Good morning. Welcome to the Diversified Healthcare Trust Third Quarter 2021 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the call over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good morning and welcome to Diversified Healthcare Trust call covering the third quarter 2021 results. Joining me on today's call are Jennifer Francis, President and Chief Executive 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. 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, November 4th, 2021. 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. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, EBITDA, net operating income or NOI, 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, and good morning. I appreciate you joining us for today's call. To start the company overview, I will share an update on our strategic changes within our SHOP segment, followed by insights about our portfolio in the current operating environment. Despite an increase in COVID cases in the United States in the third quarter due to the Delta variant and a challenging labor market, our Senior Living operators and managed communities have continued to provide quality services to our residents. Over the past 18 months, they have become skilled at managing COVID-19. As COVID cases rose in the past quarter and the risk of breakthrough infections among our mostly vaccinated residents increased, our operators had protocols in place to manage the impact on our residents. Looking forward, it's evident that the recovery of the Senior Living industry will be uneven, but we are seeing several positive trends in both our portfolio and the industry overall. We have completed our selection of new third-party managers for 107 communities within our SHOP segment and have agreements with 10 managers to operate these communities. Out of those 107 communities, 69 transitioned during the quarter, and an additional 30 transitioned shortly after. We are on track to complete all community transitions by the end of the year. We identified one community for closure and are assessing the property for its highest and best use. Given the nature of this portfolio, which includes smaller buildings with residents needing a high level of care, we believe that each selected operator is capable of executing effective business plans that enhance performance and provide an excellent experience for residents and staff. Transitions for Senior Living operators can typically be challenging for employees, particularly during this pandemic. However, the dedication shown by our new operators and Five Star helped alleviate fears during the transition process, often inspiring those affected with renewed optimism. Operationally, we still face significant challenges in Senior Living, with the Delta variant adding pressure in certain areas and exacerbating existing difficulties. Although new supply remains limited, many competing communities offered aggressive concession packages this quarter, leading Five Star to do the same. Same-property occupancy increased 50 basis points on average compared to the second quarter. However, excluding the revenue decline linked to skilled nursing unit closures in the second quarter, same-property revenues decreased about 20 basis points sequentially due to concession strategies. Following the closure of Five Star managed skilled nursing units and workforce adjustments at the community level due to current occupancy rates, we continue to observe a decline in wages and benefits expenses in our Five Star managed portfolio, which dropped 1.9% from the second quarter. Nevertheless, ongoing labor challenges hinder our operators' ability to reduce wage-related costs, and we anticipate wages to rise as these pressures remain. In addition to wage pressures faced by many industries, our operators are also struggling with a shortage of qualified employees as many have exited the industry due to burnout, opportunities elsewhere, or vaccination mandates in healthcare. Despite these obstacles, we see leading indicators this quarter that suggest cautious optimism for improved future performance in Senior Living. In our 120-community portfolio managed by Five Star, leads increased by 41% compared to the previous quarter, mainly due to a 70% rise in digital leads. Additionally, move-ins rose by 19.2%, while move-outs increased only 3.6% from the second quarter. Tours decreased by 4.3% sequentially due to concerns linked to the Delta variant. In October, tours increased by 7.8% compared to September as COVID cases began to decline. The Delta variant generally delayed return-to-office trends nationwide, extending the sales cycle in lower acuity communities by providing prospective residents more time to decide. Therefore, we are optimistic about the recent decrease in active COVID cases across the country and hopeful that these trends will lead to fewer pandemic-related restrictions and a smoother operating environment. Turning to our Office Portfolio segment, leasing activity has remained strong. During the quarter, we finalized 39 new and renewal leases totaling about 372,000 square feet, slightly surpassing our three-year quarterly average. These leases were completed at an average rent increase of 28.1%, with a weighted average lease term of 8.2 years, and leasing costs around $8 per square foot annually. Our leasing pipeline has grown to approximately 2.4 million square feet, more than double the pipeline from the second quarter. About one million square feet, or 42% of the pipeline, consists of new deals, and 10% features new tenants with whom we have letters of intent and are negotiating leases. Same-property occupancy in the third quarter decreased by 30 basis points from the previous quarter in our Office Portfolio, mainly due to two tenants vacating, including a 30,000 square foot life sciences tenant that left in July. With the Office Portfolio's same-property occupancy at a solid 92.7% as of the third quarter, and considering the size of our leasing pipeline, we are well-positioned to drive profitability through capturing significant rent increases in new leasing activity and repositioning certain assets, evidenced by the recent successful redevelopment in Torrey Pines, which is now fully leased, and the nearly completed project in Lexington, Massachusetts, fully leased for 10 years at a 46% rent increase. As a reminder, at year-end, one tenant will vacate a 112,000 square foot property in Decatur, Georgia, for which we have redevelopment plans in place following the tenant's exit. Looking into 2022, we expect approximately 190,000 square feet in Dallas and Phoenix to experience tenant departures, although we currently have steady leasing activity in both areas. With our portfolio historically over 90% occupied on a same-property basis, we feel confident about this upcoming turnover. This is typical for a portfolio of this size, and RMR Group's skilled asset management and property management teams are adept at handling leasing risks effectively and minimizing downtime. I will now hand the call over to Rick for details on our financial results.

