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dhc:agreement dhc:property
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2020
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
Commission File Number 1-15319 
DIVERSIFIED HEALTHCARE TRUST
(Exact Name of Registrant as Specified in Its Charter) 
Maryland
 
04-3445278
(State or Other Jurisdiction of Incorporation or
Organization)
 
(IRS Employer Identification No.)
 
Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634
(Address of Principal Executive Offices) (Zip Code) 
617 - 796 - 8350
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
Trading Symbol(s)
Name Of Each Exchange On Which Registered
Common Shares of Beneficial Interest
DHC
The Nasdaq Stock Market LLC
5.625% Senior Notes due 2042
DHCNI
The Nasdaq Stock Market LLC
6.25% Senior Notes due 2046
DHCNL
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No ☒
Number of registrant’s common shares outstanding as of May 6, 2020: 237,893,725



Table of Contents

DIVERSIFIED HEALTHCARE TRUST
FORM 10-Q
 
March 31, 2020
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Diversified Healthcare Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.



Table of Contents

PART I.  Financial Information
 
Item 1.  Financial Statements.
 
DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
 
 
 
March 31,
 
December 31,
 
 
2020
 
2019
Assets
 
 

 
 

Real estate properties:
 
 

 
 

Land
 
$
786,242

 
$
793,123

Buildings and improvements
 
6,648,430

 
6,668,463

Total real estate properties, gross
 
7,434,672

 
7,461,586

Accumulated depreciation
 
(1,612,328
)
 
(1,570,801
)
Total real estate properties, net
 
5,822,344

 
5,890,785

 
 
 
 
 
Assets of properties held for sale
 
244,881

 
209,570

Cash and cash equivalents
 
69,545

 
37,357

Restricted cash
 
15,691

 
14,867

Acquired real estate leases and other intangible assets, net
 
323,134

 
337,875

Other assets, net
 
228,128

 
163,372

Total assets
 
$
6,703,723

 
$
6,653,826

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Unsecured revolving credit facility
 
$
585,000

 
$
537,500

Unsecured term loans, net
 
449,035

 
448,741

Senior unsecured notes, net
 
1,821,560

 
1,820,681

Secured debt and capital leases, net
 
693,961

 
694,739

Liabilities of properties held for sale
 
8,218

 
6,758

Accrued interest
 
29,236

 
24,060

Assumed real estate lease obligations, net
 
74,430

 
76,705

Other liabilities
 
255,114

 
167,592

Total liabilities
 
3,916,554

 
3,776,776

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 

 
 

Equity attributable to common shareholders:
 
 
 
 
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,893,725 and 237,897,163 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
 
2,379

 
2,379

Additional paid in capital
 
4,612,739

 
4,612,511

Cumulative net income
 
2,062,297

 
2,052,562

Cumulative distributions
 
(4,026,418
)
 
(3,930,933
)
Total equity attributable to common shareholders
 
2,650,997

 
2,736,519

Noncontrolling interest:
 
 
 
 
Total equity attributable to noncontrolling interest
 
136,172

 
140,531

Total equity
 
2,787,169

 
2,877,050

Total liabilities and equity
 
$
6,703,723

 
$
6,653,826

 See accompanying notes.

1

Table of Contents

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Revenues:
 
 

 
 

Rental income
 
$
110,498

 
$
158,241

Residents fees and services
 
331,969

 
108,045

Total revenues
 
442,467

 
266,286

 
 
 
 
 
Expenses:
 
 

 
 

Property operating expenses
 
316,585

 
117,222

Depreciation and amortization
 
68,430

 
72,230

General and administrative
 
8,832

 
9,816

Acquisition and certain other transaction related costs
 
663

 
7,814

Impairment of assets
 
11,234

 
6,206

Total expenses
 
405,744

 
213,288

 
 
 
 
 
Gain (loss) on sale of properties
 
2,782

 
(122
)
Dividend income
 

 
923

Gains and losses on equity securities, net
 
(9,943
)
 
