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Activists at retirees’ gate mean gains for Brookdale

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(Bloomberg) — Shareholders of America’s largest retirement-home operator may reap a 25 percent gain should the company heed an activist investor’s calls for a breakup.

Brookdale Senior Living Inc. (NYSE:BKD) surged the most in almost two years to about $37 on Feb. 6 after Sandell Asset Management Corp. urged the $6.7 billion company to spin off its owned properties into a real estate investment trust (REIT). Even after the pop, the senior-housing operator is trading below the value of its assets, estimated by analysts at about $46 a share, on average. Sandell puts the valuation even higher, at $49 a share.

“The equity price of Brookdale is not necessarily reflecting the actual value of the real estate,” Jeffrey Langbaum of Bloomberg Intelligence said in a phone interview. “It makes sense that someone would propose they find a way to monetize it.”

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With commercial property values on the rise, activists have pushed corporate targets from Pinnacle Entertainment Inc. to Darden Restaurants Inc. and Dillard’s Inc. to explore REITs. Because the investment trusts pay little to no taxes, the move may be particularly logical for Brookdale, which will soon lose some tax benefits that are set to expire, said Brian Tanquilut of Jefferies.

Sandell is also seeking to revamp the Brookdale board by adding new members with more real estate expertise and making changes to its corporate governance policies. Brookdale said it had met with the activist investor and that its board and management were considering the suggestions.

Representatives for Sandell and Brookdale declined to comment further.

REIT appeal

REITs invest in properties and mortgages and receive tax benefits in exchange for distributing the majority of their income as dividends. Brookdale operates more than 1,100 senior living communities in 46 states and in July completed a takeover of Emeritus Corp.

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“With them owning a third of their real estate, it’s a big enough portfolio that you can allot enough value to move the stock if you do something with it,” Tanquilut said in a phone interview.

It’s not the simplest process. Creating a REIT spinoff could affect the company’s credit profile, limit its ability to make changes at the properties and require the approval of the landlords from which it rents other real estate, Tanquilut said. Those are all challenges Brookdale would have to resolve if it moved ahead with a split, he said.

Other options

A Brookdale REIT also may not command the same multiple as bigger, more diversified peers, Langbaum of Bloomberg Intelligence said. An alternative is to sell the properties to an already established REIT and then lease them back, he said. Ventas Inc., HCP Inc. and Health Care REIT Inc. are all looking to grow by adding more real estate and could be buyers of Brookdale’s assets, according to Langbaum.

“Why not just sell your real estate to them and let them pay market price for it and monetize it that way? That’s probably an easier execution,” he said.

A third option is for someone to buy all of Brookdale and then potentially spin off the operating company instead, said Frank Morgan, a Nashville-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada. After missing out on Emeritus, the big health-care REITs may settle for a takeover of Emeritus’ acquirer.

Brookdale needs to do something to unlock the significant value embedded in its real estate portfolio, Sandell Chief Executive Officer Tom Sandell, said in the Feb. 6 statement.