Thanks, Jennifer, and good morning, everyone. Within our Office Portfolio segment, same property cash basis NOI increased 40 basis points from the prior year, primarily due to increased parking revenues and decreased operating costs, partially offset by the lower occupancy as Jennifer mentioned in her prepared remarks. In our SHOP segment, our same-property pool decreased to 159 communities following the transition of 69 communities that occurred during the third quarter. For this same property portfolio, cash basis NOI decreased $6.1 million from the second quarter due to decreased revenues associated with the skilled nursing unit closures as well as an increase in certain operating expenses including repairs and maintenance, utilities, and wage rate expenses. During the quarter, we recognized just under $800,000 of CARES Act funds within interest and other income, which is excluded from our reported cash basis NOI, bringing year-to-date CARES Act income to $19 million. Also excluded from our cash basis NOI are the $3.1 million of transition-related expenses, which decreased $11.9 million from the second quarter as the skilled nursing unit closures are now behind us. Our general and administrative expenses decreased approximately 3% from the second quarter to $8.9 million for the third quarter as a result of lower business management fees paid to our manager. Interest expense was $64.5 million for the third quarter of 2021, a decrease of $3.2 million compared to the second quarter due to our redemption of $300 million of senior notes in June. Our next senior notes maturity is not until May of 2024, but our $1 billion of 9.75% senior notes become callable in June of 2022. At the end of the third quarter, we had approximately $795 million of unrestricted cash on hand. Subsequent to quarter end, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2023, providing us added flexibility in our capital plans and general liquidity. Following this extension, we have one remaining option to extend the maturity date of the facility by an additional year in January of 2024. We reported normalized FFO of negative $9.4 million or $0.04 a share for the third quarter of 2021 and we declared a $0.01 quarterly distribution payable on November 18 to shareholders of record on October 25. In the third quarter, we spent $41.5 million on capital expenditures across our portfolio, despite continued supply chain disruptions and shortages of certain materials and labor. These expenditures included $23.3 million of recurring CapEx within the SHOP segment, an increase of approximately $4 million from the second quarter and $9.2 million in our Office Portfolio. We also spent $9 million on redevelopment capital expenditures to reposition a number of our properties. We remain committed to investing in our portfolio to improve our future results. I will now turn it back over to Jennifer for closing remarks.

Thank you, Rick. With the progress we've made in the transition of our SHOP communities to new operators, we remain confident in our strategy and expect gradual recovery in the performance of our Senior Living portfolio. Additionally, as we continue to increase our capital investment in our properties, we believe that we're positioning our portfolio for success. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question-and-answer session. The first question comes from the line of Bryan Maher with B. Riley. Please go ahead.

Good morning, Jennifer and Rick and an awful lot to unpack there in your prepared comments, so I apologize in advance, if some of my questions are redundant. When you talk about the aggressive pricing of the competitors in the senior living market, do you have any indications or thoughts as to when that might subside? Is there some threshold, where everybody kind of gets to an occupancy, where they say enough is enough and everybody quits killing each other? Can you give a little color on that?

It's hard to say. They are very competitive and I think as long as they're working, they'll continue to offer concessions. I don't see that concessions are going to subside anytime soon.

Okay. And then the rent roll-up in the MOB life science segment were pretty impressive. Do you see continued double-digit rent roll-ups in the fourth quarter and as we roll into 2022? And what do you assign that to? Is it just the broad strength of the market or the assets that you have in certain markets? Can you give a little color on what we should be thinking in that regard?

Sure. I think it's a combination of factors, Bryan. In our life sciences properties, we are experiencing significant double-digit increases in rent. The property in Lexington is a strong market for life sciences, and Torrey Pines is also robust in that sector. Additionally, we're seeing increases in rent in our medical office building portfolio, though not at the same level as the 48% increases, but rather in the high single to double digits. Instances of rent decreases are quite rare and typically occur when a tenant has a substantial tenant improvement that gets factored into their rent. Overall, it's a vibrant market with strong leasing activity and a pipeline of 2.4 million square feet, which is unprecedented for this portfolio. There is considerable activity and projected rent growth.

Great. And I caught Rick's comments on the CapEx spending in the third quarter. Maybe I missed it. But Rick, can you give us just your quick thoughts on fourth quarter CapEx in 2022 early thoughts on CapEx there?

