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spk01: 2023 Conference Call for Diversified Healthcare Trust. Joining me on today's call are Chris Bellato, President and Chief Executive Officer, and Matt Brown, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question and answer session with sell side analysts. I would like to note that the recording and retransmission of today's conference call are strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, February 27, 2024. 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 filings with the Securities and Exchange Commission, or SEC. In addition, this column may contain non-GAAP numbers, including normalized funds from operations, or normalized FFO, net operating income, or NOI, and cash basis net operating income, or cash basis NOI. Reconciliations of net income or loss to these non-GAAP figures are available in our financial results package which can be found on our website at www.dhcreach.com. Actual results may differ materially from those projected in any forward-looking statement. 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. And finally, we will be providing guidance on this call. including shop cash basis net operating income or shop cash basis NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains or losses or impairment charges related to the disposition of real estate. Now I would like to turn the call over to Chris.
spk04: Thank you, Melissa. Good morning, everyone, and thank you for joining our call. Last evening, DHC reported fourth quarter and year-end results, along with our January SHOP performance updates that reflect operating and financial improvements across our portfolio. On today's call, I will begin by providing you with an update on the quarter's operational performance and recent events, and then discuss DHC's strategic initiatives as we look toward 2024 and beyond. Later, Matt will discuss the financial results and balance sheet in greater detail and provide full-year guidance and targets for our shop segment. 2023 was a pivotal year for DHC as we made significant progress with operational performance across our sectors, contributing to a full-year 2023 increase to normalized FFO by 207% to $41.1 million. Throughout the year, we refreshed or underwent full renovations at nearly 65 of our shop communities, serving as a stepping stone for occupancy and NOI growth and contributing to our 2023 cash basis NOI increase to $236.2 million, or 43% over the prior year. In December, we took a meaningful step to support our growth with the issuance of $940.5 million zero coupon senior secured notes using the proceeds to repay in full all $700 million of the outstanding debt maturing in 2024 and simultaneously regaining debt covenant compliance. On February 16th, we executed our purchase right and acquired approximately 34% of the currently outstanding Alaris common shares at the predetermined tender offer price for a total purchase price of $14.9 million. Alaris Life is our largest operator, managing 119 communities across our shop segment. During 2023, we sold eight non-core properties located in markets where we believe there is minimal NOI growth potential or with properties that require excessive capital investment. Currently, we are marketing for sale on additional nine non-core properties, mostly within our office portfolio. with estimated sales proceeds of $60 to $70 million. However, we are in the early innings with respect to the demand outlook from buyers and overall execution of these sales. Turning to our shop performance. For the quarter, revenue increased from the prior year by more than $26 million and sequentially by $1.2 million, primarily driven by occupancy gains and corresponding rate increases. Notably, NOI increased $8.1 million from the prior year resulting in NOI margin increase of 250 basis points. NOI and NOI margin were down sequentially due to increased labor, food, utility, and insurance expenses. Across our shop segment, we ended the fourth quarter with occupancy of 79.3%, an increase of 300 basis points, and an average monthly rate increase of 5.5% year-over-year. Fundamental support in the senior living industry remains strong entering 2024, driven by continual growth within the 80-plus population, a decrease in new supply, and moderating wage and labor costs. We maintain an active asset management role with our operators, principally focused on deployment of strategic ROI capital, providing data and analytics to support revenue growth and cost efficiency opportunities. along with routine portfolio-wide evaluation of market trends and optimization opportunities across segments and acuity levels. These focus areas, along with those initiated from our operators, have contributed to our organic growth and have also helped identify additional opportunities, including the