HCP Shakeup Takes Analysts by Surprise

Analysts and investors were surprised when news came out that the nation’s largest healthcare REIT, HCP, had fired its longtime chairman & CEO.

Analysts and investors were taken by surprise when news came out that the nation’s largest healthcare REIT, HCP, had fired its longtime chairman & CEO, James “Jay” Flaherty,  after losing confidence in his leadership and replaced him with Lauralee Martin, a Jones Lang LaSalle Inc. veteran executive. They expressed concern about how the shakeup would affect the company and its shareholders.

Michael McKee

Michael McKee, HCP

Shares of HCP, which trades on the NYSE, dropped $1.95, or 4.67 percent, on Thursday to $39.82 as investors digested the sudden changes at the top.

“It was a surprising announcement,” Jeff Theiler, senior analyst for healthcare REITs at Green Street Advisors, told Commercial Property Executive after a morning conference call with HCP leaders and industry analysts. “Jay Flaherty has been at the helm of HCP for over a decade. He’s created a lot of value for shareholders with some of the innovative deals that he’s pursued during that time. The new CEO, Lauralee Martin, appears to have solid credentials, but we have yet to see how that can translate into creating value for HCP shareholders.”

Theiler wasn’t the only analyst left scratching his head after the conference call helmed by Martin and Michael McKee, the company’s lead director, who the board elected to the new position of non-executive chairman. Saying it was a move to “enhance the governance strength of HCP,” the board decided to separate the chairman and CEO roles.

Headlines on investor reports prepared by analysts used terms like “shock to the system,” “uncertainty looms” and “questions remain about what provoked leadership change.”

The company also announced on Thursday that Kenneth Roath, chairman emeritus and the company’s first president, had stepped down from the board. He had been chairman & CEO from 1988 to 2003. McKee said Roath, 77, had decided to retire.

“He had participated in some of the deliberations and felt it was a good time for the next generation to take the company forward,” McKee said.

McKee reiterated that the move to replace Flaherty was based on concerns about his leadership and management style. He said Flaherty remained on the board and would be receiving severance as dictated by his contract.

“I would say that the headline is that it is not about a new direction or a new strategy but it’s about leadership,” McKee said. “We appreciate the contribution that Jay has made over the last decade. Most of you on this call know him and his accomplishments very well, and they speak for themselves. However, over a number of months and with due diligence, the board decided that it had lost confidence in Jay’s leadership and his leadership style.”

Pressed further, McKee added, “It was not stock performance or business performance.”

He said the platform is in “very, very good shape.” In fact, “from the perspective of the board, we felt this is actually a good time to make a transition because of the current strength of the company,” McKee noted.

Lauralee Martin

Lauralee Martin

Martin, one of the highest-ranking women in commercial real estate and the chief executive of the Americas division at Jones Lang LaSalle, has served on the HCP board for five years. She was promoted at JLL in January, after serving about 11 years in other top roles, including CFO and COO. Martin previously served as executive vice president and CFO of Heller Financial Inc. and before that in the real estate division at General Electric Credit Corp.

“Lauralee is a very seasoned and effective leader. We had a wonderful chance to see her up close and personal for a number of years and noted her contributions and insight,” McKee said.

McKee praised her experience as a “team builder” and said she had a “collegial and inclusive style.”

He noted that the board did not conduct an external search. “It was readily apparent to us that sitting among us we had the right person. We checked virtually every box that we could come up with,” he said.

While not disputing Martin’s credentials, several analysts were concerned about the shakeup.

“We do not question that Ms. Martin ‘checks the required boxes’ and are impressed with her career, reputation and track record, but the risk of uncertainty to partners, lenders and investors in a sector and business that are so capital intensive could be cause for longer-term concern for shares,” Michael Bilerman and Emmanuel Korchman, Citi Research analysts, wrote in their report on Thursday.

Richard Anderson, an analyst with BMO Capital Markets, wrote that there could be “potential growing pains related to a new CEO inheriting a game plan orchestrated by someone else, in the face of a government shutdown (and simultaneous rollout of the Affordable Care Act).”

He noted that it seemed an “odd contradiction” to criticize and fire Flaherty for his leadership while at the same time saying the company was “in very strong condition with no financial issues or other lingering shoes to drop in the aftermath.”

Martin was not available for comment, but during the conference call said she planned to continue HCP’s 5×5 business matrix that includes five ways to create, develop or manage its five asset classes: seniors housing, post-acute skilled nursing, life sciences, medical offices and hospitals. As of June 30, HCP had $21.8 billion in assets under management, with the majority in seniors housing and post-acute skilled nursing facilities.

“It would be premature of me to say there would be any change at this time,” Martin said. “You want two things: You want consistent dividends and you want growth. The 5×5 strategy can deliver that.”

Martin said in a press release and in response to analyst questions that she did expect to be dealing with international opportunities and issues. “This is a pivotal time of challenges, transitions and consolidation for the healthcare industry, both here and abroad, driven by inescapable demographics and changes in the new insurance legal framework,” Martin noted in the news release.