Diversified Healthcare Trust Stock

Good morning, and welcome to the Diversified Healthcare Trust Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matthew Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Chris Pilato, President and Chief Executive Officer; and Matt Brown, Chief Financial Officer and Treasurer. Today's call includes a presentation by management followed by a question-and-answer session with sell-side analysts.

Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws.

These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, November 3, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. other than through filings with the Securities and Exchange Commission, or SEC.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI, cash basis net operating income or cash basis NOI and adjusted EBITDAre. A reconciliation of these non-GAAP measures to net income is available in our financial results package which can be found on our website at www.dhcreit.com.

Beginning this quarter, our calculation of normalized FFO and adjusted EBITDAre include estimated incentive management fees accrued under GAAP, and prior periods have been recast to conform to this presentation. And finally, we will be providing guidance on this call, including NOI.

We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all. such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris.

Thank you, Matt. Good morning, everyone, and thank you for joining our call today. Our third quarter results reflect continued execution on the strategy we have laid out for the year. That strategy shows up across stronger operating results in our SHOP portfolio, active optimization of how we own and operate individual assets and a steadily improving financial profile.

Following the market close yesterday, DHC reported normalized FFO of $30.7 million or $0.13 per share and adjusted EBITDAre of $73.4 million, an increase of 28.4% year-over-year. Same property cash basis NOI increased 25.6% to $77.9 million and consolidated NOI increased 27.5% to $80.8 million.

Before going further, I want to note a change in our presentation Beginning this quarter, adjusted EBITDA and normalized FFO include incentive management fees as recognized under GAAP and prior periods have been recast on the same basis.

On a comparable basis, normalized FFO increased from $0.12 per share in the second quarter and from $0.02 per share a year ago and adjusted EBITDA increased both sequentially and year-over-year. The momentum in our portfolio is also reflected in our outlook. Today, we are raising our same-property shop NOI guidance by $5 million at the midpoint and lowering our expected SHOP recurring capital expenditures by $10 million.

Matt will walk through the full guidance update, including the effect of the incentive management fee change. Let me start with our shop segment. Same property NOI increased 50.4% year-over-year to $48 million, this growth was driven by a 200 basis point increase in occupancy to 84.4% and a 5.2% increase in average monthly rate which together expand same-property NOI margin by 470 basis points to 15.8%.

We used targeted move in incentives this quarter to accelerate occupancy which kept average monthly rate flat sequentially. As communities stabilize, we expect to reduce these concessions and allow rate growth to flow through more fully. Expense discipline also continues with our dietary procurement initiatives contributing to an expense reduction by approximately $1.3 million compared with the prior year.

Importantly, we believe significant embedded upside remains with same-property occupancy at 84.4%, we estimate 500 to 600 basis points of occupancy upside as our operators close the occupancy gaps between our communities and their respective NIC markets. Beyond occupancy, we continue to reposition underutilized and close skilled nursing weeks into independent living, assisted living and memory care units.

We have now approved projects across 13 communities that we expect will add approximately 356 units. We expect these investments to generate stabilized cash returns in the mid-teens or better while converting vacant space into revenue-generating units.

Finally, we are putting new management agreements in place across 76 shop communities that are managed by our legacy operators. Implementation is expected on January 1, 2027. These agreements extend the operator framework we initiated across our transition communities in 2025, including more closely aligned incentive structures and appropriately sized base management fees.

We expect them to initially generate approximately $2 million of annual cost savings while further aligning operator incentives with shareholder interests. Turning to our portfolio optimization strategy. Over the past 2 years, DHC has repositioned its portfolio through asset sales, operator transitions and targeted capital investment.

With much of that foundation in place, we are increasingly focused on optimizing individual assets. The clearest example this quarter is our transition of 7 skilled nursing facilities in Colorado to a 15-year triple-net lease with the Ensign Group effective on October 1.

This transition does 2 primary things for us. First, it increases cash flow. First year contractual rent is approximately $8 million with CPI annual escalators, which compares with $5.1 million of NOI over the prior 12 months or about $3.5 million after capital expenditures. Second, it sharpens our SHOP portfolio.

Skilled nursing relies primarily on government reimbursement and is a more labor-intensive which is why these facilities generated only about a 5.8% margin for the quarter. Skilled nursing is also more commonly under triple net leases with specialized operators. The new structure shifts reimbursement, labor and capital exposure to the tenant leads our shop portfolio more focused on private pay senior housing and on a pro forma basis, would have lifted our third quarter consolidated shop margin by about 80 basis points.

We are applying the same asset-by-asset approach to operator alignment. In September, we provided notice to transition 6 shop communities in Georgia, representing 486 units to a new manager, which we expect to begin as early as the fourth quarter. This consolidates these communities with an operator that has deep regional expertise and fits the operator framework we have built across our transition portfolio. We look forward to working closely with them to ensure a seamless transition.

Turning to our medical office and life science portfolio. Leasing activity remained healthy during the quarter. We completed approximately 130,000 square feet of leasing at rental rates 25% above prior rents with a weighted average lease term of 9.7 years. As discussed on our second quarter earnings call, 2 tenants representing approximately 213,000 square feet vacated on July 1, and and total occupancy declined to 88.4% from 92.2% in the prior quarter.

Near-term expirations are limited. Through year-end, $3.3 million of annualized rental income or 2.1% of the total is scheduled to expire. This includes $2.2 million from a life science tenant in Fremont, California that we expect to vacate at the end of November and we are actively marketing that space for lease.

The portfolio's weighted average remaining lease term was approximately 5.1 years at quarter end. As part of our capital recycling efforts, we are actively pursuing disposition opportunities. As of yesterday, we were under agreement to sell 1 vacant property consisting 126,000 square feet for $10.5 million, and we are valuing offers on 2 additional properties totaling approximately 232,000 square feet.

Together, these 3 properties generated negative NOI of $690,000 during the quarter or nearly $2.8 million annually, selling them eliminate that drag and provides capital for reinvestment. Looking ahead, our path to earnings growth is embedded in our existing portfolio. Several drivers are already in motion for 2027, a full year rent from the Ensign lease approximately $2 million of annual savings from our new shop legacy management agreements effective January 1, skilled nursing ROI conversion projects, adding approximately 350 units and the sale of nonearning medical office properties.

Most significant is the continued improvement in shop occupancy and rate on rate concessions normalize. Our third quarter results show this strategy is working with stronger shop operations, active optimization of individual assets and improving financial profile and a higher shot NOI outlook for the year.

These results are clearly resonating with investors at DHC has been the top-performing REIT in the U.S. over the past 3 years, with a total shareholder return in excess of 277% and we remain confident in our trajectory and in our ability to deliver sustainable earnings growth and long-term value for our shareholders. With that, I'll turn the call over to Matt.

Thanks, Chris, and good morning, everyone. Before I review our results, I would like to walk through a change to how we present our non-GAAP financial measures. The SEC recently provided its interpretation that incentive management fees accrued under GAAP should be included in normalized FFO and adjusted EBITDAre.

Historically, we excluded the incentive fee in these measures. While we believe our prior approach was appropriate and supported period-to-period comparability, we have adopted the SEC's interpretation and changed our presentation. Beginning this quarter, normalized FFO, adjusted EBITDAre and CAD include estimated incentive management fees as they are accrued under GAAP, and we have recast prior periods to conform.

To be clear, this is a change in presentation only. It does not affect our GAAP results or our cash flows, and it does not change how the incentive fee is calculated or the amount, if any, that would ultimately be payable to RMR because the fee is based on DHC's total shareholder return relative to a benchmark index over a 3-year period ending December 31, the accrual will fluctuate from quarter-to-quarter with our share price.

For the third quarter, normalized FFO and adjusted EBITDA include $5.4 million or $0.02 per share of accrued incentive fees, and year-to-date, we have accrued $22 million or $0.09 per share. Page 8 of our earnings presentation includes a bridge to previously issued guidance. We believe this bridge will assist our investors with comparability between our revised normalized FFO and adjusted EBITDA calculations from prior guidance.

During the third quarter, our normalized FFO was $30.7 million or $0.13 per share, and our adjusted EBITDA was $73.4 million, representing a 28.4% increase year-over-year. Our third quarter results continue to show the earnings power of our SHOP assets, the cash-generating ability of our business and a significantly stronger balance sheet than a year ago.

During the third quarter, consolidated same-property cash basis NOI was $77.9 million, a 25.6% increase year-over-year, Shop continues to drive this growth with same-property NOI increasing 50.4% year-over-year to $48 million and same-property NOI margin expanding 470 basis points to 15.8%. This improvement came from both the top line and expense side.

Same property shop revenue increased 5.8% year-over-year, driven by a 200 basis point increase in occupancy to 84.4% and and 5.2% growth in average monthly rate. At the same time, same property operating expenses were essentially flat year-over-year and expense core declined 30 basis points as our operators continue to capture the dietary maintenance and labor savings we discussed last quarter.

Sequentially, Shop Same property NOI decreased $4 million or 7.6%, driven by second quarter results that included approximately $2.2 million of onetime expense benefits that did not recur. Additionally, the third quarter includes approximately $1 million of nonrecurring expenses and $2 million of higher utility costs due to typical seasonality.

Excluding these items, third quarter same property NOI would have been 2.5% higher than the second quarter. Importantly, same property occupancy increased 130 basis points sequentially, our largest quarterly gain this year, which supports our view that the occupancy ramp on our transition communities is well underway. In our medical office and life science portfolio, same-property cash basis NOI was $22.9 million, a 1.6% decrease year-over-year.

This primarily reflects the previously disclosed tenant who vacated effective July 1 and which also drove the 120 basis point sequential decline in same-property occupancy to 94.5%. Third quarter G&A expense of $14.6 million includes $5.4 million of estimated incentive management fees, as I've discussed, and $2.2 million of noncash share-based compensation.

Excluding these items, G&A was $7 million, consistent with the second quarter. During the quarter, we invested $28.9 million of capital, including $22.6 million into our shop communities and $6.3 million into our medical office and life science portfolio. Year-to-date spending of $76.5 million is $32.1 million or approximately 30% lower than the same period in 2025.

