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Insider Buying in a Merger With a Dissenting Activist Investor – Insider Weekends

  • June 11, 2023

Ever so often, we stumble across a company that combines two or more of our event-driven strategies, and this week that company was Diversified Healthcare Trust (DHC), a healthcare REIT that specializes in life sciences, medical and senior living properties.

What is unique about DHC is that it is currently in the process of merging with another REIT, Office Properties Income Trust (OPI), an activity investor is trying to get a better price for the deal and an insider has started buying in earnest over the last few days.

DHC OPI Merger

Insider buying in an active M&A situation is highly unusual but we have seen it in the past with Biohaven (BHVN), a situation we discussed in May 2022 here. The insider of Biohaven purchased shares right before the deal with Pfizer closed because he saw value in the spinoff and was spot on with his purchase.

In this situation with DHC, the insider purchases by a director of the company do not make much sense on the surface, especially considering the spread on this all stock deal is a whopping negative 56%. In other words, if the merger of DHC and OPI were to close in a few days and the price of OPI remains unchanged, anyone purchasing DHC tomorrow would lose more than 50% of their investment when DHC stock gets converted to OPI stock.

DHC Insider Purchases
DHC Insider Purchases

Digging deeper into the situation helped us understand what was going on with this situation. The key to why Director Adam D. Portnoy keeps purchasing shares of DHC even as the stock price runs up, lies in his other role, as Chief Executive Officer of the RMR Group.

The RMR Group is an alternative asset management company with over $30 billion in AUM that specializes in commercial real estate and other similar businesses. The RMR Group currently manages a few different companies, two of which are DHC and OPI. Due to his exposure to both companies through The RMR Group, Mr. Portnoy has a vested interest in the merger closing on current terms.

This deal essentially seeks to combine OPI, which is currently struggling due to a challenging macro environment for office properties, with DHC, a company that does not appear to be managed very well. To make matters worse, DHC faces significant near-term debt maturities in the next two year and introduced “going concern” language when it reported first quarter 2023 results. The merger would save DHC from bankruptcy, while giving OPI larger scale to refinancing its maturing debt at more favorable rates. OPI faces its own near-term significant debt maturities as you can see below.

OPI Debt Maturities
OPI Debt Maturities

As the merger agreement sets forth, while 42% of the combined entity will be owned by DHC shareholders, the new company will be managed by OPI’s management team. While OPI’s funds from operations (FFO) have been declining and the REIT slashed its annualized dividend from $2.20 per share to a more sustainable $1 per share, it appears to be the better managed REIT based on the occupancy rate of its portfolio and the funds it continues to generate from operations.

From May 30th to June 9th, Mr. Portnoy steadily increased his ownership of DHC from roughly 3 million shares to over 17 million, representing an ownership stake of roughly 7% of the company.

Mr. Portnoy’s new found enthusiasm for DHC stock stems from the appearance of an activist investor, Flat Footed, which has $752 million in AUM and believes the merger massively undervalued DHC.  In a letter released by Flat Footed, an entity that owns about 9% of DHC’s shares, the firm not only questioned the terms of the agreement but also announced their intent to vote against the merger.

Flat Footed believes the intrinsic value of DHC is closer to $9 a share – significantly above the $2.66 price DHC is currently trading at and multiples above the merger price of $1.16. One interesting thing to note from Flat Footed’s second letter is that the firm mentions an all-cash deal of $4 per share that DHC’s Board rejected just last year. Since its first letter, Flat Footed has increased its stake in DHC from roughly 7% to around 9% of the company – and it seems likely that the firm will soon become a 10% owner.

As of now, there seems to be two possible paths for DHC, both of which are bad for investors. If the merger was to close as expected in Q3 2023 and OPI’s stock price does not drop significantly, DHC shareholders will suffer from large loss due to the negative spread. However, if the deal were to not go through, then DHC is at risk of bankruptcy. Furthermore, DHC is no longer profitable – the company actually recorded a net loss of roughly $52 million for Q1 2023, a sharp decrease from their net income of around $240 million in Q1 2022. We understand that with REITs, FFO is more important than net income due to non-cash expenses like depreciation.

