Good morning, and welcome to the Senior Housing Properties Trust Fourth Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is also being recorded. And at this time, I would like to turn the conference over to Mr. Brad Shepherd, Senior Director of Investor Relations. Sir, please go ahead.

Thank you. Welcome to Senior Housing Properties Trust call covering the fourth quarter and full year 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. 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 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, March 1, 2019. The Company undertakes no obligation to revise or publicly release the results of any revision to 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 basis net operating income or cash basis 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 now like to turn the call over to Jennifer.

Thank you, Brad. Good morning, and thank you for joining us as we discuss SNH's fourth quarter and 2018 annual results. 2018 was a stable year with regard to SNH's financial performance, demonstrated by our same property cash NOI remaining flat as compared to 2017. The year was highlighted by our ability to realize over $260 million in gains from the disposition of a senior living portfolio and reinvestment of a portion of the proceeds into medical office and life science buildings, a strategy I've discussed on prior calls. This investment activity produced cash NOI growth of 1.2% in 2018, despite our selling approximately $150 million more of assets that we purchased. Our flat same property cash NOI performance in 2018 was accomplished despite our managed senior living portfolio same property cash NOI decreasing by 6.8% as compared to 2017. This was due to the growth in all of our other healthcare real estate segments on a same property basis, including 1.4% cash NOI growth from our triple net leased senior living portfolio. Despite this growth, we reported a decrease in rent coverage to 1.1 times for the 12 months ended September 30, 2018 for this segment and a decrease in coverage to 1.0 times for Five Star Senior Living leases. In November, our largest tenant and operator of our senior living communities, Five Star Senior Living announced that there is substantial doubt about its ability to continue as a going concern. We are currently engaged in discussions with Five Star about a possible restructuring of our agreements to address its operating and liquidity issues. The boards of both SNH and Five Star have formed Special Committees comprised solely of independent trustees and directors, and they have engaged separate advisors to help facilitate these discussions. As a result, there may…

Thank you, Jennifer, and good morning, everyone. Earlier today, we reported normalized FFO of $0.27 per share for the fourth quarter and $1.59 per share for the full year 2018. Both amounts include a business management incentive fee expense of $40.6 million paid to RMR, our external manager based on SNH's total return per share, exceeding the SNL U.S. REIT Healthcare index by approximately 9.6% over the last three years. This incentive fee was paid in cash in January of 2019. Excluding the business management incentive fee, general and administrative expenses decreased $1.4 million or 11.5% for the fourth quarter compared to last year. This decrease was driven by a reduction in our base business management fee paid to RMR. As a reminder, our base business management fee is based on the lower of the historical cost of our real estate or our market capitalization. During the fourth quarter of 2018, SNH paid RMR $1.7 million less based on this formula, which we believe highlights the alignment of interests between our manager and our shareholders. Our balance sheet at year end was generally comparable to where it was at the end of 2017. The most significant change was our closing on $500 million of 4.75% senior notes in early 2018 to term-out the unsecured revolving credit facility balance which had totaled $596 million at the end of 2017. These senior notes were primarily responsible for the $4.8 million increase in interest expense in the fourth quarter of 2018 compared to 2017. We ended 2018 with just $139 million outstanding on our unsecured revolving credit facility, leaving us with $861 million of drawing capacity. We ended the year with total debt to gross assets of 42.4% and 6.0 times total debt to adjusted EBITDA, when excluding the incentive fee. In the fourth quarter of 2018, we spent $29.4 million on capital expenditures, of which $15.3 million or 52% was considered recurring and included tenant improvements and leasing costs at our MOBs and building improvements at both our MOBs and manage senior living communities. On average, we spent approximately $1,400 per unit on building improvements at our managed senior living communities in 2018. The remaining portion of our capital expenditures $14.1 million was spent on development and redevelopment projects split evenly between our MOBs and our managed senior living portfolio. As Jennifer commented earlier, we were able to fund the acquisitions we made in 2018 through our capital recycling plan. In conclusion, we believe that 2019 will be a transitional year for SNH, with a focus on increasing our MOB segment as a percentage of our total portfolio providing strong asset management oversight at all of our properties, investing in our existing properties in markets where we can expect strong returns, and working to maximize the performance and value of our senior living portfolio. That concludes our prepared remarks. Operator, please open up the line for questions.

