Life Time Fitness, Inc. (NYSE:LTM) is on the verge of unlocking significant shareholder value and could rise more than 30 percent, says activist hedge fund manager Richard McGuire of Marcato Capital Management (H/T MarketFolly for the find).

Life Time Fitness

McGuire, a disciple of noted activist William Ackman, invests in small to mid-sized companies and various real estate plays.  It is from a real estate angle McGuire likes Life Time Fitness and their recent move to explore spinning off the fitness club’s large real estate holdings into a real estate investment trust (REIT) conversion.

Life Time Fitness shares trade at a substantial discount

McGuire thinks the shares of Life Time Fitness, Inc. (NYSE:LTM) trade at a substantial discount “due primarily to the nature of the company’s extensive real estate holdings,” he wrote in a laudatory letter to Life Time Chairman and Chief Executive Officer Bahram Akradi.

“In our opinion, many investors and analysts do not fully appreciate the transformational nature of the company’s announcement” that it was open to spinning off real estate into a separate investment vehicle and thus potentially unlocking shareholder value.

McGuire went on to write that his fund’s analysis could reach $70 per share – at the midpoint of their valuation range.   The stock is currently trading near $50 per share.  “Given the considerable size of the company’s real estate portfolio, steps that improve the capital and tax efficiency of the real estate strategy can create enormous value for shareholders,” he wrote.

McGuire revealed an expectation for the real estate transaction

In a supplemental Q&A report where McGuire, oddly, asked and then answered his own questions, the hedge fund executive revealed an expectation for the real estate transaction to conclude in approximately 6 months and wanted clarity on the transaction type, indicating an assumption the real estate would be separately spun off from the company holdings.

The letter indicated that Life Time Fitness, Inc. (NYSE:LTM) management would do well to field indications of interest from various third parties to test demand for the real estate investment package. “Offers from third parties would provide a useful market check and help ensure that whatever path the board chooses represents the value maximum outcome for shareholders.”  Lifetime will experience two significant headwinds relative to other traditional real estate owners in terms of higher cost of debt and equity capital and corporate level tax obligations.

Marcato Capital is the largest shareholder in Life Time Fitness, Inc. (NYSE:LTM), controlling nearly 8 percent, or 3.12 million, of the total shares outstanding. Other funds invested in Life Time include Glennhill Advisors and Nantahala, each of whom own under 500,000 shares in the firm.