Good morning, and welcome to the Diversified Healthcare Trust Third 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 telephone keypad. 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 Matthew Murphy, manager of Investor Relations. Please go ahead.
Good morning. 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. 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, November 3rd, 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. 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. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or Normalized FFO, net operating income or NOI, cash basis net operating income or cash basis NOI, and Adjusted EBITDAre. 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. Beginning this quarter, our calculations of Normalized FFO and Adjusted EBITDAre include estimated incentive management fees accrued under GAAP, and prior periods have been recast to conform to this presentation. 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.
Thank you, Matt. Good morning, everyone, and thank you for joining our call today. Our third quarter results reflect continued execution on the strategy we have laid out for the year. That strategy shows up across stronger operating results in our SHOP portfolio, active optimization of how we own and operate individual assets, and a steadily improving financial profile. Following the market close yesterday, DHC reported Normalized FFO of $30.7 million, or $0.13 per share, and Adjusted EBITDAre of $73.4 million, an increase of 28.4% year-over-year. Same property cash basis NOI increased 25.6% to $77.9 million, and consolidated NOI increased 27.5% to $80.8 million. Before going further, I want to note a change in our presentation.
Beginning this quarter, Adjusted EBITDAre and Normalized FFO include incentive management fees as recognized under GAAP, and prior periods have been recast on the same basis. On that comparable basis, Normalized FFO increased from $0.12 per share in the second quarter and from $0.02 per share a year ago, and Adjusted EBITDA increased both sequentially and year-over-year. point, and lowering our expected SHOP recurring capital expenditures by $10 million. Matt will walk through the full guidance update, including the effect of the incentive management fee change. Let me start with our SHOP segment. Same property NOI increased 50.4% year-over-year to $48 million. This growth was driven by a 200 basis point increase in occupancy to 84.4% and a 5.2% increase in average monthly rate, which together expanded same property NOI margin by 470 basis points to 15.8%.
We used targeted move-in incentives this quarter to accelerate occupancy, which kept average monthly rate flat sequentially. As communities stabilize, we expect to reduce these concessions and allow rate growth to flow through more fully. Expense discipline also continues with our dietary procurement initiatives, contributing to an expense reduction by approximately $1.3 million compared with the prior year. Importantly, we believe significant embedded upside remains. With same property occupancy at 84.4%, we estimate 500 to 600 basis points of occupancy upside as our operators close the occupancy gaps between our communities and the respective NIC markets. Beyond occupancy, we continue to reposition underutilized and closed skilled nursing wings into independent living, assisted living, and memory care units. We have now approved projects across 13 communities that we expect will add approximately 356 units.
We expect these investments to generate stabilized cash returns in the mid-teens or better while converting vacant space into revenue-generating units. Finally, we are putting new management agreements in place across 76 SHOP communities that are managed by our legacy operators. Implementation is expected on January 1st, 2027. These agreements extend the operator framework we initiated across our transition communities in 2025, including more closely aligned incentive structures and appropriately sized base management fees. We expect them to initially generate approximately $2 million of annual cost savings while further aligning operator incentives with shareholder interests. Turning to our portfolio optimization strategy. Over the past two years, DHC has repositioned its portfolio through asset sales, operator transitions, and targeted capital investment. With much of that foundation in place, we are increasingly focused on optimizing individual assets.
The clearest example this quarter is our transition of seven skilled nursing facilities in Colorado to a 15-year triple net lease with the Ensign Group, effective on October 1st. This transition does two primary things for us. First, it increases cash flow. First-year contractual rent is approximately $8 million with CPI annual escalators, which compares with $5.1 million of NOI over the prior 12 months, or about $3.5 million after capital expenditures. Second, it sharpens our SHOP portfolio. Skilled nursing relies primarily on government reimbursement and is more labor-intensive, which is why these facilities generated only about a 5.8% margin for the quarter. Skilled nursing is also more commonly under triple net leases with specialized operators.
The new structure shifts reimbursement, labor, and capital exposure to the tenant, leaves our SHOP portfolio more focused on private pay senior housing, and on a pro forma basis, would have lifted our third quarter consolidated SHOP margin by about 80 basis points. We are applying the same asset-by-asset approach to operator alignment. In September, we provided notice to transition six SHOP communities in Georgia, representing 486 units, to a new manager, which we expect to begin as early as the fourth quarter. This consolidates these communities with an operator that has deep regional expertise and fits the operator framework we have built across our transition portfolio. We look forward to working closely with them to ensure a seamless transition. Turning to our medical office and life science portfolio. Leasing activity remained healthy during the quarter.
