Diversified Healthcare Trust

Good morning and welcome to the Diversified Healthcare Trust First Quarter 2024 Earnings Conference Call. All participants will be in 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 call over to Kevin Brady, Director of Investor Relations. Please go ahead.

Thanks, Nick. Good morning. Joining me on today's call are Chris Pallotto, 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. Please note that the recording and retransmission of today's conference call is prohibited and without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other security laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, May 7, 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 call, other than through filings with the Securities and Exchange Commission, or SEC. In addition, we will be discussing 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. A reconciliation of these non-GAAP figures to net income is available in our financial results package, which can be found on our website at www.dhcrept.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. And finally, we will be providing guidance on this call, including SHOP net operating income or SHOP 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 and losses or impairment charges related to the disposition of real estate. With that, I will turn the call over to Chris.

Thank you, Kevin. Good morning, everyone, and thank you for joining our call. Last evening, DHC reported first quarter results that reflect operating and financial improvements across our portfolio. On today's call, I will provide a high-level overview of DHC's first quarter financial and operating results, along with key strategic initiatives that underpin our guidance. Later, Matt will review first quarter financial results and provide additional detail related to our strategy to strengthen our capital and liquidity profile. First quarter financial results reflect continued improvement within our shop segment, consecutive mark-to-market rent growth within our medical office and life science segment, along with continued advancement of targeted strategies for financing, capital deployment, and operator transitions. General market fundamentals supporting favorable trends for healthcare and senior housing, along with the senior housing construction supply demand imbalance, continue to be a bright spot as we advance through the year. Relative to the year-ago period, our same property cash base as NOI increased 9.5% as a result of the strong performance within our shop segment. We credit our positive performance to several factors, including our community investments, our dedication to operator excellence in this segment, and the favorable tailwinds in the healthcare industry. On the financing side, we remain active with our efforts targeting secured financing on select medical office, life science, and shop properties, to improve liquidity and repay the 2025 debt maturity, which Matt will provide additional details on momentarily. Turning to our first quarter shop performance, strong results are demonstrated by our revenue increase of 10% over the year-ago period, supported by a 200 basis point increase in occupancy and a 6.8% increase in total reform. These results reflect consistent improvements across independent living, assisted living, and memory care. On a sequential basis, revenue increased 4.7%, primarily driven by rate increases that occurred within the first quarter at our alerted managed communities, along with increases within our level of care. Notably, NOI margin increased 180 basis points and 260 basis points on a year-over-year and sequential quarter basis, respectively. While we are pleased with our progress with our performance, we retain an active asset management philosophy to support continued opportunities across our communities. This includes rationalization of further operator changes consistent with the 13 communities we transitioned earlier this year. As a reminder, these transition communities contributed negative EBITDA of $3.2 million during 2023, and for the first quarter, negative EBITDA of $920,000. With the completion of the transition, we expect to see meaningful improvement of operating and financial performance toward the back half of the year. Additionally, we will assess specific dispositions and future acquisitions, focusing on identifying our presence in certain markets. With this, we anticipate benefiting from sales and cost synergies, as well as providing broader options for residents. With respect to our capital refresh and renovation projects, we are advancing refresh projects and 23 of our shop communities that are expected to be completed in Q4. These refresh projects mostly cosmetic upgrades and FF&E replacement. Estimated costs for these projects are $25.7 million, or roughly $6,600 per unit, and we are targeting an ROI of 8% to 10% when stabilized. With respect to major renovations, in the first quarter, we completed the renovation of our community in Arlington Heights, Illinois, totaling $5 million, or $17,800 per unit, with additional qualifying renovations underway at two of our communities. Major renovations generally include base level refresh work, along with changes to the acuity mix, amenity enhancements, and other potential NOI drivers, where we believe a minimum ROI of 15% is achievable upon stabilization. These refreshed projects are a continuation of our business plan to improve our communities, having completed similar scale renovations at more than 90 communities since 2021. We expect these improvements to better position our communities as a top choice for current and future residents, drive occupancy, and contribute to continued NOI growth and margin expansion. As provided with our prior call, our 2024 shop full-year guidance outlook remains generally unchanged. which Matt will speak to in more detail. Turning to highlights for the Medical Office Life Science and Wellness Center portfolio. We ended the first quarter with 102 medical office and life science assets consisting of 8.5 million square feet with same store occupancy of 89.8% and a weighted average lease term of 5.5 years. Notably, we leased approximately 101,000 square feet at weighted average rents that were 11.5% higher than prior rents for the same space, which represents the third consecutive quarter of double-digit positive rent roll-ups. Within our Wellness Center portfolio, we completed a five-year renewal for three of our Wellness Centers in Albuquerque, New Mexico, totaling 130,000 square feet, including a 7.5% rent roll-up and no leasing capital. As of quarter end, our 10 wellness centers are well covered at 1.67 times with a vault of 15.9 years. As discussed on our prior call, we are proactively working through opportunities supporting current vacancies along with our known vacates. The change in occupancy from the fourth quarter was primarily driven by known vacates with two tenants totaling 225,000 square feet and located in Kansas City and Chicago MSAs. In 2024, tenants representing roughly 4.1% of our expiring annualized revenue are anticipated to vacate with move-out staggered throughout the year. We retain an active leasing pipeline for new and renewal activity reflecting close to 650,000 square feet, which includes 372,000 square feet of potential net absorption. Subsequent to quarter end, we signed new and renewal leases totaling 55,000 square feet for a weighted average lease term of close to five years and a roll-up in rent. Also within our medical office and life science segment, we sold one vacant property during the quarter located in Phoenix, Arizona for $3.6 million. In addition, we are currently marketing for sale eight properties totaling over 800,000 square feet, which includes two properties currently under agreement for 159,000 square feet and the remaining six properties are in various stages of marketing. We expect the sale of these properties to have a positive impact on occupancy and NOI and estimate proceeds of $50 to $60 million in the event we are successful transacting on these dispositions. Before I turn the call over to Matt, I want to make you aware of the recent publication of the R-Mark Group's annual sustainability report. The report highlights insights, accomplishments, and data regarding our manager's commitment to long-term ESG goals. We are proud of the progress made to strengthen DHC's sustainability practices and enhance our ESG transparency and disclosure. You can find the links to the complete report as well as the DHC-specific tear sheet on our website at dhcreit.com. Oh, and I'll turn it over to Matt.