A merger with Office Properties Income Trust (OPI) provides Diversified Healthcare Trust (DHC) with the “best solution” to address several near-term challenges it faces, DHC President and CEO Jennifer Francis said Tuesday morning after the two real estate investment trusts announced their intentions to join together.
“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 on a conference call. “And while the SHOP [seniors housing operating portfolio] 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.”
The merger, Francis added, “provides increased liquidity to fund the SHOP turnaround and capital improvement plan.”
The transaction is expected to close during the third quarter, creating 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, with 42% of the properties located in Sunbelt markets, OPI President and Chief Operating Officer Christopher Bilotto said.
Both companies currently are managed by The RMR Group, so the combined entity should realize annual general and administrative cost savings of $2 million to $3 million by eliminating redundant costs, OPI Chief Financial Officer and Treasurer Matt Brown said.
The two REITs already have the same secretary, Jennifer Clark, and director of internal audit, Vern Larkin. DHC, OPI and RMR all are headquartered in Newton, MA.
| Diversified Healthcare Trust to merge with Office Properties Income Trust |
In the deal, OPI will acquire all of the outstanding common shares of DHC in an all-share transaction. OPI will be the surviving entity and will change its name to Diversified Properties Trust upon closing of the transaction. The combined company will be led by members of the OPI executive management team, among them Bilotto and Brown.
Merging the two REITs, Bilotto said, has “many compelling benefits.”
“Most compelling to the combined company is the expected growth through the work being done in the senior living portfolio,” he said, noting that renovations at more than 40 senior living communities were completed through the end of the year in 2022 and an additional 21 renovations are in the planning stages or are underway and are expected to lead to increased occupancy and rental growth.
DHC Chief Financial Officer and Treasurer Rick Siedel noted that in the fourth quarter of 2022, DHC’s SHOP had an occupancy rate of 76.3% and generated $7.9 million of net operating income, or NOI.
“We believe our SHOP recovery to pre-pandemic levels and beyond is dependent on both continuing our planned investments into our communities and the strategic operational improvements our operators are making in all of our communities every day,” he said.
DHC was expecting to spend between $300 million and $350 million of capital this year, according to Siedel. “About $250 [million] or so was in the SHOP portfolio, and it’s pretty evenly split between repositioning or redevelopment capital and ongoing maintenance,” he said. “On a go-forward basis, once we’ve addressed the projects that are in the hopper right now, normalized maintenance capital is expected to be about $1,500 per unit per year.”
At 40%, senior living will represent the largest property type in the combined portfolio, with office properties representing 35%. Medical office buildings will represent 12%, and life science properties will represent 9%.
DHC’s seniors housing operating portfolio includes 237 communities with 25,346 living units, according to a presentation posted online Tuesday in conjunction with the merger news. As of the fourth quarter of 2022, more than 100 of those communities were Five Star Senior Living communities managed by AlerisLife, according to a March presentation posted online. Additional operators with a presence in DHC’s SHOP, according to the March presentation, include Cedarhurst Senior Living, Charter Senior Living, IntegraCare, 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 leased communities with a combined 2,062 units and tenants such as Brookdale Senior Living.
But DHC’s portfolio also includes medical office buildings and life science properties. In fact, medical office buildings accounted for 43% of the REIT’s net operating income in the fourth quarter of 2022. Independent living and assisted living properties accounted for 37% of NOI, and skilled nursing accounted for 1%.
The merger of DHC and OPI, Bilotto said, “creates a stronger, more diversified company that is better positioned to execute on its business plan going forward. …Through 2025, our focus is on increasing cash flow from the senior housing operating portfolio with the goal of matching 2019 proforma NOI by the second half of 2024.”
