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CSU: Mercury Demand Sale of Company

(2006-02-10 14:47:36) 下一個

 

Press Release Source: Mercury Real Estate Advisors LLC


Mercury Demands Sale of Company and End to Excessive Executive Pay
Wednesday December 21, 10:03 am ET


GREENWICH, Conn., Dec. 21 /PRNewswire/ -- Mercury Real Estate Advisors LLC, an affiliate of Mercury Partners LLC, a real estate investment management company based in Greenwich, CT, sent the following letter today to Capital Senior Living Corporation's (NYSE: CSU - News) Independent Members of the Board of Directors.

    -------------------------------------------------------------------------

                       Mercury Real Estate Advisors LLC
                             100 Field Point Road
                         Greenwich, Connecticut 06830

 

                                                         December 21, 2005


    Capital Senior Living Corporation
    Independent Members of the Board of Directors
    Mssrs. Hartberg, Nee and Moore; Ms. Krueger
    14160 Dallas Parkway, Suite 300
    Dallas, Texas 75254

Dear Independent Board Members:

We are writing to you as the largest independent shareholder of Capital Senior Living Corporation ("CSU" or the "Company"), with an approximate 9.8% ownership stake in the Company. We believe, for the reasons stated below, that management has destroyed a significant amount of shareholder value and has been unjustly and exorbitantly compensated for dismally poor operating and financial performance. We further believe that the Company has never and will never achieve the scale or profitability necessary to operate successfully as an independent public entity, and therefore should be immediately sold in the current favorable market for healthcare real estate. We believe that the Board of Directors of the Company has failed in its fiduciary duty to the true owners of the Company -- the common shareholders -- and wasted corporate assets by excessively rewarding this unacceptable lack of performance. We now look to the Independent Members of the Board of Directors to fulfill their fiduciary duties and implement a plan of sale for the Company.


    The reasons for our strong conviction are as follows:

    1.  The Company has had significant operating losses in 2003, 2004 and
        2005, and further losses are expected in 2006. The Company has been
        operating at a substantial loss since the beginning of 2003. From an
        operating perspective (not including non-recurring gains on the sale
        of property and non-recurring other income) the Company had a pre-tax
        loss in 2003 of $5,377,000. In 2004, the Company lost an additional
        $9,066,000 pre-tax and $6,758,000 after-tax. For the first nine months
        of 2005 through September 30, the Company lost a further $5,456,000
        pre-tax and $3,527,000 after-tax. Analysts following the Company
        expect this highly disturbing pattern of losses to continue throughout
        2006. Management of the Company has demonstrated a complete inability
        to earn an acceptable return on shareholder equity - it is time for a
        permanent change.

    2.  During this same period, the Company's competitors are achieving
        record profits and significantly better stock price performance than
        the Company.  Most troubling, however, is the fact that the Company's
        two most comparable competitors, Sunrise Senior Living, Inc.
        ("Sunrise") and American Retirement Corporation ("American
        Retirement"), are achieving record profits in 2005, with further
        substantial profit gains expected in 2006.

        Also, as noted in the Company's 2005 Annual Proxy Statement ("Proxy"),
        the Company has woefully underperformed its competitors in terms of
        stock price performance, which is not terribly surprising given the
        substantial cumulative losses suffered by the Company over the last
        three years. As noted in the Proxy, $100 invested in the Company stock
        in December 1999 was worth an anemic $111.79 five years later in
        December of 2004. By way of contrast, $100 invested in the Company's
        Peer Group of competitors, as defined by the Company, during that same
        time period was worth $272.01!

    3.  Despite mounting operating losses and poor stock price performance,
        the Company's Board of Directors has lavished executives with
        unconscionable evergreen long-term contracts with substantial salaries
        and huge and increasing bonuses. As a reward for losing millions of
        dollars and destroying shareholder value, the Board of Directors, and
        especially the Compensation Committee (Messrs. Hartberg, Moore and
        Nee), have inexplicably lavished mind boggling compensation on Company
        executives.


    Name and Position    Year    Salary    Bonus      Other         Total
                                                      Annual     Compensation
                                                   Compensation

    Lawrence A. Cohen - 2004    $366,753  $317,619    $6,000      $690,372
     CEO and Vice       2003     352,647   254,262     6,000       612,909
      Chairman          2002     339,084   187,466     6,000       532,530

    James A. Stroud -   2004     305,627   216,114    10,035       531,776
     Chairman and       2003     293,872   197,756     8,151       499,779
      Secretary         2002     282,570   144,227     5,189       431,986

    Keith N. Johannessen -
     President and COO  2004     234,000   167,123     6,500       407,623
                        2003     225,000   151,516     6,000       382,516
                        2002     201,986   111,661     5,500       319,147

