Q1 2021 Diversified Healthcare Trust Earnings Call
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Good morning, and welcome to the diversified Healthcare Trust third quarter 2021 earnings Conference call.
All participants moving in a listen on the marriage.
Sure Jamie of the system.
With all of the conference specialist well Cristina Scacchi fully funds you're right.
After todays presentation, there will be an opportunity to ask questions.
To ask the question you May Press Star then one on the type of cranky pads.
It was Joe your question please price dobbin true.
Page nine this event is being recorded.
I would now like to turn the conference over to Mr. Michael critic the.
The rest of of Investor Relations. Please go ahead.
Good morning, and welcome to diversified healthcare Trust call covering the first quarter 2021 results.
Joining me on today's call are Jennifer Francis President and Chief operating Officer, and Rick <unk>, Chief Financial Officer and Treasurer.
Today's call, including 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 for DHT.
Today's conference call will 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 Acs the present beliefs and expectations as of today Thursday may six 2021.
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 EBITDAR net operating income or NOI 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 <unk> CAD or fad are available in our supplemental operating and financial data package found on our website at www dot the HD Green Dot 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.
Vessels 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 first quarter 2021 earnings call.
To begin today's call I will provide detailed commentary on the current operating environment and some of the recent actions we've taken to meet our long term goal of maximizing shareholder returns.
We believe the country is beginning to recover from the pandemic as we are seeing a marked decrease in confirm confirmed COVID-19 cases, and hospitalizations across the United States. Since these metrics surged at the start of 'twenty one.
We believe these trends have been and will continue to be supported by the vaccine rollout, which is progressing at various timelines across each state.
Within our own portfolio of COVID-19 vaccination clinics at our shop communities are complete which we believe is of critical step toward improving resident confidence in senior living and growing the profitability of our shop segment.
Upon completion of the vaccination clinics over 96% of residents and almost half of the employees within our shop segment were vaccinated. Although we expect this number to fluctuate with move ins and move outs.
Five star Senior living continues to work to educate employees about the benefits of being vaccinated and we hope that will encourage higher acceptance.
Vaccinations have also had an impact on the number of active COVID-19 cases in our communities as of May 1st only 11 residents in our managed communities had active cases of COVID-19 on.
All of these communities and our shop segment are accepting new residents.
Move ins on our shop segment accelerated in the first quarter up 24% relative to the fourth quarter of 2020 and leads have increased substantially.
Five star continues to focus on generating more professional and resident referrals. As these two sources of prospects tend to result in higher conversion rates and coming of lower cost and third party referral sources.
Five star is increasing investment in its digital marketing platform as it mirrors. The quantity of leads received from third party referral sources, but it is expected to result in greater conversion rates and longer lengths of stay.
Finally, senior living construction activity across the country has slowed both in construction starts and units under construction, which will of course the result in reduced new supply.
As a result of these trends and five star's efforts, we've seen shop occupancy began to stabilize in February March and in April and we're cautiously optimistic that these trends will continue through the balance of the year.
While the same property shop average occupancy declined to 69, 5% in the first quarter of 2021 down 320 basis points from the fourth quarter of 2020 March occupancy increased 30 basis points from February lows.
Excluding the approximate 500 skilled nursing units that we've announced that we're closing March occupancy increased 10 basis points from February to <unk>, 74% to 75% and increased another 30 basis points to 78% in April.
We believe the fastest path to DHT stock price recovery as the rejuvenation of our shop segment.
Following strategic discussions with five star, we recently announced our plan to transition management of 108 communities with approximately 7500 units two of them.
Diverse group of best in class of operators without paying a termination fee of five star.
Discussions are well underway with a number of operators most of whom have of regional focus which we believe is important for the types and size of communities that were transitioning.
Our interviews and in person meetings and community tours with potential new operators have gone very well and we're aiming to be finished with these management transitions by year end.
Additionally, we're supportive of five star strategic plan to reposition this business to focus on managing larger communities with residents that require a lower level of care.
To support that strategy, we've begun to close the skilled nursing units and our five star managed <unk> and repurpose them to complement the needs and requirements of the communities.
Finally, the RMR group will assume control of major renovation and repositioning activities at all of our five star managed senior living communities.
In exchange for these and other negotiated changes to our relationship with five star we agreed to amend the calculation of incentive management fees five star can earn.
We want five star to have the incentive to maximize performance. So we continue to have so it will continue to have the potential to earn 15% of.
Above a base year of 2021 budgeted EBITDA.
Going forward, though no incentive fee will be paid on senior living communities undergoing major renovations of repositioning until the end of the first full calendar year following the disruption in operations.
