Q3 2021 Diversified Healthcare Trust Earnings Call

Good morning, and welcome to the diversified health could trust third quarter of 2021 conference calls all participants who've been listening only milk should you need assistance. Please take him on a conference specialties by pressing the stocky followed by zero. After today's presentation, there will be an opportunity to ask questions too.

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Georgia question. Please Christoph then too.

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Now locked the chance of cold over to Michael <unk> Director of Investor Relations. Please go ahead.

Good morning, and welcome to diversified health care tries to call covering the third quarter of 2021 result.

Joining me on today's call are Jennifer Frances President and Chief Executive Officer, and Rick side out Chief Financial Officer and Treasurer.

Today's call include the presentation by management, followed by a question and answer session.

I would like to note that the transcription recording retransmission of today's conference call are strictly prohibited without the prior written consent of diversified health care 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.

These forward looking statements are based upon dht's present beliefs and expectations as of today Thursday November 4th 2021.

Company undertake no obligation to revise or publicly released the result 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 S. E C.

In addition, it's called May contain non-GAAP numbers, including Normalised funds from operations when normalized Eppo EBITDA net operating income R. N O Y and cash basis, net operating income or cash basis in Hawaii.

Reconciliations of net income or loss attributable to common shareholder. So these non-GAAP figures and the components to calculate <unk> cat or fad are available in our supplemental operating and financial data package found on our website at Www Dot Phd Ray Dot com.

Actual results may differ materially from those projected in any forward looking statements.

Additional information concerning factors that could cause those differences 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 good morning, Thank you for joining us on today's call.

To begin today's company overview I'll provide an update on the progress we've made 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.

Despite another ryzen Kobe case counts across the United States in the third quarter due to the Delta variant and an increasingly challenging labor market, our senior living operators and are managed and least communities continue to provide quality services and care to the residents in our communities.

Over the past 18 months, they've become experts at dealing with COVID-19, so as the cases of Covid increase throughout the country. This past quarter and the risk of breakthrough cases and are mostly vaccinated resident population increased our operators had the necessary protocols in place to minimize its impact on our residents.

As we look ahead, it's clear that the recovery of the senior living industry will continue to be uneven, but we see a number of encouraging trends both in our portfolio and across the industry.

As of today, we're complete in our selection of New third party managers for 107 communities within our shop segment and have executed agreements with 10 managers to operate these communities.

Of those 107 communities 69, where transition during the quarter and an additional 30 transition subsequent a quarter and we'd.

We remain on schedule to complete all of the community transitions by year end as.

As we work through the <unk> through the process, we identified one community that we plan to close and are evaluating the property for its highest and best use.

Given the composition of this portfolio, which consist generally a smaller buildings with residents that require a high level of care. We believe that each of these carefully chosen operators is the best choice to establish and execute business plans that optimize performance and create an exceptional experience for residents and team members.

During the best of times senior living operator transitions can be difficult for employees.

These employees have been especially hard hit during this global pandemic. So transitioning now could have been challenging for them, but the hard work and commitment to team members and residents displayed by both are new operators and five star not only alleviated many fears that initially swept through the transition in communities, but in most cases invigorated those.

Impacted with a new outlook incentive optimism.

Operationally significant headwinds persistent senior living in the Delta variant has created additional pressure in some areas and magnet boat magnified those challenges and others.

Although new supply remains largely muted many of the communities that compete with our five star managed properties or photograph aggressive rate concession packages this quarter and lost pushing five star to follow suit.

Same property occupancy decreased 50 basis increased 50 basis points on average from the second quarter. Despite this increase excluding the revenue decline associated with skilled nursing unit closures that took place in the second quarter same property revenues in this portfolio decreased approximately 20 basis points sequentially as a.

Relatives concession strategies.

Following the closure of five star managed skilled nursing unit and the right sizing of the community level workforce due to present occupancy levels. We continue to see a decrease in wages and benefits expenses and our <unk> our managed portfolio.

Which decreased 1.9% from the second quarter, we know however that persisting labor pressures challenge all of our operators ability to reduce wage related expenses and we expect wages to increase as labour pressures continue.

In addition to the wage pressure that we and many industries are facing our operators are also experiencing scarcity of qualified employees as many have left the industry as a result of burn out from the pandemic opportunities in other industries or vaccination requirements for health care workers.

With that being said leading indicators during the quarter give us reason to be cautiously optimistic about improved future performance and senior living.

Within our 120 community portfolio managed by five Star leads were up 41% from the sequential quarter, primarily driven by 70% increase in digital leads.

