Diversified Healthcare Trust

Good morning and welcome to the diversified healthcare trust first quarter 2025 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 your 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 Matt Murphy, manager of investor relations. Please go ahead.

Good morning. Joining me on today's call are Chris Bellotto, president and chief executive officer, Matt Brown, chief financial officer and treasurer and Anthony Paula, vice president. 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, May 6, 2025. 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 call 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. 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 .dhcreed.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 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, Matt. And good morning, everyone. Thank you for joining our call. I will begin by providing a high level review of DHC's solid first quarter results, as well as an update to the progress and timing of our key strategic initiatives. Then Anthony will provide more detail regarding our first quarter financials and CAF-X. And finally, Matt will review our liquidity and financing activities before providing an update on our 2025 guidance. After the market closed yesterday, DHC reported total revenues of $386.9 million for the first quarter, which was a 4% increase over last year. Adjusted EBITDA RE was $75.1 million, up 17% year over year. And normalized FFO was $14.3 million, or six cents per share, both of which exceeded the analyst consensus estimate. In addition to these solid year over year results, we have made significant progress so far in 2025, addressing our upcoming debt maturities, while also delivering the balance sheet through the completion of $332 million in asset sales. Turning first to our shop sector performance. DHC experienced a meaningful improvement within its shop segment as same property NOI came in at $38.4 million, a .6% increase sequentially, and a .1% increase year over year. On a consolidated basis, average monthly rate increased .8% year over year, and occupancy increased 130 basis points to 80.2%, resulting in a .5% increase in shop revenue. Importantly, shop NOI margin improved 320 basis points year over year to .2% on a consolidated basis, and to .9% on a same property basis. In addition, our 115 same property five-star managed communities posted an NOI margin of 14.6%. REV4 increased year over year by 4.8%, primarily driven by annual rate increases, substantial increases in shop care level pricing, and a reduction in discounts and concessions at fully occupied properties. Expense pour increased by 2% due to merit increases and filling open positions, offset by a reduction in contract labor usage, and a decrease in our annual insurance premium. Overall, we continue to be pleased with the progress we are making controlling costs, and we remain bullish on the outlook within the shop segment throughout 2025. Turning to our medical office and life science portfolio. During the quarter, we completed approximately 145,000 square feet of new and renewal leasing activity with weighted average rents that were .4% higher than prior rents for the same space, and a weighted average lease term of 10.2 years. Same property occupancy was 90.1%, down 10 basis points from the fourth quarter. As we look ahead, .7% of annualized revenue in our MOB and life science portfolio is scheduled to expire through year end 2025. As previously noted, we had one large known vacate in the first quarter in St. Louis, Missouri, occupying 233,000 square feet. We have marketed this non-core property for sale and entered into an LOI with a buyer. Known vacates for DHC's medical office, building, and life science portfolio in 2025 are modest at 115,000 square feet, and we have an active leasing pipeline of 603,000 square feet, of which 152,000 square feet is new absorption. Our pipeline includes an average lease term of approximately 8 years and a trending rent roll-up in the double digits. Turning to our key strategic initiatives, the $321 million of property sales we completed in the first quarter largely consisted of the Muse Life Science Campus in San Diego for $159 million, and 18 triple net senior living communities leased to Brookdale for $135 million. Net proceeds from the Muse and Brookdale, as well as one smaller MOB sale, totaled $299 million, which was used to partially pay down DHC's zero coupon note due in 2026. In March, DHC closed on a $140 million mortgage financing secured by 14 senior living communities with an appraised value of $164,000 per unit. And in April, we closed on a 10-year fixed-rate Freddie Mac mortgage financing for $109 million, secured by seven senior living communities valued at $199,000 per unit. In April and May, DHC is using $280 million in financing proceeds and cash on hand to further pay down our senior unsecured notes due in June 2025. Looking forward with marketing efforts of certain properties, as of quarter end, our active disposition pipeline included 65 properties, of which 30 are MOB, life science, and wellness properties, totaling 2.3 million square feet. And 35 properties are roughly 2,600 units within our shop portfolio. This includes previously communicated asset sales, along with the addition of 25 predominantly non-core MOB, life science, and wellness center assets valued at approximately $190 million. We estimate that combined asset sales will produce proceeds between $350 million and $400 million, of which approximately $125 million is collateral for our 2026 maturity. We expect these asset sales will transact over the next several quarters. Concurrently, we are under agreements with Letters of Intent with 19 of these properties for $116 million, which includes 15 non-core shop communities and 4 MOB, life science assets. And since the first quarter, we have sold one shop community for $11.2 million. These asset sales should materially enhance the portfolio's future performance, given that it will have a higher concentration of well-positioned shop assets, complemented by a portfolio of -in-class triple net, MOB, and life science properties. In addition to de-leveraging our balance sheet, we expect to see a reduction in our future year capex spending, thereby allowing us to increase overall portfolio cash flow and strategically allocate capital to the highest ROI opportunities. Before I turn the call over to Anthony, I would like to highlight the recent publication of the RMR Group's annual sustainability report, which offers a comprehensive overview of our manager's commitment and progress in addressing sustainability. Investors will also find highlights of initiatives that DHC has undertaken to improve sustainability across its portfolio of senior living communities, medical office buildings, and life science assets. A link to the report is available on our website. Now I'd like to turn the call over to Anthony.

