10-Q 1 dhc-20220331.htm 10-Q dhc-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2022
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
Commission File Number 1-15319 
DIVERSIFIED HEALTHCARE TRUST
(Exact Name of Registrant as Specified in Its Charter) 
Maryland 04-3445278
(State or Other Jurisdiction of Incorporation or
Organization)
 (IRS Employer Identification No.)
 Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634
(Address of Principal Executive Offices) (Zip Code) 
617 - 796 - 8350
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title Of Each ClassTrading Symbol(s)Name Of Each Exchange On Which Registered
Common Shares of Beneficial InterestDHCThe Nasdaq Stock Market LLC
5.625% Senior Notes due 2042DHCNIThe Nasdaq Stock Market LLC
6.25% Senior Notes due 2046DHCNLThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
Number of registrant's common shares outstanding as of April 29, 2022: 238,988,296


DIVERSIFIED HEALTHCARE TRUST
FORM 10-Q
 
March 31, 2022
 
INDEX
  Page
 
   
   
 
   
 
   
 
   
 
   
   
   
   
 
   
 
   
   
   
 
 
References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Diversified Healthcare Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.



PART I.  Financial Information
 
Item 1.  Financial Statements.
 
DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
 March 31,December 31,
 20222021
Assets  
Real estate properties:  
Land$652,302 $741,501 
Buildings and improvements5,760,881 6,072,055 
Total real estate properties, gross6,413,183 6,813,556 
Accumulated depreciation(1,689,680)(1,737,807)
Total real estate properties, net4,723,503 5,075,749 
Investments in unconsolidated joint ventures266,741 215,127 
Cash and cash equivalents732,058 634,848 
Restricted cash759,938 382,097 
Acquired real estate leases and other intangible assets, net40,231 48,746 
Other assets, net252,908 266,947 
Total assets$6,775,379 $6,623,514 
Liabilities and Shareholders' Equity  
Revolving credit facility$700,000 $800,000 
Senior unsecured notes, net2,808,467 2,806,811 
Secured debt and finance leases, net68,731 69,713 
Accrued interest45,579 29,845 
Assumed real estate lease obligations, net1,384 2,556 
Other liabilities250,485 252,199 
Total liabilities3,874,646 3,961,124 
Commitments and contingencies
Shareholders' equity:  
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 238,988,296 and 238,994,894 shares issued and outstanding, respectively
2,390 2,390 
Additional paid in capital4,615,785 4,615,475 
Cumulative net income2,328,047 2,087,624 
Cumulative distributions(4,045,489)(4,043,099)
Total shareholders' equity2,900,733 2,662,390 
Total liabilities and shareholders' equity$6,775,379 $6,623,514 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
 Three Months Ended March 31,
 20222021
Revenues:  
Rental income$65,285 $102,758 
Residents fees and services245,448 259,966 
Total revenues310,733 362,724 
Expenses:  
Property operating expenses268,742 287,391 
Depreciation and amortization57,259 66,153 
General and administrative7,285 7,542 
Acquisition and certain other transaction related costs928  
Impairment of assets (174)
Total expenses334,214 360,912 
Gain (loss) on sale of properties327,794 (122)
Losses on equity securities, net(8,553)(8,339)
Interest and other income395 2,835 
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $2,472 and $2,812, respectively)
(57,131)(60,091)
Loss on modification or early extinguishment of debt(483)(2,040)
Income (loss) from continuing operations before income tax expense and equity in earnings of investees238,541 (65,945)
Income tax expense(1,472)(238)
Equity in earnings of investees3,354  
