Good day, and welcome to the Senior Housing Properties Trust First Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations.

Thank you. Welcome to the Senior Housing Properties Trust call covering the first quarter 2017 results. Joining me today on today's call are David Hegarty, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answering session. I would like to note that transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of Senior Housing. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon Senior Housing's present beliefs and expectations as of today, Friday, May 5, 2017. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP numbers, including Normalized funds from operation or Normalized FFO and cash-based net operating income or cash NOI. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package found on our website at www.snhreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. I'd now like to turn the call over to Dave.

Thank you, Brad, and good afternoon, everyone. Thank you for joining us today on our first quarter 2017 earnings call. In the first quarter, we resumed our strategy of disciplined capital allocation, highlighted by our first joint venture transaction. We continue to invest in our existing portfolio and selectively make accretive new investments. Today, we reported Normalized funds from operations or Normalized FFO of $0.46 per share, which was equal to the first quarter of 2016. However, our balance sheet is better positioned at the lower end of our leverage range. We continue to offer SNH investors an attractive yield, little over 7% backed by our stable high quality portfolio of medical office buildings in senior housing communities. Specific highlights of the first quarter were that we sold the 45% equity interest in our Boston Seaport assets at a very attractive price and formed a joint venture with a sovereign investor; we grew consolidated NOI by 2.7% compared to the first quarter 2016; acquired one medical office building for $15 million; we're awarded the Building of the Year Award for Greater Los Angeles from the Building Owners and Managers Association International for our life-science MOB in Valencia, California; achieved BOMA 360 designation for operational best practices at three of our medical office buildings; maintained our high occupancy of 96.4% in the MOB portfolio; maintained 97% of our revenues from private pay sources; and subsequent to quarter-end, prepaid secured debt of $288 million with the weighted average interest rate of 6.7%. Now, the most significant accomplishment in the first quarter was the completion of the joint venture involving our trophy life-science buildings located in Boston Seaport District with a sovereign, where we sold 45% equity interest for approximately $261 million. In July 2016, we obtained $620 million of attractive 10-year debt…

Thanks, Dave, and good afternoon, everyone. Our Normalized FFO was $108.4 million for the first quarter or $0.46 per share, and we declared $0.39 per share dividend subsequent to quarter end. This results a Normalized FFO payout ratio of 85% for the quarter, which is consistent with last year. Rental income for the quarter increased $5 million or 3% from the first quarter of last year to $166 million. This increase is primarily due to our acquisitions of four medical office buildings and nine triple net leased senior living communities since the beginning of 2016. On a same-store basis, rental income increased $1.5 million or 1%. This increase was primarily attributable to rent increases related to our funding of capital improvements at certain of our triple net leased senior living communities, and net leasing activity along with increased escalation income in our MOB portfolio. As a reminder, we've recognized all the percentage rent related to our triple net leased senior living communities in the fourth quarter for both our GAAP and non-GAAP performance measures, so we did not recognized any percentage rent in the first quarter. Resident fees and services revenue totaled $98 million for the quarter. This represents an increase of $1.2 million or 1.2% over last year largely attributable to the three communities added to the managed portfolio during 2016. On a same-store basis, revenue at our managed senior living communities decreased 1% compared to last year or $935,000, the $91 million for the quarter. Average monthly rate increased 1.8% year-over-year, while occupancy for the quarter decreased 110 basis points to 86.1% from 87.2% last year due primarily to the challenges in the skilled nursing components of our CCRCs that Dave spoke about, and the impact of the flu on our overall occupancy. Property operating expenses from our…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bryan Maher with FBR & Company. Please go ahead.

Good afternoon, guys.

Hi, Bryan.

Two questions. One, can you walk us through how that works with the flu impact. Is it one or two things, people don't move in or you're expecting to move in because the flu is going around or do you actually have people move out?

Right. Well, it has a multiple effect. First of all, people move out either due to high acuity, so they're either going to hospital or unfortunately passed away. So we had a significant increase in number of deaths that occurred this first quarter. And once you do have a reported case of flu in your facility you have to notify the state. And as a result, you go into a quarantine mode and it could be for several days or a week that you are shutdown from admitting new residents into the facility, so until you have clarification. So it has a multiple effects on your occupancy levels and we did have a couple of properties during the quarter, at one point or another, stop admissions for few days at least.

On the acquisition front, are you seeing any increase or decrease in the number of properties coming to market. And then, also what are you seeing on cap rates? I mean, we've seen some pretty low cap rates on some transactions over the past couple of months. And as it goes to what you're looking at, what are you seeing there?

