Good morning, and welcome to the Diversified Healthcare Trust Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Thank you, Drew. Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; and Matt Brown, Chief Financial Officer and Treasurer. 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, November 5, 2024. 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. And finally, we will be providing guidance on this call, including SHOP net operating income or SHOP 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.

Thank you, Melissa. Good morning, everyone, and thank you for joining our call. On today's call, I will provide a high-level overview of DHC's third-quarter financial and operating results, along with an update on key strategic initiatives for the remainder of 2024 and into next year. Later, Matt will provide more detail on our third quarter financial results and an update on our full-year guidance. DHC delivered mixed financial results in the third quarter, primarily attributed to our SHOP segment including a sequential 40 basis-point improvement in same-store occupancy and moderate revenue growth which was offset by cost increases resulting from higher seasonal expenses, salaries and wages, and certain one-time items. Compared to the prior year, our consolidated SHOP NOI increased 32.6%, supported by operational improvements and favorable market trends in our senior housing portfolio. Turning to our medical office and life science portfolio performance. During the quarter, we completed 83,000 square feet of new and renewal leasing activity with a rent roll up of 4.8% and a weighted average lease term of 7.4 years. Same-store occupancy decreased by 150 basis points to 87.8%, largely due to the previously communicated known vacate of a building in Valley Durham, North Carolina, reflecting 126,000 square feet. As we look ahead, roughly 9% of our annualized revenue is still to expire through year-end 2025. Our largest known vacate during this period is with a tenant whose expiration is in the first quarter of 2025 and located in St. Louis, Missouri, occupying close to 233,000 square feet or 2.2% of annualized revenue. We have various initiatives underway to address vacancies and leasing of our properties, which include select dispositions along with active asset management. Complementing our retention and absorption outlook, we maintain an active leasing pipeline with close to 400,000 square feet of activity, including potential absorption of 117,000 square feet and an overall double-digit rent roll up. Turning to our SHOP performance. While we are pleased with our year-over-year revenue and NOI growth of 6.4% and 32.6%, respectively, quarterly progress remained subdued in part due to slower occupancy growth and varying expense impacts that fluctuate quarter-to-quarter. RevPOR increased by 80 basis points sequentially, primarily driven by growth within IL, skilled nursing, and levels of care, along with an overall decline in move-in incentives. Expenses increased by 140 basis points, largely due to an increase in salaries and wages, seasonal utilities, and certain one-time items. These costs, along with muted SHOP occupancy growth, resulted in NOI of $27.4 million for the quarter, representing a 32.6% increase over Q3 of last year but a decline sequentially. We remain committed to our portfolio transition strategy, and the initial progress we are making reinforces our belief that we are taking the right steps to drive sustainable long-term growth. That said, we recognize that this process will require additional time to unfold and as a result, we are lowering our guidance range for the year. We are conducting a top-to-bottom analysis of our portfolio considering various factors such as performance metric benchmarks, densification of communities, synergy opportunities, and operator relationships in key markets, a process which will include the expansion of certain key initiatives over the next several quarters. The goal of this work is to ensure that as the strategy and the broader market evolve, our portfolio continues to comprise the right assets that will position DHC to benefit from embedded NOI upside. As part of this process, we transitioned 13 communities earlier this year and have over 20 renovations scheduled for completion in Q4 2024. Further, we are expanding our disposition program to include a total of 32 SHOP communities comprised of 2,422 units, including three under agreement or LOI to sell, and 29 communities in various stages of marketing. Collectively, for the quarter, these communities generated negative NOI of $2 million with occupancy of 75.2%, and we are assuming a valuation range from $55,000 to $65,000 per unit. The decreased range of per unit value from our prior call is due to the additional communities selected for sale, which include smaller unit counts, negative NOI, and that are generally located in more tertiary markets. Removing these properties from our portfolio will also enable us to focus our strategic CapEx into our highest ROI communities, creating positive earnings momentum for our remaining portfolio. In fact, removing the 32 SHOP assets that we are in the process of selling would improve our third-quarter NOI margin by 170 basis points and occupancy by 50 basis points. Outside of SHOP, DHC is currently under agreements or letters of intent to sell 25 properties for gross proceeds of $333 million. This includes our previously announced agreement to sell 18 triple-net leased senior living communities, which is currently scheduled to close in the fourth quarter of 2024. This opportunistic sale monetizes this portfolio and highlights our ability to achieve premium valuations, reflected by a valuation of more than $150,000 per unit and an attractive in-place CAP rate of 7.3%. Proceeds generated from the sale and certain of our other properties including our life science campus in San Diego, California, will allow us to reduce our leverage as we accretively pay down our zero-coupon senior secured notes due in 2026 with up to $300 million of potential proceeds from the sale of these collateral properties. We also wanted to provide an update on our refinancing strategy to address $440 million of maturities we have due in June 2025. We are actively engaged with GSE agencies to refinance this debt. However, given the size of the financing and a more thorough understanding of the overall execution and timeline with the agencies, we have broadened our strategy to include financing of smaller tranches, tapping diversified financing sources from institutional real estate lenders along with the agencies. I will let Matt provide more details; however, the key takeaway is that we believe this change will provide for a more favorable financing outcome. Despite our mixed performance results for the quarter, we remain focused on advancing initiatives to increase occupancy and improve community performance in support of our SHOP turnaround. As highlighted earlier, our top-to-bottom evaluation of the portfolio including certain initiatives undertaken by our operators are key pillars that will position DHC to benefit from embedded NOI upside. Now, I'd like to turn the call over to Matt.

