Diversified Healthcare Trust Provides Monthly SHOP Performance Update
SHOP NOI for May 2023 Declined
Provides Additional Insight into Calculation of Debt Incurrence Covenant and Reconfirms Debt Incurrence Covenant Compliance is Unlikely Before Mid-Year 2024
Reiterates Unanimous DHC Board Recommendation that Pending Merger with Office Properties Income Trust is Best Alternative for DHC and its Shareholders and that Shareholders vote “FOR” the Transaction
Monthly Unaudited Results in DHC’s Total SHOP Comparable Properties:
-
May 2023 occupancy was
78.1% , 840 basis points below May 2019, and 10 basis points above April 2023. -
May 2023 Resident Fees and Services revenue was
$92.5 million $10.6 million 10% , below May 2019, and$0.8 million 1% , above April 2023. -
May 2023 net operating income, or NOI, was
$5.8 million $11.1 million 66% , below May 2019, and$3.2 million 36% , below April 2023. -
May 2023 NOI margin was
6.3% , 1,020 basis points below May 2019, and 360 basis points below April 2023.
Year to Date Unaudited Results in DHC’s Total SHOP Comparable Properties:
-
Year to date occupancy through May 31, 2023, was
77.5% , 900 basis points below the same period in 2019. -
Year to date Resident Fees and Services revenue through May 31, 2023, was
$456.3 million $57.3 million 11% , below the same period in 2019. -
Year to date NOI through May 31, 2023, was
$31.7 million $62.6 million 66% , below the same period in 2019. -
Year to date NOI margin through May 31, 2023, was
6.9% , 1,140 basis points below the same period in 2019.
Debt Incurrence Covenant:
- DHC is not currently in compliance and has not been in compliance for over two years with its debt incurrence covenant, which compliance is required for DHC to refinance or issue any new debt.
-
For the four quarters ended March 31, 2023, DHC would have needed
$81.3 million
Four quarters ended |
|
March 31, 2023 |
|
(dollars in thousands) |
|
Office Portfolio and Other Income |
|
SHOP Income |
26,443 |
Consolidated Income Available for Debt Service |
|
Annual Debt Service(1) |
|
Ratio of Consolidated Income Available for Debt Service to Annual Debt Service |
1.05x |
Additional Income Required for 1.5x Annual Debt Service |
|
(1) |
Calculated based on March 31, 2023, interest rates |
-
DHC believes that, to successfully refinance its
$450 million -
SHOP NOI needs to be over
$65.6 million $16.4 million -
SHOP NOI was
$32.7 million $6.5 million $9.9 million 60% , below the monthly average SHOP NOI DHC believes is required for it to be in compliance with its debt incurrence covenant by September 30, 2023.
Timing for Compliance with Debt Incurrence Covenant and Merger with Office Properties Income Trust:
-
Given that SHOP performance improvement is not consistent from month to month, DHC continues to believe that the earliest it will be in debt incurrence covenant compliance is mid-year 2024, after
$700 million - DHC also believes there is a significant risk that it may not reach debt incurrence covenant compliance by mid-year 2024 because the difficult current market environment may further impede SHOP recovery. Several DHC peers that have experienced a faster SHOP recovery than DHC have not yet realized NOI margins equal to pre-COVID levels, which may indicate that DHC’s NOI margins from SHOP will be slower to recover than originally projected.
