DIVERSIFIED HEALTHCARE TRUST 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. OVERVIEW We are a REIT organized under Maryland law that primarily owns medical office and life science properties, senior living communities and other healthcare related properties throughout the United States. As of December 31, 2023, we owned 371 properties located in 36 states and Washington, D.C., including one property classified as held for sale and three closed senior living communities. At December 31, 2023, the gross book value of our real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, was $7.2 billion. As of December 31, 2023, we owned an equity interest in each of the Seaport JV and the LSMD JV that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet that were 98% leased with an average (by annualized rental income) remaining lease term of 5.3 years. 58 Table of Contents We are closely monitoring the impacts of the current economic and market conditions on all aspects of our business, including, but not limited to, high interest rates, prolonged high inflation, labor market challenges, supply chain disruptions, volatility in the public equity and debt markets, geopolitical risks, economic downturns or a possible recession and changes in real estate utilization. We expect continued volatility in labor, insurance and food costs in our SHOP segment. For further information and risks relating to these economic uncertainties and their impact on our business and financial condition, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements," Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors". In response to significant and prolonged increases in inflation, the U.S. Federal Reserve has raised interest rates multiple times since the beginning of 2022. Although the U.S. Federal Reserve has indicated that it may lower interest rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current high levels or continue to increase. These inflationary pressures in the United States, as well as global geopolitical instability and tensions, have given rise to uncertainty regarding economic downturns or a possible recession and potential disruptions in the financial markets. An economic recession, or continued or intensified disruptions in the financial markets, could adversely affect our financial condition and that of our managers, operators and tenants, could adversely impact the ability or willingness of our managers, operators, tenants or residents to pay amounts owed to us, could impair our ability to effectively deploy our capital or realize our target returns on our investments, may restrict our access to, and would likely increase our cost of, capital, and may cause the values of our properties and of our securities to decline. We are encouraged by positive trends, including increases in rates and occupancy, in our SHOP segment. Additionally, we also expect favorable supply and demand dynamics in the senior living industry to enable our operators to generate better returns at our communities than we have experienced in the years following the COVID-19 pandemic. While certain costs, primarily labor, insurance and food costs, have increased, we expect these cost increases to moderate and decline, which will provide our operators the opportunity to increase rates in excess of increases in costs, resulting in improving returns to us. On April 11, 2023, we and Office Properties Income Trust, or OPI, entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which we and OPI agreed that we would merge with and into OPI, with OPI as the surviving entity in the merger. On September 1, 2023, we and OPI mutually terminated the Merger Agreement, effective September 1, 2023. Neither we nor OPI were required to pay any termination fee as a result of the mutual decision to terminate the Merger Agreement, and we and OPI bore our and its respective costs and expenses related to the Merger Agreement in accordance with the terms of the Merger Agreement. We recorded $9.9 million of expenses during the year ended December 31, 2023 related to the terminated merger with OPI, which is included in acquisition and certain other transaction related costs in our consolidated statement of operations. For more information regarding the merger, see Note 8 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K. PORTFOLIO OVERVIEW The following tables present an overview of our portfolio (dollars in thousands, except investment per square foot or unit data): (As of December 31, 2023) Number of Properties Square Feet or Number of Units Gross Book Value of Real Estate Assets (1) % of Total Gross Book Value of Real Estate Assets Investment per Square Foot or Unit (2) 2023 Revenues % of 2023 Revenues 2023 NOI (3) % of 2023 NOI Office Portfolio (4) 102 8,609,921 sq. ft. $ 2,284,946 31.7 % $ 265 $ 220,530 15.6 % $ 122,566 51.9 % SHOP 232 25,209 units 4,535,435 62.9 % $ 179,913 1,151,908 81.7 % 76,817 32.5 % Triple net leased senior living communities 27 2,062 units 202,908 2.8 % $ 98,403 24,588 1.7 % 24,583 10.4 % Wellness centers 10 812,000 sq. ft. 187,493 2.6 % $ 231 13,282 1.0 % 12,191 5.2 % Total 371 $ 7,210,782 100.0 % $ 1,410,308 100.0 % $ 236,157 100.0 % 59 Table of Contents Occupancy As of and for the Year Ended December 31, 2023 2022 Office Portfolio (5) 86.9 % 84.7 % SHOP 78.1 % 74.4 % Triple net leased senior living communities (6)(7) 80.7 % 79.9 % Wellness centers (7) 100.0 % 100.0 % (1) Represents gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, if any. (2) Represents gross book value of real estate assets divided by number of rentable square feet or living units, as applicable, at December 31, 2023. (3) We calculate our NOI on a consolidated basis and by reportable segment. Our definition of NOI and our reconciliation of net income (loss) to NOI are included below under the heading “Non-GAAP Financial Measures”. (4) Our medical office and life science property leases include some triple net leases where, in addition to paying fixed rents, the tenants assume the obligation to operate and maintain the properties at their expense, and some net and modified gross leases where we are responsible for the operation and maintenance of the properties and we charge tenants for some or all of the property operating costs. A portion of our medical office and life science property leases are full-service leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs. (5) Medical office and life science property occupancy data is as of December 31, 2023 and 2022 and includes (i) out of service assets undergoing redevelopment, (ii) space which is leased but is not occupied or is being offered for sublease by tenants and (iii) space being fitted out for occupancy. (6) Excludes data for periods prior to our ownership of certain properties, data for properties sold or classified as held for sale, if any, and data for which there was a transfer of operations during the periods presented. (7) Operating data for our triple net leased senior living communities leased to third party operators and wellness centers are presented based upon the operating results provided by our tenants for the 12 months ended September 30, 2023 and 2022, or the most recent prior period for which tenant operating results are made available to us. We have not independently verified tenant operating data. We operate in, and report financial information for, the following two segments: Office Portfolio and SHOP. 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, which consists of triple net leased senior living communities that are leased to third party operators from which we receive rents and wellness centers. Office Portfolio As of December 31, 2023, we owned 102 medical office and life science properties located in 24 states and Washington, D.C. These properties have a total of 8.6 million square feet. 60 Table of Contents During the year ended December 31, 2023, we entered into new and renewal leases in our Office Portfolio segment as summarized in the following table (dollars and square feet in thousands, except per square foot amounts): Year Ended December 31, 2023 New Leases Renewals Total Square feet leased during the period 284 602 886 Weighted average rental rate change (by rentable square feet) 12.8 % 10.4 % 11.1 % Weighted average lease term (years) 10.3 6.2 7.5 Total leasing costs and concession commitments (1) $ 24,151 $ 11,932 $ 36,083 Total leasing costs and concession commitments per square foot (1) $ 85.08 $ 19.82 $ 40.74 Total leasing costs and concession commitments per square foot per year (1) $ 8.24 $ 3.20 $ 5.42 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. As of December 31, 2023, lease expirations in our Office Portfolio segment were as follows (dollars in thousands): Year Number of Tenants Square Feet Leased Percent of Total Cumulative Percent of Total Annualized Rental Income (1) Percent of Total Cumulative Percent of Total 2024 73 654,793 9.1 % 9.1% $ 15,150 7.1% 7.1% 2025 76 617,857 8.5 % 17.6% 17,251 8.0% 15.1% 2026 57 759,842 10.5 % 28.1% 23,768 11.1% 26.2% 2027 62 944,509 13.1 % 41.2% 22,875 10.6% 36.8% 2028 55 1,192,516 16.5 % 57.7% 33,660 15.7% 52.5% 2029 49 550,397 7.6 % 65.3% 16,408 7.6% 60.1% 2030 22 287,954 4.0 % 69.3% 7,239 3.4% 63.5% 2031 20 905,907 12.5 % 81.8% 26,296 12.2% 75.7% 2032 15 266,009 3.7 % 85.5% 11,858 5.5% 81.2% 2033 and thereafter 44 1,054,763 14.5 % 100.0% 40,289 18.8% 100.0% Total 473 7,234,547 100.0 % $ 214,794 100.0% Weighted average remaining lease term (in years) 5.2 5.7 (1) Annualized rental income is based on rents pursuant to existing leases as of December 31, 2023, including straight line rent adjustments and estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our medical office and life science properties. 