DIVERSIFIED HEALTHCARE TRUST 10-Q

Item 4. Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 47 Table of Contents Warning Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including: • The duration and severity of the COVID-19 pandemic and its impact on us and our tenants', managers' and operators' businesses, including the ability of our tenants and senior living community residents to pay rent to us, • Our ability to pay distributions to our shareholders and to sustain the amount of such distributions, • The ability of our senior living community managers to minimize the negative impact from the COVID-19 pandemic on our senior living communities and to manage them profitably and increase our returns, • Our belief that we are well positioned to weather the present disruptions facing the real estate industry and, in particular, the real estate healthcare industry, including the senior living industry, • Our belief that the healthcare sector and many of our tenants, managers and operators provide essential services across the United States and the implication that our and our tenants', managers' and operators' businesses will remain open to provide such essential services, • Our expectations regarding the quality and future performance of the new third party managers of the senior living communities we have recently transitioned from Five Star and the senior living communities we expect to transition from Five Star, and our expectation that we will complete the transition of all 107 communities from Five Star to new third party managers by December 31, 2021, • Whether the aging U.S. population and increasing life spans of seniors will increase the demand for senior living communities and other medical and healthcare related properties and healthcare services, • Our ability to retain our existing tenants, attract new tenants and maintain or increase current rental rates on terms as favorable to us as our prior leases, • The credit qualities of our tenants, • Our ability to compete for tenancies and acquisitions effectively, • Our potential receipt of any additional funding under the CARES Act, • Our expectation that our redevelopment projects will be completed on budget and by the estimated completion dates, • Our acquisitions and sales of properties, • Our closures of senior living communities, • Our ability to raise debt or equity capital, • Our ability to complete dispositions, • The future availability of borrowings under our revolving credit facility, • Our policies and plans regarding investments, financings and dispositions, • Whether we may contribute additional properties to our joint venture and receive proceeds from the other investors in the joint venture in connection with those contributions, • Our ability to pay interest on and principal of our debt, 48 Table of Contents • Our ability to appropriately balance our use of debt and equity capital, • Our credit ratings, • Our expectation that we benefit from our relationships with RMR LLC, • Our qualification for taxation as a REIT, and • Other matters. Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO attributable to common shareholders, Normalized FFO attributable to common shareholders, NOI, cash flows, liquidity and prospects include, but are not limited to: • The impacts of the COVID-19 pandemic and its aftermath on us and our tenants', managers' and operators' businesses, • The impact of conditions in the economy and the capital markets on us and our tenants, managers and operators, • Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters, • Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes, • Competition within the healthcare and real estate industries, particularly in those markets in which our properties are located, • Actual and potential conflicts of interest with our related parties, including our Managing Trustees, Five Star, RMR LLC and others affiliated with them, and • Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control. For example: • Under the current economic conditions for the industries in which our properties and businesses operate, our tenants, managers and operators may not be able to profitably operate their businesses at our properties, our tenants may become unable or unwilling to pay rent owed to us, or the managers or operators of our senior living communities may be unable to generate our minimum returns for sustained periods as a result of the COVID-19 pandemic or otherwise. Additionally, our ability to borrow under our credit facility is subject to us satisfying financial and other covenants, and if we default under our credit facility or other debt obligations due to the impacts of the COVID-19 pandemic or otherwise, we may be required to repay our outstanding borrowings and other debt. Further, although we have taken steps to enhance our ability to maintain sufficient liquidity, unanticipated events, such as emergencies in addition to, or as an expansion of, the current impacts of the COVID-19 pandemic, may require us to expend amounts not currently planned, • This Quarterly Report on Form 10-Q states that vaccination clinics at senior living communities in our SHOP segment have been completed; however, even though vaccinations have been administered, the senior living industry may not recover to pre-pandemic levels for an extended period of time or at all if market preferences and practices result in older adults utilizing less services of the type offered at our communities, • Some of our senior living community managers have experienced, and others may experience, operating and financial challenges resulting from a number of factors, some of which are beyond their control, and which challenges impact our operating results from our managed senior living communities, including, but not limited to: • The impact of conditions in the economy and the capital markets on our senior living community managers and their residents, clients and other customers, 49 Table of Contents • Competition within the senior living and other health and wellness related services businesses, • Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services from our senior living community