Diversified Healthcare Trust Q1 2026 Earnings Call - SHOP NOI Surges 13.5% as New Operators Drive Margin Expansion

Conference Operator: Good morning, and welcome to the Diversified Healthcare Trust first quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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, Manager of Investor Relations, Diversified Healthcare Trust: Good morning. Joining me on today’s call are Christopher Bilotto, President and Chief Executive Officer, Matthew 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. 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, President and Chief Executive Officer, Diversified Healthcare Trust: 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 the 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 enhanced 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 a right sizing 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 analyzed 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 included 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 an aggregate proceeds of $23 million.

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, Vice President, Diversified Healthcare Trust: 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. These efforts led to moderation in our same property expense for growth, which was 350 basis points year-over-year and 120 basis points since last quarter. We 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 Real Estate 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-$115 million, representing approximately 18% reduction at the midpoint. Now, turning the call over to Matt.

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: Thanks, Anthony. 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 7.8 times at quarter end, down from 8.8 times a year ago, driven primarily by improved operating performance. Adjusted EBITDAre to interest expense improved meaningfully to 2 times from 1.3 times at this time last year.

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: We remain confident in reaching our near-term leverage target range of 6.5-7.5 times, 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-$185 million of SHOP NOI, $94 million-$98 million of medical office and life science segment NOI, $28 million-$30 million of NOI from our triple net lease senior living communities and wellness centers, Adjusted EBITDAre of $290 million-$305 million, and Normalized FFO of $0.52-$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.

Conference Operator: We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question is from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll, Analyst, RBC Capital Markets: Yep, thanks. Chris, I wanted to touch on some of the recurring CapEx expectations. I know within the guidance you’re assuming $80 million-$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 2026 would be lower than that?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: The $90 million includes maintenance capital and some refresh capital. That’s a blended number. 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. We’d like to see some modest pullback in maintenance capital as the years progress.

Then on the kind of what we call the redevelopment capital or the ROI capital, you know, 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. A lot of that is just soft cost work. 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, Analyst, RBC Capital Markets: Okay. 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 2027, 2028 with these new operators?

Anthony Paula, Vice President, Diversified Healthcare Trust: Yeah. The $3,500 we expect to go down in future periods. We think that’s a good run rate for 2026. The other thing to keep in mind, that’s gonna exclude refresh capital. Kind of piggybacking on what Chris had mentioned, for 2026, we expect $5 million-$10 million of refresh capital, which is embedded within that recurring CapEx number that we’re guiding towards.

Michael Carroll, Analyst, RBC Capital Markets: Okay. 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? Are there potential acquisition opportunities that you would look at pursuing too, or is it gonna be mostly these renovations?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Mostly the renovations. I think our, you know, 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 in our investor materials have teased out some items. There’s real opportunities dialing in with these operators to kind of, you know, pull in expenses in different areas, some of which we’ve touched on, continuing to kind of drive, you know, top-line performance and occupancy. Then again, I think kind of from a capital deployment, you know, really kind of putting that money towards improving these communities, then I think equally important on expanding acuity within the communities before we consider acquisitions.

Michael Carroll, Analyst, RBC Capital Markets: Okay. 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 kinda kicking 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?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah.

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: Go ahead, Anthony.

Anthony Paula, Vice President, Diversified Healthcare Trust: Yeah. From a G&A perspective, the most volatility we’re gonna see is from the business management fee. You’re right. Depending on fluctuations in share price, it will adjust that number.

Michael Carroll, Analyst, RBC Capital Markets: Within guidance, you just assume that SHOP NOI is probably exceeding that. Even if G&A goes up, your overall guidance range is still pretty accurate and maybe even trending higher.

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: That’s right.

Michael Carroll, Analyst, RBC Capital Markets: Okay, great. Appreciate it.

Conference Operator: Again, if you have a question, please press star then one. The next question is from John Massocca with B. Riley. Please go ahead.

John Massocca, Analyst, B. Riley: Good morning. Appreciated the color and the reminder on the one-time items that were impacting 1 Q 25 kind of comps. Is there anything else kind of one time to be aware of, either in how, you know, same property SHOP NOI growth is being calculated or even anywhere else in kind of the financial reports for 1 Q 26?

