DIVERSIFIED HEALTHCARE TRUST 10-Q

Item 1. Financial Statements. DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) (unaudited) September 30, December 31, 2022 2021 Assets Real estate properties: Land $ 668,908 $ 741,501 Buildings and improvements 5,927,958 6,072,055 Total real estate properties, gross 6,596,866 6,813,556 Accumulated depreciation ( 1,784,935 ) ( 1,737,807 ) Total real estate properties, net 4,811,931 5,075,749 Investments in unconsolidated joint ventures 159,476 215,127 Cash and cash equivalents 691,040 634,848 Restricted cash 109,765 382,097 Acquired real estate leases and other intangible assets, net 48,432 48,746 Other assets, net 251,842 266,947 Total assets $ 6,072,486 $ 6,623,514 Liabilities and Shareholders' Equity Revolving credit facility $ 700,000 $ 800,000 Senior unsecured notes, net 2,316,493 2,806,811 Secured debt and finance leases, net 40,936 69,713 Accrued interest 32,157 29,845 Assumed real estate lease obligations, net 1,205 2,556 Other liabilities 275,640 252,199 Total liabilities 3,366,431 3,961,124 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ .01 par value: 300,000,000 shares authorized, 239,704,493 and 238,994,894 shares issued and outstanding, respectively 2,397 2,390 Additional paid in capital 4,616,756 4,615,475 Cumulative net income 2,137,172 2,087,624 Cumulative distributions ( 4,050,270 ) ( 4,043,099 ) Total shareholders' equity 2,706,055 2,662,390 Total liabilities and shareholders' equity $ 6,072,486 $ 6,623,514 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents 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, 2022 2021 2022 2021 Revenues: Rental income $ 63,960 $ 101,403 $ 191,767 $ 306,555 Residents fees and services 258,960 236,013 754,914 739,926 Total revenues 322,920 337,416 946,681 1,046,481 Expenses: Property operating expenses 289,096 266,073 823,904 818,096 Depreciation and amortization 60,407 68,702 175,927 202,743 General and administrative 6,179 8,870 20,671 25,538 Acquisition and certain other transaction related costs 289 3,108 1,826 15,179 Impairment of assets — — — ( 174 ) Total expenses 355,971 346,753 1,022,328 1,061,382 (Loss) gain on sale of properties ( 5,044 ) 200 322,064 30,838 Losses on equity securities, net ( 2,674 ) ( 14,755 ) ( 21,384 ) ( 26,943 ) Interest and other income 4,099 976 6,760 19,849 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 1,908 , $ 3,948 , $ 6,698 and $ 9,777 , respectively) ( 46,936 ) ( 64,493 ) ( 160,042 ) ( 192,241 ) Loss on modification or early extinguishment of debt — — ( 30,043 ) ( 2,410 ) (Loss) income from continuing operations before income tax expense and equity in earnings of investees ( 83,606 ) ( 87,409 ) 41,708 ( 185,808 ) Income tax expense ( 13 ) ( 595 ) ( 845 ) ( 1,024 ) Equity in earnings of investees 2,127 — 8,685 — Net (loss) income ( 81,492 ) ( 88,004 ) 49,548 ( 186,832 ) Net income attributable to noncontrolling interest — ( 1,339 ) — ( 4,238 ) Net (loss) income attributable to common shareholders $ ( 81,492 ) $ ( 89,343 ) $ 49,548 $ ( 191,070 ) Weighted average common shares outstanding (basic and diluted) 238,344 238,008 238,231 237,905 Per common share amounts (basic and diluted): Net (loss) income attributable to common shareholders $ ( 0.34 ) $ ( 0.38 ) $ 0.21 $ ( 0.80 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents 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 Balance at December 31, 2021: 238,994,894 $ 2,390 $ 4,615,475 $ 2,087,624 $ ( 4,043,099 ) $ 2,662,390 Net income — — — 240,423 — 240,423 Distributions — — — — ( 2,390 ) ( 2,390 ) Share grants — — 318 — — 318 Share repurchases ( 1,698 ) — ( 5 ) — — ( 5 ) Share forfeitures ( 4,900 ) — ( 3 ) — — ( 3 ) Balance at March 31, 2022: 238,988,296 2,390 4,615,785 2,328,047 ( 4,045,489 ) 2,900,733 Net loss — — — ( 109,383 ) — ( 109,383 ) Distributions — — — — ( 2,390 ) ( 2,390 ) Share grants 140,000 1 668 — — 669 Share forfeitures ( 4,800 ) — ( 4 ) — — ( 4 ) Balance at June 30, 2022: 239,123,496 2,391 4,616,449 2,218,664 ( 4,047,879 ) 2,789,625 Net loss — — — ( 81,492 ) — ( 81,492 ) Distributions — — — — ( 2,391 ) ( 2,391 ) Share grants 707,000 7 470 — — 477 Share repurchases ( 122,403 ) ( 1 ) ( 159 ) — — ( 160 ) Share forfeitures ( 3,600 ) — ( 4 ) — — ( 4 ) Balance at September 30, 2022: 239,704,493 $ 2,397 $ 4,616,756 $ 2,137,172 $ ( 4,050,270 ) $ 2,706,055 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 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, 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. 4 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ 49,548 $ ( 186,832 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 175,927 202,743 Net amortization of debt premiums, discounts and issuance costs 6,698 9,777 Straight line rental income ( 7,193 ) ( 3,804 ) Amortization of acquired real estate leases 204 ( 5,563 ) Loss on modification or early extinguishment of debt 30,043 2,410 Impairment of assets — ( 174 ) Gain on sale of properties ( 322,064 ) ( 30,838 ) Losses on equity securities, net 21,384 26,943 Other non-cash adjustments, net ( 1,376 ) ( 1,183 ) Unconsolidated joint venture distributions 7,400 — Equity in earnings of investees ( 8,685 ) — Change in assets and liabilities: Deferred leasing costs, net ( 6,188 ) ( 11,736 ) Other assets 9,809 ( 29,227 ) Accrued interest 2,312 23,462 Other liabilities 5,233 ( 9,176 ) Net cash used in operating activities ( 36,948 ) ( 13,198 ) Cash flows from investing activities: Real estate acquisitions ( 75,105 ) — Real estate improvements ( 189,118 ) ( 126,142 ) Proceeds from sale of properties, net 822 103,257 Proceeds from sale of properties to joint venture, net 638,488 — Proceeds from sale of interest in joint venture, net 108,626 — Net cash provided by (used in) investing activities 483,713 ( 22,885 ) Cash flows from financing activities: Proceeds from issuance of senior unsecured notes, net — 492,500 Proceeds from borrowings on revolving credit facility — 800,000 Repayments of borrowings on revolving credit facility ( 100,000 ) — Redemption of senior unsecured notes ( 500,000 ) ( 300,000 ) Repayment of term loan — ( 200,000 ) Repayment of other debt ( 28,373 ) ( 2,349 ) Loss on early extinguishment of debt settled in cash ( 24,375 ) — Payment of debt issuance costs ( 2,821 ) ( 9,101 ) Repurchase of common shares ( 165 ) ( 381 ) Distributions to noncontrolling interest — ( 16,848 ) Distributions to shareholders ( 7,171 ) ( 7,150 ) Net cash (used in) provided by financing activities ( 662,905 ) 756,671 (Decrease) increase in cash and cash equivalents and restricted cash ( 216,140 ) 720,588 Cash and cash equivalents and restricted cash at beginning of period 1,016,945 90,849 Cash and cash equivalents and restricted cash at end of period $ 800,805 $ 811,437 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Nine Months Ended September 30, 2022 2021 Supplemental cash flow information: Interest paid $ 151,032 $ 160,091 Income taxes paid $ 905 $ 1,985 Non-cash investing activities: Decrease in assets resulting from the deconsolidation of investments that were previously consolidated: Real estate, net $ ( 355,669 ) $ — Real estate improvements accrued, not paid $ 24,218 $ 15,751 Capitalized interest $ — $ 1,089 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, 2022 2021 Cash and cash equivalents $ 691,040 $ 794,739 Restricted cash (1) 109,765 16,698 Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows $ 800,805 $ 811,437 (1) As of September 30, 2022, restricted cash consists of proceeds from the sale of joint venture interests and proceeds from the sale of properties to joint ventures held as collateral pursuant to the agreement governing our revolving credit facility, or our credit agreement. We may use these funds to pay for approved expenditures in accordance with our credit agreement. Restricted cash also consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties. Prior to the deconsolidation of the joint venture that owns a life science property located in Boston, Massachusetts, or the Seaport JV, restricted cash also consisted of cash held for the operations of this joint venture. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 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, 2021, 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 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. Note 2. Real Estate Investments As of September 30, 2022, we wholly owned 379 properties located in 36 states and Washington, D.C. and we owned an equity interest in each of two unconsolidated joint ventures that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet. Joint Venture Activities: As of September 30, 2022, we had equity investments in joint ventures as follows: Joint Venture DHC Ownership DHC Carrying Value of Investment at September 30, 2022 Number of Properties Location Square Feet Seaport Innovation LLC 10 % $ 108,395 1 MA 1,134,479 The LSMD Fund REIT LLC 20 % 51,081 10 CA, MA, NY, TX, WA 1,068,763 $ 159,476 11 2,203,242 7 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) The following table provides a summary of the mortgage debts of these joint ventures: Joint Venture Coupon Rate Maturity Date Principal Balance at September 30, 2022 (1) Mortgage Notes Payable (secured by one property in Massachusetts) (2) 3.53 % 8/6/2026 $ 620,000 Mortgage Notes Payable (secured by nine properties in five states) 3.46 % 2/11/2032 189,800 Mortgage Notes Payable (secured by one property in California) (3) 4.75 % 2/9/2024 266,825 3.82 % $ 1,076,625 (1) Amounts are not adjusted for our minority equity interest. (2) Following the deconsolidation in December 2021 of the net assets of the Seaport JV, we no longer include this $ 620,000 of secured debt financing in our condensed consolidated balance sheet; however, we continue to provide certain guaranties on this debt. (3) The maturity date of February 9, 2024 is subject to three , one year extension options and requires interest to be paid at an annual rate based on the secured overnight financing rate, or SOFR, plus a premium of 1.90 %. The interest rate is as of September 30, 2022. This joint venture has also purchased an interest rate cap through February 2024 with a SOFR strike rate equal to 4.00 %. In December 2021, we sold an additional 35 % equity interest from our then remaining 55 % equity interest in the Seaport JV to another third party institutional investor for $ 378,000 , before closing costs and other adjustments. Effective as of the date of the sale, we deconsolidated this joint venture and we now account for this joint venture using the equity method of accounting under the fair value option. Prior to the deconsolidation of the net assets of this joint venture, the joint venture investor's interest in this consolidated entity was reflected as noncontrolling interest in our consolidated financial statements. In June 2022, we sold an additional 10 % equity interest from our then remaining 20 % equity interest in the Seaport JV to an existing joint venture investor for $ 108,000 , before closing costs and other adjustments. The net proceeds of $ 108,956 , which include working capital prorations and formation costs, were included as a receivable in other assets, net in our condensed consolidated balance sheet as of June 30, 2022. We received the proceeds from this sale in July 2022. We recognized a net loss on sale of $ 1,226 related to this transaction, which is included in (loss) gain on sale of properties in our condensed consolidated statements of comprehensive income (loss). After giving effect to these sales, we continue to own a 10 % equity interest in this joint venture. Our initial investment amount was based on a property valuation of $ 1,700,000 , less $ 620,000 of existing mortgage debts on the property that this joint venture assumed. See Note 5 for more information regarding the valuation of our investment in this joint venture. In January 2022, we entered into a joint venture with two unrelated third party institutional investors for 10 medical office and life science properties we owned, or the LSMD JV. We sold equity interests in this joint venture to those investors for aggregate proceeds, before closing costs and other adjustments, of approximately $ 653,300 . We deconsolidated the net assets of these properties effective as of the date of the sale and recognized a net gain on sale of $ 322,468 related to this transaction, which is included in (loss) gain on sale of properties in our condensed consolidated statements of comprehensive income (loss). The equity interests that the investors acquired from us equaled 41 % and 39 %, respectively, of the total equity interests in the joint venture and we retained a 20 % equity interest in the joint venture. Following the sale, we account for this joint venture using the equity method of accounting under the fair value option. The initial investment amounts were based upon a property valuation of approximately $ 702,500 , less approximately $ 456,600 of secured debt on the properties incurred by this joint venture. See Note 5 for more information regarding the valuation of our investment in this joint venture. Acquisitions and Dispositions: We have accounted for our July 2022 acquisition of a life science property located in California as an acquisition of assets. We funded this acquisition using cash on hand. The table below represents the purchase price allocation (including net closing adjustments) of this acquisition: Date Location Type of Property Number of Properties Square Feet Cash Paid (1) Land Buildings and Improvements Acquired Real Estate Leases July 2022 California Life Science 1 88,508 $ 75,105 $ 15,774 $ 45,249 $ 14,082 (1) Cash paid includes closings costs. 