On March 22, 2010, First American Financial Corp. released an updated Form 10 and the parent company, First American Corp. (NYSE: FAF), issued an 8-K with pro forma financial statements for InfoCo. Based on these filings, we our updating our fair value estimates for First American Financial Corp., (‘FinCo’) and InfoCo, and adjusting our price target for First American Corp. to $41 per share. Our price target implies 20% share price appreciation from current levels and, as such, we continue to recommend FAF shares for purchase.

This fair value estimate, as it is based on current market multiples, should be considered to be the potential value to be unlocked once the spin-off is distributed and these entities begin trading independently. If one further considers that the fair value estimates for FinCo and InfoCo are based upon 2010 estimates (which, given the state of the real estate market, likely represent expected earnings that are at the low-end of the company’s long-term earnings potential) and on target valuation multiples that are near the low-end of historical trading ranges, the case for further upside to our fair value estimates can be made.

FinCo
According to the most recent filing, FinCo posted pro forma earnings per share of $1.14 in 2009 and finished the year with pro forma shareholder’s equity of $1,817 million. If one considers these metrics relative to Fidelity National Financial (NYSE: FNF), a fair value for FinCo of $18 per share appears reasonable. This estimate is based on a target price-to-book value multiple equal to Fidelity’s and implies a price-to-earnings multiple for FinCo that is slightly higher than Fidelity’s. If one considers that FinCo’s balance sheet is stronger than Fidelity’s, with a net cash position (excluding investments) of $157 million versus net debt of $660 million, a price-to-book value multiple for FinCo that is on par with Fidelity appears appropriate, if not conservative.

It should be noted that our 2010 earnings estimate for FinCo is flat to the company’s 2009 performance despite expectations for a slower mortgage market in 2010. This is based on expectations that FinCo will be able to manage expenses and maintain earnings, which is an assumption that appears in-line with expectations for Fidelity.

InfoCo
According to First American Corp.’s recent filing, InfoCo recorded pro forma EBITDA of $435 million in 2009, adjusting for $40.5 million of corporate expenses and $20-$25 million of unallocated expenses that are expected to be allocated to FinCo. We have estimated InfoCo’s 2010 EBITDA to be $425, which represents a slight decrease relative to 2009. By way of comparison, consensus expectations for Lender Processing Services (NYSE: LPS) call for the company to post 10% revenue growth and 12% EBITDA growth in 2010. LPS’s business is comparable to that of InfoCo, although LPS has greater exposure to foreclosure services, which could be beneficial in the current environment. If, however, one assumed a comparable level of EBITDA growth for InfoCo, projected 2010 EBITDA would approach $490 million.

Based on a comparable EV/2010E EBITDA multiple to that of Lender Processing Services, we arrive at a fair value estimate for InfoCo of $23 per share. This estimate assumes that an additional 11 million shares are issued to FinCo to fulfill the agreement that $250 million of InfoCo equity be distributed to FinCo in the spin off.

It should further be noted that our net debt estimate for InfoCo is based on pro forma net debt of $65 million (inclusive of deposits and debt security investments), plus an expected $459 million of additional debt that will be used to purchase the current noncontrolling interests in the company, including $314 million for Experian’s 20% equity stake in the FARES joint venture and an estimated $145 million for the minority interest in First American CoreLogic.

Based on the fair value estimates for FinCo and InfoCo, we arrive at a sum-of-the-parts valuation for First American Corp. of $41 per share, which implies 20% upside from current levels.

On February 18, 2010, Clearwater Paper Corp. (NYSE: CLW) announced 4Q09 earnings of $1.48 per share, excluding the impact of the alternative fuel tax credit, beating the consensus estimate of $1.33. The company also clarified its expansion plans, noting its intention to expand the geographic scope of its Consumer Products business to the East Coast and to increase its capacity to produce ultra quality tissue. The first phase of this expansion will be the construction of a new converting facility in the Southeast, which is expected to be completed by the second quarter of 2011 and cost approximately $30 million.

Clearwater also reported a very strong balance sheet, which, in our opinion, continues to be undervalued by the market. The company finished 2009 with $42.5 million in net cash, although, it should be noted, this number does not include a $101.3 million receivable related to the company’s alternative fuel tax credits. Further, Clearwater’s cash balance could grow by an additional $73.5 million, which is the current balance of its accrued taxes reserve, should the company not have to pay taxes on its alternative fuel tax credits. If Clearwater were to both receive the tax credits it is due and not have to pay taxes on these credits, the company’s net cash balance would grow to $217.3 million, which is 40% of its current market capitalization.

