Q2 2020 Diversified Healthcare Trust Earnings Call
Hi, My name is it because in many many different.
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Good morning, and welcome to the diversified Healthcare Trust second quarter 2020 financial results Conference call.
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Thank you welcome to diversified healthcare trust call covering the second quarter 2020 result.
Joining me on todays call, our Jennifer Frances President and Chief operating Officer, and Rick Sidel, Chief Financial Officer, and Treasurer. Today's call include the presentation by management, followed by a question and answer session I.
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 D. H C.
Today's conference call contain 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 the agencies present beliefs and expectations as of today Thursday August 620 20.
The company undertakes no obligation to revise or publicly released 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 resi seat.
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 bases in Hawaii.
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 at our supplemental operating and financial data package found on our website at www Dot the age theory dotcom.
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 FCC.
Investors are cautioned not to place undue reliance upon any forward looking statements.
Now I'd like to turn call over to Jennifer.
Thank you Michael Good morning, welcome to our second quarter 2020 earnings call.
Over the past several months to covert 19 pandemic has driven elevated levels of uncertainty and disruption to both the economy and the commercial real estate industry.
The impact on our business tenants communities and colleagues, it's been profound and has resulted in extremely challenging operating environment.
I'd like to thank the hard working employees at the Aramark rope and five star senior living he's or unusual times and it's comforting to witness the dedication that these people and their commitment to superior service delivery, while working tirelessly to handle the unprecedented challenges associated with the current climate.
Well our country managers through the crisis that has disrupted every facet of our society.
We're utilizing our entire platform to optimize resources and expertise in ways that mitigate risks associated with the virus, which we believe is paramount to providing value to all stakeholders by focusing on delivering sustainable long term results.
As expected Cobot 19 took a toll on our performance in the second quarter with impacts felt felt most strongly across our senior living portfolio.
I'll spend time this morning discussing the senior living portfolio and how our operating partner has reacted to the pandemic.
We'll also discuss the strength of our office portfolio segment with its strong meant collections and rent deferral statistics and how our operator, we manager had been working to contain operating expenses during the crisis.
In the second quarter 2020, DHC is normalized FFO attributable to common shareholders was 24 cents per share well above consensus estimates, but a decrease of 10 cents per share from the prior year quarter due to the effects of coking 19, as well as our restructuring transaction with five star.
I'd like to begin today's portfolio performance review by discussing recent trends in providing commentary with regard to our office portfolio segment, which represents approximately 60% DH sees an ally as this up the second quarter 2020.
This portfolio contains close to 12 million square feet comprised of roughly 7.1 million square feet of medical office buildings, and 4.5 million square feet of life science properties with a weighted average remaining lease term of 6.1 years and same property occupancy for the quarter of 93.8%.
In light of conditions and work from home orders during the second quarter leasing in our portfolio experienced an expected slowdown.
We entered into 60000 square feet of new and renewal leases with 5.2% Rollup in rent a.
The weighted average lease term at six years and with leasing costs of approximately $2 in two cents per square foot per year.
As I said this slowdown and leasing was expected as many tenants took a wait and see approach to their business and space needs.
We believe that this will likely lead to a backlog of deals as cobot 19 related treatments in vaccines progress as the prevalence of the pandemic essentially wanes and as a sustained broader economic reopening develops.
Our investment case for ownership of medical office and life science assets remains unchanged.
In the long term the growth of the aging U.S. population will continue to drive increases in demand for health care services.
Advances in technology, and Tele health within a lines payer system for reimbursements will attract and retain this aging population as their need for services increases creating growth in the value of medical office real estate.
Despite cobot related disruption investment in life science assets are proving to be one of the most resilient property types its business isn't the industry a commonly deemed essential.
Venture capital funding for the life Science industry has surged in recent quarters with second quarter 2020 reporting 53% increase over the prior year quarter due to the industry's role in the research development and your manufacturing of treatments and vaccines.
As a result real estate owners with life science exposure have witnessed continuing strong demand for their space.
Looking at our office portfolio results compared to the same quarter last year, we reported a 1.1% decrease in same property NOI and a 2.3% decrease on a cash basis.
