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Rating Action:

Moody's downgrades Diversified Healthcare; outlook negative

20 May 2020

New York, May 20, 2020 -- Moody's Investors Service, ("Moody's) has downgraded Diversified Healthcare Trust (DHC)'s senior unsecured and corporate family rating (CFR) to Ba2 from Ba1, concluding the review for downgrade initiated on March 30, 2020. The speculative grade liquidity rating remains unchanged at SGL-3. The outlook is negative. Today's rating actions reflect the REIT's high leverage, weak liquidity and pre-existing operating challenges that make it particularly vulnerable to risks stemming from the coronavirus outbreak.

The following ratings were downgraded:

Issuer: Diversified Healthcare Trust

- Senior unsecured debt to Ba2 from Ba1

- Corporate family rating to Ba2 from Ba1

Outlook Actions:

Issuer: Diversified Healthcare Trust

Outlook changed to Negative from Rating Under Review

RATINGS RATIONALE

DHC's Ba2 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. The REIT also maintains solid fixed charge coverage and a large unencumbered asset pool that provides financial flexibility.

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 has been experiencing declining NOI due to industry wide challenges (new supply and labor pressures) 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. The coronavirus is causing a sharp decline in move-ins and occupancy across the industry, while expense pressure related to labor and supplies is further crimping profitability. DHC's ratings also consider governance risks associated with its 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.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The senior housing sector is expected to be significantly affected due to its communal setting and this population's vulnerability to serious medical complications arising from the coronavirus. More specifically, the weaknesses in DHC's credit profile, including its direct exposure to senior housing operations have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and it remains vulnerable to the outbreak continuing to spread. 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 DHC of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

DHC's SGL-3 rating reflects its weak liquidity position as it faces escalating operating risks. The REIT is in the mist of a disposition program intended to reduce leverage and provide proceeds for repayment of debt coming due this year. The REIT had $164mm in various stages of agreement as of early May, but other deals have already fallen out over the past several weeks and we expect it will be difficult to close significant sales volumes in the current market environment. As of 1Q20, the REIT had $415mm available on its $1B unsecured credit facility, but it has since used some of this capacity to redeem $200mm of 2020 bonds. Upcoming maturities include a $250mm term loan due this June and extendable until Dec 2020 and $300mm senior notes due in 2021. We expect the REIT will need external sources of capital to help address these maturities and leverage, which is likely to increase further due to operating cash flow declines in the coming quarters.

The negative outlook reflects DHC's constrained liquidity and the risks it faces in its senior housing business, as the coronavirus outbreak is likely to cause acute occupancy and cash flow pressure. We expect DHC's high leverage will increase further due to these challenges.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

DHC's ratings could be downgraded should the REIT fail to materially improve its liquidity position as it approaches upcoming debt maturities. A downgrade would also reflect Net Debt/EBITDA above 7.2x and fixed charge coverage below 2.4x on a sustained basis. An upgrade is unlikely near-term but would likely reflect strong liquidity, Net Debt/EBITDA below 6.5x, sustained positive NOI growth from key business segments and fixed charge coverage above 2.75x.

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.

Diversified Healthcare Trust (DHC) is a real estate investment trust, or REIT, which owns senior living communities, medical office and life science buildings and wellness centers throughout the United States. DHC is managed by the operating subsidiary of The RMR Group Inc. (Nasdaq: RMR), an alternative asset management company that is headquartered in Newton, MA.

REGULATORY DISCLOSURES

For 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_1133569.

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.

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

No Related Data.
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