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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 June 30, 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 August 3, 2020: 237,950,658



Table of Contents

DIVERSIFIED HEALTHCARE TRUST
FORM 10-Q
 
June 30, 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)
 
 
 
June 30,
 
December 31,
 
 
2020
 
2019
Assets
 
 

 
 

Real estate properties:
 
 

 
 

Land
 
$
799,462

 
$
793,123

Buildings and improvements
 
6,720,113

 
6,668,463

Total real estate properties, gross
 
7,519,575

 
7,461,586

Accumulated depreciation
 
(1,666,244
)
 
(1,570,801
)
Total real estate properties, net
 
5,853,331

 
5,890,785

 
 
 
 
 
Assets of properties held for sale
 
106,049

 
209,570

Cash and cash equivalents
 
78,485

 
37,357

Restricted cash
 
15,283

 
14,867

Acquired real estate leases and other intangible assets, net
 
310,657

 
337,875

Other assets, net
 
236,718

 
163,372

Total assets
 
$
6,600,523

 
$
6,653,826

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Unsecured revolving credit facility
 
$

 
$
537,500

Unsecured term loans, net
 
198,777

 
448,741

Senior unsecured notes, net
 
2,605,153

 
1,820,681

Secured debt and finance leases, net
 
693,179

 
694,739

Liabilities of properties held for sale
 
5,841

 
6,758

Accrued interest
 
27,162

 
24,060

Assumed real estate lease obligations, net
 
72,286

 
76,705

Other liabilities
 
243,285

 
167,592

Total liabilities
 
3,845,683

 
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, 237,951,968 and 237,897,163 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
 
2,380

 
2,379

Additional paid in capital
 
4,613,146

 
4,612,511

Cumulative net income
 
2,036,225

 
2,052,562

Cumulative distributions
 
(4,028,797
)
 
(3,930,933
)
Total equity attributable to common shareholders
 
2,622,954

 
2,736,519

Noncontrolling interest:
 
 
 
 
Total equity attributable to noncontrolling interest
 
131,886

 
140,531

Total equity
 
2,754,840

 
2,877,050

Total liabilities and equity
 
$
6,600,523

 
$
6,653,826

 See accompanying notes.

1

Table of Contents

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 

 
 

 
 

 
 

Rental income
 
$
106,207

 
$
153,097

 
$
216,705

 
$
311,338

Residents fees and services
 
304,104

 
108,906

 
636,073

 
216,951

Total revenues
 
410,311

 
262,003

 
852,778

 
528,289

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Property operating expenses
 
301,915

 
120,193

 
618,500

 
237,415

Depreciation and amortization
 
68,825

 
73,924

 
137,255

 
146,154

General and administrative
 
7,312

 
8,867

 
16,144

 
18,683

Acquisition and certain other transaction related costs
 
87

 
903

 
750

 
8,717

Impairment of assets
 
31,175

 
2,213

 
42,409

 
8,419

Total expenses
 
409,314

 
206,100

 
815,058

 
419,388

 
 
 
 
 
 
 
 
 
(Loss) gain on sale of properties
 
(168
)
 
17,832

 
2,614

 
17,710

Dividend income
 

 
923

 

 
1,846

Gains and losses on equity securities, net
 
11,974

 
(64,448
)
 
2,031

 
(41,516
)
Interest and other income
 
7,736

 
238

 
7,874

 
352

Interest expense (including net amortization of debt premiums, discounts and issuance costs of $1,617, $1,519, $3,126 and $3,171, respectively)
 
(43,974
)
 
(46,412
)
 
(85,624
)
 
(92,023
)
Gain on lease termination
 

 

 
22,896

 

Loss on early extinguishment of debt
 
(181
)
 
(17
)
 
(427
)
 
(17
)
Loss from continuing operations before income tax (expense) benefit and equity in earnings of an investee
 
(23,616
)
 
(35,981
)
 
(12,916
)
 
(4,747
)
Income tax (expense) benefit
 
(1,126
)
 
35

 
(683
)
 
(99
)
Equity in earnings of an investee
 

 
130

 

 
534

Net loss
 
(24,742
)
 
(35,816
)
 
(13,599
)
 
