That code is not expecting a timeseries object to be passed in: it is expecting a vector of times as the first parameter, and a vector of theta values as the second parameter, with optional third parameter.
diff() is not a function that is defined for timeseries objects. You can use methods() applied to a timeseries object to see that diff() is simply not a defined function for it.
If you need diff() of a timeseries collection, then you can do T(2:end)-T(1:end-1) to subtract entire timeseries ... assuming they are the same length and have times that align. The result would be a timeseries collection.
But your code does not expect the diff() to return a timeseries, so even if you were to replace diff(time) with time(2:end)-t(1:end-1) getting out a timeseries object, your code would fail. time(end)-time(1) would be a timeseries and something / that would involve trying to do matrix left divide \ with the transpose of the 3 (or more) dimensional data -- timeseries data has a 3 dimensional length equal to the number of timepoints.