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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers