Diversified Healthcare Trust

Good morning and welcome to the Diversified Healthcare Trust Second 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 a touch-tone phone. 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 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 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, August 5th, 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 www.dhcreit.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 today. I will begin by providing a high-level review of DHC's solid second quarter results, as well as an update on the progress and timing of our key strategic initiatives. Then, Anthony will provide more details regarding our second quarter financials and CapEx spending. 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 second quarter results that beat analysts' expectations on both the top and bottom line, driven by a continued recovery in our shop segment. We made additional progress during the quarter in our efforts toward delivering our balance sheet through a combination of asset sales and new financing at attractive rates, and we paid off our maturing 2025 notes in June. Total revenue for the quarter was $382.7 million, a 3% increase over last year. Adjusted EBITDA RE came in at $73.6 million, of 7% year-over-year, and normalized FFO increased 172% year-over-year to $18.6 million, or 8 cents per share. Looking at our shop sector performance, DHC continues to benefit from a combination of strong sector fundamentals, as well as the significant capital expenditures we have made over the last several years to upgrade our communities. This has resulted in an 18.5% year-over-year increase in same property shop NOI, which came in at $37.4 million. On a consolidated basis, average monthly rate increased 5.4% year-over-year, and occupancy increased 160 basis points to 80.6%, resulting in a 6.2% increase in shop revenue. Although sequentially flat, shop NOI margin improved 180 basis points year-over-year, to 11.2% on a consolidated basis and came in at 12.8% on a same property basis. In addition, our 115 same property communities managed by Five Star posted an NOI margin of 14.1% of 170 basis points year over year. REV4 increased 5.4% year over year primarily driven by annual rate increases, substantial increases in shop care level pricing and a reduction in discounts and concessions at higher occupied properties. Expense for increased by 3.3% due to merit increases and filling open positions and partially offset by lower insurance costs. Overall, we continue to be pleased with the progress we are making controlling costs and we remain bullish on the outlook for our shop segment. Turning to our medical office and life science portfolio. During the second quarter, we completed over 106,000 square feet of new and renewal leasing activity with weighted average rent that were 11.5% higher than prior rents for the same space at a weighted average lease term of seven years. Same property occupancy was 89.9%, down 10 basis points from the first quarter. As we look ahead, 4% of annualized revenue in our medical office and life science portfolio is scheduled to expire through year-end 2025, of which 101,000 square feet, or 1.9% of annualized revenue, is a known vacate. Our active leasing pipeline of 691,000 square feet, of which 246,000 square feet is new absorption, provides momentum towards filling vacancy and increasing occupancy, along with the potential for double-digit rent growth. Turning to our key strategic initiatives. During the second quarter, DHC sold two unencumbered properties, including one senior living community and one medical office building, for a total of $16.4 million. We subsequently sold another three unencumbered properties in July 2025 for an aggregate sales price of $8.8 million. In support of our balance sheet initiatives, we completed an aggregate of $343 million of mortgage loans since March, obtained a new $150 million credit facility in June, which is currently undrawn, and redeemed all of our outstanding senior notes due in June 2025. and that will provide more color on these transactions shortly. As of the end of July, our active disposition pipeline included 53 properties, of which 23 are medical office and life science properties totaling 1.6 million square feet, while 30 properties encompassing roughly 2,000 units are within our shop segment. We are under agreements or letters of intent on 49 of these properties for $280 million, including 28 non-core shop communities, and 21 medical office and life science assets. Of this $280 million, approximately $91 million is collateral for our zero-coupon notes that are due in January. We expect the majority of these asset sales will transact in Q3 and Q4. In addition to these asset sales providing funds to help retire our 2,026 notes and further reduce leverage for the balance sheet, This also positions the REIT with a materially enhanced portfolio that has a higher concentration of shop assets with outside growth potential given strong sector tailwinds and complemented by a portfolio of triple net medical office and life science properties providing stable cash flows with embedded annualized rent increases. We also expect these sales to result in a reduction in CAPEX spending in 2026 and beyond, substantially increasing our overall portfolio cash flows. We remain encouraged, having delivered on the many initiatives communicated over the past year as it relates to growing shop NOI, selling non-core assets to deliver the balance sheet, and refinancing debt and materially lower interest rates. We believe our share price is undervalued, and through a continuation of these initiatives, paying off our 2026 notes due in January, which Matt will lay out momentarily, and continued improvement within our shop results, each will serve as catalysts to drive share performance. Now I'd like to turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the second quarter, our same property cash basis NOI was $71.2 million, representing an 11.2% increase year-over-year and a 30-base point decrease sequentially. The year-over-year increase was primarily driven by improvement in our shop segment, which delivered $37.4 million in same property NOI. This increase was driven by a 5.2% increase in average multi-rate, and a 100 basis points increase in oxy to 81%. These drivers resulted in year-over-year same-property shop revenue growth of 5.9% and margin expansion of 140 basis points. As a reminder, our Q1 2025 shop revenues include the $2.7 million of proceeds from business interruption claims in one of our communities in Florida. Normalizing for this item, we would have achieved a sequential increase in same-property shop NOI of 4.9%. During the G&A expense, the second quarter amount includes $4.1 million in business management incentive fees, as our total return exceeds the benchmark as of June 30, 2025. Any incentive management fee incurred will not be due until January 2026. Excluding the impact of the incentive management fee, G&A expense would have been $7 million for the quarter. During the quarter, we invested approximately $34 million in capital, including $29 million in our shop communities and $5 million in our medical office and life science portfolio. Looking back at our recently completed refreshments and redevelopments, we have achieved incremental NOI of $3.8 million during the quarter when compared to pre-renovation NOI. We believe there is continued upside in NOI and occupancy growth in these communities. Based on our spend to date and our expectations moving forward, we are reducing our 2025 CapEx guidance to $140 to $160 million, a $10 million reduction from our prior guidance. Now, I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $292 million in liquidity, including $142 million of unrestricted cash and $150 million available under our new revolving credit facility we closed in June. This new facility is secured by 14 SHOP communities, including approximately 2,600 units, at an implied valuation of $184,000 per unit. The facility has a maturity date of June 2029, with two six-month extension options, and provides us with additional liquidity while also demonstrating our lenders' support of our long-term strategy. In addition to our $150 million secured revolving credit facility, During 2025, we obtained an aggregate $343 million of financings secured by 27 of our SHOP communities, including approximately 4,100 units with a weighted average interest rate of 6.5%. All of this debt is at fixed rates with the exception of our $140 million mortgage loan, which is effectively fixed through an interest rate cap with a 4.5% SOPR strike rate. $279 million of the principal balance is interest only, for periods ranging from two to five years. On a weighted average basis, the debt has a maturity of approximately six years and reflects an implied valuation of $174,000 per unit. We are very pleased with the outcome of these financings, as they highlight the value of our shop communities, addressed our 2025 bond maturity, and reduced our annual cash interest expense by almost $15 million, or six cents per share. As we have discussed previously, Our strategy to address the remaining $641 million of January 2026 zero coupon bond includes using the $280 million of proceeds from dispositions that Chris discussed, all of which are under PSA or LOI, new financing activity in the range of $300 to $350 million expected in the third quarter, and our strong liquidity position. As a reminder, we do have the option to extend some or all of this remaining bond by one year to January 2027. Our net debt to adjusted EBITDA RE was 8.7 times at June 30th, driven by our refinancing and disposition activities. We expect our leverage to continue to decrease towards our target of 6.5 to 7.5 times as we address our 2026 bond maturity, close the dispositions highlighted earlier, and continue to realize improved performance in our shop segments. In closing, we remain confident that we will meet our 2026 debt maturity, which leaves us until 2028 before our next maturity. Given the results so far and our expectations for the remainder of the year, we are increasing our 2025 SHOP NOI guidance by $10 million at the midpoint of the guidance range to $132 to $142 million. It is important to note that our year-to-date CHOP NOI of $73.4 million includes certain non-recurring items that benefited NOI in the first six months as well as three fewer days in the first half of the year as compared to the second half of the year. As a result, we expect expense increases based on the increased number of days in Q3 and Q4 and increased utilities in Q3 due to seasonality. 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 1 on your touch-tone phone. 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. And our first question will come from John Massaca with B. Riley Securities. Please go ahead. Hello, John. Your line may be muted.