We completed approximately 130,000 sq ft of leasing at rental rates 25% above prior rents, with a weighted average lease term of 9.7 years. As discussed on our second quarter earnings call, two tenants representing approximately 213,000 sq ft vacated on July 1st, and total occupancy declined to 88.4% from 92.2% in the prior quarter. Near-term expirations are limited. Through year-end, $3.3 million of annualized rental income, or 2.1% of the total, is scheduled to expire. This includes $2.2 million from a life science tenant in Fremont, California, that we expect to vacate at the end of November, and we are actively marketing that space for lease. The portfolio's weighted average remaining lease term was approximately 5.1 years at quarter end. As part of our capital recycling efforts, we are actively pursuing disposition opportunities.
As of yesterday, we are under agreement to sell one vacant property consisting of 126,000 sq ft for $10.5 million, and we are evaluating offers on two additional properties totaling approximately 232,000 sq ft. Together, these three properties generated negative NOI of $690,000 during the quarter, or nearly $2.8 million annually. Selling them eliminates that drag and provides capital for reinvestment. Looking ahead, our path to earnings growth is embedded in our existing portfolio. Several drivers are already in motion for 2027: a full year rent from the Ensign lease, approximately $2 million of annual savings from our new SHOP legacy management agreements effective January 1st, skilled nursing NOI conversion projects adding approximately 350 units, and the sale of non-earning medical office properties. Most significant is the continued improvement in SHOP occupancy and rate concessions as rate concessions normalize.
Our third quarter results show this strategy is working with stronger SHOP operations, active optimization of individual assets, an improving financial profile, and a higher SHOP NOI outlook for the year. These results are clearly resonating with investors, as DHC has been the top-performing REIT in the U.S. over the past three years, with a total shareholder return in excess of 277%. We remain confident in our trajectory and in our ability to deliver sustainable earnings growth and long-term value for our shareholders. With that, I'll turn the call over to Matt.
Thanks, Chris, and good morning, everyone. Before I review our results, I would like to walk through a change to how we present our non-GAAP financial measures. The SEC recently provided its interpretation that incentive management fees accrued under GAAP should be included in normalized FFO and Adjusted EBITDAre. Historically, we excluded the incentive fee in these measures. While we believed our prior approach was appropriate and supported period-to-period comparability, we have adopted the SEC's interpretation and changed our presentation. Beginning this quarter, Normalized FFO, Adjusted EBITDAre, and CAD include estimated incentive management fees as they are accrued under GAAP, and we have recast prior periods to conform. To be clear, this is a change in presentation only.
It does not affect our GAAP results or our cash flows, and it does not change how the incentive fee is calculated or the amount, if any, that would ultimately be payable to RMR. Because the fee is based on DHC's total shareholder return relative to a benchmark index over a three-year period ending December 31st, the accrual will fluctuate from quarter -to -quarter with our share price. For the third quarter, Normalized FFO and Adjusted EBITDAre include $5.4 million, or $0.02 per share, of accrued incentive fees, and year -to -date, we have accrued $22 million, or $0.09 per share. Page eight of our earnings presentation includes a bridge to previously issued guidance. We believe this bridge will assist our investors with comparability between our revised Normalized FFO and Adjusted EBITDAre calculations from prior guidance.
During the third quarter, our normalized FFO was $30.7 million, or $0.13 per share, and our Adjusted EBITDAre was $73.4 million, representing a 28.4% increase year-over-year. Our third quarter results continue to show the earnings power of our SHOP assets, the cash-generating ability of our business, and a significantly stronger balance sheet than a year ago. During the third quarter, consolidated same property cash basis NOI was $77.9 million, a 25.6% increase year-over-year. SHOP continues to drive this growth, with same property NOI increasing 50.4% year-over-year to $48 million, and same property NOI margin expanding 470 basis points to 15.8%. This improvement came from both the top line and expense side. Same property SHOP revenue increased 5.8% year-over-year, driven by a 200 basis point increase in occupancy to 84.4%, and 5.2% growth in average monthly rate.