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: No. That’s the most material item that, $2.7 million of business interruption, insurance proceeds we received in Q1 2025. There’s a little bit of other noise, but nothing of that scale.

John Massocca, Analyst, B. Riley: Okay. Any kind of direct impact from the AlerisLife or the former AlerisLife property transition still flowing through 1Q 2026 results? I mean, maybe 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 2026?

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: Sure. I can start and then hand it off to Chris on operator performance. As it relates to the transition and costs associated with that, we capture that in transaction-related costs. A lot of that is kind of below the line and outside of NOI.

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah. I think the, the follow on, John, to your question. I mean, the AlerisLife, the transitions are going very well. You know, as you’re aware, you know, they were completed at the end of the year. The first couple of months in the year, you know, a lot of these operators were, you know, just kind of revisiting kind of the overall employment and kind of structure within the communities, retooling kind of their sales teams, et cetera. Again, we touched on other areas where we found pockets of opportunity to reduce costs. You know, there’s still incremental pieces there that are flowing through.

you know, I think we’ve identified kind of the more material items, and those are the 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. I would say overall, the transitions are going very well. Again, I think we’ve forged some really good relationships with some great operators.

John Massocca, Analyst, B. Riley: Okay. Then maybe specifically on occupancy or same property occupancy in the SHOP space. I noticed 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?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah, it’s both. I mean, there’s some seasonality in there, then as I just touched on, you know, there, you know, as these operators have come in, you know, predominantly starting in January and kind of reevaluating and retooling kind of the business specific to kind of their outlook, you know, that takes time. I think, you know, given the fact that we can hold occupancy while we’re going through a major transition across the entire portfolio, I think is a real win. I think it kind of reflects well for setting the pace, you know, meaning that we can run stabilize in Q1 with a lot of disruptions.

As we get in kind of to the more kind of seasonal or higher seasonal periods, we can kind of hit the ground running, focused on really pushing occupancy now that we have all the pieces in place.

John Massocca, Analyst, B. Riley: Any updates? I mean, how is 2Q trending thus far on kind of SHOP performance?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: No, I mean, technically, you know, the, you know, April just finished. Numbers are still coming in, so there’s nothing kind of specific to speak to. I just think, you know, as we referenced, we’re reaffirming guidance. We feel good about our positioning. You know, we’re seeing, you know, other opportunities as we’ve referenced. 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, Analyst, B. Riley: Okay. If I think about kind of the difference in the SHOP NOI growth kind of implied in guidance versus what kind of achieved in 1Q. I mean, is that mostly the higher comps in 1Q 2025 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?

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: Yeah.

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah.

Matthew Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: You know, on occupancy, we’re continuing to guide to that 300 basis point increase in occupancy year-over-year. You know, we didn’t see much progress in Q1 as Chris talked about. As it relates to rate growth, we’re expecting, you know, 5+% rate growth.

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: As we think about just quarterly, you know, run rate, you know, 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-$185 million.

John Massocca, Analyst, B. Riley: Lastly, I know you talked on it a little bit earlier in the call, but just for kind of, you know, the impact on bottom line or even on kind of NOI performance, how much of, kind of, the flow through from previous year CapEx spend are you expecting to kind of be impactful to 2026 NOI? Is there stuff that’s maybe more even stuff 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?

Christopher Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: 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. If you think about, you know, we had, you know, a fair amount, between 60 and 70 communities that were renovated, you know, kind of in 2023 and 2024. Those themselves are starting to kind of produce real meaningful results in the form of kind of a more stabilized event. Again, layering on kind of the new operator transition, we’ll get other incremental benefits from that. Whereas the 2025 refreshes, which was, you know, between 20 and 25 communities, we would expect that to show incremental benefit towards the back half of this year and into next year. That cadence will continue.

John Massocca, Analyst, B. Riley: Okay. I appreciate all that color. That’s it for me. Thank you very much.

Conference 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, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah. 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.

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