Diversified Healthcare Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue rose 4% year over year to $386.9M; normalized FFO reached $14.3M ($0.06/share), and Adjusted EBITDAre was $75.1M, with management stating both normalized FFO and Adjusted EBITDAre exceeded analyst consensus.
• The Senior Housing Operating Portfolio (SHOP) inflected: consolidated SHOP NOI up 49% YoY to $36.8M, same-property SHOP NOI up 42.1% YoY to $38.4M, occupancy improved to 80.2%, and NOI margin expanded 320 bps YoY to 11.2%.
• Balance sheet de-risking advanced materially: $331.98M of asset sales in 2025 YTD (net proceeds $299.2M) to redeem part of 2026 zero-coupon notes; $249M new mortgages closed in March/April, and executed term sheets for ~$94M more to retire remaining June 2025 notes; net debt to annualized Adjusted EBITDAre fell to 8.8x from 11.2x in Q4.
• 2025 SHOP NOI guidance reaffirmed at $120–$135M with potential to raise later (business interruption proceeds of $2.7M are non-recurring); 2025 CapEx guidance reaffirmed at $150–$170M.
• Estimate context: Q1 2025 revenue ($386.9M) beat Wall Street consensus ($383.2M*); Primary EPS came in slightly better than consensus (-$0.24 vs -$0.25*), and EBITDA exceeded consensus ($63.5M vs $59.5M*) — reinforcing a near-term catalyst around deleveraging and operational momentum in SHOP.

What Went Well and What Went Wrong

What Went Well

• SHOP fundamentals improved across the board: same-property NOI +42.1% YoY to $38.4M; consolidated NOI margin +320 bps YoY to 11.2%; occupancy up 130 bps YoY to 80.2%; RevPOR +4.8% YoY, driven by rate increases, care-level pricing, and reduced concessions.
• MOB/Life Science leasing quality: ~145k sf signed in Q1 at rents 18.4% above prior rents; weighted-average lease term 10.2 years, supporting rent roll-up and durability.
• Liability management: $140M March loan (SOFR+250 bps, capped at 7%), $108.9M Freddie Mac 10-year fixed at 6.22% (5 years interest-only), notice to redeem another $140M of June 2025 notes (leaving $100M), and additional ~$94M term sheets to complete redemption; net debt/Adj. EBITDAre improved to 8.8x.

Management quotes:

• “We made substantial progress in growing SHOP NOI... and addressing our 2025 and 2026 debt maturities… we remain confident in our ability to address our 2026 debt maturities.” — CEO Christopher Bilotto.
• “We are reaffirming our 2025 SHOP NOI guidance range of $120–$135M, with the potential to increase… as trends continue and we get clarity on dispositions.” — CFO Matthew Brown.

What Went Wrong

• MOB/Life Science occupancy dipped: same-property occupancy 90.1% (-10 bps seq; -180 bps YoY); consolidated portfolio occupancy 80.6% (-160 bps seq), reflecting large known vacates and asset rationalization.
• Non-recurring items and impairment: Q1 recognized $38.5M impairment; G&A included $2.4M incentive fee accrual; business interruption proceeds ($7.5M recognized, $2.7M favorable to SHOP NOI) are non-recurring and affect run-rate comparability.
• Known vacancy risk: one large vacate in St. Louis (233k sf) and a disposition-heavy pipeline that may create near-term noise before portfolio mix improves.

Transcript

Operator (participant)

Good morning and welcome to the Diversified Healthcare Trust First Quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Matt Murphy (Head of Investor Relations)

Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, May 6, 2025. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations, or normalized FFO, net operating income, or NOI, and cash basis net operating income, or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. Finally, we will be providing guidance on this call, including NOI.

We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris.

