UBS Steps Off HCP

UBS’ Nick Yulico downgraded the rating on HCP, Inc. HCP from Buy to Neutral, with a price target of $31.

With the appreciation in the share price, Yulico believes that the stock valuation is currently “less compelling,” while sentiment on the stock is mixed.

CMS Data Suggests Headwinds

Yulico also mentioned that recent CMS data on therapy minutes suggests the possibility of additional headwinds for the company’s largest tenant, HCR ManorCare (HCRMC).

“While our FFO/AFFO estimates already reflect a 30 percent rent cut at HCRMC to help improve rent coverage, we are not convinced HCP will take this approach and see risk that this overhang lingers,” the analyst stated, while mentioning that a rent cut would be the easiest way to restore confidence in the stock.

Although HCRMC has been facing financial difficulties, Yulico pointed out that it scored high on care outcomes in the CMS Five-Star Quality Rating System.

CMS Investigation

“However, on the negative side, a good portion of its SNF assets could be in the cross-hairs of CMS regulators due to therapy minutes billed close to the high-RUGs thresholds,” Yulico noted.

CMS has asked for an investigation into the issue for the SNF industry at the U.S. level, with possible overbilling for therapy having been alleged in a DOJ complaint against HCRMC in 2015.

“One potential silver lining is that HCP screens better than the US industry average on the therapy minutes data,” the UBS report added.