Executive Summary / Key Takeaways

• Diversified Healthcare Trust ($DHC) is undergoing a significant strategic transformation, divesting non-core assets and transitioning its Senior Housing Operating Portfolio (SHOP) management to enhance operational efficiency and deleverage its balance sheet.
• The company reported strong Q3 2025 results, with total revenue increasing 4% year-over-year to $388.7 million and SHOP NOI rising 7.8% to $29.6 million, despite temporary elevated labor costs from operator transitions.
• DHC is proactively addressing its debt maturities, having repaid its June 2025 notes and expecting to fully repay its January 2026 zero-coupon bonds by year-end 2025, leaving no debt maturities until 2028.
• The transition of 116 SHOP communities to new third-party managers, expected to be completed by December 31, 2025, is a key initiative aimed at driving margin expansion, occupancy growth, and improved cash flow through performance-based agreements and enhanced operational support.
• Management believes DHC's share price is undervalued, with strategic initiatives, debt reduction, and improving SHOP performance serving as clear catalysts for shareholder value.

Setting the Scene: A Healthcare REIT's Strategic Evolution

Diversified Healthcare Trust ($DHC) operates as a real estate investment trust (REIT) with a focused portfolio spanning medical office and life science properties, alongside a significant presence in senior living communities and wellness centers across 34 U.S. states and Washington, D.C. As of September 30, 2025, DHC's portfolio comprised 335 properties, including over 26,000 senior living units and approximately 6.9 million square feet of medical office and life science space. The company's operations are managed by The RMR Group , providing centralized oversight and strategic direction.

The healthcare real estate sector is influenced by broad demographic trends, notably an aging U.S. population and increasing life spans, which are expected to drive sustained demand for senior living and medical facilities. Concurrently, advancements in scientific research fuel the need for specialized life science properties. DHC's strategy is to capitalize on these trends through a dual approach: optimizing its existing portfolio for efficiency and growth, and strengthening its balance sheet through targeted dispositions and refinancing.

DHC's competitive landscape includes major healthcare REITs such as Welltower Inc. , Ventas Inc. , Healthpeak Properties Inc. (PEAK), and Sabra Health Care REIT Inc. (SBRA). While larger peers like Welltower (WELL) and Ventas (VTR) benefit from greater scale and broader geographic footprints, DHC differentiates itself through its RMR Group (RMR) management structure, which aims for operational efficiency and streamlined execution across its diverse asset base. This centralized management approach, coupled with a focus on data-driven decision-making, forms a key operational advantage. DHC's asset management team employs a "comprehensive review process" that considers "performance metric benchmarks, location and other relevant data points" to ensure "decisions are data-driven and strategically aligned with our overall objectives." This analytical rigor, combined with the integration of "each operator's broader CRM tools" by its new SHOP managers, enhances DHC's ability to optimize property performance and tenant/resident experience. While DHC may not possess proprietary hardware, its strategic use of data and management systems provides a competitive edge in operational effectiveness and responsiveness to market dynamics.

Historically, DHC faced challenges, particularly in its Senior Housing Operating Portfolio (SHOP), where occupancy declined post-2020, only returning to 80% by Q4 2024. This period also saw DHC navigate hurricane-related damages in Florida in September 2022, with losses covered by insurance. A significant strategic move occurred in February 2024 with DHC's acquisition of a 34% stake in AlerisLife Inc. for $15.459 million, an investment that yielded a $17 million cash dividend in Q1 2025 due to AlerisLife's improved performance.

Strategic Realignment and Operational Momentum

The year 2025 marks a pivotal period for DHC, characterized by aggressive portfolio optimization and balance sheet deleveraging. A major strategic initiative announced on September 3, 2025, involves the transition of management for 116 SHOP communities from Five Star Senior Living (an AlerisLife operating division) to seven new third-party managers. This move, part of AlerisLife's (ALR) planned wind-down, is designed to "establish a more efficient and geographically aligned operating model in line with broader industry trends favoring regional densification." As of November 3, 2025, 85 communities had transitioned, with the remaining expected to be complete by year-end. The new operating agreements feature 10-year terms and "performance-based incentive and termination structures that enhance accountability and align operator interest with DHC's objectives." Management anticipates these changes will lead to improved occupancy rates and NOI margins consistent with industry averages.

This strategic repositioning is already yielding results. For the third quarter ended September 30, 2025, DHC reported total revenue of $388.7 million, a 4% increase year-over-year. Adjusted EBITDAre stood at $62.9 million, and normalized FFO was $9.7 million, or $0.04 per share.

