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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After Completing Its Corporate Transition, Change Healthcare Copes With COVID-19

Change Healthcare Inc. (CHNG, Change Inc., Change or Inc.) is a new public company formed in 2016 as a joint venture between McKesson Corporation (MCK) and an investor group led by The Blackstone Group.  Over the past four years, the joint venture partners have combined their healthcare IT businesses and raised capital through an IPO and unit offering.  In March, McKesson completed the distribution of its interests in the joint venture.  With the onset of the COVID-19 pandemic, CHNG’s stock has fallen sharply and now trades at an even wider discount to its peer group.  As activity in the healthcare system returns to normal, the stock should have rebound potential to its pre-COVID levels of $15-$17.  If the company then demonstrates progress toward its revenue growth, operating cost and leverage goals, its stock should have upside beyond $17 per share, as it shrinks its discount to its peer group.

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DHC Cuts Distribution As It Copes with COVID-19 Fallout

DHC’s share price closed on Thursday (4/9) at $3.51, down 58.4% year-to-date, worse than the peer group average of down 24.7%, but the stock is up from its bottom of $2.00.  Most of the losses for DHC occurred during March. There is still considerable uncertainty about the near- to medium-term operating and financial performance for healthcare REITs, which could delay a full recovery of their shares. Even so, DHC’s share price has fallen to only 0.3 times book value, compared with the peer group average of 1.4 times. That gives the shares considerable upside potential, if DHC can cope successfully with COVID-19.

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Deep Dive on GE: Sum-of-the-Parts Valuation

As noted in a previous post, it is most appropriate to value GE as a single, stand-alone enterprise.  Several unifying investment themes support this view:

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Deep Dive on GE: GE Capital

In April 2015, partially in response to the regulatory restrictions that accompanied GE Capital’s designation as a systemically important financial institution by the Financial Stability Oversight Council, GE adopted the GE Capital Exit Plan, under which it planned to reduce the size and scope of its financial services operations through the sale of most of GE Capital’s assets and focus on growing its industrial businesses.  The plan was originally intended to be completed over two years.  GE intended to keep most of its vertical financing businesses, including GE Capital Aviation Services (GECAS), Energy Financial Services (EFS) and its Healthcare Equipment Finance business, which directly support its industrial businesses.

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Deep Dive on GE: Consolidated Enterprise Valuation

In my view, the most appropriate way to look at GE’s stock valuation is to consider the company as a single enterprise.  In this analysis, I compare its current valuation to peers.  My calculations for GE’S enterprise value-to-EBITDA multiple at 31-Dec-19 and 30-Mar-20 are given in the table below:   

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