Q2 2021 Diversified Healthcare Trust Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the diversified healthcare Trust second quarter 2021 earnings conference call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Michael Codec Director of Investor Relations. Please go ahead.
Good morning, and welcome to diversified healthcare Trust call covering the second quarter 2021 results Joy.
Joining me on today's call are Jennifer Francis President and Chief Executive Officer, and Rick set out Chief Financial Officer and Treasurer.
Today's call includes a presentation by management, followed by a question and answer session I would like to note that the transcription recording and retransmission of today's conference call are strictly prohibited without the prior written consent of diversified healthcare trust or DHT.
Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 and other securities laws. These.
These forward looking statements are based upon dht's present beliefs and expectations as of today Thursday August 8.2021.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC.
In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized <unk> EBITDA 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>.
<unk> CAD or Fad are available on our supplemental operating and financial data package found on our website at www Dot DHT 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 investors are cautioned not to.
Place undue reliance upon any forward looking statements now I'd like to turn the call over to Jennifer.
Thank you Michael and welcome to our second quarter 2021 earnings call and good morning, everyone.
To begin today's company overview I'll provide an update on the recent actions we've taken with regard to our strategic shift within our shop segment, followed by additional commentary surrounding our portfolio in the context of the current operating environment.
Subsequent to quarter end, we were excited to announce our progress on our plan to transition and close to 50% of our shop communities to new operators as we entered into 4 new management agreements for a total of 76 communities in this portfolio.
These agreements represent approximately 70% of the transitioning communities and we look forward to in some cases, the startup and in others. The continuation of successful relationships with these operators.
Given the makeup of our transitioning portfolio, which consists primarily of communities with smaller unit counts and higher acuity business lines, mostly located in secondary markets.
We believe that each of these operators as the best regional choice to execute on our business plans that will optimize optimize performance and create the best experience for the residents and team members in these communities.
The first agreement, we signed was with charter senior living who will manage communities for us in Florida, Maryland, Tennessee, and Virginia Kevin.
Kevin and Jamie net charter I believe in creating culture by having the company's senior leaders spent frequent hands on time in their communities, which allows them to quickly identify and deal with operational issues, but also it allows them to personally recognize and reward employees that excel.
The company's strong close net culture has become a key differentiator for them and the markets they serve.
We next reached agreement with Phoenix Senior living.
Jesse and his leadership team encourage a culture that supports communities with a hands on regional model that develops the leadership teams in the communities and supports individual team members with a goal of 75% internal promotion.
They believe that they are heavy investment in community personnel leads them to be the employer of choice in order to be the provider of choice in markets in which they serve.
Phoenix will manage communities in various states throughout the southeast for us.
We then reached agreement with Oaks Carabiner senior care to manage communities for us in Georgia, and South Carolina.
<unk> is an existing tenant in 3 THC owned communities.
They formed a joint venture with carabiner that brings operational efficiencies through a broadened continuum of care education and management expertise.
The team at <unk> philosophy of management through a personal hands on approach has been recognized for transforming traditional methods of caring for seniors and we're excited to grow our already strong relationship with them.
Finally, we were also pleased to announce a new management agreement with stellar senior living for 10 communities located in Colorado, Texas and Wyoming.
Stellar is also an existing tenant of ours and we're excited to expand our relationship with <unk> and his team.
<unk> average management philosophy is focus on our high touch and hands on approach that values employees, who in turn provide excellent care to residents.
They are deep involvement in community operations has resulted in employee and resident satisfaction and retention and their extensive extensive training resources aimed at community leadership teams have led to strong financial performance in their communities.
As of today, we have completed the operations transition of 41 of these 76 communities.
We're continuing to make good progress on the process, which we expect will culminate with a handful of operators managing the remaining 32 senior living communities.
Our criteria for these new operators remains unchanged and that we look for them to have regional expertise in important local relationships in the markets. They serve standards, which we believe will drive operational improvement and these smaller higher acuity communities.
