Diversified Healthcare Trust Price & Performance (DHC)

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 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 good morning, everyone. Before I begin, would like to welcome Anthony Paula as DHC's Vice President. Anthony is also a Vice President of the RMR Group where he is responsible for the accounting, SEC reporting and corporate financial functions for DAC. Welcome, Anthony. I will begin by providing a high level review of DHC's strong fourth quarter and year end financial and operating results, as well as an update to the progress and timing of our key strategic initiatives.

Then, Anthony will provide more detail to our fourth quarter financials And finally, Matt will review our liquidity, financing activities, CapEx our 2025 guidance outlook. After the market closed yesterday, DAC reported total revenues of $379,600,000 for the was a 5% year over year increase normalized FFO of $5,300,000 or $0.02 per share which exceeded consensus estimates. Turning to our shop sector performance. DAC ended the fourth quarter on a high note by reaching 80% shop occupancy for the first time since the first quarter of twenty twenty. On a year over year basis, DHC achieved a 56% improvement in shop NOI a 7.3% increase in shop revenues, and a 6.7% improvement in average monthly rate resulting in margin expansion of two fifty basis points. These positive trends show our growing momentum and are the result of a dedicated asset management team throughout 2024. RevPOR increased year over year by 6.7% primarily driven by increases in levels of care services and a reduction in discounts and concessions. Expense core increased by 3.9% primarily driven by salary and wages, general maintenance and certain one time impacts due to weather events, Overall, we are pleased with the progress and remain bullish on the outlook within this segment going into 2025.

Turning to our Medical Office and Life Science portfolio performance. Of new and renewal leasing activity with weighted average rents that were 6.9% higher than prior rents for the same space and a weighted average lease term of six point five years. Same store occupancy was flat at 90.2%. As we look ahead, roughly 7.9% of annualized revenue in this portfolio is scheduled to expire through year end twenty twenty five. As mentioned last quarter, our largest known vacate during this period is with a tenant whose expiration is in the first quarter of twenty twenty five and located in St. Louis, Missouri. Occupying close to 233,000 square feet or 2.3% of annualized revenue. This property is currently being marketed for sale. Further known vacates in 2025 are expected to be tempered for the MOB and Life Science portfolio over 400,000 square feet of which over 117,000 square feet is new absorption. Our pipeline includes an average lease term of seven to ten years a trending rent roll up in the double digits. Our leasing activity and the strategic disposition of certain assets were help further drive performance of this portfolio. Turning to our key strategic initiatives. Completed the fourth quarter with proceeds of $6,600,000 from the sale of a mostly vacant office building.

In the first quarter of twenty twenty five, we completed property sales close to $179,000,000 which included the sale of our Muse Life Science campus in San Diego for $159,000,000 $855 per square foot. Also in the first quarter of twenty twenty five, received a cash dividend of $17,000,000 derived from our pro rata 34% ownership stake in Alaris Life. Dividend resulted from strong overall performance improvement at Alaris including the sale of the Agility business in 2024. This reflects a favorable return from our investment of $15,500,000 made in 2024. Looking forward, with marketing efforts of certain properties, Within our SHOP segment, we have 34 communities that are in various stages of the disposition these communities for proceeds of $68,000,000 which we are targeting to close by the end of the second quarter. The balance of marketed communities are in various stages of the sale process and we expect these will close over the next few quarters. Collectively, we still expect that the disposition community will transact in the range of $55,000 to $65,000 per unit. As a reminder, removing these properties that are for sale from our SHOP portfolio will also enable us to focus our CapEx into our highest ROI communities creating positive earnings momentum for our remaining portfolio.

Have improved our fourth quarter NOI by $2,300,000 margin by 180 basis points and occupancy by 60 basis points. With respect to our triple net leased senior living communities, we expect to close on the previously announced sale of 18 communities within the next week for $135,000,000 $154,000 per unit. Outside of our shop and triple net activity, we are active point $2,000,000 We also wanted to provide an update on our refinancing strategy. Currently, we have signed three term sheets and one term sheet in [indiscernible] $340,000,000 in anticipated loan proceeds. Along with our cash position of $145,000,000 proceeds from dispositions to date and $77,000,000 of unencumbered assets under agreement for sale, we are well positioned to address the 25 debt maturities. Regarding our zero coupon bonds maturing in 2026, we have begun the pay down process with proceeds of $3.00 $1,000,000 from asset sales including Muse, which closed in January and the Brookdale portfolio, which we expect to close within the next week. As stated in last quarter's call, are continuing with the top to bottom analysis of our portfolio to ensure we have the right mix of assets and operators and outcome we expect will position DH to benefit from stronger liquidity and position the company for further NOI growth.