We are reducing our 2026 recurring CapEx guidance by $10 million at the midpoint to $90 million to $105 million. At quarter end, we had total liquidity of $261 million, including $111 million of cash our undrawn $150 million secured revolving credit facility. Net debt to annualized adjusted EBITDAre was 8.2x, a 2.5x reduction from a year ago. This calculation now includes incentive fees, which added 0.8x, excluding them, leverage was 7.4x, within our 6.5 to 7.5x target range.

Adjusted EBITDAre to interest expense improved to 2x from 1.2x a year ago, and we remain comfortably in compliance with all of our bond covenants. Our next debt maturity is our $500 million of senior unsecured notes due February 2028 with $4 billion of unencumbered assets representing over 64% of our portfolio, growing SHOP cash flow and steadily improving credit metrics we believe we are well positioned to address this maturity.

Turning to full year 2026 guidance. Excluding the presentation change regarding estimated incentive fees, we are raising our SHOP same-property NOI guidance by $5 million at the midpoint to $190 million to $200 million, and that increase flows through to adjusted EBITDA and normalized FFO.

The increase reflects lower expected operating expense growth of 2.3% compared with 2.5% previously an average monthly rate growth of 5.6%, up from 5.5% and with occupancy growth unchanged at 200 basis points and revenue growth of 6.3%. It should also be noted that for the 9 months ended September 30, same-property shop NOI was $144.3 million.

Separately, adjusted EBITDAre and normalized FFO guidance now includes estimated incentive management fees of $29.3 million or $0.12 per share. Netting the 2, normalized FFO guidance moves to $0.46 to $0.52 per share from $0.56 to $0.62, up $0.02 from the SHOP NOI increase and down $0.12 for the estimated incentive fee.

The final amount, if any, will be based on our total return relative to the benchmark index through December 31 and could differ materially from the amount accrued as of September 30. Updated guidance ranges are as follows: $2 million to $328 million of same-property NOI, adjusted EBITDAre of $276 million to $291 million, normalized FFO of $111 million to $126 million or $0.46 to $0.52 per share and recurring capital expenditures of $90 million to $105 million which is a reduction of $10 million at the midpoint, as I previously discussed.

Fourth quarter results will also include a full quarter of Ensign Rent for the 7 skilled nursing facilities, which will contribute approximately $2 million of cash NOI. We are confident in our updated full year guidance, and we are building momentum into 2027. We will share our 2027 guidance on our next earnings call which will include changes to our shop segment, mainly driven by the 7 skilled nursing facilities now leased to Ensign being presented in our -- all Other segment. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] Our first question today is from Henry Newell with RBC Capital Markets.

Just hoping you could touch on the updated CapEx outlook briefly. Should we expect really this updated outlook to be a run rate moving forward into '27 and '28. Or is there any reason why we should expect recurring CapEx to decrease in '27 and '28.

Yes, it's a good question. I could see it decreasing a little bit into 2027 and 2028. We've been targeting closer to 3,000 per unit as we look forward. So we do expect that to continue to kind of come down as it has been over the last few years.

Wonderful. And then just more generally, how are you viewing your different sources of capital at the moment? Is the current leverage profile and ongoing concern? And do you think you'll continue to finance CapEx or maybe any acquisitions with dispositions or something else moving forward? .

On the latter part of the question, I think right now, most of the investment we plan to make is within the existing portfolio. We've talked about the conversion of closed skilled nursing wings and that being kind of a priority given the returns that come from that profile. So that will be kind of top priority.

We are selling some assets, which we highlighted. I don't think the overall proceeds are overly material, but nonetheless, that will provide optionality for reinvestment to either delever or again, that's part of the flow skilled nursing wing strategy and then maybe in kind of small select cases considering whether or not acquisition makes sense, but I think that's kind of last aligned. So right now, it's really focused on the existing portfolio and kind of the embedded upside opportunities that we see and then Matt.

Yes. Just to add to that on leverage, leverage has been on a nice decline as we've seen the SHOP performance significantly improve over the last 15 to 18 months, and our trajectory should prove that, that will further decline as we move beyond 2026.

And as it relates to just kind of capital and liquidity for the things that we're focused on, which, as Chris mentioned, is mostly in our existing portfolio. We have adequate liquidity to continue making those investments. We have the $150 million credit facility. We have not drawn on that. So that produces us with sufficient liquidity for us.

[Operator Instructions] The next question is from John Massoca with B. Riley.

Maybe just a quick clarification. With regards to the FLIR 26 guidance, does that include the positive impact you're expecting to NOI from the Ensign transaction?

Yes. I mean it's factored in that we're going to receive $2 million in the fourth quarter. For the 9 months ended September, we've received a little bit over $4 million of NOI there. So there's some moving pieces as it relates to the change, but it is included. Is that part of where the increased shop NOI expectations are coming? Or is that something that was maybe kind of previously contemplated in the guide?

No, it's unrelated to that change in structure. -- on those skilled nursing facilities. But we've been trending towards the higher end of our SHOP NOI guidance for the first several quarters. And we're just shy of $145 million year-to-date through 9 months. So we really have added conviction in our SHOP results, and that's really the driver of the $5 million increase to the guide on this call. .

And John, I would just add that going back to the enzyme. The proceeds from the lease we get for the quarter in Q4 is more or less equivalent to what we would have gotten under the RIDEA. So as Matt alluded to, that's a wash. And again, the upside is more just performance base, which is driving the guidance.

Okay. In terms of the one-timers in 3Q, can you just provide a little more color on what those were? And are those things that we should expect to occur seasonally in 3Q going forward? Or was it just kind of really onetime events?

No, they were largely onetime events. It was about $1 million in total. We had some sales and use tax true-ups and a little bit of elevated bad debt. But we don't expect those to recur into Q4 or beyond.

Okay. And then as you think about occupancy versus rate. I mean, should we expect some of these strategies using concessions to kind of promote occupancy before you push rate to continue going forward? Is that something that we can see kind of the next couple of quarters? Or is this kind of really a onetime situation based on an opportunity operator saw or something else in the market?

Yes, it's a mix. I mean, look, the concession piece is more hand-to-hand combat on certain assets to drive strategy. It's just -- it's more pronounced now as we think about where we see the opportunity. I don't envision this being something that continues long term. I think this is kind of incremental, and we will continue to see rate lift across the portfolio.

And so I think, generally speaking, we would expect to see at least the same lift we got in 2026. And again, we've also talked about a variety of different strategies we're finding with respect to expense reduction levels of care on the revenue side. So there's kind of a whole suite of different initiatives that we continue to work through, which will be more pronounced as we go into 2027.

Okay. And then last 1 for me. In terms of some of the redevelopment potential within the portfolio, has any of that started? I mean, has there been any spend yet on that? I guess that wouldn't show up in the recurring CapEx guide, right? So are you in process on any of those projects? Or are those still primarily kind of 27 starts?

They are all '27 starts. Any spend this year is really soft costs related to design and consultants, but kind of the swinging of hammers will commence next year, and then we'll start to see delivery of some of those towards the back half of the year.

[Operator Instructions] It is showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks.

Well, thank you for joining our call today. We look forward to seeing many of you at the NAREIT conference in Atlanta this November. That concludes our call.

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

Good morning, and welcome to the Diversified Healthcare Trust Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President.

Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, August 4th, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO. net operating income, or NOI, and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures, as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate.

With that, I would now like to turn the call over to Chris.

Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered impressive second quarter results that exceeded analyst estimates, highlighted by continued operating momentum across the portfolio. The strategic changes we have implemented within our SHOP segment over the past year continue to drive improved profitability. As I will highlight shortly, we believe there is meaningful upside to our current results as new initiatives we are implementing with our operators gain traction.

Turning to the quarter. After the market closed yesterday, DHC reported normalized FFO of $39 million or $0.16 per share and adjusted EBITDAre of $82 million. Consolidated NOI increased 20.4% year-over-year to $84 million.

Beginning with our SHOP segment, same-property NOI increased 37.2% year-over-year to $52 million. This was driven by a 160 basis point increase in same-property occupancy to 83.1%, a 6.2% increase in average monthly rate and continued margin expansion. These strong results highlight solid business plan execution by our senior housing partners.

Given that operator transitions were completed in late 2025, DHC remains in the early innings of benefiting from more regionalized community oversight and shared best practices. Our agreements are structured to ensure mutual success and our continued margin expansion clearly demonstrates the effectiveness of this approach.

Turning to our outlook, we are pleased to reaffirm our recently raised full year guidance and continue to identify additional growth initiatives as we make our way through the year. As we progress, however, the key contributors of our NOI growth continue to evolve alongside the rapid ramp-up of our operators.

As Matt will highlight, while average occupancy and corresponding revenue are pacing slightly below our initial 2026 projections, the profitability of each occupied unit is currently outperforming our original underwriting.

To be clear, the pacing in occupancy gains is strictly a function of timing, and we continue to see steady month-over-month improvement. This is largely attributed to the foundational work of rebuilding local leadership and sales teams in conjunction with the operator transitions and establishing essential infrastructure across the transition portfolio. This process made meaningful progress throughout the second quarter.

Simultaneously, our profitability outperformance is being driven by an accelerated capture of higher acuity care levels and the rapid realization of expense synergies by our operators, resulting in notable improvements in RevPOR and expense expectations.

As such, the temporary moderation in our top line volume is being fully offset by the structural margin enhancements. This dynamic directly protects our bottom line, validates our transition strategy and continues to position our assets for sustained long-term growth.

Looking ahead, we are focused on additional opportunities to improve performance across our SHOP segment. Following the success we have achieved from the new operator agreements, we are currently renegotiating our contracts with our legacy operator base to bring them more in line with our upgraded operator framework.

Specifically, these new contracts will transition our legacy partners to a highly aligned fee structure. This includes lower base fees, coupled with a tier fee structure tied directly to annual operational outperformance. Furthermore, the updated agreements will introduce tighter, more disciplined cost controls to ensure baseline efficiency.

We expect the new contract to provide immediate cost savings of close to $2 million annually before consideration of further growth driven through the incentive fee structure. These updated agreements are expected to commence in January 2027.

We continue to make progress on the repositioning opportunities we discussed last quarter. As a reminder, we identified 16 SHOP communities with the potential to convert closed skilled nursing wings or floors into high-demand independent living, assisted living and memory care units.

