DHC

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Diversified Healthcare Trust (DHC) reported a strong first quarter for 2026, with normalized FFO of $0.14 per share, beating analyst expectations. The primary growth driver was the Seniors Housing Operating Portfolio (SHOP), which saw same-property NOI increase 13.5% year-over-year (22% on an adjusted basis). This improvement was driven by a 5.9% rate increase, a 110-basis point occupancy gain, and significant cost savings in labor and dietary expenses following operator transitions in 2025. DHC is now pivoting toward internal value creation, specifically through "ROI projects" that involve converting vacant skilled nursing wings into higher-acuity units across 16 identified communities. The Medical Office segment also performed well with 95.3% occupancy and positive leasing spreads. Financially, DHC's leverage improved to 7.8x net debt to EBITDAre, earning a credit upgrade to B3 from Moody’s. With $272 million in liquidity and no debt maturities until 2028, management reaffirmed its 2026 guidance. Analysts focused on the sustainability of SHOP margins and future CapEx requirements. Management remains optimistic, citing favorable senior housing demand fundamentals and the potential for further operational efficiencies under their new best-in-class operators.

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DHC: A Related-Party Fee Machine Disguised as a Healthcare REIT

Full Earnings Call Transcript — Q1 • 2026-05-05

Operator: Good morning, and welcome to the Diversified Healthcare Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.
Matt Murphy: Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. 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, May 5, 2026. 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 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.
Christopher Bilotto: Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered a strong first quarter, demonstrating the powerful combination of our active asset management and the deep expertise of our expanded operating partners. The strategic changes we made within our SHOP portfolio in 2025 continue yielding results with the first quarter aligning with our outlook focus on driving revenue, expense synergies and overall margin improvement. Looking ahead, we are well positioned to capitalize on powerful tailwinds, including the burgeoning demand from an aging population and a historically low new supply pipeline for senior housing. We are confident that our best-in-class operators and strengthened balance sheet will continue to drive superior performance and create significant long-term value for our shareholders. Turning to the quarter. After the market closed yesterday, DHC issued first quarter results that reflect continued progress across our business. We reported normalized FFO of $33.1 million or $0.14 per share and adjusted EBITDAre of $74 million, both well ahead of the analyst consensus estimate. Consolidated NOI increased 4.7% year-over-year to $75.9 million. Our same-property SHOP portfolio delivered a robust 13.5% increase in NOI year-over-year, reaching $44.3 million. This was driven by same-property occupancy growth of 110 basis points and average monthly rate growth of 5.9%. Our sequential performance reflects the benefits of our active asset management strategy with contributions from new operator partnerships becoming even more apparent. Our same-property NOI margin expanded by 160 basis points to 14.9%, with occupancy holding at 82.4%. This margin improvement was driven by progress on both the top and bottom line. On the revenue side, growth was largely supported by an average annual rate increase of 4.5% across 70% of the portfolio in January, complemented by a favorable shift in resident levels of care. On the expense side, our progress has been equally impressive and demonstrates the immediate impact of our new operating partners. For example, during the quarter, we secured new dietary and food and beverage contracts that simultaneously enhance the resident experience while locking in significant cost savings for the year. Furthermore, a key area of focus, labor costs continues to moderate with reduced contract labor and the rightsizing of regional and community labor costs. These early results are a direct testament to the enhanced discipline and tighter cost controls our operators are bringing to the portfolio, and we remain optimistic about our ability to capture further efficiencies. Building on our operational momentum, we are increasingly focused on selectively deploying capital into high-return ROI projects to drive organic growth. Our strategy targets the repositioning of underutilized or closed skilled nursing wings and converting them into independent living, assisted living or memory care. We have identified a pipeline of opportunities across 16 communities, including 6 communities as part of the first phase. These 6 initial projects are expected to cost approximately $20 million and will add roughly 150 units to the portfolio, representing a significantly lower cost per unit relative to our view of the replacement cost and creating immediate embedded value. Because we currently absorb carrying costs on these vacant wings, these projects are expected to be immediately accretive to earnings upon completion with expected returns starting in the mid-teens. Beyond the direct financial returns, these conversions enhance the marketability of the entire community, improving the sales cycle and expected length of stay for residents. We believe these projects represent a compelling and disciplined use of DHC's capital, and we expect these repositionings to begin over the coming quarters. Turning to our medical office and life science portfolio. During the first quarter, we delivered solid results as same-property occupancy increased 60 basis points year-over-year to 95.3%, generating $25.4 million of NOI, a 3.7% increase over last year and a 4.8% increase sequentially. Leasing activity was healthy with 169,000 square feet of new and renewal leasing at rents that were 12% above prior rents with a 9.5-year weighted average lease term. Looking ahead, just over 9% of annualized rental income in our Medical Office and Life Science portfolio is scheduled to expire through 