DIVERSIFIED HEALTHCARE TRUST 10-Q

Item 1. Financial Statements. DIVERSIFIED HEALTHCARE TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) (unaudited) June 30, December 31, 2023 2022 Assets Real estate properties: Land $ 656,245 $ 668,918 Buildings and improvements 6,055,915 6,023,625 Total real estate properties, gross 6,712,160 6,692,543 Accumulated depreciation ( 1,908,410 ) ( 1,828,352 ) Total real estate properties, net 4,803,750 4,864,191 Investments in unconsolidated joint ventures 155,119 155,477 Assets of properties held for sale 22,023 385 Cash and cash equivalents 338,431 658,065 Restricted cash 18,652 30,237 Acquired real estate leases and other intangible assets, net 39,309 45,351 Other assets, net 208,191 248,387 Total assets $ 5,585,475 $ 6,002,093 Liabilities and Shareholders' Equity Credit facility $ 450,000 $ 700,000 Senior unsecured notes, net 2,320,113 2,317,700 Secured debt and finance leases, net 14,390 30,177 Liabilities of properties held for sale 305 — Accrued interest 28,215 29,417 Other liabilities 263,063 286,188 Total liabilities 3,076,086 3,363,482 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ .01 par value: 300,000,000 shares authorized, 239,792,354 and 239,694,842 shares issued and outstanding, respectively 2,398 2,397 Additional paid in capital 4,617,831 4,617,031 Cumulative net income 1,946,621 2,071,850 Cumulative distributions ( 4,057,461 ) ( 4,052,667 ) Total shareholders' equity 2,509,389 2,638,611 Total liabilities and shareholders' equity $ 5,585,475 $ 6,002,093 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues: Rental income $ 61,373 $ 62,522 $ 127,811 $ 127,807 Residents fees and services 284,846 250,506 564,438 495,954 Total revenues 346,219 313,028 692,249 623,761 Expenses: Property operating expenses 286,228 266,066 572,308 534,808 Depreciation and amortization 68,394 58,261 133,194 115,520 General and administrative 7,284 7,207 13,157 14,492 Acquisition and certain other transaction related costs 6,043 609 6,136 1,537 Impairment of assets 11,299 — 17,224 — Total expenses 379,248 332,143 742,019 666,357 (Loss) gain on sale of properties — ( 686 ) 1,233 327,108 Gains and losses on equity securities, net — ( 10,157 ) 8,126 ( 18,710 ) Interest and other income 5,134 2,266 9,329 2,661 Interest expense (including net amortization of debt premiums, discounts and issuance costs of $ 2,249 , $ 2,318 , $ 4,323 and $ 4,790 , respectively) ( 47,384 ) ( 55,975 ) ( 95,164 ) ( 113,106 ) Loss on modification or early extinguishment of debt — ( 29,560 ) ( 1,075 ) ( 30,043 ) (Loss) income before income tax (expense) benefit and equity in net earnings of investees ( 75,279 ) ( 113,227 ) ( 127,321 ) 125,314 Income tax (expense) benefit ( 221 ) 640 ( 190 ) ( 832 ) Equity in net earnings of investees 2,929 3,204 2,282 6,558 Net (loss) income $ ( 72,571 ) $ ( 109,383 ) $ ( 125,229 ) $ 131,040 Weighted average common shares outstanding (basic and diluted) 238,682 238,197 238,636 238,173 Per common share amounts (basic and diluted): Net (loss) income $ ( 0.30 ) $ ( 0.46 ) $ ( 0.52 ) $ 0.55 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, 2022: 239,694,842 $ 2,397 $ 4,617,031 $ 2,071,850 $ ( 4,052,667 ) $ 2,638,611 Net loss — — — ( 52,658 ) — ( 52,658 ) Distributions — — — — ( 2,397 ) ( 2,397 ) Share grants — — 270 — — 270 Share repurchases ( 5,975 ) — ( 6 ) — — ( 6 ) Share forfeitures ( 6,400 ) — ( 1 ) — — ( 1 ) Balance at March 31, 2023: 239,682,467 2,397 4,617,294 2,019,192 ( 4,055,064 ) 2,583,819 Net loss — — — ( 72,571 ) — ( 72,571 ) Distributions — — — — ( 2,397 ) ( 2,397 ) Share grants 140,000 1 567 — — 568 Share repurchases ( 24,513 ) — ( 27 ) — — ( 27 ) Share forfeitures ( 5,600 ) — ( 3 ) — — ( 3 ) Balance at June 30, 2023: 239,792,354 $ 2,398 $ 4,617,831 $ 1,946,621 $ ( 4,057,461 ) $ 2,509,389 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 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 CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net (loss) income $ ( 125,229 ) $ 131,040 Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: Depreciation and amortization 133,194 115,520 Net amortization of debt premiums, discounts and issuance costs 4,323 4,790 Straight line rental income 2,009 ( 4,455 ) Amortization of acquired real estate leases ( 286 ) 162 Loss on modification or early extinguishment of debt 1,075 30,043 Impairment of assets 17,224 — Gain on sale of properties ( 1,233 ) ( 327,108 ) Gains and losses on equity securities, net ( 8,126 ) 18,710 Other non-cash adjustments, net ( 1,051 ) ( 905 ) Unconsolidated joint venture distributions 2,640 5,660 Equity in net earnings of investees ( 2,282 ) ( 6,558 ) Change in assets and liabilities: Deferred leasing costs, net ( 4,071 ) ( 4,968 ) Other assets 29,992 25,922 Accrued interest ( 1,202 ) ( 2,206 ) Other liabilities ( 15,254 ) ( 17,503 ) Net cash provided by (used in) operating activities 31,723 ( 31,856 ) Cash flows from investing activities: Real estate improvements ( 107,934 ) ( 116,640 ) Proceeds from sale of properties, net 3,548 792 Proceeds from sale of properties to joint venture, net — 643,892 Proceeds from sale of interest in joint venture, net — ( 330 ) Proceeds from AlerisLife Inc. tender offer 14,006 — Net cash (used in) provided by investing activities ( 90,380 ) 527,714 Cash flows from financing activities: Repayments of borrowings on credit facility ( 250,000 ) ( 100,000 ) Redemption of senior unsecured notes — ( 500,000 ) Repayment of other debt ( 15,678 ) ( 12,421 ) Loss on early extinguishment of debt settled in cash — ( 24,375 ) Payment of debt issuance costs ( 2,057 ) ( 2,820 ) Repurchase of common shares ( 33 ) ( 5 ) Distributions to shareholders ( 4,794 ) ( 4,780 ) Net cash used in financing activities ( 272,562 ) ( 644,401 ) Decrease in cash and cash equivalents and restricted cash ( 331,219 ) ( 148,543 ) Cash and cash equivalents and restricted cash at beginning of period 688,302 1,016,945 Cash and cash equivalents and restricted cash at end of period $ 357,083 $ 868,402 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 (CONTINUED) (dollars in thousands) (unaudited) Six Months Ended June 30, 2023 2022 Supplemental cash flow information: Interest paid $ 92,043 $ 110,522 Income taxes paid $ 675 $ 895 Non-cash investing activities: Decrease in assets resulting from the deconsolidation of investments that were previously consolidated: Real estate, net $ — $ ( 355,669 ) Change in assets resulting from the sale of interest in joint venture: Investments in unconsolidated joint ventures $ — $ ( 108,246 ) Other assets, net $ — $ 108,956 Real estate improvements accrued, not paid $ 26,154 $ 24,325 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 June 30, 2023 2022 Cash and cash equivalents $ 338,431 $ 705,160 Restricted cash (1) 18,652 163,242 Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows $ 357,083 $ 868,402 (1) As of June 30, 2023 and 2022, restricted cash consisted of proceeds from the sale of assets and proceeds from the sale of joint venture interests held as collateral pursuant to the agreement governing our credit facility, or our credit agreement. Subsequently, these funds were used 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. