Diversified Healthcare Trust (DHC) Q4 2020 Earnings Call Transcript

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Diversified Healthcare Trust (DHC 8.26%)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]

Now I would like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Michael Kodesch -- Diversified Healthcare Trust

Good morning and welcome to Diversified Healthcare Trust's call covering the fourth quarter 2020 results. Joining me on today's call are Jennifer Francis, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answer session. I would like to note that the transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of Diversified Healthcare Trust or DHC. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's present beliefs and expectations as of today, Thursday, February 25, 2021. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, EBITDA, EBITDARM and cash basis net operating income or cash basis NOI. Reconciliations of net income or loss attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD, are available in our supplemental operating and financial data package found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Now I'd like to turn the call over to Jennifer.

Jennifer F. Francis -- President And Chief Operating Officer

Thank you, Michael and good morning. Welcome to our fourth quarter 2020 earnings call. To begin today's call, I'd like to take a minute to talk about our shift in strategy in 2020. We started the year with the strategic plan that began with the completion of the transition of Five Star Senior Living's leases to management agreement.

With that, we had our primary operator undergoing a turnaround, but unsure financial footing. We plan to spend considerable capital in our SHOP segment and we had a plan to sell properties with the intent to reduce leverage in order to maintain an investment grade rating. Because of COVID-19, these plans changed. We swiftly mobilized to combat the effects of the pandemic operationally and financially. Our focus shifted to working closely with the tenants in our office portfolio segment to ensure their continued success through the pandemic and to support Five Star's extensive measures to safeguard the health and well-being of residents and employees at our senior living communities. The fact that they were financially secure allowed them to be laser focused on their COVID response. Where necessary, we altered the timing of our capital spend in our portfolios and also worked to strengthen the financial stability of DHC by reducing our dividend eliminating near term debt maturities, and by working with our lenders to ensure our liquidity position.

Finally, in the second quarter as part of our multi-year review of our governance policies, we were pleased to expand the Company's Board with a new Independent Trustee with deep commercial real estate and capital markets expertise. While we can say that we do not expect this unprecedented global pandemic nor the wake of its economic and social disruption, we're pleased that our asset diversification provided some stability through the year evidenced by our office portfolio's continued performance through the pandemic. We remained confident that with the steps that we've taken this year combined with the expected post senior living demographic tailwinds. DHC is on the path of growth and improved profitability.

Five Star began hosting vaccination clinics for residents and employees in our SHOP communities in December 2020. As of February 20, approximately 16,000 or 87% of residents and over 7,000 or 43% of employees have received at least the first dose of the vaccine. Additionally, close to 10,000 residents have received the second dose of the vaccine. Five Star has rolled out a series of educational sessions to encourage the acceptance of the vaccine and expects to be substantially complete with vaccination clinics by the end of the first quarter of 2021.

After the fourth quarter 2020 holiday season, much like the rest of the country, we saw an increase in positive cases -- COVID cases in our senior living communities which remained elevated through January of this year. As a result, same-property SHOP average occupancy declined to 72.7% in the fourth quarter. Sequentially, same-property SHOP average occupancy was down 320 basis points. We're approximately in line with the expectations announced on our third quarter call of 24 basis points of lost occupancy per week. Since the surge in cases, we're encouraged to see a decrease in active cases. As of February 20, just 2.5% of residents in our communities had active cases of COVID-19 down from 3.5% as of January 29. Finally, as of February 20, approximately 99% of our communities are accepting new residents in at least one line of business. And while move-ins remained modest in the fourth quarter of 2020 as a result of both the pandemic and seasonality, recent leads have accelerated.

As of February 20, trailing 4-week lease represented an 87% increase over the beginning of the fourth quarter and were approximately 37% higher than the rolling 4-week average, as of March 1, 2020 which was just as the pandemic became prevalent in the United States. We're optimistic that the vaccines will not only improve the safety and well-being of current residents, but will also improve the resident experience at our communities, which we will -- which we believe will be a driver in the recovery at our communities and in the industry.

The CDC recently quoted a 2020 Study concluding that social isolation significantly increased a person's risk of premature death from all causes, a risk that may rival those of smoking, obesity and physical inactivity, especially with older adults. In this study, loneliness and social isolation were associated with approximately a 50% increased risk of dementia, a 29% percent increased risk of heart disease, and a 32% increased risk of stroke. As a result, we believe there is a critical need for the socialization and quality care provided in senior living communities. Finally, we're starting to see a positive supply trend while senior living inventory growth in 2020 remains elevated as a result of investments made 18 to 24 months ago by those seeking to capitalize on the aging population in the United States.

