NEW YORK--(BUSINESS WIRE)--Sandell Asset Management Corp. (“Sandell”), a shareholder of Brookdale Senior Living Inc. (“BKD”, “Brookdale” or the “Company”) (NYSE: BKD), has publicly released a letter and White Paper (“Unlocking Shareholder Value at Brookdale Senior Living Inc.”) to the Board of Directors (the “Board”) of the Company to request: 1) the separation of BKD’s owned real estate portfolio into a Real Estate Investment Trust (“REIT”), and the distribution of this entity via a tax-free spin-off to shareholders (“PropCo”) and 2) in the face of recent management integration missteps, a revamp of the Board in order to enhance overall corporate governance, increase management accountability to shareholders and draw upon much needed real estate and REIT expertise. Sandell believes that these actions could unlock an intrinsic value of $49 per share for BKD.
Tom Sandell, CEO of Sandell, stated: “We are disappointed that the Board has not committed to unlocking the significant value we believe is embedded in the Company’s owned real estate portfolio, especially with senior living real estate valuations at all-time highs. By their own admission, management has classified its owned portfolio as having great ‘scarcity’ value given its scale and desirability.”
Mr. Sandell continued: “We believe the separation of the Company’s owned real estate into a PropCo is undoubtedly value-enhancing and have grown frustrated by the Board and managements claim that it ‘may not create the most value for shareholders’. We find this argument flawed and baseless given, what we believe to be based on our numerous conversations with other shareholders (the true owners of the Company) and the sell-side community, the overwhelming view that any action to surface the value of the owned real estate will unlock shareholder value. We firmly believe that PropCo and the remaining asset-light operating company (“OpCo”) will, in combination, be more highly valued than the Company in its current form. Both will be well-positioned with focused management teams and, given their tax-efficient structures, the most attractive acquisition currencies to consolidate the fragmented senior living industry.”
Mr. Sandell concluded: “Furthermore, given the recent significant reduction in 2015 CFFO guidance, we are concerned about growing integration issues with respect to the Emeritus Corp. (“ESC”) acquisition. We believe recent missteps require a complete review of the Company’s management and Board structures, and corporate governance practices.”
Based on Sandell’s analysis, Brookdale’s management structure and corporate governance are lacking in many respects including:
1) The considerable defense structure in place which, in our view, has diminished the voice of the shareholders;
2) The lack of direct real estate and REIT experience on the Board;
3) The limited number of what we view as truly ‘independent’ members who have not been tied to the Company and its previous acquisitions;
4) The questionable disclosure discrepancies between proxies of different years with respect to the same CEO compensation package; and
5) The potential for undue reliance on Board compensation for existing Board members.
The White Paper can be found at here, and the text of the letter is as follows:
February 6th, 2015
Board of Directors
Brookdale Senior Living Inc.
111 Westwood Place, Suite 400
Brentwood, Tennessee 37027
Ladies and Gentlemen:
As you know, we are shareholders of Brookdale Senior Living Inc. (“BKD” or the “Company”), as we see both significant real estate value as well as operational value in the business. We are again writing to the Board of Directors (“Board”) today as a result of what we believe is the growing disconnect between BKD’s share price and its intrinsic value, the majority of which, we believe, is a direct result of the Company's failure to surface the value of its owned real estate portfolio.
As we have pointed out in previous private correspondences, it has been over two years since CFO Mark Ohlendorf spoke at the Stephens Fall Investment Conference. At that conference Mr. Olendorf demonstrated an intimate knowledge of the potential structures that could be deployed to unlock the value of BKD’s owned real estate – including one structure (through indirect reference to the Sunrise Senior Living Inc. acquisition) that contemplated the potential acquisition of the Company and subsequent public spin-off of the management company back to shareholders. These comments stand in stark contrast to comments and intimations made over the past several months by management that the Company would now rather ‘own’ the real estate outright.