22,932

Interest and other income
 
138

 
114

Interest expense (including net amortization of debt premiums, discounts and issuance costs of $1,509 and $1,652, respectively)
 
(41,650
)
 
(45,611
)
Gain on lease termination
 
22,896

 

Loss on early extinguishment of debt
 
(246
)
 

Income from continuing operations before income tax expense and equity in earnings of an investee
 
10,700

 
31,234

Income tax expense
 
443

 
(134
)
Equity in earnings of an investee
 

 
404

Net income
 
11,143

 
31,504

Net income attributable to noncontrolling interest
 
(1,408
)
 
(1,422
)
Net income attributable to common shareholders
 
$
9,735

 
$
30,082

 
 
 
 
 
Other comprehensive income:
 
 

 
 

Equity in unrealized gain of an investee
 

 
66

Other comprehensive income
 

 
66

Comprehensive income
 
11,143

 
31,570

Comprehensive income attributable to noncontrolling interest
 
(1,408
)
 
(1,422
)
Comprehensive income attributable to common shareholders
 
$
9,735

 
$
30,148

 
 
 
 
 
Weighted average common shares outstanding (basic)
 
237,669

 
237,568

Weighted average common shares outstanding (diluted)
 
237,669

 
237,600

 
 
 
 
 
Per common share amounts (basic and diluted):
 
 

 
 

Net income attributable to common shareholders
 
$
0.04

 
$
0.13

 
See accompanying notes.

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DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands, except share data)
(unaudited)
 
 
Number of
Shares
 
Common
Shares
 
Additional
Paid-in
Capital
 
Cumulative
Net Income
 
Cumulative Other
Comprehensive
Income (Loss)
 
Cumulative Distributions
 
Total Equity Attributable to Common Shareholders
 
Total Equity Attributable to Noncontrolling
Interest
 
Total Equity
Balance at December 31, 2019:
 
237,897,163

 
$
2,379

 
$
4,612,511

 
$
2,052,562

 
$

 
$
(3,930,933
)
 
$
2,736,519

 
$
140,531

 
$
2,877,050

Net income
 

 

 

 
9,735

 

 

 
9,735

 
1,408

 
11,143

Distributions
 

 

 

 

 

 
(35,684
)
 
(35,684
)
 

 
(35,684
)
Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock
 

 

 

 

 

 
(59,801
)
 
(59,801
)
 

 
(59,801
)
Share grants
 

 

 
249

 

 

 

 
249

 

 
249

Share repurchases
 
(3,438
)
 

 
(21
)
 

 

 

 
(21
)
 

 
(21
)
Distributions to noncontrolling interest
 

 

 

 

 

 

 

 
(5,767
)
 
(5,767
)
Balance at March 31, 2020:
 
237,893,725

 
$
2,379

 
$
4,612,739

 
$
2,062,297

 
$

 
$
(4,026,418
)
 
$
2,650,997

 
$
136,172

 
$
2,787,169

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018:
 
237,729,900

 
$
2,377

 
$
4,611,419

 
$
2,140,796

 
$
(266
)
 
$
(3,731,214
)
 
$
3,023,112

 
$
156,758

 
$
3,179,870

Net income
 

 

 

 
30,082

 

 

 
30,082

 
1,422

 
31,504

Other comprehensive income
 

 

 

 

 
66

 

 
66

 

 
66

Distributions
 

 

 

 

 

 
(92,714
)
 
(92,714
)
 

 
(92,714
)
Share grants
 

 

 
215

 

 

 

 
215

 

 
215

Distributions to noncontrolling interest
 

 

 

 

 

 

 

 
(5,503
)
 
(5,503
)
Balance at March 31, 2019:
 
237,729,900

 
$
2,377

 
$
4,611,634

 
$
2,170,878

 
$
(200
)
 
$
(3,823,928
)
 
$
2,960,761

 
$
152,677

 
$
3,113,438

See accompanying notes.

