Diversified Healthcare Trust

Good morning and welcome to the Diversified Healthcare Trust Fourth Quarter 2025 Earnings Conference Call. All participants will be in a 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 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, February 24, 2026. 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.dhcree.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 under-reliance on 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 thank you, everyone, for joining our call today. I want to start with a recap of a very busy and successful 2025 for DHC in which we executed on the stated initiatives that we identified early in the year and ended the year as the best performing REIT in the U.S. as measured by both share price appreciation and total shareholder return. In 2025, we completed over $1.4 billion in capital markets activity principally focused on financing, asset sales, and the establishment of a $150 million undrawn credit facility. We also completed the wind down of a layer slide transitioning 116 communities representing over 17,000 units to seven regionally focused operators and completed renovations at over 30 communities. These efforts combined with the work of our dedicated asset management team resulted in full year consolidated NOI growth of 31.3%. a reduction in our leverage of over three terms, and no debt maturities until 2028. As one of the largest owners of senior housing properties in the country, we believe our recent accomplishments, combined with the investments we have made in the portfolio and a favorable industry outlook, sets the stage for continued outsized growth in our shop portfolio as reflected in our 2026 guidance, which Matt will expand upon momentarily. Turning to the quarter. After the market closed yesterday, DHC reported strong fourth quarter results, particularly as it relates to our shop NOI, which improved 27.6% over last year to $38.3 million, reflecting continued execution on our highlighted initiatives and further strengthening DHC's financial position. For the quarter, DHC delivered total revenue of $379.6 million, adjusted EBITDA RE of $72.4 million, and normalized SFO of $21.8 million, or 9 cents per share. Turning first to our senior housing portfolio, shop and wine for the full year came in at $139.3 million, which was toward the high end of our guidance. This was driven by same property occupancy that increased 90 basis points year over year to 82.4%, an average monthly rate that increased 5.8%. same property shop NOI margins continued to improve, up 230 basis points year over year. These results were achieved despite a somewhat noisy quarter reflecting the transition of 116 shop communities to seven different operators that have proven track records and well-established regional footprints. With all the transitions completed during the quarter, we remain focused on executing property-specific business plans and targeted opportunities identified across the portfolio. We are intensely focused on executing in lockstep with our operators, combining disciplined operational oversight with their deep regional expertise to deliver measurable gains in occupancy and portfolio NOI. We are focused on driving higher lead to move and conversion through the rollout of advanced CRM platforms, tighter and more coordinated procurement programs, the introduction of differentiated care levels to capture unmet demand, and dynamic pricing strategies that directly capitalize on market-specific conditions. Our early engagement with these operators, many of whom are industry leaders, reinforces our confidence in achieving our 2026 outlook. In addition to the operational opportunities within SHOP, we also have a healthy pipeline of ROI projects that provide an additional driver of earnings upside over the next several years. This will come through the repositioning of underutilized areas within our communities including former and now closed skilled nursing wings where we can deploy a modest amount of capital to renovate and reopen these areas with the appropriate acuity needs. This initiative has the potential to add approximately 500 shop units to the portfolio that could deliver an unlevered mid-teens ROI. We look forward to sharing more details on this opportunity in the coming quarters. Turning to our medical office and life science portfolio, During the fourth quarter, we completed approximately 81,000 square feet of leasing at weighted average rents that were 7.9% above prior rents for the same space with an average term of over eight years. Consolidated occupancy increased 460 basis points sequentially to 91.2%, primarily driven by the sales of vacant or low occupancy properties and leasing completed during the quarter. Same property cash basis NOI increased 3.8% year over year with margins improving 100 basis points to 59.6%. Looking ahead, 10.1% of annualized revenue in our medical office and life science portfolio is scheduled to expire through 2026, of which 241,000 square feet or approximately 3.9% of annualized revenue is expected to vacate. Our leasing pipeline remains active, totaling 1 million square feet, and reflects average lease terms of 6.9 years and gap rent spreads averaging more than 10%. Turning to our capital markets and balance sheet initiatives, as it relates to our disposition and deleveraging initiatives, we sold 37 non-core properties in the fourth quarter for approximately $250 million, bringing the full year disposition to 69 properties for approximately $605 million. These proceeds were used to fully repay our senior secured zero coupon bonds due in 2026, and we now have no debt maturities until 2028. Our deleveraging efforts in 2025 reduced net debt to adjusted EBITDA from 11.2 times at year end 2024 to 8.1 times at the end of 2025. As we have previously noted, our near-term goal is targeted leverage levels of 6.5 times to 7.5 times. As of February 20th, we were under agreement to sell 13 properties for $23 million. Following the completion of the sale and excluding normalized course capital recycling opportunities