Q3 2023 Diversified Healthcare Trust Earnings Call
Good morning, everyone and welcome to the diversified Health Care Trust third quarter 2023 earnings Conference call.
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At this time I'd like to turn the floor over to Melissa Mccarthy manager of Investor Relations Ma'am. Please go ahead.
Thank you and good morning, welcome to the third quarter 2023 conference call.
First find health care chart.
Joining me on today's call are Jennifer Francis President and Chief Executive Officer, and Matt Brown, Chief Financial Officer and Treasurer.
Today's call includes a presentation by management, followed by a question and answer session with sell side analysts.
I'd 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 dht's beliefs and expectations as of today Thursday November 2nd 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 S. E T.
In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized and that's all net operating income or NOI and cash basis, net operating income or cash basis NOI.
Reconciliations 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 T. H D REIT 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.
Now I'd like to turn the call over to Jennifer.
Thank you Melissa and good morning, welcome to D C 's third quarter conference call.
I'd like to begin by welcoming Matt Brown, as our new Chief Financial Officer, and Treasurer, Matt has extensive experience at the RMR group, where he was responsible for the company's accounting function and he previously served as O P. I CFO for the past four years.
Matt joined to RMR in 2007 and for much of the time prior to becoming O. P. I CFO. He was responsible for D. H C. Its financial reporting I've been working with for years and welcome him to D. H C.
In early September we mutually agreed to terminate our merger agreement with OPI.
Each company agreed to bear its own costs and expenses in connection with the terminated transaction and it was agreed that neither party would pay a termination fee.
Beginning in late September we took the following steps to move forward.
First we engage B Riley securities as our financial advisor to help evaluate options to address our near term capital needs, including upcoming debt maturities.
These capital raising options may include asset sales joint ventures, and permissible financings that can include but are not limited to issuance of preferred equity or zero coupon bonds.
This process may lead to and include other options before we're finished.
Second we're in discussions with our bank group to possibly extend the maturity date of our credit facility and to amend certain covenants that would allow D. C. Additional flexibility to use proceeds from capital raising initiatives to pay off debt and fund the capital that we've recently deferred which is an important part of the recovery in our shop communities.
Third in addition to the deferral of certain redevelopment capital we've initiated a disposition strategy for a number of assets in order to increase liquidity at the company.
Our goal is to pay off maturing debt and restart the capital projects, we've deferred yes.
Yeah, that's that we've selected for disposition come from each of our operating segments and our geographically diverse.
Finally, the board of Trustees approved an amendment to our bylaws to reduce the allowed maximum percentage ownership of D. H C. Common stock from nine 8% to 5% in order to preserve cumulative accumulative net operating losses or Nols.
These nols are valuable to D. H C. M can be used to offset any taxable gains on asset sales and our disposition strategy as well as to offset other games in the future.
It's important to note that this new ownership limitation is applicable on a prospective basis and any owner of more than 5% of D. Six common shares as of November <unk> 2023 is not required to reduce their ownership to meet this requirement.
The sequencing and timing of our planned to address near term debt maturities and return D. C to growth is still to be determined but were.
Working diligently to advance this plan on all fronts and look forward to updating the investment community when appropriate.
Moving on to our third quarter results yesterday, we reported normalized <unk> of three cents per share, which is an increase which is an increase from negative six cents per share in the prior year quarter.
This improvement was driven largely by growth in our shop segment.
There was also highlighted by a 13, 2% increase in revenue of 370 basis point increase in occupancy to 78, 4%.
The 7% increase in average monthly rate over the prior year.
The overall backdrop in the senior living industry continues to be supportive of a recovery.
New supply and construction starts boats both remained at their lowest levels in years the.
The overall labor market has become more favorable and there is evidence of decreasing labor costs across the industry.
Evidence of the positive momentum in the labor market can be seen both on an industry level with wage pressures decreasing sequentially from Q2.
And with M D ph D. As shop segment within 11, 3 million dollar decrease or 64% reduction in contract labor from the prior year.
Generally chop progress can be attributable to strategic strategic operational improvements strong industry fundamentals and our capital investments into our communities.
During the quarter, we invested $49 million, bringing year to date shop spend to $128 million.
However cost for our shop operators remain elevated due to insurance premium increases.
