Diversified Healthcare Trust — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021. DHC is a healthcare-focused REIT with medical office and life science properties, managed senior living communities (SHOP), and other healthcare real estate. It wholly owned 378 properties and held 20% interests in two unconsolidated joint ventures.
Financial results and liquidity
Unless otherwise indicated, amounts below are in millions of dollars. Reported financial figures are GAAP; NOI, FFO and Normalized FFO are non-GAAP measures.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $310.7 | $362.7 |
| Net income (loss) attributable to common shareholders | $240.4 | ($67.5) |
| Basic and diluted earnings (loss) per share | $1.01 | ($0.28) |
| NOI | $42.0 | $75.3 |
| FFO attributable to common shareholders | ($23.2) | $3.7 |
| Normalized FFO attributable to common shareholders | ($21.9) | $5.8 |
| Cash from operating activities | ($7.3) | $34.8 |
| Cash and cash equivalents, at period end | $732.1 | $843.2 |
- Revenue declined 14.3% year over year. NOI fell 44.3%; NOI as a share of revenue was approximately 13.5%, versus 20.8% in Q1 2021.
- Net income included a $327.8 million gain on the contribution of 10 medical office and life science properties to a joint venture. The gain more than explains the contrast between positive GAAP earnings and negative FFO; it should not be treated as recurring operating profit.
- Investing activities provided $588.4 million, principally from the joint venture transaction; financing activities used $106.0 million. Cash, cash equivalents and restricted cash totaled $1.492 billion at quarter end, including $759.9 million of restricted cash. Those restricted proceeds are subject to the credit agreement and are not equivalent to unrestricted cash.
- Property improvements used $55.8 million in cash. Management said 2022 capital expenditures could exceed 2021 levels, up to the $400 million annual limit in the credit agreement.
Operations and changes versus prior year
- Office Portfolio: Revenue was $55.0 million, down 41.1%, and NOI was $31.6 million, down 49.1%. The principal driver was deconsolidation of joint venture properties and property dispositions, rather than a comparable-property revenue decline. Comparable-property rental income increased 0.6%, while comparable NOI decreased 1.3%; overall Office Portfolio occupancy was 89.3%, versus 92.3%.
- SHOP: Residents fees and services were $245.4 million, down 5.6%; NOI was $0.2 million, versus $3.9 million. Comparable-property revenue declined 12.3%, partly reflecting closure of skilled nursing units; comparable occupancy improved to 74.1% from 72.7%. Higher labor costs partly offset lower expenses associated with closed units.
- Portfolio restructuring: In January, DHC contributed 10 office and life science properties to a joint venture for approximately $653.3 million in gross proceeds before adjustments, retained a 20% interest, and deconsolidated the properties. The transaction generated the gain noted above. DHC also reported $3.4 million of equity in investee earnings, reflecting fair-value changes in its joint venture investments.
- Other items: DHC recorded an $8.6 million unrealized loss on its AlerisLife investment. CARES Act-related income was $0.2 million, versus $2.4 million in Q1 2021. Transition-related senior living costs were $0.9 million.
Debt, outlook and risks
- At March 31, DHC had $700 million outstanding under its fully drawn revolving credit facility, $2.85 billion principal amount of senior unsecured notes, and approximately $62 million of mortgage debt. The revolver matures in January 2024; the company prepaid a $10.9 million mortgage in April 2022.
- A February 2022 credit amendment extended the fixed-charge coverage covenant waiver through December 31, 2022, reduced revolver commitments from $800 million to $700 million, increased the interest-rate premium by 15 basis points, and imposed restrictions on distributions, acquisitions, capital spending and additional debt. Revolver capacity is scheduled to fall to $586.4 million in January 2023, potentially requiring further repayment. Minimum liquidity under the amendment is $200 million.
- DHC said its debt-service coverage ratio was below the 1.5x threshold required to incur additional debt. It reported compliance with other debt covenants at quarter end, but warned that deterioration in operating results could threaten covenant compliance and revolver availability. Moody’s downgraded specified DHC debt ratings in February 2022, increasing borrowing costs under the credit agreement.
- Management said it believes available sources will cover expenses, debt service and distributions for the next 12 months and foreseeable future. This is subject to operating performance, rent collection, capital-market access and covenant compliance; the filing provides no conventional full-year earnings guidance.
- Key pressures include COVID-19 effects, inflation, supply-chain disruption, and labor shortages and wage inflation in senior living. Management expects elevated SHOP labor costs and cautions that redevelopment projects may cost more or take longer than planned. Five office redevelopments were underway, with estimated completion dates spanning 2022–2025.
- The quarterly distribution was $0.01 per share; the same amount was declared in April for payment in May. The filing says the rate may change and is subject to debt restrictions and the Board’s assessment of cash needs.
- DHC relies on RMR for management and has significant relationships with RMR, AlerisLife and Five Star. The filing describes related-party arrangements and associated potential conflicts. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings derives from the property contribution gain, and whether recurring cash flows and FFO improve from the Q1 losses.
- Unrestricted liquidity and permitted use of the $759.9 million restricted-cash balance, particularly alongside the fully drawn revolver and its planned capacity reduction.
- Progress against debt covenants and the 1.5x debt-incurrence threshold, plus refinancing options before the January 2024 revolver maturity.
- SHOP occupancy, resident revenue, staffing costs and operating performance following unit closures and the transition of communities to new managers.
- Whether redevelopment spending, leasing obligations and inflation-related cost increases remain within management’s stated capital limits and schedules.
- Performance and valuation assumptions for the joint ventures and AlerisLife investment, as well as the sustainability of the $0.01 quarterly distribution.