61 Table of Contents The following table presents information concerning our Office Portfolio tenants that represent 1% or more of total Office Portfolio annualized rental income as of December 31, 2023 (dollars in thousands): Tenant Square Feet Leased Percent of Total Square Feet Leased Annualized Rental Income (1) Percent of Total Annualized Rental Income (1) Lease Expiration Advocate Aurora Health 631,529 8.7% $ 16,939 7.9% 2026 - 2031 Alamar Biosciences, Inc. 88,508 1.2% 6,194 2.9% 2034 KSQ Therapeutics, Inc. 54,633 0.8% 5,595 2.6% 2032 Boston Children's Hospital 99,063 1.4% 5,573 2.6% 2028 Merck & Co., Inc. 55,102 0.8% 5,290 2.5% 2033 Sonova Holding AG 116,444 1.6% 4,875 2.3% 2033 Magellan Health Inc. 232,521 3.2% 4,643 2.2% 2025 Medtronic, Inc. 201,522 2.8% 4,512 2.1% 2027 - 2028 Tokio Marine Holdings Inc. 81,072 1.1% 3,982 1.9% 2024 - 2033 Abbvie Inc. 197,976 2.7% 3,972 1.8% 2027 United Healthcare Services, Inc. 149,719 2.1% 3,947 1.8% 2026 Cigna Holding Co. 219,644 3.0% 3,914 1.8% 2024 PerkinElmer Health Sciences, Inc. 105,462 1.5% 3,681 1.7% 2028 McKesson Corporation 475,204 6.6% 3,556 1.7% 2025 - 2029 HCA Holdings Inc. 80,478 1.1% 3,490 1.6% 2024 - 2027 Duke University 126,225 1.7% 3,359 1.6% 2024 Hawaii Pacific Health 85,956 1.2% 3,289 1.5% 2024 - 2029 New York University 109,983 1.5% 3,248 1.5% 2024 - 2028 Ultragenyx Pharmaceutical Inc. 63,048 0.9% 3,123 1.5% 2026 Virginia Commonwealth University Health System 135,375 1.9% 2,920 1.4% 2032 WRA Management, Inc. 35,067 0.5% 2,609 1.2% 2025 - 2045 The University of Kansas Health System 104,815 1.4% 2,462 1.1% 2027 - 2028 Organogenesis Holdings Inc. 22,966 0.3% 2,431 1.1% 2031 Covenant Health System 55,807 0.8% 2,376 1.1% 2034 Warner Chilcott Limited 81,712 1.1% 2,280 1.1% 2027 Cytek BioSciences, Inc. 99,378 1.4% 2,241 1.0% 2029 All Other Tenants 3,525,338 48.7% 104,293 48.5% 2024 - 2043 Totals 7,234,547 100.0% $ 214,794 100.0% (1) Annualized rental income is based on rents pursuant to existing leases as of December 31, 2023, including straight line rent adjustments and estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our medical office and life science properties. Senior Housing Operating Portfolio Our managed senior living communities are operated by third parties pursuant to management agreements. Five Star, which is an operating division of AlerisLife, manages many of our SHOP communities, and we lease nearly all of our senior living communities, including those managed by third party managers, to our TRSs. In June 2021, we amended our then existing management arrangements with Five Star and Five Star agreed to cooperate with us in transitioning 108 of our senior living communities to other third party managers. 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. Pursuant to the Master Management Agreement, Five Star receives a 62 Table of Contents management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities. Five Star may receive an annual incentive fee equal to 15% of the amount by which the annual EBITDA of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year. The target EBITDA for those senior living communities on a combined basis is increased annually based on the greater of the annual increase of the consumer price index, or CPI, or 2%, plus 6% of any capital investments funded at the managed senior living communities on a combined basis in excess of the target capital investment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%. Any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee. The Master Management Agreement expires in 2036, subject to Five Star's right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated. Pursuant to the Master Management Agreement, beginning in 2025, we 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 EBITDA for the applicable period. In addition, Five Star delivered to us a related amended and restated guaranty agreement pursuant to which Five Star is continuing to guarantee the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements. As of December 31, 2023, Five Star managed 119 senior living communities for our account. We completed the transition of 107 senior living communities from Five Star to other third party managers in 2021 and we have closed the remaining senior living community. In October 2022, we and one of our operators agreed to terminate the lease agreements for three of these senior living communities and replaced them with management agreements under our TRS structure, and an affiliate of the same operator will continue to operate these properties. Additionally, effective October 31, 2022, Five Star ceased managing our active adult community, and RMR assumed management of that community. For the years ended December 31, 2023, 2022 and 2021, we recorded $0, $2.1 million and $17.4 million, respectively, of costs that we incurred related to retention and other transition costs to acquisition and certain other transaction related costs in our consolidated statements of operations. The terms of the management agreements with the other third party managers are generally as follows: the other third party managers will receive a management fee equal to 5% to 6% of the gross revenues realized at the applicable senior living communities plus reimbursement for direct costs and expenses related to such communities. These agreements generally also provide for the other third party managers to earn a minimum base fee for a portion of the term of the agreement. Additionally, the other third party managers have the ability to earn incentive fees equal to 15% to 25% of the amount by which EBITDA of the applicable communities exceeds the target EBITDA for the applicable communities. The other third party managers can also earn a construction supervision fee ranging between 3% and 5% of construction costs. The initial terms of the management agreements with the other third party managers are generally five years, subject to automatic extensions of successive terms of two years each unless earlier terminated or timely notice of nonrenewal is delivered. The management agreements with the other third party managers also generally provide us with the right to terminate the management agreements for communities that do not earn 70% to 80% of the target EBITDA for such communities, after an agreed upon stabilized period. In December 2023, we notified one of our third party managers, Cedarhurst Senior Living, which manages certain of our communities located in Wisconsin and Illinois, that we will be terminating our management agreement with respect to these communities. We expect to transition these communities during the first half of 2024 to another third party manager, Charter Senior Living, which we have an existing relationship with. We expect the terms of the management agreement for these communities to be generally consistent with the terms outlined above. We expect to pay a termination fee of approximately $1.0 million in connection with this transition. 63 Table of Contents The following table presents a summary of the other third party managers as of December 31, 2023: Manager Location Number of Communities Number of Units Cedarhurst Senior Living IL/WI 13 767 Charter Senior Living FL/MD/TN/VA 17 977 IntegraCare Senior Living PA 2 143 Life Care Services DE 3 517 Navion Senior Solutions SC 5 235 Northstar Senior Living AZ/CA 7 418 Oaks-Caravita Senior Care GA/SC 26 1,415 Oaks Senior Living GA 3 264 Omega Senior Living NE 1 69 Phoenix Senior Living AL/AR/KY/MO/NC/SC 23 1,486 RMR TX 1 169 Stellar Senior Living CO/TX/WY 10 1,094 Total 111 7,554 For further information regarding the terms of the Master Management Agreement and of the management agreements with the other third party managers and our other business arrangements with Five Star, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, and for more information about our dealings and relationships with Five Star generally, and the risks which may arise as a result of these related person transactions, see “Risk Factors—Risks Related to Our Relationships with RMR and AlerisLife (including Five Star)” in Part I, Item 1A of this Annual Report on Form 10-K, “—Related Person Transactions” below and Note 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. All Other As of December 31, 2023, lease expirations at our triple net leased senior living communities leased to third party operators and wellness centers were as follows (dollars in thousands): Year Number of Properties Number of Units or Square Feet Annualized Rental Income (1) Percent of Total Cumulative Percent of Total 2024 — — $ — — % — % 2025 3 129,500 sq. ft. 1,458 3.7 % 3.7 % 2026 — — — — % 3.7 % 2027 4 533 units 4,612 11.8 % 15.5 % 2028 — — — — % 15.5 % 2029 1 155 units 547 1.4 % 16.9 % 2030 2 283 units 3,496 8.9 % 25.8 % 2031 1 — — — % 25.8 % 2032 18 876 units 9,836 25.1 % 50.9 % 2033 and thereafter 8 215 units and 682,500 sq. ft. 19,227 49.1 % 100.0 % Total 37 $ 39,176 100.0 % (1) Annualized rental income is based on rents pursuant to existing leases as of December 31, 2023. Annualized rental income includes estimated percentage rents and straight line rent adjustments and excludes lease value amortization. 