Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2019 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.I would like to now turn the conference over to Michael Kodesch, Director of Investor Relations. Go ahead.

Thank you. Welcome to Diversified Healthcare Trust call covering the fourth quarter 2019 results. Joining me on today's call are Jennifer Francis, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer.Today's call includes the presentation by management followed by a question-and-answer session. I would like to note that the transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of Diversified Healthcare Trust or DHC.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 present beliefs and expectations as of today, Monday, March 2, 2020.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, EBITDA, EBITDARM or adjusted EBITDA and cash basis net operating income or cash basis NOI.Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package 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 within the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.Now, I would like to turn the call over to Jennifer.

Thank you, Michael. Good morning to our shareholders and call participants and welcome to our year-end earnings call.We were pleased to begin the New Year with a new name, Diversified Healthcare Trust, or DHC. With the portfolio of roughly 50% medical office and life science properties, we believe our new name more accurately depicts both, our portfolio of diverse, high-quality healthcare real estate; and our strategy, moving forward.At the start of the year, we announced the closing of the transaction to restructure our business arrangements with Five Star Senior Living, effective January 1, 2020, which was a substantial milestone in DHC's ongoing transformation.I'd like to start the call this morning by touching upon our medical office and life science properties, now referred to as our Office Portfolio segment, which represents approximately 48% of DHC's cash basis NOI for the fourth quarter of 2019. This portfolio contains close to 12 million square feet comprised of roughly 7.3 million square feet of medical office buildings, and 4.5 million square feet of life science properties with a weighted average lease term of 6.4 years. The analysts and investor communities frequently question us on our exposure to off-campus medical office buildings. The demand for the delivery of medical care continues to be pushed away from hospital campuses to be closer to the consumer. With more complex treatments, such as total knee replacement and extensive spinal cord procedures being removed from the CMS inpatient only list, we continue to see the benefit of owning assets more conveniently located off-campus and close to the patient and therefore more attractive to the medical providers leasing space from us. As such, we remain committed to our strategy of owning off-campus medical office buildings.Of DHC's annualized life science revenue, 76% is generated from the top two life science states,…

Thank you, Jennifer, and good morning, everyone. I'll be discussing some of the fourth quarter financial results beyond what Jennifer just covered.Normalize FFO for the fourth quarter of 2019 was $70.8 million or $0.30 per share, which was up $0.03 per share compared to the same quarter last year. The majority of the increase in normalized FFO was primarily the result of not incurring a business management incentive fee to RMR in 2019, compared to the $40.6 million incentive fee recognized in the fourth quarter of 2018. This was largely offset by the Five Star rent reduction in our triple net leased Senior Living communities that we've discussed previously.In January, we declared a $0.15 per share dividend payable in the first quarter of 2020. The normalized FFO payout ratio for the fourth quarter based on this dividend was approximately 50%. In addition to not recognizing an incentive management fee in 2019, our base business management fees continued to be paid on market cap, and not on the historical cost of our real estate.As a result, total general and administrative expenses were down $48.9 million in 2019, compared to the prior year, which we believe demonstrates the strong alignment of interests between RMR and DHC's shareholders.Turning to capital expenditures, we spent $22.5 million in recurring CapEx in the fourth quarter and $28.3 million on redevelopment projects in both our Office Portfolio and SHOP segments. In our Office Portfolio, we continue to make progress on the repositioning in Washington DC that was discussed on prior calls. Looking into 2020, the majority of our Office Portfolio capital spend will be focused on our redevelopment project Torrey Pines that Jennifer mentioned earlier, and we are excited about 2 additional redevelopments planned for 2020. These assets are in the Boston and Tempe markets and represent opportunities to further enhance our high quality portfolio.In our SHOP portfolio, our redevelopment capital spend for the quarter was primarily related to leased communities in 2019. Going forward, there will be increased redevelopment capital expenditures to reposition our portfolio and address capital projects that were deferred as a result of the lease structure.Moving to our balance sheet. We ended the third quarter with $37.4 million of cash on hand and $538 million outstanding on our revolving credit facility. During the fourth quarter, we repaid our $350 million term loan that was scheduled to mature in January of 2020 and obtained a new short-term $250 million term loan to provide us with increased flexibility in the timing of our disposition. As of December 31, our debt to adjusted EBITDA was 7.3 times, down slightly from last quarter. We will continue to use asset sale proceeds from our disposition program to reduce debt.That concludes our prepared remarks. Operator, please open up the line of questions.

