Diversified Healthcare Trust(DHC) - 2022 Q4 - Annual Report

PART I Item 1. Business. 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, 202228 - 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) segment31 32 46 47 - 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 requirements33 54 - 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 operation41 42 - 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 interest66 67 - 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 85 87 - 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 97 101 MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS 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 tests120 121 - 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 distributions123 124 127 - 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)141 151 - DHC must distribute at least 90% of its REIT taxable income annually to avoid corporate income tax and a 4% excise tax on undistributed amounts164 167 - 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 taxes138 139 140 - 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 rates178 180 - 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' REIT194 195 200 201 Item 1A. Risk Factors. 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 levels226 227 234 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 2024229 231 245 - 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 profitability232 234 237 255 - 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 price278 280 286 287 - 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 capital316 317 - 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 bankruptcy318 319 Item 1B. Unresolved Staff Comments. There are no unresolved staff comments to report - No unresolved staff comments328 Item 2. Properties. 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. 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 business333 Item 4. Mine Safety Disclosures. This item is not applicable to Diversified Healthcare Trust - Not applicable334 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 record336 - 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 limitations337 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] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 billion339 - 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 segment341 342 343 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 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, 2022339 340 - 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 segment341 342 - 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 inflation343 PORTFOLIO OVERVIEW 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 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, 2022348 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 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 managers352 354 355 - As of December 31, 2022, Five Star managed 119 senior living communities, and 111 communities were managed by other third-party managers352 358 610 616 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 - 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 managers355 All Other 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 2022386 GENERAL INDUSTRY TRENDS 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)362 363 - 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 demand364 - 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 pressures364 365 366 RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted) 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 costs374 376 - 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 efforts381 382 - 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 rents386 - 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 fees389 390 - 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 investment392 393 - 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 2022395 396 Non-GAAP Financial Measures (dollars in thousands, except per share amounts) 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 results399 400 404 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 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 control408 415 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)411 412 418 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 eliminated427 428 429 435 - 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, 2022410 444 - 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 debt658 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 agreement440 445 Related Person Transactions 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-ownership452 Critical Accounting Estimates 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 assessments453 454 - Fair value determinations for purchase price allocations use methods similar to independent appraisers, involving estimated cash flows, capitalization rates, and discount rates454 - 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 rates455 Impact of Government Reimbursement 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 payments457 - 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 results457 458 Government Funds Recognized (in thousands) | Year | CARES Act and ARPA Funds | | :--- | :----------------------- | | 2022 | $4,300 | | 2021 | $19,600 | | 2020 | $17,500 | 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 performance459 - Medical office, life science properties, and wellness centers do not typically experience seasonality459 Impact of Climate Change 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 obsolete460 - 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 guaranteed461 462 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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 arrangements463 464 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 refinanced466 - 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 million469 470 472 - The credit facility transitioned from LIBOR to SOFR in February 2023, with an increased interest rate premium, which may result in higher interest payments475 Item 8. Financial Statements and Supplementary Data 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 15476 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 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 disclosure477 Item 9A. Controls and Procedures 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, 2022478 - No material changes in internal control over financial reporting during Q4 2022479 - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework481 - Deloitte & Touche LLP issued an unqualified attestation report on the effectiveness of internal control over financial reporting482 Item 9B. Other Information. There is no other information to report under this item - None483 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. This item is not applicable to Diversified Healthcare Trust - Not applicable484 PART III Item 10. Directors, Executive Officers and Corporate Governance 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 website486 - Further information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders487 Item 11. Executive Compensation 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 Statement488 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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 compensation489 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 Statement490 Item 13. Certain Relationships and Related Transactions, and Director Independence 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 Statement491 Item 14. Principal Accountant Fees and Services 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 Statement492 PART IV Item 15. Exhibits and Financial Statement Schedules 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 Statements495 - Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2022, is included495 - A comprehensive list of exhibits, including organizational documents, indentures, management agreements, and certifications, is provided498 500 502 - Financial information about AlerisLife is available on the SEC's website496 Item 16. Form 10-K Summary. This item indicates that no Form 10-K Summary is provided - None503