DIVERSIFIED HEALTHCARE TRUST Q1 FY2025 earnings call

• First quarter total revenues were $386.9 million, a 4% increase over last year. Adjusted EBITDAre was $75.1 million, up 17% year-over-year, and normalized FFO was $14.3 million or $0.06 per share, exceeding analyst consensus. - SHOP segment saw meaningful improvement with same-property NOI up 42.1% year-over-year, average monthly rate up 4.8% year-over-year, and occupancy up 130 basis points. - Medical office and life science portfolio had 145,000 square feet of new/renewal leasing with higher rents and 10.2-year lease term. - Strategic initiatives: Completed $321 million in property sales, used net proceeds to pay down notes, closed on mortgage financings, and has an active disposition pipeline of 65 properties. - Published RMR Group's Annual Sustainability Report highlighting sustainability efforts across portfolios.

SHOP segment: Same-property NOI was $38.4 million, a 42.1% year-over-year increase. On a consolidated basis, average monthly rate increased 4.8% year-over-year, occupancy increased 130 basis points to 80.2%, resulting in a 6.5% increase in SHOP revenue. Medical office and life science portfolio: Completed approximately 145,000 square feet of new and renewal leasing activity with weighted average rents 18.4% higher than prior rents for the same space and a weighted average lease term of 10.2 years. Same-property occupancy was 90.1%, down 10 basis points from the fourth quarter.

• Reaffirmed 2025 SHOP NOI guidance range of $120 million to $135 million, with potential to increase guidance if trends continue and disposition timing clarifies. - Addressed 2025 bond maturity using financing proceeds and cash, and plans to use proceeds from $350 million to $400 million in pending property dispositions to pay down 2026 zero-coupon bond. No debt maturities until 2028 after addressing current bonds.

• Uncertainty in asset disposition progress affecting debt repayment. - Potential impact of lease expirations and vacates in medical office and life science portfolio. - Fluctuations in rental market and interest rate changes affecting financing and portfolio performance.

Q: Yeah. Thanks for taking the question. It looks like during the seasonally weak quarter for the industry, occupancy was up 20 bps sequentially for the entire SHOP versus down 40 bps sequentially this time last year. Can you just provide some color on the occupancy gains for the first quarter?

A: Yes. Occupancy in general has improved for a variety of different reasons. I think kind of more specifically, as we've worked through the last couple of years with investing capital in our communities, certainly getting the benefit of that more broadly speaking, across the US. And I think we should expect to see more of that as we go into 2025, having completed an additional 23 refreshes in Q1. And so one part is just overall kind of operations and the managers focusing on certain initiatives to drive occupancy is the capital and then kind of just being positioned appropriately within the markets to drive overall improvement.

Q: Okay. And can you provide some color on the AlerisLife dividend? Is this a one-time payment? Or could DHC continue to receive future dividends like this?

A: I would say for modeling purposes, this was more of a one-time dividend that we received for our 34% interest based off some strategic actions that Aleris has taken. They are performing well with positive EBITDA. So there's potential for dividends in the future, but I wouldn't think at this time were of the magnitude of what we saw in February.

Q: Okay. And then on the SHOP results, the -- if you annualize the NOI for the current quarter, it's significantly above the top end of your range for SHOP -- so for the full year SHOP guide. Just wondering if there's any reasoning behind not increasing the guidance that you guys expect something that we -- that in the future quarters that we don't know about? Or any color there would be great.

A: Look, we've come out of the gate strong beginning 2025. We're very pleased with our NOI performance in the first quarter. As we noted, we did have some business interruption proceeds of $2.7 million that was favorably impacting NOI in the quarter. So that needs to be stripped out from a run rate basis. We are trending to the high end of our guidance. We do get the benefit in the first quarter of fewer days in the quarter that helps with salaries and benefits. That normalizes as we go out through the year. So look, we're very pleased, we do have a lot of dispositions that are in flux. And as we get more clarity on the timing of those dispositions, we're hopeful we'll be in a position to increase our guidance as early as the second quarter.

Q: Good morning. Maybe kind of building on that last question. You were able to keep your SHOP property operating expenses. You're pretty flat. Anything specific there to call out anything onetime-ish beyond the favorable kind of day mix versus 4Q? Just kind of curious what's going on there.

A: Yes. So sequentially, operating expenses in SHOP were flat on a year-over-year basis, they're up about 3%. We would expect for 2025 our expenses to trend above 3% higher than where we were in 2024. We have spoken previously about savings in our insurance premiums from our policy that resets on July 1 of each year. So we are -- we've been seeing a benefit of that since the third quarter of 2024, but nothing really material onetime that would impact that.

Q: And then on the CapEx front, anything notable to call out there? Just thinking, obviously, seasonally 2Q, 3Q tend to be the highest. Is that guidance kind of reaffirmed? And is there anything maybe that can potentially drive savings there for the remainder of the year?

A: John, good morning. This is Anthony. So Chris, certainly, you're right, most of our spend tends to be weighted towards the second half of the year. Last year, I believe, roughly two-thirds of our spend came in the second half. So that's why we're reaffirming our guidance at this time. So we're in line with what we expected through the first quarter. But as announced we’re ready to tell, we can make any changes just based off disposition timing or whatnot, so reaffirming what we've previously guided towards.

Q: Okay. And then on the debt front, what are you expecting in terms of pricing maybe on the $94 million, but even beyond that as you look to address the zero coupons kind of half with financing?

A: Yeah. So on this first phase of financing, we spoke last quarter of a weighted average interest rate of about 6.5%. And I would say, give or take, that's pretty close for once we complete this $94 million, which we're very pleased with given we're paying off 9.75% debt. So it's extremely accretive for us. As we look forward to any partial financing for the repayment of the 2026s, it's too early to really tell just because there's a lot of different options we have with financing given our large unencumbered balance sheet. But I would say pricing is probably below 7% for any financing we were to do on a secured basis.

Q: Yeah. And I would just add to that, too, and we talked about it. We have a significant amount of dispositions that we've talked about. We've added new dispositions to the market of non-core, MOB and life science properties. And so I think more specifically, as we're able to look forward to transact over the next several quarters, that's going to have a meaningful favorable impact to further reducing those 2026. And so what we're luck with at the end is going to be kind of a smaller tranche of financing with what we believe to be a good quality portfolio of remaining encumbered properties within that debt tranche.

Q: Okay. Any thoughts on timing for the financing to address the 2026s. Is that going to come a couple of months -- in the coming months? Or is that something that maybe is closer to year-end?

A: I think a lot of the dispositions are going to happen in the second half of the year, some more back weighted and financing is probably beginning of the fourth quarter rather than waiting till the end of the maturity in January.