DIVERSIFIED HEALTHCARE TRUST Q3 FY2026 earnings call

• Strategic Shift to Triple Net Leases: Transitioned seven skilled nursing facilities in Colorado to a 15-year triple net lease with Ensign Group, effective October 1st. This increases cash flow (first-year rent of ~$8 million vs. prior ~$5.1 million NOI) and sharpens the shop portfolio focus on private-pay senior housing.
• Operator Alignment & Cost Savings: Implemented new management agreements across 76 shop communities managed by legacy operators, effective January 1, 2027. These agreements are expected to generate ~$2 million in annual cost savings and better align incentives.
• Asset Repositioning: Approved projects across 13 communities to convert underutilized skilled nursing wings into independent living, assisted living, and memory care units, adding ~356 units expected to yield mid-teens returns.
• Portfolio Optimization: Actively disposing of non-performing medical office assets; under agreement to sell one vacant property for $10.5 million and valuing offers on two others totaling 232,000 sq ft to eliminate negative NOI drag.
• Operational Discipline: Achieved expense reductions of ~$1.3 million via dietary procurement initiatives. Occupancy gains were supported by targeted move-in incentives, which are expected to normalize as communities stabilize.

The Shop segment drove significant growth, with Same Property NOI increasing 50.4% year-over-year to $48 million, representing a 15.8% margin (up 470 basis points). This performance was fueled by a 200 basis point occupancy increase to 84.4% and a 5.2% rise in average monthly rates. The Medical Office and Life Science segment contributed $22.9 million in Same Property Cash Basis NOI, a slight 1.6% decrease year-over-year due to tenant vacancies that reduced occupancy to 88.4%. Consolidated Same Property Cash Basis NOI rose 25.6% to $77.9 million, while Consolidated NOI increased 27.5% to $80.8 million.

• Same Property Shop NOI: Raised guidance by $5 million at the midpoint to $190–$200 million for full year 2026, driven by lower expected operating expense growth (2.3%) and higher average monthly rate growth (5.6%).
• Recurring Capital Expenditures: Reduced guidance by $10 million at the midpoint to $90–$105 million, reflecting lower spending compared to the prior year.
• Normalized FFO: Updated range is $0.46–$0.52 per share. This reflects an upward revision of $0.02 from the shop NOI increase but a downward adjustment of $0.12 due to the inclusion of estimated incentive management fees ($29.3 million).
• Adjusted EBITDA RE: Updated range is $276–$291 million.
• Presentation Change Note: Guidance now includes estimated incentive management fees accrued under GAAP ($29.3 million or 12 cents/share), which fluctuates based on total shareholder return relative to a benchmark index.

• Incentive Fee Volatility: The inclusion of estimated incentive management fees in normalized FFO and Adjusted EBITDA RE introduces variability, as accruals depend on stock price performance relative to a benchmark index over a three-year period.
• Tenant Vacancies: The Medical Office and Life Science portfolio faces near-term vacancy risks, including a life science tenant in Fremont, California, scheduled to vacate at the end of November.
• Capital Intensity of Repositioning: While converting skilled nursing wings to senior housing offers upside, it requires significant capital investment (~$22.6 million YTD in shops) and operational execution to realize stabilized returns.

Q: Analyst asked if the updated CapEx outlook signals a sustained run-rate decline into 2027/2028 and how the company views its capital sources given current leverage.

A: CFO confirmed CapEx is expected to decrease further as the company targets lower costs per unit. CEO stated that primary investment focus remains on existing portfolio improvements, specifically converting closed skilled nursing wings, rather than acquisitions. Debt leverage is declining and well within target ranges, with adequate liquidity provided by the undrawn $150 million credit facility.

Q: Analyst inquired whether the Ensign transaction impacts the raised Shop NOI guidance and sought details on Q3 one-time expenses and future concession strategies.

A: CFO clarified that Ensign proceeds are factored in but are unrelated to the $5 million guidance raise, which stems from strong underlying shop performance. CEO noted that while concessions were used tactically to boost occupancy, they are not a long-term strategy, and rate lifts will continue. One-time Q3 expenses totaled ~$1 million and are not expected to recur.

Q: Analyst asked about the timeline for redevelopment projects, specifically whether any spend had occurred this year or if starts are delayed until 2027.

A: CEO confirmed that all major redevelopment projects are slated for 2027 starts. Current spending is limited to soft costs like design and consulting. Physical construction ('swinging of hammers') will commence next year, with deliveries expected in the latter half of 2027.