On Tuesday, B.Riley analyst Bryan Maher adjusted the price target for Diversified Healthcare Trust (NASDAQ: NASDAQ:DHC) to $5.00 from the previous $6.00. Despite the reduction, the analyst maintained a Buy rating on the shares. DHC's third-quarter results were complex, marred by an earnings miss influenced by unforeseen events, including Hurricane Helene in late September and a fire at one senior housing community.
The real estate investment trust (REIT) did not exclude approximately $2.5 million in one-time costs related to these incidents from its earnings.
Maher noted the softness in the Senior Housing Operating Portfolio (SHOP) Net Operating Income (NOI), but emphasized the importance of investors recognizing these one-time events as they project the SHOP NOI recovery into 2025-2026. DHC's fourth-quarter results are also expected to be affected by Hurricane Milton, which occurred in early October, and ongoing SHOP NOI margin pressures.
DHC is implementing strategies to mitigate the impact on SHOP results, including the sale of 32 underperforming communities, which contributed a negative $2.0 million of NOI in the third quarter. These properties are anticipated to sell for between $135.0 million and $155.0 million in the first half of 2025. This follows the sale of 18 communities to Brookdale (NYSE:BKD) for $135.0 million.
These divestitures are projected to not only decrease future capital expenditures but also improve the NOI of the remaining SHOP portfolio.
Another concern affecting DHC's share performance was the change in refinancing plans. Instead of a single large debt financing of $500.0 million to replace the June 2025 9.75% notes, DHC will opt for several smaller debt issuances with similar terms. Maher believes that these steps, along with the asset sales and DHC's current cash reserves of $261.4 million, will sufficiently cover the maturities due in 2025-2026.
Despite the near-term challenges and the adjustment in the refinancing approach, Maher reiterates a positive outlook on DHC shares. The lowered price target reflects the refinancing changes and the short-term softness in SHOP NOI, with the new target based on a 13.0x multiple of the estimated 2025 EBITDA.
InvestingPro Insights
Recent InvestingPro data and tips offer additional context to Diversified Healthcare Trust's (DHC) current situation. The company's market cap stands at $682.81 million, with a price-to-book ratio of 0.33, indicating the stock may be undervalued relative to its assets. This aligns with an InvestingPro Tip suggesting that DHC is "trading at a low Price / Book multiple."
The company's revenue for the last twelve months as of Q3 2024 was $1.48 billion, with a growth rate of 6.62%. However, DHC's profitability remains a concern, as highlighted by its negative operating income of $75.6 million and a gross profit margin of 16.87%. An InvestingPro Tip notes that DHC "suffers from weak gross profit margins," which corroborates the analyst's observations about NOI pressures.
Despite these challenges, DHC has maintained dividend payments for 26 consecutive years, as per another InvestingPro Tip. This long-standing dividend history may provide some reassurance to income-focused investors, even as the company navigates its current difficulties.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for DHC, providing a broader perspective on the company's financial health and market position.
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