Diversified Healthcare Trust announced Thursday morning that a “non-monetary event of default” had occurred under its $450 million credit facility.
The Newton, MA-based real estate investment trust’s seniors housing operating portfolio as of April included 237 senior living communities, almost half of them Five Star Senior Living communities managed by AlerisLife, with other operators in the portfolio including 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 a couple dozen leased communities with tenants such as Brookdale Senior Living.
But the REIT’s portfolio also includes medical office buildings and life science properties, and those are the property types involved in the affected credit facility.
That credit facility requires the REIT to maintain collateral properties “with an aggregate appraised value of at least $1.09 billion,” DHC said. June 23, however, the facility’s administrative agent notified the REIT that the reappraised value of the 61 medical office and life science properties securing the facility had declined in value from $1.34 billion to $1.05 billion, below the required $1.09 billion threshold. The appraised values of the collateral properties securing the facility declined 22% since they were last appraised in January 2021, DHC said.
The REIT said that it is negotiating a limited waiver with the requisite lenders under the facility to waive the event of default through Sept. 30, the outside closing date for DHC’s pending merger with Office Properties Income Trust, at which time DHC’s $450 million credit facility will be fully refinanced.
“Because DHC is not currently in compliance, and it has not been in compliance for over two years, with its debt incurrence covenants, DHC cannot issue any new debt or refinance expiring debt,” the DHC said.
It’s a situation that DHC President and CEO Jennifer Francis has discussed since the planned merger with OPI was announced.
“The company is currently restricted from issuing or refinancing debt due to debt incurrence covenants, and we do not expect to be in compliance until mid-2024. We have $700 million of debt retiring in 2024 and no ability to refinance it,” she said during an April conference call. “And while the SHOP recovery is underway and gaining momentum, it requires considerable capital to support its turnaround — a turnaround that is just not happening as quickly as is necessary.”
In May, during the REIT’s first-quarter earnings call, Francis said that current conditions raised “substantial doubt” about the firm’s ability to continue as a going concern as a stand-alone company. Earlier this week, DHC said in a filing with the SEC that for the four quarters ended March 31, DHC would have needed $81.3 million of additional income to be in compliance with the 1.5x annual debt service level required for its debt incurrence covenant.
When and if it closes during the third quarter, the merger is expected to create a $12.4 billion investment portfolio with 539 properties — senior housing, offices, medical office buildings, life science and other properties — across 40 states and Washington, DC, according to OPI President and Chief Operating Officer Christopher Bilotto said.
In the planned deal, OPI would acquire all of the outstanding common shares of DHC in an all-share transaction. OPI would be the surviving entity and would change its name to Diversified Properties Trust upon closing. Bilotto will help lead the combined company.
In late May, OPI began implementing its financing strategy for the merger, closing on a $30.7 million loan, but not all shareholders are on board.
In a public letter posted in May, Flat Footed, the owner of approximately 9.8% of the outstanding common shares of DHC, announced its intention to vote against the merger, saying that the deal “would unnecessarily burden the company with OPI’s rapidly declining commercial office properties.”
The shareholder filed a preliminary proxy statement June 7 with the Securities and Exchange Commission and a definitive one Thursday. Flat Footed also has created savedhc.com and sent a letter to DHC shareholders on Thursday.
Earlier this month, Hedge fund D.E. Shaw, which owns a 6.1% stake in DHC, filed a statement with the SEC formally opposing the merger and saying that DHC should “pursue superior alternative actions.”
