REIT Report: Sudden CEO change raises eyebrows

‘Management style’ blamed for Jay Flaherty’s abrupt departure from HCP Inc. 

By Murray W. Wolf

In an Oct. 3 news release, healthcare real estate investment trust (REIT) HCP Inc. (NYSE: HCP) announced that longtime chairman, president and CEO James F. “Jay” Flaherty III had been terminated. Lauralee Martin, a top executive with Jones Lang LaSalle (NYSE: JLL), was named president and CEO.

The surprise announcement left some securities analysts and investors concerned – and hungry for details.

“Something doesn’t feel right to us,” Citigroup analyst Emmanuel Korchman told the financial media, adding that the loss of Mr. Flaherty’s relationships could put HCP at a competitive disadvantage.

During a follow-up conference call later that morning, HCP’s newly named non-executive chairman, Michael McKee said: “This is not about a new direction or a new strategy, but it’s about leadership,” adding that the board had lost confidence in Mr. Flaherty’s management style.

Whatever that “management style” was, Mr. Flaherty enjoyed a successful run at HCP. A former investment banker, he was variously described by analysts as “whip-smart,” “a tough guy” and “a dealmaker,” and he helped HCP to become a top-performing REIT and an S&P 500 Index company. During his 11-year tenure, HCP’s market cap more than quadrupled to about $18 billion and its 10-year total return outpaced the S&P 500.

Given HCP’s strong performance under Mr. Flaherty, markets reacted predictably to his sudden and vaguely explained departure. HCP’s stock price fell 5.4 percent on the day of the announcement and dipped lower during the next couple of days. But, as of Oct. 25, HCP’s share price had more than recovered those losses.

During HCP’s third quarter (Q3) earnings conference call in late October, the firm assured securities analysts that the REIT had continued to deliver strong results during Q3 and, aside from a $26 million hit for “management transition-related costs” – primarily Mr. Flaherty’s severance package – it was meeting its financial goals and remained bullish about the future.

But analysts probed for more details about Mr. Flaherty’s abrupt departure and whether it signaled a change in strategy. Ms. Martin replied: “The board and Jay had a very different vision of the tone and standards of leadership that belong and are required at an S&P 500 company at the stature of HCP,” adding that there were no immediate plans to change strategy.

But if Mr. Flaherty’s departure was a matter of management style, why did it take more than a decade to figure that out?

“I think, style, you never quite know when it sort of hits you that it’s too much,” Ms. Martin replied. “I think I can say I was on the board of HCP for five years, most of the board much longer than I am – was. And in that time, we had four CFOs, three general counsels, two audit firms, I could go on. I mean, you never know what is finally, enough is enough. So there was no triggering event – (which) I think, is what everybody’s looking for.”

HCP hasn’t commented further, and efforts to reach Mr. Flaherty were unsuccessful.

Disclaimer: The author has no financial position in the companies mentioned and this article does not constitute an investment recommendation.