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 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, 2022, 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. Going Concern The senior living industry has been adversely affected by the continuing impact of the COVID-19 pandemic as well as the current economic and market conditions. These conditions continue to have a significant negative impact on our results of operations, financial position and cash flows. Although there have been signs of recovery and increased demand when compared to the low levels during the COVID-19 pandemic, the recovery of our senior housing operating portfolio, or SHOP, segment has been slower than previously anticipated, and we cannot be sure when or if the senior housing business will return to historic pre-pandemic levels. To mitigate the effects of the slow recovery coming from the COVID-19 pandemic and the increased variability in operating cash flows from our SHOP communities, we continue to work with our senior living operators to manage costs, especially labor costs, and to increase rates and occupancy. However, increased operating costs resulting from difficult labor market conditions and wage and commodity price inflation, among other things, continue to negatively impact margins. In order to increase the probability of a recovery of our cash flows, we have continued to invest capital in our SHOP segment, which has reduced our cash balances since the filing of our Annual Report on March 1, 2023. Our ratio of consolidated income available for debt service to debt service was below the 1.5 x incurrence requirement under our credit agreement and our public debt covenants as of June 30, 2023, and we cannot be certain how long this ratio will remain below 1.5 x. We are unable to refinance existing or maturing debt or issue new debt until this ratio is at or above 1.5 x on a pro forma basis. As of June 30, 2023, we had $ 338,431 of cash and cash equivalents and $ 700,000 of outstanding debt due within one year from the date of issuance of these financial statements, August 1, 2023. This included $ 450,000 in outstanding borrowings under our credit facility, which matures on January 15, 2024. Our credit facility is secured by 61 properties which had an 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) appraised value of approximately $ 1,046,770 based on appraisals completed in June 2023. In addition to our credit facility maturity in January of 2024, we also have $ 250,000 of senior notes that mature on May 1, 2024. Based on the challenges described above, as well as our reduced cash balances, additional capital commitments in both our Office Portfolio and SHOP segments and upcoming debt maturities, we have concluded that there is substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of these financial statements, August 1, 2023. As described below, we have entered into an agreement to merge with and into Office Properties Income Trust, or OPI. The combined company is expected to be in compliance with its financial covenants following the closing of the merger, which is expected to provide the combined company with increased access to debt capital. While we believe this transaction will alleviate the substantial doubt about our ability to continue as a going concern, we cannot provide assurance that the merger will close on the contemplated terms or timeline or at all. If the merger does not close, we will seek to raise additional capital, but we are limited in the type of financings we can pursue as we cannot refinance existing or maturing debt or issue new debt, as described above. Due to challenging capital market conditions, we do not believe it is probable as of the date of issuance of these financial statements, August 1, 2023, that we will raise sufficient capital to meet our upcoming contractual commitments. As of August 1, 2023, we cannot demonstrate that our management's plans to alleviate substantial doubt about our ability to continue as a going concern will be probable in mitigating the conditions that raise the substantial doubt because our plan to merge with OPI is subject to shareholder and other customary approvals and our potential plan to raise rescue capital is subject to market conditions beyond our control. Our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Pending Merger with Office Properties Income Trust On April 11, 2023, we and OPI entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, we will be merged with and into OPI, with OPI continuing as the surviving entity in the merger, or the Merger. Subject to the satisfaction or waiver of closing conditions, the Merger is expected to close during the third quarter of 2023. Pursuant to the terms and subject to the conditions and limitations set forth in the Merger Agreement, at the date and time the Merger becomes effective, or the Effective Time, each of our common shares of beneficial interest, $ .01 par value per share, or our common shares, issued and outstanding as of immediately prior to the Effective Time will be automatically converted into the right to receive 0.147 (such ratio, the Exchange Ratio) common shares of beneficial interest, $ .01 par value per share, of OPI, or the OPI Common Shares, subject to adjustment for certain reclassifications, distributions, recapitalizations or similar transactions and other exceptional distributions as described in the Merger Agreement, with cash paid in lieu of fractional shares. At the Effective Time, any outstanding unvested common share awards under our equity compensation plan will be converted into an award under OPI’s equity compensation plan, subject to substantially similar vesting requirements and other terms and conditions, of a number of OPI Common Shares determined by multiplying the number of our unvested common shares subject to such award by the Exchange Ratio (rounded down to the nearest whole number). Other than as provided in the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of our common shares or the OPI Common Shares prior to the Effective Time. The OPI Common Shares issued and outstanding immediately prior to the Effective Time will remain issued and outstanding common shares of beneficial ownership of the surviving entity