UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549 

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2021

OR 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

Commission File Number 1-15319 

DIVERSIFIED HEALTHCARE TRUST

(Exact Name of Registrant as Specified in Its Charter) 

Maryland	04-3445278
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code) 

617 - 796 - 8350

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title Of Each Class	Trading Symbol(s)	Name Of Each Exchange On Which Registered
Common Shares of Beneficial Interest	DHC	The Nasdaq Stock Market LLC
5.625% Senior Notes due 2042	DHCNI	The Nasdaq Stock Market LLC
6.25% Senior Notes due 2046	DHCNL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

Number of registrant's common shares outstanding as of November 1, 2021: 238,994,894

DIVERSIFIED HEALTHCARE TRUST

FORM 10-Q

September 30, 2021

INDEX

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and Nine Months Ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Shareholders' Equity — Three and Nine Months Ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2021 and 2020	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	47
	Warning Concerning Forward-Looking Statements	48
	Statement Concerning Limited Liability	53
PART II	Other Information	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6.	Exhibits	54
	Signatures	56

References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Diversified Healthcare Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

PART I.  Financial Information

Item 1.  Financial Statements.

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

(unaudited)

	September 30,		December 31,
	2021		2020
Assets
Real estate properties:
Land	$	793,555	$	789,125
Buildings and improvements	6,760,990		6,621,605
Total real estate properties, gross	7,554,545		7,410,730
Accumulated depreciation	(1,841,172)		(1,694,901)
Total real estate properties, net	5,713,373		5,715,829
Assets of properties held for sale	—		112,437
Cash and cash equivalents	794,739		74,417
Restricted cash	16,698		16,432
Acquired real estate leases and other intangible assets, net	252,629		286,513
Other assets, net	288,609		270,796
Total assets	$	7,066,048	$	6,476,424
Liabilities and Equity
Revolving credit facility	$	800,000	$	—
Term loan, net	—		199,049
Senior unsecured notes, net	2,805,154		2,608,189
Secured debt and finance leases, net	689,044		691,573
Liabilities of properties held for sale	—		3,525
Accrued interest	47,234		23,772
Assumed real estate lease obligations, net	61,335		67,830
Other liabilities	253,624		263,264
Total liabilities	4,656,391		3,857,202
Commitments and contingencies
Equity:
Equity attributable to common shareholders:
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 238,995,435 and 238,268,478 shares issued and outstanding, respectively	2,390		2,383
Additional paid in capital	4,615,162		4,613,904
Cumulative net income	1,722,039		1,913,109
Cumulative distributions	(4,040,709)		(4,033,559)
Total equity attributable to common shareholders	2,298,882		2,495,837
Noncontrolling interest:
Total equity attributable to noncontrolling interest	110,775		123,385
Total equity	2,409,657		2,619,222
Total liabilities and equity	$	7,066,048	$	6,476,424

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Rental income	$	101,403	$	104,238	$	306,555	$	320,943
Residents fees and services	236,013		290,101		739,926		926,174
Total revenues	337,416		394,339		1,046,481		1,247,117
Expenses:
Property operating expenses	266,073		315,650		818,096		934,150
Depreciation and amortization	68,702		67,211		202,743		204,466
General and administrative	8,870		6,988		25,538		23,132
Acquisition and certain other transaction related costs	3,108		53		15,179		803
Impairment of assets	—		64,202		(174)		106,611
Total expenses	346,753		454,104		1,061,382		1,269,162
Gain (loss) on sale of properties	200		(211)		30,838		2,403
Gains and losses on equity securities, net	(14,755)		12,510		(26,943)		14,541
Interest and other income	976		134		19,849		8,008
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $3,948, $2,448, $9,777 and $5,574, respectively)	(64,493)		(58,091)		(192,241)		(143,715)
Gain on lease termination	—		—		—		22,896
Loss on early extinguishment of debt	—		—		(2,410)		(427)
Loss from continuing operations before income tax expense	(87,409)		(105,423)		(185,808)		(118,339)
Income tax expense	(595)		(365)		(1,024)		(1,048)
Net loss	(88,004)		(105,788)		(186,832)		(119,387)
Net income attributable to noncontrolling interest	(1,339)		(1,100)		(4,238)		(3,838)
Net loss attributable to common shareholders	$	(89,343)	$	(106,888)	$	(191,070)	$	(123,225)
Weighted average common shares outstanding (basic)	238,008		237,752		237,905		237,707
Weighted average common shares outstanding (diluted)	238,008		237,752		237,905		237,707
Per common share amounts (basic and diluted):
Net loss attributable to common shareholders	$	(0.38)	$	(0.45)	$	(0.80)	$	(0.52)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(dollars in thousands)

