Q2 2022 Diversified Healthcare Trust Earnings Call
Good morning, and welcome to the diversified Health care Trust second quarter 2022 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Michael Codell Director of Investor Relations. Please go ahead.
Good morning, and welcome to diversified healthcare Trust call covering the second quarter 2020 results joining.
Joining me on today's call are Jennifer Francis President and Chief Executive Officer, and we're excited our Chief financial Officer and Treasurer.
Today's call includes a 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 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 1095 and other securities laws.
These forward looking statements are based upon the HCS present beliefs and expectations as of today Thursday August four 2022.
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> CAD or fad are available in our supplemental operating and financial data package found on our website at www Dot <unk> 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 good morning.
Thank you for joining us on today's second quarter conference call.
DHT had a productive quarter, we delivered operational improvements across all of our segments reduced debt by redeeming $500 million of 93 quarters percent senior notes and increased our cash position by selling an additional 10% equity interest in our existing joint venture for the property located in Boston Seaport District.
We're making progress on all of our strategic objectives as we continue to grow EBITDA and positioned the company to deliver long term sustainable growth.
The recovery of the senior living industry is well underway.
Based on the most recent data published by the National Investment Center for seniors housing and care are Nick the supply demand fundamentals within senior living continued to be in our favor as the construction pipeline remains at its lowest level since 2015, and new supply remains muted with inventory growth moderating to just one 5%.
Year over year.
Occupancy across the industry increased during the quarter and average asking rents grew with asking rents for our assisted living growing at the fastest pace since Nick began reporting data in 2005 were.
We're seeing the impact of these tailwind in our portfolio consolidated shop occupancy increased 60 basis points from the prior quarter and our properties managed by Soliris life and by our other operators experienced sequential quarter NOI improvement with increased revenues and decreased expenses for both portfolios we.
We believe that we're now on a more defined path toward the stabilization of our senior living assets.
We've seen continued improvement following the previously announced changes made it allowed us life.
While average occupancy was flat compared to the prior quarter and our same property shop segment at 74, 1%.
And occupancy in this portfolio increased to 75 four.
And 4% in June and July occupancy in our same property portfolio increased an additional 40 basis points.
Rates moved slightly higher in the quarter and as a result shop same property revenues increased one 6% from the first quarter looks.
Looking ahead, we expect to see concessions that were heavily utilized within this portfolio at the end of 2121 dissipate in the second half of the year, which should continue to improve revenue.
Same property expenses during the second quarter decreased slightly from the prior quarter largely as a result of reduced agency use related to <unk> life's labor initiatives.
Overall their labor is stabilizing as turnover the average time to fill positions and the number of open positions have all decrease.
While we were pleased with the progress made accessing labor and wage inflation will continue to be the biggest challenges facing the senior living industry.
Looking forward, we expect wages and benefits to continue to increase as our operators compete to attract and retain team members we.
We expect it expect this will be the new normal for some time, especially if these increased expenses provide our operators with a more stable employee base.
And we believe we will be able to recover most of these additional costs through rate increases at our communities.
But the properties that were transitioned to new operators occupancy increased approximately 210 basis points from the first quarter our strategy of utilizing regional operators for these smaller higher acuity communities is paying off.
These operators have found success in leveraging their local expertise and networks to source high quality leads and as a result, the turnaround of these communities is well underway.
Revenues grew to $4 million or 3% compared to the first quarter at these properties.
Turning to expenses and our transition communities, our operators are making investments and marketing initiatives and sales training to help drive the robust occupancy results I just mentioned.
While agency costs to support this increased occupancy has been necessary. We believe these operators are now finding opportunities to source fulltime labor at significant discounts to contract labor costs. As an example, stellar senior living who manages 10 communities on our behalf increased occupancy in their communities by 600.
50 basis points over the previous two quarters.
During the first quarter agency labor was utilized as increased staffing levels, where necessary to care for the additional residents in the second quarter stellar reduce these agency expenses by $1 $9 million as they were successful in bringing in permanent staff to replace agency.
With the agency costs, representing almost 17% of the non same property portfolio wages and benefits. We believe there's significant opportunity to reduce labor expenses and expand margins in these properties in the coming quarters.
Finally, we continue to identify areas of opportunity to prioritize and deploy revenue enhancing capital and we remain confident of the shop segments path towards stabilization aside from the capital is being spent by our operators on room turns we have 77 projects that are underway or in the planning and design stages. These projects range.
From major community wide renovations of dining and activity rooms, and common areas to lighter paint and carpet and other cosmetic upgrades.
Turning to our office portfolio segment at the end of the second quarter. Our consolidated office portfolio contained approximately $8 7 million square feet of high quality Medical office and life Sciences properties during.
