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Why Diversified Healthcare Trust Jumped 10% This Morning

By Reuben Gregg Brewer – Jun 1, 2020 at 11:22AM

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The positive impact of late May news is still boosting the shares in early June, but investors need to do some second-order thinking here.

What happened

Shares of healthcare-focused real estate investment trust (REIT) Diversified Healthcare Trust (DHC -0.56%) rose 10% out of the gate on June 1. That came after strong gains in the previous week. The advances were all helped along by some big news on the financing front.   

So what

First, the good news: Diversified Healthcare Trust was able to issue $1 billion worth of bonds. It made that announcement on May 28, leading to a big price move in the stock. To show just how important this was, the stock is up by about a third over the past five days. Most of that gain came following the debt announcement. For comparison, other diversified healthcare REITs, like Ventas, Welltower, and Healthpeak, were up between 2% (or so) and 8% over the same span. Clearly, investors were pleased that Diversified Healthcare was able to get a bit of extra cash to help it through the current COVID-19 difficulties facing healthcare property owners.   

A young woman in a medical coat comforting an older woman sitting down

Image source: Getty Images.

To be fair, the additional financing is very good news for the REIT. But there are some negatives here, too. For example, the interest rate on the debt is 9.75%. Diversified Healthcare is paying a huge amount in interest for this debt, which suggests that investors are worried it won't be able to repay the loan when it comes due in 2025. That, by the way, is not a particularly long way off, which makes the high interest rate even more troubling. Generally speaking, longer dated bonds tend to come with higher yields than shorter dated paper. 

Notably, at the start of the year, Diversified Healthcare had to bail out one of its senior housing operators, Five Star, by taking over the properties it formerly leased and hiring the company to be the property manager. This put these assets into the REIT's senior housing operating portfolio (or SHOP). The actual operating performance of these properties will now pass through to Diversified Healthcare, which isn't a good thing today since the senior housing sector is under extreme pressure. Essentially, a reliable lease agreement was replaced by the variable results of day-to-day ownership of properties that are currently facing sizable headwinds because of the coronavirus. This REIT is, indeed, much riskier than it was just five or six months ago.   

Now what

Investors looking at this REIT's big gains shouldn't get too excited. The debt issuance has bought Diversified Healthcare time to deal with the COVID-19 crisis. But it has come at a high cost and amid a period when the portfolio has changed in an important way -- and not for the better. Note, too, that Diversified Healthcare has dropped the dividend to a token penny a share in an attempt to free up as much cash as possible. The future here is looking better than it was, but it still isn't looking particularly good.   

Reuben Gregg Brewer owns shares of Ventas. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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