(unaudited)

	Number of Shares	Common Shares		Additional Paid In Capital		Cumulative Net Income		Cumulative Distributions		Total Equity Attributable to Common Shareholders		Total Equity Attributable to Noncontrolling Interest		Total Equity
Balance at December 31, 2020:	238,268,478	$	2,383	$	4,613,904	$	1,913,109	$	(4,033,559)	$	2,495,837	$	123,385	$	2,619,222
Net (loss) income	—	—		—		(67,505)		—		(67,505)		1,322		(66,183)
Distributions	—	—		—		—		(2,383)		(2,383)		—		(2,383)
Share grants	—	—		228		—		—		228		—		228
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,694)		(5,694)
Balance at March 31, 2021:	238,268,478	2,383		4,614,132		1,845,604		(4,035,942)		2,426,177		119,013		2,545,190
Net (loss) income	—	—		—		(34,222)		—		(34,222)		1,577		(32,645)
Distributions	—	—		—		—		(2,383)		(2,383)		—		(2,383)
Share grants	120,000	1		675		—		—		676		—		676
Share repurchases	(13,906)	—		(59)		—		—		(59)		—		(59)
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,630)		(5,630)
Balance at June 30, 2021:	238,374,572	2,384		4,614,748		1,811,382		(4,038,325)		2,390,189		114,960		2,505,149
Net (loss) income	—	—		—		(89,343)		—		(89,343)		1,339		(88,004)
Distributions	—	—		—		—		(2,384)		(2,384)		—		(2,384)
Share grants	718,000	7		738		—		—		745		—		745
Share repurchases	(94,937)	(1)		(321)		—		—		(322)		—		(322)
Share forfeitures	(2,200)	—		(3)		—		—		(3)		—		(3)
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,524)		(5,524)
Balance at September 30, 2021:	238,995,435	$	2,390	$	4,615,162	$	1,722,039	$	(4,040,709)	$	2,298,882	$	110,775	$	2,409,657

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

(dollars in thousands)

(unaudited)

	Number of Shares	Common Shares		Additional Paid In Capital		Cumulative Net Income		Cumulative Distributions		Total Equity Attributable to Common Shareholders		Total Equity Attributable to Noncontrolling Interest		Total Equity
Balance at December 31, 2019:	237,897,163	$	2,379	$	4,612,511	$	2,052,562	$	(3,930,933)	$	2,736,519	$	140,531	$	2,877,050
Net income	—	—		—		9,735		—		9,735		1,408		11,143
Distributions	—	—		—		—		(35,684)		(35,684)		—		(35,684)
Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock	—	—		—		—		(59,801)		(59,801)		—		(59,801)
Share grants	—	—		249		—		—		249		—		249
Share repurchases	(3,438)	—		(21)		—		—		(21)		—		(21)
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,767)		(5,767)
Balance at March 31, 2020:	237,893,725	2,379		4,612,739		2,062,297		(4,026,418)		2,650,997		136,172		2,787,169
Net (loss) income	—	—		—		(26,072)		—		(26,072)		1,330		(24,742)
Distributions	—	—		—		—		(2,379)		(2,379)		—		(2,379)
Share grants	60,000	1		415		—		—		416		—		416
Share repurchases	(1,757)	—		(8)		—		—		(8)		—		(8)
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,616)		(5,616)
Balance at June 30, 2020:	237,951,968	2,380		4,613,146		2,036,225		(4,028,797)		2,622,954		131,886		2,754,840
Net (loss) income	—	—		—		(106,888)		—		(106,888)		1,100		(105,788)
Distributions	—	—		—		—		(2,380)		(2,380)		—		(2,380)
Share grants	360,000	3		503		—		—		506		—		506
Share repurchases	(42,180)	—		(142)		—		—		(142)		—		(142)
Share forfeitures	(1,310)	—		(6)		—		—		(6)		—		(6)
Distributions to noncontrolling interest	—	—		—		—		—		—		(5,324)		(5,324)
Balance at September 30, 2020:	238,268,478	$	2,383	$	4,613,501	$	1,929,337	$	(4,031,177)	$	2,514,044	$	127,662	$	2,641,706

