Diversified Healthcare Trust Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 6, 2025

There are 7 speakers on the call.

Operator

Good morning and welcome to Healthcare Trust First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the call over to Matt Murphy, Manager of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning. Joining me on today's call are Chris Spilotto, President and Chief Executive Officer Matt Brown, Chief Financial Officer and Treasurer and Anthony Paola, Vice President. Today's call includes a presentation by management followed by a question and answer session with sell side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws.

Speaker 1

These forward looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, 05/06/2025. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward looking statements.

Speaker 1

Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris.

Speaker 2

Thank you, Matt, and good morning, everyone. Thank you for joining our call. I will begin by providing a high level review of DHC's solid first quarter results as well as an update to the progress and timing of our key strategic initiatives. Then Anthony will provide more detail regarding our first quarter financials and CapEx. And finally, Matt will review our liquidity and financing activities before providing an update on our 2025 guidance.

Speaker 2

After the market closed yesterday, DHC reported total revenues of $386,900,000 for the first quarter, which was a 4% increase over last year. Adjusted EBITDAre was $75,100,000 up 17% year over year and normalized FFO was $14,300,000 or $06 per share, both of which exceeded the analyst consensus estimate. In addition to these solid year over year results, we have made significant progress so far in 2025 addressing our upcoming debt maturities, while also delevering the balance sheet through the completion of $332,000,000 in asset sales. Turning first to our SHOP sector performance. GHC experienced a meaningful improvement within its SHOP segment as same property NOI came in at $38,400,000 a 33.6% increase sequentially and a 42.1% increase year over year.

Speaker 2

On a consolidated basis, average monthly rate increased 4.8% year over year and occupancy increased 130 basis points to 80.2%, resulting in a 6.5% increase in SHOP revenue. Importantly, SHOP NOI margin improved three twenty basis points year over year to 11.2% on a consolidated basis and to 12.9% on a same property basis. In addition, our 115 same property five star managed communities posted an NOI margin of 14.6%. RevPAR increased year over year by 4.8%, primarily driven by annual rate increases, substantial increases in shop care level pricing and a reduction in discounts and concessions at fully occupied properties. Expense for increased by 2% due to merit increases and filling open positions, offset by a reduction in contract labor usage and a decrease in our annual insurance premium.

Speaker 2

Overall, we continue to be pleased with the progress we are making controlling costs and we remain bullish on the outlook within the SHOP segment throughout 2025. Turning to our medical office and life science portfolio. During the quarter, we completed approximately 145,000 square feet of new and renewal leasing activity with weighted average rents that were 18.4 percent higher than prior rents for the same space and a weighted average lease term of ten point two years. Same property occupancy was 90.1%, down 10 basis points from the fourth quarter. As we look ahead, 4.7% of annualized revenue in our MOB and life science portfolio is scheduled to expire through year end twenty twenty five.

Speaker 2

As previously noted, we had one large known vacate in the first quarter in St. Louis, Missouri, occupying 233,000 square feet. We have marketed this non core property for sale and entered into an LOI with a buyer. Known vacates for DHC's medical office building and life science portfolio in 2025 are modest at 115,000 square feet and we have an active leasing pipeline of 603,000 square feet of which 152,000 square feet is new absorption. Our pipeline includes an average lease term of approximately eight years and a trending rent roll up in the double digits.

Speaker 2

Turning to our key strategic initiatives. The $321,000,000 of property sales we completed in the first quarter largely consisted of the Muse Life Science Campus in San Diego for $159,000,000 and 18 triple net senior living communities leased to Brookdale for $135,000,000 Net proceeds from the Muse in Brookdale as well as one smaller MOB sale totaled $299,000,000 which was used to partially pay down DHC's zero coupon notes due in 2026. In March, DHC closed on $140,000,000 mortgage financing secured by 14 senior living communities with an appraised value of 164,000 per unit. And in April, we closed on a ten year fixed rate Freddie Mac mortgage financing for $109,000,000 secured by seven senior living communities valued at $199,000 per unit. In April and May, DHC is using $280,000,000 in financing proceeds and cash on hand to further pay down our senior unsecured notes due in June 2025.