[Operator Instructions] Our first question is from Drew Babin from Baird. Go ahead.

A question on just the Torrey Pines redevelopment. I guess, can you give some kind of update on negotiations you may or may not be having with the potential tenants there? And then, Rick, I know you mentioned additional redevelopments in Tempe and Massachusetts. Are those related 20 maturities and then will there be some downtime that we can expect to occur with those?

So, Drew, on the Torrey Pines, we've had very good leasing activity. We have proposals out, most of them we're expecting that the three buildings will end up being multi-tenanted. So, we could see a full building tenant from one of them. But as I said in the prepared remarks, we've had proposals, we expect roll-ups in rent. So, it's been pretty active. Yes. Tell me -- could you please repeat your second question?

Yes, sure. I was asking you about the Tempe and Massachusetts, redevelopments that Rick mentioned. Are those related to 20 lease maturities, and will there be any significant downtime associated with those or re-tenanting with it?

They are, expected lease expirations in 2020. Both, our markets, we feel very good about. In Massachusetts, it's in Lexington, Mass, which is a very strong life sciences market; and Tempe is one of the stronger markets in Arizona. So, we expect the redevelopments will commence kind of midyear on both of those and continue on for the balance of 2020.

Okay. And any comment on ROI expectations on this?

I expect that we'll certainly have roll-ups in rent in both of them. I think we're expecting high single to low double digit returns.

Okay. Thank you. And then, just one more for me on the asset sales that are planned. I guess, can you talk about the cap rate on what's been executed or what's kind of spoken for thus far versus what remains, kind of breaking down -- breaking that down to two pools for modeling purposes?

Yes. I mean, we've been saying we're expecting cap rates that are around seven caps. They've come in slightly lower than that so far. I would just say that there are blended cap at around the seven.

Okay. And I guess, related question too, as you sell these assets, might there be any need for acquisitions from 1031 exchange perspective just for tax purposes? Might we see some of that or is it different tax situation, of Rick sort of -- will you be able to do that without any offsetting acquisitions?

At this point, we've worked with our tax team and the distribution portfolio we've identified, we shouldn't have any need for a 1031 change.

Our next question is from Vikram Malhotra from Morgan Stanley.

So, just for some seniors housing and the EBITDAR, and I think you mentioned that maybe it was -- I think you mentioned that the expense trend has been going higher -- should go higher recently or in 2020? I'm just wondering, can you give us a broader sort of view on occupancy and just EBITDAR? You talked -- in 2Q, you talked about '19 being down. What are your high level expectations for '20 in terms of the SHOP EBITDAR?

So, from a SHP perspective, we've generally forecasted revenue to be flattish. The team is intentionally deemphasizing occupancy and focusing on profitability. We had come to realize that there was a number of properties in the portfolio that were fairly well occupied that just weren't generating the contribution margin we were looking for. So, part of Five Star’s initiatives, they've kind of reinvented their asset management -- sorry, their revenue management system, and are really focusing to drive results there. So, as a result, we may see the occupancy lag a little bit compared to the past, but the occupancy we do add will be good solid, profitable occupancy.Going into 2020, we expect to see labor costs elevated. We are intentionally really investing in the teams. Again, we'd like to think we're being somewhat conservative with the flat revenue estimate, because as we’ve upgraded some of the local and regional teams we're expecting better results.So, they're very much working to kind of right the ship and get things trending in the right direction. And unfortunately, there's a lag in the financials to see some of those. There's a lot of things that the team is doing, they’re great work. But you just don't see the results in the financial. So, we expect the earlier half of 2020 will continue to kind of post these larger declines in EBITDAR and then it will flatten out later in the year.So, for the full year, we're modeling excluding the properties we've got slated for distribution, were probably down 8.5% to 10% or so on an EBITDARM basis. But again -- I mean, I don't think that really tells the true story of some of the wins that have happened. I mean, just making a quick list of some of the things that have…

