Diversified Healthcare Trust — Q3 2021 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same periods in 2020. DHC is a healthcare-focused REIT operating medical office and life science properties, senior living communities and other healthcare-related properties. At quarter-end it owned 392 properties in 36 states and Washington, D.C.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $337.4 million | $394.3 million | $1,046.5 million | $1,247.1 million |
| Net loss attributable to common shareholders | $(89.3) million | $(106.9) million | $(191.1) million | $(123.2) million |
| Loss per common share | $(0.38) | $(0.45) | $(0.80) | $(0.52) |
| NOI (non-GAAP) | $71.3 million | $78.7 million | $228.4 million | $313.0 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(13.2) million | $159.0 million |
| Cash and cash equivalents at period-end | $794.7 million | September 30, 2020: $82.2 million |
Q3 NOI was about 21.1% of revenue, versus 20.0% a year earlier; this is a calculated ratio based on company-reported NOI, a non-GAAP measure. SHOP occupancy was 71.3% in Q3 versus 75.2%; Office Portfolio occupancy was 91.3% in both periods.
At September 30, 2021, reported debt carrying amounts included $800 million drawn on the revolving facility, $2.805 billion of senior unsecured notes, and $689 million of secured debt and finance lease obligations. Principal debt obligations were approximately $4.333 billion, excluding finance leases. Total liabilities were $4.656 billion and total equity was $2.410 billion. The revolving facility was fully drawn.
Material changes versus prior comparable periods
- Revenue declined 14.4% in Q3 and 16.1% for the first nine months, primarily reflecting lower senior living residents’ fees and services.
- SHOP NOI fell 70.6% in Q3 and 81.1% year to date. Comparable SHOP occupancy for the nine-month period was 72.1%, down from 81.7%; lower occupancy and closed skilled nursing units weighed on revenue.
- Office Portfolio NOI declined 2.7% in Q3 and 4.6% year to date. Comparable-property leasing and rent growth partly offset dispositions and assets taken out of service or under redevelopment.
- Nine-month operating cash flow moved from positive $159.0 million to negative $13.2 million. Cash rose substantially, but largely alongside financing activity, including the $800 million revolving-credit draw.
- Interest expense increased 11.0% in Q3 and 33.8% year to date, reflecting new note issuance and higher average revolver borrowings, partly offset by repayment of term debt and 2021 notes.
- The company reported a nine-month net loss of $191.1 million versus $123.2 million in 2020. The comparison includes a $22.9 million lease-termination gain in 2020 and significant 2020 impairment charges; 2021 also included $26.9 million of net unrealized losses on the Five Star investment.
Outlook, commentary, risks and unusual items
- Management said its cash sources were expected to cover operating and capital expenses, debt service and distributions for the next 12 months and foreseeable future. This is subject to operating performance, tenant collections, capital needs and financing access; it is not a quantified earnings forecast.
- COVID-19 continued to pressure senior living occupancy and operating returns. DHC cited labor availability and cost pressures, supply-chain disruption and commodity-price inflation, and warned that additional effects on tenants, operators and residents remain uncertain.
- DHC was transitioning 107 senior living communities from Five Star to third-party managers and expected completion by December 31, 2021. Transition costs were $15.0 million for the first nine months. Management intended to close the remaining community and assess redevelopment options.
- The company recognized $19.0 million of CARES Act Provider Relief Fund income in the first nine months. Further funding was uncertain, and unused or ineligible funds may have to be returned.
- DHC issued $500 million of 4.375% notes due 2031, repaid its $200 million term loan and redeemed $300 million of 6.75% notes due 2021. Five properties were sold for $104.5 million, generating a reported $30.8 million gain on property sales.
- In October 2021, DHC extended its $800 million revolving facility maturity from January 2022 to January 2023; a further one-year extension is conditional. At September 30, its debt-service coverage ratio was below the 1.5x debt-incurrence threshold, limiting additional borrowing. Certain financial covenants were waived through June 2022, while other restrictions—including a $200 million minimum liquidity requirement—remained.
- Cash distributions were $0.01 per share each quarter in the first nine months. The company declared another $0.01-per-share distribution for November 2021. Future distributions may change or be suspended.
- Credit ratings were downgraded in February 2021. Key risks include covenant compliance and refinancing, the fully drawn revolver, pandemic-related operating pressure, redevelopment and transition execution, and conflicts or dependence involving related parties RMR LLC and Five Star.
Important facts for investors to verify
- Whether SHOP occupancy, resident revenue and NOI recover, and how results compare between retained and transitioned communities.
- Whether the Five Star manager transitions were completed as expected and what recurring fees, transition costs and operating outcomes followed.
- Available liquidity after considering the fully drawn revolver, minimum liquidity covenant, restricted cash, cash burn and upcoming capital commitments.
- Debt covenant status, the extended revolver’s conditions and pricing, and the company’s ability to refinance or reduce leverage while below the debt-incurrence threshold.
- The sustainability of distributions given losses, negative year-to-date operating cash flow and debt restrictions.
- The extent to which results depend on CARES Act relief, dispositions and fair-value changes in the Five Star investment rather than recurring property operations.