Diversified Healthcare Trust — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter report; fourth-quarter results are not clearly stated in the supplied filing text.
Business context
DHC is a healthcare real estate investment trust with 397 properties in 36 states and Washington, D.C. at year-end, including medical office and life science properties, senior living communities, and wellness centers. Gross book value of real estate assets was approximately $8.2 billion. The 2020 results reflect a major change in senior living arrangements: effective January 1, 2020, properties previously leased to Five Star Senior Living were converted to management agreements, bringing their operating revenues and expenses into DHC’s results.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.632 billion | $1.040 billion |
| Net loss attributable to common shareholders | $(139.5) million; $(0.59) per share | $(88.2) million; $(0.37) per share |
| Net operating income (NOI) | $395.7 million | $551.1 million |
| FFO attributable to common shareholders | $176.0 million; $0.74 per share | $297.0 million; $1.25 per share |
| Normalized FFO attributable to common shareholders | $160.1 million; $0.67 per share | $310.2 million; $1.31 per share |
| Cash from operating activities | $158.5 million | $265.8 million |
| Cash and cash equivalents at year-end | $74.4 million | $37.4 million |
Revenue increased 56.9%, principally because managed-community resident fees were consolidated after the Five Star restructuring; this change in presentation should not be read as comparable organic growth. NOI declined 28.2%. Office Portfolio NOI was $253.6 million, down 7.0%; SHOP NOI was $98.2 million, down 54.3%. Approximate NOI as a share of segment revenue was 66% for Office Portfolio, 8% for SHOP, and 24% consolidated; the SHOP comparison is materially affected by the change in operating structure.
Senior living occupancy fell to 77.2% from 84.4% (78.1% versus 85.2% for comparable communities). Office Portfolio occupancy was 91.4%, compared with 92.2% (93.7% versus 93.6% for comparable properties). Total impairment charges were $107.0 million. Interest expense rose 11.9% to $201.5 million, mainly following issuance of high-coupon notes.
At December 31, 2020, consolidated debt was approximately $3.5 billion and the reported consolidated net debt to total gross assets ratio was 42.4%. Debt included $2.65 billion principal of senior notes, a $200 million term loan, and approximately $684.5 million of mortgage debt. DHC had no revolver borrowings at year-end and $74.4 million of cash and cash equivalents. Operating cash flow fell to $158.5 million; investing activities used $40.4 million and financing activities used $79.5 million. The filing does not provide a clear standalone current-ratio or cash-margin figure.
Material changes and unusual items
- Common distributions were reduced from $0.21 per quarter to $0.01 per quarter beginning in the second quarter of 2020. Full-year distributions were $0.18 per share, versus $0.84 in 2019.
- DHC issued $1.0 billion of 9.75% senior notes due 2025 in June 2020. Proceeds funded repayment of a $250 million term loan and reduced revolver borrowings. The issuance contributed to higher interest expense.
- DHC recognized $17.5 million of CARES Act and related relief funds as income; an additional $2.5 million received was recorded as a liability pending satisfaction of program conditions. It also deferred $22.2 million of payroll taxes, expected to be paid in the second half of 2021.
- The Five Star restructuring generated a $22.9 million gain on lease termination and materially increased SHOP revenue and expenses. DHC recognized a $34.1 million unrealized gain on its Five Star investment.
- DHC recorded a $5.8 million settlement obligation related to Medicare billing documentation at one managed community, paid in January 2021. DHC and Five Star did not admit liability.
- During 2020, DHC sold 27 properties for aggregate proceeds of $152.9 million, excluding closing costs, and classified 15 properties as held for sale at year-end.
Outlook, risks, and contingencies
Management said it believed DHC was positioned to withstand pandemic disruption, while warning that COVID-19’s duration and financial effects remained uncertain. It expected continued pressure on senior living occupancy and resident rates, elevated labor and supply costs, and reduced returns. The filing provides no specific earnings or revenue guidance.
In January 2021, DHC amended its credit and term loan agreements and obtained waivers of certain financial covenants through June 2022. The amendments reduced revolving credit commitments from $1.0 billion to $800 million, imposed a $200 million minimum liquidity requirement and restrictions on distributions, capital spending, acquisitions, and additional debt, and required collateral support, including liens on 91 properties. DHC warned that its debt-service coverage ratio could fall below the 1.5x threshold in the first half of 2021, potentially restricting additional borrowing.
After year-end, DHC issued $500 million of 4.375% senior notes due 2031, used proceeds to repay its $200 million term loan, and expected to use remaining proceeds to redeem $300 million of 6.75% notes due 2021 in June 2021. Credit ratings were downgraded in February 2021. Key risks include pandemic impacts, Five Star’s operating and financial condition, debt covenants and refinancing needs, tenant defaults, senior living staffing and occupancy, regulatory compliance, asset-sale execution, and related-party conflicts involving RMR LLC and Five Star. The filing reports no litigation then expected to have a material adverse effect.
Important facts for investors to verify
- How much of the revenue and SHOP comparison reflects the Five Star conversion rather than underlying operating change, and how occupancy and resident rates trend after year-end.
- Compliance with the amended debt terms, the 1.5x debt-service coverage covenant, minimum liquidity requirement, and planned 2021 note redemption.
- Collection and repayment status of deferred rents, including the $2.1 million of tenant deferrals, and the use or repayment of remaining CARES Act funds and deferred payroll taxes.
- Progress and realized proceeds from held-for-sale properties and other planned dispositions, and any resulting impairment or debt reduction.
- Whether the reduced $0.01 quarterly distribution can be sustained, subject to liquidity, debt restrictions, and REIT distribution requirements.