Good morning. Welcome to the Diversified Healthcare Trust Third Quarter 2021 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the call over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good morning and welcome to Diversified Healthcare Trust call covering the third quarter 2021 results. Joining me on today's call are Jennifer Francis, President and Chief Executive Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a 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, Thursday, November 4th, 2021. 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, net operating income or NOI, and cash basis net operating income or cash basis NOI. Reconciliations of net income or loss 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 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.

Thank you, Michael and good morning. Thank you for joining us on today's call. To begin today's company overview, I'll provide an update on the progress we've made with regard to our strategic shift within our SHOP segment, followed by additional commentary surrounding our portfolio in the context of the current operating environment. Despite another rise in COVID case counts across the United States in the third quarter due to the Delta variant and an increasingly challenging labor market, our Senior Living operators and our managed and leased communities continue to provide quality services and care to the residents in our communities. Over the past 18 months, they've become experts at dealing with COVID-19. So, as the cases of COVID increase throughout the country this past quarter and the risk of breakthrough cases in our mostly vaccinated resident population increased, our operators had the necessary protocols in place to minimize its impact on our residents. As we look ahead, it's clear that the recovery of the Senior Living industry will continue to be uneven, but we see a number of encouraging trends both in our portfolio and across the industry. As of today, we're complete in our selection of new third-party managers for 107 communities within our SHOP segment and have executed agreements with 10 managers to operate these communities. Of those 107 communities, 69 were transitioned during the quarter and an additional 30 transition subsequent to quarter end. We remain on schedule to complete all of the community transitions by year end. As we worked through the process, we identified one community that we plan to close and are evaluating the property for its highest and best use. Given the composition of this portfolio which consists generally of smaller buildings with residents that require a high level of care,…

Thanks, Jennifer, and good morning, everyone. Within our Office Portfolio segment, same property cash basis NOI increased 40 basis points from the prior year, primarily due to increased parking revenues and decreased operating costs, partially offset by the lower occupancy as Jennifer mentioned in her prepared remarks. In our SHOP segment, our same-property pool decreased to 159 communities following the transition of 69 communities that occurred during the third quarter. For this same property portfolio, cash basis NOI, decreased $6.1 million from the second quarter due to decreased revenues associated with the skilled nursing unit closures as well as an increase in certain operating expenses including repairs and maintenance, utilities and wage rate expenses. During the quarter, we recognized just under $800,000 of Cares Act funds within interest and other income, which is excluded from our reported cash basis NOI, bringing year-to-date Cares Act income to $19 million. Also excluded from our cash basis NOI are the $3.1 million of transition-related expenses, which decreased $11.9 million from the second quarter as the skilled nursing unit closures are now behind us. Our general and administrative expenses decreased approximately 3% from the second quarter to $8.9 million for the third quarter as a result of lower business management fees paid to our manager. Interest expense was $64.5 million for the third quarter of 2021, a decrease of $3.2 million compared to the second quarter, due to our redemption of $300 million of senior notes in June. Our next senior notes maturity is not until May of 2024, but our $1 billion of 9.75% senior notes become callable in June of 2022. At the end of the third quarter, we had approximately $795 million of unrestricted cash on hand. Subsequent to quarter end, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2023, providing us added flexibility in our capital plans and general liquidity. Following this extension, we have one remaining option to extend the maturity date of the facility by an additional year in January of 2024. We reported normalized FFO of negative $9.4 million or $0.04 a share for the third quarter of 2021 and we declared $0.01 quarterly distribution payable on November 18 to shareholders of record on October 25. In the third quarter, we spent $41.5 million on capital expenditures across our portfolio, despite continued supply chain disruptions and shortages of certain materials and labor. These expenditures included $23.3 million of recurring CapEx within the SHOP segment, an increase of approximately $4 million from the second quarter and $9.2 million in our Office Portfolio. We also spent $9 million on redevelopment capital expenditures to reposition a number of our properties. We remain committed to investing in our portfolio to improve our future results. I will now turn it back over to Jennifer for closing remarks.