8 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) We did not dispose of any properties during the nine months ended September 30, 2022. Impairment: 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 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. No material impairment charges were recorded on held and used properties during the three or nine months ended September 30, 2022 or 2021. Other: During the three and nine months ended September 30, 2022, we recorded $ 4,112 of expenses representing insurance deductibles and other costs associated with Hurricane Ian's damage at certain of our managed senior living communities located in Florida and are evaluating additional losses. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss). 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 $ 2,738 and $ 1,679 for the three months ended September 30, 2022 and 2021, respectively, and $ 7,193 and $ 3,804 for the nine months ended September 30, 2022 and 2021, respectively. Rents receivable, excluding receivables related to our properties classified as held for sale, if any, include $ 74,640 and $ 82,131 of straight line rent receivables at September 30, 2022 and December 31, 2021, 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 $ 11,312 and $ 17,930 for the three months ended September 30, 2022 and 2021, respectively, of which tenant reimbursements totaled $ 11,263 and $ 17,875 , respectively, and $ 32,450 and $ 54,634 for the nine months ended September 30, 2022 and 2021, respectively, of which tenant reimbursements totaled $ 32,276 and $ 54,495 , respectively. 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 assets and related liabilities representing our future obligation under the respective lease arrangements for which we are the lessee were $ 27,257 and $ 27,637 , respectively, as of September 30, 2022, and $ 4,153 and $ 4,352 , respectively, as of December 31, 2021. The right of use assets and related lease liabilities 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. 9 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Note 4. Indebtedness Our principal debt obligations, excluding any debt obligations of our joint ventures, at September 30, 2022 were: (1) outstanding borrowings under our $ 700,000 revolving credit facility; (2) $ 2,350,000 outstanding principal amount of senior unsecured notes; and (3) $ 35,200 aggregate principal amount of mortgage notes secured by three properties. These three mortgaged properties had a gross book value of $ 65,957 at September 30, 2022. We also had two properties subject to finance leases with lease obligations totaling $ 5,562 at September 30, 2022; these two properties had gross book value and accumulated depreciation of $ 38,697 and $ 18,839 , respectively, at September 30, 2022, and $ 36,730 and $ 18,203 , respectively, at December 31, 2021, and the finance leases expire in 2026. We have a $ 700,000 revolving credit facility that is used for general business purposes. The maturity date of our revolving credit facility is January 2024. Our revolving credit facility generally 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. We are required to pay interest at a rate of LIBOR plus a premium, which was 250 basis points per annum at September 30, 2022, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lender commitments under our revolving credit facility, which was 30 basis points per annum at September 30, 2022. As of September 30, 2022, our revolving credit facility required interest to be paid on borrowings at the annual rate of 5.6 %. The weighted average annual interest rates for borrowings under our revolving credit facility were 4.8 % and 2.9 % for the three months ended September 30, 2022 and 2021, respectively, and 3.8 % and 2.9 % for the nine months ended September 30, 2022 and 2021, respectively. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of September 30, 2022 and October 28, 2022, we were fully drawn under our revolving credit facility. In February 2022, we and our lenders amended our credit agreement. Pursuant to the amendment: • the waiver of the fixed charge coverage ratio covenant included in our credit agreement has been extended through December 31, 2022, or the Amendment Period; • the revolving credit facility commitments have been reduced from $ 800,000 to $ 700,000 following our repayment of $ 100,000 , and as a result of the reduction in commitments, we recorded a loss on modification or early extinguishment of debt of $ 483 for the nine months ended September 30, 2022; • we have the ability to fund $ 400,000 of capital expenditures per year and we are restricted in our ability to acquire real property as defined in our credit agreement; • the interest rate premium under our revolving credit facility increased by 15 basis points; and • 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. Also in February 2022, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2024. Pursuant to our credit agreement, the borrowing capacity under our revolving credit facility will be reduced to $ 586,373 in January 2023 and, as such, we will be required to repay $ 113,627 under our revolving credit facility by that time. Pursuant to our credit agreement, we pledged certain equity interests of subsidiaries owning properties to secure our obligations under our credit agreement 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 $ 997,724 as of September 30, 2022 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. In April 2022, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $ 10,934 , a maturity date in July 2022 and an annual interest rate of 6.28 %, using cash on hand. 10 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) In June 2022, we redeemed $ 500,000 of our outstanding 9.75 % senior notes due 2025 for a redemption price equal to 104.875 % of the $ 500,000 principal amount of the notes being redeemed plus accrued and unpaid interest of $ 1,083 , using restricted cash on hand. As a result of this redemption, we recorded a loss on early extinguishment of debt of $ 29,576 for the nine months ended September 30, 2022. In July 2022, we prepaid a mortgage note secured by two of our senior living communities with an outstanding principal balance of approximately $ 15,273 , a maturity date in October 2022 and an annual interest rate of 5.75 %, using cash on hand. In October 2022, we repaid a mortgage note secured by one of our life science properties with an outstanding principal balance of approximately $ 10,287 , a maturity date in October 2022 and an annual interest rate of 4.85 %, using cash on hand. 