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(186,832)	$	(119,387)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Depreciation and amortization	202,743		204,466
Net amortization of debt premiums, discounts and issuance costs	9,777		5,574
Straight line rental income	(3,804)		(3,029)
Amortization of acquired real estate leases	(5,563)		(5,559)
Loss on early extinguishment of debt	2,410		51
Gain on lease termination	—		(22,896)
Impairment of assets	(174)		106,611
Gain on sale of properties	(30,838)		(2,403)
Gains and losses on equity securities, net	26,943		(14,541)
Other non-cash adjustments, net	(1,183)		(1,662)
Change in assets and liabilities:
Deferred leasing costs, net	(11,736)		(5,522)
Other assets	(29,227)		(35,417)
Accrued interest	23,462		29,604
Other liabilities	(9,176)		23,089
Net cash (used in) provided by operating activities	(13,198)		158,979
Cash flows from investing activities:
Real estate acquisitions and deposits	—		(2,526)
Real estate improvements	(126,142)		(118,141)
Proceeds from sale of properties, net	103,257		78,244
Distributions in excess of earnings from Affiliates Insurance Company	—		287
Net cash used in investing activities	(22,885)		(42,136)
Cash flows from financing activities:
Proceeds from issuance of senior unsecured notes, net	492,500		985,000
Proceeds from borrowings on revolving credit facility	800,000		430,500
Repayments of borrowings on revolving credit facility	—		(968,000)
Repayment of senior unsecured notes	(300,000)		(200,000)
Repayment of term loan	(200,000)		(250,000)
Repayment of other debt	(2,349)		(5,189)
Loss on early extinguishment of debt settled in cash	—		(376)
Payment of debt issuance costs	(9,101)		(5,306)
Repurchase of common shares	(381)		(171)
Distributions to noncontrolling interest	(16,848)		(16,707)
Distributions to shareholders	(7,150)		(40,443)
Net cash provided by (used in) financing activities	756,671		(70,692)
Increase in cash and cash equivalents and restricted cash	720,588		46,151
Cash and cash equivalents and restricted cash at beginning of period	90,849		52,224
Cash and cash equivalents and restricted cash at end of period	$	811,437	$	98,375

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

DIVERSIFIED HEALTHCARE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2021		2020
Supplemental cash flow information:
Interest paid	$	160,091	$	109,689
Income taxes paid	$	1,985	$	381
Non-cash investing activities:
Five Star Senior Living Inc. common stock	$	—	$	97,896
Restructuring transaction additional consideration	$	—	$	(75,000)
Real estate improvements accrued, not paid	$	15,751	$	21,342
Capitalized interest	$	1,089	$	1,152
Non-cash financing activities:
Distribution to common shareholders of the right to receive Five Star Senior Living Inc. common stock	$	—	$	(59,801)

Supplemental disclosure of cash and cash equivalents and restricted cash:

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within our condensed consolidated balance sheets to the amount shown in our condensed consolidated statements of cash flows:

	As of September 30,
	2021		2020
Cash and cash equivalents	$	794,739	$	82,241
Restricted cash (1)	16,698		16,134
Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows	$	811,437	$	98,375

(1) Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and cash held for the operations of the life science property that is owned in a joint venture arrangement in which we own a 55% equity interest.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

Note 1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Diversified Healthcare Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our Annual Report.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets.

We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other governmental audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, the defense and resolution of these claims, lawsuits, and regulatory and other governmental audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 450, Contingencies, or ASC 450. Under ASC 450, loss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; and then, as information becomes known, the minimum loss amount is updated, as appropriate. A minimum or best estimate amount may be increased or decreased when events result in a changed expectation.

We are party to a joint venture arrangement with an institutional investor. This joint venture arrangement owns a life science property located in Boston, Massachusetts. The investor owns a 45% equity interest in the joint venture, and we own the remaining 55% equity interest in the joint venture. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the FASB Accounting Standards Codification. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE's economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $935,340 and $970,142 as of September 30, 2021 and December 31, 2020, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $690,714 and $697,129 as of September 30, 2021 and December 31, 2020, respectively, and consist primarily of mortgage debts secured by the property. The investor's interest in this consolidated entity is reflected as a noncontrolling interest in our condensed consolidated financial statements. See Note 6 for further information about this joint venture.

Note 2.  Real Estate Properties

As of September 30, 2021, we owned 392 properties located in 36 states and Washington, D.C., including one life science property owned in a joint venture arrangement in which we own a 55% equity interest.

We regularly evaluate our assets for indicators of impairment. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected assets by

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

comparing it to the expected future cash flows to be generated from those assets. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.