that may arise, we are substantially done with our large-scale disposition program. With the asset sales that have been completed over the past two years, combined with the significant investments we have made upgrading our communities, we expect to see a continued decline in our CapEx spend, as Anthony will discuss in more detail. Moving forward, dispositions will be on a more opportunistic basis with proceeds used to either reduce leverage or to redeploy into accretive initiatives. To conclude, demand for our shop communities is robust, supported by a growing 80-plus population and the outlook of new supply expected to remain muted for several years. Despite the strong gains in our share price in 2025 and 2026 to date, We still see additional share price upside as we deliver materially improving shop NOI and benefit from lower interest costs and reduced capex spend. It is our focus to continue delivering on the momentum of the past two years and to further drive shareholder value for our investors. With that, I will now turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the fourth quarter, our same property cash basis NOI was $70.4 million, representing a 15.4% increase year-over-year and 12.4% increase sequentially. Our fourth quarter shop same property results include continued positive momentum in pricing, with average monthly rate increasing 580 basis points year-over-year and 120 basis points sequentially. Same property occupancy increased 90 basis points year-over-year. These increases resulted in year-over-year same-property shop revenue growth of 5.6%. Year-over-year, our same-property shop NOI margin increased by 230 basis points to 13.3%, driven by our growth in revenue. As Matt will highlight shortly, we expect that continued increases in revenue and occupancy, along with expense moderation, will result in strong NOI margin growth in 2026. Turning to G&A expense, the fourth quarter amount includes $5.7 million of business management incentive fee. For the full year, we recognize an incentive fee to RMR of $17.9 million. This incentive fee was driven apart by DHC's total shareholder return of nearly 113% during 2025. Excluding the impact of the incentive fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $37 million of capital, including $20 million into our shop communities and $17 million into our medical office and life science portfolio. For the full year, our capital spent sold $146 million, which is on the low end of our guidance. We continue to focus on discipline capital spending as evidenced by a $45 million or 23% reduction when compared to 2024. For 2026, we expect our full-year recurring capital expenditures to range from $100 to $115 million, which represents an over 18% decrease at the midpoint when compared to recurring capital expenditures in 2025. Our 2026 CapEx guidance includes $80 to $90 million in our shop segment and $20 to $25 million for our medical, office, and life science properties. It is important to note that our shop recurring capital guidance includes approximately $10 million of refresh ROI capital. Now, I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $255 million of liquidity, including $105 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. Subsequent to quarter end, we received a $27.2 million cash distribution from Alaris Lite in connection with the wind-down of its business. In December, we redeemed the remaining balance on our 2026 zero-coupon bonds, which resulted in 45 collateral properties being released that have a gross book value of approximately $850 million. Following this redemption, we have a well-laddered debt maturity schedule, with no maturities until 2028, allowing us to focus on operations. Our weighted average cash interest rate as of December 31st was 5.7%. Our net debt to adjusted EBITDA RE declined materially from 11.2 times at the beginning of 2025 to 8.1 times, while adjusted EBITDA RE to interest expense improved from 1.1 times to 1.5 times over the course of the year. And based on our guidance, we expect year-end 2026 to be at or above two times. We remain focused on further reducing our leverage, primarily by growing SHOP NOI as well as completing the sale of 13 shop communities expected to close in March for $23 million. These 13 shop communities lost $1.2 million in the fourth quarter and $3 million for the full year. Our full year adjusted EBITDA RE of $284 million was on the high end of our guidance range. For 2025, shop NOI was $139.3 million, which was at the high end of our increased guidance provided on our Q2 earnings call. Medical office and life science NOI was $108.1 million, just above the midpoint of our guidance. And our triple net lease senior living community and wellness center NOI was $31.1 million, which exceeded our guidance. Looking ahead to 2026, we are confident that strong improvements in our shop segment and reduced debt from the execution of our 2025 strategic initiatives will drive free cash flow growth at DHC. For the full year, we are expecting NOI as follows, $175 to $185 million in our shop segment, $94 to $98 million in our medical office and life science segment, and $28 to $30 million from our triple net lease senior living communities and wellness centers. It is important to note that the decline in our medical office and life science segment NOI is largely driven by the sale of 31 properties that contributed $12.3 million of NOI in 2025. In addition, the site decline in our triple net lease portfolio NOI is largely driven by the February 2025 sale of 18 triple net lease senior living communities that contributed $1.7 million of NOI in 2025. We expect our 2026 adjusted EBITDA RE to be between $290 and $305 million, and normalized FFO of 52 to 58 cents per share. To support the guidance provided on this call, we have added a new guidance slide to our quarterly earnings presentation, which can be found on page six. 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 touchtone 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 the first question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