64 Table of Contents During the year ended December 31, 2023 we entered into new leases at certain of our wellness centers in our "non-segment" operations as summarized in the following table (dollars and square feet in thousands, except per square foot amounts): Year Ended December 31, 2023 New Leases Square feet leased during the period 225 Weighted average rental rate change (by rentable square feet) (9.9) % Weighted average lease term (years) 18.6 Total leasing costs and concession commitments (1) $ 30,071 Total leasing costs and concession commitments per square foot (1) $ 133.95 Total leasing costs and concession commitments per square foot per year (1) $ 7.20 (1) Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. GENERAL INDUSTRY TRENDS The healthcare industry remains one of the most resilient commercial real estate sectors, in part due to the scale of the U.S. healthcare market, which collectively represents approximately 17% of the U.S. GDP, according to CMS. The healthcare sector’s continued expansion has been driven by rising standards of care, increasing life expectancies and other demographic trends, as well as funding from both public and private sources. In the medical office sector, the industry has been trending toward a greater proportion of outpatient care resulting in an increasing number of multi-practice medical office buildings, anchor leased by hospital systems, and a decline in free-standing medical practices, a potential benefit to our Office Portfolio. The pandemic further accelerated this trend because of stronger consumer preference for off-campus care in more convenient locations. Costs within the industry continue to be in focus with health system operating margins being under pressure in recent years, which is, while moderating, a theme that may continue in 2024. In the life science sector, particularly with properties that provide laboratory or medical manufacturing space, over the years there has been significant capital invested across the bio-medical research space, driving a large increase in demand for laboratory and research space. Venture capital funding reached an all-time high in 2021; however, such funding significantly declined in 2022 and 2023. Funding in the past two years has been increasingly concentrated on companies located in the top three markets of Boston, San Francisco and San Diego with more stringent requirements. New construction of life science properties hit record levels in 2021 and 2023 across major markets, and the construction pipeline, while decreasing, remains elevated into 2024. This has been met by softening demand from tenants and resulted in rising vacancy rates across the major life science markets. We believe that the primary market for senior living services is individuals age 80 and older. According to U.S. Census data, the age 75+ demographic is projected to be among the fastest growing age cohorts in the United States over the next 20 years, and according to CMS, the age 85+ demographic is projected to grow over 30% over the next five years. Also, as a result of medical advances, seniors are living longer. Due to these demographic trends, we expect the demand for senior living services and housing to increase for the foreseeable future. Despite this trend, future economic downturns, softness in the U.S. housing market, higher levels of unemployment among our potential residents' family members, changes in demand and market practices, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford the resident fees at our senior living communities. The medical advances which are increasing average life spans are also causing some seniors to delay moving to senior living communities until they require greater care or to forgo moving to senior living communities altogether, but we do not believe this factor is sufficient to offset the long term positive demographic trends causing increased demand for senior living communities for the foreseeable future. We believe there is a favorable mix of increased demand and limited supply for senior living communities which we expect will benefit us and our existing portfolio of senior living communities in the future. As a result of elevated financing and construction costs over recent years, inventory growth for senior living communities has reached a new low. According to NIC, annual inventory growth was 1.3% across all markets during the fourth quarter of 2023. Additionally, annual absorption was 65 Table of Contents 4.1% for the fourth quarter of 2023, according to NIC. We expect improving market fundamentals and constrained supply to continue to result in increased occupancy at our senior living communities over the next 12 to 24 months. The senior living industry is subject to extensive and frequently changing federal, state and local laws and regulations. For further information regarding these laws and regulations, and possible legislative and regulatory changes, see "Business—Government Regulation and Reimbursement" in Part I, Item 1 of this Annual Report on Form 10-K. 66 Table of Contents RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted) The following table summarizes the results of operations of each of our segments for the years ended December 31, 2023 and 2022: For the Year Ended December 31, 2023 2022 Revenues: Office Portfolio $ 220,530 $ 222,390 SHOP 1,151,908 1,022,826 Non-Segment 37,870 38,350 Total revenues $ 1,410,308 $ 1,283,566 Net income (loss): Office Portfolio $ (12,183) $ 378,282 SHOP (99,620) (139,589) Non-Segment (181,769) (254,467) Net income (loss) $ (293,572) $ (15,774) The following sections analyze and discuss the results of operations of each of our segments for the periods presented. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 (dollars and square feet in thousands, except average monthly rate): Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the year ended December 31, 2023 to the year ended December 31, 2022. Our definition of NOI and our reconciliation of net income (loss) to NOI and a description of why we believe NOI is an appropriate supplemental measure are included below under the heading “Non-GAAP Financial Measures.” For a comparison of consolidated results for the year ended December 31, 2022 compared to the year ended December 31, 2021, see Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022. For the Year Ended December 31, 2023 2022 $ Change % Change NOI by segment: Office Portfolio $ 122,566 $ 128,091 $ (5,525) (4.3) % SHOP 76,817 8,726 68,091 nm Non-Segment 36,774 37,679 (905) (2.4) % Total NOI 236,157 174,496 61,661 35.3 % Depreciation and amortization 284,083 239,280 44,803 18.7 % General and administrative 26,131 26,435 (304) (1.1) % Acquisition and certain other transaction related costs 10,853 2,605 8,248 nm Impairment of assets 18,380 — 18,380 100.0 % Gain on sale of properties 1,205 321,862 (320,657) (99.6) % Gains and losses on equity securities, net 8,126 (25,660) 33,786 (131.7) % Interest and other income 15,536 15,929 (393) (2.5) % Interest expense (191,775) (209,383) 17,608 (8.4) % Loss on modification or early extinguishment of debt (2,468) (30,043) 27,575 (91.8) % Loss before income tax expense and equity in net (losses) earnings of investees (272,666) (21,119) (251,547) nm Income tax expense (445) (710) 265 (37.3) % Equity in net (losses) earnings of investees (20,461) 6,055 (26,516) nm Net loss $ (293,572) $ (15,774) $ (277,798) nm nm – not meaningful 67 Table of Contents Office Portfolio: Comparable Properties (1) All Properties As of December 31, As of December 31, 2023 2022 2023 2022 Total buildings 91 91 102 105 Total square feet 7,683 7,689 8,610 8,811 Occupancy 92.1 % 92.1 % 86.9 % 84.7 % Year Ended December 31, Comparable (1) Non-Comparable Properties Results Properties Results Consolidated Properties Results 2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change Rental income $ 197,840 $ 194,212 $ 3,628 1.9 % $ 22,690 $ 28,178 $ 220,530 $ 222,390 $ (1,860) (0.8) % Property operating expenses (83,177) (79,598) 3,579 4.5 % (14,787) (14,701) (97,964) (94,299) 3,665 3.9 % NOI $ 114,663 $ 114,614 $ 49 0.0 % $ 7,903 $ 13,477 $ 122,566 $ 128,091 $ (5,525) (4.3) % (1) Consists of medical office and life science properties that we have owned and which have been in service continuously since January 1, 2022; excludes properties classified as held for sale or out of service undergoing redevelopment, if any, and properties owned by unconsolidated joint ventures in each of which we own an equity interest. Rental income. Rental income decreased due to a tenant default at one of our properties resulting in a write off of the corresponding unamortized straight line rent receivable, the deconsolidation of 10 medical office and life science properties currently owned by an unconsolidated joint venture in which we own an equity interest and certain of our properties being taken out of service and/or currently undergoing redevelopment, partially offset by the acquisition of one property since January 1, 2022 and an increase in rental income at our comparable properties and at certain of our recently redeveloped properties. Rental income increased at our comparable properties primarily due to higher average rents resulting from our new and renewal leasing activity, increases in property operating expense reimbursements at certain of our comparable properties, an early termination fee recognized at one of our properties and increased parking revenue at certain of our comparable properties. Property operating expenses. Property operating