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Ensign Shares Plummet After REIT Spinoff, Rise on Debut

Orange County has a new publicly traded healthcare company among its ranks.

Mission Viejo-based CareTrust REIT Inc.’s shares rose 15% over the first three days of trading after its spinoff from nursing home operator Ensign Group Inc.

CareTrust buys healthcare-related real estate.

Its spinoff affected Mission Viejo-based Ensign last week—the nursing home operator’s shares plunged more than 40% on June 3, a day after the move, before rebounding slightly. They remained up despite the initial jolt from the spinoff, and CareTrust had a market value of about $654.5 million.

CareTrust’s market value wasn’t immediately available, although analyst Robert Mains, who follows Ensign for St. Louis-based Stifel, Nicolaus & Co., estimated last year that it could have an initial market value of $275 million to $300 million based on 22.75 million shares at $12 to $13 a share.

The share price on the first day of trading on May 30, before the spinoff was completed, opened at $17.75.

The new company debuted on Nasdaq as part of Standard & Poor’s SmallCap 600 stock index, replacing Bermuda-based insurer Tower Group International Ltd.

CareTrust owns 97 skilled nursing, assisted-living and independent living buildings, all of which are leased to Ensign. Most of the properties are in California, with the rest in other Western states, including Arizona.

Rationale

CareTrust explained the rationale for the spinoff in a Securities and Exchange Commission filing:

“The strategic considerations and nature of Ensign’s healthcare business currently dictate and limit the size and scope of its real estate business.”

Spinning off real estate into a separate company allows CareTrust “to make decisions regarding the real estate business without regard to the Ensign healthcare business.”

CareTrust will be “primarily engaged in the ownership, acquisition and leasing of healthcare-related properties,” the company said in the SEC filing prior to the spinoff.

“We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses,” CareTrust said.

The REIT also anticipates “diversifying our portfolio over time, including [buying] properties in different geographic markets and different asset classes.”

CareTrust said 42 Ensign workers transferred to the spinoff. Ensign had 700 OC employees, including at nursing homes, before the spinoff.

Gregory Stapley, Ensign’s longtime corporate secretary, is CareTrust’s first chief executive. Ensign founder and Chief Executive Christopher Christensen remains at the helm of that company.

Ensign said it “expects to realize benefits from being a ‘pure play’ healthcare operation and intends to continue to pursue its historical growth practices and strategies,” the filing said.

The CareTrust split will allow “management, regulators, market analysts and investors” to focus solely on Ensign’s healthcare operations.

Ensign is the second Orange County-based public nursing home company to split itself in two since the beginning of the decade.

Irvine-based Sabra Healthcare REIT Inc. came about in late 2010 after then-parent Sun Healthcare Group Inc. spun it off. Sun, which was acquired by Kennett Square, Pa.-based Genesis HealthCare LLC in 2012, broke Sabra off in an effort to enhance shareholder value.

Ensign spun off CareTrust through distributing shares of the latter to current Ensign shareholders.

Ensign has shrugged off comparisons to others in its industry.

“We are designing the capital structure of each company to create a very healthy platform for future growth and performance,” Stapley said in November when Ensign announced plans to spin off CareTrust.

Christensen reiterated that view on an earnings call last month.

“As we said before, our goal in the spinoff has never been to produce a one-time benefit to our shareholders,” he said.

Christensen also emphasized that CareTrust wouldn’t become Ensign’s acquisition vehicle, although there “may be certain opportunities to expand our relationship with CareTrust in the future.”

Stapley said CareTrust’s relationship with Ensign would be the REIT’s “biggest advantage” at the outset.

CareTrust, “for its part, will be working hard to carry the Ensign banner into geographies without facing the operational considerations with which Ensign [deals] as a healthcare operator,” Christensen said, adding that CareTrust would be able to work with multiple healthcare operators in order to pursue larger portfolio deals.

CareTrust was designed to take advantage of favorable tax treatment for healthcare-related real estate investment trusts. The company was spun off as a nontaxable REIT, provided it pays at least 90% of its income to shareholders in the form of dividends. Ensign will remain taxed.

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