managers, • Increases in our senior living community managers' labor costs or in costs they pay for goods and services, due in part to supply chain constraints and commodity price inflation, • Increases in tort and insurance liability costs, • Our senior living community managers' operating and debt leverage, • Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations, • Delays or nonpayment of government payments to our senior living community managers, • Compliance with, and changes to, federal, state and local laws and regulations that could affect our senior living community managers' services or impose requirements, costs and administrative burdens that may reduce our managers' ability to profitably operate their businesses, • Our senior living community managers' exposure to litigation and regulatory and government proceedings due to the nature of their businesses, including adverse determinations resulting from government reviews, audits and investigations and unanticipated costs to comply with legislative or regulatory developments, and • Ongoing healthcare reform efforts, including continued efforts by third-party payers to reduce costs, • We may not be successful in transitioning the 107 senior living communities from Five Star to other third party managers by December 31, 2021 or at all, or in finding a redevelopment opportunity for the remaining senior living community, and the managers for those that we have transitioned or will transition may not be able to manage our senior living communities profitably or increase our returns, • We own a significant number of Five Star common shares and we expect to own these shares for the foreseeable future. However, we may sell some or all of our Five Star common shares, or our ownership interest in Five Star may otherwise be diluted in the future, • Our current cash distribution rate to common shareholders is $0.01 per share per quarter, or $0.04 per share per year, due to the operating challenges and uncertain economic challenges as a result of the COVID-19 pandemic. Our distribution rate may be set and reset from time to time by our Board of Trustees. Our Board of Trustees will consider many factors when setting or resetting our distribution rate, including our historical and projected net income, Normalized FFO, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our expected needs for and availability of cash to pay our obligations and other factors deemed relevant by our Board of Trustees in its discretion. Further, our projected cash available for distribution may change and may vary from our expectations. Accordingly, future distributions to our shareholders may be increased or decreased and we cannot be sure as to the rate at which future distributions will be paid, • Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our future earnings, the capital costs we incur to lease and operate our properties and our working capital requirements. We may be unable to pay our debt obligations or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated, • We may be unable to repay our debt obligations when they become due, • We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital, 50 Table of Contents • Subject to limitations on acquisitions in agreements governing our debt, we plan to selectively sell certain properties from time to time to fund future acquisitions, and to strategically update, rebalance and reposition our investment portfolio, which we refer to as our capital recycling program. In addition, to reduce our leverage, we have sold properties and other assets. We cannot be sure we will sell any of these properties or what the terms or timing of any such sales may be. In addition, in the case of our capital recycling program, we cannot be sure that we will acquire replacement properties that improve the quality of our portfolio or our ability to increase our distributions to shareholders, and, we may sell properties at prices that are less than expected and less than their carrying values and therefore incur losses, • Contingencies in our acquisition and sale agreements that we may enter may not be satisfied and any acquisitions and sales pursuant to such agreements and any related management arrangements we may expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change, • The capital investments we are making at our senior living communities and our plan to invest additional capital into our senior living communities to better position them in their respective markets in order to increase our future returns may not be successful and may not achieve our expected results. Our senior living communities may not be competitive, despite these capital investments, or these capital investments may be delayed due to the COVID-19 pandemic, • Our redevelopment projects may not be successful and may cost more or take longer to complete than we currently expect. In addition, we may not realize the returns we expect from these projects and we may incur losses from these projects, and any letters of intent we entered and may enter into to lease our redevelopment projects may not materialize, • We may spend more for capital expenditures than we currently expect, • Our existing joint venture and any other joint ventures that we may enter may not be successful, • Our tenants may experience losses and default on their rent obligations to us, • Some of our tenants may not renew expiring leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties, • Our ability to grow our business and maintain or increase our distributions to shareholders depends in large part upon our ability to buy properties and arrange for their profitable operation or lease them for rents, less their property operating expenses, that exceed our capital costs. We are currently generally prohibited from making acquisitions pursuant to our credit agreement during the Amendment Period. In addition, even after these restrictions expire, we may be unable to identify properties that we want to acquire, and we may fail to reach agreement with the sellers and complete the purchase of any properties we do want to acquire. In addition, we may not realize the returns we expect on any