Diversified Healthcare Trust has not been in compliance with its debt incurrence covenant for more than two years, the Newton, MA-based real estate investment trust disclosed Monday.

For the four quarters ended March 31, DHC would have needed $81.3 million of additional income to be in compliance with the 1.5x annual debt service level required for its debt incurrence covenant, according to a filing with the Securities and Exchange Commission.

Compliance is required for DHC to refinance or issue any new debt, a situation that the REIT said creates a financial problem.

“DHC’s inability to refinance maturing debt is a primary reason we believe that the pending merger with Office Properties Income Trust is the best path forward for DHC and provides shareholders the best alternative to realize increased shareholder value in the long term,” DHC President and CEO Jennifer Francis said in the filing.

In the proposed deal, OPI would acquire all of the outstanding common shares of DHC in an all-share transaction, which was unanimously recommended by special committees of the respective boards of DHC and OPI and then unanimously approved by the respective full boards. It is subject to the approval of DHC and OPI shareholders and other customary closing conditions.

“Upon closing of the merger, the $450 million of DHC debt maturing in January 2024 will be refinanced and the combined company will be immediately in compliance with its debt incurrence covenant. In addition, the combined company will be less vulnerable to the inconsistent nature of the SHOP [senior housing operating portfolio] recovery and the annual distribution to DHC shareholders will immediately increase by 267%,” Francis added Monday. 

Financial performance last month is evidence of “inconsistency of ongoing SHOP recovery,” the REIT noted.

SHOP net operating income in May was $5.8 million, which was $11.1 million, or 66%, below NOI in May 2019, and was $3.2 million, or 36%, below NOI in April 2023. The NOI margin in May was 6.3%, or 1,020 basis points below May 2019 and 360 basis points below April 2023. 

Year-to-date occupancy through May 31 was 77.5%, which was 900 basis points below the same period in 2019.

“The DHC board unanimously recommends that shareholders vote for the merger,” Francis said.

Not all of DHC’s shareholders are on board with the proposal, however.  June 9, shareholder Flat Footed filed a preliminary proxy statement with the SEC formally expressing opposition to the REIT’s proposed merger with OPI. The investor has a 9.8% stake in DHC. July 14, Hedge fund D.E. Shaw, which owns a 6.1% stake in DHC, also filed a statement with the SEC formally opposing the merger.

“We believe the board of trustees has failed DHC’s stakeholders by pursuing the proposed merger, which would unnecessarily burden the company with OPI’s rapidly declining commercial office properties,” Flat Footed wrote. The deal, the firm said, disproportionately benefits OPI and The RMR Group “at DHC’s direct expense.” The RMR Group manages both DHC and OPI.