Voce Capital Letter To Air Methods

Beginning in the summer of 2015, Voce Capital Management LLC (“Voce”), one of the largest and most committed long-term stockholders of Air Methods Corporation (“Air Methods” or the “Company”), invested months meeting with you and management outlining our concerns about the destruction of stockholder value at the Company. While the tenor of those meetings was amicable, they produced no results. We then sent you a series of private communications and, when those also failed to catalyze action by you, we reluctantly began communicating with you publicly. In the face of continued stonewalling by the Board of Directors (the “Board”), we were left with no choice but to commence a proxy contest last year. Even then, we nominated only two Directors for election at the 2016 annual meeting, despite the fact that we could have nominated more.

On March 22, 2016, we entered into a Cooperation Agreement (the “Cooperation Agreement”) with you in which we agreed to withdraw our 2016 Director nominations and suspend our campaign for change for one year. In exchange, you agreed to appoint one new independent Director and to take all necessary actions to de-stagger the Board so that Directors would be elected to one-year terms going forward. The standstill to which we agreed as part of the Cooperation Agreement afforded you time to demonstrate an awareness of, and capacity to address, acute stockholder dissatisfaction with corporate strategy and results. In our view, the Cooperation Agreement created a probationary period in the hope that it would usher in positive change, but if it did not we would be free to pursue much more sweeping changes in 2017, if necessary. Unfortunately, that is where we find ourselves now, as the situation at Air Methods has only deteriorated since our entry into the Cooperation Agreement:

Air Methods continues to destroy stockholder value. Stockholders suffered a -24% loss on Air Methods’ stock in 2016. During this time, the Russell 2000 (of which Air Methods is a constituent) appreciated 21% – a relative underperformance of almost 50 percentage points in just one year! Air Methods’ appalling 2016 results come on the heels of stockholder losses of -4.8% in 2015 and -24.4% in 2014, compounding to a -45% loss in the prior three years. As a result, Air Methods has underperformed the Russell 2000, S&P 500 and its own self-selected group of “Proxy Peers” for the past one-, three- and five-year periods.

Air Methods’ deep undervaluation persists, but there’s no reason to expect that will change on its own. Even after its recent bounce off of multi-year lows, Air Methods currently trades for less than seven times EBITDA, and twelve times earnings, based on consensus estimates for 2017 – a significant discount to its intrinsic value. Its stock price volatility was just as high in 2016 as in prior years, despite efforts to dampen it. Air Methods’ shocking short interest, at approximately 30% of its float, hovers near record territory and is a constant reminder of how challenging it will be for the stock to gain any sustained upward traction. Some of the Company’s largest and longest-tenured investors have begun to lose faith, as evidenced by the material reductions in their ownership.

Serious operational issues have emerged. In addition to the Company’s multi-year struggles with its runaway DSOs and incessant volatility, new issues have come to light in recent months. The Company badly missed its projections early in 2016, ultimately having to rescind its full-year EBITDA guidance of ~$350 million (which it had originally promoted as “conservative”). Integration missteps in its rash acquisition of Tri-State Care Flight also surfaced, raising questions about the quality of its due diligence process. Perhaps of greatest concern, the Company has experienced persistent softness in same-base-transport volumes. The inability to pinpoint the cause of this deterioration has unnerved the investment community and provided an additional leg to the short thesis that is likely to blunt the benefit of any reduction in DSOs that might occur. Finally, it appears to have made little progress in 2016 in negotiating in-network arrangements with its largest payors, despite identifying this as a strategic priority last year.

Land and Buildings Letter to Taubman Centers

Since our initial engagement with the Company last year, we have been deeply disappointed with the lack of response you, as independent directors, as well as management, have undertaken to unlock the Company’s substantial trapped value. As we have explained in our previous open letters and presentation (each of which can be found at www.SaveTaubman.com), we believe there is a tremendous opportunity to unlock this value, which would allow the Company’s stock to reach its net asset value of $106 per share, or approximately 50% upside from the current level.

In our well-informed opinion, Taubman Centers is severely undervalued, as a result of abysmal corporate governance, a bloated cost structure, inferior operating margins and a lack of capital allocation discipline. Unfortunately, this undervaluation is difficult for the Company’s shareholders to attempt to address because of the Taubman Family’s 30% voting power on corporate matters, which, combined with the Company’s super-majority voting requirements, effectively gives the Taubman Family overpowering control in most corporate situations. As a result of the Taubman Family’s overwhelming control over the Company, the election of Board members’ plurality voting requirement is the only significant venue where shareholders’ voices can be heard and not simply drowned out by the interests of the Taubman Family.