    Ralph A. Beattie -
     Executive VP and   2004     218,468   159,104     7,481       385,053
      CFO               2003     210,066   138,835     6,000       354,901
                        2002     201,986   111,661     5,500       319,147

    David R. Brickman -
     VP and General     2004     174,446    45,000     3,255       222,701
      Counsel           2003     168,547    30,000     3,018       201,565
                        2002     162,064    30,000     1,549       193,613

    2004 Total Compensation - Top 5 Executives                   $2,237,525
    2003 Total Compensation - Top 5 Executives                    2,051,670
    2002 Total Compensation - Top 5 Executives                    1,796,423

    4.  The Board of Directors appears at least slightly defensive and / or
        embarrassed by this disgraceful excess by stating in the Proxy that
        "the Compensation Committee recognizes that, to a large degree,
        compensation for such persons is set by contract." Ironically,
        however, the Board of Directors established the Compensation Committee
        to review and approve the compensation levels of the Executive
        Officers and presumably "negotiate" and approve their contracts. These
        same contracts are wonderfully self-perpetuating, with Mr. Cohen's
        three-year contract automatically extending for a two-year term on a
        consecutive basis while Mr. Stroud's contract renews annually for
        successive four-year periods. Mr. Johannessen's employment agreement
        has a term of three years and automatically extends for a two-year
        term on a consecutive basis, Mr. Beattie's employment agreement is for
        a term of three years and automatically extends for a two-year term on
        a consecutive basis and Mr. Brickman's three-year employment agreement
        also extends automatically for a two-year term on a consecutive basis.
        The Board of Directors, and especially the Compensation Committee,
        should be ashamed for this shocking "employment for life" and
        guaranteed overcompensation scheme.

        We hereby demand the Board of Directors terminate all five executive
        contracts immediately and refuse to pay executive bonuses until the
        Company returns to competitive levels of profitability. Granting of
        bonuses to such executives in 2005 under the economic disaster
        described above will leave us no choice but to consider all available
        options against the Board of Directors and Compensation Committee.
        This compensation program is reminiscent of the worst excesses of Tyco
        and Enron, excesses that shockingly still persist at CSU.

    5.  The Independent Directors have no equity ownership stake in the
        Company and behave like it. When the Independent Members of the Board
        of Directors are friends and cronies, and have no economic interest in
        the Company, the abuses described above are not surprising. While one
        would expect "Independent Directors" to show some intrinsic level of
        common sense, fiduciary awareness and sensitivity to true shareholder
        issues and integrity, an alignment of interest with the common
        shareholders is always critical to ensuring that perspective.
        Unfortunately, that alignment of economic interest is completely
        absent in this case. Ignoring shares acquired relating to free
        options, the Independent Members of the Board of Directors have each
        purchased the following number of shares in CSU:

             Director                           Total Shares Purchased
             Jill M. Krueger                             0
             Craig F. Hartberg                           0
             Dr. Victor W. Nee                         1,000
             James A. Moore                            4,800

        In conclusion, it is deeply troubling to the largest independent
        shareholder of the Company that the "Independent" Members of the Board
        of Directors and the Compensation Committee -- the very people
        indiscriminately throwing money at Company executives -- themselves
        have no personal economic interest in the Company.

    6.  The Company is the smallest in size in its universe of public
        competitors, which places it at a significant disadvantage. Simply
        stated, the Company is too small and lacks critical mass to be a
        successful public company. Measured by equity market capitalization,
        total revenues and resident capacity, the Company is substantially
        smaller than Sunrise Senior Living, Inc., Brookdale Senior Living
        ("Brookdale") and American Retirement Corporation.

             Company               Equity      3Q05 Revenues       Resident
                                 Market Cap   Annualized (000s)    Capacity
                                   (000s)
             Sunrise Senior
              Living, Inc.        $1,474,382      $1,852,852         52,926
             Brookdale Senior
              Living               1,907,411         839,040         30,048
             American Retirement
              Corp.                  780,366         498,996         14,324
             Capital Senior Living
              Corp.                  262,549         100,336          8,915


    7.  Given the Company's small size and shamefully high levels of
        compensation, General and Administrative ("G&A") costs are a shocking
        percentage of revenues. G&A costs for the Company totaled $11,557,000
        in calendar year 2002, $12,343,000 in 2003, and $16,523,000 in 2004.
        This level of expenses represented a stunning 18.8%, 18.6% and 17.7%
        of REVENUES in 2002, 2003 and 2004, respectively. These expenses were
        so embarrassingly gargantuan that the Company decided to change the
        definition of such costs to exclude certain items, resulting in a
        lower stated percentage. Nonetheless, even on a restated basis, G&A
        costs represented a stunning 9.8% of revenues in the first nine months
        of 2005, even more than the restated 9.3% for the similar period in
        2004. As to its competitors, Brookdale's G&A costs represented 5.4% of
        revenues, Sunrise's G&A costs represented 4.9% of revenues and
        American Retirement's G&A costs represented 5.7% of revenues. Thus,
        even after a flattering restatement, the Company's G&A costs are
        approximately twice the level of its better managed competitors. Given
        this glaring disparity in fixed cost structure, no wonder the Company
        is losing money while the competition is achieving record profits!

