Diversified Healthcare Trust (DHC) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. DHC is a healthcare REIT with an Office Portfolio and a Senior Housing Operating Portfolio (SHOP). Unless noted, figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $356.5m | $322.9m | $1,048.8m | $946.7m |
| Net income (loss) | $(65.8)m | $(81.5)m | $(191.0)m | $49.5m |
| Net income (loss) per share | $(0.28) | $(0.34) | $(0.80) | $0.21 |
| NOI (non-GAAP) | $58.1m | $33.8m | $178.0m | $122.8m |
| Normalized FFO (non-GAAP) | $8.3m | $(14.2)m | $33.0m | $(46.5)m |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $17.7m | $(36.9)m |
Q3 revenue growth was driven mainly by SHOP residents’ fees and services, up 13.2% year over year; rental income was down 0.9%. SHOP NOI improved to $20.7m from a loss of $5.8m, while Office Portfolio NOI fell 5.8% to $29.3m. SHOP occupancy was 78.4%, versus 74.7%, and its average monthly rate was $4,826, versus $4,509. Office Portfolio occupancy was 85.8%, versus 85.9%. The filing does not present a consolidated operating-margin measure.
Nine-month net income fell from a profit to a loss, principally reflecting the prior-year $322.1m property-sale gain, alongside current-year impairments and transaction costs. Current-period results included $18.4m of impairment charges and $9.8m of acquisition and other transaction costs, primarily related to the terminated OPI merger. The 2023 nine-month results also included an $8.1m gain on equity securities related to the AlerisLife investment.
Balance sheet, debt and liquidity
- At September 30, 2023, cash and cash equivalents were $278.1m; cash plus restricted cash was $279.1m. Total assets were $5.53bn and shareholders’ equity was $2.44bn.
- Debt principal included $450m drawn on the credit facility, $2.35bn of senior notes and $9.5m of mortgage debt. The credit facility was fully drawn, bore interest at approximately 8.3%, and matured January 15, 2024. A further $250m of senior notes matured May 1, 2024. DHC identified $700m of debt due within one year of the financial statements’ issuance.
- DHC disclosed substantial doubt about its ability to continue as a going concern for at least one year from issuance. Its debt-service coverage ratio was below the 1.5x incurrence requirement; as a result, it could not refinance existing or maturing debt or issue new debt until the ratio reached 1.5x on a pro forma basis.
- Management was evaluating permitted capital raising and asset sales, and negotiating with credit-facility lenders about extending maturity and amending covenants. DHC was pre-marketing a disposition program covering 66 properties. Management stated it could not demonstrate that its plans would probably alleviate the substantial doubt; success depends on market conditions and lender approval.
- Nine-month investing cash outflow was $150.8m, including $168.4m of real estate improvements; financing cash outflow was $276.0m. Cash and restricted cash declined by $409.2m from year-end 2022. DHC reported approximately $66.9m of estimated unspent leasing obligations, including $48.4m expected within 12 months.
Material changes, outlook and risks
- The proposed merger with Office Properties Income Trust was mutually terminated on September 1, 2023; neither party owed a termination fee. Merger-related costs remained in 2023 expenses.
- Senior living recovery remained slower and more uneven than expected. Management cited labor shortages and wage inflation, commodity and insurance cost increases, and resident-rate growth that had not kept pace with costs, pressuring SHOP margins. Capital spending may be deferred to preserve liquidity.
- In June 2023, a lender appraisal of collateral properties fell below the required threshold. DHC obtained a limited waiver and added a property as collateral; it reported compliance with the collateral-value covenant at September 30.
- Moody’s and S&P downgraded DHC’s senior debt ratings in 2023. DHC also identified potential covenant breaches, inability to repay or refinance maturities, and possible higher financing costs or tighter terms as risks.
- Three properties sold in October 2023 for $10.8m. DHC cautioned that planned property sales may not close or may yield less than expected or carrying value. No specific earnings guidance was provided.
- On November 1, 2023, DHC amended its bylaws to generally restrict new ownership at or above 5% of outstanding shares, intended to preserve tax benefits including net operating losses.
Most important facts for investors to verify
- Whether lenders agree to extend and amend the $450m credit facility before its January 2024 maturity, and the final terms.
- Whether DHC can execute asset sales or other permitted capital actions in time and at sufficient proceeds to meet the $700m of near-term maturities.
- Whether debt-service coverage improves enough to restore access to refinancing or new debt issuance.
- SHOP occupancy, rate growth, labor and insurance costs, and whether operating improvement translates into sustainable cash flow.
- Actual proceeds and timing from the 66-property disposition program, and the effect of deferred capital spending and leasing commitments on property operations.
NOI and FFO are non-GAAP measures; DHC cautions that they are supplemental measures and not substitutes for GAAP net income or operating cash flow.