(4,312
)
Net income attributable to noncontrolling interest
 
(1,330
)
 
(1,413
)
 
(2,738
)
 
(2,835
)
Net loss attributable to common shareholders
 
$
(26,072
)
 
$
(37,229
)
 
$
(16,337
)
 
$
(7,147
)
 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 

 
 

 
 

Equity in unrealized gain of an investee
 

 
71

 

 
137

Other comprehensive income
 

 
71

 

 
137

Comprehensive loss
 
(24,742
)
 
(35,745
)
 
(13,599
)
 
(4,175
)
Comprehensive income attributable to noncontrolling interest
 
(1,330
)
 
(1,413
)
 
(2,738
)
 
(2,835
)
Comprehensive loss attributable to common shareholders
 
$
(26,072
)
 
$
(37,158
)
 
$
(16,337
)
 
$
(7,010
)
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic)
 
237,700

 
237,580

 
237,684

 
237,574

Weighted average common shares outstanding (diluted)
 
237,700

 
237,580

 
237,684

 
237,574

 
 
 
 
 
 
 
 
 
Per common share amounts (basic and diluted):
 
 

 
 

 
 

 
 

Net loss attributable to common shareholders
 
$
(0.11
)
 
$
(0.16
)
 
$
(0.07
)
 
$
(0.03
)
 
See accompanying notes.

2

Table of Contents

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

Net (loss) income
 

 

 

 
(26,072
)
 

 

 
(26,072
)
 
1,330

 
(24,742
)
Distributions
 

 

 

 

 

 
(2,379
)
 
(2,379
)
 

 
(2,379
)
Share grants
 
60,000

 
1

 
415

 

 

 

 
416

 

 
416

Share repurchases
 
(1,757
)
 

 
(8
)
 

 

 

 
(8
)
 

 
(8
)
Distributions to noncontrolling interest
 

 

 

 

 

 

 

 
(5,616
)
 
(5,616
)
Balance at June 30, 2020:
 
237,951,968

 
$
2,380

 
$
4,613,146

 
$
2,036,225

 
$

 
$
(4,028,797
)
 
$
2,622,954

 
$
131,886

 
$
2,754,840

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Net (loss) income
 

 

 

 
(37,229
)
 

 

 
(37,229
)
 
1,413

 
(35,816
)
Other comprehensive income
 

 

 

 

 
71

 

 
71

 

 
71

Distributions
 

 

 

 

 

 
(35,659
)
 
(35,659
)
 

 
(35,659
)
Share grants
 
15,000

 

 
395

 

 

 

 
395

 

 
395

Share repurchases
 
(4,139
)
 

 
(36
)
 

 

 

 
(36
)
 

 
(36
)
Distributions to noncontrolling interest
 

 

 

 

 

 

 

 
(5,684
)
 
(5,684
)
Balance at June 30, 2019:
 
237,740,761

 
$
2,377

 
$
4,611,993

 
$
2,133,649

 
$
(129
)
 
$
(3,859,587
)
 
$
2,888,303

 
$
148,406

 
$
3,036,709

See accompanying notes.

3

Table of Contents

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
 
Six Months Ended June 30,
 
 
2020
 
2019
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(13,599
)
 
$
(4,312
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
137,255

 
146,154

Amortization of debt issuance costs and debt discounts and premiums
 
3,126

 
3,171

Straight line rental income
 
(2,538
)
 
(2,364
)
Amortization of acquired real estate leases and other intangible assets
 
(3,703
)
 
(3,080
)
Loss on early extinguishment of debt
 
51

 
17

Gain on lease termination
 
(22,896
)
 

Impairment of assets
 
42,409

 
8,419

Gain on sale of properties
 
(2,614
)
 
(17,710
)
Gains and losses on equity securities, net
 
(2,031
)
 
41,516

Other non-cash adjustments
 
(1,885
)
 
(1,885
)
Equity in earnings of an investee
 

 
(534
)
Change in assets and liabilities:
 
 

 
 

Other assets
 
(26,836
)
 
9,370

Accrued interest
 
3,085

 
(765
)
Other liabilities
 
849

 
(52,123
)
Net cash provided by operating activities
 
110,673

 
125,874

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(2,526
)
 

