Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to the fourth quarter 2023 conference call for Diversified Healthcare Trust. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; and Matt Brown, 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, Tuesday, February 27, 2024. 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. 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. And finally, we will be providing guidance on this call, including short cash basis net operating income, or SHOP cash basis 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 or losses or impairment charges related to the disposition of real estate. Now I would like to turn the call over to Chris.

Thank you, Melissa. Good morning, everyone, and thank you for joining our call. Last evening, DHC reported fourth quarter and year-end results, along with our January SHOP performance updates that reflect operating and financial improvements across our portfolio. On today's call, I will begin by providing you with an update on the quarter's operational performance and recent events and then discuss DHC's strategic initiatives as we look towards 2024 and beyond. Later, Matt will discuss the financial results and balance sheet in greater detail and provide full-year guidance and targets for our SHOP segment. 2023 was a pivotal year for DHC as we made significant progress with operational performance across our sectors contributing to a full-year 2023 increase to normalized FFO by 207% to $41.1 million. Throughout the year, we refreshed or underwent full renovations at nearly 65 of our SHOP communities, serving as a stepping stone for occupancy and NOI growth and contributing to our 2023 cash basis NOI increase to $236.2 million or 43% over the prior year. In December, we took a meaningful step to support our growth with the issuance of $940.5 million zero coupon senior secured notes using the proceeds to repay in full all $700 million of the outstanding debt maturing in 2024 and simultaneously regaining debt covenant compliance. On February 16, we executed our purchase right and acquired approximately 34% of the currently outstanding Aleris common shares at the predetermined tender offer price for a total purchase price of $14.9 million. AlerisLife is our largest operator, managing 119 communities across our SHOP segment. During 2023, we sold eight non-core properties located in markets where we believe there is minimal NOI growth potential or with properties that require excess of capital investment. Currently, we are marketing for sale on additional 9 non-core properties, mostly…

Thanks, Chris, and good morning, everyone. Before covering the results for the quarter, I wanted to highlight the bond offering we completed in December. We issued $940 million of zero coupon secured notes due in January 2026 with a one-year extension option. Net proceeds from this transaction were approximately $730 million and were used to repay and terminate our $450 million secured credit facility and redeemed $250 million of senior notes that were scheduled to mature in May. The bonds are secured by 95 properties, including medical office, life science and triple net leased senior living communities and wellness centers. We have provided additional aggregate information on this portfolio of properties in our quarterly earnings presentation. As a result of the transaction, we have no debt maturing until June 2025 and have regained compliance with our debt covenants, which allows us to issue and/or refinance debt, something we have not been able to do since May 2021. As a result of these financing activities, we have concluded that we no longer have substantial doubt about our ability to continue as a going concern. Now turning to the results for the quarter. Normalized FFO for the fourth quarter was $8.1 million or $0.03 per share and included $2.7 million or $0.01 per share of non-cash amortization of the discount associated with the zero coupon secured bond. On a run rate basis, this non-cash amortization is expected to total $20.7 million or $0.09 per share for the first quarter and $86.8 million or $0.36 per share for the full-year of 2024. Our consolidated same-property cash basis NOI was $56.3 million, representing an $11.9 million or 26.8% year-over-year improvement. The changes by segment are as follows: Office same-property cash basis NOI was $29.5 million, representing a year-over-year improvement of $1 million or 3.5%,…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Bryan Maher with B. Riley. Please go ahead.

Thank you and good morning. Before I move on to my question, I just wanted to clarify, you said SHOP NOI for 2024 back-end loaded, but $120 million to $140 million, is that correct?

That is correct.

Perfect. Thank you. Sticking with SHOP though, on the margin side, I mean, one of the questions I get most from the buy side as it relates to the percentage margin, right, which has been kind of hanging out in that five to 10 range, obviously, better at the AlerisLife properties than the other operators, and it was pleasant surprise to hear that you're going to transition some of those assets. But what's been the biggest hang-up there? And I'm assuming with your $120 million to $140 million guidance that you're expecting some major alleviation on that front. But can you just walk us through what's been the hang up and how that dissipates?

