Diversified Healthcare Trust Prices $941 Million Zero Coupon Senior Secured Notes with a Maturity Date of January 15, 2026 and a One-Year Extension Option

Rhea-AI Summary

Diversified Healthcare Trust (Nasdaq: DHC) priced an aggregate principal amount of $941 million of senior secured notes due January 2026, with a 12-month extension option. The notes will generate approximately $750 million in gross proceeds and will be used to repay all of DHC’s outstanding debt maturing in 2024, and for general business purposes. The offering is expected to close on December 21, 2023, subject to customary closing conditions.

Insights

Financial Analyst

The pricing of Diversified Healthcare Trust's senior secured notes is a strategic financial maneuver designed to manage the company's debt profile effectively. By securing $941 million at a rate of 11.25%, DHC aims to generate enough capital to address its immediate debt obligations, specifically the $450 million secured credit facility and $250 million of senior unsecured notes due in 2024.

The high interest rate, while indicative of the risk associated with the healthcare real estate sector and DHC's creditworthiness, may raise concerns over the long-term cost of capital. Investors should note the potential for increased financial burden should the 12-month extension be utilized, given the incremental interest rate hikes. The immediate benefit of regaining compliance with debt covenants is significant, as it avoids potential default scenarios and maintains corporate financial health.

However, the non-registration of these notes suggests a limited market, targeting qualified institutional buyers, which could affect the liquidity and marketability of the notes. The transaction's impact on DHC's stock will depend on investor perception of the company's ability to manage its debt load against the backdrop of the healthcare real estate industry's performance and interest rate environment.

Debt Market Analyst

Diversified Healthcare Trust's approach to refinancing its debt through senior secured notes is a tactical decision to leverage the estimated fair value of its collateral properties, approximately $1.57 billion. The transaction's structure, with a joint and several guarantees, provides a strong backing for the notes, potentially making them more attractive to the qualified institutional buyers they are being offered to.

From a debt market perspective, the offering's timing and the chosen interest rate reflect current market conditions and the company's credit assessment. The 11.25% interest rate, subject to further increases, is quite aggressive and may indicate a higher risk profile or a premium demanded by investors for the illiquidity associated with the non-public nature of the offering.

The impact on the broader debt market could be minimal, given the targeted nature of the offering and the specificity of the healthcare real estate sector. However, it could set a precedent for other firms in similar positions considering debt refinancing in a tight credit market.

Real Estate Investment Trust Analyst

The decision by Diversified Healthcare Trust, a Real Estate Investment Trust (REIT), to issue senior secured notes is a reflection of the REIT's proactive asset management and capital structure optimization. The use of the properties as collateral underscores the intrinsic value of healthcare real estate, which remains a critical asset class due to the essential nature of healthcare services.

For REIT investors, the transaction signifies DHC's commitment to maintaining operational liquidity and financial flexibility. The repayment of the 2024 maturities removes short-term uncertainty regarding debt obligations, which could positively influence investor sentiment. However, the relatively high interest rate on the new notes could be a point of scrutiny, as it may affect future dividend distributions, a key aspect for REIT investors.

Long-term, the transaction may influence DHC's ability to invest in property acquisitions or upgrades, which are crucial for maintaining competitiveness in the healthcare real estate market. Investors should balance the immediate positive impact of debt restructuring against the potential for reduced capital expenditure flexibility.

Proceeds Will be Used to Repay in Full All 2024 Maturities, Including $450 Million Secured Credit Facility and $250 Million of Senior Unsecured Notes

Will Immediately Regain Compliance with Debt Incurrence Covenants upon Closing

NEWTON, Mass.--(BUSINESS WIRE)-- Diversified Healthcare Trust (Nasdaq: DHC) today announced that it has priced 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 notes will generate 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 closing is expected to occur on December 21, 2023, subject to the satisfaction of customary closing conditions. The notes will be 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 guarantee 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 expected to be $732 million and used to repay all of DHC’s outstanding debt maturing in 2024, and for general business purposes. The debt being repaid includes DHC’s $450 million secured credit facility and its outstanding 4.750% Senior Notes due in May 2024. The offering is expected to close on December 21, 2023, subject to customary closing conditions. Following the closing of this transaction and the repayment of these outstanding debts, DHC will immediately regain compliance with the incurrence covenants under its remaining public debt agreements.

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 will be 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, including our statements about the expected settlement date of the offering of the new notes and the use of proceeds therefrom, 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. The settlement of the offering is subject to various customary conditions and contingencies. If these conditions are not satisfied or the specified contingencies do not occur, this offering may not close. Further, DHC’s current intentions with respect to the use of the net proceeds from the offering to repay DHC’s secured credit facility and to fund the redemption of its outstanding 4.750% Senior Notes due in May 2024 is dependent on the closing of the offering and may not occur. In addition, although DHC will immediately be in compliance with the debt incurrence covenants under its remaining public debt agreements as a result of this transaction and the repayment of these outstanding debts, 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/20231218370542/en/

Melissa McCarthy, Manager, Investor Relations

(617) 796-8234

Source: Diversified Healthcare Trust

FAQ

What is the aggregate principal amount of senior secured notes priced by Diversified Healthcare Trust?

Diversified Healthcare Trust priced an aggregate principal amount of $941 million of senior secured notes due January 2026.

When is the expected closing date for the offering of senior secured notes by Diversified Healthcare Trust?

The offering is expected to close on December 21, 2023, subject to customary closing conditions.

How will the proceeds from the senior secured notes be used by Diversified Healthcare Trust?

The proceeds will be used to repay all of DHC’s outstanding debt maturing in 2024, and for general business purposes.