Diversified Healthcare Trust Q2 2026 Earnings Call Transcript

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August 4, 2026

Key Takeaways

  • Positive Sentiment: Second-quarter results exceeded expectations, with Normalized FFO of $39 million, or $0.16 per share, and consolidated NOI up 20.4% year over year to $84 million.
  • Positive Sentiment: SHOP same-property NOI rose 37.2%, supported by higher occupancy, pricing, ancillary and higher-acuity revenue, and expense controls; food and beverage contracts are expected to generate $14 million–$16 million in annualized savings.
  • Positive Sentiment: DHC reaffirmed its raised 2026 guidance, including total NOI of $307 million–$323 million, Adjusted EBITDARE of $300 million–$315 million, and Normalized FFO of $0.56–$0.62 per share, with SHOP NOI tracking toward the high end.
  • Positive Sentiment: The company improved net leverage to 7.1 times from 8.7 times a year ago and ended the quarter with $267 million of liquidity; management said the stronger balance sheet could support internal investments, further deleveraging, and potentially revisiting the dividend.
  • Negative Sentiment: SHOP occupancy and revenue growth are pacing below initial 2026 assumptions because operator transitions delayed rebuilding sales and local leadership teams, while the Medical Office and Life Science portfolio faces three known tenant vacancies representing 4.6% of expiring annualized revenue.
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Earnings Conference Call
Diversified Healthcare Trust Q2 2026
00:00 / 00:00

Transcript Sections

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Operator

Good morning, and welcome to the Diversified Healthcare Trust second quarter 2026 earnings conference call. All participants will be in a 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 a 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 call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Matt Murphy
Matt Murphy
Manager of Investor Relations at Diversified Healthcare Trust

Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer, Matt 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, August 4th, 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.

Matt Murphy
Matt Murphy
Manager of Investor Relations at Diversified Healthcare Trust

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.

Matt Murphy
Matt Murphy
Manager of Investor Relations at Diversified Healthcare Trust

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.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered impressive second quarter results that exceeded analyst estimates, highlighted by continued operating momentum across the portfolio. The strategic changes we have implemented within our SHOP segment over the past year continue to drive improved profitability. As I will highlight shortly, we believe there is meaningful upside to our current results as new initiatives we are implementing with our operators gain traction. Turning to the quarter. After the market closed yesterday, DHC reported normalized FFO of $39 million, or $0.16 per share, and adjusted EBITDAre of $82 million. Consolidated NOI increased 20.4% year-over-year to $84 million. Beginning with our SHOP segment, same property NOI increased 37.2% year-over-year to $52 million.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

This was driven by a 160 basis point increase in same property occupancy to 83.1%, a 6.2% increase in average monthly rate and continued margin expansion. These strong results highlight solid business plan execution by our senior housing partners. Given that operator transitions were completed in late 2025, DHC remains in the early innings of benefiting from more regionalized community oversight and shared best practices. Our agreements are structured to ensure mutual success, and our continued margin expansion clearly demonstrates the effectiveness of this approach. Turning to our outlook. We are pleased to reaffirm our recently raised full-year guidance and continue to identify additional growth initiatives as we make our way through the year. As we progress, however, the key contributors of our NOI growth continue to evolve alongside the rapid ramp-up of our operators.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

As Matt will highlight, while average occupancy and corresponding revenue are pacing slightly below our initial 2026 projections, the profitability of each occupied unit is currently outperforming our original underwriting. To be clear, the pacing and occupancy gains is strictly a function of timing, and we continue to see steady month-over-month improvement. This is largely attributed to the foundational work of rebuilding local leadership and sales teams in conjunction with the operator transitions and establishing essential infrastructure across the transition portfolio. This process made meaningful progress throughout the second quarter. Simultaneously, our profitability outperformance is being driven by an accelerated capture of higher acuity care levels and the rapid realization of expense synergies by our operators, resulting in notable improvements in RevPOR and ExpPOR expectations. The temporary moderation in our top-line volume is being fully offset by these structural margin enhancements.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