following the Merger. OPI expects to change its name from “Office Properties Income Trust” to “Diversified Properties Trust” and, following the Effective Time, will change its ticker symbol to "DPT". The transactions contemplated by the Merger Agreement and the terms thereof were evaluated, negotiated and recommended to our Board of Trustees, or our Board, by a special committee of our Board, or the DHC Special Committee, and to OPI’s board of trustees, or the OPI Board, by a special committee of OPI’s Board, or the OPI Special Committee, each consisting of disinterested, independent trustees of us and OPI, respectively. Following the recommendations of the DHC Special Committee and the OPI Special Committee, our Board and the OPI Board each approved the Merger Agreement and the transactions contemplated thereby and resolved to recommend that our and OPI's shareholders, respectively, vote in favor of approval of the Merger and the transactions contemplated thereby. Our shareholders will be asked to vote on the approval of the Merger and related matters at a special meeting of our shareholders. 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 consummation of the Merger is subject to the satisfaction or waiver of closing conditions, including, among others: (1) the approval of the Merger by the affirmative vote of at least a majority of all the votes entitled to be cast by holders of our outstanding common shares at the meeting held for that purpose; (2) the approval of the Merger by the affirmative vote of at least a majority of all the votes entitled to be cast by holders of outstanding OPI Common Shares at the meeting held for that purpose; (3) the approval of the issuance of the OPI Common Shares to be issued in the Merger, or the Share Issuance, by the affirmative vote of at least a majority of all votes cast by holders of outstanding OPI Common Shares at the meeting held for that purpose; (4) the absence of any statute, rule or regulation by any governmental entity of competent jurisdiction or any temporary, preliminary or permanent judgment, order or decree by any court of competent jurisdiction which would prohibit or make illegal or prevent the consummation of the Merger or any of the transactions contemplated by the Merger Agreement; (5) the effectiveness of the registration statement on Form S-4, as amended, or the Form S-4, filed by OPI with the Securities and Exchange Commission, or the SEC, in connection with the Share Issuance; (6) the approval (subject to notice of issuance) of The Nasdaq Stock Market LLC, or Nasdaq, of the listing of the OPI Common Shares to be issued in the Merger; (7) the extension or replacement of OPI’s existing revolving credit facility, on terms that, among other things, would not be reasonably likely to be materially adverse to the business, operations or financial condition of OPI after giving effect to the Merger and would not delay or prevent the consummation of the Merger; (8) the receipt of certain tax opinions by us and OPI; and (9) the other party’s representations and warranties being accurate (subject to certain customary materiality exceptions) and the other party having performed or complied in all material respects with its agreements and covenants in the Merger Agreement. The Merger Agreement contains certain customary representations, warranties and covenants, including covenants providing that we and OPI will use reasonable best efforts to conduct our and its respective businesses in all material respects in the ordinary course during the period between the execution of the Merger Agreement and the earlier of the Effective Time or the termination of the Merger Agreement, and to refrain from taking certain types of actions without the other party’s consent during the period between the execution of the Merger Agreement and the earlier of the Effective Time or the termination of the Merger Agreement, subject in each case to specified exceptions. Note 2. Real Estate Investments As of June 30, 2023, we wholly owned 376 properties located in 36 states and Washington, D.C., including four properties classified as held for sale and five closed senior living communities, 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. Joint Venture Activities: As of June 30, 2023, we had equity investments in joint ventures as follows: Joint Venture DHC Ownership DHC Carrying Value of Investment at June 30, 2023 Number of Properties Location Square Feet Seaport Innovation LLC 10 % $ 106,305 1 MA 1,134,479 The LSMD Fund REIT LLC 20 % 48,814 10 CA, MA, NY, TX, WA 1,068,763 $ 155,119 11 2,203,242 The following table provides a summary of the mortgage debts of these joint ventures: Joint Venture Coupon Rate Maturity Date Principal Balance at June 30, 2023 (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) 3.46 % 2/11/2032 189,800 Mortgage Notes Payable (secured by one property in California) (3) (4) 5.90 % 2/9/2024 266,825 4.10 % $ 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 an unconsolidated joint venture that owns a life science property located in Boston, Massachusetts, or 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. 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) (3) The debt securing these properties is non-recourse to us. (4) 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 June 30, 2023. 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. We recognized a net loss on sale of $ 1,226 related to this transaction during the six months ended June 30, 2022, 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 $ 327,542 related to this transaction during the six months ended June 30, 2022, 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: During the six months ended June 30, 2023, we sold three properties for an aggregate sales price of $ 2,800 , excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions, individually or in the aggregate, and we do not believe these sales represent a strategic shift in our business. As a result, the results of operations for these properties are included in continuing operations through the date of sale of such properties in our condensed consolidated statements of comprehensive income (loss). Date of Sale Location Type of Property Number of Properties Sales Price (1) Gain on Sale February 2023 Pennsylvania and South Carolina Senior Living 3 $ 2,800 $ 293 (1) Sales price excludes closing costs. During the six months ended June 30, 2023, we recognized a gain of $ 940 related to the sales of skilled nursing bed licenses at certain of our senior living communities. As of June 30, 2023, we had four properties classified as held for sale in our condensed consolidated balance sheet as follows: Type of Property Number of Properties Real Estate Properties, Net Life Science and Medical Office 4 $ 21,786 As of July 27, 2023, these properties were under agreements to sell for an aggregate sales price of approximately $ 23,400 , excluding closing costs. We may not complete the sales of any or all of the properties we currently plan to sell. Also, we may 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) sell some or all of these properties at amounts that are less than currently expected and/or less than the carrying values of such properties and we may incur losses on any such sales as a result. We did not acquire any properties during the six months ended June 30, 2023. 