Hearing new staff and seasonal expenses, such as the impact of heat waves across the United States. This summer.
Well the sharp recovery remains pressured by higher operating expenses and our deferral of capital our operators continue to achieve rental rate growth and occupancy gains above the industry benchmark for comparable properties year over year.
Moving into our office portfolio and our same property office portfolio rental income increased less than 1% and cash basis NOI decreased two 7% compared to the third quarter of last year, which Matt will address shortly.
We ended the quarter at 93% occupancy in this portfolio, which is an 80% basis point increase from a year ago.
There was strong leasing activity on our office portfolio during the third quarter as evidenced by 289000 square feet of new and renewal leases signed.
With a 14%, 14.8% roll up in rent and a weighted average lease term of eight one years at the edge.
End of the quarter, we had a leasing pipeline of over 670000 square feet.
I'll now turn the call over to Matt to review our financial results.
Thanks, Jennifer and good morning, everyone normalized <unk> for the third quarter was $8 $3 million or <unk> <unk> per share an increase of $22 $5 million from negative $14 million in the prior year.
While we are pleased with this improvement sequentially normalized <unk> declined $3 $8 million, mainly driven by a $2 million decline in our shop segment that I'll address shortly and an increase in interest expense as a result of continued increases in silver.
Our consolidated same property cash basis, NOI was $56 $2 million, which is a $22 $1 million or 64, 6% year over year improvement the changes by segment are as follows.
Same property cash basis, NOI was $27 $6 million, representing a year over year decline of $754000, mainly driven by increased expenses due to a tenant contraction.
On a sequential quarter basis cash basis, NOI declined $1 $9 million in line with expectations based on higher cooling costs in the summer months.
Same property cash basis, NOI was $21 million, representing a significant year over year increase of $22 $8 million.
On a sequential quarter basis cash basis, NOI declined $2 million made up of the following an increase.
<unk> expenses of $9 $8 million, most notably $5 $3 million in wages payroll taxes and benefits $2 $6 million in insurance premium increases and $2 $3 million from seasonal cooling costs in the summer months.
These expense increases were partially offset by an increase in revenue of $7 $8 million driven by a 100 basis point increase in occupancy.
Turning to the balance sheet.
We ended the quarter with over $279 million in cash and restricted cash.
As a reminder, we have $700 million of debt maturing in the first half of 2024 and are not currently in compliance with our debt incurrence covenants, which prevents us from issuing any new debt or refinancing existing debt.
Our consolidated income available for debt service to annual debt service coverage grew to 1.17 times from 1.08 times last quarter below the one five times minimum requirement.
Annual EBITDA shortfall to achieve compliance is $61 million.
As we look forward, we believe we have several viable options available to us to address our near term capital needs and as Jennifer outlined we are pursuing all of these options concurrently.
A significant pool of unencumbered assets with a gross book value of approximately $5 $9 billion available to pursue various strategies.
Regarding our credit facility, we have added a property in Hawaii to satisfy the aggregate appraised value of the collateral properties requirement. Following notice I mean, non monetary default in June 2023.
We are currently engaging in discussions to possibly extend the maturity date of the credit facility and to amend certain covenants to provide D. H C. Additional flexibility to use proceeds from capital raising initiatives.
As we were in ongoing negotiations, we will not provide detail on specific terms, but look forward to disclosing more information when available.
As part of our liquidity management and financing strategies, we have begun to defer certain redevelopment capital across our portfolio.
As a result, we currently expect aggregate capital expenditures to total $240 million to $260 million in 2023 from an initial forecast of approximately $315 million and $200 million to $220 million in 2024 from an initial forecast of approximately $330 million.
Just on the execution of our financing strategies the path to covenant compliance will impact the timing of restarting these deferred projects to continue to drive the sharp recovery.
In closing we are actively evaluating all strategies to strengthen DH. These balance sheet regain debt covenant compliance source additional capital to fund our ongoing sharp recovery and best position the company for long term growth.
We currently expect to regain that compliance by the end of 2024 and based on the execution of certain financing strategies being contemplated it could lead to covenant compliance sooner.
That concludes our prepared remarks, operator, please open the line for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
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Our first question today comes from Bryan.
Mayor from B Riley FBR. Please go ahead with your question.
Oh, Thank you and good morning.
Couple from me this morning, let's start with the Covenant compliance I figure at 1.17.