Additionally, move ins were up 19.2%, while move out towards up just 3.6% from the second quarter.

Tours were down for 3% sequentially in reaction to cautiousness associated with the Delta variant.

In October tourists increase seven 8% compared to September as Covid cases began to subside.

Generally the Delta variant has delayed returned to office trends across the country, which we believe has lengthened the sales cycle and lower acuity communities by offering prospective residents additional time to make a decision.

As such were encouraged by Lisa by recent decreases in active Covid cases across the country and are hopeful that these trends prompt a reduction in pandemic related restrictions and promote a smoother operating environment.

Turning to our office portfolio segment leasing velocity across our portfolio remains strong.

During the quarter, we completed 39, new and renewal leases totaling approximately 372000 square feet, which is slightly above for our three year quarterly average.

Leases were finalized and an average roll up and rinse of 28.1% a weighted average lease term of eight two years and with leasing cost of approximately $8 per square foot per year.

Or leasing pipeline grew to approximately 2.4 million square feet, which was more than twice the second quarter's pipeline.

Approximately 1 million square feet or 42% of the pipeline, our new deals and 10% of the total pipeline, our new tenants with whom we have signed letters of intent with Lisa is being negotiated.

Same property occupancy during the third quarter decreased 30 basis points from the previous quarter and our office portfolio, primarily driven by the two vacating tenants, we mentioned in our second quarter call and a 30000 square foot life Sciences tenant that vacated in July.

With the office portfolio same property occupancy at a healthy 92.7%.

As of the third quarter and given the size of our leasing pipeline, we remained well positioned to drive profitability through capturing rentable sizable rent roll ups, and new leasing activity and to reposition certain assets, resulting in success stories, such as the recently completed redevelopment and Torrey Pines, which is now 100.

[noise] percent leased and the nearly complete Lexington, Massachusetts project, which is fully leased for 10 years at a 46% roll up and Red.

As a reminder, at year end, we will have a tenant vacate and 112000 square foot property indicators, Georgia.

We have a plan in place to redevelop this property on the tenants exit.

Looking into 2022, we have approximately 190000 square feet in Dallas, and Phoenix, where we have tenants vacating that we currently have good leasing activity on both.

With a portfolio that has historically been over 90% occupied on the same property basis, we're comfortable with this upcoming turnover. It's it is typical for a portfolio of this size and the <unk> or the RMR group strong asset management and property management teams are well versed in taking leasing risk head on.

And getting properties released with minimal downtime.

Now I'll turn the call over to Rex to provide details on our financial results.

Thanks, Jennifer and good morning, everyone.

Within our office portfolio segment same property cash basis, NOI increased 40 basis points from the prior year, primarily due to increased parking revenues and decreased operating costs, partially offset by the lower Occupancies Jennifer mentioned in your prepared remarks.

And our shop segment or same property pool decreased to 159 communities. Following the transition of 69 communities that occurred during the third quarter.

For this same property portfolio cash basis, NOI decreased $6.1 million from the second quarter due to decreased revenues associated with the skilled nursing unit closures as well as an increase in certain operating expenses, including repairs and maintenance utilities and wage rate expenses.

During the quarter, we recognised just under $800000 of cares that funds within interest and other income which is excluded from our reported cash basis NOI, bringing year to date cares act income to $19 million.

Also excluded from our cash basis, NOI are the $3.1 million of transition related expenses, which decreased $11.9 million from the second quarter as a skilled nursing unit closures are now behind us.

Our general and administrative expenses decreased approximately 3% from the second quarter to $8 $9 million for the third quarter as a result of lower business management fees paid to our manager.

Interest expense was $64.5 million from the third quarter of 2021, a decrease of $3 $2 million compared to the second quarter due to our redemption of $300 million a senior notes in June.

Our next senior notes maturity is not until May of 2024, but are $1 billion of $9, 75% senior notes become callable in June of 2022.

At the end of the third quarter, we had approximately $795 million of unrestricted cash on hand.

Subsequent quarter, and we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2023, providing us added flexibility in our capital plans in general liquidity.

Following this extension we have one remaining option to extend the maturity date of this facility by an additional year in January of 2024.

We reported normalized SFO of negative $9.4 million.04, a share for the third quarter of 2021, and we declared and one cent quarterly distribution payable on November 18th to shareholders of record on October 25th.

And the third quarter, we spent $41.5 million on capital expenditures across our portfolio. Despite continued supply chain disruption and shortages of certain materials and labor.

