MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
Following investor meetings with CCP, we are making a rating switch by upgrading CCP to Buy from Neutral (PT to $32 from $27) and downgrading LTC to Neutral from Buy (PT unchanged at $53). This ten-page report serves several purposes and read-throughs beyond these changes, including a detailed and refreshed look into the good and bad of the skilled nursing business. We conclude that the risks of bundling and other alternative Medicare payment models are overly priced into CCP, while LTC is a pure value call on a stock that has worked.
Key Points
Rating Changes: We acknowledge the challenges facing CCP’s primarily SNF portfolio, and we take a deep dive into the relevant issues in this report. However, we believe the successful refinancing of $500mm (closed on Friday) puts to rest a major issue for the company while simultaneously reinforcing its strong balance sheet. We think the spread-investing thesis could kick into higher gear for CCP on a go-forward basis, and the big dividend yield (8.3%) looks safe. As such, we are increasing our PT methodology by two turns, to 12x 2016 AFFO, which is still a deep discount to its peers. Our new target represents a 16% increase from current levels. Meanwhile, LTC has achieved our PT objective, and at a nearly 40% NAV premium, we can not justify another leg up at this time.
Debating the SNF Industry: We pull no punches in this report, and provide our latest and balanced view of an industry that has been under siege from a changing reimbursement and patient-flow landscape. This includes where we think the next steps may be as CMS pushes through its value-based agenda (PCI next?) -- CMS is ahead of its stated goal of moving 50% of all Medicare dollars into a cost-saving alternative model. We also point out where REITs like CCP have a few arrows in their own quiver to protect cash flows at least in the intermediate-term. Other hot-button topics are star ratings and declining hospital referral networks. Although it is far from perfect, there is another side to every table.
Side Note: We note that CCP’s refinancing (which closed on Friday) may have a broader read-through for HCP and the planned SpinCo financing. While the situation is vastly different in comparison to CCP, it does suggest fixed income appetite for SNFs under appropriate conditions.
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