Diversified Healthcare Trust(DHC) - 2022 Q3 - Quarterly Report

PART I: Financial Information Item 1. Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position and performance for Q3 and nine months ended September 30, 2022 Condensed Consolidated Balance Sheets As of September 30, 2022, total assets decreased to $6.07 billion, total liabilities decreased to $3.37 billion, and total shareholders' equity slightly increased to $2.71 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total real estate properties, net | $4,811,931 | $5,075,749 | | Total assets | $6,072,486 | $6,623,514 | | Revolving credit facility | $700,000 | $800,000 | | Senior unsecured notes, net | $2,316,493 | $2,806,811 | | Total liabilities | $3,366,431 | $3,961,124 | | Total shareholders' equity | $2,706,055 | $2,662,390 | Condensed Consolidated Statements of Comprehensive Income (Loss) For Q3 2022, net loss was $81.5 million, improving from Q3 2021, while nine-month net income was $49.5 million due to property sales Financial Performance Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $322,920 | $337,416 | $946,681 | $1,046,481 | | Property operating expenses | $289,096 | $266,073 | $823,904 | $818,096 | | (Loss) gain on sale of properties | ($5,044) | $200 | $322,064 | $30,838 | | Net (loss) income attributable to common shareholders | ($81,492) | ($89,343) | $49,548 | ($191,070) | | Net (loss) income per share (basic and diluted) | ($0.34) | ($0.38) | $0.21 | ($0.80) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $36.9 million for the nine months ended September 30, 2022, with significant investing and financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($36,948) | ($13,198) | | Net cash provided by (used in) investing activities | $483,713 | ($22,885) | | Net cash (used in) provided by financing activities | ($662,905) | $756,671 | | (Decrease) increase in cash | ($216,140) | $720,588 | - Investing activities in 2022 were significantly boosted by $638.5 million in proceeds from the sale of properties to a joint venture and $108.6 million from the sale of an interest in another joint venture[20] - Financing activities in 2022 included a $500.0 million redemption of senior unsecured notes and a $100.0 million repayment on the revolving credit facility[20] Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, JV transactions, debt structure, segment performance, and related-party management agreements - In January 2022, the company formed the LSMD JV by selling interests in 10 medical office and life science properties for approximately $653.3 million, recognizing a net gain of $322.5 million[35] - In June 2022, the company sold an additional 10% interest in the Seaport JV for $108.0 million and now holds a 10% equity interest in this JV[34] - In June 2022, the company redeemed $500 million of its 9.75% senior notes due 2025, resulting in a loss on early extinguishment of debt of $29.6 million[55] - The company's two operating segments are the Office Portfolio and the Senior Housing Operating Portfolio (SHOP); for Q3 2022, the Office Portfolio generated $31.1 million in NOI, while the SHOP segment had an NOI loss of ($5.8 million)[70][73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses segment performance, liquidity strategy, and market risks, noting declining SHOP NOI and debt covenant challenges Overview As of September 30, 2022, DHC owned 379 properties and held equity interests in two joint ventures, facing economic challenges impacting its SHOP segment - The company is facing significant economic headwinds, including high inflation, rising interest rates, supply chain disruptions, and potential recession, which are expected to lead to elevated labor, utility, and food costs in the SHOP segment[115][116] - As of September 30, 2022, the portfolio consisted of 379 wholly-owned properties and equity interests in two JVs owning 11 medical office and life science properties[113][114] Results of Operations For Q3 2022, total NOI decreased 52.6% to $33.8 million, driven by JV deconsolidations and increased SHOP operating expenses NOI by Segment - Q3 2022 vs Q3 2021 (in thousands) | Segment | Q3 2022 NOI | Q3 2021 NOI | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | $31,075 | $59,134 | ($28,059) | (47.4)% | | SHOP | ($5,762) | $2,326 | ($8,088) | (347.7)% | | Non-Segment | $8,511 | $9,883 | ($1,372) | (13.9)% | | Total NOI | $33,824 | $71,343 | ($37,519) | (52.6)% | - The decrease in the Office Portfolio's consolidated NOI was primarily due to the deconsolidation of 11 properties into joint ventures, though comparable property NOI for the segment increased by 3.7% in Q3 2022[141][144] - The SHOP segment's NOI declined sharply due to increased operating expenses from labor costs, Hurricane Ian damages, and inflationary pressures on food and energy, which offset revenue gains from higher occupancy[150][151] Non-GAAP Financial Measures The company uses FFO, Normalized FFO, and NOI as supplemental performance measures, with Normalized FFO showing a loss in Q3 2022 FFO and Normalized FFO per Share | Per Share Data | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | ($0.34) | ($0.38) | $0.21 | ($0.80) | | FFO | ($0.06) | ($0.06) | ($0.33) | ($0.05) | | Normalized FFO | ($0.06) | ($0.04) | ($0.20) | $0.04 | Liquidity and Capital Resources The company's liquidity relies on operating cash flow and asset dispositions, constrained by debt covenant restrictions and recent credit downgrades - As of September 30, 2022, 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[206][239] - The company generated significant liquidity in 2022 through JV transactions, including $653.3 million from the LSMD JV formation and $108.0 million from selling an additional stake in the Seaport JV[207][208] - The company was fully drawn on its $700 million revolving credit facility as of September 30, 2022, with capacity reducing to $586.4 million in January 2023, requiring a $113.6 million repayment[224][233] - Moody's downgraded the company's senior unsecured debt rating twice in 2022, from B1 to B3 in February, and then from B3 to Caa1 in September[234] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from its fixed and floating rate debt, with potential impacts from rate changes and LIBOR transition - At September 30, 2022, the company had $2.39 billion in fixed-rate debt and $700 million in floating-rate debt[259][263] - A hypothetical 1% increase in interest rates would increase annual interest expense on the $700 million of floating-rate debt by approximately $7.0 million[266] - The company's revolving credit facility is based on LIBOR, which is being phased out, requiring revision to an alternative rate like SOFR that may increase interest costs[268] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls in Q3 2022 - The President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the company's disclosure controls and procedures are effective[269] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[270] PART II: Other Information Item 1A. Risk Factors No material changes to the risk factors 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[290] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 122,403 common shares at $1.30 per share in Q3 2022 for tax withholding on share awards Issuer Purchases of Equity Securities (Q3 2022) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | September 2022 | 122,403 | $1.30 | | Total | 122,403 | $1.30 | - The share purchases were conducted to satisfy tax withholding obligations for officers and RMR employees related to vesting share awards[291] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including indentures, share agreements, and required certifications - Exhibits filed include supplemental indentures, certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[292][294]