DIVERSIFIED HEALTHCARE TRUST Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Results: Second quarter normalized FFO was $6.8 million ($0.03 per share). Consolidated same-property cash basis NOI was $68.8 million, an 8.7% year-over-year and 7.4% sequential quarter improvement, driven by the SHOP segment.
• Financing: Issued a $120 million mortgage in May, used $60 million to redeem senior notes due in 2025. Working on secured financing for SHOP to repay remaining 2025 debt and enhance liquidity.
• Renovations and Transitions: Successful handover of 13 Midwest communities. Ongoing renovation projects and initiatives to rationalize underperforming communities.
• Leasing and Portfolio Management: Medical Office and Life Science portfolio has strong leasing activity, with focus on early tenant renewal and asset management; current leasing pipeline includes nearly 800,000 square feet of new and renewal leasing activity.

Segment Performance

• SHOP Segment: Same property cash basis NOI increased 27% year-over-year, driven by increased occupancy and RevPOR. Year-to-date SHOP NOI growth is 34%. There are ~1,100 units in properties for sale with negative NOI of approximately $830,000 and 72% occupancy. Approximately $25 million is allocated for 23 renovation projects, with an estimated 8%-10% incremental return upon stabilization. Major renovations at six communities, targeting 15%-20% annual incremental NOI on invested capital.
• Medical Office and Life Science Portfolio: Ended Q2 with 101 assets (8.4 million square feet), same-store occupancy 87.4%, weighted average lease term 5.4 years. Leased ~101,000 square feet at 12.1% higher rents (4th consecutive quarter of double-digit rent roll ups). Current leasing pipeline includes nearly 800,000 square feet of new and renewal leasing activity.

Guidance

• SHOP NOI: Reaffirmed full year SHOP NOI guidance of $120 million to $140 million. Third quarter SHOP NOI expected to range from $31 million to $36 million.
• Financing: Expect to complete GSE financing in the fall to redeem the remaining $440 million balance of the 9.75% notes due in June 2025, which is expected to be accretive to earnings.

Risks

• Property Sales and Transitions: Uncertainty around timing and success of property sales and operator transitions.
• Market Conditions: Impact of market fluctuations on leasing, occupancy, and property values.

Question and Answer

• Q: On Medical Office buildings, expectations on occupancy moving higher? A: Chris Bilotto notes selling underperforming assets will push up NOI, expecting mid- to high-80s occupancy.
• Q: Interest rates for GSE agency debt? A: Matt Brown estimates ~6% to 6.5% if pricing today.
• Q: SHOP assets for sale, number of properties? A: Chris Bilotto says 3 properties in advanced stages, 5 more getting ready for marketing.
• Q: SHOP performance, occupancy vs rate mix? **A: Chris Bilotto states growth expected in second half, with positive move-ins in July.