Q1 2022 Diversified Healthcare Trust Earnings Call
Good day and welcome to the <unk>.
Diversified health care Trust first quarter 2022 earnings conference call.
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I'd now like to turn the conference over to Michael Kurdish Director Investor Relations. Please go ahead Sir.
Good morning, and welcome to diversified healthcare Trust call covering the first quarter of 2022 result.
Joining me on today's call are Jennifer Francis President and Chief Executive Officer, and Rick Tsai Dahl, Chief Financial Officer, and Treasurer. Today's call includes a presentation by management, followed by a question and answer session.
I'd 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 forward looking statements are based upon the HCS present beliefs and expectations as of today Wednesday may 4th 2022.
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> CAD or fad are available in our supplemental operating and financial data package found on our website at www dot the HD REIT Dot com.
Actual results may differ materially from those projected in any forward looking statements.
Information concerning factors that could cause those differences is contained in our filings with the SEC.
You 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.
Following the joint venture transaction completed in January our portfolio today continues to consist of diversified high quality and well located health care asset at the end of the first quarter. The size of our consolidated office portfolio is approximately $8 7 million square feet and our entire senior living portfolio is comprised of 200 <unk>.
64 communities with over 27000 units.
Given the impact that the COVID-19 pandemic had on our senior living communities over the past two years, our NOI remains disproportionately skewed toward the office portfolio.
Over the next several quarters, we expect senior living segment NOI to increase as we deploy capital to rejuvenate and stabilize our shop segment see renewed operator focus on occupancy rate and community level EBITDA growth and as we continue to deliver exceptional leasing results in our office portfolio segment as we've done since the onset of the <unk>.
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Meanwhile, we're eager to reduce debt and accelerate earnings growth.
Within our office portfolio segment leasing velocity in the first quarter remained approximately in line with the three year quarterly average highlighting the continued demand for high quality medical office and life Science space.
During the first quarter, we executed 27, new and renewal leases totaling over 200000 square feet with average roll up in rents of eight 2% and a weighted average lease term of seven four years.
As a result of this activity same property occupancy during the first quarter increased 10 basis points from the previous quarter and this portfolio.
Looking ahead, approximately 760000 square feet or eight 7% of our annualized rental income in this segment comes from leases that are expiring during the remainder of 2022.
Our leasing pipeline is generally in line with the fourth quarter of 2021 at almost 900000 square feet.
On a square footage basis, approximately 40% of the pipeline is for new tenants that could absorb close to 400000 square feet of vacant space.
<unk> group has an expert team of leasing professionals that do a great job getting ahead of renewals and leasing vacancy as we get space back.
As a result, we feel confident about keeping this portfolio well occupied as we've done historically.
We're pleased with the success at our recent redevelopment deliveries and are excited to announce additional redevelopment opportunities in this portfolio.
On previous calls we discussed our redevelopment of a medical office asset located in a strong strong suburb of Atlanta.
The property sits on a prime corner and the historic district of downtown Decatur, and it's walkable to numerous foodservice and retail option as well as the Marta Atlantica public transportation system.
With the addition of several onsite amenities, we believe this redevelopment elevated leasing prospects and will help limit any downtime.
We recently began construction and expect to deliver the asset later this year.
In Irving, Texas, we have a 94000 square foot medical office buildings that we're repositioning from a single to multi tenanted building it's.
It's located within the La Scalenus area of Dallas, the historically desirable sub market for medical office space.
Upon its delivery the property will host various collaborative features refreshed common areas and move in ready suites.
We're also in the early stages of redevelopment opportunity in Washington, D C, which will convert a medical office building into a mixed use property.
We expect design entitlement and permitting to take place in 2022, while construction is likely to begin next year.
Finally on the last call we discussed the likelihood of a tenant in suburban Boston downsizing from two buildings to one and plans are underway towards potential redevelopment of the building that is being vacated into LEED certified GMP lab ready space.