During the nine months ended September 30, 2021, we recorded a reversal of impairment charges of $174 related to the estimated costs to sell 10 senior living communities that were classified as held for sale as of December 31, 2020 and changed the status of those communities from held for sale to held and used as of March 31, 2021.

Acquisitions and Dispositions:

During the nine months ended September 30, 2021, we sold five properties for an aggregate sales price of $104,500, excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions, individually or in the aggregate, and we do not believe these sales represent a strategic shift in our business. As a result, the results of operations for these properties are included in continuing operations through the date of sale of such properties in our condensed consolidated statements of comprehensive income (loss).

Date of Sale	Location	Type of Property	Number of Properties	Square Feet	Sales Price (1)		Gain (Loss) on Sale
February 2021	Pennsylvania	Medical Office	1	92,000	$	9,000	$	(122)
April 2021	Florida	Life Science and Medical Office	4	263,656	95,500		30,760
			5		$	104,500	$	30,638

(1)Sales price excludes closing costs.

During the nine months ended September 30, 2021, we recognized a gain of $200 related to the sales of skilled nursing bed licenses at certain of our senior living communities.

Note 3.  Leases

We are a lessor of medical office and life science properties, senior living communities and other healthcare related properties. Our leases provide our tenants with the contractual right to use and economically benefit from all of the premises demised under the leases; therefore, we have determined to evaluate our leases as lease arrangements.

Certain of our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term.

We increased rental income to record revenue on a straight line basis by $1,679 and $491 for the three months ended September 30, 2021 and 2020, respectively, and $3,804 and $3,029 for the nine months ended September 30, 2021 and 2020, respectively. Rents receivable, excluding receivables related to our properties classified as held for sale, if any, include $108,180 and $104,803 of straight line rent receivables at September 30, 2021 and December 31, 2020, respectively, and are included in other assets, net in our condensed consolidated balance sheets.

We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $17,930 and $18,501 for the three months ended September 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $17,875 and $18,550, respectively, and $54,634 and $56,792 for the nine months ended September 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $54,495 and $56,742, respectively.

Certain of our tenants requested relief from their obligations to pay rent due to us in response to the current economic conditions resulting from the COVID-19 pandemic. In most cases, these tenants granted deferrals were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020. As of September 30, 2021 and December 31, 2020, deferred payments totaling $84 and $1,486, respectively, are included in other assets, net in our condensed consolidated

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

balance sheets. These deferred amounts did not negatively impact our operating results for the three or nine months ended September 30, 2021 or 2020.

Right of Use Asset and Lease Liability. For leases where we are the lessee, we recognized a right of use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and the right of use asset being amortized over the term of the lease. The values of the right of use asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $4,174 and $4,366, respectively, as of September 30, 2021, and $4,237 and $4,410, respectively, as of December 31, 2020. The right of use asset and related lease liability are included within other assets, net and other liabilities, respectively, within our condensed consolidated balance sheets. In addition, we lease equipment at certain of our managed senior living communities. These leases are short term in nature, are cancelable with no fee or do not result in an annual expense in excess of our capitalization policy and, as a result, are not recorded on our condensed consolidated balance sheets.

Note 4.  Indebtedness

Our principal debt obligations at September 30, 2021 were: (1) outstanding borrowings under our $800,000 revolving credit facility; (2) $2,850,000 outstanding principal amount of senior unsecured notes; and (3) $683,008 aggregate principal amount of mortgage notes secured by seven properties, of which $620,000 is related to the life science property owned by a joint venture arrangement in which we own a 55% equity interest. These seven mortgaged properties had a gross book value of $948,813 at September 30, 2021. We also had two properties subject to finance leases with lease obligations totaling $6,937 at September 30, 2021; these two properties had gross book value and accumulated depreciation of $36,319 and $18,014, respectively, at September 30, 2021, and $35,676 and $17,579, respectively, at December 31, 2020, and the finance leases expire in 2026.

We have a $800,000 revolving credit facility that is available for general business purposes. As of September 30, 2021, the maturity date of our revolving credit facility was January 2022. In October 2021, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2023. Subject to the payment of an extension fee and meeting other conditions, we have an additional option to extend the maturity date of the facility by one year to January 2024. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of September 30, 2021, our revolving credit facility required interest to be paid on borrowings at the annual rate of 2.9%, plus a facility fee of 30 basis points per annum on the total amount of lending commitments under the facility.

