Short seller targets Healthcare Trust of America over earnings concerns

HTA website

Healthcare Trust of America, Inc.   is a real estate investment trust with a track record of consistent returns in a growth industry with demographics working in its favor. The stock has an “overweight” rating by analysts, according to the FactSet-compiled consensus. And in May, it got a little plug from MarketWatch when an analyst we interviewed noted it on his “buy” list.

But in June, HTA became the target of a short seller – an investor who’s identified an intrinsic flaw with a company that means its stock is likely to fall. Spruce Point Capital Management, a firm that takes what its founder and chief investment officer, Ben Axler, calls a “forensic financial viewpoint,” issued a report critical of the company’s management, accounting and auditing, and its returns.

HTA shares fell 1.2% on Friday and dropped about 5% over the last month.

The idea central to Spruce Point’s thesis on HTA is familiar to those who follow the REIT space. MarketWatch’s Francine McKenna wrote back in 2016 that Brixmor Property Group discovered that its executives had “smoothed” its income to achieve those consistent returns craved by investors via a measurement known as “same property net operating income” or SPNOI.

Spruce Point says that “HTA is likely manipulating” this same metric. “We have conducted a statistical analysis of quarterly SPNOI performance, and believe it is highly likely that this measure is being managed in a manner to show consistent results,” the firm wrote. “In our analysis, we compared HTA’s quarterly SPNOI results with its Medical Office Building peers. HTA demonstrates the least volatility (i.e. lowest standard deviation) by a significant margin.”

SprucePoint also noted that HTA is constantly shifting its definition of which properties are included in calculating this metric, in order to maintain consistent growth — in the range of 2% to 3%, for years. That’s important because SPNOI is the most important measurement in determining compensation for management. SPNOI is not calculated according to Generally Accepted Accounting Principles, the accounting standard all public companies must follow.

As Axler told MarketWatch, “the numbers that they’re producing are highly irregular relative to the industry. It would be really attractive if you could consistently grow with no volatility. That’s something REIT investors want. So why haven’t other competitors been able to replicate it?”

Spruce Point’s report also highlights HTA’s management. The company’s CEO and chairman has a history of presiding over companies that have failed, in one way or another, including by bankruptcies and liquidations.

For his part, Axler has an impressive track record. As a 2016 Barron’s profile noted, of his 26 published short calls, “Two of those companies were later charged with fraud and delisted. Three others left the public markets. Sixteen CEOs or chief financial officers resigned. And this was during a bull run when the market doubled.”

HTA on Friday issued a press release defending its track record. It cited data from Revista, a company it calls “the leading data provider in the medical office sector.” HTA’s chief financial officer, Robert Milligan, sits on the Revista advisory board.

It said it uses a same store definition that is consistent with other REITs in the sector — its board reviews the same-store property pool, adds properties once owned for a full 5 quarters and only excluded properties it intends to sell in the near term.

The company added the sector is known for defensive and consistent performance.

The company declined to comment to MarketWatch.