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DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Cash flows from operating activities:
 
 

 
 

Net income
 
$
11,143

 
$
31,504

Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
68,430

 
72,230

Amortization of debt issuance costs and debt discounts and premiums
 
1,509

 
1,652

Straight line rental income
 
(1,153
)
 
(1,934
)
Amortization of acquired real estate leases and other intangible assets
 
(1,873
)
 
(1,525
)
Loss on early extinguishment of debt
 
25

 

Gain on lease termination
 
(22,896
)
 

Impairment of assets
 
11,234

 
6,206

(Gain) loss on sale of properties
 
(2,782
)
 
122

Gains and losses on equity securities, net
 
9,943

 
(22,932
)
Other non-cash adjustments
 
(943
)
 
(943
)
Equity in earnings of an investee
 

 
(404
)
Change in assets and liabilities:
 
 

 
 

Other assets
 
(39,433
)
 
(5,862
)
Accrued interest
 
5,167

 
9,059

Other liabilities
 
17,941

 
(45,658
)
Net cash provided by operating activities
 
56,312

 
41,515

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(2,526
)
 

Real estate improvements
 
(41,045
)
 
(46,237
)
Proceeds from sale of properties, net
 
16,930

 
2,929

Net cash used in investing activities
 
(26,641
)
 
(43,308
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from borrowings on revolving credit facility
 
130,500

 
178,000

Repayments of borrowings on revolving credit facility
 
(83,000
)
 
(92,000
)
Repayment of other debt
 
(2,466
)
 
(1,309
)
Loss on early extinguishment of debt settled in cash
 
(221
)
 

Repurchase of common shares
 
(21
)
 

Distributions to noncontrolling interest
 
(5,767
)
 
(5,503
)
Distributions to shareholders
 
(35,684
)
 
(92,714
)
Net cash provided by (used in) financing activities
 
3,341

 
(13,526
)
 
 
 
 
 
Increase (decrease) in cash and cash equivalents and restricted cash
 
33,012

 
(15,319
)
Cash and cash equivalents and restricted cash at beginning of period
 
52,224

 
70,071

Cash and cash equivalents and restricted cash at end of period
 
$
85,236

 
$
54,752


See accompanying notes.

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DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
35,280

 
$
35,034

Income taxes paid
 
$

 
$
31

 
 
 
 
 
Non-cash investing activities:
 
 
 
 
Five Star Senior Living Inc. common stock
 
$
97,896

 
$

Transaction Agreement additional consideration
 
(75,000
)
 

Capitalized interest
 
$
306

 
$
134

 
 
 
 
 
Non-cash financing activities:
 
 
 
 
Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock
 
$
(59,801
)
 
$

Supplemental disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within our condensed consolidated balance sheets to the amount shown in our condensed consolidated statements of cash flows:
 
 
As of March 31,
 
 
2020
 
2019
Cash and cash equivalents
 
$
69,545

 
$
39,875

Restricted cash (1)
 
15,691

 
14,877

Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows
 
$
85,236

 
$
54,752

(1) Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and cash held for the operations of one of our life science properties that is owned in a joint venture arrangement in which we own a 55% equity interest.

See accompanying notes.



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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
Note 1.  Basis of Presentation
The accompanying condensed consolidated financial statements of Diversified Healthcare Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our Annual Report.  
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets. We have made reclassifications to the financial statements of prior periods to conform to the current period presentation. These reclassifications had no effect on net income or equity.
We have a joint venture arrangement with an institutional investor for one of our life science properties located in Boston, Massachusetts. The investor owns a 45% equity interest in the joint venture, and we own the remaining 55% equity interest in the joint venture. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,004,119 and $1,015,661 as of March 31, 2020 and December 31, 2019, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $702,544 and $704,344 as of March 31, 2020 and December 31, 2019, respectively, and consist primarily of the secured debts on the property. The investor's interest in this consolidated entity is reflected as a noncontrolling interest in our condensed consolidated financial statements. See Note 7 for further information about this joint venture.

