Diversified Healthcare Trust · NASDAQ:DHC
Diversified Healthcare Trust — Merger or Acquisition (August 2023)
42 slides from Diversified Healthcare Trust's merger presentation, Aug 2, 2023
Slide 1: The Merger with OPI is the Best Strategic Alternative for DHC Shareholders
The Merger with OPI is the Best Strategic Alternative for DHC Shareholders Creates a diversified REIT with a high quality portfolio, a creditworthy tenant base, an attractive and sustainable dividend and strong growth potential
Slide 2: Warning Regarding Forward-Looking Statements
2 WARNING REGARDING FORWARD-LOOKING STATEMENTS This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever Diversified Healthcare Trust (“DHC”) uses words such as “believe”, “expect”, “anti
Slide 3: Financially and Strategically Compelling Transaction
3 1. Financially and Strategically Compelling Transaction Source: Company public filings as of July 21, 2023. (1) Unaffected DHC stock price based on DHC’s closing stock price of $1.24 on April 10, 2023. Offer based on OPI’s closing price of $11.55 on April 10, 2023, multiplied by the exchange ratio
Slide 4: Significant Downside Risk to DHC Shareholders If Not Approved
4 2. Significant Downside Risk to DHC Shareholders If Not Approved Existential threat to DHC from $700mm in 2024 debt maturities, with no ability to access the debt markets. • DHC is running out of time, with $450mm of debt coming due in five months (January 2024) – this debt is scheduled to be repa
Slide 5: DHC Board evaluated multiple alternatives
5 (1) As of June 30, 2023. (2) Ratio reflects principal amount of debt owned by each respective entity as of July 19, 2023 compared to their equity holdings based upon cost basis disclosed in 13-D filings. The DHC Board evaluated multiple alternatives, but most were either not viable or value destru
Slide 6: Financially and Strategically Compelling Transaction
Financially and Strategically Compelling Transaction
Slide 7: Best available strategy to resolve DHC financing challenges
7 • Represents best available strategy to resolve DHC financing challenges in an increasingly tight timeline; combined company will be in immediate compliance with debt covenants. • OPI secured $368mm debt commitment in connection with merger (1-year term + 1-year extension). • OPI originated $108mm
Slide 8: Merger terms: 0.147 OPI shares per DHC share
8 • Each DHC common share will be exchanged for 0.147 OPI common shares, implying at announcement: o A valuation of $1.70 per current DHC share.1 o A 37% and 20% premium to the one-day and 30-day average closing price of DHC common shares prior to announcement.2 • Dividend per current DHC share will
Slide 9: Historical trading ratio of DHC / OPI
9 Historical trading ratio of DHC / OPI Source: Company public filings and FactSet as of July 21, 2023. (1) Based on 5-year ADTV prior to transaction announcement (April 11, 2018 through April 10, 2023). 0.000x 0.020x 0.040x 0.060x 0.080x 0.100x 0.120x 0.140x 0.160x 12/31/21 3/18/22 6/4/22 8/20/22 1
Slide 10: Key Benefits of OPI Partnership
10 Key Benefits of OPI Partnership FL • Durable and stable cash flows compliment SHOP recovery. • OPI’s balance sheet allows DHC to immediately regain covenant compliance and access the debt markets. • 95% unencumbered, diversified asset pool in strong, growing markets provides access to sources of
Slide 11: Pro forma portfolio: greater scale and diversification
11 9.6% 12.8% 8.6% 8.4% 9.6% 51.1% 2023 2024 2025 2026 2027 2028 ~$12.1bn Investment Portfolio Source: Company public filings as of July 21, 2023. All information is pro forma for merger. (1) Medical Office Buildings (MOB); Life Sciences (LS). Based on annualized rental income. Excludes SHOP segment
Slide 12: Combined company priorities and sample properties
12 Source: Company public filings as of July 21, 2023. 1224 Hammond Drive Atlanta, GA TenThreeTwenty Columbia, MD Duke University Health System Durham, NC Greenbrooke Medical Pavilion Greenwood, IN Sample OPI Properties Sample DHC Properties • Continue to make necessary capex investment in order to
Slide 13: Pro Forma Debt Capitalization
13 Source: Company public filings. Note: Bridge loan amount reflects $368mm initial commitment, reduced by $108mm of new mortgage debt subsequently originated against OPI assets. Transaction adjustment for LQA Adj. EBITDAre reflects midpoint of $2mm to $3mm expected annual G&A synergies range. Pro F
Slide 14: Significant Downside Risk to Shareholders If Not Approved
Significant Downside Risk to Shareholders If Not Approved
Slide 15: Merger approved vs. not approved