Thank you, Chris. And good morning, everyone. Our same property cash basis NOI was $71.5 million, representing a .7% increase year over year and .8% increase sequentially. These increases were primarily driven by strong results in our shop segment, which delivered $38.4 million in the same property NOI, driven by a .8% increase in average monthly rate year over year and .1% sequentially. And OXIE is 80.2%, which was a 130 basis points increase year over year and 20 basis point increase sequentially. This resulted in revenue growth of .5% and margin expansion of 320 basis points year over year. Our shop and work in the first quarter was favorably impacted by $2.7 million of proceeds from a business interruption claim at one of our communities in Florida. Turning to G&A expense, the first quarter amount included $2.4 million of business management incentive fee as our total return exceeded the benchmark as of March 31st, 2025. And the incentive management fee incurred from January 2, 2026. Excluding the impact of the incentive management fee, G&A expense would have been $6.6 million for the quarter. During the quarter, we invested approximately $32 million of capital, including $27 million in our shop communities and $5 million in our medical office and life science portfolio. Our first quarter spent is consistent with our expectations and therefore we are reforming our 2025 CAFEX guidance of $150 to $170 million at this time. Now I'll send the call over to Matt.

Thanks, Anthony and good morning everyone. We ended the quarter with approximately $300 million of unrestricted cash, including the $140 million we received from the financing completed on March 31st. We subsequently paid down our June 2025 bonds in April with that $140 million. The $140 million financing is secured by 14 senior living communities as a three-year term and two one-year extension options. The financing is interest only for two years, has options to extend the interest only period subject to meeting certain conditions, and has a floating rate of SOFR plus 250 basis points capped at 7%. In addition to this financing, in April we closed on a $108.9 million financing secured by seven senior living communities. This mortgage was financed through Freddie Mac with a 10-year term and a fixed interest rate of .22% with interest only payments for five years. We are pleased with the valuations of these properties as they represent an aggregate valuation of approximately $181,000 per unit. In April, we provided notice to redeem an additional $140 million of our 2025 senior notes in May, leaving $100 million outstanding after this latest repayment. Pro forma for this additional $140 million pay down, we have approximately $120 million of cash on hand. We have two executed term sheets with lenders for aggregate proceeds of approximately $94 million, which will be secured by six senior living communities. We expect these financings to close in May and are confident the proceeds from these financings along with cash on hand will address our bonds due in June. With our June 2025 bond maturity address as noted above, we have turned our focus to proactively addressing our January 2026 zero coupon bond. As Chris noted, we have sold 22 properties that were collateral to our zero coupon bond and used net proceeds of $299 million to partially redeem these bonds, leaving $641 million outstanding on that debt. We intend to use most of the proceeds from the $350 million to $400 million of pending property dispositions to further pay down this bond. We expect these property dispositions will cover more than half of the remaining outstanding balance, with the rest coming from additional financing activity. As a reminder, we do have the option to extend the maturity by one year to January 2027. Once these bonds have been addressed, we have no debt maturities until 2028, providing ample runway to continue improving operations and results in our shop segment and driving shareholder value. The improvement in shop NOI coupled with strengthening our balance sheet through dispositions and refinancings resulted in our net debt to adjusted EBITDA RE declining significantly from 11.2 times at December 31st to 8.8 times at March 31st. In closing, we are confident that we will meet our 2025 and 2026 debt maturities, leaving us until 2028 before our next maturity. Additionally, as Anthony noted, we are pleased with our Q1 results, including the growth in shop NOI and at this time are reaffirming our 2025 shop NOI guidance range of $120 to $135 million, with the potential to increase our guidance if these trends continue in the second quarter and we get more clarity on the timing of dispositions. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speaker phone, 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 two. Our first question will come from Justin Hasbeek with RBC Capital Markets. Please go ahead.

Yeah, thanks for taking the question. Looks like during the seasonally weak quarter for the industry, occupancy was up 20 bips sequentially for the entire shop versus down 40 bips sequentially this time last year. Can you just provide some color on the on the occupancy gains for the first quarter?

