Diversified Healthcare Trust

Good afternoon and welcome to the Diversified Healthcare Trust second quarter 2024 earnings conference call. All participants will be in lesson 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 your telephone keypad. 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, Ashia. Good afternoon. Joining me on today's call are Chris Bellotto, 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 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 securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Friday, August 2nd, 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, 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 measures to net income is available in our financial results package, which can be 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. 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 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 afternoon, everyone, and thank you for joining our call. Last evening, DHC reported second quarter results that exceeded expectations for normalized SFO and reflect continued progress on our 2024 operating and financial priorities. On today's call, I will provide a high-level overview of DHC's second quarter financial and operating results, along with an update on key strategic initiatives for 2024 and beyond. Later, Matt will review second quarter financial results and provide an update on the steps we are taking to strengthen our capital and liquidity profile. Second quarter financial results reflect continued momentum within our shop segment, along with continued double-digit rent growth with leasing activity in our medical office and life sciences segment. Our consolidated gap in cash basis NOI increased 12.2%. and 7.1% respectively compared to the prior year, supported by favorable trends in senior housing and healthcare in general. In addition to favorable tailwinds in senior housing, our results are benefiting from the proven capital investments we have made within our communities and from an emphasis on improving operator performance. In May, we issued a $120 million mortgage loan secured by eight medical office and life science properties and used $60 million to partially redeem the then $500 million of senior notes scheduled to mature in 2025. We are currently working to establish additional secured financing within the shop segment in order to repay the remainder of the 2025 debt maturity and to further enhance our liquidity. Matt will provide additional details on our financing strategy shortly. Turning to the second quarter operating performance. Within our shop segment, same property cash basis NOI increased 27% over the year-ago period, driven by an increase in shop occupancy and corresponding increase in REV4, which Matt will expand on in more detail. We will continue to build on the year-to-date shop NOI growth of 34%, prioritizing initiatives with our operators to continue to enhance the resident experience, supporting retention and external growth. Further, we continue to highlight longer-term initiatives that will strengthen our portfolio, including the rationalization of underperforming communities and those with incremental performance opportunities. To accomplish this, we are working through our portfolio with an emphasis on stronger densification of communities and operator relationships in certain markets, cost management with the support of our asset management team, and enhanced living experience for residents through targeted capital improvements and the advancement of additional operator transitions and property sales. Regarding operator transitions, the successful handover of 13 Midwest communities earlier this year has brought in our partnership with our current operator, known for their community-focused strategy and strong management, which has markedly enhanced the performance of their legacy-managed communities. We foresee a comparable path of performance enhancement for the newly transitioned communities particularly as we move into the latter part of 2024 and continue into 2025. Additionally, we are engaged in discussions to facilitate more transitions within our portfolio. Although any forthcoming transitions are expected to be more modest in size, they are an integral part of our ongoing strategy. In line with our strategy to optimize asset allocation within SHOP, We have signed LOIs who are in the process of marketing properties for sale that encompass approximately 1,100 units with an estimated value between $80 and $100 million. In the second quarter, these properties have resulted in a negative NOI of approximately $830,000 and an occupancy rate of 72%. These properties typically are in locations where further growth prospects seem constrained require significant capital investment, lack portfolio synergies, or in circumstances where we believe we have maximized value. We will continue evaluating portfolio optimization initiatives, which involve divesting from underperforming or non-core assets, and look forward to providing future updates. Regarding our renovation initiatives, We are on course to allocate an estimated $25 million for 23 refurbishment projects this year, aiming for an incremental return of 8% to 10% upon stabilization. With respect to major renovations, over the past year, we have completed or have substantially completed major renovations at six communities, reflecting close to $44 million in aggregate spend. These communities are within the ramp-up period, which can take 18 to 20 months. When stabilized, we are targeting annual incremental NOI 15 to 20% on invested renovation capital. For context, these major renovations typically involve substantial upgrades in common areas and resident rooms, new FF&E, along with changes or expansions to the acuity mix. For example, we are underway with a major renovation at a community located in Scottsdale, Arizona. The project includes major improvements to the resident experience with new upgraded common areas, new amenities including a theater, bistro lounge, and fitness room, the addition of 27 new memory care units, and up to 20 new assisted living units through a conversion of a closed skilled nursing wing. We initially targeted this renovation given the favorable outlook within the three-mile statistical range, including a five-year outlook for the 75-plus population growth rate of 12.2%, a 65-plus average home value of over $560,000, and a favorable outlook supporting labor and other operating fundamentals. When stabilized following its completion in 2025, we estimated incremental NOI of $4 million equivalent to a 15% return on the $27 million investment. Here are the highlights of the medical office and life science portfolio. We ended the second quarter with 101 medical office and life science assets consisting of 8.4 million square feet with same store occupancy of 87.4% and a weighted average lease term of 5.4 years. Notably, we leased approximately 101,000 square feet at weighted average rents that were 12.1% higher than prior rents for the same space, which represents a fourth consecutive quarter of double-digit positive rent blow-ups. The quarter-over-quarter decrease for same-property occupancy is primarily driven by a previously communicated known vacate with a tenant in St. Louis, Missouri, totaling 220,000 square feet. We continue to prioritize leasing initiatives, engaging with tenants early for renewal and through proactive asset management of our properties. Our current leasing pipeline includes nearly 800,000 square feet of new and renewal leasing activity with over 200,000 square feet of potential new absorption. Subsequent to quarter end, we successfully negotiated or in advanced stages of negotiation for 135,000 square feet, more than half of which is new absorption. Also within our medical office and life science segment, we sold one vacant property during the quarter located in Irving, Texas for $4.2 million. Along the quarter close in July, we sold two medical office properties located in Buffalo Grove, Illinois and Eagan, Minnesota with proceeds totaling $21.3 million at two properties under assigned PSA or LOI for $12 million. Collectively, these properties represent 537,000 square feet with occupancy of 35% and quarterly NOI of 156,000 dollars. Lastly, we have initiated marketing efforts for our 186,000 square foot life science campus in Torrey Pines. While early in the process, we believe there are varying strategic outcomes given our view on the demand profile for both buyers and tenants within the market. We look forward to providing more updates in future quarters. Overall, we are pleased with the progress on the discussed initiatives underway for each of our SHOP and MOV Lifesign segments and look forward to providing updates on our progress in the upcoming quarters. Now I'd like to turn the call over to Matt.