Diversified Healthcare Trust(DHC) - 2021 Q2 - Quarterly Report

PART I Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Diversified Healthcare Trust as of June 30, 2021, and for the three and six-month periods then ended Condensed Consolidated Balance Sheets As of June 30, 2021, total assets increased to $7.18 billion from $6.48 billion at year-end 2020, primarily driven by a significant increase in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,179,852 | $6,476,424 | | Cash and cash equivalents | $849,079 | $74,417 | | Total real estate properties, net | $5,732,466 | $5,715,829 | | Total Liabilities | $4,674,703 | $3,857,202 | | Revolving credit facility | $800,000 | $— | | Senior unsecured notes, net | $2,803,497 | $2,608,189 | | Total Equity | $2,505,149 | $2,619,222 | Condensed Consolidated Statements of Comprehensive Income (Loss) For the second quarter of 2021, the company reported a net loss attributable to common shareholders of $34.2 million, or ($0.14) per share, compared to a net loss of $26.1 million, or ($0.11) per share, in the same period of 2020 Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $346,341 | $410,311 | $709,065 | $852,778 | | Rental income | $102,394 | $106,207 | $205,152 | $216,705 | | Residents fees and services | $243,947 | $304,104 | $503,913 | $636,073 | | Total Expenses | $353,717 | $409,314 | $714,629 | $815,058 | | Net Loss | ($32,645) | ($24,742) | ($98,828) | ($13,599) | | Net Loss Attributable to Common Shareholders | ($34,222) | ($26,072) | ($101,727) | ($16,337) | | Net Loss Per Share (basic and diluted) | ($0.14) | ($0.11) | ($0.43) | ($0.07) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash from operating activities decreased significantly to $27.0 million from $110.7 million in the prior-year period Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $27,046 | $110,673 | | Net cash provided by (used in) investing activities | $19,589 | ($7,397) | | Net cash provided by (used in) financing activities | $770,605 | ($61,732) | | Increase in cash and cash equivalents | $817,240 | $41,544 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies and events, including property sales, debt issuance, credit facility drawdown, and management agreement amendments - During the first six months of 2021, the company sold five properties for an aggregate sales price of $104.5 million, resulting in a net gain of $30.6 million[38][39] - In February 2021, the company issued $500 million of 4.375% senior notes due 2031. Proceeds were used to prepay a $200 million term loan and redeem $300 million of 6.75% senior notes due 2021[51] - On June 9, 2021, the company amended its management arrangements with Five Star Senior Living, initiating the transition of 108 senior living communities to other third-party managers and extending the management term for 120 retained communities to 2036[84][85] - The company has two operating segments: Office Portfolio and SHOP (senior housing operating portfolio). For Q2 2021, the Office Portfolio generated net income of $52.2 million, while the SHOP segment had a net loss of $6.7 million[69][72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on its operations, particularly the SHOP segment, which saw lower occupancy and higher expenses Overview and Portfolio As of June 30, 2021, DHC owned 392 properties with a gross book value of $8.2 billion, divided into Office Portfolio and Senior Housing Operating Portfolio (SHOP) segments - The company owned 392 properties in 36 states and Washington, D.C. as of June 30, 2021, with a gross book value of $8.2 billion[110] - The COVID-19 pandemic has caused significant disruptions, including lower occupancy in senior living communities and increased operating expenses for labor and personal protective equipment[111][113] - In June 2021, DHC amended its agreement with Five Star to transition management of 108 senior living communities to other operators and close skilled nursing units in retained communities to reposition them[119] Portfolio Overview as of June 30, 2021 | Segment | Number of Properties | % of Total Gross Book Value | Q2 2021 Revenues | Q2 2021 NOI | Occupancy | | :--- | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | 118 | 45.3% | $92.8M | $61.5M | 91.0% | | SHOP | 235 | 49.5% | $243.9M | $10.6M | 70.9% | | Other | 39 | 5.2% | $9.6M | $9.6M | N/A | Results of Operations Comparing Q2 2021 to Q2 2020, total NOI decreased by 24.6% to $81.7 million, primarily driven by a 67.8% plummet in the SHOP segment's NOI NOI by Segment - Q2 2021 vs Q2 2020 (in thousands) | Segment | Q2 2021 | Q2 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | $61,483 | $64,617 | ($3,134) | (4.9)% | | SHOP | $10,636 | $33,082 | ($22,446) | (67.8)% | | Non-Segment | $9,590 | $10,697 | ($1,107) | (10.3)% | | Total NOI | $81,709 | $108,396 | ($26,687) | (24.6)% | NOI by Segment - H1 2021 vs H1 2020 (in thousands) | Segment | H1 2021 | H1 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | $123,513 | $130,681 | ($7,168) | (5.5)% | | SHOP | $14,504 | $81,172 | ($66,668) | (82.1)% | | Non-Segment | $19,025 | $22,425 | ($3,400) | (15.2)% | | Total NOI | $157,042 | $234,278 | ($77,236) | (33.0)% | - SHOP comparable property NOI decreased 68.1% in Q2 2021 vs Q2 2020, driven by a decline in occupancy to 71.0% from 80.7% and the closure of skilled nursing units[149][150] Non-GAAP Financial Measures The company reported a significant decline in its key non-GAAP performance metrics, with Normalized FFO per share dropping sharply in Q2 and H1 2021 due to operational challenges FFO and Normalized FFO per Share | Per Share Data | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common shareholders | ($0.14) | ($0.11) | ($0.43) | ($0.07) | | FFO attributable to common shareholders | ($0.01) | $0.25 | $0.01 | $0.61 | | Normalized FFO attributable to common shareholders | $0.05 | $0.25 | $0.08 | $0.56 | Reconciliation of Net Loss to NOI (in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net loss | ($32,645) | ($24,742) | ($98,828) | ($13,599) | | Adjustments... | ... | ... | ... | ... | | Total NOI | $81,709 | $108,396 | $157,042 | $234,278 | Liquidity and Capital Resources The company's liquidity position has been significantly impacted by the pandemic, leading to a full drawdown of its credit facility and new senior notes issuance, while facing debt incurrence limitations - As of June 30, 2021, the company had $849.1 million in cash and cash equivalents and had fully drawn the $800 million available under its revolving credit facility[232][233] - The company's ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement, preventing it from incurring additional debt as of June 30, 2021[214][246] - In January 2021, credit agreements were amended to waive certain financial covenants through June 2022, reduce the revolver commitment to $800 million, and limit annual capital expenditures to $350 million[234] - In February 2021, Moody's and S&P downgraded the company's senior unsecured debt ratings to B1 and BB- respectively, increasing borrowing costs under the credit facility[241][247] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk primarily through its $800 million floating-rate debt, with a hypothetical 1% rate increase impacting annual interest expense by $8.0 million - At June 30, 2021, the company had $800.0 million in outstanding floating-rate debt under its revolving credit facility[268] - A hypothetical 1% increase in floating interest rates would increase annual interest expense by approximately $8.0 million, impacting annual earnings per share by about $0.03 (based on the difference between $0.10 and $0.13 per share impact)[271] - The company has $3.53 billion in fixed-rate debt, including senior unsecured notes and mortgage notes. Changes in market rates affect the fair value of this debt but not the cash interest payments[264][265] - The company is monitoring the planned phase-out of LIBOR, which is the basis for interest on its revolving credit facility, and expects its credit agreement to be amended to provide for a replacement benchmark rate[273] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter - The President and Chief Executive Officer, along with the Chief Financial Officer and Treasurer, concluded that the company's disclosure controls and procedures are effective as of June 30, 2021[274] - No changes occurred in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[275] PART II Other Information Risk Factors The company states that there have been no material changes to the risk factors from those previously disclosed in its 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[297] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company purchased 13,906 common shares at an average price of $4.18 per share to satisfy tax withholding obligations for former officers and employees Issuer Purchases of Equity Securities (Q2 2021) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2021 | 13,906 | $4.18 | | Total | 13,906 | $4.18 | - The share purchases were conducted to satisfy tax withholding and payment obligations related to the vesting of common share awards for certain former RMR LLC officers and employees[298] Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to management agreements and required certifications - Filed exhibits include the Amended and Restated Master Management Agreement with Five Star and the Third Amended and Restated Property Management Agreement with RMR LLC, both dated June 9, 2021[300] - Certifications pursuant to Rule 13a-14(a) and Section 1350 were filed, along with XBRL data files[300]