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, 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, 2022, our ratio of consolidated income available for debt service to debt service was below the 1.5 x 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 unable to incur additional debt until this ratio is at or above 1.5 x 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, 2022, subject to the waivers noted above. Although we have taken steps to enhance our ability to maintain sufficient liquidity, a protracted negative impact on the economy or the industries in which our properties and businesses operate 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. If we believe we will not be able to satisfy our financial or other covenants, we expect that we would seek waivers or amendments prior to any covenant violation or seek other financing alternatives. 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, 2022 and December 31, 2021, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset. As of September 30, 2022 As of December 31, 2021 Description Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Recurring Fair Value Measurements Assets: Investment in AlerisLife (Level 1) (1) $ 10,156 $ 10,156 $ 31,540 $ 31,540 Investment in unconsolidated joint venture (Level 3) (2) $ 108,395 $ 108,395 $ 215,127 $ 215,127 Investment in unconsolidated joint venture (Level 3) (3) $ 51,081 $ 51,081 $ — $ — (1) Our 10,691,658 shares of common stock of AlerisLife Inc., or AlerisLife, 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). During the three months ended September 30, 2022 and 2021, we recorded unrealized losses of $ 2,674 and $ 14,755 , respectively, and during the nine months ended September 30, 2022 and 2021, we recorded unrealized losses of $ 21,384 and $ 26,943 , respectively, which are included in losses on equity securities, net in our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our investment in AlerisLife common shares to their fair value. See Note 11 for further information about our investment in AlerisLife. (2) The 10 % equity interest we own in the Seaport JV is included in investments in unconsolidated joint ventures in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value analysis are a discount rate of 5.58 %, an 11 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) exit capitalization rate of 5.25 %, a holding period of approximately 10 years and market rents. The assumptions made in the fair value analysis are based on the location, type and nature of the property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding this joint venture. (3) The 20 % equity interest we own in the LSMD JV is included in investments in unconsolidated joint ventures in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value analysis are discount rates of between 5.60 % and 8.00 %, exit capitalization rates of between 5.10 % and 6.25 %, holding periods of approximately 10 years and market rents. The assumptions we made in the fair value analysis are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding this joint venture. In addition to the assets described in the table above, our financial instruments at September 30, 2022 and December 31, 2021 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, 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, 2022 As of December 31, 2021 Description Carrying Amount (1) Estimated Fair Value Carrying Amount (1) Estimated Fair Value Senior unsecured notes, 4.750 % coupon rate, due 2024 $ 249,558 $ 215,470 $ 249,348 $ 257,695 Senior unsecured notes, 9.750 % coupon rate, due 2025 495,274 452,305 987,903 1,081,990 Senior unsecured notes, 4.750 % coupon rate, due 2028 493,154 315,000 492,199 491,480 Senior unsecured notes, 4.375 % coupon rate, due 2031 492,771 323,750 492,127 480,763 Senior unsecured notes, 5.625 % coupon rate, due 2042 342,469 165,620 342,183 309,260 Senior unsecured notes, 6.250 % coupon rate, due 2046 243,267 114,100 243,051 226,500 Secured debts (2) 40,936 39,171 69,713 71,963 $ 2,357,429 $ 1,625,416 $ 2,876,524 $ 2,919,651 (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. 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, 2022 and December 31, 2021, respectively. 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, 2022 and December 31, 2021 (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 In March 2017, we entered into the Seaport JV. The investor owned a 45 % equity interest in the joint venture, and we owned the remaining 55 % equity interest in the joint venture. We determined that, while we owned a 55 % equity interest in this joint venture, this joint venture was a variable interest entity, or VIE, and that we controlled the activities that most significantly impacted the economic performance of this entity; we therefore consolidated the results of this joint venture in our financial statements. In December 2021, we sold an additional 35 % equity interest in the Seaport JV to another third party institutional investor. After giving effect to the sale, we owned a 20 % equity interest in this joint venture, but determined that we are no longer the primary beneficiary. Effective as of the date of the sale, we deconsolidated these properties and accounted for this joint venture using the equity method of accounting under the fair value option. In June 2022, we sold an additional 10 % equity interest from our then remaining 20 % equity interest in this joint venture to an existing joint venture investor and continue to account for this joint venture using the equity method of accounting under the fair