Earnings call transcript: Diversified Healthcare Q3 2025 reveals EPS miss, stock declines

Diversified Healthcare Trust (DHC) reported its Q3 2025 earnings, revealing a significant earnings per share (EPS) miss, which led to a sharp decline in its stock price. The EPS came in at -$0.38, considerably below the forecasted -$0.21, marking an 80.95% negative surprise. Despite slightly exceeding revenue expectations with $388.71 million against a forecast of $382.3 million, the market reacted negatively. The stock fell 8.26% in regular trading and dropped an additional 1.81% in premarket activity, reflecting investor concerns over profitability.

Key Takeaways

• Diversified Healthcare missed EPS forecasts by a wide margin.
• Revenue slightly surpassed expectations, with a 4% year-over-year increase.
• The stock price declined sharply, nearing its 52-week low.
• Senior housing occupancy and medical office leasing showed positive trends.
• High net debt remains a concern for investors.

Company Performance

Diversified Healthcare Trust experienced mixed performance in Q3 2025. While revenue increased by 4% year-over-year, reflecting robust leasing activity and improved occupancy in its senior housing and medical office segments, the significant EPS miss overshadowed these gains. The company’s strategic shifts, including transitioning communities and diversifying operator contracts, appear to be in progress but have not yet translated into expected profitability.

Financial Highlights

• Revenue: $388.71 million, up 4% year-over-year.
• Adjusted EBITDA RE: $62.9 million.
• Normalized FFO: $9.7 million, or $0.04 per share.
• Same property cash-based NOI: $62.6 million, up 0.7% YoY.
• Liquidity: $351 million, including $201 million in unrestricted cash.

Earnings vs. Forecast

The earnings report revealed an EPS of -$0.38, falling short of the -$0.21 forecast, resulting in an 80.95% negative surprise. However, revenue exceeded expectations by 1.68%, reaching $388.71 million against a projected $382.3 million. This mixed outcome highlights ongoing challenges in achieving profitability despite operational improvements.

Market Reaction

The market responded negatively to the earnings miss, with DHC’s stock declining 8.26% during the regular session and an additional 1.81% in premarket trading. This movement positions the stock closer to its 52-week low of $2, indicating bearish sentiment among investors. The negative reaction reflects concerns over the company’s profitability and high leverage.

Outlook & Guidance

Diversified Healthcare maintains its 2025 SHOP NOI guidance of $132-$142 million and expects full-year Adjusted EBITDA RE between $275-$285 million. The company aims to complete community transitions by year-end and targets SHOP occupancy of 82-83%. With no debt maturities until 2028, the firm plans to leverage its liquidity for future opportunities.

Executive Commentary

CEO Chris Bilotto stated, "We believe our share price does not reflect the underlying value of our portfolio," emphasizing confidence in the company’s asset base. CFO Matt Brown added, "We are optimistic about the long-term performance of our SHOP segment," highlighting strategic initiatives to improve leverage and operational efficiency.

Risks and Challenges

• High net debt to Adjusted EBITDA ratio, currently at 10x, poses financial risks.
• Transition costs and community integration challenges may impact short-term profitability.
• Market conditions in senior housing and medical office segments remain competitive.
• Potential macroeconomic pressures could affect occupancy and leasing rates.

Q&A

During the earnings call, analysts focused on transition costs, expected to decrease to $1.5-$2 million in Q4, and the disposition pipeline of $237 million. The company plans to maintain cash reserves for strategic opportunities, with over $200 million in asset sales anticipated to close in Q4 2025.

Full transcript - Diversified Healthcare Trust (DHC) Q3 2025:

Conference Operator: Good morning and welcome to the Diversified Healthcare Trust third quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Matt Murphy, Manager of Investor Relations, Diversified Healthcare Trust: 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, November 4th, 2025. 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.

