Although Diversicare Health and a few others may disagree, it is not always a bad thing to have an activist shareholder or two as investors in your company. They can keep you on your toes, force you to look at options to enhance value that you may not be considering, and their actions often result in publicity for an “undervalued” stock that may bring other shareholders in, which should help in driving the price up.
Diversicare Health is a small company, with a stock market capitalization of around $70 million. It has been growing, but mostly with new leases which did not need much capital to acquire. That is good news, at least on the capital side. Currently, about 19% of the skilled nursing beds are owned and 81% are leased, for a total of 8,550.
On September 11, shareholder Osmium Partners sent a letter to Diversicare board members explaining why the company should be worth between $17 and $25 per share, and not the $9.91 at the time the letter was delivered. The letter apparently had some impact on the market, as the share price jumped by 16% over the next three weeks. Part way there is better than no way.
One of Osmium Partners’ solutions to drive a higher price is to raise the annual dividend from $0.22 per share to $1.00 per share, taking the yield from 2.0% to 8.7%. While we are sure that would attract investors, since that yield would be higher than most of the healthcare REITs, we are not so sure that would be a good use of capital for a company that is trying to grow. Great for shareholders in the short term, but not so great for shareholders who want a long-term play. And it would certainly tie the hands of management who would lose just over $5.0 million of annual cash with the higher payout.
Osmium also did the ubiquitous “sum-of-the-parts” analysis, valuing the leased beds at $10,000 per bed (low case) and the owned beds at $80,000 per bed (low case). This derives a value of $16.95 per share after deducting debt, and a value of $29.77 per share if the leased beds are worth $15,000 per bed and the owned beds $110,000 per bed. These are not pie in the sky values in today’s market, but Osmium misses the point in terms of what has happened in the public market.
Investors have learned from Brookdale Senior Living and Capital Senior Living that, like it or not, the value of the assets on your balance sheet currently bear little relationship to the value of the company as a whole. And the asset values on the balance sheet have been higher than the company as a whole for a while. That is because of the investment dysfunction between the private market (buying real estate assets) and the public equity market for seniors housing and care companies. And it just drives activist investors nuts because they do not want to accept the dysfunction as something that can’t be altered.
Osmium also did a reasonable “funds from operations analysis,” a discounted cash flow analysis, and a simple debt paydown analysis, all of which resulted in share values between $18 and $23, and up to $33 a share in five years in one analysis. The problem is that the public market is not valuing the sector like this, and no one is quite sure how the market is valuing various companies. Otherwise, prices would be higher. And prices for companies such as Brookdale hit recent 52-week lows, and that is not a good sign. So, an immediate fix does not seem in the cards, but if Diversicare continues to grow, and can get some attention from the analyst community, its share price will eventually get there. Where “there” is can be debated.