value option. The portion of the joint 12 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) venture's net income and comprehensive income not attributable to us, or $ 1,339 and $ 4,238 for the three and nine months ended September 30, 2021, respectively, is reported as a noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). This joint venture made aggregate cash distributions to the other joint venture investor of $ 5,524 and $ 16,848 for the three and nine months ended September 30, 2021, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated statement of shareholders' equity. Note 7. Shareholders' Equity Common Share Awards: On June 2, 2022, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 20,000 of our common shares, valued at $ 2.14 per share, the closing price of our common shares on Nasdaq on that day . On September 14, 2022, we awarded under our equity compensation plan an aggregate of 707,000 of our common shares, valued at $ 1.30 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR. Common Share Repurchases: During the three and nine months ended September 30, 2022, we purchased an aggregate of 122,403 and 124,101 of our common shares, respectively, valued at a weighted average share price of $ 1.30 and $ 1.33 per share, respectively, from our officers and certain current and former officers and employees of RMR 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, 2022, we declared and paid quarterly distributions to common shareholders as follows: Declaration Date Record Date Payment Date Distribution Per Share Total Distributions January 13, 2022 January 24, 2022 February 17, 2022 $ 0.01 $ 2,390 April 14, 2022 April 25, 2022 May 19, 2022 0.01 2,390 July 14, 2022 July 25, 2022 August 18, 2022 0.01 2,391 $ 0.03 $ 7,171 On October 13, 2022, we declared a quarterly distribution to common shareholders of record on October 24, 2022 of $ 0.01 per share, or approximately $ 2,397 . We expect to pay this distribution on or about November 17, 2022. Note 8. Segment Reporting We operate in, and report financial information for, the following two segments: Office Portfolio and senior housing operating portfolio, or SHOP. We aggregate each of these two reporting segments based on their similar operating and economic characteristics. Our Office Portfolio segment consists of medical office properties leased to medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our SHOP segment consists of managed senior living communities that provide short term and long term residential living and, in some instances, care and other services for residents where we pay fees to managers to operate the communities. We also report “non-segment” operations, consisting of triple net leased senior living communities and wellness centers that are leased to third party operators from which we receive rents, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment. 13 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Three Months Ended September 30, 2022 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 55,254 $ — $ 8,706 $ 63,960 Residents fees and services — 258,960 — 258,960 Total revenues 55,254 258,960 8,706 322,920 Expenses: Property operating expenses 24,179 264,722 195 289,096 Depreciation and amortization 19,037 38,484 2,886 60,407 General and administrative — — 6,179 6,179 Acquisition and certain other transaction related costs — — 289 289 Total expenses 43,216 303,206 9,549 355,971 (Loss) gain on sale of properties ( 5,074 ) 30 — ( 5,044 ) Losses on equity securities, net — — ( 2,674 ) ( 2,674 ) Interest and other income — 125 3,974 4,099 Interest expense ( 217 ) ( 298 ) ( 46,421 ) ( 46,936 ) Income (loss) from continuing operations before income tax expense and equity in earnings of investees 6,747 ( 44,389 ) ( 45,964 ) ( 83,606 ) Income tax expense — — ( 13 ) ( 13 ) Equity in earnings of investees 2,127 — — 2,127 Net income (loss) $ 8,874 $ ( 44,389 ) $ ( 45,977 ) $ ( 81,492 ) 14 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Nine Months Ended September 30, 2022 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 162,861 $ — $ 28,906 $ 191,767 Residents fees and services — 754,914 — 754,914 Total revenues 162,861 754,914 28,906 946,681 Expenses: Property operating expenses 69,652 754,057 195 823,904 Depreciation and amortization 55,424 111,836 8,667 175,927 General and administrative — — 20,671 20,671 Acquisition and certain other transaction related costs — — 1,826 1,826 Total expenses 125,076 865,893 31,359 1,022,328 Gain on sale of properties 321,242 822 — 322,064 Losses on equity securities, net — — ( 21,384 ) ( 21,384 ) Interest and other income — 1,084 5,676 6,760 Interest expense ( 798 ) ( 1,283 ) ( 157,961 ) ( 160,042 ) Gain (loss) on modification or early extinguishment of debt 16 — ( 30,059 ) ( 30,043 ) Income (loss) from continuing operations before income tax expense and equity in earnings of investees 358,245 ( 110,356 ) ( 206,181 ) 41,708 Income tax expense — — ( 845 ) ( 845 ) Equity in earnings of investees 8,685 — — 8,685 Net income (loss) $ 366,930 $ ( 110,356 ) $ ( 207,026 ) $ 49,548 Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the U.S. Department of Health and Human Services, or HHS, established a Provider Relief Fund. Retention and use of the funds received under the CARES Act are subject to certain terms and conditions. The terms and conditions require that the funds be utilized to compensate for lost revenues that are attributable to the COVID-19 pandemic and for eligible costs to prevent, prepare for and respond to the COVID-19 pandemic that are not covered by other sources. Further, fund recipients are required to be participating in Medicare at the time of distribution and are subject to certain other terms and conditions, including quarterly reporting requirements. In addition, fund recipients are required to have billed Medicare during 2019 and to continue to provide care after January 31, 2020 for diagnosis, testing or care for individuals with possible or actual COVID-19 cases. Any funds not used in accordance with the terms and conditions must be returned to HHS. We recognize income from government grants on a systematic and rational basis over the period in which we recognize the related expenses or loss of revenues for which the grants are intended to compensate when there is reasonable assurance that we will comply with the applicable terms and conditions of the grant and there is reasonable assurance that the grant will