Q4 2020 Diversified Healthcare Trust Earnings Call
Good morning, and welcome to.
And the diversified healthcare trust fourth quarter of 2000, Twenty's and financial results Conference call.
All participants will be in listen only mode true need assistance. Please of gold conference specialist by pressing the star key followed by the roll out.
After todays presentation, there will be and opportunity to ask questions. Please note that this event is being recorded and all.
I'd like to turn the conference over the Mr. Michal Kozak director of Investor Relations. Please go ahead.
Good morning, welcome to diversified healthcare trust call covering the fourth quarter 2000, and 'twenty results.
Joining me on today's call are Jennifer Francis President and Chief operating Officer, and Rick Sydell.
<unk> financial officer and Treasurer.
Today's call includes the 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 D. H C.
Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 and other securities laws the.
These forward looking statements are based upon the agencies present beliefs and expectations as of today Thursday February 23rd the 2021.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made on 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 <unk>, EBITDA, and EBITDAR 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 <unk>.
Ponant, the calculate <unk> CAD or fad are available and our supplemental operating and financial data package found on our website at www Dot the agency REIT Dot com.
Actual results may differ materially from those projected and any forward looking statements and.
Additional information concerning factors that could cause those differences.
And 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.
You, Michael and good morning, welcome to our fourth quarter of 'twenty and 'twenty earnings call.
To begin today's call I'd like to take a minute to talk about our shift in strategy and 'twenty and 'twenty.
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 agreements.
With that we had our primary operator undergoing of turnaround, but on share of financial footing.
We plan to spend considerable capital and our shop segment, and we had a plan to sell properties with the intent to reduce leverage in order to maintain and investment grade rating.
Because of COVID-19, these plans changed.
We swiftly mobilize to combat the effects of the pandemic operationally and financially.
Our focus shifted to working closely with the tenants and our office portfolio segment to ensure the continued success through the pandemic and to support five star's extensive measures to safeguard the health and wellbeing 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-19 response.
Where necessary, we altered the timing of our capital spend and our portfolios and also work to strengthen the financial stability of the H C by reducing our dividend eliminating near term debt maturities and by working with our lenders to ensure our liquidity position.
Finally, and the second quarter as part of a multi part of our multi year review of our governance policies. We.
And we were pleased to expand the Companys board with the new independent trustee with deep commercial real estate and capital markets expertise.
Well, we can say that we did not expect this unprecedented global pandemic nor of 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 and continued performance through the pandemic.
We remain confident that with the steps that we've taken this year combined with the expected post COVID-19 senior living demographic tailwind.
THC is on the path of growth and improved profitability.
Five star began hosting COVID-19 vaccination clinics for residents and employees and our shop communities and December 2020.
As of February 20th approximately 16000, or 87% of residents and over 7000 of 43 per cent of employees have received at least the first dose of the vaccine.
Additionally, close to 10000 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 2021.
After the fourth quarter of 2020 holiday season, much like the rest of the country, we saw an increase and positive cases and <unk>.
Covid cases, and our senior living communities, which remained elevated through January of this year.
As a result same property shots of average occupancy declined to 72, 7% and the fourth quarter.
Sequentially same property shop average occupancy was down 320 basis points or approximately in line with the expectations announced on our third quarter of call of 24 basis points of lost occupancy per week.
Since the surge in Covid cases, we're encouraged to see a decrease and active cases.
As of February 20th just 2.5% of residents and our communities had active cases of COVID-19 down from $3 five per cent as of January 29th.
Finally as of February 20th of approximately 19, 9% of our communities are accepting new residents and at least one line of business.
And while move ins remained modest and the fourth quarter of 2020 as a result of both of the pandemic and seasonality.
Recent leads have accelerated.
As of February 20th trailing four week leads represented an 87% increase over the beginning of the fourth quarter and more of approximately 32% higher than the rolling four week average as of March one 2020, which was just as the pandemic became prevalent and 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 and our communities, which we will which we believe will be of driver and the recovery at our communities and in the industry.
The CDC recently quoted of 'twenty, and 'twenty study, concluding that social isolation and significantly increased a person's risk of premature death from all causes.
The risks that may rival those of smoking obesity, and physical inactivity, especially with the older adults.
And the study loneliness and social isolation were associated with approximately a 50% increased risk of dementia of 29% increased risk of heart disease and of 32% increased risk of stroke.
As a result, we believe there is a critical need for the socialization and quality of care provided and senior living communities.
Finally, we're starting to see of positive supply trend.
While senior living inventory growth and 2020 remains elevated as a result of investments made 18 to 24 months ago by those seeking to capitalize on the aging population and the United States and early 'twenty and 'twenty construction starts to began to slow materially and inventory growth is expected to moderate in 'twenty and 'twenty one as a result.
We expect the combination of these factors to result, and a favorable supply demand demand dynamic and support the senior living industry as vaccine distribution continues and the pandemic wanes and pent up demand train translates to increased move ins.
As of the fourth quarter same property occupancy and DH six office portfolio was 93, 7% of 70 basis point increase over the third quarter and of 10 basis point increase year over year, largely driven by a 100000 square foot full building lease signed by a life.
Sciences tenant and Fremont, California.
During the fourth quarter, we executed 413000 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 five four years with leasing costs of approximately $4.43 per square foot per year.
