Life Time's largest shareholder says do the split

The largest shareholder of Life Time Fitness Inc. is pressing the Chanhassen-based health club operator to proceed quickly with a proposal to spin off its real estate holdings into a separate company.

Marcato Capital Management, holder of 8 percent of Life Time shares, said Friday in a letter to the company's management that it supports spinning off properties into a real estate investment trust (REIT). The transaction would create an operating company and a property company whose shares would trade independently.

Life Time announced Aug. 25 that management and the board of directors would explore real estate options for its 112 centers across the country as a way to increase shareholder value. Life Time's shares jumped 16 percent that day. The stock was up another 6.4 percent on Friday and closed at $50.08 per share.

San Francisco-based Marcato had upped its Life Time stake in May to approximately 3.1 million shares or 8 percent. Marcato acquired approximately 2.9 million of those shares in March, April and May at between $46.36 and $49.29 per share.

In its letter to Life Time management, Marcato said it had fielded many calls from the investment community asking about the plan.

"In our opinion, many investors and analysts do not fully appreciate the transformational nature of the company's announcement," Marcato said in the letter. "Based on Marcato's analysis, at the midpoint of our valuation range, we believe the shares of LTM could reach $70 per share upon separation of the company's real estate assets."

Marcato is run by Richard McGuire, a 38-year-old former partner at Pershing Square Capital Management and a protégé of Pershing Square's Bill Ackman. McGuire started Marcato Capital in 2010, the year after Ackman launched an unsuccessful proxy battle with Target Corp. that aimed to convert Target's real estate into a separate REIT.

Sean Naughton, who follows Life Time Fitness as an analyst for Minneapolis-based Piper Jaffray & Co., thinks McGuire and Life Time are more or less on the same page.

"I think the letter he sent is consistent with what management believes in terms of creating shareholder value," said Naughton. "More than anything he is putting his position out there — what he thinks the shares could be worth."

In his analysis of the Life Time spinoff deal, Naughton offers three scenarios for the combined value of the two companies. His conservative scenario is $61 per share, with worst-case to best-case scenarios of $48 to $78 per share.

Life Time has said it might take nine to 12 months to complete a conversion to a REIT, but McGuire said in his letter that he thinks it could be done in six months.

"We encourage the company to move forward with this process expeditiously," he wrote.