During the second quarter same property cash basis, NOI increased two 4% compared to the first quarter.
Despite the current inflationary environment, it's important to note that over 90% of our leases have expense recovery structures, where much of our operating expense increases can be passed back to tenants.
Leasing velocity in the second quarter increased over the prior quarter and remains generally in line with the three year quarterly average highlighting the continued demand for our assets.
During the second quarter, we executed over 263000 square feet of new and renewal leases with average roll up in rent of nine 1% and a weighted average lease term of five five years.
Despite this strong leasing activity same property occupancy decreased slightly during the second quarter largely due to a known tenant vacating.
<unk> approximately 100000 square feet in Phoenix, a known vacate that I've mentioned on prior calls.
Given the continued strength of the medical office and life Sciences markets, we feel confident that our strong leasing pipeline will provide us the ability to backfill spaces of tenants vacate.
This pipeline contains over 850000 square feet of potential leasing and approximately 45% of the pipeline is for new lease activity that could absorb vacant space.
Last week, we acquired a life sciences asset in the San Francisco Bay area for $82 million at a cap rate of six 5%.
The recently renovated 89000 square foot asset with best in class lab improvements will serve as the corporate headquarters and critical lab functions of its tenant.
And is 100% leased through January 2034.
We're excited to grow our life sciences portfolio and the San Francisco Bay area, which is widely seen as the second largest life sciences market in the United States.
We know this market well and are pleased to grow our EBITDA with this strong acquisition.
Finally, we'd like to highlight the recent publication of the RMR group's annual sustainability report.
This report provides insights accomplishments and data regarding our managers commitment to long term environmental goals investments and the investments in the platforms workforce and social and governance performance over the last year.
Also new this year to the report is a D. H C specific supplement that focuses on sustainability at our medical office life Sciences, and senior living assets you can find links to the report in the supplemental on our website.
I'll now turn the call over to Rick to provide details on our financial results.
Thanks, Jennifer and good morning, everyone.
For the second quarter, we reported normalized <unk> of negative <unk> <unk> per share, which represents a <unk> <unk> per share improvement from the first quarter.
Adjusted EBITDA in the second quarter was $48 million, which increased 23% or $9 $1 million from the first quarter.
On a consolidated basis same property cash basis, NOI increased eight 8% compared to the first quarter. The improvement was primarily driven by continued recovery in our shop segment.
With consolidated shop cash basis, NOI, increasing $6 $3 million.
Consolidated shop, NOI is now up approximately $13 million from its trough in the fourth quarter of 2021.
Interest expense of $56 million, representing a decrease of approximately $1 $2 million from the first quarter. Following a $500 million redemption of 975% senior notes in June .
This redemption reduces our annual interest expense by approximately $49 million.
As a result of this quarter's financial performance and the redemption of these senior notes net debt to adjusted EBITDA of 11, six times was almost two full turns lower than we reported last quarter.
As Jennifer mentioned at the end of the quarter.
We sold an additional 10% equity interest in the two building life Science complex located in the Boston Seaport District for $108 million.
If the proceeds from this recapitalization were included we would have ended the quarter with just under $1 billion of cash available to make investments in our portfolio and repay debt.
At quarter end, we had total outstanding debt of $3 1 billion.
And net debt was equal to just 28% of gross assets.
In the second quarter, we spent $64 9 million on capital expenditures across our portfolio, which included approximately $39 $3 million of Capex within the shop segment and $25 $5 million of capital was deployed in the office portfolio.
As we've previously discussed investing in our portfolio is a priority for us and we continue to develop plans to improve our properties in order to grow occupancy rental rates and the overall value of our portfolio.
That concludes our prepared remarks, operator, please open up the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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Pressing the keys.
The time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Bryan Maher with B Riley Securities. Please go ahead.
Good morning, Jeff kind of her and Rick and thank you for your prepared comments.
Just two or three questions for me. This morning, Jennifer can you walk us through the decision to buy the Fremont property for $82 million that we got a lot of.
Inbound here as to why you would either pay down debt or bought back a significant amount of stock at the current levels I'm sure. There's some restrictions in place there.
But can you just walk us through you know how it is she came to that decision.
Sure.
Good morning, Brian . Thank you for your question and you're right. There are restrictions there and our ability to do a stock buyback so.
There are obviously varying opinions about how we should be deploying capital.
We're of the opinion that taking a balanced approach paying down debt is important and we did pay down debt this quarter.
But we're also very interested in deploying capital to grow EBITDA and so on.
Stated.
I think pretty publicly for a long time that we've been interested in growing our medical office and life Sciences portfolio and we're at a point in the market today, where there are opportunities to buy really good assets.
