Diversified Healthcare Trust (NASDAQ:DHC) Q3 2023 Results Conference Call November 2, 2023 10:00 AM ET Company Participants Melissa McCarthy - Manager of Investor Relations Jennifer Francis - President and Chief Executive Officer Matt Brown - Chief Financial Officer and Treasurer Conference Call Participants Bryan Maher - B. Riley FBR Operator Good morning, everyone, and welcome to the Diversified Healthcare Trust Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please also note today's ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-15319 DIVERSIFIED HEALTHCARE TRUST (Exact Name of Registrant as Specified in Its Charter) (State or Other Jurisdiction of Incorporation or Organization) Ma ...

Diversified Healthcare Trust (NASDAQ:DHC) Q2 2023 Earnings Conference Call August 2, 2023 10:00 AM ET Company Participants Melissa McCarthy - Manager, IR Jennifer Francis - President, CEO & Managing Trustee Richard Siedel - CFO & Treasurer Conference Call Participants Bryan Maher - B. Riley Securities Operator Good morning, and welcome to the Diversified Healthcare Trust Second Quarter 2023 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Melissa McCarthy, Manager of I ...

PART I. Financial Information [Item 1. Financial Statements (unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the specified periods [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20%E2%80%94%20June%2030%2C%202023%20and%20December%2031%2C%202022) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (dollars in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :-------------- | | Total Assets | $5,585,475 | $6,002,093 | | Total Liabilities | $3,076,086 | $3,363,482 | | Total Shareholders' Equity | $2,509,389 | $2,638,611 | | Cash and Cash Equivalents | $338,431 | $658,065 | | Credit Facility | $450,000 | $700,000 | | Senior Unsecured Notes, net | $2,320,113 | $2,317,700 | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)%20%E2%80%94%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) This section outlines the company's financial performance over specific periods, presenting total revenues, expenses, and net income or loss Condensed Consolidated Statements of Comprehensive Income (Loss) (amounts in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenues | $346,219 | $313,028 | $692,249 | $623,761 | | Total Expenses | $379,248 | $332,143 | $742,019 | $666,357 | | Net (Loss) Income | $(72,571) | $(109,383) | $(125,229) | $131,040 | | Net (Loss) Income Per Common Share | $(0.30) | $(0.46) | $(0.52) | $0.55 | [Condensed Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20%E2%80%94%20Three%20and%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) This section details changes in the company's equity over time, reflecting net income or loss, distributions, and share transactions Condensed Consolidated Statements of Shareholders' Equity (dollars in thousands) | Metric | Balance at Dec 31, 2022 | Balance at Jun 30, 2023 | Balance at Dec 31, 2021 | Balance at Jun 30, 2022 | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $2,638,611 | $2,509,389 | $2,662,390 | $2,789,625 | | Net Loss (6 months) | N/A | $(125,229) | N/A | $(109,383) | | Distributions (6 months) | N/A | $(4,794) | N/A | $(4,780) | | Common Shares Outstanding (June 30) | 239,694,842 | 239,792,354 | 238,994,894 | 239,123,496 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20%E2%80%94%20Six%20Months%20Ended%20June%2030%2C%202023%20and%202022) This section presents the cash inflows and outflows from operating, investing, and financing activities, illustrating changes in the company's cash position Condensed Consolidated Statements of Cash Flows (dollars in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net Cash Provided by (Used in) Operating Activities | $31,723 | $(31,856) | | Net Cash (Used in) Provided by Investing Activities | $(90,380) | $527,714 | | Net Cash Used in Financing Activities | $(272,562) | $(644,401) | | Decrease in Cash and Cash Equivalents and Restricted Cash | $(331,219) | $(148,543) | | Cash and Cash Equivalents and Restricted Cash at End of Period | $357,083 | $868,402 | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the financial statements, clarifying accounting policies and significant transactions [Note 1. Basis of Presentation](index=8&type=section&id=Note%201.%20Basis%20of%20Presentation) This note outlines the accounting principles and assumptions used in preparing the financial statements, including the company's going concern assessment and merger details - The company has concluded there is **substantial doubt about its ability to continue as a going concern** for at least one year from August 1, 2023, due to slow recovery in the senior living industry, increased operating costs, reduced cash balances, additional capital commitments, and upcoming debt maturities[22](index=22&type=chunk)[24](index=24&type=chunk) - A pending merger with Office Properties Income Trust (OPI) is expected to alleviate going concern doubts by improving compliance with financial covenants and increasing access to debt capital, though its completion is subject to shareholder and other approvals[24](index=24&type=chunk)[26](index=26&type=chunk)[29](index=29&type=chunk) - The merger agreement, signed April 11, 2023, stipulates that each common share will convert into **0.147 OPI common shares**, with OPI changing its name to 'Diversified Properties Trust' and ticker to 'DPT' post-merger[26](index=26&type=chunk)[27](index=27&type=chunk)[108](index=108&type=chunk) [Note 2. Real Estate Investments](index=10&type=section&id=Note%202.%20Real%20Estate%20Investments) This note details the company's real estate portfolio, including wholly-owned properties, joint venture interests, and transactions such as sales and impairment charges - As of June 30, 2023, the company wholly owned **376 properties** (including 4 held for sale and 5 closed senior living communities) and held equity interests in two unconsolidated joint ventures (Seaport Innovation LLC and The LSMD Fund REIT LLC) owning 11 medical office and life science properties[31](index=31&type=chunk)[107](index=107&type=chunk) Joint Venture Equity Investments (as of June 30, 2023) | Joint Venture | DHC Ownership | DHC Carrying Value of Investment (thousands) | Number of Properties | Square Feet | | :-------------------- | :------------ | :--------------------------------------- | :------------------- | :---------- | | Seaport Innovation LLC | 10% | $106,305 | 1 | 1,134,479 | | The LSMD Fund REIT LLC | 20% | $48,814 | 10 | 1,068,763 | | Total | | $155,119 | 11 | 2,203,242 | - During the six months ended June 30, 2023, the company sold three senior living properties for **$2.8 million** and recognized a gain of **$940** related to the sale of skilled nursing bed licenses. Four properties were classified as held for sale with an aggregate sales price of approximately **$23.4 million**[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) - Impairment charges of **$11.3 million** were recorded for four life science and medical office properties held for sale, and an additional **$2.3 million** for one medical office property and **$3.6 million** for one senior living community, totaling **$17.2 million** for the six months ended June 30, 2023[44](index=44&type=chunk) [Note 3. Leases](index=13&type=section&id=Note%203.%20Leases) This note describes the company's accounting for leases, including rental income recognition and variable lease payments - Rental income from operating leases is recognized on a straight-line basis over the lease term. Straight-line rent receivables were **$74.2 million** at June 30, 2023, down from **$76.4 million** at December 31, 2022[47](index=47&type=chunk) - Variable lease payments, primarily tenant reimbursements, totaled **$12.6 million** for the three months and **$24.6 million** for the six months ended June 30, 2023, increasing from **$10.4 million** and **$21.1 million** respectively in 2022[48](index=48&type=chunk) [Note 4. Indebtedness](index=14&type=section&id=Note%204.%20Indebtedness) This note provides information on the company's debt obligations, including credit facilities, senior unsecured notes, and compliance with debt covenants Principal Debt Obligations (as of June 30, 2023, dollars in thousands) | Debt Type | Outstanding Amount | | :------------------------ | :----------------- | | Credit Facility | $450,000 | | Senior Unsecured Notes | $2,350,000 | | Secured Debt and Finance Leases | $14,390 | | Total | $2,814,390 | - The **$450 million credit facility** matures in January 2024, with an annual interest rate of **8.1%** as of June 30, 2023. The company was fully drawn on this facility[51](index=51&type=chunk)[52](index=52&type=chunk) - The company's ratio of consolidated income available for debt service to debt service was **below the 1.5x incurrence requirement** as of June 30, 2023, limiting its ability to refinance or issue new debt. A non-monetary event of default occurred due to a decline in collateral property appraised value, for which a limited waiver was obtained[56](index=56&type=chunk)[58](index=58&type=chunk) [Note 5. Fair Value of Assets and Liabilities](index=16&type=section&id=Note%205.%20Fair%20Value%20of%20Assets%20and%20Liabilities) This note presents the fair value measurements of the company's assets and liabilities, particularly its investments and senior unsecured notes Recurring Fair Value Measurements Assets (dollars in thousands) | Description | Carrying Amount (June 30, 2023) | Estimated Fair Value (June 30, 2023) | Carrying Amount (Dec 31, 2022) | Estimated Fair Value (Dec 31, 2022) | | :------------------------------------ | :------------------------------ | :----------------------------------- | :------------------------------ | :----------------------------------- | | Investment in AlerisLife (Level 1) | $0 | $0 | $5,880 | $5,880 | | Seaport JV (Level 3) | $106,305 | $106,305 | $104,697 | $104,697 | | LSMD JV (Level 3) | $48,814 | $48,814 | $50,780 | $50,780 | | Real estate properties held for sale (Level 2) | $22,004 | $22,004 | $0 | $0 | Fair Value of Senior Unsecured Notes (dollars in thousands) | Description | Carrying Amount (June 30, 2023) | Estimated Fair Value (June 30, 2023) | Carrying Amount (Dec 31, 2022) | Estimated Fair Value (Dec 31, 2022) | | :------------------------------------ | :------------------------------ | :----------------------------------- | :------------------------------ | :----------------------------------- | | 4.750% Senior Notes due 2024 | $249,767 | $232,783 | $249,628 | $211,250 | | 9.750% Senior Notes due 2025 | $496,583 | $479,605 | $495,710 | $478,980 | | 4.750% Senior Notes due 2028 | $494,109 | $352,765 | $493,473 | $284,370 | | 4.375% Senior Notes due 2031 | $493,416 | $364,470 | $492,986 | $317,130 | | 5.625% Senior Notes due 2042 | $342,755 | $180,600 | $342,565 | $151,200 | | 6.250% Senior Notes due 2046 | $243,483 | $143,100 | $243,338 | $115,300 | | Secured Debts | $14,390 | $12,266 | $30,177 | $28,270 | | Total | $2,334,503 | $1,765,589 | $2,347,877 | $1,586,510 | [Note 6. Shareholders' Equity](index=18&type=section&id=Note%206.