A shareholder has taken private equity giant Fortress Investment Group (NYSE: FIG) to task over New Senior Investment Group (NYSE: SNR), a publicly traded health care real estate investment trust focused on private pay senior housing, which has seen its stock price drop dramatically since its inception last year.
John Levin of Levin Capital Strategies, a New York-based hedge fund, sent a public letter to the Chairman of the Board and members of the Board of Directors of SNR, noting that the share price of the REIT has declined 46.1% since the date the company became a spin off from Newcastle Investment Corp (NYSE: NCT).
With a 5.18% stake in New Senior, Levin compared this decline to the MSCI US REIT Index drop of just 1.2% and the S&P 500 decline of 5.5% and noted that the issue with the stock valuation was related to management structure.
In his letter, Levin specifically voiced there is a conflict of interest between the external management company, which is an affiliate of Fortress Investment Group, a private equity investment firm. Wesley Edens is Chairman of the Board of New Senior and Fortress Investment Group.
“The external management structure is one that can lead to serious conflicts of interest,” Levin wrote. “While we have no issue with management at any company succeeding alongside of shareholders, we believe the structure currently in place between New Senior and Fortress leaves the interests of shareholders and management significantly misaligned.”
The management structure is such that Fortress receives a 1.5% gross equity management fee and a quarterly incentive compensation of nearly 25% of excess return above 10% on equity, according to a recently released note from Stifel, upon initiating coverage of the REIT. SNR also reimburses Fortress for non-mangement related costs, such as stock issuance costs and certain transaction costs, according to Stifel.
Levin also took issue with second quarter 2015 New Senior equity offerings underwritten by Bank of America Merril Lynch, Citigroup and Morgan Stanley to purchase properties from Holiday Retirement, which is a privately-held Fortress affiliate. Subsequently, the New Senior stock price dropped, and it had already been trading well below Levin’s estimated Net Asset Value (NAV) when the transaction was executed.
Levin wrote this equity offering was “mistimed and inopportune,” as well as “ extremely troubling.”
New Senior purchased 28 properties from Holiday for $640 million in August. Its three largest transactions since inception have been from Fortress affiliated entities, Stifel reports.
Levin argued that the two positions create a conflict that does not play out well for public shareholders.
“As the Chairman of each of these companies, you have a fiduciary duty to their public shareholders, and that duty conflicts with your role at Fortress and specifically with Fortress’ desire to raise capital in these vehicles to increase its fee streams,” Levin penned in the letter. “Setting targets for capital raising may or may not be helpful in getting Fortress’ stock price up, but it sends a terrible message to the shareholders of companies that are externally managed by Fortress.”
Levin emphasized that his firm holds New Senior CEO Susan Givens and her management team in “high regard.” He called for a meeting with Fortress to discuss the issues raised in his letter, and potential remedies or paths forward, including re-aligning Fortress’ compensation to stock price performance, a path toward internalizing New Senior management, Board composition and independence.
If the gap between market price and NAV persists, Levin floated stock buyback and potential liquidation as options to be discussed.
Written by Amy Baxter