And then, just on the -- related again just senior housing, if I would have used a pro forma numbers, which you gave, which is really helpful in the supplement, what would be the FFO impact, if this had been converted for the full quarter of 4Q ‘19? I'm getting to about five pennies, if that's correct but just wondering if you have a more refined number.

I don't have it on a pro forma basis. The one thing I would say on an FFO basis is that believe it or not, we've actually outperformed the model that we had from August, from April of 2019, outperformed by $0.02 a share on both FFO and internally our CAD metric. Again, we kind of anticipated some of this. And that was our April model as the labor initiatives really took hold during the third quarter. We'd updated some of our internal models. I think, we had shared with the rating agencies updated projections back in October. So for the full year, we actually met those expectations and again outperformed on a CAD basis by about $0.05 per share.So, I think a lot of that capital spending is just being shifted from ‘19 to ‘20. We are anticipating elevated CapEx in 2020, but I don't think that's a surprise, based on everything we've been saying since this restructuring started.

And given the elevated CapEx. So, if we look at the goal that you had of having sort of an 80% FAD payout and the leverage coming down, sounds like that's probably shifted out into next year, if I'm correct. Like, how are you anticipating leverage and the timing of dispositions, the leverage and the FAD pay out for this year?

2020 was always expected to be a little higher. We were little bit careful in describing how we were setting the dividend, and it was based on CAD in the future, and that future was generally 2021. So we're hoping to get a lot of this -- this one time stuff behind us in 2020 and be well positioned for 2021. As we see -- once we start seeing EBITDA growth in our senior living portfolio, we should be really well positioned from a leverage and CAD perspective as well.

Okay, great. And just last one. I don't know if you've had any discussions with Five Star, but given sort of the sharp exposure now, and it might be early, but just any specific measures that are being taken in case sort of the coronavirus starts to spread more rapidly here in the U.S.?

Sure. They do -- have taken measures. Of course, the flu still remains the greatest threat to senior living right now. But, at this point, I think every operator, including Five Star needs to be prepared for the coronavirus. They've assembled the task force with strategic sourcing, clinical and operations. One of the issues that operators will have to deal with is assuring their supply chain but also obviously having a emergency preparedness information available to all of employees. And they're doing that via their share point site. And they're actively working on infection control. Again, this is stuff that they always do, but they've got a heightened elevation because of the coronavirus.

Our next question is from Bryan Maher from B. Riley FBR.

Sticking with the dividend discussion you were just having with Vikram. Just to be clear though, after the dividend cut early last year, even if it takes to 2021 to get the FAD at about 75%, there is just simply no appetite by the management or the Board to change this dividend any time in the foreseeable future. Is that clear?

Absolutely, I mean, there's -- the only appetite for change is I hope in '21 we're talking about increasing it. But, as of now, no, I think we were conservative enough. And, again, payout ratios will be a little bit elevated next year. We're still anticipating a normalized FFO payout ratio on the 50s next year, so -- or this year 2020. So we believe we're well positioned.

I just wanted to highlight that with dividend today approaching 10%, so. Moving on to the disposition, the $539 million. Do you anticipate that to be substantially completed in the second -- third quarter, or could it tail off until latter part of 2020? And then, can you remind us what the capital recycling activity level will look like kind of as we hit 2021 and 2022?

