Diversified Healthcare Trust(DHC) - 2023 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the specified periods Condensed Consolidated Balance Sheets 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) 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 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 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 This section provides detailed explanations and additional information supporting the financial statements, clarifying accounting policies and significant transactions Note 1. Basis of Presentation 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][24] - 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][26][29] - 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][27][108] Note 2. Real Estate Investments 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][107] 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][38][39][40] - 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] Note 3. Leases 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] - 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] Note 4. Indebtedness 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][52] - 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][58] Note 5. Fair Value of Assets and Liabilities 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 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] - 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] 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 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][68][119][120] 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 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][79] - 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][82] 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 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][85][142][170] - 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][88] Note 10. Related Person Transactions 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] - 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][92][93][95] - 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] Note 11. Income Taxes 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] 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 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 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 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] - 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][111][112] - 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] Portfolio Overview 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 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 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][126][127][128] - 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][131][132][134] - 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][138][140] - 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] Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 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][155][157] - 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][160][162] - 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][172][173] Non-GAAP Financial Measures 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][181][185] 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 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][192] - 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] 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] - 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] - 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] - 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][213] - 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] Related Person Transactions 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] Critical Accounting Estimates 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][231] Impact of Government Reimbursement 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] 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 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] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[247] Warning Concerning Forward-Looking Statements 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][250][251] - Other risks include compliance with debt covenants, financial strength of managers/tenants, ability to pay distributions, capital expenditure plans, and competition[251][253] Statement Concerning Limited Liability 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] PART II. Other Information Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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 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] - 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][266][269] - 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][272][273] - 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] Risks Relating to Taxation 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] - 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] Risks Relating to an Investment in OPI Common Shares Following the Merger 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] - 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] - 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] Risks Relating to Going Concern 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][292] - 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 6. Exhibits 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][296] 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]