Diversified Healthcare Trust’s proposed merger with Office Properties Income Trust is expected to close after shareholders vote Aug. 30, the real estate investment trust’s president, CEO and managing trustee, Jennifer Francis, said Wednesday during the Newton, MA-based REIT’s second-quarter earnings call.

“We continue to believe this merger represents the best opportunity available to create long-term value for DHC shareholders through a larger, more diversified REIT,” she said, “with more than $700 million of debt coming due in 2024 and being out of compliance with our debt incurrence covenants.” 

Second quarter normalized funds from operations of $0.05 per share were flat quarter over quarter, according to a business update issued in conjunction with the call. Consolidated net operating income for the second quarter also was flat with the previous quarter, with senior housing operating portfolio NOI increases offset by declines in non-SHOP NOI. SHOP NOI for the second half of the year is expected to remain unchanged, according to the report.

Francis said that DHC expects to continue to face “steep challenges” in the coming year and that SHOP turnaround will not occur in time to address the challenges from debt. 

“Following the completion of the merger, the combined company will immediately be in compliance with its debt covenants, allowing access to multiple capital sources to continue to fund the SHOP turnaround and address upcoming debt maturities,” Francis said, echoing previous comments.

As of June 30, DHC had approximately $357.1 million of cash and cash equivalents and restricted cash.

“DHC has concluded that there is substantial doubt about its ability to continue as a going concern for at least one year from the date of issuance of DHC’s financial statements, or Aug. 1, 2023,” the REIT said in its business update, repeating an assessment made several times, including in May.

In April, the REIT prepaid approximately $14.6 million of secured debt that was encumbering one of its senior living communities, with an annual interest rate of 6.64% and a maturity date in June, using cash on hand.

Chief Financial Officer and Treasurer Richard Siedel noted that the REIT’s consolidated cash basis NOI increased $20.2 million, or 46%, from the second quarter of last year to approximately $64.3 million in the second quarter of this year. 

“This increase was primarily attributable to improvements in our SHOP segment, which had an increase of $16.4 million of cash basis NOI,” Siedel said. 

Occupancy in DHC’s SHOP segment has increased 420 basis points since the second quarter of 2022 and 90 basis points since the first quarter of this year. 

“We note that our SHOP segment has begun to improve, but after consultation with our operators, we expect that SHOP NOI in the second half of this year will be approximately equal to the first,” he said. 

“We are confident that the merger with OPI will provide the necessary liquidity and financial flexibility to address all near-term debt maturities and better position our shareholders to benefit from the combined company’s long-term growth,” he said.

Shareholder opposition

Meanwhile, also Wednesday, in an investor update, shareholder Flat Footed said that the proposed merger “materially undervalues DHC” and that “several data points indicate DHC stock is worth many multiples of the $1.15 proposed merger consideration.” 

The investor has a 9.4% stake in the REIT and has expressed opposition to the planned merger in the past.

“We believe the board of trustees has failed DHC’s stakeholders by pursuing the proposed merger, which would unnecessarily burden the company with OPI’s rapidly declining commercial office properties,” the shareholders wrote previously. The deal, the company said, disproportionately benefits OPI and the RMR Group “at DHC’s direct expense.” The RMR Group manages both DHC and OPI, all of which are based in Newton, MA.

Flat Footed is not alone in its opposition to the proposed merger. 

Hedge fund D.E. Shaw, which owns a 6.1% stake in DHC, in June filed a statement with the Securities and Exchange Commission formally opposing the deal. The company said that it notified DHC privately in May that it plans to vote against the deal at an upcoming special meeting.

For additional coverage of the earnings call, see McKnight’s Senior Living.