Diversified Healthcare Trust — Q2 2023 Form 10-Q
Business context and reporting period. DHC is a healthcare REIT with medical office and life science properties, managed senior living communities (SHOP), and other leased healthcare properties. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. At quarter-end, DHC wholly owned 376 properties in 36 states and Washington, D.C.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $346.2 million | $313.0 million | $692.2 million | $623.8 million |
| Net income (loss) | $(72.6) million | $(109.4) million | $(125.2) million | $131.0 million |
| Net income (loss) per share | $(0.30) | $(0.46) | $(0.52) | $0.55 |
| Property NOI (non-GAAP) | $60.0 million | $47.0 million | $119.9 million | $89.0 million |
| Cash from operating activities | — | $31.7 million | $(31.9) million |
Q2 revenue rose about 10.6%, mainly on higher SHOP residents’ fees; six-month revenue rose about 11.0%. SHOP occupancy was 77.8% in Q2 versus 73.6% a year earlier, and average monthly rate increased to $4,809 from $4,480. SHOP NOI increased to $22.9 million from $6.5 million in Q2. Office Portfolio NOI decreased 3.8% to $29.4 million in Q2, while total NOI increased 27.7%.
Six-month GAAP results turned to a loss from income a year earlier, principally because the prior-year period included a $327.1 million property-sale gain, including the LSMD joint venture transaction. In 2023, DHC recorded $17.2 million of impairment charges and $6.1 million of merger and other transaction costs. Q2 interest expense was $47.4 million, down from $56.0 million; the reduction reflects the prior-year redemption of $500 million of 9.75% notes and lower average credit-facility borrowings, partly offset by higher borrowing rates.
At June 30, cash and cash equivalents were $338.4 million ($357.1 million including restricted cash), down from $658.1 million of cash at December 31, 2022. Six-month cash used in investing was $90.4 million and cash used in financing was $272.6 million. Total liabilities were $3.08 billion; debt included $450 million drawn on the credit facility and $2.35 billion principal of senior unsecured notes. The credit facility was fully drawn and carried an 8.1% rate at quarter-end.
Material changes, outlook and risks
- Going concern and maturities: Management concluded substantial doubt exists about DHC’s ability to continue as a going concern for at least one year from the August 1, 2023 issuance date. $700 million of debt falls due within one year of issuance: the $450 million credit facility matures January 15, 2024, and $250 million of notes mature May 1, 2024.
- Covenants and collateral: The debt-service coverage ratio was below the 1.5x level required to incur new debt or refinance existing debt. A June reappraisal put the credit-facility collateral below its required value; lenders granted a limited waiver through September 30, 2023, the merger’s outside closing date. DHC reported compliance with other covenants subject to the disclosed waiver.
- Proposed merger: Under the April 11 agreement, each DHC common share would convert into 0.147 OPI common share, with cash for fractional shares. Closing was expected in Q3 2023, subject to shareholder and other conditions, including extension or replacement of OPI’s revolving facility. The exchange ratio is fixed, so the value received varies with OPI’s share price. Management said the merger could alleviate going-concern doubt but gave no assurance it would close. If it fails, DHC said it may seek additional capital, but considered sufficient financing unlikely under then-current conditions.
- Operating outlook: Management cited a slower-than-anticipated SHOP recovery. Occupancy and rates improved, but labor constraints, wage and commodity inflation, insurance costs, and rising rates continued to pressure margins. DHC expected 2023 capital expenditures to exceed 2022 levels but remain below the $400 million credit-agreement limit; spending may be reduced if the merger is delayed or fails. Approximately $66.2 million of leasing obligations remained, with about $53.2 million expected to be spent over the next 12 months.
- Other risks and items: DHC recorded $11.3 million of Q2 impairment on four life science and medical office properties held for sale; four properties were under sale agreements for approximately $23.4 million as of July 27. Two shareholder lawsuits filed in July alleged merger-disclosure deficiencies; DHC said it believes they are without merit. Merger-related litigation, closing conditions, related-party relationships, senior-housing recovery, and access to capital remain material risks.
- Distributions: DHC paid $0.01 per share in each of Q1 and Q2 and declared another $0.01 distribution in July. The merger agreement restricts DHC from paying above an annualized $0.04 per share.
Most important facts for investors to verify
- Whether the DHC–OPI merger received required approvals, satisfied financing and other closing conditions, and closed on the expected terms; also track the market value of the fixed 0.147 exchange ratio.
- How DHC addressed the January and May 2024 maturities, the below-threshold debt-service ratio, and the collateral waiver that was due to expire September 30, 2023.
- Whether SHOP occupancy gains translate into durable NOI improvement after labor, insurance, and other operating-cost pressures.
- Whether pending property sales close at expected prices and whether further impairments or capital needs arise.
- Any updates to going-concern disclosures, liquidity, distributions, merger litigation, or lender waivers.