Diversified Healthcare Trust Closes $120 Million Mortgage Loan

Rhea-AI Summary

Diversified Healthcare Trust (Nasdaq: DHC) has secured a $120 million mortgage loan on eight properties in its Medical Office and Life Science Portfolio, covering approximately 725,000 square feet across seven states. The properties have a 93% occupancy rate and a weighted average remaining lease term of 5.4 years. The loan, with a 6.864% fixed interest rate, is non-recourse and interest-only for 10 years, with an implied capitalization rate of 7.2% and a loan-to-value ratio of 50%. DHC plans to use 50% of the proceeds to redeem some of its 9.750% senior notes due 2025 and the rest for capital investments and liquidity improvement. This move is part of DHC's strategy to lower financing costs and extend debt terms.

Positive

• DHC secures $120 million in new financing.
• Properties have a high occupancy rate of 93%.
• Weighted average remaining lease term is 5.4 years.
• Interest-only loan with a 6.864% fixed rate for 10 years.
• Implied capitalization rate of 7.2% indicates a solid return.
• Loan-to-value ratio is approximately 50%, suggesting moderate leverage.
• 50% of loan proceeds will redeem high-interest senior notes, reducing future interest expenses.
• Remaining proceeds to be used for capital investments and liquidity improvement.
• Part of a broader financing strategy to lower costs and extend debt terms.

Negative

• DHC faces a high interest rate of 6.864% for the loan.
• Occupancy rate, though high, leaves a 7% vacancy that needs to be managed.
• Need to use loan proceeds to redeem 9.750% senior notes indicates existing high-cost debt.
• Properties are spread across seven states, potentially increasing management complexity.
• Weighted average lease term of 5.4 years implies future renewal risks.

Insights

Financial Analyst

The closing of a $120 million mortgage loan by Diversified Healthcare Trust (DHC) is a significant financial event. Firstly, the interest-only 10-year mortgage with a 6.864% all-in fixed interest rate is fairly competitive given current market conditions. By securing an interest-only loan, DHC can manage cash flows more efficiently in the near term, paying just interest without reducing the loan's principal until later. Additionally, the 7.2% capitalization rate is a positive sign indicating the properties are yielding a good return relative to their appraised value.

The decision to use approximately 50% of the loan proceeds to redeem a portion of the 9.750% senior notes due 2025 is strategic. It helps reduce overall financing costs significantly, given the substantially lower interest rate on the new loan. This move can lead to considerable savings, enhancing DHC's liquidity and financial stability.

However, while this refinancing approach is prudent, it's important to note the 50% loan-to-value ratio. This relatively high leverage ratio suggests a degree of risk, as it indicates substantial reliance on borrowed funds compared to the asset value. Investors should monitor how DHC manages this leverage, especially in fluctuating real estate markets.

Lastly, using the remaining proceeds for capital investments and liquidity improvements signals an intent to bolster financial health and potentially drive growth. Investors should watch for how effectively these investments translate into improved operational performance and tenant retention, given the current 93% occupancy rate.

Market Research Analyst

This mortgage loan closing indicates strategic positioning within the Medical Office and Life Science Property sector. With a weighted average remaining lease term of 5.4 years and a 93% occupancy rate, the portfolio's stability is promising. These metrics reflect robust tenant demand and lease commitments, important for maintaining steady rental income in the long term.

The choice of lenders—Wells Fargo, Bank of Montreal and UBS—adds credibility to this financial arrangement. Their participation underscores confidence in DHC's property portfolio and business strategy.

Furthermore, redirecting a portion of the loan to fund capital investments can be a catalyst for future enhancements and upgrades, making properties more attractive to current and potential tenants. This can lead to higher occupancy rates and potentially increased lease terms, boosting long-term revenue streams.

However, stakeholders should remain vigilant about the economic environment's impact on the healthcare real estate sector. Fluctuations in healthcare policies, tenant financial health and broader economic conditions could influence occupancy rates and lease renewals. The firm’s ability to navigate these variables will be important for sustained performance.

