Good morning and welcome to the Diversified Healthcare Trust First Quarter 2023 Earnings Conference Call. [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.

Good morning, and welcome to Diversified Healthcare Trust call covering first quarter of 2023 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 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, Tuesday, May 9, 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, EBITDA, 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. On today’s call, we will be discussing the planned merger with Office Properties Income Trust in our prepared remarks. We have not yet filed a preliminary joint proxy and registration statement with the SEC and therefore, will not be taking questions about the merger. And now I’d like to turn the call over to Jennifer.

Thank you, Melissa, and good morning. Thank you for joining us on today’s first quarter 2023 conference call. I’d like to begin the call by highlighting the enhanced earnings release format that we issued last night. We believe this combined presentation of information will be helpful for analysts and investors to efficiently digest information about our company and results. Before I review DHC’s performance for the first quarter of 2023, I’ll discuss our recently announced merger with Office Properties Income Trust, or OPI. DHC is facing a number of short-term challenges. While we’ve been encouraged to see the turnaround in our senior housing operating portfolio begin to materialize, the recovery has not occurred fast enough to address several concerns. First, due to our debt covenants, we’re restricted from issuing or refinancing debt. Without the financial flexibility afforded by the merger, we do not expect to be in compliance with these debt covenants before $700 million of debt becomes due in 2024. Second, to ensure the successful turnaround of the communities in our shop segment and to realize its long-term value potential, additional investment is needed. Stand-alone DHC has insufficient liquidity to continue to fund this critical capital. And third, due to these capital constraints, we do not believe we would be in a position to increase DHC’s current annual dividend of $0.04 per share until 2025. The merger with OPI addresses all of these challenges and benefits DHC both financially and strategically. Following the completion of the merger, the combined company will immediately be in compliance with debt covenants and will have a greater scale and diversity with access to multiple capital sources to fund the business and address upcoming debt maturities. The merger is immediately accretive to our leverage as well as normalized FFO and CAD. In addition, the…

Thanks Jennifer and good morning everyone. For the first quarter, we reported normalized FFO of $12.5 million or $0.05 per share. Normalized FFO improved $34.4 million from the first quarter of 2022, and adjusted EBITDA increased $23.8 million or 61% to $62.7 million. Our consolidated cash basis NOI increased $16.8 million or 42% from the first quarter last year to approximately $57 million. This increase was attributable to significant improvements in our SHOP segment, resulting in an increase of $17.1 million of cash basis NOI. We had previously said that many of our communities were getting to occupancy levels where we expected to see margin expansion as they bring in additional residents and are better able to leverage fixed costs, and we are beginning to see that. Occupancy in our SHOP segment increased 390 basis points since the first quarter of last year and 60 basis points from the fourth quarter of 2022. Our operators were also able to increase average monthly rates, 8.2% from the first quarter of 2022 and over 6% from the fourth quarter. These increases in occupancy and rates translated to a 13.9% year-over-year increase in SHOP revenues while property operating expenses increased just 6.9% and margin improved 610 basis points. For the first quarter, 128 of our communities produced positive NOI of $31.3 million, an improvement from last quarter when we had 111 communities with positive NOI. These communities had on average occupancy of 83.3% during the first quarter at an average margin of 17%. Further, 74 of these 128 positive NOI communities had occupancies below 90% and margins of just 14%, which we believe illustrates that there is still considerable room for financial improvement in these communities that are on the path towards stabilization. The remaining 102 communities produced negative NOI of $13.5 million,…

Thank you. [Operator Instructions] The first question comes from Bryan Maher from B. Riley. Please, Bryan, go ahead.

Thank you and good morning, Jennifer and Rick. Just a couple of questions for me this morning. Can you give us a little bit more color on the occupancy trends? That was just the one metric that was a little shy of what we were looking for. And how the renovations going on at the properties this year are impacting the occupancy? Is it down 50 bps, 100 bps more it should be? And maybe a little color on the occupancy uplift of the properties that did complete renovations last year.

Bryan, thanks for the question. I think just generally to talk about occupancy, as you know, Q4 and Q1 are traditionally the seasonally slow quarters. Q2 and Q3 are traditionally viewed as kind of the selling season for senior living. So we are optimistic that we’ll see continued growth in occupancy as we go forward. The focus really, though, is on growing NOI. So we will certainly continue to grow occupancy, but not at the expense of rate or NOI. So we will see where that goes. The other part of your question was really about the disruption from some of the capital projects. We do have a significant number of projects. There’s a number of fairly light refresh projects that are not that disruptive. We can work around residents pretty easily. But there are a number of projects that take units out of service, and we have to believe rooms open so that we can move residents and get some of the work done. But it’s hard to quantify exactly what the occupancy impact of that is. I mean taking rooms offline is not great. But at the same time, some of our sales folks can sell the dream and see the progress happening at the communities. They’re – I know they’ve done some hard hat tours and things like that with some prospective residents. So overall, I think residents are pleased that we’re reinvesting in the communities. It’s certainly given the workforce at the communities a renewed hope that the building is on the right path, and we’re going to continue to push. So the focus, again, really is on NOI, but we do expect to continue to see occupancy grow through the rest of the year.

Great. And yes, I mean, NOI clearly, from a dollar standpoint, is the most important. We’ve been hearing not only from you guys, but your competitors publicly traded senior housing companies about everybody pushing rate higher. It seems like that kind of 8% to 10%, the ZIP code is where most people are settling in. Are you seeing any pushback at all in the market to those increases that – or acceptance beyond what you would expect that would get you to maybe go outside that bandwidth?

Well, there may have been – there’s pushback now and then. I think everybody is pretty accepting of the increases in rate. I mean, it’s happening – as you said, it’s happening in our communities and the communities of our peers. So with the inflationary pressures and the capital that we’re deploying into these communities, I think the residents are pretty understanding. And so I think there’ll be the ability to continue to push rate. And then really, our operators are also looking very closely at the cost associated with the varying levels of care in our assisted living communities and charging appropriately for that as well.

Okay. And then just lastly, on the CapEx, I’m sure it’s going to be variable depending upon how the next month or 2 plays out, clearly. But as it stands now, what is the CapEx trend for the balance of this year?

So we’ve been talking about CapEx of about $200 million – in the SHOP portfolio, specifically $200 million a year in ‘23 and ‘24, and that hasn’t really changed. I think we’re at about $350 million a year in ‘23 and ‘24 in total.

Okay, thank you.

Thanks, Bryan.

[Operator Instructions] At this point, we are concluding our question-and-answer session. And I would like to turn the conference back over to Jennifer Francis, President and Chief Executive Officer, for some closing remarks. Go ahead.

Thank you. Thank you, operator. Thank you all for joining our call today. That concludes our call. We look forward to seeing many of you at the B. Riley conference in May and at NAREIT in June.

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