Well, we saw a roll down in rent per leases executed this quarter of seven 9%. It was related to one short term renewal by attendant, who required flexibility due to the pandemic, excluding that renewal rents on our executed lease deals for the quarter rolled up seven 4%.
We have signed letters of intent for an additional 136000 square feet at our Torrey Pines redevelopment and San Diego.
If these leases are executed will heavily used 85 per cent of the redevelopment project at an average of close to 22% roll up and rents.
During our third and third quarter call we reported.
Debt as of November 2nd THC had granted rent deferrals equal to $1 8 million and the office portfolio segment.
And from the $2 $4 million reported during the our second quarter call.
The date, the total amount of deferred rent remains unchanged and represents 4% of DH six total annualized rental income.
And no new rent deferral requests 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 of partial rent deferrals to one tenant in this portfolio, which has begun to repay the deferred rent as plant the remaining triple net senior living tenants are current with no additional requests for deferrals.
These properties had rent coverage of 161 times and aggregate as of the third quarter of 2020 compared to 1.69 times at the end of 2019.
Our wellness center portfolio represented three five per cent of fourth quarter of NOI and was relatively flat sequentially.
As we've mentioned in the past this portfolio was made up of two tenants.
One of which was previously and default subsequent to quarter, and we restructured and extended the tenant's 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 the 2020 top places to work and Massachusetts by the Boston Globe.
We're proud to be part of an organization the 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 dht's path toward growth and improved profitability.
And now I'll 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 it from our financial covenants through June of 2022 and added an additional option to extend the maturity of the revolving credit facility in January of 2024.
Shortly after.
After completing our credit facility Amendment, we issued $500 million of senior notes due 2031 kind of four and three eighths percent interest rate.
The proceeds of this offering were primarily used to prepay, our $200 million term loan and.
And the set money aside the redeemed 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.
The <unk> reported normalized <unk> attributable to common shareholders of <unk> <unk> per share, which was <unk> <unk> per share higher than the third quarter.
Sequentially same property EBITDA arm and 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 EBIT of arm decreased five 9%.
Same property revenues and the shop segment were down two 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 and the shop segment decreased two 2% from the third quarter on approximately $5 $6 million.
Most of our expense line items decreased and the fourth quarter with the exceptions of repair and maintenance and marketing expenses.
Looking at our year over year office portfolio of results the slight increase in occupancy Jennifer mentioned earlier was offset by decreased parking revenues of $800000, resulting in approximately flat same property cash basis NOI.
Interest expense was $57 $8 million from 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 notes issued in June of 2020, offset by lower revolver and term loan interest.
And the fourth quarter, we spent $64 7 million on capital expenditures and increase of $19 $5 million over the third quarter <unk>.
Approximately $39 $9 million of our fourth quarter spend was considered recurring and included building improvements and both our office portfolio and shop segment and tenant improvements and leasing costs and our office portfolio.
The remaining portion of our capital expenditures or $24 $8 million, we spent on redevelopment capital projects.
Lastly, I wanted to touch on our rent collections, which continue to be strong.
And our office portfolio of approximately 99% of our contractual rents do were collected during the fourth quarter and in January and February.
I'll now turn it back over to Jennifer Thanks Vic much.
Much of 2020 and early 2021 has been spent with the focus on the effects of the global pandemic and recent extreme weather events and parts of the United States with that said, we're cautiously optimistic at the progress that's been made with vaccinations and our senior living communities and are looking forward to moving to moving out of this difficult.
After and into a more normal world, where we can set in place of our plans to improve our portfolio and resumed the HCS path to growth and profitability.
That concludes our prepared remarks, operator, please open the line for questions.
And I'll begin the question answer session task of question you May Press Star then one on your touched on the phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Brian Mayor of B Riley FBR. Please go ahead.
Rick Thanks for those comments.
A couple of questions as it relates to the dispositions and aside from what you've already announced for 2021 and what might be a reasonable expectation given what youre seeing out on the landscape.
And is there any change to your cap rate expectations on what you've been selling.
Good morning, Brian This is Jennifer.
Our cap rate expectations remain we've talked about cap rates at about 8% and and we.
Still believe that number and we have one property that is under agreement is still under agreement that we expect to close and the next 60 days or so and we have a handful of properties that we're currently marketing there are properties that we.
We worked 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. You know our focus is going to be on repositioning our portfolio investing the capital recovering from Covid and the effects of Covid and our senior living portfolio and so the.
Other than what I just talked about we're really we have no plans for dispositions.
Okay and that kind of brings me to my next question as you know I cover five star as well and you know we noticed when they reported last night, yeah. The the impact of some sales on their numbers how do those discussions go between D C and five star as it relates to selling D. H b.
Oh, and five star managed property.
Is there a back and forth on which ones to sell I mean 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 of communities very regularly and.
And.
And and we look at ones that have debt are underperforming, where we think if we go and where to invest capital and.
The returns still wouldn't be.
You know what our what we should be targeting and so those are the ones that we decided to 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 and then just lastly for me is there any situation in which you would have to return on the of the $10 million and cares Act funds.
Hey, Brian and I.
I can't really envision a scenario, where we would have to return. It there are some audit requirements that will take care of but.
No theres 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 have met the criteria to recognize it.
Really confident that there's not much risk of the going back.
Great. Thank you.
Thank you.
Again, a free up a question. Please press Star then one.
This concludes our question and answer session and 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.
Okay.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.