15 Failure to merge with OPI would leave DHC: Out of time to refinance looming debt maturities Stuck in debt covenant non-compliance through at least mid-2024 Unable to access debt markets to refinance upcoming debt maturities Unable to fund capex vital to SHOP recovery Unable to increase dividend t
Slide 16: Net Debt / Adjusted EBITDAre and Debt Incurrence Covenant Ratio
16 Net Debt / Adjusted EBITDAre 1 Debt Incurrence Covenant Ratio 3 (1) As reported in DHC’s quarterly financial supplements for each quarter shown. (2) Net debt based on the book value of DHC’s debt as shown on the Company’s balance sheet less cash & cash equivalents. EBITDA reflect Adjusted EBITDAr
Slide 17: DHC's cash reserves are dwindling
17 Cash & Cash Equivalents ($mm) Total Debt ($mm) DHC’s cash reserves are dwindling and its financial flexibility is becoming more strained $705 $691 $658 $380 $338 2Q22 3Q22 4Q22 1Q23 2Q23 $3,107 $3,091 $3,080 $2,830 $2,814 2Q22 3Q22 4Q22 1Q23 2Q23 Recent debt paydown required in connection with co
Slide 18: Debt maturity schedule: 43% maturing in the next years
18 43% of Debt is maturing in the next 2 years, with no further extensions available Debt Maturity Schedule ($mm) (1) Figures may not sum to 100% due to rounding. (2) Includes $5mm of finance lease obligations due through April 2026. % Debt Outstanding 1 Restructured credit facility matures in Janua
Slide 19: OPI debt maturity schedule and access to capital
19 Source: Company public filings. FL $108 $350 $650 $300 $350 $562 $240 $590 $650 $300 $350 $670 2023 2024 2025 2026 2027 2028+ Unsecured Floating Rate Debt Unsecured Fixed Rate Debt Secured Fixed Rate Debt 0% 23% 25% 12% 14% 26% OPI Debt Maturity Schedule – As of Q2 2023 ($mm) Issuer Date Type Amo
Slide 20: Historical and Projected Capex Spending
20 Historical and Projected Capex Spending ($mm) Historical Capex Composition 59% 41% Maintenance Revenue-Enhancing $858mm capex spent since 2020 Just maintaining the DHC portfolio has required nearly $510mm since 2020 … $185 $254 $314 $353 $346 2020 2021 2022 2023E 2024E DHC requires significant ca
Slide 21: DHC capex and cash NOI projections
21 $223 $352 $459 $524 $574 2023E 2024E 2025E 2026E 2027E $353 $346 $322 $216 $100 2023E 2024E 2025E 2026E 2027E Cumulative capex investment ($mm) $353 $699 $1,021 $1,237 $1,337 DHC – Capex Projections ($mm) DHC – Cash NOI Projections ($mm) DHC assumes ~$1.0bn of capex through 2025E • Over ~$1bn in
Slide 22: DHC SHOP NOI and margin recovery
22 $48.2 $48.1 $33.1 $7.9 $9.1 $3.9 $10.6 $2.3 ($6.7) $0.2 $6.5 ($5.8) $7.9 $17.3 $22.9 34.1% 14.5% 10.9% 2.7% 3.3% 1.5% 4.4% 1.0% (2.9%) 0.1% 2.6% (2.2%) 2.9% 6.2% 8.0% (5.0%) 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% ($10.0) $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 4Q19 1Q20 2Q20 3Q20 4Q
Slide 23: Industry-wide SHOP same-store NOI growth estimates
23 Aug 2022 May 2023 Aug 2021 Industry Wide SHOP Same-Store NOI Growth Estimates Over Time 1 • A SHOP recovery is coming, but timing has been impossible to predict. • Analysts continue to push out the timing of the SHOP recovery, and latest research suggests that it will be more gradual than initial
Slide 24: DHC's financing actions timeline
24 January: Asset sale program – $162mm raised over 13 months April: Dividend reduction – $33mm in quarterly savings May: New debt issuance – $1.0bn raised in new senior unsecured debt June: Amendment to credit facility and term loan to provide financial flexibility January: Obtained covenant waiver
Slide 25: DHC cannot wait for SHOP recovery to regain compliance
25 • It is almost impossible for DHC to reach covenant compliance before year end 2023 and DHC is unlikely to reach covenant compliance until 2H 2024 – at the earliest. • $700mm in debt maturities are coming due before the earliest date that covenant compliance is expected to be achieved. • Taking a
Slide 26: Rising interest rates and asset sale environment
26 • The unprecedented rapid rise in interest rates since early 2022 has severely negatively affected all commercial real estate markets. • Difficulty securing financing and the increasing cost of financing, if financing is available, have put significant downward pressure on commercial real estate
Slide 27: Leverage and covenant compliance side-by-side
27 By contrast, OPI’s stronger balance sheet – which will be in compliance with all its debt covenants at closing – enables the combined company’s access to capital and the upside of its SHOP portfolio. Note: Dollars in millions. (1) Based on DHC’s weighted average interest rate of 4.75% senior note
Slide 28: $700mm preferred equity alternative