Net income (loss)240,423 (66,183)
Net income attributable to noncontrolling interest (1,322)
Net income (loss) attributable to common shareholders$240,423 $(67,505)
Weighted average common shares outstanding (basic)238,149 237,834 
Weighted average common shares outstanding (diluted)238,198 237,834 
Per common share amounts (basic and diluted):  
Net income (loss) attributable to common shareholders$1.01 $(0.28)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Number of
Shares
Common
Shares
Additional
Paid In
Capital
Cumulative
Net Income
Cumulative DistributionsTotal Equity Attributable to Common ShareholdersTotal Equity Attributable to Noncontrolling
Interest
Total Equity
Balance at December 31, 2021:238,994,894 $2,390 $4,615,475 $2,087,624 $(4,043,099)$2,662,390 $ $2,662,390 
Net income— — — 240,423 — 240,423 — 240,423 
Distributions— — — — (2,390)(2,390)— (2,390)
Share grants— — 318 — — 318 — 318 
Share repurchases(1,698)— (5)— — (5)— (5)
Share forfeitures(4,900)— (3)— — (3)— (3)
Balance at March 31, 2022:238,988,296 $2,390 $4,615,785 $2,328,047 $(4,045,489)$2,900,733 $ $2,900,733 
Balance at December 31, 2020:238,268,478 $2,383 $4,613,904 $1,913,109 $(4,033,559)$2,495,837 $123,385 $2,619,222 
Net (loss) income— — — (67,505)— (67,505)1,322 (66,183)
Distributions— — — — (2,383)(2,383)— (2,383)
Share grants— — 228 — — 228 — 228 
Distributions to noncontrolling interest— — — — — — (5,694)(5,694)
Balance at March 31, 2021:238,268,478 $2,383 $4,614,132 $1,845,604 $(4,035,942)$2,426,177 $119,013 $2,545,190 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 Three Months Ended March 31,
 20222021
Cash flows from operating activities:  
Net income (loss)$240,423 $(66,183)
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:  
Depreciation and amortization57,259 66,153 
Net amortization of debt premiums, discounts and issuance costs2,472 2,812 
Straight line rental income(1,745)(804)
Amortization of acquired real estate leases105 (1,866)
Loss on modification or early extinguishment of debt483 2,040 
Impairment of assets (174)
(Gain) loss on sale of properties(327,794)122 
Losses on equity securities, net8,553 8,339 
Other non-cash adjustments, net(628)(715)
Unconsolidated joint venture distributions2,720  
Equity in earnings of investees(3,354) 
Change in assets and liabilities:  
Deferred leasing costs, net(2,568)(3,309)
Other assets21,326 (20,533)
Accrued interest15,734 29,035 
Other liabilities(20,250)19,905 
Net cash (used in) provided by operating activities(7,264)34,822 
Cash flows from investing activities:  
Real estate improvements(55,791)(44,005)
Proceeds from sale of properties, net252 8,702 
Proceeds from sale of properties to joint venture, net643,892  
Net cash provided by (used in) investing activities588,353 (35,303)
Cash flows from financing activities:  
Proceeds from issuance of senior unsecured notes, net 492,500 
Proceeds from borrowings on revolving credit facility 800,000 
Repayments of borrowings on revolving credit facility(100,000) 
Repayment of term loan (200,000)
Repayment of other debt(838)(779)
Payment of debt issuance costs(2,805)(4,007)
Repurchase of common shares(5) 
Distributions to noncontrolling interest (5,694)
Distributions to shareholders(2,390)(2,383)
Net cash (used in) provided by financing activities(106,038)1,079,637 
Increase in cash and cash equivalents and restricted cash475,051 1,079,156 
Cash and cash equivalents and restricted cash at beginning of period1,016,945 90,849 
Cash and cash equivalents and restricted cash at end of period$1,491,996 $1,170,005 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

