Disgruntled senior living shareholders pushed two major providers to sell off the companies in part or whole this year, raising questions about market fundamentals while stock prices have remained undervalued.
Capital Senior Living Corp. (NYSE: CSU) was recently publicly pressured to explore a sale of the company by Lucus Advisors, a 5.6% shareholder in the company. The move prompted some comparisons to the activist shareholder situation facing Brookdale Senior Living (NYSE: BKD).
While CSU reported improved occupancy levels over the past year—as the company shifted to offer more assisted living by converting independent living units and bounced back from a weaker 2014—those changes have yet to be reflected in stock prices.
In early 2015, Sandell Asset Management Corp. sent a public letter to Brookdale, the nation’s largest senior housing provider. Tom Sandell, CEO of Sandell, urged Brookdale to sell its senior living real estate portfolio to a real estate investment trust (REIT) to unlock share value.
While the letter to CSU did not explicitly encourage an OpCo/PropCo deal, a deal with a REIT certainly is not off the table as far as Lucus Advisors is concerned, a source with close knowledge of the situation told Senior Housing News.
CSU holds a unique position in the senior housing space as an operator that owns the majority of its real estate. While Brookdale is the nation’s largest senior housing owner overall, CSU has the highest percentage of owned real estate among the largest owner/operators, according to CEO Larry Cohen.
If not a REIT, a private equity firm or other strategic buyer also would be a welcome suitor for Capital, according to the Lucus Advisors letter.
The Brookdale Shadow
Capital Senior Living’s issues trace back to its past troubles, but the fact that its improvement has yet to be reflected in its share prices might be due at least in part to a drag on the industry exerted by the behemoth, Brookdale.
With more than 1,100 facilities in its portfolio post-Emeritus acquisition, Brookdale’s sheer size and impact on the space has cast a shadow on the larger industry. Experts have noted that Brookdale’s rocky integration with Emeritus resulted in occupancy and revenue issues and negatively influenced stock prices, perhaps for the industry as a whole.
“Brookdale is the largest owner/operator of senior housing in the U.S., and they’ve had a fair amount of challenges with the integration of Emeritus,” Kevin Tyler, an analyst with Green Street Advisors, told Senior Housing News. “It has been a drag.”
A ‘Price for Everything’
Outside of Brookdale’s impact, shifting market fundamentals indicate that there could be more challenges ahead for shareholder confidence in the sector.
“The whole industry has come under the microscope because fundamentals have decelerated,” Tyler observed.
Particularly within assisted living, increased supply and higher rates of construction could be cause for concern.
“Supply has started to impact underlying fundamentals,” Tyler said. “Inventory growth has accelerated as developers continue to access cheap capital and new lenders enter from the multifamily space. Development pencils out very well because it is cheaper to put up a new property than to purchase one in many markets.”
In the third quarter of 2015, overall construction rates versus inventory climbed to 4.9%, according to data from the National Investment Center for Seniors Housing & Care (NIC). For assisted living, construction reached 7.4%.
“Fundamentals have been healthy for a number of years, with high occupancy levels and decent growth, but we’re getting to a point in the cycle where REITs and other investors are thinking twice about laying out capital,” Tyler told SHN.
However, CSU seems undeterred by supply concerns. Speaking at the Oppenheimer 26th Annual Health Care Conference in December, Cohen stated that the company is coming off the year with nearly $180 million in acquisitions and has significant plans to continue converting units to accommodate higher acuity residents. While the company stated no plans to sell, some industry experts say the market might be ripe for a deal if CSU can continue improving.
“Analysts this fall seemed [to think] CSU was on a path to hit higher FFO,” John Ransom, analyst with Raymond James & Associates, Inc., told SHN. “My guess is CSU wants to put up some good numbers for a while and see if the market supports that. Now, they would be selling at a point where the market is probably punishing them, but fundamentals are pointing up for this company in the short-term and they want to see what will happen. There’s a price for everything.”
CSU stock prices took a hit over the last week, dropping nearly 8.79% as of Monday, Dec. 14.
Capital Senior Living did not respond to inquiries from Senior Housing News. Lucas Advisors’ letter requested a response from the senior living provider by January 15, 2016.
Written by Amy Baxter