Executive Summary / Key Takeaways

• Diversified Healthcare Trust is executing a strategic rebalancing, significantly deleveraging its balance sheet through targeted asset sales and new financings, addressing all debt maturities through 2026.
• The Senior Housing Operating Portfolio (SHOP) is demonstrating a robust recovery, with Q2 2025 NOI surging 26.3% year-over-year and occupancy reaching 80.6%, driven by strategic capital investments and favorable demographic tailwinds.
• Portfolio optimization, including the disposition of non-core assets and a disciplined focus on high-ROI capital expenditures, is enhancing the quality and cash flow generation of the remaining portfolio.
• The Medical Office and Life Science segment provides stable cash flows, supported by an active leasing pipeline and consistent double-digit rent growth on renewals.
• Management's increased 2025 SHOP NOI guidance and reduced CapEx forecast reflect growing confidence in the company's operational turnaround and long-term value creation potential.

Setting the Scene: DHC's Strategic Rebalancing in Healthcare Real Estate

Diversified Healthcare Trust (DHC) operates as a specialized real estate investment trust, focusing on a diverse portfolio of medical office and life science properties, senior living communities, and wellness centers across the United States. Managed by The RMR Group (RMR), DHC's core strategy emphasizes diversification across various health services, scientific research disciplines, and property types to mitigate risk and capture opportunities within the expansive healthcare sector. This sector benefits from powerful demographic tailwinds, notably an aging U.S. population, which continues to drive demand for senior care and healthcare services. Indeed, the broader healthcare REIT sector demonstrated resilience, recording a median year-over-year same-store NOI increase of 7.1% in Q1 2025.

DHC holds a mid-tier position within the competitive healthcare REIT market. While its diversified portfolio offers a qualitative advantage in risk mitigation compared to more specialized players like Welltower Inc. (WELL) in senior housing or Healthpeak Properties Inc. (PEAK) in life sciences, DHC does not command the same scale as these larger rivals or Ventas Inc. (VTR). The company's operational adaptability, facilitated by RMR Group's management expertise and network, serves as a key competitive strength. This management structure enables a data-driven approach to asset management and strategic capital allocation, which DHC leverages as its primary "technological" differentiator.

This operational "technology" involves comprehensive reviews of communities and operators, utilizing performance metric benchmarks, and identifying opportunities for densification and synergy. A tangible benefit of this approach is evident in the incremental NOI of $3.8 million achieved in Q2 2025 from recently completed refreshes and redevelopments. This strategic focus on high-ROI capital investments and redevelopment projects enhances DHC's competitive moat by optimizing its portfolio, driving better financial performance through higher NOI and reduced future capital expenditures, and improving its market positioning. While DHC's growth trajectory aligns with industry trends, it acknowledges that it may trail in specialized execution or rapid innovation speed compared to some competitors, necessitating a strategic focus on its core strengths and efficient capital deployment.

DHC's Strategic Evolution: A History of Adaptation

DHC's journey began on September 20, 1999, with a foundational mandate for diversification across healthcare real estate. The early 2020s presented significant challenges, including operational adjustments and the impact of natural disasters such as hurricane damage in Florida in September 2022, which subsequently led to insurance recoveries. This period spurred a more aggressive strategic pivot towards deleveraging and portfolio optimization.

The company initiated a robust disposition program, divesting non-core assets to streamline its portfolio and strengthen its balance sheet. Notable sales in early 2025 included the Muse Life Science campus for $159 million ($855 per square foot) and 18 triple-net leased senior living communities to Brookdale (BKD) for $135 million ($154,000 per unit). The net proceeds of $299 million from these sales were strategically deployed to partially redeem DHC's zero-coupon senior secured notes due in January 2026. Concurrently, DHC secured $343 million in new mortgage financings between March and May 2025, including a $140 million floating-rate loan, a $109 million fixed-rate loan, a $64 million fixed-rate loan, and a $30.3 million fixed-rate loan, all secured by various SHOP communities. These new financings, combined with existing cash, enabled DHC to successfully redeem the remaining $380 million principal balance of the 9.75% senior unsecured notes due in June 2025.

Operational Performance: A Tale of Two Portfolios

DHC's operational narrative in Q2 2025 reveals a compelling story of recovery in its Senior Housing Operating Portfolio (SHOP) juxtaposed with strategic adjustments in its Medical Office and Life Science segment.