DIVERSIFIED HEALTHCARE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
20222021
Supplemental cash flow information:  
Interest paid$38,925 $29,071 
Income taxes paid$50 $ 
Non-cash investing activities:
Decrease in assets resulting from the deconsolidation of investments that were previously consolidated:
   Real estate, net$(355,669)$ 
Real estate improvements accrued, not paid$20,645 $18,513 
Capitalized interest$ $827 
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 March 31,
20222021
Cash and cash equivalents$732,058 $843,237 
Restricted cash (1)
759,938 326,768 
Total cash and cash equivalents and restricted cash shown in our condensed consolidated statements of cash flows$1,491,996 $1,170,005 
(1) As of March 31, 2022, restricted cash consists of proceeds from the sale of joint venture interests and proceeds from the sale of properties to joint ventures held as collateral pursuant to the agreement governing our revolving credit facility, or our credit agreement. We may use these funds to pay for approved expenditures in accordance with our credit agreement. Restricted cash also consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties. Prior to the deconsolidation of the joint venture that owns a life science property located in Boston, Massachusetts, or our Boston life science property joint venture, restricted cash also consisted of cash held for the operations of this joint venture. As of March 31, 2021, restricted cash also included amounts we used to redeem all $300,000 of our then outstanding 6.75% senior notes due 2021 in June 2021, when these notes became redeemable with no prepayment premium.

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


5

DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
 
Note 1.  Basis of Presentation
The accompanying condensed consolidated financial statements of Diversified Healthcare Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our Annual Report.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairments of real estate and intangible assets.
We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other governmental audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, the defense and resolution of these claims, lawsuits, and regulatory and other governmental audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 450, Contingencies, or ASC 450. Under ASC 450, loss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero, is recorded; and then, as information becomes known, the minimum loss amount is updated, as appropriate. A minimum or best estimate amount may be increased or decreased when events result in a changed expectation.

Note 2.  Real Estate Investments
As of March 31, 2022, we wholly owned 378 properties located in 36 states and Washington, D.C. and we owned a 20% equity interest in each of two unconsolidated joint ventures that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet that were 98% leased with an average (by annualized rental income) remaining lease term of 6.6 years.
Joint Venture Activities:
As of March 31, 2022, we had equity investments in joint ventures as follows:
Joint VentureDHC Ownership
DHC Carrying Value of Investment at March 31, 2022
Number of PropertiesLocationSquare Feet
Seaport Innovation LLC20%$216,416 1MA1,134,479 
The LSMD Fund REIT LLC20%50,325 10CA, MA, NY, TX, WA1,068,763 
$266,741 112,203,242 
6

DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
The following table provides a summary of the mortgage debts of these joint ventures:
Joint VentureCoupon RateMaturity Date
Principal Balance at March 31, 2022 (1)
Mortgage Notes Payable (secured by one property in Massachusetts) (2)
3.53%8/6/2026$620,000 
Mortgage Notes Payable (secured by nine properties in five states)3.46%2/11/2032189,800 
Mortgage Notes Payable (secured by one property in California) (3)
2.20%2/9/2024266,825 
3.19%$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 our Boston life science property joint venture, we no longer include this $620,000 of secured debt financing in our consolidated balance sheet; however, we continue to provide certain guaranties on this debt.
(3)The maturity date of February 9, 2024 is subject to three, one year extension options and requires interest to be paid at SOFR plus a premium of 1.90%. The interest rate is as of March 31, 2022. This joint venture has also purchased an interest rate cap through February 2024 with a SOFR strike rate equal to 4.00%.

In December 2021, we sold an additional 35% equity interest from our then remaining 55% equity interest in our Boston life science property joint venture to another third party institutional investor for $373,847, which includes certain costs associated with the formation of this joint venture. 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. After giving effect to the sale, we continue to own a 20% equity interest in this joint venture. Our 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 use of the equity method for 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 our 10 medical office and life science properties joint venture, for aggregate proceeds, before closing costs and other adjustments, of approximately $653,300. We deconsolidated the net assets of these properties and recognized a net gain on sale of $327,542 related to this transaction, which is included in gain on sale of properties in our consolidated statements of comprehensive income (loss). The investors acquired a 41% and 39% equity interest in the joint venture and we retained a 20% equity interest in the joint venture. Effective as of the date of the sale, we deconsolidated these properties and we now account for this joint venture using the equity method of accounting under the fair value option. The investment amounts are 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 use of the equity method for this joint venture.
Acquisitions and Dispositions:
We did not acquire or dispose of any properties during the three months ended March 31, 2022.
Impairment:
We regularly evaluate our assets for indicators of impairment. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected assets by comparing it to the expected future cash flows to be generated from those assets. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.