Thank you, Chris, and good morning, everyone. Normalized FFO for the third quarter was $4 million or $0.02 per share. Our same property cash basis NOI was $65.8 million, representing a 16.1% improvement year-over-year and a 1.5% decline sequentially. The sequential decline was mainly caused by our Medical Office and Life Science segment that saw same property occupancy drop 150 basis points to 87.8%. SHOP highlights for our same property portfolio include a 5.4% increase in average monthly rate year-over-year, occupancy growth of 130 basis points year-over-year, and 40 basis points sequentially, and margin expansion of 240 basis points year-over-year. These factors combine to deliver the 6.4% year-over-year revenue growth, Chris touched on earlier. Despite this strong progress on the top line, we experienced certain expense increases negatively impacting results that totaled $2.5 million and include an insurance deductible related to a fire at a community and water intrusion remediation that we did not factor into our quarterly SHOP guidance. On a positive note on expense management, we successfully renewed our annual insurance program effective July 1st, resulting in a $6.8 million or 26% reduction in our premiums, a benefit we anticipate to realize in the upcoming quarters. Lastly, as it relates to this quarter's earnings, G&A expense includes a $6.9 million estimated business management incentive fee. Excluding estimated incentive fees, G&A expense would have been $7 million, in line with Q2 results. We do not include incentive fee expense in normalized FFO or adjusted EBITDAre until the fourth quarter when the final incentive fee amount is determined, if any. The incentive fee accrual may increase or decrease over the remainder of the year, depending on how DHC performs relative to the index. Turning to liquidity, financing activities and CapEx. We ended the quarter with over $256 million of cash. As discussed on prior earnings calls, our financing strategy to address the remaining $440 million of unsecured senior notes maturing in June of 2025 was to do a large single issuance of agency financing on certain SHOP communities. As we have progressed through this process, we have realized that the pace of agency financing is slower than anticipated and the limited new financings the agencies have closed this year are at smaller scale, either single property or smaller pool financings. As a result of this, we have quickly pivoted to engage with multiple lenders, and based on dialogue to date, we expect the terms to be in line with those the agencies are willing to provide. This expanded outreach, which given the current environment, best positions DHC to accretively address our 2025 maturity as soon as possible with the most competitive terms available. To date, we have received a formal quote with one government agency for approximately $106 million in loan proceeds and are in active negotiations with two other lenders to finance certain of the initial targeted communities. If our financing strategy does not produce our target proceeds to repay our June 2025 bonds, we can use a portion of our $256 million cash position and proceeds from property dispositions that are in various stages. We are currently under agreements or letters of intent to sell 28 properties for an aggregate estimated gross sales price of $348 million and have other properties in various stages of marketing. Approximately $300 million of these proceeds relate to properties that secure our zero-coupon bond and as a result, are required to be used to partially redeem our $940 million senior secured notes due in January 2026, highlighting significant progress towards the refinancing of this bond. During the quarter, we invested over $50 million of capital, including nearly $40 million into our SHOP communities. We also advanced 23 refresh projects in the quarter by investing $6.4 million and expect these projects to be completed by year-end. Regarding our full year guidance, our CapEx guidance for the full year 2024 is reduced to $180 million to $190 million with $118 million spent through September 30. Our full-year CapEx guidance includes SHOP CapEx of $130 million to $140 million. Based on our Q3 SHOP results falling short of guidance, we are lowering our full-year SHOP NOI guidance to $102 million to $107 million. This revised guidance takes into account additional insurance and remediation costs from the recent hurricanes negatively impacting Q4 results and a new target occupancy slightly below 80% at year-end as a result of our Q3 and peak selling season not yielding the occupancy lift we expected. As we communicated in February, our full-year SHOP NOI guidance assumed occupancy rates increasing by approximately 400 basis points and that our NOI growth would ramp up in the second half of 2024. Certain communities have negatively impacted our initial guidance targets, and as Chris noted, we are advancing our disposition program by targeting communities that are weighing down improved results in line with our initial forecast. In summary, we are continuing to make progress on our SHOP turnaround despite bottom-line results that were below our expectations. As we look ahead, we remain bullish on the senior living industry given the tailwinds supporting it. We will continue to leverage the strength of our portfolio and opportunistically pursue property dispositions, transitions and refinancing strategies to fuel NOI growth and value creation for all of our stakeholders. 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 Bryan Maher with B. Riley Securities. Please go ahead.