Yep, thanks. Chris, how should we think about the go-forward strategy from here? Can you provide some color on the opportunities to reopen the wings that you talked about at existing communities? I mean, how many units could this add to the portfolio, and what could be the expected cost from that? And should we think about that as being the main strategy on the external investment side?

Yeah, I mean, look, the main strategy is the continued unlocked value proposition, which is growing performance through operations. I mean, despite what we believe to be a really strong outlet for 2026, I think collectively speaking, we believe we're still trailing kind of the benchmark and occupancy, even at kind of the guidance occupancy provided. We know just based on kind of margins and where the portfolio will end up for 2026, that there's outside potential to grow margins. Again, these are all kind of more organically opportunities, and I just want to emphasize we're laser focused on continuing to kind of push in that direction, which will provide a healthy runway for the next several years. Specific to your question, you know, as we think about kind of those wings, there's probably give or take 15 locations that we've identified that we're bullish on. I think through those, we probably can get in the neighborhood of close to 500 units. And we talked about mid-teens ROI supporting those. And so that is going to be a function of, you know, over a period of time. That's not going to all happen in 2026. And I think the last part to your question more specifically is the cost is going to vary. But I think if we use kind of 125 to 175 units, you know, per unit, that's probably kind of a decent kind of runway to consider. Again, still premature, but just kind of a benchmark to consider.

That's helpful. And will external investments still kind of be focused on these types of renovations? I mean, how are you thinking about the acquisition market? Is just the renovation still just have a better risk-adjusted return versus pursuing future acquisitions?

Certainly, they'll have a better risk-adjusted return for a couple reasons. You know, as you think about, you know, these kind of closed wings, you know, mostly it's going to be to support new acuity. So, for example, if we have a community that offers IL and AL, this is an opportunity to introduce memory care. And that just kind of adds for kind of the continuation of care in the community. And, again, that's going to also support other drivers of through kind of shared cost benefits, pushing rates at IL and AL, given that you kind of have kind of the full package to offer. So, it's kind of a rising tide, this all boat scenario when you're investing in these wings. Look, we don't want to rule out, you know, the idea of looking at the acquisitions market, but at the same time, just want to temper that's not where our focus is today. Certainly downstream, if we continue to see progress, uh you know with the growth that we've outlined in 2026 and we think about capital recycling we're selling kind of the assets we've noted uh that could be a way to kind of support you know dipping our toe uh into the acquisition market but again there's a lot of opportunity of better than what we have so that'll be kind of a priority we'll continue to address in the next couple quarters okay and then on the operating side

I mean, is there anything that's specific that drove the 4Q margin improvement? I mean, how much of that was driven by the transition disruptions just kind of dissipating versus core operational gains?