Now I would like to turn the call over to Anthony. Thank you, Chris, and good morning, everyone. Normalized FFO for the fourth quarter was $5,300,000 or $0.02 per share. Representing a 31% sequential quarter increase. Our same property cash basis NOI was $63,700,000 representing an 18.7% improvement year over year and a 1.4% decline sequentially. The sequential quarter decline was mainly caused by additional insurance and remediation costs from the hurricanes negatively impacting Q4 results in our SHOP segment. This decline was partially offset by the recognition of $3,400,000 of percentage rent in our triple net leased senior living portfolio that is recognized on an annual basis. Shop highlights for our same property portfolio include 6.7% increase in fab risk due rate year over year and obviously of 80.9%. Resulting in growth of 100 basis points year over year and 60 basis points sequentially. These increases resulted in revenue growth of 7.5% and margin expansion of two fifty basis points year over year. Despite strong performance on the top line, we experienced certain non recurring expense increases, negatively impacting results that totaled $4,400,000 and includes a $1,000,000 insurance deductible. To Hurricane Milton and water intrusion remediation that we discussed on our last call, Excluding these $4,400,000 of additional weather related expenses, we consolidated fourth quarter shop NOI margin would have been 140 basis points higher.

For full year 2024, our shop NOI of $106,000,000 from the high end of our revised shop guidance. Turning to G and A expense. The fourth quarter amount was a $6,900,000 reversal of business management incentive fee as our total returns fell below the benchmark. Resulting in no incentive fee incurred for 2024. Excluding this rehearsal, G and A expense would have been $5,700,000 Now I'll turn the call over to Matt. Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $145,000,000 of unrestricted cash which reflects a $60,000,000 pay down towards our 2025 unsecured senior notes in November, leaving $380,000,000 due in June. Since our Q3 earnings call, we have made significant progress on our financing strategy with three executed term sheets and one term sheet in final stages of negotiation, for anticipated aggregate loan proceeds of $340,000,000 secured by 27 of our shop communities. Based on current spreads, way that average interest rate on these expected financings which is subject to fluctuated changes in treasury rates, is approximately 6.5% compares very favorably to the 9.75% debt being paid off. While the closings are contingent on the completion of diligence and certain structuring requirements with licensing, we expect the closings to occur over the next sixty days.

To ensure we have ample liquidity, and to improve our portfolio, we continue to target select properties for disposition many of which have underperformed Since the beginning of the fourth quarter, we have sold three unencumbered properties, including two medical office and life science properties and one shop community, for an aggregate sales price of $26,300,000 We are also currently under agreements to sell seven unencumbered properties including five shop communities, one medical office and web science property, and one former senior living community for an aggregate estimated gross sales price of $77,000,000 In addition, we have other properties in various stages of marketing. Based on the progress we've made on our financing strategy, the sale of unencumbered properties and our current liquidity position. We are very comfortable with our ability to repay the $380,000,000 of bonds due in June. In January of this year, we sold the Muse Life Science portfolio which secures our zero coupon bond for a gross sales price of $159,000,000 have 19 additional collateral properties under agreements to sell for $142,000,000 including 18 triple net leased senior living communities leased to Brookdale and one MOB which are expected to close within the next week, We are required to use the net proceeds from these sales to partially redeem our $940,000,000 zero coupon bonds due in January 2026.

Highlighting our proactiveness in addressing this bond. After these repayments, we will have approximately $640,000,000 outstanding and continue to focus on this maturity including additional property sales and secured financings to address the balance of this maturity. As a reminder, we do have an option to extend the maturity by one year to January 2027. After addressing our 2025 and 2026 debt maturities, have no maturities until 2028 with a well laddered debt expiration schedule. Are confident that the continued execution of our financing strategy ultimately position us to drive growth and deliver meaningful value. During the quarter, invested approximately $73,000,000 of capital including $61,000,000 into our shop communities which included the completion of 23 refresh projects dollars 8,000,000 in our medical office and life science portfolio, and $4,000,000 at our wellness centers. The full year of 2024, CapEx spend was $191,000,000 including $140,000,000 in our shop segment. Turning to our 2025 outlook. We expect to spend between $150,000,000 and $170,000,000 on Cap in 2025 with approximately $105,000,000 to $120,000,000 being invested in our senior living communities. As we've stated previously, 2025 CapEx levels are declining from the prior years as much of the refreshed capital in deferred maintenance is now behind us.