The weighted average annual interest rates for borrowings under our revolving credit facility were 2.9% and 2.6% for the three months ended September 30, 2021 and 2020, respectively, and 2.9% and 2.2% for the nine months ended September 30, 2021 and 2020, respectively. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. On March 31, 2021, we borrowed $800,000 under our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility in light of continued uncertainties related to the COVID-19 pandemic. As of September 30, 2021 and November 1, 2021, we were fully drawn under our revolving credit facility.

In February 2021, we issued $500,000 aggregate principal amount of our 4.375% senior notes due 2031 in an underwritten public offering raising net proceeds of $491,357, after deducting estimated offering expenses and underwriters' discounts. These notes are guaranteed by all of our subsidiaries, except for certain excluded subsidiaries, including pledged subsidiaries under the agreement governing our revolving credit facility, or our credit agreement, and require semi-annual interest payments through maturity. We used the net proceeds from this offering to prepay in full in February 2021 our $200,000 term loan which was scheduled to mature in September 2022. The weighted average interest rate under our $200,000 term loan was 2.9% for the period from January 1, 2021 to February 7, 2021 and 2.7% for each of the three and nine months ended September 30, 2020. As a result of the prepayment of our $200,000 term loan, we recorded a loss on early extinguishment of debt of $1,477 for the nine months ended September 30, 2021. In June 2021, we used the remaining net proceeds from this offering and cash on hand to redeem all of our outstanding 6.75% senior notes due 2021 for a redemption price equal to the principal amount of $300,000 plus accrued and unpaid interest of $10,125, when these notes became redeemable with no prepayment premium. In connection with this redemption, we recorded a loss on early extinguishment of debt of $370 for the nine months ended September 30, 2021.

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

In January 2021, we and our lenders amended the agreements governing our revolving credit facility and our $200,000 term loan, or collectively, our credit and term loan agreements, in order to provide us with certain flexibility in light of continued uncertainties related to the COVID-19 pandemic. Pursuant to the amendments:

•certain of the financial covenants under our credit and term loan agreements, including covenants that require us to maintain certain financial ratios, have been waived through June 2022, or the Amendment Period;

•the revolving credit facility commitments have been reduced from $1,000,000 to $800,000, and as a result of the reduction in commitments, we recorded a loss on early extinguishment of debt of $563 for the nine months ended September 30, 2021;

•we pledged certain equity interests of subsidiaries owning properties to secure our obligations under our credit and term loan agreements and agreed to provide, and as of September 2021 had provided, first mortgage liens on 61 medical office and life science properties with an aggregate gross book value of real estate assets of $991,074 as of September 30, 2021 to secure our obligations, which pledges and/or mortgage liens may be removed or new ones may be added during the Amendment Period based on outstanding debt amounts, among other things;

•we had the ability to fund $250,000 of capital expenditures per year, which increased to $350,000 per year following the repayment of our term loan in February 2021, and are restricted in our ability to acquire real property as defined in our credit agreement;

•the interest rate premium over LIBOR under our revolving credit facility and term loan increased by 30 basis points;

•certain covenants and restrictions on distributions to common shareholders, share repurchases, capital expenditures, acquiring additional properties and incurring additional indebtedness (in each case subject to various exceptions), and the minimum liquidity requirement of $200,000 will remain in place during the Amendment Period; and

•we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions, and debt financings to the repayment of any amounts outstanding under our revolving credit facility.

In September 2021, we and our lenders further amended our credit agreement. Among other things, the amendment sets forth the mechanics for establishing a replacement benchmark rate under our credit agreement at such time as LIBOR is no longer available to calculate interest payable on amounts outstanding thereunder.

Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our credit agreement restricts our ability to make distributions under certain circumstances. As of September 30, 2021, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our revolving credit facility and our public debt covenants as the effects of the COVID-19 pandemic continued to adversely impact our operations. We are not allowed to incur additional debt while this ratio is below 1.5x on a pro forma basis. We believe we were in compliance with the remaining terms and conditions of the respective covenants under our credit agreement and our senior unsecured notes indentures and their supplements at September 30, 2021. Although we have taken steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from the COVID-19 pandemic may cause increased pressure on our ability to satisfy financial and other covenants. Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions. If our operating results and financial condition are significantly negatively impacted by economic conditions or otherwise, we may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants.

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

Note 5.  Fair Value of Assets and Liabilities

The following table presents certain of our assets that are measured at fair value at September 30, 2021, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.