expenses consist of real estate taxes, utility expenses, insurance, management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. The increase in property operating expenses is primarily due to an increase in property operating expenses at our comparable properties and at certain of our recently developed properties, and our acquisition of one property since January 1, 2022, partially offset by the deconsolidation of 10 medical office and life science properties currently owned by an unconsolidated joint venture in which we own an equity interest. Property operating expenses at our comparable properties increased primarily due to increases in insurance costs, repairs and maintenance expense, utilities expense and other direct costs at certain of our comparable properties, partially offset by decreases in real estate taxes. Net operating income. The change in NOI reflects the net changes in rental income and property operating expenses described above. SHOP: Comparable Properties (1) All Properties As of and For the Year Ended December 31, As of and For the Year Ended December 31, 2023 2022 2023 2022 Total properties 225 225 232 237 Number of units 24,499 24,499 25,209 25,346 Occupancy 78.5 % 74.5 % 78.1 % 74.4 % Average monthly rate (2) $ 4,824 $ 4,527 $ 4,821 $ 4,506 68 Table of Contents Year Ended December 31, Comparable (1) Non-Comparable Properties Results Properties Results Consolidated Properties Results 2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change Residents fees and services $ 1,132,280 $ 1,010,723 $ 121,557 12.0 % $ 19,628 $ 12,103 $ 1,151,908 $ 1,022,826 $ 129,082 12.6 % Property operating expenses (1,054,545) (996,954) 57,591 5.8 % (20,546) (17,146) (1,075,091) (1,014,100) 60,991 6.0 % NOI $ 77,735 $ 13,769 $ 63,966 464.6 % $ (918) $ (5,043) $ 76,817 $ 8,726 $ 68,091 780.3 % (1) Consists of senior living communities that we have owned and which have been in service, reported in the same segment and operated by the same operator continuously since January 1, 2022; excludes communities classified as held for sale, closed or out of service, if any. (2) Average monthly rate is calculated by taking the average daily rate, which is defined as total residents fees and services divided by occupied units during the period, and multiplying it by 30 days. Residents fees and services. Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided and related fees are accrued. Residents fees and services increased primarily due to increases in occupancy and average monthly rate at our communities and the transfer of three previously leased communities to our SHOP segment in October 2022 as described below, partially offset by one community that was taken out of service due to damage sustained by Hurricane Ian. Property operating expenses. Property operating expenses consist of wages and benefit costs of community level personnel, real estate taxes, utility expenses, insurance, repairs and maintenance expense, management fees, cleaning expense and other direct costs of operating these communities. Property operating expenses increased primarily due to increases in labor costs, dietary expenses, insurance costs, increased sales and marketing costs to improve occupancy and the transfer of three previously leased communities to our SHOP segment as described below, partially offset by one community that was taken out of service due to damage sustained by Hurricane Ian. Net operating income. The change in NOI reflects the net changes in residents fees and services and property operating expenses described above. Non-Segment (1) : Comparable Properties (2) All Properties As of and For the Year Ended December 31, As of and For the Year Ended December 31, 2023 2022 2023 2022 Total properties: Triple net leased senior living communities 26 26 27 27 Wellness centers 10 10 10 10 Year Ended December 31, Comparable (2) Non-Comparable Properties Results Properties Results Consolidated Properties Results 2023 2022 $ Change % Change 2023 2022 2023 2022 $ Change % Change Rental income $ 37,033 $ 36,371 $ 662 1.8 % $ 837 $ 1,979 $ 37,870 $ 38,350 $ (480) (1.3) % Property operating expenses (1,096) (671) 425 63.3 % — — (1,096) (671) 425 63.3 % NOI $ 35,937 $ 35,700 $ 237 0.7 % $ 837 $ 1,979 $ 36,774 $ 37,679 $ (905) (2.4) % (1) Non-segment operations consists of all of our other operations, including certain senior living communities and wellness centers that are leased to third party operators, which segment 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. (2) Consists of properties that we have owned and which have been reported in the same segment and leased to the same operator continuously since January 1, 2022; excludes properties classified as held for sale, if any. Rental income. Rental income decreased primarily due to the termination of the lease agreements for three of our senior living communities which were replaced with management agreements under our TRS structure in October 2022, partially offset by an increase in rental income at our comparable properties. The increase in comparable properties rental income was primarily due to net leasing activity and increased property operating expense reimbursements at our wellness centers. In January 2023, we agreed to amend the lease for three of these wellness centers and repossess the remaining three wellness centers. In February 2023, we entered into a 15 year lease, which commenced in June 2023, with a private operator for 69 Table of Contents one of these repossessed wellness centers. In March 2023, we entered into two separate 20 year leases, which are expected to commence in 2024, with an operator for the remaining two repossessed wellness centers. Property operating expenses. Property operating expenses consist of real estate taxes and other direct costs of operating certain of our wellness centers. Pursuant to an agreement with a previously defaulted tenant in January 2023, we expect to continue to incur real estate taxes and other direct costs for three of these wellness centers. We will also continue to pay real estate taxes and other direct costs for two wellness centers until the leases commence, which we expect to occur in 2024. Net operating income. The change in NOI reflects the net changes in rental income and property operating expenses described above. Consolidated: References to changes in the income and expense categories below relate to the comparison of consolidated results for the year ended December 31, 2023, compared to the year ended December 31, 2022. Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to the purchase of capital improvements at certain of our properties, the write off of unamortized assets as a result of a tenant default at one property in our Office Portfolio and the acquisition of one property since January 1, 2022. Increases in depreciation and amortization expenses were partially offset by the deconsolidation of 10 medical office and life science properties owned by an unconsolidated joint venture in which we own an equity interest and certain depreciable assets becoming fully depreciated since January 1, 2022. General and administrative expense . General and administrative expense consists of fees paid to RMR under our business management agreement, legal and accounting fees, fees and expenses of our Trustees, equity compensation expense and other costs relating to our status as a publicly traded company. General and administrative expense decreased primarily due to a decrease in our base business management fees expense as a result of lower consolidated indebtedness and lower trading prices for our common shares during 2023 compared to 2022, partially offset by an increase in legal and other professional fees. Acquisition and certain other transaction related costs. For the year ended December 31, 2023, acquisition and certain other transaction related costs primarily represent costs incurred in connection with our terminated merger with OPI and costs incurred for financial advisory services regarding our then 2024 debt maturities. For the years ended December 31, 2023 and 2022, acquisition and certain other transaction related costs also include costs related to the transition of certain senior living communities to other third party managers. Impairment of assets. For information about our asset impairment charges, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Gain on sale of properties. Gain on sale of properties is the net result of our sales of certain of our properties and joint venture equity interests during 2023 and 2022. Our aggregate gain on sale of properties during 2023 was not significant. The gain on sale of properties during the year ended December 31, 2022 reflects our sale of 10 medical office and life science properties to the LSMD JV in which we retained a 20% equity interest and our sale of a 10% equity interest in the Seaport JV. For further information regarding gain on sale of properties, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Gains and losses on equity securities, net. Gains and losses on equity securities, net, represent the net realized and unrealized gains and losses to adjust our former investment in AlerisLife to its fair value. For further information regarding our former investment in AlerisLife, see Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Interest and other income. The decrease in interest and other income is primarily due to $1,581 of funds we received from certain programs under the CARES Act, ARPA and various state programs during the year ended December 31, 2023 compared to $4,327 received during the year ended December 31, 2022, partially offset by higher interest earned during the year ended December 31, 2023, as a result of higher interest rates compared to the year ended December 31, 2022. Interest expense. Interest expense decreased primarily due to our redemption in June 2022 of $500,000 of our 9.75% senior notes due 2025 and a decrease in average borrowings under our former credit facility in connection with repayments aggregating $700,000 during 2023 related to amendments to and repayment in full of such credit facility in December 2023. 