Good day, and welcome to the Senior Housing Properties Trust Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Brad Shepherd, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Senior Housing Properties Trust’s call covering the fourth quarter and full year 2017 results. Joining me on today’s call are David Hegarty, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer; and Jennifer Francis, Senior Vice President of RMR and Head of Asset Management. Today’s call includes a presentation by management, followed by a question-and-answer session. I would like to note that the 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 and 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, Tuesday, February 27, 2018. The Company undertakes no do 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 operations 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 on 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 like to turn the call over to Dave.

Thank you, Brad, and good afternoon, everyone. Before we begin our prepared remarks, I would like to take a minute to say we’re deeply saddened by the unexpected passing of Barry Portnoy, our founder and one of our managing trustees. I have worked closely with him for 35 years and I, like all the other RMR employees, will miss his friendship, mentorship and sage advice. I’ve also worked with Adam Portnoy for the past 15 years in his capacity as the President and CEO of the RMR Group and a managing trustee of SNG. And I’m confident he will continue to lead us fully, under the same high standards Barry had set for us. And now, thank you for joining us on SNH’s fourth quarter and year-end 2017 earnings call. 2017 was a very stable year for SNH, highlighted by our ability to raise attractively priced capital outside of the common equity market by completing a joint venture, harvesting gains from significantly appreciated asset sales and issuing attractive gap. The Vertex joint venture in March 2017 was a milestone for SNH and the pricing was extremely favorable as was one of only handful of real estate transactions in the Boston market that had traded above a $1,000 per square foot mark. The Seaport District has really become the new ground zero for growth and development in the Boston area, and we have the foresight to be one of the earliest investors in that market. We’re able to realize meaningful value creation in our senior housing portfolio by entering into agreements to sell our four Sunrise Senior Living leased communities at a price of $368 million, realizing a $308 million gain. Both of these transactions exemplified the value of SNH’s portfolio that has not been recognized in the public market in…

Thanks, Dave. Our medical office building portfolio same store cash NOI, decreased 1.6% in the quarter compared to the fourth quarter last year and decreased 10 basis points in 2017 compared to 2016. Overall occupancy at the end of the quarter was 95%. Tenant retention for the fourth quarter and the full-year was 80%. Separating the performance of our life science and our traditional medical office portfolios for the year, same-store cash NOI in our traditional medical office portfolio increased 40 basis points in 2017 compared to 2016 and our life science portfolio decreased 70 basis points. The decrease year-over-year in the life science portfolio is almost entirely the result of the two single tenant buildings Dave mentioned on our third quarter earnings call. We had a tenant in the Southwest suburb of Boston renew in two of three buildings, vacating approximately 84,000 square feet. And we provided concessions associated with the renewal for a tenant north of Chicago in two buildings, containing approximately 200,000 square feet. Our life sciences portfolio contained 23 properties in 4.5 million square feet at year-end. The year-end occupancy was 97.4% and the retention rate was 90% on the approximately 700,000 square feet that expired in 2017. The only none renewal in the life science portfolio in 2017 was the one building near Boston I just mentioned. This building has had significant interest, and I’m confident it will be leased in 2018. We believe that this strong 90% retention rate in the life science portfolio is the result of our buildings being strategic to our tenants, and improved with infrastructure critical to the operation of their businesses. If a tenant were to vacate at the end of its term, we believe our buildings are well-positioned in their respective market with life sciences related improvements that…

