September 29, 2015
New Senior Investment Group Inc.
1345 Avenue of the Americas
New York, NY 10105
Attention: Wesley R. Edens, Chairman of the Board
Cc: Board of Directors
In my long experience in the investment management business, I have spoken to members of company boards of directors and management teams about my views on numerous occasions, but this marks the first time that I am sending a public letter to the Chairman of the Board of Directors and members of its Board of Directors. I take this communication seriously and I sincerely hope that you will as well.
Since the effective date of the spinoff from Newcastle Investment Corp on November 6, 2014, New Senior Investment Group (“New Senior”) share price has declined -46.1% versus the MSCI US REIT Index decline of -1.2% and the S&P 500 decline of -5.5%, as reported on Bloomberg. While operating results of the company have been strong, with increasing occupancy at your properties and significant growth in Funds from Operations (FFO) led by CEO Susan Givens, the issue with your stock valuation is not one of business performance but fundamentally one of structure and alignment of shareholder interest.
The external management structure is one that can lead to serious conflicts of interest. While we have no issue with management at any company succeeding alongside of shareholders, we believe the structure currently in place between New Senior and Fortress leaves the interests of shareholders and management significantly misaligned.
On May 7th, 2015, on Fortress’ second quarter conference call, you said the following regarding the Fortress Permanent Capital Vehicle (“PCV”) business that includes New Senior, “The goal for that business from my standpoint is going to be $12 billion to $15 billion in capital by the end of the year. It’s $6 billion right now.” Since you made this statement, the companies externally managed by Fortress that were spun out of Newcastle have dramatically underperformed with New Senior down -37.0%, New Residential down -21.1% and New Media down -30.6%, as compared with the S&P 500 decline of –9.0% and the MSCI US REIT Index decline of -3.6%, as reported on Bloomberg that includes dividends paid. As the Chairman of each of these companies, you have a fiduciary duty to their public shareholders, and that duty conflicts with your role at Fortress and specifically with Fortress’ desire to raise capital in these vehicles to increase its fee streams. Setting targets for capital raising may or may not be helpful in getting Fortress’ stock price up, but it sends a terrible message to the shareholders of companies that are externally managed by Fortress.
As we know, this issue of equity capital raise played out in New Senior before the end of the second quarter and is the main reason, in our view, for the precipitous stock decline versus benchmarks. On June 22nd, New Senior announced an equity offering underwritten by Bank of America Merrill Lynch, Citigroup, and Morgan Stanley to raise capital to purchase properties in a related party transaction from a privately-held Fortress affiliate, Holiday Retirement (“Holiday”). The announcement came with New Senior trading at $15.25 per share; already well below our estimated Net Asset Value (“NAV”), and was then executed approximately 10% lower at $13.75 per share. We believe the equity offering was mistimed and inopportune and doing an equity offering well below NAV was extremely troubling. We believe this has created the perception that Fortress has little regard for public shareholders. New Senior stock closed at $9.95 on September 29, 2015, the stock price has now dropped an additional -27.6% from the $13.75 offering and -34.8% below the $15.25 it was trading at before the offering was announced.
With New Senior’s stock trading dramatically below NAV, we call upon Fortress to take meaningful action to demonstrate a more appropriate balance between the external manager and the public shareholders in order to help bridge the substantial value discrepancy. We understand that New Senior has been a stand-alone public entity for less than a year, but Fortress has not earned the benefit of the doubt that they care about shareholder value in this and its other permanent capital vehicles. It is our view that the current structure does not align Fortress’ interest closely enough to New Senior shareholders. Until demonstrable actions are taken, potentially across the entire Fortress permanent capital universe, we believe these discounts to NAV will persist. If Fortress wants to be in the long-term business of taking private equity fee streams in public equity vehicles, we firmly believe that it must behave in a way that demonstrates appreciation that shareholder value is essential. By rebuilding trust with the public markets, we believe Fortress will benefit greatly and be able to continue to grow its permanent capital businesses and succeed alongside of shareholders.
Levin Capital Strategies looks forward to working constructively with you and the New Senior Board of Directors, as well as Susan Givens (who we hold in high regard) and her management team, to further explore these issues. We would like to address the external management structure and ways to further align Fortress’ compensation to stock price performance, a path toward internalization of management, Board composition and independence, and stock buyback and potential liquidation if the gap between the market price and NAV persists. We stand ready to meet with you at your earliest convenience.