Real estate improvements
 
(71,762
)
 
(135,750
)
Proceeds from sale of properties, net
 
66,604

 
34,116

Distributions in excess of earnings from Affiliates Insurance Company
 
287

 

Net cash used in investing activities
 
(7,397
)
 
(101,634
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from issuance of senior unsecured notes, net
 
985,000

 

Proceeds from borrowings on revolving credit facility
 
405,500

 
730,000

Repayments of borrowings on revolving credit facility
 
(943,000
)
 
(179,000
)
Repayment of senior unsecured notes
 
(200,000
)
 
(400,000
)
Repayment of unsecured term loan
 
(250,000
)
 

Repayment of other debt
 
(4,455
)
 
(44,552
)
Loss on early extinguishment of debt settled in cash
 
(376
)
 

Payment of debt issuance costs
 
(4,926
)
 

Repurchase of common shares
 
(29
)
 
(33
)
Distributions to noncontrolling interest
 
(11,383
)
 
(11,187
)
Distributions to shareholders
 
(38,063
)
 
(128,373
)
Net cash used in financing activities
 
(61,732
)
 
(33,145
)
 
 
 
 
 
Increase (decrease) in cash and cash equivalents and restricted cash
 
41,544

 
(8,905
)
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
 
$
93,768

 
$
61,166


See accompanying notes.

4

Table of Contents

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
 
 
Six Months Ended June 30,
 
 
2020
 
2019
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
80,131

 
$
90,061

Income taxes paid
 
$

 
$
431

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

 
$

Transaction Agreement additional consideration
 
(75,000
)
 

Capitalized interest
 
$
718

 
$
444

 
 
 
 
 
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 June 30,
 
 
2020
 
2019
Cash and cash equivalents
 
$
78,485

 
$
48,033

Restricted cash (1)
 
15,283

 
13,133

Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows
 
$
93,768

 
$
61,166

(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.



5

Table of Contents
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 (loss) 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 $991,730 and $1,015,661 as of June 30, 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 $699,761 and $704,344 as of June 30, 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 June 30, 2020, we owned 412 properties located in 38 states and Washington, D.C., including 21 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.
We regularly evaluate our assets for indicators 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 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 cash flows to be generated from those assets. The future cash flows are subjective and are

6

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

based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.
Acquisition Activities:
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 acquisition costs.
Disposition Activities:
During the six months ended June 30, 2020, we sold 12 properties for an aggregate sales price of $68,154, 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 (loss).

Date of Sale
 
Location
 
Type of Property
 
Number of Properties
 
Square Feet or Number of Units
 
 
Sales Price (1)
 
Gain (loss) on Sale
 
Impairment of Assets
January 2020
 
Louisiana
 
Medical Office
 
6
 
40,575

sq. ft.
 
$
5,925

 
$
(81
)
 
$

February 2020
 
Pennsylvania
 
Medical Office
 
1
 
50,000

sq. ft.
 
2,900

 

 
(47
)
March 2020
 
Texas
 
Medical Office
 
1
 
70,229

sq. ft.
 
8,779

 
2,863

 

April 2020
 
California
 
Managed Senior Living
 
3
 
599

units
 
47,000

 
(168
)
 
5,465

June 2020
 
South Carolina
 
Medical Office
 
1
 
49,242

sq. ft.
 
3,550

 

 
2,753

 
 
 
 
 
 
12
 
 
 
 
$
68,154

 
$
2,614

 
$
8,171


(1)
Sales price excludes closing costs.

As of June 30, 2020, we had 21 properties classified as held for sale in our condensed consolidated balance sheet as follows:
Type of Property
 
Number of Properties
 
Undepreciated Carrying Value
 
Impairment of Assets(1)
Managed Senior Living
 
15
 
$
52,563

 
$
30,752

Medical Office
 
3
 
11,832

 
415

Triple Net Leased, Senior Living
 
3
 
48,236

 

 
 
