Q1 2020 Earnings Call

good day and welcome to the Diversified Health Care trust first quarter 2020 results conference call and webcast all participants will be in listen-only mode should you need assistance please Sumo conference questions or press the star key followed by zero

after today's presentation there will be an opportunity to ask questions do you ask a question you may press * then 1 and a touch-tone phone so which are your question please I'm starving to please note this event is being recorded I will return the call over to mister Michael Curtis director of investor relations Mister Curtis the phone number sir

Thank you. Welcome to Diversified Health Care trusts call covering. The first quarter of 2020 results joining me on today's call are Jennifer Francis president and Chief Operating Officer and Rick Seidel financial officer and Treasurer today's call includes a presentation by management followed by a question-and-answer session would like to note that the transcription recording and retransmission of today's conference call our life without the prior written consent of Diversified Health Care trust or d h c.

We're adjusted ebitda in cash basis net operating income or cash basis and reconciliations of net income attributable to Common shareholders through these non-gaap figures and the components to a g a f f o Kadar or fad or available in our supplemental operating and financial data package found on our website at ww.w actual results, May differ materially from those projected in any forward-looking statement additional information concerning factors that could cause those differences contained in our filings with the SEC investors are cautioned not to place undue Reliance on any forward-looking statements under the current unique circumstances. The management team is conducting today's call from several locations and ask that the listeners on the call bear with us should any technical technical difficulties arise now, I'd like to turn the call over to Jennifer.

Around the clock to modify and apply enhanced cleaning protocols adapt to continually changing regulations surrounding the operation of our assets employed cost-reducing measures as states have issued Chef to place me on dates and prioritize non-emergency tenant work orders to limit face-to-face interactions. In addition. The team has worked to secure the availability of critical supplies name and best practices for addressing confirm covid-19 cases and are now in the process of implementing procedures for the reopening of certain tenant spaces to ensure the safety of our tenants and to help them cope with the realities of a new normal.

today's conference call contains forward-looking statements within the meaning of the private Securities litigation Reform Act of 1995 and other

We want to thank everyone in each of our regions as these efforts have and will continue to play a vital role in weathering through these challenging times.

In the first quarter of 2020 dhcs normalized ffo attributable to Common shareholders with 29 cents per share down just a penny from last quarter's results and a decrease of $0.08 a month prior year quarter largely due to the restructuring transaction with 5-star and to an extent the effects of covid-19.

Thank you, Michael. Good morning to our shareholders in call participants and Welcome to our first quarter of 2020 earnings call.

The first quarter saw the beginning of a worldwide health crisis with an immediate impact on the global economy, which is created new and unforeseen challenges for our industry.

Kick off our portfolio performance review. I'd like to begin by touching Upon Our medical office and life-science properties. Now refer to as our office portfolio segment, which represents approximately 53% of g e d h c is noi for the first quarter of 2020.

Over the last two months. Our priority has been monitoring the development of the covid-19 pandemic and its effect on our business tenants communities and Families.

I'd like to start the call this morning by expressing my gratitude and respect for health care workers and essential workers across all industries that are on the front lines of This Global pandemic risking their own health and safety for the sake of others. We've experienced some of that courage and commitment first hand across our portfolio and thank those Heroes as they continue to battle the virus and provide care and services to us our residents and armed I'd like to personally recognize the Swift action and critical efforts made by our operator five star Senior Living in response to the pandemic.

This portfolio contains close to 12 million square feet comprised of roughly 7.2 million square feet of medical office buildings and four point five million square feet of life science properties with a weighted average remaining lease term of 6.2 years.

That was going to be effective covid-19 which took a greater hold toward the end of the quarter. We reported strong leasing results across our office portfolio segment in the first quarter. We executed when the three thousand two thousand square feet of new and renewing leases with a 16% roll up and rent a weighted average lease term of 7.7 years would leasing cost of approximately $3.70 per square foot per year.

