Prepared remarks
Good morning, and welcome to the Diversified Healthcare Trust Fourth Quarter 2025 Earnings Conference Call. 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.
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, February 24, 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. And 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, and thank you, everyone, for joining our call today. I want to start with a recap of a very busy and successful 2025 for DHC, in which we executed on the stated initiatives that we identified early in the year, and ended the year as the best-performing REIT in the U.S. as measured by both share price appreciation and total shareholder return. In 2025, we completed over $1.4 billion in capital markets activity, principally focused on financing, asset sales and the establishment of a $150 million undrawn credit facility. We also completed the wind down of AlerisLife, transitioning 116 communities, representing over 17,000 units to seven regionally focused operators and completed renovations at over 30 communities. These efforts, combined with the work of our dedicated asset management team, resulted in full year consolidated NOI growth of 31.3%, a reduction in our leverage of over three turns and no debt maturities until 2028.
As one of the largest owners of senior housing properties in the country, we believe our recent accomplishments, combined with the investments we have made in the portfolio and the favorable industry outlook sets the stage for continued outsized growth in our SHOP portfolio as reflected in our 2026 guidance, which Matt will expand upon momentarily. Turning to the quarter. After the market closed yesterday, DHC reported strong fourth quarter results, particularly as it relates to our SHOP NOI, which improved 27.6% over last year to $38.3 million reflecting continued execution on our highlighted initiatives and further strengthening DHC's financial position. For the quarter, DHC delivered total revenue of $379.6 million adjusted EBITDAre of $72.4 million and normalized FFO of $21.8 million or $0.09 per share. Turning first to our senior housing portfolio. SHOP NOI for the full year came in at $139.3 million, which was towards the high end of our guidance.
This was driven by same property occupancy that increased 90 basis points year-over-year to 82.4%, an average monthly rate that increased 5.8%. Same-property SHOP NOI margins continued to improve, up 230 basis points year-over-year. These results were achieved despite a somewhat noisy quarter reflecting the transition of 116 SHOP communities to seven different operators that have proven track records and well-established regional footprints. With all the transitions completed during the quarter, we remain focused on executing property-specific business plans and targeted opportunities identified across the portfolio. We are intensely focused on executing in lockstep with our operators combining disciplined operational oversight with their deep regional expertise to deliver measurable gains in occupancy and portfolio NOI. We are focused on driving higher lead to move-in conversion through the rollout of advanced CRM platforms, tighter and more coordinated procurement programs, the introduction of differentiated care levels to capture unmet demand and dynamic pricing strategies that directly capitalize on market-specific conditions.
Our early engagement with these operators, many of whom are industry leaders reinforces our confidence in achieving our 2026 outlook. In addition to the operational opportunities within SHOP, we also have a healthy pipeline of ROI projects that provide an additional driver of earnings upside over the next several years. This will come through the repositioning of underutilized areas within our communities, including former and now closed skilled nursing wings where we can deploy a modest amount of capital to renovate and reopen these areas with the appropriate acuity needs. This initiative has the potential to add approximately 500 SHOP units of the portfolio that could deliver an unlevered mid-teens ROI. We look forward to sharing more details on this opportunity in the coming quarters. Turning to our Medical Office and Life Science portfolio. During the fourth quarter, we completed approximately 81,000 square feet of leasing at weighted average rents that were 7.9% above prior rents for the same space with an average term of over 8 years.
Consolidated occupancy increased 460 basis points sequentially to 91.2%, primarily driven by the sales of vacant or low occupancy properties and leasing completed during the quarter. Same-property cash basis NOI increased 3.8% year-over-year, with margins improving 100 basis points to 59.6%. Looking ahead, 10.1% of annualized revenue in our Medical Office and Life Science portfolio scheduled to expire through 2026, of which 241,000 square feet or approximately 3.9% of annualized revenue is expected to vacate. Our leasing pipeline remains active, totaling 1 million square feet and reflects average lease terms of 6.9 years and GAAP rent spreads averaging more than 10%. Turning to our capital markets and balance sheet initiatives. As it relates to our disposition and deleveraging initiatives, we sold 37 noncore properties in the fourth quarter for approximately $250 million bringing the full year disposition to 69 properties for approximately $605 million.