Jennifer Francis, DHC’s President and Chief Executive Officer made the following statement regarding today’s announcement:
“DHC’s SHOP performance in May 2023 continues to evidence that its SHOP recovery is inconsistent and hard to predict. Because of this, we believe it is very unlikely that DHC will be in compliance with its debt incurrence covenant in time to refinance its
Diversified Healthcare Trust(1) (dollars in thousands, except average monthly rate) |
|||||||||||||||||||||||||
2019 Pro Forma (2) |
2023 |
||||||||||||||||||||||||
COMPARABLE (3) |
Jan |
Feb |
Mar |
Apr |
May |
YTD |
Jan |
Feb |
Mar |
Apr |
May |
YTD |
|||||||||||||
ALR/Five Star Managed Communities |
|
||||||||||||||||||||||||
Number of Properties |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
117 |
|
Number of Units |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
17,006 |
|||||||||||||
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Average Monthly Rate |
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Residents Fees and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property Operating Expenses |
|
(57,167) |
|
(53,410) |
|
(59,496) |
|
(56,988) |
|
(58,708) |
|
(285,769) |
|
(52,606) |
|
(51,786) |
|
(54,777) |
|
(50,892) |
|
(54,500) |
|
(264,561) |
|
NOI (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NOI Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other Operator Managed Communities |
|||||||||||||||||||||||||
Number of Properties |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
107 |
|
Number of Units |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
7,190 |
|||||||||||||
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly Rate |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents Fees and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property Operating Expenses |
|
(26,941) |
|
(24,769) |
|
(27,953) |
|
(26,475) |
|
(27,442) |
|
(133,580) |
|
(33,178) |
|
(30,239) |
|
(32,697) |
|
(31,766) |
|
(32,147) |
|
(160,027) |
|
NOI (4) |
|
|
|
|
|
|
( |
( |
( |
( |
( |
( |
|||||||||||||
NOI Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total SHOP Comparable |
|||||||||||||||||||||||||
Number of Properties |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
224 |
|
Number of Units |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
24,196 |
|||||||||||||
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
Average Monthly Rate |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Residents Fees and Services |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property Operating Expenses |
|
(84,108) |
|
(78,179) |
|
(87,449) |
|
(83,463) |
|
(86,150) |
|
(419,349) |
|
(85,784) |
|
(82,025) |
|
(87,474) |
|
(82,658) |
|
(86,647) |
|
(424,588) |
|
NOI (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NOI Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(1) |
|
The information regarding DHC’s SHOP segment results for April and May 2023 and year to date 2023, and on a pro forma basis for the 2019 periods indicated, reflects preliminary estimates with respect to certain results of DHC for such periods, based on currently available information. Because the quarterly financial close process and review for those periods is not yet complete, DHC’s final results upon completion of its quarterly close process and review may vary from these preliminary estimates. |
(2) |
|
Many of the senior living communities currently operated on DHC’s behalf in its SHOP segment were leased in 2019. DHC believes pro forma operating results are a meaningful supplemental performance measure as they present historical community level operating results regardless of the form of contractual arrangements. The table presents pro forma residents fees and services revenue, pro forma property operating expenses and pro forma NOI as if the communities had been managed for DHC’s account throughout all periods presented to assist in understanding community level operating results. |
(3) |
|
Comparable properties consist of properties owned and in service continuously since January 1, 2019; excludes properties classified as held for sale, closed or out of service and communities previously leased to operators that did not provide monthly financial results. |
(4) |
|
The calculation of NOI shown excludes certain components of net income (loss) in order to provide results that are more closely related to DHC's property level results of operations. DHC defines NOI as income from its real estate less its property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that DHC records as depreciation and amortization. DHC calculates comparable property NOI in the same manner that it calculates the corresponding NOI amount, except that it only includes comparable properties in calculating comparable property NOI. DHC uses NOI and comparable property NOI to evaluate individual and company wide property level performance. Other real estate companies and real estate investment trusts, or REITs, may calculate NOI and comparable property NOI differently than DHC does. |