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 undiscounted cash flows to be generated from those assets. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. During the six months ended June 30, 2023, we recorded impairment charges of $ 11,299 related to four life science and medical office properties that were classified as held for sale as of June 30, 2023. We also recorded impairment charges of $ 2,308 to adjust the carrying value of one medical office property and $ 3,617 to adjust the carrying value of one senior living community to their respective estimated fair value. 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. 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 decreased rental income to record revenue on a straight line basis by $ 4,457 and $ 2,009 for the three and six months ended June 30, 2023, respectively, and we increased rental income to record revenue on a straight line basis by $ 2,710 and $ 4,455 for the three and six months ended June 30, 2022, respectively. Rents receivable, excluding receivables related to our properties classified as held for sale, if any, include $ 74,197 and $ 76,363 of straight line rent receivables at June 30, 2023 and December 31, 2022, 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 $ 12,575 and $ 10,430 for the three months ended June 30, 2023 and 2022, respectively, of which tenant reimbursements totaled $ 12,525 and $ 10,350 , respectively, and $ 24,561 and $ 21,138 for the six months ended June 30, 2023 and 2022, respectively, of which tenant reimbursements totaled $ 24,449 and $ 21,013 , 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 $ 24,950 and $ 25,331 , respectively, as of June 30, 2023, and $ 26,508 and $ 26,889 , respectively, as of December 31, 2022. 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. 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) Note 4. Indebtedness Our principal debt obligations, excluding any debt obligations of our joint ventures, at June 30, 2023 were: (1) $ 450,000 of outstanding borrowings under our credit facility; (2) $ 2,350,000 outstanding principal amount of senior unsecured notes; and (3) $ 9,872 principal amount of a mortgage note secured by one property. This mortgaged property had a gross book value of $ 14,925 at June 30, 2023. We also had two properties subject to finance leases with lease obligations totaling $ 4,518 at June 30, 2023; these two properties had gross book value and accumulated depreciation of $ 43,026 and $ 19,580 , respectively, at June 30, 2023, and $ 41,543 and $ 19,196 , respectively, at December 31, 2022, and the finance leases expire in 2026. We have a $ 450,000 credit facility that is used for general business purposes. The maturity date of our credit facility is January 2024. As of June 30, 2023, our credit facility required interest to be paid on borrowings at the annual rate of 8.1 %, plus a facility fee of $ 338 per quarter. The weighted average annual interest rates for borrowings under our credit facility were 8.1 % and 3.3 % for the three months ended June 30, 2023 and 2022, respectively, and 7.6 % and 3.1 % for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and July 27, 2023, we were fully drawn under our credit facility. In January 2023, pursuant to our credit agreement, we repaid $ 113,627 in outstanding borrowings under our credit facility and the facility commitments were reduced to $ 586,373 . In February 2023, we and our lenders further amended our credit agreement. Pursuant to the amendment: • the waiver of the fixed charge coverage ratio covenant has been extended through the maturity date of our credit facility, or January 15, 2024; • the minimum liquidity requirement was decreased from $ 200,000 to $ 100,000 ; • the facility commitments were reduced from $ 586,373 to $ 450,000 following our repayment of $ 136,373 in then outstanding borrowings, and as a result of the reduction in commitments, we recorded a loss on modification or early extinguishment of debt of $ 1,075 for the six months ended June 30, 2023; • the feature of our credit facility permitting us to reborrow any repaid funds was eliminated; • we continue to 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 the credit agreement; • SOFR was established as the replacement benchmark rate in place of LIBOR to calculate interest payable on amounts outstanding under our credit facility, and the interest premium under our credit facility was increased by 40 basis points; and • we are required to repay outstanding amounts under our credit facility with excess cash flow, and certain financial 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) will remain in place through the maturity date of our credit facility. 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 $ 1,004,700 as of June 30, 2023 to secure our obligations, which pledges and/or mortgage liens may be removed or new ones may be added based on outstanding debt amounts, among other things. Our credit agreement requires us to maintain collateral properties with an aggregate appraised value of at least $ 1,090,909 , and allows Wells Fargo Bank, National Association, as administrative agent under our credit facility, or the Administrative Agent, to periodically reappraise the collateral properties. On June 23, 2023, the Administrative Agent notified us that the reappraised value of the 61 medical office and life science properties securing our credit facility had declined from $ 1,337,200 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) to $ 1,046,770 , below the $ 1,090,909 threshold required under our credit agreement. Failure to meet the required threshold constitutes a non-monetary event of default under our credit agreement. In July 2023, we obtained a limited waiver from the Administrative Agent and requisite lenders under our credit facility, which waived the event of default and decreased the required appraised value of the collateral properties through September 30, 2023, the outside closing date for the Merger. In April 2023, we prepaid a mortgage note secured by one of our senior living communities with an outstanding principal balance of approximately $ 14,565 , a maturity date in June 2023 and an annual interest rate of 6.64 %, using cash on hand. Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding 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 senior unsecured notes indentures and their supplements and our credit agreement also contain covenants that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts and require us to maintain various financial ratios, and our credit agreement contains covenants that restrict our ability to make distributions to our shareholders in certain circumstances. As of June 30, 2023, our ratio of consolidated income available for debt service to debt service was below the 1.5 x incurrence requirement under our credit agreement and our public debt covenants as the effects of the slower than anticipated recovery of our SHOP business from the COVID-19 pandemic, wage and commodity price inflation, rising interest rates, geopolitical risks and other economic, market and industry conditions continued to adversely impact our operations. We are unable to refinance existing or maturing debt or issue new debt until this ratio is at or above 1.5 x on a pro forma basis. As of June 30, 2023, other than the non-monetary event of default and subject to the waivers discussed above, we believe we were in compliance with all of the other covenants under our senior unsecured notes indentures and their supplements, our credit agreement and our other debt obligations. Although we have taken steps to enhance our ability to maintain sufficient liquidity, including entering into the Merger Agreement, a delay in the completion of the Merger or failure to complete the Merger, and a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from wage or commodity price inflation, rising or sustained high interest rates, geopolitical risks or other economic, market or industry conditions, including the delayed recovery of the senior housing industry, downturns or recessions, may cause increased pressure on our ability to satisfy financial and other covenants. 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. Further, 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, which may lead to increased costs and interest rates, additional restrictive covenants or other lender protections. Note 5. Fair Value of Assets and Liabilities The following table presents certain of our assets that are measured at fair value at June 30, 2023 and December 31, 2022, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset. As of June 30, 2023 As of December 31, 2022 Description Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Recurring Fair Value Measurements Assets: Investment in AlerisLife (Level 1) (1) $ — $ — $ 5,880 $ 5,880 Investment in unconsolidated joint venture (Level 3) (2) $ 106,305 $ 106,305 $ 104,697 $ 104,697 Investment in unconsolidated joint venture (Level 3) (3) $ 48,814 $ 48,814 $ 50,780 $ 50,780 Non-Recurring Fair Value Measurements Assets: Real estate properties held for sale (Level 2) (4) $ 22,004 $ 22,004 $ — $ — (1) On February 2, 2023, in connection with the proposed acquisition of AlerisLife Inc., or AlerisLife, by a subsidiary of ABP Trust, which is the controlling shareholder of The RMR Group Inc., or RMR Inc., we agreed to tender all of the 10,691,658 shares of common stock of AlerisLife, we owned at a price of $ 1.31 per share, and the acquisition was completed on March 20, 2023. Prior to March 20, 2023, these AlerisLife common shares were included in other assets, net in our condensed consolidated balance sheets, and were reported at fair value, which was based upon quoted market prices on Nasdaq (Level 1 inputs). During the three months ended June 30, 2022, we recorded an unrealized loss of $ 10,157 , and during the six months ended June 30, 2023 and 2022, we recorded an unrealized gain of $ 8,126 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) and an unrealized loss of $ 18,710 , respectively, which are included in gains and losses on equity securities, net in our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our former investment in AlerisLife common shares to their fair value. See Note 10 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 7.00 %, an exit capitalization rate of 6.00 %, a holding period of 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. 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 6.00 % and 7.25 %, exit capitalization rates of between 4.50 % and 7.00 %, holding periods of 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. See Note 2 for further information regarding this joint venture. (4) We have assets in our condensed consolidated balance sheets that are measured at fair value on a non-recurring basis. During the three months ended June 30, 2023, we recorded impairment charges of $ 11,299 to reduce the carrying value of four medical office and life science properties that are classified as held for sale to their estimated sales price, less estimated costs to sell, based on the aggregate sales prices of $ 22,004 under agreements to sell that we have entered into with third parties for these medical office and life science properties. See Note 2 for further information about impairment charges and the properties we have classified as held for sale. In addition to the assets described in the table above, our financial instruments at June 30, 2023 and December 31, 2022 included cash and cash equivalents, restricted cash, certain other assets, our credit facility, senior unsecured notes, secured debt and finance leases and certain 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 June 30, 2023 As of December 31, 2022 Description Carrying Amount (1) Estimated Fair Value Carrying Amount (1) Estimated Fair Value Senior unsecured notes, 4.750 % coupon rate, due 2024 $ 249,767 $ 232,783 $ 249,628 $ 211,250 Senior unsecured notes, 9.750 % coupon rate, due 2025 496,583 479,605 495,710 478,985 Senior unsecured notes, 4.750 % coupon rate, due 2028 494,109 352,765 493,473 284,375 Senior unsecured notes, 4.375 % coupon rate, due 2031 493,416 364,470 492,986 317,130 Senior unsecured notes, 5.625 % coupon rate, due 2042 342,755 180,600 342,565 151,200 Senior unsecured notes, 6.250 % coupon rate, due 2046 243,483 143,100 243,338 115,300 Secured debts (2) 14,390 12,266 30,177 28,275 $ 2,334,503 $ 1,765,589 $ 2,347,877 $ 1,586,515 (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 values of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 inputs) as of June 30, 2023 and December 31, 2022. 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 June 30, 2023 and December 31, 2022 (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. 