Although Diversified Healthcare Trust’s senior housing operating portfolio continues to recover from the effects of the COVID-19 pandemic, the third quarter was challenging for operating expenses, according to the Newton, MA-based real estate investment trust’s president and CEO, Jennifer Francis.
Operators drove improvement in SHOP occupancy compared with the second quarter, with a 110-basis-point increase for the total portfolio, the sixth consecutive quarter of occupancy growth, Francis said Thursday during a third-quarter earnings call.
DHC’s SHOP segment includes 227 independent and assisted living communities, 120 of which are Five Star communities, with the other 107 being managed by 10 other operators.
In its same-property senior living portfolio — the 120 Five Star communities, Francis said, occupancy increased at its fastest pace in more than a decade, increasing 120 basis points from the second quarter, to 75.3%. Steady occupancy improvement followed changes made by Five Star parent company AlerisLife, including “considerable” investment in its sale and marketing functions and the implementation of community incentive programs that reward teams for occupancy growth and expense containment related to its communities.
In DHC’s 107-community non-same-store property portfolio, average occupancy increased 80 basis points from the second quarter, up 660 basis points from the prior year. Revenue in this portfolio also grew 9.7% year-over-year.
Most of the occupancy gains came in assisted living and memory care rather than in independent living, which will be a focus going forward, Chief Financial Officer and Treasurer Richard Seidel Jr. said.
But those strong gains were negated by elevated costs due to inflationary pressures from increased labor and wages, utilities and food costs, as well as the effects of Hurricane Ian.
Occupancy gains in the quarter led to increased care and service demands that required operators to turn to agency staffing, Francis said. Operators continue to push to stabilize their workforces through recruitment and retention strategies, she said, adding that communities in DHC’s portfolio have seen decreases in turnover and in the time needed to fill open positions, as well as a reduction in the number of open positions across the portfolio compared with the second quarter.
“We expect increases in wages and benefits to continue to challenge our ability to return margins to pre-pandemic levels,” Francis said. “Despite these setbacks, we are seeing strengthening demand for senior living and expect continued occupancy and rate growth in our SHOP segment, leading to future stabilization.”
Some inflationary costs will persist, leading to a need to raise rents to offset those costs, Seidel added. He said he anticipates some tailwinds coming in the first quarter of 2023 as some operators increase rates by 10% or more.
Hurricane Ian causes significant damage
Although the majority of DHC’s communities in the Southeast largely were unaffected by Hurricane Ian, one 380-unit community in Fort Myers, FL, sustained significant damage, Seidel said. That community, he added, is out of service while building repairs are underway; residents have moved temporarily to other communities owned by the REIT.
Seidel said that DHC saw $3.8 million in hurricane-related costs for those communities. Damage to the community was “fairly extensive,” he added, with the first floor flooded and rooftop independent living units of a building tower completely destroyed.
Francis said she expects the community to begin opening in phases beginning later this month. Seidel said that repairs to the independent living building will take more time, with a reopening anticipated in the middle of 2023.
Focus remains on portfolio stabilization
Francis said that DHC will continue with its plan to invest in its SHOP communities to stabilize the portfolio.
The REIT invested $70 million in capital expenditures during the third quarter, including $52.9 million in the SHOP. Seidel said he anticipates that the REIT will spend an additional $115 million on capital improvements across the portfolio in the remainder of the year.
“Investing in our portfolio is a priority for us,” Seidel said. “We continue to develop plans to improve our properties in order to grow occupancy, push rental rates and enhance the overall value of our portfolio.”