Since our initial engagement, we have attempted, to no avail, to have constructive discussions with Chairman and CEO Bobby Taubman regarding ways to address the Company’s significant undervaluation. Regrettably, Bobby seemingly only wants to do things the way Bobby wants to do things, regardless of the effects his poor decisions have on shareholders. Troublingly, the same pattern appears to be persisting with the Taubman Family in general—the Family consistently puts its interests ahead of common shareholders and you, the independent directors, continue to let this happen.

The reactions by the Company since our initial engagement have been cosmetic in nature at best, and fall far short of the change necessary. Specifically:

  • Myron Ullman was appointed to a newly created role of lead independent director, a role which appears to lack any meaningful powers that could change the status quo of prioritizing the Taubman Family’s interests first to the detriment of all other shareholders;
  • Cia Buckley Marakovits was added to the Board only after the Company violated its charter by shrinking the size of its Board following a then Board member’s resignation.

We believe there is a clear path to unlocking substantial value for all shareholders and freeing the Company to reach or exceed its current net asset value of $106 per share. These are the steps you should take to reassure shareholders, including Land and Buildings, that the Company is on the right path:

  • Modernizing corporate governance, including de-staggering the Board, reducing the tenure of the Board, separating the Chairman and CEO roles, and having shareholders vote on the Taubman Family’s preferred stock voting rights;
  • Improving operations by reducing bloated G&A, especially costs associated with the Asia platform and development, and improving margins from current levels that are materially inferior to the Company’s peers;
  • Improving capital allocation by ceasing all new major external growth initiatives until a robust capital spending structure is enacted, selling underperforming assets and exiting Asia;
  • Communicating a philosophy shared by best in class management teams—the Company is for sale every day for the right price, and such a sale will be explored if the aforementioned strategy does not unlock value.

As you know, due to Taubman’s shareholder-unfriendly staggered Board, only the seats of Bobby Taubman, Myron Ullman and Cia Buckley Marakovits are up for election at the 2017 Annual Meeting. There are compelling reasons why the Company would be better off with directors who have a strong track record of maximizing value for all shareholders, are credible in the public institutional real estate investment community and are strong advocates for best in class corporate governance, as the directors up for election have a poor track record, or no track record, in the public markets:

  • Bobby Taubman has been CEO for more than 25 years, and his actions have most recently resulted in the stock trading at a substantial discount to those of Company peers and NAV, while shareholder returns have also materially lagged its peers. Bobby’s and his Family’s actions have repeatedly shown that the interests of the Taubman Family are being put before the interests of common shareholders.
  • Myron Ullman is now on his second stint as a Board member of Taubman. Shareholders would be remiss to forget that Mr. Ullman was on the Taubman Board in 2003, when a Federal Judge found that the Board was likely in breach of its fiduciary duty to shareholders after Board members, in response to the Company’s rebuffing of Simon Property Group, changed the Company’s by-laws to make it more difficult for shareholders to call special meetings. Further, as a member of the Taubman Centers Audit Committee, Ullman failed to respond to our concerns about likely material violations of the Company’s charter due to the Taubman Family exceeding its ownership limit.
  • Cia Buckley Marakovits is new to the Board and her appointment was in reaction to our efforts. While our due diligence suggests that she has a good professional reputation, she lacks the public company real estate experience that we believe is critical at Taubman, and she is unlikely to change the status quo in the boardroom where Bobby appears to run roughshod over you, the independent directors of the Board. Given the Company’s track record, we have to see this as a calculated move to earn “points” with shareholders and corporate governance experts – both of whom should see through it.

If the Company does not address the serious problems we have highlighted and fails to expeditiously undertake a plan similar to the one we outlined above, we are prepared to nominate replacement directors who understand what is necessary to unlock shareholder value. Although our strong preference is to work collaboratively with you, and avoid the Board and management’s distraction of a time-consuming election contest, we are committed to doing whatever is necessary to improve Taubman for the betterment of all shareholders.