As soon as the spread of covid-19 was anticipated in the United States Five Star teams moved quickly to implement numerous protocols and precautionary measures throughout our communities to safeguard the health and well-being of President clients and team members.

Releasing results we achieved over the past twelve months have been a direct result of the Investments. We've made in this segment over that time. We've executed over one point three million square feet of new and renewing with a 10% roll up and rent 10.5 years of weighted average lease term and leasing cost of $2.18 per square foot per year.

Among those protocols five stars restricting all non-essential visitors from entering our communities and essential visitors must adhere to strict visitation protocols.

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For medical office and life-science investment strategy is working then we believe it has not only strengthen our portfolio but will demonstrate resilience as we navigate through this current economic downturn.

Looking at our office portfolio results compared to the same quarter last year. We reported a 2.6% increase in same property cash base with and we had several large whole building tenants that time long-term goals in the first quarter last year and they were given free rent as part of these transactions. These concessions were effective in the first quarter of nineteen and are primarily what makes up the growth from the prior-year quarter of

Through the first three business days of may we collected approximately 86% of the office portfolios. May rents to which is in line with where we were at this point in April for April a d h d collected approximately 99% of the office portfolios rent.

Much like our peers and the rest of the real estate industry. Our portfolio is not immune to the economic effects of the stay-at-home orders are tenants are facing that state and local government mandates have resulted in the temporary home of non-essential and elective medical procedures. The volume of patients are tenants have seen his fallen and some non-essential businesses have temporarily closed their doors.

Even the most the even the more critical or essential medical practices are saying the material decrease in patients While most of our biotech and laboratory tenants are considered essential businesses off some of the small to mid-sized organizations are temporarily working from home due to local and state restrictions on non-essential Workforce with that said it comes as no surprise that most of our rent really require have come from the smaller businesses and medical practices.

Of the 180 for rent relief request we received in our office portfolio segment only a handful came from Life Science tenants 77% of these Grant relief requests came from tenants at least under five thousand square feet from us approximately 55% of the girls granted for dependents at two of our strongest Medical Office Buildings Peterson. I'm in Los Angeles and 11:45 19th Street in Washington DC both our properties where we believe there is potential to more quickly recover any deferrals granted.

Well working with each tenant disaster relief on an individual basis to understand their financial situation and assess their ability to meet their obligations. Generally. We provided rent deferral at a time the expectation that the Deferred amount will are to be repaid over a 12-month. Mostly beginning this fall. We've not granted any outright rent abatements, but in some cases favorite restructuring leases to give small concessions now in exchange for extended lease term and rent growth

As of Monday, we had granted rent a Pearl's equal to one point seven million dollars in the office portfolio segment this represents 1.4% of the recurring monthly cash Revenue. We expect to cross over the deferral. And only 4% of the annualized revenue from our office portfolio segment.

We Believe partnering with our tenants that are experiencing Financial challenges will provide support for their businesses and ultimately provide for greater assurances for collection in the long-term best preserving our relationships retention and portfolio stability

While we're pleased with how resilient our office portfolio has been during the pandemic as one would expect our wellness centers have all been closed by government-mandated for voluntary closure of health clubs across the United States.

Today we've deferred 2.75 million dollars of rent and are in ongoing discussions with each of our Wellness Center tenants.

Is it?

Similarly, we're having regular discussions with our triple net senior living tenants where we have agreed to defer approximately $360,000 of rent in that segment.

One of the HC is highest priorities is the health and well-being of the residents at our senior living communities are tenants and all of our stakeholders as of April 30th across our shop and took that senior living communities. We have 350 confirmed resident cases of covid-19 across 46 communities representing less than 1.5% of our total resident population.

He's 46 Community Afflicted with confirmed cases represent about 17% of our shop and triple net senior living communities combined five stars earning College scheduled for this afternoon and 1:00 p.m. Eastern and we encourage you to listen to it senior leadership discuss both their covid-19 response and updates on their company-wide initiatives.