2026, of which 304,000 square feet or approximately 4.9% of annualized rental income is expected to vacate. Subsequent to the quarter, we signed leases totaling 390,000 square feet, which primarily include renewals representing 29% of our 2027 expirations. Turning to our capital markets and balance sheet initiatives. In March, we sold 13 unencumbered non-core SHOP communities for aggregate proceeds of $23 million. And in April, we also exercised land lease purchase options on 2 of our properties for an aggregate purchase price of $14.5 million. By eliminating ground rent on these well-performing communities, we are able to capture the full economics of the assets and expect to generate low to mid-teen returns on this investment. With DHC's large-scale capital recycling program now complete, we have transitioned from portfolio transformation to value creation. Given our current capital structure, including relatively low-cost debt and no maturities until 2028, we believe that one of the best uses of our capital today is reinvesting in our own assets. In conclusion, our strong first quarter results validate our strategy and reinforce our confidence for the remainder of 2026. Demand fundamentals in senior housing remain compelling, supported by favorable demographic trends and limited new supply growth. We believe these actions we have taken to enhance operations, reduce leverage and empower our best-in-class operators have positioned DHC for continued earnings and cash flow growth, and we remain committed to delivering attractive total returns to our shareholders. With that, I will turn the call over to Anthony.
Anthony Paula: Thank you, Chris, and good morning, everyone. During the first quarter, our consolidated same-property cash basis NOI was $75.9 million, representing an 8.6% increase year-over-year and a 7.8% increase sequentially. We continue to see upside in our SHOP segment as same-property NOI increased 13.5% year-over-year. When adjusting for insurance proceeds received in Q1 2025, our SHOP same-property NOI would have increased 22% year-over-year. As Chris highlighted earlier, our operators have had early success in managing expenses as evidenced by the following in our SHOP same-property portfolio, a 370 basis point decrease in dietary costs sequentially, a 70 basis point sequential reduction in labor when adjusting for the number of days in the period and a nearly 35% decrease in contract labor year-over-year and that has led to moderation in our same-property expense growth, which was 350 basis points year-over-year and 120 basis points since last quarter. We also continue to see strength in pricing as our same-property average monthly rate increased 590 basis points year-over-year and 320 basis points sequentially. Turning to G&A expense. DHC shares have delivered the highest total shareholder returns across all REITs in the U.S. over the past 1-year and 3-year measurement periods. Year-to-date alone, DHC's stock price has appreciated 60% versus a 5.2% gain in the S&P 500 and a 7.9% gain in the Vanguard REIT ETF. As a result of this, our first quarter G&A expense includes $6.6 million of incentive management fees. Excluding the impact of the incentive fee, G&A expense would have been $7.4 million for the quarter. During the quarter, we invested approximately $21.8 million of capital, including $17.2 million into our SHOP communities and $4.6 million into our Medical Office and Life Science portfolio. As a result of our recently completed disposition program and disciplined capital allocation, we are reaffirming our 2026 recurring CapEx guidance of $100 million to $115 million, representing approximately 18% reduction at the midpoint. Now I'll turn the call over to Matt.
Matt Murphy: Thanks, Anthony, and good morning, everyone. Overall, our first quarter results further demonstrate the meaningful progress we have made strengthening our balance sheet, reducing leverage and positioning the company for sustainable earnings and cash flow growth. At quarter end, we had total liquidity of $272 million, including $122 million of cash and cash equivalents and the full $150 million available under our secured revolving credit facility. This strong liquidity position provides us with flexibility to support our operating strategy while maintaining appropriate balance sheet discipline. Net debt to annualized adjusted EBITDAre was 7.8x at quarter end, down from 8.8x a year ago, driven primarily by improved operating performance. Adjusted EBITDAre to interest expense improved meaningfully to 2x from 1.3x at this time last year. We remain confident in reaching our near-term leverage target range of 6.5 to 7.5x with the majority of that improvement expected to be driven by continued growth in SHOP NOI. In April, Moody's upgraded DHC's corporate family rating to B3 from Caa1 and revised the outlook to positive. This upgrade reflects the progress we have made improving operating performance and strengthening the balance sheet over the past several quarters. Following the completion of our debt transactions in 2025, we have a well-laddered debt maturity profile with no maturities until 2028, allowing us to remain primarily focused on operations. Our portfolio includes 197 unencumbered properties, representing nearly 64% of the portfolio's gross book value, which provides meaningful balance sheet flexibility as we look ahead. Turning to guidance. For the full year 2026, we are reaffirming the ranges outlined in our fourth quarter earnings as follows: $175 million to $185 million of SHOP NOI, $94 million to $98 million of Medical Office and Life Science segment NOI, $28 million to $30 million of NOI from our triple net lease senior living communities and wellness centers, adjusted EBITDAre of $290 million to $305 million and normalized FFO of $0.52 to $0.58 per share. We are pleased with our first quarter results, particularly the continued growth in SHOP NOI, which is tracking ahead of our initial expectations. The performance is partly being driven by early success in expense management and margin improvement from our new operators. As we look ahead, the momentum we are seeing in the business gives us increasing confidence in our earnings outlook. That concludes our prepared remarks. Operator, please open the line for questions.
