DHC 2026 Q2 Earnings Call

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.

This call may contain non-GAAP numbers, including Normalized FFO, NOI, and 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.

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. 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.

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.

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.

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.

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.

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 square feet 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 square feet, with the remaining tenant vacating effective December 1st.

We plan to market for sale one of these properties representing 150,000 square feet 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 7.1 times net debt to EBITDA from 8.7 times. 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.

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.

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.

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 US REIT/Health Care REIT Index. As a result of this outperformance, our second quarter G&A expense includes approximately $10 million of incentive management fees.