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.
7

DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
Certain of our leases provide for base rent payments and in addition, may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term.
We increased rental income to record revenue on a straight line basis by $1,745 and $804 for the three months ended March 31, 2022 and 2021, respectively. Rents receivable, excluding receivables related to our properties classified as held for sale, if any, include $69,192 and $82,131 of straight line rent receivables at March 31, 2022 and December 31, 2021, respectively, and are included in other assets, net in our condensed consolidated balance sheets.
We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $10,708 and $18,228 for the three months ended March 31, 2022 and 2021, respectively, of which tenant reimbursements totaled $10,663 and $18,180, 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 asset and related liability representing our future obligation under the lease arrangement for which we are the lessee were $28,740 and $29,074, respectively, as of March 31, 2022, and $4,153 and $4,352, respectively, as of December 31, 2021. The right of use asset and related lease liability are included within other assets, net and other liabilities, respectively, within our condensed consolidated balance sheets. In addition, we lease equipment at certain of our managed senior living communities. These leases are short term in nature, are cancelable with no fee or do not result in an annual expense in excess of our capitalization policy and, as a result, are not recorded on our condensed consolidated balance sheets.

Note 4.  Indebtedness
Our principal debt obligations, excluding any debt obligations of our joint ventures, at March 31, 2022 were: (1) outstanding borrowings under our $700,000 revolving credit facility; (2) $2,850,000 outstanding principal amount of senior unsecured notes; and (3) $61,976 aggregate principal amount of mortgage notes secured by six properties. These six mortgaged properties had a gross book value of $115,874 at March 31, 2022. We also had two properties subject to finance leases with lease obligations totaling $6,321 at March 31, 2022; these two properties had gross book value and accumulated depreciation of $37,024 and $18,418, respectively, at March 31, 2022, and $36,730 and $18,203, respectively, at December 31, 2021, and the finance leases expire in 2026.
We have a $700,000 revolving credit facility that is used for general business purposes. The maturity date of our revolving credit facility is January 2024. Our revolving credit facility generally provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2022, our revolving credit facility required interest to be paid on borrowings at the annual rate of 3.0%, plus a facility fee of 30 basis points per annum on the total amount of lending commitments under the facility.
The weighted average annual interest rates for borrowings under our revolving credit facility were 2.9% for each of the three months ended March 31, 2022 and 2021. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of March 31, 2022 and April 29, 2022, we were fully drawn under our revolving credit facility.
In February 2022, we and our lenders amended our credit agreement. Pursuant to the amendment:
the waiver of the fixed charge coverage ratio covenant included in our credit agreement has been extended through December 31, 2022, or the Amendment Period;
the revolving credit facility commitments have been reduced from $800,000 to $700,000 following our repayment of $100,000, and as a result of the reduction in commitments, we recorded a loss on modification or early extinguishment of debt of $483 for the three months ended March 31, 2022;
8

DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
we have the ability to fund $400,000 of capital expenditures per year and we are restricted in our ability to acquire real property as defined in our credit agreement;
the interest rate premium under our revolving credit facility increased by 15 basis points; and
certain covenants and restrictions on distributions to common shareholders, share repurchases, capital expenditures, acquiring additional properties and incurring additional indebtedness (in each case subject to various exceptions), and the minimum liquidity requirement of $200,000 will remain in place during the Amendment Period.
Also in February 2022, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2024. Pursuant to our credit agreement, the borrowing capacity under our revolving credit facility will be reduced to $586,373 as of January 2023 and as such, further repayment of our revolving credit facility may be required.
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 $994,281 as of March 31, 2022 to secure our obligations, which pledges and/or mortgage liens may be removed or new ones may be added during the Amendment Period based on outstanding debt amounts, among other things.
In April 2022, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $10,934, a maturity date in July 2022 and an annual interest rate of 6.28%. We prepaid this mortgage using cash on hand.
Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, as defined, which includes The RMR Group LLC, or RMR, ceasing to act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our credit agreement restricts our ability to make distributions under certain circumstances. As of March 31, 2022, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our revolving credit facility and our public debt covenants as the effects of the COVID-19 pandemic continued to adversely impact our operations. We are unable to incur additional debt until this ratio is at or above 1.5x on a pro forma basis. We believe we were in compliance with the remaining terms and conditions of the respective covenants under our credit agreement and our senior unsecured notes indentures and their supplements at March 31, 2022. Although we have taken steps to enhance our ability to maintain sufficient liquidity, a protracted negative impact on the economy or the industries in which our properties and businesses operate may cause increased pressure on our ability to satisfy financial and other covenants. Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions. If our operating results and financial condition are significantly negatively impacted by economic conditions or otherwise, we may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants.

Note 5.  Fair Value of Assets and Liabilities
The following table presents certain of our assets that are measured at fair value at March 31, 2022 and December 31, 2021, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
As of March 31, 2022As of December 31, 2021
DescriptionCarrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Recurring Fair Value Measurements Assets:    
Investment in AlerisLife (Level 1) (1)
$22,987 $22,987 $31,540 $31,540 
Investment in unconsolidated joint venture (Level 3) (2)
$216,416 $216,416 $215,127 $215,127 
Investment in unconsolidated joint venture (Level 3) (3)
$50,325 $50,325 $ $ 
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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
(1)Our 10,691,658 shares of common stock of AlerisLife Inc., or AlerisLife, are included in other assets, net in our condensed consolidated balance sheets, and are reported at fair value, which is based upon quoted market prices on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs). During the three months ended March 31, 2022 and 2021, we recorded unrealized losses of $8,553 and $8,339, respectively, which are included in losses on equity securities, net in our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our investment in AlerisLife common shares to their fair value. See Note 11 for further information about our investment in AlerisLife.
(2)The 20% equity interest we own in our Boston life science property joint venture is included in investments in unconsolidated joint ventures in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value analysis are a discount rate of 5.58%, an exit capitalization rate of 5.25%, a holding period of approximately 10 years and market rents. The assumptions made in the fair value analysis are based on the location, type and nature of the property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding this joint venture.
(3)The 20% equity interest we own in our 10 medical office and life science properties joint venture is included in investments in unconsolidated joint ventures in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value analysis are discount rates of between 5.67% and 8.93%, exit capitalization rates of between 4.75% and 6.00%, holding periods of approximately 10 years and market rents. The assumptions we made in the fair value analysis are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding this joint venture.
In addition to the assets described in the table above, our financial instruments at March 31, 2022 and December 31, 2021 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, senior unsecured notes, secured debt and finance leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows:
 As of March 31, 2022As of December 31, 2021
Description
Carrying Amount (1)
Estimated Fair Value
Carrying Amount (1)
Estimated Fair Value
Senior unsecured notes, 4.750% coupon rate, due 2024
$249,418 $238,401 $249,348 $257,695 
Senior unsecured notes, 9.750% coupon rate, due 2025
988,790 1,056,375 987,903 1,081,990 
Senior unsecured notes, 4.750% coupon rate, due 2028
492,517 462,823 492,199 491,480 
Senior unsecured notes, 4.375% coupon rate, due 2031
492,342 428,303 492,127 480,763 
Senior unsecured notes, 5.625% coupon rate, due 2042
342,279 253,540 342,183 309,260 
Senior unsecured notes, 6.250% coupon rate, due 2046
243,121 198,400 243,051 226,500 
Secured debts (2)
68,731 69,379 69,713 71,963 
 $2,877,198 $2,707,221 $2,876,524 $2,919,651 
(1)Includes unamortized net debt issuance costs, premiums and discounts.
(2)We assumed certain of these secured debts in connection with our acquisition of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage notes to adjust interest expense to the estimated market interest rates as of the date of acquisition.
We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of March 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 March 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.
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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

