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Ensign Group Calls Its Business Spinoff Different

The Ensign Group Inc. is shrugging off comparisons to others in its industry as it prepares to split off its operating and real estate businesses into a pair of publicly traded companies.

The Mission Viejo-based operator of nursing homes and other health businesses announced the spinoffs last month, saying it is separating its real estate into a new company called CareTrust REIT Inc. in a deal expected to be completed in next year’s first quarter.

Ensign’s operating group will continue to provide long-term care, rehabilitation, hospice and other specialty healthcare services and retain the Ensign name.

CareTrust will own almost 100 healthcare facilities at the start, thanks largely to a run of deals by Ensign, which will lease 94 facilities from CareTrust.

Ensign will be the second OC-based public nursing home company to split itself in two since the beginning of the decade.

Irvine-based Sabra Health Care REIT Inc. came about in late 2010 after then-parent Sun Healthcare Group Inc. spun it off.

The Ensign-CareTrust split will come

about through distributing shares of the real estate investment trust to current Ensign shareholders.

CareTrust will trade on the Nasdaq Global Market exchange under the symbol CTRE.

“We are designing the capital structure of each company to create a very healthy platform for future growth and performance,” said Ensign Executive Vice President and Corporate Secretary Gregory Stapley, who will be CareTrust’s chief executive.

Ensign founder Christopher Christensen will remain Ensign’s chief executive.

Tax Treatment

CareTrust, among other things, is intended to take advantage of favorable tax treatment for healthcare-related real estate investment trusts.

It’s being spun off as a nontaxable REIT, provided it pays at least 90% of its income to shareholders in the form of dividends.

The operating company will be taxed.

“Doing the tax-free spin leaves both companies with additional capital to execute their business plans,” Stapley said in a recent interview.

Spinning off CareTrust is a way “to return value to shareholders, because the REIT will pay a nice dividend. … Ensign pays a dividend right now but not as much as the REIT will pay,” said Robert Mains, an analyst who follows Ensign for St. Louis-based Stifel, Nicolaus & Co.

Ensign shares rose 5% the day after the split was announced on Nov 8.

Shares of the company are up 51% from the start of the year, with a recent market value of about $934 million.

CareTrust could have an initial market value of $275 million to $300 million, based on 22.75 million shares at $12 to $13 a share, Mains said.

Sabra’s market value was projected at $350 million to $400 million. It ended its first week at a market value of $1.5 billion and is now at $1.01 billion.

CareTrust also is expected to help Ensign in situations such as the possible acquisition of large real estate portfolios, Christensen said.

Those deals are “sometimes … too much for Ensign to swallow all at once,” he said.

The REIT would have access to capital that operating companies don’t have, “so they can facilitate Ensign’s growth more than Ensign could on its own,” Mains said. “They can buy a nursing home for a lower price if you include the capital costs.”

Ensign executives “designed the transaction to leave both resulting companies in positions of great strength,” Christensen said on Ensign’s earnings call last month.

“Unlike other transactions that have occurred in our industry, which on the surface may seem similar, we have taken great care in structuring a transaction that would safeguard our ability to provide the highest-quality healthcare services while also finding a way to share the tremendous value we have created in our real estate with our partners and shareholders now and over time,” he said.

Christensen referred to the fact that previous spinoffs were taxable and executed by shares of the operating company being newly distributed rather than the distribution of the real estate company’s new shares.

“The two parts were worth more than the whole … kind of [how] the alchemy works,” Mains said.

He noted that the deal is also different in that Christensen is staying with the operating company rather than going to the real estate unit a la former Sun Chief Executive Richard Matros after the Sabra-Sun split.

Real Estate

Real estate has been a keynote of Stapley’s 14 years at Ensign, he said.

“I’ve spent most of my time here working with the finding and acquisition of our real estate portfolio,” said Stapley, an alumnus of Brigham Young University and the University of Arizona who worked as general counsel for San Clemente-based manufacturer and retailer Sedgwick Sales Inc. prior to his Ensign career.

He said CareTrust, which will move to an unspecified location in South OC, plans to diversify its tenant and asset bases.

“We expect CareTrust as a healthcare oriented REIT not only to pursue skilled nursing, assisted living and independent living properties, but also to potentially diversify or eventually diversify into different property classes, such as medical office buildings, long-term acute care hospitals and in-patient rehabilitation facilities,” Stapley said.

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