These proceeds were used to fully repay our senior secured zero-coupon bonds due in 2026, and we now have no debt maturities until 2028. Our deleveraging efforts in 2025 reduced net debt to adjusted EBITDA from 11.2x at year-end 2024, to 8.1x at the end of 2025. As we have previously noted, our near-term goal is targeted leverage levels of 6.5x to 7.5x. As of February 20, we were under agreement to sell 13 properties for $23 million. Following the completion of the sale and excluding normalized course capital recycling opportunities that may arise, we are substantially done with our large-scale disposition program. With the asset sales that have been completed over the past two years, combined with the significant investments we have made upgrading our communities, we expect to see a continued decline in our CapEx spend, as Anthony will discuss in more detail. Moving forward, dispositions will be on a more opportunistic basis with proceeds used to either reduce leverage or to redeploy into accretive initiatives.
To conclude, demand for our SHOP communities is robust, supported by a growing 80-plus population and the outlook of new supply expected to remain muted for several years. Despite the strong gains in our share price in 2025 and 2026 to date, we still see additional share price upside as we deliver materially improving SHOP NOI and benefit from lower interest costs and reduced CapEx spend. It is our focus to continue delivering on the momentum of the past two years and to further drive shareholder value for our investors. With that, I will now turn the call over to Anthony.
Thank you, Chris, and good morning, everyone. During the fourth quarter, our same property cash basis NOI was $70.4 million, representing a 15.4% increase year-over-year and a 12.4% increase sequentially. Our fourth quarter SHOP same-property results include continued positive momentum in pricing with average monthly rate increasing 580 basis points year-over-year and 120 basis points sequentially. Same-property occupancy increased 90 basis points year-over-year. These increases resulted in year-over-year same-property SHOP revenue growth of 5.6%. Year-over-year, our same-property SHOP NOI margin increased by 230 basis points to 13.3%, driven by our growth in revenue. As Matt will highlight shortly, we expect that continued increases in revenue and occupancy on the expense moderation result in strong NOI margin growth in 2026. Turning to G&A expense. The fourth quarter amount includes $5.7 million of business management incentive fee.
For the full year, we recognized an incentive to RMR of $17.9 million. This incentive was driven apart by DHC's total shareholder return of nearly 113% during 2025. Excluding the impact of the incentive fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $37 million of capital, including $20 million into our SHOP communities and $17 million into our Medical Office and Life Science portfolio. For the full year, our capital spend totaled $146 million, which is on the low end of our guidance. We continue to focus on disciplined capital spending as evidenced by a $45 million or 23% reduction when compared to 2024. For 2026, we expect our full year recurring capital expenditures to range from $100 million to $115 million, which represents an over 18% decrease at the midpoint when compared to recurring capital expenditures in 2025. Our 2026 CapEx guidance includes $80 million to $90 million in our SHOP segment, and $20 million to $25 million for our Medical Office and Life Science properties, it is important to note that our SHOP recurring capital guidance includes approximately $10 million of refresh ROI capital. Now I'll turn the call over to Matt.
Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $255 million of liquidity, including $105 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. Subsequent to quarter end, we received a $27.2 million cash distribution from AlerisLife in connection with the wind-down of its business. In December, we redeemed the remaining balance on our 2026 zero-coupon bonds, which resulted in 45 collateral properties being released that have a gross book value of approximately $850 million. Following this redemption, we have a well-laddered debt maturity schedule with no maturities until 2028, allowing us to focus on operations. Our weighted average cash interest rate as of December 31 was 5.7%. Our net debt to adjusted EBITDAre declined materially from 11.2x at the beginning of 2025 to 8.1x while adjusted EBITDAre to interest expense improved from 1.1x to 1.5x over the course of the year.
And based on our guidance, we expect year-end 2026 to be at or above 2x. We remain focused on further reducing our leverage, primarily by growing SHOP NOI, as well as completing the sale of 13 SHOP communities expected to close in March for $23 million. These 13 SHOP communities lost $1.2 million in the fourth quarter and $3 million for the full year. Our full year adjusted EBITDAre of $284 million was on the high end of our guidance range. For 2025, SHOP NOI was $139.3 million, which was at the high end of our increased guidance provided on our Q2 earnings call. Medical Office and Life Science NOI was $108.1 million, just above the midpoint of our guidance, and our triple-net lease senior living community and wellness center NOI was $31.1 million, which exceeded our guidance. Looking ahead to 2026, we are confident that strong improvements in our SHOP segment and reduced debt from the execution of our 2025 strategic initiatives will drive free cash flow growth at DHC.
