Diversified Healthcare Trust — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. DHC is a healthcare-property REIT operating medical office and life science properties, managed senior living communities (SHOP), and other healthcare properties. It owned 392 properties in 36 states and Washington, D.C.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $346.3 million | $410.3 million | $709.1 million | $852.8 million |
| Net loss attributable to common shareholders | $34.2 million | $26.1 million | $101.7 million | $16.3 million |
| Net loss per common share | $0.14 | $0.11 | $0.43 | $0.07 |
| Property NOI | $81.7 million | $108.4 million | $157.0 million | $234.3 million |
| Operating cash flow | Not stated separately | Not stated separately | $27.0 million | $110.7 million |
- Q2 revenue declined 15.6%; first-half revenue declined 16.8%. Residents fees and services were $243.9 million in Q2, down from $304.1 million; rental income was $102.4 million, down from $106.2 million.
- SHOP was the main operating pressure: Q2 NOI fell 67.8% to $10.6 million and first-half NOI fell 82.1% to $14.5 million. SHOP occupancy was 70.9% in Q2 versus 78.7% a year earlier; comparable-property occupancy was 71.0% versus 80.7%.
- Office Portfolio NOI decreased 4.9% in Q2 and 5.5% in the first half. Comparable office occupancy was 92.3% versus 93.4% a year earlier.
- Normalized FFO attributable to common shareholders was $12.2 million in Q2 versus $59.7 million, and $18.0 million for the first half versus $132.7 million. This is a company-defined non-GAAP measure, not a substitute for GAAP earnings or cash flow. The filing does not provide a clear consolidated operating-margin percentage.
Debt, cash and distributions
- At June 30, cash and cash equivalents were $849.1 million; restricted cash was $59.0 million. The $800 million revolving credit facility was fully drawn, leaving no undrawn revolver capacity.
- Principal debt included $800 million drawn on the revolver, $2.85 billion of senior unsecured notes, and $683.5 million of mortgage notes. The balance sheet reported $4.29 billion of total liabilities.
- The revolver matures in January 2022, with two one-year extension options subject to conditions and fees. The next significant unsecured note maturity is $250 million in May 2024.
- In February, DHC issued $500 million of 4.375% notes due 2031, used proceeds to repay its $200 million term loan, and later redeemed $300 million of 6.75% notes due 2021. First-half interest expense rose to $127.7 million from $85.6 million.
- DHC reported its debt-service coverage ratio was below the 1.5x threshold for incurring additional debt. Certain financial covenants were waived through June 2022, but a $200 million minimum liquidity requirement and other restrictions remained. The credit amendments also limit acquisitions and cap annual capital expenditures at $350 million.
- Operating cash flow fell to $27.0 million from $110.7 million. Investing activities provided $19.6 million, including property-sale proceeds; financing activities provided $770.6 million, mainly reflecting the revolver borrowing and note issuance.
- Quarterly common-share distributions were $0.01 per share. A further $0.01 distribution was declared in July 2021.
Material changes and unusual items
- COVID-19-related occupancy pressure and property dispositions reduced revenue and NOI, particularly in SHOP. DHC recorded $18.2 million of CARES Act Provider Relief Fund income in the first half, versus $7.3 million in the prior-year period; additional funding was uncertain.
- Property sales generated a $30.6 million gain in the first half. DHC also recorded $12.1 million of transaction-related costs, primarily for the Five Star management transition, and a $12.2 million net unrealized loss on its Five Star investment.
- In June, DHC agreed with Five Star to transition 108 senior living communities, with approximately 7,500 units, to other managers. As of August 3, agreements covered 76 communities and 41 had transitioned. DHC expected completion before year-end and warned transition and retention costs could be significant.
- Management described its liquidity sources as sufficient for the next 12 months, but cautioned that prolonged pandemic effects could reduce cash flows, weaken covenant compliance, constrain financing access, or affect rent collection and senior living returns. Credit ratings were downgraded in February 2021.
- Other concerns include lower rent coverage at wellness centers, the potential for further senior-living operating pressure, and related-party relationships with RMR LLC and Five Star. DHC said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether SHOP occupancy, resident revenue and NOI recover, and whether the new managers can successfully operate the transitioning communities.
- Cash availability, revolver refinancing or extension before January 2022, covenant status, and the effect of the below-threshold debt-service ratio on financing flexibility.
- How much of reported income and liquidity depends on nonrecurring government relief, property sales, or other unusual items.
- Actual transition costs, capital spending needs and rent collections, including the collectability and timing of deferred rent and payroll-tax payments.
- Potential effects of credit-rating changes, interest costs, related-party arrangements, and the continuing ability to pay distributions.