And that year's EBITDA will become the new base year over which the fee is calculated.
They will no longer be of cap on the potential incentive fee five star can earn.
For the 120 communities five star will continue to manage for us the target EBITDA for budget for 2021 is approximately $100 million.
Based on first quarter performance and our forecast for the remainder of 2021, we do not expect to pay an incentive fee. This year.
Due to our planned capital spend in the portfolio, we expect nearly 60% of the base years to be reset over the next few years as we execute on that capital.
Our goal is for five star to improve operations to a point, where they are earning incentive fees because if they're successful we're successful.
Turning to our office portfolio of segment as of the first quarter same property occupancy in Dht's office portfolio was 93, 6%.
A 10 basis point decrease from both the sequential and year over year quarters.
On a consolidated basis, though occupancy increased 90 basis points sequentially.
During the first quarter, we executed 26, new and renewal leases totaling approximately 213000 square feet at a weighted average lease term of 10 six years were all up on rents of 18, 7% and with leasing costs of approximately $14 50 50.
<unk> 57 per square foot per year.
This quarter's leasing results were heavily influenced by two leases signed for a total of approximately 122000 square feet at the recently.
The recently Redeveloped Torrey Pines life Sciences assets.
Subsequent to quarter end, we signed another lease for close to 10000 square feet of Torrey pines, bringing the project of approximately 85% leased.
The asset managers and real estate services professionals that are responsible for leasing our portfolio has seen a notable increase in leasing activity. This year, both an increase of renewal discussions with our existing tenants and new prospects to our activity.
Our leasing pipeline across our portfolio was healthy at $1 6 million square feet, which is slightly higher than our pipeline in the fourth quarter of 2020 and above the 2019 average of $1 2 million square feet.
Approximately 60% of this $1 6 million square foot pipeline is for lease renewals and 40% is for leasing vacant space.
Additionally, more than 40% of this pipeline is at the signed LOI stage with lease documents being negotiated.
Rent deferrals remain largely unchanged since our last call and represent just four tenths of a percent of Dht's total annualized rental income.
Rent collections continued to be strong and our office portfolio as approximately 99% of our contractual rents due were collected during the first quarter and in April.
Our triple net senior living communities and wellness centers represent 8% and 4% of first quarter NOI respectively.
All of our Triple net senior living and wellness tenants of our current and the portfolio of Triple net senior living properties had rent coverage of 148 times for the trailing 12 months ended December 31 2020.
Before I turn the call over to Rick I wanted to highlight the RMR group's recently published sustainability report.
This report provides insights accomplishments and data regarding our managers commitment to long term environmental goals investment in the platforms workforce and social and governance performance over the last year.
You can find links to the report on our website the HCV dot com.
I'll now turn the call over to Rick to provide details on our financial results.
Thanks, Jennifer and good morning, everyone.
As Jennifer said, we believe the country is now beginning to recover from the COVID-19 pandemic, but our first quarter results are reflective of what has been an unprecedented 12 months on the senior living business.
This extraordinary time of declining Occupancies and expense pressure in our shop segment, along with steps, we took to share of our balance sheet and think longer term about our liquidity needs and resulted in normalized <unk> attributable to common shareholders of <unk> <unk> per share and adjusted EBITDA of $73 2 million for the first quarter of 2020.
One.
As the shop segment has now experienced several quarters of pandemic impacted results much of my commentary will compare the first quarter's results with the fourth quarter of 2024 sequential quarters to provide more meaningful comparisons and year over year changes.
Sequentially, the same property cash basis NOI on our shop segment was down $8 $3 million from the fourth quarter.
Same property revenues in our shop segment were down four 5% from the fourth quarter driven by lower occupancy.
Same property average monthly fees, however were up approximately two 3% compared to the fourth quarter and were up one 3% compared to the prior year.
Same property expenses in the shop segment decreased one 5% from the fourth quarter were approximately $3 9 million.
Primarily as a result of lower wages and benefits, partially offset by approximately $2 million of costs related to the severe weather experienced in Texas and several other states in February.
Looking at sequential office portfolio results same property cash basis, NOI was up 90 basis points, largely driven by lower repairs and maintenance expense in the first quarter.
Interest and other income was $2 8 million for the first quarter of 2021, a decrease of $7 4 million compared to the fourth quarter due to lower cares Act income recognized.
Interest expense was $60 1 million for the first quarter of 2021, an increase of $2 $3 million compared to the fourth quarter, primarily due to the $500 million.
Of four 375% senior notes issued in February partially offset by lower interest on the $200 million term loan we prepaid in February.