Note 2.  Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We adopted this standard which was effective as of January 1, 2020 using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements.

Note 3.  Real Estate Properties
As of March 31, 2020, we owned 416 properties located in 38 states and Washington, D.C., including 24 properties classified as held for sale and one life science property owned in a joint venture arrangement in which we own a 55% equity interest.
Impairment:
We regularly evaluate our assets for indications of impairment. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to

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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected assets by comparing it to the expected future undiscounted net cash flows to be generated from those assets. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.
During the three months ended March 31, 2020, we recorded impairment charges of $5,581 to adjust the carrying values of five senior living communities to their aggregate estimated fair value less estimated costs to sell. These five senior living communities are classified as held for sale in our condensed consolidated balance sheet as of March 31, 2020. During the three months ended March 31, 2020, we also recorded a reversal of impairment charges of $565 related to two senior living communities that were classified as held for sale as of December 31, 2019 and changed the status of those communities from held for sale to held and used as of March 31, 2020.
During the three months ended March 31, 2020, we recorded impairment charges of $6,505 to adjust the carrying value of seven medical office properties to their aggregate estimated fair value less estimated costs to sell. We sold one of these medical office properties in February 2020 and the remaining six medical office properties are classified as held for sale in our condensed consolidated balance sheet as of March 31, 2020. During the three months ended March 31, 2020, we also recorded a reversal of impairment charges of $287 related to two medical office properties that were classified as held for sale as of December 31, 2019 and changed the status of those properties from held for sale to held and used as of March 31, 2020. These impairment charges, in aggregate, are included in impairment of assets in our condensed consolidated statements of comprehensive income.
Acquisitions:
In January 2020, we acquired a vacant land parcel adjacent to a property we own in our portfolio of medical office and life science properties, or our Office Portfolio, segment located in Tempe, Arizona for $2,600, excluding closing costs.
Dispositions:
During the three months ended March 31, 2020, we sold eight properties for an aggregate sales price of $17,604, excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions individually or in the aggregate, nor do we believe they represent a strategic shift in our business. As a result, the results of the operation for these properties are included in continuing operations through the date of sale of such properties in our condensed consolidated statements of comprehensive income.
Date of Sale
 
Location
 
Type of Property
 
Number of Properties
 
Square Feet
 
Sales Price (1)
 
Gain (loss) on Sale
January 2020
 
Louisiana
 
Medical Office
 
6
 
40,575

 
$
5,925

 
$
(81
)
February 2020
 
Pennsylvania
 
Medical Office
 
1
 
50,000

 
2,900

 

March 2020
 
Texas
 
Medical Office
 
1
 
70,229

 
8,779

 
2,863

 
 
 
 
 
 
8
 
 
 
$
17,604

 
$
2,782


(1)
Sales price excludes closing costs.
As of March 31, 2020, we had ten properties in our Office Portfolio segment and 14 senior living communities in our senior housing operating portfolio, or SHOP, segment with an aggregate undepreciated carrying value of $287,397 classified as held for sale in our condensed consolidated balance sheet as of March 31, 2020. Subsequent to March 31, 2020, we sold three of these properties for an aggregate sales price of $47,000, excluding closing costs.
As of May 6, 2020, we had 27 properties under agreements to sell for an aggregate sales price of approximately $164,047, excluding closing costs. We may not complete the sales of any or all of the properties we currently plan to sell. Also, we may sell some or all of these properties at amounts that are less than currently expected and/or less than the carrying values of such properties and we may incur losses on any such sales as a result.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)