be received. We have recognized $ 1,084 and $ 18,967 as other income in our condensed consolidated statements of comprehensive income (loss) with respect to our SHOP segment for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 1,969,679 $ 3,039,210 $ 1,063,597 $ 6,072,486 15 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Three Months Ended September 30, 2021 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 91,520 $ — $ 9,883 $ 101,403 Residents fees and services — 236,013 — 236,013 Total revenues 91,520 236,013 9,883 337,416 Expenses: Property operating expenses 32,386 233,687 — 266,073 Depreciation and amortization 32,142 33,688 2,872 68,702 General and administrative — — 8,870 8,870 Acquisition and certain other transaction related costs — — 3,108 3,108 Total expenses 64,528 267,375 14,850 346,753 Gain on sale of properties — 200 — 200 Losses on equity securities, net — — ( 14,755 ) ( 14,755 ) Interest and other income — 786 190 976 Interest expense ( 6,053 ) ( 523 ) ( 57,917 ) ( 64,493 ) Income (loss) from continuing operations before income tax expense 20,939 ( 30,899 ) ( 77,449 ) ( 87,409 ) Income tax expense — — ( 595 ) ( 595 ) Net income (loss) 20,939 ( 30,899 ) ( 78,044 ) ( 88,004 ) Net income attributable to noncontrolling interest ( 1,339 ) — — ( 1,339 ) Net income (loss) attributable to common shareholders $ 19,600 $ ( 30,899 ) $ ( 78,044 ) $ ( 89,343 ) 16 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) For the Nine Months Ended September 30, 2021 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 277,647 $ — $ 28,908 $ 306,555 Residents fees and services — 739,926 — 739,926 Total revenues 277,647 739,926 28,908 1,046,481 Expenses: Property operating expenses 95,000 723,096 — 818,096 Depreciation and amortization 96,577 97,587 8,579 202,743 General and administrative — — 25,538 25,538 Acquisition and certain other transaction related costs — — 15,179 15,179 Impairment of assets — ( 174 ) — ( 174 ) Total expenses 191,577 820,509 49,296 1,061,382 Gain on sale of properties 30,638 200 — 30,838 Losses on equity securities, net — — ( 26,943 ) ( 26,943 ) Interest and other income — 18,967 882 19,849 Interest expense ( 17,984 ) ( 1,576 ) ( 172,681 ) ( 192,241 ) Loss on modification or early extinguishment of debt — — ( 2,410 ) ( 2,410 ) Income (loss) from continuing operations before income tax expense 98,724 ( 62,992 ) ( 221,540 ) ( 185,808 ) Income tax expense — — ( 1,024 ) ( 1,024 ) Net income (loss) 98,724 ( 62,992 ) ( 222,564 ) ( 186,832 ) Net income attributable to noncontrolling interest ( 4,238 ) — — ( 4,238 ) Net income (loss) attributable to common shareholders $ 94,486 $ ( 62,992 ) $ ( 222,564 ) $ ( 191,070 ) As of December 31, 2021 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 2,282,652 $ 2,995,819 $ 1,345,043 $ 6,623,514 Note 9. Senior Living Community Management Agreements Our managed senior living communities are operated by third parties pursuant to management agreements. Five Star Senior Living, or Five Star, which is an operating division of AlerisLife, manages certain of our SHOP communities. 2021 Amendments to our Management Arrangements with Five Star. On June 9, 2021, we and Five Star amended our management arrangements, as follows: • Five Star agreed to cooperate with us in transitioning 108 of our senior living communities with approximately 7,500 living units to other third party managers without our payment of any termination fee to Five Star; • We no longer have the right to sell up to an additional $ 682,000 of senior living communities currently managed by Five Star and terminate Five Star's management of those communities without our payment of a fee to Five Star upon sale; • Five Star continued to manage 120 of our senior living communities, and the skilled nursing units in all of our continuing care retirement communities that Five Star is continuing to manage, which then included approximately 1,500 living units, were closed and are being evaluated and repositioned; 17 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) • Beginning in 2025, we will have the right to terminate up to 10 % of the senior living communities that Five Star is continuing to manage, based on total revenues per year for failure to meet 80 % of a target earnings before interest, taxes, depreciation and amortization for the applicable period; • The incentive fee that Five Star may earn in any calendar year for the senior living communities that Five Star is continuing to manage is no longer subject to a cap and any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee; • RMR will oversee any major renovation or repositioning activities at the senior living communities that Five Star is continuing to manage; and • The term of our management agreements with Five Star for our senior living communities that Five Star is continuing to manage was extended by two years to December 31, 2036. Pursuant to these changes, we and Five Star entered into an amended and restated master management agreement, or the Master Management Agreement, for the senior living communities that Five Star is continuing to manage and interim management agreements for the senior living communities that we and Five Star agreed to transition to other third party managers. These agreements replaced our prior master leases and management and pooling agreements with Five Star. In addition, AlerisLife delivered to us a related amended and restated guaranty agreement pursuant to which AlerisLife is continuing to guarantee the payment and performance of its subsidiaries' obligations under the applicable management agreements. As of December 31, 2021, we had transitioned 107 of the 108 senior living communities, containing 7,340 living units, from Five Star to other third party managers, of which 69 senior living communities with approximately 4,800 living units were transitioned during the three months ended September 30, 2021. The remaining senior living community was closed in February 2022 and we are assessing opportunities to redevelop that property. We continue to lease our senior living communities that have been transitioned to new managers to our taxable REIT subsidiaries, or TRSs. We incurred costs related to retention and other transition costs for these communities. We recorded $ 220 and $ 3,123 for the three months ended September 30, 2022 and 2021, respectively, and $ 1,665 and $ 15,037 for the nine months ended September 30, 2022 and 2021, respectively, of these