At this point, all we can say is that there have been a lot of pissed off shareholders of Capital Senior Living, and not just this year. It goes back several years when the stock price was just over $27 ($416 in today’s post-split equivalent price) and the market was riding high in general. Shareholders thought management and the board should take advantage of the environment and sell. The rest, of course, is history.
Companies were being sold at premium values, such as the sale of Emeritus to Brookdale Senior Living (which never should have happened). And later on, the 49% interest in Enlivant sold to Sabra Health Care REIT nearly $200,000 per unit. Cap Senior’s assets were much better. The market was on fire, and if there was a time to sell, that was it. It was not a secret that a few headwinds were gaining strength, such as the labor problem as well as excessive development, all of which were brought up on these pages way before the pandemic hit. That just made a deteriorating situation far worse.
The then-CEO Larry Cohen had little interest in selling early on, and like most CEOs, he believed in his company and its future. But we are sure he could have been persuaded if the board wanted to go in that direction. He stood to gain more than most from a sale since he owned more than one million shares, so in that sense, his financial interests were very much aligned with shareholders. But he also believed that the value would continue to rise as the company grew and did better. Every CEO believes that. If they didn’t, they probably shouldn’t be the CEO.
Like most CEOs, he knew the company, and the senior living industry, far better than the members of his board, so they relied on his judgment. But the board had a fiduciary responsibility to help guide management, ask the hard questions, and maybe do the unpopular. The question is, did they do any of this? Cohen took a lot of heat for not selling the company, but he is only one person and a lot of others could have pushed a deal through. After Arbiter Partners came on the board a little more than four years ago, what influence did they have? Because their basis in the stock was about $15 (pre-split), were they arguing against a sale at a lower price because their paper loss would become a real loss? We may never know.
What we do know is that most of the board members today, making decisions on the future, were on the board as the stock tanked amid a deteriorating operating environment. From 2014 through today, they basically could have done something to stop everyone’s investment from dropping to nearly zero. If they didn’t make the right decisions four or five years ago, why should shareholders believe they are making the right ones today? And where was the current CEO, Kim Lodi, at these board meetings? It would be nice to know what she thought back when values were high. And then with Larry Cohen’s departure as CEO, did they think they had the crystal ball answers and could fix the problems? Yes, they got rid of expensive leases, which was the right thing to do, but we never really saw much else, and then the pandemic hit.
As the stock price started to tumble, and there were growing calls to sell while they could, the board did very little. We had heard of offers coming in during the 2018 to 2019 period, but nothing happened. Cohen watched as the largest part of his net worth tumbled as well. Hindsight is always great, and in this case, one can make many arguments along with the brutal plunge in value as to why and when they should have sold the company. But it didn’t happen, and the value dropped 90%.
One of the problems with public companies is that the board, management and shareholders are not always aligned. This can especially be true when activist shareholders get involved, whether actually on the board or through their proxies. They have only one goal, and that is to maximize their investment, and they are usually the largest shareholder in the company. But in the case of Capital Senior Living, they also sat around and watched their investment fall to practically zero.
We are speaking of Arbiter Partners and their 13% interest in the company, and they have been on the board for four years now. Some other investors, activist or not, from five and six years ago have already departed, and glad they gave up. At the end of 2018, Peter Martin of JMP Securities issued an investment report where he concluded that “Activists should force a sale of the company.” The share price was $6.76 at the time ($101.40 post-split), but no one listened, or maybe they listened, but no one acted. They all should have, if not earlier.
For now, Arbiter has aligned themselves with management in the recap proposal from Conversant Capital, most likely because they will do anything to avoid the stain of a bankruptcy filing on their reputation. They screwed up, and they know it, and they will never come close to recovering their investment, no matter what the outcome of the current recap proposal.
But some funny things have been happening. In early August, as the share price started to drop again, someone was snapping them up. The obvious one was Ortelius Advisors, the thorn in management’s side this summer as they launched a proxy fight to stop the Conversant deal from going through, using its Pangea Ventures. From August 5th through August 10th, they purchased 118,902 shares at prices between $24 and $26 per share. In fact, since the beginning of the year, they have purchased more than 275,000 shares, with about 70% of them well below $30 per share. The bottom line is that they are the only activist shareholder that has a profitable position in the company. They could get out with a $1.5 million profit. Except they can’t, because any kind of selling like that would tank the stock.
Our guess is that they are teaming up with another large shareholder, Siget, LLC (also using Silk Partners and PF Investors, among other names). They have a more than 15% share of Cap Senior and added about 35,000 shares in early August at prices between $24 and $31 per share. Their overall position, however, is still at a hefty loss, and they can’t be happy with anything going on at Cap Senior. So, if they are of the mind of Ortelius Advisors, between them they most likely control about 30% (if not more) and need shareholders with just 20% to stop the recap. That percentage seems to be dropping by the week as they add to their holdings. That is doable.
Stopping the recap, which still may be difficult, is one thing, but to convince on-the-fence shareholders to vote no they have to have an alternative plan. We have yet to see one, other than vague talk about providing financing relief for short-term problems. If Ortelius and Siget really believe that Cap Senior has a good future, they should team up and offer a better PIPE solution, one that does not dilute the other common shareholders as much as the Conversant deal does. Even though Ortelius’ investment in Cap Senior is in the black, the dilution that would come with the recap would obviously set them back. And perhaps Conversant would listen to them and re-structure their current recap proposal and include them. Hope springs eternal.
The other thing that has been nagging us is the process to find a solution, run by Morgan Stanley, which, by the way, at the same time was in the mix with the acquisition of New Senior Investment Group by Ventas, where all parties seem to be happy. On November 24, 2020, Cap Senior engaged Morgan Stanley to assist in reviewing various strategic alternatives. A year earlier Morgan had worked with management to see if there was a financing solution. Was this always the goal, and not a sale? Who knows? But there were plenty of opportunities for a sale along the way.
The investment bank contacted 33 potential investors for a possible transaction that could range from a private placement to an acquisition of the entire company. Of this group, 25 executed non-disclosure agreements and engaged in due diligence of some sort, and by March 23 only three made proposals. By mid-May, two of the bidders dropped out, leaving just Conversant.
An industry friend quipped to us that Cap Senior should have hired Newmark since they would have a better handle on which PE funds and other institutional investors were looking for a platform acquisition or investment. They certainly are more day-to-day in the sector than the big investment banks. It is sort of like who Ventas hired to sell its Eclipse Senior Living portfolio. We have heard that Eastdil Secured is running that process, and while it is a fine company, when was the last time they completed a major seniors housing deal? Your guess is as good as ours. Maybe when Lisa Widmier ran the seniors housing group there years (and years) ago?
The situation at Cap Senior is very fluid, but the very near-term liquidity crunch should have been solved with the temporary loan from Conversant as part of the agreement. Meanwhile, the shareholder base continues to turn over, although at a slower rate, and the Delta variant continues to spread, which could slow the census recovery across the board. That may influence the outcome if operating results and census start to deteriorate. Stay tuned.
