Diversified Healthcare Trust(DHC) - 2019 Q1 - Quarterly Report

PART I Financial Information Financial Statements Unaudited statements show a significant net income decrease to $30.1 million from $236.0 million year-over-year, driven by a non-recurring gain on property sales in 2018 Balance Sheet Summary (in thousands) | Balance Sheet Items | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $7,145,900 | $7,160,426 | | Total real estate properties, net | $6,298,986 | $6,341,908 | | Cash and cash equivalents | $39,875 | $54,976 | | Total Liabilities | $4,032,462 | $3,980,556 | | Senior unsecured notes, net | $2,217,989 | $2,216,945 | | Secured debt and capital leases, net | $742,883 | $744,186 | | Total Equity | $3,113,438 | $3,179,870 | Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Total Revenues | $266,286 | $275,770 | | Rental income | $158,241 | $173,728 | | Residents fees and services | $108,045 | $102,042 | | Total Expenses | $213,288 | $203,575 | | (Loss) gain on sale of properties | ($122) | $181,154 | | Net Income | $31,504 | $237,405 | | Net Income Attributable to Common Shareholders | $30,082 | $236,022 | | EPS (basic and diluted) | $0.13 | $0.99 | Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $41,515 | $84,034 | | Net cash (used in) provided by investing activities | ($43,308) | $80,349 | | Net cash used in financing activities | ($13,526) | ($158,463) | | (Decrease) increase in cash | ($15,319) | $5,920 | Notes to Condensed Consolidated Financial Statements Key notes detail a major tenant restructuring with Five Star Senior Living, a $6.2 million impairment charge, a significant dividend reduction, and subsequent debt management activities - During Q1 2019, the company recorded impairment charges of $6,206 thousand to adjust the carrying values of 15 skilled nursing facilities (SNFs) to their aggregate estimated fair value[40] - In May 2019, the company redeemed all of its outstanding 3.25% senior notes due 2019 for a redemption price of $400 million, plus accrued interest, funded by cash on hand and borrowings under its revolving credit facility[54] - On April 18, 2019, the company declared a regular quarterly distribution of $0.15 per share, a significant reduction from the previous quarter's distribution of $0.39 per share paid on February 21, 2019[69] - Due to substantial doubt about Five Star's ability to continue as a going concern, a Transaction Agreement was entered into in April 2019, which included a reduction of monthly minimum rent payable by Five Star to $11 million from February 1, 2019, through December 31, 2019[77][78][106] - The Transaction Agreement with Five Star proposes terminating all existing master leases and management agreements and replacing them with new management agreements for all senior living communities, effective January 1, 2020, subject to shareholder and other approvals[103] Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion centers on the Five Star Senior Living restructuring, which reduced rental income and key metrics like NOI and Normalized FFO, prompting a dividend cut and asset sales Portfolio Summary as of March 31, 2019 | Facility Type | Number of Properties | % of Total Investment | Q1 2019 NOI | % of Q1 2019 NOI | | :--- | :--- | :--- | :--- | :--- | | MOBs | 153 | 44.6% | $71,024 | 47.6% | | Senior living communities | 304 | 53.3% | $73,320 | 49.2% | | Wellness centers | 10 | 2.1% | $4,700 | 3.2% | | Total | 467 | 100.0% | $149,044 | 100.0% | - Five Star is the largest tenant, with its leased properties representing 26.5% of the total investment and contributing 26.4% of Q1 2019 NOI[123][125] Results of Operations Total revenues decreased due to a $17.7 million decline in rental income from the Five Star rent reduction, while net income fell sharply due to a non-recurring prior-year gain - Rental income from the Triple Net Leased Senior Living Communities segment decreased by 26.0% to $50.3 million, primarily due to a $12.8 million rent reduction from Five Star as part of the Transaction Agreement[166][167] - Managed Senior Living Communities' NOI decreased by 7.6% to $23.0 million as a 10.2% increase in property operating expenses outpaced revenue growth[174][176] - General and administrative expenses decreased significantly to $9.8 million from $25.1 million, primarily because no business management incentive fees were accrued for Q1 2019[184][187] - Acquisition and other transaction-related costs were $7.8 million, including $7.7 million related to the Five Star Transaction Agreement[189] Non-GAAP Financial Measures FFO and Normalized FFO Reconciliation (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net income attributable to common shareholders | $30,082 | $236,022 | | FFO attributable to common shareholders | $80,411 | $92,666 | | Normalized FFO attributable to common shareholders | $88,225 | $107,163 | | FFO per share | $0.34 | $0.39 | | Normalized FFO per share | $0.37 | $0.45 | | Distributions declared per share | $0.39 | $0.39 | Net Operating Income (NOI) by Segment (in thousands) | Segment | Q1 2019 NOI | Q1 2018 NOI | | :--- | :--- | :--- | | MOB NOI | $71,044 | $70,213 | | Triple net leased communities NOI | $50,320 | $67,975 | | Managed communities NOI | $23,000 | $24,882 | | All other operations NOI | $4,700 | $4,602 | | Total NOI | $149,064 | $167,672 | Liquidity and Capital Resources Reduced cash flow from the Five Star restructuring prompted a dividend cut, planned asset sales to reduce leverage, and triggered a credit rating downgrade from S&P to BB+ - Following the entry into the Transaction Agreement with Five Star, the company reduced its regular quarterly distribution rate to $0.15 per common share[205] - The company intends to sell properties, focusing on underperforming senior living communities and non-core assets, to reduce leverage[204] - In April 2019, S&P downgraded the company's issuer credit rating from BBB- to BB+ following the announcement of the Five Star business restructuring[217] - As of March 31, 2019, the company had $225.0 million outstanding under its $1.0 billion revolving credit facility, with $775.0 million available for borrowing[211][212] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from its $3.0 billion in fixed-rate and $775 million in floating-rate debt, and notes the upcoming LIBOR phase-out Floating Rate Debt Sensitivity as of March 31, 2019 (in thousands) | Scenario | Outstanding Floating Rate Debt | Annual Interest Expense | Annual Earnings Per Share Impact | | :--- | :--- | :--- | :--- | | At March 31, 2019 | $775,000 | $29,450 | $0.12 | | One percentage point increase | $775,000 | $37,200 | $0.16 | - As of March 31, 2019, the company had approximately $3.0 billion in fixed-rate debt, and a hypothetical 1% interest rate increase would increase annual interest cost by approximately $29.8 million if all debt were refinanced[252][255] - The company acknowledges the expected phase-out of LIBOR in 2021, which will require amendments to its credit facility and term loan agreements[267] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal controls during the quarter - Based on an evaluation as of the end of the period, the company's management concluded that disclosure controls and procedures are effective[269] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[270] PART II Other Information Risk Factors There have been no material changes to risk factors from those previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to risk factors from those previously disclosed in the company's Annual Report[292] Exhibits This section lists filed exhibits, including officer certifications and XBRL data, with key agreements incorporated by reference - The exhibits include Rule 13a-14(a) and Section 1350 certifications, as well as XBRL formatted financial statements[293][294]