The tax credits to the pulp and paper industry have been controversial and investors appear reluctant to give companies credit for the expected cash payments. It should be noted, however, that Clearwater appears undervalued even when excluding these potential cash payments. We estimate that Clearwater posted 2009 EBITDA, excluding tax credits, of $174 million. If one considers its current market capitalization of $533 million and its current net cash position of $42.5 million, Clearwater currently trades at only 3.4x 2009 EBITDA. If Clearwater were to receive the additional cash payments, as outlined above, the company would trade at only 2.4x 2009 EBITDA. Comparable companies appear to trade at a range of 4.6x-to-7.5x 2009 EBITDA, placing Clearwater considerably below the low end of this range.

We would argue, therefore, that Clearwater, excluding any future potential benefits from the tax credits it is owed, is significantly undervalued. Further, we would argue that the tax credits do not appear to be priced in to the company’s current valuation. In this context, it would appear that investors are able to purchase, at a discount, a paper company that has demonstrated a stable top line through the recent economic downturn and that has significant expansion potential, while receiving a free option on a potential $175 million in additional cash related to the alternative fuel tax credit. Based on a target EV/EBITDA multiple of 5x, we estimate Clearwater is worth $78 to $93 per share, depending on the outcome of its 2009 tax credits.

On February 11, 2010, Motorola, Inc. (NYSE: MOT) announced its plans to separate its Enterprise Mobility Solutions and Networks Mobility businesses from its Mobile Devices and Home Mobility businesses. The transaction is expected to occur during the first quarter of 2011 via a tax-free dividend distribution to Motorola shareholders. In March 2008, Motorola had announced its intention to spin-off the Mobile Devices business, although the segment’s recent financial underperformance may have prompted the company to revise its separation plans.

The Enterprise Mobility business manufactures and services two-way radio, data, and voice communications products. This segment has historically achieved the highest margins within Motorola, generating operating income of $1.1 billion during 2009. The Networks Mobility business manufactures wireless access systems, including cellular infrastructure and wireless broadband systems. At the time of the separation, the Enterprise Mobility and Networks Mobility businesses are expected to assume all of Motorola’s existing public debt. As of December 31, 2009, Motorola carried debt of approximately $3.9 billion within its consolidated balance sheet.

The Mobile Devices business designs and manufactures mobile phones. During the period 2007-2009, the Mobile Devices segment generated operating losses and experienced a decrease in revenue of approximately 62%. The Home Mobility business provides video and data equipment to cable television and telecom service providers. The Mobile Devices and Home Mobility businesses would own the Motorola brand following the separation, although it is expected that the company would enter into a licensing agreement with the other separated entity for combined use of the Motorola brand name.

The Networks Mobility and Home Mobility businesses, which are currently reported within Motorola as one segment, would be split as part of the separation transaction. During 2009, the combined segment generated operating income of approximately $558 million. Therefore, even if one assumed that the entire Networks Mobility and Home Mobility segment were part of the separated Mobile Devices’ business, this entity would still generate operating losses.

On January 13, 2010, Cablevision Systems Corp. (NYSE: CVC) announced that the tax-free distribution of Madison Square Garden shares would be completed on February 9, 2010. Cablevision Systems Corp. shareholders as of the record date on January 25, 2010, are expected to receive one share of Madison Square Garden common stock for every four shares of Cablevision Systems Corp. common stock held. Shares of Madison Square Garden are expected to begin trading on the NASDAQ exchange on a when-issued basis under the symbol ‘MSGNV’ on January 25, 2010. Regular way trading of Madison Square Garden shares is expected to begin under the symbol ‘MSG’ on February 10, 2010.

The Dolan family, which controls all of the Cablevision Systems Corp. class B shares, is expected to receive one share of Madison Square Garden class B common stock for every four shares of Cablevision Systems Corp. class B common stock held. Class B shares of Madison Square Garden will not be listed on a securities exchange.

We had previously established a fair value estimate for Madison Square Garden of $35 per share based on an assumed exchange ratio of 1:10. Due to the finalized exchange ratio of 1:4, we are revising our fair value estimate to $14 per share, which includes an estimated $1 billion in capital expenditures related to the planned renovation of the Madison Square Garden complex.

Please refer to our published Spin-Off Report on Madison Square Garden, dated October 13, 2009.