Note 4.  Leases
We are a lessor of medical office and life science properties, senior living communities and other healthcare related properties. Our leases provide our tenants with the contractual right to use and economically benefit from all of the premises demised under the leases; therefore, we have determined to evaluate our leases as lease arrangements.
Certain of our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term.
We increased rental income to record revenue on a straight line basis by $1,153 and $1,934 for the three months ended March 31, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $103,340 and $99,297 of straight line rent receivables at March 31, 2020 and December 31, 2019, respectively, and are included in other assets, net in our condensed consolidated balance sheets.
We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. We recognized such payments totaling $20,028 and $18,845 for the three months ended March 31, 2020 and 2019, respectively, of which tenant reimbursements totaled $1,020 and $1,197, respectively.
As a result of market disruptions due to the COVID-19 pandemic, some of our tenants have requested relief from their obligation to pay rent due to us. As of May 4, 2020, we granted requests for certain of our tenants to defer rent payments totaling $4,822. These tenants will be obligated to pay, in most cases, the deferred rents in 12 equal monthly installments commencing in September 2020.
Right of Use Asset and Lease Liability. For leases where we are the lessee, we recognized a right of use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and the right of use asset being amortized over the term of the lease. The value of the right of use asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $4,299 and $4,449, respectively, as of March 31, 2020, and $4,319 and $4,461, respectively, as of December 31, 2019. The right of use asset and related lease liability are included within other assets, net and other liabilities, respectively, within our condensed consolidated balance sheets. In addition, we lease equipment at certain of our managed senior living communities. These leases are short term in nature, are cancelable with no fee or do not result in an annual expense in excess of our capitalization policy and, as a result, are not recorded on our condensed consolidated balance sheets.

Note 5.  Indebtedness
Our principal debt obligations at March 31, 2020 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) $1,850,000 outstanding principal amount of senior unsecured notes; (3) $450,000 outstanding principal amount under two term loans; and (4) $687,154 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by eight properties, of which $620,000 is related to a joint venture arrangement in which we own a 55% equity interest. These eight mortgaged properties had a gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs of $1,271,352 at March 31, 2020. We also had two properties subject to capital leases with lease obligations totaling $8,615 at March 31, 2020; these two properties had gross book value of real estate assets of $35,627 at March 31, 2020, and the capital leases expire in 2026. As of March 31, 2020, $1,267 of principal mortgage obligations, secured by one property, are included in liabilities of properties held for sale in our condensed consolidated balance sheet.
We have a $1,000,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility

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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

until maturity, and no principal repayment is due until maturity. At March 31, 2020, our revolving credit facility required interest to be paid on borrowings at the annual rate of LIBOR plus a premium of 120 basis points, plus a facility fee of 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. Effective April 1, 2020, our revolving credit facility premium and facility fee increased to 155 and 30 basis points per annum, respectively, due to a downgrade of our credit rating.
As of March 31, 2020, the annual interest rate payable on borrowings under our revolving credit facility was 1.8%. The weighted average annual interest rates for borrowings under our revolving credit facility were 2.6% and 3.6% for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, we had $585,000 outstanding and $415,000 available for borrowing, and as of May 6, 2020, we had $775,000 outstanding and $225,000 available for borrowing under our revolving credit facility.
We have a $250,000 unsecured term loan that matures in June 2020 and is prepayable without penalty at any time. Subject to the satisfaction of certain conditions, including the payment of an extension fee, we have the option to extend the maturity date by six months. At March 31, 2020, this term loan required interest to be paid at the annual rate of LIBOR plus a premium of 125 basis points that is subject to adjustment based upon changes to our credit ratings. Effective April 1, 2020, the interest rate premium for this term loan increased to 165 basis points per annum due to a downgrade of our credit rating. At March 31, 2020, the annual interest rate payable on amounts outstanding under this term loan was 1.9%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.7% for the three months ended March 31, 2020. We obtained this term loan in December 2019.
We have a $200,000 unsecured term loan that matures in September 2022 and is prepayable without penalty at any time. At March 31, 2020, this term loan required interest to be paid at the annual rate of LIBOR plus a premium of 135 basis points that is subject to adjustment based upon changes to our credit ratings. Effective April 1, 2020, the interest rate premium for this term loan increased to 175 basis points per annum due to a downgrade of our credit rating. At March 31, 2020, the annual interest rate payable on amounts outstanding under this term loan was 2.3%. The weighted average annual interest rate for amounts outstanding under this term loan was 3.1% and 3.9% for the three months ended March 31, 2020 and 2019, respectively.
In February 2020, we prepaid a mortgage note secured by one of our life science properties with an outstanding principal balance of approximately $1,554, a maturity date in March 2026 and an annual interest rate of 6.25%. As a result of this prepayment, we recorded a loss on early extinguishment of debt of $246 for the three months ended March 31, 2020. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
In April 2020, we redeemed all of our outstanding 6.75% senior notes due 2020 for a redemption price equal to the principal amount of $200,000 plus accrued and unpaid interest of $6,750. We funded this redemption with cash on hand and borrowings under our revolving credit facility.
In May 2020, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $1,213, a maturity date in January 2022 and an annual interest rate of 7.49%. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at March 31, 2020. Although we have taken steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative economic impact resulting from the COVID-19 pandemic may cause increased pressure on our ability to satisfy financial and other covenants.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)