21
 
$
112,631

 
$
31,167

(1)
We recorded an aggregate of $31,167 impairment of real estate during the six months ended June 30, 2020 to adjust the carrying values of certain of these properties to their estimated fair values less costs to sell.
Subsequent to June 30, 2020, two of the three medical office properties and two of the 15 managed senior living communities classified as held for sale in the table above were sold for an aggregate sales price of $5,197, excluding closing costs.
We also recorded impairment charges of $3,071 related to seven medical office properties and two senior living communities that were classified as held for sale during the three months ended March 31, 2020. These properties were subsequently reclassified to held and used as of June 30, 2020.
As of August 3, 2020, we had 24 properties under agreements to sell for an aggregate sales price of approximately $231,725, 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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DIVERSIFIED HEALTHCARE TRUST
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 $1,385 and $430 for the three months ended June 30, 2020 and 2019, respectively, and $2,538 and $2,364 for the six months ended June 30, 2020 and 2019, respectively. Rents receivable, excluding properties classified as held for sale, include $107,178 and $99,297 of straight line rent receivables at June 30, 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 $18,263 and $19,525 for the three months ended June 30, 2020 and 2019, respectively, of which tenant reimbursements totaled $1,074 and $1,203, respectively, and $38,291 and $38,370 for the six months ended June 30, 2020 and 2019, respectively, of which tenant reimbursements totaled $2,094 and $2,400, respectively.
As a result of the COVID-19 pandemic, some of our tenants have requested relief from their obligations to pay rent due to us. As of August 3, 2020, we granted requests for certain of our tenants to defer rent payments totaling $5,474. These tenants are obligated to pay, in most cases, the deferred rents in 12 equal monthly installments commencing in September 2020. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease. Because the majority of the deferred rents referenced above will generally be repaid over a 12-month period, the cash flows from the respective leases are substantially the same as before the rent deferrals. These deferred amounts did not negatively impact our results for the three and six months ended June 30, 2020 and, as of June 30, 2020, we recognized an increase in our accounts receivable related to these deferred amounts of $3,504.
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 $4,278 and $4,437, respectively, as of June 30, 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.


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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 5.  Indebtedness
Our principal debt obligations at June 30, 2020 were: (1) $2,650,000 outstanding principal amount of senior unsecured notes; (2) $200,000 outstanding principal amount under our term loan; and (3) $685,428 aggregate principal amount of mortgage notes (excluding premiums, discounts and net debt issuance costs) secured by seven properties, of which $620,000 is related to a joint venture arrangement in which we own a 55% equity interest. These seven 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 $1,258,457 at June 30, 2020. We also had two properties subject to finance leases with lease obligations totaling $8,352 at June 30, 2020; these two properties had gross book value of real estate assets of $35,708 at June 30, 2020, and the finance leases expire in 2026.
We have a $1,000,000 unsecured revolving credit facility that is available for general business purposes. 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 until maturity, and no principal repayment is due until maturity. As of June 30, 2020, our revolving credit facility required interest to be paid on borrowings at the annual rate of 2.6%, plus a facility fee of 30 basis points per annum on the total amount of lending commitments under the facility.
The weighted average annual interest rates for borrowings under our revolving credit facility were 1.8% and 3.6% for the three months ended June 30, 2020 and 2019, respectively, and 2.2% and 3.6% for the six months ended June 30, 2020 and 2019, respectively. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of June 30, 2020 and August 3, 2020, we had no outstanding borrowings and $1,000,000 available for borrowing under our revolving credit facility.
We have a $200,000 unsecured term loan that matures in September 2022 and is prepayable without penalty at any time. At June 30, 2020, the annual interest rate payable on amounts outstanding under this term loan was 2.4%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.3% and 3.9% for the three months ended June 30, 2020 and 2019, respectively, and 2.7% and 3.9% for the six months ended June 30, 2020 and 2019, respectively. The interest rate premium is subject to adjustment based upon changes to our credit ratings.
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 six months ended June 30, 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%. As a result of the prepayment of this mortgage note, we recorded a loss on early extinguishment of debt of $155 for both the three and six months ended June 30, 2020. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
In June 2020, we issued $1,000,000 aggregate principal amount of our 9.75% senior notes due 2025 in an underwritten public offering raising net proceeds of $983,500, after deducting estimated offering expenses and underwriters' discounts. These notes are guaranteed by all of our subsidiaries, except for certain excluded subsidiaries, and require semi-annual interest payments through maturity. Prior to June 15, 2022, we may, at our option, redeem all or a portion of these notes at a redemption price equal to the outstanding principal amount of these notes, plus accrued and unpaid interest, plus the make-whole amount set forth in the indenture which governs these notes, as supplemented, or our 2025 Notes Indenture. Prior to June 15, 2022, we may also, at our option, redeem up to 40% of the aggregate principal amount of these notes with the net proceeds of certain equity offerings at the redemption price set forth in the 2025 Notes Indenture, so long as at least 50% of the original aggregate principal amount of these notes remains outstanding after each such redemption. In addition, we have the option to redeem all or a portion of these notes at any time on or after June 15, 2022 at the redemption prices set forth in the 2025 Notes Indenture. We used the net proceeds from this offering to prepay in full our $250,000 unsecured term loan which was scheduled to mature