Okay. Well, obviously, we look at senior housing product as well as medical office product. And on the senior housing front, it has been a modest amount of opportunities to consider, I'd say it's slower than it has been in the past. And we have not really seen any large portfolios for us to consider acquiring in that space. So I think we will continue to look for one-offs in individual properties that complement our portfolio. And with regards to medical office building area, obviously, there has been a few large transactions and the large one of two. Those portfolios are extremely competitive and therefore cap rates are very aggressive on those. So we look, window shop, but we really are not pursuing those highly priced portfolios. We do see a tremendous amount of individual assets in small portfolios, and the medical office space too. So we acquired one last quarter. And I expect that we will continue to buy individual assets and small portfolios for the foreseeable future. With regards to cap rates, again, class A product in both senior housing as well as medical office, we will continue to attract. Normally, I'd say in the 5% for cap rates, or to low 6%s. I think Duke is exceptionally low cap rate, and unless you have a truly crown jewel in different places. But - so I think there are still a number of products trading out there in the high 6%s, low 7% range, which is more likely where we'll be participating in.

Yes.

Okay.

And our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Yes. Thanks. David, just kind of after the last question, with the joint venture, I guess, that you agreed to complete on the Vertex building, how should we think about that changing your approach in new investments? Are you going to be more aggressive now that your leverage metrics have improved or it's kind of going to continue as you have been over the past several quarters?

Well, Mike. As you said, that certainly improved our leverage position on our balance sheet. And I think now we have probably one of the lower ratios amongst the healthcare REITs. So that does give us a little more cushion to go out and be in an acquirer. I would say, we'll be modestly a little bit more inquisitive. We're not - as I mentioned in the last statement that we're not going to chase the 5%s and low to mid 6% cap rate transactions. But I hope that we can sharpen our pencil a little bit more and still acquire a little bit more product. But I'd say, we're going to be modestly more aggressive is my expectation.

Okay. And can you give us some color on how you guys are viewing your relationship with Five Star right now? It looks like those coverage ratios continue to slip a little bit, and given the tenants results today, kind of what's your outlook for those coverage ratios? And where do you think they'll trend over the next 12 months?

Okay. Well, let me take two areas separately, the managed portfolio versus the triple net leased properties. We both us and Five Star have been investing extensively in the whole portfolio. And there is a lot going on within the portfolio, which is obviously very disruptive. At the end of the day, we expect that substantially all of those improvements will ultimately improve the performance of the properties. And allow us to increase occupancy or them to increase occupancy and rates. I think there's also one thing that - we've seen really a noticeable impact from a lot of the Medicare changes that are going on with regard to the skilled nursing units within our CCRCs. We leased a number CCRCs to Five Star and we also have some in our managed portfolio. And as we mentioned on the last couple of quarters, that we've seen significant drop off in Medicare revenues and that's pretty high margin business. And that won't necessarily come back until we've implemented some of the cosmetic changes as well as medical records. And then, the CCRCs can now participate more with the managed care networks and increase volume and so on. A couple quarters ago, we reported, it was $ 1 million impact to just our portfolio. And it was a larger impact to Five Star. And I think that, again, we can't recoup those revenues, probably not entirely 100%, but a good chunk of that we won't be able to recoup until we've invested all those capital, and gone online with some of the healthcare systems. So I would expect that we're probably going to be at this level, maybe even take a dip before we bounce back for coverage. But we're very comfortable with Five Star from their ability to pay the rent. And they have a fair amount of flexibility with $100 million line of credit. They own a lot of assets, about 25 properties that are unencumbered or financeable. And they did generate about, I think it was about $3.8 million of EBITDA this past quarter. So we feel comfortable that they can pay the rent. It's just we're going to have to. It's just takes time to see the changes and the benefit from it.

Okay. And then, I guess, last question just real quick, on the SNF renovations that you kind of mentioned. I mean how many units or beds are you renovating today? And do you expect to do more of it? And then, how many of them have been completed so far?

Okay.

It's ongoing, I would say, I mean, one of them was a conversion. We took 43 SNF units out of a facility in Arizona, accounted for about $0.5 million of revenue. And we are converting them to AL and memory care. So that's kind of a different conversion and we're not going to expect that to come back in the form of SNF revenues, but we're comfortable with where the project is going. There is a number of other properties that have conversions from kind of your traditional SNF to more what Five Star brand's Rehab to Home program that they've had success with throughout the portfolio, where they have implemented those changes. So we're excited to get some of those units back online. Varying stages of completions, some are approaching the end and others are kind of just been taken down after running down the census a little bit. So I guess, it's hard to say, but we do expect it to pay off.

Okay.

Yes, I would say, within our portfolio we have got a half-a-dozen locations that are undergoing that type of transformation. And certainly, Five Star, within their portfolio, again, have another half-a-dozen to 10 properties that are undergoing that type of conversion, so it's pretty significant.

Great. Thank you.

Our next question comes from Drew Babin with Robert W. Baird. Please go ahead.