In the first quarter, we spent $51 9 million on capital improvements of decrease of $12 $8 million compared to the fourth quarter of 2020.
Approximately $33 $1 million of our first quarter spend was considered the recurring while the remaining portion of our capital expenditures were $18 8 million was spent on redevelopment capital projects.
We remain committed to investing capital into our portfolio to improve future results.
With the senior living operator transitions plan. We currently expect 2021 capital expenditures to be between $250 and $290 million.
Of which approximately $90 million to $120 million relates to redevelopment capital projects and includes the $19 $6 million acquisition of the property physically connected to one of our existing medical office properties in silver spring, Maryland that we believe will provide flexibility as we evaluate several potential redevelopment opportunities for the combined.
Right.
I'd also like to provide a brief update on our liquidity position.
At the end of the first quarter, we had approximately $310 million of cash set aside to redeem our 675% senior notes in June when they can be redeemed without a prepayment penalty.
We also had an additional $843 million of cash on hand.
While we're cautiously optimistic about the recovery of our shop segment out of an abundance of caution we drew the $800 million that was available on our revolving credit facility as a precautionary measure to preserve our liquidity.
As previously disclosed we expect to be out of compliance with one of the incurrence covenants contained in our debt agreements that will prohibit us from incurring additional debt until we are back in compliance.
This had been anticipated when we amended our credit facility in January and we are confident that we will be able to utilize cash on hand from all of our liquidity needs until we can reduce our debt service costs by refinancing a portion of the 975% senior notes that become callable in June of 2022.
The credit facility Amendment also provides for waivers from 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.
Other than the previously mentioned early redemption of the $300 million of senior notes in June our next senior notes maturity is not until may of 2024.
That concludes our prepared remarks, operator, please open up the line for questions.
Thank you.
We will now begin the question and answer the question.
Lots of question you May Press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the case.
Joe Your question. Please press Star N G.
At this time, we will pause momentarily to assemble our staff.
The first question today comes from Brian Ma'am.
B Riley security. Please go ahead.
Good morning, Jennifer on Rick Scott a couple of.
<unk> for me.
When we think about the transitioning of the 108 senior living facilities.
Have you identified any of their that you are just planning on selling and not transitioning or is the goal to transition all went away and see how they go and then mega sell decision and if so how long of Youre going to give those properties to show some improvement.
So we have not identified any per disposition at this point Brian.
We feel very positive about the operators that we've met with.
We're in varying stages of of transition we.
We've talked to dozens of of operators.
And then issued rfps to of probably more than 20 operators we've interviewed.
10, but are expecting to interview another 10, and we've even started touring some of those operators doing some diligence. So we're pretty far along on the process and at this point we're in discussions on all of the communities that we're transitioning and the operators that we've been speaking to are pretty excited about the prospect of managing.
These communities.
Great.
How should we think about the new contracts on those properties will they be similar to the five star contracts or will they vary in some degree that we should be thinking about.
It's early to tell I think they'll be pretty similar to the five stars.
At this point, where we're just starting to as I said, we have issued Rfps, we have received proposals.
So we're starting the stage of negotiation of those but they will all be management contracts and five stars contract is at market. So I think there'll be pretty similar.
Okay, and then on the property that you bought next to the <unk> B in Maryland.
<unk> been a little vague on what you might do with that property can you give us a little color as to maybe two or three options debt that you might convert that too.
Sure.
I think it's important to note that the property that's under agreement and we're currently in diligence is one unit of of two unit condo building. The second unit is the 92000 square foot mob.
<unk> that we currently own.
And this is a situation where the whole is greater than the sum of the parts. So.
While the MLP that we own is a good building it will be better when it's combined and put back together with with this hotel.
This is a market silver string of spring is of great market. Its this building is close to the metro. It has many nearby retail amenities. It's about a 20 minute metro ride to the Union station in D C.
So the.
This is a market where there there are a few life sciences tenants in the market.
And then the existing building is of hotel so on its own it's a strong investment but together.
Our redevelopment group is looking at it during the diligence period and Theyre looking at it as.
Should it should the whole thing be converted two of hotel should the whole thing be converted to life Sciences and so we have a couple of good strong options that will get get further along in our diligence.
Determining what the best of the path forward is.
Great. That's some good color.
The first of all thank you for the.
Shop occupancy per month in your release that goes through March where we see the uptick sequentially.
And I think you made some comments in your prepared remarks regarding April but I didn't catch that what would that number of for occupancy in April.
Let's see for April are spot occupancy at the end of the April.
<unk> I'm sorry of the occupancy was 71 eight.
Does that 71 eight compared to the 69 five in March so.