Note 6.  Fair Value of Assets and Liabilities
The following table presents certain of our assets that are measured at fair value at March 31, 2020, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
 
 
 
 
Fair Value at Reporting Date Using
 
 
 
 
Quoted Prices in 
Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring Fair Value Measurements Assets:
 
 
 
 
 
 
 
 
Investment in Five Star (1)
 
$
29,723

 
$
29,723

 
$

 
$

Non-Recurring Fair Value Measurements Assets:
 
 
 
 
 
 
 
 
Real estate properties held for sale (2)
 
$
98,927

 
$

 
$
98,927

 
$


(1)
Our 10,691,658 shares of common stock of Five Star Senior Living Inc., or Five Star, are included in other assets, net in our condensed consolidated balance sheets, and are reported at fair value, which is based upon quoted market prices on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs). On April 1, 2019, we entered into a transaction agreement with Five Star, or the Transaction Agreement, to restructure our business arrangements with Five Star, or the Restructuring Transaction. Pursuant to the Transaction Agreement, on January 1, 2020, Five Star issued 10,268,158 Five Star common shares to us. The fair value and initial cost basis of the Five Star common shares issued to us on January 1, 2020 was $38,095. Our adjusted cost basis inclusive of the 423,500 Five Star common shares we owned as of December 31, 2019 and the 10,268,158 Five Star common shares issued to us on January 1, 2020 was $44,448 as of March 31, 2020. During the three months ended March 31, 2020, we recorded an unrealized loss of $9,943, which is included in gains and losses on equity securities, net in our condensed consolidated statements of comprehensive income, to adjust the carrying value of our investment in Five Star common shares to their fair value. See Note 12 for further information about our investment in Five Star.
(2)
We have assets in our condensed consolidated balance sheets that are measured at fair value on a nonrecurring basis. During the three months ended March 31, 2020, we recorded impairment charges of $6,544 to reduce the carrying value of six medical office properties that are classified as held for sale to their estimated sales price, less estimated costs to sell of $1,658, based on purchase and sale agreements that we have entered into with third party buyers for these medical office properties of $51,640. We also recorded impairment charges of $5,581 to reduce the carrying value of five senior living communities that are classified as held for sale to their estimated sales price, less estimated costs to sell of $655, based on purchase and sale agreements that we have entered into with third party buyers for these senior living communities of $49,600. See Note 3 for further information about impairment charges and these and other properties we have classified as held for sale.
In addition to the assets described in the table above, our financial instruments at March 31, 2020 and December 31, 2019 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows:
 
 
As of March 31, 2020
 
As of December 31, 2019
Description
 
Carrying Amount (1)
 
Estimated Fair Value
 
Carrying Amount (1)
 
Estimated Fair Value
Senior unsecured notes
 
$
1,821,560

 
$
1,568,167

 
$
1,820,681

 
$
1,890,386

Secured debts(2)(3)
 
695,228

 
744,082

 
697,729

 
697,142

 
 