Thank you, Rick. With the progress we've made in the transition of our SHOP communities to new operators, we remain confident in our strategy and expect gradual recovery in the performance of our Senior Living portfolio. Additionally, as we continue to increase our capital investment in our properties, we believe that we're positioning our portfolio for success. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question-and-answer session The first question comes from the line of Bryan Maher with B. Riley. Please go ahead.

Good morning, Jennifer and Rick and awful lot to unpack there in your prepared comments, so I apologize in advance, if some of my questions are redundant. When you talk about the aggressive pricing of the competitors in the senior living market, do you have any indications or thoughts as to when that might subside? Is there some threshold, where everybody kind of gets to an occupancy, where they say enough is enough and everybody quits killing each other. Can you give a little color on that?

It's hard to say. It's – they are very competitive and I think as long as they're working, they'll continue to offer concessions. I don't see that concessions are going to subside anytime soon.

Okay. And then the rent roll-up in the MOB life science segment were pretty impressive. Do you see continued double-digit rent roll-ups in the fourth quarter and as we roll into 2022? And what do you assign that to? Is it just the broad strength of the market or the assets that you have in certain markets? Can you give a little color on what we should be thinking in that regard?

Sure. I think it's a combination of things, Bryan. Certainly in our life sciences assets, we're seeing large double-digit roll-ups in rent. The Massachusetts property is -- Lexington is a strong life sciences market. Torrey Pines is a strong life sciences market. But we are also seeing roll-ups in rent in our MOB portfolio, certainly not 48% roll-ups in rent, but high-single to double-digit roll-ups. Very rarely are we seeing roll downs in rent. And in those instances, it's usually because of a tenant had a large TI that they amortize into their rent. So, it's a strong market. It's a strong leasing market with a pipeline of 2.4 million square feet. I don't think we've seen a pipeline that big in this portfolio. I don't think ever. And so there's just a great deal of activity and rent growth -- projected rent growth.

Great. And I caught Rick's comments on the CapEx spending in the third quarter. Maybe I missed it. But Rick, can you give us just your quick thoughts on fourth quarter CapEx in 2022 early thoughts on CapEx there?

Bryan, I would love to give you thoughts on CapEx. There's a number of reasons why it's incredibly difficult to forecast. I mentioned in the prepared remarks some of the supply chain disruptions. I would just say the things you're reading about are true. We're seeing 16 to 18-week delays for carpet. I won't even tell you what delays for furniture are like nowadays, but I mean there's even paint shortages. So across the supply chain, we are seeing real impact there. And the team is well prepared to deal with it in some cases sourcing US-made furniture versus waiting for things in a container offshore. But again, I mean it's constantly moving and it's a real challenge and they're doing a great job, but it's really difficult for me to predict what will actually get spent in the fourth quarter. Beyond that, I mean there -- you also hear a lot about shortages in skilled labor to get some of these projects done. Again, we're working with some really great contractors that can overcome that, but it's still not easy in the current environment. And the other thing I would say is, we've been really active with these operator transitions and bringing a fresh set of eyes into a community, they have some different ideas. And our asset managers are working very closely with them. We had historical capital plans. We did some capital needs assessments. We thought we knew what we wanted to do but we're certainly willing to listen to some of our new operators or frankly thoughts from Five Star as well. I mean we want to make sure that we're best positioning the assets for success. And in some cases, we are changing our plans. So I think we are still forecasting a significant amount of capital in Q4. It's just difficult to kind of put a number on it. So where before, I thought maybe for the year we'd be in the $250 million range. We're probably closer to $200 million. I'm hoping we can do a little better than that, but some of the delays are real.

So I just want to follow-on on a couple of things that Rick said. I just want to make it clear that we have projects that are well underway and hammers are swinging. And so we are executing on some of the plans. There is that added complexity that Rick mentioned of labor shortages, because we've transitioned a lot of these projects over the project management group at the RMR Group, they have well-established relationships around the country that they're tapping into. So, while everybody is seeing supply chain delays in labor shortages, we're well positioned to deal with those.

Great. Thank you, Jennifer and Rick. Appreciate it.

Sure.