We plan to initially spend approximately $20 million on 6 of these communities, which will add roughly 150 units to our SHOP portfolio. Importantly, given that we are currently absorbing the carrying costs of these closed wings, completing these conversions will transition carrying cost headwinds into revenue-generating units, providing further uplift to our SHOP margins and overall profitability.

We believe these projects represent an attractive use of DHC's capital and should generate unlevered mid-teens returns, while also improving the overall marketability of these communities. We anticipate the initial phase of construction to begin later this year with the first deliveries of these new units coming online in the second half of 2027.

Turning to our Medical Office and Life Science portfolio, during the second quarter, same-property occupancy increased 110 basis points year-over-year to 95.8%. Leasing activity remained healthy with approximately 477,000 square feet of new and renewal leasing at a 6.7% rent roll-up and a weighted average lease term of 7.1 years.

Same-property NOI in this segment was $24.1 million, essentially flat with last year. As discussed in prior quarters, we have 3 known vacates representing roughly 4.6% of the segment's expiring annualized revenue. Two of these tenants vacated effective July 1st, representing 3.5% of annualized revenue and 213,000 square feet, with the remaining tenant vacating effective December 1st.

We plan to market for sale one of these properties representing 150,000 square feet and are actively marketing for lease the 2 remaining properties. We look forward to providing updates on the progress of each of these next quarter.

Turning to capital allocation and the balance sheet. We ended the quarter with approximately $267 million of liquidity and materially improved our leverage over the past year to 7.1x net debt to EBITDA from 8.7x. We have also significantly improved our interest coverage and strengthened our outlook with the rating agencies.

With DHC's large-scale capital recycling program substantially complete, our focus is squarely on improving operations, reducing leverage and identifying the best uses for our growing free cash flow.

What makes our investment thesis so compelling today is that our path to substantial earnings growth is entirely organic with significant upside already embedded within our existing portfolio.

Beyond maintaining liquidity for high-return internal projects such as our SHOP redevelopments and continued deleveraging, our strengthening balance sheet provides flexibility to evaluate broader strategies to enhance shareholder returns, including revisiting the dividend, which the Board reviews quarterly.

In conclusion, our second quarter results demonstrate meaningful progress on improving operations, driving SHOP NOI margins higher and strengthening our financial position. We remain confident in our outlook for the remainder of 2026 and continue to believe the actions we have taken over the past 2 years will continue to deliver strong returns and create value for our shareholders.

With that, I will turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the second quarter, our consolidated same-property cash basis NOI was $83 million, representing a 20.2% increase year-over-year and 9.3% increase sequentially. These increases were driven by continued robust growth in our SHOP segment as same-property NOI increased 37.2% year-over-year and 17.3% sequentially.

Our operators continue to be a major factor in driving the improvement in SHOP NOI by managing expenses, while also increasing occupancy and pricing. As an example of this disciplined expense management, we work with our operators to procure new food and beverage contracts. These new contracts have led to menu optimization and reduced fees.

We anticipate annualized cost savings of $14 million to $16 million, of which approximately $8 million is expected to be recognized this year and is included in our revised guidance provided in June.

Same-property expense [ core ] decreased 170 basis points sequentially and grew just 150 basis points year-over-year, which is in line with our revised full year guidance assumptions that Matt will highlight shortly. During the quarter, same-property occupancy grew 70 basis points sequentially and 160 basis points year-over-year. We also continue to see strong momentum in pricing with same-property average monthly rate increasing 100 basis points sequentially and 620 basis points year-over-year.

DHC shares continue to deliver among the highest total shareholder returns across all REITs in the U.S. over both the past 1-year and 3-year measurement periods. Year-to-date alone, DHC stock price has appreciated 81.7% versus an 11% gain in the S&P 500 and a 23% gain in the MSCI U.S. Healthcare REIT Index. As a result of this outperformance, our second quarter G&A expense includes approximately $10 million of incentive management fees.

Second quarter G&A also includes $2.3 million of noncash share-based compensation, more than half of which represents a onetime expense for the accelerated vesting of previously granted share awards with the remainder consistent with prior year periods. Excluding the incentive fee in these noncash items, G&A expense was $7.1 million for the quarter.

During the quarter, we invested $25.8 million of capital, including $19.1 million into our SHOP communities and $6.7 million into our Medical Office and Life Science portfolio. Our year-to-date spend of $47.6 million represents a reduction of $18.4 million or approximately 28% when compared to the same period in 2025.

Our capital expenditures are in line with our expectations. And as a result, we are reaffirming our 2026 recurring CapEx guidance of $100 million to $115 million.

Now I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. As highlighted by Chris and Anthony, our second quarter results continue to show the cash-generating ability of our business, embedded growth in our SHOP segment and reduced leverage.

At quarter end, we had total liquidity of $267 million, including $117 million of cash and our undrawn $150 million secured revolving credit facility. Net debt to annualized adjusted EBITDAre was 7.1x at quarter end, a 1.6x year-over-year and 0.7x sequential leverage reduction. This was driven primarily by continued strong performance in our SHOP segment and over $600 million of asset sales completed since the beginning of 2025.

We expect our leverage to continue to decrease given the favorable trends at our senior living communities and primarily fixed rate debt profile. Adjusted EBITDAre to interest expense improved meaningfully to 2.2x from 1.4x in the prior year. As a reminder, our next debt maturity is not until February 2028.

With growing SHOP NOI, decreasing leverage and a portfolio of over $4 billion of unencumbered assets, we believe we have numerous options available to us as this maturity approaches.

In June, we increased each of our SHOP NOI, adjusted EBITDAre and normalized FFO guidance by $10 million at the midpoint. Today, we are reaffirming this guidance as follows: total NOI of $307 million to $323 million, including $185 million to $195 million of SHOP NOI, adjusted EBITDAre of $300 million to $315 million and normalized FFO of $0.56 per share to $0.62 per share.

While our SHOP NOI guidance remains unchanged, we have updated our assumptions as follows: occupancy growth of 200 basis points, a reduction of 100 basis points; revenue growth of 6.6%, a reduction of 140 basis points, partially offset by average monthly rate growth of 5.5%, an increase of 20 basis points. These revenue changes are offset as we have seen meaningful expense control from our new operators. Assumptions include operating expense growth of 2.5%, a reduction of 200 basis points and expense core growth of 1.5%, a reduction of 70 basis points.

Our second quarter results were consistent with the outlook we laid out when we raised guidance in June, and today's reaffirmation reflects that performance combined with our expectations for the remainder of the year.

Our second quarter SHOP same-store NOI of $52 million included a onetime benefit of approximately $1.5 million related to expenses that we do not expect to see repeated in Q3. These expense onetime benefits contributed 50 basis points of margin in the quarter.

We are encouraged by our results so far in 2026, particularly the continued growth in SHOP NOI, which is tracking towards the high end of our June guidance. Our new operators continue to drive margin expansion through a combination of revenue growth and expense discipline, and we remain confident in the years ahead.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question will come from Michael Carroll with RBC Capital Markets.

Chris, I know you touched on this in your prepared remarks, but I wanted to know if you can give us some additional color on why the SHOP top line is tracking below your expectations. It sounds like this is mainly driven by just the lower occupancy uptick. Is just -- are you just seeing a slower trend in the key leasing season that's driving that? Or is there something more temporary or one-off that's holding that back at least here in the near term?

A lot of it is just kind of more attributed to kind of the transition noise. I think one thing that's important to note is when these communities were transitioned, it wasn't uncommon that many of the operators took on kind of the existing operations infrastructure and team members. And over the course of the last 6 months have continued to kind of rework that.

And I think where it's most relevant with respect to the portfolio is in kind of the sales teams and those programs. And so those are largely now in place, and we're seeing kind of the benefit of some of that occupancy flow through as we've seen in the Q2 results. But nonetheless, the pace of where we think that growth will occur is going to be somewhat muted.

And so this isn't a function in our view of hitting kind of certain occupancy levers -- levels. It's just a kind of a delay in the timing of that ramp-up. And so I think overall, we remain bullish on our outlook for driving occupancy across the portfolio and again, kind of have the tools and the resources in place to do that.

Okay. Then what's the lower RevPOR driven by? Is this just that -- is it kind of tied within the occupancy uptick? Or did you have to also be a little bit more judicious on increasing rates to your existing residents because of these transitions?

Well, total RevPOR is actually increasing. So that in itself is not going down. I think maybe total revenue is what you're referring to, where there's a decrease, and that's tied to the occupancy. Where we're getting kind of better RevPOR throughout the portfolio is outside of just kind of work that's being done and opportunities identified through driving occupancy, there's also seeing -- we're also seeing kind of a good pace and uptick in other ancillary revenues in the level of care, which is driving outsized results with respect to how that informs RevPOR. And so I think that will continue to pace accordingly. And then as occupancy ramps, we'll start to recapture that incremental revenue.

Okay. Great. And then on the ExPOR side, I know that has been reduced or improved. And I think you kind of highlighted just these new group contracts that these new operators have been able to obtain. I mean, kind of within guidance kind of moving into '27, is there more benefit related to that? Or is this kind of a good baseline and they've already seen the benefits of getting to those new contracts and the new ExPOR run rate is a good base kind of growing going forward?

I think for now, the new guidance is a good run rate at least through the end of this year. We are expecting additional synergies as we move into 2027, both in the new operators and even in some of the legacy operators with expected changes to the management contracts for those.

But we are -- for 2026 seeing significant savings in dietary. We've seen maintenance come down significantly, and that's a function of the CapEx we've put into these communities over the last several years and then some other wins we're seeing in contract labor, et cetera.

[Operator Instructions] The next question will come from John Massocca with B. Riley.

Maybe starting off with the new management agreements that are going to start in 2027 that you announced. Is there opportunity as you're thinking longer term for additional agreement changes? Or does that pretty much encompass the entire portfolio once that's in place?

Once that's in place, that will encompass the entire portfolio. So really, just to kind of go back a little bit, this is all of the agreements outside of those that were transitioned with the Aleris contract. So that will be the balance of 80-plus communities. And I don't anticipate any major changes to the contracts in the near term.

There are additional opportunities we're evaluating that is more related to kind of the operators and kind of how we think about opportunities there. But the contract itself, I think, would roll forward in any particular type of relationship.

