Breaking Down Ensign’s Home Health and Hospice Spinoff Plans

Mission Viejo, California-based The Ensign Group Inc. (Nasdaq: ENSG) unveiled plans Monday to spin off its home health, hospice and senior living businesses into The Pennant Group, a separate publicly traded company.

Expected to close by the end of 2019, the Pennant spinoff will consist of 60 home health and hospice agencies and 51 senior living operations, in addition to mobile diagnostics and lab operations in 13 states. Following the spinoff, Ensign will maintain a portfolio of transitional and skilled services, rehabilitative care services and health care campuses, as well as new business ventures and real estate investments related to post-acute care.

Ensign and Pennant will remain close even after the spinoff is finalized, according to company executives, who discussed the news in-depth during a first quarter earnings call with investors on Tuesday afternoon.

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Specifically, the two will work together in a preferred provider network — the Ensign-Pennant Care Continuum — aimed at strengthening transitions of care.

“As we move forward, we’re very excited to retain the benefits from our affiliation with Ensign, while simultaneously gaining the benefits of creating a separate platform to drive growth,” Daniel Walker — who currently serves as president of Ensign’s home health and hospice holding company, Cornerstone Healthcare Inc. — told investors.

Walker will assume the roles of chairman, CEO and president of Pennant moving forward. Ensign’s current CEO — Christopher Christensen — is set to step down from his role May 30, with skilled nursing division CEO Barry Port replacing him.

The spinoff news likely doesn’t come as surprise to those who have followed Ensign, which has long talked about the market underappreciating the embedded value in its small but fast-growing home health and hospice businesses, Stephens analyst Dana Hambly wrote in a note published Tuesday.

“We thought the company may wait to grow those [home health and hospice] lines a bit more,” the note reads. “But market conditions are favorable so the timing makes sense. We think the Pennant story will be similar to the Ensign story as an outstanding operator with a strong balance sheet that provides plenty of capital to acquire underperforming assets and a demonstrated track record of improving those assets.”

Once separated from Ensign, Stephens estimates that Pennant can grow its base 2018 EBITDA by about 15% in 2019 and 2020 to $28.4 million and $32.6 million, respectively.

Investor preferences and skepticism of the skilled nursing industry were partly behind the move to form Pennant, Christensen said during Tuesday’s call.

“There are people that don’t really like our profession, that don’t like our industry — and they like our model and they like the results we achieve,” he said. “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 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.”

Ensign made 12 different acquisitions during the first quarter, mostly for skilled nursing assets in California, Utah and Arizona.

Since announcing its spinoff plans, Ensign has received multiple questions about mixing its home health and hospice businesses with its senior living assets. Executives, however, view the alignment as a natural one with ample cross-over opportunities.

“Home health happens a lot more in an [assiste living facility] setting than it does in a skilled nursing setting,” Christensen said. “There is a lot more overlap between these two particular industries than our industry with these. It is pretty natural even outside of our organization.”

Pennant will list its shares on the NASDAQ exchange under the ticker symbol PNTG.

Broadly, the spinoff’s growth profile will look similar to Ensign’s, though likely at a faster pace given its relatively small size, Hambly noted. Stephens expects the home health and hospice businesses to have a mid-to-high single-digit organic growth profile.

“We aren’t close to what we must become, but we have come a long, long way,” Christensen said.

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