Because we are negotiating agreements for the balance of the transitioning communities, we won't be discussing significant contract terms today, but in general we're negotiating market terms with lengths of 5 years with varying options to renew.
Each has a base management fee with some form of incentive fee based on community performance.
Overall, the remainder of operator transitions will proceed as planned and we expect to be completed with the process by year end.
We continue to believe that the senior living industry will benefit from increasing vaccine acceptance.
As of today over 70% of the U S. Adult population has received at least the first dose of the vaccine and we believe acceptance remains critical to combating the spread of the virus.
It's clear that the vaccines are effective and the level of infections and the impact of the disease on those vaccinated is significantly reduced.
As such while the emergence of the Delta variant could pose further uncertainty we're pleased with how the vaccine rollout has greatly reduced the impact of COVID-19 to those in our communities.
All of our operators have become experts in dealing with the virus and following their critical work early in the pandemic. They now have the protocols and procedures to reactively to react effectively to any future outbreaks.
Also on June 1st 5 Star senior living mandated employee vaccine vaccinations beginning September 1 of this year.
As of July 30, 125 Star employee vaccinations have increased to 66, 3% compared to 49, 6% as of May 1.
Because vaccinations have had a significant impact on reducing the number of active COVID-19 cases in our communities. We're supportive of 5 star and this vaccination requirement initiative.
<unk> is making great progress on its strategic initiatives and we believe that will benefit from their focus on the 120 communities that they will continue to manage for us.
They've closed the skilled nursing units within our 5 star managed portfolio and we've begun the process of marketing those bad licenses for disposition.
They continue to see improvements in sales leads and tours and we're cautiously optimistic that occupancy will continue to grow.
During the quarter same property shop average occupancy increased 40 basis points from the first quarter.
We also note that month and July spot occupancy in the same property portfolio increased to 72, 2% up 40 basis points compared to June month end spot occupancy.
Same store shop rates this quarter increased 1.7% over the prior year quarter, but due to the fiercely competitive environment and race to regain occupancy same property rate was down approximately 90 basis points sequentially.
Turning to our office portfolio segment same property occupancy during the quarter was 92, 3% on 130 basis point decrease from the previous quarter. This drop was primarily the result of 2 tenants vacating in the corner both of which were expected.
1 was in a property that we're marketing for disposition and the other in a well located property in suburban Boston.
Leasing activity has been strong at this property and we're expecting rent rollouts with new tenants there.
Our second quarter leasing volume with our best in company history in terms of square footage, we completed 36, new and renewal leases totaling approximately 632000 square feet.
These leases were finalized at an average roll up in rents of 5.9% a weighted average lease term of 9.1 years and with leasing costs of approximately $4.60 per square foot per year.
Following the strong quarter of leasing activity, we still have a robust leasing pipeline of approximately 1 million square feet, which is roughly back in line with 2019 average of 1.2 million square feet.
We expect to continue to negotiate leases with rent roll ups and with weighted average lease terms for deals currently in our pipeline is over 8 years.
Parking revenue increased approximately $600000 this quarter, a 20% increase from the first quarter and approximately 90% of the pre pandemic average.
We're seeing increased space utilization across our office portfolio and this parking revenue increase is the result.
We've been very pleased with RV development success and strong leasing activity in our Redeveloped buildings. As previously mentioned, we've leased approximately 85% of the newly Redeveloped Torrey Pines asset and we have strong interest in the remaining balance.
Subsequent to quarter end, we signed a full building life sciences tenant for a 10 year lease in our Lexington, Massachusetts redevelopment at a roll up in rent of 46%.
Finally, we're in early stages of our redevelopment in Tempe, Arizona, and we're encouraged by our prospects there.
Looking forward at year end, we will have a tenant vacate on 112000 square foot property indicators, Georgia.
We plan to commence redevelopment work on this property upon the tenants exit this is a great asset and a strong sub market and we're excited to position it for future tenants.
Finally, we were honored to be recognized in May as a green lease leader by the U S Department of energy.
To receive this recognition DHT met requirements for energy efficiency, and sustainability best practices, including utility data tracking and sharing cost recovery for capital improvements and sustainability training.