Thanks, Jennifer, and good morning, everyone. Earlier today, we reported normalized FFO of $59 million for the fourth quarter or $0.25 per share, and normalized FFO of $375 million for the full year 2017 or $1.58 per share. Both of these amounts included business management incentive fees of $55.7 million paid to RMR, our external manager, based on SNH’s total return per share, exceeding the SNL Healthcare REIT index by approximately 9% cumulatively over the past three years. This incentive fee was paid in cash in January of 2018. As Dave mentioned, several of the 11 analysts that provide research coverage on SNH view this incentive fee as unique or not part of normalized result. As the incentive fees have been excluded, normalized FFO per share would have been $0.48 for the fourth quarter and a $1.82 for the full-year. This is the first time that SNH has paid a incentive fees since the business management agreement with RMR was amended, and there is no way to know if SNH will continue to outperform the Healthcare REIT index on a go forward basis. Therefore, in our supplemental we’ve noted what our payout ratio and some of our debt metrics are, with and without the incentive fee. For example, excluding the business management incentive fee, our normalized FFO payout ratio for the quarter would have been 81.3% and our debt to adjusted EBITDA would have been 5.9 times. As we go into 2018, it may be helpful to know what the potential incentive fee expense could be for SNH this year. Looking back at SNH’s total return, in 2015, we underperformed the index and produced the negative 26% per share return. In 2016, stock price recovered a bit and we produced a positive 38% per share return. And in 2017, we…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Drew Babin with Robert W. Baird. Please go ahead.

Good morning. Sorry for your loss. A quick question on MOBs and life science as we roll in 2018. I was just hoping you could talk about the anticipated expirations into this year, anything that might be chunky in there and kind of where you expect leasing spreads to come out and retention rates as we approach this year?

I don’t think we anticipate any major lease expirations in 2018; it’s really normal course. So, there’s -- I don’t think there’s much to talk about.

I think to the extent we have some little bit of vacancy that came up during this most recent quarter, we would be working on re-letting that space, and otherwise there’s nothing anticipated over the rest of 2018. We have a couple of properties in 2019 that we will be evaluating what the likelihood of renewal or redevelopment of some of those properties but we still have some time to work through that.

And Drew, just to address your question on leasing spreads, I think this quarter on the leasing activity, we did have our -- leasing spreads were up 4.1% year-over-year versus prior leases.

And quickly on the managed senior living portfolio, obviously there’s been some CapEx related occupancy loss that occurred throughout ‘17 and it looks like 4Q ‘17 among same store highest occupancy level you have had in a while. I guess, in terms of year-over-year comps, is there a certain point in 2017 where year-over-year comps get a lot easier where you might have a breakeven [ph] on that portfolio in terms of NOI growth becoming positive again?

Yes. There’s a lot of activity going on within the portfolio, and unlike most of our peers, we just give you the numbers as they are, so we don’t adjust -- for instance, one of our properties in California is undergoing a tremendous redevelopment projects and that is the property that I mentioned in the prepared remarks that Medicare revenues were up $1.5 million year-over-year, partly because of improvements going on and so on. And as projects get completed and properties begin to fill up, for instance the Dallas premier property is up in the lower 90% occupancy level at this point, we see the benefit but it’s delayed. And then, there are other projects that coming on line now that are affecting the ongoing numbers. So, I’d say probably, ‘18 is probably still going to be a bit volatile for projects coming on line and new ones commencing, affecting operations, these rehab the home programs are one that definitely affects the skill nursing component. So, I really, think that it’s probably beginning of 2019 that starts to see normal, stabilized growth in revenue and earnings and so on.

The next question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Just kind of following up that line of questioning a little bit, on the senior living facility, seeing the occupancy tick up, that was certainly welcome to see. Can you talk about how you feel that the renovations are impacting occupancy in the face of new supply? And do you think we can continue admittedly with some noisy numbers that start to trend back up?

It’s a couple of factors. I guess, with regards to the renovations, where we have put in the money, we’re seeing improving results coming -- once those are complete. So, that’s definitely helping us. Of course, some of the improvements too are defensive to meet, just to say even with new competition in the marketplace. But, I would say too, this quarter we didn’t -- you noticed in the prepared remarks we did not comment on the flu, because really in our managed portfolio, I think we had one week of impact from the flu and that was it. But, we are seeing it affecting our first quarter ‘18 numbers. And I would say we have a half of dozen or so properties that have been impacted by the flu in the first two months of 2018. I really think that these properties when they are completed, we do see a meaningful increase in performance. I think we continue with the direction we’re headed in completing the rest of the projects and seeing it would be approved in, I would say ‘19 and thereafter.