following. First, Alaris Life transitioned to annual rental rate increases effective each January, and for 2024 included a rate increase at the majority of their communities, ranging from 5% to 10%, depending on communities and the markets where they reside. On average, this includes a 7% rate increase, and while early in the year, our January 2024 shop results point to improved NOI and margin expansion in part from these changes. Second, in December, we gave notice of termination to one of our operating partners following a comprehensive review of a portfolio of 13 non-performing communities with locations in Wisconsin and Illinois. At year-end 2023, these collective communities contributed negative EBITDA of $3.2 million and occupancy of 69%. We expect to transition these communities during the first half of 2024 with operations to be assumed by another of our third-party operators, Charter Senior Living. Charter has demonstrated significant success turning around 17 DHC communities currently under their management. Since its onboarding in 2021, Charter has increased occupancy from 76% at the time of transition to 87% and increased NOI from $1.3 million to $5.9 million in Q4 2023. We expect there will be minimal disruption during the transition period and anticipate this will lead to meaningful improved operating and financial performance toward the back half of the year and into future years. Capital deployment continues to be a priority across our communities to ensure we are offering a best-in-class experience for current and future residents. Further, the current slowdown with new construction deliverables in select markets creates an environment that is ripe for organic growth and stability. During 2023, we invested $183 million of maintenance and value-enhancing capital across our shop communities, which included cosmetic or full renovations at nearly 65 communities. These investments, coupled with operational improvements at the community, serve as a platform to drive performance. We expect to continue with improvements across our communities into 2024, with roughly 25 refresh projects currently underway, specifically targeted in communities where we expect improvements to enable higher rents and occupancy. Across our shop segment, in 2024, we are forecasting to end the year with occupancy growth of 300 to 400 basis points, rep poor growth of 10 to 12%, along with NOI improvements, which Matt will speak to in more detail. Turning to our office portfolio, we ended the quarter with 102 medical office and life science assets containing 8.6 million square feet with same store occupancy of 92.2% and a weighted average lease term of 5.7 years. Leasing activity during the fourth quarter included new and renewal leases of 200,000 square feet at weighted average rents that were 18.1% higher than prior rents for the same space. Notably, quarterly activity included a renewal in Lubbock, Texas with a full building medical office user for 56,000 square feet for a 10-year term and a rent increase of 13%. Along with a renewal in one of our multi-tenant properties in Albuquerque, New Mexico with a medical office tenant occupying 59,000 square feet for three years with a rental rate increase of 29%. For the full year 2023, we executed 886,000 square feet of leasing activity with an average rent roll of 11.1% and overall improvement over the prior year. When looking at DHC's upcoming lease expirations in 2024, we have 7.1% of our annualized revenue expiring, of which close to 4.5% are known vacates, primarily driven by three properties occupied by single tenants and located in St. Louis, Missouri, Durham, North Carolina, and Phoenix, Arizona. We are actively marketing these properties for lease while also evaluating strategic alternatives, including potential repositioning and dispositions. Despite some of these known vacates, we are off to an active start this year, having signed 65,000 square feet of new and renewable leases, reflecting a 14% increase in rents. Our pipeline remains healthy, with approximately 650,000 square feet of total leasing activity, and includes close to 390,000 square feet of potential absorptions. Looking ahead, we remain optimistic about the outlook for our shop segment in 2024 and beyond. We are encouraged by the performance trends and remain steadfast in our commitment to identifying and pursuing capital investment opportunities to support sustainable performance improvement. As we consider future capital needs, we maintain our outlook to identify and sell non-core assets and are currently in the process of evaluating financing options for select properties across our portfolio, along with agency financing given our unencumbered senior housing portfolio. I will now turn the call over to Matt to review our financial results. Matt? Thanks, Chris, and good morning, everyone.
