Q3 2024 Diversified Healthcare Trust Earnings Call
Good morning and welcome to the diversified healthcare trust, 3rd quarter, 2024 earnings conference call. All participants will be in listen only mode.
Should you need assistance? Please signally conference specialists by pressing star, then zero on your telephone keypad.
After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask you a question, you may press star than one on your telephone keypad. To withdraw your question, please press star than two. Please note this event is being recorded. I would now like to turn the conference over to Melissa McCarthy, manager of investor relations. Please go ahead.
Melissa McCarthy: Thank you, Drew. Good morning. During the on-state calling our Crystal Allato President and Chief Executive Officer, and Matt Brown, Chief Financial Officer, and Director.
Today it's called Inclusive Presentation by Management, followed by Question and Answer session with Southside Anna.
Melissa McCarthy: Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.
Melissa McCarthy: Today's conference call contains four looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws.
These four looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, November 5th, 2024.
Melissa McCarthy: In addition, this call may contain non-GAAP numbers, including Normalized Funds from Operation or Normalized FFO.
Melissa McCarthy: Net Operating Income, or NOI, and Cash Basis Net Operating Income, or Cash Basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcbreach.com.
Melissa McCarthy: Actual results may differ materially from those projected in any forelooking statement.
Melissa McCarthy: Additional information concerning factors that could cause those differences is contained in our filings with the SEC.
Melissa McCarthy: Investors are cautioned not to place under-reliance upon any forward-looking statements.
Melissa McCarthy: And finally, we will be providing guidance on this call, including SHOP, Net Operating Income, or SHOP NOI.
Melissa McCarthy: We are not providing a reconciliation of these non-GAAP measures.
Melissa McCarthy: as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Craig.
Craig: Thank you, Melissa. Good morning, everyone, and thank you for joining our call. On today's call, I will provide a high-level overview of DHC's third quarter financial and operating results, along with an update on key strategic initiatives for the remainder of 2024 and into next year.
Craig: Later, Matt will provide more detail on our third quarter financial results and an update on our full year guidance.
Melissa McCarthy: to our shop segment, including a sequential 40 basis point improvement and same store occupancy.
Melissa McCarthy: and moderate revenue growth which was offset by cost increases resulting from higher seasonal expenses, salaries and wages, and certain one-time items.
Melissa McCarthy: Compared to the prior year, our consolidated shop NOI increased 32.6% supported by operational improvements and a favorable market trends in our senior housing portfolio.
Melissa McCarthy: Turning to our medical office and life science portfolio performance.
Melissa McCarthy: Same store occupancy decreased by 150 basis points to 87.8%, largely due to the previously communicated known vacate of a building in Raleigh, Durham, North Carolina, reflecting 126,000 square feet.
Melissa McCarthy: As we look ahead.
Melissa McCarthy: Roughly 9% of our annualized revenue is scheduled to expire through year-end.
Melissa McCarthy: 2025. Our largest known vacate during this period is with a tenant whose expiration is in the first quarter of 2025 and located in St. Louis, Missouri, occupying close to 233,000 square feet or 2.2% of annualized revenue.
Melissa McCarthy: We have various initiatives underway to address vacancies and leasing of our properties, which includes select dispositions along with active asset management.
Melissa McCarthy: Complementing our retention and absorption outlook, we maintain an active leasing pipeline with close to 400,000 square feet of activity, including potential absorption of 117,000 square feet and an overall double-digit rent roll-up.
Melissa McCarthy: Turning to our shot performance.
Melissa McCarthy: While we are pleased with our year-over-year revenue and NOI growth of 6.4% and 32.6% respectively,
Melissa McCarthy: Quarterly progress remains subdued in part due to slower occupancy growth and varying expense impacts that fluctuate quarter to quarter.
Melissa McCarthy: Rep 4 increased by 80 basis points sequentially, primarily driven by growth within IL, skilled nursing, and levels of care, along with an overall decline in movement incentives.