Looking at the first quarter 2020 results on a comparable basis our same property shop segment revenues were down 140 basis points due to expense pressure labor and reduced occupancy. First quarter, even on the same property shop portfolio was down 14.4% from the prior-year quarter as a reminder. We believe you've had armed as a month transitional performance measure as it presents historical Community level operating results regardless of lease or management structure and removes the impact of any changes in the agreements during the periods presented.

Diving deeper into our same-property shop segment Revenue decreased average rate was down 80 basis points with occupancy for the quarter of 83.3%

due to restrictions intended to prevent the spread of covid-19, including a decrease in in person towards and limitations on non-essential visitors to our communities, like other Senior Living writers five star is experiencing significant challenges and attracting new residents to our communities.

Additionally were experiencing cost increases as a result of the pandemic.

Salaries and benefits were the primary drivers of our cost increased this quarter accounting for 72% of the evidence decrease.

Prior to the start of the pandemic five star continued to invest in with employees during the first quarter in a meaningful way.

We expect our labor cost to move higher in the second quarter as a result of five stars initiatives independent pandemic.

And dispositions as previously announced we completed an additional fifty six million dollars of assets sales since our last earnings call the majority of which closed well after the covid-19 demek started to ramp up off the Springs are twenty-twenty Property Disposition total up to sixty four point six million dollars today. We have approximately $164 million dollars of assets under agreement to sell.

We expect them to.

30 of these to stall is due diligence is delayed and capital markets remain relatively Detective.

We remain committed to our disposition program and our Target remain nine hundred million dollars of property sales.

Now turn the call over to to provide for further Financial commentary.

Thank you, Jennifer and good morning. Everyone to begin as a segue from Jennifer's disposition remarks. I wanted the first provide color around our liquidity position in light of the pandemic We Believe d h c is well-positioned whether the near-term challenges presented by the pandemic and we expect to meet all of our upcoming Capital obligations, including our debt maturities and in a number of planned capital projects to improve our portfolio.

We ended the first quarter with approximately seventy million dollars of cash on hand at $415 available on our $1 revolving credit facility.

As previously announced we sold 47 million dollars of Senior Living assets subsequent to quarter-end additionally in early April our board made the difficult decision to reduce our dividend to $0.01 per share projector from fifteen cents per share per quarter preserving roughly thirty-three million dollars of capital each quarter.

As of March 31st our debt to adjusted ebitda was seven point four times roughly in line with the previous quarter as Jennifer stated. We expect the pace of our asset disposition program to slow considerably off some deals falling out of agreement as a result of the difficulties of conducting physical diligence while under shelter and place orders in the current state of the markets.

For those assets sales we do complete. However, we will continue to use the proceeds to reduce debt.

Moving to our use of capital subsequent to quarter-end. We repaid two hundred million dollars of 6.75% senior notes that matured in mid-april. We expect to utilize a six-month extension on the $250 unsecured Term Loan currently scheduled to mature in June after that. Our next scheduled debt maturity is not until December of 2021.

Turning to our capital expenditure Outlook as previously disclosed. We are deferring a hundred and fifty million dollars of previously budgeted Capital expenditures in both our shop and office portfolios.

Many of these deferrals are the result of being realistic about the work that can be completed while we are restricting non-essential visits at our senior living communities and leasing expectations while under shelter and place orders.

Is important to understand that we are continuing to invest in our properties in order to improve our future returns and we still expect to spend approximately 160 million dollars at our properties for the remainder of this year. Approximately one-third being spent on completing the Redevelopment of our life science asset in Torrey Pines that we've talked about on prior calls.

Lastly if business conditions deteriorate beyond our current expectations, there are additional levers we can pull to ensure sufficient liquidity. For example, after preliminary discussions with certain members of our bank group. We believe we could possibly add additional extension options to our 250 million dollar unsecured Term Loan and amend certain terms in our credit agreement to provide additional cushion for our Covenants.

It is also important.

Number that the vast majority of our assets remain unencumbered in the past. We have utilized financing from Fannie Mae and believe we could raise Capital by placing secured debt on a portfolio of our senior living properties to provide additional liquidity if we thought it was necessary.