Note 6. Noncontrolling Interest
In March 2017, we entered into our Boston life science property joint venture. The investor owned a 45% equity interest in the joint venture, and we owned the remaining 55% equity interest in the joint venture. We determined that, while we owned a 55% equity interest in this joint venture, this joint venture was a variable interest entity, or VIE, and that we controlled the activities that most significantly impacted the economic performance of this entity; we therefore consolidated the results of this joint venture in our financial statements. In December 2021, we sold an additional 35% equity interest in our Boston life science property joint venture to another third party institutional investor. After giving effect to the sale, we continue to own a 20% equity interest in this joint venture, but have determined that we are no longer the primary beneficiary. Effective as of the date of the sale, we deconsolidated these properties and we now account for this joint venture using the equity method of accounting under the fair value option. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,322 for the three months ended March 31, 2021, is reported as a noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). This joint venture made aggregate cash distributions to the other joint venture investor of $5,694 for the three months ended March 31, 2021, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated statement of shareholders' equity.

Note 7.  Shareholders' Equity
Common Share Repurchases:
During the three months ended March 31, 2022, we purchased 1,698 of our common shares, valued at $3.20 per common share, from a former employee of RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of prior awards of our common shares.
Distributions:
During the three months ended March 31, 2022, we declared and paid a quarterly distribution to common shareholders as follows:
Declaration DateRecord DatePayment DateDistribution Per ShareTotal Distributions
January 13, 2022January 24, 2022February 17, 2022$0.01 $2,390 
On April 14, 2022, we declared a quarterly distribution to common shareholders of record on April 25, 2022 of $0.01 per share, or approximately $2,390. We expect to pay this distribution on or about May 19, 2022.

Note 8.  Segment Reporting
We operate in, and report financial information for, the following two segments: Office Portfolio and senior housing operating portfolio, or SHOP. We aggregate each of these two reporting segments based on their similar operating and economic characteristics. Our Office Portfolio segment consists of medical office properties leased to medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our SHOP segment consists of managed senior living communities that provide short term and long term residential living and, in some instances, care and other services for residents where we pay fees to managers to operate the communities.
We also report “non-segment” operations, consisting of triple net leased senior living communities and wellness centers that are leased to third party operators from which we receive rents, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
 For the Three Months Ended March 31, 2022
 Office PortfolioSHOPNon-SegmentConsolidated
Revenues:    
Rental income$54,997 $ $10,288 $65,285 
Residents fees and services 245,448  245,448 
Total revenues54,997 245,448 10,288 310,733 
Expenses:    
Property operating expenses23,447 245,295  268,742 
Depreciation and amortization18,390 35,983 2,886 57,259 
General and administrative  7,285 7,285 
Acquisition and certain other transaction related costs
  928 928 
Total expenses41,837 281,278 11,099 334,214 
Gain on sale of properties327,542 252  327,794 
Losses on equity securities, net  (8,553)(8,553)
Interest and other income 199 196 395 
Interest expense(365)(494)(56,272)(57,131)
Loss on modification or early extinguishment of debt  (483)(483)
Income (loss) from continuing operations before income tax expense and equity in earnings of investees340,337 (35,873)(65,923)238,541 
Income tax expense  (1,472)(1,472)
Equity in earnings of investees3,354   3,354 
Net income (loss)$343,691 $(35,873)$(67,395)$240,423 
Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the U.S. Department of Health and Human Services, or HHS, established a Provider Relief Fund. Retention and use of the funds received under the CARES Act are subject to certain terms and conditions. The terms and conditions require that the funds be utilized to compensate for lost revenues that are attributable to the COVID-19 pandemic and for eligible costs to prevent, prepare for and respond to the COVID-19 pandemic that are not covered by other sources. Further, fund recipients are required to be participating in Medicare at the time of distribution and are subject to certain other terms and conditions, including quarterly reporting requirements. In addition, fund recipients are required to have billed Medicare during 2019 and to continue to provide care after January 31, 2020 for diagnosis, testing or care for individuals with possible or actual COVID-19 cases. Any funds not used in accordance with the terms and conditions must be returned to HHS. We recognize income from government grants on a systematic and rational basis over the period in which we recognize the related expenses or loss of revenues for which the grants are intended to compensate when there is reasonable assurance that we will comply with the applicable terms and conditions of the grant and there is reasonable assurance that the grant will be received. We have recognized $199 and $2,433 as other income in our condensed consolidated statements of comprehensive income (loss) with respect to our SHOP segment for the three months ended March 31, 2022 and 2021, respectively.
 As of March 31, 2022
 Office PortfolioSHOP Non-SegmentConsolidated
Total assets$1,991,516 $2,981,824 $1,802,039 $6,775,379 