Calculation and Reconciliation of NOI and Comparable Property NOI for SHOP Segment |
|||||||||||||||
(dollars in thousands) |
|||||||||||||||
For the Five Months Ended |
|||||||||||||||
5/31/2019 |
5/31/2023 |
||||||||||||||
Calculation of NOI: |
SHOP |
|
Restructuring Transaction |
|
Pro Forma |
SHOP |
|||||||||
Rental income |
$ |
61,244 |
|
$ |
(61,244 |
) |
$ |
- |
|
$ |
- |
|
|||
Residents fees and services |
|
180,822 |
|
|
350,274 |
|
|
531,096 |
|
|
468,870 |
|
|||
Property operating expenses |
|
(144,249 |
) |
|
(289,265 |
) |
|
(433,514 |
) |
|
(436,155 |
) |
|||
NOI |
|
97,817 |
|
|
(235 |
) |
|
97,582 |
|
|
32,715 |
|
|||
|
|||||||||||||||
Reconciliation of NOI to Comparable Property NOI: |
|||||||||||||||
NOI |
$ |
97,817 |
|
$ |
(235 |
) |
$ |
97,582 |
|
$ |
32,715 |
|
|||
NOI of properties not included in comparable results |
|
(1,794 |
) |
|
(1,568 |
) |
|
(3,362 |
) |
|
(1,048 |
) |
|||
Comparable property NOI |
$ |
96,023 |
|
$ |
(1,803 |
) |
$ |
94,220 |
|
$ |
31,667 |
|
|||
For the Five Months Ended |
||||||||||||||||
5/31/2019 |
5/31/2023 |
|||||||||||||||
(dollars in thousands) |
SHOP |
|
Restructuring Transaction |
|
Pro Forma |
SHOP |
||||||||||
Revenues: |
|
|
|
|
|
|
|
|||||||||
Rental income |
$ |
61,244 |
|
$ |
(61,244 |
) |
$ |
- |
|
$ |
- |
|
||||
Residents fees and services |
|
180,822 |
|
|
|
350,274 |
|
|
|
531,096 |
|
|
|
468,870 |
|
|
Total revenues |
|
242,066 |
|
|
289,030 |
|
|
531,096 |
|
|
468,870 |
|
||||
|
|
|
|
|
|
|
|
|||||||||
Expenses: |
||||||||||||||||
Property operating expenses |
|
144,249 |
|
|
|
289,265 |
|
|
|
433,514 |
|
|
|
436,155 |
|
|
Depreciation and amortization |
|
53,745 |
|
|
- |
|
|
53,745 |
|
|
70,825 |
|
||||
Impairment of assets |
|
6,206 |
|
|
|
- |
|
|
|
6,206 |
|
|
|
3,617 |
|
|
Total expenses |
|
204,200 |
|
|
289,265 |
|
|
493,465 |
|
|
510,597 |
|
||||
|
|
|
|
|
|
|
|
|||||||||
Gain on sale of properties |
|
15,207 |
|
|
- |
|
|
15,207 |
|
|
1,233 |
|
||||
Interest expense |
|
(1,524 |
) |
|
|
- |
|
|
|
(1,524 |
) |
|
|
(451 |
) |
|
Loss on early extinguishment of debt |
|
(17 |
) |
|
- |
|
|
(17 |
) |
|
- |
|
||||
Net income (loss) |
|
51,532 |
|
|
|
(235 |
) |
|
|
51,297 |
|
|
|
(40,945 |
) |
|
Add (less): |
Interest expense |
|
|
|
|
|
1,524 |
|
|
|
451 |
|
||||
|
Depreciation and amortization |
|
53,745 |
|
|
70,825 |
|
|||||||||
|
Impairment of assets |
|
|
|
|
|
6,206 |
|
|
|
3,617 |
|
||||
|
Gain on sale of properties |
|
(15,207 |
) |
|
(1,233 |
) |
|||||||||
|
Loss on early extinguishment of debt |
|
|
|
|
|
17 |
|
|
|
- |
|
||||
NOI |
|
97,582 |
|
|
32,715 |
|
||||||||||
NOI of properties not included in comparable results |
|
|
|
|
|
(3,362 |
) |
|
|
(1,048 |
) |
|||||
Comparable property NOI |
$ |
94,220 |
|
$ |
31,667 |
|
||||||||||
Ratio of Consolidated Income Available for Debt Service to Annual Debt Service
Adjusted |
|||||||||||||
Four Quarters Ended |
Four Quarters Ended |
||||||||||||
|
3/31/2023 |
Adjustments (1) |
3/31/2023 |
||||||||||
(dollars in thousands) |
|||||||||||||
Net Loss |
|
$ |
(308,855 |
) |
|
$ |
44,981 |
|
|
$ |
(263,874 |
) |
|
Loss (Gain) on Sale of Properties |
|
4,699 |
|
|
274 |
|
|
4,973 |
|
||||
|
Property Valuation Losses |
|
|
5,925 |
|
|
|
- |
|
|
|
5,925 |
|
Loss on Early Extinguishment of Debt |
|
30,635 |
|
|
(30,635 |
) |
|
- |
|
||||
Earnings (Losses) from Operations |
|
|
(267,596 |
) |
|
|
14,620 |
|
|
|
(252,976 |
) |
|
Interest on Debt |
|
191,772 |
|
|
(13,156 |
) |
|
178,616 |
|
||||
|
Provision for Taxes based on Income |
|
|
(793 |
) |
|
|
- |
|
|
|
(793 |
) |
Amortization of Debt and Deferred Financing Costs |
|
8,260 |
|
|
- |
|
|
8,260 |
|
||||
|
Property Depreciation and Amortization |
|
|
246,821 |
|
|
|
874 |
|
|
|
247,695 |
|
Fair Value Adjustments on Investments |
|
8,981 |
|
|
- |
|
|
8,981 |
|
||||
Consolidated Income Available for Debt Service |
|
$ |
187,445 |
|
|
$ |
2,338 |
|
|
$ |
189,783 |
|
|
Annual Debt Service |
$ |
191,772 |
|
$ |
(11,045 |
) |
$ |
180,727 |
|
||||
Ratio of Consolidated Income Available for Debt Service to Annual Debt Service |
0.98x |
|
|
|
1.05x |
||||||||
| (1) | Adjustments for acquisition or disposition of properties and repayment of debt during the period as required by covenant calculation. Annual debt service related to debt that bears interest at floating interest rates based on March 31, 2023, rates. |
About Diversified Healthcare Trust:
DHC is a real estate investment trust focused on owning high-quality healthcare properties located throughout
Warning Concerning Forward-Looking Statements