For the full year, we are expecting NOI as follows. $175 million to $185 million in our SHOP segment, $94 million to $98 million in our Medical Office and Life Science segment, and $28 million to $30 million from our triple net leased senior living communities and wellness centers. It is important to note that the decline in our Medical Office and Life Science segment NOI is largely driven by the sale of 31 properties that contributed $12.3 million of NOI in 2025. In addition, the slight decline in our triple net lease portfolio NOI is largely driven by the February 2025 sale of 18 triple-net leased senior living communities that contributed $1.7 million of NOI in 2025. We expect our 2026 adjusted EBITDAre to be between $290 million and $305 million and normalized FFO of $0.52 to $0.58 per share. To support the guidance provided on this call, we have added a new guidance slide to our quarterly earnings presentation, which can be found on Page 6. That concludes our prepared remarks. Operator, please open the line for questions.
Questions and answers
And the first question will come from Michael Carroll with RBC Capital Markets.
Chris, how should we think about the go-forward strategy from here? Can you provide some color on the opportunities to reopen the wings that you talked about at existing communities? I mean, how many units could this add to the portfolio? And what could be the expected cost from that? And should we think about that as being the main strategy on the external investment side?
Yes, the main strategy is to continue unlocking value by enhancing performance through operations. We believe we have a strong outlook for 2026, but we recognize that we are still lagging behind the benchmark in terms of occupancy, even with the guidance we provided. Given the margins and the projected portfolio status for 2026, there is significant potential to increase margins, largely through organic opportunities. We are focused on pushing in that direction, which will create a solid growth path for the coming years. In response to your question about the wings, we have identified around 15 locations that we are optimistic about, which could add nearly 500 units to our portfolio, supported by mid-teens ROI. This will be a gradual process over time and won't all take place in 2026. Regarding costs, they will vary, but estimating around $125 million to $175 million per unit seems reasonable as a preliminary benchmark.
That's helpful. And will external investments still kind of be focused on these types of renovations? I mean, how are you thinking about the acquisition market? Is just the renovation still just have a better risk-adjusted return versus pursuing future acquisitions?
Certainly, we'll have a better risk-adjusted return for a couple of reasons. As you think about these kind of closed wings, mostly it's going to be to support new acuity. So for example, if we have a community that offers IL and AL, this is an opportunity to introduce memory care. And that just kind of adds for kind of the continuation of care in the community. And again, that's going to also support other drivers through kind of shared cost benefits, pushing rates at IL and AL given that you kind of have kind of the full package to offer. So it's kind of a rising tide lifts all boats scenario when you're investing in these wings. Look, we don't want to rule out the idea of looking at the acquisitions market, but at the same time, just want to temper that's not where our focus is today. Certainly, downstream, if we continue to see progress with the growth that we've outlined in 2026, and we think about capital recycling, we're selling kind of the assets we've noted, that could be a way to kind of support dipping our toe into the acquisition market. But again, there's a lot of opportunity embedded in what we have. So that will be kind of a priority we'll continue to address in the next couple of quarters.
Okay. And then on the operating side, I mean, is there anything that's specific that drove the 4Q margin improvement? I mean, how much of that was driven by the transition disruptions just kind of dissipating versus core operational gains?
It was a combination. Obviously, we had some transition noise more material in the third quarter. But as these operators are now getting in and rightsizing their cost structures, we definitely saw a little bit of a benefit in Q4 and would expect to continue seeing that as we move into 2026.
Was there any specific costs in the fourth quarter related to transitions? Or is this a good run rate to consider?
It was a pretty small impact in the fourth quarter, nothing really material. So it's a decent run rate.
Okay. And then just last one for me. Can you talk a little bit about the January and February trends, I guess, specifically, was there any impact related to the flu season? And then, what was the average of rent escalators that you're able to pass through or your operators are able to pass through to specific customers? Can you provide any color on that?
Sure. The rate growth is expected to occur sporadically throughout the year, with a significant increase typically at the start. This is mainly related to the legacy Aleris properties, where the rate increase is projected to be between 4% and 6%, aligning with our annual guidance. Regarding the flu season, there is no substantial impact to report; we manage this every year without any significant negative effects on our portfolio. Although we don't yet have complete results for February, January was encouraging and met our expectations for the year. I want to emphasize that the operators will need some time to navigate through the transition process, as we just completed transitioning properties at the end of last year. While some transitions occurred around September and October, many are still at the latter part of the year. Therefore, we anticipate gradual benefits as they continue to adapt and integrate their models. For January specifically, the performance aligns with our positive outlook and initial guidance.
The next question will come from John Massocca with B. Riley.