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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
 For the Three Months Ended March 31, 2021
 Office PortfolioSHOPNon-SegmentConsolidated
Revenues:    
Rental income$93,323 $ $9,435 $102,758 
Residents fees and services 259,966  259,966 
Total revenues93,323 259,966 9,435 362,724 
Expenses:    
Property operating expenses31,293 256,098  287,391 
Depreciation and amortization31,938 31,361 2,854 66,153 
General and administrative  7,542 7,542 
Impairment of assets (174) (174)
Total expenses63,231 287,285 10,396 360,912 
Loss on sale of properties(122)  (122)
Losses on equity securities, net  (8,339)(8,339)
Interest and other income 2,433 402 2,835 
Interest expense(5,939)(528)(53,624)(60,091)
Loss on modification or early extinguishment of debt  (2,040)(2,040)
Income (loss) from continuing operations before income tax expense24,031 (25,414)(64,562)(65,945)
Income tax expense  (238)(238)
Net income (loss)24,031 (25,414)(64,800)(66,183)
Net income attributable to noncontrolling interest
(1,322)  (1,322)
Net income (loss) attributable to common shareholders
$22,709 $(25,414)$(64,800)$(67,505)
 As of December 31, 2021
Office PortfolioSHOP Non-SegmentConsolidated
Total assets$2,282,652 $2,995,819 $1,345,043 $6,623,514 


