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Ensign Bets Pennant Spinoff Unlocks Senior Housing Potential

The Ensign Group’s (Nasdaq: ENSG) newly announced spinoff of its senior living, home health and hospice properties will provide a more focused foundation of support for its 51-property senior housing portfolio, unlock untapped earnings potential and identify new acquisition opportunities, the Mission Viejo, California-based company said during its Q1 2019 earnings call Tuesday.

Ensign reported a record per share earning of $0.49 in the first quarter, a 14% increase over the previous year. Adjusted earnings per share jumped 22% year-over-year, to a record $0.55.

The company’s senior living segment reported $40.7 million in revenue in Q1, a 12% increase over the previous year, while senior living income recorded an 8% increase over Q4 2018, to $5 million.

As happy as Ensign Group was with its Q1 performance, it believes the Pennant Group spinoff will unlock even more earnings potential, CEO Christopher Christensen said.

“We believe the [spinoff] will accelerate the growth of businesses while allowing our shareholders direct access to inherent value in these lines of businesses,” he said.

The Q1 performance led Ensign to adjust its 2019 guidance. It now expects annual revenues between $2.34 billion and $2.4 billion, and full-year earnings between $2.22 and $2.30 per share.

“[R]aising guidance this early in the year shows strong momentum and lends us to believe this could be a ‘beat and raise’ kind of year given improving fundamentals and continued acquisition opportunities,” Stifel Nicolaus Analyst Chad Vanacore wrote in a note to investors.

Comparisons to CareTrust spinoff

Ensign hopes it can capture lightning in a bottle a second time with the Pennant Group, pointing to how the company unlocked value with CareTrust (Nasdaq: CTRE), its 2014 spinoff of 94 assets in a real estate investment trust.

In the five years since CareTrust was formed, Ensign has added 187 operations and acquired 77 real estate assets, Ensign Group Executive Vice President and Secretary Chad Keetch said. As of March 31, Ensign and CareTrust have collectively produced a 408% return to investors since the spinoff date.

Keetch and Christensen believe Pennant Group can unlock similar untapped value in its home health, senior living and hospice assets by placing the portfolio under a dedicated operating company.

Another contributing factor in Ensign’s decision to launch Pennant is a shared relationship between home health and senior living. Home health visits more often take place in assisted living settings than skilled nursing, Christensen observed.

“There’s more overlap than we realize,” he said.

Pennant’s portfolio 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 new, long-term triple-net leases with Ensign subsidiaries.

Ensign will continue to pursue strategic acquisition opportunities across all of its service lines, and believes the spinoff can unlock new opportunities as well as bring new investors to the space, Christensen said.

“There are people who don’t like our industry, but like our model,” he said, alluding to concerns around skilled nursing, which has been beset in recent years by reimbursement and regulatory pressures. “This gives them a chance to invest without entering an uncomfortable industry.”

A new provider network

As part of the spinoff, Ensign and Pennant are launching a preferred provider network, the Ensign-Pennant Care Continuum, Pennant Group Chairman, CEO and President Daniel Walker said. The operations electing to opt in to the network will work together to share data and create care pathways designed by clinicians to achieve the highest possible outcomes in transitions between care settings.

“This memorializes the operational partnership we have always enjoyed under Ensign’s leadership,” Walker said.

Each Pennant business has developed its own leadership and field-based resources that operate independent of its skilled nursing counterparts. Ensign is confident the spinoff will allow Pennant to quickly adapt to the needs of patients, payers and providers within its care continuum.

The spinoff is expected to be completed by year-end, and analysts are optimistic that Ensign can unlock value with Pennant Group. Pennant can grow its base 2018 EBITDA by 15% in 2019 and 2020 to $28.4 million and $32.6 million, respectively, Stephens analyst Dana Hambly estimated.

“[M]arket conditions are favorable so the timing makes sense,” Hambly wrote in a note to investors. “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.”

Ensign Group stock closed trading Tuesday down 2.15%, to $50.91 per share.

Publicly traded health care real estate investment trusts (REIT) and senior care operators have started 2019 with a bang. Last week, HCP (NYSE: HCP) announced $558 million in senior housing acquisitions in its Q1 earnings, after a two-year portfolio restructuring. A shift in senior housing supply-and demand dynamics drove a Ventas’ Q1 earnings were tampered by lagging senior housing performance, but CEO Debra Cafaro was optimistic that supply-and-demand dynamics would soon shift in its favor. Welltower (NYSE: WELL) reported $1.27 billion in revenue in Q1, a 13.4% increase over the previous time frame last year.