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Thank you, Matt, and good morning, everyone. Thank you for joining our call today. I will begin by providing a high-level review of DHC’s third quarter results and an update on the progress we are making toward our key strategic objectives, including an update to the previously announced transition of our AlerisLife Managed Communities. Then, Anthony will provide more details regarding our quarterly financials and capital spending, and finally, Matt will review our financing activity and liquidity before discussing our outlook for the remainder of the year. After the market closed yesterday, DHC reported third quarter results that highlight continued momentum across our operating segments and steady execution on our initiatives to strengthen DHC’s financial position. Total revenue for the quarter was $388.7 million, an increase of 4% year over year. Adjusted EBITDA RE was $62.9 million, and normalized FFO was $9.7 million or $0.04 per share.

During the quarter, we took a significant step forward in repositioning our senior housing operating portfolio with the announced sale by AlerisLife of its management contracts, and our results reflected a temporary decline in NOI due to elevated labor costs as we transitioned the 116 AlerisLife Communities to new operators. For the transitioning portfolio, compensation expense as a percent of revenue was approximately 240 basis points above the portfolio average for prior periods, representing an incremental cost of roughly $5.1 million for the quarter. These elevated labor costs are primarily driven by required investments in operational support, including payroll allocations for property tours, community reviews, training, and onboarding to support incoming operators. Additionally, temporary employee overlap necessary to meet required notice periods prior to terminations has contributed to the increase.

As previously communicated, these transitions are part of AlerisLife’s planned wind-down of its business, which included a broadly marketed process for the sale of the management contracts for the DHC-owned communities to seven operators and the sale of 17 AlerisLife-owned communities to unique buyers. 21 of the 116 communities were transitioned to new operators as of quarter-end, and a total of 85 communities have transitioned as of today’s call. We are tracking all 116 communities to transition by year-end. As a 34% owner of AlerisLife, we expect to receive approximately $25-$40 million of net proceeds upon the completion of the wind-down in 2026. Importantly, this transition transaction advances our strategy to establish a more efficient and geographically aligned operating model in line with broader industry trends favoring regional densification.

The new DHC operating agreements include a 10-year term and incorporate performance-based incentive and termination structures that enhance accountability and align operator interests with DHC’s objectives reinforced by the operators’ purchase of these contracts. As part of the diligence and selection of the seven operators, five of whom are new to DHC, our asset management team developed specific criteria to evaluate each operator’s capabilities and market expertise. We expect these measures will result in occupancy rates and NOI margins that are more consistent with industry averages. During the third quarter, SHOP occupancy increased 210 basis points year over year to 81.5%. Marking the fourth consecutive quarter of occupancy growth, and RevPOR rose 5.3%. Reflecting annual rate increases, gains in care-level pricing, and reduced discounts and concessions at higher-occupied communities. Expense POR for the same period increased by 5.1%.

Driven primarily by temporary labor cost increases associated with the community transitions, wage adjustments, and filling of previously open positions. Collectively, these trends resulted in a 6.9% year-over-year increase in SHOP revenues and a 7.8% increase in consolidated SHOP NOI to $29.6 million. Sequentially, the decline in SHOP NOI is primarily attributable to higher seasonal utility costs, favorable one-time adjustments in Q2, and the noted temporary labor costs related to the community transitions, which are expected to moderate through Q4. Initial feedback from the new operators has been encouraging, with feedback complementing opportunities to drive top-line revenue with the introduction of additional care levels above market rent increases, the opportunity to reduce expenses through right-sizing services with meal offerings, equipment leases, and procurement of recurring services, and the ability to improve lead-to-move-in conversion across the portfolio through the integration of each operator’s broader CRM tools.

We expect to see these initiatives complement our performance over the next several quarters. Based on year-to-date performance and current trends, we are maintaining our full-year SHOP NOI guidance range of $132-$142 million. Turning to our medical office and life science portfolio, during the quarter, we completed approximately 86,000 sq ft of leasing at weighted average rents of 9% above prior rents for the same space, with an average term of nearly seven years. Consolidated occupancy increased 370 basis points sequentially to 86.6%, primarily driven by the asset sales of vacant or low-occupancy properties and leasing during the quarter. Same property cash basis NOI increased 1.6% year over year, with margins improving 100 basis points to 58.9%.

