Ensign Group to Spin Off Non-Skilled Nursing Assets into New Public Company

The Ensign Group (Nasdaq: ENSG) on Monday announced a plan to spin off its non-skilled nursing assets into a separate publicly traded company.

The Mission Viejo, Calif.-based operator will shift its home health, hospice, and senior living assets into a new firm known as The Pennant Group, Inc., with the deal tentatively set to close by the end of 2019.

Ensign’s portfolio of post-acute assets — including transitional and skilled nursing facilities, health care campuses, and any new operations or real estate investments — will remain under The Ensign Group Inc., according to the company.

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CEO Christopher Christensen, who will join the board of directors at Pennant, said the spin-off was necessary amid rapid macro-level changes in the post-acute care space.

“We believe that taking this additional step will accelerate both organizations’ ability, as two smaller but strong organizations, to quickly adapt to the ever-changing needs of our patients, payers, and other providers within the continuum of care,” Christensen said in a statement.

Daniel Walker, currently president and CEO of Ensign’s home health and hospice operating arm Cornerstone Healthcare, will rise to chairman, CEO, and president of Pennant, according to the company. Christensen is slated to hand over the Ensign CEO reins to Barry Port on May 30, while staying on as executive chairman and chairman of the board.

Christensen pointed to the company’s history with large-scale spin-offs in justifying the decision: Back in 2014, Ensign jettisoned its real estate assets into CareTrust REIT (Nasdaq: CTRE), the real estate investment trust (REIT) that continues to serve as its primary ownership partner.

“While there are obvious differences in the Pennant spin-off, we are applying the lessons learned from the CareTrust spin-off, some positive and some negative, to create a structure that leaves both very healthy, financially and operationally,” Christensen said.

All told, Pennant — which will trade on the Nasdaq exchange under the symbol PNTG — will include 60 home health and hospice agencies, 51 senior living properties, and a variety of mobile diagnostics and lab operations in 13 states. Of those 51 senior living properties, Pennant will lease 28 from Ensign affiliates on a triple-net basis, with the remaining 23 under the ownership of third-party landlords.

Christensen had hinted at a spin-off back in the winter of 2018, positioning the idea as a way for shareholders to realize the full value of the company’s home health business line.

“Creating a separate entity that functions alongside us, but where people can see in detail what’s happening with our home health and hospice and assisted living [segments] that are both functioning very, very well … that’s something that we certainly have the obligation to look at and constantly consider,” Christensen said on an earnings call with investors and analysts.

Walker specifically called out investor skepticism of skilled nursing in justifying the spin-off move in a letter to shareholders.

“More education about and visibility into these uniquely situated operations will create a better understanding of the value we believe remains somewhat hidden and overshadowed by the market’s perception of the skilled nursing industry at large, despite Ensign’s successful history of outperforming industry peers in many key metrics,” Walker wrote.

Moving forward, the two companies will establish a preferred provider network known as the Ensign-Pennant Care Continuum, with the goal of fostering easy data sharing and the development of new care pathways between the Ensign and Pennant affiliates that elect to join.

“We are excited to further enhance our service offerings to our acute-care partners, payers, and other channel partners, and look forward to continuing to earn the trust of patients, residents, and their families,” Walker said in the statement.

In announcing the move, Ensign affirmed its commitment to the skilled nursing space, indicating a continued plan to purchase additional real estate assets on top of its current total of 77.

“We will always be an operationally-driven organization first, but we are always evaluating the growing underlying value in our owned real estate and other new business ventures and the additional potential opportunities that each of those businesses gives us in the future,” Christensen said. 

Ensign has consistently stood at the top of the heap among skilled nursing operators, posting quarter after quarter of profits and expanding its footprint with a focus on turnaround opportunities.

“The dynamics in our industry, while sometimes challenging, are not nearly as difficult as many are led to believe as a result of these self-imposed challenges that follow creative financial engineering,” executive vice president Chad Keetch said in February on the company’s year-end earnings call, which saw the operator post record earnings.

The company’s portfolio of skilled operations currently sits at 197, and while many leaders have predicted the end of the large-scale, national nursing home chain, Ensign has succeeded with a decentralized approach that emphasizes local autonomy. Instead of a top-down structure with orders coming from headquarters, the company operates more as a loose affiliation of regional leaders with the power to make significant decisions regarding care, staffing, and vendor partnerships. A central service office — which the company bought last spring — serves as a logistical backbone for payroll and other back-office operations.

That strategy has carried over to the company’s other post-acute assets, Christensen noted Monday.

“We recognized early on in our new business venture experience that it was very important to invest in the right people and systems to give each of these unique operations the resources they require to be the best of the best,” he said. “To that end, each of the Pennant businesses has successfully developed their own leadership and field-based resources that operate independent of their skilled nursing counterparts.”

Ensign management will discuss the plan further on the company’s first quarter 2019 earnings call Tuesday afternoon. ENSG shares rose nearly $3, or about 5.7%, in after-hours movement immediately after the announcement, reaching $55 per share.

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