1) the separation of BKD’s owned real estate portfolio into a Real Estate Investment Trust (“REIT”), and the distribution of this entity via a tax-free spin-off to shareholders (“PropCo”) and
2) in the face of recent management integration missteps, a revamp of the Board in order to enhance overall corporate governance, increase management accountability to shareholders and draw upon much needed real estate and REIT expertise
The integration issues refer to the company’s acquisition of Emeritus which hasn’t gone as smoothly as planned. According to Mr. Sandell, following these simple steps will ‘unlock’ Brookdale’s true value of $49 per share, a significant premium to recent closing prices. Detailed support for that number can be found in the firm’s Brookdale White Paper, but they justified their value:
by applying a 5.25%-5.50% capitalization rate to PropCo and a 10x-12x cash earnings multiple to the OpCo. The PropCo capitalization rates are well-within recent transaction comparables and ranges implied by the publicly traded healthcare REITs. The OpCo cash earnings multiples are, in our view, conservative for an entity that will be the premier operator of senior living and CCRC properties in the US with several unique characteristics including:
1) Desirable acquisition currency to grow rapidly both organically and through M&A in an industry with significant tailwinds and the potential for international expansion;
2) Motivated and focused management team;
3) Strong balance sheet paired with an asset-light structure; and
4) Low cash tax rates as a result of its large NOL balance.
The public battle seems to have come about after company’s shift in tone regarding its real estate portfolio. Apparently, the company had once seemed more open to such a move, but recent comments implied a desire to own its real estate properties instead.
The company responded with its own letter shortly thereafter noting that the company is
committed to acting in the best interests of the Company and its shareholders. We regularly examine a wide range of strategic opportunities to enhance shareholder value and have a strong track record of taking decisive actions to achieve this important objective.We maintain a longstanding commitment to open dialogue with our shareholders, and, in that regard, we have met with and listened to the views of Sandell, as we would with any shareholder of Brookdale. Our Board and management are considering Sandell’s suggestions as we continue to execute our strategic plan and deliver on our priorities with the goal of driving significant value for all of our shareholders.
I didn’t see Brookdale listed amongst Sandell’s holdings in its most recent 13F, but I imagine the firm must own some stock to be going public like this and receiving a response from management.
Senior Housing News has a nice roundup of some of the response to this proposal.
Disclosure: Author holds no position in any stock mentioned.