Diversified Healthcare Trust

Good day and welcome to the Diversified Healthcare Trust fourth quarter 2022 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 an opportunity to ask questions. To ask a question, you may press star then one on a touchtone 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 Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Good morning and welcome to Diversified Healthcare Trust's call covering the fourth quarter 2022 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 current beliefs and expectations as of today, Thursday, March 2nd, 2023. The 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 the 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.dhcREIT.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. As we've previously disclosed, in February, we agreed to tender all of the Alaris Life Inc. common shares we currently own in connection with the tender offer and proposed acquisition of Alaris Life Inc. by ABP Acquisition LLC. In light of the pendency of the tender offer, we do not intend to speak to these matters on today's call and instead refer you to our current report on Form 8K we filed with the SEC on February 2, 2023. and to the Offer to Purchase filed by Alaris Life Inc. with the SEC on February 17th, 2023 for additional information. Now I'd like to turn the call over to Jennifer.

Thank you, Melissa, and good morning. Thank you for joining us on today's fourth quarter and year-end 2022 conference call. 2022 is a year of recovery for Diversified Healthcare Trust. As we executed on our plan to deploy capital across our portfolio, and support the operators and asset managers that are implementing the recovery strategy in our senior living communities. All of our operators have been successful in growing occupancy and revenue during the year, while they worked diligently to battle inflationary pressures that are impacting labor, utilities, food, and other expenses across our portfolio. Rick and I will provide details this morning on some of their successes and also on some of the challenges still to overcome in the year ahead. After market close yesterday, DHC reported normalized FFO of 3 cents per share for the fourth quarter. The year-over-year and quarter-over-quarter improvement in normalized FFO from negative 7 cents per share and negative 6 cents per share, respectively, was largely driven by continued improvements in three areas within our shop segment during the fourth quarter. First, growth in net operating income and operating leverage for the quarter and the year. an acceleration in occupancy recovery and rate growth during the quarter, and third, a decrease from the third quarter in the use of contract labor and the associated costs. Starting with the positive trends in our shop segment, many of our metrics are trending positively, but most notably, occupancy improved 380 basis points year over year to 76.3%, and same property occupancy also increased 380 basis points year over year, to 76.7 percent. We're continuing a consistent trend of improvement, as this is our seventh consecutive quarter of occupancy growth in this segment, as we saw a 180 basis point increase in occupancy from the last quarter in our same property occupancy and a 160 basis point increase over the last quarter in our consolidated portfolio. Our transitioned communities achieved a year-over-year occupancy increase of 660 basis points. Similar to the overall senior living industry, the recovery in our shop segment was led by our needs-based assisted living communities, which were hard hit during the pandemic due to the impact that COVID-19 had on high-acuity seniors in assisted living and by the fact that occupancy in these communities was trending lower prior to the pandemic as the assisted living sector had experienced more oversupply than independent living. Occupancy improvements have been bolstered by our operators' improved marketing and sales processes and by the positive impact of our ongoing capital investment strategy. We believe that continued focus in these areas will yield further improved performance. We're encouraged by the quarter's progress in occupancy, but we believe there is still room for improvement across this segment. Shop revenue increased $33 million year-over-year, or 14%, and 3.5% since the last quarter. These increases in revenue were driven primarily by higher rental and care revenue and reduced discounts, a direct result of the sales training that has been implemented by all of our operators. Average monthly rates increase nearly 9% year-over-year as our operators are pushing rate across the board. While this occupancy and revenue growth are encouraging, elevated expenses in our shop segment remain a challenge. This quarter's property-level operating expenses increased by close to $19 million, or 8% from last year. They decreased by close to 2% sequentially, though, as operators began to see certain expenses moderate. For instance, contract labor and utilities declined compared to the third quarter, but remained elevated year over year. Our operators experienced less pressure on wages during the quarter, with agency usage down significantly from the third quarter. although there's still improvement needed in our communities with skilled nursing units. Our operators remain very focused on employee recruitment and retention. Recruitment efforts include the use of dedicated hiring specialists, careful evaluation of competitive wages, and the more frequent use of sign-on bonuses. Retention efforts center on paying competitive wages to existing employees, active employee engagement, consistent career path development, and generally fostering a strong workplace culture within their teams. While the cost and availability of labor remains a challenge in this industry, the recruitment and retention of nurses remains the greatest staffing challenge for our operators. We've made significant progress with our planned renovation projects and our managed senior living communities. We've added a page to our supplemental package that highlights and provides detail on our development projects in our shop segment. Renovation projects were completed at 36 of our communities in 2022. In 2023, we're in active stages of planning our construction for renovations at 89 communities, and we anticipate approximately 70% of these projects will be completed by year end. As I've said in the past, we believe that our capital spend in communities is an important part of the turnaround underway in this segment. Turning to our office portfolio segment, year over year, rental income was up slightly in our same property office portfolio, but fourth quarter cash basis NOI was down slightly by 90 basis points due to a number of one-time expenses across our portfolio. For leasing activity, we executed 182,000 square feet of new and renewal leases in the quarter with strong roll-up in rents of 8.9% and a weighted average lease term of 9.2 years. We ended the quarter at 90% occupancy in our same property office portfolio segment and had a leasing pipeline of just over 1 million square feet at year end, in line with our pipeline in the third quarter. We have just over 110,000 square feet of transactions in our pipeline where leases have been signed or are in letter of intent stage with leases being negotiated. I'd like to speak briefly about our wellness centers, which accounted for 3.6% of our fourth quarter NOI. In January, we terminated the leases of a tenant of three wellness centers located in Tampa, Atlanta, and the suburban D.C. area. These are extremely well-located properties in affluent submarkets. Subsequent to termination, we have a signed lease for one of the locations and have a signed letter of intent for the two other clubs. Also in February, we announced that we'd amended our credit facility to provide DHC covenant relief while we continue to execute on our recovery strategy this year. I'll now turn the call over to Rick, who will provide more detail on our financial results and the key terms of this amendment.