Good morning, and welcome to the Diversified Healthcare Trust Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Thank you, Drew. Good morning. Joining me on today's call are Chris Bilotto, 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 5, 2024. 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 SHOP net operating income or SHOP 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, Melissa. Good morning, everyone, and thank you for joining our call. On today's call, I will provide a high-level overview of DHC's third-quarter financial and operating results, along with an update on key strategic initiatives for the remainder of 2024 and into next year. Later, Matt will provide more detail on our third quarter financial results and an update on our full-year guidance. DHC delivered mixed financial results in the third quarter, primarily attributed to our SHOP segment including a sequential 40 basis-point improvement in same-store occupancy and moderate revenue growth which was offset by cost increases resulting from higher seasonal expenses, salaries and wages, and certain onetime items. Compared to the prior year, our consolidated SHOP NOI increased 32.6%, supported by operational improvements and a favorable market trends in our senior housing portfolio. Turning to our medical office and life science portfolio performance. During the quarter, we completed 83,000 square feet of new and renewal leasing activity with a rent roll up of 4.8% and a weighted average lease term of 7.4 years. Same-store occupancy decreased by 150 basis-points to 87.8%, largely due to the previously communicated known vacate of a building in Valley Durham, North Carolina, reflecting 126,000 square feet. As we look ahead, roughly 9% of our annualized revenue is still to expire through year-end 2025. Our largest known vacate during this period is with a tenant whose expiration is in the first quarter of 2025 and located in St. Louis, Missouri, occupying close to 233,000 square feet or 2.2% of annualized revenue. We have various initiatives underway to address vacancies and leasing of our properties, which include select dispositions along with active asset management. Complementing our retention and absorption outlook, we maintain an active leasing pipeline with close to 400,000 square feet of activity,…

Thank you, Chris, and good morning, everyone. Normalized FFO for the third quarter was $4 million or $0.02 per share. Our same property cash basis NOI was $65.8 million, representing a 16.1% improvement year-over-year and a 1.5% decline sequentially. The sequential decline was mainly caused by our Medical Office and Life Science segment that saw same property occupancy dropped 150 basis-points to 87.8%. SHOP highlights for our same property portfolio include a 5.4% (ph) increase in average monthly rate year-over-year, occupancy growth of 130 basis-points year-over-year, and 40 basis-points sequentially and margin expansion of 240 basis-points year-over-year. These factors combine to deliver the 6.4% year-over-year revenue growth, Chris touched on earlier. Despite this strong progress on the top line, we experienced certain expense increases negatively impacting results that totaled $2.5 million and include an insurance deductible related to a fire at a community and water intrusion remediation that we did not factor into our quarterly SHOP guidance. On a positive note on expense management, we successfully renewed our annual insurance program effective July 1st, resulting in a $6.8 million or 26% reduction in our premiums, a benefit we anticipate to realize in the upcoming quarters. Lastly, as it relates to this quarter's earnings, G&A expense includes a $6.9 million estimated business management incentive fee. Excluding estimated incentive fees, G&A expense would have been $7 million, in-line with Q2 results. We do not include incentive fee expense in normalized FFO or adjusted EBITDAre until the fourth quarter when the final incentive fee amount is determined, if any. The incentive fee accrual may increase or decrease over the remainder of the year, depending on how DHC performs relative to the index. Turning to liquidity, financing activities and CapEx. We ended the quarter with over $256 million of cash. As discussed on prior…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Thank you. Good morning. Quite a lot to unpack there. Maybe starting with the GSE agency debt and issuances, can you give us a little bit more color. I think you said that you're in the market on $106 million, I think I might have that right of proceeds with the agencies. How many property, how much more do you think you go down with the road -- with the agency debt versus other lenders? And maybe you can also share with us what kind of terms we're looking at here?

Hey, Bryan. Good morning. Yes, you're right. It was about $106 million in proceeds. We're at the phase of a formal quote receipt that we're currently negotiating based off the terms that were put in that. That is a financing on eight of our communities. And we are also looking at another government agency to do financing on a handful of communities or so as well as expanding our pool of lenders to achieve the maximum proceeds available. So that's where we are currently. As it relates to terms because we're still in a negotiation phase, I don't want to go into too much detail, but a lot of the terms are similar to what we've talked about previously, including a loan-to-value somewhere around 60% as well as for interest rates still in that 6% to 6.5% range.

Okay. Thanks. That's helpful. And you're sitting on a lot of cash, $250 million-ish, $100 million coming in here, $50 million that you can bring in from other asset sales aside from the $302 million or so million that's going over to the zero. So you're kind of in the $400 million zip code, you need $440 million. Is there a thought process given, the cash that you have and the cash that's coming in near-term to start shipping away at buying in some of those $975 million or are you going to wait until you have the whole bucket and do it all at once?

Yeah, Bryan. We're advancing our financing strategy here. So, we're first focused on bringing in proceeds there. But you're right, we have adequate cash and likely, we'll start chipping away at that.

Okay. I think the big frustration here today and with the stock in particular is the SHOP NOI, slowness of recovery. I mean, we all agree that there is recovery, but I think that there is some disappointment. Can you drill down a little bit further on why the costs have persisted to increase so much that its impacted environment where we're generally hearing that costs are becoming not quite the headwind that they had over the past couple of years.