These expenditures included $23.3 million of her current capex within the shop segment, an increase of approximately $4 million from the second quarter and $9.2 million in our office portfolio.

We also spent $9 million on a redevelopment capital expenditures to reposition a number of our properties.

We remain committed to investing in our portfolio to improve our future results.

I will now turn it back over to Jennifer for closing remarks.

Thank you back with the progress we've made in the transition of our shop communities to new operators, we remain confident in our strategy and expect gradual recovery and the performance of our senior living portfolio. Additionally, as we continue to increase our capital investment in our properties. We believe that we're positioning our portfolio for success.

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 might <unk> and one on your telephone keypad, if you're using a speaker phone. Please pick up Johansson before pressing the keys to withdraw your question. Please for solving too.

They saw me with both of them totally possible a rooster.

The first question comes with a lot of Brown and might be Riley. Please go ahead.

Morning, Jennifer and Rick an awful lot to unpack there in your prepared comments, so I apologize in advance if some of my questions are redundant.

When you talk about the aggressive pricing of the competitors in the senior living market do you have any indications are thought when that might subside.

Is there some threshold, where everybody kind of gets to an occupancy where where they say enough is enough.

Everybody quits, killing each other.

Can you can you give a little color on that.

Yes, it's hard to say it's.

They are very competitive and.

I think is as long as they're working.

They'll continue to to offer concessions I I don't see that concessions are going to subside anytime soon.

Okay, and then the rent roll up you know and the M O B life Science segment, we're pretty impressive.

Do you see continued double digit rent roll ups in the fourth quarter and as we roll into 2022, and what do you you know a sign that too is it is it just the broad strengths of the market or the assets that you have in certain markets can can you give me the low color on what we should be thinking in that regard.

Sure I think it's a combination of things Brian.

Certainly in our life Sciences assets, we're seeing large double digit roll ups and rent the Massachusetts property is Lexington has a strong life sciences market Torrey Pines is a strong life sciences market, but we are also seeing roll ups and rent an R. M O b portfolio, certainly not 48% roll ups and ran.

But.

Hi single the double digit roll ups.

Very rarely are we seeing roll downs and rent and in those instances, it's usually because of a tenant had.

A large ti that they amortized into their rent so.

It's a strong market to strong leasing market with a pipeline of 2.4 million square feet. I don't think we've seen a pipeline that big in this portfolio.

Don't think ever and so.

There's just a great deal of activity.

And rent growth projected rent growth.

Great and that caught <unk> comments on the Capex spending in the third quarter, maybe I missed it but can you give it is it just your quick thoughts on fourth quarter Capex in 2022 early thoughts on Capex there.

Brian I would love to give your thoughts on Capex, there's a number of reasons why it's incredibly difficult to forecast.

I mentioned in the prepared remarks, some of the supply chain disruption.

I would just say the things you are reading about our true we're seeing <unk>.

16 to 18 week delays for carpet.

I won't even tell you what delays for furniture or like nowadays, but I mean, there's even paint shortages so across the supply chain. We are seeing real impact there in the team is well prepared to deal with it in some cases sourcing you estimate furniture versus waiting for things.

Container offshore.

But but again I mean, it's it's constantly moving and it's it's a real challenge and they're doing a great job, but it's really difficult for me to predict.

What will actually get spent in the fourth quarter.

Beyond that I mean there.

You also hear a lot about shortages in.

Skilled labor.

To get some of these projects done again, we're working with some really great contractors that can overcome that but it's still not not easy in the current environment.

And the other thing I would say is we've been really active with these operator transitions and.

Bringing fresh set of eyes into a community.

They have some different ideas and or asset managers are working very closely with them. We had historical capital plans. We did some capital needs assessments. We thought we we knew what we wanted to do but.

Certainly willing to listen to some of our new operators or frankly thoughts from five star as well I mean, we want to make sure that we're best positioning the assets for success and in some cases, we are changing our plans so.

I think we are still forecasting a significant amount of capital in.

Q for it's just difficult to kind of put a number on it. So we're before I thought maybe for the year, we'd be in the $2 50 range, where we're probably closer to 200 I'm, hoping we can do a little better than that but.

Some of the delays are real so I just want to follow on.

A couple of things that Rick said.

You just want to make it clear that we have projects that are well underway and hammers or swinging and so we are executing on some of the plans. There is that added complexity that Rick mast mentioned of labor shortages bitch.

Because we've transitioned a lot of these projects over the project management group.