This recognition highlights the careful stewardship of our manager the RMR group and executing Dht's business strategy.
I'll now turn the call over to Rick to provide details on our financial results.
Thanks, Jennifer and good morning, everyone.
In the second quarter, we reported normalized <unk> attributable to common shareholders of <unk> per share and adjusted EBITDA of $87.8 million.
Looking at our sequential office portfolio results same property cash basis, NOI was up 10 basis points.
With the utilization of our assets, increasing we've seen a resulting increase in parking revenue, which helped offset the decreased occupancy Jennifer mentioned.
Rent collections have remained strong in this portfolio with nearly 100% of contractual rents do being collected during the second quarter and for the month of July.
And our shop segment sequentially same property cash basis NOI for our 228 community portfolio was up $6.9 million from the first quarter.
Same property revenues in the shop segment decreased $15.9 million or 6.1% from the first quarter, primarily due to the closure of approximately 500 skilled nursing units in the portfolio that 5 star will continue to manage for us.
Same property expenses in the shop segment decreased 8.9% from the first quarter or approximately $22.7 million also primarily as a result of the skilled nursing closures.
Related to the skilled nursing unit closures, we recently completed the first sales skilled bed licenses.
We plan to sell over 500 in total and believe we can generate proceeds of over $10 million that we will reinvest into our communities.
Okay.
During the quarter, we recognized approximately $15.7 million of cares act funds as it.
A minder. These funds are included in interest and other income, but excluded from our reported NOI results.
Interest expense was $67.7 million for the second quarter of 2021, an increase of $7.6 million compared to the first quarter due to drawing $800 million on our revolving credit facility at the end of the first quarter.
In June we redeemed $300 million of our 675% senior notes using a portion of the proceeds from our February issuance of senior notes.
Following this June 2021 redemption. Our next senior notes maturity is not until may of 2024.
At the end of the second quarter, we had $849 million of unrestricted cash on hand, as well as $59 million of restricted cash much of which can be used to fund budgeted expenditures.
In the second quarter, we spent $48.8 million on capital improvements, bringing year to date Capex to just over $100 million, we remain committed to investing capital into our portfolio to improve our future results and these plans are largely unaffected by the senior living operator transitions we have scheduled.
I'll now turn it back over to Jennifer for closing remarks. Thanks, Rick We're pleased with the progress we've made on the transition of our shop communities to new operators, we remain confident in both the recovery and long term prospects of senior living and healthcare real estate in general due to the aging of the U S. Population. Additionally, as we continue to increase.
The long term value of our buildings through capital investment. We believe that we are best positioning our portfolio to capitalize on this strong supply demand dynamic.
That concludes our prepared remarks, operator, please open the line for questions.
We will now begin the question and answer session to ask a question you May plus Star then 1 on your touched on flow.
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At this time, we will pause momentarily to assemble our roster.
Our first question today will come from Bryan Maher with B Riley Securities. Please go ahead.
Great. Thank you and good morning, and thanks for that color.
Thus far.
Can we drill down a little bit on that.
License sales I, just want to make sure I got the numbers correctly did you say that of the <unk> how to.
Going to sell 500, or you've already sold $510 million, we're marketing them for sale.
Sold 10.
And we're marketing the balance.
And why Wouldnt you sell all 1500, maybe im just naive there yes, no it's dependent on where it's it's allowed and what states allow that the sale.
Of the bed licenses.
So of the 1500 really there's only 500 to be sold.
Correct.
Great. Thank you and then as far as the cares Act money that was received in the quarter was that actually received in the quarter was received prior and you just took the credit during <unk> and do you expect to get any more.
Good question, Brian much of it was received in the second quarter.
Might've been a little bit that had been received in the first quarter, but you don't recognize it until you've met all the requirements and the team has been pretty diligent about going through and making sure that by the time, we recognize it.
We were confident we fulfilled all the obligations.
So yes, $15.7 million. This quarter was recognized we certainly hope there is more there has been some some recent talk about possibly a fourth phase.
