Diversified Healthcare Trust

Good day and welcome to the DHC fourth quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be the opportunity to ask a question. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Michael Kodesh, Director of Investor Relations. Please go ahead.

Good morning, and welcome to Diversified Healthcare Trust's call covering the fourth quarter of 2021 results. Joining me on today's call are Jennifer Francis, President and Chief Executive Officer, and Rick Seidel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question and answer session. I would like to note that the transcription, recording, and retransmission of today's conference call are strictly prohibited without the prior written consent of Diversified Healthcare Trust, or DHC. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's present beliefs and expectations as of today, Thursday, February 24, 2022. Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP numbers including normalized funds from operations or normalized FFO, EBITDA, net operating income, or NOI, and cash basis net operating income or cash basis NOI. Reconciliations of net income or loss attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD, or FAD are available in our supplemental operating and financial data package found on our website at www.dhcrete.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. Now, I'd like to turn the call over to Jennifer.

Thank you, Michael. Good morning, and thank you for joining us on today's call. I'd like to begin today's call by reflecting on the year where we focused on the foundational work necessary for DHC to emerge from the COVID-19 pandemic in a position of strength. While I would classify 2020 as a year of defensive measures taken to withstand the effects of COVID-19, 2021 was a year defined by our proactive steps taken to best position the company in terms of liquidity and future profitability. As vaccine acceptance and easing of pandemic-related social restrictions helped curb deterioration across the senior living industry, we executed on a plan to refine our operator mix, enhance liquidity, and deploy capital to reposition a number of our properties. Since our last call, we completed three significant transactions that immediately improved our liquidity to enable us to unlock portfolio value and grow earnings. First, at the end of December, we sold a 35% equity interest in the existing joint venture that owns the two-building life science complex in the Seaport District of Boston for approximately $378 million. As a reminder, This asset was purchased in 2014 for $1.1 million at a 7% cap rate, and the recent sale was at a $1.7 billion valuation, or a 4.2% cap rate, a sizable appreciation in the value of this asset. Second, in January, we completed a joint venture with 10 properties in our office portfolio segment that resulted in cash proceeds of approximately $653 million, and we retained a 20% equity interest in the joint venture. The 10 property portfolio was sold at approximately $657 per square foot or at a 4.98% cap rate. And third, we announced yesterday an amendment to our credit agreement with our lenders that extends certain covenant waivers through the end of 2022 and extended the maturity date of our revolving credit facility to January 2024, which Rick will discuss more thoroughly in his prepared remarks. The combination of these transactions created approximately a billion dollars of liquidity and flexibility as we continue to invest in our portfolio to drive operational performance and optimize returns. Following the deconsolidation of the assets related to the two joint venture sales, our office portfolio segment remains small, nope, remains strong and well diversified. The 8.7 million square foot portfolio contains 104 high quality properties located across 24 states and Washington, D.C., and represented approximately 85% of fourth quarter net operating income at DHC. As of December 31, 2021, this portfolio was approximately 91% occupied, which compares to the total portfolio inclusive of the JV assets of approximately 92% occupancy, both with a weighted average remaining lease term of just under six years. We're pleased with the remaining portfolio, whose attributes closely resemble the portfolio prior to the joint venture transactions. Of our top 25 tenants, 22 of them are in our remaining portfolio. And over 98% of this quarter's leasing was completed in the remaining portfolio. With properties like our Torrey Pines buildings, the Aurora Healthcare buildings, our newly redeveloped properties in Washington, D.C., and Lexington, Mass., and many others, We remain confident that this portfolio will continue to be the solid, well-occupied portfolio that the larger portfolio has always been. Turning to our results, leasing velocity was strong in our office portfolio segment for the fourth quarter and full year 2021. In the fourth quarter, we achieved the highest quarterly activity that we've had in over 10 years, with 43 new and renewal leases totaling close to 1.4 million square feet, with average roll-up in rents of 6.7%, a weighted average lease term of 9.3 years, and with leasing costs of approximately $2.84 per square foot per year. We completed over 2.5 million square feet of leasing during the year, and an average roll-up in rents of 11.2%, a weighted average lease term of 9.2 years, and