Diversified Healthcare Trust — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are with Q1 2023 unless stated otherwise. Amounts below are in millions of dollars unless noted. DHC is a healthcare REIT with medical office and life science properties, managed senior living communities (SHOP), and other healthcare properties.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $370.8 | $346.0 | +$24.7; +7.1% |
| Net loss | $(86.3) | $(52.7) | Loss widened $33.6 |
| Net loss per share, basic and diluted | $(0.36) | $(0.22) | |
| Net operating income (NOI), non-GAAP | $63.2 | $60.0 | +$3.2; +5.4% |
| Funds from operations (FFO), non-GAAP | $2.6 | $9.8 | |
| Normalized FFO, non-GAAP | $3.5 | $12.5 | |
| Cash provided by operating activities | $28.6 | $6.0 | |
| Cash and restricted cash at quarter-end | $208.2 | $382.7 |
- Residents fees and services rose 10.2% to $308.1 million; rental income fell 5.7% to $62.7 million. Reported NOI was about 17.0% of revenue versus 17.3% a year earlier.
- SHOP NOI increased 43.1% to $24.7 million, while medical office and life science NOI declined 9.7% to $30.3 million. Non-segment NOI fell 10.6% to $8.2 million.
- SHOP occupancy improved to 78.9% from 76.9%, and average monthly rate rose to $5,165 from $4,837. Medical office and life science occupancy declined to 82.9% from 85.1% (comparable-property occupancy: 89.8% versus 92.9%).
- Interest expense increased 20.5% to $57.6 million. It included $24.9 million of net debt discount, premium and issuance-cost amortization, including $20.7 million of accretion on the zero-coupon secured notes.
- Investing cash outflow was $58.8 million, including $46.7 million of real estate improvements and $15.5 million invested in AlerisLife. Financing cash outflow was $8.6 million. Capital expenditures and development activity were lower than in Q1 2023.
Debt, liquidity and capital
- At March 31, 2024, principal debt obligations were approximately $2.1 billion of senior unsecured notes, $940.5 million of senior secured notes due 2026, and $8.7 million of mortgage debt. Balance-sheet carrying amounts for senior secured and unsecured notes were $751.9 million and $2.074 billion, respectively; secured-note carrying value is below its amount due at maturity because of discount accretion.
- The secured notes accrue at 11.25% annually, compounded semiannually, with no cash interest before maturity. DHC repaid its former $450 million credit facility and redeemed $250 million of notes due May 2024 with proceeds from the December 2023 secured-note offering. Management said there were no significant debt maturities until $500 million of notes come due in June 2025.
- DHC had no floating-rate debt at quarter-end. Management reported compliance with debt covenants and said the pro forma consolidated income available for debt service to debt service ratio exceeded the 1.5x threshold for incurring or refinancing debt.
- Management believes operating cash flows, cash on hand and other expected sources will be sufficient to fund operations, capital needs, debt service and distributions for at least 12 months. This outlook is subject to operating, financing and market conditions.
- Quarterly distribution was $0.01 per share, or about $2.4 million. A further $0.01 distribution was declared in April for payment in May.
Material changes, outlook and notable items
- SHOP revenue and NOI growth reflected improved occupancy and resident rates; expenses also rose, primarily from labor, dietary, insurance and other costs. Management cited positive senior-living demand and occupancy trends, and expects labor, insurance and food cost increases to moderate, while cautioning that these trends may not continue or benefit DHC evenly.
- Medical office and life science comparable-property NOI declined, principally because of vacancies and higher repairs, taxes and other operating costs. New and renewal leases signed during the quarter had an 11.5% weighted-average rental rate increase and a 3.6-year weighted-average term.
- DHC recorded $12.1 million of impairment charges on two medical office properties classified as held for sale. It sold one property for $3.6 million and recorded a $5.9 million loss on sale. Four properties were classified as held for sale at quarter-end; two additional properties were under sale agreements as of May 2 for approximately $10.4 million, with completion and proceeds not assured.
- On February 16, DHC acquired approximately 34% of AlerisLife for $14.9 million and now accounts for the investment under the equity method. DHC has significant related-party relationships with RMR, AlerisLife and their affiliates. Q1 general and administrative expense included $0.85 million of estimated RMR incentive fees; any 2024 fee is determined based on the full-year contractual measure and would be payable in January 2025.
- Net loss was also affected by the absence of Q1 2023’s $8.1 million net gain on equity securities and by the change from a $1.2 million property-sale gain to a $5.9 million loss. The filing presents no formal earnings or FFO guidance.
- Management highlights risks from high interest rates, inflation, labor availability and costs, insurance, capital-market volatility, economic downturn or recession, property demand and utilization, senior-living operator performance, and the ability to meet debt covenants or access financing. Certain joint-venture debt is non-recourse, but DHC provides guarantees on the Seaport JV’s $620 million mortgage financing.
Important facts for investors to verify
- Progress in SHOP occupancy, resident rates and NOI, and whether cost increases moderate as management expects.
- Medical office and life science leasing, occupancy and vacancy trends, including the effect of upcoming lease expirations.
- Cash generation and liquidity relative to the $500 million June 2025 debt maturity, the secured notes’ accretion, and covenant requirements.
- Whether held-for-sale properties close at expected prices and whether further impairments or sale losses arise.
- Terms and financial impact of the AlerisLife investment and DHC’s related-party management arrangements.
- FFO and Normalized FFO trends: both declined year over year despite higher revenue and NOI; these are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.