Inside Ensign’s New Home Health Spinoff, The Pennant Group

More than 10 years after the concept for The Pennant Group (Nasdaq: PNTG) came to be, The Ensign Group (Nasdaq: ENSG) spinoff has finally made its way to fruition.

The deal was completed on Oct. 1, meaning Ensign’s former home health, hospice and senior living businesses are now part of the new publicly traded company.

On a micro-level, not much will change for agencies and communities housed under Pennant, executives told Home Health Care News. But on a macro-level, the move will create exponential growth opportunities for the new company and its local leadership in the years to come.

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“The Pennant Group is really a holding company that’s serving as a vehicle to allow [our] two businesses, [Cornerstone Healthcare and Pinnacle Senior Living], to take the next natural step in our growth and development,” CEO Danny Walker told HHCN. “That’s the history.”

That history dates back to 2007, when Walker joined Ensign as a transactional lawyer tasked with helping the company launch its initial public offering. That year, Walker and his wife also welcomed a son, who was born with down syndrome and required home health services.

“That was my first introduction to having a team come into our home,” Walker said. “That home health service lasted for three years, and it was during that period of our life that I decided I … wanted to set aside the practice of law and pursue home health and hospice.”

Walker was able to do that because of Ensign’s organizational structure, which allows for leaders to start up new businesses if they wish. They must replace themselves in the organization and take full risk, while Ensign operates as a partner by providing capital, expertise and growth.

“The business was started with the intention of growing it so it could eventually spin off from The Ensign Group,” Walker said. “That’s really where Pennant came from.”

Growth goals

Pennant is comprised of two former Ensign subsidiaries, Cornerstone Healthcare and Pinnacle Senior Living.

Cornerstone offers home health, home care and hospice services, with 63 agencies across 13 states. Meanwhile, Pinnacle operates a total of 52 senior living communities across six states.

On its end, Ensign is left with 212 health care facilities, with services ranging from skilled nursing to various forms of therapy and rehab.

The goal of the spinoff was to give investors more industry-specific options while creating two seperate, healthy publicly traded companies, Ensign and Pennant leaders said when announcing the deal. But the move comes with additional perks, too.

For one, the transaction will improve Pennant’s access to capital, Walker said.

“We’ve always been able to access capital through Ensign’s balance sheet,” he explained. “We’re now able to directly access that capital either from the equity capital markets or from a banking group that’s supportive of our growth.”

It’s unclear exactly what Pennant’s growth will look like.

Public documents indicate the company is prioritizing organic growth, as well as growth through the strategic acquisition of underperforming operations in target markets. Additionally, as was the case before, companies acquired by Pennant will maintain their local branding.

However, executives intentionally decline to identify geographic or financial growth goals, telling HHCN only that the pipeline is “robust” and that opportunities will only increase after the implementation of the Patient-Driven Groupings Model (PDGM).

“We’re very opportunistic acquirers,” Chief Operating Officer John Gochnour told HHCN. “We won’t come out and say, … ‘We’re going to do $20 million worth of deals this year,’ or, ‘We’re going to target and will enter the Tucson market.’”

Instead, Pennant is focused on deals of any size that align with its needs and partners, Gochnour said. Part of that means prioritizing acquisitions that fit into its long-standing co-location strategy, which it refers to as “clustering.”

“That has been a priority; it hasn’t been ‘the priority,’” Gochnour said. “But we really believe there’s a lot of upside to building post-acute care continuums that are focused on patient care and patient experience.”

Beyond building that care continuums within Pennant, the new company will also continue to work with Ensign through the newly formed preferred provider network called the Ensign Pennant Care Continuum (EPCC).

The continuum will allow for Pennant and Ensign to share data and create pathways to better care for patients. Gochnour expects all Pennant operations in markets adjacent to Ensign operations to participate, as well as a “high, high percentage” of Ensign operations.

“We see [EPCC] as something that will put us in a position where we’re able to work strategically with payers, with hospital systems [and] with groups that are already at risk on outcome-based reimbursement models [to] really deliver a solution that’s a win for the payers, patients and providers,” Gochnour said.

Pennant hopes to develop additional care continuums with more providers in the future.

Local leadership

On a local level, not much will change in terms of day-to-day operations for agencies within Pennant.

They’ll maintain the same leadership structure, systems, processes, policies and procedures as before the spinoff. Only the agency’s professional services provider will from Ensign to another entity, Walker said.

But local leadership will have more opportunity to reap the benefits of equity compensation programs as a result of the spinoff.

“That equity is tied specifically to success and growth of the Pennant Group,” Walker said. “When you’re part of The Ensign Group and the SNF world is a much larger piece of the pie, it’s harder to distribute equity as widely as we would normally do it.”

Such equity programs are somewhat unique for a company of Pennant’s size due to its leadership structure.

“Because we don’t have a large middle management structure in a traditional corporate hierarchy, [local administrators and leaders] participate regularly in equity programs,” Gochnour said. “That creates this widespread participation in options and restricted stock awards.”

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