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Diversified Healthcare Trust -- Moody's downgrades Diversified Healthcare's corporate family rating to Ba3, outlook negative

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Rating Action: Moody's downgrades Diversified Healthcare's corporate family rating to Ba3, outlook negativeGlobal Credit Research - 01 Feb 2021New York, February 01, 2021 -- Moody's Investors Service, ("Moody's") downgraded the ratings of Diversified Healthcare Trust (DHC) including its corporate family rating to Ba3 from Ba2, its guaranteed senior unsecured notes to Ba3 from Ba1, and its senior unsecured notes to B1 from Ba2. The guaranteed senior unsecured shelf downgraded to (P)Ba3 from (P)Ba1 and senior unsecured shelf downgraded to (P)B1 from (P)Ba2.The speculative grade liquidity rating remains unchanged at SGL-3. The rating outlook remains negative.The ratings downgrades reflect the shift in DHC's capital structure, with the REIT amending its bank credit agreement to include the delivery of first lien mortgages on unencumbered assets totaling about $1.4 billion in gross book value in order to secure obligations under the $1 billion facility in exchange for waivers on most financial covenants through 2Q22. The downgrades also reflect the ongoing impact of the coronavirus on the REIT's senior housing cash flows and leverage metrics. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We also note that the recent bank amendment raises concerns about financial policy and governance.Downgrades:..Issuer: Diversified Healthcare Trust.... Corporate Family Rating, Downgraded to Ba3 from Ba2....Gtd Senior Unsecured Shelf, Downgraded to (P)Ba3 from (P)Ba1....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Ba1....Senior Unsecured Shelf, Downgraded to (P)B1 from (P)Ba2....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 from Ba2Outlook Actions:..Issuer: Diversified Healthcare Trust....Outlook, Remains NegativeRATINGS RATIONALEDHC's Ba3 CFR reflects its diversification among multiple segments of healthcare real estate, including senior housing, medical office buildings, life sciences, and, to a much lesser extent, wellness centers and skilled nursing facilities. Despite the contribution of mortgage liens to its bank facility, the REIT still maintains a large unencumbered asset pool that could be monetized once the operating environment stabilizes and transaction pricing improves. DHC also benefits from its large size and geographic and tenant diversification.DHC's ratings are constrained by its high leverage and the increased business risk it assumed by transitioning Five Star's senior living portfolio to a management structure from a lease effective at the start of 2020. This portfolio had been experiencing declining NOI prior to COVID due to industry wide challenges as well as operator-specific missteps by Five Star under the previous leadership team. We expect DHC to face execution risk with its plans to turn around performance, with the risks now magnified by the coronavirus outbreak which is causing steep occupancy declines and expense increases across the industry. Declining cash flow has caused DHC's Net Debt/EBITDA to rise to 10.9x for 3Q20 and occupancy has since fallen another 3.7% over the fourth quarter. Even as vaccinations will help stabilize cash flows, we expect the REIT will face a long and protracted road to recovery and leverage will remain high over the intermediate term.DHC's ratings also consider governance risks associated with its financial policy and external management structure, which we believe creates potential conflicts of interest between management and investors. DHC is managed by The RMR Group (RMR), which also manages several other REITs and operating companies, including Five Star, which is a material concern with respect to DHC's governance.DHC's SGL-3 rating reflects its reduced financial flexibility following the amendment of its bank facility as it continues to face high operating risks. The REIT has access to an $800 million secured revolver, with upcoming maturities including $300 million unsecured bonds in December 2021 and $200 million of term loans that must be refinanced prior to DHC exercising the extension option on its revolver that comes due in January 2022.The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Diversified Healthcare Trust of the deterioration in credit quality it has triggered, given its exposure to senior housing operations, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.DHC's negative outlook reflects the steep cash flow declines it has experienced within its senior housing business, which has resulted in very high Net Debt/EBITDA. We expect a long and protracted recovery in senior housing will make it challenging for DHC to reduce debt levels.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSDHC's ratings could be downgraded should the REIT fail to maintain ample liquidity as it approaches upcoming debt maturities. A downgrade would also reflect Net Debt/EBITDA above 8x and fixed charge coverage below 2.2x on a sustained basis.An upgrade is unlikely near-term but would likely reflect strong liquidity, Net Debt/EBITDA below 7x, and sustained positive NOI growth from key business segments.The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Lori Marks VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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