28 • $700mm of preferred equity would be required to repay 2024 debt maturities. o This amount would represent close to 2x the equity value of DHC pre-merger announcement, deeply subordinating the common equity’s interest. • Raising this amount of preferred equity is likely unobtainable and any term
Slide 29: $700mm zero-coupon bond refinancing
29 $700mm Zero-Coupon Bond Refinancing • In order to achieve $700mm of proceeds to repay 2024 debt maturities, a zero-coupon bond would be issued at an unprecedented ~50% discount to par of ~$1.4bn.1 o This is a highly unusual structure that would be required to eliminate “accrued interest expense”
Slide 30: Robust Board Process Delivered Best Outcome for Shareholders
Robust Board Process Delivered Best Outcome for Shareholders – Including by Examining Inferior ‘Alternatives’ Now Being Proposed by Some Conflicted Bondholders
Slide 31: Negotiation history and offers considered
31 × Valuation: $0.90 per share, an implied premium of 9% × Consideration: 27% cash / 73% stock × Pro-forma ownership: DHC ~16% / OPI ~84% Initial OPI offer Negotiations Announcement Valuation: $1.70 per share, a premium at announcement of 20% to the 30d avg. price 1 37% premium to last close Consid
Slide 32: Special Committee members and process
32 Daniel F. LePage Deep expertise in finance, real estate, capital raising, and strategic business transactions, having led the U.S. real estate corporate banking group at RBC Capital Markets. Lisa Harris Jones Extensive experience practicing mergers and acquisitions, real estate financing, corpora
Slide 33: May 2022 unsolicited proposal
33 May 2022 Unsolicited Proposal • DHC received an unsolicited proposal from a third party regarding a potential transaction with DHC involving the acquisition of all DHC Common Shares for $4.00 in cash per share. • The May 2022 unsolicited proposal was unfinanced, from an inexperienced buyer and co
Slide 34: Bondholders' debt versus equity positions
34 Source: Company public filings and FactSet as of July 19, 2023. (1) Reflects principal amount owned by each respective entity. (2) Reflects aggregate cost basis as reported in the most recent respective 13-D filings for Flat Footed and D.E. Shaw. Debt Position 1 $151.5mm $37.1mm Equity Position 2
Slide 35: Bondholders' assertions vs. reality: better alternatives
35 Bondholders’ Assertion Reality Better alternatives exist for DHC equity holders. • DHC reviewed every alternative raised by the bondholders opposing the deal – they all create value for bondholders at the expense of equity holders. • We know our business better than the bondholders campaigning ag
Slide 36: Bondholders' assertions vs. reality: timing and rationale
36 (1) Unaffected DHC stock price based on DHC’s closing stock price on $1.24 on April 10, 2023. Offer based on OPI’s closing stock price of $11.55 on April 10, 2023, multiplied by the exchange ratio of 0.147x. Dividend increase calculated after giving effect to the exchange ratio of 0.147; OPI divi
Slide 37: Bondholders' assertions vs. reality: process
37 (1) Termination fee as of June 30, 2023. (2) Weighted Average Lease Term (WALT). Bondholders’ Assertion Reality The process was flawed and inadequate. • DHC’s Special Committee conducted a robust process focused on the best possible outcome for DHC shareholders. o The DHC Special Committee overse
Slide 38: Conclusion
Conclusion MME DIVERSIFIED HMB HEALTHCARE SMB TRUST
Slide 39: The merger offers DHC shareholders compelling value now
39 The merger offers DHC shareholders compelling value now … • Ownership of 42% of the combined company. • Premium at announcement of 20% vs. average closing price over the preceding 30 trading days and 37% vs. last closing price before announcement. • 267% increase in dividend per current DHC share
Slide 40: Appendix
Appendix MME DIVERSIFIED f HEALTHCARE SMB TRUST
Slide 41: DHC portfolio summary
41 • DHC is a publicly-traded REIT with a diversified portfolio of senior housing and office properties. • $7.1bn in gross book value of assets; • 62% = Senior Housing Operating Portfolio (SHOP) 1 • 32% = Life Science and Medical Office Buildings (Office) 1 • 6% = Other senior living assets and well
Slide 42: Diversified Properties portfolio metrics
42 Properties 105 157 262 Square Feet (MSF) 8.8 20.9 29.7 WALT 1 5.6 6.4 6.1 % Investment Grade Tenants 2 44.2% 63.0% 57.5% Expiring Leases 2023-2026 1 36.8% 40.3% 39.3% Occupancy (based on SF) 85.1% 90.5% 88.9% % Annualized Rental Income from Top 20 Tenants 45.1% 58.7% 43.0% Triple Net Senior Livin
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