Maybe given some of your comments on some of these new operators continuing to get up to speed. As we think about the cadence of some of the NOI growth implied in guidance over the coming quarter? Should it be kind of back half of the year weighted then? Or is that maybe overstating the impact of timing for some of those transitions?
When analyzing the sources of our growth, about a third will come from occupancy, which we expect to increase throughout the year, especially during the sales season that typically peaks in Q2 and into Q3. Therefore, we anticipate that this portion will improve over time. For revenue per occupancy rate growth, that will primarily result from rate increases, with significant contributions expected early in the year, along with the integration of levels of care, which may take a little longer. From a revenue perspective, we see a combination of these factors. On the expense side, we expect some initial benefits as we transition these communities, thanks to our focused efforts on local staffing which should enhance our operations. However, there's still some work ahead for operators to recruit the right local teams and to continue executing on our business strategy, which may take some time. In summary, there are definitely opportunities emerging early on, with additional significant opportunities expected as we progress into the middle and later parts of the year.
Okay. And then just to kind of confirm, the 300 basis points of kind of occupancy growth in the guidance, is that kind of compared to 4Q end occupancy? Or is that kind of on the average occupancy over the course of 2025?
The latter. So it's comparing kind of full year average occupancy to, again, the guide of full year average occupancy.
Okay. And then as I think about kind of 4Q results compared to 3Q, was there anything driving the kind of sequential decline in overall rental revenue, but specifically kind of the SHOP rental income and resident fees other than just the asset sales that occurred over the 2H '25?
I would say a little bit on the asset sales, but I think if anything, it may have just been more tempered towards the actual operations being transferred and maybe a slight slowdown in pushing revenue and such is really the only real driver. But a lot of that noise is now behind us, and we start with a clean slate in 2026.
Okay. I'll probably do the math myself to some extent. When considering the revenue per room and the growth in revenue per occupied room as implied in the guidance, what are you anticipating in terms of margin expansion for 2026?
Yes. I mean, ultimately, if you kind of do the math, the flow-through, we would expect close to a couple of hundred basis points of margin improvement on a same-store basis.
Okay. And then maybe moving on from the SHOP side of the business. As I think about the MOB and Life Science assets that have leases expiring in 2026, how do those look today? What do you think the prospects of renewal or releasing are? And is there potential for kind of rent roll-ups? Or how are you viewing those assets?
Yes. I mean for the known vacates in '26, there are two primary tenants, both with full building users. One is with a building in Minnesota, which represents about 1.9% of annualized revenue and another building in Fremont, California that represents about 1% of annualized revenue. I think the building in Minnesota, we've got some early indications of interest. That's going to go from a single-tenant building likely to a multi-tenant building. And so that will need to play out a little bit. We do have some runway before that tenant leaves midyear. So there's still time to evaluate kind of the ultimate strategy there. For the building in Fremont, that tenant doesn't expire until Q4 of 2026. And that's a really strong R&D market for life science. And so much more healthier outlook and interest on that building. So I would say, overall, I think there's some promising outlook to re-lease both buildings, but kind of more tilted towards Fremont kind of being the better of the two opportunities.
Okay. And then I know you said dispositions are likely to be kind of selective and opportunistic. Would that kind of imply that they might be weighted more towards the MOB Life Science side of the business, just given the management transitions going on in SHOP? And I guess, if so, what does that market kind of look like today?
I want to be transparent; we don't have anything specifically planned at the moment. However, if we consider additional sales, there seems to be more opportunity in the MOB Life Science sector, especially since we've sold a significant amount of SHOP and addressed the easier options for 2025 with what we're wrapping up in Q1. Generally, we've had success in selling assets. Typically, those we sell are ones facing occupancy challenges or requiring capital, which aligns with our previous sales. The market for these has proven viable, as shown by the transactions we completed last year, which included both stabilized and non-stabilized assets. The value will depend on each situation. So, without any specific items identified, it's tough to pinpoint a particular strategic outcome. Nevertheless, we are confident in our ability to make transactions.
Next question will come from Michael Diana with Maxim Group.
What implications, if any, does your significant momentum have on the dividend?
We just came off of a very active 2025 for 2026. Our major focus will be on operations during these transitions. With our guidance, we are expecting growth in NOI, growth in normalized FFO, and adjusted EBITDA. This is something our Board will consider, but there are no immediate priorities regarding the dividend at this time.
This concludes 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.
Yes. Thank you for joining the call today. Please contact our Investor Relations team if you're interested in scheduling a call with DHC or meeting with management at the upcoming Citi conference. Operator, that concludes our call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.