Apologies. I was muted. Good morning, everybody. Maybe digging in a little bit on the PQ results, just giving kind of the change to guidance and your kind of calling out of some one-time items in the first half of the year. Anything notable specifically in 2Q25? I know there were some, I believe it was insurance reimbursements in 1Q, but just anything in 2Q that would be considered kind of one-time issue, maybe how much did that impact the model going forward?

Yeah, the majority of the NOI benefit came in the first quarter, as we noted with those insurance proceeds. We had a little bit of benefit to Q2, PLGL insurance, but not as material to Q1. As we look forward, we expect to continue to see occupancy growth towards the year-end target that we previously highlighted. We do expect some seasonal increases in Q3 with utilities that happen every year. And then with a few more days in the second half, that'll add some costs as it relates to salaries and benefits, et cetera.

Okay. And then as I think about the CapEx guidance change, was that all tied to reductions in kind of shop CapEx, or was there other parts of the portfolio where you're seeing less of a need for CapEx?

There's a few different pieces. So really part of it's dispositions and just generally as we advance towards close to the year end, just kind of comparing where we're at from an actual yearday spend to what we underwrote for budgeting. We're just trying to tighten our range a little bit and then Also, we have some tenant-managed TI and suspected leasing in the MOV and life science portfolios that can fluctuate, but we kind of feel good about taking that range to what we did earlier today during the prepared remarks.