And the provider relief funds. So we are.
Like many other players on the senior living industry, hoping that there is some more to offset some of the.
The damage that COVID-19 has really done on the business but.
Again, it's not something we would put in the model at this point.
Great and then I think earlier, maybe last quarter. You said that you were thinking about $250 million of Capex for the year with maybe $1.50 per shop, and I think 100 for MLP life Science is that still the plan now that you've gotten through half the year on I think you said you spent about 100 million so far.
It is certainly still the plan.
There is a little bit of question about timing and weather weather, we can with labor shortages and things physically get it all done this year there is a chance.
Some of it will slip into early 2022, but.
We are still very much moving forward with all of those projects.
The folks in the communities and at our properties are excited to see the investments and frankly, we were excited about what it will do for our future cash flow.
Great and just 1 last from me and I'll hop back in the queue on the shop occupancy.
I think we've heard dialogue from a couple of companies about the expectation for a post labor day, Bob are you still thinking that that's going to be the case when people head back to work and school.
We are.
As we've talked about before.
There are a lot of people, who are home and are carrying firm mom or dad, because they're working from home. So as as kids return to school and adults returned to work, we think there'll be a need to move those that parent our parents into senior living.
<unk>.
Okay. Thank you Jennifer alright. Thanks.
Alright.
Our next question will come from Jason West.
With RBC capital markets. Please go ahead.
Hey, Good morning, guys I just had a question on the Smith closure so.
I understand.
A lot of the change from sequential change in revenues and expenses were driven by the sniff closures, but just wondering if you could put maybe a more specific value on like how much of that change was driven.
By that specifically.
Jason This is Rick that's a it's a good question. It's 1 we've we've dug into a bit and the challenges that many of the communities where you have multiple business lines skilled nursing assisted living there are a lot of shared functions like youre dietary team is generally consistent youre cleaning staff.
Is the same so it's really hard to bifurcate it by business line, when we're really managing it more by function.
<unk>.
What we what we see in our retained the 5 star retained portfolio that that we've.
On.
Close the 500 sniff units and we've seen revenue decrease but that expenses have decreased more.
As compared to the transitioning properties, where we're leaving the skilled nursing units opened for the most part.
We've seen labor pressure related to costs and things like that so.
It's interesting.
To really see the results that even this quarter, where we did have some sniff operations for a period the cost savings outweighed the revenue loss. So we're.
Think that just further validates that it was probably the right decision and the teams are actively working to repurpose those sniffs and develop the plans and a lot of cases, it'll it'll likely be higher acuity memory care type type product, but all the other business lines are less expenses to operate and less regulated than the skilled nursing spaces.
We.
Again, we're pleased to see that net reduction in expected to continue in the future.
Okay, Yes, that's helpful.
And then the 76 communities that are transitioned I guess when are you guys expecting to start receiving NOI from those properties and I assume the remaining transitions I still expect it to be completed by year end, but would you also be expecting too.
Collecting or be collecting rent at that period of time as well.
These are.
They're in our shop portfolio. So these are managed communities and just I wanted to just be clear. We have agreement signed for 76 communities 41 have transitioned to date and so the transitions we will continue to happen.
They are staggered over the next couple of months.
But yes, we're expecting that these operators will grow occupancy and and.
It's competitive across.
All senior living so they will also be.
Providing concessions in order to grow occupancies, but but yes, we're hoping that we'll see.
Yes, certainly increased NOI as the result of their growth in occupancy.
Okay, and then I guess, just following up on that a little bit how should we think about the impact to the transitions will have on occupancy and revpar.
Given the competitive dynamics with building that occupancy I guess, how are you guys thinking about that.
I think it's important to keep in mind that the transitioning properties do have a little bit more of the mix of the units is a little bit more towards the needs based product versus.
The properties, where we're keeping 5 stars the manager have have a higher concentration of assistant sorry, independent living which has more choice based so I do think we'll see.
On the benefit of that needs based product right now and Thats, usually in the senior living cycles Thats, usually the 1 that comes back first.
