Diversified Healthcare Trust is implementing a recovery strategy to return the company to a position of growth, pinning its hopes on continued improvement in its senior housing operating portfolio, although executives are unsure when or whether that business will return to historical, pre-pandemic levels for operations, finances and cash flow.
“We are actively evaluating all strategies to strengthen DHC’s balance sheet, regain debt covenant compliance, source additional capital to fund our ongoing SHOP [senior housing operating portfolio] recovery and best position the company for long-term growth,” Chief Financial Officer and Treasurer Matt Brown said Thursday during a third-quarter earnings call, adding that he expects the company to regain debt compliance before the end of 2024.
One strategy undertaken by executives from the Newton, MA-based real estate investment is hiring financial adviser B. Riley Securities to evaluate options to address near-term debt maturities and return the company to growth. The action followed the August collapse of a merger agreement with Office Properties Income Trust.
In addition to considering property sales, joint ventures and permissible financing, President and CEO Jennifer Francis said, DHC also is in discussions with its bank group to potentially extend the maturity date of its credit facility and amend certain covenants. Doing so, she said, would allow the company flexibility to use proceeds from capital-raising initiatives to pay off debt and fund recently deferred capital projects.
Selling properties
Francis said that the company has initiated a disposition strategy for several properties from each of its operating segments, to increase liquidity. From Jan. 1 through Oct. 23, DHC has sold six properties, including four senior living communities, and is in the pre-marketing stage of a disposition program that includes 66 properties, the company outlined in a presentation issued in conjunction with the call. The REIT owned 376 properties as of Sept. 30 and has not made any acquisitions in 2023.
“The sequencing and timing of our plan to address near-term debt maturities and return DHC to growth is still yet to be determined,” Francis said. “But we’re working diligently to advance this plan on all fronts.”
Despite those efforts, the company continued to express “substantial doubt” about its ability to continue as a growing concern for at least one year.
Senior living recovery continues
The REIT said that it is unsure when or if its senior living business will return to historical pre-pandemic levels for operations, finances and cash flows, according to a Securities and Exchange Commission filing. The COVID-19 pandemic, as well as economic and market conditions, have had a significant negative effect on DHC’s operations, financial position and cash flows, the REIT said, adding that although signs of improvement exist, the recovery in the REIT’s SHOP segment has been slower than previously anticipated, and uneven.
But as the senior living industry continues to show improvement from the effects of the COVID-19 pandemic, DHC’s SHOP saw an $11.3 million (64%) reduction in the use of contract labor from 2022. Operator costs, however, remain elevated due to insurance premium increases, new staff and seasonal expenses, the REIT reported.
“Our SHOP progress can be attributed to strategic operational improvements, strong industry fundamentals and our capital investments in our communities,” Francis said, adding that during the quarter, DHC invested $49 million in the segment, bringing its year-to-date SHOP investments total to $128 million. “While SHOP recovery remains pressured by higher operating expenses and our deferral of capital, our operators continue to achieve rental growth and occupancy gains above the industry benchmark for comparable properties year over year,” she added.
Brown said that the SHOP segment saw a $9.8 million increase in expenses in the quarter, mostly due to $5.3 million in labor costs, $2.6 million in insurance premium increases and $2.3 million from season cooling costs.
Those expense increases were partially offset by a 13.2% revenue increase, a 370-basis-point occupancy increase, to 78.4%, and a 7% increase in average monthly rates for the third quarter.
As of Sept. 30, according to a presentation, 119 of the 230 senior living communities in DHC’s senior housing operating portfolio were operated by Five Star Senior Living. Other operators, according to the presentation, included Cedarhurst Senior Living, Charter Senior Living, IntegraCare Senior Living, Life Care Services, Navion Senior Solutions, Northstar Senior Living, Oaks-Caravita Senior Care, Omega Senior Living, Oaks Senior Living, Phoenix Senior Living, Stellar Senior Living and The RMR Group.
DHC’s senior living portfolio also includes 27 communities with triple net leases, with tenants including Brookdale Senior Living and Stratford Retirement.