Land And Buildings Letter On Brookdale Senior Living

We were encouraged by the January 10, 2017, Wall Street Journal report that Brookdale is in talks to sell all or a portion of the Company. As we outlined in our December 20, 2016 letter to fellow Brookdale shareholders (available at www.landandbuldings.com), we believe the Company’s net asset value is at least $25 per share, including owned real estate worth in excess of $21 per share. Further, in our opinion, three recently completed multi-billion dollar senior housing transactions highlight both the significant institutional demand for senior housing as well as the high valuations the real estate continues to garner in the private market.

The Brookdale Board has a fiduciary duty to maximize shareholder value and fully and properly pursue strategic alternatives. Any decision by the Brookdale Board and management to take solace in the improved share price and choose not to pursue strategic alternatives would be thoroughly misguided, as the unaffected share price prior to the article clearly reflected the poor operating performance under current management.

We believe shareholders, ourselves included, would be extremely disappointed and would hold the Brookdale Board accountable if the strategic alternatives process is not fully explored and fails to result in a successful conclusion. We, and in our opinion other shareholders will stand with us, refuse to accept any half steps taken by this Board instead of the clear transparent action required to maximize shareholder value.

We are hopeful that the Board will take seriously the substance of this letter and conduct the strategic alternatives process accordingly.

Land and Buildings Letter to Brookdale Senior Living

Brookdale Senior Living (NYSE: BKD) (“Brookdale”, “BKD” or the “Company”) shareholders have endured one misstep after another on the part of BKD’s management and Board of Directors (the “Board”) over the past several years, and nearly 70% of shareholder value has been eviscerated in the past 18 months. Land and Buildings believes the current net asset value of Brookdale is at least $25 per share, more than 100% above the current share price. As we have communicated to the Brookdale management team and Board in numerous discussions and letters over the past several months, the Company must act with urgency to crystalize value.

Management has had more than two years since the Emeritus merger to realize synergies, increase growth and maximize value. Instead, shareholders have dealt with a multi-year string of strategic, operational, and merger-related disappointments. Earnings expectations have been consistently missed, and Wall Street estimates cut, as the Brookdale management team has overpromised and under delivered – despite strong prospects for the industry overall.

Fortunately, Brookdale is more than the largest senior housing operator in the United States, the Company also owns an enviable portfolio of senior housing properties which we believe is worth over $21 per share, ~70% above the current share price. Institutional investors continue to flock to senior housing, given the desirable long-term secular demographic and demand trends, with three multi-billion-dollar private market transactions completed at strong valuations just last month.

In this favorable climate, we see a clear path to value realization and a leaner, more efficient, asset-light Brookdale:

1) Sell the Company’s owned real estate and distribute proceeds to shareholders, and

2) Become an asset-light senior housing management company by converting existing leases to management contracts

Sell the Company’s owned real estate and distribute proceeds to shareholders

It is time for Brookdale’s Board of Directors to take affirmative action to maximize the value of Brookdale for all shareholders, sell the $7 billion-plus owned senior housing portfolio, and distribute the proceeds to shareholders. Based on three senior housing sales transactions in November 2016, all over $1 billion, applying a cap rate of 6.25%, Brookdale’s owned real estate is worth in excess of $21 net per share.

  • NorthStar Realty Finance (NYSE: NRF) sold a non-controlling stake in over $2 billion worth of senior housing at an estimated low-to-mid 5’s cap rate to Taikang Insurance Group, a large Chinese financial services company
  • Welltower (NYSE: HCN) sold $1.2 billion of non-core, lower quality senior housing assets at a 6.3% NOI cap rate
  • HCP (NYSE: HCP) sold $1.125 billion of below average quality Brookdale senior housing assets at a 6.5% NOI cap rate principally to Blackstone

The significant institutional demand and high valuations for senior housing real estate are due to the attractive long-term demographic demand profile and high historical NOI growth. The three transactions completed last month transferred assets approaching the size of Brookdale’s owned real estate and as a result provide a compelling justification for the applicable 6.25% cap rate at which the Company can obtain $21.50 per share in a divestiture of BKD’s owned real estate.