At the same time, same property operating expenses were essentially flat year-over-year, and expense POR declined 30 basis points, as our operators continue to capture the dietary maintenance and labor savings we discussed last quarter. Sequentially, SHOP same property NOI decreased $4 million, or 7.6%, driven by second quarter results that included approximately $2.2 million of one-time expense benefits that did not recur. Additionally, the third quarter includes approximately $1 million of non-recurring expenses and $2 million of higher utility costs due to typical seasonality. Excluding these items, third quarter same property NOI would have been 2.5% higher than the second quarter. Importantly, same property occupancy increased 130 basis points sequentially, our largest quarterly gain this year, which supports our view that the occupancy ramp at our transition communities is well underway.
In our medical office and life science portfolio, same property cash basis NOI was $22.9 million, a 1.6% decrease year-over-year. This primarily reflects a previously disclosed tenant who vacated effective July 1, which also drove the 120 basis point sequential decline in same property occupancy to 94.5%. Third quarter G&A expense of $14.6 million includes $5.4 million of estimated incentive management fees, as I've discussed, and $2.2 million in non-cash share-based compensation. Excluding these items, G&A was $7 million, consistent with the second quarter. During the quarter, we invested $28.9 million of capital, including $22.6 million into our SHOP communities and $6.3 million into our medical office and life science portfolio. Year-to-date spending of $76.5 million is $32.1 million, or approximately 30% lower than the same period in 2025.
We are reducing our 2026 recurring CapEx guidance by $10 million at the midpoint to $90 million-$105 million. At quarter end, we had total liquidity of $261 million, including $111 million of cash and our undrawn $150 million secured revolving credit facility. Net debt to annualized Adjusted EBITDAre was 8.2 x, a 2.5 x reduction from a year ago. This calculation now includes incentive fees, which added 0.8 x. Excluding them, leverage was 7.4 x, within our 6.5x-7.5 x target range. Adjusted EBITDAre to interest expense improved to two times from 1.2 x a year ago, and we remain comfortably in compliance with all of our bond covenants. Our next debt maturity is our $500 million of senior unsecured notes due February 2028.
With $4 billion of unencumbered assets, representing over 64% of our portfolio, growing SHOP cash flow, and steadily improving credit metrics, we believe we are well-positioned to address this maturity. Turning to full year 2026 guidance. Excluding the presentation change regarding estimated incentive fees, we are raising our SHOP same property NOI guidance by $5 million at the midpoint to $190 million-$200 million, and that increase flows through to Adjusted EBITDAre and Normalized FFO. The increase reflects lower expected operating expense growth of 2.3% compared with 2.5% previously, an average monthly rate growth of 5.6%, up from 5.5%, with occupancy growth unchanged at 200 basis points and revenue growth of 6.3%. It should also be noted that for the nine months ended September 30, same property SHOP NOI was $144.3 million.
Separately, Adjusted EBITDAre and Normalized FFO guidance now includes estimated incentive management fees of $29.3 million, or $0.12 per share. Netting the two, Normalized FFO guidance moves to $0.46-$0.52 per share from $0.56-$0.62, up $0.02 from the SHOP NOI increase and down $0.12 for the estimated incentive fee. The final amount, if any, will be based on our total return relative to the benchmark index through December 31st and could differ materially from the amount accrued as of September 30th.
Updated guidance ranges are as follows: $312 million-$328 million of same property NOI, Adjusted EBITDAre of $276 million-$291 million, Normalized FFO of $111 million-$126 million, or $0.46-$0.52 per share, and recurring CapEx of $90 million-$105 million, which is a reduction of $10 million at the midpoint, as I previously discussed. Fourth quarter results will also include a full quarter of Ensign rent for the seven skilled nursing facilities, which will contribute approximately $2 million of cash NOI. We are confident in our updated full-year guidance, and we are building momentum into 2027.
We will share our 2027 guidance on our next earnings call, which will include changes to our SHOP segment, mainly driven by the seven skilled nursing facilities now leased to Ensign being presented in our all other segment. That concludes our prepared remarks. Operator, please open the line for questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today is from Henry Newell with RBC Capital Markets. Please go ahead.
Yeah, thank you. Just hoping you could touch on the updated CapEx outlook briefly. Should we expect really this updated outlook to be a run rate moving forward into 2027 and 2028, or is there any reason why we should expect recurring SHOP CapEx to decrease in 2027 and 2028?
Yeah, it's a good question. Good morning. I could see it decreasing a little bit into 2027 and 2028. We've been targeting closer to 3,000 per unit as we look forward, so we do expect that to continue to kind of come down as it has been over the last few years.
