DHC 22Q1 Update

22Q1 In Line with Expectations.  Maintaining Performance Rating and Price Target.

22Q1 GAAP earnings were $1.01 per share and normalized FFO $0.09 per share, in line with my expectations of $1.04 and $0.06.  Excluding a $327.8 million gain on the sale of JV interests, the performance of the Office Portfolio was moderately below expectations, but Senior Housing Operating Portfolio (SHOP) results were better than anticipated.

DHC ended 22Q1 with $1.49 billion of cash, $759.9 million of which was restricted but available for debt repayment.  This gives it the means to retire a large portion of the 9.75% Senior Notes that become callable in June.  My analysis suggests that the Trust can retire $700 million of the 9.75s and maintain adequate liquidity.  However, if DHC plans an even higher level of capital expenditures over the next two years, it probably will call fewer bonds, perhaps ~$500 million, according to my analysis.  In that case, I may reduce my price target to $3.50-$4.00.

My projections anticipate that DHC will buy back $700 million of the 9.75s in June.  With the interest savings and steady improvement in its core businesses, especially in SHOP, I project 2023 normalized FFO of $0.39 per share.  On that basis, I maintain my strong buy rating and price target of $5.00, which equates to a 2023 forward multiple of 12.8 times normalized FFO.

DHC’s stock has declined 22% since my last report, worse than the 10% drop in small cap stocks and REITs.  The declines reflect concerns about rising interest rates on real estate values and general economic activity, to which DHC is more exposed owing to its high leverage.  Some of the decline may also be due to AlerisLife’s hiring of Alvarez & Marsal (A&M) for a comprehensive operational review, because of A&M’s traditional focus on troubled debt restructurings.  Nevertheless, as long as the economic environment does not deteriorate significantly, I believe that DHC has sufficient financial resources to follow through on its turnaround plan.

This is a summary of my recent report on Diversified Healthcare Trust (DHC). For a copy of the full report, please contact me by telephone or by email.

May 16, 2022

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

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