Operator: [Operator Instructions] The first question is from Michael Carroll with RBC Capital Markets.
Michael Carroll: Chris, I wanted to touch on some of the recurring CapEx expectations. I know within the guidance, you're assuming $80 million to $90 million of recurring CapEx within the seniors housing operating portfolio. Is that true maintenance CapEx? And is that the correct run rate to think about going forward? Or is there still some additional deferred CapEx in those numbers and the run rate as you kind of look beyond '26 would be lower than that?
Christopher Bilotto: Yes. The $90 million includes maintenance capital and some refresh capital. So that's a blended number. But I think more broadly, to answer your question, maintenance capital, we've got that run rate we're expecting to continue to come in a little bit in overall costs. We're spending a lot more time with our operators just dialing into overall needs of the communities. And so we'd like to see some modest pullback in maintenance capital as the years progress. And then on the kind of the -- what we call a redevelopment capital or the ROI capital, that number as it stands today, I think will stay pretty firm for 2026 despite doing some of these incremental ROI projects I discussed, just given the fact that those will really start to kind of commence later on in the year and a lot of that is just soft cost work. And then in 2027, kind of all things considered, that's where we'll start kind of pulling levers on incremental dollars for that bucket depending on how much of these ROI projects we have in the pipeline.
Michael Carroll: Okay. And then I think you previously said that the recurring CapEx number would run around 3,500 a unit once kind of you're through some of the deferred stuff that was completed in prior years. Is that still a good number? Or is it going to be lower than that as you kind of progress in '27, '28 with these new operators?
Anthony Paula: Yes. So the 3,500, we expect to go down in future periods. We think that's a good run rate for 2026. I think to keep in mind, that's going to exclude refresh capital. So kind of piggybacking on what Chris had mentioned for 2026, we expect $5 million to $10 million of refresh capital, which is embedded within that recurring CapEx number that we're guiding towards.
Michael Carroll: Okay. And then on the investment side, should we think about the new investment opportunities really focused on these wing expansions that you kind of discussed in the prepared remarks? I mean, are there potential acquisition opportunities that you would look at pursuing too? Or is it going to be mostly these renovations?
Christopher Bilotto: Mostly the renovations, I think our position today is we've got a lot of opportunity within the portfolio. We talked about a lot of things in the prepared remarks and our investor materials have teased out some items, but there's real opportunity dialing in with these operators to kind of pull in expenses in different areas, some of which we've touched on continuing to kind of drive top line performance and occupancy. And then, again, I think kind of from a capital deployment, really kind of putting that money towards improving these communities and then I think equally important on expanding acuity within the communities before we consider acquisitions.
Michael Carroll: Okay. And then just last question for me. I guess, within guidance, you reaffirmed the G&A number. I know with the stock performance, I would assume the base management fee is kind of ticking up a little bit. I mean is that the right way to think about it? Or is there something in there that keeps that base management fee lower throughout 2026 that I'm not calculating correctly?
Anthony Paula: Go ahead, Anthony. Yes. From a G&A perspective, the most volatility we're going to see is from the business management fee, you're right. Depending on fluctuations in share price, it will adjust that number.
Michael Carroll: Okay. And then within guidance, you just assume that SHOP NOI is probably exceeding that. So even if G&A goes up, then your overall guidance range is still pretty accurate and maybe even trending higher?
Anthony Paula: That's right.
Operator: [Operator Instructions]	The next question is from John Massocca with B. Riley.
John Massocca: So I appreciate the color and the reminder on the onetime items that were impacting 1Q '25 kind of comps. Is there anything else kind of onetime to be aware of either in how same-property SHOP NOI growth is being calculated or even anywhere else in kind of the financial reports for 1Q '26...
Matthew Brown: No, that's the most material item that $2.7 million of business interruption insurance proceeds we received in Q1 '25. There's a little bit of other noise, but nothing of that scale.
