Good morning, and welcome to the Diversified Healthcare Trust Second Quarter 2023 Earnings Call. [Operator Instructions]. 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 second quarter 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 with sell-side analysts. 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, Wednesday, August 2, 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. Now I'd like to turn the call over to Jennifer.

Thank you, Melissa, and good morning. Thank you for joining us on DHC's Second Quarter 2023 Conference Call. On today's call, we'll provide an update on DHC's merger with Office Properties Income Trust, or OPI, and on our operational and financial results. Two weeks ago, we filed a registration statement with the SEC and has scheduled a special meeting of shareholders on August 30, 2023, where our shareholders will be asked to vote on proposals to approve the merger. With shareholder approval, we expect to close the transaction shortly thereafter. We continue to believe this merger represents the best opportunity available to create long-term value for DHC shareholders through a larger, more diversified REIT. With more than $700 million of debt coming to coming due in 2024 and being out of compliance with our debt incurrence covenants. DHC continues to face steep challenges in the coming year. As discussed in our monthly business updates, the turnaround of our senior housing operating portfolio is inconsistent, unpredictable and has not occurred fast enough and will not occur in time to address these challenges. Further, as things stand, DHC had insufficient liquidity to fund the capital investments needed to continue the turnaround underway in our SHOP segment. As a result of these operating challenges, we do not believe we will be able to increase DHC's current annual dividend of $0.04 per share until 2025 at the earliest. Following the completion of the merger, the combined company will immediately be in compliance with its debt covenants, allowing access to multiple capital sources to continue to fund the SHOP turnaround and address upcoming debt maturities. The merger will be immediately accretive to our leverage as well as normalized FFO and CAD. In addition, the pro rata annual dividend of the combined company represents a 267%…

Thanks, Jennifer, and good morning, everyone. Second quarter, we reported normalized FFO of $12.1 million or $0.05 per share, flat from the first quarter, but an improvement of $0.09 per share from the second quarter of 2022. Adjusted EBITDA increased 30% from the prior year to $62.1 million, but is down 1% from the first quarter. Our consolidated cash basis NOI increased $20.2 million or 46% from the second quarter of last year to approximately $64.3 million. This increase was primarily attributable to improvements in our SHOP segment, which had an increase of $16.4 million of cash basis NOI. Occupancy in our SHOP segment increased 420 basis points since the second quarter of last year and 90 basis points since the first quarter of 2023. Average monthly rates increased 7.3% year-over-year but decreased slightly 60 basis points sequentially. The year-over-year increases in occupancy and rates resulted in a 13.7% increase in SHOP revenues, while property operating expenses increased 7.3%. The margin improved 540 basis points year-over-year but only 180 basis points sequentially. For the second quarter, 148 of our communities produced positive NOI of $34.4 million and 82 communities produced negative NOI of $11.3 million. While the number of positive NOI producing communities has increased by 20% from last quarter, we noted 101 communities had decreased NOI in the second quarter compared to the first quarter. The decrease of NOI in these communities is illustrative of the uneven and unpredictable recovery of this portfolio. Labor continues to be our largest SHOP cost at nearly 52% of revenue. And while we have seen improvements in decreasing contract labor, we are seeing the need to adjust wages to be in line with market in many of our communities. Competition for top talent remains fierce and our operators need our support to continue…

[Operator Instructions]. The first question comes from Bryan Maher with B. Riley Securities.

A couple of questions for me. Maybe starting with medical office building. And I don't know, maybe for Rick. It seems like even though occupancy was up rental income and cash rental income and NOI margin were down. Can you explain what's going on there? Is there any transaction activity, anything we're missing as it relates to that?

There is, Bryan. It's a good question. So in our non-same-store portfolio, so it was part of the redevelopments, we had a tenant that we terminated following their default and now pending bankruptcy. So we took a $6.8 million straight-line rent write-off related to that tenant, but we were able to recover the security deposits. So there's a decrease or a hit in NOI, but there's actually a pickup in cash NOI. So that's the difference that creates that disconnect.

Okay. That's helpful. And then maybe we're getting a lot of questions on this cost pressure situation. Some of your competitors, Welltower included, have talked about cost pressures easing. Can you talk about what the delta might be between your portfolio and some of the others? I think that, that storyline has caught some people off guard.

Sure. I would say that a lot of our insurance renewals are July 1, and we're seeing it varies by operator, but we're seeing increases between 10% and 100%. So pretty significant. Similarly, there's been considerable wage pressure. That's always a thing in senior living and the operators manage it really well. But where we see the need, there are still intense shortage of caregivers around the country, in particular, I think, in the Southeast and for just labor in general and then nurses are still in high demand. So I think we need to adjust wages to be competitive, and then you have to deal with all the wage compression that happens within a community to make sure things are fair. We will try to recover that through rate increases, but there's usually a disconnect in timing. So again, that's -- there are significant headwinds and we're continuing to make investments in the portfolio and the workforce. We do believe that eventually, we will see higher margins and returns from these investments. But the good news is we did recover a bit faster than we had projected in the first half of 2023, but we expect it to flatten out a little bit in the second half.

Okay. And then last for me, and I'll hop back in the queue. On the CapEx spending, we know that you plan to spend a lot this year. Our model had called for, I think, we're at $285 million or so. It doesn't seem like you're maybe pacing at that rate, and you're sitting on $357 million in cash at quarter end. Is there anything going on there? Are you slowing your CapEx spend to be cautious in case the merger is not approved? Or are you just moving forward as you had planned as if it was January 1?

We are moving forward as if it was January 1, we really believe we've prioritized the capital spend throughout the portfolio and the returns that we'll generate when the projects are done and the communities are stabilized are pretty significant, generally high teens or 20% returns. We have faced some delays. It's primarily permitting type things that we thought would be wrapped up by now that have continued to drag on. So we are making progress. But because of the delays, our estimate for the year has probably come down a little bit where previously we were probably targeting $375 million. We think we can catch it up and we'll probably be closer to $350 million for this year with a similar number next year. About $250 million of that $350 million is expected to be spent in the SHOP portfolio, where the portfolio needs the most investment and where we see the greatest returns. So again, it's a little bit delayed because of permitting, but for the most part, it's consistent with what we've been trying to do.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Francis, President and Chief Executive Officer, for any closing remarks.

Thank you, operator, and thank you all for joining our call today. That concludes our call.

The conference has concluded. Thank you for participating. You may now disconnect.