Our model had you at one point to two for the quarter. So we're not too far off I think the prior commentary from management was by mid year.
'twenty 'twenty four and I think Matt you just said by year end 2024, barring some changes you know in dispositions and what have you.
What what's pushing pushing that back again, you know, we're kind of getting to it in the second quarter of 2024.
I think Brian is really relates to the growth in our shop segment, we do expect to see that continue to improve but as you saw in this quarter's results. We did have some negative impact from operating expenses. Some of those are seasonal. However, some of those are going to continue such as <unk>.
Ages are in insurance costs. So we think realistically you know by the end of 'twenty for makes sense. However, if if the shop growth is in excess of forecast it.
It could be closer to the middle of the year I just.
Want to add to that Brian that we you know Matt talked about the deferral of capital in a in his prepared remarks, and and we have deferred capital in and that capital deferral will have an impact on.
Our operator's ability to to grow rates and drink while occupancy I mean, obviously.
We are still projecting real growth in the shop segment, but as soon as we can start redeploying that deferred capital, we'll be able to our operators will be able to push results.
Yeah, and I can understand and agree with deferring some capital that being said at properties, where you might have previously done a deep dive in a refresh you know instead, maybe changing carpet and you know putting paint on it you know maybe at <unk>.
Capital improvement light.
But still something that refreshes. The property is is that something that's being considered.
Without a doubt I mean, we're still expecting in 'twenty for $200 million to $220 million of capital spend so we've deferred capital we havent suspended capital. So there is still there are still improvements going on and we will see the results from those improvements.
Okay moving on to the bylaws changes I found that to be interesting specifically as it relates to the Nols matters can you share with us what the current Nols available are.
Sure at DHT are there currently in excess of $300 million and for our Trs entity, either in excess of $100 million, so over $400 million in the aggregate.
Right and then we noticed that the other operators within shopped at a little bit better than our expectations and you know the five star stuff was a little lighter than we had thought is there anything going on there, particularly in the other operators that can further juice the NOI coming out of those properties.
And they're just really having positive results growing occupancy pushing rate I think there's still a great deal of opportunity with our other operators and with our Laris took to push rate and and you know continuing to push the rate associated.
Weighted with level of care and making sure that residents are at the appropriate level of care and so now they're just you know they're there for the most part doing a really good job.
Shifting gears to the asset sales and I know you probably don't want to get into too much detail on that but can you give us any more color as to if there you know more along the lines of one offs or if there are portfolios I think you've talked about in your prepared comments across segments and across geographies.
Can you give us any more color or level of magnitude of proceeds etc.
Yeah. So they are it is across the properties are across all of our operating segments. Its a pretty challenging time right now to sell assets. You know, we feel pretty positive about the properties that we picked we picked you know the assets that we believe have them.
Desirable characteristics for buyers.
Yeah, it's really not a market for large portfolio sales. So I think that these dispositions will be in small bite.
Bite size dispositions 123 assets, maybe some much smaller portfolios, but it's certainly not you know one or two or three large portfolios.
It's a pretty you know its like I said, it's a challenging time to sell assets, but because of the quality of these assets, we think that will be successful.
Right now where we're out with.
You know I was close to 1 billion in assets that fleets, what's that worth.
We're engaging brokers with.
That's good color and you know we've come across articles, saying that you know entities like being capital have an over $2 billion fund you know looking to buy assets and in your world and I suspect that you know ventas and wall tower might be interested as well, but I'll leave that up to you guys in your.
Brokers like last for me.
And I know you didn't really want to go too far down this road on the credit facility.
But would you say that the bank group is receptive to your overtures and if you were to look for an extension or you're kind of thinking six months or a year or just you know any broad strokes there would be really helpful.
Yeah, Brian it's tough to provide too much color because we are in ongoing negotiations thus far we've been dealing with the admin agent and we believe we've reached terms with them and now it's really engaging in the rest of the bank group and we need a Peru.
From a 100% as it relates to a maturity extension, we'd love to get a year, but it's too early to really definitively say at this point.
Okay. Thank you very much.
Thanks, Brian.
Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May press Star and two.
Again that is star and then wanted to join the question queue.
And ladies and gentlemen, I'm showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Thank you and thank you all for joining our call today, operator that concludes our call.
Yeah.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.