$
2,516,788

 
$
2,312,249

 
$
2,518,410

 
$
2,587,528

(1)
Includes unamortized debt issuance costs, premiums and discounts.
(2)
We assumed certain of these secured debts in connection with our acquisition of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

adjustments, if any, to interest expense over the respective terms of the mortgage notes to adjust interest expense to the estimated market interest rates as of the date of acquisition.
(3)
Includes $1,267 of principal mortgage obligations for a property classified as held for sale as of March 31, 2020. This mortgage is included in liabilities of properties held for sale in our condensed consolidated balance sheet as of March 31, 2020.
We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of March 31, 2020. We estimated the fair values of our four issuances of senior unsecured notes due 2020, 2021, 2024 and 2028 using an average of the bid and ask price on Nasdaq on or about March 31, 2020 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values.
Realized and unrealized gains and losses for our equity securities for the three months ended March 31, 2020 and 2019 were as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Realized gains and losses on equity securities sold (1)
 
$

 
$
20,836

Unrealized gains and losses on equity securities held
 
(9,943
)
 
2,096

Gains and losses on equity securities, net
 
$
(9,943
)
 
$
22,932

(1)
For further information about our former investment in The RMR Group Inc., or RMR Inc., that we sold on July 1, 2019, see our Annual Report.

Note 7. Noncontrolling Interest
We have a joint venture arrangement with an institutional investor for one of our life science properties located in Boston, Massachusetts. The investor owns a 45% equity interest in the joint venture, and we own the remaining 55% equity interest in the joint venture. We continue to control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,408 and $1,422 for the three months ended March 31, 2020 and 2019, respectively, is reported as a noncontrolling interest in our condensed consolidated statements of comprehensive income. The joint venture made aggregate cash distributions of $5,767 and $5,503 to the other joint venture investor for the three months ended March 31, 2020 and 2019, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of March 31, 2020, this joint venture held real estate assets with an aggregate net book value of $719,811, subject to mortgage notes of $620,000.
In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligations to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.

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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)


Note 8.  Shareholders’ Equity
Common Share Purchases:
During the three months ended March 31, 2020, we purchased our common shares from certain former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at the closing price of our common shares on Nasdaq on the purchase dates, as follows:
Date Purchased
 
Number of Shares
 
Price per Share
1/9/2020
 
1,938

 
$
8.10

3/13/2020
 
1,500

 
$
3.79


Distributions:
During the three months ended March 31, 2020, we declared and paid a quarterly distribution to common shareholders as follows:
Record Date
 
Payment Date
 
Distribution Per Share
 
Total Distributions
January 27, 2020
 
February 20, 2020
 
$
0.15

 
$
35,684


As described in Note 10, pursuant to the Transaction Agreement, on January 1, 2020, Five Star issued an aggregate of 16,118,849 of its common shares, with a value of $59,801, to our shareholders of record as of December 13, 2019. We recorded this issuance as a non-cash distribution in our condensed consolidated financial statements.
On April 2, 2020, we declared a quarterly distribution payable to our common shareholders of record on April 13, 2020 in the amount of $0.01 per share, or approximately $2,379. We expect to pay this distribution on or about May 21, 2020.

Note 9.  Segment Reporting
We report under the following two segments: Office Portfolio and SHOP. We aggregate these two reporting segments based on their similar operating and economic characteristics. Our Office Portfolio segment consists of medical office properties leased to medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our SHOP segment consists of managed senior living communities that provide short term and long term residential living and in some instances care and other services for residents where we pay fees to the operator to manage the communities for our account. In addition, prior to January 1, 2020, our SHOP segment included triple net leased senior living communities that provided short term and long term residential living and in some instances care and other services for residents and from which we received rents from Five Star. Pursuant to the Restructuring Transaction, effective January 1, 2020, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with new management and related agreements, or collectively, the New Management Agreements, for all of our senior living communities operated by Five Star. Prior periods have been recast to reflect these reportable segments for all periods presented.
We also report “non-segment” operations, which consists of triple net leased senior living communities that are leased to operators other than Five Star from which we receive rents and wellness centers, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment.