Good afternoon.

Hi, Drew.

A quick question on the managed senior living communities, it looks like revenues were down on same property basis about 1% year-over-year, with rates up 1.8%, occupancy down 110 basis points. Was there something in the numbers in terms of a one-time fee or other income last year that would have made that revenue growth negative, because it looks based on the same property math that you should have had some modest positive revenue growth in the quarter? I was just wondering what the accounting difference is there?

Sure. Well, I think it's important. Average monthly rate, the way we calculated is, it's revenue divided by occupied unit days to calculate an average daily rate. And then we multiply that by 30 to get a monthly rate. So, total revenue doesn't always change by just the difference between the changes in average monthly rate and occupancy for a few reasons. The first is just mix. A resident will pay more for a one or two bedroom suite than they will for a studio. So a higher occupancy percentage in our larger units will increase our rate, but overall occupancy would be unchanged for that same resident. We could also have a change in the number of companion residents throughout the portfolio. This is where a companion resident moved in. We continue to count the same one unit as occupied, but we are able to collect additional fees. So you do see a little bit of fluctuation in rate that isn't necessarily tied directly to occupants.

Okay. That helps. And then just one more question on the balance sheet side, I'm curious what your revolver balance is today after some of the debt retirement that you've done or going to do in the second quarter. I mean, what plans to retire that balance might be, new bond or potentially more JV sales or things like that? I'm just hoping to get - kind of get a general outline of how you're thinking about that.

Sure, we had it down to $97 million at the end of the quarter. And then, in April, we drew another $287 million to pay off some of that secured debt. So round numbers, it's a little bit under $400 million right now. Our revolver isn't due until January, so we'll probably - we do have the ability to pay a fee and extend that another year. But we'll likely get started this summer to redo the revolver. And I think, with the interest rates where they are, I think we have a number of options from a refinancing perspective. But, again, I think we have some flexibility with the balance sheet where it is.

Okay. That's helpful. Thank you.

[Operator Instructions] And our next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Hi, yes, good afternoon. A question, the JV, I just wanted to clarify, did you mention the potential dilution could be $0.03 of FFO a quarter or for the year?

That was per quarter.

That's per quarter. And does that also include the impact of you guys also paying down the debt, the 6.4% debt?

No, it's about $0.03 on just the Vertex building itself. We'll get a $0.01 of it back by repaying that debt. But really in order to grow FFO, we need to take those proceeds and reinvest them at higher cap rates.

Okay, got you. Okay. So that's helpful. Then second of all, I guess, one question that's kind of out there is when we take a look at your operating metrics, whether it's this quarter or, again, even historically, when we're just going to take a look at same-store NOI growth for your MOB portfolio, your shop [ph] portfolio, your triple net, those statistics tend to lag some of your peers in each of those respective categories. And I guess, how do you get investors comfortable with the idea that your portfolio is capable of generating growth similar to your peer set?

Yes, well, Tayo, I think there are a couple of different pieces to that, obviously. The MOB portfolio itself, we have approximately 1,000 leases in total. And they're all - we have growth leases, triple net leases, and then modified growth. And, it's an older portfolio and so it's very difficult to compare with the newer healthcare REITs that have brand new properties with new leases in place with fixed increases. But I believe that we have made a lot of changes in the last couple years, invested fair amount of capital. And that you have - and the growth leases will start to be able to push rates for. The triple net is likely to stay more or less the same. And then you have situations like the Vertex buildings and our wellness center leases, and a few other - a number of other triple net leases, where they have five year bumps that will kick-in in 2018 and 2019. So, now, on the lease renewals that we did this quarter, we actually had rent roll ups of about 8.1% on our renewals. So we had a very, obviously, good quarter, but it's to show up going forward. And with regards to the triple net, I think the triple net is likely to continue at the same levels, just because our percentage rent is tied to how much growth in revenues there are for properties. And as we often said in the past that the last thing we want to do is layer on 2.5%, 3% fixed rate increase to someone in this environment, who is struggling to just stay even with competition. So I don't expect any meaningful change there. The idea [ph] portfolio, I believe all these investments will hopefully, turn that performance around. we'll really be able to push rates. As we said in our prepared remarks, five properties that we invested a significant amount of capital, that's complete, we have seen a major increase in performance from those properties. So we're going to continue that program. So I think that's where we see probably the greatest potential going forward. But we have to get through this new supply competition right now to get there. So I think there's still leverage more so on the managed care. But we got to be a little more patient. And then on the medical office buildings front that I believe there is more growth to be attained from that.

All right, that's helpful. Thank you.

Okay. You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to David Hegarty for any closing remarks.

I appreciate you all joining us today and look forward to meeting up with a number of you in the upcoming REIT conferences, especially NAREIT in June. Thank you and have a good day. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.