Good afternoon, everyone, and welcome to the 2025 REAT Week presentation from Diversified Healthcare Trust. I'm John Massocca, a Senior Research Analyst at B. Riley Securities, and I also cover DHC, and I'll be moderating the presentation this afternoon. With me, I have Chris Bilotto, President and CEO of DHC, as well as CFO Matt Brown. DHC owns 343 healthcare-related properties, including over 25,000 senior living units and 7.6 million sq ft of medical office space slash life science space, as well as a selection of net-leased medical assets and wellness properties. With that, I'll turn the floor over to Chris to give a little bit of a quick overview of DHC's business model and what they're kind of seeing today.
All right, thank you. As John alluded to, I'll give you some of the metrics with respect to the portfolio. I think for everybody's benefit, as we think about DHC more specifically and kind of the overall strategic opportunities that we've been evaluating, you know, if you look back over the last couple of years, I think more specifically with respect to the healthcare industry, I think it's kind of no surprise with respect to what you've heard out there in tailwinds supporting various sectors and more specifically around SHOP. The SHOP portfolio for DHC has been kind of a big part of the growth engine for the business.
And in support of that, we've spent a lot of time kind of culling our portfolio and really kind of positioning our asset base and investment with capital to kind of take advantage of some of the opportunities we're seeing in the greater market. You know, I think supporting that in addition to asset-level strategies, for the company, we've really been focused on our balance sheet. We've had a handful of near-term maturities in our capital stack in 2025 and 2026, having recently addressed the 2025s and now focused on the 2026s.
We've outlined, which we'll talk about here in some of the Q&A, kind of a path for, you know, really getting to a scenario where we have, you know, our balance sheet kind of tidied up in 2026 with no near-term maturities until 2028, having completed a lot of the capital investment across the portfolio, kind of paving the way for upside and NOI growth in the SHOP portfolio, and then a broader disposition plan to sell off assets that are either negative NOI drivers, those that are capital-intensive, or other strategies because we've maximized value across the portfolio. It has been a lot of work over the last couple of years. We're starting to kind of see the benefit of that performance.
For those of you that may have seen our Q1 earnings, you know, having come off year- over- year with a 42% increase in NOI and a 110 basis points increase in occupancy, I think are components to some of the success that is coming out with the execution of that plan. So, Matt, anything you want to cover?
We'll kick off Q&A here. If there's any questions from the crowd, please feel free to raise your hand. Ideally, use the microphones because I believe this is being webcast. I'll start off with kind of a bigger picture question to get things going. Given we have some people probably new to the DHC story in the room and even some people, you know, familiar, you've done a lot of disposition activity recently. Can you provide us an update on what the DHC portfolio looks like today in terms of kind of components and segments and what's kind of been, you know, the recent flavor of business operations, if you will?
Yeah, I mean, I think, you know, you touched on a little bit about the segmentation. So we've got about 230 properties that fit in the SHOP segment. We have a small portfolio of triple-net leases and just under 100 properties within our MOB and life science category. We're selling just over 60 properties, I would say equally weighted between SHOP and MOB as part of our disposition process, which we expect to conclude in the back half of this year. Really what we would expect as part of that is to find ourselves much more concentrated on the SHOP side of the portfolio based on number of properties and NOI, with kind of a cleaner path to, you know, to grow NOI in the SHOP portfolio.
As you think about what's left for our MOB and life science side, I think what we find are these are properties with longer walls and more prominent markets, primarily physician-based on the MOB side, and then more on core markets on the life science side, specifically.
Maybe specifically with the SHOP assets, you know, NOI margins in the senior housing portfolio grew pretty meaningfully in one Q25. What are the factors that drove that and kind of how sustainable is that as we look out in the next three quarters of the year?
Sure. I mean, I think, Matt, you can touch on this, as well, but I think the margin improvement is a byproduct of some of the things we touched on. You know, over the last year, there's been a lot of disruption in our portfolio as we've done renovations. You know, those are all for, you know, potential future positive outcomes, but nonetheless, there's a distraction when you have a property under renovation. You know, we're getting the benefit from increased performance coming out of that. We've had a slight increase in occupancy over the last couple of quarters, more prominently year-over-year. We're getting the benefit of more controlled expenses across the portfolio. You know, we're seeing some pressures in labor continuing to increase, but we're finding meaningful offsets with other aspects in the portfolio.