This press release contains 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, it 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. Actual results may differ materially from those contained in or implied by DHC’s forward-looking statements as a result of various factors. For example: (a) the information regarding DHC’s SHOP segment results provided in this press release reflects certain preliminary estimates based on currently available information, and DHC’s final results upon completion of its quarterly financial close process and review may vary from these preliminary estimates, and as a result, the information provided herein may not provide a meaningful measure of DHC’s SHOP segment results as expected; and (b) Ms. Francis states in this press release that the merger with Office Properties Income Trust, or OPI, is the best path forward for DHC and provides shareholders the best alternative to realize increased shareholder value in the long term; however, the closing of the merger is subject to the satisfaction or waiver of closing conditions, some of which are beyond DHC’s control, and DHC cannot be sure that any or all of these conditions will be satisfied or waived. Accordingly, the merger may not close on the contemplated terms or at all or it may be delayed, and if merger does close, DHC may not realize the benefits from the merger that it currently expects, including the expectation that the combined company will immediately be in compliance with its debt incurrence covenant and able to refinance or issue new debt, will be less vulnerable to the inconsistent nature of the SHOP recovery and will provide an annual distribution to DHC shareholders that represents an immediate increase of
The information contained in DHC's periodic reports filed with the SEC, including under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or incorporated therein, also identifies 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 any 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.
Important Additional Information About the Merger
This press release may be deemed to be solicitation material in respect of the proposed merger between DHC and OPI. In connection with the proposed merger, OPI filed a registration statement on Form S-4 with the SEC, containing a joint preliminary proxy statement/prospectus of DHC and OPI. DHC and OPI intend to file a definitive joint proxy statement/prospectus. The proposed transaction involving DHC and OPI will be submitted to DHC’s and OPI’s shareholders for their consideration at special meetings of shareholders to be held on August 9, 2023. BEFORE MAKING ANY VOTING OR INVESTMENT DECISION, INVESTORS ARE URGED TO CAREFULLY READ THE REGISTRATION STATEMENT, THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS THAT ARE FILED OR WILL BE FILED WITH THE SEC IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE IN THE REGISTRATION STATEMENT AND JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT DHC, OPI AND THE MERGER. When available, the relevant portions of the joint proxy statement/prospectus will be mailed to DHC’s and OPI’s shareholders. Investors will also be able to obtain copies of the registration statement and the joint proxy statement/prospectus and other relevant documents (when they become available) free of charge at the SEC’s website (www.sec.gov). Additional copies of documents filed by DHC with the SEC may be obtained for free on DHC’s Investor Relations website at www.dhcreit.com/investors or by contacting the DHC Investor Relations department at 1-617-796-8234. In addition to the registration statement and joint proxy statement/prospectus filed or expected to be filed, DHC files annual, quarterly and current reports and other information with the SEC. DHC’s filings with the SEC are also available to the public from commercial document-retrieval services and at the website maintained by the SEC at www.sec.gov.
No Offer or Solicitation
This press release is for informational purposes only and is not intended to and does not constitute an offer to sell, or the solicitation of an offer to subscribe for or buy, any securities or a solicitation of any vote or approval in any jurisdiction with respect to the merger or otherwise, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful, prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the
Participants in the Solicitation
DHC and certain of its trustees and executive officers, OPI and certain of its trustees and executive officers, and The RMR Group LLC, the manager of DHC and OPI, and its parent and certain of their respective directors, officers and employees may be deemed to be participants in the solicitation of proxies from DHC’s and OPI’s shareholders in connection with the merger. Certain information regarding these trustees, executive officers, directors, officers and employees and a description of their direct and indirect interests are and will be set forth in the registration statement and the joint proxy statement/prospectus when filed with the SEC by DHC and/or OPI. Information about DHC’s trustees and executive officers is also included in the proxy statement for DHC’s 2023 annual meeting of shareholders, which was filed with the SEC on April 20, 2023. Information about OPI’s trustees and executive officers is included in the proxy statement for OPI’s 2023 annual meeting of shareholders, which was filed with the SEC on April 6, 2023. Copies of the foregoing documents may be obtained as provided above.
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/20230625386790/en/
Melissa McCarthy, Manager, Investor Relations
(617) 796-8234
Source: Diversified Healthcare Trust