70 Table of Contents This decrease was partially offset by an increase in interest rates under our former credit facility during 2023 and the issuance of $940,534 of our senior secured notes due 2026 in December 2023, resulting in accretion of the discount totaling $2,720 in the 2023 period. Loss on modification or early extinguishment of debt. During the year ended December 31, 2023, we recorded a loss on modification or early extinguishment of debt in connection with amendments to and repayment in full of our then credit facility as well as redemption of $250,000 of our 4.750% senior notes due May 2024. During the year ended December 31, 2022, we also recorded a loss on early extinguishment of debt in connection with our redemption of $500,000 of our 9.75% senior notes due 2025, partially offset by a gain on early extinguishment of debt in connection with our prepayment of a mortgage note in April 2023. Income tax expense. Income tax expense is the result of operating income we earned in certain jurisdictions where we are subject to state income taxes. Equity in net earnings of investees. Equity in net earnings of investees is the change in the fair value of our investments in our unconsolidated joint ventures. Non-GAAP Financial Measures (dollars in thousands, except per share amounts) We present certain "non-GAAP financial measures" within the meaning of applicable SEC rules, including FFO, Normalized FFO and NOI for the years ended December 31, 2023 and 2022. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) or net income (loss) attributable to common shareholders as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) and net income (loss) attributable to common shareholders as presented in our consolidated statements of operations. We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss) and net income (loss) attributable to common shareholders. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties. Funds From Operations and Normalized Funds From Operations We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts, which is net income (loss) attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of properties, equity in net earnings or losses of unconsolidated joint ventures, loss on impairment of real estate assets, gains or losses on equity securities, net, if any, and including adjustments to reflect our proportionate share of FFO of our former equity method investment in AlerisLife for the periods we had an equity investment in AlerisLife that we accounted for as an equity method investment and our proportionate share of FFO from our unconsolidated joint ventures, plus real estate depreciation and amortization of consolidated properties, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the items shown below including similar adjustments for our unconsolidated joint ventures, if any. FFO and Normalized FFO are among the factors considered by our Board when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. Our calculations of FFO and Normalized FFO for the years ended December 31, 2023 and 2022 and reconciliations of net income (loss), the most directly comparable financial measure under GAAP reported in our consolidated financial statements, to FFO and Normalized FFO appear in the following table. This table also provides a comparison of distributions to shareholders, FFO and Normalized FFO and net income (loss) per share for these periods. 71 Table of Contents For the Year Ended December 31, 2023 2022 Net loss $ (293,572) $ (15,774) Depreciation and amortization 284,083 239,280 Gain on sale of properties (1,205) (321,862) Impairment of assets 18,380 — Gains and losses on equity securities, net (8,126) 25,660 Equity in net losses (earnings) of unconsolidated joint ventures 20,461 (6,055) Share of FFO from unconsolidated joint ventures 7,738 11,518 Adjustments to reflect our share of FFO attributable to an equity method investment (1,586) (7,715) FFO 26,173 (74,948) Acquisition and certain other transaction related costs 10,853 2,605 Loss on modification or early extinguishment of debt 2,468 30,043 Adjustments to reflect our share of Normalized FFO attributable to an equity method investment 1,576 3,975 Normalized FFO $ 41,070 $ (38,325) Weighted average common shares outstanding (basic and diluted) 238,836 238,314 Per common share data (basic and diluted): Net loss $ (1.23) $ (0.07) FFO $ 0.11 $ (0.31) Normalized FFO $ 0.17 $ (0.16) Distributions declared $ 0.04 $ 0.04 Property Net Operating Income (NOI) We calculate NOI as shown below. The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. 72 Table of Contents The calculation of NOI by reportable segment is included above in this Item 7. The following table includes the reconciliation of net loss to NOI for the years ended December 31, 2023 and 2022. For the Year Ended December 31, 2023 2022 Reconciliation of Net Loss to NOI: Net loss $ (293,572) $ (15,774) Equity in net losses (earnings) of investees 20,461 (6,055) Income tax expense 445 710 Loss from continuing operations before income tax expense and equity in net (losses) earnings of investees (272,666) (21,119) Loss on modification or early extinguishment of debt 2,468 30,043 Interest expense 191,775 209,383 Interest and other income (15,536) (15,929) Gains and losses on equity securities, net (8,126) 25,660 Gain on sale of properties (1,205) (321,862) Impairment of assets 18,380 — Acquisition and certain other transaction related costs 10,853 2,605 General and administrative 26,131 26,435 Depreciation and amortization 284,083 239,280 Total NOI $ 236,157 $ 174,496 Office Portfolio NOI $ 122,566 $ 128,091 SHOP NOI 76,817 8,726 Non-Segment NOI 36,774 37,679 Total NOI $ 236,157 $ 174,496 LIQUIDITY AND CAPITAL RESOURCES Our principal sources of cash to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate as rental income from our leased properties, residents fees and services revenues from our managed communities and proceeds from the disposition of certain properties. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for at least the next 12 months. Our future cash flows from operating activities will depend primarily upon: • our ability to receive rents from our tenants; • our ability to maintain or increase the occupancy of, and the rates at, our properties; • our and our managers' abilities to control operating expenses and capital expenses at our properties, including increased operating expenses that we may incur in response to wage and commodity price inflation, limited labor availability and increased insurance costs; and • our managers' abilities to maintain or increase our returns from our managed senior living communities. The senior living industry has been adversely affected by a slow recovery from the COVID-19 pandemic, as well as 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 SHOP segment has been slower than previously anticipated and uneven, and we cannot be sure when or if the senior living 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, wage and 73 Table of Contents commodity price inflation and increased insurance costs, among other things, continue to negatively impact margins. Additionally, while our senior living operators have increased rates, those rates are increasing gradually and are not increasing at the same pace as our costs, putting further pressure on our margins. In order to increase the probability of a recovery of our cash flows, we have continued to invest capital in our SHOP segment. As a result of the slow recovery of our SHOP segment and having $700.0 million of outstanding debt then becoming due within one year and only $338.4 million in cash and cash equivalents as of June 30, 2023, we concluded as of May 8, 2023 that there was a substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of those condensed consolidated financial statements. Additionally, as of November 1, 2023 we were unable to demonstrate that our plans to alleviate the substantial doubt about our ability to continue as a going concern would be probable in mitigating the conditions that raised the substantial doubt given our plans were beyond our control. On December 21, 2023, we completed a private offering of $940.5 million in aggregate principal amount at maturity of senior secured notes due January 2026, with a one-year extension option. The net proceeds from the offering were approximately $730.4 million after deducting initial purchaser discounts and estimated offering costs. We used a portion of the net proceeds to repay in full the $450.0 million outstanding under our then secured credit facility and to redeem $250.0 million of our senior notes that were scheduled to mature in May 2024. As a result of these transactions, we have no significant debt maturities until June 2025 when $500.0 million of our senior notes will become due, and as of December 31, 2023, we had $245.9 million of cash and cash equivalents. Additionally, as of December 31, 2023, our ratio of consolidated income available for debt service to debt service is above the 1.5x incurrence requirement under our senior notes, on a pro forma basis. As a result, we are able to refinance existing or maturing debt and issue new debt as long as this ratio is at or above 1.5x on a pro forma basis at the time of such refinancing or issuance. Our management has concluded that these transactions have successfully alleviated the conditions that raised the substantial doubt about our ability to continue as a going concern and that no substantial doubt about our ability to continue as going concern exists as of February 26, 2024. Until its repayment in full and termination on December 21, 2023, we had a $450.0 million credit facility that was fully drawn. 