Melissa McCarthy: Expense for increased 140 basis points largely due to an increase in salaries and wages, seasonal utilities, and certain one-time items.
Melissa McCarthy: These costs, along with muted shop occupancy growth, resulted in an NOI of $27.4 million for the quarter, representing a 32.6% increase over Q3 of last year, but a decline sequentially.
Melissa McCarthy: We remain committed to our portfolio transition strategy and the initial progress we are making reinforces our belief that we are taking the right steps to drive sustainable long-term growth.
Melissa McCarthy: That said, we recognize that this process will require additional time to unfold and as a result we are lowering our guidance range for the year.
Melissa McCarthy: We are conducting a top-to-bottom analysis of our portfolio, considering various factors such as performance metric benchmarks, densification of communities,
Melissa McCarthy: synergy opportunities, and operator relationships in key markets, a process which will include the expansion of certain key initiatives over the next several quarters.
Melissa McCarthy: The goal of this work is to ensure that as our strategy in the broader market evolves, our portfolio continues to comprise the right assets that will position DHC to benefit from embedded NOI upside.
Melissa McCarthy: As part of this process, we transitioned 13 communities earlier this year and have over 20 renovations scheduled for completion in Q4 2024.
Melissa McCarthy: Further, we are expanding our disposition program to include a total of 32 shop communities comprised of 2,422 units, including three under agreement or LOI to sell, and 29 communities in various stages of marketing.
Melissa McCarthy: Collectively for the quarter, these communities generated negative NOIs of two million dollars.
Melissa McCarthy: with occupancy of 75.2% and we are assuming a valuation range from $55,000 to $65,000 per unit.
Melissa McCarthy: The decreased range of per-unit value from our prior call is due to the additional communities selected for sale, which includes smaller unit counts, negative NOI, and that are generally located in more tertiary markets.
Melissa McCarthy: In fact, removing the 32 shop assets that we are in the process of selling would improve our third quarter NOI margin by 170 basis points and occupancy by 50 basis points.
Melissa McCarthy: Outside of shop, DEC is currently under agreements or letters of intent to sell 25 properties for gross proceeds of $333 million.
Melissa McCarthy: This includes our previously announced agreement to sell 18 Triple Net Lease Senior Living Communities, which is currently scheduled to close in the fourth quarter of 2024.
Melissa McCarthy: This opportunistic sale monetizes this portfolio and highlights our ability to achieve premium valuations reflected by a valuation of more than $150,000 per unit and an attractive in-place cap rate of 7.3 percent.
Melissa McCarthy: proceeds generated from the sale and certain of our other properties including our life science campus in San Diego, California.
Melissa McCarthy: will allow us to reduce our leverage as we accredibly pay down our zero-coupon senior secure notes due in 2026 with up to $300 million in potential proceeds from the sale of these collateral properties.
Melissa McCarthy: We also wanted to provide an update on our refinancing strategy to address 440 million in maturities we have due in June 2025.
Melissa McCarthy: We are actively engaged with GSC agencies to refinance this debt. However, given the size of the financing and a more thorough understanding of the overall execution and timeline with the agencies,
Melissa McCarthy: We have broadened our strategy to include financing of smaller tranches, tapping diversified financing sources from institutional real estate lenders, along with the agencies.
Melissa McCarthy: I will let Matt provide more details, however the key takeaway is that we believe this change will provide for a more favorable financing outcome.
Melissa McCarthy: Despite our mixed performance results for the quarter, we remain focused on advancing initiatives to increase occupancy and improve community performance in support of our shop turnaround.
Melissa McCarthy: As highlighted earlier, our top-to-bottom evaluation of the portfolio, including certain initiatives undertaken by our operators, are key pillars that will position DAC to benefit from embedded NOI upside. Now I'd like to turn the call over to Matt.
Speaker Change: Normalized FFO for the third quarter was four million dollars or two cents per share. Our same property cash basis NOI was sixty five point eight million dollars representing a sixteen point one percent improvement year-over-year and a one point five percent decline sequentially.