This change in tone is particularly worrisome as it comes at a time when the value of owned senior living real estate is near historic highs and cap rates near historic lows. In our view, the timing is ideal to commit to unlocking value of the Company’s valuable, owned real estate portfolio. Further, we believe these conflicting messages have called into question the credibility of management and the independence of its Board. These sentiments have led some investors with whom we have spoken over the past several months to classify BKD shares as ‘un-investable’ given ‘increasing agency costs’ as a new investment risk factor.
Therefore, we call on the Board to commit to separating the Company’s owned real estate portfolio into a REIT and distributing it to shareholders via tax a free spin-off (“PropCo”) – an action we believe is undeniably value-enhancing. We believe the PropCo and the remaining asset-light operating company (“OpCo”) will both be highly valued as rapid consolidators in the fragmented senior living industry with focused management teams and acquisition currencies.
The first step in the PropCo/OpCo process is to immediately file a request to receive a private letter ruling (“PLR”) from the Internal Revenue Service (“IRS”) in order to confirm operational and technical compliance with REIT requirements. Importantly, the Internal Revenue Service has recently directed its ‘Working Group,’ which was formed in mid-2013 and resolved mid-2014, to revise the real estate related PLR process and definitions for REIT conversions. The Working Group has now worked through many of the pending requests, and it is imperative that the Company make its PLR request as quickly as possible to get into the queue.
Furthermore, to provide better management oversight in light of the recent management integration missteps, we believe that the Board should enhance corporate governance and augment its current roster with at least two independent candidates who have direct experience in real estate and/or REITs. As detailed in the attached White Paper, we also believe that the current corporate governance structure is lacking and we call upon the Board to voluntarily enact changes to align practices with other industry leaders. We are particularly concerned with: 1) the considerable defense structure in place which, in our view, has diminished the voice of the shareholders, 2) the lack of direct real estate and REIT experience on the Board, 3) the limited number of what we view as truly ‘independent’ members who have not been tied to BKD and its previous acquisitions, 4) the questionable disclosure discrepancies between proxies of different years with respect to the same CEO compensation package and 5) the potential for undue reliance on Board compensation for existing Board members.
As noted in our White Paper, according to our analysis, using a tax efficient PropCo/OpCo structure, we calculate an intrinsic value of $49/share for BKD. Importantly, with ample capital deployment opportunities in its owned portfolio and largely private pay exposure, we believe that we may be conservative in our PropCo cap rate assumptions, as its NOI growth rate may be faster and more stable than its larger healthcare REIT competitors. Furthermore, we believe the opportunities for PropCo to use its low cost of capital to diversify its tenant base, consolidate the fragmented industry and truly become a leading healthcare REIT are, for all practical purposes, endless.
Lastly, despite our generally constructive dialog over the past several months, we have been particularly frustrated with the repeated assertion that this kind of transaction will not be value-enhancing. We believe that it is this viewpoint that has delayed serious consideration of the changes we have proposed.
As we have detailed in our white paper, we have justified our valuation by applying a 5.25%-5.50% capitalization rate to PropCo and a 10x-12x cash earnings multiple to the OpCo. The PropCo capitalization rates are well-within recent transaction comparables and ranges implied by the publicly traded healthcare REITs. The OpCo cash earnings multiples are, in our view, conservative for an entity that will be the premier operator of senior living and CCRC properties in the US with several unique characteristics including:
1) Desirable acquisition currency to grow rapidly both organically and through M&A in an industry with significant tailwinds and the potential for international expansion;
2) Motivated and focused management team;
3) Strong balance sheet paired with an asset-light structure; and
4) Low cash tax rates as a result of its large NOL balance.
As we have mentioned before, we have spoken to a number of our fellow shareholders and believe that the changes we have proposed will be welcomed.
Thomas E. Sandell
Chief Executive Officer
About Sandell Asset Management Corp.
Sandell Asset Management Corp. is a leading private, alternative asset management firm specializing in global corporate event-driven, multi-strategy investing with a strong focus on equity special situations and credit opportunities. Sandell Asset Management Corp. was founded in 1998 by Thomas E. Sandell and has offices in New York and London, including a global staff of investment professionals, traders and infrastructure specialists.
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