Lucus Advisors LLC Releases Public Letter to Board of Directors of Capital Senior Living Corporation
December 10 2015 - 8:00AM
Business Wire
Major Shareholder Calls Upon Company to
Retain Investment Bank to Explore Strategic Alternatives in Order
to Unlock Potential and Maximize Shareholder Value
Believes that CSU Could be Worth Between $32
and $35 Per Share to a Third Party Acquirer, Implying Premium of
Approximately 57%
Lucus Advisors LLC (“Lucus”), an investment management firm
overseeing funds including Red Alder Master Fund, LP (“Red Alder”),
and an approximately 5.6% shareholder of Capital Senior Living
Corporation (“CSU” or the “Company”) (NYSE:CSU) through its
affiliated funds and managed accounts, today publicly released the
following letter sent to the Company’s Board of Directors:
December 10, 2015
Capital Senior Living Corporation14160 Dallas Parkway Suite,
300Dallas, Texas 75254Attention: Board of Directors
Ladies and Gentlemen:
Lucus Advisors LLC (“Lucus”), through its affiliated funds and
managed accounts, currently owns approximately 5.6% of Capital
Senior Living Corporation (“CSU” or the “Company”). Lucus believes
that CSU is deeply undervalued, and that there are opportunities
readily within the control of the Board of Directors (the “Board”)
to create significant value for shareholders.
By way of background, Lucus was founded in 2012 and its most
well-known offering, Red Alder Master Fund, LP (“Red Alder”),
invests in undervalued and underperforming public companies with
high potential. Our approach to such investments is to actively
engage with management teams and boards of directors in a
constructive manner to identify and execute on opportunities to
unlock value for the benefit of all shareholders. Our principals
and investment team have experience enhancing value at portfolio
companies through a combination of strategic refocusing, improved
operational execution, more efficient capital allocation, and
stronger management focus. Most recently, Red Alder was involved
with Ann Inc. (“ANN”), a company more than triple the size of CSU,
which was sold to a logical buyer for a hefty premium. We believe
all shareholders benefitted from our involvement with ANN.
As you know, we have had discussions with Company management for
longer than a year; we started these conversations in an attempt to
understand (and to help rectify) why the stock traded at a deep
discount to its intrinsic value. We toured the Company’s facilities
across the country, met with the team in Dallas, and visited
several facilities owned by the Company’s competitors. Throughout
this period, we have been circumspect of publicly pushing for a
sale of the Company, as we believed that we could work
constructively with management and the Board to entertain organic
solutions to correct this discount. We have concluded, however,
that the time has come for the Company to explore strategic
initiatives and that ongoing private discussions will not bring
about the necessary change.
We filed a Schedule 13D with the SEC on October 9, 2015,
revealing publicly a 5.6% ownership stake in the Company at that
time. We believe our sponsorship of the Company has galvanized
market participants to become more eager about the possibility of
value creation. Unfortunately, the Company’s inability to
invigorate its stock price has increased our conviction in the idea
that alternatives to the status quo ought to be examined. For
example, the Company has delivered an approximately 5.0% annualized
return to shareholders since January 1, 2013. During the same
period, the S&P 500 index has handily outperformed CSU by
almost twofold with an approximately 9.1% annualized return. During
a bull market for US stocks, and with particularly favorable
interest rate conditions for real estate-oriented companies, we do
not believe CSU has lived up to its potential and has instead
delivered subpar returns to its shareholders. Moreover, when
compared against the Company’s own peer group, as used in its
compensation analysis disclosed in its 2014 proxy statement, CSU
ranks ninth out of twelve for one-year total shareholder return and
tenth out of fifteen for three-year total shareholder return.
While we are delighted that the Company’s cash flow growth,
EBITDAR margins and occupancy, amongst other key metrics, are
healthy and trending in the right direction, as more time goes by,
we do not believe that the public market is the best channel for
value realization. Therefore, we urge the Board to immediately
retain a nationally recognized investment bank to explore strategic
alternatives to maximize shareholder value. Now is the time for
action: the cap rate environment is favorable, there is strong
institutional demand for yield assets, interest rates are hovering
at lows, and there is widespread demand for stable cash-flowing
real estate. We see no reason to delay, and we urge the Board to
take advantage of the opportunities provided by these favorable
conditions.
Over the last few years, sale transactions in the senior living
and healthcare real estate industry have taken place at cash flow
multiples notably in excess of where CSU trades. In addition,
comparable transactions have cleared at cap rates that make CSU
look comparatively attractive as a takeout candidate. Particularly
given the significant synergies a deal with CSU would afford, we
believe an acquisition would look especially attractive to a buyer
on a post-synergy creation multiple basis. Based on our analysis of
CSU, we believe that CSU could be worth between $32 and $35 per
share to a third party acquirer, implying a premium of
approximately 57% to the current stock price of $21.36 (assuming
the midpoint of our valuation range).
We believe CSU is a highly suitable candidate for a private
equity or strategic acquirer because of its (i) wide cap rates (as
compared to where individual assets trade in the private market),
(ii) ability to further improve margins, (iii) significant and
growing cash flow generation, (iv) strong borrower relationships
(great access to borrowers, as evidenced by the panel of lenders
that spoke supportively at CSU’s recent investor day), and (v) size
(CSU’s market capitalization is the perfect size for a wide range
of acquirers). It is also worth reiterating the unusually favorable
state of the credit markets, which we believe should allow an
acquirer to borrow at very attractive rates.
We strongly disagree with delaying a sale process based on
management and the Board’s belief that the market does not fully
appreciate CSU’s favorable prospects:
- If the Company has favorable
projections that are credible, potential buyers will price CSU
accordingly. The fact that a company has favorable prospects is
hardly a reason not to explore a value-maximizing transaction. Just
the opposite – often an ideal time to sell a company is when it has
favorable prospects.
- As discussed above, credit markets may
never be as good. The ability of an acquirer to pay a premium for
CSU is, in significant part, informed by its ability to finance the
purchase. Do not let this substantial opportunity slip away.
- Factoring in the time value of money
and execution risk, in order to try to justify not pursuing
strategic alternatives now, by our calculation, we believe the
Board would have to be confident that the Company’s stock would
exceed $47 per share within three years (at a 12% discount rate and
assuming a $33.50 per share transaction). This means that the Board
would have to be confident that Adjusted Cash From Facility
Operations would have to start growing at a substantially faster
rate.
In conclusion, we believe the Board has a unique opportunity now
to increase shareholder value by exploring strategic alternatives,
including a sale of the Company. We have been CSU shareholders for
a long time. We have talked to a number of investors who share our
views. Despite your best efforts and improved operational
performance, the public markets are not affording the Company
credit for your pipeline, portfolio, and management business. It is
now time for the Board to act with urgency to unlock CSU’s
potential, and we ask that you immediately retain a nationally
recognized investment bank to begin this process. We expect a
response and action by January 15, 2016.
Sincerely,
Schuster B. TangerManaging MemberLucus Advisors LLC
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