DIVERSIFIED HEALTHCARE TRUST Q4 FY2023 earnings call

• 2023 was a pivotal year for DHC with significant progress in operational performance across sectors, leading to a 207% increase in normalized FFO to $41.1 million in 2023 and a 43% increase in cash basis NOI to $236.2 million.
• In December, issued $940.5 million zero coupon senior secured notes, used proceeds to repay debt and regain covenant compliance. On February 16, acquired approximately 34% of Aleris common shares.
• 2023 sold 8 non-core properties and is marketing 9 additional non-core properties.
• For SHOP, fourth quarter revenue and NOI grew, occupancy increased, and average monthly rate rose. Confident in senior living industry with strong 80-plus population growth, decreased new supply, and moderating wages. AlerisLife transitioned to annual rental rate increases. Terminated one operating partner and Charter will assume operations of 13 non-performing communities.
• Invested $183 million in maintenance and value-enhancing capital across SHOP communities in 2023, with 25 refresh projects underway in 2024.
• Office Portfolio had strong leasing activity in Q4 2023 with increased rents on new and renewal leases, and 2023 full-year leasing activity showed improvement

SHOP Segment

• Fourth Quarter: Revenue increased by more than $26 million from the prior year and by $1.2 million sequentially, primarily driven by occupancy gains and corresponding rate increases. NOI increased $8.1 million from the prior year, resulting in an NOI margin increase of 250 basis points. Ended the fourth quarter with occupancy of 79.3%, an increase of 300 basis points and an average monthly rate increase of 5.5% year-over-year.
• 2023 Full-Year: Cash basis NOI increased to $236.2 million or 43% over the prior year.

Office Portfolio

• Ended the quarter with 102 medical office and life science assets containing 8.6 million square feet with same-store occupancy of 92.2% and a weighted average lease term of 5.7 years. Leasing activity during the fourth quarter included new and renewal leases of 200,000 square feet at weighted average rents that were 18.1% higher than prior rents for the same space. For the full-year 2023, executed 886,000 square feet of leasing activity with an average rent roll up 11.1%

• 2024 SHOP cash basis NOI is forecasted to range from $120 million to $140 million, with most growth occurring during the second half of the year.
• 2024 SHOP is forecasting occupancy growth of 300 basis points to 400 basis points, RevPAR growth of 10% to 12%, along with NOI improvements.
• 2024 CapEx is expected to be between $250 million and $270 million, including approximately $190 million to $200 million in senior living communities.
• 2025 aggregate CapEx is预计 to be in the range of $230 million to $250 million

Q: Before I move on to my question, I just wanted to clarify, you said SHOP NOI for 2024 back-end loaded, but $120 million to $140 million, is that correct?

A: That is correct.

Q: Sticking with SHOP though, on the margin side, one of the questions I get most from the buy side as it relates to the percentage margin, right, which has been kind of hanging out in that five to 10 range, obviously, better at the AlerisLife properties than the other operators, and it was pleasant surprise to hear that you're going to transition some of those assets. But what's been the biggest hang-up there? And I'm assuming with your $120 million to $140 million guidance that you're expecting some major alleviation on that front. But can you just walk us through what's been the hang up and how that dissipates?

A: Sure. Bryan, I can start that. So we definitely expect in 2024 margin expansion, a lot of that is going to come from the topline. As we talked about, we're expecting occupancy to grow 300 to 400 basis points in the year. We're going to continue bringing rents more in line with market as we enter new leases with residents. I think as an industry with inflation where it's been, the expense side has definitely been pressured and it is a huge focus of our operators to not just grow the topline to drive that NOI growth, but to also really manage and rationalize the operating expenses at our communities. Chris Bilotto: And the other thing I would add on that, Bryan, is as you may be aware, we're kind of at that tipping point with occupancy kind of being closer to the 80% threshold. And I think as we continue to advance occupancy upwards of kind of – we talked about the 300 to 400 basis points, we expect more to flow down to the bottom line. So certainly, we would expect incremental improvement in addition to some of those things that Matt referenced specifically attributed to occupancy.

Q: Can you tell us what compelled the repurchase of the AlerisLife position that you previously held?

A: Yes. I mean, look, I think that on the onset, there was a tender offer, which everyone is aware of with the opportunity to kind of rightsize Aleris to control costs. And I think at the end, being in a position with kind of a more streamlined company and being able to purchase those shares at that same tender offer price is compelling. And I think further Aleris manages about 119 of our communities. And so I think there's aligned interest in kind of that investment.

Q: And then on the SHOP assets in general. I mean, I'm sure you're aware of Welltower buying Affinity, I think it was announced maybe 10 days ago for just under $1 billion, which would equate to about $250,000 a key. I think clearly, your assets aren't trading anywhere near that. And the upside to your share price common should you move towards that direction from $50,000, $60,000 a key to $100,000 to $150,000 is huge. I mean, can you give us what your thoughts are related to the marketplace for SHOP assets, given the broader dynamic that you talked about, which is lower supply and more people moving into the age group of going into the communities. I mean it seems like the demand is there. What's your view on the impact on valuations of what you own?

A: Yes. I mean I think a couple of things. I mean we're certainly familiar with the headlines with some of these larger trades. There's different dynamics that go into those metrics and, I guess, overall cap rates and valuations assigned to the different kind of product type. But I think, in general, I would view this as a good kind of comp for the industry. And I think kind of going back to your comment, when we look across our portfolio, we have a very large presence in kind of strong growing markets like Southern Florida, Atlanta, Houston, Charlotte, where a lot of our units reside. And I would say within those, these are kind of institutional quality properties where we invest in meaningful capital, and we think there's continued upside. And so when you combine kind of some of these stronger markets where we're located, which I think across our portfolio represents a substantial portion of our units combined with the opportunity to continue growing NOI as we alluded to in some of our prepared remarks, I think, overall, seeing kind of those comps on some of those headlines, I think, provides further justification about overall increased values across the sector. And so I think seeing that and seeing those comps, I think, bodes well for senior living as a whole.

Q: The SHOP numbers you gave for CapEx this year, $190 million to $200 million, if you're successful at getting that deployed, is that substantially it? Or do you expect more to flow into 2025?

A: Bryan, I think that in 2025, the numbers will probably be a little bit less than 2024 for the SHOP portfolio. We are thinking in aggregate CapEx in 2025 is probably somewhere in the $230 million to $250 million range. So it's still a little higher than normal. But after 2025, we expect it to come down very significantly. I will also say that in prior modeling that we've done, we were thinking that CapEx was going to be in excess of $300 million in each of 2024 and 2025. So we are really tightening and sharpening the pencil here with the level that we provided on today's call. And the result of that is obviously less financing needs in 2024 that we highlighted on the call.

Q: You said $230 million to $250 million just now for 2025, but you said they were in aggregate. So is that going to include MOB also?

A: Yes, that's all in, correct.