Diversified Healthcare Trust — 2023 Form 10-K
Business context and reporting period. DHC is a healthcare-focused REIT reporting for the year ended December 31, 2023; the filing does not provide a clear set of standalone fourth-quarter results. At year-end it owned 371 properties in 36 states and Washington, D.C., with $7.2 billion of gross real estate book value. Its two reporting segments are medical office and life science properties (“Office Portfolio”) and managed senior living communities (“SHOP”); other operations include triple-net senior living and wellness centers.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $1,410.3 million | $1,283.6 million |
| Net income (loss) | $(293.6) million | $(15.8) million |
| Property NOI (non-GAAP) | $236.2 million | $174.5 million |
| Operating cash flow | $10.5 million | $(40.4) million |
| Cash and cash equivalents at year-end | $245.9 million | $658.1 million |
| Debt principal outstanding at year-end | Approximately $3.05 billion | Included $700 million credit facility, repaid in 2023 |
- Revenue rose 9.9%, chiefly as SHOP resident fees increased. SHOP NOI grew to $76.8 million from $8.7 million; Office Portfolio NOI declined 4.3% to $122.6 million, and non-segment NOI declined 2.4% to $36.8 million. Total NOI increased 35.3%. On a simple NOI-to-revenue basis, consolidated NOI margin was approximately 16.7%, versus 13.6% in 2022.
- SHOP occupancy improved to 78.1% from 74.4%; comparable-property occupancy was 78.5% versus 74.5%. Average monthly rate increased to $4,821 from $4,506. Office Portfolio occupancy was 86.9%, up from 84.7%; comparable-property occupancy was unchanged at 92.1%.
- The net loss widened substantially, reflecting the absence of 2022’s $321.9 million property-sale gain, higher depreciation and amortization, and $18.4 million of 2023 impairments. The company recorded $293.6 million of depreciation and amortization and $191.8 million of interest expense.
- FFO was $26.2 million ($0.11 per share), versus negative $74.9 million (negative $0.31 per share); Normalized FFO was $41.1 million ($0.17 per share), versus negative $38.3 million (negative $0.16 per share). These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash and restricted cash combined were $247.0 million at year-end. Cash flow from investing was negative $202.1 million and financing was negative $249.7 million. Capital expenditures totaled $161.8 million, with a further $91.5 million spent on development, redevelopment and related activities.
Debt, material changes, and unusual items
- In December 2023, DHC issued $940.5 million of senior secured notes due January 2026, receiving approximately $730.4 million net proceeds. The notes require no cash interest before maturity and accrete at 11.25% annually, compounded semiannually. DHC used proceeds in part to repay its $450 million credit facility and redeem $250 million of notes scheduled to mature in 2024. The new notes are secured by 95 properties and include a one-year maturity extension option subject to conditions and a fee.
- The next significant stated maturity is $500 million of 9.75% senior notes in June 2025. Management said the debt-service coverage ratio was above the 1.5x incurrence threshold on a pro forma basis at year-end and concluded the December financing alleviated the prior going-concern doubt. Management stated no substantial doubt existed as of February 26, 2024; refinancing capacity and future liquidity remain dependent on operating performance, covenant compliance, and capital-market access.
- Debt carrying value was approximately $2.82 billion, compared with $2.35 billion in 2022. The $940.5 million secured notes’ accreted value grows without interim cash interest; the filing’s debt maturity schedule shows approximately $501.98 million due in 2025 and $941.42 million in 2026. DHC reported covenant compliance at December 31, 2023. It had no floating-rate debt at year-end.
- The quarterly common-share distribution remained $0.01 per share ($0.04 annualized); 2023 distributions totaled $9.6 million. The Board may maintain, reduce, eliminate, or change the form of future distributions.
- DHC recorded $9.9 million of costs related to its terminated merger agreement with Office Properties Income Trust (OPI), which was mutually terminated in September 2023 without a termination fee. Total acquisition and other transaction costs were $10.9 million. DHC also recorded $18.4 million of impairment charges on four office/life science properties and two senior living communities.
- In February 2024, after year-end, DHC and an applicable subsidiary acquired approximately 34% of AlerisLife for $14.9 million from ABP Trust; ABP Trust retained approximately 66%. The filing identifies related-party and governance conflicts associated with RMR, ABP Trust, AlerisLife, and Five Star.
- SHOP trends improved, but management said labor, insurance, food, and other operating costs continued to pressure margins. Management expects senior living occupancy to benefit from favorable supply-demand conditions over the next 12–24 months and expects some cost pressures to moderate, but cautions that timing and results are uncertain. No quantified financial guidance is provided.
Outlook, risks, and contingencies
Management’s outlook depends on sustained SHOP occupancy and rate growth, cost control, successful refinancing, and asset sales or other financing as needed. Principal risks include high interest rates and refinancing costs, substantial leverage and secured collateral, uncertain senior housing recovery and operator performance, inflation and labor availability, rising insurance costs, office and life-science leasing conditions, property impairments, and dependence on RMR and third-party managers. REIT qualification and distribution requirements may constrain retained cash. The filing describes extensive healthcare regulation, reimbursement, cybersecurity, environmental, climate, insurance, litigation, and related-party risks. DHC reported no litigation it expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal controls; impairment valuation was identified as a critical audit matter.
Most important facts for investors to verify
- How DHC will refinance or repay the $500 million June 2025 notes and the accreting secured notes due in 2026, including any extension conditions and collateral implications.
- Whether SHOP occupancy and resident rates continue to improve faster than operating costs, and whether reported NOI gains translate into durable operating cash flow.
- Current liquidity, covenant headroom, and the availability and cost of refinancing or asset-sale proceeds; year-end operating cash flow was only $10.5 million.
- Whether planned leasing obligations, redevelopment spending, and other capital needs can be funded while maintaining the $0.01 quarterly distribution.
- The performance and governance implications of DHC’s AlerisLife investment and its relationships with RMR, ABP Trust, and Five Star.