John Massocca: Okay. And any kind of direct impact from the Aleris or the former Aleris property transition still flowing through 1Q '26 results? And I mean bigger picture, how are those kind of transitions going in your mind? I know you touched on it a bit in the prepared remarks, but anything kind of tangible that's already been achieved or left to be achieved over the remainder of '26?
Matthew Brown: Sure. So I can start and then hand it off to Chris on operator performance. So as it relates to the transition and costs associated with that, we capture that in transaction-related costs. So a lot of that is kind of below the line and outside of NOI.
Christopher Bilotto: Yes. I think the follow-on, John, to your question, I mean, the AlerisLife, the transitions are going very well. As you're aware, they were completed at the end of the year. The first couple of months in the year, a lot of these operators were just kind of revisiting kind of the overall employment and kind of structure within the communities, retooling kind of their sales teams, et cetera. And again, we touched on other areas where we found pockets of opportunity to reduce costs. And so there's still incremental pieces there that are flowing through. I think we've identified kind of the more material items and those are some of the things that are in progress and underway, and we expect to continue to get incremental benefit each quarter as time progresses, at least through 2026. But I would say, overall, the transitions are going very well. And again, I think we forged some really good relationships with some great operators.
John Massocca: Okay. And then maybe specifically on occupancy or same-property occupancy in the shop space. I know it was kind of flat quarter-over-quarter. I mean does that just reflect seasonality in that? Or is that still some maybe friction from operator transitions? I mean is that going according to maybe your expectations versus your initial guidance?
Matthew Brown: Yes, it's both. I mean there's some seasonality in there. And then as I just touched on, as these operators have come in predominantly starting in January and kind of reevaluating and retooling kind of the business specific to kind of their outlook, that takes time. And so I think given the fact that we can hold occupancy while we're going through a major transition across our portfolio, I think, is a real win. And I think it kind of reflects well for setting the pace, meaning that we can -- we can run stabilized in Q1 with a lot of disruptions. And then as we get kind of to the more kind of seasonal or higher seasonal period, we can kind of hit the ground running focused on really pushing occupancy now that we have all the pieces in place.
John Massocca: And any updates? I mean how is 2Q trending thus far on kind of SHOP performance?
Matthew Brown: No. I mean, technically, the April just finished, Numbers are still coming in. So there's nothing kind of specific to speak to. I just think as we referenced, we're reaffirming guidance -- we feel good about our positioning. We're seeing other opportunities as we've referenced. And so I think we feel generally good about the outlook and potentially further improvement, but nothing specifically to touch on just given where we are in the second quarter.
John Massocca: Okay. And then if I think about kind of the difference in the SHOP NOI growth kind of implied in guidance versus what we kind of achieved in 1Q, I mean, is that mostly the higher comps in 1Q '25? Or is there something else to be kind of aware of on either what you're expecting for 2H occupancy or kind of even rate growth?
Anthony Paula: Yes. I would say that on occupancy, we're continuing to guide to that 300 basis point increase in occupancy year-over-year. We didn't see much progress in Q1, as Chris talked about. As it relates to rate growth, we are expecting 5-plus percent rate growth. And then as we think about just quarterly run rate, we're definitely expecting some NOI increase in Q2. We may see that increase come down a little bit in Q3 with just some seasonal expenses and then ramp back up again in Q4 to come into the overall guide of $175 million to $185...
John Massocca: Okay. And then lastly, I know you talked on it a little bit earlier in the call, but just for kind of the impact on bottom line or even on kind of NOI performance, how much kind of the flow-through from previous year CapEx spend are you expecting to kind of be impactful to 2026 NOI? And is there stuff that's maybe more -- even that was completed years ago or a year ago, that is really more of kind of a 2027 event in terms of a tailwind for NOI or even bottom line numbers?
Matthew Brown: Yes. I think the best way to kind of think about that is a typical kind of stabilization period following a renovation is kind of 18 to 20 months. So if you think about we had a fair amount between 60 and 70 communities that were renovated kind of in 2023 and '24 those themselves are starting to kind of produce real meaningful results in the form of kind of a more stabilized event. And again, layering on kind of the new operator transition, we'll get other incremental benefits from that, whereas the 2025 refreshes, which was between 20 and 25 communities, we would expect that to show incremental benefit towards the back half of this year and into next year. And then that cadence will continue.
Operator: As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto to close the call.
Christopher Bilotto: Thank you, everybody, for joining the call. We look forward to seeing many of you at our upcoming industry conferences, including NAREIT conference in New York this June. Please reach out to Investor Relations if you are interested in scheduling a meeting with DHC. That concludes our call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.