Diversified Healthcare Trust Q4 FY2025 Earnings Call

Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2025 Earnings Conference Call. 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.

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, February 24, 2026. 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 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, Matt, and thank you, everyone, for joining our call today. I want to start with a recap of a very busy and successful 2025 for DHC, in which we executed on the stated initiatives that we identified early in the year, and ended the year as the best-performing REIT in the U.S. as measured by both share price appreciation and total shareholder return. In 2025, we completed over $1.4 billion in capital markets activity, principally focused on financing, asset sales and the establishment of a $150 million undrawn credit facility. We also completed the wind down of AlerisLife, transitioning 116 communities, representing over 17,000 units to seven regionally focused operators and completed renovations at over 30 communities. These efforts, combined with the work of our dedicated asset management team, resulted in full year consolidated NOI growth of 31.3%, a reduction in our leverage of over three turns and no debt maturities until 2028. As one of the largest owners of senior housing properties in the country, we believe our recent accomplishments, combined with the investments we have made in the portfolio and the favorable industry outlook sets the stage for continued outsized growth in our SHOP portfolio as reflected in our 2026 guidance, which Matt will expand upon momentarily. Turning to the quarter. After the market closed yesterday, DHC reported strong fourth quarter results, particularly as it relates to our SHOP NOI, which improved 27.6% over last year to $38.3 million reflecting continued execution on our highlighted initiatives and further strengthening DHC's financial position. For the quarter, DHC delivered total revenue of $379.6 million adjusted EBITDAre of $72.4 million and normalized FFO of $21.8 million or $0.09 per share. Turning first to our senior housing portfolio. SHOP NOI for the full year came in at $139.3 million, which was towards the high end of our guidance. This was driven by same property occupancy that increased 90 basis points year-over-year to 82.4%, and an average monthly rate that increased 5.8%. Same-property SHOP NOI margins continued to improve, up 230 basis points year-over-year. These results were achieved despite a somewhat noisy quarter reflecting the transition of 116 SHOP communities to 7 different operators that have proven track records and well-established regional footprints. With all the transitions completed during the quarter, we remain focused on executing property-specific business plans and targeted opportunities identified across the portfolio. We are intensely focused on executing and working closely with our operators, combining disciplined operational oversight with their deep regional expertise to deliver measurable gains in occupancy and portfolio NOI. We are focused on driving higher lead to move-in conversion through the rollout of advanced CRM platforms, tighter and more coordinated procurement programs, the introduction of differentiated care levels to capture unmet demand and dynamic pricing strategies that directly capitalize on market-specific conditions. Our early engagement with these operators, many of whom are industry leaders reinforces our confidence in achieving our 2026 outlook. In addition to the operational opportunities within SHOP, we also have a healthy pipeline of ROI projects that provide an additional driver of earnings upside over the next several years. This will come through the repositioning of underutilized areas within our communities, including former and now closed skilled nursing wings where we can deploy a modest amount of capital to renovate and reopen these areas with the appropriate acuity needs. This initiative has the potential to add approximately 500 SHOP units to the portfolio that could deliver an unlevered mid-teens ROI. We look forward to sharing more details on this opportunity in the coming quarters. Turning to our Medical Office and Life Science portfolio. During the fourth quarter, we completed approximately 81,000 square feet of leasing at weighted average rents that were 7.9% above prior rents for the same space with an average term of over 8 years. Consolidated occupancy increased 460 basis points sequentially to 91.2%, primarily driven by the sales of vacant or low occupancy properties and leasing completed during the quarter. Same-property cash basis NOI increased 3.8% year-over-year, with margins improving 100 basis points to 59.6%. Looking ahead, 10.1% of annualized revenue in our Medical Office and Life Science portfolio is scheduled to expire through 2026, of which 241,000 square feet or approximately 3.9% of annualized revenue is expected to vacate. Our leasing pipeline remains active, totaling 1 million square feet and reflects average lease terms of 6.9 years and GAAP rent spreads averaging more than 10%. Turning to our capital markets and balance sheet initiatives. As it relates to our disposition and deleveraging initiatives, we sold 37 non-core properties in the fourth quarter for approximately $250 million bringing the full year disposition to 69 properties for approximately $605 million. These proceeds were used to fully repay our senior secured zero-coupon bonds due in 2026, and we now have no debt maturities until 2028. Our deleveraging efforts in 2025 reduced net debt to adjusted EBITDA from 11.2x at year-end 2024, to 8.1x at the end of 2025. As we have previously noted, our near-term goal is targeted leverage levels of 6.5x to 7.5x. As of February 20, we were under agreement to sell 13 properties for $23 million. Following the completion of the sale and excluding normalized course capital recycling opportunities that may arise, we