Diversified Healthcare Trust’s pending merger with Office Properties Income Trust remains the “best path” forward as DHC’s senior housing operating portfolio continues to struggle in its COVID-19 pandemic recovery, DHC President and CEO Jennifer Francis said Thursday in a performance update.
The Newton, MA-based real estate investment trust reported that net operating income for its senior housing operating portfolio, or SHOP, has flattened over the past two months, and no real growth is anticipated for the second half of the year. The REIT said that its operating partners have indicated that they expect higher operating expenses, particularly insurance and labor costs.
With the news, DHC said it expects that it may not reach compliance with its debt incurrence until mid-2024, with “substantial risk” that it may take longer.
“We continue to believe that the previously announced merger with Office Properties Income Trust is the best path for long-term value preservation and creation for DHC shareholders,” Francis said in a statement.
DHC reported that June total SHOP occupancy of 78.7% was 780 basis points below the June 2019 level and 60 basis points above the May 2023 level. Year-to-date occupancy for June was 77.8%, 870 basis points below the same period in 2019, according to the REIT.
Resident fees and services revenue for June was 9% below the June 2019 level and 0.5% above the May 2023 level, DHC said. Year-to-date, those figures came in at 10.7% below the same period in 2019, according to the REIT.
June net operating income was reported at 63.1% below June 2019 and 22% above May 2023. The net operating income margin for the month was 1,130 basis points below June 2019 and 130 basis points above May 2023, according to DHC.
Advocacy for merger continues
Since announcing plans for the merger in April, DHC has repeatedly advocated for the move, holding a call, discussing it on its first-quarter earnings call in May and issuing updates in May and June before the one issued Thursday.
During a 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. In a filing with the Securities and Exchange Commission last month, DHC said that it would have needed $81.3 million of additional income for the four quarters ended March 31 to be in compliance with the annual debt service level required for its debt incurrence covenant.
Last month, DHC announced that a non-monetary event of default occurred under its $450 million credit facility.
As of March 31, the REIT’s portfolio included 376 properties in 36 states and Washington, DC, including senior living communities (40% of the overall portfolio), medical office buildings (39%), life science (13%), wellness centers (7%) and skilled nursing facilities (1%). The REIT’s SHOP portfolio, as of April, included 237 senior living communities, almost half of them Five Star Senior Living communities managed by AlerisLife.
In the planned merger, 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.
Two shareholders have publicly announced their intent to vote against the merger. Flat Footed, which owns roughly 9.8% of the outstanding DHC shares, said the deal “would unnecessarily burden the company with OPI’s rapidly declining commercial office properties. Hedge fund D.E. Shaw, which owns a 6.1% stake in DHC, said in an SEC filing that DHC should “pursue superior alternative actions.”
