The world’s largest asset management firm has purchased a significant claim in New Senior Investment Group (NYSE: SNR), but the purchase may not contribute much to an unfolding story that some believe could end with an outright sale of the real estate investment trust.
In the final days of January 2016, BlackRock Inc., which has more than $4.5 trillion in assets under management, purchased a 7.4% share in New Senior.
The BlackRock investment does not signal that New Senior will come under additional shareholder pressure to sell—in fact, the investment fits BlackRock’s profile and appears to be part of a health care buying spree that the firm has embarked on in recent months.
“It’s not unusual, since BlackRock is one of the largest owners of REITs,” says Brad Thomas, senior analyst at iREIT Forbes and editor of the Forbes Real Estate Investor. “As a passive portfolio manager, BlackRock is passive owner. So the exposure with New Senior is market weighted, meaning that the new purchase was not a tactical purchase. …I would love to see a larger institution purchase shares in New Senior with a dedicated strategy.”
The asset management firm has been focused lately on health care stocks and became a shareholder in at least 14 health care companies last year.
Despite being a mostly passive shareholder, BackRock CEO Larry Fink has also been a champion of long-term solutions for recapturing shareholder value. In an open letter to CEOs last spring, Fink urged executives to invest in assets and their own people, rather than seeking short-term value in stock buybacks.
“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Fink wrote in the letter. “In the face of these pressures, more and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increase, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
Fink’s views are in direct contrast to another activist shareholder that took issue with New Senior’s external management structure. Last September, a shareholder in New Senior wrote in a public letter to the board that the REIT’s declining share price resulted in a “fiduciary duty” of the chairman to take action. New Senior’s management structure should be internalized in order to recapture share value or pursue alternative strategies, urged John Levin of New York-based hedge fund Levin Capital Strategies.
In response to that letter, the REIT announced a $100 million stock buyback plan in December 2015.
As one of only handful of pure-play REITs within the senior housing and health care space, New Senior was thrust into the spotlight last fall when a shareholder called out the company for its declining stock price and external management structure. Since its original public listing as a spin-off from Newcastle Investment Corp. (NYSE: NCT), share value has dropped more than 50%.
As a smaller REIT within the health care space, the company has an advantage in being able to do smaller deals in addition to major acquisitions, CEO Susan Givens told Senior Housing News.
But the REIT has a number of risk factors, including high leverage, tenant concentration and its external management structure with an affiliate of Fortress Investment Group (NYSE: FIG), according to Thomas.
“They probably have the highest debt ratio of any of the REITs today and high tenant concentration,” Thomas tells SHN. “I still feel they are mispriced.”
Thomas has predicted that the company is a prime candidate to be sold, as its management has been unable to recoup shareholder value.
“I think this company is probably going to get sold,” says Thomas. “Internal management isn’t going to move the needle. I would not be surprised to see the company get acquired.”
However, the question of who the buyer would be remains open. A larger REIT, such as Chicago-based Ventas Inc. (NYSE: VTR) would make sense, Thomas says. But Ventas and its peers may not be in a great position to go after such a significant acquisition.
As the “Big Three” health care REITs have seen their share prices hammered over the last year, they may no longer have the leverage to acquire New Senior, says Thomas.
“To me, the writing is on the wall that New Senior is a very logical sale, but I don’t see a logical buyer,” he concludes.
New Senior’s stock price hovered under $9.50 during the first week of February, though the REIT recently came off a year of blockbuster acquisitions, including a $640 million portfolio purchased from Holiday Retirement.
“I think 2016 will be a good year,” Thomas says of the REIT space generally. “The big question for me is New Senior. It screams buyer for me, but I just don’t know who that buyer is. Pure play [REITs] will provide pretty sustainable footprints going forward.”