These are just two examples of potential sources of liquidity that may be helpful to understanding why we believe we are well-positioned to manage through this challenging environment with our current balance sheet and liquidity options.

That concludes our prepared remarks operator. Please open up the line for questions.

Yes, sir. We will now begin the question-and-answer session to ask you a question. You may press star one of their tests on phone. If you're using a speaker phone, please pick up before pressing the keys if any time request has been addressed. Do you like to enjoy your question, please? Press star then again. It is star then one to ask you a question at this time would just paused momentarily to Assam our roster.

And our first question will come from Brian May her of the FBR, please go ahead.

Jennifer and and and thank you for the details, Those are really helpful Jennifer when you think about the senior housing component, you know kind of down the road and I think you use the term New Normal. You know, how do you think that that looks into the 3/4, you know, maybe from an increased regulatory standpoint visitation and social distance thing, you know, etcetera. Can you elaborate on how you're thinking that this industry looks in in, you know, maybe by year-end 2020

Yeah, well, I think social distancing is is here to stay and Senior Living for a period of time regardless of whether states start to open up. I think that just because of the address population operators will continue to have you know, social distancing and and Sheltering in place residents staying home in their their units for the time being, you know regulatory. It's hard to say. I know that there's been an increased in a regulatory wage. There's been government agencies that are talking about increasing regulations when it comes to Assisted Living. I think Independent Living is is pretty different and and yeah 3 to 4 p.m. Two or three quarters out. It's hard to to know. I mean, you know that these operators are living in the moment doing everything they can to to keep covid-19 out of the community job.

I think they're doing a great job regardless of what we see in the process.

And and then when we think about occupancy for for modeling purposes, I don't know. Maybe I missed it if you shared what occupancy was looking like in April, I know well I was putting out some kind of biweekly, you know with the degradation and occupancy was I didn't know if if you would be willing to share that or put another way where you think it could go over the next couple of quarters before, you know, eventually rebounding

Yeah, I think with this.

The current state we're thinking occupancy will likely drop by forty to fifty basis points a week for how long that lasts again. It's hard to say, you know, it really depends on how long covid-19 is is Raging through the country, but I think those are good numbers to use the Forty to fifty basis points per week not wage per week. Now, that's great. And then lastly for me and maybe wreck. This might be a question for you. You talked to at the end of your comment about, you know, the ability to raise additional capital above and beyond the liquidity that you currently have and things that you could do to do that with your bankers and with the um, you know assets that you have an available. What world would you be living in that you think you need to access materially more than the, you know, roughly half a billion of liquidity that you currently have. How how bad would it be?

to get where do you see you know the leavers to make you have to make those phone calls

thanks Brian there's just still a lot of uncertainty related to the pandemic if we had a crystal ball and knew where it was going we would we wouldn't have to worry about em but I believe our investor relations team is getting a lot of inbound calls asking about liquidity part of that may be related to the two hundred million dollars in your notes that we just retired in in mid also while we ended the quarter with 415 million available on the revolver we did use 200 of it initially to to pay down those notes so we still have plenty of capacity for our limited upcoming maturities and again we've scaled back our our capex assumptions a bit but really that was just being realistic about what can physically be done in this environment so we still feel very comfortable but because there's been some some questions we wanted to just make sure we address that

Okay, thank you. That's all for me. Thanks, Brian.

Get as a reminder. If you'd like to speak to these Q-tips * then 1 and we will just pause momentarily.

Well at this time, we're sorry for the questions we will.

Go ahead and conclude today's questions. I have to return a conference call back over to management for an enclosed one box.

Thank you for joining us on our first quarter earnings call. We hope you your families and colleagues stay well and look forward to connecting with many of you as a virtual Navy Conference in June month.

We thank you ma'am. Answer the rest of the management team for your time today. The conference calls are concluded at this time. You may disconnect. Thank you. Take care and have a great day everyone.

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