In addition to the rate growth, and we do it predominantly annually in January, so we get the benefit of that rate increase in January. We're also seeing some pockets of opportunity with other levels of care, and other kind of revenue aspects within our portfolio that are also driving performance on the margin side.
You know, as we think about maybe rate growth and occupancy, how meaningfully do you think you can push either one of those given some of the macro dynamics we're seeing today around the overall senior housing space?
Yeah, I think we have the opportunity to grow both. The investment we've made in our portfolio, as Chris mentioned, gives us a real opportunity to drive both rate and occupancy. Our current occupancy in SHOP is just over 80%. We have a target of getting to 82%-83% by the end of this year. I think we have the opportunity for both.
What are some of the kind of pushes and pulls you're seeing today on the expense side in the SHOP space? You mentioned labor a little bit, but anything else where you're making kind of strides to kind of maximize returns within that portfolio?
Yeah, over the last couple of years, contract labor was a larger percentage of our expenses. We've done a nice job with our operators of getting that down to well under 1% of expenses. That's been a positive for us. We had a very successful insurance premium policy renewal in July of last year, about 25%-30% reduction in annual premiums, which was a good catalyst for expenses. Overall, you know, our operators are doing a nice job with expense management, and we're expecting expenses of about a 3% growth from 2024 levels.
Maybe for those who may be less familiar with the senior housing space, what are some of the broader kind of macro dynamics you're seeing? How does DHC kind of fit within that? How does it kind of, you know, benefit from some of those supply-demand kind of dynamics that are in the space right now?
Yeah, I mean, I think kind of more generally, there's just a lot of tailwinds supporting the industry. You know, the population continues to age, and, you know, I think you're looking at a 4%-5% CAGR over the next five years, which will continue to benefit senior housing and other pockets of healthcare. You know, there's a scenario today where it's just not affordable to build, and so you're seeing a really kind of compressed, delivery in the supply-demand dynamic with less than 1% being delivered quarterly.
Really, I think that goes back to the philosophy that we've been deploying over the last couple of years where, you know, looking at pockets to reinvest within our communities to position those to be kind of the best in the market or to kind of capture as much share as we can, given that there's no new supply coming in, has really been a focus. I think sitting here today, you know, we don't expect that there's going to be a material change impacting that trajectory, and we would, you know, continue to believe that there's meaningful upside, both on the MOB and the SHOP portfolio.
As you see it, kind of how has replacement costs maybe evolved since, since COVID, just given, you know, inflation, tariffs, etc.? I mean, has that really been a major tailwind for kind of in-place portfolios?
It has been a tailwind. I mean, when you think about, you know, just replacement costs growing, you know, 20+%, kind of more broadly speaking, and it's going to depend, by acuity, just given the cost nuances that increase as you get to higher acuity. You know, you're not necessarily seeing any pullback. If anything, you know, it may have leveled off in some cases, but there continues to be kind of a push-pull dynamic with overall costs. I think more specifically, while we had seen some really good historical growth in rate over the years, it's moderated, you know, still favorable. You're still seeing kind of the mid-single digits year-over-year, and maybe you can kind of push in some areas to see some outsized performance. You know, as rates continue to level off, costs continue to climb a little bit, and then just being overinflated, it really makes it difficult to pencil, doing new construction.
Anything you're seeing today from some of the changes in government policy that have recently been announced or you would expect to see? I guess at this point, it's probably too early to see them in your actual tenant base. But, you know, is there an expectation that that could have an impact on anything within your portfolio, or is this specific to some other healthcare REITs?
Yeah, it's a mix. I mean, I think when you look at policy, there's dialogue around Medicaid and other benefits and how those are handled. I think that does have a meaningful impact, but it's more akin to hospitals or skilled nursing, which is a very small, less than 10% of our portfolio. From that side, I don't necessarily see any kind of meaningful impact. You know, there's certain, you know, conversations around where tariffs will land, what the impact is today versus where that might go. Again, we would expect some movement with tariffs, but it represents such a small percentage. I think it's sub 15% of our costs really kind of are impacted by tariffs. Again, not a meaningful impact.