NEWTON, Mass.--(BUSINESS WIRE)-- Diversified Healthcare Trust (Nasdaq: DHC) today announced that it closed a $120 million mortgage loan secured by eight properties within DHC’s Medical Office and Life Science Portfolio, located in seven states and consisting of approximately 725,000 square feet. As of March 31, 2024, the weighted average remaining lease term for these properties was 5.4 years and the occupancy rate was 93%. The non-recourse loan has an implied capitalization rate of 7.2% based on the aggregate appraised value for the collateral properties and a loan to value ratio of approximately 50%.

The loan is an interest only 10-year mortgage with a 6.864% all-in fixed interest rate. DHC intends to use approximately 50% of the loan proceeds to redeem a portion of its outstanding 9.750% senior notes due 2025. DHC will use the remainder of the loan proceeds to fund capital investments and improve liquidity.

Matt Brown, Chief Financial Officer and Treasurer of DHC, made the following statement.

“Today’s announced financing is the first step in executing on our broader financing strategy to lower financing costs, improve weighted average remaining debt term and enhance our liquidity profile.”

The lenders were Wells Fargo Bank, National Association, Bank of Montreal and UBS AG.

WARNING CONCERNING FORWARD-LOOKING STATEMENTS

This press release contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever DHC uses words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, DHC is making forward-looking statements. These forward-looking statements are based upon DHC’s present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. DHC currently intends to use approximately 50% of the loan proceeds to redeem a portion of its outstanding 9.75% senior notes due 2025; however, the redemption may not occur or may be delayed. Further, Mr. Brown’s statement regarding DHC’s financing strategy may imply that DHC will be able to sustain and improve its liquidity; however, DHC may not be able to execute on its financing strategies or have sufficient liquidity available to fund its capital needs. Actual results may differ materially from those contained in or implied by DHC’s forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond DHC’s control.

The information contained in DHC’s filings with the SEC, including under the caption “Risk Factors” in DHC’s periodic reports, or incorporated therein, identifies other important factors that could cause differences from DHC’s forward-looking statements. DHC’s filings with the SEC are available on the SEC’s website at www.sec.gov.

You should not place undue reliance upon forward-looking statements.

Except as required by law, DHC does not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.‎

About Diversified Healthcare Trust:

DHC is a real estate investment trust focused on owning high-quality healthcare properties located throughout the United States. DHC seeks diversification across the health services spectrum by care delivery and practice type, by scientific research disciplines and by property type and location. As of March 31, 2024, DHC’s approximately $7.2 billion portfolio included 371 properties in 36 states and Washington, D.C., occupied by approximately 500 tenants, and totaling approximately 8.5 million square feet of life science and medical office properties and more than 27,000 senior living units. DHC is managed by The RMR Group (Nasdaq: RMR), a leading U.S. alternative asset management company with over $41 billion in assets under management as of March 31, 2024 and more than 35 years of institutional experience in buying, selling, financing and operating commercial real estate. DHC is headquartered in Newton, MA. For more information, visit www.dhcreit.com.

A Maryland Real Estate Investment Trust with transferable shares of beneficial interest listed on the Nasdaq.
No shareholder, Trustee or officer is personally liable for any act or obligation of the Trust.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240530930388/en/

Kevin Brady, Director, Investor Relations

(617) 231-3017

Source: Diversified Healthcare Trust

FAQ

What is the amount of the mortgage loan secured by Diversified Healthcare Trust?

Diversified Healthcare Trust secured a $120 million mortgage loan.

What is the interest rate on Diversified Healthcare Trust's new loan?

The loan has a fixed interest rate of 6.864%.

What is the occupancy rate of the properties securing the mortgage loan for DHC?

The occupancy rate of the properties is 93%.

How will DHC use the $120 million mortgage loan proceeds?

DHC plans to use 50% of the proceeds to redeem a portion of its 9.750% senior notes due 2025 and the rest for capital investments and liquidity improvement.

What is the duration of the mortgage loan obtained by Diversified Healthcare Trust?

The mortgage loan is for a duration of 10 years.

What is the loan-to-value ratio of the mortgage secured by Diversified Healthcare Trust?

The loan-to-value ratio of the mortgage is approximately 50%.

What is the weighted average remaining lease term for DHC’s properties securing the loan?

The weighted average remaining lease term is 5.4 years.