Segment Performance Highlights

Senior Housing Operating Portfolio (SHOP): This segment is a key driver of DHC's recovery. Q3 2025 saw SHOP occupancy increase by 210 basis points year-over-year to 81.5%, marking the fourth consecutive quarter of growth. Revenue per occupied room (RevPOR) rose 5.3%, driven by annual rate increases, gains in care level pricing, and reduced discounts. These factors contributed to a 6.9% year-over-year increase in SHOP revenues and a 7.8% increase in consolidated SHOP NOI to $29.6 million. Despite these gains, Q3 SHOP NOI was impacted by approximately $5.1 million in "temporary labor cost increases associated with the community transitions," which are expected to moderate in Q4 2025 to an estimated $1.5 million to $2 million. Excluding these temporary costs, the SHOP NOI margin for Q3 2025 would have been 10.4%, a 150 basis point increase from the reported 8.9%. Management remains "bullish on the outlook for our SHOP segment," expecting continued occupancy growth and cost control.

Medical Office and Life Science Portfolio: This segment provides stable cash flows. In Q3 2025, DHC completed approximately 86,000 square feet of leasing at weighted average rents 9% above prior rents, with an average term of nearly 7 years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, primarily due to asset sales of vacant or low-occupancy properties and new leasing activity. Same-property cash basis NOI for this segment increased 1.6% year-over-year, with margins improving 100 basis points to 58.9%. Looking ahead, DHC maintains an active leasing pipeline of 717,000 square feet, including 103,000 square feet of new absorption, signaling momentum for higher occupancy and continued rent growth.

Strengthening the Balance Sheet and Capital Allocation

DHC has made substantial progress in deleveraging its balance sheet. Year-to-date through Q3 2025, DHC sold 44 properties for $396 million. These dispositions included the Muse Life Science campus in San Diego for $159.025 million in January 2025 and 18 senior living properties for $135 million in February 2025. The net proceeds of $299 million from these sales were primarily used to partially redeem DHC's zero coupon notes due in 2026.

The company has also been active in refinancing its debt. In March 2025, DHC secured a $140 million mortgage financing, followed by a $109 million Freddie Mac mortgage financing in April 2025. These, combined with cash on hand, allowed DHC to fully redeem its senior unsecured notes due in June 2025. Further, in September 2025, DHC issued $375 million of 7.25% senior secured notes due October 2030, using $307 million of the proceeds to further reduce its 2026 zero coupon bonds. The remaining balance on the 2026 bonds is $324 million, which DHC expects to repay in full by year-end 2025 using existing cash, its undrawn $150 million revolving credit facility, and proceeds from pending dispositions. This proactive approach means DHC anticipates "no debt maturities until 2028," positioning the company with "its strongest liquidity maturity profile in several years."

Capital expenditures are also being managed strategically. DHC reaffirmed its 2025 CapEx guidance at $140 million to $160 million, a reduction from prior years, as "much of the refreshed capital and deferred maintenance is now behind us." Recurring CapEx for SHOP is estimated at $3,500 per unit. The company plans to continue investing in redevelopment projects, targeting mid-teen returns on investment.

Outlook and Risks

DHC's management has provided a clear outlook for 2025, reaffirming its full-year SHOP NOI guidance range of $132 million to $142 million. For the Medical Office and Life Science segment, NOI is expected to range from $104 million to $112 million. This guidance reflects the anticipated moderation of temporary transition costs in SHOP, continued occupancy growth, and the impact of dispositions. The company expects adjusted EBITDAre for the full year 2025 to be between $275 million and $285 million, trending towards positive cash flow as SHOP operations stabilize.

Despite the positive momentum, DHC faces several risks. The company is "closely monitoring the impacts of the current economic and market conditions," including "uncertainties surrounding interest rates and inflation, volatility in the public debt and equity markets, global geopolitical hostilities and tensions, any U.S. government shutdown, economic uncertainties and tariffs, labor market conditions and changes in real estate utilization." Specifically, "continued or intensified disruptions in the financial markets could adversely affect our financial condition and that of our managers, operators and tenants." DHC also expects "continued variability in labor, insurance and food costs in our SHOP segment." The success of asset dispositions is not guaranteed, and properties "may sell... at amounts that are less than currently expected and/or less than the carrying values of such properties." Redevelopment projects also carry risks of "significant capital expenditures and time to complete" and potential delays or increased costs due to "labor availability constraints and wage and commodity price inflation."

To mitigate interest rate risk, DHC employs "derivative instruments, including interest rate caps," and engages only with "counterparties with high credit ratings." The company's debt agreements also offer "opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity."

Conclusion

Diversified Healthcare Trust is executing a comprehensive strategy to transform its portfolio and strengthen its financial foundation. By divesting non-core assets, proactively addressing debt maturities, and strategically transitioning its SHOP management, DHC is positioning itself for sustainable growth and enhanced shareholder value. The company's focus on operational efficiency, leveraging data-driven insights and new operator partnerships, is expected to drive margin expansion and occupancy gains in its core segments. While macroeconomic uncertainties and operational challenges persist, DHC's clear roadmap for debt reduction and portfolio optimization, coupled with its commitment to high-ROI capital allocation, underscores a compelling investment thesis for discerning investors. The anticipated repayment of all 2026 debt by year-end, leaving no maturities until 2028, provides a significant runway for DHC to realize the full benefits of its strategic realignment.