The SHOP segment is demonstrating a robust turnaround. In Q2 2025, NOI surged 26.3% year-over-year to $36.6 million, contributing to a 36.8% increase in NOI for the first six months of 2025, reaching $73.4 million. Occupancy climbed 160 basis points year-over-year to 80.6%, while the average monthly rate increased 5.4% to $5,440. This strong performance was primarily driven by a 5.4% increase in RevPOR, reflecting annual rate adjustments, higher care level pricing, and reduced discounts. ExpensePOR increased by a more modest 3.3%, benefiting from lower insurance costs that partially offset merit increases and new hires. Five Star (FVE)-managed communities, often located in primary markets and benefiting from DHC's capital investments, notably achieved a 14.1% NOI margin, a 170 basis-point improvement year-over-year. However, the segment did experience a pullback in its Skilled Nursing Facility (SNF) properties in Q2 2025 due to one-time adjustments with an operator, and Q1 2025 results included a $2.7 million non-recurring business interruption insurance benefit.

Conversely, the Medical Office and Life Science Portfolio experienced a revenue decline of 11.9% year-over-year in Q2 2025 to $48.1 million, with NOI falling 12.5% to $26.5 million. This was primarily attributed to vacancies at certain properties, leading to a sequential 10 basis-point drop in same-property occupancy to 89.8%. Despite this, leasing activity remains strong, with 106,000 square feet leased in Q2 2025 and 251,000 square feet in the first half of the year, achieving weighted average rent increases of 11.5% and 15.4%, respectively. The outlook for this segment remains positive, with an active leasing pipeline of 691,000 square feet, including 246,000 square feet of new absorption, expected to drive occupancy gains and double-digit rent growth.

Financial Health and Deleveraging Pathway

DHC's financial health is undergoing a significant transformation, marked by aggressive deleveraging and enhanced liquidity. The company ended Q2 2025 with $292 million in liquidity, comprising $142 million in unrestricted cash and a new, undrawn $150 million secured revolving credit facility. This facility, secured by 14 SHOP communities, reflects an implied valuation of $184,000 per unit and matures in June 2029.

The successful redemption of the $380 million principal balance of 9.75% senior unsecured notes due June 2025, funded by $343 million in new mortgage financings and cash on hand, demonstrates DHC's commitment to proactive debt management. These new mortgage financings, secured by 27 SHOP communities, carry a weighted average interest rate of 6.5%, significantly reducing annual cash interest expense by approximately $15 million, or $0.06 per share.

DHC's focus now shifts to the remaining $641 million zero-coupon bond due in January 2026. The strategy involves utilizing $280 million from properties currently under agreement or letter of intent for sale, coupled with an additional $300 million to $350 million in new financing expected in Q3 2025. This comprehensive approach is designed to reduce DHC's net debt to adjusted EBITDAre from 8.7x at June 30, 2025, towards a target range of 6.5x to 7.5x. Capital expenditures are also being managed prudently, with Q2 2025 spend at $34 million. The 2025 CapEx guidance has been reduced to $140 million to $160 million, with recurring SHOP CapEx estimated at $3,500 per unit, indicating that much of the deferred maintenance is now complete.

Outlook, Guidance, and Risk Factors

DHC's forward-looking guidance reflects management's increasing confidence in the company's strategic rebalancing. The 2025 SHOP NOI guidance has been increased by $10 million at the midpoint to a range of $132 million to $142 million, with a year-end SHOP occupancy target of 82.5%. This outlook is predicated on continued SHOP recovery, the moderation of operating cost increases, and the successful execution of planned dispositions and new financings. The reduced 2025 CapEx guidance further underscores a disciplined approach to capital allocation, freeing up cash flow for debt reduction and other strategic initiatives.

Despite the positive momentum, DHC faces several pertinent risks. Economic and market uncertainties, including fluctuating interest rates, persistent inflation, and global geopolitical instability, could impact property values, tenant demand, and the cost of capital. Operational challenges, such as the variability in labor, insurance, and food costs within the SHOP segment, remain a concern. There is also the inherent risk that planned property dispositions may not materialize as expected or could close at lower-than-anticipated prices. Furthermore, DHC's exposure to floating-rate debt, though partially mitigated by interest rate caps for some loans, makes it vulnerable to increases in SOFR. Management acknowledges these risks and aims to mitigate them through proactive asset management, strategic dispositions, and diversified financing.

Conclusion

Diversified Healthcare Trust is in the midst of a significant strategic transformation, effectively rebalancing its portfolio and fortifying its financial structure. The core investment thesis hinges on the robust recovery of its Senior Housing Operating Portfolio, driven by demographic tailwinds and targeted capital investments, coupled with a disciplined deleveraging strategy. By shedding non-core assets and securing new, more favorable financing, DHC has successfully addressed near-term debt maturities and is well-positioned to tackle its 2026 obligations.

The company's data-driven asset management approach, acting as a key operational differentiator, is proving instrumental in optimizing performance and enhancing portfolio quality. While challenges persist, particularly in managing operating costs and navigating broader economic uncertainties, DHC's proactive management and clear strategic roadmap suggest a compelling path toward sustained NOI growth and long-term shareholder value creation. The focus on a higher-ROI asset base and a strengthened balance sheet positions DHC to capitalize on the enduring demand for healthcare real estate.