Good morning, and welcome to the Senior Housing Properties Trust Third Quarter 2018 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Shepherd, Senior Director of Investor Relations. Please go ahead, sir.

Thank you. Welcome to Senior Housing Properties Trust call covering the third quarter 2018 results. Joining me on today's call are Jennifer Francis, 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-answer session with analysts. I would like to note that the transcription, recording, and re-transmission of today's conference call without prior written consent of SNH are strictly prohibited. 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 SNH's present beliefs and expectations as of today, Tuesday, November 6, 2018. And actual results may differ maturely from those projected in any forward-looking statements. SNH undertakes no obligation to revise or publicly release the results of any revision forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the securities exchange commission or SEC, which can be accessed on SNH website at www.snhreit.com or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. 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 Basis NOI. Reconciliations of net income attributable to common shareholders and these non-GAAP figures and components to calculate AFFO, CAD or FAD are available on our supplemental operating and financial data package found on SNH's website. I'd now like to turn the call over to Jennifer.

Thank you, Brad. Good morning, everyone, and welcome to SNH's third quarter 2018 earnings call. This quarter's results are highlighted by strong performances in our medical office and life science portfolios as well as increased occupancy both sequentially and year-over-year in our managed senior living portfolio. While bottom line performance still lags in our managed senior living portfolio, our medical office buildings remain highly occupied and serve as a stable foundation during this challenging senior living operating environment. This is one of the reasons we have the appetite to grow the MOB segment portion of our portfolio in the coming year. Earlier this morning, we reported a 30 basis point increase in consolidated same-property Cash Basis NOI in the third quarter compared to the same quarter last year. This slight increase is a result of a 2.4% increase from the MOB portfolio and a 1.8% increase from our triple-net leased senior living portfolio offset by a 10.5% decrease in our smaller unit senior living portfolio. Taking a closer look at our MOB segments, same-property Cash Basis NOI in our life science properties increased 2.2% in the third quarter compared to the same quarter last year and our traditional medical office properties increased by 2.6%. We had a very active third quarter with solid leasing volume. During the quarter, we executed 86,000 square feet of new leases at a 19.6% roll up in rental rates and a weighted average lease term of 8.2 years. A portion of this positive new leasing is the result of our plan to reposition a 130,000 square foot medical office building located in the heart of Washington, D.C. Central Business District. This building, which is in a Class A location, has become over time a class B property due to its age. We will invest an…

Thanks, Jennifer; and good morning, everyone. I'd like to start off by reviewing few items on our balance sheet. We ended the second quarter with $47.7 million of cash and $108.7 million of restricted cash on hand. As was the case last quarter, $94.3 million of that restricted cash represents the net proceeds from the sale of our fourth Sunrise Senior Living Community in the second quarter of 2018. These proceeds are being held by our like kind exchange intermediary for SNH's benefit and will become unrestricted in mid-November. We had $195 million outstanding on our $1 billion unsecured revolving credit facility, leaving us with $805 million of drawing capacity at quarter end. Our reported debt-to-adjusted EBITDA was 6.1 times and debt-to-gross assets was 41.3%. Between our cash and borrowing capacity on the revolver, we have ample liquidity to pursue medical office and life science acquisitions and grow our portfolio. Turning to the income statement. Our capital recycling efforts over the past year have resulted in us being net sellers over that time. Yet, total NOI was up approximately $1 million or 60 basis points in the third quarter when compared to the same quarter last year. This is the result of us selling approximately $390 million of properties at a weighted average cap rate of just under 4.5% and acquiring approximately $299 million of properties at a weighted average cap rate of approximately 8.5%. General and administrative expenses for the third quarter included $18.7 million in estimated business management incentive fees. The incentive fee accrued in the third quarter is based on the outperformance of SNH's common shares versus the Benchmark Index from January 1, 2016, through the end of the third quarter. SNH has outperformed the Index by 45.9% over this 33-month period with a total return of…

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question will come from Drew Babin of Robert W. Baird.

Good morning.

Good morning.

A quick question on Five Star. Obviously, the coverage ratios has come down a bit and you give some color on why. I was just wondering, just in terms of their liquidity, whether it'd be properties they own on their secured revolver, how do you feel about their ability to bridge any shortfalls that may occur to pay the leases, whether it'd be selling properties to SNH or et cetera? How do you feel about their health at the moment?

It didn't surprise us that their rent coverage dropped a bit. It was something we were expecting. We continue to reimburse them for the capital spend there, which causes the rent to go up. Again, one of the things we looked at recently is, Five Star was to sell the top 10 or so or the bottom 10 of their performing assets. It would substantially increase their rent coverage. They're still the fourth largest operator in the company and they continue to have a strong balance sheet. So, we have been talking to them about the potential disposition of some of the skilled nursing facilities and we think that would certainly help with their rent coverage.

Okay. Do you mean disposition of the skilled nursing facilities to third-party, not necessary, correct?

Yes, that's correct.

Yes.

Okay. Just making sure. Secondly, can you just talk generally about capital plans on heading into next year? I guess, first off, do you - in mid-November when you're able to use the restricted cash, should we expect an acquisition right away? And where do you see the best opportunities going into next year, should we expect that capital recycling is probably BMO [ph] given where the cost of equity is right now?

