Q1 2023 Diversified Healthcare Trust Earnings Call
Good morning, and welcome to the diversified healthcare Trust first quarter 2023 earnings conference call.
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I would now like to turn the conference over to Melissa Mccarthy.
Manager of Investor Relations. Please go ahead.
Yeah.
Good morning, and welcome to diversified Health care Trust call covering first quarter of 2023 result.
Joining me on today's call are Jennifer Francis President and Chief Executive Officer, and Rick <unk>, 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 recording and retransmission of today's conference call are strictly prohibited without the prior written consent of the company.
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 D. H C D H C beliefs and expectations as of today Tuesday may nine 2023.
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.
Reconciliation of net income or loss to these non-GAAP figures are available in our financial results package, which can be found on our website at www Dot D. H C reached dotcom.
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.
On today's call, we will be discussing the planned merger with office properties income trust in our prepared remarks.
We have not yet filed a preliminary joint proxy and registration statement with the SEC and therefore will not be taking questions about the merger and now I'd like to turn the call over to Jennifer.
You Melissa and good morning, Thank you for joining us on today's first quarter 2023 conference call.
I'd like to begin the call by highlighting the enhanced earnings release format that we issued last night. We believe this combined presentation of information will be helpful for analysts and investors to efficiently Digest the information about our company and result.
Before I review D. H <unk> performance for the first quarter of 2023, I will discuss our recently announced merger with office properties income Trust or OPI.
THC is facing a number of short term challenges.
Well, we've been encouraged to see the turnaround in our senior housing operating portfolio begin to materialize. The recovery has not occurred fast enough to address several concerns <unk>.
First due to our debt due to our debt covenants were restricted from issuing or refinancing debt.
Without the financial flexibility afforded by the merger, we do not expect to be in compliance with these debt covenants before $700 million of debt becomes due in 'twenty 'twenty four.
Second to ensure the successful turnaround of the communities in our shop segment and to realize its long term value potential additional investment is needed.
Standalone D. H C has insufficient liquidity to continue to fund this critical capital.
And third due to these capital constraints, we do not believe we would be in a position to increase D. H. These current annual dividend of four cents per share until 2025.
The merger with the OPI addresses all of these challenges and benefits D C. Both financially and strategically.
Following the completion of the merger the combined company will immediately be in compliance with debt covenants and will have a greater scale and diversity with access to multiple multiple capital sources to fund the business and address upcoming debt maturities.
The merger is immediately accretive to our leverage as well as normalized F. F O N C. A D.
In addition, the pro rata annual dividend represents a 267% immediate increase for DHT shareholders.
Strategically the merger provides the necessary liquidity to continue with the capital deployment strategy needed to fund the sharp turnaround underway.
Not only does this mutually beneficial combination address the near term challenges in our business. It also provides more long term growth opportunity for OPI as it navigates continued headwinds facing its traditional office portfolio.
H C shareholders will benefit from that upside as well.
By creating a stronger more diversified REIT with a broad portfolio and defensive tenant base. We believe the merger will unlock significant long term growth potential and value creation opportunities.
We continue to expect the transaction to close in the third quarter of 2023.
And while we focus on completing this mutually beneficial combination we're continuing to take steps to increase operating efficiencies and the communities in our shop segment and improve our bottom line. So the we entered the combination from a position of operational strength.
With that I'll move to D. H These first quarter results.
After market close yesterday D. H C reported normalized <unk> of <unk> per share for the first quarter.
The year over year and sequential improvement in normalized F. F O from negative nine cents per share and <unk> per share respectively was driven by several positive trends in our shop segment during the first quarter.
The first positive trend is the continuing occupancy recovery.
Our shop occupancy increased 390 basis points year over year to 76, 9% and shop NOI increased by $17 $1 million in the same period.
We exceeded the net Nick benchmark for occupancy growth by 30 basis points. During what is generally considered a seasonably weak quarter.
New supply continues to be muted from pandemic related slowdowns and construction starts have been held in check by high construction costs and the limited availability of financing.
It should continue to support our sharp recovery as should our operators continued focus on marketing and sales training.
The second positive trend is NOI margin growth.
Our shop segments margins increased by 610 basis points over Q1, 'twenty, two and 330 basis points sequentially as operating efficiencies drove more incremental revenue to the bottom line.
The third positive trend is the decrease in contract labor expenses.
There's been a clear reduction in agency costs late in agency labor costs as our operators has have been effective in decreasing the use of agency labor by about 50% from last quarter to the lowest level since Q2 'twenty one.
