There is a company called Sandell Management that has recently acquired a substantial number of shares in Brookdale Senior Living. They are a firm that has a long history of pushing companies into making substantive changes in how they do business with the goal of improving shareholder value.

Bad IdeaFirst a disclosure: I do own a teeny tiny number of shares of Brookdale stock in an IRA.

There is a company called Sandell Management that has recently acquired a substantial number of shares in Brookdale Senior Living. They are a firm that has a long history of pushing companies into making substantive changes in how they do business with the goal of improving shareholder value.  

The Proposition

In the case of Brookdale, Tom Sandell the leader of the company, wants them to do a tax-free spinoff of all of their owned real estate senior living communities (about 42% of the total number of units) to a REIT. He is also pushing to replace 3 existing board members who are up for reelection with 3 new members that favor his position. Finally  he wants changes in governance and executive compensation.

At the time of this writing, the Brookdale shares are selling in the $37-$38 price. Sandell believes this spinoff could result in an increased shareholder value in the neighborhood of $49 a share; allocated at $34 per share for the property ownership and $15 for the remaining operating company. 

The Danger Zone

At first blush this would seem to be a big win for shareholders and, in fact, that could, in the short-term, be true. It is less clear that it would be good for residents, team members and the industry as a whole. Here is my thinking:

  1. Distraction –  I have been unbelievably impressed with how Brookdale has continued to explore new and better ways of serving residents while working through all of the details of the Emeritus merger. That integration has a ways to go and having to fight or deal with this proposal and, if successful, spinoff, can’t do anything but be a distraction. That would not be good.
  2. It’s All About The Money –  I have some reservations about the depth of REIT ownership in senior living. The REITs exist to make money. I worry about what happens when we have an economic slow-down and rents don’t go up but lease payments do. I fear there will be real pressure to cut costs to meet lease covenants, leaving residents caught in the middle. With an organization like Sandell, it seems likely that this is all about the money: that it is really no different than a restaurant, strip mall or laundry mat. But it is not. It is about the elders of this country who have put their total trust in our communities.

    Don’t get me wrong there are some really great REITs that understand the industry and will go and have gone the second mile when projects have fallen behind performance curves.

  3. Not Now –  Even if this were the right thing to do, it would seem as if Brookdale has significant upside opportunity to improve occupancy as they move through the Emeritus merger and move toward a common operating platform and philosophy.
  4. There Are Residents? – The story at the website SeekingAlpha.com titled “Sandell Asset Management Dials Up Brookdale Senior Living,” includes a link to a white paper put out by Sandell that outlines their thinking. What I found worrisome is there was zero discussion or consideration for residents, family or staff. No discussion about how it might impact them positively or negatively. I fear when thinking about the people comes last . . . or not at all . . . that there will be the consequences.

I continue to believe that putting residents and team members first always results in the highest value for the company, in this case shareholders. Hard to see how this does anything except make it less likely that residents’ quality of life will be the most important thing for the board.

Maybe they should add me to the board and I could really help them out.

Steve Moran