Looking ahead, 1.5% of annualized revenue in our medical office and life science portfolio is scheduled to expire through year-end 2025, of which 22,000 sq ft, or approximately 30 basis points of annualized revenue, is expected to vacate. We maintain an active leasing pipeline totaling 717,000 sq ft, including approximately 103,000 sq ft of new absorption, providing momentum toward higher portfolio occupancy and continued rent growth, with average lease terms of 7.6 years and GAAP rent spreads averaging more than 8%. Turning to our capital markets and balance sheet initiatives. In August, our Seaport Innovation Joint Venture completed a $1 billion refinancing of the Vertex Pharmaceuticals headquarters in Boston. As part of this transaction, DHC received a $28 million cash distribution, reflecting our 10% share of the proceeds.

Following our September issuance of $375 million of senior secured notes in 2030, and with the expected payoff of our remaining 2026 zero-coupon bond notes as early as the fourth quarter, DHC will have no debt maturities until 2028. We continue to make significant progress with our non-core asset sales. Year-to-date, DHC has sold 44 properties for $396 million, and as of November 3rd, we are under agreement through letters of intent to sell 38 properties for $237 million. We are also tracking close to close on 25 of these properties in Q4 for total proceeds of $211 million, with the remaining balance planned for Q1 2026. These asset sales will reduce capital spending in 2026 and beyond, improve overall occupancy and margins, and will contribute to the portfolio’s cash flow growth. Looking ahead to 2026, the company is positioned to have its strongest liquidity maturity profile in several years.

We believe our share price does not reflect the underlying value of our portfolio or the initiatives management has undertaken this year. With a fully transitioned SHOP portfolio, we believe DHC is well-positioned to drive margin expansion, cash flow growth, and continued balance sheet improvement, all of which are clear catalysts to drive shareholder value. With that, I will turn the call over to Anthony.

Anthony Paula, Vice President, Diversified Healthcare Trust: Thank you, Chris, and good morning, everyone. During the third quarter, our same property cash-based NOI was $62.6 million, representing a 70 basis point increase year over year and a 9.5% decrease sequentially. Our third-quarter SHOP same property results include improvements in both occupancy and average monthly rate. Same property occupancy increased 140 basis points year over year and 100 basis points sequentially. We also continue to see positive momentum with pricing and achieved an increase in same property SHOP average monthly rate of 5.3% year over year and 60 basis points sequentially. These increases resulted in year-over-year same property SHOP revenue growth of 6.6%.

Excluding the $5.1 million of temporary compensation expense increases related to the transition of management contracts from AlerisLife, adjusted SHOP NOI for the quarter would have been $34.8 million, and SHOP NOI margin would have been 10.4%, an increase of 150 basis points from the reported margin of 8.9%. Turning to G&A expense, the third-quarter amount includes $5.7 million of business management incentive fee. This incentive fee is driven in part by an increase in DHC’s stock price of approximately 90% year-to-date. Any incentive management fee incurred would not be due until January 2026. Excluding the impact of the incentive management fee, G&A expense would have been $7.1 million for the quarter. During the quarter, we invested approximately $43 million of capital, including $35 million in our SHOP communities and $7 million in our medical office and life science portfolio.

We are pleased with our recent completed refreshes and redevelopments as we achieved incremental NOI of $2.8 million during the quarter when compared to pre-renovation NOI. These returns are in line with our expectations of delivering a mid-teens ROI. We believe there is continued upside in NOI and occupancy growth at these communities. Based on our current expectations for the fourth quarter, we are reaffirming our 2025 CapEx guidance of $140-$160 million. Now, I’ll turn the call over to Matt.

Matt Brown, Chief Financial Officer and Treasurer, Diversified Healthcare Trust: Thanks, Anthony, and good morning, everyone. We ended the quarter with approximately $351 million of liquidity, including $201 million of unrestricted cash and $150 million available under our undrawn revolving credit facility. In September, we advanced the repayment of our January 2026 zero-coupon bonds by issuing $375 million of five-year secured bonds at a fixed coupon of 7.25%. We used $307 million of the proceeds to partially redeem our January 2026 bonds. The offering was several times oversubscribed, allowing us to improve pricing. This bond is secured by equity pledges on 36 properties, including 21 SHOP communities with an implied valuation of $226,000 per unit. The remaining balance on our 2026 bond is $324 million after a $10.2 million paydown from an encumbered property sale. In addition to this October property sale, subsequent to quarter-end, we also sold 11 properties for aggregate gross proceeds of $31 million.

