An investment management firm that late last year publicly pushed for the sale of Capital Senior Living Corp. (NYSE: CSU) is now putting even more pressure on the company.
The firm has gone as far as to suggest a sale to real estate investment trust HCP, Inc. (NYSE: HCP)—or a company like it.
In a public letter issued on Dec. 10, 2015, Red Alder Master Fund LP, an offering of Lucus Advisors LLC, said CSU should explore a sale. The Dallas-based senior living company has not brought on a qualified financial advisor to explore strategic alternatives, despite Red Alder’s request that it do so by Jan. 15.
In response, Red Alder on Monday published an investor presentation extensively detailing what it describes as “opportunities to realize shareholder value” at Capital Senior Living.
Such a sale transaction could propel CSU to more than $30 per share, Red Alder says. As of Jan. 22, CSU traded at $16.82 per share.
Capital Senior Living had not responded to SHN’s requests for comment as of press time.
In its presentation, the activist shareholder emphasizes the “deep” discount at which CSU trades on both a relative and an intrinsic value basis, and concludes that the best way to unlock this value is through a sale of the company.
According to Red Alder, bigger, better capitalized buyers — such as private equity firms, strategic acquirers and family offices — would appreciate CSU’s value more than the public markets.
“Given the apparent disconnect between the CSU management and public market views of the company’s growth potential, the question arises whether CSU is fully maximizing its value by operating as a public company,” Red Alder says in the presentation.
CSU’s performance has been improving, the presentation notes, but investors have not rewarded it for these gains, implying that they lack confidence in management.
For example, Capital Senior Living reported 20% growth in adjusted cash flow from operations between the third quarter of 2014 and the third quarter of 2015, and a 7.3% growth in total revenue during that period. However, the company’s stock price did not increase much as a result of this performance, the presentation notes. Nor do investors seem moved by a CFFO growth algorithm that company leader’s laid out at an Investor Day in October, it states.
One shortcoming of CEO and Vice Chairman Larry Cohen and the company’s other leadership has been a failure to highlight the value of its owned real estate, including by declining to share cap rates, according to the Red Alder document. Red Alder also raises questions about leaders’ own faith CSU.
For instance, although the stock price of CSU has fallen almost 12% since Jan. 1, 2013, only one of the “named executive officers” and directors in its 2015 Proxy statement has purchased stock in the open market over that period — and only two of these individuals have done so in the past five years, Red Alder says.
“This is a strongly negative signal – if those most knowledgeable as to CSU’s business prospects aren’t buying at these undervalued levels, why would other investors believe in its story enough to do so?” the presentation asks.
Red Alder also claims Capital Senior Living would be an attractive asset for the right buyer, given that it has a high percentage of owned properties and because it is a relatively digestible size, unlike Emeritus Corp. In fact, several key factors work to distinguish a potential CSU acquisition from Brookdale Senior Living’s (NYSE: BKD) 2014 acquisition of Emeritus, Red Alder’s argument goes.
Red Alder has previously indicated a real estate sale to a REIT could be a good strategy for CSU. In the new presentation, the firm specifically shares its models for what an acquisition by HCP Inc. would look like.
Despite the fact analyst estimates for CSU are conservative through 2017, the synergy value that could be unlocked through a strategic acquisition by HCP or one of its peers implies substantial potential accretion to consensus estimates for Adjusted Funds from Operation, according to the analysis. Though HCP is used for illustrative purposes, the Red Alder analysis indicates similar accretion for other comparable possible buyers.
Red Alder also specifically calls for CSU to hire a nationally recognized investment bank to explore a sale to “a third-party that appreciates its true value.” Additionally, the shareholder requests the creation of a special committee of independent directors with financial backgrounds.
CSU currently operates 121 communities in geographically concentrated regions, with the capacity to serve over 15,400 residents, the presentation notes. Additionally, 55% of the company’s operations are clustered in three states, with 80% in the top nine.
CSU benefits from bespoke acquisition opportunities and a reduced cost basis, given the relative concentration of its operations in lower-cost secondary markets, Red Alder says in its presentation.
Also, CSU is located in favorable markets, relatively insulated from oversupply issues.
Lucus Advisors, through its affiliated funds and managed accounts, owns more than 6% of Capital Senior Living.
Capital Senior Living is not the only publicly traded senior living company to come under pressure as share prices have slid over the last year. Brookdale has been pressured to spin off its real estate, and Five Star was approached by a company, Senior Star, with an offer to buy 33 properties.
Written by Mary Kate Nelson