At pricing that is very different than it was.
At the end of last year or last year cap rates are really widening.
And pricing is coming down and so.
Thinking about our portfolio for the long term.
Buying this asset which is in the second best life Sciences market in the United States in the San Francisco Bay area.
With our building.
Paid $925 a square foot for this building and in the recent years. Prior owners have spent close to $600 a foot improving this building so to get this very highly improved asset in a market that we know quite well at a six five cap rate.
<unk> made a lot of sense for us.
Okay. Thanks for that and then maybe kind of sticking them on on that line of questioning.
I think that when people look at the share price and what you have been through in the past year or two and honestly, it's kind of a pleasant surprise and not really be focusing on shop at the moment.
Given all that's happened there.
But.
Rick you talked about maybe you could elaborate a little bit more on this $1 billion of.
Cash or availability with the recent JV sale I didn't quite get that was that after the quarter and now you have $1 billion on top of whatever the 800 was we looked at in the press release and Jennifer as we think about that $1 billion. How should we expect that to kind of go out the door over the next 12 months to 24.
Okay.
Sure So Brian I'll try to clarify one point on the $108 million of proceeds from selling the 10% interest.
We actually legally closed on.
June 28th but the.
Contract with the buyer.
Actually had the proceeds come in in early July So as of June 30, we had a receivable of $109 million included in the other assets line of our balance sheet. So youll see if you look at the balance sheet we had.
About $868 million of cash and restricted cash.
We spoke previously about our restricted cash and how how flexible our banking group has been with US that's really an accommodation that we can continue to make investments and do things that will help our portfolio long term.
Instead of repaying debt that we wouldn't be able to redraw right away so that.
$868 million, along with $108 million of receivable at at June 30th is $976 million, which I described is just under $1 billion.
So and thanks, Rick and Brian as far as how we plan to deploy it I mean I think our plan remains as we've stated where we're looking to spend.
Spend capital and.
In a way that will help stabilize our senior living portfolio.
And then in our medical office and life Sciences asset we have capital that will.
That is redevelopment capital that is generally.
We're generally getting.
Low double digit returns on our redevelopment. So that's really our plan going forward is to continue with that.
And Rick and Rick can you remind us what the I know you're trying to grow EBITDA through a combination of sharp recovery in this acquisition in Fremont what are the restriction of hurdles that you're trying to call the year and what does that then allow you to do.
Sure, Brian Theres, a theres a couple they're both pretty related under our revolving credit facility. We have a fixed charge coverage ratio that is essentially waived through the end of the year. So we'll need to be back in compliance with that come January .
And again fixed charge coverage ratio as you can imagine is really our income compared to our our debt service essentially so.
Again, the redemption of the $500 million of 975% bonds certainly helps with that.
Our model has us very much on track to be back in compliance with that when we need to be.
And then similarly under our bonds and our credit agreement, we have a consolidated income available for debt service over debt service ratio. This is an incurrence test that we've talked about in the past, where we need to have a one five times coverage ratio in order to incur new debt.
No.
Again, that's the reason, we're sitting with a fully drawn revolver today and we're expecting to continue to be in this kind of cash rich position until we can repay the revolver once or that ratio was back above one five.
Our model has us back in compliance with that mid 'twenty. Three there are it is a test that is done on a pro forma basis. So there are some some variables.
So for example, if we were to refinance the remaining $500 million of 975% debt at a lower rate that'll help us get back in compliance sooner because it affects the denominator there the debt service.
It's something that we've modeled out but I mean.
You mentioned in your first question that it was nice to not be focused on the shop portfolio. I can tell you that I'm very focused on the shop portfolio. We are really trying to squeeze as much EBITDA out of that portfolio. As we can I think in order to get back in compliance we need to just be at a little over 60% of where the portfolio used to be and Thats frankly, not good enough for us.
We are very focused on maximizing value there.
Right from our standpoint on the sharp recovery looking at occupancy trending higher in rate trending higher.
Those are the two variables, we care about first and foremost we'll leave the cost controls which are important.
Up to you in the layers life of one more for me and then I'll hop back in the queue.
On the Phoenix vacancy, which.
Here you guys mentioned in prior calls still caught us a little off guard is there any other material vacancies known vacancies in the system that we should be thinking about as we model occupancy in the mob portfolio.
Yeah.
Thanks, Brian Yes, there is a vacancy we have.
A two building tenants in suburban Boston.
That is downsizing out of one of the buildings at the 125000 square foot building.
That building is actually going to come out of our same store set because we've had our development team take a look and they have plans to convert that space into GMP lab facility.
For which there is a great deal of activity in the Boston market as you can imagine.