The RMR group they they have well established relationships around the country that they are tapping into so while everybody is seeing supply chain delays and labor shortages, we're well positioned to to to deal with those.

Great. Thank you Jennifer I appreciate it sure.

Again, if you have a question. Please birstall then one.

The next question is from a lot of Michael Karl with RBC capital markets. Please go ahead.

Yeah. Thanks, Jennifer can you provide some color on the current concession past packages that are currently being offered I mean, how much are your competitors are offering right now and are they would be more aggressive than they have been just a few months ago.

No I think that they are as aggressive as they have been a few months ago.

It varies from market to market you might see.

Community fees being waived or a half a month rent for for.

Per month for the next three months.

It's usually things like that and five stars offering similar packages.

Yeah, I know five star has been and and I think D. C has wanted to avoid offering these packages I mean, what changed and when did you start offering these concessions.

What changed was the that the the competitors worse.

Being offering deep concessions and so in order to to try to grow occupancy five star had to start offering them to keep up with that we did want to avoid it and we certainly want to avoid reducing rent.

So free rent is the way to do it so once that pre rent Burns off you still have a strong face right. So that the next year when rent increase their increasing from a stronger face right.

Okay and then he said that these packages are working right now I'm gonna have your competitors being stronger occupancy gains than than five star has <unk> and if so can you kind of quantify to what extent.

Well I think that they have I haven't seen the quarterly results from some of our peers yet.

But yeah some of the some of the piers have been reporting stronger occupancy gains.

We're undergoing a transition the announcement of the transition of the.

107 communities had an impact across the portfolio not just on the transition in communities, but on all sides. John managed communities I think that that and five stars reorganization at a corporate.

And regional level had an impact as well so I think that that's one of the differences.

Between our portfolio and our peers.

I think the other.

Mike is that.

We have a portfolio that needs capital and we are as Rick said, we're working to deploy that capital.

And so I think as that capital gets deployed will see continuing improvement.

Okay, and then can you quantify what you're seeing on the labor side and now you mentioned that a little bit in your prepared remarks, Uhm I mean, when did you start increasing wages for first of all of your employees and and how big are those increases I knew how how big have they been.

So.

Our our wages and wage increases are generally consistent with the market.

I think Nick Slash report had 4.5% wage increases year over year, and we're seeing similar increases with our operators, 5% or so.

Though for frontline workers worse in some markets, we're seeing double digit.

Increases these are workers.

The operators are competing for workers with Amazon and Walmart all stock we've talked about before so not only.

Is their wage pressure, but there's also a scarcity of employees and so that that that drives wages up as well.

And then it has there been an increase I guess during the August.

September type timeframe is did you see a nickel increase towards the end of the summer in the beginning of fall of cost cutting jumping or the difficulty to find those labour goodness.

I think it's been it's been tough for awhile, but yeah. I mean, certainly the last few months have been particularly challenging I mean.

We've talked to them a little bit about the 5% or so year over year growth, but I mean certain roles I think I read the hospitality was up nearly 13% year over year in some cases.

Working food and beverage isn't that different depending on if you're in senior living orange hospitality. So.

Each market is different.

Some of the new operators have slightly different philosophies. There are some some different benefits that are being offered to employees at some of our newer operators versus what five star and offered and there is some some equalization for that but.

It's a it's a tough market without without a doubt I mean, the good news is if.

If you provide good care, we should be able to push it back through right and recover it.

But there is a little bit of lag there I mean, I think customers know that ray rates and costs in general are increasing as well.

Okay, and then just finally talking about lead to think you're highlighting those are pretty big uptick. It leaves it sounds like the majority of that was.

On over the Internet, which I believe is a lower closing right type lead.

What type of weeds can you come to quantify the other leave for so that you had an interesting similar upticks errors or is it mostly just the internet searches.

No I think it's.

Almost entirely driven by by website leaves I think there has been.

Still using some other sources for five star specifically has.

<unk> lead sources, but it.

Really been pushing.

They're they're digital lead platform and and are seeing results from it. The result of those leads as we've seen an increase in tours.

And the five star manage communities in October versus September of 8%. So so we are we are seeing those leads.

Resulting tours.

Okay, great. Thank you.

<unk>.

There is a gentleman. This concludes our question and answer session of luck not to turn the conference back over to Miss Jennifer Francis for any closing remarks. Thank you.

Thank you. Thank you all for joining our call today, we look forward to seeing many of you at the Navy Conference next week, operator that concludes our call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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