This dynamic directly protects our bottom line, validates our transition strategy, and continues to position our assets for sustained long-term growth. Looking ahead, we are focused on additional opportunities to improve performance across our SHOP segment. Following the success we have achieved from the new operator agreements, we are currently renegotiating our contracts with our legacy operator base to bring them more in line with our upgraded operator framework. Specifically, these new contracts will transition our legacy partners to a highly aligned fee structure. This includes lower base fees coupled with a tier fee structure tied directly to annual operational outperformance. Furthermore, the updated agreements will introduce tighter, more disciplined cost controls to ensure baseline efficiency. We expect the new contract to provide immediate cost savings of close to $2 million annually before consideration of further growth driven through the incentive fee structure.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

These updated agreements are expected to commence in January 2027. We continue to make progress on the repositioning opportunities we discussed last quarter. As a reminder, we identified 16 SHOP communities with the potential to convert closed skilled nursing wings or floors into high-demand independent living, assisted living, and memory care units. We plan to initially spend approximately $20 million on six of these communities, which will add roughly 150 units to our SHOP portfolio. Importantly, given that we are currently absorbing the carrying costs of these closed wings, completing these conversions will transition carrying cost headwinds into revenue-generating units, providing further uplift to our SHOP margins and overall profitability. We believe these projects represent an attractive use of DHC's capital and should generate unlevered mid-teens returns while also improving the overall marketability of these communities.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

We anticipate the initial phase of construction to begin later this year, with the first deliveries of these new units coming online in the second half of 2027. Turning to our Medical Office and Life Science portfolio. During the second quarter, same-property occupancy increased 110 basis points year-over-year to 95.8%. Leasing activity remained healthy with approximately 477,000 sq ft of new and renewal leasing at a 6.7% rent roll-up and a weighted average lease term of 7.1 years. Same-property NOI in this segment was $24.1 million, essentially flat with last year. As discussed in prior quarters, we have three known vacates representing roughly 4.6% of the segment's expiring annualized revenue. Two of these tenants vacated effective July 1st, representing 3.5% of annualized revenue and 213,000 sq ft, with the remaining tenant vacating effective December 1st.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

We plan to market for sale one of these properties representing 150,000 sq ft and are actively marketing for lease the two remaining properties. We look forward to providing updates on the progress of each of these next quarter. Turning to capital allocation and the balance sheet. We ended the quarter with approximately $267 million of liquidity and materially improved our leverage over the past year to 7.1x net debt to EBITDA from 8.7x. We have also significantly improved our interest coverage and strengthened our outlook with the rating agencies. With DHC's large-scale capital recycling program substantially complete, our focus is squarely on improving operations, reducing leverage, and identifying the best uses for our growing free cash flow. What makes our investment thesis so compelling today is that our path to substantial earnings growth is entirely organic, with significant upside already embedded within our existing portfolio.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

Beyond maintaining liquidity for high-return internal projects such as our SHOP redevelopments and continued deleveraging, our strengthening balance sheet provides flexibility to evaluate broader strategies to enhance shareholder returns, including revisiting the dividend, which the board reviews quarterly. In conclusion, our second quarter results demonstrate meaningful progress on improving operations, driving SHOP NOI margins higher, and strengthening our financial position. We remain confident in our outlook for the remainder of 2026 and continue to believe the actions we have taken over the past two years will continue to deliver strong returns and create value for our shareholders. With that, I will turn the call over to Anthony.

Anthony Paula
Anthony Paula
VP at Diversified Healthcare Trust

Thank you, Chris, and good morning, everyone. During the second quarter, our consolidated same-property cash basis NOI was $83 million, representing a 20.2% increase year-over-year and 9.3% increase sequentially. These increases are driven by continued robust growth in our SHOP segment as same-property NOI increased 37.2% year-over-year and 17.3% sequentially. Our operators continue to be a major factor in driving the improvement in SHOP NOI by managing expenses while also increasing occupancy and pricing. As an example of this disciplined expense management, we work with our operators to procure new food and beverage contracts. These new contracts have led to many optimization and reduced fees. We anticipate annualized cost savings of $14 million-$16 million, of which approximately $8 million is expected to be recognized this year and is included in our revised guidance provided in June.