leasing costs of approximately $5 per square foot per year. The annual results represent approximately the same square footage of leases that we executed in the prior two years combined. Same property occupancy during the fourth quarter increased 80 basis points from the previous quarter in our office portfolio segment, primarily driven by this strong leasing activity. Leasing in the fourth quarter included the renewal of Aurora Healthcare, now DHC's largest tenant in this portfolio, following the deconsolidation of the assets included in the joint venture transactions. This 631,000 square foot, eight-building renewal was at a 4.2% roll-up in rent with a new lease term of approximately 10 years and with leasing costs of $2.36 per square foot per year. Tenant retention in the fourth quarter was 91% based on annualized revenues, bringing total retention for the year to 83%. Our leasing pipeline is now approximately 875,000 square feet following the large leasing volume completed in the fourth quarter. Approximately half of the pipeline is for new tenants that could absorb close to 400,000 square feet of space. Additionally, subsequent to quarter end, we executed a lease in our newly redeveloped Tempe, Arizona property for 82,000 square feet, or 100% of the building, for an 11-year term at a 20.3% roll-up in rent. We're pleased with the leasing success at our recent redevelopment properties, and are excited to continue to pursue redevelopment opportunities in our portfolio where appropriate. For instance, I've spoken in past calls about a property in Decatur, Georgia that is being vacated by its full building tenant this month. Redevelopment plans have been finalized, and construction will begin as soon as the tenant vacates. We also have a tenant outside of Boston downsizing from two buildings to one, and plans are advancing toward a potential redevelopment of the building that is being vacated into lab-ready space. Turning to our shop segment, in the fourth quarter and well ahead of schedule, we completed the management transition of 107 senior living communities from five-star senior living to 10 new third-party operators. As our new operators have started settling in, we're already seeing the benefits of utilizing regional operators for these communities. They're leveraging their local market presence and referral source relationships to drive occupancy increases in previously challenged assets and are utilizing regional labor networks to limit costly agency use. Operationally, despite expected seasonal weakness and another rise in COVID case counts across the United States in the fourth quarter due to the Omicron variant, our shop segment experienced occupancy growth. In our same property shop segment, which is comprised of 120 communities managed by Five Star, occupancy increased approximately 70 basis points on average from the third quarter. Total shop occupancy this quarter increased 120 basis points from the third quarter, as the transition portfolio is more heavily weighted toward higher acuity needs-based care, which continues to outperform choice-based care in our portfolio as it does in the broader senior living recovery. While we're encouraged by occupancy growth in our senior living properties and are now seeing the aggressive concessions that were being offered earlier in the year subside, due to those concession packages offered in 2021 in our same property portfolio, rate was down 2.6 percent from the third quarter and same property revenues decreased approximately 170 basis points sequentially. Looking ahead, we're seeing signs that we're reaching an inflection point for rate recovery and continued occupancy growth. Our operators are increasing asking rents 5% to 10% in the first quarter in reaction to increased expenses and wage inflation, which all of our operators believe is realistic and achievable. We've also seen some operators begin to increase community fees, which should help drive margins. While we're hopeful that many of these tailwinds continue, the biggest challenge now facing the senior living industry is labor. While dealing with labor issues is not new to our operators, and prior to the pandemic, they were already experts at dealing with wage pressure and labor shortages. These issues have accelerated. Same property wages and benefits increased $3.4 million, or 4.1% from the third quarter, largely driven by a sharp uptick in agency use. Agency cost increases represented approximately 65% of the same property wages and benefits increase due to staffing shortages driven by the Omicron variant and the holiday season. Looking forward, we expect agency costs to moderate as the effects from the Omicron variant subside, but expect wage inflation to persist, with same property wages expected to grow 10 to 12 percent in 2022. We believe our operators can price a portion of increased wages and benefits into resident rent and community fees, while also implementing more efficient labor models that can adjust to varying acuity and occupancy levels. The senior living industry is well positioned for recovery. The sector is benefiting from outpaced absorption and a strong supply-demand environment, and we're actively positioning our communities for success through a balanced operator mix and capital investment. I'll now turn the call over to Rick to provide details on our financial results.