<unk> hundred 30 bps increase month to month.
No Brian we have to.
On a go forward basis, we made the announcement of the restructuring with five star on April 9th and as you can imagine once we announced that they were exiting the skilled nursing space and that we were shutting those units down.
Havent had a lot of sniff move ins on those units and we have been placing residents elsewhere. So.
On a kind of April forward and we did look at what March would look like in February on a comparative basis, but we're generally starting to strip out that 500 SNP units out of the five star retained portfolio just to make it more meaningful comparisons so.
If we.
If we look at the entire portfolio. So this is the five star retain excluding the sniff.
And the transition communities.
We did see occupancy increase from February to March 10 basis points on average and from March to April another 30 basis points.
And then I don't know if Jennifer set of it but we ended April with spot occupancy of 71 eight in that portfolio and then just to provide a little bit more color there.
There is a difference between the properties five star is looking to retain or is retaining and the transition properties. So the the ones. They are retaining are generally the properties. There. They believe theyre better at operating and have more confidence.
Those properties ended with spot occupancy of 73, 8%, while the transition properties ended at 67, 1% at the end of April. So there is there is still some work to do but as Jennifer said the the operators. We've been talking to are really excited and frankly, our team has been touring on.
All of these assets and we're excited about the possibilities as well.
Alright, so there is a lot of it to unpack and what you just said.
The kind of dumb it down a little bit would you say that kind of no matter. How you slice the March to April was positive.
Without a doubt Bryan.
In addition to that.
This activity leaves activity activity tour activity has been very strong we had 400 move ins in our shop portfolio in.
In the week, beginning April 25, and that's the most move ins that we've had in the portfolio in 2014 months.
So occupancy is growing.
Move ins are growing the increase in leads has been substantial as I said, we had close to a 30% increase in leads in the first quarter over the fourth quarter of 'twenty.
The 40% more than 40% increase in web leads so we're really starting to to feel of change or.
The increase in tours has been substantial and then close to an 80% increase in repeat tours in the shop portfolio and those are people who are coming back for a second tour.
So we're really.
<unk> like things are turning.
Great. Thank you so much that's all from me great. Thank you.
Thank you.
Your next question comes from Jason the idling.
Please go ahead.
Hey, good morning, guys I just wanted to ask about how you went about selecting the 108 properties that youre going to be transitioning.
Based on some of your comments to Bryans question. It sounds like those might of been some of the weaker operating properties.
So I guess, what gives you confidence at the new operator will be able to comment on improved results.
That those transitions will ultimately be overly disruptive.
Yes.
Thanks for your question question Jason.
There I would say that they are.
They are not weak communities.
We've spent a good deal of time with five star talking about their strength, Dave obviously spent a long time or a lot of time thinking about where they can excel and what the determination was is there.
Better at managing larger communities that have residents, who have a lower level of care.
And I think that those that determination plays out when you look at the at the the units that were two of the buildings that were transitioning they tend to be smaller.
<unk>, two and I'm talking generalizations, but they tend to have residents who have require a higher level of care and so it's bill.
It became pretty obvious when we and five star and senior living asset management went through each asset asset by asset to determine which which five star would continue to manage and which we would transition over.
Just based on on kind of that that criteria larger independent assisted living independent and assisted living buildings.
Our adjusted five stars better at managing those.
Got it Okay and then what.
Would slow down those transitions, so I mean, it seems like.
Previously when you guys were transitioning from the outside so there were some delays with licensing switches.
Just what are your thoughts on any potential like administrative to the lawyers that could be caused by COVID-19 or anything along those lines like maybe slow down the those transitions, yes, we've got a team of folks that have been working on that.
For some time and.
These are managed communities when we transitioned from a leased to manage the relationship with five star.
When <unk> share of leased communities from us they held the license.
And when we transitioned it took that year to transition over a really because of the change in who held the license and now DHT is licensed in all of these communities because five star is our is the our manager.
The transitioning manage managers is much easier than transitioning from lease to managed because we do not have to transition the the.
Of the licenses so that should not hold us up at all because it's just not a requirement.
I don't know that there's a lot of communities to transition, but we have a team both at five star and and its senior living asset management that are going to be focused on that transition and as part of our interview process with the operators we spend a good deal of time talking about their transition expertise.
And how theyre going to do it and it's part of.
What we're looking for and new operators as operators, who have done this and are expert at it.
Got it Okay and then on my last question of how did you guys think about the new management agreements.
Obviously weighing taking the incentive fee cap off on.
Kind of a point, where we're at a trough in the business.
And then also on not having to pay the termination fee in having a stake in five star's business. So I guess, what those puts and takes how did you guys were those.