Speaker Change: The sequential decline was mainly caused by our medical office and life science segment that saw same property occupancy drop 150 basis points to 87.8%.
Speaker Change: Shop highlights for our same property portfolio include a 5.4% increase in average monthly rate year-over-year.
Speaker Change: Occupancy growth of 130 basis points year-over-year and 40 basis points sequentially and margin expansion of 240 basis points year-over-year.
Speaker Change: These factors combine to deliver the 6.4% year-over-year revenue growth Chris touched on earlier.
Speaker Change: Despite this strong progress on the top line, we experienced certain expense increases negatively impacting results that totaled 2.5 million dollars and included an insurance deductible related to a fire at a community and water intrusion remediation that we did not factor into our quarterly shop guidance.
Speaker Change: On a positive note on expense management, we successfully renewed our annual insurance program effective July 1st, resulting in a $6.8 million, or 26% reduction in our premiums, a benefit we anticipate to realize in the upcoming quarters.
Speaker Change: Lastly, as it relates to this quarter's earnings, G&A expense includes a $6.9 million estimated business management incentive fee. Excluding estimated incentive fees, G&A expense would have been $7 million in line with Q2 results.
Speaker Change: We do not include incentive fee expense in normalized FFO or adjusted EBITDA RE until the fourth quarter when the final incentive fee amount is determined, if any.
Speaker Change: Turning to Liquidity, Financing Activities and CapEx.
Melissa McCarthy: We ended the quarter with over $256 million of cash.
Melissa McCarthy: As discussed on prior earnings calls, our financing strategy to address the remaining $440 million of unsecured senior notes maturing in June of 2025 was to do a large, single issuance of agency financing on certain shop communities.
Melissa McCarthy: As a result of this, we have quickly pivoted to engage with multiple lenders, and based on dialogue to date, we expect the terms to be in line with those the agencies are willing to provide.
Speaker Change: This expanded outreach, which given the current environment, best positions DHC to creatively address our 2025 maturity as soon as possible with the most competitive terms available.
Speaker Change: To date, we have received a formal quote with one government agency for approximately $106 million in loan proceeds and are in active negotiations with two other lenders to finance certain of the initial targeted communities.
Speaker Change: If our financing strategy does not produce our target proceeds to repay our June 2025 bonds, we can use a portion of our $256 million cash position and proceeds from property dispositions that are in various stages.
Speaker Change: Approximately three hundred million dollars of these proceeds relate to properties that secure our zero coupon bond and as a result are required to be used to partially redeem our 940 million dollar senior secured notes due in January 2026.
Speaker Change: Highlighting significant progress towards the refinancing of this bond.
Speaker Change: Regarding our full year guidance, our CapEx guidance for the full year 2024 is reduced to 180 to $190 million, with $118 million spent through September 30th.
Speaker Change: Our full year capex guidance includes shop capex of 130 to 140 million dollars
Speaker Change: Based on our Q3 shop results falling short of guidance, we are lowering our full year shop NOI guidance to $102 to $107 million.
Speaker Change: This revised guidance takes into account additional insurance and remediation costs from the recent hurricanes negatively impacting Q4 results.
Speaker Change: As we communicated in February, our full-year shop NOI guidance assumed occupancy rates increasing by approximately 400 basis points and that our NOI growth would ramp up in the second half of 2024.
Speaker Change: Certain communities have negatively impacted our initial guidance targets, and as Chris noted, we are advancing our disposition program by targeting communities that are weighing down improved results in line with our initial forecast.
Speaker Change: In summary, we are continuing to make progress on our shop turnaround despite bottom-line results that were below our expectations.
Speaker Change: As we look ahead, we remain bullish on the senior living industry given the tailwind supporting it. We will continue to leverage the strength of our portfolio and opportunistically pursue property dispositions, transitions, and refinancing strategies to fuel NOI growth and value creation for all of our stakeholders.
Speaker Change: That concludes our prepared remarks. Operator, please open the line for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Brian Maher with B-Riley Securities. Please go ahead.
