sale. That makes it an interesting REIT for investors to watch, as a sale could boost its value as well as the shares of other MOB-focused REITs.