On Monday, B.Riley raised the price target for Diversified Healthcare Trust (NASDAQ: NASDAQ:DHC) shares to $6.00, up from the previous $5.00, while retaining a Buy rating on the stock. The adjustment follows a detailed review of the company's second-quarter 2024 earnings and subsequent conference call, which revealed several positive developments beneath the surface of what appeared to be standard results.
The firm noted that the recovery of the senior housing sector, also known as SHOP, is progressing as anticipated, with management confirming its SHOP net operating income (NOI) guidance for 2024 to be between $120.0M and $140.0M.
Additionally, there is optimism surrounding DHC's financing strategy. The company is expected to issue approximately $500.0M in GSE/Agency debt in September at a rate of 6.0%-6.5%, a reduction from the previous estimate of around 7.0%. This move aims to pay off the remaining $440.0M of 9.75% notes due in 2025.
In terms of asset sales, DHC has been active in the market, having sold five medical office buildings (MOBs) year-to-date for a total of $29.1M. The company is also in the process of selling eight underperforming SHOP communities, comprising 1,100 units, with expected proceeds ranging from $80.0M to $100.0M. These divestitures are seen as positive, aligning with market valuations and contributing to the company's financial strategy.
Furthermore, DHC is exploring the sale of The Muse at Torrey Pines in La Jolla, California, a property that underwent significant redevelopment costing approximately $120.0M. The potential sale of this asset would contribute to retiring zero-coupon debt due in the first quarter of 2026, as it serves as partial collateral for those notes.
The firm believes that DHC is well-positioned to benefit from multiple tailwinds that could elevate its share price. Currently, DHC's shares are trading at a multiple of 12.7x estimated 2024 EBITDA, which is below the average of 16.2x for its healthcare REIT peers.
The price target increase reflects a valuation of 12.75x the last twelve months' EBITDA expected by the third quarter of 2025.
In other recent news, Diversified Healthcare Trust (DHC) reported a successful second quarter, exceeding expectations with its senior housing and healthcare operations. The company's normalized funds from operations (FFO) reached $6.8 million, or $0.03 per share.
In response, DHC has outlined strategies for debt management and liquidity enhancement, including securing additional financing within the Senior Housing Operating Portfolio (SHOP) segment to address the 2025 debt maturity.
DHC's consolidated GAAP and cash basis net operating income (NOI) increased by 12.2% and 7.1% year over year, respectively. The company also confirmed its full-year NOI guidance, reflecting confidence in its strategic initiatives and asset optimization.
These recent developments include initiatives to improve the resident experience and optimize asset allocation, with divestiture from non-core assets. DHC has also reduced its total capital expenditure guidance for 2024 to between $200 million and $220 million.
Despite a slight dip in occupancy during the first half of the year, DHC expects growth in the second half. However, the Life Science property in Torrey Pines has an overall occupancy rate just under 50%, with one of the three buildings fully vacant.
Lastly, DHC has seen positive rent roll-ups in the Medical Office and Life Science segments, indicating favorable trends in senior housing and healthcare operations.
InvestingPro Insights
Recent analysis from InvestingPro provides a deeper dive into Diversified Healthcare Trust's (NASDAQ: DHC) financial health and market performance. Key data points indicate that DHC is trading at a low Price / Book multiple of 0.36, suggesting that the stock may be undervalued compared to the book value of its assets. This aligns with the optimistic view from B.Riley regarding the company's potential. Furthermore, DHC has shown a solid revenue growth of 8.0% over the last twelve months as of Q2 2024, highlighting its capacity to increase earnings.
InvestingPro Tips also reveal that DHC has maintained dividend payments for 26 consecutive years, which could be a sign of the company's commitment to returning value to shareholders despite its current lack of profitability. Additionally, with a dividend yield of 1.23% as of the latest data, DHC may appeal to income-focused investors. However, it's important to note that analysts do not anticipate the company will be profitable this year, which is a critical factor for investors to consider.
For readers looking to explore further, InvestingPro offers additional tips on DHC, providing a comprehensive understanding of the company's financial position and market expectations. With these insights, investors can make more informed decisions about their investment strategies.
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