Yeah, Bryan. I think a real impact of the cost increase this quarter was really driven by certain kind of non-recurring expenses that I highlighted in the prepared remarks, totaling about $2.5 million, mainly due to a fire we had at a community resulting in an insurance deductible as well as certain remediation costs from damage from the hurricanes that occurred in Q3. Beyond that, I would say our costs have really moderated and we were negatively impacted by that. I will also add, in Q3 of every year, we generally see an increase in utilities as a result of seasonal cooling and that will kind of moderate and come down slightly in Q4 for that.

Yeah. And I would add, Bryan, the slowness here is in the top-line. I mean, as Matt mentioned, we do have certain costs that are unexpected and that can kind of ebb and flow between quarter as we understand that, but really, I think, kind of not getting to the overall net move-ins and the occupancy is probably, a larger factor impacting some of these results. So that's really kind of what we're focused on. And I think it’s important as we highlighted that, we recognize in some cases, it’s just kind of overall operational things that we need to work through, which I think we have a good pulse on. We have a larger presence in some of these markets where there has been kind of impacted weather events, which just slows the process outside of any occupancy impact with sales and marketing and other things. But I think equally important is kind of our view on how we're getting in front of some of the known cash drags with the expansion of dispositions and certain transitions, which is just a process that is going to take a little bit more time to unfold.

Okay. Maybe just two more questions from me and I'll hop back-in the queue. When you talked about the hurricanes, I guess, Milton and Helene. Was there any properties closed during, those storms and any material damage that's noteworthy to discuss?

We had one property specifically that was more broadly impacting, hitting our insurance deductible where it required kind of the temporary relocation of residents with respect to the hurricane and then, certainly a handful of properties that require dislocation temporarily just until kind of the warning subsided. And then, something else to note is also we did have damage at a community due to a fire event, which also required a temporary move out on a portion of that community impacting the results there.

Okay. And last for me, and I'll hop back in the queue. So look, we've got the Brookdale properties being sold at over $150,000 a key. You've got some other properties, in the SHOP community segment that are -- I think you talked about $55,000 to $65,000 key. You have a ton of keys, right. You've got whatever, 25,000 units. Then I think that the big question that not only I have, but I think a lot on the buy-side is what are these things worth? Can you share what you think if you had to liquidate the SHOP portfolio today, the whole portfolio we go for; is it 100,000, 110,000? And can you give us any color there? Because I think that that's kind of the big bogey that everybody is making their investment decisions on at the moment?

Yeah. Look, I mean it’s -- we want to be sensitive to kind of where we are in the overall turnaround of the portfolio. And so I think where value could be today isn't necessarily indicative of kind of where we're going. What I would guide is, let’s look at some of the transactions we're talking about, right, for kind of smaller tertiary communities that are stabilized, looking at the Brookdale event, you're talking about $150,000 per unit. If you kind of step back and look at more challenged assets and also in tertiary markets of similar size with NOI drag, you're looking at $50,000 to $60,000 per unit. And so that's kind of in my view on some of the smaller side. And then obviously, on the other side of the equation where we have kind of those better communities, 100 unit plus and more primary and secondary markets, we think that there is outsized potential value with those specific communities. And so I think, what we're hopeful as we continue to work through this portfolio and communicate more on these updates, you're going to see kind of more natural progression towards value as we talk about certain financing events where we're getting valuations on those assets in addition to select sales, whether they be opportunities to kind of monetize value or just kind of cut short on areas we don't see that there is value. And that's really, I think the best way to kind of tease out valuation as some of these transactions mature.

Okay. Thank you.

[Operator Instructions] The next question comes from Justin Haasbeek with RBC Capital Markets. Please go ahead.

Yeah. Thanks for taking the question. Just doing the math on the total SHOP guidance you guys just gave. It implies that the SHOP NOI, the total SHOP NOI is going to drop to roughly $24 million in 4Q. Is that correct? And then can you just provide some color if it is correct on, why we're going to see that drop? And then also just on some more color on occupancy. Can you provide, why occupancy didn't meet you guys' expectation in the quarter?

Sure. So on Q4 NOI, your estimate is within our guidance range. We are expecting that Q4 results are going to be negatively impacted by the October hurricane that came through. It impacted certain communities. We're expecting approximately $4 million of costs related to that with remediation and insurance premiums or insurance deductibles. And as it relates to occupancy, we ended September 30th at 79.4% and we're currently expecting to end the year just shy of 80% as we go into generally little bit of a softer selling season.

Okay. And then on the 29 communities with negative $2 million of NOI, what is the total value of those communities, and sort of what's the timeline should we expect for closing on those?

Yeah. I mean, we provided kind of the range of $55,000 to $65,000 per unit, so let’s just call it, and this includes the 29 plus the three that are more advanced, and so that's kind of on the low end $135 million, on the high end just above $155 million. I think kind of holistically, we wouldn't expect that any of these transactions would be completed prior to year-end. So the more advanced stuff would be kind of in the earlier part of the quarter of Q1 and then the stuff that's hitting the market now likely thereafter.

Okay. And then on the wellness center NOI, just, is there a reason why NOI ticked up roughly around 700,000?

Yeah. We had a couple of wellness centers that were previously leased by one tenant that we transitioned to be leased by Lifetime and one of those leases commenced during the year, resulting in that NOI increase.

Okay. And then the last one for me. Just on the Muse, where are you guys at on the marketing process, and then is occupancy still around 50%?

Yeah. Occupancy is just below 50%. We've kind of commenced the marketing process. We're in advanced stages of working through that transaction and we may be in a position to potentially close on that in 2024.

Okay. Great. Thank you.

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.

Thank you for joining our call today, and we look-forward to speaking with many of you at the upcoming NAREIT convention

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