Brian Maher: Thank you. Good morning. Quite a lot to unpack there. Maybe starting with the GSE agency debt.
Brian Maher: Issuances. Can you give us a little bit more color? I think you said that you're in the market on a hundred and...
Brian Maher: Six million, I think I might have that right of proceeds with the agencies. How many property how much more do you think you go down? I want the road with the agency debt versus other lenders and maybe you can also share with us What kind of terms were looking at here?
Speaker Change: Hey Brian, good morning. Yes, you're right. It was about $106 million in proceeds. We're at the phase of a formal quote received that we're currently negotiating based off the terms that were put in that.
Brian Maher: That is a financing on eight of our communities.
Brian Maher: And we are also looking at another government agency to do a financing on a handful of communities or so, as well as expanding our pool of lenders to achieve the maximum proceeds available. So that's where we are currently. As it relates to terms, because we're still in a negotiation phase, I don't want to go into too much detail. But a lot of the terms are similar to what we've talked about previously, including a
Brian Maher: As well as for interest rates still in that six to six and a half percent range.
Speaker Change: Okay, thanks. That's helpful. And you're sitting on a lot of cash, you know, $250-ish million, $100 million coming in here, $50 million that you can bring in from other asset sales aside from the $300 and
Speaker Change: Unknown Executive, Kevin Brady, Melissa Mccarthy, Matthew Brown
Speaker Change: Until you have the whole bucket and do it all at once.
Speaker Change: Yeah, Brian, you know, we're advancing our financing strategy here. So you know, we're first focused on bringing in proceeds there. But you're right, we have adequate cash and likely will start chipping away at that.
Brian Maher: Okay, I think the big frustration here today and with the stock in particular is the shop NOI you know slowness of Recovery, I mean we all agree that there is recovery But I think that there's some disappointment. Can you drill down a little bit further on? Why the costs have persisted to increase so much that is
Brian Maher: environment where we're generally hearing
Brian Maher: that costs are becoming not quite the, you know, headwind that they had over the past couple of years.
Speaker Change: Yeah, Brian, I think a real impact of the cost increase this quarter was really driven by certain kind of non recurring expenses that I highlighted in the prepared remarks.
Brian Maher: Totaling about two and a half million dollars, mainly due to a fire we had in a community resulting in an insurance deductible as well as certain remediation costs from damage from the hurricanes that occurred in Q3.
Speaker Change: Beyond that, I would say our costs have really moderated.
Speaker Change: Unknown Executive, Kevin Brady, Melissa Mccarthy, Matthew Brown
Speaker Change: that are unexpected and that can kind of ebb and flow between quarter as we understand that, but really I think, you know, kind of not getting to, you know, the overall net move-ins and the occupancies is probably a larger factor impacting some of these results. So that's
Speaker Change: That's really kind of what we're focused on and I think it's important as we highlighted that.
Speaker Change: You know, we recognize in some cases, it's just kind of overall, overall operational things that we need to work through, which I think we have a good pulse on.
Speaker Change: You know, we have a larger presence in some of these markets where there's been kind of impacted weather events, which just slows the process outside of any occupancy impact.
Speaker Change: with sales and marketing and other things. But I think equally important is kind of our view on how we're getting in front of some of the known cash drags with the expansion of dispositions and certain transitions, which is just the process that is going to take a little bit more time to unfold.
Speaker Change: Okay maybe just two more for me and I'll hop back in the queue and you talked about the hurricanes I guess you know Milton and Helene was there any properties closed during you know those storms and any material damage that's noteworthy to discuss?
Speaker Change: We had one property specifically that was more broadly impacting hitting our insurance deductible where it required kind of
Speaker Change: Unknown Executive, Kevin Brady, Melissa Mccarthy, Matthew Brown
Speaker Change: And then, you know, something else to note is also we did have damage at a community due to a fire event, which also required a temporary move out on a portion of that community impacting the results there.
