Diversified Healthcare Trust

Good morning and welcome to the Diversified Healthcare Trust third quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 conference over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Thank you, Drew. Good morning. Joining me on today's call are Chris Palato, 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 strictly 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, Tuesday, November 5th, 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 operation 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 in our website at www.dhcbrief.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 under-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 would now like to turn the call over to Chris.

Thank you, Melissa. Good morning, everyone, and thank you for joining our call. On today's call, I will provide a high-level overview of DHC's third quarter financial and operating results, along with an update on key strategic initiatives for the remainder of 2024 and into next year. Later, Matt will provide more detail on our third quarter financial results and an update on our full-year guidance. DHC delivered mixed financial results in the third quarter, primarily attributed to our shop segment, including a sequential 40 basis point improvement in same-store occupancy and moderate revenue growth, which was offset by cost increases resulting from higher seasonal expenses, salaries and wages, and certain one-time items. Compared to the prior year, our consolidated shop NOI increased 32.6%, supported by operational improvements and favorable market trends in our senior housing portfolio. Turning to our medical office and life science portfolio performance. During the quarter, we completed 83,000 square feet of new and renewal leasing activity with a rent roll-up of 4.8% and a weighted average lease term of 7.4 years. Same store occupancy decreased by 150 basis points to 87.8%, largely due to the previously communicated known vacate of a building in Raleigh, Durham, North Carolina, reflecting 126,000 square feet. As we look ahead, roughly 9% of our annualized revenue is scheduled to expire through year-end 2025. Our largest known vacate during this period is with a tenant whose expiration is in the first quarter of 2025 and located in St. Louis, Missouri, occupying close to 233,000 square feet, or 2.2% of annualized revenue. We have various initiatives underway to address vacancies and leasing of our properties, which includes select dispositions along with active asset management. Complementing our retention and absorption outlook, we maintain an active leasing pipeline with close to 400,000 square feet of activity, including potential absorption of 117,000 square feet and an overall double-digit rent roll-up. Turning to our shop performance, While we are pleased with our year-over-year revenue and NOI growth of 6.4% and 32.6% respectively, quarterly progress remains subdued in part due to slower occupancy growth and varying expense impacts that fluctuate quarter to quarter. REV4 increased by 80 basis points sequentially, primarily driven by growth within IL, skilled nursing, and levels of care, along with an overall decline in movement incentives. Expense for increased 140 basis points, largely due to an increase in salaries and wages, seasonal utilities, and certain one-time items. These costs, along with muted shop occupancy growth, resulted in an NOI of 27.4 million for the quarter, representing a 32.6% increase over Q3 of last year, but a decline sequentially. We remain committed to our portfolio transition strategy and the initial progress we are making reinforces our belief that we are taking the right steps to drive sustainable long-term growth. That said, we recognize that this process will require additional time to unfold, and as a result, we are lowering our guidance range for the year. We are conducting a top-to-bottom analysis of our portfolio, considering various factors such as performance metric benchmarks, densification of communities, synergy opportunities, and operator relationships in key markets, a process which will include the expansion of certain key initiatives over the next several quarters. The goal of this work is to ensure that our strategy and the broader market evolves, our portfolio continues to comprise the right assets that will position DHC to benefit from embedded NOI upside. As part of this process, we transitioned 13 communities earlier this year and have over 20 renovations scheduled for completion in Q4 2024. Further, we are expanding our disposition program to include a total of 32 shop communities comprised of 2,422 units, including three under agreement or LOI to sell, and 29 communities in various stages of marketing. Collectively for the quarter, these communities generated negative NOIs of $2 million with occupancy of 75.2%, and we are assuming a valuation range from $55,000 to $65,000 per unit. The decreased range of per unit value from our prior call is due to the additional community selected for sale, which includes smaller unit counts, negative NOI, and that are generally located in more tertiary markets. Removing these properties from our portfolio will also enable us to focus our strategic capex into our highest ROI communities, creating positive earnings momentum for our remaining portfolio. In fact, removing the 32 shop assets that we are in the process of selling would improve our third quarter NOI margin by 170 basis points and occupancy by 50 basis points. Outside of shop, DAC is currently under agreements or letters of intent to sell 25 properties for gross proceeds of $333 million. This includes our previously announced agreement to sell 18 triple net lease senior living communities, which is currently scheduled to close in the fourth quarter of 2024. This opportunistic sale monetizes this portfolio and highlights our ability to achieve premium valuations reflected by a valuation of more than $150,000 per unit and an attractive in-place cap rate of 7.3%. Proceeds generated from the sale and certain of our other properties, including our LifeScience campus in San Diego, California, will allow us to reduce our leverage as we accretively pay down our zero-coupon senior secured notes due in 2026 with up to $300 million in potential proceeds from the sale of these collateral properties. We also wanted to provide an update in our refinancing strategy to address 440 million in maturities we have due in June 2025. We are actively engaged with GSC agencies to refinance this debt. However, given the size of the financing and a more thorough understanding of the overall execution and timeline with the agencies, we have broadened our strategy to include financing of smaller tranches, tapping diversified financing sources from institutional real estate lenders along with the agencies. I will let Matt provide more details. However, the key takeaway is that we believe this change will provide for a more favorable financing outcome. Despite our mixed performance results for the quarter, we remain focused on advancing initiatives to increase occupancy and improve community performance in support of our shop turnaround. As highlighted earlier, our top-to-bottom evaluation of the portfolio, including certain initiatives undertaken by our operators, are key pillars that will position DAC to benefit from embedded NOI upside. Now I'd like to turn the call over to Matt.