Diversified Healthcare Trust Q4 FY2024 earnings call

• High-level review of strong fourth quarter and year-end financial and operating results, and progress on key strategic initiatives.
• SHOP sector ended Q4 with 80% occupancy, 56% improvement in SHOP NOI, 7.3% revenue increase, etc. Medical office and life science portfolio had leasing activity with higher rents and average lease term.
• Key strategic initiatives: Completed $6.6 million sale of a mostly vacant office building in Q4; $179 million in property sales in Q1 2025 including sale of Muse Life Science campus for $159 million; received $17 million cash dividend from Alaris Life; 34 SHOP communities in disposition process with 5 signed term sheets for $68 million targeting Q2 end closure; expected to close sale of 18 triple net leased senior living communities for $135 million soon; marketing 6 MOB life science properties for $35.2 million; refinancing strategy with 3 signed term sheets and one in negotiation for $340 million; began pay-down of zero coupon bonds maturing in 2026 with $301 million from asset sales; top-to-bottom portfolio analysis ongoing.

SHOP Sector Performance

• Fourth quarter ended with 80% SHOP occupancy for the first time since Q1 2020. Year-over-year, SHOP NOI improved by 56%, revenues increased by 7.3%, average monthly rate grew by 6.7%, RevPOR increased by 6.7%, and expense growth was 3.9%.

Medical Office and Life Science Portfolio Performance

• During the quarter, completed approximately 112,000 square feet of new and renewal leasing activity with weighted average rents 6.9% higher than prior rents for the same space and a weighted average lease term of 6.5 years. Same-store occupancy was flat at 90.2%. Roughly 7.9% of annualized revenue in this portfolio is scheduled to expire through year-end 2025, with known vacates and an active lease pipeline over 400,000 square feet.

• 2025 CapEx expected to be between $150 and $170 million, with approximately $105 to $120 million invested in senior living communities.
• SHOP segment NOI expected to range from $120 to $135 million, medical office and life science segment NOI expected to range from $104 to $112 million.
• Confident in repaying $380 million debt maturing in June 2025 and proactively addressing zero coupon bonds maturing in January 2026.

• Sequential quarter decline in same property cash basis NOI due to additional insurance remediation costs from hurricanes in SHOP segment.
• Interest rate fluctuations affecting the cost of secured financing.
• Uncertainty in property sale progress which could impact debt repayment plans.
• Difficulty in predicting weather events and their potential impact on SHOP segment results.

Q: Can you provide some more color on why SHOP beat your guidance this quarter? And whether or not the insurance-related costs didn't materialize in Q4 2024?

A: As it relates to SHOP guidance for Q4, occupancy growth was seen and the insurance impact estimated around $4.4 million modeled in Q3 guidance came in right in line. For full year 2024, SHOP NOI was $106 million towards the high end of revised guidance.

Q: And then on the SHOP outlook for 2025, how confident are you guys in the existing operators to help drive the recovery?

A: Very comfortable. Have been making changes with operators, have a dedicated in-house asset management team working with operators daily in a joint effort to hit targets.

Q: And then turning to debt, what's the plan for the zero coupon bond? And can you guys completely pay it down over the next year? And how are you guys thinking about extending that to 2027?

A: Not planning to extend to 2027. Have made progress on pay-down with $301 million of asset sales completed or close, net proceeds going to pay it down, leaving about $640 million, and looking at additional property sales and financings to repay prior to January 2026 maturity.

Q: The $340 million of term sheets for the secured financing, what's the rate on that?

A: Based on today's rates, would expect a weighted average rate of about 6.5%, paying off 9.75% debt which is accretive.

Q: Just on that last one minute to kind of confirm. The interest rate though is still not set, right? I mean, that can fluctuate based on where base rates move in the next couple of months or so.

A: That is correct, they could move between now and closing each of the loans.

Q: And then thinking about 2025 guidance, just given the impact weather had on Q4 results, are you baking in some kind of assumption of the impact of adverse weather events or other impacts to insurance? And I guess maybe with that insurance, something that because it was a deductible, could be one-time for a longer period of time than just being an annually recurring thing if we see other hurricane issues any given year?

A: More broadly as it relates to the guidance in that portfolio, it's really hard to predict weather events, so generally don't bake any of that into our forecasts. But along the way, if we do experience those types of events, we would notify the market and update guidance accordingly.

Q: And then lastly, on the disposition side, particularly the stuff that is being currently marketed, who's kind of the buyer base for those assets? And I guess maybe how interest rate sensitive are they?

A: Buyer's a mix. Seeing operators as buyer candidates with certain sources of capital, could be through cash, private equity relationships or financing. Financing path can be challenging for some assets with less occupancy or more work to do, but buyers come to the table with their financing partner or sources depending on the assets and locations.

Q: As you look at the portfolio today, are there opportunities for additional H2C financing beyond what you kind of expect to close in the next 60 days?

A: Yes. Expect there to be, but want to get through this first round of financing before potentially introducing other communities into the agencies.