Shares of Diversified Healthcare Trust (NASDAQ: DHC) plummeted 5.21% on Monday after the company reported its third-quarter 2024 results, which highlighted the company's ongoing financial struggles.
Despite improvements in its SHOP segment, with same-property net operating income (NOI) rising 38.4% year-over-year, DHC continues to grapple with high debt levels and poor cash flow visibility. The company's medical office and life sciences portfolio also experienced significant occupancy declines of 5.9% compared to the previous year.
Investors are growing increasingly concerned about DHC's ability to service its upcoming debt maturities, particularly in 2025 and 2026. The company has been slow in selling off assets to generate cash, with only $35.7 million worth of assets sold since the beginning of 2024. DHC's debt-to-EBITDA ratio remains elevated at 10.6x, and interest coverage has deteriorated due to the issuance of 0% coupon notes with an effective interest rate of 22%.
While DHC's bonds are trading close to par, suggesting some confidence in the underlying assets, the upside for common shareholders appears limited. Consensus net asset value (NAV) estimates are below $4.00 per share, offering little potential upside given the company's financial challenges and the availability of other REITs trading at discounts to NAV without such significant debt burdens.
Investors seeking higher yields may be tempted by DHC's "baby bonds," including the 8.9% yielding DHCNI and the 9.3% yielding DHCNL. However, these high-yield bonds carry substantial risks due to the company's junk credit rating and financial distress, as reflected in their trading prices of $15.44 and $16.70, respectively, well below their $25 par value.
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