Diversified Healthcare Trust (DHC): Weaker Than Anticipated 20Q3 Results

Diversified Healthcare Trust reported 2020 third quarter normalized funds from operations (FFO) (according to my definition) of $11.0 million or $0.05 per share, well below results for 19Q3 and 20Q2 and also below my projection of $27.8 million or $0.12 per share.  The decline reflects the impact of pandemic-related costs and occupancy declines on its senior housing operating portfolio (SHOP) business.

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GE: 2020 Third Quarter Earnings Review

General Electric reported a 2020 third quarter GAAP loss of $1.16 billion or $0.13 per share on revenues on revenues of $19.4 billion, down 17%.  In the 2019 third quarter, the company reported a comparable net loss of $1.3 billion of $0.15 per share.

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Wells Fargo: Still Under a Regulatory Cloud, Wading Through the Pandemic

Shares of Well Fargo have been under a regulatory cloud ever since the Federal Reserve placed a cap on its total assets in April 2018.  To lift the cap, the company must demonstrate that it has implemented an effective remediation plan that guards against a repeat of the abusive sales practices that led to the creation of millions of deposit and credit card accounts without customers’ consent.

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GE 20Q3 Earnings Preview and Outlook

Shares of GE have underperformed both the broader market and GE’s industrial peer group since the onset of the COVID-19 pandemic.  The weak performance reflects primarily the company’s exposure to the aviation business, which prior to the pandemic was GE’s most profitable by far.  With both the suspension of production of Boeing’s 737 Max aircraft and more recently the sharp drop in air travel due to the COVID-19 pandemic, GE Aviation’s profitability has collapsed.  At this point, the consensus view, as articulated by Boeing in its 20Q2 conference call, is that air traffic will not return to pre-pandemic levels for three years.  Some see a permanent reduction in air travel demand.

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Housing Market Update

Despite continuing elevated unemployment and dampened consumer confidence, the housing market has been surprisingly strong in the months following the onset of the COVID-19 pandemic.  According to the U.S. Commerce Dept., single-family housing starts for August were estimated at the seasonally-adjusted annual rate (SAAR) of 1.01 million units, up 4.1% from July and 12.1% from August 2019.  This represented the highest level for single-family starts since May 2007.  Similarly, new home sales for July were estimated to be 901,000 units, up 20% from June and 36.3% from July 2019, the highest level for new home sales since April 2007.

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Debt Refinancing Eliminates Risk of Default; But Diversified Healthcare Trust Will Need to Raise Equity Eventually

Diversified Healthcare Trust (DHC) reported 2020 second quarter normalized funds from operations (FFO) (according to my definition) of $52.8 million or $0.22 per share, down 33% from $81.1 million or $0.33 per share in the prior year quarter.  The decline was driven mostly by the 2019 restructuring of its lease agreements with its affiliate, Five Star Senior Living (FVE), and also by the impact of pandemic-related restrictions on its business.

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A Weak Second Quarter Should Mark the Bottom for Colony Capital, But Future Dilution is a Key Issue

Colony Capital reported a 2020 second quarter net loss of $2.04 billion or $4.33 per share, compared with a much smaller loss in the prior year quarter.  This year’s loss was driven by $2.0 billion of impairment charges taken across all of the company’s business segments, except digital and included a $515 million goodwill charge taken against its Other Investment Management (OIM) business.  It also recorded a $274.7 million other-than-temporary impairment charge against its 36.4% stake in Colony Credit Real Estate (CLNC).

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Five Star’s Strong Stock Performance Could Signal Quicker Turnaround

Five Star Senior Living continues to cope with the effects of the COVID-19 pandemic on its operations.  During the 2020 second quarter, it experienced a 3.8% decline in occupancy from 82.5% to 78.7% across its owned and managed senior living communities.  In addition, its average monthly revenue per available room (RevPAR) decreased 4.6% to $3,581.  The drop in occupancy equates to an average weekly decline of about 0.3%, which is better than the 0.40%-0.50% average weekly decline anticipated by Diversified Healthcare Trust (DHC), the owner of FVE’s managed properties.

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Colony Capital: The Big Pivot on Hold

In response to activist pressure precipitated by a deterioration in its financial performance and a steady decline in its stock price, Colony Capital announced in November 2019 a new strategy to focus on growing its Digital Realty and Investment Management business, divest over time its healthcare, hospitality and other equity and debt assets and sell substantially all of its investment management business to Colony Credit Real Estate (CLNC). 

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After the Quick Rebound, Investors Should Approach Homebuilding Stocks with Caution

Homebuilding stocks have been on a wild ride in 2020.  They boomed from the start of the year, rising 19.1% (according to my index of 11 publicly-traded builders) to February 21, handily beating the 3.0% gain on the S&P 500 and the flattish 0.6% return on the Russell 2000.  Then in just four weeks, with the onset of economy-busting measures taken to combat COVID-19, the sector plunged 60.6%, much worse than 30.9% drop in the S&P and 39.6% drop in the Russell.  Since the March 21 lows, however, the homebuilders have come roaring back, surging 117.4% to June 5, compared with the gains of 38.6% in the S&P and 48.7% in the Russell.

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