What Does The Ensign Group's Spin Off Mean for Shareholders?

The Ensign Group just spun off 96 of its elder care properties into a REIT, there are a couple of interesting ways this could play out...

Jul 3, 2014 at 6:00AM

The Ensign Group (NASDAQ:ENSG) just jettisoned 96 of its properties in a tax-free spin off, issuing shares of CareTrust REIT (NASDAQ:CTRE). Since the CEO of Ensign Group sits on the board of CareTrust and the CEO of CareTrust is a notable shareholder of Ensign, the pair are likely to have an even cozier relationship than a surface view of this transaction suggests.

That's not a bad thing, but it's worth a deeper look at what could happen from here now that the transaction is complete.

Another small elder care REIT
The health care niche of the real estate investment trust (REIT) sector is relatively small, with three companies dominating over a collection of smaller players. In fact, CareTrust REIT, with just 96 properties, is pretty small compared to the big boys, each of which have over 1,000 facilities.

(Source: Bioluminescence 2009 Expedition, via Wikimedia Commons)

For example, Ventas (NYSE:VTR), one of the largest players, just agreed to acquire a health care REIT about the size of CareTrust REIT.

That $2.6 billion transaction will bring Ventas a company focused on medical office buildings (roughly 55% of net operating income) and senior housing (32%). The rest of the acquired business is hospitals (11%) and skilled nursing (2%).

The deal will bolster Ventas' medical office business, which is currently its third largest segment at 16% of net operating income. Senior housing (54%) and skilled nursing (19%) are one and two. Medical office buildings are a relatively attractive segment of the health care property sector.

CareTrust REIT's portfolio, meanwhile, will consist of around 80 skilled nursing facilities, 11 assisted living facilities, and four independent living facilities. Skilled nursing, which tends to be more dependent on government payments, is much less desirable than medical office buildings, overall.

Why spin CareTurst REIT off?
The big reason for the spin off is likely that Ensign Group wanted to get the properties off of its balance sheet. That reduces debt and frees the company up to focus on managing properties instead of financing buildings. And that's good for Ensign Group.

Since Ensign Group shareholders already owned the properties before they were spun off, it doesn't hurt them to have received CareTrust REIT shares.

And now shareholders can decide if they want to own health care properties or a health care management company—or keep both. That's still a good thing.

However, the CEO of Ensign Group will remain on CareTrust REIT's board and the CEO of CareTrust REIT is a notable shareholder of Ensign Group. So, it wouldn't be surprising to see the pair continue to work closely together on expansion opportunities. And that goes beyond the fact that CareTrust REIT is almost completely reliant on Ensign Group for its rental income (CareTrust REIT will manage three of its own properties). So, if Ensign Group is eying an acquisition, it might just ask CareTrust REIT to pitch in or sell the REIT properties after deals are done.

(Source: Jacinta Quesada, via Wikimedia Commons)

That would give Ensign Group access to additional funding and CareTrust REIT a potential stream of property acquisitions. As long any deals are priced fairly, everyone wins. However, there's another reason that supports the spin off... simplifying the acquisition of Ensign Group's former properties by a larger REIT.

Big deals are hard to find
Ventas' recent purchase, plus another smaller deal announced at the same time, will increase the size of its portfolio by roughly 10%. Deals of this scale are hard to come by and when they do appear they can be complicated. For example, one of the other big health care REITs bought an operating company and its properties and subsequently sold most of, though not all of, the operating company to a private equity shop which has since sold it to another company. That was a lot of work to expand a portfolio by roughly 120 facilities.

Ensign Group has, essentially, done the hard work already by braking itself up for any would be acquirer. And it has remained independent in the process. Will a company like Ventas step in and buy CareTrust REIT? It's clearly too soon to tell. However, it looks like a transaction that's just inviting a suitor's attention.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of The Ensign Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information