Diversified Healthcare Trust Announces Third Quarter 2020 Results

11/5/20

NEWTON, Mass.--(BUSINESS WIRE)--Diversified Healthcare Trust (Nasdaq: DHC) today announced its financial results for the quarter and nine months ended September 30, 2020.

"While the senior living industry continues to experience significant challenges as a result of the COVID-19 pandemic, the stability of our medical office and life sciences portfolio and the steps we took earlier in the year to enhance liquidity put us in a strong position to withstand the effect of the pandemic," stated Jennifer Francis, President and Chief Operating Officer of Diversified Healthcare Trust. "Our third quarter results have been materially impacted by COVID-19 and measures taken to ensure the safety and well-being of the residents and employees in our senior living communities, resulting in both continued occupancy declines and sharp increases in expenses related to employee healthcare and personal protective equipment.

While the pandemic is expected to continue to negatively impact our near-term senior living results, we believe that we are strengthened by the diversity of our portfolio, and that healthcare real estate will benefit from the aging U.S. population in the long term."

Results for the Quarter Ended September 30, 2020:

Net loss attributable to common shareholders was $106.9 million, or $0.45 per share, for the quarter ended September 30, 2020 compared to $29.4 million, or $0.12 per share, for the quarter ended September 30, 2019. The change in net loss attributable to common shareholders for the quarter ended September 30, 2020 primarily resulted from:

  • increased impairment charges for the 2020 period primarily related to senior living communities scheduled for closure and/or sale;
  • a $4.0 million revenue reserve for an estimated Medicare refund DHC expects to pay with respect to one of its senior living communities and $2.2 million in estimated related penalties, compliance costs and professional fees, net of management fees reimbursable by Five Star Senior Living Inc. (Nasdaq: FVE), or Five Star;
  • losses on sale of properties during the 2020 period compared to gains during the 2019 period; and
  • decreased normalized funds from operations, or Normalized FFO, attributable to common shareholders for the 2020 period, as discussed below.

Those changes were partially offset by:

  • unrealized gains on investment in Five Star common stock for the 2020 period; and
  • decreased acquisition and certain other transaction related costs for the 2020 period.

Normalized FFO attributable to common shareholders were $13.2 million and $70.1 million, or $0.06 and $0.29 per share, for the quarters ended September 30, 2020 and 2019, respectively. As previously announced, on January 1, 2020, DHC completed the restructuring of its business arrangements, or the Restructuring Transaction, with Five Star. Pursuant to the Restructuring Transaction, effective January 1, 2020, the previously existing master leases and management and pooling agreements between DHC and Five Star were terminated and replaced with new management and related agreements, or the New Management Agreements, for all of DHC's senior living communities operated by Five Star. The change in Normalized FFO attributable to common shareholders for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019 primarily resulted from:

  • decreased rental income for the 2020 period due to the conversion of DHC's previously existing leasing arrangements with Five Star to management arrangements as part of the Restructuring Transaction and the results from the converted managed communities for the 2020 period being less than DHC's rental income for these communities for the 2019 period, as well as DHC's dispositions since July 1, 2019;
  • increased interest expense for the 2020 period primarily due to a higher average interest rate on DHC's outstanding debt; and
  • decreased general and administrative expense for the 2020 period primarily due to decreased business management fee expense, primarily resulting from lower average trading prices of DHC's common shares.

Reconciliations of net loss attributable to common shareholders determined in accordance with U.S. generally accepted accounting principles, or GAAP, to funds from operations, or FFO, attributable to common shareholders and Normalized FFO attributable to common shareholders for the quarters ended September 30, 2020 and 2019 appear later in this press release.

Results for the Nine Months Ended September 30, 2020:

Net loss attributable to common shareholders was $123.2 million, or $0.52 per share, for the nine months ended September 30, 2020 compared to $36.5 million, or $0.15 per share, for the nine months ended September 30, 2019. The change in net loss attributable to common shareholders for the nine months ended September 30, 2020 primarily resulted from:

  • decreased Normalized FFO attributable to common shareholders for the 2020 period, as discussed below;
  • increased impairment charges for the 2020 period;
  • a $4.0 million revenue reserve for an estimated Medicare refund DHC expects to pay with respect to one of its senior living communities and $2.2 million in estimated related penalties, compliance costs and professional fees, net of management fees reimbursable by Five Star; and
  • decreased gain on sale of properties during the 2020 period.

Those changes were partially offset by:

  • gains on equity securities for the 2020 period compared to losses for the 2019 period; and
  • decreased acquisition and certain other transaction related costs for the 2020 period.