%20Shareholders'%20Equity) This note details changes in shareholders' equity, including share awards, repurchases, and quarterly distributions to common shareholders - On June 5, 2023, **20,000 common shares** were awarded to each of the seven Trustees, valued at **$1.74 per share**[64](index=64&type=chunk) - The company repurchased **24,513 common shares** during Q2 2023 and **30,488 shares** during H1 2023 at weighted average prices of **$1.14** and **$1.09 per share**, respectively, to satisfy tax withholding obligations for former RMR officers/employees[65](index=65&type=chunk) Quarterly Distributions to Common Shareholders (dollars in thousands) | Declaration Date | Record Date | Payment Date | Distribution Per Share | Total Distributions | | :--------------- | :---------- | :----------- | :--------------------- | :------------------ | | Jan 12, 2023 | Jan 23, 2023 | Feb 16, 2023 | $0.01 | $2,397 | | Apr 13, 2023 | Apr 24, 2023 | May 18, 2023 | $0.01 | $2,397 | | Total (H1 2023) | | | $0.02 | $4,794 | | July 13, 2023 (Declared) | July 24, 2023 | Aug 17, 2023 | $0.01 | $2,398 | [Note 7. Segment Reporting](index=18&type=section&id=Note%207.%20Segment%20Reporting) This note provides financial information by operating segment, including the Office Portfolio, SHOP, and non-segment operations, detailing revenues and net income (loss) - The company operates in two segments: Office Portfolio (medical office and life science properties) and SHOP (managed senior living communities). Non-segment operations include triple net leased senior living communities and wellness centers[67](index=67&type=chunk)[68](index=68&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) Segment Revenues and Net Income (Loss) (Six Months Ended June 30, 2023, dollars in thousands) | Segment | Total Revenues | Net Income (Loss) | | :-------------- | :------------- | :---------------- | | Office Portfolio | $110,390 | $8,497 | | SHOP | $564,438 | $(46,495) | | Non-Segment | $17,421 | $(87,231) | | Consolidated | $692,249 | $(125,229) | Segment Revenues and Net Income (Loss) (Six Months Ended June 30, 2022, dollars in thousands) | Segment | Total Revenues | Net Income (Loss) | | :-------------- | :------------- | :---------------- | | Office Portfolio | $107,607 | $358,056 | | SHOP | $495,954 | $(65,967) | | Non-Segment | $20,200 | $(161,049) | | Consolidated | $623,761 | $131,040 | [Note 8. Senior Living Community Management Agreements](index=22&type=section&id=Note%208.%20Senior%20Living%20Community%20Management%20Agreements) This note describes the management agreements for senior living communities, detailing fees paid to managers and revenue by payer source - Five Star Senior Living (an AlerisLife division) managed **119** of the company's senior living communities as of June 30, 2023. Management fees payable to Five Star were **$9.9 million** for Q2 2023 and **$19.9 million** for H1 2023[78](index=78&type=chunk)[79](index=79&type=chunk) - Other third-party managers managed **111** senior living communities as of June 30, 2023. Management fees payable to these managers were **$5.4 million** for Q2 2023 and **$10.6 million** for H1 2023[81](index=81&type=chunk)[82](index=82&type=chunk) Residents Fees and Services Revenue by Payer (dollars in thousands) | Revenue Source | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic housing and support services | $226,606 | $196,999 | $448,793 | $389,873 | | Medicare and Medicaid programs | $21,740 | $18,966 | $43,397 | $38,783 | | Private pay and other third party payer SNF services | $36,500 | $34,541 | $72,248 | $67,298 | | Total residents fees and services | $284,846 | $250,506 | $564,438 | $495,954 | [Note 9. Business and Property Management Agreements with RMR](index=23&type=section&id=Note%209.%20Business%20and%20Property%20Management%20Agreements%20with%20RMR) This note outlines the company's reliance on RMR for management services, detailing business and property management fees and the waiver of termination fees - The company has no employees and relies on RMR for management services under business and property management agreements. Net business management fees were **$3.3 million** for Q2 2023 and **$6.6 million** for H1 2023, a decrease from 2022 due to lower consolidated indebtedness and common share trading prices[84](index=84&type=chunk)[85](index=85&type=chunk)[142](index=142&type=chunk)[170](index=170&type=chunk) - Net property management and construction supervision fees were **$2.2 million** for Q2 2023 and **$4.2 million** for H1 2023. RMR has waived its right to termination fees for these agreements upon the consummation of the merger with OPI[86](index=86&type=chunk)[88](index=88&type=chunk) [Note 10. Related Person Transactions](index=24&type=section&id=Note%2010.%20Related%20Person%20Transactions) This note discloses the company's extensive relationships and transactions with RMR, AlerisLife, and other affiliated entities - The company has extensive relationships with RMR, RMR Inc., AlerisLife, and other affiliated entities, with shared trustees and officers, including Adam D. Portnoy, who is a controlling shareholder of RMR Inc. and ABP Trust[90](index=90&type=chunk) - The company was AlerisLife's largest stockholder until March 20, 2023, when it tendered its **31.9% stake** in connection with ABP Trust's acquisition of AlerisLife. This transaction also involved amending the Master Management Agreement with Five Star (an AlerisLife division)[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) - RMR manages the company's joint ventures (Seaport JV and LSMD JV), for which the company does not pay management fees directly under its agreements with RMR[99](index=99&type=chunk) [Note 11. Income Taxes](index=26&type=section&id=Note%2011.%20Income%20Taxes) This note explains the company's income tax status as a REIT and the tax implications for its Taxable REIT Subsidiaries - As a REIT, the company is generally exempt from federal and most state income taxes on operating income, provided it distributes taxable income and meets specific requirements. However, its Taxable REIT Subsidiaries (TRSs) are subject to federal and state income taxes[103](index=103&type=chunk) Income Tax (Expense) Benefit (dollars in thousands) | Period | Income Tax (Expense) Benefit | | :------------------------------- | :--------------------------- | | Three Months Ended June 30, 2023 | $(221) | | Three Months Ended June 30, 2022 | $640 | | Six Months Ended June 30, 2023 | $(190) | | Six Months Ended June 30, 2022 | $(832) | [Note 12. Weighted Average Common Shares](index=27&type=section&id=Note%2012.%20Weighted%20Average%20Common%20Shares) This note provides the weighted average number of common shares outstanding used in calculating earnings per share Weighted Average Common Shares Outstanding (in thousands) | Period | Basic and Diluted | | :------------------------------- | :------------------ | | Three Months Ended June 30, 2023 | 238,682 | | Three Months Ended June 30, 2022 | 238,197 | | Six Months Ended June 30, 2023 | 238,636 | | Six Months Ended June 30, 2022 | 238,173 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including segment performance, non-GAAP measures, and liquidity [Overview](index=28&type=section&id=OVERVIEW) This section provides a high-level summary of Diversified Healthcare Trust's business, its real estate portfolio, and key economic factors, including the pending merger - Diversified Healthcare Trust is a REIT owning medical office, life science, and senior living properties across **36 states and Washington, D.C.**, with a gross book value of **$7.1 billion** as of June 30, 2023[107](index=107&type=chunk) - The company is closely monitoring economic conditions, including labor constraints, inflation, rising interest rates, and geopolitical risks, which negatively impact its business, especially the SHOP segment's slower-than-anticipated recovery[110](index=110&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk) - The pending merger with OPI is expected to close in Q3 2023, with DHC common shares converting to **0.147 OPI common shares**. OPI will be renamed 'Diversified Properties Trust' (DPT)[108](index=108&type=chunk) [Portfolio Overview](index=29&type=section&id=PORTFOLIO%20OVERVIEW) This section details the company's real estate portfolio by segment, including property count, square footage or units, gross book value, revenues, NOI, and occupancy rates Portfolio Overview (as of June 30, 2023, dollars in thousands) | Segment | Number of Properties | Square Feet / Units | Gross Book Value of Real Estate Assets | % of Total Gross Book Value | Q2 2023 Revenues | % of Q2 2023 Revenues | Q2 2023 NOI | % of Q2 2023 NOI | | :-------------------------------- | :------------------- | :------------------ | :------------------------------------- | :-------------------------- | :--------------- | :-------------------- | :---------- | :--------------- | | Office Portfolio | 105 | 8,796,541 sq. ft. | $2,293,360 | 32.2% | $53,368 | 15.4% | $29,430 | 49.1% | | SHOP | 234 | 25,322 units | $4,448,414 | 62.4% | $284,846 | 82.3% | $22,887 | 38.2% | | Triple net leased senior living communities | 27 | 2,062 units | $202,737 | 2.8% | $5,198 | 1.5% | $5,198 | 8.7% | | Wellness centers | 10 | 812,000 sq. ft. | $179,025 | 2.6% | $2,807 | 0.8% | $2,476 | 4.0% | | Total | 376 | | $7,123,536 | 100.0% | $346,219 | 100.0% | $59,991 | 100.0% | Occupancy Rates (as of and for the Three Months Ended June 30) | Segment | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Office Portfolio | 85.8% | 88.1% | | SHOP | 