Speaker 2

Looking forward with marketing efforts of certain properties. As of quarter end, our active disposition pipeline included 65 properties, of which 30 are MOB, life science and wellness properties totaling 2,300,000 square feet and 35 properties are roughly 2,600 units within our SHOP portfolio. This includes previously communicated asset sales along with the addition of 25 predominantly non core MOB life science and wellness center assets valued at approximately $190,000,000 We estimate the combined asset sales will produce proceeds between $350,000,000 and $400,000,000 of which approximately $125,000,000 is collateral for our 2026 maturity. We expect these asset sales will transact over the next several quarters. Concurrently, we are under agreements with letters of intent with 19 of these properties for $116,000,000 which includes 15 non core SHOP communities and four MOB life science assets.

Speaker 2

And since the first quarter, we have sold one SHOP community for $11,200,000 These asset sales should materially enhance the portfolio's future performance given that it will have a higher concentration of well positioned SHOP assets complemented by a portfolio of best in class triple net MOB and life science properties. In addition to deleveraging our balance sheet, we expect to see a reduction in our future year CapEx spending, thereby allowing us to increase overall portfolio cash flow and strategically allocate capital to the highest ROI opportunities. Before I turn the call over to Anthony, I would like to highlight the recent publication of the RMR Group's annual sustainability report, which offers a comprehensive overview of our managers' commitment and progress in addressing sustainability. Investors will also find highlights of initiatives that DHC has undertaken to improve sustainability across its portfolio of senior living communities, medical office buildings and life science assets. A link to the report is available on our website.

Speaker 2

Now I'd like

Speaker 3

to turn the call over to Anthony.

Speaker 4

Thank you, Chris, and good morning, everyone. Our same property cash basis NOI was $71,500,000 representing a 20.7% increase year over year

Speaker 3

and

Speaker 4

14.8% increase sequentially. These increases were primarily driven by strong results in our SHOP segment, which delivered $38,400,000 in same property NOI, driven by a 4.8% increase in average monthly rate year over year and 3.1 sequentially and occupancy of 80.2%, which was a 130 basis point increase year over year and 20 basis point increase sequentially. This resulted in revenue growth of 6.5% and margin expansion of three twenty basis points year over year. Our shop and wine for the first quarter was favorably impacted by $2,700,000 of proceeds from a business interruption claim at one of our communities in Florida. Turning to G and A expense, the first quarter amount included $2,400,000 of business management incentive fee as our total return exceeded the benchmark as of 03/31/2025.

Speaker 4

Any incentive management fee incurred will not be due until January 2026. Excluding the impact of the incentive management fee, G and A expense would have been $6,600,000 for the quarter. During the quarter, we invested approximately $32,000,000 of capital, including $27,000,000 in our shop communities and $5,000,000 in our medical office and life science portfolio. Our first quarter spend is consistent with our expectations and therefore we are reaffirming our 2025 CapEx guidance of $150,000,000 to $170,000,000 at this time. Now I'll turn

Speaker 5

the call over to Matt. Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $300,000,000 of unrestricted cash, including the $140,000,000 we received from the financing completed on March 31. We subsequently paid down our June 2025 bonds in April with that $140,000,000 The $140,000,000 financing is secured by 14 senior living communities, has a three year term and two one year extension options. The financing is interest only for two years, has options to extend the interest only period subject to meeting certain conditions and has a floating rate of SOFR plus two fifty basis points capped at 7%.