Design and permitting is expected to take place this year with delivery anticipated early next year.
We have an active leasing pipeline for these developments and look forward to providing updates on our activity in future quarters.
Moving to our shop segment.
Earlier this week <unk> life, the manager of 120 communities in our shop segment announced a change to its senior management and appointed Jeff Leer as interim President and Chief Executive Officer.
With this change <unk> also retained Polaris life also retained the healthcare consulting group within Alberta, and Marsal to conduct an operational review of the company and they are expected to make recommendations to the <unk> life board by the end of the second quarter.
We believe that their review in finding and the resulting plan will accelerate the improvement of the performance at the communities that five star manages on our behalf.
In the first half of last year, the senior living industry experienced tremendous occupancy declines and while occupancy has modestly improved since then.
Pace of the recovery has been more measured than anticipated.
That being said, though it has been only a few months since the 107 community transitions were completed our new operators have had more time to assess their respective communities and are now executing their business plan where.
We're pleased to begin seeing some of the plans materialize in our operating results. This quarter occupancy in this portfolio increased approximately 100 basis points from the prior quarter with eight of the 10, new operators reporting an increase Additionally, seven of the 10, new operators raised rates this quarter, resulting in non same property revenue growth.
$4 5 million or five 8% compared to the fourth quarter.
Following the completion of these transitions, we believe we have the right operator mix and are starting to see the benefits from both our capital spend and from the investment of our operators are making in their communities and in their corporate and marketing teams.
And our same property shop segment that is comprised of the 120 communities managed by five star occupancy was flat for the fourth quarter, but same property revenues increased 344, 3% sequentially as rate increases took effect during the quarter and concessions began to dissipate.
Generally speaking our operators have not seen significant pushback from residents on rate increases as the media coverage of inflation is widespread in the alternatives to our senior living communities, such as homecare and competing senior living communities are also increasing rates.
Looking ahead, we're seeing that our operators are now largely using concessions as a closing tool and it most offering one month of free rent to help drive occupancy.
Labor is the biggest challenge facing the senior living industry today, but we're pleased with how our operators manage through these headwinds during the first quarter.
Same property wages and benefits decreased approximately $800000 or 1% from the fourth quarter, largely driven by lower agency costs.
While we're encouraged by this level of cost containment in the quarter. We note that the competition for labor remains elevated looking forward, we expect wages and benefits to increase as our operators look to compete for and retain team members.
We continue to encourage our operators to perform extensive care level assessments and to make market price adjustments where needed as part of a broader effort through 2022.
Our manager the RMR group continues to make significant investments in its senior living asset management team, which is focused on high impact deliverables targeted to improve operations at underperforming underperforming assets and optimize results elsewhere.
As our teams identify areas of opportunity to prioritize and deploy revenue enhancing capital we remain confident of the shop segments path towards stabilization.
In total we currently have 58 major capital projects that the RMR group's project and asset management teams are working with the <unk> like to complete our kickoff in 2022.
These include a sizable projects that are either underway or in permitting another 14 that are in the design phase and we have another 29 projects that are building refreshes that will be complete by year end.
In total these projects combined for a budgeted spend within the same property portfolio of approximately $110 million in 2022.
The teams are also working with our new operators on capital improvement projects at some of the 107 communities transitioned to new operators last year.
Finally, we're proud of the progress we continue to make to strengthen thc's corporate governance in.
In March we welcome David Pearce as the newest member of our board of Trustees, David has more than 30 years of healthcare industry experience and we look forward to drawing on his perspective to create value for DHT shareholders.
I'll now turn the call over to Rick to provide detail on our financial results.
Thanks, Jennifer and good morning, everyone.
For the first quarter of 2022, we reported net income attributable to common shareholders of $244 million or $1 one per share, which includes a $327 $5 million gain on the joint venture sale of 10 office portfolio assets that we discussed during our last earnings call.
We have a 20% ownership in two ventures that combined for $2 2 million square feet of medical office and life Science space that is 98% occupied and generated approximately $5 2 million of EBITDA for us during the first quarter.
