Good morning and welcome to the Diversified Healthcare Trust Second Quarter 2020 Financial Results Conference Call. All participants are in a listen-only mode. Please note that this event is being recorded. I will now turn the conference over to Michael Kodesch, Director of Investor Relations. Please proceed.

Thank you. Welcome to Diversified Healthcare Trust's call covering the second quarter 2020 results. Joining me on today's call are Jennifer Francis, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answer session. I would like to note that the transcription, recording, and retransmission of today's conference call are strictly prohibited without the prior written consent of Diversified Healthcare Trust or DHC. 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 present beliefs and expectations as of today, Thursday, August 6th, 2020. 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, EBITDA, EBITDARM, and cash basis net operating income, or cash basis NOI. Reconciliations of net income or loss attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD, are available in our supplemental operating and financial data package 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. Now, I'd like to turn the call over to Jennifer.

Thank you, Michael. Good morning and welcome to our second quarter 2020 earnings call. Over the past several months, the COVID-19 pandemic has driven elevated levels of uncertainty and disruption to both the economy and the commercial real estate industry. The impact on our business, tenants, communities, and colleagues has been profound and has resulted in an extremely challenging operating environment. I'd like to thank the hard-working employees at the RMR Group and Five Star Senior Living. These are unusual times, and it's comforting to witness the dedication of these people and their commitment to superior service delivery, while working tirelessly to handle the unprecedented challenges associated with the current climate. While our country manages through the crisis that has disrupted every facet of our society, we're utilizing our entire platform to optimize resources and expertise in ways that mitigate risks associated with the virus, which we believe is paramount to providing value to all stakeholders by focusing on delivering sustainable long-term results. As expected, COVID-19 took a toll on our performance in the second quarter, with impacts felt most strongly across our senior living portfolio. I'll spend time this morning discussing the senior living portfolio and how our operating partner has reacted to the pandemic. We'll also discuss the strength of our office portfolio segment with its strong rent collections and rent deferral statistics, and how our operating manager has been working to contain operating expenses during the crisis. In the second quarter of 2020, DHC's normalized FFO attributable to common shareholders was $0.24 per share, well above consensus estimates but a decrease of $0.10 per share from the prior year quarter due to the effects of COVID-19 as well as our restructuring transaction with Five Star. I'd like to begin today's portfolio performance review by discussing recent trends and providing commentary with regard to our Office portfolio segment, which represents approximately 60% of DHC's NOI of the second quarter 2020. This portfolio contains close to 12 million square feet, comprised of roughly 7.1 million square feet of medical office buildings and 4.5 million square feet of life science properties, with a weighted average remaining lease term of 6.1 years and same-property occupancy for the quarter of 93.8%. In light of conditions and work-from-home orders during the second quarter, leasing in our portfolio experienced an expected slowdown. We entered into 60,000 square feet of new and renewal leases with a 5.2% roll-up in rents, a weighted average lease term of six years and with leasing costs of approximately $2.02 per square foot per year. As I said, the slowdown in leasing was expected as many tenants took a wait-and-see approach to their business and space needs. We believe that this will likely lead to a backlog of deals as COVID-19-related treatments and vaccines progress, as the prevalence of the pandemic eventually wanes and as the sustained broader economic reopening develops. Our investment case for ownership of medical office and life science assets remains unchanged. In the long term, the growth of the aging U.S. population will continue to drive increases in demand for health care services. Advances in technology and telehealth with an aligned payer system for reimbursements will attract and retain this aging population as their need for services increases, creating growth in the value of medical office real estate. Despite COVID-related disruptions, investment in life science assets are proving to be one of the most resilient property types as businesses in the industry are commonly deemed essential. Venture capital funding for the life science industry has surged in recent quarters with the second quarter 2020 reporting a 53% increase over the prior year quarter due to the industry's role in the research, development, and manufacturing of treatments and vaccines. As a result, real estate owners with life science exposure have witnessed continuing strong demand for their space. Looking at our office portfolio results compared to the same quarter last year, we reported a 1.1% decrease in same-property NOI and a 2.3% decrease on a cash basis. The decrease in NOI was largely due to parking revenue, which was down approximately $1.5 million from the prior year quarter as work-from-home orders drastically decreased volumes in our parking garages. Excluding this decrease in parking revenue, same-store NOI for the office portfolio segment would have been up 1.2% and up 10 basis points on a cash basis year-over-year, in part due to RMR's property management group's focus on reducing operating costs as utilization of our buildings decreased by implementing procedures to ensure unnecessary expenses were mitigated. These efforts resulted in total operating expenses that