For the multitude of reasons outlined above, we will not be participating in this merger situation, despite the added component of a series of insider purchases and the presence of an activist investor. If anything, investors may consider shorting DHC – as both possible paths for the company appear to be terrible for shareholders.

The risk is that in the interim both Mr. Portnoy and Flat Footed keep purchasing shares on the open market and drive the price higher. The risk of DHC renegotiating the merger price higher exists but the probability is low. The addition of a “going concern” clause was a brilliant move by RMR as it is likely to sway firms like ISS and Glass Lewis to recommend that institutional investors vote in favor of a merger.

If healthcare REITs are of great interest, the Healthcare Realty (HR) opportunity we discussed in our last Buyback Wednesdays article offers a much better opportunity compared to DHC.

Welcome to edition 686 of Insider Weekends. Insider buying increased last week with insiders purchasing $72.87 million of stock compared to $63.86 million in the week prior. Selling also increased to $1.51 billion compared to $835.36 million in the week prior.

Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by the total insider purchases that week. The adjusted ratio for last week went up to 20.75. In other words, insiders sold almost 21 times as much stock as they purchased. This week, the Sell/Buy ratio was unfavorable, compared to the prior week when the ratio stood at 13.08.

Notable Insider Buys:

1. Diversified Healthcare Trust (DHC): $1.69

Director Adam D. Portnoy acquired 11,541,844 shares of this diversified holding company, paying $2.12 per share for a total amount of $24.51 million. These shares were purchased indirectly by a trust.

You can view the list of recent insider transactions for Diversified Healthcare Trust here.

P/E: N/AForward P/E: N/AIndustry P/E: 26.85
P/S: 0.42Price/Book: 0.22EV/EBITDA: 22.61
Market Cap: $637.54MAvg. Daily Volume: 4,231,75352 Week Range: $0.61 – $2.76

2. TMC the metals company Inc. (TMC): $0.8829

Director Andrei Karkar acquired 3,997,519 shares of this battery-grade metals explorer, paying $0.75 per share for a total amount of $2.99 million. These shares were purchased indirectly by ERAS Capital LLC.

You can view the list of recent insider transactions for TMC the metals company Inc. here.

P/E: N/AForward P/E: -14.72Industry P/E: 13.94
P/S: N/APrice/Book: 4.46EV/EBITDA: -1.32
Market Cap: $247.78MAvg. Daily Volume: 1,022,10752 Week Range: $0.511 – $1.61

3. StepStone Group Inc. (STEP): $24.95

Head of Strategy Michael I. McCabe acquired 95,000 shares of this investment firm, paying $23.31 per share for a total amount of $2.21 million. Mr. McCabe increased his stake by 110.01% to 181,357 shares with this purchase.

You can view the list of recent insider transactions for StepStone Group Inc. here.

P/E: N/AForward P/E: 13.86Industry P/E: 9.43
P/S: -40.51Price/Book: 2.03EV/EBITDA: 43.95
Market Cap: $2.74BAvg. Daily Volume: 288,73352 Week Range: $19.83 – $32.12

4. Topgolf Callaway Brands Corp. (MODG): $19.64

Director Adebayo O. Ogunlesi acquired 100,000 shares of this golf equipment company, paying $19.45 per share for a total amount of $1.94 million. These shares were purchased indirectly by Raynham I LLC.

You can view the list of recent insider transactions for Topgolf Callaway Brands Corp. here.

P/E: 37.77Forward P/E: 22.07Industry P/E: 16.50
P/S: 0.88Price/Book: 0.96EV/EBITDA: 16.2
Market Cap: $3.65BAvg. Daily Volume: 2,367,47752 Week Range: $16.13 – $25.96

5. DISH Network Corporation (DISH): $6.55

Director James DeFranco acquired 300,000 shares of DISH Network, paying $6.00 per share for a total amount of $1.8 million. Mr. DeFranco increased his stake by 6462.73% to 304,642 shares with this purchase.