Our supplemental package includes additional detail regarding our joint venture investments on page 16 and 17.
Our consolidated same property cash basis, NOI increased 10, 3% compared to last quarter larger.
Largely driven by a $6 $6 million increase in same property shop NOI.
Our general and administrative expenses decreased approximately 15% from last quarter to $7 3 million as a result of lower business management fees paid to RMR.
Interest expense decreased approximately $6 $4 million from the fourth quarter, primarily due to $620 million of debt secured by the Boston Seaport asset that was deconsolidation following the joint venture transaction completed in December .
Aggregating. These results we reported normalized <unk> of negative $21 9 million, which reflects roughly breakeven results in our shop segment and interest expense.
Normalized <unk> was approximately $5 million lower than we reported last quarter due to approximately $2 million of percentage rent recognized in the fourth quarter.
And to the impact of the joint venture sales.
We believe it's important to note that while normalized <unk> was negative DHT ended the quarter with approximately $1 5 billion of cash available to repay debt and make investments in our portfolio and had total outstanding debt of $3 6 billion.
Net debt was equal to just 25% of gross assets and our next meaningful debt maturity is not until January of 2024, which gives us time for the shop segment to recover.
As a reminder, the proceeds from the joint venture transactions that we completed at a blended four 7% four 7% cap rate have not yet been deployed.
Our nine and three quarter percent senior notes become callable in June and we expect to be in a position to reduce our interest expense at that time.
In the first quarter, we spent $60 4 million on capital expenditures across our portfolio, which included approximately $36 million of Capex within the shop segment and $24 million of capital was deployed in the office portfolio.
We continue to review and prioritize our capital spend on a property by property basis for its overall potential NOI impact is.
As Jennifer mentioned, we're excited about our capital program and the impact it will have on our results.
Now I'll turn it back over to Jennifer.
Thank you Rick.
We're pleased with some with some of the progress made this quarter in our shop segment and are optimistic that our operators will continue to execute as industry fundamentals recover.
Our financial position provides us the flexibility to reduce debt and lower interest expense and affords us the opportunity to continue investing in our portfolio, which we expect will accelerate the stabilization of our shop segment and maximize the value of our office portfolio segment.
That concludes our prepared remarks, operator, please open the line for questions.
Okay.
Okay.
We will now begin the question and answer session.
As a reminder to ask a question you May Press Star then one on your telephone keypad.
If you are 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 will pause momentarily to assemble our roster.
Today's first question comes from Bryan Maher with B Riley Securities. Please proceed.
Good morning, Jennifer and Rick a couple of questions on the JV sales.
With the two that you've completed at this point are you done with that or do you think we could see more of that over the balance of the year.
We're not looking at adding any of our existing properties into those jb's.
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So we haven't assembled any additional portfolios.
Okay, and then as it relates to the $1 billion by the cash and the $1 billion callable.
June can you elaborate on the thought process there whether it's.
Pay it all down pay down half and refinance half where is management thinking about taking that.
It's a good question Bryan we definitely expect to prepay some portion of the nine and three quarter notes, but.
As you said, we do need to be thoughtful and we need to continue to assess our investments and liquidity.
<unk> thing for US is to make sure that we're investing in the portfolio and positioning ourselves to grow earnings. So we can get a more normal dividend in place.
But all that being said, we definitely expect to call. Some portion of the nine and three quarter notes.
I think last year, maybe it was in the first quarter I forget you issued some debt and I think the interest rate was maybe in the fours yeah.
Given what's going on with interest rates now if you had to refinance some of that debt how much higher do you think the interest rate might be.
It's a good question, Brian Youre right, we were below four and a half on that on that last issuance.
Interest rates have come up a bit but.
To be honest I haven't been as focused on where we would issue that we're really we're sitting on a billion and a half of cash.
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When we look at our total debt net debt to gross assets is just 25% so.