77.8% | 73.6% | | Triple net leased senior living communities | 80.8% | 78.7% | | Wellness centers | 100.0% | 100.0% | Leasing Activity in Office Portfolio Segment (Six Months Ended June 30, 2023) | Metric | New Leases | Renewals | Total | | :------------------------------------------ | :--------- | :------- | :---- | | Square feet leased (thousands) | 201 | 195 | 396 | | Weighted average rental rate change | 5.1% | 3.9% | 4.5% | | Weighted average lease term (years) | 9.1 | 5.6 | 7.3 | | Total leasing costs and concession commitments (thousands) | $12,772 | $2,764 | $15,536 | | Total leasing costs and concession commitments per square foot | $63.69 | $14.13 | $39.22 | [Results of Operations](index=32&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, comparing revenues, expenses, and net income (loss) across different reporting periods and segments [Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022](index=33&type=section&id=Three%20Months%20Ended%20June%2030%2C%202023%20Compared%20to%20Three%20Months%20Ended%20June%2030%2C%202022) This section compares the company's financial results for the second quarter of 2023 against the same period in 2022, highlighting changes in segment performance NOI by Segment (Three Months Ended June 30, dollars in thousands) | Segment | 2023 | 2022 | $ Change | % Change | | :-------------- | :----- | :----- | :------- | :------- | | Office Portfolio | $29,430 | $30,584 | $(1,154) | (3.8)% | | SHOP | $22,887 | $6,466 | $16,421 | 254.0% | | Non-Segment | $7,674 | $9,912 | $(2,238) | (22.6)% | | Total NOI | $59,991 | $46,962 | $13,029 | 27.7% | - Office Portfolio rental income increased by **1.4% to $53.4 million**, driven by higher average rents and expense reimbursements, but NOI decreased by **3.8%** due to higher property operating expenses (up **8.7%**)[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) - SHOP residents fees and services increased by **13.7% to $284.8 million**, primarily due to higher occupancy (**77.8% vs 73.6%**) and average monthly rates (**$4,809 vs $4,480**). This led to a significant **254.0% increase in SHOP NOI**[129](index=129&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk) - Non-Segment rental income decreased by **19.2% to $8.0 million**, mainly due to lease terminations and lower cash rents from a previously defaulting tenant, resulting in a **22.6% decrease in NOI**[137](index=137&type=chunk)[138](index=138&type=chunk)[140](index=140&type=chunk) - Consolidated net loss improved from **$(109.4) million** in Q2 2022 to **$(72.6) million** in Q2 2023, driven by higher NOI, lower interest expense (down **15.3%**), and the absence of significant losses on equity securities and debt extinguishment costs seen in the prior year[123](index=123&type=chunk) [Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022](index=37&type=section&id=Six%20Months%20Ended%20June%2030%2C%202023%20Compared%20to%20Six%20Months%20Ended%20June%2030%2C%202022) This section compares the company's financial results for the first half of 2023 against the same period in 2022, detailing changes in segment performance NOI by Segment (Six Months Ended June 30, dollars in thousands) | Segment | 2023 | 2022 | $ Change | % Change | | :-------------- | :----- | :----- | :------- | :------- | | Office Portfolio | $62,937 | $62,134 | $803 | 1.3% | | SHOP | $40,150 | $6,619 | $33,531 | 506.6% | | Non-Segment | $16,854 | $20,200 | $(3,346) | (16.6)% | | Total NOI | $119,941 | $88,953 | $30,988 | 34.8% | - Office Portfolio rental income increased by **2.6% to $110.4 million**, and NOI increased by **1.3% to $62.9 million**, primarily due to acquisitions and higher rents at comparable properties, partially offset by deconsolidation of joint venture properties[154](index=154&type=chunk)[155](index=155&type=chunk)[157](index=157&type=chunk) - SHOP residents fees and services increased by **13.8% to $564.4 million**, driven by higher occupancy (**77.4% vs 73.3%**) and average monthly rates (**$4,823 vs $4,476**). This resulted in a substantial **506.6% increase in SHOP NOI**[158](index=158&type=chunk)[160](index=160&type=chunk)[162](index=162&type=chunk) - Consolidated net loss was **$(125.2) million** in H1 2023, a significant decline from net income of **$131.0 million** in H1 2022, primarily due to a large gain on sale of properties in 2022 that did not recur, and increased impairment charges in 2023[152](index=152&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) [Non-GAAP Financial Measures](index=41&type=section&id=Non-GAAP%20Financial%20Measures) This section explains and reconciles non-GAAP financial measures such as FFO, Normalized FFO, and NOI, used to assess operating performance - The company uses non-GAAP measures like FFO, Normalized FFO, and NOI to evaluate operating performance, excluding items such as depreciation, asset sales, and impairment, to facilitate comparisons with other REITs[180](index=180&type=chunk)[181](index=181&type=chunk)[185](index=185&type=chunk) FFO and Normalized FFO (dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (Loss) Income | $(72,571) | $(109,383) | $(125,229) | $131,040 | | FFO | $6,090 | $(41,245) | $15,858 | $(64,415) | | Normalized FFO | $12,133 | $(10,395) | $24,645 | $(32,296) | | FFO Per Common Share | $0.03 | $(0.17) | $0.07 | $(0.27) | | Normalized FFO Per Common Share | $0.05 | $(0.04) | $0.10 | $(0.14) | Reconciliation of Net Income (Loss) to NOI (dollars in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (Loss) Income | $(72,571) | $(109,383) | $(125,229) | $131,040 | | Total NOI | $59,991 | $46,962 | $119,941 | $88,953 | | Office Portfolio NOI | $29,430 | $30,584 | $62,937 | $62,134 | | SHOP NOI | $22,887 | $6,466 | $40,150 | $6,619 | | Non-Segment NOI | $7,674 | $9,912 | $16,854 | $20,200 | [Liquidity and Capital Resources](index=43&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's cash position, cash flow activities, debt obligations, and ability to meet financial commitments, including the going concern assessment - The company faces **substantial doubt about its ability to continue as a going concern** due to slow SHOP recovery, high operating costs, reduced cash, and upcoming debt maturities (**$450M credit facility in Jan 2024, $250M senior notes in May 2024**)[191](index=191&type=chunk)[192](index=192&type=chunk) - The pending merger with OPI is seen as a potential solution to alleviate going concern doubts by improving financial covenants and debt access, but its completion is uncertain[192](index=192&type=chunk) Cash Flow Summary (Six Months Ended June 30, dollars in thousands) | Cash Flow Activity | 2023 | 2022 | | :------------------------------------------ | :--------- | :--------- | | Net cash provided by (used in) operating activities | $31,723 | $(31,856) | | Net cash (used in) provided by investing activities | $(90,380) | $527,714 | | Net cash used in financing activities | $(272,562) | $(644,401) | | Cash and cash equivalents and restricted cash at end of period | $357,083 | $868,402 | - Operating cash flow improved significantly in H1 2023 to **$31.7 million** (from **$(31.9) million** in H1 2022) due to increased NOI from the SHOP segment and lower interest payments[200](index=200&type=chunk) - Investing cash flow shifted to a net use of **$(90.4) million** in H1 2023 (from a net provide of **$527.7 million** in H1 2022), primarily due to proceeds from property sales to a joint venture in 2022 not recurring in 2023, partially offset by proceeds from the AlerisLife tender offer[202](index=202&type=chunk) - Financing cash flow decreased to **$(272.6) million** in H1 2023 (from **$(644.4) million** in H1 2022), mainly due to the **$500 million** senior notes redemption in 2022, partially offset by higher credit facility repayments in 2023[209](index=209&type=chunk) - The company's credit facility commitments were reduced to **$450 million** in February 2023, and the reborrowing feature was eliminated. The company was fully drawn as of June 30, 2023[212](index=212&type=chunk)[213](index=213&type=chunk) - The company's debt ratings were downgraded by Standard & Poor's in February 2023 but placed on CreditWatch with a positive outlook by S&P and under review for possible upgrade by Moody's following the merger announcement[219](index=219&type=chunk) [Related Person Transactions](index=50&type=section&id=Related%20Person%20Transactions) This section highlights ongoing relationships and transactions with RMR and other affiliated entities, emphasizing potential conflicts of interest - The company maintains ongoing relationships and transactions with RMR, RMR Inc., AlerisLife, and other related entities, including shared management and board members, which are detailed in Notes 8, 9, and 10[229](index=229&type=chunk) [Critical Accounting Estimates](index=50&type=section&id=Critical%20Accounting%20Estimates) This section identifies the key accounting estimates that require significant judgment and assumptions, such as purchase price allocations and asset impairment assessments - Significant accounting estimates include purchase price allocations, useful lives of fixed assets, and impairments of real estate and intangible assets. No significant changes in critical accounting estimates were reported since December 31, 2022[230](index=230&type=chunk)[231](index=231&type=chunk) [Impact of Government Reimbursement](index=51&type=section&id=Impact%20of%20Government%20Reimbursement) This section discusses the influence of federal and state healthcare payment programs, like Medicare and Medicaid, on the company's revenues and operations - Most NOI is from properties with private-pay revenues, but some properties and tenants participate in federal and state healthcare payment programs like Medicare and Medicaid[232](index=232&type=chunk) - The company recognized **$1.5 million** in H1 2023 (vs. **$1.0 million** in H1 2022) in interest and other income from government grants under the CARES Act, ARPA, and state programs for its SHOP segment[233](index=233&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to market changes in interest rates, distinguishing between fixed and floating rate debt and their potential impact Fixed Rate Debt Obligations (as of June 30, 2023, dollars in thousands) | Debt | Principal Balance | Annual Interest Rate | Maturity | | :------------------------ | :---------------- | :------------------- | :------- | | Senior unsecured notes (2024) | $250,000 | 4.750% | 2024 | | Senior unsecured notes (2025) | $500,000 | 9.750% | 2025 | | Senior unsecured notes (2028) | $500,000 | 4.750% | 2028 | | Senior unsecured notes (2031) | $500,000 | 4.375% | 2031 | | Senior unsecured notes (2042) | $350,000 | 5.625% | 2042 | | Senior unsecured notes (2046) | $250,000 | 6.250% | 2046 | | Mortgage note | $9,872 | 4.444% | 2043 | | Total | $2,359,872 | | | - A one percentage point increase in interest rates would increase annual interest cost for fixed-rate debt by approximately **$23.6 million** if refinanced at higher rates[238](index=238&type=chunk) Impact of Changes in Floating Interest Rates (as of June 30, 2023, dollars in thousands) | Scenario | Outstanding Floating Rate Debt | Total Interest Expense Per Year | Annual Earnings Per Share Impact | | :-------------------------- | :----------------------------- | :------------------------------ | :------------------------------- | | At June 30, 2023 (8.12%) | $450,000 | $36,540 | $0.15 | | One percentage point increase (9.12%) | $450,000 | $41,040 | $0.17 | [Item 4. Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023, concluding they are effective with no material changes - Disclosure controls and procedures were evaluated and deemed **effective** as of June 30, 2023[246](index=246&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[247](index=247&type=chunk) [Warning Concerning Forward-Looking Statements](index=53&type=section&id=Warning%20Concerning%20Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, which could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties, including the completion of the merger, the company's ability to continue as a going concern, impacts of high interest rates and inflation, and the performance of senior living operators[249](index=249&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk) - Other risks include compliance with debt covenants, financial strength of managers/tenants, ability to pay distributions, capital expenditure plans, and competition[251](index=251&type=chunk)[253](index=253&type=chunk) [Statement Concerning Limited Liability](index=55&type=section&id=Statement%20Concerning%20Limited%20Liability) The company's Declaration of Trust limits personal liability for trustees, officers, shareholders, employees, or agents, directing all claims solely to company assets - No personal liability for trustees, officers, shareholders, employees, or agents for company obligations; all claims are limited to the assets of Diversified Healthcare Trust[257](index=257&type=chunk) PART II. Other Information [Item 1. Legal Proceedings](index=56&type=section&id=Item%201.%20Legal%20Proceedings) The company faces two lawsuits alleging federal securities law violations related to the pending merger, which the company believes are without merit - Two lawsuits (Weiss Action and Thompson Action) were filed in July 2023, alleging federal securities law violations related to the merger's Form S-4 and joint proxy statement/prospectus[259](index=259&type=chunk) - Plaintiffs seek to enjoin the merger until alleged deficiencies are corrected and to recover attorneys' and experts' fees. The company believes the lawsuits are without merit[259](index=259&type=chunk) [Item 1A. Risk Factors](index=56&type=section&id=Item%201A.%20Risk%20Factors) This section details various risks, including those specific to the pending merger, potential tax consequences, and the company's going concern uncertainty [Risks Relating to the Merger](index=56&type=section&id=Risks%20Relating%20to%20the%20Merger) This section outlines specific risks associated with the pending merger, including market value fluctuations, potential adverse effects of non-completion, and factors discouraging competing acquirers - The fixed exchange ratio (**0.147 OPI common shares per DHC share**) means the market value of the merger consideration will fluctuate with OPI's share price. The implied value per DHC share decreased from **$1.70** on April 10, 2023, to **$1.13** on July 31, 2023[261](index=261&type=chunk) - Failure to complete the merger could result in adverse effects, including payment of a **$5.9 million termination fee** to OPI, negative market reactions, and diversion of management resources[265](index=265&type=chunk)[266](index=266&type=chunk)[269](index=269&type=chunk) - Provisions in the merger agreement and management agreements with RMR could discourage competing acquirers, as RMR has waived termination fees only for the OPI merger, not for other potential transactions[269](index=269&type=chunk)[272](index=272&type=chunk)[273](index=273&type=chunk) - Trustees and executive officers of DHC and OPI, as well as RMR, may have interests in the merger that differ from shareholders, potentially influencing their support for the transaction[275](index=275&type=chunk) [Risks Relating to Taxation](index=61&type=section&id=Risks%20Relating%20to%20Taxation) This section discusses potential tax consequences if the company fails to maintain its REIT qualification, which could lead to significant tax liabilities - If DHC fails to qualify as a REIT before or during the merger, OPI could inherit significant tax liabilities, including corporate income tax on built-in gains and accumulated earnings and profits, potentially reducing cash available for distributions[283](index=283&type=chunk) - Both DHC and OPI must meet complex REIT organizational and operational requirements, including distributing at least **90% of taxable income**. Failure to qualify could lead to significant tax liabilities and disqualification for four subsequent years[286](index=286&type=chunk) [Risks Relating to an Investment in OPI Common Shares Following the Merger](index=61&type=section&id=Risks%20Relating%20to%20an%20Investment%20in%20OPI%20Common%20Shares%20Following%20the%20Merger) This section addresses risks for investors in OPI common shares post-merger, including market price declines, distribution rate changes, and increased indebtedness - The market price of OPI Common Shares may decline post-merger if expected benefits are not realized or if a large volume of shares are sold by former DHC shareholders[287](index=287&type=chunk) - The combined company may not maintain or increase the distribution rate currently paid by DHC or OPI, due to capital expenditure requirements, changes in cash flow, or other financial conditions[288](index=288&type=chunk) - OPI's indebtedness will increase significantly post-merger (from **$2.6 billion to $5.4 billion**), increasing its vulnerability to adverse economic conditions, limiting cash flow for distributions, and potentially restricting future financing[280](index=280&type=chunk) [Risks Relating to Going Concern](index=62&type=section&id=Risks%20Relating%20to%20Going%20Concern) This section highlights the substantial doubt about the company's ability to continue as a going concern, emphasizing dependence on the merger's completion and debt covenant compliance - The company has concluded there is **substantial doubt about its ability to continue as a going concern** due to ongoing impacts of the COVID-19 pandemic, current economic conditions, and non-compliance with debt covenants[291](index=291&type=chunk)[292](index=292&type=chunk) - Continuation as a going concern depends on completing the merger, meeting debt covenants, and repaying obligations. Failure to complete the merger could make refinancing difficult and lead to loss of investor confidence[292](index=292&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=63&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the company's purchases of its own equity securities during Q2 2023, primarily to satisfy tax withholding obligations Issuer Purchases of Equity Securities (Quarter Ended June 30, 2023) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--------------- | :------------------------- | :--------------------------- | | May 1 - May 31, 2023 | 17,058 | $0.88 | | June 1 - June 30, 2023 | 7,455 | $1.74 | | Total | 24,513 | $1.14 | - These share purchases were made to satisfy tax withholding and payment obligations of former RMR officers and employees related to the vesting of common share awards[293](index=293&type=chunk) [Item 6. Exhibits](index=63&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including the merger agreement, organizational documents, and various certifications - Key exhibits include the Agreement and Plan of Merger (Exhibit 2.1), various Articles of Amendment and Restatement (Exhibits 3.1-3.5), Indentures and Supplemental Indentures for Senior Unsecured Notes (Exhibits 4.2-4.15), and certifications (Exhibits 31.1, 31.2, 32.1)[294](index=294&type=chunk)[296](index=296&type=chunk) [Signatures](index=65&type=section&id=Signatures) The report was signed by Jennifer F. Francis, President and CEO, and Richard W. Siedel, Jr., CFO and Treasurer, on August 1, 2023 - The report was signed by Jennifer F. Francis, President and Chief Executive Officer, and Richard W. Siedel, Jr., Chief Financial Officer and Treasurer, on August 1, 2023[299](index=299&type=chunk)

Diversified Healthcare Trust (NASDAQ:DHC) Q1 2023 Earnings Conference Call May 9, 2023 11:00 AM ET Company Participants Melissa McCarthy - Investor Relations Jennifer Francis - President and Chief Executive Officer Rick Siedel - Chief Financial Officer and Treasurer Conference Call Participants Bryan Maher - B. Riley Operator Good morning and welcome to the Diversified Healthcare Trust First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now ...

WASHINGTON, DC 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-15319 DIVERSIFIED HEALTHCARE TRUST (Exact Name of Registrant as Specified in Its Charter) (State or Other Jurisdiction of Incorporation or Organization) Maryla ...

Diversified Healthcare Trust (NASDAQ:DHC) Q4 2022 Results Conference Call March 2, 2023 10:00 AM ET Company Participants Melissa McCarthy - Manager of Investor Relations Jennifer Francis - President and Chief Executive Officer Rick Siedel - Chief Financial Officer and Treasurer Conference Call Participants Joshua Dennerlein - Bank of America Bryan Maher - B. Riley Operator Good day, and welcome to the Diversified Healthcare Trust Fourth Quarter 2022 Earnings Conference Call. All participants will be in a li ...