I don't think Theres any reason to.
Expect that to be different this time around and just to build on what Richard said.
We currently are very much in a needs based market.
The industry is working hard with all of the news of the residents being vaccinated in the.
On the vaccine mandates for employees and so therefore the growth in employees that have been vaccinated.
Building consumer confidence to bring the IL resident back is very important the vaccinations are certainly helping with that but as Rick said because.
It's a needs based market the smaller higher acuity.
Communities should benefit from that.
Got it alright.
Thank you.
I've done that you'd like to ask a question Star then 1.
Star then 1 to ask a question.
Our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.
Good morning, Thanks for taking the questions, maybe just to clarify on that transition versus non transition.
Can you just give us some color how pre this transition, which I guess all of them have occurred.
Our July onward, how are the 2 buckets performed relative flow.
First and second quarter.
Alright, I can take that so the 5 star retained portfolio of 120 assets occupancy was up about 170 basis points.
From first quarter to the second quarter.
And again, we saw revenues decreased $16.7 million as a result of the sniff closures and we saw expenses decreased $18.6 million.
Yeah.
It's pretty consistent across the board.
As a result of those skilled nursing units shutdowns on the transition communities. We did see an occupancy increase despite the news of the announcement and the fact that we were touring our asset management folks we're touring through with prospective operators, we still saw occupancy increased 90 basis points.
And I think even more positive note. We saw revenues increase in that portfolio about $800000 from from Q1 to Q2, and we were actually able to bring expenses down $4.1 million. So combined NOI in the transition portfolio was up $4.9 million and we're confident that our.
Team.
Got out met with the staff at these transitioning communities to assure them that we're still committed to the buildings in the space and that we're hopeful for that for the future.
Again, I think theres still a lot of work to do but we are really much more optimistic than we've been in quite some time.
Great and then can you remind me the.
Specific for both the transition and the retained with 5 star can you remind me sort of your capex outlook specifically.
If you can give us a sense of over the next 2 or 3 years whats budgeted that'd be helpful.
Yes so.
Brian had mentioned last quarter, we kind of talk about a range of probably $2.50 to 290 in total capex.
I still think that.
Is probably appropriate again, the big question Mark is whether we can physically get it Don duda contractor availability and some labor shortages and things like that.
But we are for.
For the most part now that the vaccines are in place and the communities are open and we can get people in.
We are excited to do that.
The development team is also doing a great job moving things forward with with the Redevelopments, we have on the office side. So.
Again.
There is a little bit.
250 to $2.90 is just for senior housing or is that total so thats the whole portfolio.
And roughly how much it is.
As for senior housing, it's roughly 55% for senior housing.
Got it Okay and then just.
Last question just on the on the Covenant waivers, which I think correct me if I'm wrong run through June 22.
First can you just remind us of the specific covenant or covenants that you're monitoring.
What that metric is and then second if I, if I remember correctly, there's sort of 3 levers youre looking at in terms of <unk>.
Compliance with REIT compliance 1 is just the organic growth.
With reducing high cost debt and third I think is the.
Central asset sales I'm, specifically interested on the organic side.
On your confidence around meeting those covenants can you give us a sense of what are you expecting for organic growth and shelf.
Okay.
I mean this quarter. The consolidated same property NOI was up 10% from the first quarter. So we do think things are going in the right direction wed.
We'd like to continue that progress and we are confident that we're that we've got the right operators at all of our communities.
To get that done there is still some work to do so there may be some.
Disruptions from headlines about the Delta variant and things like that but we are still very optimistic about the organic growth story on that.
These communities have really suffered during the pandemic and we will return.
I think investing capital at the same time is helpful.
So we are we are confident that that first leg as far as levers you mentioned.
Getting organic growth back.
Restoring EBITDA to where it used to be will certainly help quite a bit.
The second 1 you mentioned was refinancing high cost debt and Thats still very much on the table. The 1 covenant that that I think has gotten the most attention. So far is the.
1 of our incurrence tests.
