Here we go again. Land & Buildings Investment Management LLC is stirring up the pot with shareholders yet again after meeting with several members of Brookdale Senior Living’s board in what appears to be a very friendly meeting. Everyone would like Brookdale’s share price to be much higher than it is, and Land and Buildings is still pursuing the concept of spinning out the owned real estate assets into a new REIT using the RIDEA structure. But in a new twist, they want the best properties spun out into this REIT.
They claim that it would produce $1.00 per share of cash flow (adjusted funds from operations), and that the market multiple on that would be in the mid to high teens, according to comparable REITs. That would effectively mean a doubling of the current value of Brookdale. And, shareholders would benefit as Brookdale improves upon operations, the extra cash flow of which would be retained by the REIT and available for distribution to shareholders in its dividend.
All of this sounds great, and the valuation may be true. But then what happens to operator Brookdale? It is left with its leased portfolio, the worst owned assets, its existing management contracts plus the new one with the newly created REIT. Brookdale’s other landlords would not be happy, and may start looking for other tenants either at renewal or before the leases are up. Land & Buildings gratuitously refers to the remaining owned real estate as “opportunistic,” improving them and then monetizing them upon stabilization. If it is that easy, why not throw them into the new REIT as well and benefit from the improved cash flow?
If all shareholders want is a short-term return, meaning a return now, then this may be the best, or only, way to go. But there is no guarantee that the new REIT will perform in the market as hoped for, and there is certainly no guarantee that the operating Brookdale will perform at all. We understand that shareholders feel burned by what has happened to Brookdale’s share price in the past several years.
But all we can say is that some of them made a very naïve investment without fully understanding the dynamics of the seniors housing sector and betting that management would sell the company or assets. Neither happened, and while the company did try to sell itself, the price kept on going lower as the operating conditions deteriorated. This was not in the playbook. To put it another way, they all made a bad investment and are looking for any way to salvage as much as possible. We don’t blame them, and we would probably be reacting the same way. But we didn’t make the investment, even when it went below $7 per share, tempting as that was.
Putting legal, tax and structural issues aside (easy for us to do), we suspect that the board was playing nice and really does not want to split off the best owned real estate into a REIT. They are shareholders as well and may benefit financially from such a move, but they are also thinking about what is best for the company as a whole, including their employees and residents.
We believe that it will be a long road to recovery for the company remaining as it is, and while there would be much to write about and analyze if such a split up were to occur, we just don’t think the board and management want to see it happen. The main thing we want to see happen is a significant further reduction in the size of the company, but that will take several years to accomplish, and it is doubtful management sees that as a real goal. Time will tell, but shareholders don’t want to wait.