As of November 1st, we had a total of 38 properties under agreement or LOI for aggregate proceeds of $237 million, with a majority of these closings expected before year-end. We expect to use cash on hand, our undrawn credit facility, and proceeds from our pending dispositions to repay all amounts on our January 2026 bonds as early as year-end. After this repayment, we estimate the weighted average interest rate on our remaining debt to be approximately 5.7%, with no maturities until 2028. As of September 30th, our net debt to Adjusted EBITDA RE was 10 times, primarily reflecting the temporary compensation expense increases from our SHOP segment. Excluding these $5.1 million of elevated compensation expenses, leverage would have been 9.3 times, an improvement of 70 basis points from the as-reported number.

We remain confident in our strategies to reduce leverage by executing on our pending asset sales to repay debt and to drive stronger performance in our SHOP segment. Looking ahead, we expect improvements in Adjusted EBITDA RE with a full-year 2025 range of $275-$285 million and trending towards positive cash flow as SHOP operations stabilize and leverage declines. In closing, based on our current liquidity and asset sales, we are confident the January 2026 bonds will be repaid in full as early as year-end. With our next scheduled maturity in 2028, our near-term focus is on ensuring a smooth transition of the remaining communities from AlerisLife to our new managers. While the transition of these communities presents a temporary increase in cost, we are reaffirming our 2025 SHOP NOI guidance of $132-$142 million. Looking ahead, we are optimistic about the long-term performance of our SHOP segment.

We believe our strategic initiatives will continue to drive improvements in NOI, margins, and occupancy across our portfolio. That concludes our prepared remarks. Operator, please open the line for questions.

Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you’re using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble a roster. The first question comes from John Massocca with B. Riley Securities. Please go ahead.

John Massocca, Analyst, B. Riley Securities: Good morning. Maybe looking towards 4Q25 and in light of the unchanged SHOP NOI guidance. What impact are you expecting from operator transition OpEx costs in 4Q, especially relative to what you experienced in 3Q?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Good morning, John. Thanks for the question. So as we noted in prepared remarks, approximately $5.1 million of costs in the quarter related to the transitions. As of today, the majority of our communities have now transitioned. So I would say maybe somewhere around $1.5-$2 million of impact in the fourth quarter. As it relates to the overall NOI guide, we do expect to continue seeing increases in occupancy. And some reductions in expenses, mainly utilities, that support the overall guidance being unchanged at $132-$142 million for the year.

John Massocca, Analyst, B. Riley Securities: Okay. And then in the prepared remarks, you mentioned you had 10.1% margin ex the kind of transition labor compensation expense. Was that a same store number, or was that just for the consolidated portfolio?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: That’s a consolidated number.

John Massocca, Analyst, B. Riley Securities: Okay. And then. Continuing with kind of the operator transition costs, that’s something that was kind of contemplated when you put out guidance, your adjusted guidance in October. Or even earlier this year. And maybe kind of why I understand there are other parties involved, but why now for the transition. From the AlerisLife assets to third-party operators?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Well, we’ll answer that in parts. So with respect to the guidance, we hadn’t necessarily contemplated specific interruption or quantified that with respect to the AlerisLife management contracts. But I think the real kind of opportunity is for us to kind of meet the needs and going through the process. And we understood that there was going to be some disruption in quantifying that. It’s variable. And so I think we’ve done the best we can to kind of help monitor that and mitigate it where appropriate. And understand it’s kind of a necessary temporary commitment to a broader strategy to bolster the overall performance for the company through the change in relationship to, again, to the seven new operators and kind of the information that we provided supporting the benefit of that.

I think the latter part of your question with why now, I mean, this was really a decision through AlerisLife and its business needs. And I think kind of looking at various options supporting a go-forward, management on that side has done an amazing job turning around performance. And I think that’s reflected in kind of the multi-year improvement for DHC when you look at AlerisLife managed communities relative to the other operators. They’ve outperformed. And given where SHOP is today, they felt like strategically it was the best benefit and value proposition for the company. And then certainly with DHC being a 34% owner. There’s inherent benefits for that. And we’ve talked about what a lot of those things are, including the diversification and operators. It cleans up the story for DHC without an affiliation.