PART I [Item 1. Business.](index=9&type=section&id=Item%201.%20Business.) Diversified Healthcare Trust (DHC) is a REIT owning **379 healthcare properties** with a **$7.1 billion** gross book value, leveraging an aging population amidst economic and regulatory challenges - DHC is a REIT owning **379 healthcare-related properties** (medical office, life science, senior living) across 36 states and Washington, D.C., with a gross book value of **$7.1 billion** as of December 31, 2022[28](index=28&type=chunk) - The business strategy is driven by the aging U.S. population, expecting increased demand for healthcare services and senior living communities. However, current economic conditions (high interest rates, inflation, labor shortages) and the lingering impact of the COVID-19 pandemic pose significant challenges, particularly for the Senior Housing Operating Portfolio (SHOP) segment[31](index=31&type=chunk)[32](index=32&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk) - DHC operates through a capital recycling program, selectively selling properties that do not meet desired returns or require excessive capital, and using proceeds to acquire newer properties, lengthen lease terms, and reduce capital requirements[33](index=33&type=chunk)[54](index=54&type=chunk) - DHC utilizes a Taxable REIT Subsidiary (TRS) structure for nearly all senior living communities, leasing them to TRSs which then contract third-party managers (e.g., Five Star Senior Living, an operating division of AlerisLife Inc.) for operation[41](index=41&type=chunk)[42](index=42&type=chunk) - DHC is dependent on RMR for day-to-day operations, investment opportunities, and management services, with key executives holding roles in both DHC and RMR, creating potential conflicts of interest[66](index=66&type=chunk)[67](index=67&type=chunk) - The company's properties and operations are subject to extensive and frequently changing federal, state, and local healthcare laws and regulations, including licensure, reimbursement (Medicare/Medicaid), fraud, and data privacy laws (HIPAA, CCPA/CPRA)[68](index=68&type=chunk)[85](index=85&type=chunk)[87](index=87&type=chunk) - DHC is committed to corporate sustainability and ESG principles, aiming to minimize environmental impact, optimize operational efficiency, and obtain certifications like ENERGY STAR and LEED®[96](index=96&type=chunk)[97](index=97&type=chunk)[101](index=101&type=chunk) [MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS](index=21&type=section&id=MATERIAL%20UNITED%20STATES%20FEDERAL%20INCOME%20TAX%20CONSIDERATIONS) This section details DHC's complex U.S. federal income tax considerations as a REIT, including qualification tests, distribution requirements, and shareholder tax treatment - DHC has elected to be taxed as a REIT since 1999, which generally exempts it from federal income tax on net income distributed to shareholders, subject to continuous compliance with complex qualification tests[120](index=120&type=chunk)[121](index=121&type=chunk) - Failure to qualify as a REIT would result in DHC being taxed as a C corporation, leading to significant tax liabilities and potential reduction or elimination of shareholder distributions[123](index=123&type=chunk)[124](index=124&type=chunk)[127](index=127&type=chunk) - REIT qualification requires satisfying annual gross income tests (**75%** from real property-related income, **95%** from qualifying income) and quarterly asset tests (e.g., **75%** of assets in real estate assets, no more than **20%** in TRSs)[141](index=141&type=chunk)[151](index=151&type=chunk) - DHC must distribute at least **90%** of its REIT taxable income annually to avoid corporate income tax and a **4%** excise tax on undistributed amounts[164](index=164&type=chunk)[167](index=167&type=chunk) - Taxable REIT Subsidiaries (TRSs) allow DHC to conduct activities that would otherwise generate non-qualifying income or prohibited transaction gains, but are subject to their own corporate taxes and arm's-length transaction rules to prevent excise taxes[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk) - Distributions to noncorporate U.S. shareholders are generally taxed at ordinary income rates, though a deduction under Section 199A of the IRC may provide lower effective rates until 2026. Capital gain dividends and distributions from C corporation earnings may qualify for preferential rates[178](index=178&type=chunk)[180](index=180&type=chunk) - Non-U.S. shareholders' distributions are generally subject to **30%** withholding (or lower treaty rate), but capital gain dividends on U.S. national securities exchange-listed shares are treated as ordinary dividends. Gain on sale of shares is generally not subject to U.S. federal income tax if shares are listed on a U.S. national securities exchange or DHC is a 'domestically controlled' REIT[194](index=194&type=chunk)[195](index=195&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) [Item 1A. Risk Factors.](index=34&type=section&id=Item%201A.%20Risk%20Factors.) DHC faces significant risks from adverse economic conditions, substantial debt, dependence on third-party managers, related-party conflicts, and potential Nasdaq delisting - Unfavorable market and economic conditions, including rising interest rates, high inflation, labor market challenges, and supply chain disruptions, significantly impact DHC's and its tenants'/managers' operations and financial health, with businesses not yet returning to pre-COVID-19 levels[226](index=226&type=chunk)[227](index=227&type=chunk)[234](index=234&type=chunk) Consolidated Debt as of December 31, 2022 | Metric | Amount (USD) | | :----- | :----------- | | Consolidated Debt | **$3.1 billion** | | Credit Facility Status | Fully drawn | - DHC's substantial debt (**$3.1 billion** as of Dec 31, 2022) and restrictive covenants in debt agreements limit its ability to incur additional debt, make capital investments, and pay distributions, with a waiver for the fixed charge coverage ratio covenant extended through January 2024[229](index=229&type=chunk)[231](index=231&type=chunk)[245](index=245&type=chunk) - Dependence on third-party managers for senior living communities exposes DHC to operational risks, including fluctuations in occupancy, increased labor costs, and competition, which can adversely affect revenues and profitability[232](index=232&type=chunk)[234](index=234&type=chunk)[237](index=237&type=chunk)[255](index=255&type=chunk) - Relationships with RMR and AlerisLife (including Five Star), where key personnel hold multiple roles, create potential conflicts of interest that could impact DHC's reputation, business, and stock price[278](index=278&type=chunk)[280](index=280&type=chunk)[286](index=286&type=chunk)[287](index=287&type=chunk) - DHC is not currently in compliance with Nasdaq's minimum bid price listing standard, risking delisting, which could negatively impact its market price and ability to raise capital[316](index=316&type=chunk)[317](index=317&type=chunk) - The company's unsecured notes are structurally subordinated to the debt and liabilities of non-guarantor subsidiaries and effectively subordinated to secured debt, increasing risk for noteholders in case of bankruptcy[318](index=318&type=chunk)[319](index=319&type=chunk) [Item 1B. Unresolved Staff Comments.](index=55&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments.) There are no unresolved staff comments to report - No unresolved staff comments[328](index=328&type=chunk) [Item 2. Properties.](index=56&type=section&id=Item%202.%20Properties.) As of December 31, 2022, DHC's portfolio comprised **379 wholly-owned properties** with a gross book value of **$7.1 billion**, with a small portion subject to secured financing Wholly Owned Properties Overview (as of December 31, 2022) | Metric | Value | | :-------------------------------- | :---------- | | Number of Properties | **379** | | Gross Book Value of Real Estate Assets | **$7.1 billion** | | Properties with Secured Financing/Leases | **4** | | Gross Book Value of Secured Properties | **$97.9 million** | | Aggregate Principal Balance of Secured Debt | **$30.1 million** | Property Portfolio by Segment (as of December 31, 2022) | Segment | Number of Properties | Gross Book Value of Real Estate Assets (in thousands) | | :-------------------------------- | :------------------- | :------------------------------------------------ | | Office Portfolio | **105** | **$2,298,305** | | Senior Housing Operating Portfolio | **236** | **$4,403,086** | | All Other | **37** | **$380,806** | | **Total** | **378** | **$7,082,197** | [Item 3. Legal Proceedings.](index=58&type=section&id=Item%203.%20Legal%20Proceedings.) DHC is not currently involved in any litigation expected to have a material adverse effect on its business - No current litigation is expected to have a material adverse effect on the business[333](index=333&type=chunk) [Item 4. Mine Safety Disclosures.](index=58&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) This item is not applicable to Diversified Healthcare Trust - Not applicable[334](index=334&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=58&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) DHC common shares trade on Nasdaq, with **1,302 shareholders** of record and a quarterly distribution of **$0.01 per share**, subject to discretion and debt limitations - DHC common shares trade on Nasdaq (symbol: DHC). As of February 24, 2023, there were **1,302 shareholders** of record[336](index=336&type=chunk) - The current quarterly cash distribution rate is **$0.01 per common share** (**$0.04 annually**), with future distributions subject to Board discretion, REIT requirements, and debt limitations[337](index=337&type=chunk) Issuer Purchases of Equity Securities (Q4 2022) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :------------- | :------------------------- | :--------------------------- | | October 2022 | **833** | **$0.98** | | December 2022 | **8,818** | **$0.65** | | **Total** | **9,651** | **$0.68** | [Item 6. [Reserved]](index=58&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=58&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes DHC's financial condition and operational results for 2022, highlighting portfolio performance, economic challenges, non-GAAP measures, liquidity, and debt obligations - DHC's portfolio consists of medical office and life science properties, senior living communities, and other healthcare-related properties. As of December 31, 2022, it wholly owned **379 properties** with a gross book value of **$7.1 billion**[339](index=339&type=chunk) - The company is actively monitoring and impacted by current economic conditions, including labor availability, high inflation, rising interest rates, supply chain disruptions, and geopolitical risks, which are increasing costs, especially in the SHOP segment[341](index=341&type=chunk)[342](index=342&type=chunk)[343](index=343&type=chunk) Portfolio Overview (as of December 31, 2022) | Segment | Number of Properties | Gross Book Value of Real Estate Assets (in thousands) | % of Total Gross Book Value | 2022 Revenues (in thousands) | % of 2022 Revenues | 2022 NOI (in thousands) | % of 2022 NOI | | :-------------------------------- | :------------------- | :------------------------------------------------ | :-------------------------- | :--------------------------- | :----------------- | :-------------------- | :------------ | | Office Portfolio | **105** | **$2,298,305** | **32.4%** | **$222,390** | **17.3%** | **$128,091** | **73.4%** | | SHOP | **237** | **$4,403,572** | **62.2%** | **$1,022,826** | **79.7%** | **$8,726** | **5.0%** | | Other triple net leased senior living communities | **27** | **$202,671** | **2.9%** | **$25,647** | **2.0%** | **$25,647** | **14.7%** | | Wellness centers | **10** | **$178,135** | **2.5%** | **$12,703** | **1.0%** | **$12,032** | **6.9%** | | **Total** | **379** | **$7,082,683** | **100.0%** | **$1,283,566** | **100.0%** | **$174,496** | **100.0%** | Occupancy Rates (as of December 31) | Segment | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Office Portfolio | **84.7%** | **91.3%** | | SHOP | **74.4%** | **71.1%** | | Other triple net leased senior living communities | **79.9%** | **75.5%** | | Wellness centers | **100.0%** | **100.0%** | [OVERVIEW](index=58&type=section&id=OVERVIEW) DHC owns **379 medical office, life science, and senior living properties** with a **$7.1 billion** gross book value, facing significant economic headwinds and unrecovered pre-pandemic senior living conditions - DHC owns **379 properties** (medical office, life science, senior living) with a gross book value of **$7.1 billion** and equity interests in two unconsolidated joint ventures as of December 31, 2022[339](index=339&type=chunk)[340](index=340&type=chunk) - Current economic conditions (labor availability, high inflation, rising interest rates, supply chain disruptions, geopolitical risks, economic downturns) are significantly impacting DHC's business, with expected continued increases in labor, utility, and food costs for the SHOP segment[341](index=341&type=chunk)[342](index=342&type=chunk) - The senior living industry has not returned to pre-pandemic levels, facing challenges with SHOP occupancy, labor availability, wage inflation, and cost pressures from supply chain disruptions and commodity price inflation[343](index=343&type=chunk) [PORTFOLIO OVERVIEW](index=59&type=section&id=PORTFOLIO%20OVERVIEW) DHC's