Bryan, I'd be happy to share my thoughts on CapEx. There are several reasons why forecasting it is quite challenging. As I mentioned earlier, there are supply chain disruptions affecting us. The delays for carpet are around 16 to 18 weeks, and the situation for furniture is even worse, with paint shortages also becoming an issue. This has a real impact on our supply chain. Our team is prepared to adapt by sourcing US-made furniture instead of waiting for imports. However, the situation is constantly changing, making it hard for me to predict the actual spending for the fourth quarter. Additionally, there are shortages of skilled labor for completing some of these projects. We're collaborating with excellent contractors to manage this, but it remains a tough environment. Moreover, we are actively involved in operator transitions, which brings fresh perspectives and ideas. Our asset managers are closely working with them. Although we had established capital plans and needs assessments, we are open to suggestions from our new operators and insights from Five Star. Our goal is to position our assets effectively for success, and in some instances, we are revising our plans. We still anticipate a significant amount of capital in Q4, though it's challenging to assign an exact figure. Initially, I expected our spending for the year to be around $250 million, but we're likely closer to $200 million now. I hope we can exceed that, but the delays are substantial.

So I just want to follow-on on a couple of things that Rick said. I just want to make it clear that we have projects that are well underway and hammers are swinging. And so we are executing on some of the plans. There is that added complexity that Rick mentioned of labor shortages, because we've transitioned a lot of these projects over the project management group at the RMR Group, they have well-established relationships around the country that they're tapping into. So, while everybody is seeing supply chain delays in labor shortages, we're well positioned to deal with those.

Great. Thank you, Jennifer and Rick. Appreciate it.

Sure.

The next question is from the line of Michael Carroll, RBC Capital Markets. Please go ahead.

Yeah, thanks. Jennifer can you provide some color on the current concession packages that are currently being offered? I mean how much are your competitors offering right now? And are they being more aggressive than they have been just a few months ago?

No. I think that they're as aggressive as they've been a few months ago. It varies from market to market. You might see community fees being waived or half a month rent for per month for the next three months it's usually things like that and Five Star is offering similar packages.

Yes. I know Five Star has been hesitant, and I think DHC has wanted to avoid offering these packages. What changed? When did you start providing these concessions?

What changed was that the competitors were offering deep concessions. And so in order to try to grow occupancy Five Star had to start offering them to keep up with that. We did want to avoid it and we certainly want to avoid reducing rent. So free rent is the way to do it. So once that free rent burns off you still have a strong base rate so that the next year when rents increase, they're increasing from a stronger base rate.

Okay. And then you said that these packages are working right now. I mean have your competitors seen stronger occupancy gains than Five Star has? And if so, can you kind of quantify to what extent?

I believe they have seen stronger occupancy gains. I haven't received the quarterly results from some of our competitors yet, but it appears that some of them are reporting those gains. We're going through a transition, and the announcement regarding the 107 communities has affected our entire portfolio, not just those communities. Additionally, Five Star's reorganization at both corporate and regional levels has had an impact. This is one of the distinctions between our portfolio and that of our competitors. Another factor is that we have a portfolio that requires capital, and as Rick mentioned, we are actively working to deploy that capital. I believe that as this capital gets utilized, we will continue to see improvements.

Okay. And then can you quantify what you're seeing on the labor side? I know you mentioned it a little bit in your prepared remarks. I mean when did you start increasing wages for some of your employees? And how big are those increases? I mean how big have they been?

Our wages and wage increases are generally in line with the market. Nick's last report indicated a 4.5% wage increase year-over-year, and we are observing similar increases among our operators, around 5%. However, for frontline workers, some markets are seeing double-digit increases. These workers are in competition with Amazon and Walmart for talent. As we've discussed previously, there is not only wage pressure but also a shortage of employees, which further drives wages up.

And then has there been an increase, I guess during the August-September type timeframe. Did you see a noticeable increase towards the end of summer and the beginning of the fall of costs kind of jumping or the difficulty to find those labor units?

I think it's been tough for a while. But yes I mean certainly the last few months have been particularly challenging. I mean we've talked a little bit about the 5% or so year-over-year growth. But I mean certain roles I think I read that hospitality was up nearly 13% year-over-year in some cases working food and beverage isn't that different depending on if you're in senior living or in hospitality. So, each market is different. Some of the new operators have slightly different philosophies. There are some different benefits that are being offered to employees at some of our newer operators versus what Five Star offered and there is some equalization for that. But it's a tough market without a doubt. I mean the good news is if you provide good care we should be able to push it back through rate and recover it but there is a little bit of a lag there. I mean I think customers know that rates and costs in general are increasing as well.

Okay. Finally, regarding leads, it seems there has been a significant increase in them. Most of this growth appears to come from the Internet, which typically has a lower closing rate. Can you provide more details on the other lead sources you have? Are you experiencing similar increases there, or is it primarily from Internet searches?

I believe the increase in leads is primarily due to website traffic. While Five Star is still utilizing other lead sources, they have made significant efforts to enhance their digital lead platform, which is yielding positive outcomes. As a result, we've observed an 8% increase in tours at the Five Star managed communities in October compared to September, indicating that these leads are effectively translating into tours.

Okay. Great. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like now to turn the conference back over to Ms. Jennifer Francis for any closing remarks. Thank you.

Thank you all for joining our call today. We look forward to seeing many of you at the NAREIT conference next week. Operator, that concludes our call.

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