You know, it was a combination. Obviously, you know, we had some transition noise, more material in the third quarter. But as these operators are now getting in and right-sizing the Their cost structures, we definitely saw a little bit of a benefit in Q4 and would expect to continue seeing that as we move into 2026.

Was there any specific costs in 4Q related to transitions? Or are those, like this right now, it's a pretty good run rate to think about?

It was a pretty small impact in the fourth quarter, nothing really material.

So it's a decent run rate. Okay. And then just last one for me. Can you talk a little bit about the January and February trends? I guess specifically, was there any impact related to the flu season? And then what was the average rent escalators that you were able to pass through or your operators were able to pass through to specific customers? Can you provide any color on that?

Sure. I think for the rate, you know, again, the rate growth is going to happen sporadically over the year. We do typically have an outsized push in the beginning of the year, and this is primarily on the legacy Alaris properties. And that kind of rate range is 4% to 6%, which is consistent kind of with how we're thinking about the guidance for the year. But regarding kind of any impact with the flu season, nothing outsized. I mean, certainly, you know, it's something that we deal with and we manage through each year, but there's nothing outsized relative to the portfolio, specifically on any impact or negative impact, if you will, with an outsized flu season. And we don't have February results, you know, fully in tow, but January look promising, and again, is in line kind of with our expectations are for the year. The one thing I would really highlight, you know, it's going to take a little bit of time for these operators to kind of continue working through the transition. I mean, you know, we just completed transition properties literally at year end last year. And so, While some were done, you know, let's call it in kind of October, September, October, a lot are more weighted towards the back end of the year. So we should continue to see incremental benefit as they kind of get in and continue to work through, you know, the transition, the integration of their business models. But again, for January specifically, it's in line with, you know, some of the kind of the opportunistic views that we saw at the beginning of this in our overall guidance. Great. Appreciate it.

Again, if you have a question, please press star and then one. The next question will come from John Masoka with B. Riley. Please go ahead.

Good morning. Maybe given some of your comments on some of these new operators, continuing to get up to speed, as we think about the cadence of some of the NOI growth implied in guidance over the coming quarter, should it be kind of back half of the year weighted then, or is that maybe overstating the impact of of timing for some of those transitions?

I mean, when you kind of bifurcate where the growth is coming, you've got kind of a third of that, you know, through occupancy, and that specifically will happen over the course of the year and through kind of the sales season, if you will, which is kind of back-loaded Q2 and into Q3. So for that portion, yes, we would expect that to flow through as time progresses. When you think about kind of REVPOR and the growth there, that's going to be a function of the rate increase. Again, we'll get a big piece of that in the beginning of the year, combined with levels of care, which will likely take a little bit more time as they get integrated. So from a top line, it's kind of the blend of those two. From an expense side, you know, it's going to be a little bit of benefit out of the gate. You know, one of the benefits of transitioning these communities is we're getting kind of the much more targeted local regional penetration of staffing and getting the benefit of that flow through. But there's still some work that the operators are going to do with respect to bringing in kind of the right team at the local level. or continuing to work with them to execute on the stated business plan, and that piece can take a little bit of time. So I think that's a long-winded way of saying there is definitely opportunity on the front end, and again, and then there's going to be continued, I would say, outsized incremental opportunity as we get into mid and late in the year.

Okay. And then just to kind of confirm, the 300 basis points of kind of occupancy growth and the guidance, is that kind of compared to 4Q end occupancy, or is that kind of on the average occupancy over the course of 2025? The latter.