On November 14, 2013, Kimberly-Clark Corporation (NYSE: KMB) announced its Board of Directors had granted management the opportunity to consider a tax-free spin-off of its health care business. A final decision regarding the transaction is expected in the next several months. If the spin-off is given final Board approval, the separation could be completed in 3Q 2014. The health care segment generates about $1.6 billion in annual sales, about 70% in North America. Manufacturing facilities are primarily located in Latin America and Asia, and headquarters are in Roswell, GA. Products include surgical gowns, sterilization wraps, sampling catheters, feeding tubes, medical exam gloves and pain management systems. About 70% of revenue is derived from surgical and infection prevention products and 30% medical devices. During an appearance on CNBC, Chairman and CEO Thomas Falk noted that the health care business is becoming less synergistic as it expands further into the medical device arena. These products require different materials, are sold to distinct end markets (hospitals as opposed to drug or grocery stores) and have a separate sales and marketing team. KMB is one of the world’s largest consumer product businesses with well known brands, including Huggies diapers, Kleenex facial tissues, and Cottonelle toilet paper.

If the spin-off is completed, Thomas Falk would remain CEO of the parent, while the spin-off entity would be led by Robert Abernathy, currently a KMB group president. The transaction, if pursued, would still require a filing of a Form 10, an effectiveness declaration by the SEC of filings, a private letter ruling by the IRS regarding the tax-free status of the transaction, and final Board approval. A sale of the business could also be considered. But given the low tax basis of the assets, a spin-off may make the most sense. A conference call to discuss the potential transaction is scheduled for 10 a.m. (ET) on November 15.

About 51% of KMB’s total revenue is generated in North America. In recent years, the fastest growth has come outside the continent, primarily China, Russia and Latin America. In 2012, North American sales grew less than 1% while revenue outside North America and Europe expanded more than 5%. Without the more North American-centric health care business, KMB might be able to drive stronger growth in emerging markets. Consumer products stocks receive higher multiples than similar health care companies, perhaps due to better international growth prospects. KMB is likely to receive a higher multiple following a possible spin-off. Currently it trades at an EV/EBITDA multiple closer to the health care stocks. The spin entity would likely receive a multiple closer to the current KMB multiple. As a result, the transaction would appear to unlock value for KMB based on this rough, preliminary valuation exercise.

Through the first nine months of 2013, operating profit for the health care business has been flat at $168 million. Last year, the segment generated $288 million in EBITDA. Applying the peer group multiple of 9.8x to $288 million in EBITDA generates a segment enterprise value of $2.8 billion. Subtracting $288 million in health care EBITDA from the consensus KMB 2013 forecast of $4,146 million, results in standalone EBITDA of $3,858 million. Applying a 13.3x multiple (excluding the high outlier) to standalone EBITDA generates an enterprise value for KMB ex. health care of $51.3 billion. Subtracting $6.2 billion in net debt and assuming 383 million shares, the rough sum-of-the-parts estimate is $125 per share. This valuation does not consider higher corporate costs for two public entities.

On September 9, 2013, SAIC Inc. (NYSE: SAI) announced shares of Science Applications International Corp. will be distributed after the market close on September 27, 2013, with regular way trading scheduled to begin on the NYSE on September 30 under the ticker ‘SAIC.’ Shares will be distributed on a 1:7 basis to SAI holders as of September 19, 2013. Trading on a ‘when-issued’ basis is expected to commence on or about September 16. The transaction still requires an effectiveness declaration by the SEC. Following the distribution, SAIC will change its name to Leidos Holdings Inc. and effectuate a 1:4 reverse stock split. Leidos will trade under the ticker ‘LDOS’ on the NYSE beginning on September 30. Following the spin-off, LDOS intends to pay an annual quarterly dividend of $0.32 per share ($0.08 on a pre-split basis) and New SAIC will pay a quarterly dividend of $0.28 per share ($0.04 on a pre-spin basis) equaling the pre-spin quarterly dividend of $0.12 for SAI. Following the first quarterly payout, the respective Boards will determine dividend targets and policy.

As noted in the initial SAIC Inc. Spin-Off Report (April 5, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. Leidos and Science Applications are scheduled to hold a joint investor day on September 11. Final changes to The Spin-Off Report’s fair values for LDOS and SAIC will be made following the presentations. Please see the SAIC Spin-Off Report and September edition of The Spin-Off Report Calendar (which made adjustments based on changing capital structures) for earlier calculations. The pre-spin sum-of-the-parts valuation totals $14.78 per share. Based on the distribution ratio and reverse split, LDOS is valued at about $44 per share and SAIC is valued at about $26 per share.