And then in the quarter, you mentioned $1.5 million of benefits to expenses you don't expect to roll forward. Can you provide a little color on what those were?

Sure. It was really just the timing of expense recognition. We had some over accruals in the first quarter that were offset in the second quarter, and that's really the noise from the quarter.

So I guess kind of even factoring that in, if I look at kind of 1H SHOP NOI performance, it kind of feels like if you continue with any kind of a growth trajectory that you saw from 1Q to 2Q that you're getting towards or above the high end of the new guidance. Anything to kind of be aware of seasonality-wise in 3Q or 4Q that would cause you to kind of keep guidance in place? I know it was relatively recently updated, but just kind of curious if there's something to be aware of beyond those onetime expense savings.

Sure. So to your point, yes, we are tracking to the high end of guidance. We do expect a little bit of seasonality in the third quarter related to just increases in utilities, but nothing overly material. So overall, we still feel good about kind of the high end of that guidance as of now.

And then maybe kind of a similar question on rate. It feels like 5.5% for the full year, but you've already done somewhere closer to 6% in 1H. Any kind of reason not to raise that further? Are you kind of lapping tougher comps in 2H? I was just curious if there's any kind of color around that.

No. I mean, look, I think just being comfortable with kind of where the trajectory is, is we're trying to be mindful. I think that the key theme here, at least for us this quarter is there's just a lot of moving pieces, all for the positive in many ways with respect to these transitions. And so I think as time progresses, we're just kind of unpacking other parts of the business and opportunities.

And again, I think for the revised guidance on kind of the rate of RevPOR growth, I think we feel comfortable with where that is. But at the same time, I think that there's a reasonable expectation that we can kind of continue that run rate as we go into 2027 with seeing consistent growth across the portfolio. And so I think, again, I think we feel good about where that number is.

And then in terms of the occupancy guidance, holistically speaking, is maybe a way to view it that the new operators are kind of not chasing expensive occupancy, if you will? Or is it -- to your point, is it just kind of a focus is maybe more on the expense side for them today and less on the kind of top line growth side and that will come in time? I'm just kind of curious if it's more like a dynamic of how these operators think about the business or if it's something that's just kind of a timing of getting their kind of teeth fully into these new locations?

I think it's the latter, right? I don't think there's any delay in focus on driving top line. And just a reminder, this is average occupancy growth for the year. So this is a culmination of kind of a 12-month trajectory. I mean, we still feel good around as we get to the end of the year around there being kind of real growth throughout the portfolio, and those things kind of remain even with this revised guidance.

And so there's certain communities that we have as identified as kind of more focus-related communities, where we can drive outsized occupancy. There's opportunities with kind of the teams that I referenced earlier kind of getting integrated in these communities. And then outside of just the occupancy side, as I referenced, there's also other upside we're seeing with levels of care and ancillary revenue, which is also going to continue to drive performance.

And then last one for me, just kind of switching away from the SHOP portfolio. What drove the kind of quarter-over-quarter decline in MOB/Life Science rental revenue? I just -- it seems like a lot of the vacancy is going to hit in 3Q. So just curious if there's something else going on there.

Sure. We had a onetime bad debt charge in the quarter of about $1 million that was impacting Q2 results.

Is that related at all to these upcoming vacancies? Or is that a separate credit event?

Unrelated.

[Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

Thank you for joining our call today. Please reach out to our Investor Relations team if you're interested in scheduling a call with the DHC management. Thank you.

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

Good morning, and welcome to the Diversified Healthcare Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, May 5, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate.

With that, I would now like to turn the call over to Chris.

Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered a strong first quarter, demonstrating the powerful combination of our active asset management and the deep expertise of our expanded operating partners. The strategic changes we made within our SHOP portfolio in 2025 continue yielding results with the first quarter aligning with our outlook focus on driving revenue, expense synergies and overall margin improvement. Looking ahead, we are well positioned to capitalize on powerful tailwinds, including the burgeoning demand from an aging population and a historically low new supply pipeline for senior housing. We are confident that our best-in-class operators and strengthened balance sheet will continue to drive superior performance and create significant long-term value for our shareholders.

Turning to the quarter. After the market closed yesterday, DHC issued first quarter results that reflect continued progress across our business. We reported normalized FFO of $33.1 million or $0.14 per share and adjusted EBITDAre of $74 million, both well ahead of the analyst consensus estimate. Consolidated NOI increased 4.7% year-over-year to $75.9 million. Our same-property SHOP portfolio delivered a robust 13.5% increase in NOI year-over-year, reaching $44.3 million. This was driven by same-property occupancy growth of 110 basis points and average monthly rate growth of 5.9%.

Our sequential performance reflects the benefits of our active asset management strategy with contributions from new operator partnerships becoming even more apparent. Our same-property NOI margin expanded by 160 basis points to 14.9%, with occupancy holding at 82.4%. This margin improvement was driven by progress on both the top and bottom line. On the revenue side, growth was largely supported by an average annual rate increase of 4.5% across 70% of the portfolio in January, complemented by a favorable shift in resident levels of care.

On the expense side, our progress has been equally impressive and demonstrates the immediate impact of our new operating partners. For example, during the quarter, we secured new dietary and food and beverage contracts that simultaneously enhance the resident experience while locking in significant cost savings for the year. Furthermore, a key area of focus, labor costs continues to moderate with reduced contract labor and the rightsizing of regional and community labor costs. These early results are a direct testament to the enhanced discipline and tighter cost controls our operators are bringing to the portfolio, and we remain optimistic about our ability to capture further efficiencies.

Building on our operational momentum, we are increasingly focused on selectively deploying capital into high-return ROI projects to drive organic growth. Our strategy targets the repositioning of underutilized or closed skilled nursing wings and converting them into independent living, assisted living or memory care. We have identified a pipeline of opportunities across 16 communities, including 6 communities as part of the first phase. These 6 initial projects are expected to cost approximately $20 million and will add roughly 150 units to the portfolio, representing a significantly lower cost per unit relative to our view of the replacement cost and creating immediate embedded value. Because we currently absorb carrying costs on these vacant wings, these projects are expected to be immediately accretive to earnings upon completion with expected returns starting in the mid-teens.

Beyond the direct financial returns, these conversions enhance the marketability of the entire community, improving the sales cycle and expected length of stay for residents. We believe these projects represent a compelling and disciplined use of DHC's capital, and we expect these repositionings to begin over the coming quarters.

Turning to our medical office and life science portfolio. During the first quarter, we delivered solid results as same-property occupancy increased 60 basis points year-over-year to 95.3%, generating $25.4 million of NOI, a 3.7% increase over last year and a 4.8% increase sequentially. Leasing activity was healthy with 169,000 square feet of new and renewal leasing at rents that were 12% above prior rents with a 9.5-year weighted average lease term. Looking ahead, just over 9% of annualized rental income in our Medical Office and Life Science portfolio is scheduled to expire through 2026, of which 304,000 square feet or approximately 4.9% of annualized rental income is expected to vacate. Subsequent to the quarter, we signed leases totaling 390,000 square feet, which primarily include renewals representing 29% of our 2027 expirations.

Turning to our capital markets and balance sheet initiatives. In March, we sold 13 unencumbered non-core SHOP communities for aggregate proceeds of $23 million. And in April, we also exercised land lease purchase options on 2 of our properties for an aggregate purchase price of $14.5 million. By eliminating ground rent on these well-performing communities, we are able to capture the full economics of the assets and expect to generate low to mid-teen returns on this investment. With DHC's large-scale capital recycling program now complete, we have transitioned from portfolio transformation to value creation.

Given our current capital structure, including relatively low-cost debt and no maturities until 2028, we believe that one of the best uses of our capital today is reinvesting in our own assets. In conclusion, our strong first quarter results validate our strategy and reinforce our confidence for the remainder of 2026. Demand fundamentals in senior housing remain compelling, supported by favorable demographic trends and limited new supply growth. We believe these actions we have taken to enhance operations, reduce leverage and empower our best-in-class operators have positioned DHC for continued earnings and cash flow growth, and we remain committed to delivering attractive total returns to our shareholders.

With that, I will turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the first quarter, our consolidated same-property cash basis NOI was $75.9 million, representing an 8.6% increase year-over-year and a 7.8% increase sequentially. We continue to see upside in our SHOP segment as same-property NOI increased 13.5% year-over-year. When adjusting for insurance proceeds received in Q1 2025, our SHOP same-property NOI would have increased 22% year-over-year.

As Chris highlighted earlier, our operators have had early success in managing expenses as evidenced by the following in our SHOP same-property portfolio, a 370 basis point decrease in dietary costs sequentially, a 70 basis point sequential reduction in labor when adjusting for the number of days in the period and a nearly 35% decrease in contract labor year-over-year and that has led to moderation in our same-property expense growth, which was 350 basis points year-over-year and 120 basis points since last quarter.

We also continue to see strength in pricing as our same-property average monthly rate increased 590 basis points year-over-year and 320 basis points sequentially. Turning to G&A expense. DHC shares have delivered the highest total shareholder returns across all REITs in the U.S. over the past 1-year and 3-year measurement periods. Year-to-date alone, DHC's stock price has appreciated 60% versus a 5.2% gain in the S&P 500 and a 7.9% gain in the Vanguard REIT ETF. As a result of this, our first quarter G&A expense includes $6.6 million of incentive management fees. Excluding the impact of the incentive fee, G&A expense would have been $7.4 million for the quarter.

During the quarter, we invested approximately $21.8 million of capital, including $17.2 million into our SHOP communities and $4.6 million into our Medical Office and Life Science portfolio. As a result of our recently completed disposition program and disciplined capital allocation, we are reaffirming our 2026 recurring CapEx guidance of $100 million to $115 million, representing approximately 18% reduction at the midpoint. Now I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. Overall, our first quarter results further demonstrate the meaningful progress we have made strengthening our balance sheet, reducing leverage and positioning the company for sustainable earnings and cash flow growth. At quarter end, we had total liquidity of $272 million, including $122 million of cash and cash equivalents and the full $150 million available under our secured revolving credit facility. This strong liquidity position provides us with flexibility to support our operating strategy while maintaining appropriate balance sheet discipline.

