Diversified Healthcare Trust (DHC) 22Q2 Update

22Q2 GAAP loss was $0.46 per share and normalized FFO -$0.04 per share, below my forecast of -$0.42 and +$0.01, respectively.  The Office Portfolio disappointed again, raising concerns about declining occupancy.  Senior Housing Operating Portfolio (SHOP) results met expectations.

DHC redeemed $500 million of the 9.75% Senior Notes on June 15, below my estimate of $700 million.  In June, it sold a 10% interest in its Boston life sciences joint venture for $109 million.  In July, it acquired a life sciences property in the San Francisco Bay area for $82 million at a 6.50% cap rate.

Based upon the lower-than anticipated redemption of the 9.75s and earnings from joint ventures that are running below my expectations (and now set to go lower with the sale of the 10% interest), I have reduced my normalized FFO projections to -$0.10 for 2022 and $0.25 for 2023.  Yet, with the significant earnings leverage in SHOP, which is now running a little above breakeven, there is upside to my earnings estimates, even though the Trust still faces the tough tasks of building back occupancy in SHOP and maintaining occupancy in the Office Portfolio.

DHC’s stock has fallen 36% year-to-date vs. the 1% advance in the S&P Small Cap 600.  Despite the mediocre 22Q2 results, the stock has rebounded 14% since reporting earnings on August 4.  This perhaps is a sign that a bottom is in.  With the cut in earnings estimates, I am reducing my price target on DHC’s stock to $3.00 (from $5.00 previously).  The new price target equates to a one-year forward multiple of 12 applied to projected 2023 FFO per share of $0.25.  At the current share price, the new PT represents a potential total return of 52%, including the 2.0% dividend yield.  Consequently, I am maintaining my performance rating of “1”, strong outperformance.

This is a summary of my recent report on Diversified Healthcare Trust (DHC). To obtain a copy of the full report, please reach out to me using the contact information provided below.

August 15, 2022

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

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