Good morning and welcome to the Diversified Healthcare Trust Second Quarter 2022 Earnings Call. All participants will be in listen-only mode. I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please, go ahead.

Good morning and welcome to Diversified Healthcare Trust Call covering the second quarter 2022 results. Joining me on today's call are Jennifer Francis, President and Chief Executive Officer; and Rick Seidel, Chief Financial Officer and Treasurer. Today's call includes the 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, August 4, 2022. Company undertakes no obligation to revise or publicly released 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, in 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 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 second quarter conference call. DHC had a productive quarter. We delivered operational improvements across all of our segment, reduce debt by redeeming $500 million of 9.75% senior notes and increased our cash position by selling an additional 10% equity interest in our existing joint venture for the property located in Boston Seaport district. We're making progress on all of our strategic objectives as we continue to grow EBITDA and position the company to deliver long term sustainable growth. The recovery of the senior living industry is well underway. Based on the most recent data published by the National Investment Center for Seniors Housing and Care or NIC, the supply demand fundamentals within senior living continue to be in our favor as the construction pipeline remains at its lowest level since 2015 and new supply remains muted with inventory growth moderating to just 1.5% year-over-year. Occupancy across the industry increased during the quarter and average asking rents grew with asking rents for assisted living growing at the fastest pace since NIC began reporting data in 2005. We're seeing the impact of these tailwinds in our portfolio. Consolidated shop occupancy increased 60 basis points from the prior quarter and our properties managed by Alerus Life and by our other operators experienced sequential quarter NOI improvements with increased revenues and decrease expenses for both portfolios. We believe that we're now on a more defined path toward the stabilization of our senior living assets. We've seen continued improvement following the previously announced changes made at Alerus Life. While average occupancy was flat compared to the prior quarter in our same property shop segment at 74.1%, month end occupancy in this portfolio increased to 75.4% in June. In July, occupancy in the…

Thanks, Jennifer, and good morning, everyone. For the second quarter, we reported normalized FFO of negative $0.04 per share, which represents a $0.05 per share improvement from the first quarter. Adjusted EBITDA in the second quarter was $48 million, which increased 23% or $9.1 million from the first quarter. On a consolidated basis, same property cash basis NOI increased 8.8% compared to the first quarter. The improvement was primarily driven by continued recovery in our shop segment, with consolidated shop cash basis NOI increasing $6.3 million. Consolidated shop NOI is now up approximately $13 million from its trough in the fourth quarter of 2021. Interest expense of $56 million, represented a decrease of approximately $1.2 million from the first quarter, following the $500 million redemption of 9.75% senior notes in June. This redemption reduces our annual interest expense by approximately $49 million. As a result of this quarters, financial performance and the redemption of these senior notes, net debt to adjusted EBITDA of 11.6x was almost two full turns lower than we reported last quarter. As Jennifer mentioned, at the end of the quarter, we sold an additional 10% equity interest in the two building life science complex located in the Boston Seaport district for $108 million. If the proceeds from this recapitalization were included, we would have ended the quarter with just under $1 billion of cash available to make investments in our portfolio and repay debt. At quarter end, we had total outstanding debt of $3.1 billion and net debt was equal to just 28% of gross assets. In the second quarter, we spent $64.9 million on capital expenditures across our portfolio, which included approximately $39.3 million of CapEx within the shop segment and $25.5 million of capital was deployed in the office portfolio. As we've previously discussed, investing in our portfolio is a priority for us and we continue to develop plans to improve our properties in order to grow occupancy, rental rates and the overall value of our portfolio. That concludes our prepared remarks. Operator, please open up the line for questions.

We will now begin the question-and-answer session. The first question comes from Brian Maher with B. Riley Securities. Please, go ahead.

Good morning, Jennifer and Rick, and thanks for those prepared comments. Just two or three questions from me this morning. Jennifer, can you walk us through the decision to buy the Fremont property for $82 million? We got a lot of inbound tier as to why you wouldn't have either paid down debt or bought back a significant amount of stock at the current levels. I'm sure there's some restrictions in place there. But can you just walk us through how it is you came to that decision?

