What happened
The latest investor update from specialty real estate investment trust (REIT) Diversified Healthcare Trust (DHC 2.10%) didn't make investors happy. Following the update's release, many investors sold out of the stock, sending it to a 4% share-price loss by the end of the day. That contrasted rather unfavorably with the S&P 500 index, which experienced a drop of less than 0.5%.
So what
Diversified publishes monthly business updates, and the edition covering May revealed several points of concern. The first was a metric always front of mind for REIT investors -- occupancy.
In May, Diversified's occupancy tallied just over 78%, a relatively steep decline of more than 8 percentage points from the same month of 2019 (i.e., the last May before the coronavirus pandemic). The figure did improve over the April 2023 level, but only by 0.10 percentage points.
All things being more or less equal, lower occupancy means lower revenue. Diversified's May take for resident fees and services of $92.5 million was 10% lower than the May 2019 figure. Again, it topped the April level, but the improvement was relatively marginal.
There was also discouraging news regarding the REIT's finances. Diversified admitted that it's not in compliance -- nor has it been for more than two years -- with a debt incurrence covenant it agreed to with lenders. Unfortunately, the company is unable to issue new debt or refinance existing debt.
Now what
Investors like to see their REITs grow and have full access to all financial means. Occupancy and revenue are important, impossible-to-ignore measures of a REIT's health, as is a company's access to debt instruments (a must in the capital-intensive real estate world). It's little wonder the market found Diversified's latest update wanting.