I think, midyear is our target on disposition. I think we’d be -- where we are -- we're happy with where we are right now, would be over $900 million really. It's buyers on some of these deals that have fallen out of agreement -- have done what they said they were going to do, moving into these deals. But -- so, I would say, yes, midyear probably makes sense. And as far as capital recycling, the rate by which -- at which we recycle capital, we're putting together lists of properties that we think might make sense, based on recent transactions, where we think we've maximized value. But, I don't feel that we have a specific targeted amount that we hope to recycle every year.

And then, lastly for me, can you talk a little bit more about -- you talked about the region challenges, and I think you noted South Carolina in your prepared comments. Was that mostly a supply issue? And I'm constantly perplexed when I look at not just your information, but some others where we see occupancy levels decline but rates go up. And I know the end game, whether it's hotels or anything is you always want rate to go up because most of that drops to the bottom line versus occupancy going up and rate coming down which squeezes margins. But, can you talk a little bit about the nuances of occupancy declines and rate increases? And how do you kind of weigh the in order to optimize the revenue?

That's really specifically what Five Star’s updated revenue management platforms is all about, trying to make sure that we're charging for services appropriately, trying to make sure we're not giving certain services away that result in a suboptimal profitability margin. The supply is certainly a piece of it. It's difficult to push rate when your new competitors are giving the product away.On the flip side, our well-established communities should generally have an established reputation. And frankly, we should have a lower cost, so we should be able to win a competition on cost. But, the question is whether that makes sense and whether we're willing to. Certain markets, again, the Charleston, South Carolina market, for example, over the last few years have seen an incredible amount of new supply, coupled with -- there's been a fair amount of turnover, voluntary and involuntary down there, as a result of Five Star’s focused regions programs. So, I don't want to say too much about it specifically, but I mean we're pleased with the focus and the intensity of the additional resources of Five Star is dedicated to certain regions and we expect to see that continue forward.

Our next question is from Michael Carroll from RBC Capital Markets. Go ahead.

Yes. Jennifer, can you provide us some additional color on the shop results? I know you continue to indicate that the 2019 results, while they were down or better than your expectations. Can you help us understand what your expectations are going forward? Should we expect these type of declines to continue as we go into 2020?

Mike, this is Rick. Maybe I can take that one. I do expect the same type of decreases in Q1 and probably Q2 before it flattens out for Q3 and Q4, kind of bring us back to that 8.5% to 10% number for the year, most likely. And again, I mean, really trying to upgrade the talent in a number of these properties, both frontline staff, but most importantly that executive director role, I think Five Star’s hired an incredible amount of new EDs this year. And we're pretty excited about that. I think, the number is over 80…

82.

…for the portfolio, which is pretty incredible, when you think about it. There's also been a number of additional regional folks put in. And those costs are -- because they're in the communities every day, are actually allocated down to the communities. So, we're seeing that as kind of an unfavorable comp where it's a cost that wasn't there last year, but it's a cost we all agree is necessary and a good thing to drive future results.So, again, there's a number of investments in people and platforms. From a cost perspective we've continued to see elevated repair and maintenance expense, again, as part of making sure that communities are well-positioned to compete. I don't think too many other people have talked about it much, but we've seen increases in insurance expense as well. I think, that's kind of market wide, doesn't really matter the industry. I think, we've all seen insurance rates climb. We’ve had some -- this particular quarter, we've had some real estate tax increases that we're in the process of trying to appeal. So, it's a lot going on, but I think that the key thing is the investments in people.

Okay. And then, with regard to those initiatives that was started in 3Q ‘19, and how long are those going to cause labor costs to continue to grind higher? I mean, is this a two-year type uptick or a step up in labor costs expenses, or how should we think about that?

I'd say, we've been talking about this with Katie since she kind of took over in January of '19. A lot of it was planning out and doing some market analysis and really assessing kind of where we were. And then, the execution on the plan really started in the second quarter. Q3 is really where we started to see that increased labor, and they’ve largely addressed the big issues. And I think we're kind of at a new level for labor. But again, really hopeful that we'll see it turn into revenue growth soon to offset it.

