An activist shareholder in Brookdale Senior Living Inc. urged the company to sell its multibillion-dollar portfolio of senior living properties and convert to an asset-light management company.
Jonathan Litt, founder and chief investment officer of Land & Buildings Investment Management LLC, estimated the portfolio's value at $7 billion, or roughly $21 per share, based on the capitalization rates of recent seniors housing sales by NorthStar Realty Finance Corp., Welltower Inc. and HCP Inc.
In all, Litt contended in a letter to shareholders, Brookdale is worth at least $25 per share, 100% more than the company's Dec. 19 closing share price of $12.72. As of the third quarter, Land & Buildings reported ownership of 573,034 Brookdale common shares, or 0.30% of the company's outstanding stock.
Since the company's July 2014 merger with Emeritus Corp., "shareholders have dealt with a multi-year string of strategic, operational, and merger-related disappointments," Litt said. In private discussions, he added, company leadership acknowledged that Brookdale's share-price decline of more than 40% since the fourth quarter of 2015 is a "substantial change in circumstances" since the company's last strategic review.
Asked to respond to Litt's proposals, a company spokeswoman told S&P Global Market Intelligence: “Brookdale’s board and management appreciate and value constructive input from shareholders, consistent with our goal of increasing shareholder value. Brookdale’s board is carefully evaluating Land and Buildings' letter and the company remains open to continuing our dialogue with Land and Buildings.”
Brookdale said in July that it was selling 44 properties in a deal valued at $252.5 million. In 2015, a different activist shareholder, Sandell Asset Management Corp., called on Brookdale to spin off its owned real estate into a REIT, but then backed off the demand after Brookdale agreed to leadership and corporate governance changes. In the ensuing months, the company replaced its CFO and chief operating officer, announced the departure of its president and appointed a new board chairman.
Litt called on Brookdale to emulate the asset-light management model of the hotel brand company Marriott International Inc., which has divested owned real estate in recent years. Marriott's stock now trades at roughly 21x the company's expected 2017 earnings, while Brookdale trades at 5.7x cash flow, including the value of its owned real estate, Litt said.
The company should "work aggressively" with its landlords, including Welltower, HCP and Ventas Inc., to terminate its real estate leases and convert all assets it can run efficiently to management contracts, Litt said, calling the company's leases with the healthcare REITs "outdated and a relic of the past."