DIVERSIFIED HEALTHCARE TRUST Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Portfolio Transition Strategy: Transitioned 13 communities, with over 20 renovations scheduled for Q4 2024. Expanded disposition program to 32 SHOP communities (2,422 units), with 3 under agreement/LOI and 29 in various stages of marketing, generating negative NOI of $2 million.
• Dispositions Outside SHOP: Under agreements to sell 25 properties for $333 million, including 18 senior living communities set to close in Q4 2024 with premium valuations over $150,000 per unit and 7.3% CAP rate.
• Refinancing Strategy: Addressing $440 million maturity in June 2025, pivoted to multiple lenders and agencies, received a $106 million quote from one agency, and using cash and sale proceeds to address debt.
• CapEx: Full-year CapEx guidance reduced to $180 million to $190 million, with $118 million spent by Q3. SHOP CapEx guidance $130 million to $140 million.

Segment Performance

• SHOP Segment: Third-quarter NOI was $27.4 million, a 32.6% increase year-over-year but a sequential decline. Revenue grew 6.4%, with a sequential 40 basis-point improvement in occupancy. Expenses rose due to salaries, wages, seasonal utilities, and one-time items. For the quarter, 32 SHOP communities generated negative NOI of $2 million with an occupancy of 75.2%, and the valuation range per unit is $55,000 to $65,000.
• Medical Office and Life Science Portfolio: Completed 83,000 sq ft of new and renewal leasing with a 4.8% rent roll up and 7.4-year weighted average lease term. Same-store occupancy decreased 150 basis-points to 87.8% due to a known vacate, but there's an active leasing pipeline with ~400,000 sq ft of activity, including potential absorption of 117,000 sq ft and double-digit rent roll up.

Guidance

• Full-year SHOP NOI guidance lowered to $102 million to $107 million due to additional hurricane-related costs and lower occupancy.
• CapEx guidance reduced to $180 million to $190 million.
• Q4 SHOP NOI expected to be impacted by October hurricane costs (~$4 million in remediation and deductibles), ending the year just shy of 80% occupancy.

Risks

• Weather Impact: Hurricanes (Milton, Helene) caused temporary relocations, damage, and insurance deductibles affecting results.
• Financing Uncertainty: Slower agency financing pace, relying on multiple lenders and sale proceeds for refinancing.
• Portfolio Performance: Underperforming SHOP communities in tertiary markets with negative NOI and lower valuations.

Question and Answer

• Q: Bryan Maher asks about GSE agency debt and issuances.

A: Matthew Brown discusses a $106 million quote from one agency, terms similar to previous, and pivoting to multiple lenders.

• Q: Justin Haasbeek asks about Q4 NOI drop and occupancy.

A: Matthew Brown explains Q4 impacted by October hurricane, ~$4 million in costs, occupancy ending just shy of 80%.

• Q: Justin Haasbeek asks about value and timeline of SHOP communities with negative NOI.

A: Chris Bilotto provides value range $55,000 to $65,000 per unit, transactions not expected to close prior to year-end.