Anthony Paula
Anthony Paula
VP at Diversified Healthcare Trust

In-property ExpPOR decreased 170 basis points sequentially, and grew just 150 basis points year-over-year, which is in line with our revised full-year guidance assumptions that Matt will highlight shortly. During the quarter, same-property occupancy grew 70 basis points sequentially and 160 basis points year-over-year. We also continue to see strong momentum in pricing, with same-property average monthly rate increasing 100 basis points sequentially and 620 basis points year-over-year. DHC shares continue to deliver among the highest total shareholder returns across all REITs in the U.S. over both the past one year and three-year measurement periods. Year-to-date alone, DHC's stock price has appreciated 81.7% versus an 11% gain in the S&P 500 and a 23% gain in the MSCI U.S. Health Care REIT Index. As a result of this outperformance, our second quarter G&A expense includes approximately $10 million of incentive management fees.

Anthony Paula
Anthony Paula
VP at Diversified Healthcare Trust

Second quarter G&A also includes $2.3 million of non-cash share-based compensation, more than half of which represents a one-time expense for the accelerated vesting of previously granted share awards, with the remainder consistent with prior-year periods. Excluding the incentive fee and these non-cash items, G&A expense was $7.1 million for the quarter. During the quarter, we invested $25.8 million of capital, including $19.1 million into our SHOP communities and $6.7 million into our Medical Office and Life Science portfolio. Our year-to-date spend of $47.6 million represents a reduction of $18.4 million, or approximately 28%, when compared to the same period in 2025. Our capital expenditures are in line with our expectations, and as a result, we are reaffirming our 2026 recurring CapEx guidance of $100 million-$115 million. Now I'll turn the call over to Matt.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Thanks, Anthony, and good morning, everyone. As highlighted by Chris and Anthony, our second quarter results continue to show the cash-generating ability of our business, embedded growth in our SHOP segment, and reduced leverage. At quarter end, we had total liquidity of $267 million, including $117 million of cash and our undrawn $150 million secured revolving credit facility. Net debt to annualized adjusted EBITDAre was 7.1x at quarter end, a 1.6x year-over-year, and 0.7x sequential leverage reduction. This was driven primarily by continued strong performance in our SHOP segment and over $600 million of asset sales completed since the beginning of 2025. We expect our leverage to continue to decrease given the favorable trends at our senior living communities and primarily fixed rate debt profile. Adjusted EBITDAre to interest expense improved meaningfully to 2.2x from 1.4x in the prior-year.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

As a reminder, our next debt maturity is not until February 2028. With growing SHOP NOI, decreasing leverage, and a portfolio of over $4 billion of unencumbered assets, we believe we have numerous options available to us as this maturity approaches. In June, we increased each of our SHOP NOI, adjusted EBITDAre, and normalized FFO guidance by $10 million at the midpoint. Today, we are reaffirming this guidance as follows: total NOI of $307 million-$323 million, including $185 million-$195 million of SHOP NOI, adjusted EBITDAre of $300 million-$315 million and normalized FFO of $0.56-$0.62 per share. While our SHOP NOI guidance remains unchanged, we have updated our assumptions as follows. Occupancy growth of 200 basis points, a reduction of 100 basis points.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Revenue growth of 6.6%, a reduction of 140 basis points, partially offset by average monthly rate growth of 5.5%, an increase of 20 basis points. These revenue changes are offset as we have seen meaningful expense control from our new operators. Assumptions include operating expense growth of 2.5%, a reduction of 200 basis points, and ExpPOR growth of 1.5%, a reduction of 70 basis points. Our second quarter results were consistent with the outlook we laid out when we raised guidance in June, and today's reaffirmation reflects that performance combined with our expectations for the remainder of the year. Our second quarter SHOP same store NOI of $52 million included a one-time benefit of approximately $1.5 million related to expenses that we do not expect to see repeated in Q3. These expense one-time benefits contributed 50 basis points of margin in the quarter.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

We are encouraged by our results so far in 2026, particularly the continued growth in SHOP NOI, which is tracking towards the high end of our June guidance. Our new operators continue to drive margin expansion through a combination of revenue growth and expense discipline, and we remain confident in the years ahead. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, I'll pause momentarily to assemble the roster. The first question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll
Michael Carroll
Analyst at RBC Capital Markets

Thanks, Chris. I know you touched on this in your prepared remarks, but I wanted to know if you can give us some additional color on why the SHOP top line is tracking below your expectations. I mean, it sounds like this is mainly driven by just the lower occupancy uptick. Are you just seeing slower trends in the key leasing season that's driving that? Or is there something more temporary or one-off that's holding that back, at least here in the near-term?