Sure. Good morning, Brian. Thank you for your question, and you're right, there are restrictions there and our ability to do a stock buyback. So, there are obviously varying opinions about how we should be deploying capital where were of the opinion that taking a balanced approach, paying down debt is important and we did pay down debt this quarter. But we're also very interested in deploying capital to grow EBITDA. And so, I've stated, I think pretty publicly for a long time that we've been interested in growing our medical office and life sciences portfolio and we're at a point in the market today, where there are opportunities to buy really good assets at pricing that is very different than it was at the end of last year or last year. Cap rates are really widening and pricing is coming down. So, thinking about our portfolio for the long term, buying this asset, which is in the second best life sciences market in the United States in the San Francisco Bay area, with a building, we paid $925 a square foot for this building and in the recent years, prior owners have spent close to $600 a foot improving this building. So to get this very highly improved asset in a market that we know quite well, a 6.5 cap rate made a lot of sense for us.

Okay, thanks for that. And maybe be kind of sticking on that line of questioning. I think that when people look at the share price and what you have been through in the past year or two and honestly, it's kind of a pleasant surprise to not really be focusing on shop at the moment, given all that has happened there. But Rick, you talked about -- maybe you can elaborate a little bit more on this $1 billion of cash or availability with the recent JV sale. I didn't quite get that. Was that after the quarter and now you have $1 billion on top of whatever the $800 million was that we looked at in the press release? And Jennifer, as we think about that $1 billion, how should we expect that to kind of go out the door over the next 12 to 24 months?

Sure. Brian, I'll try to clarify one point on the $108 million of proceeds from selling the 10% interest. We actually legally closed on June 28, but the contract with the buyer actually had the proceeds come in in early July. So as of June 30, we had a receivable of $109 million included in the other assets line of our balance sheet. So you'll see if you look at the balance sheet, we had about $868 million of cash and restricted cash and I think we've spoke previously about our restricted cash and how flexible our banking group has been with us that that's really an accommodation that we can continue to make investments and do things that will help our portfolio long term instead of repaying debt that we wouldn't be able to redraw right away. So that $868 million, along with $108 million of receivable at June 30 is $976 million, which I described is just under a $1 billion.

Thanks, Rick, and Brian, as far as how we plan to deploy it, I think our plan remains as we've stated, where we're looking to spend capital in a way that will help stabilize our senior living portfolio and then in our medical office and life sciences asset, we have capital that is redevelopment capital that we're generally getting low double digit returns on our redevelopment. So that's really our plan going forward, is to continue with that.

Thanks. And Rick can you remind us -- I know you're trying to grow EBITDA through a combination of shop recovery and this acquisition in Fremont. What are the restriction hurdles that you're trying to clear? And what does that then allow you to do?

Sure, Brian. There's a couple there. They're both pretty related under our revolving credit facility. We have a fixed charge coverage ratio that is essentially waived through the end of the year. So we'll need to be back in compliance with that come January. And again, fixed charge coverage ratio, as you can imagine is really our income compared to our debt service, essentially. So again, the redemption of the $500 million of 9.75% bond certainly helps with that. Our model has us very much on track to be back in compliance with that when we need to be. And then similarly, under our bonds and our credit agreement, we have a consolidated income available for debt service over debt service ratio. This is an incurrence test that we've talked about in the past, where we need to have a 1.5x coverage ratio in order to incur new debt. So again, that's the reason we're sitting with a fully drawn revolver today and we're expecting to continue to be in this kind of cash-rich position until we can repay the revolver once that ratio is back above 1.5. Our model has us back in compliance with that mid-2023. It is a test that's done on a pro forma basis. So, there are some variables. For example, if we were to refinance the remaining $500 million of 9.75% debt at a lower rate, that will help us get back in compliance sooner because it affects the denominator there, the debt service. So it's something that we've modeled out, but you mentioned in your first question that it was nice to not be focused on the shop portfolio. I can tell you that I'm very focused on the shop portfolio. We are really trying to squeeze as much EBITDA out of that portfolio as we can. I think in order to get back in compliance, we need to just be at a little over 60% of where the portfolio used to be and that's frankly not good enough for us. So we are very focused on maximizing value there.

Right. From our standpoint on the shop recovery looking at occupancy trending higher and rate trending higher, those are the two variables we care about first and foremost and we'll leave the cost controls which are important up to you and Alerus Life. But one more for me and then I'll hop back in the queue. On the Phoenix vacancy which I hear you guys mentioned in prior call, still caught us a little off guard. Is there any other material known vacancies in the system that we should be thinking about as we model occupancy in the MOB portfolio?