were down 2% compared to the prior year quarter due to savings in controllable expenses such as utilities, cleaning, and repairs and maintenance. During our first quarter call, we reported that DHC had granted rent deferrals equal to $1.7 million in the office portfolio segment, representing only 0.4% of the annualized revenue from this segment. As of August 3rd, these numbers have grown only modestly as we've granted rent deferrals for a total of just under $2.4 million in the office portfolio segment, or only 0.6% of the annualized revenue from this segment. We also granted deferrals to one wellness center tenant and one triple-net senior living tenant. We're interested in the success of our tenants' businesses and continue to believe that partnering with our tenants that are experiencing financial challenges will provide support for their businesses and ultimately provide for greater assurances for collection in the long-term, thus preserving our tenant relationships, retention, and portfolio stability. The majority of relief requests have come from our medical office tenants and only a handful from our life science tenants. From a monthly trend perspective, there was a significant decline in rent deferral requests in June and July. Our wellness center portfolio, which represents 3.3% of second quarter NOI, has faced considerable pressure since the beginning of the pandemic as state-imposed closures weighed on the tenant's ability to pay rent. We previously noted that we granted a quarter of rent deferral for one tenant in this portfolio, which is a high-quality company that we expect will meet rent obligations following the deferral period. Our other wellness center tenant is currently in default, and subject to the tenant curing its default, we are evaluating a wide range of alternatives for the assets associated with leases. We're also having regular discussions with our triple net senior living tenants, where we've agreed to defer partial rent from one tenant. These properties had rent coverage of 1.66 times as of the first quarter of 2020 and represented approximately 6.6% of our second quarter NOI. One of DHC's highest priorities remains the health and well-being of the residents at our senior living communities. As of July 31st, approximately 4.5% of our resident population across our managed and leased portfolio had tested positive for COVID-19. In our shop portfolio, roughly 43% of the residents that tested positive have since recovered as defined by the CDC guidelines. Five Star's earnings call is scheduled for this afternoon at 1:00 P.M. Eastern, and we encourage you to listen to its senior leadership discuss their COVID-19 response, phased reopening plans, and updates on their company-wide initiatives. Looking at the second quarter 2020 shop results, total average occupancy for the quarter, inclusive of all 241 communities, was 78.7%, which was down 400 basis points from the prior quarter. As of July 31st, our total shop portfolio occupancy was 76.1%, which was down 130 basis points from June 30th's reported occupancy of 77.4%. Due to restrictions intended to prevent the spread of COVID-19, including a decrease of in-person tours and limitations on nonessential visitors to our communities, like other senior living operators, Five Star is experiencing significant challenges in attracting new residents to our communities. On a comparable basis, our same-property shop segment average occupancy was down 610 basis points from the prior year and approximately 420 basis points from the prior quarter. This sequential decline equates to roughly 32 basis points of lost occupancy per week, which is slightly ahead of our previous expectation of 40 to 50 basis points of occupancy declines per week announced in the first quarter call in May. Average monthly rate for the same-property shop segment was down 1.7% from the prior year quarter. As a result of these occupancy and rate declines, same-property revenues were down 8.5% compared to the prior year quarter pro forma results. We note that we did not include the $7.3 million of CARES Act funds we received in our revenue figures as these amounts were accounted for in our other income line. Approximately $6.8 million of these CARES Act funds were included in second quarter same-property shop EBITDARM, which was down 23.5% from the prior year quarter. Our operator has remained focused on areas of the business within its control, optimizing resources on hand, and diligently regulating expenses. On a pro forma basis, same-property wages and benefits in our shop portfolio were up just 0.7% from the prior year quarter, while repairs and maintenance, food, and contract labor were down 22%, 9.2%, and 17%, respectively. Despite seeing substantial increases in supply costs related to PPE, same-property operating expenses in our shop segment were down $3.1 million or 1.3% year-over-year driven by cost controls. While Five Star employee investment initiatives were impacted by the pandemic during the second quarter, they were still able to make significant advancements in engagement and retention initiatives. As of June 30th, Five Star recruited and hired over 6,600 team members this year, including 35 new executive directors and five new regional directors. Since our last earnings call, we completed an additional $8.7 million of asset sales, bringing our dispositions total to $334 million since the program began. Today, we have properties under agreement to sell with negotiated proceeds totaling approximately $232 million. It is still our intent to sell assets, and as I've stated on previous calls, we expect to resume our sales campaign when markets stabilize. As a final item of note, the RMR Group recently published its inaugural sustainability report. We encourage you to read through the analysis for insights and underlying data on how it is reducing costs for us and its other managed REITs and managing to long-term sustainable performance through a commitment to ESG initiatives. You can find links to the report on our website. I will now turn the call over to Rick to provide further financial commentary.

