Diversified Healthcare Trust — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and reporting period
DHC is a healthcare-focused REIT. At June 30, 2020, it owned 412 properties in 38 states and Washington, D.C., including medical office and life science properties, managed senior living communities, other triple-net senior living properties, and wellness centers. The filing covers a major change in senior-living operations: effective January 1, 2020, DHC replaced its former Five Star leases and management arrangements with new management agreements. Five Star managed 241 communities for DHC at quarter-end.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $410.3 million | $262.0 million | $852.8 million | $528.3 million |
| Net loss attributable to common shareholders | $(26.1) million | $(37.2) million | $(16.3) million | $(7.1) million |
| Loss per common share | $(0.11) | $(0.16) | $(0.07) | $(0.03) |
| NOI, a company-defined non-GAAP measure | $108.4 million | $141.8 million | $234.3 million | $290.9 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $110.7 million | $125.9 million |
Reported revenue rose sharply, principally because the Five Star restructuring changed managed-community revenue and expenses from a rental model to gross residents-fees-and-services reporting; this is not a like-for-like growth comparison. For Q2, residents fees and services were $304.1 million versus $108.9 million, while rental income was $106.2 million versus $153.1 million. Q2 NOI fell 23.6%; SHOP NOI fell 39.5% to $33.1 million. DHC reported $57.1 million of Q2 Normalized FFO, or $0.24 per share, versus $81.1 million, or $0.34, a year earlier; this is also a non-GAAP measure.
At June 30, total assets were $6.60 billion, total liabilities $3.85 billion, and total equity $2.75 billion. Cash and cash equivalents were $78.5 million, with $15.3 million of restricted cash. DHC had no revolver borrowings and $1.0 billion of revolver availability. Cash and restricted cash together increased to $93.8 million from $52.2 million at year-end. Six-month investing cash use was $7.4 million and financing cash use was $61.7 million.
Principal debt included $2.65 billion of senior unsecured notes, a $200 million term loan, and $685.4 million of mortgage debt; two properties also had $8.4 million of finance-lease obligations. In June, DHC issued $1.0 billion of 9.75% notes due 2025, using net proceeds to repay a $250 million term loan and reduce revolver borrowings. The next stated note maturity was $300 million due December 2021.
Material changes versus the prior comparable period
- Q2 total NOI decreased $33.4 million year over year; first-half NOI decreased $56.6 million. The decline reflects lower SHOP results, office-property dispositions and pandemic-related operating pressure, alongside the changed Five Star accounting and operating arrangement.
- SHOP comparable-community occupancy was 78.9% for Q2 versus 85.0% a year earlier; average monthly rate was $4,500 versus $4,578. Office Portfolio occupancy was 92.0% versus 92.5% for all properties.
- Interest expense declined to $85.6 million for the first half from $92.0 million, but the new 9.75% notes raise financing costs going forward.
- Six-month operating cash flow declined $15.2 million. DHC said the decrease reflected the Five Star restructuring, lower property NOI and related working-capital changes.
- Quarterly common-share cash distributions were reduced from $0.15 to $0.01 per share beginning in Q2. The Q1 and Q2 2020 distributions totaled $0.16 per share for the first half.
Outlook, risks, contingencies and unusual items
- Management said it believed liquidity was adequate for the next 12 months, but emphasized that COVID-19’s duration and economic effects were uncertain. DHC expected senior-living occupancy pressure and higher labor and supply costs, and anticipated further declines in senior-living returns.
- As of August 3, DHC had granted $5.5 million of rent deferrals to 106 tenants, covering leases representing about 9.4% of annualized rental income. Most deferred rent was due in 12 monthly installments starting September 2020. DHC collected approximately 99% of Q2 contractual Office Portfolio rent.
- As of July 31, 4.5% of residents in DHC senior-living communities had tested positive for COVID-19 since the pandemic began. The company warned that outbreaks, admission restrictions and industry perceptions could further hurt occupancy and results.
- DHC recorded $42.4 million of first-half asset impairments, including $31.2 million related to properties held for sale. At August 3, 24 properties were under sale agreements for approximately $231.7 million; DHC cautioned that transactions could be delayed, not completed, or produce lower proceeds.
- DHC received $10.1 million from the CARES Act Provider Relief Fund. It recognized $7.3 million as other income and recorded the remaining $2.8 million as a liability, expecting to return it unless it determined the funds qualified for retention.
- A June amendment to the credit and term-loan agreements modified certain covenants through June 30, 2021. During this period, DHC must maintain at least $200 million of unrestricted liquidity, faces additional debt and investment restrictions, and generally may distribute only $0.01 per share per quarter plus amounts needed for REIT requirements. DHC reported covenant compliance at June 30 but warned a prolonged downturn could increase covenant pressure.
- Unusual first-half items included a $22.9 million gain on termination of the former Five Star arrangements and $2.0 million of net gains on equity securities. Q2 also included an $11.97 million unrealized gain on DHC’s Five Star investment.
- Credit ratings were downgraded in 2020, increasing applicable borrowing costs. The filing also identifies related-party relationships with RMR and Five Star as potential conflicts and risks.
- No numerical earnings or operating guidance was provided. Management’s stated outlook is conditional on pandemic developments, tenant and operator performance, capital markets and property-sale execution.
Important facts for investors to verify
- Whether senior-living occupancy, rates and operating costs stabilize, and how COVID-19 affects residents and community operations.
- Whether deferred rents are repaid as scheduled and whether tenant defaults or additional concessions increase.
- Compliance with amended debt covenants, the $200 million liquidity minimum, and the ability to refinance the December 2021 maturity.
- The cash-flow and earnings effects of the 9.75% notes and whether planned property sales close at expected prices and timing.
- Whether the $2.8 million of unrecognized Provider Relief Fund proceeds must be returned and whether recognized funds continue to meet program conditions.
- How the Five Star restructuring affects comparable results, DHC’s investment value and related-party oversight.