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

A lot of it is just kind of more attributed to kind of the transition noise. I think one thing that's important to note is when these communities were transitioned, it wasn't uncommon that many of the operators took on kind of the existing operations infrastructure and team members, and over the course of the last six months have continued to kind of rework that. I think where it's most relevant with respect to the portfolio is in kind of the sales teams and those programs. So those are largely now in place and we're seeing kind of the benefit of some of that occupancy flow through as we've seen in the Q2 results. Nonetheless, the pace of where we think that growth will occur is going to be somewhat muted.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

So this isn't a function in our view of hitting kind of certain occupancy levels. It's just a kind of a delay in the timing of that ramp up. So I think overall, we remain bullish on our outlook for driving occupancy across the portfolio, and again, kind of have the tools and the resources in place to do that.

Michael Carroll
Michael Carroll
Analyst at RBC Capital Markets

Okay, what's the lower RevPOR driven by? Is it kind of tied within the occupancy uptick, or did you have to also be a little bit more judicious on increasing rates to your existing residents because of these transitions?

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

Total RevPOR is actually increasing, that in itself is not going down. I think maybe total revenue is what you're referring to, where there's a decrease, and that's tied to the occupancy. Where we're getting better RevPOR throughout the portfolio is outside of just work that's being done and opportunities identified through driving occupancy, we're also seeing a good pace and uptick in other ancillary revenues in the level of care, which is driving outsized results with respect to how that informs RevPOR. I think that will continue to pace accordingly, then as occupancy ramps, we'll start to recapture that incremental revenue.

Michael Carroll
Michael Carroll
Analyst at RBC Capital Markets

Okay, great. On the ExpPOR side, I know that has been reduced or improved. I think you highlighted just due these new group contracts that these new operators have been able to obtain. Within guidance, moving into 2027, is there more benefit related to that, or is this a good baseline and they've already seen the benefits of getting those new contracts and the new ExpPOR run rate is a good base growing going forward?

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

I think for now, the new guidance is a good run rate, at least through the end of this year. We are expecting additional synergies as we move into 2027, both in the new operators and even in some of the legacy operators with expected changes to the management contracts for those. We are, for 2026, seeing significant savings in dietary. We've seen maintenance come down significantly, and that's a function of the CapEx we've put into these communities over the last several years. Some other wins we're seeing in contract labor, et cetera.

Michael Carroll
Michael Carroll
Analyst at RBC Capital Markets

Okay, great. Thank you.

Operator

Again, if you have a question, please press star and then one. The next question will come from John Massocca with B. Riley. Please go ahead.

John Massocca
John Massocca
Analyst at B. Riley

Good morning. Maybe starting off with the new management agreements that are going to start in 2027 that you announced. Is there opportunities, as you're thinking longer term for additional agreement changes, or does that pretty much encompass the entire portfolio once that's in place?

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

Once that's in place, that will encompass the entire portfolio. Really, just to kind of go back a little bit, this is all of the agreements, outside of those that were transitioned with the AlerisLife contract. That'll be the balance of 80+ communities. I don't anticipate any major changes to the contracts in the near-term. There are additional opportunities we're evaluating that is more related to kind of the operators and kind of how we think about opportunities there. The contract itself, I think, would roll forward in any particular type of relationship.

John Massocca
John Massocca
Analyst at B. Riley

Yeah. Then in the quarter, you mentioned $1.5 million of benefits to expenses you don't expect to roll forward. Can you provide a little color on what those were?

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Sure. It was really just the timing of expense recognition. We had some over accruals in the first quarter that were offset in the second quarter. That's really the noise from the quarter.