portfolio includes **105 Office Portfolio** and **237 SHOP properties**, with Office Portfolio contributing **73.4%** of NOI and having **84.7%** occupancy as of December 31, 2022 Portfolio Overview (as of December 31, 2022) | Segment | Number of Properties | Gross Book Value of Real Estate Assets (in thousands) | % of Total Gross Book Value | 2022 Revenues (in thousands) | % of 2022 Revenues | 2022 NOI (in thousands) | % of 2022 NOI | | :-------------------------------- | :------------------- | :------------------------------------------------ | :-------------------------- | :--------------------------- | :----------------- | :-------------------- | :------------ | | Office Portfolio | **105** | **$2,298,305** | **32.4%** | **$222,390** | **17.3%** | **$128,091** | **73.4%** | | SHOP | **237** | **$4,403,572** | **62.2%** | **$1,022,826** | **79.7%** | **$8,726** | **5.0%** | | Other triple net leased senior living communities | **27** | **$202,671** | **2.9%** | **$25,647** | **2.0%** | **$25,647** | **14.7%** | | Wellness centers | **10** | **$178,135** | **2.5%** | **$12,703** | **1.0%** | **$12,032** **$12,032** | **6.9%** | | **Total** | **379** | **$7,082,683** | **100.0%** | **$1,283,566** | **100.0%** | **$174,496** | **100.0%** | Occupancy Rates (as of December 31) | Segment | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Office Portfolio | **84.7%** | **91.3%** | | SHOP | **74.4%** | **71.1%** | | Other triple net leased senior living communities | **79.9%** | **75.5%** | | Wellness centers | **100.0%** | **100.0%** | [Office Portfolio](index=60&type=section&id=Office%20Portfolio) DHC's Office Portfolio, comprising **105 properties** and **8.8 million square feet**, saw occupancy decline to **84.7%** in 2022, with significant lease expirations expected in 2023 and 2024 - The Office Portfolio consists of **105 medical office and life science properties** (**8.8 million square feet**) across 24 states and Washington, D.C. as of December 31, 2022[348](index=348&type=chunk) Office Portfolio Occupancy | Year | Occupancy | | :--- | :-------- | | 2022 | **84.7%** | | 2021 | **91.3%** | Office Portfolio Leasing Activity (Year Ended December 31, 2022) | Metric | New Leases | Renewals | Total | | :------------------------------------------ | :--------- | :------- | :---- | | Square feet leased (in thousands) | **248** | **619** | **867** | | Weighted average rental rate change | **13.1%** | **4.8%** | **7.2%** | | Weighted average lease term (years) | **7.5** | **6.7** | **7.0** | | Total leasing costs and concession commitments (in thousands) | **$17,917** | **$10,965** | **$28,882** | | Total leasing costs and concession commitments per square foot | **$72.25** | **$17.72** | **$33.32** | Office Portfolio Lease Expirations (as of December 31, 2022) | Year | Square Feet Leased (in thousands) | Percent of Total Square Feet Leased | Annualized Rental Income (in thousands) | Percent of Total Annualized Rental Income | | :--- | :-------------------------------- | :---------------------------------- | :-------------------------------------- | :---------------------------------------- | | 2023 | **624,956** | **8.4%** | **$18,390** | **8.4%** | | 2024 | **951,894** | **12.7%** | **$23,121** | **10.5%** | | 2025 | **724,036** | **9.7%** | **$17,339** | **7.9%** | | 2026 | **795,514** | **10.7%** | **$23,922** | **10.9%** | | 2027 | **873,061** | **11.7%** | **$21,256** | **9.7%** | | 2028 | **1,009,373** | **13.5%** | **$26,712** | **12.2%** | | 2029 | **389,394** | **5.2%** | **$11,463** | **5.2%** | | 2030 | **268,806** | **3.6%** | **$6,419** | **2.9%** | | 2031 | **781,742** | **10.5%** | **$23,229** | **10.6%** | | 2032 and thereafter | **1,048,745** | **14.0%** | **$47,479** | **21.7%** | | **Total** | **7,467,521** | **100.0%** | **$219,330** | **100.0%** | [Senior Housing Operating Portfolio](index=62&type=section&id=Senior%20Housing%20Operating%20Portfolio) The SHOP segment, with **119 communities** managed by Five Star and **111 by other managers**, saw occupancy rise to **74.4%** in 2022, incurring **$2.1 million** in transition costs - The 2020 Restructuring Transaction and 2021 amendments replaced previous master leases with Five Star Senior Living with new management agreements, transitioning **107 senior living communities** to other third-party managers[352](index=352&type=chunk)[354](index=354&type=chunk)[355](index=355&type=chunk) - As of December 31, 2022, Five Star managed **119 senior living communities**, and **111 communities** were managed by other third-party managers[352](index=352&type=chunk)[358](index=358&type=chunk)[610](index=610&type=chunk)[616](index=616&type=chunk) SHOP Operating Data (as of and for the Year Ended December 31) | Metric | 2022 | 2021 | | :---------------- | :----- | :----- | | Total properties | **237** | **235** | | Number of units | **25,346** | **25,345** | | Occupancy | **74.4%** | **71.1%** | | Average monthly rate | **$4,506** | **$4,339** | - Management fees for third-party managers typically range from **5% to 6% of gross revenues**, plus potential incentive fees (**15% to 25% of EBITDA** exceeding target) and construction supervision fees (**3% to 5% of construction costs**)[356](index=356&type=chunk) - DHC incurred **$2.1 million** in acquisition and other transaction-related costs in 2022, primarily for the transition of senior living communities to new third-party managers[355](index=355&type=chunk) [All Other](index=64&type=section&id=All%20Other) The 'All Other' segment, comprising **27 senior living communities** and **10 wellness centers**, projects **74.0%** of rental income expiring in 2032 and later, with 2022 rental income decreasing due to tenant default All Other Lease Expirations (as of December 31, 2022) | Year | Number of Properties | Annualized Rental Income (in thousands) | Percent of Total Annualized Rental Income | | :--- | :------------------- | :-------------------------------------- | :---------------------------------------- | | 2027 | **4** | **$4,469** | **13.6%** | | 2028 | **6** | **$0** | **0.0%** | | 2029 | **1** | **$547** | **1.7%** | | 2030 | **2** | **$3,496** | **10.7%** | | 2031 | **1** | **$0** | **0.0%** | | 2032 and thereafter | **23** | **$24,295** | **74.0%** | | **Total** | **37** | **$32,807** | **100.0%** | - Rental income decreased due to lower cash rents from a tenant in default for **six wellness centers**, with DHC electing to recognize income only upon receipt. This was partially offset by higher percentage rents in 2022[386](index=386&type=chunk) [GENERAL INDUSTRY TRENDS](index=64&type=section&id=GENERAL%20INDUSTRY%20TRENDS) Healthcare real estate is driven by medical practice consolidation and biotech investment, while senior living, though boosted by an aging population, faces economic downturns and increased competition - Medical office and life science properties are impacted by two trends: consolidation of medical practices into hospital systems (increasing demand for off-campus medical offices) and growth in bio-medical research companies (requiring specialized lab/office space)[362](index=362&type=chunk)[363](index=363&type=chunk) - The primary market for senior living services is individuals aged **80 and older**, with the **75+ and 85+ demographics** projected to be among the fastest-growing age cohorts, indicating increased demand[364](index=364&type=chunk) - Despite demographic tailwinds, economic downturns, soft housing markets, and seniors delaying moves to communities could negatively impact affordability and occupancy rates. Increased supply from new developments also creates competitive pressures[364](index=364&type=chunk)[365](index=365&type=chunk)[366](index=366&type=chunk) [RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)](index=66&type=section&id=RESULTS%20OF%20OPERATIONS%20(dollars%20and%20square%20feet%20in%20thousands%2C%20unless%20otherwise%20noted)) DHC reported a **$15.8 million net loss** in 2022, a significant decline from **$174.5 million net income** in 2021, with total revenues decreasing by **7.2%** and total NOI by **40.1%** due to portfolio changes and increased operating costs Consolidated Results of Operations (Year Ended December 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | $ Change | % Change | | :------------------------------------------ | :------------------ | :------------------ | :------- | :------- | | Total revenues | **$1,283,566** | **$1,383,212** | **$(99,646)** | **(7.2)%** | | Net (loss) income attributable to common shareholders | **$(15,774)** | **$174,515** | **$(190,289)** | nm | | Total NOI | **$174,496** | **$291,400** | **$(116,904)** | **(40.1)%** | NOI by Segment (Year Ended December 31) | Segment | 2022 (in thousands) | 2021 (in thousands) | $ Change | % Change | | :---------------- | :------------------ | :------------------ | :------- | :------- | | Office Portfolio | **$128,091** | **$240,284** | **$(112,193)** | **(46.7)%** | | SHOP | **$8,726** | **$10,124** | **$(1,398)** | **(13.8)%** | | Non-Segment | **$37,679** | **$40,992** | **$(3,313)** | **(8.1)%** | - Office Portfolio rental income decreased due to deconsolidation of **11 properties** and dispositions, partially offset by higher average rents from new/renewal leases and increased parking revenue. Property operating expenses increased due to higher utility expenses and direct costs[374](index=374&type=chunk)[376](index=376&type=chunk) - SHOP residents fees and services increased due to higher occupancy and average monthly rates. However, property operating expenses increased significantly due to rising labor costs, food, energy inflation, and increased sales/marketing efforts[381](index=381&type=chunk)[382](index=382&type=chunk) - Non-Segment rental income decreased primarily due to lower cash rents from a tenant in default for **six wellness centers**, partially offset by higher percentage rents[386](index=386&type=chunk) - Consolidated depreciation and amortization decreased due to deconsolidation of joint venture properties and fully depreciated assets. General and administrative expenses decreased due to lower base business management fees[389](index=389&type=chunk)[390](index=390&type=chunk) - DHC recognized a significant gain on sale of properties (**$321.9 million**) in 2022, primarily from the contribution of **10 medical office and life science properties** to the LSMD JV. Losses on equity securities (**$25.7 million**) were due to unrealized losses on the AlerisLife investment[392](index=392&type=chunk)[393](index=393&type=chunk) - Interest expense decreased due to debt redemptions but was partially offset by increased interest rates on the credit facility and new senior notes issuance. A **$30.0 million loss** on modification/early extinguishment of debt was recorded in 2022[395](index=395&type=chunk)[396](index=396&type=chunk) [Non-GAAP Financial Measures (dollars in thousands, except per share amounts)](index=78&type=section&id=Non-GAAP%20Financial%20Measures%20(dollars%20in%20thousands%2C%20except%20per%20share%20amounts)) This section presents non-GAAP measures like FFO and Normalized FFO, which declined to **$(74.9) million** and **$(38.3) million** respectively in 2022, and NOI, which significantly decreased to **$174.5 million** - FFO and Normalized FFO attributable to common shareholders, along with NOI, are presented as non-GAAP measures to supplement GAAP net income (loss) for evaluating REIT operating performance and property-level results[399](index=399&type=chunk)[400](index=400&type=chunk)[404](index=404&type=chunk) FFO and Normalized FFO Attributable to Common Shareholders (Year Ended December 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Net (loss) income attributable to common shareholders | **$(15,774)** | **$174,515** | | FFO attributable to common shareholders | **$(74,948)** | **$(30,896)** | | Normalized FFO attributable to common shareholders | **$(38,325)** | **$(7,906)** | | Weighted average common shares outstanding (basic and diluted) | **238,314** | **237,967** | | Net (loss) income attributable to common shareholders per share | **$(0.07)** | **$0.73** | | FFO attributable to common shareholders per share | **$(0.31)** | **$(0.13)** | | Normalized FFO attributable to common shareholders per share | **$(0.16)** | **$(0.03)** | | Distributions declared per share | **$0.04** | **$0.04** | Reconciliation of Net (Loss) Income to Total NOI (Year Ended December 31) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Net (loss) income | **$(15,774)** | **$179,926** | | Total NOI | **$174,496** | **$291,400** | [LIQUIDITY AND CAPITAL RESOURCES](index=81&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) DHC's liquidity, from operating cash flows and property dispositions, saw **$40.4 million** cash used in operations and **$387.7 million** provided by investing activities in 2022, with **$658.1 million** cash on hand and a fully drawn **$700.0 million** credit facility, now reduced to **$450.0 million** and restricted from further debt - Principal sources of cash are operating cash flows from rental income and resident fees, and proceeds from property dispositions. Future cash flows depend on rent collection, occupancy/rates, and expense control[408](index=408&type=chunk)[415](index=415&type=chunk) Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | | :------------------------------------------ | :--------- | :--------- | | Net cash (used in) provided by operating activities | **$(40,353)** | **$(63,323)** | | Net