With its upcoming August 30th shareholder vote on its merger with Office Properties Income Trust, Diversified Healthcare Trust provided some discouraging news on its seniors housing portfolio. It is almost as if they wanted to have bad news, since the dissident shareholders have been touting the recovery of DHC’s SHOP portfolio as one of many reasons to reject the proposed merger as undervaluing DHC.
The reason why we say that they seemed to want to share bad news is that they keep on comparing results with 2019 performance, as in July occupancy was 750 basis points below July 2019. Yes, we all know that most operators have not fully recovered from pre-pandemic census levels, but is it really necessary to highlight the fact? Perhaps they are trying to prove to shareholders who are on the fence with their vote that it will be a long, slow road to recovery and they won’t see that increased value for a while.
Occupancy in July did increase by 30 basis points sequentially to 79.0%, which seems to be somewhat average, and this was on top of a June increase of 60 basis points. But the operating margin decreased sequentially from 7.7% to 6.3%, mostly because the average unit rate dropped and expenses increased.
It gets more interesting, however, when the components of the SHOP properties are broken out. The 117 properties managed by Five Star/Aleris posted a July occupancy of 79.5%, the highest of the year so far, with an operating margin of 9.7%, down from 11.4% in June, mostly because of a 2.2% sequential increase in operating costs and a 3.1% decline in average monthly rate. Both seem quite large for a one-month change. Year over year the average monthly rate declined by 7%.
Then, looking at the 106 properties managed by other operators, July census was at 77.6%, up 40 basis points from June, but 190 basis points lower than the Five Star portfolio. It gets worse, however. These 106 communities have posted a negative NOI margin every month this year, except in June. July’s margin was a negative -0.3%, and January was -7.3%. The monthly rates, however, are 28% higher than the rates in the Five Star communities. This leads us to believe that the acuity levels are higher in the “other” communities, but the other operators can’t seem to manage them properly.
This year seems to be the year of the management company shuffle, with investors and REITs removing underperforming operators and replacing them with operators that are supposed to do a better job. Regardless of what happens with the upcoming shareholder vote, it would seem that DHC should get some new managers for the 106 properties.
With the three major proxy firms advising shareholders to vote against the merger, we have to assume that there is a good chance it will not pass. But we would underestimate the Portnoy family at our peril.