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 for aggregate proceeds, before closing costs and other adjustments, of $653.3 million. 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 $702.5 million, less approximately $456.6 million of secured debt on the properties incurred by this joint venture. In June 2022, we sold an additional 10% equity interest in the Seaport JV to an existing joint venture investor for aggregate proceeds, before closing costs and other adjustments, of $108.0 million. After giving effect to this sale, we continue to own a 10% equity interest in this joint venture. Our initial investment amount was based on a property valuation of $1.7 billion, less $620.0 million of existing mortgage debts on the property that this joint venture assumed. In February 2023, we sold three properties for an aggregate sales price of $2.8 million, excluding closing costs. In October 2023, we sold three properties for an aggregate sales price of $10.8 million, excluding closing costs. In November 2023, we sold one property for $1.8 million, excluding closing costs. In December 2023, we sold one property for $3.5 million, excluding closing costs. The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our consolidated statements of cash flows (dollars in thousands): Year Ended December 31, 2023 2022 Cash and cash equivalents and restricted cash at beginning of period $ 688,302 $ 1,016,945 Net cash provided by (used in): Operating activities 10,483 (40,353) Investing activities (202,111) 387,708 Financing activities (249,713) (675,998) Cash and cash equivalents and restricted cash at end of period $ 246,961 $ 688,302 74 Table of Contents Our Operating Liquidity and Resources We generally receive minimum rents from tenants at our Office Portfolio properties, triple net leased senior living communities and wellness centers monthly, we receive residents fees and services revenues, net of expenses, from our managed senior living communities monthly and we receive percentage rents from tenants at certain of our senior living communities monthly, quarterly or annually. The change in cash provided by (used in) operating activities for the year ended December 31, 2023 compared to the prior year was primarily due to increased NOI as a result of increased rates and occupancy at the senior living communities in our SHOP segment. Additionally, interest payments decreased in 2023 compared to 2022 primarily due to our redemption of $500,000 of our 9.75% senior notes due 2025 in June 2022. These increases were partially offset by an increase in costs incurred in connection with our terminated merger with OPI. Although we have seen signs of recovery as it relates to our SHOP segment, the recovery of our SHOP segment has been slower than previously anticipated and uneven, and we face and may continue to face issues with limited labor availability and wage inflation along with cost pressures from increased insurance premiums and commodity price inflation and possible reduced demand for senior living communities. Our Investing Liquidity and Resources The change in cash (used in) provided by investing activities for the year ended December 31, 2023 compared to the prior year was primarily due to proceeds in 2022 from our sale of 10 medical office and life science properties to the LSMD JV in which we retained a 20% equity interest and our sale of a 10% equity interest in the Seaport JV, partially offset by a property acquisition in 2022, a decrease in real estate improvements in 2023 compared to 2022, additional proceeds from the sale of properties in 2023 as compared to 2022 and the proceeds received from the tender of all of the 10,691,658 AlerisLife common shares we owned at a price of $1.31 per share in 2023. The following is a summary of capital expenditures, development, redevelopment and other activities for the periods presented (dollars in thousands): For the Year Ended December 31, 2023 2022 Office Portfolio segment capital expenditures: Lease related costs (1) $ 38,070 $ 25,227 Building improvements (2) 12,984 11,955 Recurring capital expenditures - Office Portfolio segment 51,054 37,182 SHOP fixed assets and capital improvements 100,981 109,529 Wellness centers lease related costs (1) 9,721 — Recurring capital expenditures $ 161,756 $ 146,711 Development, redevelopment and other activities - Office Portfolio segment (3) $ 9,244 $ 48,390 Development, redevelopment and other activities - SHOP segment (3) 82,207 118,601 Total development, redevelopment and other activities $ 91,451 $ 166,991 (1) Lease related costs generally include capital expenditures to improve tenants' space or amounts paid directly to tenants to improve their space and other leasing related costs, such as brokerage commissions and tenant inducements. (2) Building improvements generally include capital expenditures to replace obsolete building components that extend the useful life of existing assets or other improvements to increase the marketability of the property. (3) Development, redevelopment and other activities generally include capital expenditures that reposition a property or result in new sources of revenue. We generally plan to continue investing capital in our properties, including redevelopment projects, to better position these properties in their respective markets in order to increase our returns in future years. However, we have deferred, and may in the future defer, our capital expenditures to preserve liquidity. 75 Table of Contents As of December 31, 2023, we had estimated unspent leasing related obligations at our triple net leased wellness centers and our medical office and life science properties of approximately $54.1 million, of which we expect to spend approximately $43.3 million during calendar year 2024. We expect to fund these obligations using operating cash flows we generate as rental income from our leased properties, residents fees and services revenues from our managed communities, cash on hand, proceeds from the disposition of certain properties, future financing activities with unencumbered properties and proceeds related to distributions from our two unconsolidated joint ventures. We are currently in the process of redeveloping certain properties in our Office Portfolio and a number of our managed senior living communities, which projects are expected to be completed at various times between 2024 and 2025. We continue to assess opportunities to redevelop other properties in our Office Portfolio and SHOP segment. These redevelopment projects may require significant capital expenditures and time to complete, and we have deferred, and may in the future defer, certain redevelopment projects to preserve liquidity. In July 2022, we acquired one life science property located in California with approximately 88,508 square feet for approximately $75.1 million, including closing costs and credits. We funded this acquisition using cash on hand. Due to labor availability constraints and wage and commodity price inflation, the capital investments we plan to make may be delayed or cost more than we expect. For further information regarding our acquisitions and dispositions, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Our Financing Liquidity and Resources The change in cash used in financing activities for the year ended December 31, 2023 compared to the prior year was primarily due to the issuance of $940.5 million in aggregate principal amount at maturity of our senior secured notes due 2026 in a private offering, raising net proceeds of $730.4 million, after deducting initial purchaser discounts and estimated offering costs. Additionally, we redeemed in June 2022 $500.0 million of our outstanding 9.75% senior notes due 2025. We also made repayments under our former credit facility aggregating $700.0 million during 2023 as compared to $100.0 million during 2022, and we redeemed in December 2023 all $250.0 million of our outstanding 4.750% senior notes due May 2024. As of December 31, 2023, we had $245.9 million of cash and cash equivalents. We typically use cash balances, net proceeds from offerings of securities, debt issuances or dispositions of assets and cash flows from our operations to fund our operations, debt repayments, distributions, acquisitions, investments, capital expenditures and other general business purposes. Until its repayment in full and termination on December 21, 2023, we had a $450,000 credit facility that was fully drawn. At December 21, 2023, our former credit facility required interest to be paid on borrowings at the annual rate of 8.4%, plus a facility fee of $0.3 million per