are substantially done with our large-scale disposition program. With the asset sales that have been completed over the past 2 years, combined with the significant investments we have made upgrading our communities, we expect to see a continued decline in our CapEx spend, as Anthony will discuss in more detail. Moving forward, dispositions will be on a more opportunistic basis with proceeds used to either reduce leverage or to redeploy into accretive initiatives. To conclude, demand for our SHOP communities is robust, supported by a growing 80-plus population and the outlook of new supply expected to remain muted for several years. Despite the strong gains in our share price in 2025 and 2026 to date, we still see additional share price upside as we deliver materially improving SHOP NOI and benefit from lower interest costs and reduced CapEx spend. It is our focus to continue delivering on the momentum of the past 2 years and to further drive shareholder value for our investors. With that, I will now turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the fourth quarter, our same property cash basis NOI was $70.4 million, representing a 15.4% increase year-over-year and a 12.4% increase sequentially. Our fourth quarter SHOP same-property results include continued positive momentum in pricing with average monthly rate increasing 580 basis points year-over-year and 120 basis points sequentially. Same-property occupancy increased 90 basis points year-over-year. These increases resulted in year-over-year same-property SHOP revenue growth of 5.6%. Year-over-year, our same-property SHOP NOI margin increased by 230 basis points to 13.3%, driven by our growth in revenue. As Matt will highlight shortly, we expect that continued increases in revenue and occupancy along with expense moderation will result in strong NOI margin growth in 2026. Turning to G&A expense. The fourth quarter amount includes $5.7 million of business management incentive fee. For the full year, we recognized an incentive to RMR of $17.9 million. This incentive was driven in part by DHC's total shareholder return of nearly 113% during 2025. Excluding the impact of the incentive fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $37 million of capital, including $20 million into our SHOP communities and $17 million into our Medical Office and Life Science portfolio. For the full year, our capital spend totaled $146 million, which is on the low end of our guidance. We continue to focus on disciplined capital spending as evidenced by a $45 million or 23% reduction when compared to 2024. For 2026, we expect our full year recurring capital expenditures to range from $100 million to $115 million, which represents an over 18% decrease at the midpoint when compared to recurring capital expenditures in 2025. Our 2026 CapEx guidance includes $80 million to $90 million in our SHOP segment, and $20 million to $25 million for our Medical Office and Life Science properties. It is important to note that our SHOP recurring capital guidance includes approximately $10 million of refresh ROI capital. Now I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $255 million of liquidity, including $105 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. Subsequent to quarter end, we received a $27.2 million cash distribution from AlerisLife in connection with the wind-down of its business. In December, we redeemed the remaining balance on our 2026 zero-coupon bonds, which resulted in 45 collateral properties being released that have a gross book value of approximately $850 million. Following this redemption, we have a well-laddered debt maturity schedule with no maturities until 2028, allowing us to focus on operations. Our weighted average cash interest rate as of December 31 was 5.7%. Our net debt to adjusted EBITDAre declined materially from 11.2x at the beginning of 2025 to 8.1x while adjusted EBITDAre to interest expense improved from 1.1x to 1.5x over the course of the year. And based on our guidance, we expect year-end 2026 to be at or above 2x. We remain focused on further reducing our leverage, primarily by growing SHOP NOI, as well as completing the sale of 13 SHOP communities expected to close in March for $23 million. These 13 SHOP communities lost $1.2 million in the fourth quarter and $3 million for the full year. Our full year adjusted EBITDAre of $284 million was on the high end of our guidance range. For 2025, SHOP NOI was $139.3 million, which was at the high end of our increased guidance provided on our Q2 earnings call. Medical Office and Life Science NOI was $108.1 million, just above the midpoint of our guidance, and our triple net lease senior living community and wellness center NOI was $31.1 million, which exceeded our guidance. Looking ahead to 2026, we are confident that strong improvements in our SHOP segment and reduced debt from the execution of our 2025 strategic initiatives will drive free cash flow growth at DHC. For the full year, we are expecting NOI as follows: $175 million to $185 million in our SHOP segment, $94 million to $98 million in our Medical Office and Life Science segment, and $28 million to $30 million from our triple net leased senior living communities and wellness centers. It is important to note that the decline in our Medical Office and Life Science segment NOI is largely driven by the sale of 31 properties that contributed $12.3 million of NOI in 2025. In addition, the slight decline in our triple net lease portfolio NOI is largely driven by the February 2025 sale of 18 triple-net leased senior living communities that contributed $1.7 million of NOI in 2025. We expect our 2026 adjusted EBITDAre to be between $290 million and $305 million and normalized FFO of $0.52 to $0.58 per share. To support the guidance provided on this call, we have added a new guidance slide to our quarterly earnings presentation, which can be found on Page 6. That concludes our prepared remarks. Operator, please open the line for questions.

