In late 2019, Senior Housing Properties Trust changed its name to Diversified Healthcare Trust (NYSE: DHT) to reflect a strategic shift to diversify its portfolio into the office arena. While the name change was timely, given the 2020 pandemic, it still owned a large portfolio of senior living facilities as the coronavirus ripped through the sector. It was a difficult year, to say the least. Given the still strong demographic trends of an aging baby boomer population, isDiversified Healthcare Trust worth the risk? Here are some things to consider.
Real estate investment trusts (REITs) are designed to pass income on to shareholders. In 2020, thanks to the impact of the pandemic, Diversified Healthcare Trust cut its dividend from $0.25 per share in the first quarter to $0.15 in the second and then to just a penny per share in the third. The dividend is still stuck at that token level, which is likely just there so that certain institutional investors with dividend mandates can still own the stock. The dividend yield is roughly 1%.
There's really no way around this one. Diversified Healthcare Trust isn't a great option if you are a dividend investor looking for a reliable dividend payer or a generous yield. In fact, the dividend is pretty clear evidence that, no matter how positive a spin management tries to put on things, it is facing a very difficult time and it isn't going well.
2. The balance sheet
With that dividend backdrop, it probably wouldn't be too shocking to find out that Diversified Healthcare Trust's balance sheet is rated below investment grade by both Standard & Poor's and Moody's. With debt that would usually be called "junk" in Wall Street circles, there are clear problems here that have to be addressed. The company is working on the issue, recently amending a credit agreement to give it some more breathing room. That's a good thing and shows that the REIT's lenders are willing to work with the landlord. However, that this is needed at all isn't a good sign. At this point, Diversified Healthcare Trust is a turnaround stock -- and that's a style of investing that's really only appropriate for more aggressive investors.
3. An inflection point?
That said, if turnarounds are appealing to you, Diversified Healthcare Trust has a lot of upside potential if it can get back on track. The stock has lost more than 80% of its value since 2013, a downtrend that dates back to well before the pandemic. That's a massive statement, actually, showing that the difficulties here are long-term in nature. But the pandemic appears to have really brought things to a head.
The company's senior housing portfolio consists of 264 properties, 235 of which it both owns and operates. Those 235 senior housing properties are what are known as SHOP assets in the industry. Property level performance flows directly through to the REIT. This is why it is struggling so much today. To help highlight the issue a bit, in the first quarter the company's medical office and research assets (which make up most of the rest of its 396-property portfolio) contributed 40% and 43% of net operating income (NOI), respectively. The rest of the portfolio, which is largely made up of SHOP assets, was just 17% of NOI even though senior housing makes up around two-thirds of properties the REIT owns.
But there is an opportunity in these numbers if the world learns to deal with the coronavirus. The REIT's office and research properties are in an industry sweet spot, so there's probably no reason to get overly concerned about these assets. The big problem is turning around the senior housing segment, which, thanks to effective vaccines, is starting to show signs of improvement.
Assuming this trend continues, the SHOP portfolio could eventually turn into a major contributor to the REIT's financial performance instead of a major drag. The question is whether the REIT can limp along until that happens, noting that the demographic tailwind of an aging baby boomer population is only just starting to heat up. Given the unpredictable nature of the coronavirus and its variants, there's no way to handicap that -- so buying this financially troubled REIT is really a leap of faith that things will return to normal sooner rather than later.
Is it a buy?
Most investors will want to avoid Diversified Healthcare Trust. There are better-positioned and financially stronger names in the healthcare property niche that also happen to offer higher yields. That said, for investors who like turnaround stories, and perhaps are willing to gamble just a little bit, there could be a chance for big returns if this REIT can get through the current headwinds it's facing.
However, a lot will depend on the REIT's lenders continuing to work with it and, frankly, uncertainty remains high. So, in the end, it's likely that only the most aggressive investors will want to check out this REIT.