[Operator Instructions] Our first question today comes from Tayo Okusanya from Jefferies. Please go ahead with your question.

In regards to lease expirations, you also have lease with Cedars-Sinai that's expiring I believe in 2019. Could you just tell us what the status of that is?

Sure. So Cedars is a tenant of ours and they've got a great deal -- a number of leases in that building, and so they've got staggered expiration. We expect Cedars to stay in that property for a long period, and their connected by a walkway between our buildings and the hospital, so we're expecting they will renew and we also expect that will likely be a roll-up in rent.

And then in regards to the same-store pool and the performance this quarter, I appreciate your comments around supply still being an issue and also kind of operating expense headwinds. Could you just talk a little bit about whether performance during the quarter was also somewhat impacted by a lot of what's just going on generally with Five Star as a company?

I don't think it was. I really do think it's wages and benefits and just expenses being higher. Occupancy grew, and so, I mean, I think at a community level, I don't think there is a lot of insight or a lot of exposure to what's going on with Five Star.

And then also with those assets, anything new on the skilled nursing side, which I knew that has kind of dragged the numbers down as well?

Yes. We are continuing with our marketing campaign on the stand-alone skilled nursing facilities, and so they are in varying stages of either negotiation or marketing. So that plan remains as we've discussed in the past, and we do have a disposition program in place.

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

I wanted to ask a question on the MOBs that were sold in Massachusetts, I assume those were the ones vacated by Reliant. Can you talk about the pricing on those on a trailing 12 month basis, and how that might kind of dictate or predict pricing on the rest of those assets?

You know, the pricing is -- these are properties that were occupied by Reliant for 20 years. So I don't think that it's a cap rate discussion certainly, and these are local buyers who are interested in these properties. So there's not really much to say other than it's their properties that just we didn't think investing capital and maintaining have made sense for the portfolio.

The one thing I would add, when we file the 10-K later today, it will have a little bit more information. We did take an impairment on these assets as well when we determine that it wasn't worth spending the capital to try to restabilize them. So we took about $46 million of charges related to these particular assets and there will be disclosure on that in the 10-K.

I'll look for that. And just one question on Scripps. I guess, can you give a little more detail about, as that space vacate, maybe the scope of the capital plans there kind of what the money might be spent on? And any way you can kind of quantify the markup in that market on rents, potentially once any renovations are completed?

Sure. We're still in the planning stages of repositioning of those assets. So we still need -- we have a certain level of approvals that we go through before we actually kick off the redevelopment. But if we go ahead with it, it would be a complete repositioning of the assets. Again Scripps has also been a tenant in those three buildings for 20 years. So the mechanicals, the lab equipments, it's all outdated. And in order to bring it up to a Class A, it's going to take some significant capital. Again, if we decide to move in that direction, we do expect that will see roll ups in rents from where they are currently, from their current rents. It's a great market.

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

When we look at 2019, it seems like there's kind of a lot going on between the discussion with Five Star, which I'm not asking you to elaborate on. The potential for acquisitions and dispositions, and basically some blocking and tackling with some of the properties you've discussed on the call. Jennifer when you look at the upcoming year, how would you kind of prioritize those things?

It's a good question, because they're all priorities. We've got a really deep bench here. The managers, RMR Group has a quite a deep bench. So I think no one is prioritized over the other and we'll have different people working on different aspects of our challenges for the year. So everybody, it is will be a full-court press all around.

And you and I have discussed this in the past, you know the name of the REIT Senior Housing Properties, but yet significant exposure to MOBs. How do you think that the REIT and/or RMR can do a better job of getting investors to focus on the valuable MOB portfolio that you guys have? Is it a matter of separating the two out? Is it renaming the REIT? Is it investor outreach? I mean, how do you get these shares out from these pretty depressed levels?