quarter. During the year ended December 31, 2023, we paid quarterly cash distributions to our shareholders totaling approximately $9.6 million using existing cash balances. For further information regarding the distributions we paid during 2022, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. On January 11, 2024, we declared a quarterly distribution to common shareholders of record on January 22, 2024 of $0.01 per share, or approximately $2.4 million in aggregate. We paid this distribution on February 15, 2024, using cash on hand. We believe we may have access to certain types of financings, including debt or equity offerings, to fund our operations and to repay our debts and other obligations as they become due. Our ability to complete, and the costs associated with, future debt or equity transactions depends primarily upon credit market conditions and our then creditworthiness and our ability to be in compliance with our debt covenants as discussed below. We have no control over market conditions. Our credit and debt ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out that intention. A protracted negative impact on the economy or the industries in which our properties and businesses operate, wage and commodity price inflation, high interest rates, increased insurance costs, geopolitical risks or other economic, market or industry conditions, including the delayed recovery of the senior housing industry, economic downturns and a possible recession, may have various negative consequences including a decline in financing availability and 76 Table of Contents increased costs for financing. Further, those conditions could also disrupt capital markets and limit our access to financing from public sources, particularly if the global financial markets experience significant disruptions. In February 2022, we and our lenders amended our credit agreement. Pursuant to the amendment, among other things, the facility commitments were reduced from $800.0 million to $700.0 million following our repayment of $100.0 million. In February 2022, we exercised our option to extend the maturity date of our former credit facility by one year to January 2024. In January 2023, pursuant to our credit agreement, we repaid $113.6 million in outstanding borrowings under our former credit facility and the facility commitments were reduced to $586.4 million. In February 2023, we and our lenders further amended our credit agreement. Pursuant to the amendment the facility commitments were reduced from $586.4 million to $450.0 million following our repayment of $136.4 million in then outstanding borrowings. In April 2022, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $10.9 million, a maturity date in July 2022 and an annual interest rate of 6.28%, using cash on hand. In June 2022, we redeemed $500.0 million of our outstanding 9.75% senior notes due 2025 for a redemption price equal to 104.875% of the $500.0 million principal amount of the notes being redeemed plus accrued and unpaid interest of $1.1 million, using restricted cash on hand. In July 2022, we prepaid a mortgage note secured by two of our senior living communities with an outstanding principal balance of approximately $15.3 million, a maturity date in October 2022 and an annual interest rate of 5.75%, using cash on hand. In October 2022, we repaid at maturity a mortgage note secured by one of our life science properties with an outstanding principal balance of approximately $10.3 million and an annual interest rate of 4.85%, using cash on hand. In April 2023, we prepaid a mortgage note secured by one of our senior living communities with an outstanding principal balance of approximately $14.6 million, a maturity date in June 2023 and an annual interest rate of 6.64% using cash on hand. In December 2023, we issued $940.5 million in aggregate principal amount at maturity of our senior secured notes due 2026 in a private offering, raising net proceeds of $730.4 million, after deducting initial purchaser discounts and estimated offering costs. These notes are fully and unconditionally guaranteed, on a joint, several and senior secured basis, by certain of our subsidiaries that own 95 properties, or the Collateral Guarantors, and on a joint, several and unsecured basis, by all our subsidiaries other than the Collateral Guarantors, except for certain excluded subsidiaries. These notes and the guarantees provided by the Collateral Guarantors are secured by a first priority lien and security interest on each of the collateral properties and 100% of the equity interests in each of the Collateral Guarantors. These notes require no cash interest payments to accrue prior to maturity. The accreted value of these secured notes will increase at a rate of 11.25% per annum compounded semiannually on January 15 and July 15 of each year. We used the net proceeds from this offering to repay in full and terminate our then $450.0 million secured credit facility and to redeem $250.0 million of our senior notes which were scheduled to mature in May 2024. In January 2023, Moody's downgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from B3 to Caa3 and our senior unsecured debt rating from Caa1 to Ca. In September 2023, Moody's downgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from Caa3 to Ca and our senior unsecured debt rating from Ca to C. In January 2024, Moody's upgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from Ca to Caa3 and our senior unsecured debt rating from C to Ca, and Moody's also assigned a Caa2 rating to our senior secured notes due 2026. In February 2023, Standard & Poor's downgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from BB- to B and our senior unsecured debt rating from B to CCC+. In September 2023, Standard & Poor's downgraded our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 ratings from B to CCC+ and our senior unsecured debt rating from CCC+ to CCC-. In January 2024, Standard & Poor's upgraded our 9.75% senior notes due 2025 rating from CCC+ to B, our 4.375% senior notes due 2031 rating from CCC+ to B and our senior unsecured debt rating from CCC- to CCC, and Standard & Poor's also assigned a B rating to our senior secured notes due 2026. Our next significant debt maturity is $500.0 million of senior unsecured notes that mature in June 2025. 77 Table of Contents For further information regarding our outstanding debt, see Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Debt Covenants Our principal debt obligations at December 31, 2023 were: (1) $2.1 billion outstanding principal amount of senior unsecured notes; (2) $940.5 million outstanding principal amount of senior secured notes; and (3) $9.1 million aggregate principal amount of mortgage notes (excluding premiums, discounts and net debt issuance costs) secured by one property. For further information regarding our indebtedness, see Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Our senior notes are governed by our senior notes indentures and their supplements. Our senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default. Our senior notes indentures and their supplements 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. As of December 31, 2023, we believe we were in compliance with all of the covenants under our senior notes indentures and their supplements and our other debt obligations. Although we continue to take steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Annual Report on Form 10-K, a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from wage or commodity price inflation, high interest rates, geopolitical risks or other economic, market or industry conditions, including the delayed recovery of the senior housing industry, economic downturns or a possible recession, 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 our debt covenants and conditions. Our senior notes indentures and their supplements do not contain provisions for acceleration which could be triggered by our debt ratings. See "—Our Financing Liquidity and Resources" above for information regarding recent changes to our issuer credit rating and senior debt ratings. Our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $20.0 million ($50.0 million or more in the case of our senior notes indentures and supplements entered in February 2016, February 2018, June 2020, February 2021 and December 2023). The loan agreements governing the aggregate $620.0 million secured debt financing related to the Seaport JV contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default. We no longer include this $620.0 million of secured debt financing in our consolidated balance sheet following the deconsolidation of the net assets of this joint venture; however, we continue to provide certain guaranties on this debt. The debt secured by the properties included in the LSMD JV in which we own a 20% equity interest is guaranteed by this joint venture and is non-recourse to us. Supplemental Guarantor Information On May 28, 2020, we issued $1.0 billion of our 9.75% senior notes due 2025. We subsequently redeemed $500.0 million of this debt in June 2022, with $500.0 million remaining outstanding. On February 3, 2021, we issued $500.0 million of our 4.375% senior notes due 2031. As of December 31, 2023, all $500.0 million of our 9.75% senior notes due 2025 and all $500.0 million of our 4.375% senior notes due 2031 were fully and unconditionally guaranteed, on a joint, several and unsecured basis, by all of our subsidiaries, except for certain excluded