Diversified Healthcare Trust Closes $941 Million Zero Coupon Senior Secured Notes with a Maturity Date in January 2026, and a One-Year Extension Option

Rhea-AI Summary

Diversified Healthcare Trust (Nasdaq: DHC) repaid a $450 million secured credit facility and issued a notice of redemption for $250 million of senior unsecured notes maturing in May 2024. The company also closed an offering of $941 million in senior secured notes due January 2026, generating approximately $750 million in gross proceeds. The net proceeds of around $732 million will be used to repay outstanding debt and for general business purposes. DHC regained compliance with debt incurrence covenants upon closing the offering.

Insights

Financial Analyst

Diversified Healthcare Trust's strategic financial maneuvering, involving the issuance of $941 million in senior secured notes and the subsequent repayment of existing debt, is a notable event for investors and market analysts. The transaction's impact is multifaceted, affecting the company's debt profile, interest expenses and liquidity.

The 11.25% interest rate, compounded semi-annually, is significantly above the average corporate bond yield, indicating a higher risk perception among investors or a strategic premium paid by the company for flexibility and immediate liquidity. The decision to retire the $450 million secured credit facility and redeem $250 million of Senior Unsecured Notes due May 2024 is a proactive step in debt management, potentially reducing future interest obligations and alleviating near-term refinancing risk.

From a balance sheet perspective, the transaction strengthens DHC's short-term financial position by ensuring compliance with debt covenants. However, the elevated interest rate could pressure the company's long-term profitability if the new capital is not deployed efficiently to generate returns exceeding the cost of debt. The involvement of prominent financial institutions as joint book-running managers suggests a level of confidence in the offering, albeit within a private placement framework exempt from standard registration requirements.

Debt Market Analyst

The issuance of senior secured notes by Diversified Healthcare Trust reflects a strategic capital raising effort within the debt market. The structure of the notes, including the 12-month extension option with incremental interest rate hikes, provides DHC with a flexible but potentially expensive financing tool. This extension feature could be appealing to investors who are compensated for additional risk with higher interest rates.

It's important to note that the collateral backing these notes is valued at approximately $1.57 billion, offering a substantial cushion for note holders. Nevertheless, investors will need to monitor the company's ability to manage its leveraged position, especially considering the high-interest burden and the potential for property value fluctuations that could affect collateral value.

The private placement nature of the offering, targeting qualified institutional buyers, suggests a tailored approach to fundraising, bypassing broader market participation. This could imply a strategic focus on investors with a deeper understanding of DHC's business model and risk profile, which is often characteristic of companies operating within niche industries like healthcare real estate.

Real Estate Investment Trust Analyst

For stakeholders in the Real Estate Investment Trust (REIT) sector, Diversified Healthcare Trust's recent financial activities provide significant insights into the company's capital structure strategy. The choice to issue high-yield debt in the form of senior secured notes is a critical move for a REIT, as it directly impacts the cost of capital and, thereby, the ability to generate shareholder value through property investments and management.

The estimated fair value of the collateral properties at $1.57 billion versus the principal amount of the notes indicates a loan-to-value ratio that is within reasonable bounds for secured real estate debt. However, the real estate market is subject to cycles and the valuation of healthcare properties can be influenced by regulatory changes, demographic shifts and technological advancements in healthcare delivery.

Investors in REITs often seek stable income through dividends, which are funded by the trust's operations. The increased interest expense from the new debt could impact DHC's ability to maintain or grow its dividend distributions in the future. Careful analysis of DHC's operational efficiency and asset quality will be essential to assess the sustainability of its financial structure in the context of the broader REIT market.

