Talk about a surprise move. The Ensign Group announced that it will be spinning out its home health and hospice business and substantially all of its senior living operations, plus its mobile diagnostic and clinical lab operations, into a separate publicly traded company called The Pennant Group. Ensign will become a stand-alone skilled nursing company but will also continue to own the real estate of 28 of the senior living communities and lease them to Pennant. The remaining 23 senior living properties are leased from third parties.

While it makes sense for Ensign to want to focus just on skilled nursing because the business is getting increasingly complex, we are not sure why they want to keep the senior living real estate. Two logical reasons for that is to enjoy any increase in value as operations improve, and to also collect some lease income to maybe balance the skilled nursing income as we go into uncharted territory with the new Medicare reimbursement starting October 1. However, Pennant will be starting off with no owned real estate and all leases, if we are understanding the structure correctly. Unless they are somewhat under-levered leases, we would think that it could be a bit of a burden for its capital structure with no diversity.

Spin-offs such as these have not worked out so great in our industry, with one exception. When Ensign spun out much of its real estate several years ago into CareTrust REIT, both companies performed well over the next few years, often at or near the top of the rankings for shareholder return in their respective sectors. From a public market perspective, however, both will be relatively small, which hurts their market appeal and liquidity. Someone may end up making an offer for Pennant down the road for its home health business. There could be a lot of moving parts with this one.