吳氏股票研究
股票研究,經濟分析,共同基金管理,交易練習,投資理念,投資心理學
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