Net debt to annualized adjusted EBITDAre was 7.8x at quarter end, down from 8.8x a year ago, driven primarily by improved operating performance. Adjusted EBITDAre to interest expense improved meaningfully to 2x from 1.3x at this time last year. We remain confident in reaching our near-term leverage target range of 6.5 to 7.5x with the majority of that improvement expected to be driven by continued growth in SHOP NOI.

In April, Moody's upgraded DHC's corporate family rating to B3 from Caa1 and revised the outlook to positive. This upgrade reflects the progress we have made improving operating performance and strengthening the balance sheet over the past several quarters. Following the completion of our debt transactions in 2025, we have a well-laddered debt maturity profile with no maturities until 2028, allowing us to remain primarily focused on operations. Our portfolio includes 197 unencumbered properties, representing nearly 64% of the portfolio's gross book value, which provides meaningful balance sheet flexibility as we look ahead.

Turning to guidance. For the full year 2026, we are reaffirming the ranges outlined in our fourth quarter earnings as follows: $175 million to $185 million of SHOP NOI, $94 million to $98 million of Medical Office and Life Science segment NOI, $28 million to $30 million of NOI from our triple net lease senior living communities and wellness centers, adjusted EBITDAre of $290 million to $305 million and normalized FFO of $0.52 to $0.58 per share. We are pleased with our first quarter results, particularly the continued growth in SHOP NOI, which is tracking ahead of our initial expectations. The performance is partly being driven by early success in expense management and margin improvement from our new operators. As we look ahead, the momentum we are seeing in the business gives us increasing confidence in our earnings outlook.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question is from Michael Carroll with RBC Capital Markets.

Chris, I wanted to touch on some of the recurring CapEx expectations. I know within the guidance, you're assuming $80 million to $90 million of recurring CapEx within the seniors housing operating portfolio. Is that true maintenance CapEx? And is that the correct run rate to think about going forward? Or is there still some additional deferred CapEx in those numbers and the run rate as you kind of look beyond '26 would be lower than that?

Yes. The $90 million includes maintenance capital and some refresh capital. So that's a blended number. But I think more broadly, to answer your question, maintenance capital, we've got that run rate we're expecting to continue to come in a little bit in overall costs. We're spending a lot more time with our operators just dialing into overall needs of the communities. And so we'd like to see some modest pullback in maintenance capital as the years progress. And then on the kind of the -- what we call a redevelopment capital or the ROI capital, that number as it stands today, I think will stay pretty firm for 2026 despite doing some of these incremental ROI projects I discussed, just given the fact that those will really start to kind of commence later on in the year and a lot of that is just soft cost work. And then in 2027, kind of all things considered, that's where we'll start kind of pulling levers on incremental dollars for that bucket depending on how much of these ROI projects we have in the pipeline.

Okay. And then I think you previously said that the recurring CapEx number would run around 3,500 a unit once kind of you're through some of the deferred stuff that was completed in prior years. Is that still a good number? Or is it going to be lower than that as you kind of progress in '27, '28 with these new operators?

Yes. So the 3,500, we expect to go down in future periods. We think that's a good run rate for 2026. I think to keep in mind, that's going to exclude refresh capital. So kind of piggybacking on what Chris had mentioned for 2026, we expect $5 million to $10 million of refresh capital, which is embedded within that recurring CapEx number that we're guiding towards.

Okay. And then on the investment side, should we think about the new investment opportunities really focused on these wing expansions that you kind of discussed in the prepared remarks? I mean, are there potential acquisition opportunities that you would look at pursuing too? Or is it going to be mostly these renovations?

Mostly the renovations, I think our position today is we've got a lot of opportunity within the portfolio. We talked about a lot of things in the prepared remarks and our investor materials have teased out some items, but there's real opportunity dialing in with these operators to kind of pull in expenses in different areas, some of which we've touched on continuing to kind of drive top line performance and occupancy. And then, again, I think kind of from a capital deployment, really kind of putting that money towards improving these communities and then I think equally important on expanding acuity within the communities before we consider acquisitions.

Okay. And then just last question for me. I guess, within guidance, you reaffirmed the G&A number. I know with the stock performance, I would assume the base management fee is kind of ticking up a little bit. I mean is that the right way to think about it? Or is there something in there that keeps that base management fee lower throughout 2026 that I'm not calculating correctly?

Go ahead, Anthony. Yes. From a G&A perspective, the most volatility we're going to see is from the business management fee, you're right. Depending on fluctuations in share price, it will adjust that number.

Okay. And then within guidance, you just assume that SHOP NOI is probably exceeding that. So even if G&A goes up, then your overall guidance range is still pretty accurate and maybe even trending higher?

That's right.

[Operator Instructions]The next question is from John Massocca with B. Riley.

So I appreciate the color and the reminder on the onetime items that were impacting 1Q '25 kind of comps. Is there anything else kind of onetime to be aware of either in how same-property SHOP NOI growth is being calculated or even anywhere else in kind of the financial reports for 1Q '26...

No, that's the most material item that $2.7 million of business interruption insurance proceeds we received in Q1 '25. There's a little bit of other noise, but nothing of that scale.

Okay. And any kind of direct impact from the Aleris or the former Aleris property transition still flowing through 1Q '26 results? And I mean bigger picture, how are those kind of transitions going in your mind? I know you touched on it a bit in the prepared remarks, but anything kind of tangible that's already been achieved or left to be achieved over the remainder of '26?

Sure. So I can start and then hand it off to Chris on operator performance. So as it relates to the transition and costs associated with that, we capture that in transaction-related costs. So a lot of that is kind of below the line and outside of NOI.

Yes. I think the follow-on, John, to your question, I mean, the AlerisLife, the transitions are going very well. As you're aware, they were completed at the end of the year. The first couple of months in the year, a lot of these operators were just kind of revisiting kind of the overall employment and kind of structure within the communities, retooling kind of their sales teams, et cetera. And again, we touched on other areas where we found pockets of opportunity to reduce costs. And so there's still incremental pieces there that are flowing through. I think we've identified kind of the more material items and those are some of the things that are in progress and underway, and we expect to continue to get incremental benefit each quarter as time progresses, at least through 2026. But I would say, overall, the transitions are going very well. And again, I think we forged some really good relationships with some great operators.

Okay. And then maybe specifically on occupancy or same-property occupancy in the shop space. I know it was kind of flat quarter-over-quarter. I mean does that just reflect seasonality in that? Or is that still some maybe friction from operator transitions? I mean is that going according to maybe your expectations versus your initial guidance?

Yes, it's both. I mean there's some seasonality in there. And then as I just touched on, as these operators have come in predominantly starting in January and kind of reevaluating and retooling kind of the business specific to kind of their outlook, that takes time. And so I think given the fact that we can hold occupancy while we're going through a major transition across our portfolio, I think, is a real win. And I think it kind of reflects well for setting the pace, meaning that we can -- we can run stabilized in Q1 with a lot of disruptions. And then as we get kind of to the more kind of seasonal or higher seasonal period, we can kind of hit the ground running focused on really pushing occupancy now that we have all the pieces in place.

And any updates? I mean how is 2Q trending thus far on kind of SHOP performance?

No. I mean, technically, the April just finished, Numbers are still coming in. So there's nothing kind of specific to speak to. I just think as we referenced, we're reaffirming guidance -- we feel good about our positioning. We're seeing other opportunities as we've referenced. And so I think we feel generally good about the outlook and potentially further improvement, but nothing specifically to touch on just given where we are in the second quarter.

Okay. And then if I think about kind of the difference in the SHOP NOI growth kind of implied in guidance versus what we kind of achieved in 1Q, I mean, is that mostly the higher comps in 1Q '25? Or is there something else to be kind of aware of on either what you're expecting for 2H occupancy or kind of even rate growth?

Yes. I would say that on occupancy, we're continuing to guide to that 300 basis point increase in occupancy year-over-year. We didn't see much progress in Q1, as Chris talked about. As it relates to rate growth, we are expecting 5-plus percent rate growth. And then as we think about just quarterly run rate, we're definitely expecting some NOI increase in Q2. We may see that increase come down a little bit in Q3 with just some seasonal expenses and then ramp back up again in Q4 to come into the overall guide of $175 million to $185...

Okay. And then lastly, I know you talked on it a little bit earlier in the call, but just for kind of the impact on bottom line or even on kind of NOI performance, how much kind of the flow-through from previous year CapEx spend are you expecting to kind of be impactful to 2026 NOI? And is there stuff that's maybe more -- even that was completed years ago or a year ago, that is really more of kind of a 2027 event in terms of a tailwind for NOI or even bottom line numbers?

Yes. I think the best way to kind of think about that is a typical kind of stabilization period following a renovation is kind of 18 to 20 months. So if you think about we had a fair amount between 60 and 70 communities that were renovated kind of in 2023 and '24 those themselves are starting to kind of produce real meaningful results in the form of kind of a more stabilized event. And again, layering on kind of the new operator transition, we'll get other incremental benefits from that, whereas the 2025 refreshes, which was between 20 and 25 communities, we would expect that to show incremental benefit towards the back half of this year and into next year. And then that cadence will continue.

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto to close the call.

Thank you, everybody, for joining the call. We look forward to seeing many of you at our upcoming industry conferences, including NAREIT conference in New York this June. Please reach out to Investor Relations if you are interested in scheduling a meeting with DHC. That concludes our call.

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

Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President.

Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, February 24, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package which can be found on our website at www.dhcreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate.

With that, I would now like to turn the call over to Chris.

Thank you, Matt, and thank you, everyone, for joining our call today. I want to start with a recap of a very busy and successful 2025 for DHC, in which we executed on the stated initiatives that we identified early in the year, and ended the year as the best-performing REIT in the U.S. as measured by both share price appreciation and total shareholder return.

In 2025, we completed over $1.4 billion in capital markets activity, principally focused on financing, asset sales and the establishment of a $150 million undrawn credit facility. We also completed the wind down of AlerisLife, transitioning 116 communities, representing over 17,000 units to seven regionally focused operators and completed renovations at over 30 communities. These efforts, combined with the work of our dedicated asset management team, resulted in full year consolidated NOI growth of 31.3%, a reduction in our leverage of over three turns and no debt maturities until 2028.