Speaker 5

In addition to this financing, in April, we closed on a $108,900,000 financing secured by seven senior living communities. This mortgage was financed through Freddie Mac with a ten year term and a fixed interest rate of 6.22 with interest only payments for five years. We are pleased with the valuations of these properties as they represent an aggregate valuation of approximately $181,000 per unit. In April, we provided notice to redeem an additional $140,000,000 of our twenty twenty five senior notes in May, leaving $100,000,000 outstanding after this latest repayment. Pro form a for this additional $140,000,000 pay down, we have approximately $120,000,000 of cash on hand.

Speaker 5

We have executed term sheets with lenders for aggregate proceeds of approximately $94,000,000 which will be secured by six senior living communities. We expect these financings to close in May and are confident the proceeds from these financings along with cash on hand will address our bonds due in June. With our June 2025 bond maturity address as noted above, we have turned our focus to proactively addressing our January 2026 Euro coupon bond. As Chris noted, we have sold 22 properties that were collateral to our zero coupon bond and used net proceeds of two ninety nine million dollars to partially redeem these bonds leaving $641,000,000 outstanding on net debt. We intend to use most of the proceeds from the $350,000,000 to $400,000,000 of pending property dispositions to further pay down this bond.

Speaker 5

We expect these property dispositions will cover more than half of the remaining outstanding balance with the rest coming from additional financing activity. As a reminder, we do have the option to extend the maturity by one year to January 2027. Once these bonds have been addressed, we have no debt maturities until 2028 providing ample runway to continue improving operations and results in our SHOP segment and driving shareholder value. The improvement in SHOP NOI coupled with strengthening our balance sheet through dispositions and refinancings resulted in our net debt to adjusted EBITDAre declining significantly from 11.2 times at December 31 to 8.8 times at March 31. In closing, we are confident that we will meet our 2025 and 2026 debt maturities leaving us until 2028 before our next maturity.

Speaker 5

Additionally, as Anthony noted, we are pleased with our Q1 results including the growth in SHOP NOI and at this time are reaffirming our 2025 SHOP NOI guidance range of 120,000,000 to $135,000,000 with the potential to increase our guidance if these trends continue in the second quarter and we get more clarity on the timing of dispositions. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question will come from Justin Hasbeak with RBC Capital Markets. Please go ahead.

Speaker 6

Yes, thanks for taking the question. Looks like during the seasonally weak quarter for the industry occupancy was up 20 bps sequentially for the entire shop versus down 40 bps sequentially this time last year. Can you just provide some color on the occupancy gains for the first quarter?

Speaker 2

Yes. Occupancy in general has improved for a variety of different reasons. I think kind of more specifically as we work through the last couple of years with investing capital in our communities, certainly getting the benefit of that more broadly speaking across The U. S. And I think we should expect to see more of that as we go into 2025 having completed an additional 23 refreshes in Q1.

Speaker 2

And so one part, it's just overall kind operations and the managers focusing on certain initiatives to drive occupancy as they capital and then kind of just being positioned appropriately within the markets to drive overall improvement.

Speaker 6

Okay. And can you provide some color on the Aleris Life dividend? Is this a one time payment? Or could DHC continue to receive future dividends like this?

Speaker 5

I would say for modeling purposes this was more of a one time dividend that we received for our 34% interest based off some strategic actions that Aleris has taken. They are performing well with positive EBITDA. So there's potential for dividends in the future, but I wouldn't think at this time they're of the magnitude of what we saw in February.

Speaker 6

Okay. And then on the SHOP results, the if you annualize the NOI for the current quarter, it's significantly above the top end of your range for SHOP guide for the full year SHOP guide. Just wondering if there's any reasoning behind not increasing the guidance? Do you guys expect something that we that in the future quarters that we don't know about? Or any color there would be great.

Speaker 4

Look, we've come out

Speaker 5

of the gate strong beginning 2025. We're very pleased with our NOI performance in the first quarter. As we noted, we did have some business interruption proceeds of $2,700,000 that was favorably impacting NOI in the quarter. So that needs to be stripped out from a run rate basis. We are trending to the high end of our guidance.