In early 2020 construction starts began to slow materially and inventory growth is expected to moderate in 2021 as a result. We expect the combination of these factors to result in a favorable supply demand dynamic and support the senior living industry as vaccine distribution continues and the pandemic wanes and pent-up demand translates to increase move-ins. As of the fourth quarter, same-property occupancy in DHCs office portfolio was 93.7%, a 70 basis point increase over the third quarter and a 10 basis point increase year-over-year largely driven by a 100,000 square feet full-building lease signed by a life science tenant in Fremont, California.

During the fourth quarter, we executed 413,000 square feet of new and renewal leases, more than doubling our previous quarter's results. These leases were signed at a weighted average lease term of 5.4 years with leasing costs of approximately $4.43 per square foot per year. While we saw a roll down in rent for leases executed this quarter of 7.9%, it was related to one short-term renewal by a tenant who required flexibility due to the pandemic. Excluding that renewal, rents on our executed lease deals for the quarter rolled up 7.4%.

We have signed letters of intent for an additional 136,000 square feet at our Torrey Pines redevelopment in San Diego. If these leases are executed will have leased 85% of the redevelopment project at an average of close to 22% roll up in rents. During our third quarter call, we reported that as of November 2, DHC had granted rent deferrals equal to $1.8 million in the office portfolio segment down from the $2.4 million reported during our second quarter call. To date, the total amount of deferred rent remains unchanged and represents 0.4% of DHC's total annualized rental income. We've had no new rent deferral request since our last call. Our triple-net senior living portfolio represented 10% of fourth quarter NOI.

As previously mentioned on our prior calls, we had granted a partial rent deferral to one tenant in this portfolio, which has begun to repay their deferred rent as planned. The remaining triple net senior living tenants are current with no additional request for deferrals. These properties had rent coverage of 1.61 times in aggregate as of the third quarter of 2020 compared to 1.69 times at the end of 2019. Our wellness center portfolio represented 3.5% of fourth quarter NOI and was relatively flat sequentially. As we've mentioned in the past, this portfolio is made up of 2 tenants one of which was previously in default. Subsequent to quarter end, we restructured and extended this tenants lease and both tenants are now current. Finally, before I turn the call over to Rick, I'd like to recognize the hard work and dedication exhibited by our operators and managers, employees during the year. Recently, the RMR Group was named as one of the 2020 top places to work in Massachusetts by the Boston Globe. We're proud to be part of an organization that demonstrates continuous commitment to its employees by providing the resources, development and innovative workplace necessary to succeed. These employees are critical to the success of our properties and I believe that having these highly motivated and engaged professionals will contribute to DHCs path toward growth and improved profitability.

I'll now turn the call over to Rick to provide details on our financial results.

Richard W. Siedel, Jr. -- Chief Financial Officer And Treasurer

Thanks, Jennifer, and good morning everyone. To begin today's financial commentary, I'd like to first provide an update on our liquidity position. On January 29, we amended our credit facilities to provide for waivers of most of our financial covenants through June of 2022 and added an additional option to extend the maturity of the revolving credit facility into January of 2024. Shortly after completing our credit facility amendments, we issued $500 million of senior notes due 2031 at a four and three-eighths percent interest rate. The proceeds of this offering were primarily used to prepay our $200 million dollar term loan and to set money aside to redeem the $300 million of senior notes due December 2021 in June when these notes become redeemable without a prepayment penalty.

Following the redemption, our next senior notes maturity is not until May of 2024. At December 31, 2020, we had $74 million of cash, and following these transactions, we had $800 million available on our revolving credit facility, which to date remains undrawn. DHC reported normalized FFO attributable to common shareholders of $0.09 per share, which was $0.03 per share higher than the third quarter. Sequentially, same-property EBITDARM in our SHOP segment actually increased 32.1% from the third quarter due to the recognition of $10.1 million of care benefits in other income during the fourth quarter. Excluding this benefit, EBITDA decreased 5.9%.

Same-property revenues in the SHOP segment were down 2.1% from the third quarter, driven by lower occupancy. Same-property average monthly rates, however, were up 70 basis points compared to the third quarter, which includes the impact of concession. Same-property expenses in the SHOP segment decreased 2.2% from the third quarter or approximately $5.6 million. Most of our expense line items decreased in the fourth quarter with the exceptions of repair and maintenance and marketing expenses.