Using the midpoint of our 2025 CapEx guidance, the forecast represents a 16% reduction from 2024 levels a 49% reduction from 2022. Which was our highest level of CapEx spend over the past several years. As it relates to NOI, we expect NOI to range from 121 hundred and $35,000,000 in our shop segment and $104,112,000,000 dollars in our Medical Office and Life Science segment, From a modeling perspective, the Muse that sold in January generated approximately $5,000,000 of NOI in 2024 and the Brookdale portfolio that we expect to sell within the next week generated $10,000,000 of NOI in 2024 inclusive of $2,200,000 of percentage rent recognized in the fourth quarter. The impact of these sales is reflected in the guidance ranges provided. Lastly, as it relates to guidance, we've implemented several initiatives, which we expect will have an impact on our results. Plan to update investors as to the timing of key events on future calls and we'll refine our outlook as the year progresses I would like to highlight that we have published an updated investor presentation which includes additional details and support our guidance on our disposition and transition plans. In closing, are confident that we will accretively meet our 03/2025 debt maturity and we'll continue to proactively address our zero coupon bonds that mature in January 2026.

That concludes our prepared remarks. Operator, please open the line for questions. We will now begin the question and answer session. Our first question is from Justin Hosbeeague with RBC Capital Markets. Please go ahead. Hi, thanks. Can you provide some some more color on why SHOP beat your guidance this quarter? And whether or not the insurance related costs didn't materialize in 4Q twenty twenty four? Good morning, Justin. So as it relates to SHOP guidance for Q4, we did have occupancy growth in the fourth quarter and we reached 80% for the first time in a few years. Additionally, we did model in our revised guidance provided in Q3 the insurance impact that we had estimated around $4,400,000 So that came in right in high. So overall, we're continuing to see our positive trends. And I will say, for the full year 2024, as Anthony had noted, our shop NOI was $106,000,000 which towards the high end of our revised guidance that we have provided. Okay. And then on the shop outlook for 2025, how confident are you guys in the existing operators help drive the recovery I think we're very comfortable. I think as we've talked about before, we've been making changes with operators some in the form of transitions and then in certain scenarios selling assets which will have an impact on the number of assets being managed by different operators.

And so so as we look into 2025, we've been spending a significant amount of time with each of the operators. We have a dedicated in house asset management team that is super focused on on working with these groups daily. And so it's really a joint effort to ensure we're kind of hitting our targets. Okay. And then turning to debt, what's the plan for the zero coupon bond and you guys completely pay it down over the next year? And kind of how are you guys thinking about extending that? To 2027?

Sure. So first, we're not planning on extending it 2027. I did note in our prepared remarks, we have that option, but that's not our plan today.

Look, we've made a lot of progress on the pay down. We have $3.00 $1,000,000 of assets sales either completed or very close to completion. The net proceeds from that will go to paying it down. So that's going to leave us about $640,000,000 and then we're looking at additional property sales. Some of those are unencumbered assets today. Some of them may secure the zero coupon bond. In addition to additional financings that we're going to be kicking off to put us in a great position to repay that prior to the January 26 maturity.

Okay. And then last one, the 340 million dollars of term sheets for the secured financing, What's the rate on that? So based off today's rates, we would expect it to have a weighted average rate of about 6.5% And as a reminder, we're paying off 9.75% debt. So it's extremely accretive [indiscernible] Okay. Thank you. The next question is from John Massocca with B. Riley. Please go ahead. Good morning.

So just on that last one to kind of [indiscernible] couple of months or so? That is correct. It could move between now and closing each of the loans.

Okay. And then thinking about 2025 guidance, just given the impact weather had on 4Q results, I mean, are you baking in some kind of assumption of the impact of adverse weather events or other impacts to in [indiscernible] because it was a deductible could be one time for a longer period of time than just being an annually recurring thing if we see other kind of hurricane issues a given year?

Yes. So So more broadly as it relates to the guidance in that four portfolio, it's really hard to predict weather events. So we generally don't bake any of that into our forecasts. But along the way, if we do experience those types of events, we would notify the market and update Okay. And then last currently marketed, who's kind of the buyer base for those assets? And I guess maybe how interest rate sensitive Are they?

Yes. I mean the buyer is a mix. We're seeing operators as buyer candidates with certain sources of capital and that can be through stuff cash their balance sheet, it could be through other private equity relationships or financing. Certain scenarios where there is less occupancy or more work to do, the financing pass can be a little bit more challenging. But in most cases, these buyers are coming to the table and again these are operators, these are private equity, these are local regional groups. It kind of runs the gamut. They're coming to the table with kind of their financing partner or sources as so it really is a mix just given kind of the assets and locations we are selling. Okay. And then last one for me on the balance sheet side. As you look at the portfolio today, are there opportunities for additional agency financing beyond what you kind of expect to close in the next Sixty days? Yes, we expect there to be first, we just want to get through this first round of financing. Before potentially introducing other communities into the agencies.

That's it for me. You very much. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Chris Bellotto for any closing remarks. Well, thank you for joining our call today and that concludes our call. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.