Diversified Healthcare Trust saw “continued momentum” in its senior housing operating portfolio, or SHOP, in the second quarter due to “favorable tailwinds in senior housing” in addition to “prudent capital investments we have made within our communities and from an emphasis on improving operator performance,” President and CEO Chris Bilotto said Friday on the Newton, MA-based real estate investment trust’s second-quarter earnings call.
As of June 30, $61.9 million in SHOP renovation projects were underway. Major renovations, Bilotto said, typically include “substantial upgrades in common areas and resident rooms, new FF&E [furniture, fixtures and equipment], along with changes or expansion to the acuity mix.”
One of the undertakings is a $26.6 million project at Pueblo Norte Senior Living, a 197-unit independent and assisted living community in Scottsdale, AZ. As of the end of the second quarter, the REIT had spent $15.9 million on the work, which is expected to be completed in the second quarter of 2025.
“The project includes major improvements to the resident experience, with new upgraded common areas; new amenities, including a theater, bistro lounge and fitness rooms; the addition of 27 new memory care units; and up to 20 new assisted living units through a conversion of a closed skilled nursing wing,” Bilotto said.
“We initially targeted this renovation given the favorable outlook within the three-mile statistical range, including a five-year outlook for the 75-plus population growth rate of 12.2%, a 65-plus average home value of over $560,000, and a favorable outlook supporting labor and other operating fundamentals,” he continued. “When stabilized following its completion of 2025, we estimate incremental NOI [net operating income] of $4 million, equivalent to a 15% return on the $27 million investment.”
Meanwhile, the REIT reported that it also is spending a total of $25 million on 23 projects to refresh 3,873 units at various independent living, assisted living and memory care communities. As of the end of the second quarter, $0.2 million in costs had been incurred on the work, which DHC said should be completed in the fourth quarter. The firm expects an incremental NOI of 8% to 10% on invested renovation capital once the properties are stabilized, Bilotto said.
Also underway is a $10.3 million project at Five Star Premier Residences of Teaneck, a 218-unit independent living and assisted living community in Teaneck, NJ. As of June 30, the REIT had spent $10.2 million on the project, which it estimates will be completed in the third quarter.
Total SHOP capital expenditure guidance for 2024 is $130 million to $150 million, according to DHC Chief Financial Officer Matt Brown. “This reduction is mainly driven by timing of certain projects being pushed to 2025 and pausing certain projects related to communities we are evaluating for transition or sale,” he said.
Longer-term initiatives
Longer-term initiatives meant to strengthen the portfolio, Bilotto said, include “the rationalization of underperforming communities and those with incremental performance opportunities.”
“To accomplish this,” he continued, “we are working through our portfolio with an emphasis on stronger densification of communities and operator relationships in certain markets, cost management with the support of our asset management team, enhanced living experience for residents through targeted capital improvements and the advancement of additional operator transitions and property sales.”
The REIT transitioned 13 communities in the Midwest to a new operator earlier this year and is in discussions to undertake additional transitions that are “more modest in size,” the CEO said.
Three SHOP properties are in “advanced stages” of being sold, with letters of intent in place, Bilotto said. “And then we have another five communities that are getting ready to kick off for marketing.”
“In line with our strategy to optimize asset allocation within SHOP, we have signed LOIs or are in the process of marketing properties for sale that encompass approximately 1,100 units with an estimated value between $80 million and $100 million,” he said. “During the second quarter, these properties have resulted in negative NOI of approximately $830,000 and an occupancy rate of 72%.”
Bilotto said that the communities are located “where further growth prospects seem constrained, require significant capital investment, lack portfolio synergies or in circumstances where we believe we have maximized value.”
Occupancy, rate increases
Occupancy in the overall SHOP as of June 30 was 79%, an increase of 10 basis points, or 0.1%, from the 78.9% seen in the previous quarter and an increase of 120 basis points, or 1.2%, compared with the same quarter of 2023, when occupancy was 77.8%.
Same-property occupancy in the SHOP as of June 30 was 79.6%, an increase of 20 basis points, or 0.2%, from the 79.4% seen in the previous quarter and an increase of 160 basis points, or 1.6%, compared with the same quarter of 2023, when occupancy was 78%.
“The preliminary results we’re seeing for July move-ins is positive,” Bilotto said.
Year over year, average monthly rates increased by 6.1% in the second quarter, resulting in an 8.3% increase in SHOP revenues. Consolidated SHOP NOI increased 17.3% sequentially to $29 million, including a margin increase of 140 basis points, or 1.4%. Same-property SHOP NOI increased 27% year over year.
DHC’s portfolio as of June 30 included 232 managed senior living communities, more than half (119) of which were operated by Five Star Senior Living across 28 states. Other managers of senior living communities owned by DHC as of the end of the second quarter included Charter Senior Living (30), Oaks-Caravita Senior Care (26), Phoenix Senior Living (23), Stellar Senior Living (10), Northstar Senior Living (7), Navion Senior Solutions (5), Life Care Services and Oaks Senior Living (3 each), IntegraCare Senior Living (2), and Omega Senior Living and The RMR Group (1 each).
DHC’s portfolio as of June 30 also included 27 senior living communities leased by Brookdale Senior Living, Covenant Care, Stellar, Stratford Retirement and other operators.
