The Ensign Group, Inc. (Nasdaq: ENSG) is separating its home health, hospice and nearly all of its senior living businesses into a separate publicly-traded company called The Pennant Group.
After the spinoff is finalized, it’s expected that Pennant — which is itself currently a wholly owned subsidiary of Mission Viejo, California-based Ensign — will consist of 60 home health and hospice agencies, 51 senior living operations, and mobile diagnostics and lab operations in 13 states. Of the senior living assets, 23 will remain subject to leases with third-party landlords, and Pennant will also operate 28 according to a new, long-term triple-net leases with Ensign subsidiaries.
The Ensign Group, meanwhile, will have a portfolio consisting of transitional and skilled services, rehabilitative care services, health care campuses and new business ventures and real estate investments related to post-acute care.
Under the spin-off arrangement, Ensign plans to distribute shares of Pennant’s common stock to the company’s shareholders on a pro rata basis. The spinoff is also expected to be tax-free for those shareholders, save for cash paid in place of fractional shares. Pennant will list its shares on the NASDAQ exchange under the ticker symbol PNTG.
Ensign will keep its management team in place, though some roles will change under the spinoff.
Daniel Walker — who currently works as president of Ensign’s home health and hospice holding company, Cornerstone Healthcare — will assume the role of the chairman, CEO and president of Pennant. Christopher Christensen, who works as Ensign’s Ensign’s president and CEO, will also serve as a director for both companies for the time being. John Nackel, a current director with Ensign, will also serve as a Pennant director and on the Ensign board until a replacement for him is found or his current term ends.
Ensign and Pennant will work together in a preferred provider network called the Ensign-Pennant Care Continuum.
“As preferred providers within the care continuum, each Ensign and Pennant operation that elects to opt into the network will work together to appropriately share data and create care pathways that will help us continue to drive care models focused on achieving the highest possible outcomes in transitions between care settings,” Walker stated.
In February, Ensign announced that Christensen will step down as CEO as of May 30, to be succeeded by Barry Port, current CEO of Ensign’s skilled nursing division.
The goal of the spinoff is to create two healthy, growing operations, according to Christensen.
“As we have emphasized repeatedly over the last several quarters, our home health, hospice and senior living leaders have created significant value as they have embraced and applied Ensign’s innovative operating model,” Christensen stated in a press release. “As a result of consistently achieving outstanding clinical results, Pennant has become the partner of choice in the markets they serve, and it shows in their financial and clinical results.”
Spinning off various business segments will help investors better understand the company’s multifaceted operations, Christensen wrote in a letter to shareholders about the arrangement.
“We believe a spin-off of Pennant’s businesses will foster better understanding by public stockholders, analysts and other stakeholders about how the application of Ensign’s core operating principles to these lines of business has the ability to produce extraordinary clinical, cultural and financial results,” Christensen wrote in the letter. “More education about and visibility into these uniquely situated operations will create better understanding of the value that we believe remains somewhat hidden and overshadowed by the market’s perception of the skilled nursing industry at large.”
The spinoff is also aimed at boosting transparency and accountability within Ensign’s different business lines.
“Our leaders and resources feel a collective sense of ownership for the clinical, financial and cultural success of our affiliated operations and hold each other accountable for successes and failures in an environment that fosters transparency and improvement,” Christensen wrote. “A spin-off of our businesses expands that model and provides our local leaders even more transparency, accountability and support from cutting-edge data systems and an innovative service center.”
Ensign posted its highest-ever earnings per share in Q4 2018, with the results primarily stemming from strong growth in the skilled nursing segment, but buoyed as well by an 11.1% year-over-year increase in senior living revenue.
The company is no stranger to spinoffs. In 2014, the company completed a plan to spin off 94 assets into the company known today as CareTrust REIT (Nasdaq: CTRE).
“We have been very pleased with the combined growth that Ensign and CareTrust have experienced and the return that it has generated for our shareholders, which as of the recent quarter end, had collectively produced a 408% return since the spin-off date,” Christensen stated. “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, while also ensuring that each company stays true to the operationally-driven culture upon which they were founded.”
Looking ahead, Ensign expects the spin-off to be completed in or by the fourth quarter of this year.
BofA Merrill Lynch is Ensign’s financial advisor for the spin-off, and Kirkland & Ellis LLP is serving as the company’s legal advisor.