DHC 21Q2 Update

Progress on Strategic Repositioning; Performance in Line with Expectations; Upgrading Performance Rating; Maintaining Price Target of ~$7.50.

DHC reported 21Q2 normalized funds from operations (FFO) of $12.2 million or $0.05 per share, lower than 20Q2’s $0.25, due mostly to a 780 bp decline in senior housing operating portfolio (SHOP) occupancy.  Although SHOP occupancy was down vs. the prior year, it increased 140 bp sequentially, suggesting that a bottom is in.  Still, the pace of the rebound is uncertain due to the Delta variant, among other factors.  DHC’s office portfolio also reported a  drop in profits mostly due to previous asset sales and a 100 bp decline in occupancy.  However, strong lease-ups and the added contribution from redevelopment projects should improve its profitability going forward.

In April, DHC announced its plan to transition to other operators 108 smaller senior living communities that are currently managed by its affiliate Five Star Senior Living (FVE) and located mostly in the Southeast.  In June, it announced signed agreements for 76 of those properties with three regional operators.  41 of the 76 had been transferred as of August 3.  Although DHC has not disclosed the terms of these new arrangements, it expect to see meaningful improvements in occupancy at the 108 properties over time.

On March 31, DHC drew down its entire $800 million credit facility to ensure its liquidity in anticipation that it would violate the minimum debt service coverage requirement of 1.5 times.  That followed a two-notch credit rating downgrade by Moody’s and a one-notch downgrade by S&P in February.

The end game, as I see it, remains the repayment/refinancing of the $1 billion 9.75% Senior Notes as soon as possible after the issue becomes callable in 2022.  This could be accomplished through a combination of new equity and debt issuance, the proceeds of which would be used to repay the 9.75s.  Raising new equity capital will require meaningful progress on building back SHOP occupancy.  Although DHC’s occupancy seems to have bottomed out one quarter ahead of my expectations, there is still considerable uncertainty about whether and when the industry will return to pre-COVID occupancy levels.  Nevertheless, I am maintaining my price target of ~$7.50 and raising my performance rating on the stock a notch to “1” (strong outperformance), given the stock’s decline year-to-date.

This is a summary of my update report on DHC dated August 18, 2021. To obtain a copy of the report, give me a call.

August 20, 2021

Stephen P. Percoco
Lark Research
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Linden, New Jersey 07036
(908) 975-0250
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