Is there preference for one on other or is just opportunistic?

Sorry, part of your question was cut out, could you repeat the question?

Sure. On your acquisitions going forward between life science and MOB, is there a preference for one over the other, will it be more opportunistic?

Well, I think, it’s actually probably more opportunistic. We do see quite a bit of product in both spaces. I do think that we can probably compete more effectively in the life science space, because there are only a couple of players that are investing in that space in any meaningful way. But we do like that space and we will continue it. The MOB area, again it’s more optimistic. I think, we are not going to compete in the hot markets where pricing has gotten very low, or cap rate is very low. But I mean, healthcare is something that’s in 50 states and we have -- we are currently -- within the RMR companies, we have a presence I believe in 48 states. So, we do -- we can reach other markets and we believe that there are healthcare systems that are healthy [ph] that we want to align ourselves with, but they may not be…

Thank you.

The next question will be from Michael Carroll with RBC Capital Markets. Please go ahead.

I wanted to dive into I guess the Five Star exposure real quick. David, how many renovations is Five Star pursuing right now in the triple net portfolio? And can you remind us how much rent do you expect that to bring online once those facilities are completed and stabilized?

Well, that is a number that moves around over the course of the year. But, they currently have about six of the rehab the home programs in process within the leasing portfolio. And there are approximately another six or so major projects that are in the neighborhood of $10 million to $20 million per location. Several have just been completed. And those should be benefitting us or benefitting the, hopefully benefits us, and most of the fundings, I believe that’s probably about another $60 million to $75 million this year would be provided by us to fund triple net lease properties with them. And so, that would result in pretty much about a $4 million or so rental increase as it gets funded. And that’s -- and typically [indiscernible] most of it can be funded using our line of credit or other internal funding and we don’t have to do a debt offering or larger capital markets transaction to fund that type of capital.

Are they still asking SNH to fund those projects or are they using the proceeds from the asset sales to fund those projects right now?

The longer term assets are still coming to SNH to be funded, more of the shorter term there, utilizing their own cash.

Yes. I mean, generally, they’ve been managing to make sure they have maximum flexibility, the entire senior housing industry has faced pressures, as you are well aware. And again, I think they’re prudently managing their balance sheet carefully. And if it makes sense to sell or improvement [ph] back to us we are more happy to take it. We do look at the underwriting, they generate double digit returns, it makes sense for everybody involved.

And then, with regard to the rehab the home projects, how many of those have a finished to-date and have they been successful and bringing in more Medicare patients from those renovations?

Yes. On the triple net leased portfolio, they have -- six of them complete and they have completed two on the managed portfolio for us. And everyplace that they have put those in place have generated increased Medicare business and it also helps certainly with some -- they do take some Medicaid in certain locations too. But it’s primarily motivation of bringing in more Medicare funding.

Okay. And then, can you provide an update? I know, you mentioned this, Dave, in your prepared remarks on the electronic Medical records. Have they finished rolling them out in some of the communities or is that expected to be done this quarter?

It should be all done this quarter. They are 85% complete as of yearend. The remainder is expected to be done within this quarter.

Okay. And then, how much of an impact can that have? So, how much on admissions, and that’s really just coming from the Medicare admissions from -- for the skilled nursing facility units, is that correct?

Right. I mean, one place that we see that we’ve seen the biggest impact negatively over last year or has been in Florida and managed care programs have grown tremendously within that state. And in order to participate in a lot of those programs, you have to have compatible electronic medical record. So, we expect to see a bounce back of some of that business in Florida but we also know it’s coming -- it’s helped us in Phoenix, Arizona area. And we expect this to become more widespread across the country. So, a good part of it is preventative from losing anymore Medicare business and generating -- and to build that book of business back up. So, I mean, it’s really -- it’s part of their master plan. So, it would be inappropriate for me to comment on the impact that they expect to see from us. But from ours, we’re clearly seeing it in the managed portfolio where it’s being implemented.