spk05: Before covering the results for the quarter, I wanted to highlight the bond offering we completed in December. We issued $940 million of zero-coupon secured notes due in January 2026 with a one-year extension option. Net proceeds from this transaction were approximately $730 million, and were used to repay and terminate our $450 million secured credit facility and redeem $250 million of senior notes that were scheduled to mature in May. The bonds are secured by 95 properties, including medical office, life science, and triple net lease senior living communities and wellness centers. We have provided additional aggregate information on this portfolio of properties in our quarterly earnings presentation. As a result of the transaction, we have no debt maturing until June 2025 and have regained compliance with our debt covenants, which allows us to issue and or refinance debt, something we have not been able to do since May 2021. As a result of these financing activities, we have concluded that we no longer have substantial doubt about our ability to continue as a going concern. Now turning to the results for the quarter. Normalized FFO for the fourth quarter was $8.1 million, or $0.03 per share, and included $2.7 million, or $0.01 per share, of non-cash amortization of the discount associated with a zero-coupon secured bond. On a run rate basis, this non-cash amortization is expected to total $20.7 million, or $0.09 per share, for the first quarter, and $86.8 million, or $0.36 per share, for the full year of 2024. Our consolidated same property cash basis NOI was $56.3 million, representing an $11.9 million, or 26.8% year-over-year improvement. The changes by segment are as follows. Office same property cash basis NOI was $29.5 million, representing a year-over-year improvement of $1 million, or 3.5%, mainly driven by free rent burning off. On a sequential quarter basis, cash basis NOI improved $645,000, or 2.2%, mainly driven by reductions in utilities that were higher in Q3 due to seasonal cooling. The same property cash basis NOI was $16.3 million, representing another significant year-over-year increase of more than $10 million. On the revenue side, increases in occupancy and average monthly rate were the main drivers. These revenue increases were partially offset by expense increases, most notably wages and benefits of $8 million and insurance increases. While we saw an increase in wages and benefits, it is important to note that contract labor decreased $8.7 million over the prior year period. Turning to liquidity financing strategies and CapEx, we ended the quarter with $246 million in cash. Our portfolio is comprised of 371 properties with a gross book value of $7.2 billion. With a significant amount of unencumbered assets, including all properties in our shop segment, our financing focus in 2024 is as follows. Issuing CMBS debt secured by certain of our unencumbered medical office and life science properties with target proceeds to exceed $150 million, which will be used to enhance liquidity. issuing agency debt with certain of our unencumbered shop properties with the use of proceeds being used to repay our $500 million of 9.75% on secured notes, which become prepayable without penalty in June of this year. Based on the makeup of our portfolio, we have more than enough stabilized communities to achieve this financing strategy. In the fourth quarter, we invested $79 million in our properties, including $19 million in our office segment and $56 million in our shop segment. For the full year of 2023, we invested $253 million in our properties, in line with the CapEx guidance provided on our Q3 earnings call, including $60 million in our office segment and $183 million in our shop segment. As we have stated, continued investment in our senior living communities is an important component to support the NOI recovery. As part of our 2024 business plan, we have rationalized certain CapEx spend to ensure we are generating appropriate returns on our investment. With that said, in 2024, we expect to spend between $250 and $270 million, including approximately $190 to $200 million in our senior living communities. Looking forward, we expect full year 2024 SHOP NOI to range from $120 to $140 million, with most of the growth over 2023 occurring during the second half of the year. This SHOP NOI guidance assumes occupancy increasing approximately 400 basis points, which represents the high end of our occupancy range, to 83% by year end 2024. That concludes our prepared remarks. Operator, please open the line for questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Brian Maher with B Reilly. Please go ahead.
spk00: Thank you and good morning. Before I move on to my question, I just want to clarify, you said SHOP NOI for 2024, back end loaded, but 120 to 140 million, is that correct? That is correct. Perfect, thank you. Sticking with SHOP though, On the margin side, I mean, one of the questions I get most from the buy side is it relates to the percentage margin, right? Which has been kind of hanging out in that five to 10 range, obviously better at the Alaris Life properties than the other operators. And it was a pleasant surprise to hear that you're going to transition some of those assets. But what's been the biggest hang up there? And I'm assuming with your 120 to 140 guidance that you're expecting some major alleviation on that front. But can you just walk us through what's been the hang up and how that dissipates?
spk05: Sure, Brian, I can start that. So we definitely expect in 2024 margin expansion. A lot of that is going to come from the top line. As we talked about, we're expecting, you know, occupancy to grow 300 to 400 basis points in the year. We're going to continue bringing rents more in line with market as we enter new leases with residents. You know, I think as an industry with inflation where it's been, the expense side has definitely been pressured, and it is a huge focus of our operators to not just grow the top line to drive that NOI growth, but to also really manage and rationalize the operating expenses at our communities.
