Diversified Healthcare Trust — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021, compared primarily with fiscal 2020. The filing provides annual results; standalone fourth-quarter financial values are not clearly provided. Dollar amounts below are in millions unless otherwise noted.
Business context
DHC is a healthcare real estate investment trust. At year-end it wholly owned 390 properties across 36 states and Washington, D.C., with real estate gross book value of $7.2 billion. Its portfolio included medical office and life science properties (Office Portfolio), managed senior living communities (SHOP), triple-net leased senior living properties, and wellness centers. It also held a 20% interest in a Boston life science property joint venture.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $1,383.2 | $1,632.0 |
| Net income (loss) attributable to common shareholders | $174.5 | $(139.5) |
| NOI | $291.4 | $395.7 |
| FFO attributable to common shareholders | $(30.9) | $176.8 |
| Normalized FFO attributable to common shareholders | $(7.9) | $170.1 |
| Cash from operating activities | $(63.3) | $158.5 |
| Capital expenditures and real estate improvements | $227.6 | $185.6 |
| Distributions declared per common share | $0.04 | $0.18 |
- Revenue fell 15.2% and NOI declined 26.4%. The NOI margin, calculated as NOI divided by revenue, was approximately 21.1%, versus 24.2% in 2020.
- SHOP revenue declined 19.1% to $974.6 million; SHOP NOI fell 89.7% to $10.1 million. Comparable SHOP occupancy dropped to 73.3% from 80.7%, and average monthly rate was $3,958 versus $3,982.
- Office Portfolio revenue fell 4.1% to $367.6 million and NOI declined 5.3% to $240.3 million. Comparable-property NOI was nearly flat, up 0.2%; year-end occupancy for all Office Portfolio properties was 91.3%.
- Reported common-shareholder net income included a $492.3 million gain on property sales, primarily the sale of a 35% interest in the Boston life science joint venture. The gain helped turn GAAP results positive but did not prevent negative FFO and Normalized FFO.
- Cash and cash equivalents were $634.8 million, with a further $382.1 million of restricted cash; combined cash and restricted cash was $1,016.9 million. Restricted cash primarily included proceeds from the Boston joint-venture interest sale held under credit-agreement restrictions.
- Consolidated debt was approximately $3.7 billion at year-end, including $800 million drawn on the revolving credit facility. The company reported consolidated net debt to total gross assets of 32.3% and was fully drawn on the revolver.
Material changes and unusual items
- SHOP operating results remained under pressure from pandemic-related occupancy weakness and costs. DHC completed the transition of 107 senior living communities from Five Star to new third-party managers and closed the remaining community being transitioned. Transition-related costs were $17.4 million in 2021.
- DHC closed approximately 1,500 skilled nursing units during 2021; approximately 1,900 remained in the portfolio.
- In December 2021, DHC sold a 35% interest in its Boston life science joint venture, retained 20%, received net proceeds of $373.8 million, and deconsolidated the venture. In January 2022, it formed a joint venture for 10 medical office and life science properties, retaining 20%; stated aggregate proceeds were approximately $653.3 million before closing costs and adjustments.
- DHC issued $500 million of 4.375% notes due 2031, repaid its $200 million term loan, and redeemed $300 million of 6.75% notes due 2021. Interest expense rose 26.9% to $255.8 million, primarily reflecting the new notes and higher average revolver borrowings.
- The company recognized $19.6 million of CARES Act/provider relief funds as income in 2021. It had not recognized a further $3.7 million of received funds at year-end and expected to return them unless eligible use was established.
Liquidity, outlook, and risks
- DHC stated that its available resources should cover operating and capital expenses, debt service, and distributions for the next 12 months and the foreseeable future. However, operating cash flow was negative in 2021, the revolver was fully drawn, and the debt-service ratio was below the 1.5x threshold for incurring additional debt. The filing says this restriction did not itself require repayment of outstanding debt.
- The fixed-charge coverage covenant waiver was extended through December 31, 2022 in a February 2022 amendment; the revolver was reduced to $700 million after a $100 million repayment and maturity extended to January 2024. Its borrowing capacity is scheduled to decline to approximately $586.4 million in January 2023, potentially requiring further repayment. These are post-year-end developments.
- The credit agreement restricts acquisitions, distributions, capital expenditures, and additional borrowing, and requires minimum liquidity of $200 million during the amendment period. DHC said 2022 capital expenditures could exceed 2021 levels, up to the $400 million agreement limit. Estimated unspent leasing obligations were $76.6 million, with about $54.7 million expected to be spent in 2022.
- The quarterly common distribution remained $0.01 per share ($0.04 annualized), subject to board discretion, REIT requirements, and debt restrictions. Management gave no assurance that the rate would continue or increase.
- Key risks include COVID-19 impacts, senior living occupancy and labor costs, inflation and supply constraints, tenant and operator credit, covenant compliance and access to capital, refinancing and floating-rate exposure, property redevelopment costs, regulatory and reimbursement changes, and conflicts related to RMR LLC and AlerisLife/Five Star.
- Moody’s downgraded DHC’s senior unsecured debt rating from B1 to B3 in February 2022. Management also warned that further covenant noncompliance could constrain liquidity or lead to acceleration under certain debt provisions. The company reported no litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Whether SHOP occupancy, operating margins, and per-resident labor costs recover, especially at newly transitioned communities.
- Available unrestricted liquidity after accounting for restricted cash, required revolver reductions, minimum-liquidity terms, and planned capital spending.
- Compliance with debt covenants and the duration and conditions of the waiver; confirm the effect of subsequent amendments and rating changes.
- Whether joint-venture proceeds are applied as planned to reduce leverage and fund capital needs, and how the retained interests perform.
- How much of reported earnings reflects property-sale gains and government relief rather than recurring property operations; compare GAAP results with FFO, Normalized FFO, and operating cash flow.
- Whether the $0.01 quarterly distribution is sustainable and permitted under the debt agreements and REIT distribution requirements.
The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting as of December 31, 2021.