John Massocca
John Massocca
Analyst at B. Riley

Okay. I guess kind of even factoring that in, if I look at kind of 1H SHOP NOI performance, it kind of feels like if you continue with any kind of a growth trajectory that you saw from 1Q to 2Q, that you're getting towards or above the high end of the new guidance. Anything to kind of be aware of seasonality wise in 3Q or 4Q that would cause you to kind of keep guidance in place? I know it was relatively recently updated, but just was kind of curious if there's something to be aware of beyond those one time expense savings.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Sure. To your point, yes, we are tracking to the high end of guidance. We do expect a little bit of seasonality in the third quarter, related to just increases in utilities, but nothing overly material. Overall, we still feel good about kind of the high end of that guidance as of now.

John Massocca
John Massocca
Analyst at B. Riley

Okay. Maybe kind of a similar question on rate. It feels like 5.5 for the full year, but you've already done somewhere closer to six in 1H. Any kind of reason not to raise that further? Are you kind of laughing tougher comps in 2H? Was just curious if there's any kind of color around that.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

No, I mean, look, I think just being comfortable with kind of where the trajectory is we're trying to be mindful. I think that the key theme here, at least for us this quarter, is there's just a lot of moving pieces, all for the positive in many ways with respect to these transitions. I think as time progresses, we're just kind of unpacking other parts of the business and opportunities. Again, I think for the revised guidance on kind of the rate or RevPOR growth, I think we feel comfortable with where that is. At the same time, I think that there's a reasonable expectation that we can kind of continue that run rate as we go into 2027 with seeing consistent growth across the portfolio. I think, again, I think we feel good about where that number is.

John Massocca
John Massocca
Analyst at B. Riley

Okay. In terms of the occupancy guidance, holistically speaking, is maybe a way to view it that the new operators are kind of not chasing expensive occupancy, if you will? Or is it, to your point, is it just kind of a focus is maybe more on the expense side for them today and less on the kind of top-line growth side and that will come in time? I'm just kind of curious if it's more like a dynamic of how these operators think about the business or if it's something that's just kind of a timing of getting their kind of teeth fully into these new locations.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

I think it's the latter, right? I don't think there's any delay in focus on driving top line. Just a reminder, this is average occupancy growth for the year, so this is a combination of kind of a 12-month trajectory. We still feel good around, as we get to the end of the year, around there being kind of real growth throughout the portfolio. Those things kind of remain, even with this revised guidance. There's a certain communities that we have as identified as kind of more focus-related communities, where we can drive outsized occupancy. There's opportunities, with kind of the teams that I referenced earlier, kind of getting integrated in these communities. Outside of just the occupancy side, as I referenced, there's also other upside we're seeing with levels of care and ancillary revenue, which is also gonna continue to drive performance.

John Massocca
John Massocca
Analyst at B. Riley

Okay. Last one for me, just kind of switching away from the SHOP portfolio. What drove the kind of quarter-over-quarter decline in MOB Life Science rental revenue? It seems like a lot of the vacancy is gonna hit in 3Q, so just was curious if there's something else going on there.

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Sure. We had a one-time bad debt charge, in the quarter, of about $1 million that was impacting Q2 results.

John Massocca
John Massocca
Analyst at B. Riley

Is that related at all to these upcoming vacancies, or is that a separate credit event?

Matt Brown
Matt Brown
CFO and Treasurer at Diversified Healthcare Trust

Unrelated.

John Massocca
John Massocca
Analyst at B. Riley

Okay. That's it for me. Thank you very much.

Operator

Again, if you have a question, please press star and then one. Please stand by as we poll for questions. Showing no further questions, this will conclude 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.

Chris Bilotto
Chris Bilotto
President and CEO at Diversified Healthcare Trust

Thank you for joining our call today. Please reach out to our investor relations team if you're interested in scheduling a call with the DHC management. Thank you.

Operator

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

Executives
    • Matt Murphy
      Matt Murphy
      Manager of Investor Relations
    • Chris Bilotto
      Chris Bilotto
      President and CEO
    • Anthony Paula
      Anthony Paula
      VP
    • Matt Brown
      Matt Brown
      CFO and Treasurer
Analysts
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