Okay. And then on the disposition front specifically, is there anything maybe beyond the pipeline of sales that are under PSA and LOI that you think you could continue to close? either by year end or maybe heading into 26, just kind of trying to balance out what was closed, you know, year to date, what was kind of in, you know, the pipeline as of the June presentation and, you know, what's kind of in the just under contract bucket per the kind of supplemental. I mean, does that imply that maybe you're going to sell less stuff that was being marketed previously or is that still kind of in the works and maybe could close later this year?

Yeah, it's a mix, right? We noted the $280 million, as you alluded to, on the PSA and LOI front. Those are kind of the Q3, Q4 targets. We do have a handful of other assets, four different properties, two MOB, life science, two shop, for another $20 million that is kind of behind with respect to the marketing process versus the LOI PSA. And so, you know, I don't, I would look at that as late Q4 and even into Q1 as a guide, but that really rounds out kind of the active marketing that we're doing. We did sell the three post quarter end, as I mentioned in our prepared remarks. So, you know, things are trending accordingly, but yes, this will conclude kind of the broader stretch of asset dispositions and then you know, we'll just kind of turn to more hand-to-hand combat or strategic capital recycling on an ongoing basis as we get into 2026. Okay.

And then, you know, not a huge differential, but it seemed a little bit like the five-star assets, you know, at least on a kind of comparative basis, maybe even quarter-over-quarter comparative basis kind of outperformed some of the other shop properties in the portfolio, anything to call out there as to why that was and how does that, if at all, change your philosophy on how much of the portfolio you want to have being operated by Five Star?

Yeah, I mean, look, I think that, you know, Five Star has been really kind of working towards, you know, improving its overall business model and kind of bringing kind of the right team members in place. And, you know, we've talked about some of the, you know, general improvements to the operating platform that they've instilled. You know, we've invested capital in many of those Five Star properties. And so we're starting to see the benefit of that as well. And I think kind of generally speaking, I would say net-net, you know, some of the five-star properties are located in more primary markets, and we're going to get some outside benefit from that. You know, for the balance of the portfolio, you know, there's still a lot of upside opportunity with there. I mean, we talked about some of the one-time impacts. We saw a pullback in Q2 with our SNF properties. We have 10 of those. with an operator and with some one-time adjustments. And so that is impairing some of the results for the quarter. But we would expect both to kind of trend favorably, but with a slight tilt towards a five-star manage, just given the properties, the renovations more specifically with that portfolio.

And then last question for me, in terms of occupancy, you know, as we think about where you are today versus kind of getting to the target range and guidance, is there some reason that that could maybe kind of hockey stick up at the tail end of the year, either, you know, fulfillment of the CapEx plan, something around seasonality, or should that kind of, you know, in your mind gradually build towards that guidance number?

It gradually builds over the year. I mean, we provided kind of the year-end spot occupancy north of 82%, about 82.5% was kind of the midpoint we're targeting. And so, that's going to be a byproduct of just improvements. I mean, we're seeing some favorable results coming into July. And again, as we get through these months, kind of being more in favor with seasonality. We would expect that trend to continue. And then you're going to have the inflows and outflows of the dispositions that are currently under LOI or PSA that will also kind of fluctuate that occupancy number, ultimately getting us to that guidance towards the end of the year.

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

Thanks. Again, if you have a question, please press star, then 1. Our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

Yeah, thanks. Just have a few clarification questions. I know you said there was a non-recurring benefit, mostly in 1Q, but there was a little in 2Q. What was the amount in 2Q that was non-recurring, and where was that included in the P&L? Is that in Shop NOI?

Yes, it's in Shop NOI. It was on the expense side related to a benefit in PLGL insurance. It was about $1 million.

Okay, great. I know that the CapEx number has been coming down a little bit. What is the correct recurring CapEx per unit in your shop portfolio? So if you kind of fast forward into 26 and beyond, is all the extra CapEx dollars that you've been spending, is that done? And what is the right run rate per unit going forward?

So from a recurring shop standpoint, we're thinking about $3,500 per unit. And on the redevelopment side, we're trying to be strategic in terms of how we deploy capital there. But in general, we're thinking mid to high team returns on that CapEx.

And then as you go into 2026, are we done with the extra maintenance CapEx that you've been kind of going through the past few years? Or is there any other heavier CapEx years that we should expect?

I'd say we're caught up for the most part in terms of deferred cap tax at this point.

Okay, great. And then just lastly, I know you mentioned, and I believe I've heard this correctly, the new debt financings of $3 to $350 million in 3Q. Is that going to be new secured debt on shop assets, or how should we think about how that potential secured financing could come in?

Yeah, we've been working on this for a bit of time now. We have a couple different options at play. Some is secured financing or unsecured in the form of a bond or more traditional type financing. As of now, we're not expecting it to be on shop communities, but we expect to report more in the coming months on that. Okay, great. That's all I got. Thanks.

With no further questions, this will conclude 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.

Thank you for joining our call today, and that concludes our call. Thank you.

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