Chris Bilotto (CEO)

Thank you, Matt, and good morning, everyone. Thank you for joining our call. I will begin by providing a high-level review of DHC's solid first quarter results, as well as an update to the progress and timing of our key strategic initiatives. Then Anthony will provide more detail regarding our first quarter financials and CapEx. Finally, Matt will review our liquidity and financing activities before providing an update on our 2025 guidance. After the market closed yesterday, DHC reported total revenues of $386.9 million for the first quarter, which was a 4% increase over last year. Adjusted EBITDA RE was $75.1 million, up 17% year-over-year, and normalized FFO was $14.3 million, or $0.06 per share, both of which exceeded the analyst consensus estimate.

In addition to these solid year-over-year results, we have made significant progress so far in 2025, addressing our upcoming debt maturities while also delivering the balance sheet through the completion of $332 million in asset sales. Turning first to our SHOP sector performance, DHC experienced a meaningful improvement within its SHOP segment as same property NOI came in at $38.4 million, a 33.6% increase sequentially, and a 42.1% increase year-over-year. On a consolidated basis, average monthly rate increased 4.8% year-over-year, and occupancy increased 130 basis points to 80.2%, resulting in a 6.5% increase in SHOP revenue. Importantly, SHOP NOI margin improved 320 basis points year-over-year to 11.2% on a consolidated basis and to 12.9% on a same property basis. In addition, our 115 same property Five Star managed communities posted an NOI margin of 14.6%.

RevPOR increased year-over-year by 4.8%, primarily driven by annual rate increases, substantial increases in SHOP care level pricing, and a reduction in discounts and concessions at fully occupied properties. ExpensePOR increased by 2% due to merit increases and filling open positions, offset by a reduction in contract labor usage and a decrease in our annual insurance premium. Overall, we continue to be pleased with the progress we are making controlling costs, and we remain bullish on the outlook within the SHOP segment throughout 2025. Turning to our Medical Office and Life Science Portfolio, during the quarter, we completed approximately 145,000 sq ft of new and renewal leasing activity with weighted average rents that were 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.

As we look ahead, 4.7% of annualized revenue in our MOB and life science portfolio is scheduled to expire through year-end 2025. As previously noted, we had one large known vacate in the first quarter in St. Louis, Missouri, occupying 233,000 sq ft. We have marketed this non-core property for sale and entered into an LOI with a buyer. Known vacates for DHC's medical office building and life science portfolio in 2025 are modest at 115,000 sq ft, and we have an active leasing pipeline of 603,000 sq ft, of which 152,000 sq ft is new absorption. Our pipeline includes an average lease term of approximately eight years and a trending rent roll-up in the double digits.

Turning to our key strategic initiatives, the $321 million of property sales we completed in the first quarter largely consisted of the Muse Life Science Campus in San Diego for $159 million and 18 triple-net senior living communities leased to Brookdale for $135 million. Net proceeds from the Muse and Brookdale, as well as one smaller MOB sale, totaled $299 million, which was used to partially pay down DHC's zero-coupon notes due in 2026. In March, DHC closed on $140 million mortgage financing secured by 14 senior living communities with an appraised value of $164,000 per unit. In April, we closed on a 10-year fixed-rate Freddie Mac mortgage financing for $109 million, secured by seven senior living communities valued at $199,000 per unit.

In April and May, DHC is using $280 million in financing proceeds and cash on hand to further pay down our senior unsecured notes due in June 2025. Looking forward with marketing efforts of certain properties. As the quarter end, our active disposition pipeline included 65 properties, of which 30 are MOB, life science, and wellness properties totaling 2.3 million sq ft, and 35 properties are roughly 2,600 units within our SHOP portfolio. This includes previously communicated asset sales, along with the addition of 25 predominantly non-core MOB, life science, and wellness center assets valued at approximately $190 million. We estimate the combined asset sales will produce proceeds between $350 million and $400 million, of which approximately $125 million is collateral for our 2026 maturity. We expect these asset sales will transact over the next several quarters.