The next question is from the line of Michael Carroll, RBC Capital Markets. Please go ahead.

Yeah, thanks. Jennifer can you provide some color on the current concession packages that are currently being offered? I mean how much are your competitors offering right now? And are they be more aggressive than they have been just a few months ago?

No. I think that they're as aggressive as they've been a few months ago. It varies from market to market. You might see community fees being waived or half a month rent for per month for the next three months it's usually things like that and Five Star is offering similar packages.

Yes. I know Five Star has been -- and I think DHC has wanted to avoid offering these packages. I mean what changed? And when did you start offering these concessions?

What changed was that the competitors were being -- offering deep concessions. And so in order to try to grow occupancy Five Star had to start offering them to keep up with that. We did want to avoid it and we certainly want to avoid reducing rent. So free rent is the way to do it. So once that free rent burns off you still have a strong base rate so that the next year when rents increase, they're increasing from a stronger base rate.

Okay. And then you said that these packages are working right now. I mean have your competitors seen stronger occupancy gains than Five Star has? And if so, can you kind of quantify to what extent?

Well, I think that they have. I haven't seen the quarterly results from some of our peers yet. But yes, some of the peers have been reporting stronger occupancy gains. We're undergoing a transition. The announcement of the transition of the 107 communities had an impact across the portfolio, not just on the transition in communities but on all Five Star managed communities. I think that and Five Star's reorganization at a corporate and regional level had an impact as well. So, I think that that's one of the differences between our portfolio and our peers. I think the other Mike is that, where we have a portfolio that needs capital. And we are -- as Rick said we're working to deploy that capital. And so, I think as that capital gets deployed, we'll see continuing improvement.

Okay. And then can you quantify what you're seeing on the labor side? I know you mentioned it a little bit in your prepared remarks. I mean when did you start increasing wages for some of your employees? And how big are those increases? I mean how big have they been?

So we're -- our wages and wage increases are generally consistent with the market. I think Nick's last report had 4.5% wage increases year-over-year and we're seeing similar increases with our operators 5% or so. Though for frontline workers we're -- in some markets we're seeing double-digit increases. These are workers. The operators are competing for workers with Amazon and Walmart. It's all stuff we've talked about before. So not only is there wage pressure, but there's also a scarcity of employees and so that drives wages up as well.

And then has there been an increase, I guess during the August-September type time frame. Did you see a noticeable increase towards the end of summer and the beginning of the fall of costs kind of jumping or the difficulty to find those labor units?

I think, it's been tough for a while. But yes I mean certainly the last few months have been particularly challenging. I mean we've talked a little bit about the 5% or so year-over-year growth. But I mean certain roles I think I read that hospitality was up nearly 13% year-over-year in some cases working food and beverage isn't that different depending on if you're in senior living or in hospitality. So each market is different. Some of the new operators have slightly different philosophies. There are some different benefits that are being offered to employees at some of our newer operators versus what Five Star offered and there is some equalization for that. But it's a tough market without a doubt. I mean the good news is if you provide good care we should be able to push it back through rate and recover it but there is a little bit of a lag there. I mean I think customers know that rates and costs in general are increasing as well.

Okay. And then just finally talking about leads I think you're highlighting there's a pretty big uptick in leads. It sounds like the majority of that was on -- over the Internet. which I believe is a lower closing rate type lead. What type of leads can you kind of quantify the other lead sources that you had? And if you're seeing similar upticks there, or is it mostly just Internet searches?

No, I think, it's almost entirely driven by website leads. I think there's been -- we're still using some other sources for Five Star specifically has other lead sources but it they've really been pushing their digital lead platform and are seeing results from it. The result of those leads is we've seen an increase in tours in the Five Star managed communities in October versus September of 8%. So we are seeing those leads result in tours.

Okay. Great. Thank you.

Ladies and gentlemen this concludes our question-and-answer session. I would like now to turn the conference back over to Ms. Jennifer Francis for any closing remarks. Thank you.

Thank you all for joining our call today. We look forward to seeing many of you at the NAREIT conference next week. Operator that concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.