Diversified Healthcare Trust (NASDAQ:DHC) reported second-quarter results marked by higher senior housing profitability, continued occupancy and pricing gains, and reduced leverage, while reaffirming the full-year guidance it raised in June.
Normalized funds from operations totaled $39 million, or $0.16 per share, in the second quarter, while adjusted EBITDARE was $82 million. Consolidated net operating income rose 20.4% year over year to $84 million, according to President and Chief Executive Officer Chris Bilotto.
SHOP segment drives NOI growth
Bilotto said the company’s operator transitions, completed in late 2025, are beginning to produce benefits from more regional oversight and shared operating practices. However, management said occupancy growth and related revenue are tracking slightly below its initial 2026 expectations because of the timing required to rebuild local leadership, sales teams and operating infrastructure at transitioned communities.
“This isn’t a function in our view of hitting certain occupancy levels,” Bilotto said in response to an analyst question. “It’s just a delay in the timing of that ramp up.”
Management said the slower occupancy ramp is being offset by better-than-expected profitability per occupied unit. Higher-acuity care revenue, ancillary revenue and expense efficiencies have supported revenue per occupied room and expense performance.
Anthony Paula, vice president, said same-property SHOP occupancy increased 70 basis points sequentially during the quarter, while average monthly rates rose 100 basis points sequentially and 620 basis points year over year. In-property expense per occupied room declined 170 basis points from the first quarter and increased 150 basis points from the prior year.
The company cited new food-and-beverage procurement contracts among the cost-saving measures. Paula said those agreements are expected to produce annualized savings of $14 million to $16 million, including about $8 million expected to be recognized during 2026.
Second-quarter SHOP NOI also included about $1.5 million of one-time expense benefits related to timing of expense recognition and first-quarter overaccruals, CFO and Treasurer Matt Brown said. The benefit is not expected to recur in the third quarter.
New operator agreements and redevelopment plans
DHC is renegotiating contracts with its legacy SHOP operators, seeking to align them with the framework used for recently transitioned communities. The revised agreements are expected to include lower base fees, incentive fees tied to annual operational performance and tighter cost controls.
Bilotto said the agreements are expected to generate immediate annual cost savings of nearly $2 million before potential incentive-fee-related growth. The new contracts are expected to begin in January 2027 and cover the remainder of the portfolio outside of communities transitioned from the former AlerisLife arrangement.
The company also continues to pursue redevelopment opportunities at 16 SHOP communities, where closed skilled nursing wings or floors could be converted into independent living, assisted living and memory care units. DHC plans an initial investment of about $20 million at six communities to add roughly 150 units.
Construction on the initial phase is expected to begin later this year, with the first units scheduled to come online in the second half of 2027. Management expects the projects to generate unlevered returns in the mid-teens while converting carrying costs on closed space into revenue-producing units.
Medical office occupancy rises, known vacancies remain
In DHC’s medical office and life science portfolio, same-property occupancy increased 110 basis points year over year to 95.8%. The company completed approximately 477,000 square feet of new and renewal leasing during the quarter, with a 6.7% rent roll-up and a weighted-average lease term of 7.1 years.
Same-property NOI in the segment was $24.1 million, essentially unchanged from a year earlier. Brown said second-quarter rental revenue was affected by a one-time bad-debt charge of about $1 million that was unrelated to upcoming vacancies.
The company has three known tenant departures representing approximately 4.6% of the segment’s expiring annualized revenue. Two tenants vacated July 1, accounting for 3.5% of annualized revenue and 213,000 square feet, while another tenant is expected to leave Dec. 1. DHC plans to market one 150,000-square-foot property for sale and is marketing the other two properties for lease.
Guidance reaffirmed as leverage declines
DHC ended the quarter with $267 million of liquidity, including $117 million of cash and an undrawn $150 million secured revolving credit facility. Net debt to annualized adjusted EBITDARE declined to 7.1 times from 8.7 times a year earlier, helped by SHOP performance and more than $600 million of asset sales completed since the beginning of 2025.
Interest coverage improved to 2.2 times from 1.4 times in the prior-year period. The company’s next debt maturity is not until February 2028, Brown said.
The company reaffirmed its 2026 outlook:
- Total NOI of $307 million to $323 million.
- SHOP NOI of $185 million to $195 million.
- Adjusted EBITDARE of $300 million to $315 million.
- Normalized FFO of $0.56 to $0.62 per share.
While retaining its SHOP NOI forecast, DHC lowered its occupancy-growth assumption to 200 basis points and its revenue-growth assumption to 6.6%. It raised its average monthly rate growth assumption to 5.5% and reduced its operating expense growth assumption to 2.5%, reflecting stronger-than-expected cost controls.
Brown said SHOP NOI is tracking toward the high end of the company’s June guidance range, though DHC expects some third-quarter utility-cost seasonality. The company also reaffirmed recurring capital expenditure guidance of $100 million to $115 million for 2026.
Bilotto said DHC’s capital recycling program is substantially complete and that the company is focused on operations, deleveraging and internal investment opportunities. He added that the board reviews the dividend quarterly as the company evaluates options to enhance shareholder returns.
About Diversified Healthcare Trust (NASDAQ:DHC)
Diversified Healthcare Trust is a real estate investment trust (REIT) specializing in the acquisition, ownership and management of healthcare properties across the United States. The company focuses on assets that serve the senior housing and post-acute care sectors, including skilled nursing facilities, assisted living communities, memory care centers and medical office buildings. By partnering with experienced operators, Diversified Healthcare Trust aims to generate stable, long-term cash flows through triple-net leases and percentage rent structures tailored to each property type.
The company’s portfolio spans multiple states and encompasses a mix of single-tenant and multi-tenant properties.
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