Thanks, Brian. Yes, there is a vacancy. We have a two-building tenant in suburban Boston that is downsizing out of one of the buildings. It's 125,000 square foot building. That building is actually going to come out of our same store set because we've had our development team take a look and they have plans to convert that space into a GMP lab facility for which there's a great deal of activity in the Boston Market as you can imagine. So we are we are getting that back, but we are very quickly working to redevelop it into some pretty attractive space for the market.

Thanks. I'll stop there and let others ask and I'll hop back in the queue. Thank you.

Thank you.

The next question comes from Daniel Byun with Bank of America. Please, go ahead.

Hello, good morning. I'm on call with Josh . I had a quick question on if you can speak about the senior housing trust that you're seeing across the quarter end of July. Thank you.

Sure. We're actually seeing an increase. Our operators are really focused on a more robust and targeted marketing and sales strategies and the result of that has produced an increase in leads, an increase in tours and the conversion rate from tours to move ins is up. Occupancy, as I mentioned in my prepared remarks is up in both portfolios in June and July. So things are actually looking pretty positive.

Great, thank you.

Thank you.

The next question comes from Aaron Hecht with JMP securities. Please, go ahead.

Thanks for taking my questions. Rick, you mentioned that you guys are looking to get back to about 60% or you need to get to 60% internally to get to the fixed charge coverage you want -- 60% on the shop portfolio NOI. That portfolio has changed a bit over time. Is the baseline around $100 million of NOI that you're working from, or can you can you set a goalpost?

Yes, Aaron, I think that's pretty accurate. From where we are today, again, if you look back at last quarter, the shop portfolio was essentially breakeven with just -- sorry, going back to the first quarter $153,000 of NOI. The good news is it did grow this quarter and we expect that to continue. The 62% was just kind of looking back at where we were historically in 2019. I think in order to get back to where we want to be, it's about $100 million as you said and what's interesting about the shop portfolio is in order to get to that level, the margins would still be pretty substantially lower than what we expect long term. The industry for example often operates independent living at much higher margins, but even assisted living and memory care, we should be able to have a margin in the 20%-25% range pretty easily. I think we need to get back to 10% to 11% in order to be back in compliance with this incurrence test so that we can kind of get back to normal. But again, it feels very achievable. We just have to execute on it and we're really focused on that right now.

And I think last year, there may have been some noise in the NOI numbers. I think some CARES Act funds. Is this a clean quarter in terms of the NOI that rolled through?

It's pretty clean. There's a little bit of CARES Act money. It's about a $561,000 increase from last quarter on CARES Act funds. So we've break that out in our supplemental. You can you can find it there. But, again, I think some of that might continue on a go-forward basis as some of these state programs -- we only recognize that when the cash is received and there's no further strings attached. So hopefully, we'll continue to look for those opportunities, but relatively clean. Yes.

Okay. And then what's the appetite to do more joint venture type deals? And has this change in capital markets adjusted your opinion on the viability of doing those types of investments?

It's a good question. Our joint venture partners would like to continue to grow our partnership and we're always looking to find properties that might make sense for that partnership. We haven't to-date found any that that checked all those boxes, but we might because they are very interested in growing our MOB Life Sciences JV.

Appreciate the thoughts.

And we have a follow up from Brian Maher with B. Riley Securities. Please, go ahead.

Thank you. Kind of sticking along that line of questioning. On the JV, both Vertex and the 10 office MOB, was there any material and to the extent there was, can you quantify it to some degree difference in the rent per square foot of those properties versus the remaining MOB Life Science properties?

No. Our remaining portfolio is -- I guess I should say the JV portfolio is very representative of our remaining portfolio in tenant mix and rent weighted average lease term. All of the metrics that we look at are very similar when we compare the two portfolios.

Okay. And then the last for me on Torrey Pines, the news , can you give us an update on that property? Is that now fully-leased? Or how far along are you on that property?

Yes, it is fully-leased and were working through our tenant improvement projects with the tenants. We wish we had more space to lease there because it was so successful. But yes, we're wrapping that up. The tenant improvement projects will continue on through the year.

Thank you, Jennifer.

Thank you.

This concludes our question-and-answer session. Just one moment. Just one moment as I turn the call back over to Jennifer Francis, for any closing remarks.

Thank you, Operator. We're making demonstrated progress in driving the recovery of our shop results, reducing interest expenses and making enhancements across our portfolio. Our continued investment within our portfolio will help accelerate improvement to our results and we believe that we're on-track to improve portfolio performance, deliver earnings growth and maximize long term shareholder returns. Thank you for joining the call today. Operator, that concludes our call.

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