Activist Investor Reportedly Urges Brookdale to Split Into REIT, Operating Company

One of Brookdale Senior Living’s (NYSE: BKD) most vocal investors has reportedly told management they should split the company into two parts, with one dedicated to real estate ownership and the other focused on operations.

Activist investor Jonathan Litt, who heads up Stamford, Connecticut-based investment management firm Land & Buildings, told Brookdale management the company should split into a real estate investment trust (REIT) and a senior living operator, according to a new report from Bloomberg citing “people familiar with the matter.”

Litt reportedly told Brookdale Chairman Lee Wielansky and CEO Cindy Baier via teleconference that moving the company’s high-performing properties into a separate REIT would help the company boost its share price and position itself to cash in on future growth in the senior living industry. Under Litt’s apparent plan, the new operating company would also own some properties.

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The parties also reportedly discussed whether Brookdale should sell real estate in $500 million increments, as Litt has suggested previously. But no agreement was reached regarding either matter, according to Bloomberg.

Litt has in the past repeatedly urged Brookdale to unlock more value from its real estate, and has also accused the Brentwood, Tennessee-based company of doing “the bare minimum to appease shareholders.” And he’s not the only investor calling for more real estate sales. In November, Macquarie Investment Management wrote an open letter to Brookdale shareholders calling on the company to consider selling its owned assets.

Brookdale has over the past year disposed of 104 communities through sales and lease terminations, and is making progress on its goal of cutting 20% from its overall portfolio by 2021.

Brookdale declined to elaborate on the Bloomberg report, as the company doesn’t generally make public remarks about individual actions or shareholder requests.

“In a short period of time, Brookdale’s leadership team has made significant business and operational improvements at the company to deliver long-term value to stockholders,” the company said in a statement shared with Senior Housing News. “We are executing our turnaround strategy to drive operational improvements and position Brookdale for long-term success, and we remain committed to evaluate feedback from shareholders regarding potential opportunities to create shareholder value.”

Stephens Analyst Dana Hambly does not see Brookdale splitting into an operating company and a REIT — an arrangement sometimes referred to as an “OpCo/PropCo.”

“This was a popular strategy several years ago across multiple industries (health care and casinos, in particular) and something Brookdale likely considered at some point,” Hambly told Senior Housing News. “However, legislation passed in late 2015 that generally prohibits tax-free spin-offs from non-REIT entities. The last health care OpCo/PropCo transaction that I recall was The Ensign Group spinning-off CareTrust REIT in 2014.”

And there are other potential complications to such a strategy, such as capital structure and rent expense consuming most or all of cash flow of the new operating company, he added.

“This would clearly hurt the OpCo valuation,” Hambly explained. “And, I’d think that it would also negatively impact the REIT (OpCo) valuation as it would have a single, struggling tenant.”

Brookdale shares ended the day Friday up 2.4% at $8.55.

Written by Tim Regan

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