Activist shareholder Land & Buildings is again making its case that Brookdale Senior Living (NYSE: BKD) should split into an operating company and a real estate investment trust (REIT) — an arrangement commonly referred to as an “OpCo/PropCo.”
Land & Buildings on Tuesday shared its latest open letter to Brookdale shareholders, decrying the senior living operator’s relationship with the Stamford, Connecticut-based real estate investment firm. In addition arguing for the OpCo/PropCo, Land & Buildings has pledged to nominate to Brookdale’s board of directors former HCP (NYSE: HCP) CEO and Chairman Jay Flaherty and its own founder and chief investment officer (CIO), Jonathan Litt.
“They have demonstrated a lack of willingness to meaningfully engage with Land & Buildings or its director nominees around how to potentially reverse this half-decade-long trend of underperformance,” read the letter, which was signed by Litt.
Land & Buildings previously worked with the advisory and consulting arm of Green Street Advisors to value Brookdale and its real estate as well as comment on the feasibility of undertaking a PropCo/OpCo split. That analysis — which Land & Buildings included in its letter — found that an OpCo/PropCo Brookdale could add up to a combined total of $13.60 per share, a roughly 70% increase over Brookdale’s current share price of just over $8.
That analysis assumes that Brookdale’s owned real estate is worth $5.6 billion. Brookdale has a total portfolio of with 809 communities, and outright owns the underlying real estate for 336. The Green Street valuation is based on an analysis of other senior housing transactions, the quality of the senior housing portfolios of publicly traded REITs, and a price-per-unit evaluation of Brookdale’s portfolio. However, Green Street lacked data such as unit count and type for “a meaningful number” of Brookdale properties for the price-per-unit calculation, and so gave more weight to the other values.
Brookdale CEO Cindy Baier doesn’t see eye-to-eye with Land & Buildings, and called the analysis behind its OpCo/PropCo proposal “fundamentally flawed” during the company’s second-quarter earnings call last week. Baier also cited previous consultations with independent financial advisory firms BoA Merrill Lynch and Morgan Stanley, which found an OpCo/PropCo arrangement would be “imprudent” if enacted.
“There were fundamental flaws in [the Green Street advisory group’s] theoretical assessment of a PropCo/OpCo structure,” Baier said during the Aug. 6 earnings call. “Those flaws include disregard of numerous critical, practical and market considerations and execution risk and the use of unrealistic assumptions.”
Land & Buildings contrasted Baier’s statement with what it perceives as an overall lack of urgency from Brookdale to change its “troubling status quo.”
“One action Brookdale did take was to state on its recent earnings call that creating a separate Brookdale REIT alongside a Brookdale operator would not create value and that Green Street Advisors’ analysis contained ‘fundamental flaws,’” the open letter continued. “Green Street is the preeminent independent research and advisory firm concentrating on the commercial real estate industry.”
Reached Tuesday, Brookdale said it appreciated the opportunity to review the Green Street advisory group’s analysis.
“We were pleased to report a strong set of second-quarter earnings and we remain focused on continuing to provide our residents with high-quality care and service to energize our employees and maintain the clear momentum in our business,” the company told Senior Housing News in a statement. “At Brookdale, we appreciate and are always open to constructive feedback from all of our shareholders toward a common goal of sustained value creation.”
Land & Buildings isn’t the first Brookdale shareholder to suggest an OpCo/PropCo split for the company. In 2015, Sandell Asset Management Corp. pushed the company to explore a similar arrangement. The saga ultimately ended without a real estate spin-off, however, and Sandell sold its stake in the company the following year.
The argument for OpCo/PropCo
The advantages to adopting an OpCo/PropCo structure are numerous, and the Green Street findings are “compelling,” Land & Buildings said.
For the PropCo, Land & Buildings envisions a company valued at $10.30 per share, with an all-RIDEA senior housing portfolio and net leverage similar to comparable other publicly traded healthcare REITs. The OpCo, which could be valued at $3.30 per share, would have no corporate debt and would earn fees from managing the PropCo’s assets under a RIDEA structure.
This structure would make the Brookdale operating company the “first of its kind in the senior housing segment,” the Green Street analysis stated.
As for concerns that the PropCo would suffer from a lack of tenant diversification, the analysis argued that CareTrust REIT (Nasdaq: CTRE) had only a single operator after spinning off from Ensign Corp. (Nasdaq: ENSG), and was able to perform financially while diversifying over time.
“One thing we want to make absolutely clear is that this proxy contest is not about whether a PropCo/OpCo structure is best for Brookdale,” Litt wrote. “This contest is a referendum on the company’s historical underperformance and whether the directors in place today are best equipped to reverse this trend and properly evaluate the range of strategic and operational opportunities available to maximize value for all Brookdale shareholders.”