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) Note 6. Shareholders' Equity Common Share Awards: On June 5, 2023, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 20,000 of our common shares, valued at $ 1.74 per share, the closing price of our common shares on Nasdaq on that day . Common Share Purchases: During the three and six months ended June 30, 2023, we purchased an aggregate of 24,513 and 30,488 of our common shares, respectively, valued at a weighted average share price of $ 1.14 and $ 1.09 per common share, respectively, from certain 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 six months ended June 30, 2023, we declared and paid quarterly distributions to common shareholders as follows: Declaration Date Record Date Payment Date Distribution Per Share Total Distributions January 12, 2023 January 23, 2023 February 16, 2023 $ 0.01 $ 2,397 April 13, 2023 April 24, 2023 May 18, 2023 0.01 2,397 $ 0.02 $ 4,794 On July 13, 2023, we declared a quarterly distribution to common shareholders of record on July 24, 2023 of $ 0.01 per share, or approximately $ 2,398 . We expect to pay this distribution on or about August 17, 2023. Note 7. Segment Reporting We operate in, and report financial information for, the following two segments: Office Portfolio and 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 on our behalf. We also report “non-segment” operations, which consists 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. 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 Three Months Ended June 30, 2023 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 53,368 $ — $ 8,005 $ 61,373 Residents fees and services — 284,846 — 284,846 Total revenues 53,368 284,846 8,005 346,219 Expenses: Property operating expenses 23,938 261,959 331 286,228 Depreciation and amortization 22,855 43,152 2,387 68,394 General and administrative — — 7,284 7,284 Acquisition and certain other transaction related costs — — 6,043 6,043 Impairment of assets 11,299 — — 11,299 Total expenses 58,092 305,111 16,045 379,248 Interest and other income — 1,466 3,668 5,134 Interest expense ( 116 ) ( 152 ) ( 47,116 ) ( 47,384 ) Loss before income tax expense and equity in net earnings of investees ( 4,840 ) ( 18,951 ) ( 51,488 ) ( 75,279 ) Income tax expense — — ( 221 ) ( 221 ) Equity in net earnings of investees 2,929 — — 2,929 Net loss $ ( 1,911 ) $ ( 18,951 ) $ ( 51,709 ) $ ( 72,571 ) 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 Six Months Ended June 30, 2023 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 110,390 $ — $ 17,421 $ 127,811 Residents fees and services — 564,438 — 564,438 Total revenues 110,390 564,438 17,421 692,249 Expenses: Property operating expenses 47,453 524,288 567 572,308 Depreciation and amortization 42,890 85,304 5,000 133,194 General and administrative — — 13,157 13,157 Acquisition and certain other transaction related costs — — 6,136 6,136 Impairment of assets 13,607 3,617 — 17,224 Total expenses 103,950 613,209 24,860 742,019 Gain on sale of properties — 1,233 — 1,233 Gains on equity securities, net — — 8,126 8,126 Interest and other income — 1,466 7,863 9,329 Interest expense ( 225 ) ( 423 ) ( 94,516 ) ( 95,164 ) Loss on modification or early extinguishment of debt — — ( 1,075 ) ( 1,075 ) Income (loss) before income tax expense and equity in net earnings of investees 6,215 ( 46,495 ) ( 87,041 ) ( 127,321 ) Income tax expense — — ( 190 ) ( 190 ) Equity in net earnings of investees 2,282 — — 2,282 Net income (loss) $ 8,497 $ ( 46,495 ) $ ( 87,231 ) $ ( 125,229 ) Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the U.S. Department of Health and Human Services established a Provider Relief Fund. Subsequently, the American Rescue Plan Act, or ARPA, was enacted. Retention and use of the funds received under the CARES Act and ARPA 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. 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 received funds related to certain programs under the CARES Act, ARPA and various state programs in which certain of our communities in our SHOP segment are located. We have recognized $ 1,466 and $ 959 with respect to those funds we received as interest and other income in our condensed consolidated statements of comprehensive income (loss) with respect to our SHOP segment for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 1,922,835 $ 3,185,289 $ 477,351 $ 5,585,475 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 Three Months Ended June 30, 2022 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 52,610 $ — $ 9,912 $ 62,522 Residents fees and services — 250,506 — 250,506 Total revenues 52,610 250,506 9,912 313,028 Expenses: Property operating expenses 22,026 244,040 — 266,066 Depreciation and amortization 17,997 37,369 2,895 58,261 General and administrative — — 7,207 7,207 Acquisition and certain other transaction related costs — — 609 609 Total expenses 40,023 281,409 10,711 332,143 (Loss) gain on sale of properties ( 1,226 ) 540 — ( 686 ) Losses on equity securities, net — — ( 10,157 ) ( 10,157 ) Interest and other income — 760 1,506 2,266 Interest expense ( 216 ) ( 491 ) ( 55,268 ) ( 55,975 ) Gain (loss) on modification or early extinguishment of debt 16 — ( 29,576 ) ( 29,560 ) Income (loss) before income tax benefit and equity in net earnings of investees 11,161 ( 30,094 ) ( 94,294 ) ( 113,227 ) Income tax benefit — — 640 640 Equity in net earnings of investees 3,204 — — 3,204 Net income (loss) $ 14,365 $ ( 30,094 ) $ ( 93,654 ) $ ( 109,383 ) For the Six Months Ended June 30, 2022 Office Portfolio SHOP Non-Segment Consolidated Revenues: Rental income $ 107,607 $ — $ 20,200 $ 127,807 Residents fees and services — 495,954 — 495,954 Total revenues 107,607 495,954 20,200 623,761 Expenses: Property operating expenses 45,473 489,335 — 534,808 Depreciation and amortization 36,387 73,352 5,781 115,520 General and administrative — — 14,492 14,492 Acquisition and certain other transaction related costs — — 1,537 1,537 Total expenses 81,860 562,687 21,810 666,357 Gain on sale of properties 326,316 792 — 327,108 Losses on equity securities, net — — ( 18,710 ) ( 18,710 ) Interest and other income — 959 1,702 2,661 Interest expense ( 581 ) ( 985 ) ( 111,540 ) ( 113,106 ) Gain (loss) on modification or early extinguishment of debt 16 — ( 30,059 ) ( 30,043 ) Income (loss) before income tax expense and equity in net earnings of investees 351,498 ( 65,967 ) ( 160,217 ) 125,314 Income tax expense — — ( 832 ) ( 832 ) Equity in net earnings of investees 6,558 — — 6,558 Net income (loss) $ 358,056 $ ( 65,967 ) $ ( 161,049 ) $ 131,040 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) As of December 31, 2022 Office Portfolio SHOP Non-Segment Consolidated Total assets $ 1,967,244 $ 3,147,785 $ 887,064 $ 6,002,093 Note 8. 