Figure 1: Brookdale’s Owned Real Estate is Estimated to be Worth More than $21 Per Share

Brookdale Owned Real Estate Valuation

In-Place Net Operating Income $447,000

Applied Cap Rate 6.25%

Brookdale Owned Real Estate $7,152,000

Total Brookdale Net Liabilities ($3,156,000)

Net Real Estate Value $3,996,000

Brookdale Shares Outstanding 186,000

Real Estate Value Per Share $21.50

Source: Company reports, Land and Buildings; Notes: In-Place Net Operating Income is 3Q16 annualized after deducting a 5% of revenue G&A allocation, Total Brookdale Net Liabilities are inclusive of all tangible 3Q16 balance sheet assets and liabilities including Land and Buildings’ estimate of the value of Brookdale’s unconsolidated joint ventures, and all numbers are in thousands except per share figures

Management and the Board, in our numerous private discussions, acknowledge that the more than 40% decline in the share price since the fourth quarter 2015 is a substantial change in circumstances since they last undertook a strategic review. The time is right to explore strategic alternatives and therefore we have stressed to Management and the Board the urgency to evaluate all options to maximize shareholder value now.

Having reviewed many of the Companies’ master lease agreements with the three publicly traded REITs, we believe Brookdale is not subject to any contractual restrictions if it were to sell the Company’s owned real estate. A sale of the real estate portfolio is unlikely to trigger a change of control, a sale of substantially all of Brookdale’s assets, or minimum net worth covenants given the value that will remain in the managed portfolio, leased assets, and ancillary service business of the Company.

Taxable gains from the sale of the owned portfolio would likely be largely offset by the approximately $1 billion in net operating losses on Brookdale’s balance sheet.

Becoming an asset-light senior housing management company

As the largest manager of senior housing with over 100,000 residents and 80,000 employees, Brookdale is extraordinarily well positioned to grow its management business. Emulating Marriott International (NYSE: MAR) in the lodging sector, Brookdale should focus on management and not ownership of senior housing properties. The population of seniors over the age of 85 is expected to grow much faster than the population overall, including doubling over the next 20 years, which should cause senior housing unit growth to be greater than hotel growth in the coming years and decades, providing an attractive runway for growth. Marriott is currently trading at 21x 2017 earnings, while BKD trades at only 5.7x 2017 cash flow (including the value of the owned real estate) based on consensus estimates, an absurdly low valuation for a growing cash flow stream.

Brookdale should work aggressively with its landlords, primarily the three largest public healthcare REITs, to terminate its real estate leases and convert all assets it can run efficiently to management contracts. Brookdale’s legacy leases with the healthcare REITs are outdated and a relic of the past given the REITs can now lease the properties to taxable REIT subsidiaries and realize the underlying NOI of the properties.

We believe the net asset value of Brookdale, inclusive of the management company and the owned real estate, is at least $25 per share.

Strong secular tailwinds should drive senior housing demand

Senior housing remains one of the most attractive real estate asset classes from a secular demographic perspective. The senior population aged 75+ with incomes over $50k/year is expected to grow 40% in 2015 – 2020e, ~3x faster than the national average and there will be 34 million 75+ seniors by 2030, up from 20 million today. Increased life expectancy and an increased penetration rate among seniors is driving significant demand. 40% of the 85+ population needs help with three or more activities of daily living. The penetration rate among 75+ seniors with incomes over $50k/year is approximately 20%, suggesting annual demand in excess of 5%.i

To meet this demand, supply growth has increased, and despite overbuilding in some markets, the major owners of properties enjoyed 3.4% same-store revenue growth year-to-date through the third quarter 2016, and 2.7% same-store NOI growth. Rent growth remains remarkably strong, up 3.8% in third quarter 2016 per The National Investment Center for Seniors Housing & Care (NIC). 2017 expectations are for continued low single-digit revenue and NOI growth industry-wide.

Figure 2: Year-to-date Senior Housing Operating Results Have Shown Solid Growth

YTD Senior Housing Operating ResultsSame-Store Revenue GrowthSame-Store NOI Growth

HCP (NYSE: HCP) 3.7% 3.4%

Welltower (NYSE: HCN) 4.8% 3.9%

Ventas (NYSE: VTR) 3.5% 1.8%

Brookdale Senior Living 1.7% 1.7%

Source: Company reports, Land and Buildings

It is time for Brookdale’s Board of Directors to take affirmative action to maximize value

We have spoken on multiple occasions with Dan Decker, the newly appointed Executive Chairman, and Andy Smith, the Chief Executive Officer, of Brookdale about strategies to maximize value for all shareholders. We have made it clear that circumstances have significantly changed since the Company last evaluated strategic alternatives and now more than ever the time is right for the Board and management to move quickly to maximize value for all shareholders.