Yeah, you know, occupancy in general has improved for a variety of different reasons. I think, you know, kind of more specifically as we've worked through the last couple of years with investing capital in our communities. You know, certainly getting the benefit of that, you know, more broadly speaking across the US. I think we should expect to see more of that as we go into 2025, having completed an additional 23 refreshes and Q1. And so, you know, one part, you know, it's just overall kind of operations and the managers focusing on certain initiatives to drive occupancy. It's the capital and then kind of just being positioned appropriately within the markets to drive overall improvement.

Okay, and can you provide some color on the Alaris life dividend? Is this a one time payment or could could continue to receive future dividends like this?

I would say for modeling purposes, this was more of a one time dividend that we receive for our 34% interest based off some strategic actions that Alaris has taken. You know, they are performing well with positive EBITDA. So there's potential for dividends in the future, but I wouldn't think at this time they're of the magnitude of what we saw in February.

Okay. And then on the shop results, the if you annualize the NOI for the current quarter, it's significantly above the top end of your range for the full year shop guide. Just wondering if there's any reasoning behind not increasing the guidance that you guys expect something that we that in the future quarters that we don't know about or any color that would be great.

Look, we've come out of the gate strong beginning 2025. We're very pleased with our NOI performance in the first quarter. As we noted, we did have some business interruption proceeds of 2.7 million dollars that was favorably impacting NOI in the quarter. So that needs to be stripped out from a run rate basis. You know, we are trending to the high end of our guidance. We do get the benefit in the first quarter of a few fewer days in the quarter that helps with salaries and benefits that normalizes as we go out through the year. So look, we're very pleased. We do have a lot of dispositions that are in flux. And as we get more clarity on the timing of those dispositions, we're hopeful we'll be in a position to increase our guidance as early as the second quarter.

That's it for me. Thank you very much.

Again, if you have a question, please press star then one. Our next question will come from John Massa with the Riley. Please go ahead.

Good morning. Good morning. Maybe kind of building on that last question. You know, you were able to keep your shop property operating expenses pretty flat. Anything specific there to call out anything one time-ish beyond the favorable kind of day mix versus, you know, 4Q? Just kind of curious what's going on there.

Yeah, so sequentially operating expenses in shop were flat on a year over year basis. They're up about 3%. You know, we would expect for 2025 our expenses to trend about 3% higher than where we were in 24. We have spoken previously about savings in our insurance premiums from our policy that resets on July 1st of each year. So we are, we've been seeing a benefit of that since the third quarter of 24, but nothing really material one time that would impact that.

And then, you know, on the capex front, anything notable to call out there? Just thinking, you know, obviously, seasonally 2Q, 3Q tend to be the highest. You know, is that guidance kind of reaffirmed and is there anything maybe that could potentially drive savings there for the remainder of the year?

Yeah, good morning. This is Anthony. So, certainly you're right. Most of our spend tends to be weighted towards the second half of the year. Last year, I believe roughly two thirds of our spend came in the second half. So that's why we're reaffirming our guidance at this time. So we're in line with what we expected through the first quarter. But as of now, it's your relative talent. We can make any changes based off of disposition timing or whatnot. So reaffirming what we previously guided towards.

Okay, and then on the debt front, what are you expecting in terms of pricing, maybe on the 94 million, but even beyond that, as you look to kind of address the zero coupons kind of half with financing?

Yeah, so on this first phase of financing, you know, we spoke last quarter of a weighted average interest rate of about 6.5%. And I would say give or take that's pretty close for once we complete this 94 million dollars, which we're very pleased with given we're paying off .75% debt. So it's extremely accretive for us. As we look forward to any partial financing for the repayment of the 2026 is it's too early to really tell just because there's a lot of different options we have with financing, giving our large unencumbered balance sheet. But I would say pricing is probably below 7% for any financing we were to do on a on a secure basis.

Yeah, and I would just add to that too, and we, and we talked about it, you know, we have a significant amount of dispositions that we've talked about. We've added new dispositions to the market of non core and will be in life science properties. And so I think more specifically, as we're able to kind of look forward and transact over the next several quarters, that's going to have a meaningful favorable impact further reducing those 26 is. And so what we're left with at the end is going to be kind of a smaller tranche of financing with what we believe to be kind of a good quality portfolio of remaining and covered properties within that that tranche.

Any thoughts on timing for the financing to kind of address the 26 is coming in the coming months or is that something that maybe is closer to your end? But

I think a lot of the I think a lot of the dispositions are going to happen in the second half of the year, so more kind of back, waited and financing is probably beginning of the 4th quarter rather than waiting till the end of the of the maturity engineering.

Okay, that's it for me. I appreciate all the color. Thank you.

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Chris Bolita, president and chief executive officer for any closing remarks.

Thank you for joining our call today. We look forward to seeing many of you at the upcoming Navy conference in June institutional investors should contact our investor relations. If you'd like to schedule a meeting with management. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now

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