costs to acquisition and certain other transaction related costs in our condensed consolidated statements of comprehensive income (loss). Our Senior Living Communities Managed by Five Star. Five Star managed 120 and 159 of our senior living communities as of September 30, 2022 and 2021, respectively. We lease our senior living communities that are managed by Five Star to our TRSs. Effective October 31, 2022, Five Star ceased managing an active adult community we own located in Plano, Texas, and effective as of November 1, 2022, RMR assumed management of that community pursuant to our property management agreement with RMR. We paid Five Star a termination fee of $ 350 in connection with the termination of Five Star's management of this community. We incurred management fees payable to Five Star of $ 9,477 and $ 11,220 for the three months ended September 30, 2022 and 2021, respectively, and $ 27,380 and $ 37,997 for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, $ 8,601 and $ 10,518 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 876 and $ 702 , respectively, were capitalized in our condensed consolidated balance sheets. For the nine months ended September 30, 2022 and 2021, $ 25,017 and $ 35,746 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 2,363 and $ 2,251 , respectively, were capitalized in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets. We incurred fees of $ 1,590 and $ 1,508 for the three months ended September 30, 2022 and 2021, respectively, and $ 5,242 and $ 9,579 for the nine months ended September 30, 2022 and 2021, respectively, with respect to rehabilitation services Five Star provided at our senior living communities that are payable by us. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss). We lease to Five Star space at certain of our senior living communities, which it uses to provide certain outpatient rehabilitation and wellness services. We recorded $ 380 and $ 399 for the three months ended September 30, 2022 and 2021, 18 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) respectively, and $ 1,147 and $ 1,194 for the nine months ended September 30, 2022 and 2021, respectively, with respect to these leases. Our Senior Living Communities Managed by Other Third Party Managers. We incurred management fees payable to our other third party managers of $ 5,108 and $ 1,678 for the three months ended September 30, 2022 and 2021, respectively, and $ 15,434 and $ 1,678 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022 and 2021, respectively, our other third party managers managed 107 and 69 of our senior living communities. These amounts are included in property operating expenses in our condensed consolidated financial statements. The following table presents residents fees and services revenue from all of our managed senior living communities disaggregated by the type of contract and payer: Three Months Ended September 30, Nine Months Ended September 30, Revenue from contracts with customers: 2022 2021 2022 2021 Basic housing and support services $ 204,842 $ 188,381 $ 594,715 $ 564,579 Medicare and Medicaid programs 21,370 18,948 60,153 79,803 Private pay and other third party payer SNF services 32,748 28,684 100,046 95,544 Total residents fees and services $ 258,960 $ 236,013 $ 754,914 $ 739,926 Note 10. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of many of our properties, including our medical office and life science properties, and major renovation or repositioning activities at our senior living communities that we may request RMR to manage from time to time. See Note 11 for further information regarding our relationship, agreements and transactions with RMR. We recognized net business management fees of $ 3,763 and $ 5,986 for the three months ended September 30, 2022 and 2021, respectively, and $ 13,082 and $ 17,627 for the nine months ended September 30, 2022 and 2021, respectively. Based on our common share total return, as defined in our business management agreement, as of each of September 30, 2022 and 2021, no estimated incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2022 or 2021. The actual amount of annual incentive fees for 2022, if any, will be based on our common share total return as defined in our business management agreement, for the three-year period ending December 31, 2022, and will be payable in January 2023. We did not incur any incentive fee payable for the year ended December 31, 2021. We recognize business management and incentive fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). RMR provides management services to our joint ventures. See Note 11 for further information regarding our joint ventures' management arrangements with RMR and the related impact on our management fees payable to RMR. We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Health Care REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR, and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Healthcare Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Healthcare Index. We recognized aggregate net property management and construction supervision fees of $ 2,658 and $ 2,931 for the three months ended September 30, 2022 and 2021, respectively, and $ 7,567 and $ 9,276 for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, $ 1,521 and $ 2,410 , respectively, of the total property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,137 and $ 521 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the nine months ended September 30, 2022 and 2021, $ 4,142 and $ 7,360 , respectively, of the total property management fees were expensed to property operating expenses in our condensed consolidated statements of 19 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) comprehensive income (loss) and $ 3,425 and $ 1,916 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets. We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR on our behalf. We are generally not responsible for payment of RMR's employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR's employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR's centralized accounting personnel, our share of RMR's costs for providing our internal audit function, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR. We reimbursed RMR $ 3,498 and $ 3,121 for these expenses and costs for the three months ended September 30, 2022 and 2021, respectively, and $ 9,573 and $ 9,620 for the nine months ended September 30, 2022 and 