DHC

Business Context and Reporting Period

Company: Diversified Healthcare Trust (DHC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2025
Business Overview: DHC is a Maryland-domiciled REIT owning 298 healthcare-related properties across 33 states and Washington, D.C. The portfolio consists of 212 senior living communities (SHOP segment), 67 medical office and life science properties, and 10 wellness centers. As of year-end, 13 properties were classified as held for sale.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Transition: Completed the transition of 116 senior living communities previously managed by Five Star Senior Living (AlerisLife) to seven different third-party managers. This incurred $10.4 million in transaction-related costs.
• Asset Impairments: Recorded $165.7 million in impairment charges, a 134% increase from 2024 ($70.7 million), primarily related to 18 medical office/life science properties and 25 senior living communities.
• Property Dispositions: Sold 69 properties in 2025 for aggregate proceeds of $604.9 million, resulting in a $117.7 million gain on sale. This compares to a $18.9 million loss on sale in 2024.
• Debt Refinancing: Fully redeemed $940.5 million of senior secured notes due 2026 and $380.0 million of senior unsecured notes due 2025. Issued $375.0 million of new 7.25% senior secured notes due 2030 and executed four new mortgage financings totaling $343.2 million.
• Investment Income: Recognized $36.8 million in equity in net earnings of investees, driven by the wind-down of AlerisLife and distributions from joint ventures, compared to $1.6 million in 2024.

Guidance, Outlook, and Risks

Management Commentary: Management cites positive trends in the SHOP segment, including increases in occupancy (81.0% in 2025 vs. 79.3% in 2024), rates, and margins. However, they note continued variability in operating costs, particularly labor, insurance, and food costs. The company expects favorable supply and demand dynamics in senior living to continue driving occupancy growth.

Distributions: The quarterly cash distribution rate remains at $0.01 per share ($0.04 annually) to preserve liquidity. Future distributions are discretionary and depend on FFO, debt covenants, and capital needs.

Key Risks:

• Interest Rate Sensitivity: High interest rates have increased borrowing costs. The company has $140 million in floating-rate debt (capped at 4.50% SOFR) and significant fixed-rate debt maturing between 2028 and 2046.
• Regulatory Environment: Changes in Medicare/Medicaid reimbursement rates and the "One Big Beautiful Bill Act" (Public Law No. 119-21) pose risks to tenant profitability and rent collection.
• Operational Dependence: DHC relies entirely on third-party managers (including RMR) for operations. Transitioning managers carries risks of temporary disruption and cash flow reduction.
• REIT Qualification: Failure to meet distribution requirements or asset tests could result in significant tax liabilities.

Investor Verification Checklist

• Debt Covenants: Verify compliance with financial ratios under the new $375 million senior secured notes and the $150 million revolving credit facility.
• Manager Performance: Monitor the stabilization and financial performance of the 116 communities transitioned from Five Star to new managers.
• Impairment Trends: Assess whether the $165.7 million in impairments indicates broader portfolio valuation issues or isolated asset issues.
• Liquidity Position: Confirm the sufficiency of the $105.4 million cash balance and $150 million credit facility to cover debt service and capital expenditures given the low distribution rate.
• AlerisLife Wind-down: Track the finalization of the AlerisLife liquidation and the receipt of the remaining $27.2 million dividend share.