Life Time Fitness, Chanhassen, MN, announced that it is exploring a conversion of real estate assets into a real estate investment trust (REIT), paving the way to potentially split Life Time into two companies.
The process was initiated by the company's board of directors and senior management team based on a review of several strategic alternatives, the company said in its announcement on Monday.
Jason Thunstrom, vice president of corporate communications and public relations for Life Time Fitness, tells Club Industry that the primary business benefit of a REIT conversion is to "create a more efficient capital structure" for Life Time Fitness.
If the Life Time board approves a specific transaction, Thunstrom says, it takes nine to 12 months to complete the formation of a REIT. Thunstrom also says if the board approves a plan to separate Life Time into two companies, they will be two publicly traded companies.
"The governance of those entities will be determined by a variety of factors, and it is premature to speculate on the governance and management of the entities at this point in the exploration process," Thunstrom says.
The Life Time board also adopted a shareholder rights plan to prohibit ownership of more than 9.8 percent of its outstanding shares "in order to safeguard its ability to pursue a pro rata dividend in connection with a REIT conversion," the company said. The shareholder rights plan, which expires no later than Aug. 21, 2015, also protects against "coercive or abusive takeover tactics" and helps ensure that Life Time's shareholders "are not deprived of the opportunity to realize the full and fair value of their investment."
In May, Marcato Capital Management, a hedge fund firm run by Richard "Mick" McGuire, bought a 7.2 percent stake in Life Time Fitness through share and stock option holdings as an activist investor. At the time, Marcato Capital said it wanted Life Time to expand more quickly and consider options for its real estate, the Minneapolis Star Tribune reported. Some analysts and media outlets had speculated Life Time would announce a REIT conversion plan in June, according to the newspaper.
Asked if the shareholder rights plan was affected by the Marcato Capital stake or if the plan was put in place to prevent another investor from purchasing a greater than 10 percent stake in the company, Thunstrom tells Club Industry the plan was adopted to facilitate the REIT's qualification.
"If the board approves a transaction, the REIT would have to satisfy certain requirements related to the diversity of ownership," Thunstrom says. "In order to help the REIT satisfy the requirements, its charter would include provisions typical for REITs that will prohibit ownership of more than 9.8 percent of outstanding shares."
Life Time's stock shot up after the news of the REIT conversion plan was announced, producing the biggest intraday gain for the company since April 2010, Bloomberg reported. Life Time's price closed up more than 16 percent to $48.36 Monday afternoon and up 26 percent from Aug. 7, when Life Time share prices hit a 2014 low of $38.36, Twin Cities Business reported. Before Monday, Life Time's shares had dropped 11 percent since the start of 2014.
Life Time opened at $48.16 today on the New York Stock Exchange.