properties we acquire, • Rents that we can charge at our properties may decline upon renewals or expirations because of changing market conditions or otherwise, • Although we have obtained a waiver from compliance with certain financial covenants under our credit agreement through June 2022, if our operating results and financial condition are further adversely impacted by current economic conditions or otherwise, we may fail to comply with the terms of the waiver and other requirements under our credit agreement, and we may also fail to satisfy certain financial requirements under the agreements governing our public debt. For example, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our credit agreement and our public debt covenants as of September 30, 2021, and we cannot be certain how long this ratio will remain below 1.5x. We are prohibited from incurring additional debt while this ratio is below 1.5x on a pro forma basis, but are not required to repay outstanding debt as a result of failure to comply with this financial requirement. We are currently fully drawn under our revolving credit facility and could also be required to repay our outstanding debt in the event of non-compliance with certain other requirements of our credit agreement or the agreements governing our public debt. We may therefore experience future liquidity constraints, as we are prohibited from incurring additional debt under our credit agreement or otherwise for failure to comply with the requirements of our credit agreement and the agreements governing our public debt, and we will be limited to our cash on hand or be forced to raise additional sources of capital or take other measures to maintain adequate liquidity, 51 Table of Contents • Actual costs under our revolving credit facility or other floating rate debt will be higher than the stated rates because of fees and expenses associated with such debt, • We have an option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions; however, the applicable conditions may not be met, • The premiums used to determine the interest rate payable on our revolving credit facility and the facility fee payable on our revolving credit facility are based on our credit ratings, which are subject to change, • For the three months ended September 30, 2021, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources. This may imply that we will maintain or increase the percentage of our NOI generated from private resources at our senior living communities. However, our residents and patients may become unable to fund our charges with private resources and we may be required or may elect for business reasons to accept or pursue revenues from government sources, which could result in an increased part of our NOI and revenue being generated from government payments and our becoming more dependent on government payments. If the government fails to pay us or our tenants or managers amounts due to us or them because of government defaults, shutdowns, budgetary constraints or otherwise, we and they may be significantly negatively impacted, • Circumstances that adversely affect the ability of seniors or their families to pay for our managers' or operators' services, such as economic downturns, weak housing market conditions, higher levels of unemployment among our residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the profitability of our senior living communities, • It is difficult to accurately estimate tenant space preparation costs. Our unspent leasing related obligations may cost more or less and may take longer to complete than we currently expect, and we may incur increasing amounts for these and similar purposes in the future, • Our senior living communities are subject to extensive government regulation, licensure and oversight. Our operators sometimes experience deficiencies in the operation of our senior living communities and some of our communities may be prohibited from admitting new residents or our license to continue operations at a community may be revoked. Also, operating deficiencies or a license revocation at one or more of our senior living communities may have an adverse impact on our ability to obtain licenses for or attract residents to our other communities, • We believe that our relationships with our related parties, including Five Star and RMR LLC and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and • The business and property management agreements between us and RMR LLC have continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms. Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, new legislation or regulations affecting our business or the businesses of our tenants, managers or operators, changes in our tenants', managers' or operators' revenues or costs, worsening or lack of improvement of the financial condition or changes in our tenants', managers' or operators' financial conditions, deficiencies in operations by a tenant, manager or operator of one or more of our senior living communities, changed Medicare or Medicaid rates, acts of terrorism, pandemics, natural disasters, climate change or changes in capital markets or the economy generally. The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our other filings with the SEC are available on the SEC's website at www.sec.gov. You should not place undue reliance upon our forward-looking statements. Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise. 52 Table of Contents Statement Concerning Limited Liability The Amended and Restated Declaration of Trust establishing Diversified Healthcare Trust, dated September 20, 1999, as amended and supplemented, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Diversified Healthcare Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Diversified Healthcare Trust. All persons dealing with Diversified Healthcare Trust in any way shall look only to the assets of Diversified Healthcare Trust for the payment of any sum or the performance of any obligation. 53 Table of Contents PART II. Other Information Item 1A. Risk Factors. There have been no material changes to risk factors from those we previously disclosed in our Annual Report.