Bill Ackman Thoughts On Herbalife $HLF

On November 1, 2016, Herbalife reported its third quarter financial results. Modest financial performance in the quarter, disappointing 2017 guidance and the unexpected announcement of a CEO transition caused the stock to decline. HLF stock has traded down more than 33% since the announcement of the company’s settlement with the FTC on July 15th, 2016, a 15% year-to-date decline, as investors have come to increasingly ignore the company’s fraudulent characterization of the FTC settlement. At its December 2, 2016, price of $47.99 per share, HLF currently trades at approximately the price at which we shorted the shares in 2012.

On a consolidated basis the company reported net sales of $1.1 billion for the quarter, up 1.7% year-over-year. Headline adjusted net income of $105 million for the quarter (down 3% YoY) translated into adjusted EPS of $1.21 (down 4% YoY). On a constant currency basis the company reported net sales growth of 5%, driven by EMEA (+15%), Mexico (+14%) and North America (+10%).

The deceleration of Herbalife’s China business during the quarter is notable. Once a high-flying growth market (regularly posting 20-30%+ top-line growth), the China business has slowed in recent quarters, achieving modest 1% currency-adjusted, year-over-year top-line growth in Q3 (or negative 5% on actual basis).

Along with earnings, Herbalife announced that Michael Johnson is slated to transition to Executive Chairman in June 2017 at which point Rich Goudis, the current COO, will take over as CEO. Goudis has been largely absent from the public eye in recent years.

Since HLF’s earnings call, two other notable events have taken place. First, on November 6th, John Oliver’s Last Week Tonight aired a 32-minute segment on multi-level-marketing companies with a focus on Herbalife. In his typically colorful style, John Oliver points out the hypocrisy and fraud inherent in Herbalife’s business and shines a spotlight on how the company harms hundreds of thousands of people every year. You can watch his scathing take-down of HLF here. To date, the John Oliver segment has been viewed on YouTube more than 8 million times including over 1.7 million views of the Spanish-language version representing about 11% of the Hispanic households in the U.S. These 8 million views are in addition to the 4.1 million viewers of Oliver’s show on HBO and millions more on Facebook.

Second, on November 7, 2016, the documentary film “Betting on Zero” secured distribution rights, which will include a 30 or so city theatrical release in early 2017 and online video-on-demand dissemination thereafter. We believe that the John Oliver segment and the wide distribution of the film are materially positive developments which will help elevate the Herbalife story beyond traditional financial news media.

Despite its weak financial outlook, Herbalife is trading at $47.99 or about 10 times the midpoint of management’s new 2017 guidance ($4.60 – $5.00). Importantly, however, this guidance does not assume a significant disruption in Herbalife’s U.S. business. We believe the negative earnings impact is likely to be substantial as the U.S. accounted for ~23% of Herbalife’s contribution margin this past quarter (a measure of profitability before general selling and administrative expenses), and a substantially higher portion of earnings when giving consideration to the inherent operating leverage of the business.

Furthermore, Herbalife’s “definition” of earnings continues to exclude certain items which we believe are actual ongoing costs of the business but which Herbalife adds-back (including ~$0.46 for “non-cash interest expense”). This excludes additional fines and/or injunctive relief that may arise from other regulatory agencies. On a pro-forma basis, assuming a modest decline in the U.S. business and expensing the add-backs, we estimate Herbalife is currently trading at 12 to 15 times 2017 pro forma earnings (and a potentially much higher multiple depending on the magnitude of the impending U.S. decline).

Fundamentally, pyramid schemes are confidence games. The CEO exit, deteriorating earnings, the declining stock price, and the John Oliver segment should materially impact Herbalife distributor confidence. When distributors reduce their purchases and/or leave the company, the financial results of the company should decline on an accelerated basis. Furthermore, we believe the injunctive relief demanded by the FTC is likely to significantly impact Herbalife’s financial performance beginning in the second quarter of 2017. Coupled with decelerating growth in many international markets, especially in China, we expect earnings to decline in 2017. We remain short Herbalife because we believe its intrinsic value is zero.