Thank you. Good morning. There's a lot to discuss here. To start with the GSE agency debt and issuances, could you provide more details? I believe you mentioned being in the market with $106 million in proceeds from the agencies. How many properties are involved, and how much further do you anticipate going with the agency debt compared to other lenders? Also, could you share what kind of terms we might expect?

Hey, Bryan. Good morning. Yes, you're right. It was about $106 million in proceeds. We're at the phase of a formal quote receipt that we're currently negotiating based on the terms that were put in that. That is a financing on eight of our communities. And we are also looking at another government agency to do financing on a handful of communities as well as expanding our pool of lenders to achieve the maximum proceeds available. So that's where we are currently. As it relates to terms because we're still in a negotiation phase, I don't want to go into too much detail, but a lot of the terms are similar to what we've talked about previously, including a loan-to-value somewhere around 60% as well as for interest rates still in that 6% to 6.5% range.

Okay. Thanks. That's helpful. And you're sitting on a lot of cash, around $250 million, $100 million coming in here, $50 million that you can bring in from other asset sales aside from the $302 million million that's going over to the zero. So you're kind of in the $400 million range, but you need $440 million. Is there a thought process given the cash that you have and the cash that's coming in near-term to start chipping away at buying in some of those $975 million or are you going to wait until you have the whole bucket and do it all at once?

Yeah, Bryan. We're advancing our financing strategy here. So, we're first focused on bringing in proceeds there. But you're right, we have adequate cash and likely, we'll start chipping away at that.

Okay. I think the big frustration here today and with the stock in particular is the SHOP NOI, slowness of recovery. I mean, we all agree that there is recovery, but I think that there is some disappointment. Can you drill down a little bit further on why the costs have persisted to increase so much that it impacted an environment where we're generally hearing that costs are becoming not quite the headwind that they had over the past couple of years?

Yeah, Bryan. I think a real impact of the cost increase this quarter was really driven by certain kind of non-recurring expenses that I highlighted in the prepared remarks, totaling about $2.5 million, mainly due to a fire we had at a community resulting in an insurance deductible as well as certain remediation costs from damage from the hurricanes that occurred in Q3. Beyond that, I would say our costs have really moderated, and we were negatively impacted by that. I will also add, in Q3 of every year, we generally see an increase in utilities as a result of seasonal cooling, and that will kind of moderate and come down slightly in Q4 for that.

Yeah. And I would add, Bryan, the slowness here is in the top-line. I mean, as Matt mentioned, we do have certain costs that are unexpected and that can kind of ebb and flow between quarters as we understand that, but really, I think not getting to the overall net move-ins and the occupancy is probably a larger factor impacting some of these results. So that's really kind of what we're focused on. And I think it’s important, as we highlighted that, we recognize in some cases, it’s just kind of overall operational things that we need to work through, which I think we have a good pulse on. We have a larger presence in some of these markets where there have been kind of impacted weather events, which just slows the process outside of any occupancy impact with sales and marketing and other things. But I think equally important is kind of our view on how we're getting in front of some of the known cash drags with the expansion of dispositions and certain transitions, which is just a process that is going to take a little bit more time to unfold.