In fact in some markets our operators are reporting the cost gap between agency and in house staffing is narrowing so that agency use when needed is less cost prohibitive than it's been in the past few years.
Turning to our office portfolio segment before I discuss this segment's results I want to acknowledge the recent publication of the RMR group's annual sustainability report, which provides a comprehensive overview of our managers commitment to long term ESG goals were.
We're deeply committed to enhancing D. She's corporate sustainability practices and continue to advance our sustainability initiatives you can find links to the report and the tear sheets specific to D. H. These highlights on our website at D. H C Beach Dot com.
Onto the results.
Rental income for our same property office portfolio segment increased three 1% and cash basis, NOI increased seven 7% compared to the first quarter of last year.
Our leasing activity in our office portfolio, we executed 72000 square feet of new and renewal leases in the quarter with average roll up in rent of 17, 9% and a weighted average lease term of eight nine years.
We ended the quarter at 91% occupancy in our same property office portfolio segment and had a leasing pipeline of just under 1 million square feet at quarter end roughly in line with our pipeline in the fourth quarter we.
We have close to 530000 square feet of transactions or 53% of our pipeline where leases have been signed subsequent to quarter end or are in letter of intent stage with leases being negotiated.
I'd like to provide a quick update on our wellness centers, which accounted for for six 7% of our first quarter NOI as a reminder, in January we terminated the leases for three wellness centers located in Tampa, Atlanta, and the suburban Washington D C area.
Since then we've signed leases for all three locations two for 20 years with an existing tenant life time athletics for the clubs in Atlanta, and Tampa and 115 year lease with a strong regional wellness club operator, operator in the suburban D C property.
We're encouraged that this portfolio was quickly stabilized a testament to the RMR group's strong tenant relationship management and our well located properties.
Now I'd also like to address the information that was included in our financial results package and Form 10-Q filed yesterday.
As I've stated a few times the sharp recovery is underway, but it is not happening fast enough.
Current conditions raise substantial doubt about our company's ability to continue as a going concern as a standalone company.
Rick will go into more detail on our cash and balance sheet position shortly but.
Based on our current cash balance and projected cash needs for the next 12 months, we need to take action to fund our operating capital requirements and meet our debt obligations.
This is another reason why the merger with OPI will benefit D. H C.
I'll now turn the call over to Rick who will provide more details on our financial results.
Thanks, Jennifer and good morning, everyone.
For the first quarter, we reported normalized <unk> of $12 $5 million or <unk> per share.
Normalized <unk> improved $34.4 million from the first quarter of 2022, and adjusted EBITDA increased $23 $8 million or 61% to $62 $7 million.
Our consolidated cash basis, NOI increased $16 $8 million or 42% from the first quarter last year to approximately $57 million.
This increase was attributable to significant improvements in our shop segment, resulting in an increase of $17 $1 million of cash basis NOI.
We had previously said that many of our communities, we're getting to occupancy levels, where we expected to see margin expansion as they bring in additional residents and are better able to leverage fixed cost and we are beginning to see that.
Occupancy in our shop segment increased 390 basis points since the first quarter of last year, and 60 basis points from the fourth quarter of 2022.
Our operators were also able to increase average monthly rates eight 2% from the first quarter of 2022 and over 6% from the fourth quarter.
These increases in occupancy and rates translated to a 13, 9% year over year increase in shop revenues.
Property operating expenses increased just six 9% and margin improved 610 basis points.
For the first quarter of 128 of our communities produced positive NOI of $31 3 million an improvement from last quarter. When we had 111 communities with positive NOI. These.
These communities.
Had an average occupancy of 83.3% during the first quarter and an average margin of 17%.
Further 74 of these 128 positive NOI communities had occupancies below 90% and margins of just 14%, which we believe illustrates that there is still considerable room for financial improvement in these communities that are on the path towards stabilization.
The remaining 102 community has produced negative NOI of $13 $5 million with average occupancy of 66, 1% for the first quarter, which is an improvement from the fourth quarter. When we had 119 communities that generated $18 $7 million of negative NOI.
67 communities, where under 75% occupied.
These communities will continue to focus on occupancy rate and expense control as part of their business plans.
Interest expense was $47 $8 million for the first quarter, representing a 16, 4% reduction from a year ago attributable to the $500 million prepayment of 975% senior notes in June of 2022, and the repayments of our credit facility totaling $250 million during the quarter.
As a reminder, in February we amended our credit facility and reduce the size of the facility in exchange for continued covenant relief.
The weighted average interest rate on our credit facility was seven 6% during the first quarter compared to two 9% a year ago.
As of March 31st DHT had approximately $382 $7 million of cash and restricted cash.
