Diversified Healthcare Trust — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. DHC is a healthcare REIT with medical office and life science properties, managed senior living communities (SHOP), and other healthcare-related properties. It owned 396 properties across 36 states and Washington, D.C. at quarter-end.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $362.7 | $442.5 |
| Net income (loss) attributable to common shareholders | $(67.5) | $9.7 |
| Basic and diluted EPS | $(0.28) | $0.04 |
| Net operating income (NOI), non-GAAP | $75.3 | $125.9 |
| NOI margin, calculated as NOI/revenue | 20.8% | 28.4% |
| Operating cash flow | $34.8 | $56.3 |
| Capital expenditures and development activity | $51.9 | $37.2 |
Revenue declined 18.0% year over year. Resident fees and services fell 21.7% to $260.0 million, while rental income declined 7.0% to $102.8 million. SHOP occupancy decreased to 69.5% from 82.7% (82.7% to 83.5% for comparable properties); its NOI fell 92.0% to $3.9 million. Office Portfolio NOI declined 6.1% to $62.0 million. Overall NOI decreased 40.2%.
Interest expense rose 44.3% to $60.1 million, mainly reflecting debt issued in 2020 and 2021. The prior-year quarter included a $22.9 million gain on lease termination; Q1 2021 included $2.0 million of debt-extinguishment losses and $8.3 million of unrealized losses on DHC’s Five Star investment. DHC recognized $2.4 million of CARES Act Provider Relief Fund income. FFO was $3.7 million and normalized FFO was $5.8 million, both non-GAAP measures, versus $86.9 million and $73.0 million, respectively, in Q1 2020.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $843.2 million; restricted cash was $326.8 million, for combined cash and restricted cash of $1.170 billion. Restricted cash included funds intended for the planned June redemption of $300 million of 6.75% notes due 2021.
- Total liabilities were $4.998 billion. Principal debt obligations included $800 million drawn on the revolving facility, $3.15 billion of senior unsecured notes and approximately $684 million of mortgage debt. The revolver was fully drawn, with a January 2022 maturity and potential one-year extensions to January 2024, subject to conditions.
- Q1 financing included issuing $500 million of 4.375% senior notes due 2031. Proceeds repaid a $200 million term loan; remaining proceeds and cash were intended to fund redemption of the $300 million 2021 notes. DHC gave notice of that redemption in April.
- Operating cash flow was $34.8 million; investing activities used $35.3 million and financing activities provided $1.080 billion. Q1 distributions were $0.01 per share, or $2.4 million; the same quarterly distribution was declared for payment in May.
Material changes, outlook and risks
- COVID-19 continued to weigh on senior living occupancy, resident revenues and operating conditions. Management reported that all communities were open to admissions and that over 96% of residents had received a vaccine at the conclusion of vaccination clinics; this figure may include residents who had received only one of two required doses.
- Management said it believed available funding sources would be sufficient for operating and capital expenses, debt service and distributions for the next 12 months and beyond. However, it warned that the debt-service coverage ratio could fall below the 1.5x requirement in 2021 as pandemic effects continued. DHC was fully drawn on its revolver and could be prohibited from incurring additional debt if the ratio fell below the threshold.
- January credit-agreement amendments waived certain financial covenants through June 2022, reduced revolver commitments to $800 million, imposed collateral and restrictions on distributions, acquisitions, capital spending and additional debt, and set a $200 million minimum liquidity requirement. DHC reported compliance at March 31, 2021, but cautioned that a prolonged downturn could challenge compliance. Credit ratings were downgraded in February 2021.
- On April 9, DHC announced agreed-in-principle changes to its Five Star arrangements: transition of 108 senior living communities to other operators, while Five Star would continue managing 120. The transition was expected before year-end 2021 and could involve significant costs. Definitive documentation had not been completed as of the filing’s forward-looking-statement discussion.
- After quarter-end, DHC sold four held-for-sale properties for $95.5 million and agreed to acquire an adjacent Maryland property for $19.6 million, subject to conditions. It also disclosed expected transition costs, continuing redevelopment and leasing commitments, and uncertainty around future property sales and capital access.
- Other notable exposures include tenant rent collection and retention, senior living labor and other costs, possible further COVID-19 disruption, interest-rate and refinancing risk, and related-party relationships with RMR and Five Star. DHC reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- SHOP occupancy, resident revenues and NOI recovery, including results after operator transitions.
- Execution and costs of the Five Star management changes, including the ability to secure qualified replacement operators.
- Completion of the planned $300 million note redemption and the company’s liquidity after using restricted cash and offering proceeds.
- Debt-service coverage against the 1.5x threshold, covenant terms and access to refinancing or other capital while the revolver is fully drawn.
- Actual rent collections, leasing commitments, redevelopment spending and any further property sales or acquisitions.
NOI, FFO and normalized FFO are non-GAAP measures and should be considered alongside GAAP results; they are not measures of cash generated from operations.