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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)

in June 2020 and to reduce amounts outstanding under our revolving credit facility. The weighted average interest rate under our $250,000 senior unsecured term loan was 1.9% and 2.4% for the periods from April 1, 2020 to June 2, 2020 and January 1, 2020 to June 2, 2020, respectively. As a result of the repayment of our $250,000 senior unsecured term loan, we recorded a loss on early extinguishment of debt of $26 for the three and six months ended June 30, 2020.
In June 2020, we amended the agreements governing our $1,000,000 unsecured revolving credit facility and $200,000 unsecured term loan, or collectively, our credit and term loan agreements. The amendments modify certain of the financial covenants under our credit and term loan agreements through June 30, 2021, or the Amendment Period, during which, subject to certain conditions, we will continue to have access to undrawn amounts under our revolving credit facility. We have the right to terminate the Amendment Period prior to June 30, 2021, subject to certain conditions.
During the Amendment Period:
our interest rate premium over LIBOR under our revolving credit facility and term loan increased by 50 basis points;
we will generally be required to apply the net cash proceeds from the disposition of assets, capital markets transactions, debt financings or COVID-19 government stimulus programs, if allowed, to the repayment of outstanding loans under the revolving credit facility, if any;
we will be subject to certain additional covenants, including additional restrictions on our ability to incur indebtedness (with exceptions for borrowings under our revolving credit facility and certain other categories of secured and unsecured indebtedness), and to acquire real property or make other investments (with exceptions for, among other things, certain categories of capital expenditures and costs);
we will be required to maintain unrestricted liquidity (unrestricted cash and undrawn availability under our revolving credit facility) of not less than $200,000; and
our ability to pay distributions on our common shares will be limited to paying a cash dividend of $0.01 per common share per quarter and amounts required to maintain our qualification for taxation as a real estate investment trust, or REIT, and to avoid the payment of certain income and excise taxes.
Our credit 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 credit 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 credit 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 credit 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 credit and term loan agreements and our senior unsecured notes indentures and their supplements at June 30, 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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DIVERSIFIED HEALTHCARE TRUST
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 June 30, 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)
 
$
41,697

 
$
41,697

 
$

 
$

Non-Recurring Fair Value Measurements Assets:
 
 
 
 
 
 
 
 
Real estate properties held for sale (2)
 
$
52,957

 
$

 
$
52,957

 
$


(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 June 30, 2020. During the three and six months ended June 30, 2020, we recorded unrealized gains of $11,974 and $2,031, respectively, which is included in gains and losses on equity securities, net in our condensed consolidated statements of comprehensive income (loss), 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 six months ended June 30, 2020, we recorded impairment charges of $267 to reduce the carrying value of one medical office property that is classified as held for sale to its estimated sales price, less estimated costs to sell of $84, based on the sales price under a purchase and sale agreement that we have entered into with a third party buyer for this medical office property of $625. We also recorded impairment charges of $30,752 to reduce the carrying value of 15 senior living communities that are classified as held for sale to their estimated sales price, less estimated costs to sell of $1,184, based on the aggregate sales prices under the purchase and sale agreements that we have entered into with third party buyers for these senior living communities of $53,600. 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 June 30, 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 finance 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 June 30, 2020
 
As of December 31, 2019
Description
 
Carrying Amount (1)
 
Estimated Fair Value