On November 12, 2013, Ingersoll-Rand plc (NYSE: IR) conducted an analyst day, providing a first look at operations as a standalone entity Following the presentation, ALLE filed a revised Form 10. IR announced shares of Allegion plc will be distributed on December 1, 2013, with regular way trading scheduled to begin on the NYSE the following day under the ticker “ALLE”. Shares will be distributed on a 1:3 basis to IR holders as of November 22, 2013. Trading on a “when-issued” basis is expected to commence on or about November 18. ALLE management has scheduled a listen-only webcast also on November 18. The transaction still requires an effectiveness declaration by the SEC and final Board approval. The new entity, which will have annual revenue of about $2 billion, will comprise IR’s Security Technologies segment as well as a portion of its Residential Solutions segment. Allegion has a higher operating margin than the businesses that will remain with IR, although in recent years sales have been growing at a slower pace. The peer group trades at a higher multiple than more diverse industrial machinery providers, and as a result ALLE will likely lower its cost of capital. Products include locks, door frames, panic bars and access-control systems.

The security products industry remains fragmented, although Sweden’s Assa Abloy (ASSAB SS) has made a series of acquisitions over the last decade. Just since October 2013, ASSAB has announced acquisitions of privately-held US-based garage door manufacturer Amarr and security fence provider Ameristar Fence Products. As a standalone entity, ALLE may be better positioned than it was as part of IR to play a leading role in the consolidation of the industry. Consolidation could lead to better pricing power in mature markets. Expansion in emerging markets and increased spending on new technologies may offer organic paths to growth.

Following the spin-off, IR’s remaining businesses, which are expected to generate annual revenue of about $12.2 billion, could be compared to a group of large global industrial conglomerates. Following the separation, the heating, ventilation, and air conditioning (HVAC) businesses, including refrigerated transport, will generate a majority of company profits. HVAC businesses trade at slightly higher multiples than their more diverse peers. The valuation of New IR may in part be determined by whether investors view the parent post-spin as an HVAC business with a smaller diversified industrials component or the new entity continues to trade with a conglomerate discount.

As noted in the initial Ingersoll-Rand Spin-Off Report (July 24, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. The valuation is based on comparable multiples for diversified industrials and HVAC manufacturers and assuming about 60% of post-spin profitability is generated by HVAC and refrigerated transport markets. IR has guided for stand-alone 2013 EPS of $2.55 to $2.60 per share. Applying peer group multiples to projected 2013 EPS generates a fair value of $51 per share. Assuming the $1.3 billion cash distribution from ALLE at the time of separation is used to repurchase 25.4 million shares, the fair value rises to $56 per share (see attachment). One may also consider takeover multiples in both those businesses. (See the initial Ingersoll-Rand Spin-Off Report, pages 18-20, for those valuation exercises.)

Management will not provide guidance for 2014 until the 4Q conference call. For the three-year period through 2016, management targets are for 4-5% revenue CAGR, and 13-15% operating income CAGR, although 2014 is likely to account for the slowest growth in that three-year period. IR expects to pay out 30-35% of earnings as a dividend. Prior to separation, the payout ratio was closer to 25%.

The fair value for ALLE will likely be revisited following Monday’s investor webcast. Through the first nine months of 2013, EBITDA has grown about 5% when adding back a $138 million asset impairment charge. Similarly, analysts project closest peer, ASSAB SS, will grow EBITDA 5% in 2013. If one assumes full year ALLE EBITDA growth of 5% to $433 million, applies a 12.5x multiple (the multiple for ASSAB prior to last month’s acquisition announcements, which are not likely fully incorporated into next year’s EBITDA estimate), subtracts $1.15 billion in net debt, and utilizes a 96 million share count, the ALLE fair value is $44 per share. Upside to the valuation would likely be through synergistic acquisitions. For instance, ASSAB noted that both of its recent acquisitions will be immediately accretive to earnings.

One may also consider the acquisitions ASSAB has made in recent years in order to grow into a significant global security products manufacturer. Of course, given the timing of the spin-off, it is unlikely due to tax consequences that ALLE would be a takeover candidate for two years. According to Bloomberg, ASSAB has made 98 acquisitions since 1998, ten sizable enough for full financial disclosure. ASSAB paid 11.5x trailing EBITDA for those acquisitions. One of its largest was the $1.6 billion tender offer (commenced in December 2010 and completed in February 2011) for industrial door maker Cardo AB, which was valued at 11.5x trailing EBITDA. Applying the Cardo and historical acquisition multiples to ALLE’s 2013E EBITDA results in a $40 per share valuation for ALLE.

