Capital Senior Living (NYSE: CSU) is being publicly pressured by a shareholder to take steps that could lead to the sale of the company, one of the largest senior living providers in the country.
An investment management firm with a stake in the company has written a public letter urging CSU’s board of directors to act on opportunities to boost shareholder value, which may include selling to private equity investor or other strategic acquirer.
Lucus Advisors LLC Managing Member Schuster B. Tanger penned the letter, noting that Lucus Advisors—a 5.6% shareholder of CSU—has worked with CSU to improve its value and performance for longer than one year and determined the company has failed to “entertain organic solutions.”
“We have concluded, however, that the time has come for the Company to explore strategic initiatives and that ongoing private discussions will not bring about the necessary change,” the letter reads.
CSU did not immediately respond to inquiries from Senior Housing News.
Lucus Advisors’ most well-known offering Red Alder Master Fund, LP was recently involved with the sale of Ann Inc., a company more than triple the size of CSU, for a “hefty premium.” The firm believes its involvement in this transaction could benefit CSU.
In 2015, Dallas-based CSU reached a total resident capacity of 15,100, securing it as the ninth largest national senior housing provider. It’s current market capitalization is close to $631 million.
Given its size and performance, some analysts have speculated that a sale was likely a favorable option for CSU.
“People have speculated for years that CSU is a seller,” John Ransom, analyst at Raymond James & Associates Inc., told SHN. “Their policy to own real estate is good because it gives them to option to do OpCo-PropCo. I think it would be a nice deal for a real estate investment trust (REIT) or other strategic buyer.”
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While the letter told CSU to consider selling the entire company, a deal with a REIT is also an option in addition to private equity interest.
Tanger also pointed to a bullish market for senior housing, including a favorable cap rate environment, low interest rates, strong institutional demand for yield assets and stable cash-flowing real estate. These factors could also influence a sale. However, under these conditions, CSU’s stock value has remained undervalued, with the S&P 500 index outperforming the company twofold.
“We do not believe CSU has lived up to its potential and has instead delivered subpar returns to its shareholders,” the letter reads.
With healthy margins and huge gains in occupancy levels, Lucus Advisors believes CSU could gain back its share value by seeking an investment bank and take the company out of the public market.
“As more time goes by, we do not believe that the public market is the best channel for value realization,” Tanger wrote. “…Therefore, we urge the Board to immediately retain a nationally recognized investment bank to explore strategic alternatives to maximize shareholder value.”
Lucus Advisors anticipates that CSU shares could be worth between $32 and $35 per share to a third party acquirer. The currently stock price is hovering around $21 per share.
“We believe the Board has a unique opportunity now to increase shareholder value by exploring strategic alternatives, including a sale of the Company,” Tanger wrote. “Despite your best efforts and improved operational performance, the public markets are not affording the Company credit for your pipeline, portfolio and management business. It is now time for the Board to act with urgency to unlock CSU’s potential and we ask that you immediately retain a nationally recognized investment back to being this process.”
The letter concluded with an expectation of a response from CSU by January 15, 2016.