Under our public debt covenants. So the idea there is that you're we're not allowed to issue new debt until our consolidated income available for debt service ratio is above 1.5.
The number we printed in the supplemental this quarter is $1.3.
But it is important to remember that that that incurrence test is done on a pro forma basis. So when the when the $1 billion of 975% notes are callable.
And we look to refinance that with lower cost debt you do that calculation on a pro forma basis, you go back to the beginning of the period for both so.
It's a time, where our numerator the EBITDA is growing and the denominator of the debt service should be shrinking so.
Again, we remain confident that by the middle of next year when our on our waiver period runs through that we'll be well positioned and as you said the third lever that can be pulled is.
Asset sales are potentially JV or any number of other things that that don't involve issuing debt.
Until were until we've got the balance sheet back where we believe it should be.
That's really helpful. Thanks for all the color just to clarify on the you said on a pro forma basis, so that but that does not include.
On the refi of the high cost debt correct.
It can it very much Ken.
I'm, sorry, I just meant the <unk>.
It is like the Mexico, 1.3 that you reported.
As is we just reported is for informational purposes that test really only applies if we were trying to issue new debt.
But we think it's a helpful metric to have an.
It has to be taken.
Together with all of the other metrics that we reported including our GAAP financial statements, but.
Again, we're trying to be really transparent about where we are on the process.
Okay, great. Thanks, so much.
<unk>.
Our next question will come from part a lawyer with Mizuho.
Securities. Please go ahead.
Hi, just a follow up on that gross question isn't that a little bit of a chicken on the AG, saying with it.
Pro forma and Youre going to refinance the high cost debt.
How does that work I mean, if you come to the market, let's just say with the $1 billion at 4.5% do they consider the success of that transaction and allowing the ability to actually do the transaction and issue more debt.
Short answer is yes.
Pro forma you'll go back to the beginning of the 4 quarter period as if it happened at the beginning of the test period.
Including the application of proceeds so yes.
Without actually knowing exactly what your interest rate will be until you complete the deal I guess, you kind of have an idea where its going to price out and so they allow it is that a right way to think about it.
I think so yes.
Okay, and then just 1 more question from me.
We noticed that you sold and that will be life science properties in the quarter I think it was $95 million.
Can you give us a little color on those assets and is there any more that we should be thinking about on the back half of this year.
So those assets that we sold.
It was a great sales those were properties that we had under agreement.
As part of our previously stated disposition program, those where that $30 million gain so it was a good sales for us.
We have some.
Senior living communities, where we are.
Had the operator vacate the residents in those communities and so we have a handful of those or so that are being marketed for sale, but other than that we're just focused on the.
Our strategy of repositioning this portfolio.
On your living portfolio now and so we have no further dispositions planned at this point.
Right in saying that we have a little bit of time, let me just ask you maybe a big picture question, Yes, the vertex pharmaceutical headquarters and let's just say Cedars Sinai Medical Center towers in L. A.
They are a big part of your NOI at this point and those are just you know wale of assets.
And what do you think the street's missing when they looked at the portfolio. It seems like there's so much noise related to the shop component of the business that it seems like the street and investors are maybe not giving you credit for kind of the super tankers and their portfolio. How do you think about that.
That when talking to investors and trying to convey the story.
It's a really good point, Brian I spend a lot of time trying to talk about our MLP and life Sciences portfolio and while you talk about those 2 assets, which obviously are.
Premier assets really well located great tenant base in those.
The rest of our portfolio is also very strong we've been consistently over 90%, 92% occupied on our same store portfolio, We've got Torrey pines.
We've got assets in life Sciences assets in Boston.
San Francisco and San Diego.
Our strong portfolio I don't know what people are missing and it's why I try to spend a lot of time talking about that portfolio senior living as the topic of of choice certainly but.
But we'll continue to get out and try to come.
Convey the strength of that portfolio.
Okay. Thank you.
Ladies and gentlemen, 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 all for joining our call today, operator that concludes our call.
Conference has now concluded. Thank you for attending today's presentation you may now.
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