Good morning, everyone, and welcome to the Diversified Healthcare Trust Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Melissa McCarthy, Manager of Investor Relations. Ma'am, please go ahead.

Thank you, and good morning. Welcome to the Third quarter 2023 Conference Call for Diversified Healthcare Trust. Joining me on today's call are Jennifer Francis, 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. I would like to note that the recording and retransmission of today's conference call are 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, Thursday, November 2, 2023. 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. Reconciliations of net income or loss to these non-GAAP figures are 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. Now I'd like to turn the call over to Jennifer. Jennifer F. Francis Diversified Healthcare Trust – President, CEO & Managing Trustee Thank you, Melissa, and good morning. Welcome to DHC's third quarter conference call. I'd like to begin by welcoming Matt Brown as our new Chief Financial Officer…

Thanks, Jennifer, and good morning, everyone. Normalized FFO for the third quarter was $8.3 million or $0.03 per share, an increase of $22.5 million from negative $14 million in the prior year. While we are pleased with this improvement, sequentially normalized FFO declined $3.8 million, mainly driven by a $2 million decline in our SHOP segment that I'll address shortly, and an increase in interest expense as a result of continued increases in SOFR. Our consolidated same-property cash basis NOI was $56.2 million which is a $22.1 million or 64.6% year-over-year improvement. The changes by segment are as follows: Office same-property cash basis NOI was $27.6 million, representing a year-over-year decline of $754,000, mainly driven by increased expenses due to a tenant contraction. On a sequential quarter basis, cash basis NOI declined $1.9 million in line with expectations based on higher cooling costs in the summer months. SHOP same-property cash basis NOI was $21 million, representing a significant year-over-year increase of $22.8 million. On a sequential quarter basis, cash basis NOI declined $2 million made up of the following: an increase in expenses of $9.8 million, most notably $5.3 million in wages, payroll taxes and benefits $2.6 million in insurance premium increases and $2.3 million from seasonal cooling costs in the summer months. These expense increases were partially offset by an increase in revenue of $7.8 million, driven by a 100 basis point increase in occupancy. Turning to the balance sheet. We ended the quarter with over $279 million in cash and restricted cash. As a reminder, we have $700 million of debt maturing in the first half of 2024 and are not currently in compliance with our debt incurrence covenant which prevents us from issuing any new debt or refinancing existing debt. Our consolidated income available for debt service…

[Operator Instructions] Our first question today comes from Bryan Maher from B. Riley FBR.

A couple for me this morning. Let's start with the covenant compliance. I think you're at 1.17, our model had you at 1.22 for the quarter. So we're not too far off. I think the prior commentary from management was by mid-year 2024. And I think, Matt, you just said by year-end 2024, barring some changes in dispositions and what have you. What's pushing that back? Again, we're kind of getting to it in the second quarter of 2024.

I think, Bryan, it really relates to the growth in our SHOP segment, we do expect to see that continue to improve. But as you saw in this quarter's results, we did have some negative impact from operating expenses. Some of those are seasonal. However, some of those are going to continue such as wages and insurance costs. So we think realistically, by the end of '24 makes sense. However, if the SHOP growth is in excess of forecast, it could be closer to the middle of the year.

I just want to add to that, Bryan, that we -- Matt talked about the deferral of capital in his prepared remarks and we have deferred capital and that capital deferral will have an impact on our operators' ability to grow rate and to grow occupancy. I mean, obviously, we are still projecting real growth in the SHOP segment. But as soon as we can start redeploying that deferred capital, we'll be able to -- our operators will be able to push results.

Yes. And I can understand and agree with deferring some capital. That being said, at properties where you might have previously done a deep dive and a refresh instead maybe changing carpet and putting pain on it, maybe a capital improvement light, but still something that refreshes the property. Is that something that's being considered?

Without a doubt, I mean, we're still expecting in '24 million $200 million to $220 million of capital spend. So we've deferred capital and we haven't suspended capital. So there is still -- there are still improvements going on, and we will see the results from those improvements.

Okay. Moving on to the bylaws changes. I found that to be interesting specifically as it relates to the NOLs. Matt, can you share with us what the current NOLs available are?

Sure. At DHC, they're currently in excess of $300 million. And for our TRS entity, they're in excess of $100 million. So over $400 million in the aggregate.

Great. And then we noticed that the other operators within SHOP did a little bit better than our expectations and the 5-star stuff was a little lighter than we had thought. Is there anything going on there particularly in the other operators that can further juice the NOI coming out of those properties?

They're just really having positive results, growing occupancy, pushing rate. I think there's still a great deal of opportunity with our other operators and with Aleris to push rate and continue to push the rate associated with level of care and making sure that residents are at the appropriate level of care. And so they're just -- they're for the most part, doing a really good job.

Shifting gears to the asset sales. And I know you probably don't want to get into too much detail on that. But can you give us any more color as to if they're more along the lines of one-offs or if they're portfolios? I think you talked about in your prepared comments across segments and across geographies. Can you give us any more color, level of magnitude of proceeds, et cetera?

Yes. So they are -- it is across -- the properties are across all of our operating segments. It's a pretty challenging time right now to sell assets. We feel pretty positive about the properties that we've picked. We picked the assets that we believe have the most desirable characteristics for buyers. Yes, it's really not a market for large portfolio sales. So I think that these dispositions will be in small bite-size dispositions, 1, 2, 3 assets maybe some much smaller portfolios, but it's certainly not 1 or 2 or 3 large portfolios. It's a pretty -- like I said, it's a challenging time to sell assets, but because of the quality of these assets, we think that we'll be successful. We're out with -- I would -- close to $1 billion in assets that we've -- that we're engaging brokers with.

That's good color. And we've come across articles saying that entities like Bain Capital have an over $2 billion fund looking to buy assets in your world. And I suspect that Ventas and Welltower might be interested as well. But I'll leave that up to you guys and your brokers. Last for me on -- and I know you didn't really want to go too far down this road on the credit facility. But would you say that the bank group is receptive to your overtures? And if you were to look for an extension, are you kind of thinking 6 months or a year? Just any broad strokes there would be really helpful.

Yes, Bryan, it’s tough to provide too much color because we are in ongoing negotiations. Thus far, we’ve been dealing with the admin agent. And we believe we’ve reached terms with them. And now it’s really engaging in the rest of the bank group, and we need approval from 100% as it relates to a maturity extension, we’d love to get a year, but it’s too early to really definitively say at this point.

[Operator Instructions] And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

Thank you, and thank you all for joining our call today. Operator, that concludes our call.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.