HPE 21Q2 Results

The Company Reported Stronger Than Expected 21Q2 Results, But Its Upwardly Revised Guidance Was Somewhat Disappointing.

HPE reported fiscal 2021 second quarter GAAP earnings of $0.19 per share, well above its most recent guidance of $0.02-$0.08 per share and ahead of my estimate of $0.12.  Its Non-GAAP earnings of $0.46 also exceeded its guidance of $0.38-$0.44 and my estimate of $0.42.  Revenues of $6.7 billion were exactly in line with my projections.

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Update on Hewlett Packard Enterprise (HPE)

HPE has posted two consecutive quarters of stronger-than-expected results.  Although the quarterly figures still lag behind the prior year, the recent strength suggests that its business is rebounding strongly off the bottom.  As noted by management, HPE’s business portfolio, which sports beefed-up offerings in cloud services, edge networking and high performance computing (HPC), is well positioned coming out of the pandemic as organizations pursue greater flexibility in their IT operations to improve their ROI and seek a more permanent role for work from home.  HPE also appears to be benefiting from a catch up in customer IT spending after pandemic-related delays.

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Five Star Alters Strategy, Its Stock Gets Slammed

In early April, Five Star announced a change in its strategy whereby it will transition out of the management of 108 smaller senior living communities (SLCs) with 7,500 living units (with an average of 69.4 units per community), close and reposition 27 skilled nursing facilities (SNFs) with 1,500 units located within its continuum of care retirement communities (CCRCs) and close 37 Ageility inpatient rehabilitation clinics that are located within the exited SLCs. The transition is expected to be completed by the end of 2021.

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Assessing the Impact of the Organon Spin-Off on Merck

Merck is progressing toward the spin-off of its subsidiary, Organon & Co., which is expected to be completed by the end of the June.  Organon will include Merck’s women’s health products, biosimilars and certain established brands, most of which have lost patent protection.  (For a more complete analysis of Organon, see my primary report dated April 14, 2021.)

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Five Star and DHC Restructure Their Agreement

On April 9, Five Star and DHC announced a restructuring of their management agreement whereby DHC will transition the management of 108 smaller senior living communities (SLCs) with a total of 7,500 units to other operators by the end of 2021.  Five Star will reposition its senior living management business to focus on larger independent living (IL), assisted living (AL) and memory care communities, as well as stand-alone active adult and IL communities. It will also exit the skilled nursing facility (SNF) business.

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Merck Spin-Off of Organon Targeted for 21Q2

In recent weeks, Merck has been following through on its plan to spin-off its subsidiary, Organon & Co., to shareholders.  On March 17, it filed its Form 10 registration statement related to the transaction.  On March 24, it posted on its investor relations website a lender presentation related to planned debt to be issued by Organon.  On March 30, it announced that it had agreed to acquire Alydia Health on Organon’s behalf.  On April 8, it issued a press release announcing the pricing of three debt tranches in a private placement.  The debt offering is expected to close on April 22.

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Vaccinations Raise Visibility of a Bottom in Occupancy for DHC

Diversified Healthcare Trust reported 2020 fourth quarter normalized funds from operations (FFO) (my definition) of $15.1 million or $0.06 per share, slightly better than 20Q3, but well below 19Q4.  The results were modestly better than I anticipated with lower operating expenses, greater unrealized gains on its investment in Five Star Senior Living (FVE) and realized gains on property sales.  Even so, occupancy in its senior housing operating portfolio continued to fall at about the same pace as in 20Q2 and 20Q3.

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Citius Pharma Raises $71 million in Equity Unit Offering

Citius Pharmaceuticals (CXTR) is a specialty pharmaceutical company focused on the development of four potential products: (1) Mino-Lok, an antibiotic lock solution to treat and salvage infected central venous catheters (“CVCs”) in patients with catheter-related bloodstream infections (“CRBSIs”); Halo-Lido, a topical formation of halobetasol propionate and lidocaine for the treatment of hemorrhoids; Mino-Wrap, a liquefying, gel-based wrap for the reduction of infections associated with breast implants following breast reconstructive surgeries; and a next generation mesenchymal stem cell (MSC) mRNA therapy under license from Novellus Therapeutics Limited that is early in pre-clinical development.

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Five Star Senior Living (FVE) Update

Vaccination of 90% of Residents Raises Visibility on a Rebound in Occupancy

Five Star reported slightly stronger 20Q4 results than anticipated, due primarily to gains on investments held by its captive insurer.  Average occupancy across its owned and leased senior living communities (SLCs) declined by 320 basis points (bp) to 71.5% in the quarter, comparable to the decline reported for 20Q3.  Average occupancy at SLCs managed for Diversified Health Care Trust (DHC) declined 293 bp to 72.3% in 20Q4.  The decline in managed community average occupancy was 54 bp slower than that reported for 20Q3.  At year-end, the company said that “spot” occupancy was 70.7%.

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2021 Market Outlook – Part 2: S&P 500 Sector Analysis

2020 was of course dominated by the impact of the pandemic on the economy and specifically on the revenues and profits of each of the S&P 500 constituents.  There was a sharp stock market sell-off in March-April, followed by a quick recovery.  By mid-July, the S&P 500 had recovered all of its March-April losses.  By the end of the September, it was up 4.1% YTD.  With a quick resolution to the presidential election and the announcements of the vaccine rollouts, the Index rallied 11.7% in the fourth quarter, posting a 16.3% official return for the full year.

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