But outside of that, when you think about, you know, certain initiatives, with the administration or otherwise, look, it's things we monitor regularly. But I think we're somewhat insulated from, I guess, outsized impacts that might come with that.
Switching gears, you know, what are some of the factors driving performance within your MOB portfolio? And how do you think that portfolio would stand up when it might be a choppier kind of macro environment, a choppier tenant credit environment potentially?
Yeah, so a couple of things. On the MOB portfolio, I think we would, we have what we believe to be today an outsized amount of vacancy, you know, on a consolidated basis. We're trending in the low 80s. A lot of that is a byproduct over the last, let's call it 18 months. We've seen some fallout in occupancy, primarily in buildings that serve as back office to the portfolio. As you think about, or as we think about the construct of the MOB portfolio, you've got the physician-type business. This is kind of the forward-facing where you go in and see a practitioner, which is a very solid, strong dynamic for the portfolio. Then you have the back office support, the administrative, which again is more consistent with what we would think is office. We've seen some impact there.
You know, a lot of that, for us, for the most part, are assets that we're selling. I think as we get through the year, we'll kind of see, you know, occupancy get back up through dispositions. We, you know, we're seeing good momentum on the leasing side, with respect to the physician side of the business. You have seen that kind of flow through in our Q1 results, pushing north of 100,000 sq ft with mark to market rents of over 15%. I think generally speaking, you know, we feel good about the portfolio and where it's going. Again, I think for us, we have some work to do on the disposition side. Nonetheless, we've been out in the market, you know, we're getting good activity around that portfolio. It is just really a function of time.
What's the outlook for the life science portfolio given some of the broader headwinds in the biotech industry?
For the life science side, specifically for DHC, we're selling some assets. Again, I think those are assets that might be vacancy challenged. There's opportunity for other uses, if not for life science. I think that serves us more optionality. When you look at our life science portfolio, which represents about a third of our MOB life science segment, really the balance of that portfolio is located in your top three markets. We expect that there to be some staying power with respect to that. A lot of our tenants, they serve as the headquarters for those buildings. We have a WALNet portfolio probably north of five years.
I think for us, while life science is under pressure today, I think we have some optionality with kind of how we play that out, and we would expect to kind of retain that side of the portfolio status quo.
You talked a little bit about it within some of the earlier questions, but, you know, what's kind of the targets here on the disposition side? And I guess, you know, is there something unique worth highlighting about some of these dispositions versus kind of the portfolio as a whole?
The target on the dispositions right now, for the balance of the year is between $330 million-$350 million for kind of overall net proceeds. I would say the profile is a mix between medical office and senior housing. We have a small tranche of triple net in there. The profile on the senior housing, these tend to be kind of smaller communities, those in more tertiary markets, and where we're just not in a position where we feel like performance can be achieved through an operator transition or some, some other form of improvement. For us, it's better served to exit those communities. On the MOB, it's a mix. I think we've been successful, in releasing some of those properties. We're going to get the benefit of value creation through monetizing on those sales.
As I noted earlier, you know, there's a scenario where we do have some vacant properties where, again, the highest and best use is, you know, probably, you know, more geared towards a local owner, developer, or some other group that's not conducive to our business plan. Exiting those properties makes the most sense.
I guess, particularly on the SHOP side, I mean, can you maybe go through who the buyer is for these kind of low to maybe even negative NOI assets that are kind of in the disposition bucket and why it's attractive for them to have this property versus, you know, if you're not producing NOI off of it yourself?
Yeah, the primary buyer is kind of local regional operators, owner users. These aren't necessarily groups that operate in kind of the Ridea type structure managing properties. They get the benefit of kind of the lower overhead costs. They can come into a community that's at, you know, call it 80% occupancy that's negative EBITDA and turn that performance around on day one. We're certainly seeing interest on that front. I think outside of that, you know, for some of the better performing communities that are in kind of markets we're looking to reduce exposure in, or just again, transition to other strategies, that's when you get into other groups around private equity, other partnerships with operators, etc.