The Ensign Group’s (Nasdaq: ENSG) newly announced spinoff of its senior living, home health and hospice properties will provide a more focused foundation of support for its 51-property senior housing portfolio, unlock untapped earnings potential and identify new acquisition opportunities, the Mission Viejo, California-based senior care operator said during its Q1 2019 earnings call Tuesday.

Ensign reported a record per share earning of $0.49 in the first quarter, a 14% increase over the previous year. Adjusted earnings per share jumped 22% year-over-year, to a record $0.55.

The company’s senior living segment reported $40.7 million in revenue in Q1, a 12% increase over the previous year, while senior living income recorded an 8% increase over Q4 2018, to $5 million.

As happy as Ensign Group was with its Q1 performance, it believes the Pennant Group spinoff will unlock even more earnings potential, CEO Christopher Christensen said.

“We believe the [spinoff] will accelerate the growth of businesses while allowing our shareholders direct access to inherent value in these lines of businesses,” he said.

The Q1 performance led Ensign to adjust its 2019 guidance. It now expects annual revenues between $2.34 billion and $2.4 billion, and full-year earnings between $2.22 and $2.30 per share.

“[R]aising guidance this early in the year shows strong momentum and lends us to believe this could be a ‘beat and raise’ kind of year given improving fundamentals and continued acquisition opportunities,” Stifel Nicolaus Analyst Chad Vanacore wrote in a note to investors.

Parallels to CareTrust spinoff

Ensign hopes it can capture lightning in a bottle a second time with the Pennant Group, pointing to how the company unlocked value with CareTrust (Nasdaq: CTRE), its 2014 spinoff of 94 assets in a real estate investment trust.

In the five years since CareTrust was formed, Ensign has added 187 operations and acquired 77 real estate assets, Ensign Group Executive Vice President and Secretary Chad Keetch said. As of March 31, Ensign and CareTrust have collectively produced a 408% return to investors since the spinoff date.

Keetch and Christensen believe Pennant Group can unlock similar untapped value in its home health, senior living and hospice assets by placing the portfolio under a dedicated operating company.

Another contributing factor in Ensign’s decision to launch Pennant is a shared relationship between home health and senior living. Home health visits more often take place in assisted living settings than skilled nursing, Christensen observed.

“There’s more overlap than we realize,” he said.

Pennant’s portfolio 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 new, long-term triple-net leases with Ensign subsidiaries.

Ensign will continue to pursue strategic acquisition opportunities across all of its service lines, and believes the spinoff can unlock new opportunities as well as bring new investors to the space, Christensen said.

“There are people who don’t like our industry, but like our model,” he said. “This gives them a chance to invest without entering an uncomfortable industry.”

A new provider network

As part of the spinoff, Ensign and Pennant are launching a preferred provider network, the Ensign-Pennant Care Continuum, Pennant Group Chairman, CEO and President Daniel Walker said. The operations electing to opt in to the network will work together to share data and create care pathways designed by clinicians to achieve the highest possible outcomes in transitions between care settings.

“This memorializes the operational partnership we have always enjoyed under Ensign’s leadership,” Walker said.

Each Pennant business has developed its own leadership and field-based resources that operate independent of its skilled nursing counterparts. Ensign is confident the spinoff will allow Pennant to quickly adapt to the needs of patients, payers and providers within its care continuum.

The spinoff is expected to be completed by year-end, and analysts are optimistic that Ensign can unlock value with Pennant Group. Pennant can grow its base 2018 EBITDA by 15% in 2019 and 2020 to $28.4 million and $32.6 million, respectively, Stephens analyst Dana Hambly estimated.

“[M]arket conditions are favorable so the timing makes sense,” Hambly wrote in a note to investors. “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.”

Ensign Group stock closed trading Tuesday down 2.15%, to $50.91 per share.
Publicly traded health care real estate investment trusts (REIT) and senior care operators have started 2019 with a bang. Last week, HCP (NYSE: HCP) announced $558 million in senior housing acquisitions in its Q1 earnings, after a two-year portfolio restructuring. A shift in senior housing supply-and demand dynamics drove a Ventas’ Q1 earnings were tampered by lagging senior housing performance, but CEO Debra Cafaro was optimistic that supply-and-demand dynamics would soon shift in its favor. Welltower (NYSE: WELL) reported $1.27 billion in revenue in Q1, a 13.4% increase over the previous time frame last year.

The post Ensign Bets Pennant Spinoff Unlocks Senior Housing Potential appeared first on Senior Housing News.

Source: Senior Housing News

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