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Ensign to Spin Off Senior Housing, Hospice Unit

Mission Viejo’s the Ensign Group Inc. (Nasdaq: ENSG) is at the spinoff game again.

The owner and operator of nursing homes and other healthcare facilities is creating a publicly traded company called the Pennant Group Inc. that will include Ensign’s ancillary businesses in areas like senior housing, hospices and mobile diagnostic and clinical laboratory operations.

The new company could have annual revenue topping $300 million.

It’s the second such deal for Ensign, which five years ago spun off San Clemente-based CareTrust REIT Inc. (Nasdaq: CTRE), which now has a $2.3 billion market cap.

Ensign and CareTrust were the 13th and 14th most valuable public companies based in Orange County as of last month.

“We believe that this spinoff, much like the very successful spinoff of CareTrust REIT Inc. in 2014, will shine light on value that has yet to be fully realized under Ensign and will present two very attractive investments that provide our partners and shareholders the opportunity to share in that value, now and over time,” Ensign Chief Executive Christopher Christensen said in a May 6 statement.

Christensen will serve as a director for both companies for the foreseeable future.

‘Beat and Raise’ Year?

Ensign, which has a $2.8 billion market cap, was begun in 1999 by Christensen and his father, Roy E. Christensen.

Last week, it reported first-quarter revenue climbed 12% to $549.2 million while net income jumped 28% to $30.8 million. The company also boosted its 2019 guidance for revenue and public adjusted profit.

“Management’s initial guidance last quarter was well above prior consensus expectations and raising guidance this early in the year shows strong momentum and lends us to believe this could be a ‘beat and raise’ kind of year given improving fundamentals and continued acquisition opportunities,” Stifel analyst Chad Vanacore said in a note to investors.

While shares didn’t rise much last week, they have more than doubled in the past 16 months.

CareTrust last week also announced first-quarter funds from operations, a key measure for REITs, increased 16% to $27.9 million. Shares changed little last week, settling on $24.19; its shares have also doubled in the past year.

One for Two

Ensign didn’t reveal the value of the latest spinoff or the share price, except to say it anticipates one share of Pennant common stock for every two shares of Ensign’s common stock. The spinoff could be completed by the fourth quarter this year.

The spinoff could have a value of $18 a share while the remaining Ensign company could be worth around $42 for a combined $60, according to Stephens Inc. analyst Dana Hambly.

“We expect that Pennant’s growth profile will look similar to ENSG’s, though likely at a faster pace given its relatively small size,” Hambly wrote in a note to investors. “We expect Pennant will continue to use its balance sheet to acquire underperforming assets in core markets such that total growth is double-digits [mid- to high-teens] in both segments.”

Prior Spinoff

In 2014, Ensign decided to focus on acquiring underperforming assets that it could improve while spinning off its premium assets to CareTrust.

Christensen told analysts on a call last week, “We are applying the lessons learned from our prior spinoff, some of which were positive and some negative to create a structure for both companies that leaves each very healthy financially and operationally.”

Ensign currently has 171 skilled nursing facilities, 56 assisted living facilities, 60 home and health hospices, seven mobile operations and five medical transportation units.

After the spinoff to Pennant, Ensign will include transitional and skilled services, rehabilitative care services, healthcare campuses, post-acute-related new business ventures and real estate investments.

It’s anticipated that Pennant will consist of 60 home health and hospice agencies, 51 senior living operations, and mobile diagnostics and lab operations across 13 states.

Pennant won’t be joining OC’s contingent of publicly traded companies. Its new headquarters will be based in Idaho, where its recently announced chief executive currently works.

Regulatory filings note that Pennant’s operations will be largely decentralized, with a “local leadership-centered operating model.”

Pennant will have about 15% of Ensign’s revenue and about 14% of its EBITDA profit, Vanacore estimated. Ensign in 2018 reported revenue of $2.04 billion and EBITDA of $195.3 million.

The split will give investors who don’t either like the skilled nursing or the senior housing industries a chance to invest in just one as a more pure-play investment, Christensen told analysts.

Skilled nursing is a relatively low-margin business where competitors often include nonprofits. Analysts have referred to Ensign as “the best house in a bad neighborhood.”

“There are people that don’t really like our profession, they don’t like our industry [but] they like our model and they like the results that we achieve,” Christensen said. “And this gives them a chance to invest in Ensign and what we believe in and how we operate and the fundamentals and the way we acquire the contrarian way that—contrarian acquisition model we tend to follow.

“It gives them a chance to do that without necessarily coming into an industry that they’re uncomfortable with.”

Welcome PNTG

Pennant has applied to list its shares on the Nasdaq under the ticker symbol “PNTG.”

Ensign will keep in place its plan for a management change at the end of the month. In February, the company said Christensen will become executive chairman, replacing his father who will remain on the board. The new chief executive will be Barry Port, who’s been with the company for 15 years, including the past five as chief operating officer.

Daniel H. Walker, who’s been with Ensign for 12 years and is president of its home health and hospice holding company, Cornerstone Healthcare Inc. based in Eagle, Idaho, will become chairman and chief executive of Pennant.

Christensen will be on Pennant’s board of directors.

Bank of America Merrill Lynch is serving as financial adviser to Ensign in connection with the spinoff. Kirkland & Ellis LLP is serving as legal adviser to Ensign.

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.
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