You can view the list of recent insider transactions for DISH Network Corporation here.

P/E: 1.88Forward P/E: 29.77Industry P/E: 18.87
P/S: 0.21Price/Book: 0.19EV/EBITDA: 10.18
Market Cap: $3.49BAvg. Daily Volume: 11,074,20352 Week Range: $5.91 – $20.35

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Walmart Inc. (WMT): $153.09

Director Robson S. Walton sold 891,340 shares of Walmart for $150.08, generating $133.78 million from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for Walmart Inc. here.

P/E: 36.11Forward P/E: 24.15Industry P/E: 22.17
P/S: 0.66Price/Book: 5.7EV/EBITDA: 12.93
Market Cap: $412.25BAvg. Daily Volume: 6,492,87752 Week Range: $117.9 – $154.64

2. Ares Management Corporation (ARES): $92.22

Shares of this asset  management company were sold by 2 insiders:

  • Co-Founder, CEO and President Michael J. Arougheti sold 500,000 shares for $90.76, generating $45.38 million from the sale. These shares were sold indirectly by Atticus Enterprises LLC.
  • Chief Mktg. & Strategy Officer Ryan Berry sold 20,000 shares for $88.67, generating $1.77 million from the sale.

You can view the list of recent insider transactions for Ares Management Corporation here.

P/E: 80.89Forward P/E: 18.12Industry P/E: 9.43
P/S: 8.79Price/Book: 10EV/EBITDA: 29.9
Market Cap: $27.73BAvg. Daily Volume: 1,062,52852 Week Range: $53.15 – $92.75

3. Medpace Holdings, Inc. (MEDP): $207.86

CEO August J. Troendle sold 169,005 shares of this clinical research-based drug and medical device development services provider for $222.15, generating $37.54 million from the sale. These shares were purchased indirectly by Medpace Investors.

You can view the list of recent insider transactions for Medpace Holdings, Inc. here.

P/E: 26.18Forward P/E: 22.23Industry P/E: 26.63
P/S: 4.06Price/Book: 18.29EV/EBITDA: 21.59
Market Cap: $6.34BAvg. Daily Volume: 348,51952 Week Range: $130.79 – $241.475

4. Cadre Holdings, Inc. (CDRE): $20.07

CEO and Chairman Warren B. Kanders sold 1,725,000 shares of this safety and survivability equipment manufacturer for $19.00, generating $32.78 million from the sale. These shares were sold indirectly by Kanders SAF, LLC.

You can view the list of recent insider transactions for Cadre Holdings, Inc. here.

P/E: 30.88Forward P/E: 20.07Industry P/E: 19.3
P/S: 1.62Price/Book: 4.45EV/EBITDA: 12.67
Market Cap: $754.35MAvg. Daily Volume: 95,85552 Week Range: $16.58 – $31.5

5. NVIDIA Corporation (NVDA): $387.7

Shares of NVIDIA were sold by 3 insiders:

  • Director Harvey C. Jones sold 70,205 shares for $405.00, generating $28.43 million from the sale. These shares were sold indirectly by a trust.
  • Director Dawn E. Hudson sold 3,500 shares for $384.03, generating $1.34 million from the sale.
  • Director John Dabiri sold 383 shares for $384.89, generating $147,413 from the sale.

You can view the list of recent insider transactions for NVIDIA Corporation here.

P/E: 195.81Forward P/E: 40.26Industry P/E: 25.15
P/S: 37.01Price/Book: 39.1EV/EBITDA: 156.71
Market Cap: $957.62BAvg. Daily Volume: 47,541,65052 Week Range: $108.13 – $419.38

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.

Disclaimer:  I hold a long position in HR. Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.