And then have you seen those investments turn the revenue growth yet or is it too early to tell still?

I think it's too early to tell.

Okay.

We have toured a number of properties. Our asset managers are excited about the teams that are in place and the things that they're doing. Some of these communities are smaller, and they may only have 4 or 5 move-ins a month. So, it's kind of hard to say specifically what's driving it, but we're excited about the direction.

And then, can you talk to us a little bit about the investment strategy? I mean, specifically, I know that the active adult facility is something a little bit different versus the rest of the portfolio. And was there any contemplation of not doing an acquisition and buying back stock instead?

Well, we're very excited about the acquisition and I'm sure I've talked to you about this, talk a lot about how senior living and independent living is very different today than it was 10 or 15 years ago. And it's higher acuity in independent living. And so, we've been very interested in the active adult over 55. Because, again, we think, it looks more like what independent living looked like 10 or 15 years ago. So, we were very excited when the opportunity came -- was presented to us. Because it's so close to a couple of our senior living communities, we felt like there were some real synergies there. So no, we didn’t -- we were excited about it and didn't think about anything else associated with it.

Would you consider buying back stock at these current levels?

Absolutely. I think, it's something the Board has discussed. The challenge we have is again we're in the middle of a disposition program to reduce our leverage, to try to maintain the investment grade rating. And I think where we are today, trying to maintain access to that capital is really important for us. So, it wouldn’t really make a lot of sense to talk about a share repurchase program or execute on them right now.I think -- as I said, I mean, we've kind of performed very much in line with our previous expectations. But, if concerns about some of the headlines with this new virus or other things caused the rating agencies to downgrade us further, then, once -- we could potentially reset leverage targets, but it's too early for that. And we're continuing to march along with the stated plan, but it is something that the Board's discussed several times. I think, we all agree that shares are undervalued for the assets that we have at this point.

[Operator Instructions] Our next question is from Omotayo Okusanya from Mizuho. Go ahead.

Hi. Yes. Good morning. I just wanted to focus on the MOB portfolio for a minute, Jennifer. And I guess, just the same store NOI growth from the MOB portfolio was again negative for all of ‘19, negative during the quarter as well. Just kind of curious, as you start think about 2020, how you just kind of think about the longer term performance of the MOB portfolio, especially relative to your peers who seem to kind of deliver this kind of 2.5%, 3%, same store NOI number on a very consistent basis.

Yes. So, we are generally negotiating increases in our leases. I know in the last quarter for the leases that we negotiated, both new and renewal leases, we had close to a 3% annual increase in the leases that we negotiated in rents. But we've -- some of the vacancies that we've had have offset that. So, I think that our Office Portfolio segment is going to be probably flat to up just a bit, in 2020.

Like what do you think it takes to kind of get into this kind of 2.5% to 3% number that everybody else kind of puts out there?

Yes. I think executing on some of the redevelopment programs that we have with Torrey Pines and some of our other properties where we're investing in repositioning those assets, once we get those leased up and put into our -- back into our portfolio, I think that we'll start seeing some growth.

Okay, great. And then, just one other question. You did make a comment in your earlier part of the call about the lease expiration looks much better this year. But, could you just kind of talk us through some of the stuff that might be expiring in 2020/2021, like some parts of Cedar [ph] if the Medtronic kind of -- what those conversations are like right now. And maybe if we should be expecting any major non-renewals from any of your large tenants?

So, the tenants that you just mentioned, we don't have any expected vacating coming up. We've got a little over 1 million square feet of leases that expire in 2020, and we are in active -- kind of pretty far along, active negotiations with about two thirds of those tenants. We’re actually feeling very good. The redevelopment properties that I talked about in the call, in my prepared remarks, in Lexington and in Arizona, I think are probably the two biggest lease expirations that -- where we know that tenants are vacating.

This concludes our question-and-answer session. I would now like to turn the conference over to Jennifer Francis for closing remarks.

Thank you. And thank you for joining us on our fourth quarter earnings call.

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