The number of publicly traded home health companies in operation may soon rise by one, as The Ensign Group Inc. (Nasdaq: ENSG) signaled Monday its intent to spin off and grow a separate business under the name The Pennant Group Inc.
Plans for the spinoff — expected to close toward the end of 2019 — were unveiled with the Mission Viejo, California-based company’s first-quarter earnings results.
Once spun into its own company, The Pennant Group Inc. will consist of roughly 60 of Ensign’s home health and hospice agencies, in addition to dozens of the health care organization’s senior living operations. After receiving necessary approval, Pennant will list its shares on the Nasdaq stock market under the ticker symbol “PNTG.”
In doing so, Pennant will join the likes of Amedisys Inc. (Nasdaq: AMED), LHC Group Inc. (Nasdaq: LHCG) and Encompass Health Corporation (NYSE: EHC) as one of the relatively few publicly traded home-based care companies in the U.S. Others include Addus HomeCare Corporation (Nasdaq: ADUS) and Brookdale Senior Living (NYSE: BKD).
Previously, Ensign had rolled up home health and hospice assets in its Cornerstone Healthcare Inc. subsidiary.
“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,” Ensign President and CEO Christopher Christensen said in a statement announcing the news. “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.”
Ensign’s current management team is largely expected to continue in their existing roles. Cornerstone President Daniel Walker will become the chairman, CEO and president of Pennant following the spinoff.
While Pennant will stand independently from Ensign, the two will remain close partners. Moving forward, the companies will participate in a preferred provider network to foster data sharing and smooth care transitions between health care settings.
“We are excited to further enhance our service offerings to our acute care partners, payors and other channel partners and look forward to continuing to earn the trust of patients, residents and their families,” said Walker, who recently highlighted Ensign’s desire to acquire both well-performing and struggling home health, hospice and home care operations on a national scale.
The Pennant spinoff is expected to be tax-free to Ensign’s shareholders, except for any cash paid in lieu of fractional shares, according to the company.
Apart from home health and hospice, 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.
In discussing the rationale to spin off its home health and hospice businesses, Christensen pointed to Ensign’s 2014 move to separate its real estate assets into CareTrust REIT (Nasdaq: CTRE).
“While there are obvious differences in the Pennant spinoff, we are applying the lessons learned from the CareTrust spinoff, 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,” he said. “Because of that, we are confident that both Ensign and Pennant will have a solid cultural and financial foundation to drive both near-term and long-term growth.”
The Ensign Group — which has made at least nine acquisitions over the past few months, including its most recent deal for Resolutions Hospice — is also the parent company of nine home care businesses. The company’s footprint spans 12 states.
When the spinoff is finalized, Pennant will have an ability to tap public markets for capital as it executes on its strategic and organic growth objectives, Walker wrote in a letter to shareholders. Those objectives overlap but also diverge from Ensign’s, resulting in different capital needs and pressures, he noted.
On Monday, Ensign reported home health and hospice services segment revenue for Q1 2019 of $46.1 million, up 16% over the prior year’s quarter.
From 2013 to 2018, Ensign grew its home health and hospice services and senior living services revenue by approximately 330%, according to the company.
For comparison, home health net operating revenues for Birmingham, Alabama-based Encompass Health checked in at $219.5 million in the first quarter, a nearly 19% increase over the $185.3 million the company netted in Q1 2018.
Pennant will also include Ensign’s mobile diagnostic and clinical laboratory operations.
“I think it’s a valuation issue for investors,” Stoneridge Partners Presidents told Home Health Care News in an email. “Trying to align investors into their respective pools and drive valuation up in total. Certain investors probably view one set of assets as a drag on valuation — and vice verse.”