The decrease in Oh, I was largely due to parking revenue, which was down approximately $1.5 million from the prior year quarter as work from home orders drastically decreased volumes in our parking garages. Excluding this decrease in parking revenue same store NOI for the office portfolio segment would have been up 1.2% and up 10 basis points on it.
Cash basis year over year in part due to RMR property management groups focus on reducing operating costs and utilization of our buildings decreased by implementing procedures to ensure unnecessary expenses were mitigated.
These efforts resulted in total operating expenses that were down 2% compared to the prior year quarter due to savings and controllable expenses, such as utilities cleaning and repairs and maintenance.
During our first quarter call, we reported that deep sea had granted rent deferrals equal to $1.7 million in the office portfolio segment, representing only <unk>, 0.4% of the annualized revenue from this segment.
As of August Threerd. These numbers have grown only modestly as weve granted rent deferrals for a total of just under $2.4 million in the office portfolio segment or only <unk>, 0.6% of the annualized revenue from this segment.
We also granted deferrals to one wellness center tenant and one triple net senior living tenant.
We're interested in the success of our tenants businesses and continue to believe that partnering with our tenants that are experiencing financial challenges will provide support for their businesses and ultimately provide for greater assurance is for collection in the long term, that's preserving our tenant relationships retention and portfolio stability.
The majority of relief requests have come from our medical office tenants and only a handful from our life science tenants.
From a monthly trend perspective, there was a significant decline in rent deferral requests in June and July.
Our wellness center portfolio, which represents 3.3% of second quarter and NOI.
Let's face considerable pressure since the beginning of the pandemic and state impose closures weighed on tenants ability to pay rent.
We previously noted that we granted a quarter rent deferral from one tenant in this portfolio, which has a high quality company that we expect will meet rent obligations following the deferral period.
Our other wellness center tenant is currently in default and subject to the tenant carrying its default we are evaluating a wide range of alternatives for the assets associated with leases.
We're also having regular discussions with our triple net senior living tenants, where we've agreed to defer a partial rent from one tenant.
These properties had rent coverage of 1.66 times as if the first quarter of 2020 and represented approximately 6.6% of our second quarter and Hawaii.
One of DHC is highest priorities remains the health and wellbeing of the residents at our senior living communities.
As of July 31st approximately 4.5% of our resident population across our managed and leased portfolio had tested positive for covert 19.
In our shop portfolio, roughly 43% of the residents that tested positive have since recovered as defined by the CDC guidelines.
I've started earnings call is scheduled for this afternoon at one o'clock P.M. eastern.
We encourage you to listen to it senior leadership discuss their cobot 19 response phase reopening plan an update on their company wide initiatives.
Looking at the second quarter 2020 shop results total average occupancy for the quarter inclusive of all 241 communities was 78.7%, which was down 400 basis points from the prior quarter.
As of July 30, Onest, our total shop portfolio occupancy was 76.1%, which was down 130 basis points from June Thirtyth reported occupancy of 77.4%.
Due to restrictions intended to prevent the spread of cobot 19, including a decrease of in person tours and limitations on non essential visitors to our communities like other senior living operators five stars experiencing significant challenges in attracting new residents to our communities.
On a comparable basis, our same property shop segment average occupancy was down 610 basis points from the prior year.
And approximately 420 basis points from the prior quarter.
The sequential decline equates to roughly 32 basis points of lost occupancy per week, which is slightly ahead of our previous expectation of 40 to 50 basis points of occupancy declines per week announced in the first quarter call in May.
Average monthly rate for the same property shop segment was down 1.7% from the prior year quarter.
As a result of these occupancy and rate declines same property revenues were down 8.5% compared to the prior year quarter pro forma results.
We note that we did not include the $7.3 million of cares Act funds. We received in our revenue figures as these amounts were accounted for in our other income line.
Approximately $6.8 million of that these cares act funds were included in second quarter same property shop, EBITDARM, which was down 23.5% from the prior year quarter.
Our operator has remained focused on areas of the business within its control optimizing resources on hand, and diligently regulating expenses.