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 many of our SHOP communities. Five Star manages these communities pursuant to an amended and restated master management agreement, or the Master Management Agreement, that we and Five Star are party to. AlerisLife guarantees the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements pursuant to an amended and restated guaranty agreement. In February 2022, we closed a senior living community that had previously been managed by Five Star. We are assessing opportunities to redevelop that property. This community was one of the 108 communities that we and Five Star agreed in 2021 to transition to other third party managers or close. As of December 31, 2021, we had transitioned the other 107 senior living communities, containing 7,340 living units, from Five Star to other third party managers. We incurred costs related to retention and other transition costs for these communities. We recorded $ 517 and $ 1,445 for the three and six months ended June 30, 2022, respectively, of these costs to acquisition and certain other transaction related costs in our condensed consolidated statements of comprehensive income (loss). In connection with ABP Trust’s acquisition of AlerisLife, as described in Note 10, we entered into a Consent and Amendment Agreement, or the Consent Agreement, on February 2, 2023, pursuant to which, among other things, we agreed to amend the Master Management Agreement. See Note 10 for further information regarding the acquisition of AlerisLife, including the related amendment to the Master Management Agreement. Our Senior Living Communities Managed by Five Star. Five Star managed 119 and 120 of our senior living communities as of June 30, 2023 and 2022, respectively. We lease our senior living communities that are managed by Five Star to our taxable REIT subsidiaries, or TRSs. We incurred management fees payable to Five Star of $ 9,890 and $ 8,971 for the three months ended June 30, 2023 and 2022, respectively, and $ 19,904 and $ 17,903 for the six months ended June 30, 2023 and 2022, respectively. For the three months ended June 30, 2023 and 2022, $ 9,315 and $ 8,274 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 575 and $ 697 , respectively, were capitalized in our condensed consolidated balance sheets. For the six months ended June 30, 2023 and 2022, $ 18,452 and $ 16,416 , respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,452 and $ 1,487 , 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 $ 334 and $ 1,736 for the three months ended June 30, 2023 and 2022, respectively, and $ 1,213 and $ 3,652 for the six months ended June 30, 2023 and 2022, 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. Our Senior Living Communities Managed by Other Third Party Managers. Several other third party managers managed 111 and 107 of our senior living communities as of June 30, 2023 and 2022, respectively. We lease our senior living communities that are managed by these third party managers to our TRSs. 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) We incurred management fees payable to these third party managers of $ 5,357 and $ 5,218 for the three months ended June 30, 2023 and 2022, respectively, and $ 10,595 and $ 10,326 for the six months ended June 30, 2023 and 2022, respectively. 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 June 30, Six Months Ended June 30, Revenue from contracts with customers: 2023 2022 2023 2022 Basic housing and support services $ 226,606 $ 196,999 $ 448,793 $ 389,873 Medicare and Medicaid programs 21,740 18,966 43,397 38,783 Private pay and other third party payer SNF services 36,500 34,541 72,248 67,298 Total residents fees and services $ 284,846 $ 250,506 $ 564,438 $ 495,954 Note 9. 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 10 for further information regarding our relationship, agreements and transactions with RMR. We recognized net business management fees of $ 3,321 and $ 4,506 for the three months ended June 30, 2023 and 2022, respectively, and $ 6,591 and $ 9,319 for the six months ended June 30, 2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of each of June 30, 2023 and 2022, no estimated incentive fees are included in the net business management fees we recognized for the three or six months ended June 30, 2023 or 2022. The actual amount of annual incentive fees for 2023, 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, 2023, and will be payable in January 2024. We did not incur any incentive fee payable for the year ended December 31, 2022. We recognize business management and incentive fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). We recognized aggregate net property management and construction supervision fees of $ 2,202 and $ 2,518 for the three months ended June 30, 2023 and 2022, respectively, and $ 4,194 and $ 4,909 for the six months ended June 30, 2023 and 2022, respectively. For the three months ended June 30, 2023 and 2022, $ 1,400 and $ 1,272 , respectively, of the total property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 802 and $ 1,246 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the six months ended June 30, 2023 and 2022, $ 2,863 and $ 2,621 , respectively, of the total property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 1,331 and $ 2,288 , 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 $ 3,561 and $ 3,111 for these expenses and costs for the three months ended June 30, 2023 and 2022, respectively, and $ 7,094 and $ 6,075 for the six months ended June 30, 2023 and 2022, 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. 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) As described in Note 10 below, contemporaneously with the execution of the Merger Agreement, we, OPI and RMR entered into a letter agreement pursuant to which, on the terms and subject to conditions contained therein, we and RMR have acknowledged and agreed that, effective upon consummation of the Merger, we shall have terminated our business and property management agreements with RMR for convenience, and RMR shall have waived its right to receive payment of the termination fee pursuant to each such agreement upon such termination. The foregoing terminations and waivers apply only in respect of the Merger and do not apply to any other transaction or arrangement. Management Agreements Between Our Joint Ventures and RMR. We have two separate joint venture arrangements with third party institutional investors, the Seaport JV and the LSMD JV. 