Thank you, Jennifer and good morning everyone. We ended the second quarter with approximately $78.5 million of cash on hand; $1 billion of available capacity on our revolver, and our next debt maturity is not until December of 2021. During the second quarter, we issued $1 billion of senior notes due in 2025, but callable after two years. We used the proceeds from this issuance to repay the $250 million term loan that was scheduled to mature in June of 2020 and paid off the amounts outstanding on our unsecured revolving credit facility. We also amended our credit and term loan agreements to provide us with additional flexibility to weather the pandemic. Specifically, these amendments changed the way certain of our financial covenants are calculated and provided some additional cushion in exchange for a 50 basis point increase in the interest rate through the amendment period. As a result of these actions, we believe we have addressed all liquidity concerns related to the pandemic and are looking forward to moving forward with many of the investments we previously expected to defer in order to position the company for a stronger recovery as we emerge from the pandemic. While the pandemic has slowed our deployment of capital, we are still actively investing capital into our portfolio to maximize value. In the second quarter, we spent $37.6 million, of which $16.1 million was considered recurring and included building improvements in both our office portfolio and managed senior living communities and tenant improvements and leasing costs in our office portfolio. The remaining portion of our capital expenditure is $21.5 million was spent on redevelopment capital projects. This included $14.9 million of redevelopment capital in our office portfolio, primarily related to two projects: the redevelopment of our life science campus in Torrey Pines and the recently completed repositioning of a 140,000 square foot medical office building in Washington, D.C. We have also started preliminary work on the repositioning of two assets in our life science portfolio, one in Lexington, Massachusetts, and one in Tempe, Arizona, and added new disclosure about these projects in our supplemental. We invested approximately $6.6 million of redevelopment capital in our Shop segment, as COVID-19 related visitor restrictions continue to limit our ability to spend capital inside many of our communities. Lastly, I wanted to touch on rent collections, which continue to be strong. In our office portfolio specifically, 99% of our contractual rents due were collected during the quarter and subsequent collections are trending in line with prior months. That concludes our prepared remarks. Operator, please open up for line for questions.

We will now begin the question-and-answer session. Our first question comes from Jason Idoine of RBC Capital Markets. Please go ahead.

Hey guys. I had a question on your expectations for the shop occupancy. So, I know last quarter, you had said the 40 to 50 bps per week decline. I know it came in a little bit below that. So, I'm wondering what was the driver that led to that being a little bit better than expected. And then if you could also touch on how that's trended throughout July, maybe trends at the beginning of July versus the end and what your expectations are through the rest of the quarter.

Thank you, Jason. That's a great question. Our occupancy decline was indeed lower than we anticipated, and it seems to have continued in a similar vein, possibly slightly lower in July. This situation is largely influenced by the pandemic and its progression nationwide. Interestingly, 50% of our cases are concentrated in seven states, which are the ones we expected, including California, Texas, and Florida among the largest. Depending on the developments of the virus across the country, we are hopeful that the rate of occupancy decline will lessen. Do you have any other questions?

Got it. Yes, it does. One of the things you mentioned was that it seems you might be experiencing some pricing pressure in the shop portfolio. In the more stabilized states, are you observing operators being more disciplined with pricing? What are you seeing as these assets attempt to rebuild occupancy?

Yes, I think it varies. Five Star has definitely been more disciplined on pricing. Most of the move-ins are driven by necessity, allowing us to maintain stricter pricing in this situation. We are noticing that other operators are starting to give concessions to draw in residents, but Five Star has remained firm. We have implemented revenue management across all our communities, so we are focused on keeping our prices steady rather than lowering them.

Okay. And then last one for me. So, you mentioned that, as expected, the office leasing slowed down. I guess I'm wondering what would be the catalyst for it to pick back up or if you guys are already seeing it pick back up. And also, when would you expect those parking revenues and those utility expenses to maybe normalize?

The parking and utility revenues are expected to stabilize as more people return to the office. The same applies to parking revenues. We are already noticing an increase; the decline in parking revenues was mainly tied to two properties, one in the Seaport District of Boston and the other at Cedars on the West Coast. We're beginning to see a rise in parking. In Cedars, much of the parking is utilized by employees and visitors, including doctors, but there are also many visitors to patients in the hospital there. We need visitation restrictions to ease before parking can fully rebound. In Boston, we anticipate an uptick in parking as office spaces, which were largely vacant while people worked from home, begin to see increased occupancy. Employees are often avoiding public transportation, leading to more people opting to drive. Regarding leasing, we have a substantial pipeline with approximately 1.5 million square feet of deals in development. We are witnessing an uptick in tour activity nationwide, and I'm optimistic about new deals being initiated and receiving letters of intent or requests for proposals. It seems we are starting to see some momentum.