spk04: And the other thing I would add on that, Brian, is As you may be aware, we're kind of at that tipping point with occupancy kind of being close to that 80% threshold. And I think as we continue to advance occupancy upwards of kind of we talked about the 300 to 400 basis points, we expect more to flow down to the bottom line. So certainly we would expect incremental improvement in addition to some of the things that Matt referenced specifically attributed to occupancy.
spk00: Okay, sticking with shop for a minute, can you tell us what compelled the repurchase of the Alaris Life position that you previously held?
spk04: Yeah, I mean, look, I think that on the onset, you know, there was a tender offer, which everyone is aware of, with the opportunity to kind of right-size Alaris and control costs. And I think at the end, you know, being in a position with kind of a more streamlined company and being able to purchase those shares at that same tender offer price is compelling. And I think further, you know, Alaris, you know, manages about 119 of our communities. And so I think there's aligned interests in kind of that investment.
spk00: And then on the shop assets in general, I mean, I'm sure you're aware of Welltower buying Affinity. I think it was announced maybe 10 days ago for just under a billion dollars. which would equate to about $250,000 a key. I mean, clearly your assets aren't trading anywhere near that. And the upside to your share price common should you move towards that direction from $50,000, $60,000 a key to $100,000 to $150,000 is huge. I mean, can you give us what your thoughts are related to the marketplace for shop assets, given the broader dynamic that you talked about, which is lower supply and more people moving into the age group of going into the communities? I mean, it seems like the demand is there. What's your view on the impact on valuations of what you own?
spk04: Yeah, I mean, I think a couple of things. I mean, we're certainly familiar with the headlines with some of these larger trades. There's different dynamics that go into those metrics. And I guess overall cap rates and valuations assigned to the different kind of product type. But I think in general, I would view this as, you know, a good kind of comp for the industry. And I think kind of going back to your comment, when we look across our portfolio, you know, we have a very large presence in kind of, you know, strong growing markets like Southern Florida, Atlanta, Houston, Charlotte, where a lot of our units reside. And I would say within those, you know, these are kind of institutional quality properties where we've invested meaningful capital and we think there's continued upside. And so when you combine, you know, kind of some of these stronger markets where we're located, which I think across our portfolio represents a substantial portion of our units, combined with the opportunity to continue growing NOI, as we alluded to in some of our prepared remarks, I think overall seeing kind of those comps on some of those headlines I think provides further justification about, you know, overall increased values across the sector. And so I think seeing that and seeing those comps I think bodes well for senior living as a whole.
spk00: Just a real last for me, the shop numbers you gave for CapEx this year, 190 to 200, If you're successful at getting that deployed, is that substantially it or do you expect more to flow into 2025?
spk05: Brian, I think that in 2025, the numbers will probably be a little bit less than 2024 for the SHOP portfolio. We are thinking in aggregate CapEx in 25 is probably somewhere in the 230 to $250 million range. So it's still a little higher than normal, but after 2025, we expect it to come down very significantly. I will also say that, you know, in prior modeling that we've done, We were thinking that CapEx was going to be in excess of $300 million in each of 2024 and 2025. So we are really tightening and sharpening the pencil here with the levels that we provided on today's call. And the result of that is obviously less financing needs in 2024 that we highlighted on the call.
spk00: You said 230 to 250 just now for 2025, but you said the word aggregate. So is that going to include MOB also? Yeah, that's all in, correct. Thank you. That's all from me. Appreciate it.
spk02: As a reminder, if you would like to ask a question, please press star then 1 to enter the question queue. This concludes our question and answer session. I would like to turn the conference back over to Chris Bellotto, President and Chief Executive Officer, for any closing remarks.
spk03: Thank you for joining our call today, and we look forward to seeing many of you at some of the upcoming conferences. Thank you.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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