We are encouraged that our shop segment is beginning to improve but the recovery has not been fast enough as Jennifer noted as of today, we have $700 million of debt maturing in the next 12 months and our debt incurrence covenants prevent us from refinancing are issuing new debt.
In April we announced the plan to merge with OPI, but we cannot provide assurance that the merger will close.
If the merger does not close we will be forced to defer capital investments in our portfolio, which will substantially delay the turnaround of our shop segment, and we will look to raise additional capital, but we are limited in the financings. We may seek as we cannot incur any debt.
Due to capital market conditions as of today, we do not believe it is probable that we will raise sufficient capital to alleviate the substantial doubt about our ability to continue as a going concern.
However, the merger with OPI will result in a combined company that will immediately be in compliance with all financial covenants and be able to refinance debt.
The merger will be immediately accretive to D. H C. F F O and provide shareholders with an annualized dividend of $1 per share of the combined company.
We are actively working towards closing the merger and remain committed to executing our business plan to create long term value. We are confident that the merger with OPI will provide the necessary liquidity and financial flexibility to address all near term debt maturities and better position us for long term growth.
That concludes our prepared remarks, operator, please open up the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brian Meredith from B Riley. Please Brian go ahead.
Thank you and good morning, Jennifer and wreck just a couple of questions from me this morning.
Can you give us a little bit more color on the occupancy trends that was just the one metric that was a little shy of what we were looking for and how the renovations going on at the property. This year are impacting.
The occupancy is down 50 bps 100 bps from where it should be and maybe a little color on the occupancy uplift of the properties that did complete renovations last year.
Brian Thanks for the question I think just generally to talk about occupancy.
As you know Q4, and Q1 are traditionally the seasonally slow quarters.
Q2, and Q3 are traditionally viewed as kind of the selling season for senior living so we.
And are optimistic that we'll see continued growth.
In occupancy as we go forward the focus really though is on growing NOI.
So we will certainly continue to grow occupancy, but not at the expense of rate or NOI. So we will see where that goes.
The other.
Part of your question was really about the disruption from some of the capital projects.
We do have a significant number of projects. There's a number of you know fairly light refresh projects that are not that disruptive. We can work around residents pretty easily but there are a number of projects that the take units out of service and we have to leave rooms open. So that we can move residents and get some of the work done but you know it.
It's hard to quantify exactly.
What the occupancy impact of the of that is I mean, taking rooms offline is not great but at the same time.
Some of our sales folks can sell the dream and see the progress happening at the communities. There I know they've done some hard hat tours and things like that with some some prospective residents. So.
You know overall I think residents are pleased that where were reinvesting in the communities. It's certainly given the workforce and the communities.
Renewed hope that the buildings on the right path and we're going to continue to push so the focus again really is on NOI, but we do expect to continue to see occupancy growth through the rest of the year.
Oh, great and yeah, I mean, NOI you know clearly up from a dollar standpoint is the most important we've been hearing.
Yeah, not only from you guys, but your competitors publicly traded senior housing companies about everybody pushing rate higher it seems like you know that kind of 8% to 10% ZIP code is where most people are settling in.
Are you seeing any pushback at all in the market to those increases that.
Or acceptance beyond what you would expect that would get you to maybe go outside that band.
Well there may have been you know that there was pushed back now and then I think everybody is pretty accepting of the increases in.
In right I mean, it is happening as you said, it's happening in our communities and the communities of our peers. So.
With with the inflationary pressures and and the capital that we're deploying into these communities I think the residents are pretty understanding.
And so I think there'll be the ability to continue to push rate and then you know.
Really our operators are also looking very closely at the cost associated with the varying levels of care in our assisted living communities and charging appropriately.
Appropriately for that as well.
Okay, and then just lastly on the Capex.
I'm sure, it's going to be variable depending upon how the next month or two plays out clearly, but as it stands now what is the capex trend for the balance of this year.
So I you know we've been talking about Capex.
Of about 200 million.
In the shop portfolio, specifically $200 million a year in 'twenty, three and 'twenty four and that hasn't really changed I think worried about 350 million a year in 'twenty three and 24 in total.
Okay. Thank you.
Thanks, Brian .
And I would like to remind you if you would like to pose a question. Please press star one.
Okay.
Yeah.
At this point, we are concluding our question and answer session and I would like to turn the conference back over to Jennifer Francis President and Chief Executive Officer for some closing remarks go ahead.
Thank you. Thank you operator, and thank you all for joining our call today.
That concludes our call we look forward to seeing many of you at the B Riley conference in May and at NAREIT in June .
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.