cash provided by (used in) investing activities | **$387,708** | **$242,696** | | Net cash (used in) provided by financing activities | **$(675,998)** | **$746,723** | | Cash and cash equivalents and restricted cash at end of period | **$688,302** | **$1,016,945** | - Investing activities in 2022 were significantly boosted by proceeds from the sale of **10 medical office and life science properties** to the LSMD JV (**$638.5 million**) and an additional **10% equity interest** in the Seaport JV (**$108.0 million**)[411](index=411&type=chunk)[412](index=412&type=chunk)[418](index=418&type=chunk) Capital Expenditures (in thousands) | Category | 2022 | 2021 | | :------------------------------------------ | :--------- | :--------- | | Recurring capital expenditures | **$146,711** | **$196,782** | | Development, redevelopment and other activities | **$166,991** | **$57,527** | - As of December 31, 2022, DHC had **$658.1 million** in cash and cash equivalents and was fully drawn on its **$700.0 million** credit facility, which matures in January 2024. The credit facility commitments were further reduced to **$450.0 million** in February 2023, and the reborrowing feature was eliminated[427](index=427&type=chunk)[428](index=428&type=chunk)[429](index=429&type=chunk)[435](index=435&type=chunk) - DHC's ability to incur additional debt is currently restricted because its consolidated income available for debt service to debt service ratio was below the **1.5x** incurrence requirement as of December 31, 2022[410](index=410&type=chunk)[444](index=444&type=chunk) - DHC redeemed **$500.0 million** of its **9.75% senior notes** due 2025 in June 2022, incurring a **$29.6 million loss** on early extinguishment of debt[658](index=658&type=chunk) Outstanding Indebtedness (as of December 31, 2022, in thousands) | Debt Type | Principal Balance | | :---------------------- | :---------------- | | Credit facility | **$700,000** | | Senior unsecured notes | **$2,350,000** | | Secured debt and finance leases | **$30,068** | | **Total** | **$3,080,068** | - Credit ratings for DHC's senior unsecured debt were downgraded multiple times in 2022 and early 2023 by Moody's and Standard & Poor's, increasing interest expense under the credit agreement[440](index=440&type=chunk)[445](index=445&type=chunk) [Related Person Transactions](index=88&type=section&id=Related%20Person%20Transactions) DHC maintains ongoing relationships and transactions with related parties like RMR and AlerisLife, involving shared management and cross-ownership, which present potential conflicts of interest - DHC has historical and continuing relationships and transactions with RMR, RMR Inc., AlerisLife (including Five Star), and other related entities, involving shared management and cross-ownership[452](index=452&type=chunk) [Critical Accounting Estimates](index=88&type=section&id=Critical%20Accounting%20Estimates) DHC's critical accounting estimates for real estate investments involve significant judgments in purchase price allocation, fair value determination, and impairment assessments, relying on subjective assumptions - Critical accounting policies for real estate investments involve significant judgments and estimates for purchase price allocations (land, building, improvements, above/below market leases) and impairment assessments[453](index=453&type=chunk)[454](index=454&type=chunk) - Fair value determinations for purchase price allocations use methods similar to independent appraisers, involving estimated cash flows, capitalization rates, and discount rates[454](index=454&type=chunk) - Impairment indicators (declining occupancy/profitability, decreasing cash flows, disposition decisions, market changes) trigger an evaluation comparing carrying value to expected future undiscounted cash flows, which relies on subjective assumptions about hold periods, market rents, and terminal capitalization rates[455](index=455&type=chunk) [Impact of Government Reimbursement](index=89&type=section&id=Impact%20of%20Government%20Reimbursement) While most of DHC's NOI is from private resources, a small portion relies on government reimbursement programs, which are subject to changes expected to negatively impact rates and increase expenses - Substantially all of DHC's NOI is from private resources, with a small portion dependent on Medicare and Medicaid payments[457](index=457&type=chunk) - Government healthcare programs are subject to frequent legislative and regulatory changes, which are expected to result in reimbursement rates that may not match increasing expenses, potentially materially and adversely affecting DHC's financial results[457](index=457&type=chunk)[458](index=458&type=chunk) Government Funds Recognized (in thousands) | Year | CARES Act and ARPA Funds | | :--- | :----------------------- | | 2022 | **$4,300** | | 2021 | **$19,600** | | 2020 | **$17,500** | [Seasonality](index=90&type=section&id=Seasonality) Senior housing operations show modest seasonality, with lower earnings in Q4 and Q1 due to holiday discharges and increased illness, but this is not expected to materially impact DHC's overall financial performance - Senior housing operations show modest seasonality, with lower earnings in Q4 and Q1 due to holiday discharges and increased illness, but this is not expected to materially impact DHC's overall financial performance[459](index=459&type=chunk) - Medical office, life science properties, and wellness centers do not typically experience seasonality[459](index=459&type=chunk) [Impact of Climate Change](index=90&type=section&id=Impact%20of%20Climate%20Change) Climate change regulations may increase DHC's property operating costs, though direct impacts are currently immaterial due to cost pass-throughs, with DHC actively mitigating risks and improving energy efficiency - Climate change regulations may increase energy and operating costs, but direct impact is expected to be immaterial as costs are passed to tenants. However, future laws could require material investments or render buildings obsolete[460](index=460&type=chunk) - DHC and RMR actively improve energy efficiency (ENERGY STAR, LEED®) and mitigate risks from severe weather and rising sea levels through insurance, though full compensation for losses is not guaranteed[461](index=461&type=chunk)[462](index=462&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=82&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) DHC's primary market risk is interest rate fluctuations, with **$2.37 billion** in fixed-rate debt and a **$700.0 million** floating-rate credit facility, where a **one percentage point increase** would raise annual interest expense by **$7.0 million** - DHC's primary market risk exposure is to changes in interest rates, managed by monitoring financing alternatives and potentially using hedge arrangements[463](index=463&type=chunk)[464](index=464&type=chunk) Fixed Rate Debt (as of December 31, 2022, in thousands) | Debt Type | Principal Balance | Annual Interest Rate | Annual Interest Expense | | :---------------------- | :---------------- | :------------------- | :---------------------- | | Senior unsecured notes | **$2,350,000** | Varies | **$142,985** | | Mortgage notes | **$24,729** | Varies | **$1,422** | | **Total** | **$2,374,729** | | **$144,407** | - A **one percentage point increase** in interest rates would increase DHC's annual interest cost on fixed-rate debt by approximately **$23.7 million** if refinanced[466](index=466&type=chunk) - Floating-rate debt, primarily the **$700.0 million credit facility** (fully drawn as of Dec 31, 2022), exposes DHC to interest rate risk and credit rating changes. A **one percentage point increase** in floating rates would increase annual interest expense by approximately **$7.0 million**[469](index=469&type=chunk)[470](index=470&type=chunk)[472](index=472&type=chunk) - The credit facility transitioned from LIBOR to SOFR in February 2023, with an increased interest rate premium, which may result in higher interest payments[475](index=475&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=84&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Required financial statements and supplementary data are included in Part IV, Item 15 of this Annual Report on Form 10-K - Financial statements and supplementary data are located in Part IV, Item 15[476](index=476&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=84&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure[477](index=477&type=chunk) [Item 9A. Controls and Procedures](index=84&type=section&id=Item%209A.%20Controls%20and%20Procedures) DHC's management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes during the quarter - Disclosure controls and procedures were effective as of December 31, 2022[478](index=478&type=chunk) - No material changes in internal control over financial reporting during Q4 2022[479](index=479&type=chunk) - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[481](index=481&type=chunk) - Deloitte & Touche LLP issued an unqualified attestation report on the effectiveness of internal control over financial reporting[482](index=482&type=chunk) [Item 9B. Other Information.](index=85&type=section&id=Item%209B.%20Other%20Information.) There is no other information to report under this item - None[483](index=483&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.](index=85&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections.) This item is not applicable to Diversified Healthcare Trust - Not applicable[484](index=484&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=85&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) DHC maintains a Code of Conduct for its officers, Trustees, and RMR personnel, with additional governance information incorporated by reference from its 2023 Proxy Statement - DHC has a Code of Conduct for officers, Trustees, and RMR personnel, available on its website[486](index=486&type=chunk) - Further information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[487](index=487&type=chunk) [Item 11. Executive Compensation](index=85&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from DHC's definitive Proxy Statement - Information on executive compensation is incorporated by reference from the definitive Proxy Statement[488](index=488&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=85&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) DHC awards common shares to officers and RMR employees under its 2012 Equity Compensation Plan, with **2,667,253 shares** remaining available as of December 31, 2022 - Common shares are awarded to officers and RMR employees under the 2012 Equity Compensation Plan; Trustees also receive common shares as annual compensation[489](index=489&type=chunk) Equity Compensation Plan Information (as of December 31, 2022) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under our equity compensation plan | | :------------------------------------------ | :------------------------------------------------------------------------ | :------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | | Equity compensation plans approved by securityholders—2012 Plan | None. | None. | **2,667,253** | | Equity compensation plan not approved by securityholders | None. | None. | None. | | **Total** | **None.** | **None.** | **2,667,253** | - Payments to RMR employees are detailed in Notes 5 and 8 to the Consolidated Financial Statements. Additional information is incorporated by reference from the definitive Proxy Statement[490](index=490&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=86&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from DHC's definitive Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the definitive Proxy Statement[491](index=491&type=chunk) [Item 14. Principal Accountant Fees and Services](index=86&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from DHC's definitive Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the definitive Proxy Statement[492](index=492&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=87&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all consolidated financial statements, financial statement schedules, and a comprehensive index of exhibits included in the 10-K report - Includes Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Comprehensive Income (Loss), Statements of Shareholders' Equity, Statements of Cash Flows, and Notes to Consolidated Financial Statements[495](index=495&type=chunk) - Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2022, is included[495](index=495&type=chunk) - A comprehensive list of exhibits, including organizational documents, indentures, management agreements, and certifications, is provided[498](index=498&type=chunk)[500](index=500&type=chunk)[502](index=502&type=chunk) - Financial information about AlerisLife is available on the SEC's website[496](index=496&type=chunk) [Item 16. Form 10-K Summary.](index=91&type=section&id=Item%2016.%20Form%2010-K%20Summary.) This item indicates that no Form 10-K Summary is provided - None[503](index=503&type=chunk)

Diversified Healthcare Trust (NASDAQ:DHC) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET Company Participants Michael Kodesch - Director of IR Jennifer Francis - President and CEO Rick Siedel - CFO and Treasurer Conference Call Participants Bryan Maher - B. Riley Securities Operator Good morning, and welcome to the Diversified Healthcare Trust Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an ...