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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
 
For the Three Months Ended March 31, 2020
 
 
Office Portfolio
 
SHOP
 
Non-Segment
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

Rental income
 
$
98,770

 
$

 
$
11,728

 
$
110,498

Residents fees and services
 

 
331,969

 

 
331,969

Total revenues
 
98,770

 
331,969

 
11,728

 
442,467

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Property operating expenses
 
32,706

 
283,879

 

 
316,585

Depreciation and amortization
 
32,163

 
33,042

 
3,225

 
68,430

General and administrative
 

 

 
8,832

 
8,832

Acquisition and certain other transaction related costs
 

 

 
663

 
663

Impairment of assets
 
6,218

 
5,016

 

 
11,234

Total expenses
 
71,087

 
321,937

 
12,720

 
405,744

 
 
 
 
 
 
 
 
 
Gain on sale of properties
 
2,782

 

 

 
2,782

Losses on equity securities, net
 

 

 
(9,943
)
 
(9,943
)
Interest and other income
 

 

 
138

 
138

Interest expense
 
(6,052
)
 
(564
)
 
(35,034
)
 
(41,650
)
Gain on lease termination
 

 

 
22,896

 
22,896

Loss on early extinguishment of debt
 
(246
)
 

 

 
(246
)
Income (loss) from continuing operations before income tax expense
 
24,167

 
9,468

 
(22,935
)
 
10,700

Income tax expense
 

 

 
443

 
443

Net income (loss)
 
24,167

 
9,468

 
(22,492
)
 
11,143

Net income attributable to noncontrolling interest
 
(1,408
)
 

 

 
(1,408
)
Net income (loss) attributable to common shareholders
 
$
22,759

 
$
9,468

 
$
(22,492
)
 
$
9,735



 
 
As of March 31, 2020
 
 
Office Portfolio
 
SHOP
 
Non-Segment
 
Consolidated
Total assets
 
$
3,133,881

 
$
3,080,002

 
$
489,840

 
$
6,703,723




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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
 
For the Three Months Ended March 31, 2019
 
 
Office Portfolio
 
SHOP
 
Non-Segment
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

Rental income
 
$
103,221

 
$
39,313

 
$
15,707

 
$
158,241

Residents fees and services
 

 
108,045

 

 
108,045

Total revenues
 
103,221

 
147,358

 
15,707

 
266,286

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Property operating expenses
 
32,177

 
85,045

 

 
117,222

Depreciation and amortization
 
36,101

 
30,953

 
5,176

 
72,230

General and administrative
 

 

 
9,816

 
9,816

Acquisition and certain other transaction related costs
 

 

 
7,814

 
7,814

Impairment of assets
 

 
6,206

 

 
6,206

Total expenses
 
68,278

 
122,204

 
22,806

 
213,288

 
 
 
 
 
 
 
 
 
Loss on sale of properties
 
(122
)
 

 

 
(122
)
Dividend income
 

 

 
923

 
923

Gains on equity securities, net
 

 

 
22,932

 
22,932

Interest and other income
 

 

 
114

 
114

Interest expense
 
(6,030
)
 
(994
)
 
(38,587
)
 
(45,611
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
28,791

 
24,160

 
(21,717
)
 
31,234

Income tax expense
 

 

 
(134
)
 
(134
)
Equity in earnings of an investee
 

 

 
404

 
404

Net income (loss)
 
28,791

 
24,160

 
(21,447
)
 
31,504

Net income attributable to noncontrolling interest
 
(1,422
)
 

 

 
(1,422
)
Net income (loss) attributable to common shareholders
 
$
27,369

 
$
24,160

 
$
(21,447
)
 
$
30,082


 
As of December 31, 2019
 
Office Portfolio
 
SHOP
 
Non-Segment
 
Consolidated
Total assets
$
3,165,577

 
$
3,044,989

 
$
443,260

 
$
6,653,826