Longer term, when do you think DHC might return to the acquisition market? To the extent you do, what would you be looking to buy?
I would say that, you know, it's not going to be sooner than next year. I preface that because, you know, we have what we believe is a really good plan in place, just with respect to the work we're doing in 2025. As we talked about, you know, we've got some zero coupon bonds maturing in January that we're focused on paying down through the form of dispositions and refinancing. You know, we've seen significant improvement in our performance, more specifically around Q1, which is at the top end of our guidance if you use that as a run rate. We think there's opportunity to kind of continue to evaluate that side of the business.
and I think, you know, just given some of the other levers as we think about rating agencies and other groups, you know, continuing to kind of pay more attention and kind of reevaluate the portfolio, we're going to be sitting in a very different place, you know, standing here in January on a go forward basis about, you know, what the portfolio looks like, what our cost of capital looks like, you know, where there's opportunities around dividend acquisition, etc. I think there's a lot to talk about, in respect to that opportunity. I think the key takeaway there is, is we're going to have varying opportunities in support of, you know, different growth levers or ways to kind of return some of the capital to investors.
Question from the audience here.
Yeah, you refinanced unsecured debt and secured debt. I understand that's your only possibility right now. I was trying to figure out, you know, what's going to happen to the unsecured debt as you lump up more secured debt and how much is left. Can you talk a little bit about, like, you gave parameters for how much you got per unit for the things you sold. Any estimate of how much is left and how much would be available for the unsecured debt to cover that outstanding? You talked about 82%-83% occupancy ratio. Is that a target so that you can get back to the unsecured market or you would need a considerably higher occupancy to get to the unsecured market?
I'll try to cover all those questions. Yes, we did just, we had some unsecured debt that was coming due later this month at a 9.75% interest rate. We accretively refinanced that with about $340 million of secured debt, all coming from our senior living business. Weighted average interest rate is 6.55%, an average valuation of about $174,000 per unit, which is a great value for those assets. I think helps show the investor community the value of our SHOP assets that we're not getting credit for today. As we, you know, from a leverage standpoint, which is a big factor in getting back to unsecured debt in the future, we had real improvement. We went from 11.2x at the end of 2024 down to 8.8x at the end of March.
We put in our investor presentation that hit the market after close yesterday, to get to 6.5x- 7.5x leverage. We think we'll do that through asset sales that we talked about through the balance of the year with somewhere around $350 million of expected proceeds, continued improvement in our senior living portfolio, all being catalysts for the rating agencies to improve the ratings. S&P recently just removed the negative watch that they had and put the outlook to positive. That was the first step of many, we hope, as it relates to rating agencies. Yes, we want to get back to the unsecured market. In the meantime, we have $4 billion or so of unencumbered asset value that we can finance. That is some of the opportunities we took advantage of earlier this year.
Maybe with kind of refinancing in mind, what are you kind of looking at today in terms of the refinancing component of paying off the 2026 maturities?
Sure. We took a big chunk of that off the table in Q1. We did about $300 million of asset sales that encumbered that bond. That maturity is down to about $640 million today. We expect to use the majority of asset sale proceeds to continue chipping away at that. If we use $350 million on the $640 million we have remaining, that would leave just under $300 million left to finance. We have a lot of good collateral in that zero coupon bond today where we could look to do other financings, likely secured financing to take out the balance. Now that we have the 2025s behind us, you know, our kind of our sole focus is addressing the 2026s through that combination of asset sales and financings.
What type of collateral do you think would typically be used for that secured financing?
Most likely, coming from our Medical Office and Life Science Portfolio. Today, that bond is secured by 73 assets, 59 of them are medical office and life science. Our 10 wellness centers are part of the collateral and then four triple net lease senior living communities. We have some good collateral in there. I would expect it to come most likely from MOB, life science, and maybe some of our wellness centers that are well leased.
Kind of given the accretive nature of the recent refinancing, you know, where you utilize GSE debt, maybe why not, you know, use the SHOP assets as collateral? Why not go the GSE route for the, you know, paying off part of the 2026s?
