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Brookdale You Are Breaking My Heart

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"The Confessions of a Discouraged Shareholder"(I am not a very big shareholder, but a shareholder none the less). 

I write this with a mildy gloomy heart and some trepidation.

I have had a tiny bit of interaction with Andy Smith, the CEO of Brookdale and I like him. I have many many friends and acquaintances who work for Brookdale and whom I like and respect. I have great admiration for the way Brookdale is innovating and looking for new and better ways to serve residents.

Brookdale Management Gets Pushed Around (or maybe this is what they want)

Several weeks ago I wrote about how Sandell Management, an investment company that has a history of purchasing shares of a company, then pushing management and the board of directors around with goal of creating a big short-term profit, set their sights on Brookdale.

Broken HeartIn March Tom Sandell announced that as the owner of around 1.5% of the company shares they wanted Brookdale to spin off the rest of their real estate assets to a newly formed REIT, with the goal of increasing shareholder value by perhaps as much as $15 per share. He also wanted to appoint three new directors to the board and make some significant changes to the governance of the company.

In the article I linked to above I listed four reasons why the Sandell proposal is a bad idea. The April 24 announcement by Brookdale that they have appointed 2 of the three directors Sandell proposed,   hints that Brookdale will travel the path of spinning off all of their real estate to either a new REIT or perhaps more likely one or more of the REITS they are currently working with.  Correction:  Only one of the new directors was suggested by Sandell, the other was someone who had already been under consideration by Brookdale.

Why I Am Discouraged

I should start by saying that maybe Brookdale polled the major shareholders and figured out that if the hostile Sandell proposal went to a vote at the annual meeting, the Sandell proposal would win . . . though I am doubtful that would have happened. (It is also possible that this comprimise averted a proxy fight and Brookdale has no inention of bowing to the wishes of Sandell.)

These changes that Brookdale management has agreed to do no seem to be viewed as being particularly happy making for the general shareholder population. On April 23, 2015 the day before the big announcement the closing share price was $36.74. The next day, the day of the announcement, it jumped to $37.33. Today May 1, 2015 as I am writing this ,Friday morning, the price is $35.98.  (Because I was chicken to publish this article while I was at the ALFA conference last week, I need to note that today May 12, 2015 the price remains essentially the same.)

While I care about short, medium, and long-term share prices I think top leadership must take a long view with respect to increasing shareholder value. 

THIS IS NOT WHAT SANDELL CARES ABOUT.

History suggests that if Sandell get’s his way and the hoped for value increase results, he will sell his shares and go hunting for the next company to push around. He will have gotten what he wanted, which is money.  For him Brookdale is just another company . . . like a restaurant chain, or computer maker, or retail store.

This is a problem because senior living is not just another company. It is a sector that cares for older people who have complex, often hard to manage, needs. The care is largely provided by individuals who are making only a tiny bit more than they would if they were on welfare.

This is important because, as Steve Monroe of The Senior Care Investor points out in his one minute video of April 28, a spin-off of assets will ultimately mean higher costs to the company in the form of lease payments to the new owners of those assets.

This means less wiggle room if the economy falters (which it always does at some point); if there are occupancy challenges or if costs increase faster than rents.

If things were to go bad for Brookdale it would go bad for the whole industry. It would make people more skeptical and fearful of senior living communities and could very well invite federal regulation.  Most importantly it would be bad for a whole bunch of frail elders and near minimum wage workers.

Lament over,

Steve Moran

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