Healthcare-focused real estate investment trusts (REITs) can be a great way to invest in real estate. They provide investors exposure to a high-demand, high-growth industry backed by an aging population and a need for continued innovation in the research and development (R&D) and health fields. But choosing the right REIT can be a challenge.
Diversified Healthcare Trust (NASDAQ: DHC) has a wide range of properties in the medical and healthcare field. This minimizes risks for investors, but the company still has serious vulnerabilities. Here's an in-depth look at the company and what you need to know before investing.
Diversified Healthcare Trust company profile
Diversified Healthcare Trust was previously known as Senior Housing Properties but changed its name in 2019 as it began transitioning its portfolio to encompass additional healthcare properties beyond senior housing. Currently, the company owns, leases, and manages 392 medical-related properties valued at $8.2 billion. That includes 10.9 million square feet of office and science buildings, and 27,000 retirement and senior living units.
As of Q1 2021, life science properties accounted for the largest portion of its net operating income (NOI) (43%), followed by medical offices (40%), independent living facilities (11%), wellness centers (4%), and assisted living and skilled nursing facilities (less than 2% combined).
Its portfolio is dispersed across 35 states and Washington, D.C., but its market exposure in relation to the value of the assets are:
- Massachusetts: (16% of portfolio book value)
- California: (10%)
- Florida: (9%)
- Texas: (8%)
- Georgia: (5%)
- Maryland: (4%)
- North Carolina: (4%)
- Wisconsin: (3%)
- Illinois: (3%)
- Virginia: (3%)
- Remaining 25 states plus Washington, D.C.: (35%)
The properties held by the company are Class A, higher-end medical offices and retirement facilities, managed entirely by third-party asset management company RMR Management Group. DHC outsources all of its portfolio management, including acquisitions and dispositions, financial management, and business administration services to RMR, having no employees of its own.
The company believes this management model allows it to access superior employees through the RMR network, which collectively manages $32 billion in assets and has over 600 employees. Diversified Healthcare Trust pays RMR a management fee tied directly to its performance (rental collections) and share price, incentivizing RMR to focus on adding shareholder value through share price growth.
Diversified Healthcare Trust news
The healthcare industry has been hit hard by the coronavirus pandemic. Increased pressure on the medical field and concerns over contracting or spreading the virus have put a lot of routine medical procedures on pause while also keeping some staff from returning to the office. Additionally, because the elderly are more at risk for severe illness or death from the virus, retirement and senior living communities have struggled with attracting and retaining tenants.
So it's no surprise to see a net loss for the quarter of $34.2 million, or $0.14 per share. Normalized funds from operations (FFO) are down nearly 80% year over year.
Diversified Healthcare Trust's office and life sciences portfolio makes up the bulk of its income. While down compared to its previous performance, it's showing some resiliency, with Q2 marking its strongest-ever quarter for leasing.
Occupancy for the company's office portfolio was 91% at the end of Q2 2021. Of the company's office portfolio, DHC granted rent deferrals amounting to roughly 0.4% of its annualized rental income, or $1.6 million. In Q2 2021, DHC leased 632,055 square feet of office space at an average weighted rate 5.9% higher than previous rents. Net operating income for its office portfolio increased from the previous quarter but was still down 1.2% year over year.
DHC's senior housing portfolio has been the most severely impacted. Occupancy at the end of Q2 2021 was 70.9%, down 7.8% year over year. Net operating income for this segment was down 68% year over year, although up when compared to the previous quarter.
In 2020, the company announced its plans to transition 108 senior living facilities comprising roughly 7,500 senior living units from third-party management company Five Star Senior Living to other third-party management companies. Five Star will continue to operate and manage 120 living facilities comprising around 18,000 living units. Additionally, DHC will close 1,500 skilled nursing units and sell 542 licenses to operate skilled beds in permitting states.
These changes are an effort to improve and stabilize its senior housing operation portfolio (SHOP). As of Q2 2021, 70% of the transitioning facilities are now under new management agreements with four companies, Charter Senior Living, Oaks-CaraVita Senior Care, Phoenix Senior Living, and Stellar Senior Living. As of Aug. 2, 2021, 10 of the skilled licenses had been sold.
Debt seems to be a growing concern for the company. While its debt-to-EBITDA ratio isn't explicitly shared in its latest earnings report, the company disclosed that it's below its 1.5 times incurrence limit required by its revolving credit facility and other debt covenants -- meaning the company cannot take on any additional debt.
As of Q2 2021, the company had $908.1 million in cash and cash equivalents, with just over $1 billion of debt maturing in 2021 and 2022. If needed, the company can sell properties to increase liquidity and pay its debt obligations. Year to date, the company has sold five properties, bringing in $104.5 million (excluding closing costs).
Diversified Healthcare Trust stock price
Share prices have steadily decreased for the company over the past five years. In total, stock prices are down 81% from August 2016, a huge decline even in the current economic landscape. Total annualized returns over the last five years are dismal at best, at -24.7%. Its flattening share price growth is undoubtedly related to the company's performance.