On November 4, 2013, Weyerhaeuser Co. (NYSE: WY) announced plans to separate its homebuilding and real estate development business, WRECO, in a spin-off or split-off and immediately merge it with homebuilder TRI Pointe Homes Inc. (NYSE: TPH). The separation still requires final Board and TPH shareholder approval, a declaration of effectiveness by the SEC, and any additional regulatory approvals. The merger will be structured as a Reverse Morris Trust transaction, which would maintain the tax-free status of the separation. Following the transaction, WY shareholders would control approximately 80.5% of the newly merged company, which will retain the TRI Pointe Homes corporate moniker. TPH’s current management will remain in place, including CEO Doug Bauer and Chairman Barry Sternlicht, who is also CEO and Chairman of Starwood Capital. The deal is valued at $2.7 billion based on 130 million new shares of TPH exchanged for shares of WRECO, based on TPH’s closing price November 1, 2013, and a $700 million cash distribution paid to WY. The merger is expected to be completed in 2Q 2014.

TPH is a regional homebuilder with operating divisions in Northern California, Southern California, and Colorado. The addition of WRECO gives significant scale and an entrance into new markets for TPH’s business. WY’s real estate business has generated EBIT of $47 million through 3Q 2013, versus $24 million through 3Q 2012. Housing market strength has resulted in increased home closings at higher prices over the last 18 months.

Given the potential early stages of a housing recovery, the timing of the spin-off would appear to make sense, particularly if one viewed the company’s land holdings as undervalued as part of a larger entity. In WY’s latest earnings release, the company guided for continued growth in the real estate business while wood products and timberland results are expected to be relatively flat. The new entity will have 25,096 owned lots. Assuming continued housing strength through the remainder of 2013, one could project WY real estate segment EBITDA of $173 million. If one adds in a $21 million contribution from TPH and applies the peer group 16x multiple (excluding one outlier), a value of $3.1 billion can be reached.

Following the separation, WY will focus on its forest products business, which includes 20.8 million acres of timberland, primarily located in North America, with over 315,000 acres in Uruguay. In June 2013, WY purchased Longview Timber LLC for $2.65 billion, which included approximately 645,000 acres in the Washington and Oregon. Separating the homebuilding businesses should result in reduced earnings volatility with a focus on returning capital to shareholders through dividend payment and potential share repurchases. Excluding the home building businesses the company generated $1.2 billion in EBITDA through 3Q 2013 which represented 53% growth over the first nine months of 2012. Using that growth rate, full-year EBITDA could be projected at $1.66 billion. On average, forest products companies trade at approximately 13.5x 2013E EBITDA. Applying that multiple to projected 2013 EBITDA results in an enterprise value of $22.3 billion, near where the stock currently trades. The two other forest REITs (Plum Creek and Rayonier) on average yield 4%. If WY maintains its current $0.88 dividend (annual distributions of $513 million, less than 33% of projected EBITDA) shares may receive a similar yield, which would imply WY would be worth $22 per share.

On October 31, 2013, Starwood Property Trust (NYSE: STWD) filed a Form 10 to spin off its single-family residential business, including single-family home rentals and related home loans, into a separate publicly traded REIT to be called Starwood Waypoint Residential Trust. The REIT is expected to be listed on the NYSE under the ticker “”SWAY””. Shares will be distributed on a 1:5 basis to STWD holders of record as of January 24, 2014. The transaction is expected to be completed on February 3. Management anticipates that the spin-off will be treated for tax purposes as a distribution equal to the value of the distributed SWAY shares. STWD Chairman and CEO Barry Sternlicht will also serve as Chairman of SWAY. The deal requires final Board approval as well as an effectiveness declaration by the SEC. STWD will retain its commercial mortgage loans and commercial debt investments in a mortgage REIT. The transaction could be viewed as similar in nature to the separation of the commercial and residential pieces of Newcastle Investment Corp. (NYSE: NCT) with the creation of New Residential (NYSE: NRZ) in May 2013. One might expect that SWAY will trade at a higher price/book or lower dividend yield, given its hard assets, than as part of a larger mortgage REIT.

The Spin-Off Report Radar Screen has highlighted STWD since June 2013. STWD is externally managed and advised by SPT Management, LLC, an affiliate of Starwood Capital Group. STWD also announced that it had acquired Waypoint Real Estate Group, a leading vertically integrated single-family rental operating platform. Terms were not disclosed. Waypoint’s co-CEOs, Gary Beasley and Doug Brien, will serve as co-CEOs of SWAY.

