Diversified Healthcare Trust Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Third Quarter Results: Total revenue for the quarter was $388.7 million, an increase of 4% year-over-year. Adjusted EBITDAre was $62.9 million and normalized FFO was $9.7 million or $0.04 per share.
• AlerisLife Communities Transition: 21 of 116 AlerisLife-managed communities were transitioned to new operators by quarter end, with 85 transitioned by the call date. New operating agreements with 7 operators include a 10-year term and performance-based incentives.
• SHOP Performance: Occupancy growth, RevPOR and revenue increases, but ExpensePOR up due to temporary labor costs from transitions. Adjusted SHOP NOI would be higher excluding transition costs.
• Medical Office and Life Science: Leasing activity, occupancy increase, and same-property cash basis NOI growth.
• Capital Markets and Balance Sheet: $1 billion refinancing of Vertex Pharmaceuticals' headquarters, $375 million senior secured notes issued, noncore asset sales ongoing with proceeds to reduce capital spending and improve cash flow.

Segment Performance

• Senior Housing Operating Portfolio (SHOP): Total revenue for the quarter was $388.7 million, an increase of 4% year-over-year. Same-property cash basis NOI was $62.6 million, a 70 basis point increase year-over-year and a 9.5% decrease sequentially. SHOP occupancy increased 210 basis points year-over-year to 81.5%, RevPOR rose 5.3%, ExpensePOR increased 5.1%, SHOP revenues were up 6.9% year-over-year, and consolidated SHOP NOI was up 7.8% to $29.6 million. Excluding the $5.1 million of temporary compensation expense increases related to the transition of management contracts from AlerisLife, adjusted SHOP NOI for the quarter would have been $34.8 million and SHOP NOI margin would have been 10.4%, an increase of 150 basis points from the reported margin.
• Medical Office and Life Science portfolio: Completed approximately 86,000 square feet of leasing at weighted average rents 9% above prior rents for the same space with an average term of nearly 7 years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, same-property cash basis NOI increased 1.6% year-over-year with margins improving 100 basis points to 58.9%.

Guidance

• SHOP NOI guidance for 2025 remains at $132 million to $142 million.
• 2025 adjusted EBITDAre is expected to be in the range of $275 million to $285 million, trending towards positive cash flow as SHOP operations stabilize.
• Expect approximately $1.5 million to $2 million of OpEx impact from operator transitions in the fourth quarter of 2025.

Risks

• Temporary labor costs associated with operator transitions could impact financial results.
• Uncertainty regarding the timing and completion of noncore asset sales.
• Potential differences between forward-looking statements and actual results due to various market and operational factors.

Q: Maybe looking towards 4Q '25 and in light of the unchanged GAAP NOI guidance, what impact are you expecting from operator transition OpEx costs in 4Q, especially relative to what you experienced in 3Q?

A: As noted, approximately $5.1 million of costs in 3Q related to transitions. By 4Q, majority of communities have transitioned, so impact expected to be somewhere around $1.5 million to $2 million.

Q: And then in the prepared remarks, you mentioned you had 10.1% margin ex the transition labor compensation expense. Was that a same-store number? Or was that just for the consolidated portfolio?

A: That's a consolidated number.

Q: Okay. And then continuing with kind of the operator transition costs, is that something that was kind of contemplated when you put out guidance -- your adjusted guidance in October or even earlier this year? And maybe kind of why -- I understand there are other parties involved but why now for the transition from the AlerisLife assets to third-party operators?

A: With respect to guidance, specific interruption from AlerisLife contracts wasn't contemplated. The transition is due to AlerisLife's business needs and aligning with a broader strategy to bolster performance with new operators.

Q: Okay. Sticking with the SHOP portfolio, I know you kind of gave the updated guidance on the NOI. But are you still expecting occupancy to be in the 82% to 83% range by year-end?

A: Yes.

Q: And then any kind of, I guess, maybe pull on the revenue side you've seen from the transition, just any kind of temporary disruption there? Or has that largely been unaffected by these operator transitions?

A: Difficult to quantify top-line disruption, but expense side impacted. Transitions largely complete by mid-November, which will remove noise.

Q: Okay. And then anything else to call out on the SHOP operating expense side that was maybe unrelated to these transitions that increased in the quarter versus in 2Q or 1Q?

A: Major headline was $5.1 million of elevated comp costs; about a $2.5 million sequential increase on utilities was expected.

Q: And then switching gears to the disposition activity. Can you maybe provide a little more color on the items in the pipeline today? How close are those to closing? Do you expect that entire pipeline to close by year-end? And I guess maybe what are the variables that could cause some of those to slip into 2026 or maybe fall out of the pipeline, if at all?

A: Expect small portion of dispositions to close in Q1 2026, primarily on SHOP side. Over $200 million expected to close in 4Q 2025, risk minimal with most closing within year.

Q: Okay. And then I think with the disposition activity as it seems to be closing, you would have maybe a little bit of excess capital but I guess it depends on how much kind of cash you want to leave on hand. I mean, is there any potential to pay down additional debt with disposition activity completed in '25 beyond those -- that debt maturing in 2026? Or is that more likely to stay as kind of dry powder to deal with whatever comes next in 2026?

A: Better to leave debt on balance sheet as next maturity in 2028 has lower interest rate, so cash position will be increased.