On a pro forma basis same property wages and benefits in our shop portfolio were up just 0.7% from the prior year quarter, while repairs and maintenance food and contract labor were down, 22%, 9.2% and 17% respectively.
The site, despite seeing substantial increases in supply costs related to pp same property operating expenses in our shop segment were down $3.1 million or 1.3% year over year driven by cost controls.
Well five star employee in batsmen initiatives were impacted by the pandemic during the second quarter, there were still able to make significant advancements and engagement and retention initiatives.
As of June Thirtyth, five star recruited and hired over 6600 team members this year, including 35, New executive directors and five new regional directors.
Since our last earnings call, we completed an additional $8.7 million of asset sales, bringing our dispositions total to $334 million since the program began.
Today, we have properties under agreement to sell with negotiated proceeds totaling approximately $232 million.
It is still our intent to sell assets and as I've stated on previous calls we expect to resume our sales campaign when markets stabilize.
As a final item of note the arm our group recently published its inaugural sustainability report and we encourage you to read through the analysis for insights and underlying data on how it is reducing cost for us and its other managed Reits and managing to long term sustainable performance through commitment to SG initiatives you can finally.
Thanks to the report on our website.
Ill now turn the call over to Rick to provide for further financial commentary.
Thank you Jennifer and good morning, everyone.
We ended the second quarter with approximately $78.5 million a cash on hand $1 billion available capacity on our revolver and our next debt maturity is not until December of 2021.
During the second quarter, we issued $1 billion a senior notes due in 2025, the callable after two years we.
We used the proceeds from this issuance to repay the 250 million dollar term loan that was scheduled to mature in June of 2020 and paid off the amounts outstanding on our unsecured revolving credit facility.
We also amended our credit and term loan agreements to provide us with additional flexibility to weather the pandemic.
Specifically these amendments change the way certain of our financial covenants are calculated and provided some additional cushion in exchange for a 50 basis point increase in the interest rate through the amendment period.
As a result of these actions we believe we've addressed all liquidity concerns related to the pandemic and are looking forward to moving forward with many of the investments. We previously expected to differ in order to position the company for a stronger recovery as we emerge from the pandemic.
While the pandemic has slowed our deployment of capital we are still actively investing capital into our portfolio to maximize value in the second quarter. We spent $37.6 million of which 16.1 million was considered recurring and included building improvements in both our office portfolio and managed senior living communities.
And tenant improvements and leasing cost in our office portfolio.
The remaining portion of our capital expenditures $21.5 million with spin on redevelopment capital projects.
This included $14.9 million of redevelopment capital in our office portfolio, primarily related to two projects the redevelopment of our life Science campus and Torrey Pines and the recently completed repositioning of 140000 square foot Medical office building in Washington DC.
We've also started preliminary work on the repositioning of two assets in our life science portfolio, one in Lexington, Massachusetts, and one in Tempe, Arizona and added new disclosure about these projects in our supplemental.
We invested approximately $6.6 million of redevelopment capital in our shop segment as coven 19 related visitor restrictions continue to limit our ability to spend capital inside many of our communities.
Lastly, I wanted to touch on rent collections, which continue to be strong in our office portfolio, specifically, 99% of our contractual rents due were collected during the quarter and subsequent collections are trending in line with prior months.
That concludes our prepared remarks, operator, please open up one for questions.
We will now begin my question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Jason I, Danny of RBC capital markets. Please go ahead.
Hey, guys I had a question on your expectations for the shop occupancy. So I know last quarter you. It's about 40 to 50 Bips per week decline I know came in a little bit below that so I'm wondering what was the driver that led to that being a little bit better than expected.
And then if you could also touch on how that's trended throughout July maybe trends at the beginning of July versus the and what your expectations are through the rest of the quarter.
Thanks, Jason Good question.
Yes, so our.
Occupancy drop was lower.
Unexpected and I think it's been trending along the same line, maybe even just a little bit lower.
In July no. This is all really depends on.
On the pandemic and how.
It continues through the country's no interesting we've got 50% of our cases are in seven states.
And so understanding that you would you would expect the state that were California, Texas, Florida, I was a major ones and.
So depending on.
What happens when does the virus around the country vocally no look and see.