As of June 30, 2013, net book value of SWAY’s residential real estate, which includes 5,817 single-family home units that are being prepared for rental or sale, and non-performing residential loans (NPLs), totaled about $581 million. STWD expects to contribute $100 million in cash to the entity. According to the company’s press release announcing the spin-off, the book value of SWAY’s properties as of September 30, 2013, was $198 million while unpaid principal on the NPL portfolio was $413 million, for a total value of about $711 million (including the $100 million cash contribution). Based on the peer group price/book of 1.0x, and assuming a 1:5 share distribution, SWAY could be valued at $21 per share based on this rough, preliminary exercise. The peer group includes single-family home rental REIT American Homes 4 Rent (NYSE: AMH), which raised $706 million through an August 2013 IPO, and Silver Bay Realty Trust (NYSE: SBY), an owner of single-family residential homes, which went public in late 2012.

As STWD generally trades on the basis of dividend yield, and the possible assets in the spin entity do not contribute at all to the dividend, the value of the standalone parent should not change substantially following a separation. The dividend will remain unchanged. As of yesterday’s market close, STWD had a 7.2% yield, based on a $1.84 per share annual dividend. Other commercial mortgage REITS trade at about an 8.8% yield. Based on STWD’s current yield as well as the peer group yield, STWD could be valued in a range of $21-$25 per share.

On November 7, 2013, The Ensign Group Inc. (NASDAQ: ENSG) filed a Form 10 to spin off its real estate into a separate publicly traded REIT to be called CareTrust REIT Inc. through a tax free distribution of shares to shareholders. The REIT has applied to be listed on the NASDAQ under the ticker “”CTRE””. The transaction is expected to be completed in 1Q 2014. Following the separation, ENSG will manage approximately 116 skilled nursing centers and managed care facilities in California, Arizona, Texas, Washington, Utah, Idaho, Colorado, Nevada, Iowa, Nebraska and Oregon. CTRE will hold all of the ENSG properties and will manage three independent living facilities. The remaining properties will be leased back to ENSG on a triple net basis.

The transaction appears similar to the spin-off of Sabra Health Care REIT Inc. (NASDAQ: SBRA) by Sun Healthcare Group Inc. in November 2010. Sun was acquired by privately held Genesis HealthCare in 2012 for $215 million, excluding $89 million of Sun debt. Ensign’s management team will remain in place other than Executive Vice President Gregory Stapley, who will assume the duties of CEO and President of CTRE. REITs do not pay federal income tax but are required to return 90% of earnings to shareholders as dividends. The beneficial tax rules and high payout rates have made REITS particularly popular in recent years as investors pursue strong yields. However, not more than 50% of the stock may be held by five or fewer individuals. The separation still requires a private letter ruling from the IRS regarding the tax free nature of the spin-off, an effectiveness declaration of the filings by the SEC and final Board approval.

CTRE may initially trade at a discount to other nursing home REITS given its “”single tenant risk.”” However, CTRE’s strategy appears to be to expand and diversify via acquisition once it begins operating as an independent entity. Assuming these acquisitions are done with equity, this should have a positive impact on the company’s interest coverage ratio and help promote the diversification of the tenant portfolio, which could lead to an erasure of the discount. However, this may lead to merger risk given potential overpaying for acquisitions and integration issues.

The peer group of senior living REITs with one or limited tenants trades at 2.8x book, 1.6x EV/assets and 8.6x sales. Applying those multiples, to CTRE’s assets and book as of June 30, 2013 (from the Form 10) and projected $59 million in rent from ENSG, provides a range of market capitalizations from $507 million to $582 million, or $23 to $26.50 per share based on a 1:1 share distribution (see attached exhibit). The EV/assets valuation assumes CTRE initially has $166 million in net debt as a result of a cash distribution to the parent. The limited tenant peer group trades at about a dividend yield of 5.7%, above the 5% for the wider health care REIT group. As CTRE accumulates tenants, its valuation multiple could expand.

The valuation for ENSG is based on the midpoint of 2013 net income guidance of $59.4 million and adding back projected full year taxes, interest and D&A for a total EBITDA of $138 million. Subtracting $59 million in projected rent results in post-spin ENSG forecasted EBITDA of $79 million. Applying the peer group multiple of 6.7x 2013 EBITDA results in an EV of $529 million. Assuming no debt, the fair value per share estimate from this rough, preliminary exercise is about $24. The sum-of-the-parts valuation range is $47 to $50.50 per share.