The Ensign Group Will Split Into a REIT
November 8, 2013
November 8, 2013. Although we should not have been surprised, given that The Ensign Group (NASDAQ: ENSG) owns the vast majority of its 119 properties, we were a bit taken aback when the company announced last night that it will be splitting into an operating company and a REIT, with the new REIT named CareTrust REIT. It is something that every public company in the senior care space has had to consider in the past few years, given REIT valuations, but health care REIT stock prices dropped significantly since mid-May, so the valuations are down from those previous nose-bleed heights. Management obviously had to wait to make a move until it finalized a settlement with the Department of Justice and the OIG regarding an ongoing investigation into the company since 2006, and this was completed on October 1.
At the same time, Ensign reported third quarter earnings results, and while there was some good news on same store managed care days and skilled nursing quality mix revenues, the quarter missed some targets. Worse, management lowered the full year guidance for revenues and earnings per share, with full-year revenues cut by $15 million and the low end of earnings cut by 16 cents per share to $2.56 from $2.72. On a normal day, that news would send any other company’s shares plummeting by 10% to 20%, but with the REIT spin-off announcement coinciding, it changed everything. Ensign had already been the best performing senior care stock in 2013, with its shares up 57% through October 31. In early trading today, Ensign’s shares are up nearly $2.00 or more than 4%. Obviously, investors like the REIT idea, and so do we. But it may be difficult to differentiate themselves since there are so many small REITs competing for acquisitions. Fortunately, the supply of available deals remains robust.