Aging Populations And Telehealth Trends Will Uplift Facilities

Key Takeaways

• Divesting underperforming assets and repositioning towards higher-quality properties is set to rapidly improve portfolio quality, margins, and long-term revenue growth.
  
• Strategic refinancing, favorable demographic trends, and robust institutional investor interest are expected to drive sustainable earnings upside and support long-term asset value appreciation.
  
• Persistent financial, regulatory, and operational challenges threaten revenue stability, asset values, and long-term profitability due to sector shifts, high leverage, and underperforming core assets.

Catalysts

DHC is a real estate investment trust focused on owning high-quality healthcare properties located throughout the United States.

• Analyst consensus recognizes that asset sales will fund deleveraging, but the market may be understating the immediate and sustained uplift; divesting non-core and underperforming properties at robust valuations is likely to rapidly increase portfolio quality and drive stronger margin expansion and cash flows than anticipated.
  
• Analysts broadly agree that refinancing and improved debt structure support future earnings, yet DHC's successful execution of fixed-rate, long-maturity financings and available credit lines could deliver larger and more durable reductions in interest expense, with greater upside to earnings and free cash flow.
  
• With the continued demographic shift towards an aging U.S. population, sustained demand for senior housing and medical office buildings is set to outpace current occupancy growth, providing additional revenue tailwinds and steady NOI improvement for DHC's portfolio over the next decade.
  
• Recent capital improvements and repositioning towards higher quality medical office and life science assets are driving above-market rent increases, as evidenced by new and renewal leases signed at over 11 percent higher rents with long weighted average lease terms, which should drive robust revenue growth and higher long-term valuation.
  
• The healthcare real estate sector remains highly attractive for institutional investors, and increasing capital allocations into defensive asset classes can support further compression of cap rates, boosting asset values and DHC's net asset value beyond current market expectations.

Diversified Healthcare Trust Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Diversified Healthcare Trust compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Diversified Healthcare Trust's revenue will grow by 3.0% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Diversified Healthcare Trust will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Diversified Healthcare Trust's profit margin will increase from -18.8% to the average US Health Care REITs industry of 22.9% in 3 years.
• If Diversified Healthcare Trust's profit margin were to converge on the industry average, you could expect earnings to reach $381.4 million (and earnings per share of $1.57) by about August 2028, up from $-286.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 4.1x on those 2028 earnings, up from -2.8x today. This future PE is lower than the current PE for the US Health Care REITs industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Diversified Healthcare Trust Future Earnings Per Share Growth

Risks

• Rising interest rates remain a significant risk, as even with recent financing activities, a high average interest rate of 6.5 percent on new debt raises concerns that further increases could elevate borrowing costs, pressure property values, and negatively impact net income and earnings over the long term.
  
• The accelerating shift toward telehealth and home-based care may structurally reduce long-term demand for traditional healthcare facilities such as senior housing and medical offices, potentially resulting in persistently lower occupancy and revenue for DHC's core assets.
  
• DHC continues to face elevated leverage with a net debt to adjusted EBITDAre ratio of 8.7 times, which, even with the intent to deleverage, exposes the company to refinancing challenges, higher interest expenses, shareholder dilution risk, and potential liquidity constraints if capital markets tighten, all of which could materially impact earnings and net margins.
  
• Ongoing government reimbursement pressures and the potential for Medicare or Medicaid funding cuts could squeeze operator margins, raising the risk of lease defaults or demands for rent concessions from tenants, which would jeopardize rental income and revenue stability for DHC.
  
• The company's historical difficulty in achieving consistent same-property Net Operating Income growth, especially in its Senior Housing Operating Portfolio, raises concerns about chronic underperformance and operational risk that could continue to drag down profitability and limit improvements in share price over time.

Valuation

• The assumed bullish price target for Diversified Healthcare Trust is $4.5, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Diversified Healthcare Trust's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.5, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $381.4 million, and it would be trading on a PE ratio of 4.1x, assuming you use a discount rate of 12.3%.
• Given the current share price of $3.37, the bullish analyst price target of $4.5 is 25.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.