Concurrently, we are under agreement with letters of intent with 19 of these properties for $116 million, which includes 15 non-core SHOP communities and four MOB life science assets. Since the first quarter, we have sold one SHOP community for $11.2 million. These asset sales should materially enhance the portfolio's future performance, given that it will have a higher concentration of well-positioned SHOP assets, complemented by a portfolio of best-in-class triple-net MOB and life science properties. In addition to deleveraging our balance sheet, we expect to see a reduction in our future year CapEx spending, thereby allowing us to increase overall portfolio cash flow and strategically allocate capital to the highest ROI opportunities.

Before I turn the call over to Anthony, I would like to highlight the recent publication of the RMR Group's annual sustainability report, which offers a comprehensive overview of our manager's commitment and progress in addressing sustainability. Investors will also find highlights of initiatives that DHC has undertaken to improve sustainability across its portfolio of senior living communities, medical office buildings, and life science assets. A link to the report is available on our website. Now I'd like to turn the call over to Anthony.

Anthony Paula (VP)

Thank you, Chris. Good morning, everyone. Our same property cash basis NOI was $71.5 million, representing a 20.7% increase year-over-year and a 14.8% increase sequentially. These increases were primarily driven by strong results in our SHOP segment, which delivered $38.4 million in same property NOI, driven by a 4.8% increase in average monthly rate year-over-year and 3.1% sequentially, and occupancy of 80.2%, which was a 130 basis points increase year-over-year and a 20 basis point increase sequentially. This resulted in revenue growth of 6.5% and margin expansion of 320 basis points year-over-year. Our SHOP NOI for the first quarter was favorably impacted by $2.7 million of proceeds from a business interruption claim of one of our communities in Florida.

Turning to G&A expense, the first quarter amount included $2.4 million of business management incentive fee as our total return exceeded the benchmark as of March 31, 2025. Any incentive management fee incurred would not be due until January 2026. Excluding the impact of the incentive management fee, G&A expense would have been $6.6 million for the quarter. During the quarter, we invested approximately $32 million of capital, including $27 million in our SHOP communities and $5 million in our Medical Office and Life Science Portfolio. Our first quarter spend is consistent with our expectations, and therefore we are reaffirming our 2025 CapEx guidance of $150 million-$170 million at this time. Now I'll turn the call over to Matt.

Matt Brown (CFO)

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $300 million of unrestricted cash, including the $140 million we received from the financing completed on March 31. We subsequently paid down our June 2025 bonds in April with that $140 million. The $140 million financing is secured by 14 senior living communities, has a three-year term, and two one-year extension options. The financing is interest-only for two years, has options to extend the interest-only period subject to meeting certain conditions, and has a floating rate of SOFR plus 250 basis points capped at 7%. In addition to this financing, in April, we closed on a $108.9 million financing secured by seven senior living communities. This mortgage was financed through Freddie Mac with a 10-year term and a fixed interest rate of 6.22% with interest-only payments for five years.

We are pleased with the valuations of these properties as they represent an aggregate valuation of approximately $181,000 per unit. In April, we provided notice to redeem an additional $140 million of our 2025 senior notes in May, leaving $100 million outstanding after this latest repayment. Pro forma for this additional $140 million paydown, we have approximately $120 million of cash on hand. We have two executed term sheets with lenders for aggregate proceeds of approximately $94 million, which will be secured by six senior living communities. We expect these financings to close in May and are confident the proceeds from these financings, along with cash on hand, will address our bonds due in June. With our June 2025 bond maturity addressed as noted above, we have turned our focus to proactively addressing our January 2026 zero-coupon bond.

As Chris noted, we have sold 22 properties that were collateral to our zero-coupon bond and used net proceeds of $299 million to partially redeem these bonds, leaving $641 million outstanding on that debt. We intend to use most of the proceeds from the $350 million-$400 million of pending property dispositions to further pay down this bond. We expect these property dispositions will cover more than half of the remaining outstanding balance, with the rest coming from additional financing activity. As a reminder, we do have the option to extend the maturity by one year to January 2027. Once these bonds have been addressed, we have no debt maturities until 2028, providing ample runway to continue improving operations and results in our SHOP segment and driving shareholder value.

