Activist Shareholder Again Pressures Brookdale on OpCo/PropCo Split

Land & Buildings is again pushing the nation’s largest senior living operator to consider splitting into an operating company and a real estate ownership company, and Brookdale re-affirmed that it has no intention of doing so.

The Stamford, Connecticut-based real estate investment firm on Tuesday released yet another open letter to the shareholders of Brookdale Senior Living (NYSE: BKD). The letter comes just days after Land & Buildings pledged to nominate former HCP (NYSE: HCP) CEO and Chairman Jay Flaherty to Brookdale’s board of directors. Land & Buildings will also nominate to the board its own founder and chief investment officer (CIO), Jonathan Litt.

The crux of Litt’s argument is that the Brentwood, Tennessee-based senior living owner and operator has done little to maximize value for its shareholders since Brookdale named Cindy Baier CEO and Lee Wielansky chairman of the board last February. More aggressive measures, including an OpCo/PropCo split, are needed if the company wants to grow its share price, he said.

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“Brookdale’s total shareholder return has consistently underperformed relative to proxy peers, healthcare REITs, and the broad market over the trailing 10-year, five-year, three-year, and one-year time periods,” Litt wrote in the open letter. “We are deeply disappointed and fault a lack of urgency on the part of the company, having not sought to maximize value for all shareholders through an asset monetization program since the majority of leases were restructured more than a year ago.”

Land & Buildings recently tapped Green Street Advisors to value Brookdale and its real estate as well as comment on the feasibility of undertaking a PropCo/OpCo split.

In its preliminary analysis, Green Street found that the REIT’s net asset value is above its current share price, and that there may be viable OpCo/PropCo structures that could boost share values up to double what they are now.

“We believe the company’s prior concerns about a REIT structure can be straightforwardly addressed while creating substantial value for shareholders,” Litt wrote. “In fact, the case for a REIT structure or other strategic options for the real estate has only strengthened over the past six to 12 months, as Brookdale’s share price is lower, healthcare REIT share prices are higher and trading at significant premiums to NAV and interest rates have moved sharply down.”

Brookdale’s investment committee should work with Green Street Advisors, including by giving it access to the company’s books and records, Litt continued.

Brookdale has 844 communities spread throughout the U.S., and Land & Buildings held approximately 2.17% of the REIT’s stock as of March 31.

OpCo/PropCo row

Litt has repeatedly urged the company to split into two parts, with one dedicated to operations and the other focused on property ownership — an arrangement otherwise known as an OpCo/PropCo.

But while Brookdale weighed Litt’s proposal, the provider ultimately ruled out an OpCo/PropCo split earlier this year.

“We do not believe that an OpCo/PropCo transaction is advisable to pursue at this time, as it likely wouldn’t create additional shareholder value,” Baier said during a Feb. 14 earnings call. “A separation would result in an operating company with uncertain viability and a single operating PropCo REIT that is unlikely to trade well due to key structural deficiencies.”

Brookdale reaffirmed Baier’s comments Tuesday and again took the prospect of an OpCo/PropCo split off the table, citing a previous analysis its three-member investment committee undertook with the help of an undisclosed independent advisory firm recommended by Land & Buildings.

“Based on this review, and as discussed in our February 2019 earnings call, we determined, at the unanimous recommendation of the investment committee and with the agreement of the advisory firm, that undertaking an OpCo/PropCo transaction would be unlikely to generate additional value for Brookdale shareholders,” the company noted Tuesday.

Brookdale touted the fact that it had implemented some of Land & Buildings’ previous recommendations, such as when it appointed Marcus Bromley as an independent director of the board in 2017. The REIT also has refreshed its board in recent years, with overhauls to its corporate governance and, soon, it will have just one director who has served more than five years.

Still, those moves didn’t go far enough to satisfy Land & Buildings.

“Recent steps taken by the company to enhance governance have, in our view, been reactionary and in direct response to our strident criticisms as well as our director nomination, including an accelerated de-staggering of the board (which the Company initially resisted and fell well short of our expectations) and two recent resignations by long-tenured Brookdale directors,” Litt’s letter read. “We are concerned these actions, and potential future actions, are a means to entrenchment as opposed to genuine positive change.”

A major turning point for Brookdale, and the senior living industry as whole, occurred when the company acquired rival Emeritus Corp. in a 2014 mega-deal. But Brookdale’s shares have slumped since then, over the course of a troubled integration with Emeritus and industry headwinds such as oversupply in certain markets. And while the company is making headway on its ongoing turnaround plan, its long-term success remains uncertain.

Brookdale shares fell roughly 1.5% to $7.95 by the time the markets closed Tuesday.

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