And I think strategically, it positions us to be kind of a better partner with the new operators and to grow our overall performance as we head into 2026 and future years.

John Massocca, Analyst, B. Riley Securities: Okay. Sticking with the SHOP portfolio. I know you kind of gave the updated guidance on the NOI, but are you still expecting occupancy to be in the 82%-83% range by year-end?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yes.

John Massocca, Analyst, B. Riley Securities: And then any kind of. I guess maybe pulls on the revenue side you’ve seen from the transition, just any kind of temporary disruption there, or has that largely been unaffected by these operator transitions?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Look, it’s difficult to kind of quantify the top line with respect to where there may have been disruption or not in the sales process. I mean, certainly you’re seeing in our results that top line performance is trending favorably. Really, the impact to the quarterly performance is on the expense side. But there’s likely some disruption. We think going forward as the transitions are complete, and as Matt noted, we’re largely through those in October. I think all but a handful will wrap up towards mid-November. That clearly will provide a lot of a better runway, if you will, to avoid any other noise with respect to a transition and focus solely on operations. So again, hard to quantify, probably some impact. As we get to mid-November, that’ll be behind us.

John Massocca, Analyst, B. Riley Securities: Okay. And then anything else to call out on the SHOP operating expense side that was maybe unrelated to these transitions that increased in the quarter versus in 2Q or in 1Q?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: No. The major headline was clearly the $5.1 million of elevated comp costs. We did have about a $2.5 million increase sequentially on utilities that was expected, and we highlighted that on our Q2 earnings call. But those are the major drivers.

John Massocca, Analyst, B. Riley Securities: Okay. And then switching gears to the disposition activity, can you maybe provide a little more color on the items in the pipeline today? How close are those to closing? Do you expect that entire pipeline to close by year-end? And I guess maybe what are the variables that could cause some of those to slip into 2026 or maybe fall out of the pipeline, if at all?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah. We do expect a small portion of the highlighted dispositions will close in Q1 2026. That’s primarily on the SHOP side. There’s about 13 communities as part of kind of a portfolio transaction. But just over $200 million is expected to close for the balance of this quarter. And that’s a combination of MOB and kind of select SHOP assets. I think the risk with that, I think, is minimal at this stage. I think a lot of what we see today are the closing periods are within the year for the most part. And so we feel pretty good about being in a position to achieve a lion’s share of that number this year. So again, close to $200 million for the balance of this year. And then again, there will be some dispositions that will fall into next year.

John Massocca, Analyst, B. Riley Securities: Okay. And then I think with the disposition activity, as it seems to be closing, you would have maybe a little bit of excess capital, but I guess it depends on how much kind of cash you want to leave on hand. I mean, is there any potential to pay down additional debt with disposition activity completed in 2025 beyond that debt maturing in 2026? Or is that more likely to stay as kind of dry powder to deal with whatever comes next in 2026?

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Yeah. That would be left on the balance sheet as dry powder as we kind of turn our focus to offense. Our next debt maturity after the 2026s is in 2028. And the interest rate on that is 4.75%. So we’re better off leaving that debt on the balance sheet and increasing our cash position.

John Massocca, Analyst, B. Riley Securities: Okay. That’s it for me. Thank you very much for all the detail.

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Thanks.

Conference Operator: Once again, if you have a question, please press star then one. If there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Chris Bilotto for any closing remarks. Please go ahead.

Chris Bilotto, President and Chief Executive Officer, Diversified Healthcare Trust: Thank you. We would like to thank you all for joining our call today. And we look forward to meeting with many of you at the NAREIT Conference in Dallas in December. At that time, we will have substantially completed the SHOP operator transitions. And we plan to publish an updated investor presentation for the conference with additional color on our transition progress and supporting performance. Please reach out to investor relations if you’re interested in scheduling a call with DHC or meeting at NAREIT. Operator, that concludes our call.

Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You are now disconnected.

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