So it's comparing kind of full year average occupancy to, again, the guide of full year average occupancy.

Okay. And then as I think about kind of 4Q results compared to 3Q, was there anything driving the kind of sequential decline in overall rental revenue, but specifically kind of the shop rental income and resident fees, other than just the asset sales that occurred over the 2H25 period?

I would say a little bit on the asset sales, but I think if anything, it may have just been more tempered towards the actual operations being transferred and maybe a slight slowdown in pushing revenue and such is really the only real driver. But a lot of that noise is now behind us, and we start with a clean slate in 2026. Okay.

And then probably do the math. myself to a certain extent, but when you think about the REV revenue, the rent per room, sorry, and the REV core growth implied in guidance, what are you looking at there in terms of margin expansion kind of being implied with that over the course of 26?

Yeah, I mean, ultimately, if you kind of do the math, the flow through, we would expect close to a couple hundred base points of margin improvement on the same store basis.

Okay. And then maybe moving on from the shop side of the business, as I think about the MOB and life science assets that have leases expiring in 2026, how would those look today? What do you think the prospects of renewal or releasing are? And is there potential for kind of rent roll-ups or how are you viewing those assets?

Yeah, I mean, for the known Bay case in 2026, There's two primary tenants, and they're both full building users. One's with a building in Minnesota, which represents about 1.9% of annualized revenue, and another building is in Fremont, California, that represents about 1% of annualized revenue. I think, you know, the building in Minnesota, look, we've got some early indications of interest. You know, that's going to go from a single-tenant building likely to a multi-tenant building. And so, you know, that will need to play out a little bit. We do have some runway before that tenant leaves mid-year, so there's still time to evaluate kind of the ultimate strategy there. For the building in Fremont, that tenant doesn't expire until Q4 of the, you know, of 2026. And that's a really strong R&D market for life science. And so much more healthier outlook and interest on that building. So I would say, you know, overall, I think there's some promising outlook to release both buildings, but kind of more tilted towards Fremont kind of being kind of the better of the two opportunities.

Okay. And then I know you said dispositions are likely to be kind of selective and opportunistic. Would that kind of imply that they might be weighted more towards the MOB life science side of the business, just given the management transitions going on in shock? And I guess if so, what does that market kind of look like today?

Yeah, I mean, I think to be transparent, we don't have anything specifically teed up. But I think to the point that, you know, if we were to consider additional sales, you know, there's likely more opportunity on the MOB Life Science, given that we've sold a lot of shop and kind of got rid of the low-hanging fruit, if you will, in 2025 and what we're closing in Q1. But, look, I think generally speaking, you know, we've seen success in being able to sell assets. I mean, you know, if we're selling assets, it's likely those that are occupancy challenged or in need of capital, which is consistent with what we've been selling. And so I guess it's proven that there's a market for that, given all the transactions we did last year, which was a mix of both stabilized and non-stabilized assets. And, you know, it's just going to be that the value is going to be relative to the situation. So, again, without having anything specifically identified, it's a little bit hard to kind of dial into a specific strategy outcome. But nonetheless, I think we feel good about being able to transact.

Okay. That's fair. I appreciate all the color. That's it for me. Thank you.

Thanks, John. The next question will come from Michael Diana with Maxim Group. Please go ahead.

Thank you. What implications, if any, does your significant momentum have on the dividend?

So, you know, we just came off of a very active 2025. For 2026, you know, our major focus is going to be around operations with these transitions. Clearly, with our guidance, you know, we're expecting growth. in NOI, growth in normalized FFO and adjusted EBITDA. You know, it's something that our board will consider, but no immediate priorities on addressing the dividend right now.

Okay. Thank you.

This concludes 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 the call today. Please contact our Investors Relations team if you're interested in scheduling a call with DHC or meeting with management at the upcoming city conference. Operator, that concludes our call.

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