A Brookdale Senior Living Real Estate Spinoff Seems Inevitable

NEW YORK (TheStreet) -- Brookdale Senior Living  (BKD),  the largest U.S. assisted living facility owner and operator, may have a deadline to sell or spin off its real estate to shareholders in the form of a Real Estate Investment Trust: March 2, 2016. That's the earliest activist shareholders can nominate director candidates to the board of the Brentwood, Tenn.-based company.

Sounds like a long time from now, but company officials should take it seriously. According to people familiar with the situation, activist fund manager Tom Sandell will nominate a short-slate of three dissident candidates to Brookdale's board if the stock is still "languishing" and no significant moves are made before then to monetize the company's real estate portfolio. And it looks as if he has enough support to make good on the threat.

The Deal has obtained a letter written to Brookdale in October from Sandell, who manages Sandell Asset Management out of New York, urging it to take some action with its property holdings. After no response, Sandell escalated and launched a public insurgency in February suggesting that Brookdale's stock price could be worth roughly $49 if it spins off its real estate to shareholders in the form of a REIT. Brookdale shares were trading under $37 Wednesday afternoon.

In addition, the election of three dissident director candidates would effectively put control of the nine-person board in Sandell's hands. That's partly because he has already essentially succeeded in putting two REIT-friendly directors on the board and its key "investment committee" as part of an April settlement. In that deal, Sandell installed one of his candidates -- Lee Wielansky, a REIT expert -- and the company added Mark Parrell -- described by the Brookdale as having "real estate, capital markets and M&A" experience. Parrell is widely regarded as REIT-focused and would likely support the kind of change Sandell is urging.

Another key part of the settlement involved changes to Brookdale's investment committee charter to allow the panel to work with the company's outside advisers independently from the rest of the board. CS Capital Advisors, a health care REIT and service adviser, and Bank of America Merrill Lynch, provide Brookdale with financial and real estate assistance. Goldman Sachs, was hired separately to help to defend Brookdale against Sandell.

A May 20 letter from Glenview Capital, which holds a 6.3% passive stake in Brookdale, suggests that the investment committee may advocate steps to monetize Brookdale's real estate. In the letter, which was addressed to its investors and obtained by The Deal, the fund noted that in the last two quarters Brookdale has added three new members to its board with "extensive real estate experience" and that in the past month the company has "revamped" the four-member investment committee with the "sole focus" of assisting the board in its review of the company's real estate portfolio. "We believe that BKD has a range of attractive options to monetize the real estate," the letter said.

The presence of REIT-related experts on the board indicates that the company may take action to head off a 2016 proxy fight. Another possibility is that the whole of Brookdale's real estate or its properties and a stake in the operating business could be sold to a health care REIT.

People familiar with Sandell point out that two of the company's main rivals -- and partners in some cases -- HCP  (HCP) and Ventas  (VTR) -- are  interested in acquiring Brookdale's remaining real estate but that both are giving the company time to complete the integration of a recent acquisition, Emeritus Senior Living, which was purchased last year for $2.8 billion.

For HCP and Ventas, an acquisition of Brookdale or its assets would prevent the formation of a new rival. Any move by Brookdale to spin off its massive real estate holdings into a free-standing REIT would create new competition for HCP and Ventas in the health care REIT industry, people familiar with Sandell argue.

Brookdale and HCP are partners in a joint venture that owns and operates a collection of communities.  Ventas owns more than 100 properties operated by Brookdale. A spokesman for Ventas declined to comment about whether it would be interested in Brookdale properties. HCP did not return calls. A Brookdale spokeswoman declined to comment.

Another major factor suggesting that a real estate-related move is in the cards for Brookdale is the transformation of the company's investor base since the campaign was officially launched in February. Sandell only owns a small stake -- about 1.4%. But Brookdale has become a breeding ground for insurgent investors and other shareholders who are likely to back the insurgent in a future proxy fight.

Jana Partners' Barry Rosenstein reported last month that he owns a 4.8% stake in Brookdale. Rosenstein and Sandell appeared together two years in a row on a panel at the annual SALT hedge fund conference, giving them ample opportunity to discuss Brookdale. In addition, Glenview Capital, Scopia Capital and Senator Investment Group hold substantial stakes, suggesting even more support for Sandell. Senator, which has a 5.7% passive Brookdale stake, is an event-driven long-short fund and people familiar with the firm suggest it would be likely to back Sandell.

Bottom line: If no real estate deal is consummated in the coming months, one will be after Sandell succeeds at taking over Brookdale's board next year.

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