Brookdale Prodded to Spin Off Real Estate [Updated]

Sandell Asset Management Corp., a shareholder of Brookdale Senior Living (NYSE: BKD), is pushing the industry’s largest senior housing provider to spin off its real estate into a real estate investment trust (REIT).

The New York-based firm today released a letter and a white paper to Brookdale, requesting the separation of the Brentwood, Tennessee-based provider’s owned real estate portfolio into a REIT, and the distribution of this entity via a tax-free spin off to shareholders, as well as a revamp of the company’s Board in order to draw upon much needed real estate and REIT expertise.

By doing so, Sandell believes these actions could unlock an “intrinsic value” of $49 per share for Brookdale.

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“We are disappointed that the Board has not committed to unlocking the significant value we believe is embedded in the Company’s owned real estate portfolio, especially with senior living real estate valuations at all-time highs,” said Sandell CEO Tom Sandell in a written statement. “By their own admission, management has classified its owned portfolio as having great ‘scarcity’ value given its scale and desirability.”

Sandell assures that the separation of Brookdale’s owned real estate into a PropCo is “undoubtedly value-enhancing,” and the company says it’s frustrated by Brookdale’s claim that it may not create the most value for shareholders.

The push from Sandell arrives the same week Brookdale issued its full-year and fourth quarter 2014 earnings, which revealed a net loss of $106.5 million, 0r $0.58 per share, attributable to common stockholders. As a result, the company reduced its 2015 Cash From Facility Operations (CFFO) per share to a range of $2.60 to $2.75.

“Furthermore, given the recent significant reduction in 2015 CFFO guidance, we are concerned about growing integration issues with respect to the Emeritus Corp. acquisition,” Sandell said. “We believe recent missteps require a complete review of the Company’s management and Board structures, and corporate governance practices.”

In response, Brookdale issued a statement today acknowledging Sandell’s request, reiterating that its Board of Directors and management team remain committed to acting in the best interests of the company and its shareholders.

“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,” the company said in a statement issued today. “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.”

Spinning-off the company’s real estate opens up “a whole set of complexities” about what the relationship is between it’s operations and real estate, according to comments made by Brookdale CEO Andy Smith during an earnings call with analysts Thursday morning.

“So the real estate has a value, and then the operating side of the business has a value. And you’ve got to make sure that you think if you were to do something structural, you have to make sure that you think that A plus B is worth more than the C you would get by keeping everything together,” Smith said. “That is a complex analysis.”

It is not surprising that Sandell is making the case for conversion on the company’s behalf as REIT conversions, while time-consuming and complex, can lead to the creation of significant shareholder value, said Kevin Tyler, analyst with Green Street Advisors.

“The publicly traded Big 3 health care REITs (i.e., Ventas, HCP and Health Care REIT), who have about 50% of their portfolios in senior housing properties, have share prices that significantly exceed net asset value,” Tyler told SHN in an email. “This is a sign that the marketplace is currently willing to pay a premium for these assets.”

Written by Jason Oliva

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