Okay. Maybe just two more questions from me and I'll hop back in the queue. When you talked about the hurricanes, I guess, Milton and Helene, was there any properties closed during those storms and any material damage that's noteworthy to discuss?

We had one property specifically that was more broadly impacted, hitting our insurance deductible where it required kind of the temporary relocation of residents with respect to the hurricane and then, certainly a handful of properties that required dislocation temporarily just until the warning subsided. And then, something else to note is also we did have damage at a community due to a fire event, which also required a temporary move out on a portion of that community impacting the results there.

I have a question about the Brookdale properties being sold for over $150,000 per unit, and other properties in the SHOP community segment that you mentioned are priced between $55,000 and $65,000 per unit. Given that you have a significant number of units, around 25,000, I believe the key question that many investors are pondering is the overall value of these assets. Could you provide an estimate of what the entire SHOP portfolio would be worth if liquidated today? Would it be around $100,000 or $110,000 per unit? Any insights on this would be greatly appreciated, as it seems to be a crucial factor in current investment decisions.

Yeah. Look, I mean, we want to be sensitive to kind of where we are in the overall turnaround of the portfolio. And so I think where value could be today isn't necessarily indicative of kind of where we're going. What I would guide is, let’s look at some of the transactions we're talking about, right? For kind of smaller tertiary communities that are stabilized, looking at the Brookdale event, you're talking about $150,000 per unit. If you kind of step back and look at more challenged assets and also in tertiary markets of similar size with NOI drag, you're looking at $50,000 to $60,000 per unit. And so that's kind of in my view on some of the smaller side. And then obviously, on the other side of the equation where we have kind of those better communities, 100 unit plus and more primary and secondary markets, we think that there is outsized potential value with those specific communities. And so I think, what we're hopeful as we continue to work through this portfolio and communicate more on these updates, you're going to see kind of more natural progression towards value as we talk about certain financing events where we're getting valuations on those assets in addition to select sales, whether they be opportunities to kind of monetize value or just kind of cut short on areas we don't see that there is value. And that's really, I think the best way to kind of tease out valuation as some of these transactions mature.

Okay. Thank you.

The next question comes from Justin Haasbeek with RBC Capital Markets. Please go ahead.

Yeah. Thanks for taking the question. Just doing the math on the total SHOP guidance you guys just gave. It implies that the SHOP NOI, the total SHOP NOI is going to drop to roughly $24 million in Q4. Is that correct? And then can you just provide some color if it is correct on why we're going to see that drop? And then also just on some more color on occupancy. Can you provide why occupancy didn't meet you guys' expectation in the quarter?

Sure. So on Q4 NOI, your estimate is within our guidance range. We are expecting that Q4 results are going to be negatively impacted by the October hurricane that came through. It impacted certain communities. We're expecting approximately $4 million of costs related to that with remediation and insurance premiums or insurance deductibles. And as it relates to occupancy, we ended September 30th at 79.4% and we're currently expecting to end the year just shy of 80% as we go into generally a little bit of a softer selling season.

Okay. And then on the 29 communities with negative $2 million of NOI, what is the total value of those communities, and sort of what's the timeline should we expect for closing on those?

Yeah. I mean, we provided kind of the range of $55,000 to $65,000 per unit, so let’s just call it, and this includes the 29 plus the three that are more advanced, and so that's kind of on the low end $135 million, on the high end just above $155 million. I think kind of holistically, we wouldn't expect that any of these transactions would be completed prior to year-end. So the more advanced stuff would be kind of in the earlier part of the quarter of Q1 and then the stuff that's hitting the market now likely thereafter.

Okay. And then on the wellness center NOI, just is there a reason why NOI ticked up roughly around $700,000?

Yeah. We had a couple of wellness centers that were previously leased by one tenant that we transitioned to be leased by Lifetime and one of those leases commenced during the year, resulting in that NOI increase.

Okay. And then the last one for me. Just on the Muse, where are you guys at on the marketing process, and then is occupancy still around 50%?

Yeah. Occupancy is just below 50%. We've kind of commenced the marketing process. We're in advanced stages of working through that transaction and we may be in a position to potentially close on that in 2024.

Okay. Great. Thank you.

This concludes 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.

Thank you for joining our call today, and we look forward to speaking with many of you at the upcoming NAREIT convention.

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