Brookdale Activist Shareholder Pushes Proposed OpCo/PropCo Split

One of Brookdale Senior Living’s (NYSE: BKD) most vocal investors has weighed in on its previously reported proposal to split the company into a real estate investment trust (REIT) and an operator.

Stamford, Connecticut-based investment management firm Land & Buildings on Monday released an open letter to Brookdale’s shareholders detailing a recent meeting with members of Brookdale’s board of directors and management regarding ways to unlock the company’s real estate value.

“The discussion was productive, and several interesting perspectives surfaced,” Land & Buildings Founder and CIO Jonathan Litt wrote in the letter. “We left the conversation with a strong conviction that structural and tax issues involved in such a path can be overcome.”

Litt called on Brookdale to adopt an arrangement sometimes known as an “OpCo/PropCo,” in which the senior living company would create a REIT election for its properties and a separate public company for its management business. Many other companies have undertaken similar REIT conversions in the past, including Marriott’s (NYSE:MAR) split from Host Hotels (NYSE: HST) and Vici Properties’ (NYSE: VICI) spin-off from Caesars Entertainment (Nasdaq: CZR) in 2017. On the senior housing side, one relatively recent example is The Ensign Group spinning-off CareTrust REIT in 2014.

Under Litt’s plan, the Brookdale operating company would consist of the manager and the company’s ancillary services, such as its home health care division. The REIT, meanwhile, would likely operate under a REIT Investment Diversification and Empowerment Act (RIDEA) structure, and could bring in other senior living operators in addition to Brookdale. The new REIT would also own the “highest quality, most ideally-located” properties in the company’s current portfolio, allowing it to maintain a deleveraged balance sheet.

“Fellow shareholders, we urge you to reach out to management and the board to voice your opinions about the potential strategic options Brookdale may pursue with respect to its real estate,” Litt wrote.

Bringing in additional operators to take over some Brookdale buildings could address one critique of this plan, which is that a spin-off REIT would have an undiversified portfolio. It’s a point that Dana Hambly, an analyst with Stephens, made to Senior Housing News last month, after rumors of this plan first surfaced in the press.

“I am not sure what the potential tax bill to shareholders would be if BKD tried an OpCo/PropCo, but I’m guessing it complicates this strategy,” Hambly told SHN last month. “Also, one would have to consider the value of the OpCo. It would likely have an onerous capital structure and rent expense consuming most or all of cash flow. This would clearly hurt the OpCo valuation, and I’d think that it would also negatively impact the REIT (OpCo) valuation as it would have a single, struggling tenant.”

But Litt is confident in the plan’s merits. Overall, the OpCo/PropCo split could generate approximately $1 per share of recurring cash flow, and position the company to grow in 2020 and beyond, Litt wrote in Monday’s letter. A Brookdale REIT could also possibly trade at double the current BKD share price, he said, citing the fact that some other health care REITs trade in mid- to high-teen AFFO multiples.

“Improving the operations at Brookdale remains key to enhancing value, and we are highly encouraged that Brookdale reached out to us and leading real estate advisors to explore ways to maximize value for all shareholders,” Litt wrote.

Brookdale didn’t weigh in on the specifics of Litt’s plan in a statement emailed to SHN.

“We welcome feedback from all shareholders, but as a matter of policy, do not comment on individual interactions,” the statement read. “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. We are executing our turnaround strategy to drive operational improvements and position Brookdale for long-term success, and we will continue to carefully evaluate options for increasing shareholder value.”

The positive tone is somewhat a change for Litt, who in September vented his frustration that Brookdale’s management was only doing “the bare minimum to appease shareholders.” In the past, the Land & Buildings founder and activist investor has urged Brookdale to unlock its real estate value through sales. And he’s not the only one with this idea, as Macquarie Investment Management in November also wrote an open letter to Brookdale shareholders calling on the company to consider selling its owned assets.

Written by Tim Regan