As one of the largest owners of senior housing properties in the country, we believe our recent accomplishments, combined with the investments we have made in the portfolio and the favorable industry outlook sets the stage for continued outsized growth in our SHOP portfolio as reflected in our 2026 guidance, which Matt will expand upon momentarily.

Turning to the quarter. After the market closed yesterday, DHC reported strong fourth quarter results, particularly as it relates to our SHOP NOI, which improved 27.6% over last year to $38.3 million reflecting continued execution on our highlighted initiatives and further strengthening DHC's financial position. For the quarter, DHC delivered total revenue of $379.6 million adjusted EBITDAre of $72.4 million and normalized FFO of $21.8 million or $0.09 per share.

Turning first to our senior housing portfolio. SHOP NOI for the full year came in at $139.3 million, which was towards the high end of our guidance. This was driven by same property occupancy that increased 90 basis points year-over-year to 82.4%, an average monthly rate that increased 5.8%. Same-property SHOP NOI margins continued to improve, up 230 basis points year-over-year. These results were achieved despite a somewhat noisy quarter reflecting the transition of 116 SHOP communities to 7 different operators that have proven track records and well-established regional footprints.

With all the transitions completed during the quarter, we remain focused on executing property-specific business plans and targeted opportunities identified across the portfolio. We are intensely focused on executing and lockstep with our operators combining disciplined operational oversight with their deep regional expertise to deliver measurable gains in occupancy and portfolio NOI.

We are focused on driving higher lead to move-in conversion through the rollout of advanced CRM platforms, tighter and more coordinated procurement programs, the introduction of differentiated care levels to capture unmet demand and dynamic pricing strategies that directly capitalize on market-specific conditions. Our early engagement with these operators, many of whom are industry leaders reinforces our confidence in achieving our 2026 outlook.

In addition to the operational opportunities within SHOP, we also have a healthy pipeline of ROI projects that provide an additional driver of earnings upside over the next several years. This will come through the repositioning of underutilized areas within our communities, including former and now closed skilled nursing wings where we can deploy a modest amount of capital to renovate and reopen these areas with the appropriate acuity needs. This initiative has the potential to add approximately 500 SHOP units of the portfolio that could deliver an unlevered mid-teens ROI. We look forward to sharing more details on this opportunity in the coming quarters.

Turning to our Medical Office and Life Science portfolio. During the fourth quarter, we completed approximately 81,000 square feet of leasing at weighted average rents that were 7.9% above prior rents for the same space with an average term of over 8 years. Consolidated occupancy increased 460 basis points sequentially to 91.2%, primarily driven by the sales of vacant or low occupancy properties and leasing completed during the quarter. Same-property cash basis NOI increased 3.8% year-over-year, with margins improving 100 basis points to 59.6%.

Looking ahead, 10.1% of annualized revenue in our Medical Office and Life Science portfolio scheduled to expire through 2026, of which 241,000 square feet or approximately 3.9% of annualized revenue is expected to vacate. Our leasing pipeline remains active, totaling 1 million square feet and reflects average lease terms of 6.9 years and GAAP rent spreads averaging more than 10%.

Turning to our capital markets and balance sheet initiatives. As it relates to our disposition and deleveraging initiatives, we sold 37 noncore properties in the fourth quarter for approximately $250 million bringing the full year disposition to 69 properties for approximately $605 million. These proceeds were used to fully repay our senior secured zero-coupon bonds due in 2026, and we now have no debt maturities until 2028. Our deleveraging efforts in 2025 reduced net debt to adjusted EBITDA from 11.2x at year-end 2024, to 8.1x at the end of 2025.

As we have previously noted, our near-term goal is targeted leverage levels of 6.5x to 7.5x. As of February 20, we were under agreement to sell 13 properties for $23 million. Following the completion of the sale and excluding normalized course capital recycling opportunities that may arise, we are substantially done with our large-scale disposition program. With the asset sales that have been completed over the past 2 years, combined with the significant investments we have made upgrading our communities, we expect to see a continued decline in our CapEx spend, as Anthony will discuss in more detail. Moving forward, dispositions will be on a more opportunistic basis with proceeds used to either reduce leverage or to redeploy into accretive initiatives.

To conclude, demand for our SHOP communities is robust, supported by a growing 80-plus population and the outlook of new supply expected to remain muted for several years. Despite the strong gains in our share price in 2025 and 2026 to date, we still see additional share price upside as we deliver materially improving SHOP NOI and benefit from lower interest costs and reduced CapEx spend. It is our focus to continue delivering on the momentum of the past 2 years and to further drive shareholder value for our investors.

With that, I will now turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the fourth quarter, our same property cash basis NOI was $70.4 million, representing a 15.4% increase year-over-year and 12.4% increase sequentially. Our fourth quarter SHOP same-property results include continued positive momentum in pricing with average monthly rate increasing 580 basis points year-over-year and 120 basis points sequentially. Same-property occupancy increased 90 basis points year-over-year.

These increases resulted in year-over-year same-property SHOP revenue growth of 5.6%. Year-over-year, our same-property SHOP NOI margin increased by 230 basis points to 13.3%, driven by our growth in revenue. As Matt will highlight shortly, we expect that continued increases in revenue and occupancy on the expense moderation result in strong NOI margin growth in 2026.

Turning to G&A expense. The fourth quarter amount includes $5.7 million of business management incentive fee. For the full year, we recognized an incentive to RMR of $17.9 million. This incentive was driven apart by DHC's total shareholder return of nearly 113% during 2025. Excluding the impact of the incentive fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $37 million of capital, including $20 million into our SHOP communities and $17 million into our Medical Office and Life Science portfolio. For the full year, our capital spend totaled $146 million, which is on the low end of our guidance.

We continue to focus on disciplined capital spending as evidenced by a $45 million or 23% reduction when compared to 2024. For 2026, we expect our full year recurring capital expenditures to range from $100 million to $115 million, which represents an over 18% decrease at the midpoint when compared to recurring capital expenditures in 2025. Our 2026 CapEx guidance includes $80 million to $90 million in our SHOP segment, and $20 million to $25 million for our Medical Office and Life Science properties, it is important to note that our SHOP recurring capital guidance includes approximately $10 million of refresh ROI capital.

Now I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $255 million of liquidity, including $105 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. Subsequent to quarter end, we received a $27.2 million cash distribution from AlerisLife in connection with the wind-down of its business.

In December, we redeemed the remaining balance on our 2026 zero-coupon bonds, which resulted in 45 collateral properties being released that have a gross book value of approximately $850 million. Following this redemption, we have a well-laddered debt maturity schedule with no maturities until 2028, allowing us to focus on operations.

Our weighted average cash interest rate as of December 31 was 5.7%. Our net debt to adjusted EBITDAre declined materially from 11.2x at the beginning of 2025 to 8.1x while adjusted EBITDAre to interest expense improved from 1.1x to 1.5x over the course of the year. And based on our guidance, we expect year-end 2026 to be at or above 2x. We remain focused on further reducing our leverage, primarily by growing SHOP NOI, as well as completing the sale of 13 SHOP communities expected to close in March for $23 million.

These 13 SHOP communities lost $1.2 million in the fourth quarter and $3 million for the full year. Our full year adjusted EBITDAre of $284 million was on the high end of our guidance range. For 2025, SHOP NOI was $139.3 million, which was at the high end of our increased guidance provided on our Q2 earnings call. Medical Office and Life Science NOI was $108.1 million, just above the midpoint of our guidance, and our triple net lease senior living community and wellness center NOI was $31.1 million, which exceeded our guidance.

Looking ahead to 2026, we are confident that strong improvements in our SHOP segment and reduced debt from the execution of our 2025 strategic initiatives will drive free cash flow growth at DHC. For the full year, we are expecting NOI as follows. $175 million to $185 million in our SHOP segment, $94 million to $98 million in our Medical Office and Life Science segment, and $28 million to $30 million from our triple net leased senior living communities and wellness centers. It is important to note that the decline in our Medical Office and Life Science segment NOI is largely driven by the sale of 31 properties that contributed $12.3 million of NOI in 2025.

In addition, the site decline in our triple net lease portfolio NOI is largely driven by the February 2025 sale of 18 triple-net leased senior living communities that contributed $1.7 million of NOI in 2025. We expect our 2026 adjusted EBITDAre to be between $290 million and $305 million and normalized FFO of $0.52 to $0.58 per share.

To support the guidance provided on this call, we have added a new guidance slide to our quarterly earnings presentation, which can be found on Page 6. That concludes our prepared remarks.

Operator, please open the line for questions.

[Operator Instructions] And the first question will come from Michael Carroll with RBC Capital Markets.

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

Yes. I mean, look, the main strategy is the continued unlock value proposition which is growing performance through operations. I mean, despite what we believe to be a really strong outlook for 2026. I think, collectively speaking, we believe we're still trailing kind of the benchmark and occupancy even at kind of the guidance occupancy provided. We know just based on kind of margins and where the portfolio will end up for 2026 that there's outsized potential to grow margins.

Again, these are all kind of more organically opportunities. And I just want to emphasize we're laser-focused on continuing to kind of push in that direction, which will provide a healthy runway for the next several years. Specific to your question, as we think about kind of those wings, there's probably, give or take, 15 locations that we've identified that we're bullish on.

I think through those, we probably can get in the neighborhood of close to 500 units, and we talked about mid-teens ROI supporting those. And so that -- that is going to be a function of over a period of time. That's not going to all happen in 2026. And I think the last part to your question, more specifically, is -- the cost is going to vary, but I think if we use kind of $125 million to $175 million per unit, that's probably kind of a decent kind of runway to consider. Again, still premature, but just kind of a benchmark to consider.

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

Certainly, we'll have a better risk-adjusted return for a couple of reasons. As you think about these kind of closed wings, mostly it's going to be to support new acuity. So for example, if we have a community that offers IL and AL, this is an opportunity to introduce memory care. And that just kind of adds for kind of the continuation of care in the community.

And again, that's going to also support other drivers through kind of shared cost benefits, pushing rates at IL and AL given that you kind of have kind of the full package to offer. So it's kind of a rising tide list all boat scenario when you're investing in these wings.

