Diversified Healthcare Trust — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. DHC is a healthcare real estate REIT with medical office and life science properties, senior living communities, and wellness centers. At year-end it owned 379 properties across 36 states and Washington, D.C.; gross real estate book value was approximately $7.1 billion. It also held interests in two unconsolidated joint ventures.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $1,283.6 million | $1,383.2 million |
| Net income (loss) attributable to common shareholders | $(15.8) million; $(0.07) per share | $174.5 million; $0.73 per share |
| Property NOI | $174.5 million | $291.4 million |
| FFO attributable to common shareholders | $(74.9) million | $(30.9) million |
| Normalized FFO attributable to common shareholders | $(38.3) million; $(0.16) per share | $(7.9) million; $(0.03) per share |
| Net cash from operating activities | $(40.4) million | $(63.3) million |
| Cash and cash equivalents at year-end | $658.1 million | $634.8 million |
| Total liabilities | $3,363.5 million | $3,961.1 million |
Restricted cash was an additional $30.2 million at year-end. Gross debt was approximately $3.1 billion, including $700 million drawn on the credit facility, $2.35 billion face amount of senior notes, and secured debt and finance leases. The company reported $2.64 billion of shareholders’ equity.
Total revenue declined 7.2% and NOI declined 40.1%. Rental income fell largely because 11 office/life science properties were deconsolidated following joint venture transactions and because of property dispositions and redevelopment; residents’ fees and services rose 4.9%. Reported results included a $321.9 million gain on property sales, primarily from contributing properties to the LSMD joint venture, a $30.0 million debt-modification/extinguishment loss, and $25.7 million of unrealized losses on AlerisLife securities. These items, along with property deconsolidations, make year-over-year GAAP earnings comparisons less indicative of ongoing operations.
Office Portfolio NOI declined 46.7% to $128.1 million, while comparable-property NOI was nearly flat, down 0.1%; total portfolio occupancy fell to 84.7% from 91.3%. SHOP NOI declined 13.8% to $8.7 million, although comparable SHOP NOI increased 26.0%. SHOP occupancy improved to 74.4% from 71.1% (75.1% for comparable communities), but remained below pre-pandemic levels. Labor, food, energy, and other operating costs pressured SHOP results. The company’s reported overall NOI margin was approximately 13.6%, versus 21.1% in FY2021.
Liquidity, debt, and distributions
- Cash used in operating activities was $40.4 million. Investing activities provided $387.7 million, primarily from joint venture transactions; financing activities used $676.0 million, including debt repayments and the $500 million redemption of 9.75% notes.
- At December 31, 2022, the company was fully drawn on its $700 million credit facility, which then carried a 6.9% rate plus a facility fee and matured in January 2024. Its debt-service ratio was below the 1.5x threshold for incurring additional debt; the company said it could not incur additional debt until that threshold was met.
- In February 2023, lenders extended the fixed-charge-coverage covenant waiver through the facility’s January 2024 maturity, reduced facility commitments to $450 million, lowered the minimum liquidity covenant to $100 million, eliminated the ability to reborrow repaid amounts, and required excess cash flow to repay borrowings. Acquisition and distribution restrictions continued. At February 24, 2023, DHC reported approximately $413 million in cash and $450 million drawn.
- Credit ratings were downgraded during 2022 and again in early 2023. The company stated it was in compliance with other debt covenants at year-end, subject to waivers. It had no additional option to extend the credit facility maturity.
- The quarterly common distribution was $0.01 per share, or $0.04 annualized, and was restricted by debt terms to that rate through facility maturity. FY2022 distributions totaled $9.6 million. Management cautioned that distributions could be reduced or suspended.
Outlook, commentary, and notable developments
- Management said available resources and actions taken were expected to support operating and capital expenses, debt service, and distributions for at least the next 12 months. This expectation is subject to operating results, asset sales, financing access, and covenant compliance.
- Management expected 2023 capital expenditures to exceed FY2022 levels but remain below the $400 million annual credit-agreement limit. Estimated unspent leasing obligations were $39.3 million at year-end, with approximately $33.9 million expected to be spent in 2023. Redevelopments at four Office Portfolio properties were expected to finish between 2023 and 2025.
- Management cited continued SHOP recovery, but occupancy and business conditions had not returned to pre-pandemic levels. It expected continued pressure from labor availability and wage inflation, supply-chain disruption, inflation, and higher interest rates; recession risk could also affect residents’ ability to pay and tenants’ rent coverage.
- In February 2023, DHC agreed to tender its 10.7 million AlerisLife shares at $1.31 per share in a proposed acquisition, while retaining an option to acquire up to a 31.9% interest in the surviving company. Completion and proceeds were uncertain.
- DHC was not meeting Nasdaq’s $1 minimum bid-price standard and had until July 18, 2023 to regain compliance, subject to possible additional time. Delisting could impair share liquidity and access to capital.
- Other material risks include debt refinancing and covenant pressure, tenant/manager performance, SHOP operating costs and occupancy, property values and asset-sale execution, related-party conflicts involving RMR and AlerisLife, and healthcare regulation. The filing reported no litigation expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control.
Key facts investors should verify
- Current cash, required cash uses, and the plan to refinance or repay the credit facility at its January 2024 maturity, including whether further lender waivers or amendments are needed.
- Progress toward the 1.5x debt-incurrence threshold and compliance with all debt covenants, restrictions, and minimum-liquidity requirements.
- SHOP occupancy, community-level profitability, labor costs, and the extent to which operating recovery can improve cash generation.
- Whether operating cash flow can support planned capital spending, debt service, and the current distribution without relying on asset sales or new financing.
- Completion and economics of the AlerisLife tender offer, Nasdaq bid-price compliance, and the valuation and execution risks of planned dispositions and redevelopments.