Wonderful. Thank you. Then just more generally, how are you viewing your different sources of capital at the moment? Is the current leverage profile an ongoing concern, and do you think you'll continue to finance CapEx or maybe any acquisitions with dispositions or something else moving forward?
On the latter part of the question, I think right now, most of the investment we plan to make is within the existing portfolio. We've talked about the conversion of closed skilled nursing wings, and that being kind of a priority given the returns that come from that profile, so that'll be kind of top priority. We are selling some assets, which we highlighted. I don't think the overall proceeds are overly material, but nonetheless, that'll provide optionality for reinvestment to either delever or, again, as part of the closed skilled nursing wing strategy, and then maybe in kind of small select cases, considering whether or not acquisition makes sense. But I think that's kind of last in line. So, right now, it's really focused on the existing portfolio and kind of the embedded upside opportunities that we see. Then Matt—
Yeah, just to add to that on leverage has been on a nice decline, as we've seen the SHOP performance significantly improve over the last 15 to 18 months, and our trajectory should prove that that'll further decline as we move beyond 2026. As it relates to just kind of capital and liquidity, for the things that we're focused on, which, as Chris mentioned, is mostly in our existing portfolio, we have adequate liquidity to continue making those investments. We have the $150 million credit facility. We have not drawn on that, so that produces us with sufficient liquidity for us.
Wonderful. Thank you.
Again, if you have a question, please press star, then one. The next question is from John Massocca with B. Riley. Please go ahead.
Good morning. Let me just start with a quick clarification. With regards to the full-year 2026 guidance, does that include the positive impact you're expecting to NOI from the Ensign transaction?
Yeah, I mean, it's factored in that we're going to receive $2 million in the fourth quarter. For the nine months ended September, we've received a little bit over $4 million of NOI there. There's some moving pieces as it relates to the change, but it is included.
Is that part of where the increased SHOP NOI expectations are coming, or is that something that was maybe previously contemplated in the guide?
No, it's unrelated to that change in structure on those skilled nursing facilities. Look, we've been trending towards the higher end of our SHOP NOI guidance for the first several quarters, and we're just shy of $145 million year-to-date through nine months, so we really have added conviction in our SHOP results, and that's really the driver of the $5 million increase to the guide on this call.
John, I would just add that going back to the Ensign, the proceeds from the lease we get for the quarter in Q4 is more or less equivalent to what we would have gotten under the RIDEA. So as Matt alluded to, that's a wash. Again, the upside is more just performance-based, which is driving the guidance.
Okay. In terms of the one-timers in 3Q, can you just provide a little more color on what those were, and are those things that we should expect to occur seasonally in 3Qs going forward, or is it just kind of really one-time events?
No, they were largely one-time events. It was about $1 million in total. We had some sales and use tax true-ups and a little bit of elevated bad debt, but we don't expect those to recur into Q4 or beyond.
Okay. As you think about occupancy versus rate, I mean, should we expect some of these strategies of using concessions to kind of promote occupancy before you push rates to continue going forward? Is that something that we can see kind of in the next couple of quarters, or is this kind of really a one-time situation based on an opportunity operator saw or something else in the market?
Yeah, it's a mix. I mean, look, the concession piece is more hand-to-hand combat on certain assets to drive strategy. It's more pronounced now as we think about where we see the opportunity. I don't envision this being something that continues long term. I think this is kind of incremental, and we will continue to see rate lift across the portfolio. I think, generally speaking, we would expect to see at least the same lift we got in 2026. Again, we've also talked about a variety of different strategies we're finding with respect to expense reduction, levels of care on the revenue side. So, there's kind of a whole suite of different initiatives that we continue to work through, which will be more pronounced as we go into 2027.
Okay. Then last one from me. In terms of some of the redevelopment potential within the portfolio, has any of that started? I mean, has there been any spend yet on that? Because I guess that wouldn't show up in the recurring CapEx guide, right? Are you in process on any of those projects, or are those still primarily kind of 2027 starts?
They're all 2027 starts. Any spend this year is really soft costs related to design and consultants. But the swinging of hammers will commence next year, and then we'll start to see delivery of some of those towards the back half of the year.
Okay. That's it for me. Thank you very much.
Thank you.
Once again, if you have a question, please press star then one. Please stand by as we poll for questions. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks.
Well, thank you for joining our call today. We look forward to seeing many of you at the Nareit conference in Atlanta this November. That concludes our call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.