Yes. I mean investor outreach is obviously extremely important Rick and I hit the road a lot last year. And I do spend a lot of time talking about the MOB portfolio. It's near and dear to my heart. It's a 12.6 million square feet. It's a big portfolio. You know, I think we've talked about the name change. I think that all of the things that you mentioned, it's getting out, it's talking about the strength of the portfolio, and just trying to get people to understand it a little better.

And then just lastly from me, you guys kind of had a home run when you did the Vertex Pharmaceuticals JV, I forget, a year, year and a half ago, any thoughts to doing something similar like that with maybe Cedars-Sinai?

I personally think the Cedars buildings will be a great candidate for that, but we don't really have a use of proceeds at this point. So it wouldn't make sense to pursue it at this time. We've got some shorter-term challenges that we're working through. We do have $400 million of notes that will come due in May that we're preparing to repay on the revolver for now until our spreads tighten a little bit. The uncertainty related to Five Star, we don't think it's helping the spreads there. So we believe we will eventually go back to the market on the debt side, but it will likely be awhile after we removed some of the uncertainties that's out there. But, yes, at this point, I don't think there's any need for JV Capital.

Right. But if you were to find a, let's say, sovereign wealth fund, who is willing to do a JV with you on that property in an extremely low cap rate with where your shares are trading right now, that might be kind of a good arbitrage situation if you could do a JV in a low single-digit cap rate and then turn around buy your shares, which are extremely depressed relative to the peer group.

Fair point. And we'll certainly run the numbers and discuss it with the Board.

Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead with your question.

Yes. Thanks. Jennifer I want to talk a little bit about Five Star's coverage ratios. I know that in the start it says it's about one times right now on EBITDAR basis. But I know Five Star's results drops pretty handily starting in the second quarter. So it's all including about six months of that. So where do you think or where should we assume the stabilized coverage ratios are for that portfolio?

Hard to say. I mean, I think, we weren't surprised that their coverage was at 1.0, as it's hard to speculate where they are going to be moving forward.

But as we roll-in, I guess, the fourth quarter results or maybe the first quarter 2019 results. Is it fair to assume that those ratios would continue to drop from this level?

It's hard to say.

Yes. Just based on the math, I mean, when we put Q4 in, we would expect that it will likely trend lower, just based on what we saw in our own TRS and our managed portfolio, but their call is next week and they'll release earnings at that point.

And then Rick I know and I think Jennifer you too have said that there is a number of assets at Five Star that's generating negative EBITDA. So by simply selling those assets are giving them away you could see coverage improve. Can you kind of quantify how many of those assets are out there and those assets are being marketed today?

As Jennifer mentioned, there are a number of those assets that are being marketed today. I think just quick metrics, I think something like the bottom 20 or so properties, which is a fairly small percentage of their portfolio. And generally, these are smaller in scale. I think if they were to just cut the losses there, it would uptick to 1.1 times on this trailing 12 month basis.

So why haven't those assets been sold yet? Are you marketing them right now and expect to sell them soon? I guess, what's holding you back?

We generally don't announce that until we've closed, but they are in various stages of marketing at this point.

And then, I know we've been hearing a lot about the electronic medical record systems at Five Star. I think we've been hearing it for like the past three years. So you only rolled it out or Five Star only rolled it out for half the portfolio, I guess, what's taking so long there?

No, electronic medical records is used everywhere. They're running in the SNF units. The little over half is related to the dynamic pricing model.

Yes. Revenue management. So the electronic medical records have been implemented in all of the skilled nursing facilities in our CCRCs and they're now moving forward in using them in the assisted living communities as well.

So you just started in the assisted living communities that's what your prepared remarks were referring to?

No, I think that my prepared remarks, we were talking about revenue management, which is different. That's the dynamic pricing where you're looking at a kind of a micro market level and adjusting rates for different types of rooms very regularly, similar to what is done in the hotels.

And you're seeing good results from those right now, and do you think that will start showing up in the P&L as we move into 2019?

I think it will. Yes.

And our next question comes from Todd Stender from Wells Fargo. Please go ahead with your question.