Speaker Change: Okay and last for me and I'll hop back in the queue so look we've got the Brookdale properties being sold at over a hundred and fifty thousand a key you've got some other properties you know in the shop community
Speaker Change: segments that are I think you talked about 55, 65,000 a key you have a ton of keys right you've got whatever 25,000 units
Speaker Change: The whole portfolio we go for is it a hundred thousand one ten and can you give us any color there? Because I think that that's kind of the big bogey that everybody's making their investment decisions on at the moment
Speaker Change: Yeah, look, I mean, it's.
Speaker Change: We want to be sensitive to kind of where we are in the overall turnaround of the portfolio. And so I think where value could be today isn't necessarily indicative of kind of where we're going.
Speaker Change: What I would guide is, is let's, let's, you know, look at some of the transactions we're talking about, right, for kind of smaller tertiary communities that are stabilized, looking at the Brookdale event, you know, you're talking about 150,000 per unit.
Speaker Change: You know, if you kind of step back and look at more challenged assets, and also in tertiary markets of similar size, but then a line drag, you're looking at.
Speaker Change: Better communities 100 unit plus and more primary and secondary markets. We think that there's outsized potential value you know with those specific communities and so
Speaker Change: I think, you know, what we're hopeful as we continue to work through this portfolio and communicate more on these updates.
Speaker Change: You're going to see kind of more, you know, natural progression towards value as we talk about certain financing events.
Speaker Change: where we're getting valuations on those assets in addition to select sales, whether they be opportunities to kind of monetize value or just kind of cut short on areas we don't see that there's value. And that's really, I think, the best way to kind of tease out valuation as some of these transactions mature.
Speaker Change: Okay, thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: The next question comes from Justin Hesby with RBC Capital Markets. Please go ahead.
Justin Hesby: Yeah, thanks for taking the question just doing the math on the the total shop guidance you guys just gave
Justin Hesby: It implies that the shop and why the total shop and why is going to drop to roughly 24 million In 4q is is that correct and then can you just provide some color if it is correct on?
Speaker Change: Why we're going to see that drop. And then also just on some more color on occupancy. Can you provide, you know, why occupancy didn't meet your guys' expectation in the quarter?
Speaker Change: Sure, so on Q4 NOI, your estimate is within our guidance range.
Speaker Change: We are expecting that Q4 results are going to be negatively impacted by the October hurricane that came through and impacted certain communities. We're expecting...
Speaker Change: Approximately $4 million of costs related to that with remediation and insurance premiums.
Speaker Change: or insurance deductibles. And as it relates to the occupancy, you know, we ended September 30th at 79.4% and we're currently expecting to end the year just shy of 80% as we go into generally a little bit of a softer selling season.
Speaker Change: Okay and then on the 29 communities with negative two million dollars of NOI what what is the total value of those communities and and so what's the timeline should we expect for for for closing on those?
Speaker Change: Yeah, I mean, we provided kind of the range of 55 to 65,000 per unit. So let's just call it, and this includes the 29, you know, plus the three that are more advanced. And so that's kind of on the low end, 135 million on the high end, just above 155 million.
Speaker Change: I think kind of, you know, holistically, we wouldn't expect that any of these transactions would be completed prior to year end. So the more advanced stuff would be kind of in the earlier part of the quarter of Q1, and then the stuff that's hitting the market now, you know, likely, you know, thereafter.
Speaker Change: Okay and then on the Wellness Center NOI, just is there a reason why NOI ticked up roughly around 700,000?
Speaker Change: Yeah, we had a couple of wellness centers that were previously leased by one tenant that we transitioned to be leased by Lifetime and one of those leases commenced during the year resulting in that NLI increase.
Speaker Change: Okay, and then the last one for me, just on the muse, where are you guys at on the marketing process and then is occupancy still around 50%?
Speaker Change: Yeah, occupancy is just below 50%. You know, we've kind of convinced the marketing process, we're in an advanced stages of working through that transaction.
Speaker Change: You know, we may be in a position to potentially close on that, you know, in 2024.
Speaker Change: Okay, great. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.
Speaker Change: The conference has concluded. You may now disconnect your line. Thank you for attending today's presentation.