And the first question will come from Michael Carroll with RBC Capital Markets.

Chris, how should we think about the go-forward strategy from here? Can you provide some color on the opportunities to reopen the wings that you talked about at existing communities? I mean, how many units could this add to the portfolio? And what could be the expected cost from that? And should we think about that as being the main strategy on the external investment side?

Yes. The main strategy focuses on unlocking value through improving operational performance. We have a solid outlook for 2026, but we acknowledge that we're currently behind the benchmark in terms of occupancy, even with the guidance provided. Given our margins and the portfolio's trajectory for 2026, there is significant potential for margin growth. These opportunities will primarily arise organically, and we are committed to pushing in that direction to ensure a healthy growth path for the coming years. Regarding your question about reopening wings, we've identified about 15 locations that we are optimistic about, which could yield nearly 500 units with a mid-teens ROI. This process will span several years and won’t all culminate in 2026. Lastly, costs will fluctuate, but rough estimates would suggest around $125 million to $175 million per unit as a benchmark. While this is still in the early stages, it can serve as a guideline.

That's helpful. And will external investments still kind of be focused on these types of renovations? I mean, how are you thinking about the acquisition market? Is just the renovation still just have a better risk-adjusted return versus pursuing future acquisitions?

Certainly, we'll have a better risk-adjusted return for a couple of reasons. As you think about these kind of closed wings, mostly it's going to be to support new acuity. So for example, if we have a community that offers IL and AL, this is an opportunity to introduce memory care. And that just kind of adds for kind of the continuation of care in the community. And again, that's going to also support other drivers through kind of shared cost benefits, pushing rates at IL and AL given that you kind of have kind of the full package to offer. So it's kind of a rising tide lifts all boats scenario when you're investing in these wings. Look, we don't want to rule out the idea of looking at the acquisitions market, but at the same time, just want to temper that's not where our focus is today. Certainly, downstream, if we continue to see progress with the growth that we've outlined in 2026, and we think about capital recycling, we're selling kind of the assets we've noted, that could be a way to kind of support dipping our toe into the acquisition market. But again, there's a lot of opportunity embedded in what we have. So that will be kind of a priority we'll continue to address in the next couple of quarters.

Okay. And then on the operating side, I mean, is there anything that's specific that drove the 4Q margin improvement? I mean, how much of that was driven by the transition disruptions just kind of dissipating versus core operational gains?

It was a combination. Obviously, we had some transition noise more material in the third quarter. But as these operators are now getting in and rightsizing their cost structures, we definitely saw a little bit of a benefit in Q4 and would expect to continue seeing that as we move into 2026.

Were there any specific costs in the fourth quarter related to transitions? Or is the current run rate a good estimate to consider?

It was a pretty small impact in the fourth quarter, nothing really material. So it's a decent run rate.

Okay. And then just last one for me. Can you talk a little bit about the January and February trends, I guess, specifically, was there any impact related to the flu season? And then, what was the average of rent escalators that you're able to pass through or your operators are able to pass through to specific customers? Can you provide any color on that?

Sure. I think the rate growth is going to occur sporadically throughout the year. Typically, we see a significant boost at the start of the year, mainly driven by the legacy Aleris properties. The expected rate range is between 4% and 6%, which aligns with our guidance for the year. In terms of the flu season, there hasn’t been any significant impact. It's something we manage every year, but we aren't seeing anything unusual that would negatively affect the portfolio. While we don’t have full results for February yet, January looked promising and is consistent with our expectations for the year. I want to emphasize that it will take some time for the operators to fully navigate the transition. We completed some transitions at the end of last year, and while a few were finished around September and October, many are more concentrated in the latter part of the year. Therefore, we anticipate continued incremental benefits as they progress with the transition and integration of their business models. As for January specifically, it aligns with the optimistic outlook we had at the beginning and supports our overall guidance.

The next question will come from John Massocca with B. Riley.

