Diversified Healthcare Trust — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. DHC is a healthcare-property REIT with 407 properties across 37 states and Washington, D.C., including medical office and life science assets, managed senior living communities (SHOP), and other healthcare properties.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $394.3m | $255.8m | $1,247.1m | $784.1m |
| Net loss attributable to common shareholders | $(106.9)m | $(29.4)m | $(123.2)m | $(36.5)m |
| NOI (non-GAAP) | $78.7m | $130.7m | $313.0m | $421.6m |
| Normalized FFO attributable to common shareholders (non-GAAP) | $13.2m | $70.1m | $139.6m | $239.4m |
| Cash provided by operating activities | — | $159.0m | $195.7m |
- Q3 revenue rose 54% year over year, largely because the January 2020 Five Star restructuring changed senior living communities from leased properties to managed operations: revenue shifted from rental income to resident fees, alongside corresponding operating expenses. Comparisons therefore are not like-for-like.
- SHOP Q3 NOI fell to $7.9m from $49.7m; total Q3 NOI declined 39.8%. SHOP occupancy was 75.2% across all properties, versus 86.0% a year earlier; comparable-property occupancy was 76.3% versus 85.4%.
- Office Portfolio Q3 NOI was $60.8m, down 7.7%; comparable-property occupancy was 93.3% versus 93.7%. The company collected approximately 99% of Q3 contractual Office Portfolio rents.
- Q3 net loss included $64.2m of asset impairment charges and a $12.5m unrealized gain on Five Star shares. Nine-month results included $106.6m of impairment charges, a $22.9m gain on lease termination tied to the Five Star restructuring, and $7.3m of CARES Act Provider Relief Fund income.
- Cash and cash equivalents were $82.2m at quarter-end; cash plus restricted cash totaled $98.4m. Operating cash flow was $159.0m for the first nine months, down from $195.7m. Investing cash use was $42.1m; financing cash use was $70.7m.
Debt, liquidity and distributions
- At September 30, principal debt comprised $2.65bn of senior notes, $200m under a term loan and approximately $685m of mortgage debt; finance-lease obligations were $8.1m. The $1.0bn revolving credit facility had no borrowings and was fully available at September 30 and November 2.
- In June, DHC issued $1.0bn of 9.75% senior notes due 2025, using proceeds to repay a $250m term loan and reduce revolver borrowings. The next stated debt maturity was $300m of senior notes due December 2021.
- Credit-agreement amendments through June 30, 2021 require at least $200m of unrestricted liquidity, restrict debt and acquisitions, generally direct certain proceeds to revolver repayment, and limit quarterly common distributions to $0.01 per share (subject to REIT requirements). DHC reported covenant compliance at quarter-end; a prolonged downturn could pressure compliance.
- The quarterly cash distribution was cut from $0.15 to $0.01 per share beginning in Q2 2020. DHC declared another $0.01 distribution for November 2020.
Outlook, risks and unusual matters
- Management said available resources were expected to cover operating and capital costs, debt service and distributions for the next 12 months, while emphasizing substantial uncertainty from COVID-19. It expected senior-living occupancy pressure and elevated labor, health-benefit and protective-equipment costs to continue weighing on returns.
- As of November 2, 74 tenants had been granted $2.2m of rent deferrals, generally repayable in installments; deferred rent temporarily reduced operating cash flow. Twenty-one properties were under agreements to sell for about $167.4m, but timing, completion and proceeds were uncertain. Four properties sold in October and November for $49.0m.
- Nine senior living communities scheduled for closure or sale incurred $59.8m of impairment charges. DHC also reported 22 properties held for sale and cautioned that planned sales could be delayed, abandoned or completed below carrying value.
- DHC and Five Star voluntarily disclosed potentially inadequate Medicare billing documentation at one managed skilled nursing facility. DHC accrued a $4.0m expected Medicare refund and $2.2m for related penalties, compliance costs and professional fees; final amounts remained uncertain.
- Six wellness centers were in tenant default as of September 30, with approximately $7.9m annualized rental income. The company was evaluating options; a separate four-center lease was renewed in October.
- Management cited risks including pandemic-related disruption, tenant and operator solvency, senior-living staffing and occupancy, asset-sale execution, refinancing and covenant compliance, higher financing costs after rating downgrades, and related-party conflicts. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How senior-living occupancy, resident rates, operating costs and SHOP NOI develop, while accounting for the Five Star restructuring’s impact on comparability.
- Whether asset-sale agreements close on expected terms and how proceeds affect leverage and liquidity.
- Compliance with amended debt covenants and the $200m minimum unrestricted-liquidity requirement, including the impact of operating cash flow and upcoming maturities.
- Final Medicare repayment and penalty exposure after the OIG review, and whether any remaining Provider Relief Fund amounts must be returned.
- Tenant performance, rent collections and resolution of wellness-center defaults and deferred rents; confirm whether distributions remain constrained at $0.01 per share.