Sure. Bryan, I can start that. So we definitely expect in 2024 margin expansion, a lot of that is going to come from the topline. As we talked about, we're expecting occupancy to grow 300 to 400 basis points in the year. We're going to continue bringing rents more in line with market as we enter new leases with residents. I think as an industry with inflation where it's been, the expense side has definitely been pressured and it is a huge focus of our operators to not just grow the topline to drive that NOI growth, but to also really manage and rationalize the operating expenses at our communities.

And the other thing I would add on that, Bryan, is as you may be aware, we're kind of at that tipping point with occupancy kind of being closer to the 80% threshold. And I think as we continue to advance occupancy upwards of kind of – we talked about the 300 to 400 basis points, we expect more to flow down to the bottom line. So certainly, we would expect incremental improvement in addition to some of those things that Matt referenced specifically attributed to occupancy.

Okay. Sticking with SHOP for a minute, can you tell us what compelled the repurchase of the AlerisLife position that you previously held?

Yes. I mean, look, I think that on the onset, there was a tender offer, which everyone is aware of with the opportunity to kind of rightsize Aleris to control costs. And I think at the end, being in a position with kind of a more streamlined company and being able to purchase those shares at that same tender offer price is compelling. And I think further Aleris manages about 119 of our communities. And so I think there's aligned interest in kind of that investment.

And then on the SHOP assets in general. I mean, I'm sure you're aware of Welltower buying Affinity, I think it was announced maybe 10 days ago for just under $1 billion, which would equate to about $250,000 a key. I think clearly, your assets aren't trading anywhere near that. And the upside to your share price common should you move towards that direction from $50,000, $60,000 a key to $100,000 to $150,000 is huge. I mean, can you give us what your thoughts are related to the marketplace for SHOP assets, given the broader dynamic that you talked about, which is lower supply and more people moving into the age group of going into the communities. I mean it seems like the demand is there. What's your view on the impact on valuations of what you own?

Yes. I mean I think a couple of things. I mean we're certainly familiar with the headlines with some of these larger trades. There's different dynamics that go into those metrics and, I guess, overall cap rates and valuations assigned to the different kind of product type. But I think, in general, I would view this as a good kind of comp for the industry. And I think kind of going back to your comment, when we look across our portfolio, we have a very large presence in kind of strong growing markets like Southern Florida, Atlanta, Houston, Charlotte, where a lot of our units reside. And I would say within those, these are kind of institutional quality properties where we invest in meaningful capital, and we think there's continued upside. And so when you combine kind of some of these stronger markets where we're located, which I think across our portfolio represents a substantial portion of our units combined with the opportunity to continue growing NOI as we alluded to in some of our prepared remarks, I think, overall, seeing kind of those comps on some of those headlines, I think, provides further justification about overall increased values across the sector. And so I think seeing that and seeing those comps, I think, bodes well for senior living as a whole.

Well, just real last for me. The SHOP numbers you gave for CapEx this year, $190 million to $200 million, if you're successful at getting that deployed, is that substantially it? Or do you expect more to flow into 2025?

Bryan, I think that in 2025, the numbers will probably be a little bit less than 2024 for the SHOP portfolio. We are thinking in aggregate CapEx in 2025 is probably somewhere in the $230 million to $250 million range. So it's still a little higher than normal. But after 2025, we expect it to come down very significantly. I will also say that in prior modeling that we've done, we were thinking that CapEx was going to be in excess of $300 million in each of 2024 and 2025. So we are really tightening and sharpening the pencil here with the level that we provided on today's call. And the result of that is obviously less financing needs in 2024 that we highlighted on the call.

You said $230 million to $250 million just now for 2025, but you said they were in aggregate. So is that going to include MOB also?

Yes, that's all in, correct.

Thank you. That's all for me. Appreciate it.

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

Thank you for joining our call today, and we look forward to seeing many of you at some of the upcoming conferences. Thank you.

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