Okay. Thanks.

Sure.

Our next question comes from Bryan Maher of B. Riley FBR. Please go ahead.

Great. Thanks. And Jennifer, I really appreciate the thorough overview you provided, it was very good. Regarding the 24 assets for sale valued at $232 million, could you give an idea of the types of assets included in that? Also, you mentioned you're still ramping up sales. What is the current goal from here?

The properties we have under agreement represent a good mix of our portfolio, including some medical office buildings and several senior living communities. Our goal is to reach $900 million in dispositions, and we plan to wait for the capital markets to reopen. We are starting to sense a shift towards that, but we need to see concrete signs before we actively enter the market.

Okay. And then when we think about the portfolio mix in general, which has really moved pretty quickly now to about 60% office for NOI, where do you think that that settles in? Or are we about where you want to be, 60/40? Or is MOB pushed further closer to 70?

I believe that our 60% net operating income in the office portfolio segment is largely due to the effects of COVID-19 on our shop portfolio. As the performance of those shops improves, that percentage could increase. We've expressed our desire to expand our medical office building and life science segments, but I want to emphasize that we are not currently pursuing acquisitions and do not anticipate doing so for a while. At this stage, our main focus is on our existing portfolio, and we hope to invest capital in a manner that enhances value. Unfortunately, COVID-19 has limited our ability to do so.

Okay. And then last from me. You referenced cost control is helping to offset increased costs, I guess, associated with PPE. Can you elaborate on what types of cost controls generally? And is there any more room there?

Sure. Both Five Star and the property management group within RMR have strong strategic sourcing departments that are effectively managing expense increases. While there are variable expenses due to decreased occupancy, both groups are actively exploring cost control measures, including cleaning and utilities. Additionally, in the shop portfolio, the number of room turns will decrease as we limit access to the communities, leading to further expense savings.

Okay. Thank you. That's all for me.

Thank you.

Our next question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.

I was curious if you could provide the $7 million in CARES Act costs on a per property basis. Additionally, do you have any expectations of your property providing any type of aid in the future?

The funds we received were based on 2018 Medicare billing, specifically related to skilled nursing. They were not distributed evenly across properties but rather on a per bed basis. This makes it challenging to discuss since our properties are quite diverse. The funds were primarily allocated to properties with skilled nursing beds. Regarding future expectations, it's difficult to predict how the government will respond with additional stimulus, as this is currently a hot topic of debate. There are many groups advocating for more financial support for senior living, and I hope they are successful, but it's hard to make any predictions.

What have Five Star and other operators said about organization-wide bans as we see a second wave or in some states, the first wave? Are they considering another organization-wide ban, or will it be more targeted based on locations? Some insight on that would be appreciated.

Yes, I believe the situation largely depends on the number of active cases in the communities. It is noteworthy that in my prepared remarks, I mentioned that 4.5% of the residents tested positive, but that figure is cumulative. Currently, in our portfolio, only about 1.5% of the residents have active cases or have tested positive recently. Operators will need to be very cautious and selective when admitting new residents. Testing will be critically important. There is significant discussion about who will have access to the vaccine once it becomes available, and I hope senior living communities are prioritized because their residents are at the highest risk.

Great. Thank you so much.

Our next question will come from Aaron Hecht of JMP Securities. Please go ahead.

Good morning guys. Thanks for taking my questions.

Good morning.

Are you observing widespread declines in occupancy for the shop portfolio, and do these declines happen when COVID cases spike or when markets begin to express concerns about COVID? I'm curious about the timing of demand in markets in relation to when the virus appears.

Yes, I mentioned earlier that 50% of our cases are concentrated in seven states. The occupancy and new move-ins are primarily driven by necessity, making it a challenging question to address. Very few individuals are relocating due to lifestyle preferences. Therefore, it largely depends on the pandemic and its progression; if cases increase across the country, it impacts us significantly. It's difficult to predict because we lack visibility into the pandemic's developments in the coming months.

Right. And then it looks like a couple of the dispositions you guys did this quarter were on the senior housing side. What's pricing looking like there today? Were those deals signed before COVID really hit any communities, kind of insights there on where the market looks like it's at today? And is the buyer pool changing for assets?

The pricing met our expectations, with an overall cap rate of about 7% on our dispositions to date. This pricing reflects pre-COVID levels, as these properties were under agreement before the pandemic began affecting the market. Currently, we are not actively in the market, making it difficult to assess the situation. However, I believe the buyer pool has shifted, with fewer institutional buyers and more regional buyers now active.

All right. Thanks for your time.

This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Francis for any closing remarks.

Thank you. And thank you for joining us on our second quarter earnings call. We hope you all stay well.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.