Diversified Healthcare Trust(US:DHC)2020-05-07 20:09PART I. Financial Information This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2020 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Diversified Healthcare Trust for the three months ended March 31, 2020 Condensed Consolidated Balance Sheets As of March 31, 2020, total assets increased slightly to $6.70 billion, while total liabilities rose to $3.92 billion, leading to a decrease in total equity to $2.79 billion Condensed Consolidated Balance Sheets (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $6,703,723 | $6,653,826 | | Total real estate properties, net | $5,822,344 | $5,890,785 | | Assets of properties held for sale | $244,881 | $209,570 | | Cash and cash equivalents | $69,545 | $37,357 | | Total Liabilities | $3,916,554 | $3,776,776 | | Unsecured revolving credit facility | $585,000 | $537,500 | | Senior unsecured notes, net | $1,821,560 | $1,820,681 | | Total Equity | $2,787,169 | $2,877,050 | Condensed Consolidated Statements of Comprehensive Income Total revenues significantly increased to $442.5 million for Q1 2020, primarily due to the Five Star restructuring, though net income attributable to common shareholders decreased to $9.7 million Q1 2020 vs Q1 2019 Performance (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Total revenues | $442,467 | $266,286 | | - Rental income | $110,498 | $158,241 | | - Residents fees and services | $331,969 | $108,045 | | Total expenses | $405,744 | $213,288 | | Net income | $11,143 | $31,504 | | Net income attributable to common shareholders | $9,735 | $30,082 | | EPS (basic and diluted) | $0.04 | $0.13 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $56.3 million in Q1 2020, while net cash used in investing activities decreased, and financing activities shifted to a net cash inflow Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $56,312 | $41,515 | | Net cash used in investing activities | ($26,641) | ($43,308) | | Net cash provided by (used in) financing activities | $3,341 | ($13,526) | | Increase (decrease) in cash | $33,012 | ($15,319) | Notes to Condensed Consolidated Financial Statements The notes detail real estate activities including $11.2 million in impairment charges, $3.5 billion in total debt, the Five Star restructuring resulting in a $22.9 million gain, and $4.8 million in COVID-19 related rent deferrals - In Q1 2020, the company recorded net impairment charges of $11.2 million, primarily to adjust the carrying values of senior living communities and medical office properties classified as held for sale3738 - During Q1 2020, eight medical office properties were sold for an aggregate price of $17.6 million, resulting in a net gain of $2.8 million4041 - Effective January 1, 2020, all existing master leases with Five Star were terminated and replaced with new management agreements, resulting in a gain on lease termination of $22.9 million8486 - Due to the COVID-19 pandemic, the company granted rent deferrals totaling $4.8 million to certain tenants as of May 4, 2020, generally scheduled for repayment in 12 monthly installments starting September 202049 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic, leading to increased operating expenses, occupancy challenges, and capital conservation measures, alongside segment-specific financial results and liquidity analysis Impact of COVID-19 The COVID-19 pandemic has severely impacted the business, particularly the SHOP segment, leading to increased costs, occupancy challenges, and the implementation of capital conservation measures including dividend reduction and capex deferrals - As of April 30, 2020, 46 properties, primarily in the SHOP segment, had confirmed resident COVID-19 cases122 - Capital conservation measures implemented in response to the pandemic include reducing the quarterly cash dividend to $0.01 per share, saving approximately $33.3 million per quarter, and deferring up to $150.0 million in non-essential capital investments for 2020124 - As of May 4, 2020, the company granted rent deferrals totaling $4.8 million to tenants, representing approximately 8.5% of annualized rental income, with repayment generally scheduled in 12 monthly installments starting September 2020126 Results of Operations For Q1 2020, total Net Operating Income (NOI) decreased by 15.6% to $125.9 million, with the SHOP segment experiencing a 22.8% decline due to the Five Star restructuring and higher operating expenses NOI by Segment (in thousands) | Segment | Q1 2020 | Q1 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | $66,064 | $71,044 | ($4,980) | (7.0)% | | SHOP | $48,090 | $62,313 | ($14,223) | (22.8)% | | Non-Segment | $11,728 | $15,707 | ($3,979) | (25.3)% | | Total NOI | $125,882 | $149,064 | ($23,182) | (15.6)% | - The significant increase in SHOP segment revenues (from $147.4 million to $332.0 million) and property operating expenses (from $85.0 million to $283.9 million) was primarily due to the Five Star restructuring, converting previously leased properties to managed properties and bringing their operations onto DHC's income statement167168169170 Non-GAAP Financial Measures While FFO attributable to common shareholders increased to $91.3 million ($0.38 per share), Normalized FFO decreased to $69.3 million ($0.29 per share), reflecting weaker core operating performance after adjustments FFO and Normalized FFO per Share | Metric per Share | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net income attributable to common shareholders | $0.04 | $0.13 | | FFO attributable to common shareholders | $0.38 | $0.34 | | Normalized FFO attributable to common shareholders | $0.29 | $0.37 | | Distributions declared | $0.15 | $0.39 | Liquidity and Capital Resources The company's liquidity is supported by operating cash flows and its revolving credit facility, with $69.5 million cash and $415.0 million available on its revolver as of March 31, 2020, alongside recent debt redemptions and rating downgrades - As of May 6, 2020, the company had $775.0 million outstanding and $225.0 million available under its $1.0 billion revolving credit facility55124 - In March 2020, S&P downgraded the company's issuer credit rating from BB+ to BB and its unsecured debt rating from BBB- to BB+, increasing interest rate premiums on its revolving credit facility and term loans effective April 1, 202023154 - In April 2020, the company redeemed all of its $200.0 million 6.75% senior notes due 2020 using cash on hand and borrowings from its revolving credit facility23459 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes on its $1.035 billion floating-rate debt, where a 1% increase would raise annual interest expense by approximately $10.4 million, while also managing $2.54 billion in fixed-rate debt Debt Profile as of March 31, 2020 (in millions) | Debt Type | Principal Balance | Description | | :--- | :--- | :--- | | Fixed Rate Debt | $2,537.2 | Includes senior unsecured notes and mortgage notes | | Floating Rate Debt | $1,035.0 | Includes $585M on revolver, $250M term loan, and $200M term loan | - A hypothetical one percentage point increase in interest rates would increase the company's annual interest expense on its outstanding floating-rate debt by approximately $10.4 million, impacting annual earnings per share by about $0.04261262 - The company notes that LIBOR, the benchmark for its floating-rate debt, is expected to be phased out in 2021, requiring revisions or amendments to its credit agreements for an alternative interest rate266 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the period, the company's management concluded that its disclosure controls and procedures are effective267 - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal controls268 PART II. Other Information This section outlines significant risk factors, including the substantial impact of the COVID-19 pandemic, and details on unregistered sales of equity securities Item 1A. Risk Factors The COVID-19 pandemic is highlighted as a primary risk, causing increased operating costs, decreased occupancy, potential tenant defaults, and challenges in debt covenant compliance, alongside delays in asset sales and potential long-term demand shifts - The COVID-19 pandemic is expected to have a substantial and lasting adverse impact on business, operations, and liquidity, with senior living communities facing increased costs and downward pressure on occupancy291293 - The company has reduced its quarterly dividend to $0.01 per share and warns that future distributions may remain at this level, be eliminated, or be paid in a form other than cash to preserve liquidity302303 - Planned asset sales intended to reduce leverage are expected to be delayed until 2021 or may not occur, potentially at prices lower than anticipated, due to market conditions307 - The company may need waivers or amendments from lenders to avoid defaulting on financial covenants in its credit facility due to the pandemic's economic impact312313 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company purchased 3,438 of its common shares at a weighted average price of $6.22 per share to satisfy tax withholding obligations for former officers and employees Issuer Purchases of Equity Securities (Q1 2020) | Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2020 | 1,938 | $8.10 | | March 2020 | 1,500 | $3.79 | | Total | 3,438 | $6.22 | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt indentures, officer certifications, and interactive data files