There were a lot of lot of puts and takes and so this was we spent a good deal of time coming up with the changes to the management agreement.
The on.
The negotiation of of any agreement there are gives and takes in.
And we just this is this is where we settled and we think that.
Both parties gained in both parties.
<unk> settled at some point, but we're pretty happy we do strongly believe that an incentive fee is important but we want our manager to be motivated to continue.
To grow NOI to grow EBITDA and so that's that's where the incentive fee comes into play and so we think it's pretty important.
Okay, sorry, and then on day one other one so did you mentioned what the.
2020, or the targeted EBITDA level was going to be I think you did on your prepared remarks, but I would just be curious I guess, how did you guys come to that number yes. It was based on budget and the budget is the.
The budget process works is.
On the senior living asset management, and five star work closely together on establishing our budget for the coming year. So in the late spring early summer of last year, They met and talked about every community and so the target for the <unk> 2021 budget or the target EBITDA is of.
About $100 million and the retained communities.
Again, we don't think debt.
Debt five.
<unk> will the.
EBITDA will come close to that number.
And.
So I think we will not pay an incentive fee this year.
Okay. Thanks.
Yes.
Thank you.
Your next question comes from Joe <unk> with Raymond James. Please go ahead.
Hi, there.
We've seen some recent public to public M&A activity across the REIT space and a few of those were <unk>.
Scenarios, where the target is the company that just hasn't worked or add structural headwinds in the merger was a win win for both shareholder basis. So they look at DHT, where.
The 10 year total return CAGR has been negative 10% versus the healthcare REIT average of positive seven.
It seems like things just aren't working here on hasn't for a while so.
Jennifer you mentioned a focus on.
Maximizing value in your your first of all.
Prepared remarks, and I know the last year has been very difficult, but has the board of RMR explore all ways to maximize value at the HC, including the sale of the company or at least the announcement of our review of strategic alternatives of not just transitions and more capex investment.
I mean, the board I think ways has conversations in ways all options on a regular basis, our focus is to stabilize our portfolio.
And we feel obviously are MLB life Sciences portfolio is is pretty strong.
And in some instances we.
Put capital into those buildings to reposition them, we're really focused on stabilizing our senior living portfolio as a way to to increase shareholder to maximize shareholder value. So that's that's that's our strategy.
Okay.
I mean.
I hear the comments on the same store NOI in life Science, and Mlps has been negative for.
A couple of times now and we haven't seen that at any of the peers. So.
Maybe.
Maybe this is the question for the board, whereas the accountability.
For the performance and frankly, the underperformance of DHT over the past decade every board member with the exception of one has served for an average of 11 years and has on another RMR managed REIT board and to shareholders. The shareholders voice. This accountability concern to you and the board.
And if so what do you tell them.
Yeah.
Jonathan.
I want to I'm struggling a little bit with the 10 year period I mean, if you look back there have been a number of actions taken to try to be more shareholder friendly and to enhance returns for our shareholders. The 10 year number is if you look back of the very different business 10 years ago.
<unk> with in 2015, there was a significant restructuring in order to make RMR. The manager that was previously private.
Public and be more transparent and we actually distributed those shares out to shareholders and then obviously the senior living business has changed since 10 years ago. So there was a significant restructuring from leases to management contracts and essentially the entire industry did that maybe.
Maybe we were a little late because again there is a certain amount of related party transaction that we don't want to do something like that unless we absolutely have to because it could be disruptive to shareholders.
The COVID-19 was not expected and we have repositioned the portfolio more towards medical office and life Science. If you look at our our more recent redevelopment activity I mean, the team is hitting home runs on that stuff and again, if we've got some some long term leased.
The assets that are finally, rolling after a 15 year term youre going to have some vacancy and were going to reposition those portfolios. So if other peers have been out buying brand new buildings with 2% rent steps, it's different than what was in our portfolio, but we are doing everything we can to maximize value.
In our portfolio.
What's the what is the breakup fee payable to the RMR. If they were to be terminated as manager of DHT in a change of control transaction.
Again, we are focused on the business and moving it forward that stuff is disclosed in the SEC filings. If you wanted to dig through it but that is that is not what we're what we're focused on.
Okay.
This is more digging.
Thanks for the time.
Yes.
Thank you.
There are no other questions at this time I would like to share the conference back over to MS. Franklin for any closing remarks.
Thank you and thank you for joining our call today, we look forward to seeing many of you at the upcoming week Navy 2021, Investor Conference Operator that concludes our call.
Yes.
That does conclude our conference for today. Thank you all for participating you may now disconnect your line.
Yes.
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