Diversified Healthcare Trust (DHCNL) Q4 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Diversified Healthcare Trust Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] I'd now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Diversified Healthcare Trust 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 Web site 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.

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 a strategic plan that began with the completion of the transition of Five Star senior livings leases to management agreements. With that we had our primary operator undergoing a turnaround but on sure 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 segments 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 and 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 did 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 portfolios continued performance through the pandemic. We remain confident that with the steps that we've taken this year, combined with the expected post-COVID senior living demographic tailwinds, DHC is on the path of growth and improved profitability. Five Star began hosting COVID 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 7000 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 of 2020 holiday season, much like the rest of the country, we saw an increase in positive 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 or approximately in line with the expectations announced in our third quarter call of 24 basis points of lost occupancy per week. Since this surge in COVID 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 four week leads represented an 87% increase over the beginning of the fourth quarter and we're approximately 32% higher than the rolling four 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 in our communities, which we believe will be a driver in the recovery at our communities 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, risks 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% 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 increased move-ins. As of the fourth quarter, same property occupancy and DHC's 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 foot full building lease signed by a life sciences tenant in Fremont, California. During the fourth quarter, we executed 413,000 square feet of new and renewal leases, more than doubling our previous quarters 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 our 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, we'll have least 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 requests for deferrals. These properties had rent coverage of 1.61x in aggregate as of the third quarter of 2020 compared to 1.69x 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 two 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 DHC's path toward growth and improved profitability. I'll now turn the call over to Rick to provide details on our financial results.

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 4.375% interest rate. The proceeds of this offering were primarily used to prepay our $200 million 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 today remains undrawn. The 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 CARES Act benefits and other income during the fourth quarter excluding this benefit EBITDARM 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 concessions. 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 a year-over-year, primarily due to the $1 billion of senior notes issued in June of 2020 offset by lower revolver and 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 spend was considered recurring and included building improvements in both our office portfolio and SHOP segments and tenant improvements and leasing costs in our office portfolio. The remaining portion of our capital expenditures or $24.8 million was spent on redevelopment capital projects. Lastly, I wanted to touch on rent collections which continue to be strong. In our office portfolio approximately 99% of our contractual rent dues were collected during the fourth quarter and in January and February. I'll now turn it back over to Jennifer.

Thanks Rick. Much of 2020 and early 2021 has been spent with a 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 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 DHC's path to growth and profitability. That concludes our prepared remarks. Operator, please open the line for questions.

And I'll begin the question and answer session. [Operator Instructions] First question comes from Bryan Maher, B. Riley FBR.

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?

Our cap rate expectations remain -- we've talked about cap rates at about 8% and more, we still believe that number, we have one property that's 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 their properties that we work with Five Star. Five Star moved residents out and more marketing them for sale vacant. Other than that, 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 in the effects of COVID in our senior living portfolio. And so, other than what I just talked about, we're really we have no plans for dispositions.

Okay. And that kind of brings me up 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 as it relates to selling DHC owned Five Star managed property? Is there back and forth on which ones to sell? Can you give us some color on that?

Sure, there is back and forth, the 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 we look at ones that have that are underperforming, where we think if we were to invest capital, the returns 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.

Got it. 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?

I can't really envision a scenario where we'd have to return it. There are some audit requirements that will take care of. But no, there's 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 it, we're really confident that there's not much risk of it going back.

[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.

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

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.