Really looking to issue more debt right now.
Key is again focusing on the performance of the portfolio and getting EBITDA back up to where it should be.
Okay, and then Jennifer I think you mentioned that we would concur.
That it appears that.
The shop occupancy is not kind of a.
Hovering in the past several months, maybe as fast as we had thought do you think that the first quarter really was you know omicron do you think it was maybe rate increases and maybe a little bit of pushback there.
What are your thoughts related to the first quarter and how are you thinking the rest of this year plays out.
Yes, I think that the recovery in senior living is more heavily weighted towards needs based and so we've seen more occupancy growth in our needs based communities than our choice based communities and so our same store portfolio is definitely more heavily weighted to independent living so I think that.
That is some of the issue.
We are seeing some.
Increases we've seen increases in leads increases and qualified leads over the fourth quarter.
Increases in tours and so I think the key is converting those as having the operators and that really the folks out in the communities convert those tours.
Move ins.
So really they're all very focused on <unk>.
Training the sales force.
And in the first quarter <unk> lifestyle, the lowest percentage of voluntary move outs since Q1 2020. So it's.
It's not as much the move out issue our voluntary move outs, it's really converting the tours to to move ins.
Okay, and maybe shifting gears.
You did touch upon Capex for 2022.
You said $110 million in the.
The five star associated shop portfolio, but can you give us a total capex breakdown for the year between the MLP full year shop full year, including the new operators what are you thinking along those lines.
Certainly so yes, Jennifer mentioned the $110 million that we are actively working to deploy throughout the <unk> life flashed five star portfolio, but.
Overall, we are expecting capex for this year to be close to that $400 million number we spoke about previously.
The break out there there's a couple of different ways to split it I would say.
Probably $125 million or so is in the office portfolio, while the rest is dedicated to shop.
And then depending on how you slice it I mean, the recurring versus redevelopment repositioning capital.
The split that we're asked about somewhat regularly and I would say of the 400, it's probably a.
A little over $100 million on the recurring side and then a little under three.
<unk> $300 million on the redevelopment side, so Brian just to clarify the number that I was talking about is the number that the.
RMR project management group is deploying the operators are also as Rick mentioned are also doing kind of the the lighter capital projects on their own.
Okay.
Maybe I'm a little confused so 400 million total.
125 is going to be M O B and $2 75 is gonna be shop.
Potentially yes, if we can if we can get it all deployed there is still supply chain issues that are slowing us down in some cases, but.
The team is making great progress.
And are you done at that point or are we going to have some spillover into 2023 and 2024 they'll definitely.
Continued spend in 2023.
Our goal was to spend a great deal of capital last year and the year before and it really got delayed because of the pandemic and so we will it will not be as elevated next year as it is this but.
We'll still be at a pretty heavy capital year.
Okay, and maybe one more if I might on the expense side of the equation and maybe you could break it out between shop and M O B.
Can you tell us where your biggest concerns are and.
What the trend might be.
In shop, and then my guess would be on MLP. Its a combination of taxes and utilities, that's going to drive that higher can you give us just a little bit of color on that.
I think it's.
Labor is obviously.
Our big issue, we saw an increase in.
In salaries and benefits in our in our office portfolio segment. This quarter and we will continue to see it in senior living utilities are up I mean, it's all the things that people are talking about there is theres a lot of discussion about the cost of food in senior living.
So this quarter and the first quarter, we saw increased snow removal, but that's just seasonal.
Just really depends on how much its nose from quarter to quarter, but utilities salaries and benefits are really.
Kind of.
Kind of be a push.
Okay. Thank you that's all for me thanks.
Thank you Brian .
Again, if you do have a question. Please press Star then one on your Touchtone phone.
At this time there are no further questioners in the queue and I would like to turn the conference back over to <unk>.
Jennifer Francis for any closing remarks.
Thank you operator, and thank you all for joining our call today, we look forward to seeing many of you in person at NAREIT in June operator that concludes our call.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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