subsidiaries. The notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and are structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $1.1 billion of senior unsecured notes do not have the benefit of any guarantees as of December 31, 2023. A subsidiary guarantor's guarantee of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, and all other obligations of such subsidiary guarantor under the indenture governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and the indenture under certain circumstances, including on or after the date (a) the notes have an investment grade rating from two rating agencies and one of such investment grade ratings is a mid-BBB investment grade rating and (b) no default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on our 9.75% senior notes due 2025 or our 4.375% senior notes due 2031 or the respective guarantees, or to make any funds available therefor, whether by 78 Table of Contents dividend, distribution, loan or other payments. The rights of holders of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031 and the respective guarantees are structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, including guarantees of other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity. The following tables present summarized financial information for guarantor entities and issuer, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor (dollars in thousands): December 31, 2023 Real estate properties, net $ 3,694,759 Other assets, net 502,729 Total assets $ 4,197,488 Indebtedness, net $ 2,803,829 Other liabilities 242,093 Total liabilities $ 3,045,922 Year Ended December 31, 2023 Revenues $ 1,225,573 Expenses 1,359,041 Loss from continuing operations (302,313) Net loss (323,219) Related Person Transactions We have relationships and historical and continuing transactions with RMR, RMR Inc., AlerisLife (including Five Star) and others related to them. For further information about these and other such relationships and related person transactions, see Notes 3, 6, 7 and 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference and our other filings with the SEC including our definitive Proxy Statement for our 2024 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2023. For further information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services. Critical Accounting Estimates Our critical accounting policies are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates have been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our: • allocation of purchase prices among various asset categories, including allocations to above and below market leases, and the related impact on the recognition of rental income and depreciation and amortization expenses; and • assessment of the carrying values and impairments of long lived assets. 79 Table of Contents We allocate the purchase prices of our properties to land, building and improvements based on determinations of the fair values of these assets assuming the properties are vacant. We determine the fair value of each property using methods similar to those used by independent appraisers, which may involve estimated cash flows that are based on a number of factors, including capitalization rates and discount rates, among others. In some circumstances, we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of depreciable useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives. We allocate a portion of the purchase price to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. The terms of below market leases that include bargain renewal options, if any, are further adjusted if we determine that renewal is probable. We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. In making these allocations, we consider factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to our consolidated financial statements. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amount over the estimated life of the relationships. We regularly evaluate our properties 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 a property. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate incorrectly or if future tenant operations, market or industry factors differ from our expectations, we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, or the amount of any such charges may be inaccurate. These accounting policies involve significant judgments made based upon our experience and the experience of our management and our Board of Trustees, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, and the current and likely future operating and competitive environments in which our properties are operated. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense or impairment charges related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets. Impact of Government Reimbursement For the year ended December 31, 2023, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources, and a small amount of our NOI was generated from properties where a majority of the revenues are derived from Medicare and Medicaid payments. Nonetheless, we own, and our tenants, managers and operators operate, facilities in many states that participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs and other federal and state healthcare payment programs. Also, some of our medical office and life science property tenants participate in federal Medicare and state Medicaid programs and other government healthcare payment programs. Because of shifting policy priorities, the current and projected federal budget deficit, other federal spending priorities and challenging fiscal conditions in some states, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates, state Medicaid rates and federal payments to states for Medicaid programs, as well as existing regulations that impact these matters. Further, there are other existing and recently enacted legislation, and related litigation, related to government payments, insurance and healthcare delivery. Examples of these, and other information regarding such matters and developments, are provided under the caption “Business—Government Regulation and Reimbursement” above in Part I, Item 1 of this Annual Report on Form 10-K. We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate changes or other changes that may be implemented, but we believe that some of these changes will cause these government funded 80 Table of Contents healthcare programs to fail to provide rates that match our and our tenants' increasing expenses and that such changes may be material and adverse to our future financial results. During the years ended December 31, 2023, December 31, 2022 and December 31, 2021, we recognized $1.6 million, $4.3 million and $19.6 million, respectively, in interest and other income in our consolidated statements of operations related to funds received under the CARES Act and ARPA. Seasonality Senior housing operations have historically reflected modest seasonality. During fourth quarter holiday periods, residents at such communities are sometimes discharged to spend time with family and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among residents which can result in increased costs or discharges to hospitals. As a result of these and other factors, these operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the fourth and first calendar quarters. We do not expect these seasonal differences to have a material impact upon the ability of our tenants to pay our rent or our ability to fund our managed senior living operations or our other businesses. Our medical office and life science properties and wellness centers do not typically experience seasonality. Impact of Climate Change Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our properties to increase. We do not expect the direct impact of these increases to be material to our results of operations, because the increased costs either would be the responsibility of our tenants directly or in the longer term, passed through and paid by tenants of our properties. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our buildings obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition or the financial condition of our tenants or managers and their ability to pay rent or returns to us. In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties. Our property manager, RMR, is a member of the ENERGY STAR program, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that is focused on promoting energy efficiency at commercial properties through its “ENERGY STAR” partner program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its leadership in energy and environmental design, or LEED®, green building program. RMR's annual Sustainability Report summarizes the ESG initiatives RMR and its clients, including DHC, employ. RMR's Sustainability Report may be accessed on RMR Inc.'s website at www.rmrgroup.com/corporate-sustainability/default.aspx. The information on or accessible through RMR Inc.'s website is not incorporated by reference into this Annual Report on Form 10-K. For more information, see "Business—Corporate Sustainability" in Part I, Item 1 of this Annual Report on Form 10-K. Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather may have an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, which may have an adverse effect on individual properties we own. We mitigate these risks by procuring, or requiring our tenants to procure, insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results.