			Fair Value at Reporting Date Using
			Quoted Prices in  Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements Assets:
Investment in Five Star (1)	$	46,829	$	46,829	$	—	$	—

(1)Our 10,691,658 shares of common stock of Five Star Senior Living Inc., or Five Star, are included in other assets, net in our condensed consolidated balance sheets, and are reported at fair value, which is based upon quoted market prices on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs). Our adjusted cost basis for these shares was $44,448 as of September 30, 2021. During the three months ended September 30, 2021 and 2020, we recorded an unrealized loss of $14,755 and an unrealized gain of $12,510, respectively, and during the nine months ended September 30, 2021 and 2020, we recorded an unrealized loss of $26,943 and an unrealized gain of $14,541, respectively, which are included in gains and losses on equity securities, net in our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our investment in Five Star common shares to their fair value. See Note 11 for further information about our investment in Five Star.

In addition to the assets described in the table above, our financial instruments at September 30, 2021 and December 31, 2020 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loan, senior unsecured notes, secured debt and finance leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows:

	As of September 30, 2021				As of December 31, 2020
Description	Carrying Amount (1)		Estimated Fair Value		Carrying Amount (1)		Estimated Fair Value
Senior unsecured notes, 6.750% coupon rate, due 2021	$	—	$	—	$	299,273	$	303,891
Senior unsecured notes, 4.750% coupon rate, due 2024	249,278		258,096		249,068		256,258
Senior unsecured notes, 9.750% coupon rate, due 2025	987,017		1,094,415		984,359		1,135,800
Senior unsecured notes, 4.750% coupon rate, due 2028	491,881		505,630		490,925		502,648
Senior unsecured notes, 4.375% coupon rate, due 2031	491,913		485,743		—		—
Senior unsecured notes, 5.625% coupon rate, due 2042	342,088		337,540		341,802		330,120
Senior unsecured notes, 6.250% coupon rate, due 2046	242,977		250,300		242,762		245,000
Secured debts (2) (3)	689,044		707,026		691,573		716,185
	$	3,494,198	$	3,638,750	$	3,299,762	$	3,489,902

(1)Includes unamortized net debt issuance costs, premiums and discounts.

(2)We assumed certain of these secured debts in connection with our acquisition of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage notes to adjust interest expense to the estimated market interest rates as of the date of acquisition.

(3)Includes secured debts for the life science property owned by a joint venture arrangement in which we own a 55% equity interest. The amounts listed in the table for these debts have not been adjusted to reflect the equity interests in the joint venture that we do not own.

We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of September 30, 2021. We estimated the fair values of our four issuances of senior unsecured notes due 2024, 2025, 2028 and 2031 using an average of the bid and ask price on Nasdaq on or about September 30, 2021

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DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

(Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values.

Note 6. Noncontrolling Interest

We are party to a joint venture arrangement with an institutional investor for one of our life science properties located in Boston, Massachusetts. The investor owns a 45% equity interest in the joint venture, and we own the remaining 55% equity interest in the joint venture. We continue to control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,339 and $1,100 for the three months ended September 30, 2021 and 2020, respectively, and $4,238 and $3,838 for the nine months ended September 30, 2021 and 2020, respectively, is reported as a noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). The joint venture made aggregate cash distributions to the other joint venture investor of $5,524 and $5,324 for the three months ended September 30, 2021 and 2020, respectively, and $16,848 and $16,707 for the nine months ended September 30, 2021 and 2020, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of September 30, 2021, this joint venture held real estate assets with an aggregate net book value of $690,382, subject to mortgage notes of $620,000.

In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligations to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.

Note 7.  Shareholders' Equity

Common Share Awards:

On June 3, 2021, in accordance with our Trustee compensation arrangements, we awarded to each of our six Trustees 20,000 of our common shares, valued at $3.70 per share, the closing price of our common shares on Nasdaq on that day.

On September 15, 2021, we awarded under our equity compensation plan an aggregate of 718,000 of our common shares, valued at $3.41 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC.

Common Share Repurchases:

During the three and nine months ended September 30, 2021, we purchased an aggregate of 94,937 and 108,843 of our common shares, respectively, valued at a weighted average share price of $3.39 and $3.49 per share, respectively, from our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

Distributions:

During the nine months ended September 30, 2021, we declared and paid quarterly distributions to common shareholders as follows:

Declaration Date	Record Date	Payment Date	Distribution Per Share		Total Distributions
January 14, 2021	January 25, 2021	February 18, 2021	$	0.01	$	2,383
April 15, 2021	April 26, 2021	May 20, 2021	0.01		2,383
July 15, 2021	July 26, 2021	August 19, 2021	0.01		2,384
			$	0.03	$	7,150

12

DIVERSIFIED HEALTHCARE TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except