The improvement in SHOP NOI, coupled with strengthening our balance sheet through dispositions and refinancings, resulted in our net debt to adjusted EBITDA RE declining significantly from 11.2 times at December 31 to 8.8 times at March 31. In closing, we are confident that we will meet our 2025 and 2026 debt maturities, leaving us until 2028 before our next maturity. Additionally, as Anthony noted, we are pleased with our Q1 results, including the growth in SHOP NOI, and at this time, are reaffirming our 2025 SHOP NOI guidance range of $120 million-$135 million, with the potential to increase our guidance if these trends continue in the second quarter and we get more clarity on the timing of dispositions. That concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question will come from Justin Haasbeek with RBC Capital Markets. Please go ahead.

Justin Haasbeek (Senior Associate)

Yeah, thanks for taking the question. Looks like during the seasonally weak quarter for the industry, occupancy was up 20 basis points sequentially for the entire SHOP versus down 40 basis points sequentially this time last year. Can you just provide some color on the occupancy gains for the first quarter?

Chris Bilotto (CEO)

Yeah. 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 U.S. I think we should expect to see more of that as we go into 2025, having completed an additional 23 refreshes in Q1. One part, it's just overall kind of operations and the managers focusing on certain initiatives to drive occupancy as they capital, and then kind of just being positioned appropriately within the markets to drive overall improvement.

Operator (participant)

Okay. 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?

Matt Brown (CFO)

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 AlerisLife 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 they're of the magnitude of what we saw in February.

Justin Haasbeek (Senior Associate)

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

Matt Brown (CFO)

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 a few fewer days in the quarter. That helps with salaries and benefits. That normalizes as we go out through the year. 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.

Justin Haasbeek (Senior Associate)

That's it for me. Thank you very much.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question will come from John Massocca with B. Riley. Please go ahead.

John Massocca (Senior Research Analyst)

Good morning.

Chris Bilotto (CEO)

Good morning.

John Massocca (Senior Research Analyst)

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

Matt Brown (CFO)

Yeah. 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 about 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. We have been seeing a benefit of that since the third quarter of 2024, but nothing really material one-time that would impact that.

John Massocca (Senior Research Analyst)

Okay. 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 could potentially drive savings there for the remainder of the year?

Anthony Paula (VP)

Yeah. Good morning. This is Anthony. Historically, 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. That is why we're reaffirming our guidance at this time. We're in line with what we expected through the first quarter, but as of now, it's too early to tell if we can make any changes just based off of disposition timing or whatnot. Reaffirming what we've previously guided towards.

John Massocca (Senior Research Analyst)

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 kind of address the zero coupons, kind of half with financing?

Matt Brown (CFO)

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

Chris Bilotto (CEO)

Yeah. 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. I think more specifically, as we're able to kind of look forward and transact over the next several quarters, that's going to have a meaningful, favorable impact to further reducing those 26s. What we're left with at the end is going to be kind of a smaller tranche of financing with what we believe to be kind of a good quality portfolio of remaining encumbered properties within that debt tranche.

John Massocca (Senior Research Analyst)

Okay. Any thoughts on timing for the financing to kind of address the 26s? I mean, is that something that's coming in the coming months, or is that something that maybe is closer to year-end?

Matt Brown (CFO)

I think a lot of the dispositions are going to happen in the second half of the year, so more kind of back-weighted. Financing is probably beginning of the fourth quarter rather than waiting till the end of the maturity in January.

John Massocca (Senior Research Analyst)

Okay. That's it for me. I appreciate all the color. Thank you.

Operator (participant)

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Chris Bilotto (CEO)

Thank you for joining our call today. We look forward to seeing many of you at the upcoming NAREIT conference in June. Institutional investors should contact our investor relations if you'd like to schedule a meeting with management. Thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.