Repaid in Full $450 Million Secured Credit Facility and Issued Notice of Redemption of $250 Million of Senior Unsecured Notes Maturing in May 2024

Immediately Regained Compliance with Debt Incurrence Covenants upon Closing

NEWTON, Mass.--(BUSINESS WIRE)-- Diversified Healthcare Trust (Nasdaq: DHC) today announced that it has consummated the offering of an aggregate principal amount of $941 million of senior secured notes due January 2026, with a 12-month extension option, subject to the satisfaction of certain conditions and payment of an extension fee. The sale of the notes generated approximately $750 million in gross proceeds before issuance costs and will accrete at a rate of 11.25% annually, compounded semi-annually. If the 12-month extension option is exercised, interest payments will be due semi-annually during the extension period at an initial interest rate of 11.25% with increases of 50 basis points every 90 days that the notes remain outstanding. The notes are guaranteed on a joint, several and senior secured basis by subsidiaries of DHC that own the properties comprising the collateral for the notes and on a joint, several and unsecured basis by all subsidiaries of DHC that previously guaranteed its existing senior notes due 2025 and 2031. DHC believes that the collateral properties have an estimated fair value of approximately $1.57 billion.

The net proceeds from this transaction, after initial purchaser discounts and offering costs, are approximately $732 million and are being used to repay all of DHC’s outstanding debt maturing in 2024, and for general business purposes. DHC repaid its $450 million secured credit facility and, in connection with the offering, issued a notice of redemption for its outstanding 4.750% Senior Notes due in May 2024. In connection with the offering, DHC immediately regained compliance with the incurrence covenants under its remaining public debt agreements.

B. Riley Securities, BMO Capital Markets, BofA Securities, Citigroup, Morgan Stanley, PNC Capital Markets LLC, UBS Investment Bank and Wells Fargo Securities acted as joint book-running managers for the offering.

The notes have not and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), any state securities laws or the securities laws of any other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from registration under the Securities Act or any applicable state securities laws. The new notes were offered only to persons reasonably believed to be qualified institutional buyers under Rule 144A under the Securities Act and outside the United States only to non-U.S. investors in compliance with Regulation S under the Securities Act.

This press release does not constitute an offer to sell, or a solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. This press release also does not constitute a notice of redemption with respect to the redemption of DHC’s 4.750% Senior Notes due 2024.

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 September 30, 2023, DHC’s approximately $7.2 billion portfolio included 376 properties in 36 states and Washington, D.C., occupied by approximately 500 tenants, and totaling approximately 9 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 approximately $36 billion in assets under management as of September 30, 2023 and more than 35 years of institutional experience in buying, selling, financing and operating commercial real estate. To learn more about DHC, visit www.dhcreit.com.

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. In addition, although DHC is immediately in compliance with the debt incurrence covenants under its remaining public debt agreements as a result of this transaction and the repayment of DHC’s secured credit facility and the redemption of its outstanding 4.750% Senior Notes due in May 2024, DHC may not be able to execute on additional financing strategies or have sufficient liquidity available to fund its capital projects as it currently expects, and DHC may not be able to continue to invest in the growth and recovery of its senior living communities as a result of economic and market conditions or other reasons.

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 Securities and Exchange Commission (the “SEC”), including under “Risk Factors” in DHC’s periodic reports, or incorporated therein, identifies other important factors that could cause DHC’s actual results to differ materially from those stated in or implied by 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20231221666854/en/

Melissa McCarthy, Manager, Investor Relations

(617) 796-8234

Source: Diversified Healthcare Trust

FAQ

What did Diversified Healthcare Trust (DHC) announce regarding its debt repayment and new offering?

DHC repaid a $450 million secured credit facility and issued a notice of redemption for $250 million of senior unsecured notes maturing in May 2024. The company also closed an offering of $941 million in senior secured notes due January 2026, generating approximately $750 million in gross proceeds.

How much were the net proceeds from the new offering, and how will they be used?

The net proceeds from the offering are approximately $732 million, which will be used to repay all of DHC’s outstanding debt maturing in 2024 and for general business purposes.

What did DHC achieve in relation to its debt incurrence covenants?

DHC immediately regained compliance with the incurrence covenants under its remaining public debt agreements upon closing the offering.