UPDATE: UBS Upgrades HCP (HCP) to Buy

(Updated - March 31, 2015 10:08 AM EDT)

UBS upgraded HCP (NYSE: HCP) from Neutral to Buy with a price target of $47 (from $41). Analyst Nick Yulico discussed its ManorCare restructuring and pointed out that news removes a negative overhang.

"CP announced today that it is reducing HCR ManorCare's (HCRMC) annual rent payments by 13%, with AFFO dilution of 5%. This is a better outcome than the 30% rent cut/12% AFFO dilution we expected. While a rent cut is usually not welcome news for a REIT, the cut returns HCRMC (HCP's largest tenant) to 1.3x fixed charge coverage, which substantially reduces the likelihood of an operator bankruptcy filing, in our opinion.," said Yulico.

"HCP will receive $68m less annual rent from HCRMC, while lease escalators are now 3% (from 3%-3.5% prior). Helping mitigate the rent cut is $19m of additional rent (included in the $68m rent cut) from $250m of additional HCRMC assets that HCP will now own. Additionally, HCP is receiving a second lease receivable of $250m (which has annually escalating PIK interest but no current cash payments); this will be paid to HCP if 1) HCRMC is sold or 2) at end of renewal pool (2029). Importantly, we think the rent restructuring today makes both HCP and HCRMC more attractive sale candidates in an M&A scenario based on the improving HCRMC coverage," added the analyst.

For an analyst ratings summary and ratings history on HCP click here. For more ratings news on HCP click here.

Shares of HCP closed at $42.15 yesterday.

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