Normalized FFO attributable to common shareholders were $139.6 million and $239.4 million, or $0.59 and $1.01 per share, for the nine months ended September 30, 2020 and 2019, respectively. The change in Normalized FFO attributable to common shareholders for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from:

  • decreased rental income due to the conversion of DHC's previously existing leasing arrangements with Five Star to management arrangements as part of the Restructuring Transaction and the results from the converted managed communities for the 2020 period being less than DHC's rental income for these communities for the 2019 period, as well as DHC's dispositions since January 1, 2019;
  • increased interest expense primarily due to a higher average interest rate on DHC's outstanding debt; and
  • decreased general and administrative expense primarily due to decreased business management fee expense, primarily resulting from lower average trading prices of DHC's common shares.

Reconciliations of net loss attributable to common shareholders determined in accordance with GAAP to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the nine months ended September 30, 2020 and 2019 appear later in this press release.

Portfolio Operating Results:

Cash basis net operating income, or Cash Basis NOI, at properties owned, in service and operated by the same operator continuously since July 1, 2019, or same property, decreased 32.1% for the quarter ended September 30, 2020 compared to the 2019 period, primarily resulting from the conversion of DHC's previously existing leasing arrangements with Five Star to management arrangements as part of the Restructuring Transaction and the results from the converted managed communities for the 2020 period being less than DHC's rental income for these communities for the 2019 period.

For the quarter ended September 30, 2020, 77.2% of net operating income, or NOI, came from the 126 properties with 11.6 million leasable square feet in the Office Portfolio segment. Same property occupancy for this segment was 93.3% as of September 30, 2020 compared to 93.7% as of September 30, 2019. Same property Cash Basis NOI from this segment decreased 2.9% for the quarter ended September 30, 2020 compared to the 2019 period, primarily resulting from decreased parking revenue and increased bad debt at certain of DHC's medical office and life science properties related to the COVID-19 pandemic. For the quarter ended September 30, 2020, DHC collected approximately 99% of contractual rents due from tenants in its Office Portfolio segment.

For the quarter ended September 30, 2020, 10.0% of NOI came from the 239 senior living communities with 28,232 living units in the Senior Housing Operating Portfolio, or SHOP, segment. Occupancy for this segment was 75.2% for the quarter ended September 30, 2020 compared to 86.0% for the quarter ended September 30, 2019. Same property occupancy for this segment was 76.3% for the quarter ended September 30, 2020 compared to 85.4% for the quarter ended September 30, 2019. Same property average monthly rates for this segment were $4,515 for the quarter ended September 30, 2020 compared to $4,508 for the quarter ended September 30, 2019. Same property Cash Basis NOI from this segment decreased 70.7% for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019, primarily resulting from the conversion of DHC's previously existing leasing arrangements with Five Star to management arrangements as part of the Restructuring Transaction and the results from the converted managed communities for the 2020 period being less than DHC's rental income for these communities for the 2019 period, as well as impacts related to the COVID-19 pandemic and revenue reserves and related estimated penalties, compliance costs and professional fees, net of management fees reimbursable by Five Star, incurred related to the compliance matter discussed below. Same property earnings before interest, taxes, depreciation, amortization, impairment of assets, gains or losses on sale of properties, rent and management fees, or EBITDARM, from this segment decreased 55.8% for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019.

For the quarter ended September 30, 2020, 12.8% of NOI came from the 32 triple net leased senior living communities and 10 wellness centers comprising DHC's all other operations. As of September 30, 2020, six of the 10 wellness centers were in default under their leases. The weighted average rent coverage for the remaining four wellness centers and 32 triple net leased senior living communities decreased to 1.62x for the 12-month period ended June 30, 2020 compared to 1.94x for the 12-month period ended June 30, 2019(1). Same property Cash Basis NOI for the 32 triple net leased senior living communities and 10 wellness centers on a combined basis decreased 15.8% for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019 primarily due to the six DHC wellness centers in default as of September 30, 2020.

Reconciliations of net loss determined in accordance with GAAP to NOI and Cash Basis NOI, and a reconciliation of NOI to same property NOI and calculation of same property Cash Basis NOI by operating segment for the quarters ended September 30, 2020 and 2019 appear later in this press release. Reconciliations of SHOP segment net loss determined in accordance with GAAP to pro forma EBITDARM, and a reconciliation of pro forma EBITDARM to same property pro forma EBITDARM for the quarters ended September 30, 2020 and 2019 appear later in this press release. Prior periods have been recast to reflect DHC's new reportable segments.

Leasing Activities:

During the quarter ended September 30, 2020, DHC entered into new and renewal leases for an aggregate of 201,721 rentable square feet at weighted average rents that were 4.1% higher than prior rents for the same space. The weighted (by annualized rental income) average lease term for these leases was 7.0 years and leasing concessions and capital commitments were $5.0 million, or $3.51 per square foot per lease year of the lease term on average (weighted by annualized rental income). Leasing activity for the quarter ended September 30, 2020 also includes a new 10-year lease at a rental rate that is approximately 20% higher than the prior rental rate for the same space for one of DHC's Torrey Pines buildings located in San Diego, CA that is currently undergoing redevelopment.