PART I: Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited condensed consolidated financial statements detail the company's financial position and performance for Q3 and nine months ended September 30, 2022 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2022, total assets decreased to **$6.07 billion**, total liabilities decreased to **$3.37 billion**, and total shareholders' equity slightly increased to **$2.71 billion** Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total real estate properties, net** | $4,811,931 | $5,075,749 | | **Total assets** | **$6,072,486** | **$6,623,514** | | Revolving credit facility | $700,000 | $800,000 | | Senior unsecured notes, net | $2,316,493 | $2,806,811 | | **Total liabilities** | **$3,366,431** | **$3,961,124** | | **Total shareholders' equity** | **$2,706,055** | **$2,662,390** | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) For Q3 2022, net loss was **$81.5 million**, improving from Q3 2021, while nine-month net income was **$49.5 million** due to property sales Financial Performance Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $322,920 | $337,416 | $946,681 | $1,046,481 | | Property operating expenses | $289,096 | $266,073 | $823,904 | $818,096 | | (Loss) gain on sale of properties | ($5,044) | $200 | $322,064 | $30,838 | | **Net (loss) income attributable to common shareholders** | **($81,492)** | **($89,343)** | **$49,548** | **($191,070)** | | **Net (loss) income per share (basic and diluted)** | **($0.34)** | **($0.38)** | **$0.21** | **($0.80)** | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was **$36.9 million** for the nine months ended September 30, 2022, with significant investing and financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($36,948) | ($13,198) | | Net cash provided by (used in) investing activities | $483,713 | ($22,885) | | Net cash (used in) provided by financing activities | ($662,905) | $756,671 | | **(Decrease) increase in cash** | **($216,140)** | **$720,588** | - Investing activities in 2022 were significantly boosted by **$638.5 million** in proceeds from the sale of properties to a joint venture and **$108.6 million** from the sale of an interest in another joint venture[20](index=20&type=chunk) - Financing activities in 2022 included a **$500.0 million** redemption of senior unsecured notes and a **$100.0 million** repayment on the revolving credit facility[20](index=20&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, JV transactions, debt structure, segment performance, and related-party management agreements - In January 2022, the company formed the LSMD JV by selling interests in 10 medical office and life science properties for approximately **$653.3 million**, recognizing a net gain of **$322.5 million**[35](index=35&type=chunk) - In June 2022, the company sold an additional **10%** interest in the Seaport JV for **$108.0 million** and now holds a **10%** equity interest in this JV[34](index=34&type=chunk) - In June 2022, the company redeemed **$500 million** of its **9.75%** senior notes due 2025, resulting in a loss on early extinguishment of debt of **$29.6 million**[55](index=55&type=chunk) - The company's two operating segments are the Office Portfolio and the Senior Housing Operating Portfolio (SHOP); for Q3 2022, the Office Portfolio generated **$31.1 million** in NOI, while the SHOP segment had an NOI loss of **($5.8 million)**[70](index=70&type=chunk)[73](index=73&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses segment performance, liquidity strategy, and market risks, noting declining SHOP NOI and debt covenant challenges [Overview](index=25&type=section&id=MD%26A%20Overview) As of September 30, 2022, DHC owned 379 properties and held equity interests in two joint ventures, facing economic challenges impacting its SHOP segment - The company is facing significant economic headwinds, including high inflation, rising interest rates, supply chain disruptions, and potential recession, which are expected to lead to elevated labor, utility, and food costs in the SHOP segment[115](index=115&type=chunk)[116](index=116&type=chunk) - As of September 30, 2022, the portfolio consisted of **379** wholly-owned properties and equity interests in two JVs owning **11** medical office and life science properties[113](index=113&type=chunk)[114](index=114&type=chunk) [Results of Operations](index=28&type=section&id=Results%20of%20Operations) For Q3 2022, total NOI decreased **52.6%** to **$33.8 million**, driven by JV deconsolidations and increased SHOP operating expenses NOI by Segment - Q3 2022 vs Q3 2021 (in thousands) | Segment | Q3 2022 NOI | Q3 2021 NOI | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office Portfolio | $31,075 | $59,134 | ($28,059) | (47.4)% | | SHOP | ($5,762) | $2,326 | ($8,088) | (347.7)% | | Non-Segment | $8,511 | $9,883 | ($1,372) | (13.9)% | | **Total NOI** | **$33,824** | **$71,343** | **($37,519)** | **(52.6)%** | - The decrease in the Office Portfolio's consolidated NOI was primarily due to the deconsolidation of **11** properties into joint ventures, though comparable property NOI for the segment increased by **3.7%** in Q3 2022[141](index=141&type=chunk)[144](index=144&type=chunk) - The SHOP segment's NOI declined sharply due to increased operating expenses from labor costs, Hurricane Ian damages, and inflationary pressures on food and energy, which offset revenue gains from higher occupancy[150](index=150&type=chunk)[151](index=151&type=chunk) [Non-GAAP Financial Measures](index=38&type=section&id=Non-GAAP%20Financial%20Measures) The company uses FFO, Normalized FFO, and NOI as supplemental performance measures, with Normalized FFO showing a loss in Q3 2022 FFO and Normalized FFO per Share | Per Share Data | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | ($0.34) | ($0.38) | $0.21 | ($0.80) | | FFO | ($0.06) | ($0.06) | ($0.33) | ($0.05) | | **Normalized FFO** | **($0.06)** | **($0.04)** | **($0.20)** | **$0.04** | [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity relies on operating cash flow and asset dispositions, constrained by debt covenant restrictions and recent credit downgrades - As of September 30, 2022, the company's ratio of consolidated income available for debt service to debt service was below the **1.5x** incurrence requirement, preventing it from incurring additional debt[206](index=206&type=chunk)[239](index=239&type=chunk) - The company generated significant liquidity in 2022 through JV transactions, including **$653.3 million** from the LSMD JV formation and **$108.0 million** from selling an additional stake in the Seaport JV[207](index=207&type=chunk)[208](index=208&type=chunk) - The company was fully drawn on its **$700 million** revolving credit facility as of September 30, 2022, with capacity reducing to **$586.4 million** in January 2023, requiring a **$113.6 million** repayment[224](index=224&type=chunk)[233](index=233&type=chunk) - Moody's downgraded the company's senior unsecured debt rating twice in 2022, from B1 to B3 in February, and then from B3 to Caa1 in September[234](index=234&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces interest rate risk from its fixed and floating rate debt, with potential impacts from rate changes and LIBOR transition - At September 30, 2022, the company had **$2.39 billion** in fixed-rate debt and **$700 million** in floating-rate debt[259](index=259&type=chunk)[263](index=263&type=chunk) - A hypothetical **1%** increase in interest rates would increase annual interest expense on the **$700 million** of floating-rate debt by approximately **$7.0 million**[266](index=266&type=chunk) - The company's revolving credit facility is based on LIBOR, which is being phased out, requiring revision to an alternative rate like SOFR that may increase interest costs[268](index=268&type=chunk) [Item 4. Controls and Procedures](index=49&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective, with no material changes to internal controls in Q3 2022 - The President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the company's disclosure controls and procedures are effective[269](index=269&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[270](index=270&type=chunk) PART II: Other Information [Item 1A. Risk Factors](index=55&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to risk factors from those previously disclosed in the company's Annual Report[290](index=290&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **122,403** common shares at **$1.30** per share in Q3 2022 for tax withholding on share awards Issuer Purchases of Equity Securities (Q3 2022) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | September 2022 | 122,403 | $1.30 | | **Total** | **122,403** | **$1.30** | - The share purchases were conducted to satisfy tax withholding obligations for officers and RMR employees related to vesting share awards[291](index=291&type=chunk) [Item 6. Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including indentures, share agreements, and required certifications - Exhibits filed include supplemental indentures, certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[292](index=292&type=chunk)[294](index=294&type=chunk)