A Look at One of Baupost's Smallest Equity Holdings

Is this health care business worth buying?

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Rupert Hargreaves
Apr 07, 2021
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Baupost Group's latest 13F filing, which detailed the hedge fund's equity positions at the end of 2020, shows

Seth Klarman (Trades, Portfolio)'s firm owned 44 different U.S. equities. The top five holdings accounted for around 50% of assets documented on the report. The largest holding was eBay Inc. (EBAY, Financial) with a 14.5% portfolio weight at the end of the year.

I should note at this point that 13F filings only show fund equity positions. They do not profile credit or cash holdings. What's more, these reports only highlight U.S. stock holdings.

So these reports should not be relied on for trading purposes and only provide an indication of the equities well-known investors own.

For example, Baupost's latest 13F contains details on $10.8 billion of stocks. However, we know the firm manages around $30 billion for clients.

Still, as noted above, these reports can be a great starting point for further research.

With that in mind, I wanted to take a look at a couple of Klarman's smaller equity holdings to see if there are any hidden gems in Baupost's portfolio that other investors might have overlooked.

Baupost's smaller equity holdings

With a 1.12% portfolio weight, one of the smallest holdings is Healthpeak Properties Inc. (

PEAK, Financial).

Baupost bought 4 million shares of this business in the third quarter of 2020. Shares were trading at an average price of around $27. Healthpeak is a diversified real estate investment trust, which invests in real estate serving the health care industry.

The company has a mixed track record of creating value for investors. Over the past six years, book value per share has declined from $20 in 2015 to $12.6 for 2020. Its dividend has also fallen.

From $2.26 per share in 2015, the payout was just $1.11 for 2020.

At a guess, I would say this is a recovery play. Healthpeak's property portfolio includes senior housing, which has struggled over the past 12 months. Senior housing income was down 5.8% year over year through the first nine months of 2020.

However, this makes up just 25% of the business. The other 75% comes from hospitals (5.5%), medical office buildings (31%) and medical research properties (38%). All of these segments reported net operating income growth last year.

As such, Healthpeak has several healthy operating divisions, but its struggling senior housing business seems to be holding the group back. This could change as we emerge from the pandemic.

Senior housing operators have struggled over the past 12 months, but the trends in place before the pandemic have not vanished. The aging baby boomer generation is not getting any younger, and demand for retirement housing will likely continue to grow in the years ahead.

Even though the company has repeatedly cut its dividend in the past several years, the stock still offers a 3.9% dividend yield. That looks attractive in the current interest rate environment and means investors will be paid to wait for the company's turnaround to take shape over the next few quarters and years.

Klarman could view this as a turnaround play, or it could be something else. I mentioned above 13F reports don't list credit investments. The guru has a reputation for picking up deeply discounted bonds as well as other assets. Baupost has hedged these positions in the past, and there's no guarantee the Healthpeak holding isn't part of another trade. This seems likely considering the small size of the position and the lack of any easily identifiable value catalyst on the horizon.

The stock also looks expensive compared to its current asset value. It is trading at a price-to-tangible book ratio of 2.8.

Still, there's a high chance Klarman can see something I'm missing.

Disclosure: The author owns no stocks mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.