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. We wholly owned the 10 medical office and life science properties included in the LSMD JV until the contribution of these properties to the LSMD JV in January 2022, and we paid management fees to RMR for the management services it provided to us for those properties until the contribution of those properties to the LSMD JV. Note 10. Related Person Transactions We have relationships and historical and continuing transactions with RMR, 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. and AlerisLife, 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, until the acquisition of AlerisLife by ABP Trust on March 20, 2023, the chair of the board of directors and a managing director of AlerisLife, and currently the sole 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 officers and employees 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, secretary of AlerisLife and, until March 20, 2023, a managing director of AlerisLife. Certain of AlerisLife's officers are officers and employees of RMR. Some of our Independent Trustees also serve as independent trustees of other public companies to which RMR or its subsidiaries provide management services. Mr. Portnoy serves as the chair of the board and as a managing trustee of these companies. Other officers of RMR, including Ms. Clark, serve as managing trustees 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. AlerisLife. Until March 20, 2023, we were AlerisLife's largest stockholder, owning 10,691,658 of AlerisLife's common shares, or approximately 31.9 % of AlerisLife's outstanding common shares, and ABP Acquisition LLC, or ABP Acquisition, a subsidiary of ABP Trust, together with ABP Trust, owned approximately 6.1 % 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. On February 2, 2023, AlerisLife entered into an Agreement and Plan of Merger, or the ALR Merger Agreement, with ABP Acquisition, and its wholly owned subsidiary, ABP Acquisition 2 LLC, or ABP Acquisition 2. Pursuant to the ALR Merger Agreement, ABP Acquisition 2 commenced a tender offer to acquire all of the outstanding AlerisLife common shares (other than the AlerisLife common shares held by ABP Trust, ABP Acquisition or their subsidiaries), at a price of $ 1.31 per share, net to the seller in cash, without interest, subject to any withholding of taxes. Following the consummation of the tender offer, on March 20, 2023, ABP Acquisition 2 merged with and into AlerisLife, with AlerisLife as the surviving entity. We refer to the transactions contemplated by the ALR Merger Agreement as the AlerisLife Transaction. In connection with the ALR Merger Agreement, on February 2, 2023, we entered into the Consent Agreement with ABP Acquisition 2, ABP Acquisition, ABP Trust and Adam D. Portnoy, or, collectively, the ABP Parties. Pursuant to the Consent Agreement, we: (1) consented to AlerisLife’s granting of certain exceptions to the ownership restrictions set forth in its charter to the ABP Parties in connection with the AlerisLife Transaction, (2) waived any default under our Master Management Agreement arising or resulting from the AlerisLife Transaction, (3) agreed to tender all of the 10,691,658 AlerisLife common shares that we and our subsidiary owned, into the tender offer at the tender offer price, subject to the right, but not the 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) obligation, to purchase, in a single private transaction, on or before December 31, 2023, a number of shares of common stock of the surviving entity in the AlerisLife Transaction constituting a percentage up to 31.9 % of the then issued and outstanding shares of the common stock of the surviving entity based on the tender offer price and otherwise pursuant to a stockholders agreement to be entered into at the time of any such purchase on such terms as are negotiated and mutually agreed by the parties, and (4) agreed to amend the Master Management Agreement to eliminate any change of control default or event of default provisions effective upon the consummation of the AlerisLife Transaction. See Note 8 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. Merger Agreement with Office Properties Income Trust. As described further in Note 1, on April 11, 2023, we and OPI entered into the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, we will be merged with and into OPI, with OPI continuing as the surviving entity in the Merger. Subject to the satisfaction or waiver of closing conditions, the Merger is expected to close during the third quarter of 2023. RMR serves as our and OPI’s manager and will continue to manage the surviving entity following the Merger. Contemporaneously with the execution of the Merger Agreement, we, OPI and RMR entered into a letter agreement pursuant to which, on the terms and subject to conditions contained therein, we and RMR have acknowledged and agreed that, effective upon consummation of the Merger, we shall have terminated our business and property management agreements with RMR for convenience, and RMR shall have waived its right to receive payment of the termination fee pursuant to each such agreement upon such termination. The foregoing terminations and waivers apply only in respect of the Merger and do not apply to any other transaction or arrangement. Our Joint Ventures. In connection with our entering into the LSMD JV in January 2022, we paid mortgage escrow amounts and closing costs that were payable by that joint venture. Those costs totaled $ 6,040 as of June 30, 2023 and are included in other assets, net, in our condensed consolidated balance sheet. RMR provides management services to each of the Seaport JV and the LSMD JV. See Note 9 for further information regarding those management agreements with RMR. Our Manager, RMR. We have two agreements with RMR to provide management services to us. See Note 9 for further information regarding our management agreements with RMR. Leases with RMR. We lease office space to RMR in certain of our properties for RMR’s property management offices. Pursuant to our lease agreements with RMR, we recognized rental income from RMR for leased office space of $ 13 and $ 78 for the three months ended June 30, 2023 and 2022, respectively, and $ 74 and $ 148 for the six months ended June 30, 2023 and 2022, respectively. For further information about these and other such relationships and certain other related person transactions, see our Annual Report. Note 11. 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 June 30, 2023 and 2022, we recognized income tax expense of $ 221 and benefit of $ 640 , respectively, and for the six months ended June 30, 2023 and 2022, we recognized income tax expense of $ 190 and $ 832 , respectively. 21 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 12. 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. 22 Table of Contents