Look, we don't want to rule out the idea of looking at the acquisitions market, but at the same time, just want to temper that's not where our focus is today. Certainly, downstream, if we continue to see progress with the growth that we've outlined in 2026, and we think about capital recycling, we're selling kind of the assets we've noted, that could be a way to kind of support dipping our toe into the acquisition market. But again, there's a lot of opportunity embedded in what we have. So that will be kind of a priority we'll continue to address in the next couple of quarters.

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

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

Was there any specific costs in 4Q related to transitions? Or are those -- like this right now is a pretty good run rate to think about?

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

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

Sure. I think for the rate, again, these -- the rate growth is going to happen sporadically over the year. We do typically have an outsized push in the beginning of the year, and this is primarily on the legacy Aleris properties. And that kind of rate range is 4% to 6%, which is consistent kind of with how we're thinking about the guidance for the year.

But regarding kind of any impact with the flu season, nothing outsized. I mean, certainly, it's something that we deal with and we manage through each year. But there's nothing outsized relative to the portfolio, specifically on any impact or negative impact, if you will, with an outsized flu season. And we don't have February results fully in tow, but January looked promising and again, is in line kind of what our expectations are for the year.

The one thing I would really highlight, it's going to take a little bit of time for these operators to kind of continue working through the transition. I mean, we've just completed transition properties literally at year-end last year. And so while some were done, let's call it, in kind of October, September, October, a lot are more weighted towards the back end of the year. So we should continue to see incremental benefit as they kind of get in and continue to work through the transition and the integration of their business models.

But again, for January specifically, it's in line with some of the kind of the opportunistic views that we saw at the beginning of this in our overall guidance.

[Operator Instructions] The next question will come from John Massocca with B. Riley.

Maybe given some of your comments on some of these new operators continuing to get up to speed. As we think about the cadence of some of the NOI growth implied in guidance over the coming quarter?

Should it be kind of back half of the year weighted then? Or is that maybe overstating the impact of timing for some of those transitions?

I mean, when you kind of bifurcate where the growth is coming, you've got kind of 1/3 of that through occupancy and that specifically will happen over the course of the year and through kind of the sales season, if you will, which is kind of backloaded Q2 and into Q3. So for that portion, yes, we would expect that to flow through as time progresses. When you think about kind of RevPOR and the growth there, that's going to be a function of the rate increase.

Again, we'll get a big piece of that in the beginning of the year combined with levels of care, which will likely take a little bit more time as they get integrated. So from a top line, it's kind of the blend of those two. From an expense side, it's going to be a little bit of benefit out of the gate.

One of the benefits of transitioning these communities as we're getting kind of the much more targeted local regional penetration of staffing and getting the benefit of that flow through. But there's still some work that the operators are going to do with respect to bringing in kind of the right team at the local level or continuing to work with them to execute on the state of business plan, and that piece can take a little bit of time.

So I think that's a long-winded way of saying there is definitely opportunity on the front end. And again -- and then there's going to be continued, I would say, outsized incremental opportunity as we get into mid and late in the year.

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

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

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

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

Okay. And then probably do the math myself to a certain extent. But when you think about the rev -- revenue -- the rent per room, sorry, and the RevPOR growth implied in guidance, what are you looking at there in terms of margin expansion kind of being implied with that over the course of '26?

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

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

Yes. I mean for the known vacates in '26, there's two primary tenants, ones with -- and they're both full building users, one is with the building in Minnesota, which represents about 1.9% of annualized revenue and another building is in Fremont, California that represents about 1% of annualized revenue.

I think the building in Minnesota, look, we've got some early indications of interest. That's going to go from a single-tenant building likely to a multi-tenant building. And so that will need to play out a little bit. We do have some runway before that tenant leaves midyear. So there's still time to evaluate kind of the ultimate strategy there.

For the building in Fremont, that tenant doesn't expire until Q4 of 2026. And that's a really strong R&D market for life science. And so much more healthier outlook and interest on that building. So I would say, overall, I think there's some promising outlook to re-lease both buildings, but kind of more tilted towards Fremont kind of being kind of the better of the two opportunities.

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

Yes. I mean, I think to be transparent, we don't have anything specifically teed up. But I think to the point that if we were to consider additional sales, there's slightly more opportunity on the MOB Life Science given that we've sold a lot of SHOP and kind of got rid of the low-hanging fruit, if you will, in 2025 on what we're closing in Q1. But look, I think, generally speaking, we've seen success in being able to sell assets.

I mean, if we're selling assets, it's likely those that are occupancy challenge or in need of capital, which is consistent with what we've been selling. And so we've -- I guess, it's proven that there's a market for that, given all the transactions we did last year, which was a mix of both stabilized and nonstabilized assets. And it's just going to be -- that the value is going to be relative to the situation.

So again, without having anything specifically identified, it's a little bit hard to kind of dial into a specific strategy outcome. But nonetheless, I think we feel good about being able to transact.

Next question will come from Michael Diana with Maxim Group.

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

So we are -- we just came off of a very active 2025 for 2026. Our major focus is going to be around operations with these transitions. Clearly, with our guidance, we're expecting growth in NOI, growth in normalized FFO and adjusted EBITDA. It's something that our Board will consider, but no immediate priorities on addressing the dividend right now.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto, President and Chief Executive Officer, for any closing remarks.

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

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

Good morning, and welcome to the Diversified Healthcare Trust Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Christopher Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, November 4, 2025. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than the filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO and net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package which can be found on our website at www.dhcreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate.

With that, I would now like to turn the call over to Chris.

Thank you, Matt, and good morning, everyone. Thank you for joining our call today. I will begin by providing a high-level review of DHC's third quarter results and an update on the progress we are making toward our key strategic objectives, including an update to the previously announced transition of our AlerisLife managed communities. Then Anthony will provide more details regarding our quarterly financials and capital spending. And finally, Matt will review our financing activity and liquidity before discussing our outlook for the remainder of the year.

After the market closed yesterday, DHC reported third quarter results that highlight continued momentum across our operating segments and steady execution on our initiatives to strengthen DHC's financial position. Total revenue for the quarter was $388.7 million, an increase of 4% year-over-year. Adjusted EBITDAre was $62.9 million and normalized FFO was $9.7 million or $0.04 per share. During the quarter, we took a significant step forward in repositioning our senior housing operating portfolio with the announced sale by AlerisLife of its management contracts and our results reflect a temporary decline in NOI due to elevated labor costs as we transition the 116 AlerisLife communities to new operators. For the transitioning portfolio, compensation expense as a percent of revenue was approximately 240 basis points above the portfolio average for prior period, representing an incremental cost of roughly $5.1 million for the quarter. These elevated labor costs are primarily driven by required investments in operational support, including payroll allocation for property tours, community reviews, training and onboarding to support incoming operators.

Additionally, temporary employee overlap necessary to meet required notice periods prior to terminations has contributed to the increase. As previously communicated, these transitions are part of AlerisLife's planned wind down of its business which included a broadly marketed process for the sale of the management contracts for the DHC-owned communities to 7 operators and the sale of 17 AlerisLife-owned communities to unique buyers, 21 of the 116 communities were transitioned to new operators as of quarter end and a total of 85 communities have transitioned as of today's call. We are tracking all 116 communities to transition by year-end. As a 34% owner of AlerisLife we expect to receive approximately $25 million to $40 million net proceeds upon the completion of the wind down in 2026. Importantly, this transition -- transaction advances our strategy to establish a more efficient and geographically aligned operating model in line with broader industry trends favoring regional densification.

The new DHC operating agreements include a 10-year term and incorporate performance-based incentive and termination structures that enhance accountability and align operator interest with DHC's objectives reinforced by the operators purchase of these contracts. As part of the diligence and selection of the 7 operators, 5 of whom are new to DHC, our asset management team developed specific criteria to evaluate each operator's capabilities and market expertise. We expect these measures will result in occupancy rates and NOI margins that are more consistent with industry averages. During the third quarter, SHOP occupancy increased 210 basis points year-over-year to 81.5%, marking the fourth consecutive quarter of occupancy growth and RevPAR rose 5.3%, reflecting annual rate increases, gains in care level pricing and reduced discount on concessions at higher occupied communities. Expense for the same period increased by 5.1%, driven primarily by temporary labor cost increases associated with the community transitions, wage adjustments and filling of previously open positions.

Collectively, these trends resulted in a 6.9% year-over-year increase in SHOP revenues and a 7.8% increase in consolidated shop NOI to $29.6 million. Sequentially, the decline in SHOP NOI is primarily attributable to higher seasonal utility costs, favorable onetime adjustments in Q2 and the noted temporary labor costs related to the community transitions, which are expected to moderate through Q4. We Initial feedback from the new operators has been encouraging with feedback complementing opportunities to drive top line revenue with the introduction of additional care levels above market rent increases the opportunity to reduce expenses through rightsizing services with meal offerings, equipment leases and procurement of recurring services and the ability to improve lead to move-in conversion across the portfolio through the integration of each operator's broader CRM tools. We expect to see these initiatives complement our performance over the next several quarters.

Based on year-to-date performance and current trends, we are maintaining our full year SHOP NOI guidance range of $132 million to $140 million. Turning to our medical office and life science portfolio. During the quarter, we completed approximately 86,000 square feet of leasing at weighted average rents of 9% above prior rents for the same space with an average term of nearly 7 years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, primarily driven by the asset sales of vacant or low occupancy properties and leasing during the quarter. Same property cash basis NOI increased 1.6% year-over-year with margins improving 100 basis points to 58.9%. Looking ahead, 1.5% of annualized revenue in our medical office and life science portfolio is scheduled to expire through year-end 2025 of which 22,000 square feet or approximately 30 basis points of annualized revenue is expected to vacate. We maintain an active leasing pipeline totaling 717,000 square feet, including approximately 103,000 square feet of new absorption, providing momentum toward higher portfolio occupancy and continued rent growth with average lease terms of 7.6 years and GAAP rent spreads averaging more than 8%.