Look, it's one of many possibilities. For those that have been following along, the agency financing takes a long time. We started a process in 2024 that we just completed recently. And what we saw is while we executed with both of the agencies, over an extended period of time, we also did a couple financings with non-agency. The differential in rate was not really that meaningful at the end of the day. I think that just shows that there's a lot of people willing to lend against senior living. Yes, we have a lot of SHOP unencumbered assets. It's a possibility. I think it puts us in a great position on refinancing overall.
Okay. If anyone else from the floor has questions, we've got about five minutes left. So I'm yelling here.
I have a question. You have some debt with very low coupons that's trading at very, very big discounts. Can you, perch, you know, do some sales and re or tender for bonds at a discount? Is that a possibility? Is that being contemplated within your refinancings?
I think it's a possibility. But as we think about priorities with financings, obviously priority one was addressing the 25s, check, done. And now it's turning the focus to the 26s and getting those behind us. I think as we continue to execute, that discount is going to narrow. But it is something down the road that we're always looking at.
On the, you know, one other part of the story has been kind of CapEx. Obviously, there was a bit of a deferred CapEx cycle there. CapEx has kind of come down pretty notably versus prior years. Where do you kind of view the $150-$170 million of total CapEx that you're assuming in guidance as versus kind of a run rate number? And what are kind of the unique features within that, that number?
Sure. The $150 million-$170 million is our current estimate for 2025. That includes about $105 million-$120 million in our SHOP segment and about $25 million-ish of ROI capital, embedded in that overall forecast. You know, in 2024, our total CapEx was $190 million. We are seeing a nice decline into 2025. We expect that to continue, on a downward trajectory, with an estimate of about $3,500 per unit of our SHOP portfolio. On a pro forma basis, after the dispositions that we are working through, we are looking to have about 22,000 units in that segment of our business. That would put the maintenance CapEx at about the $75 million-$80 million run rate range.
What kind of returns are you looking at on the ROI CapEx? And maybe why, you know, what, what's kind of it going into?
Yeah, I think just to expand on what Matt touched on, I think it's also important to note that with that elevated CapEx spend over the last couple of years, we've largely completed kind of that capital profile for the portfolio. As of Q1, where we completed just over 20 renovations, I think now, as we sit here today, the sole focus becomes on typical maintenance CapEx and then ROI CapEx, which you're touching on now. As we think about ROI CapEx, you know, we've got, you know, certain communities where we might have a floor that was primarily skilled nursing. We want to convert that to a different acuity level to complement the overall plan for the property, or some other version of that with the portfolio.
As we look at that target, which is kind of a, you know, $20 million-$30 million for this year, perhaps that's a reasonable run rate for future years. We are looking at returns in the neighborhood of 15%, stabilized yield on cost is really kind of what our target is for those.
Anything else you think kind of within the industry that's playing a role in the kind of long-term operational dynamics for DHC? You know, maybe kind of what are some of the constraints you're seeing on supply, new supply in the market? I mean, how expensive has it gotten for competitors to kind of build new supply? And how kind of directly is that impacting where you're seeing NOI at some of your properties?
Yeah, I mean, we touched on it a little bit earlier. I mean, I think it's just, I think the idea around new construction is just such a small, kind of fraction as far as what we're seeing for the comp set. I mean, really it's kind of a race towards, you know, improving existing communities and performance within those communities. You know, we've seen some real lift on rate over the last couple of years. I think for our portfolio, we had some catch-up to do more specifically because we were investing in those communities. The byproduct of that allowed us to push rate. I think you see some of that come through in the Q1. We feel like there's continued run rate into next year, etc.
I would say the overall market itself has seen rate kind of hit, I think somewhat of an impetus just because, you know, the overall cost structure for residents moving into the community is just kind of relative to other factors. There's only so much you can push on rate to achieve that. Again, I think big picture, we feel pretty compelling. There's a compelling story around, again, continuing to drive performance within existing communities without necessarily the noise that'll come from new supply, just given the other dynamics we touched on.
Okay. With that, unless we have any further questions from the floor, I think that will wrap things up. Thank you very much. Thank you for the audience.
Thank you.