Correct. So we have a very active acquisition group here and we - our pipeline is probably, on average, generally about six properties. We're in the process now of reviewing and underwriting some acquisitions we haven't acquired of late, because the cap rate environment has been very competitive. We are still focused on acquiring life science and MOB assets. Whether we close anything by year-end, I can't speak to that right now. And then, again, next year, we're going to be focused on a couple of things, certainly on acquiring MOB and life science assets and then continuing to invest capital in our portfolio. We're seeing good returns in deploying capital into our MOB life science and our senior living assets. So, looks like we will continue with that focus.

Okay great appreciate the detail thank you.

And our next question will come from Matt Boone from B Riley FBR.

Hi, we were a little bit surprised by the level of strength in the MOB portfolio and corresponding asset in senior living. Could you provide a little bit of color as to the diverging trends there and how we can expect that to evolve as we head into 2019?

We are not surprised by the results in our MOB portfolio. It's a very strong portfolio, it's over 95% occupied and we are investing in that portfolio. And so, we're - I talked on the call about one of the properties where we're doing the redevelopment and we're already getting double-digit net growth. It's a good portfolio. We have a really strong leasing team that keeps the portfolio well occupied. So any future roles in tenants, we feel pretty comfortable that we can get those properties we tenanted. We also weren't surprised by the new living portfolios results. We have three things in the TRS, we've seen growth in occupancy certainly in our IL, very strong growth in occupancy in our independent assisted living and memory care as well, skilled nursing is pulling that down. Some of the growth in expenses there are the result of room turns. And so, I look at that as being a good thing as we're positioning units to lease up and upgrading them to keep up with the competition. It costs money to do that, but I think that that - it's good, it's investing in the communities.

Got it. Thanks

Sure. Thank you.

[Operator Instructions] And our next question will come from Tayo Okusanya of Jefferies.

Hi, good morning. I just wanted to go back to Drew's question about the acquisition outlook and giving your focus on MOBs and life science, again, how you think about funding that going forward given the cost of capital and your leverage target?

Well, I mean, I think we have capacity right now for $400 million to $500 million in acquisitions. So I think that we would fund it basically undrawn upon our pretty low amount drawn on our revolver. So, I think that's how we would fund it.

Okay. If you put it on the revolver, would you think longer term you will just kind of put long-term debt behind it and kind of increase leverage from current levels, is that the idea that you would kind of fund these deals mainly using debt?

I think that would certainly be the plan upfront. Next year, we have some maturities in May of 2019. So, we'll be looking probably to go back to the market for longer-term fixed rate debt at that point. But yeah, I mean, right now, we've historically used our revolver. There is plenty of capacity on it. I would expect us to do that to get as much accretion as possible out of it, but as we mentioned in the prepared remarks, I mean, we are still recycling some of the capitals and we've been net sellers over the past year, but we're still able to increase consolidated income. So, we're trying to at least get that capital redeployed and the balance sheet will work itself out as we grow.

Got you. Okay. That's helpful. And then the comments around the shop [ph] portfolio, again, nice increases in rent there, nice increases in occupancy, but the OpEx was a little bit higher, so just to confirm that will you adjust additional operating expenses on the turns you had putting in new carpets, painting the walls, making the rooms look good and at least for the next few years, given that you've done the room upgrades we should not run into as much of that going forward even if you continue to have turns in those rooms.

We will if they continue to have turns. So as residents move out and we meet tenants there, their units will - we'll continue to upgrade those units. Some of the increase in operating expenses were also due to some real estate tax abatements that we received last year, so our real state taxes are normalized, so that's not really an increase.

Got you. Any meaningful amount of that labors is an - by any chance or do you - are you concerned you could have a labor component on a going forward basis?

Yeah. I mean, labor - there's a couple of things that are happening with labor and it's - we're in a very, very low unemployment rate environment. And so, we've seen - I think we've had 11 states to where we've seen an increase in minimum wages. And so that is affecting operators. In addition to that, there is a shortage of skilled employees. And so, when you have open positions, you have to fill those openings with paying your existing employees over time. So, I don't know that I see that changing anytime in the near future.

I think - just to add to that, I mean I think the operators are very focused on their HR efforts in making sure they're investing in human capital, so that they can fill those positions. They're more active at some of the community schools and some of the - even some of the high school, frankly, because I think there is an opportunity to bring people into the space and see that they can grow their career within senior living. So I mean, we're encouraged by what they're doing and we'd like to see that play out, because again, as Jennifer said, we have seen wage pressure and there is some real difficulty filling some of the open roles and the sooner we can - we're certainly not hoping for a downturn in the economy that would alleviate wage pressure, but we'd love to be able to fill those roles faster.

Got you. And the last one, if you could indulge me just on Five Star, again the capital improvement projects that they're doing there again, so they start to pay you quarter-on-quarter rents before they even built or leased out these assets. It's putting pressure on the rent coverage. When does all of that kind of stop - flat, stabilize and that kind of negative pressure on coverage reduces our end?

Yes. They have seen some positive results in performance on some of the properties where they've invested capital. So, it's kind of a rolling capital investment plan, but Yonkers was one of the big projects and it's up 30% this quarter compared to the third quarter of last year. This is a big repositioning in Dallas and that property was up 35%. And so, we are seeing improvements, but then there's continued capital for instance that was building the IL units down in Tennessee and there while they're doing pre-leasing they're going from ground - they do the ground out, so it will take a little bit to catch up.

Got you, all right. Thank you very much.

And this concludes our question-and-answer session. I would like to turn the conference back to Jennifer Francis for any closing remarks.

Thank you, and thank you for joining us on our third quarter earnings call. I look forward to seeing many of you tomorrow and maybe a week late, as well as at our other upcoming investor conferences.

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