Looking at our year-over-year office portfolio results, the slight increase in occupancy Jennifer mentioned earlier was offset by decreased parking revenues of $800,000 resulting in approximately flat same property cash basis NOI. Interest expense was $57.8 million for the fourth quarter of 2020 generally consistent with the third quarter, but increased approximately $14.5 million year-over-year primarily due to the $1 billion of senior note issued in June of 2020 offset by lower revolver in term loan interest. In the fourth quarter, we spent $64.7 million on capital expenditures, an increase of $19.5 million over the third quarter.

Approximately $39.9 million of our fourth quarter spends have considered recurring and included building improvements in both our office portfolio and SHOP segments and tenant improvements and leasing costs in our office portfolio. Remaining portion of our capital expenditures or $24.8 million was spent on redevelopment capital projects. Lastly, I want to touch on rent collections, which continued to be strong. In our office portfolio, approximately 99% of our contractual rents due were collected during the fourth quarter and in January and February.

I'll now turn it back over to Jennifer.

Jennifer F. Francis -- President And Chief Operating Officer

Thanks, Rick. Much of 2020 and early 2021 has been spent with the focus on the effects of the global pandemic and recent extreme weather events in parts of the United States. With that said, we're cautiously optimistic at the progress that's been made with vaccinations in our senior living communities and are looking forward to moving -- to moving out of this difficult chapter and into a more normal world where we can set in place our plans to improve our portfolio and resume DHCs path to growth and profitability.

That concludes our prepared remarks. Operator, please open the line for questions.

Questions and Answers:

Operator

I'll begin the question-and-answer session. [Operator Instructions] First question comes from Bryan Maher of B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR -- Analyst

Rick. Thanks for those comments. A couple of questions, as it relates to the dispositions aside from what you've already announced for 2021, what might be a reasonable expectation given what you're seeing out in the landscape? And is there any change to your cap rate expectations on what you've been selling?

Jennifer F. Francis -- President And Chief Operating Officer

Good morning, Bryan. This is Jennifer. Our cap rate expectations remained -- we've talked about cap rates at about 8% and we still believe that number. We have one property that's under -- still under agreement that we expect to close in the next 60 days or so. And we have a handful of properties that we're currently marketing there properties that we work with Five Star, Five Star moved residents out and more marketing them for sale vacant. Other than that, where we're really on hold with our disposition program, our focus is going to be on repositioning our portfolio, investing the capital, recovering from COVID and the effects of COVID in our Senior Living portfolio. And so, other than what I just talked about, really we have no plans for disposition.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. And that kind of brings me to my next question. As you know, I covered Five Star as well and we noticed when they reported last night, the impact of some sales on their numbers, how do those discussions go between DHC and Five Star's relate to selling DHC owned Five Star managed properties, which is there back and forth on which ones to sell, can you give us some color on that?

Michael Kodesch -- Diversified Healthcare Trust

Sure. There is back and forth, senior management folks at Five Star and Rick and I and then members of our asset management teams go through the list of communities, very regularly, and and we look at ones that have -- that are underperforming where we think if we were to invest capital, the return still wouldn't be what we should be targeting. And so those are the ones that we decided to close and sell and we didn't want to sell them occupied with residents because they competed with some of our other communities and we didn't want to create competition for ourselves.

Bryan Maher -- B. Riley FBR -- Analyst

And then just lastly for me, is there any situation in which you would have to return any of the 10 million in CARES Act funds?

Jennifer F. Francis -- President And Chief Operating Officer

Hey, Brian. I can't really envision a scenario where we would've to return it. There are some audit requirements that will take care of, but no, there is not a lot. I mean, we still have some money sitting on the balance sheet that we haven't -- that we've received, but not recognized. So once we've met the criteria to recognize that we're really confident that that there is not much risk of going back.

Bryan Maher -- B. Riley FBR -- Analyst

Great, thank you.

Jennifer F. Francis -- President And Chief Operating Officer

Thank you.

Operator

[Operator Instructions] This concludes our question and answer session. Now I'd like to turn the conference back over to Jennifer Francis for closing remarks.

Jennifer F. Francis -- President And Chief Operating Officer

Thank you everyone for joining our call today. Have a nice day.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Michael Kodesch -- Diversified Healthcare Trust

Jennifer F. Francis -- President And Chief Operating Officer

Richard W. Siedel, Jr. -- Chief Financial Officer And Treasurer

Bryan Maher -- B. Riley FBR -- Analyst

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