Turning to our capital markets and balance sheet initiatives. In August, our Seaport Innovation joint venture completed a $1 billion refinancing of the Vertex Pharmaceuticals headquarters in Boston. As part of this transaction, DHC received a $28 million cash distribution reflecting our 10% share of the proceeds. Following our September issuance of $375 million of senior secured notes in 2030 and with the expected payoff of our remaining 2026 zero-coupon bond notes as early as the fourth quarter, DHC will have no debt maturities until 2028. We continue to make significant progress with our noncore asset sales. Year-to-date, DHC has sold 44 properties for $396 million. And as of November 3, we are under agreement or letters of intent to sell 38 properties for $237 million. We are also tracking close -- to close on 25 of these properties in Q4 and for total proceeds of $211 million, with the remaining balance planned for Q1 2026.

These asset sales will reduce capital spending in 2026 and beyond improve overall occupancy and margins and will contribute to the portfolio's cash flow growth. Looking ahead to 2026, the company is positioned to have its strongest liquidity maturity profile in several years. We believe our share price does not reflect the underlying value of our portfolio for the initiatives management has undertaken this year. With a fully transitioned SHOP portfolio, we believe DHC is well positioned to drive margin expansion, cash flow growth and continued balance sheet improvement, all of which are clear catalysts to drive shareholder value.

With that, I will turn the call over to Anthony.

Thank you, Chris, and good morning, everyone. During the third quarter, our same-property cash-based NOI was $62.6 million, representing a 70 basis point increase year-over-year and 9.5% decrease sequentially. Our third quarter SHOP same-property results include improvements in both occupancy and average monthly rates. Same property occupancy increased 140 basis points year-over-year and 100 basis points sequentially. We also continue to see positive momentum with pricing and achieved an increase in same-property SHOP average monthly rate of 5.3% year-over-year and 60 basis points sequentially. These increases resulted in year-over-year same-property shop revenue growth of 6.6%. Excluding the $5.1 million of temporary compensation expense increases, related to the transition of management contracts from AlerisLife, adjusted SHOP NOI for the quarter would have been $34.8 million and shop NOI margin would have been 10.4%, an increase of 150 basis points for the reported margin of 8.9%.

Turning to G&A expense. The third quarter amount includes $5.7 million of business management incentive fee. This incentive fee is driven in part by an increase in DHC stock price of approximately 90% year-to-date. Any incentive managed to be incurred would not be due until January 2026. Excluding the impact of the incentive management fee G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $43 million of capital, including $35 million in our SHOP communities and $7 million in our medical office and life science portfolio, We are pleased with our recently completed refreshes and redevelopments as we achieved incremental NOI of $2.8 million during the quarter when compared to pre-renovation NOI. These returns are in line with our expectations of delivering a mid-teens ROI. We believe there is continued upside in NOI and growth at these communities. Based on our current expectations for the fourth quarter, we are reaffirming our 2025 CapEx guidance of $140 million to $160 million.

Now I'll turn the call over to Matt.

Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $351 million of liquidity, including $201 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. In September, we advanced the repayment of our January 20260 coupon bonds by issuing $375 million of 5-year secured bonds at a fixed coupon of 7.25%. We used $307 million of the proceeds to partially redeem our January 2026 bonds. The offering was several times oversubscribed, allowing us to improve pricing. This bond is secured by equity pledges on 36 properties, including 21 SHOP communities with an implied valuation of $226,000 per unit. The remaining balance on our 2026 bond is $324 million after a $10.2 million paydown from an encumbered property sale. In addition to this October property sale, subsequent to quarter end, we also sold 11 properties for aggregate gross proceeds of $31 million. As of November 1, we had a total of 38 properties under agreement or LOI for aggregate proceeds of $237 million, with the majority of these closings expected before year-end.

We expect to use cash on hand, our undrawn credit facility and proceeds from our pending dispositions to repay all amounts on our January 2026 bonds as early as year-end. After this repayment, we estimate the weighted average interest rate on our remaining debt to be approximately 5.7% with no maturities until 2028, As of September 30, our net debt-to-adjusted EBITDAre was 10x, primarily reflecting the temporary compensation expense increases from our SHOP segment. Excluding these $5.1 million of elevated compensation expenses, leverage would have been 9.3x, an improvement of 70 basis points from the as-reported number. We remain confident in our strategies to reduce leverage by executing on our pending asset sales to repay debt and to drive stronger performance in our SHOP segment. Looking ahead, we expect improvements in adjusted EBITDA with a full year 2025 range of $275 million to $285 million and trending towards positive cash flow as SHOP operations stabilized and leverage declines.

In closing, based on our current liquidity and asset sales, we are confident that January 2026 bonds will be repaid in full as early as year-end. With our next scheduled maturity in 2028, our near-term focus is on ensuring a smooth transition of the remaining communities from AlerisLife to our new managers. While the transition of these communities presents a temporary increase in cost, we are reaffirming our 2025 SHOP NOI guidance of $132 million to $142 million. Looking ahead, we are optimistic about the long-term performance of our shop segment. We believe our strategic initiatives will continue to drive improvements in NOI, margins and occupancy across our portfolio.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question comes from John Massocca with B. Riley Securities.

Maybe looking towards 4Q '25 and in light of the unchanged job NOI guidance. What impact are you expecting from operator transition OpEx costs in 4Q especially relative to what you experienced in 3Q?

Thanks for the question. So as we noted in prepared remarks, approximately $5.1 million of costs in the quarter related to the transitions. As of today, the majority of our communities have now transitioned. So I would say maybe somewhere around $1.5 million to $2 million of impact in the fourth quarter. As it relates to the overall NOI guide, we do expect to continue seeing increases in occupancy and some reductions in expense mainly utilities that support the overall guidance being unchanged at $1.32 to $1.42 for the year.

Okay. And then in the prepared remarks, you mentioned you had 10.1% margin ex the kind of transition labor compensation expense. Was that a same-store number? Or was that just for the consolidated portfolio?

That's a consolidated number.

Okay. And then continuing with kind of the operator transition costs, is that something that was kind of contemplated when you put out guidance our adjusted guidance in October or even earlier this year? And maybe kind of why -- I understand there are other parties involved, but why now for the transition from the AlerisLife assets to third-party operators.

We'll answer that in parts. So with respect to the guidance, we hadn't necessarily contemplated specific interruption or quantified that with respect to the AlerisLife management contracts. But I think the real kind of opportunity is for us to kind of meet the needs and going through the process, and we understood that there was going to be some disruption and quantifying that it's variable. And so I think we've done the best we can to kind of help monitor that and mitigate it where appropriate. And understand it's kind of a necessary temporary commitment to a broader strategy to bolster the overall performance for the company through the change in relationship, again, to the 7 new operators and kind of the information that we provide is supporting the benefit of that. I think the latter part of your question was why now? I mean, this is really a decision through Alerislife and its business needs. And I think kind of looking at various options supporting it go forward, management on that side has done an amazing job, turning around performance. And I think that's reflected in kind of the multiyear improvement for DHC when you look at AlerisLife managed communities relative to the other operators, they've outperformed.

And given where SHOP is today, they felt like strategically, it was the best benefit and value proposition for the company. And then certainly, with DHC being a 34% owner, there's inherent benefits for that, and we've talked about what a lot of those things are, including the diversification and operators. It cleans up the story for DHC without an affiliation. And I think strategically, it positions us to be kind of a better partner with the new operators and to grow our overall performance as we head into 2026 and future years.

Okay. Sticking with the SHOP portfolio, I know you kind of gave the updated guidance on the NOI, but are you still expecting occupancy to be in the 82% to 83% range by year-end?

Yes.

And then any kind of -- maybe pulls on the revenue side you've seen from the transition? Just any kind of temporary disruption there? Or has that largely been unaffected by these operator transitions?

Look, it's difficult to kind of quantify the top line with respect to where there may have been disruption or not in the sales process. I mean, certainly, you're seeing in our results that top line performance is trending favorably and really the impact to the quarterly performance is on the expense side. But there's likely some disruption. And we think going forward, as the transitions are complete. And as Matt noted, largely through those in October, and I think all but a handful will wrap up towards mid-November. That clearly will provide a lot of -- a better runway, if you will, to avoid any other noise with respect to a transition and focus solely on operations. So again, hard to quantify -- probably some impact as we get mid-November that will be behind us.

Okay. And then anything else to call out on the SHOP operating expense side, that was maybe unrelated to these transitions that increased in the quarter versus in 2Q or 1Q?

No. The major headline was clearly the $5.1 million of elevated comp costs. We did have about a $2.5 million increase sequentially on utilities that was expected, and we highlighted that on our Q2 earnings call. But those are the major drivers.

Okay. And then switching gears to the disposition activity. Can you maybe provide a little more on the items in the pipeline today, how close are those to closing? Do you expect that entire pipeline to close by year-end? And I guess maybe what are the variables that could cause some of those to slip into 2026 or maybe fall out of the pipeline, if at all?

Yes. We do expect a small portion of the highlighted dispositions will close in Q1 2026. That's primarily on the shop side. There's about 13 communities as part of kind of a portfolio transaction. But just over $200 million is expected to close for the balance of this quarter. And that's a combination of MOB and kind of select shop assets. I think the risk with that I think is minimal at this stage. I think a lot of what we see today are the closing periods are within the year for the most part. And so we feel pretty good about being in a position to achieve a lion's share of that number this year. So again, close to $200 million for the balance of this year. And then again, there will be some dispositions that will fall into next year.

Okay. And then I think with the disposition activity as it seems to be closing, you would have maybe a little bit of excess capital, but I guess it depends on how much kind of cash you want to leave on hand. I mean is there any potential to pay down additional debt with disposition activity completed in '25 beyond those -- that debt maturing in 2026? Or is that more likely to stay as kind of dry powder to deal with whatever comes next in 2026.

Yes, that would be left on the balance sheet as dry powder as we kind of turn our focus to offense. Our next debt maturity after the '26 is in 2028. And the interest rate on that is 4.75%. So we're better off leaving that debt on the balance sheet and increasing our cash position.

[Operator Instructions] Since there are no more questions, this concludes the question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks.

Thank you. We would like to thank you all for joining our call today, and we look forward to meeting with many of you at the NAREIT Conference in Dallas in December. At that time, we will have substantially completed the SHOP operator transitions and we plan to publish an updated investor presentation for the conference with additional color on our transition progress and supporting performance. Please reach out to Investor Relations if you're interested in scheduling a call with DHC or meeting at NAREIT. Operator, that concludes our call.

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