Diversified Healthcare Trust (NASDAQ:DHC) reported third-quarter results marked by continued growth in its senior housing operating portfolio, higher same-property net operating income and reduced capital expenditure expectations, while updating the presentation of certain non-GAAP measures to include accrued incentive management fees.
Normalized funds from operations totaled $30.7 million, or $0.13 per share, for the quarter, while Adjusted EBITDAre was $73.4 million, up 28.4% from a year earlier. Consolidated same-property cash-basis NOI increased 25.6% year over year to $77.9 million, and consolidated NOI rose 27.5% to $80.8 million.
Management said beginning this quarter, its Normalized FFO and Adjusted EBITDAre calculations include estimated incentive management fees accrued under GAAP. Prior periods were recast to conform with the revised presentation. CFO and Treasurer Matt Brown said the change follows an SEC interpretation and does not affect the company’s GAAP results, cash flow, calculation of the incentive fee or the ultimate amount payable, if any.
For the third quarter, the revised measures included $5.4 million, or $0.02 per share, of accrued incentive fees. Year to date, DHC accrued $22 million, or $0.09 per share, of such fees. The ultimate fee depends on the company’s total shareholder return relative to a benchmark index over a three-year period ending Dec. 31.
SHOP Portfolio Drives NOI Growth
The company’s senior housing operating portfolio, or SHOP segment, was the largest contributor to its operating improvement. Same-property SHOP NOI increased 50.4% year over year to $48 million, while NOI margin expanded 470 basis points to 15.8%.
Occupancy in the same-property SHOP portfolio increased 200 basis points from a year earlier to 84.4%, and average monthly rates rose 5.2%. Same-property SHOP revenue increased 5.8%, while operating expenses were essentially flat year over year, according to Brown.
President and CEO Chris Bilotto said the company used targeted move-in incentives during the quarter to accelerate occupancy gains, which kept average monthly rates flat sequentially. As communities stabilize, the company expects to reduce concessions and allow rate growth to have a greater effect.
Brown said third-quarter same-property SHOP NOI declined $4 million, or 7.6%, from the prior quarter, reflecting about $2.2 million of one-time benefits in the second quarter that did not recur, roughly $1 million of nonrecurring expenses and $2 million of seasonally higher utility costs. Excluding those factors, third-quarter SHOP NOI would have increased 2.5% sequentially, he said.
DHC said it sees 500 to 600 basis points of potential occupancy upside as its communities narrow occupancy gaps with their respective NIC markets. The company has also approved projects at 13 communities to convert underused or closed skilled nursing wings into independent living, assisted living and memory care units. Those projects are expected to add approximately 356 units and generate stabilized cash returns in the mid-teens or better, according to Bilotto.
The company is also implementing new management agreements across 76 SHOP communities run by legacy operators, effective Jan. 1, 2027. DHC expects the agreements to generate about $2 million in annual cost savings initially through lower base management fees and revised incentive arrangements.
Skilled Nursing Lease and Portfolio Actions
Effective Oct. 1, DHC transitioned seven Colorado skilled nursing facilities to a 15-year triple-net lease with The Ensign Group. The lease provides approximately $8 million of first-year contractual rent, subject to annual CPI escalators.
Bilotto said the facilities produced $5.1 million of NOI during the prior 12 months, or approximately $3.5 million after capital expenditures. The new lease transfers reimbursement, labor and capital exposure to the tenant, while further concentrating DHC’s SHOP portfolio on private-pay senior housing. On a pro forma basis, he said the transaction would have increased third-quarter consolidated SHOP margin by about 80 basis points.
Fourth-quarter results are expected to include a full quarter of Ensign rent, contributing approximately $2 million of cash NOI. Management said the Ensign transaction was already incorporated in full-year guidance and was not the source of the company’s increased SHOP NOI outlook.
DHC also issued notice in September to transition six SHOP communities in Georgia, representing 486 units, to a new manager. The transition could begin as early as the fourth quarter.
Medical Office Leasing and Dispositions
In DHC’s medical office and life science portfolio, same-property cash-basis NOI declined 1.6% year over year to $22.9 million. The decline primarily reflected a previously disclosed tenant vacancy effective July 1. Same-property occupancy declined 120 basis points sequentially to 94.5%, while total portfolio occupancy fell to 88.4% from 92.2% in the prior quarter.
The company completed about 130,000 square feet of leasing during the quarter at rental rates 25% above prior rents, with a weighted average lease term of 9.7 years. At quarter-end, the portfolio had a weighted average remaining lease term of about 5.1 years.
DHC said $3.3 million of annualized rental income, or 2.1% of the portfolio total, is scheduled to expire through year-end. This includes $2.2 million from a life science tenant in Fremont, California, that the company expects to vacate at the end of November.
As part of capital-recycling efforts, DHC is under agreement to sell a vacant 126,000-square-foot property for $10.5 million and is evaluating offers for two additional properties totaling about 232,000 square feet. The three properties generated negative NOI of $690,000 during the quarter, or nearly $2.8 million annually, management said.
Guidance, Capital Spending and Balance Sheet
DHC raised its 2026 SHOP same-property NOI guidance by $5 million at the midpoint to a range of $190 million to $200 million, citing lower expected operating expense growth and slightly higher anticipated rate growth. Occupancy growth guidance remained 200 basis points.
- Same-property NOI guidance: $312 million to $328 million
- Adjusted EBITDAre guidance: $276 million to $291 million
- Normalized FFO guidance: $111 million to $126 million, or $0.46 to $0.52 per share
- Recurring capital expenditure guidance: $90 million to $105 million
The FFO range reflects the higher SHOP NOI outlook but also includes an estimated $29.3 million, or $0.12 per share, of incentive management fees. DHC reduced recurring capital expenditure guidance by $10 million at the midpoint. Brown said the company expects recurring SHOP capital spending to decline somewhat in 2027 and 2028, targeting approximately $3,000 per unit.
At quarter-end, DHC had $261 million of liquidity, including $111 million of cash and an undrawn $150 million secured revolving credit facility. Net debt to annualized Adjusted EBITDAre was 8.2 times, though Brown said the ratio was 7.4 times excluding incentive fees and within the company’s 6.5-times to 7.5-times target range. The company’s next debt maturity is $500 million of senior unsecured notes due in February 2028.
Management said investment priorities remain focused primarily on the existing portfolio, including redevelopment and conversion projects. DHC expects construction on the approved skilled nursing wing conversion projects to begin in 2027, with some deliveries anticipated in the second half of that year.
About Diversified Healthcare Trust (NASDAQ:DHC)
Diversified Healthcare Trust (NASDAQ: DHC) is a real estate investment trust that owns and manages healthcare-related properties in the United States. Its portfolio includes medical office buildings, life science and research facilities, senior living communities, and wellness-oriented properties.
The trust leases its properties to healthcare providers, research organizations, senior living operators, and other related businesses. Its medical office and life science properties support outpatient care, medical research, and healthcare innovation, while its senior living portfolio serves older adults through independent living, assisted living, and related care services.
DHC was formerly known as Senior Housing Properties Trust and adopted its current name in 2020 to reflect its broader healthcare real estate strategy.