Speaker 5

We do get the benefit in the first quarter of a few fewer days in the quarter that helps with salaries and benefits that normalizes as we go out through the year. So look, we're very pleased. We do have a lot of dispositions that are in flux. And as we get more clarity on the timing of those dispositions, we're hopeful we'll be in a position to increase our guidance as early as the second quarter.

Speaker 6

That's it for me. Thank you very much.

Operator

Our next question will come from John Massocca with B. Riley. Please go ahead.

Speaker 2

Good morning. Morning.

Speaker 3

Maybe kind of building on that

Speaker 4

last question. You were able to keep your

Speaker 3

SHOP property operating expenses pretty flat. Anything specific there to call out? Anything one time ish beyond the favorable kind of day mix versus 4Q? Just kind of curious what's going on there.

Speaker 5

Yes. So sequentially operating expenses in SHOP were flat. On a year over year basis they're up about 3%. We would expect for 2025 our expenses to trend about 3% higher than where we were in 2024. We have spoken previously about savings in our insurance premiums from our policy that resets on July 1 of each year.

Speaker 5

So we are we've been seeing a benefit of that since the third quarter of twenty four, but nothing really material one time that would impact that.

Speaker 3

Okay. And then on the CapEx front, anything notable to call out there? Just thinking obviously seasonally 2Q, 3Q tend to be the highest. Is that guidance kind of reaffirmed? And is there anything maybe that can potentially drive savings there for the remainder of the year?

Speaker 4

Yes. Good morning. This is Anthony. So historically you're right. Most of our spend tends to be weighted towards the second half of the year.

Speaker 4

Last year I believe roughly two thirds of our spend came in the second half. So that's why we're reaffirming our guidance at this time. So we're in line with what we expected through the first quarter. But as of now, it's really to tell if we can make any changes that's based off of disposition timing or whatnot. So reaffirming what we've previously guided towards.

Speaker 3

Okay. And then on the debt front, what are you expecting in terms of pricing maybe on the $94,000,000 but even beyond that as you look to kind of address the zero coupons kind of half with financing?

Speaker 5

Yes. So on this first phase of financing, we spoke last quarter of a weighted average interest rate of about 6.5%. And I would say give or take that's pretty close for once we complete this $94,000,000 which we're very pleased with given we're paying off 9.75% debt. So it's extremely accretive for us. As we look forward to any partial financing for the repayment of the twenty twenty six's, It's too early to really tell just because there's a lot of different options we have with financing giving our large unencumbered balance sheet.

Speaker 5

But I would say pricing is probably below 7% for any financing we were to do on a secured basis.

Speaker 2

Yes. And I would just add to that And we talked about it. We have a significant amount of dispositions that we've talked about. We've added new dispositions to the market of non core MOB and life science properties. And so I think more specifically as we're able to kind of look forward and transact over the next several quarters, that's going to have a meaningful favorable impact further reducing those 26s.

Speaker 2

And so what we're left with at the end is going to be kind of a smaller tranche of financing with what we believe to be kind of a good quality portfolio of remaining encumbered properties within that debt tranche.

Speaker 3

Okay. Any thoughts on timing for the financing to kind of address the 26s? I mean, is that something that's coming a couple of months in the coming months or is that something that maybe is closer to year end?

Speaker 2

Well, think a lot of

Speaker 5

the dispositions are going to happen in the second half of the year. So more kind of back weighted and financings is probably beginning of the fourth quarter rather than waiting till the end of the maturity in January.

Speaker 3

Okay. That's it for me. I appreciate all the color. Thank you.

Operator

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Chris Valita, President and Chief Executive Officer for any closing remarks.

Speaker 2

Thank you for joining our call today. We look forward to seeing many of you at the upcoming NAREIT Conference in June. Institutional investors should contact our Investor Relations if you'd like to schedule a meeting with management. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Diversified Healthcare Trust Q1 2025
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