Life Time Fitness, Inc. (LTM) Exploring REIT Conversion: Marcato Capital Management Sends Letter To CEO

In a newly amended filing with the U.S Securities and Exchnage Commission, Marcato Capital Management, managed by Richard Mcguire, has disclosed a letter it sent to Chairman and Chief Executive Officer (CEO) Bahram Akradi of Life Time Fitness, Inc. (NYSE:LTM). The hedge fund sent the letter in response to the company’s recent announcement to explore a potential conversion of real estate assets into a Real Estate Investment Trust (REIT).

Mick McGuire

Marcato Capital Management is one of the Life Time Fitness, Inc.’s (NYSE:LTM) largest shareholders, owning 3.12 million shares of the company. The stake is equal to 8.0% of common stock outstanding, according to the filing.

In the letter, Marcato Capital Management states that it commends Life Time Fitness, Inc. (NYSE:LTM) on its announcement that the company has retained financial and legal advisors to explore a potential conversion of its real estate assets into a REIT. According to the hedge fund, following the announcement, it received numerous in-bound calls from the investment community with questions regarding its view of the implications of the announcement and have reviewed reports by research analysts who cover the company.

“In our opinion, many investors and analysts do not fully appreciate the transformational nature of the company’s announcement. Based on Marcato’s analysis, at the mid-point of our valuation range, we believe the shares of LTM could reach $70 per share upon separation of the Company’s real estate assets. We are writing this letter to you and the board of directors to share this analysis and to offer suggestions for your consideration that we believe may help clarify any confusion in the marketplace,” according to the letter.

Further, Marcato Capital Management states that it invested in Life Time Fitness, Inc. (NYSE:LTM) because it believes that the company’s stock trades at a substantial discount to their fair value and this is due primarily to the nature of the company’s extensive real estate holdings. The fund adds that Life Time Fitness, Inc. (NYSE:LTM) faces two significant disadvantages versus other traditional real estate owners: a higher cost of debt and equity capital and corporate level tax obligations.

In addition, the fund states that given the considerable size of Life Time Fitness, Inc. (NYSE:LTM)’s real estate portfolio, steps that improve the capital and tax efficiency of the real estate strategy can create enormous value for shareholders.

Marcato Capital Management also submitted its analysis, in which it laid out its assumptions of a hypothetical separation of the company’s operating business from its real estate ownership business and the range of values that it thinks these two businesses are likely to garner as independent entities.

Moreover, in the letter, the fund shared with Life Time Fitness, Inc. (NYSE:LTM) a number of recurring questions the fund is hearing and its perspective on the likely answers.

Life Time Fitness, Inc. (NYSE:LTM) is engaged in operating sports and athletic fitness, recreation and spa centers, and has a market cap of nearly $2 billion. Aside from Marcato Capital Management, Glenn J. Krevlin’s Glenhill Advisors holds 337,735 shares, and Nantahala Capital Management, led by Wilmot B. Harkey and Daniel Mack, owns 278,177 shares of the company.

Disclosure: none