The occupancy decline decrease.
So why don't you.
Yeah, those and then one of the other things that you mentioned was sounds like you might be seeing a little bit of pricing pressure in the shop portfolio in some of those states that are maybe more stabilized are you seeing operators more disciplined on pricing or you know what are you seeing as as these assets or try to rebuild occupancy.
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Yeah, I think it varies I know I stop it definitely then we're just one on pricing no lot of the move ins or.
Majority of the move ins or need space.
And so you can be a bit more disciplined on pricing and not situation. I think we are seeing other operators start to offer concession.
Attract resident five stars then lead us since.
No we've got revenue yields meaningfully throughout all of our communities and so we're really.
Turning to stick.
Great thing to not reduce it.
Okay and last one for me. So you mentioned that no I was expecting the office leasing slowed down.
I guess I'm wondering what would be the catalyst for to pick back up or if you guys are you, saying it pick back up and also when would you expect those parking revenues and those utility expenses to maybe normalized.
Well the park it really utility revenues.
I'm going to normalize as.
Folks start coming into the office.
I think the thing we can be said for the the parking revenues. We've actually already started the increases are dropping parking revenues was mostly based on two properties.
The company that we have in the Super District as Boston.
Peter Snobbery on Wescos.
And we're already starting to see increase in any parking.
I think that a lot of the parking Cedar is is that the people that work in the building. The people that are visiting the doctors in the building, but a lot of the parking was also people that are visiting.
Folks that are in the hospital theaters, and so no visitation restrictions need to open up a bit out there before that marketing.
Really starts to come back in Boston, I think that we're going to see increasing parking and.
The labs have been pretty fully utilized during the crisis. The office space people have been working from home as they start coming back into the office.
Probably be more parking because people are you seeing even public transportation so more people will drive in.
[laughter].
Yeah, it's very leasing those yeah, we've got very large pipeline of deals we've got about one half million square feet or deals in the pipeline.
We're definitely starting to be tour activity pick up around the country. So.
So I'm, hoping that some of that we're seeing new deals and getting our lives or are you on fees for new deals around the country. So I think it's starting to pick back up.
Okay. Thanks.
Sure.
Our next question comes from Brian Mayor of B. Riley FBR. Please go ahead.
Great. Thanks, and Jennifer really appreciate the very comprehensive overview, you put forward really good.
Thanks.
When when we look at they're going to think about the assets that you have for sale. The 24 for the 232 million.
Without getting overly specific can you talk about what types of assets are included in that and you talked about still ramping up sales further what's the current goal from here.
So the properties that we have under agreement are really a mix, it's actually pretty representative of the portfolio.
The whole, but the long list that we had originally put together we've got.
And we'll be.
We've got a.
A number of senior living community. So it it's really.
Hi, good mix of property.
And then the goal, we're we're sticking to our and our 900 million.
Both disposition, though we really are going to wait for the capital markets to open back up but I think there.
Starting what we're getting the feeling that things are starting to open back up but no I think you see some evidence of that before we really market.
Okay, and then when we think about the portfolio makes in general Rich, which is really moved pretty quickly now to about 60% office for an ally.
Where do you think did that settle did or are we about where you want to be 60 already or is MLB pushed further closer to 70.
Okay.
No I think that means.
Well I mean, I think that's the reason that were 60% and aligned in our office portfolio segment is because of.
The impact of Cobot 19, our shop portfolio.
And so you know as those shop results turnarounds that that number could could go up.
Yeah, we've talked about wanting to grow on office Imobile in life Science.
Selling general and.
I continue to say that though we're really not any acquisition market today into expecting there will be for some time I think that at this point, we're really focusing on our existing portfolio.
And hoping to be able to spend capital.
No way that will be accretive.
As we talked about and then a little bit precluded because improving nicely from doing that.
Okay, and then last from me you referenced a cost controls helping.
To offset increased costs I guess associated with PD. He.
Can you elaborate on what types of cost controls generally and is there any more room there.
Sure you know both sides star and the property management within RMR have pretty strong strategic sourcing.
Department, So I think that they're they're both doing a good job.
You know mitigating.
<unk> expense increases that way.