I know you don't want to talk about Five Star. But I think investors would like just a little more clarity maybe on what the delay is or maybe the perception of the delay in the restructuring, and your stock prices, I think feeling some of the impact today of a delay. Anything more behind that?

Thank you for your question. Unfortunately, we really can't talk about the discussions that are ongoing. I can't add any more color to what we said during the prepared remarks.

But maybe I guess in the next 60 days, is that a pretty good indication of the committees will be formed or decisions will be made, what's around that 60 day period?

Committees have been formed, discussions are ongoing. So the 60 days is we think that will have an announcement within the next 60 days. So the discussions are actively happening.

And if you can comment on what would happen, I guess, in the past we've seen SNH make loans to Five Star. Is that on the table other than maybe rent restructuring, maybe could you outline a couple of things that would be possibilities?

I can't. Just as I said, we're not going to comment on the discussions that are ongoing. We expect to have news that we'll announce publicly at some point in the next 60 days.

And then just lastly, because of that, I guess, 60 day period, our investments on hold, would you say, until the Five Star situation is handled?

No, I don't think that, absolutely not, I think that our acquisitions team is underwriting. I meet with them regularly. So they're looking at everything really that hits the market. So no, we have not put acquisitions on hold.

And our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead with your question.

So I know you can't talk about what options you're considering as you deal with or you restructure potentially Five Star and agreement you have. But can you maybe give us a sense of what you may not be considering? For example, is this really just dealing with Five Star, you're not sort of thinking about bringing a new operator, you're not just spinning it off, is there something that's just not on the table? Just so we have a sense of like there's so many wide outcomes here, like what are you just not focused on?

I think as Jennifer said, I mean, there could be changes to our agreements with Five Star, but we're certainly not going to try to negotiate publically and we really can't comment on the potential theoretical outcomes that could possibly occur.

And then just timing wise, you said 60 days, but I'm assuming what you're looking at today, the reason you are sort of focused on this now and formed the committees now, is you don't see any real change in the underlying markets or improvement over the next, call it, 12 months to 18 months as opposed to like some of your peers that have talked about potential bottoming and moves in occupancy up by year-end?

Well, we have had moves in occupancy up. I think that the market has changed and that new construction starts have declined, but there is still a good number of properties that are being constructed. So, net reported, absorption high, inventory growth is higher still. So I think the market is at its bottom, but is it turning, it's hard to say. Again, the news looks good, but I think there is still time for some of the properties that are under construction to complete and open. So competition will stay high and wages and benefits are continuing to high.

And then just to get more color on the comment you made around risks to potential dividend distribution. I mean it seems like, whether you adjust rents, you sell the asset, you convert RIDEA, you change structure there will have to be an adjustment to the dividend just from a sustainability standpoint. Is that a fair comment?

I mean, Jennifer said in prepared remarks that changes to our agreements may negatively impact our cash flows. And again, beyond that, we really can't comment on the potential theoretical outcomes that could possibly occur.

And then just turning away from that, just on the MOB side, you made a reference to really wanting to grow the MOB platform. And as a percent of the business, just can you walk us through sort of it from here on, like how do you expect to do that? What are the various strategies over the next sort of 12 months to 24 months?

Well, you know, I've been saying that for sometime and the goal is to acquire MOB and life sciences properties. And we've been actively pursuing acquisitions, but unfortunately the cap rates are lower than we will pay. Our properties are trading at numbers that are higher than we will pay. So we're going to continue to be diligent and patient, but look to acquire properties that fit well within our portfolio.

And I will just add a few, if you look at..

I was just confused because you mentioned, in '19 you'd like to grow that. That's why I was just trying to understand what you're doing?

I mean you could look to 2018. In 2018, we recycled some senior living capital and reinvested into the MOB segment. We'd hope there's continued opportunities to do things like that.

And ladies and gentlemen, with that we will end today's question-and-answer session. I'd like to turn the conference call back over to Jennifer Francis for any closing remarks.

Thank you for joining us on today's call. Operator, that concludes this call.

Ladies and gentlemen, that will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.