2021, respectively. These amounts are included in property operating expenses or general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss) for these periods. On June 9, 2021, we and RMR amended our property management agreement to, among other things, provide for RMR's oversight of any major capital projects and repositionings at our senior living communities, including our senior living communities which Five Star is continuing to manage, and that RMR receives the same fee previously paid to Five Star for such services, which is equal to 3 % of the cost of any such major capital project or repositioning. Note 11. Related Person Transactions We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., AlerisLife (including Five Star) and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR Inc. is the managing member of RMR. The Chair of our Board and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR and the chair of the board of directors and a managing director of AlerisLife. Jennifer F. Francis, our other Managing Trustee and our President and Chief Executive Officer, and our Chief Financial Officer and Treasurer are also employees and officers of RMR. Jennifer B. Clark, our Secretary and former Managing Trustee, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR, an officer of ABP Trust and a managing director and the secretary of AlerisLife. Certain of AlerisLife's officers are officers and employees of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Adam Portnoy serves as the chair of the board and as a managing director or managing trustee of these companies. Other officers of RMR, including Ms. Clark and certain of our officers, serve as managing trustees, managing directors or officers of certain of these companies. In addition, officers of RMR and RMR Inc. serve as our officers and officers of other companies to which RMR or its subsidiaries provide management services. See Note 7 for information relating to awards of our common shares we made in September 2022 to our officers and certain other employees of RMR and our repurchase of common shares from our officers and certain current and former officers and employees of RMR in satisfaction of tax withholding and payment obligations owed in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for common share awards to our officers and RMR officers and employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). AlerisLife. We are currently AlerisLife's largest stockholder. As of September 30, 2022, we owned approximately 32.8 % of AlerisLife's outstanding common shares. Five Star is an operating division of AlerisLife. Five Star manages certain of the senior living communities we own pursuant to the Master Management Agreement. RMR provides management services to both us and AlerisLife. See Note 9 for further information regarding our relationships, agreements and transactions with AlerisLife (including Five Star) and Note 5 for further information regarding our investment in AlerisLife. As of September 30, 2022, ABP Acquisition LLC, a subsidiary of ABP Trust, the controlling shareholder of RMR Inc., together with ABP Trust, owned approximately 6.2 % of AlerisLife's outstanding common shares. 20 Table of Contents DIVERSIFIED HEALTHCARE TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except per share data or as otherwise stated) Our Joint Ventures. We have two separate joint venture arrangements with two third party institutional investors, the Seaport JV and the LSMD JV. We own a 10 % equity interest in the Seaport JV and a 20 % equity interest in the LSMD JV; from January 2022 until June 28, 2022, we owned a 20 % equity interest in the Seaport JV. We initially entered into the Seaport JV prior to January 1, 2021, and we entered into the LSMD JV in January 2022. RMR provides management services to both of these joint ventures. Our joint ventures are not our consolidated subsidiaries and, as a result, we are not obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding the joint ventures. Prior to December 23, 2021, the Seaport JV was our consolidated subsidiary and, as such, we were previously obligated to pay management fees to RMR under our management agreements with RMR for the services it provided regarding that joint venture; however, that joint venture paid management fees directly to RMR, and any such fees paid by that joint venture were credited against the fees payable by us to RMR. In addition, we wholly owned the 10 medical office and life science properties until the contribution of these properties to the applicable joint venture in January 2022 and we paid management fees to RMR for the management services it provided to us for those properties up until that time. As of September 30, 2022, in connection with entering into the LSMD JV in January 2022, we paid mortgage escrow amounts and closing costs of $ 9,558 that were payable by that joint venture. Those costs are presented as other assets, net, in our condensed consolidated balance sheet. Our Manager, RMR. We have two agreements with RMR to provide management services to us. See Note 10 for further information regarding our management agreements with RMR. For further information about these and other such relationships and certain other related person transactions, see our Annual Report. Note 12. Income Taxes We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease our managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our taxation as a REIT. Our current income tax expense (or benefit) fluctuates from period to period based primarily on the timing of our income, including gains on the disposition of properties or losses in a particular quarter. For the three months ended September 30, 2022 and 2021, we recognized income tax expense of $ 13 and $ 595 , respectively, and for the nine months ended September 30, 2022 and 2021, we recognized income tax expense of $ 845 and $ 1,024 , respectively. Note 13. Weighted Average Common Share s (share amounts in thousands) We calculate basic earnings per common share using the two class method. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, together with the related impact on earnings, are considered when calculating diluted earnings per share. For purposes of calculating diluted earnings per share, we did not include 891 and 855 of unvested share awards for the three and nine months ended September 30, 2022, respectively, because to do so would have been antidilutive. 21 Table of Contents