Obviously, there are the variable.
Lenses associated with the drop in occupancy.
But but they both groups have been looking hard at ways that they can control cost.
You know.
And as we talked about utilities.
Turning to think that there's there's anything else, but they're just.
They're just very focused.
In the shop portfolio they are.
Well returns are are going to be down as.
Where precluding you from coming into the community and so there's going to be an expected in there as well.
Okay. Thank you that's all for me.
Thank you.
Our next question comes from brick Vikram Malhotra of Morgan Stanley. Please go ahead.
Hi, this well now on perfect. Thanks for taking the question I guess you had mentioned earlier at the 7 million carry backs cost that you have or Steve I'm. Just wondering if you could provide done on a per property. He said and then you have any expectation though.
Your property, just keeping any type of eat into future.
So the the money that we received was based on 2018, Medicare building and so that specifically skilled nursing.
Good allocated it wasn't allocated evenly across property that we distribute into on a per bed basis.
It's hard to talk about yes.
Properties that are so diverse.
No.
It went more specifically to two properties that had a skilled nursing beds in them and then as far as.
What we expect in the future you know, it's hard to know exactly where they've got the government is going to settle on.
Additional stimulus I noticed the hotly debated now there are certainly a lot of groups lobbying for additional monies to be targeted to.
Senior living and I hope that they they succeed but it's hard to speculate.
And then last question for me on won five star and other operating kind of set about organization wide fans.
Just fine.
We kind of to your second wave or I guess first lien for some seats.
Are they planning on doing another organizational wide band or well partial depending on location just some color on that would be helpful. Yeah. I mean, I think it's it depends on the active.
Yes cases in the community.
You know it's interesting that on my in my prepared remarks, we talk about one half percent.
Oh the residents.
Tested positive that's a cumulative number no currently in our shop portfolio only about one and half percentage. The residents have had active kids are tested actively tested positive.
You know I think that the operators are gonna have to be very careful in selective about.
About Green, let you guys didn't Dan.
I think testing is gonna be vitally essential.
There's a lot of talks now about once the tough once once the vaccine is out who's going to who's going to get access to that vaccine and I hope that it it's the senior living communities that get access to it because they recognize that are most at risk.
Great. Thank you so much.
Again, if you would like to ask your question. Please press Star then one.
And our next question will come from Aaron Heck of JMP Securities. Please go ahead.
Morning, guys. Thanks for taking my questions good morning.
Wondering on the occupancy side are you seeing broad base declines or do the OCC is and this is for the shop portfolio are you seeing declines occur when cases break out or is that when markets start to.
We have concerns over overcoat did that that occupancy declined just wondering on timing of of demand in markets relative to when you're seeing the virus show up.
Yeah, I mean, you know I said earlier.
80% of our our cases are in.
Yeah. Good portion of our cases or are in seven states and no I.
I think the.
I think that's the occupancy.
New move ins now or do you continue to be safe.
And so so I think that.
Yeah.
The hard question to answer.
You have very few people that are.
Moving in because I'm a lifestyle choice.
Mhm and so I think that really is dependent upon the pandemic and how it continues to.
Yes, if cases continue to grow through throughout the country to hard question to answer because we just don't have insight as to what's been happening with the PM dynamic over the next several months right.
Right.
It looks like a couple of the dispositions you guys did this quarter were on the senior housing side.
What's pricing looking like there today were those deals.
Signed before.
You know coded really hit any communities hi inside there on one of the market looks like it today and it is the buyer pool changing for assets.
The pricing was as we expected.
We've talked about Oh.
Overall cap rate of about seven on all of her on our disposition today, the the pricing wise.
Was pre coded pricing.
These were all properties that we had under agreement before the code you know before the pandemic really hit.
Well, its and I would say the buyer pool, where we're not really in the market right. Now so it's hard to know, but I think that the buyer pools. The buyers that are out there right now are.
Last the institutional buyers.
And your regional.
Okay, all right. Thanks for your time.
This concludes our question and answer session I would like to turn the conference back over to Jennifer Francis for any closing remarks.
Thank you and thank you for joining us on our second quarter earnings call Hope you all stay well.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.