Maybe given some of your comments on some of these new operators continuing to get up to speed. As we think about the cadence of some of the NOI growth implied in guidance over the coming quarter? Should it be kind of back half of the year weighted then? Or is that maybe overstating the impact of timing for some of those transitions?

When we break down where the growth is coming from, around one-third will come from occupancy, which we expect will progress throughout the year and particularly during the sales season, heavily weighted towards the second and third quarters. We anticipate that this growth will materialize over time. Regarding revenue per occupied room, this will largely be influenced by rate increases, with a significant impact occurring early in the year, along with varying levels of care that may take longer to integrate. So from a top-line perspective, it’s a combination of these factors. On the expenses side, we expect some immediate benefits as we transition communities, taking advantage of more targeted staffing at the local level. However, there is still work ahead for operators in terms of establishing the right local teams and continuing to implement the business plan, which may take some time. In summary, there are clear opportunities at the beginning of the year, and we foresee continued significant incremental opportunities as we progress into the middle and later parts of the year.

Okay. And then just to kind of confirm, the 300 basis points of kind of occupancy growth in the guidance, is that kind of compared to 4Q end occupancy? Or is that kind of on the average occupancy over the course of 2025?

The latter. So it's comparing kind of full year average occupancy to, again, the guidance of full year average occupancy.

Okay. And then as I think about kind of 4Q results compared to 3Q, was there anything driving the kind of sequential decline in overall rental revenue, but specifically kind of the SHOP rental income and resident fees other than just the asset sales that occurred over the 2H '25?

I would say a little bit on the asset sales, but I think if anything, it may have just been more tempered towards the actual operations being transferred and maybe a slight slowdown in pushing revenue and such is really the only real driver. But a lot of that noise is now behind us, and we start with a clean slate in 2026.

Okay. I can calculate some figures myself. When considering the revenue, specifically the rent per room and the growth in revenue per occupied room implied in the guidance, what are your expectations regarding the margin expansion over the course of 2026?

Yes. I mean, ultimately, if you kind of do the math, the flow-through, we would expect close to a couple of hundred basis points of margin improvement on a same-store basis.

Okay. And then maybe moving on from the SHOP side of the business. As I think about the MOB and Life Science assets that have leases expiring in 2026, how do those look today? What do you think the prospects of renewal or releasing are? And is there potential for kind of rent roll-ups? Or how are you viewing those assets?

Yes. For the known vacancies in 2026, there are two main tenants, both occupying entire buildings. One is located in Minnesota, contributing about 1.9% of our annualized revenue, while the other is in Fremont, California, accounting for about 1% of our annualized revenue. We have received some early interest for the Minnesota building, which is likely to transition from a single-tenant to a multi-tenant situation. We have some time before that tenant departs midyear, allowing us to refine our strategy. The tenant in Fremont won’t be leaving until the fourth quarter of 2026, and that area boasts a robust R&D market for life sciences, leading to a much more positive outlook and interest for that building. Overall, I believe we have a promising chance to re-lease both buildings, with a greater likelihood of success in Fremont.

Okay. And then I know you said dispositions are likely to be kind of selective and opportunistic. Would that kind of imply that they might be weighted more towards the MOB Life Science side of the business, just given the management transitions going on in SHOP? And I guess, if so, what does that market kind of look like today?

Yes, to be open, we don't have anything specifically planned. However, I believe there is a bit more potential for additional sales in the MOB Life Science sector since we've already sold a significant amount in SHOP and addressed the easier opportunities for 2025 with what we are closing in Q1. Generally, we've been successful in selling assets. Typically, these are assets that face occupancy challenges or require capital, which aligns with our recent sales. This has demonstrated that there is a market for such transactions, as evidenced by the mix of stabilized and non-stabilized assets we sold last year. The value will depend on the situation, so while we don't have specific assets identified right now, it's difficult to pinpoint a concrete strategy outcome. Nevertheless, we feel confident about our ability to make transactions.

Next question will come from Michael Diana with Maxim Group.

What implications, if any, does your significant momentum have on the dividend?

We recently completed a very active 2025 and our main focus now is on managing operations during these transitions. Based on our guidance, we are anticipating growth in net operating income, normalized funds from operations, and adjusted EBITDA. While the Board will consider this, there are currently no immediate plans to address the dividend.

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.

Yes. Thank you for joining the call today. Please contact our Investor Relations team if you're interested in scheduling a call with DHC or meeting with management at the upcoming Citi conference. Operator, that concludes our call.

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