The next question comes from Juan Sanabria with Bank of America. Please go ahead.

This is Kevin on for Juan. I just had a question, if you guys to break out RevPAR regarding renewals and new residents as far as [indiscernible] goes? And then, secondly on a different topic, just on -- what should we expect for as far as it goes pace for MOB, and life science acquisitions ‘18 as far as the numbers? And then, have you seen any I guess P/E activity and competitions for those deals at all?

Sure. Well, the first question on the revenue per available room, per occupied room. The increases from people coming off -- the normal increase is going in place for renewals has been pretty much between the 2% to 3% range. And it varies very much by market. Florida [ph] is our strongest market and we’re seeing 4% to 5% rate increases there, while other states like Arizona, Phoenix market, it’s more likely 0% to 1%. So, you have to bring it back to the average and we are pretty much seeing average about 1.5% to 2% really. People coming in the door, again, it depends on how occupied the facilities are. Again, most of those markets tend to be close to 3% to 5% rates, coming in off the streets through unoccupied units. But, as you can see from our most quarterly results, the actual rate increase was about 1.2% on the same store basis. So, there’s a lot of different pricing by community and it’s very difficult to give you an overall standard. Jennifer can comment on life science. The question was on…

Was on acquisition.

Acquisition. And again, it is opportunistic if you look at this past year, it is heavily weighted towards the back end of the year. I would say that that’s probably more likely to be the case again this year, coming out of the gate. I think, it’s on the life side, but I expect to see us being a little more aggressive now that our cost of capital from the most recent capital transactions has become more attractive. And we can be a little more aggressive but we are not going to stretch to the 5s and 6s for cap rates. So, I think normal bread and butter will be a couple of $100 million, maybe $200 million this year, and hopefully -- something little more sizeable. Your third question? Oh, private equity you asked. Private equity coming for the large deals, definitely there -- it’s very difficult for the public REITs to compete against the private equity transactions out there. But again, those are of size in our market that we are pursuing $10 million to $15 million per transaction, and we are really not seeing a lot of private equity in that particular space.

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

I just wanted to look out maybe ‘18 and ‘19. You have done some nice capital recycling and taken advantage of maybe certain types of assets in pricing. Where are we with sort of the repositioning over maybe the next 12 to 18 months? Is there a pool of properties you’ve now identified that warrant maybe need further recycling?

Well not, I mean, not that we can disclose. We haven’t publicly announced anything. But, we are not doing a major recycling, like some of our peers have done. I think, we like the makeup of the portfolio. I can envision that our investments will be more heavily weighted towards life science and medical office buildings such that we should be at least 50% medical office and 50% senior housing. So, I don’t see us doing a lot of acquisitions on the senior housing side. We will opportunistically sell down a couple, say skilled nursing facilities and individual assets here and there. But, I don’t expect any major shift in the portfolio make up and again we’re only -- not even 15% of our portfolio is in the operation. So, we like the triple net leased and having a bit of a buffer between us and the direct line of operations. So, I can’t expect that to change very much either.

Got it. That makes sense. And then, just can you clarify -- I think you mentioned -- was it the FFO payout you mentioned on normalize basis or did you also give the FAD payout?

We did not give a FDA payout, and we don’t as a rule. In the supplemental, we provide all the components because different analysts calculate in different ways. So, we try to keep the components and people can determine their own number for that to make it comparable for their peer group, qualitatively though. I mean, I think we’re been pretty clear that our payout ratio is higher this year than it normally would be. We’ve invested fairly aggressively in our TRS or managed portfolio to make sure that product can compete with anything new coming out of the ground. And again, with the incentive fee being kind of a unique situation, it does skew the numbers a bit towards the end of the year there. But, overall, very comfortable with where we’re.

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

Thank you all for joining us on today. Have a nice day. Thank you.