So we are we are getting that back but we are.
Very quickly working to redevelop it into some pretty attractive space for the market.
Thanks, I'll stop there and let others ask and I'll hop back into queue. Thank you. Thank you.
Again, if you have a question. Please press Star then one.
Next question comes from Daniel <unk> with Bank of America. Please go ahead.
Yeah.
Hello.
Hey, Paul with Josh to NOI.
Quick question on if you can speak about the senior housing trends that youre seeing across the quarter into July .
Sure.
We're actually seeing.
An increase in.
Our operators are really focused on.
More robust and targeted marketing and sales strategies and the result of that has.
Sure.
Produced an increase in leads.
An increase in tours and the conversion rate from tours to move ins is up.
Occupancy as I mentioned in my prepared remarks is is up.
In both portfolios in in June and July so things are actually looking pretty positive.
Great. Thank you.
Thank you.
The next question comes from Aaron Hecht with JMP Securities. Please go ahead.
Hey, guys. Thanks for taking my questions sure.
Rick you mentioned that you guys are looking to get back to about 60% or you need to get to 60% internally to get to the.
Fixed charge coverage, you want 60% on the shop portfolio NOI.
That portfolio has changed a bit over time.
The baseline around $100 million of NOI that youre working from or can you can you set a goalpost.
Yeah, Aaron I think that's pretty accurate.
From where we are today again, if you look back at last quarter. The shop portfolio was essentially breakeven with just sorry going back to the first quarter of 153000.
<unk> of NOI. So the good news is it did grow this quarter and we expect that to continue.
The 62% was just kind of looking back at where we were historically in 2019.
Thank.
In order to get back to where we want to be it's about $100 million.
As you said and.
Yeah.
What's interesting about the shop portfolio is in order to get to that level, the margins would still be pretty substantially lower than what we expect long term.
The industry for example, often operates.
Independent living at much higher margins, but even assisted living and memory care.
Should be able to have a margin in the 2025% range pretty easily I think we need to get back to 10 to 11 in order to be back in compliance with.
With this incurrence tests, so that we can kind of get back to normal but.
Again, it feels very achievable, we just have to execute on it and we're really focused on that right now.
And I think last year, there may have been some noise in the NOI numbers I think some cares act funds is this a clean quarter in terms of the NOI that rolled through.
It's pretty clean there is a little bit of cares Act.
Money, it's about a $561000 increase from last quarter.
Cares Act funds, so we break that out in our supplemental you can you can find it there.
But I mean again I think some of that might continue on a go forward basis as some of these state programs.
We only recognize that when the cash is received and there is no further strings attached so.
Hopefully, we'll continue to look for those opportunities but <unk>.
Relatively clean.
Okay, and then what's the appetite to do more joint venture type deals and as the change in capital markets.
Adjusted your opinion on.
The viability of doing those types of.
Uh huh.
Restaurants, yeah.
It's a good question.
Our.
Joint venture partners would like to continue to grow our partnership.
And we're always looking to find properties that might makes sense for that partnership.
We haven't to date found any that that checked all those boxes.
But we might because they are very interested in growing our mob life Sciences JV.
Appreciate the thoughts.
And we have follow up from Bryan Maher with B Riley Securities. Please go ahead.
Thank you kind of sticking on that line of questioning on the JV, both vertex and the 10 office M. O B was there any material and to the extent there was can you quantify it to some degree difference in the rent per square foot of those properties versus the three remaining MLP lives.
Its properties.
No.
Our remaining portfolio is.
I guess.
I guess I should say the JV portfolio is very representative of our remaining portfolio and tenant mix and.
And rent and a weighted average lease term in all of the.
Metrics that we look at are very similar when we compare the two portfolios.
Okay, and then last for me on Torrey Pines. The news can you give us an update on that property is that now fully at the east or how far along are you on that property.
Yes, it is fully leased and we're working through our tenant improvement projects with the tenants. So we have it.
Wish we had more space to lease there because it was so successful, but yes, we're wrapping that up the tenant improvement projects will continue on.
Through through the year.
Thank you Jennifer Thank you.
This concludes our question and answer session.
Just one moment.
Okay.
Just one moment.
I will turn the call back over to Jennifer Francis.
<unk> remarks.
Thank you operator.
We're making demonstrated progress in driving the recovery of our shop results, reducing interest and <unk> expenses, and making enhancements across our portfolio. Our continued investment within our portfolio will help accelerate improvement to our results and we believe that we're on track to improve portfolio performance deliver earnings growth and maximize long term shareholder return.
Thank you for joining the call today, operator that concludes our call.
Thank you that's helpful.
So is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Yeah.