    8.  Strategically, the Company's portfolio is too small and too
        geographically dispersed to achieve the necessary economies of scale.
        In the real estate ownership and management business, especially one
        with an operational component as intensive as senior living, it is
        critical to cluster properties in order to achieve economies of scale.
        While the Company has a critical mass in the state of Texas, the
        remainder of the far-flung portfolio, comprising an additional 19
        states, is ridiculously dispersed. The investment and business
        strategy of the Company is thus clearly fatally flawed. The number of
        Company assets in the remaining states is as follows:

     Eight States - One Property Each State

                   New    New    South
     Connecticut  Jersey  York  Carolina  Florida  Louisiana  Kansas  Arizona


     Six States - Two Properties Each State


     Nebraska   Missouri   Michigan   Mississippi   North Carolina   Arkansas

     Three States - Three Properties Each State

     California  Illinois   Ohio

     Two States - Four Properties Each State

     Indiana    Oklahoma


    9.  Your management team is completely dysfunctional. Your Chief Executive
        Officer lives and has an office in New York while the remainder of the
        executive management team works out of the corporate headquarters in
        Texas. Leadership cannot be accomplished living 1,800 miles away from
        headquarters. No matter how many airplane flights one makes, this
        arrangement is bizarre and completely dysfunctional.

    10. Not only is the Company far too small to be viable as a public
        company, the Company is also overleveraged and operating in an
        environment where new acquisitions are more competitive and expensive
        than ever before in healthcare real estate history. Any growth
        initiatives for the Company are hamstrung by high levels of debt
        compounded by a sizeable exposure to rising interest rates due to
        variable rate loans. Debt to total market capitalization of the
        Company is approximately 50%, while debt plus capitalized rent (using
        a 10% capitalization rate) results in leverage approaching 60%,
        reflecting the results of the recent Ventas transactions. Moreover,
        approximately 67% of the Company's debt is variable rate, leaving the
        Company uncomfortably exposed to increases in interest rates. Debt
        constitutes a whopping 10.8x 3Q05 annualized Adjusted EBITDA, compared
        with the far lower 3Q05 annualized Adjusted EBITDA multiples (adjusted
        for straight-line rents and entrance fees) of approximately 4.2x, 5.3x
        and 6.3x at competitors Sunrise, American Retirement and Brookdale,
        respectively. Interest expense for the Company is covered only a
        meager 1.3x by 3Q05 annualized Adjusted EBITDA, versus 3Q05 annualized
        Adjusted EBITDA coverage of approximately 14.2x, 5.1x and 2.1x at
        competitors Sunrise, American Retirement and Brookdale, respectively.

        Even if the Company had the financial resources to grow, which it does
        not, the current market for acquisitions is both highly competitive
        and very expensive. Attractive senior healthcare real estate assets,
        such as those owned by the Company and its competitors, are now
        selling for capitalization rates approximately in the mid-7% range,
        versus approximately 10% only 18 to 24 months ago. In summary, the
        Company needs to grow dramatically to achieve a critical mass
        commensurate with its bloated overhead, but does not have sufficient
        equity to do so and would be forced into paying prices that would
        unlikely to be accretive to earnings.

    11. The Company should maximize shareholder value by taking advantage of
        the current overheated environment for senior healthcare assets and
        selling itself in an auction.  As shown above, the Company has the
        disastrous combination of being far smaller than competitors with a
        disproportionately far higher level of expenses, predictably resulting
        in heavy ongoing losses for shareholders. Together with being
        overleveraged in a market where potential acquisitions are too
        expensive, the obvious solution for maximizing shareholder value is
        clear. Sell the Company in an auction to the highest bidder. Bidders
        would certainly be plentiful for a portfolio of this size and quality,
        and long suffering shareholders would finally benefit from their stock
        ownership, after having subsidized extravagant salaries for executives
        who showed talent at only losing money.

        We look forward to meeting with you immediately and will be in contact
        in the next week to schedule a time to review these urgent concerns.

        Very truly yours,

        MERCURY REAL ESTATE ADVISORS LLC


        David R. Jarvis                    Malcolm F. MacLean IV
        Chief Executive Officer            President


 

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