Note 9. Senior Living Community Management Agreements
Our managed senior living communities are operated by third parties pursuant to management agreements. Five Star Senior Living, or Five Star, which is an operating division of AlerisLife, manages certain of our SHOP communities.
2021 Amendments to our Management Arrangements with Five Star. On June 9, 2021, we amended our management arrangements with Five Star. The principal changes to the management arrangements included:
that Five Star agreed to cooperate with us in transitioning 108 of our senior living communities with approximately 7,500 living units to other third party managers without our payment of any termination fee to Five Star;
that we no longer have the right to sell up to an additional $682,000 of senior living communities currently managed by Five Star and terminate Five Star's management of those communities without our payment of a fee to Five Star upon sale;
that Five Star is continuing to manage 120 of our senior living communities, and that the skilled nursing units in all of our continuing care retirement communities that Five Star is continuing to manage, which then included approximately 1,500 living units, were closed and are being evaluated and repositioned;
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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
that beginning in 2025, we will have the right to terminate up to 10% of the senior living communities that Five Star is continuing to manage, based on total revenues per year for failure to meet 80% of a target earnings before interest, taxes, depreciation and amortization for the applicable period;
that the incentive fee that Five Star may earn in any calendar year for the senior living communities that Five Star is continuing to manage is no longer subject to a cap and that any senior living communities that are undergoing a major renovation or repositioning are excluded from the calculation of the incentive fee;
that RMR will oversee any major renovation or repositioning activities at the senior living communities that Five Star is continuing to manage; and
that the term of our management agreements with Five Star for our senior living communities that Five Star is continuing to manage was extended by two years to December 31, 2036.
Pursuant to these changes, we and Five Star entered into an amended and restated master management agreement, or the Master Management Agreement, for the senior living communities that Five Star is continuing to manage, and interim management agreements for the senior living communities that we and Five Star agreed to transition to new third party managers. These agreements replaced our prior master leases and management and pooling agreements with Five Star. In addition, AlerisLife delivered to us a related amended and restated guaranty agreement pursuant to which AlerisLife is continuing to guarantee the payment and performance of each of its applicable subsidiary's obligations under the applicable management agreements.
As of December 31, 2021, we had transitioned 107 of the 108 senior living communities, containing 7,340 living units, from Five Star to new third party managers. The remaining senior living community was closed in February 2022 and we are assessing opportunities to redevelop that property. We continue to lease our senior living communities that have been transitioned to new managers to our taxable REIT subsidiaries, or TRSs. We incurred and expect to continue to incur costs related to retention and other transition costs for these communities. For the three months ended March 31, 2022, we recorded $928 of these costs to acquisition and certain other transaction related costs in our condensed consolidated statements of comprehensive income (loss).
Our Senior Living Communities Managed by Five Star. Five Star managed 120 and 235 of our senior living communities as of March 31, 2022 and 2021, respectively. We lease our senior living communities that are managed by Five Star to our TRSs.
We incurred management fees payable to Five Star of $8,932 and $13,850 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, $8,142 and $13,016, respectively, of the total management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $790 and $834, 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.
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DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
We incurred fees of $1,916 and $5,441 for the three months ended March 31, 2022 and 2021, respectively, with respect to rehabilitation services Five Star provided at our senior living communities that are payable by us. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income (loss).
We lease to Five Star space at certain of our senior living communities, which it uses to provide certain outpatient rehabilitation and wellness services. We recorded $388 and $397 for the three months ended March 31, 2022 and 2021, respectively, with respect to these leases.
Our Senior Living Communities Managed by Other Third Party Managers. We incurred management fees payable to the new third party managers of $5,108 for the three months ended March 31, 2022. 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 March 31,
Revenue from contracts with customers:20222021
Basic housing and support services$192,874 $188,029 
Medicare and Medicaid programs19,817 35,948 
Private pay and other third party payer SNF services 32,757 35,989 
Total residents fees and services$245,448 $259,966 

Note 10. Business and Property Management Agreements with RMR
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of our medical office and life science properties and major renovation or repositioning activities at our senior living communities that we may request RMR to manage from time to time. See Note 11 for further information regarding our relationship, agreements and transactions with RMR.
We recognized net business management fees of $4,813 and $5,317 for the three months ended March 31, 2022 and 2021, respectively. Based on our common share total return, as defined in our business management agreement, as of each of March 31, 2022 and 2021, no estimated incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2022 or 2021. The actual amount of annual incentive fees for 2022, if any, will be based on our common share total return as defined in our business management agreement, for the three-year period ending December 31, 2022, and will be payable in January 2023. We did not incur any incentive fee payable for the year ended December 31, 2021. We recognize business management and incentive fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). RMR provides management services to our joint ventures. See Note 11 for further information regarding our joint ventures' management arrangements with RMR and the related impact on our management fees payable to RMR.
We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Health Care REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR, and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Healthcare Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Healthcare Index.
We recognized aggregate net property management and construction supervision fees of $2,391 and $3,154 for the three months ended March 31, 2022 and 2021, respectively. Of those amounts, for the three months ended March 31, 2022 and 2021, $1,349 and $2,485, respectively, of property management fees were expensed to property operating expenses in our condensed consolidated statements of comprehensive income (loss) and $1,042 and $669, respectively, were capitalized as building
15

DIVERSIFIED HEALTHCARE TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)
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 $2,964 and $3,297 for these expenses and costs for the three months ended March 31, 2022 and 2021, respectively. These amounts are