Good day, and welcome to the Senior Housing Properties Trust Second Quarter Financial Results Conference Call. This call is being recorded. I would like to turn the call over to the Director of Investor Relations, Kimberly Brown for opening remarks and introductions. Please go ahead, ma’am.

Thank you, and good afternoon, everyone. Joining me on today’s call are David Hegarty, President and Chief Operating Officer; and Rick Doyle, Treasurer and Chief Financial Officer. Today’s call includes a presentation by management, followed by a question-and-answer session. I would also note that the transcription, recording and transmission of today’s conference call are strictly prohibited without the prior written consent of Senior Housing. Before we begin, I would like to state that 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, August 4, 2014. 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 operations or normalized FFO. A reconciliation of normalized FFO to net income 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 the 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. Now, I would like to turn the call over to Dave.

Thank you, Kim and good afternoon everyone and thank you for joining us on today’s earnings call. Earlier this morning, we were pleased to report normalized funds from operations or normalized FFO of $0.43 per share for the second quarter, up from $0.42 per share for the same period last year and in line with consensus. We are particularly pleased with our second same-store results as we posted same-store NOI growth across all property types. I will talk through in more detail each segment in a moment. As we look back in the first half of 2014, we have taken some important strategic steps to better position SNH for more meaningful normalized FFO per share growth. One of the most impactful steps was the completion of the $1.1 billion acquisition of the two biotech research buildings leased to Vertex Pharmaceuticals on May 7. Following our successful capital raising activities and consistent with our previous guidance, we financed Vertex with approximately 75% debt and 25% equity. As a result, we remain confident in our accretion guidance of $0.06 to $0.08 per share on a normalized FFO basis and $0.05 to $0.07 per share on an AFFO or CAD basis after the effect of straight line rent. Closing the Vertex transaction was an important new accomplishment in SNH’s history and fits squarely in our stated strategy of diversifying and further strengthening our portfolio, increasing the percentage of private pay assets and improving the security of the cash flows to support dividend distributions. As previously reported, in April, we purchased the Texas Center for Athletes, a Class A 97% occupied, multi-tenant medical office building located in San Antonio’s South Texas Medical Center. The purchase price was approximately $33 million with the GAAP cap rate of 8.9% and cash cap rate of approximately 8%.…

Thank you, Dave, and good afternoon, everyone. For the second quarter of 2014, we generated normalized FFO of $86.6 million, up from $79.1 million for the same period last year. On a per share basis, normalized FFO for the quarter increased to $0.43 per share, up from $0.42 per share for the same period last year and in line with consensus. Rental income for the quarter increased $15 million to $128 million. The increase is primarily due to external growth from investments offset by reduction in rental income due to the sale of the two inpatient rehab hospitals and four underperforming senior living communities since August of 2013. $55 million of rental income was derived from our senior living leased communities, while $68 million was derived from our medical office buildings. Looking at our managed senior living portfolio, resident fees and services increased nearly 6% to $79 million during the second quarter. The increase primarily relates to acquiring five senior living communities over the past 12 months. As Dave mentioned, we were very pleased with our same-store NOI growth of 6.4% in the margin improvement of 110 basis points to 23.1%. We believe there is still room to increase occupancy and push rates at these properties. Property operating expenses for the quarter increased to $79.8 million due to external growth from acquisitions as we added five managed senior living communities and six MOBs to our portfolio since the second quarter of 2013. Approximately $19 million of property operating expenses were derived from our medical office buildings and approximately $61 million was derived from our managed senior living communities. General and administrative expenses for the quarter were $9.6 million compared to $8.2 million for the same period last year. The increase primarily relates to the property acquisition since April of 2013…

(Operator Instructions) This is from the line Tayo Okusanya with Jefferies. Please go ahead.

Yes, good afternoon gentlemen.

Hey, Tayo.

Hey, Tayo.

Just a couple of quick questions, I hear your point about the acquisition outlook and that second half was just really much stronger than the first half, but I mean, just kind of curious, you mean, you have already done over $1 billion. When you kind of just think about the second half, what do you think you are kind of on pace to do and what are you generally seeing pricing wise?

Well, as I always comment about acquisitions is that it’s very difficult to predict even when we come up with an assumption at the beginning the year, it’s what we would expect to do, but we just don’t really know because if the market just continues to become harder, I guess pricing is extremely aggressive out there. So, it’s very difficult to predict what will succeed on. We do have few situations in the pipeline of modest amounts that we are negotiating right now, but again, it’s extremely difficult to predict what the likelihood of success is on a number of offers and so on.

Okay. Are they kind of reasonably sized portfolio deals out there, are you kind of looking at a world more back to one-off $25 million to $50 million type of transactions?

Well, we look at – we pretty much see all of them, usually we don’t see very huge ones, but we see most of the ones out there and both from a senior living and medical office side, we consider what if it’s a fit or how much we think we could reasonably do, but I would say the ones that I currently envisioned are more the one-offs, but again, we still – we will look at the bigger ones and evaluate them anyways.

Got it. Okay, that’s helpful. And then just one more, I appreciate you are indulging me, but the MOB portfolio, again when you take out the one-off instances during the quarter as you mentioned the hospitals are still in that finding the longer lease, but there was a bit of roll down. When you just kind of look at the core portfolio, I mean, what are you seeing in that portfolio in regards to pricing, in regards to mark-to-market on rents kind of excluding this kind of one-off instances that happened during the quarter to drive the numbers generally in the negative direction?

Right. Well, the traditional multi-tenant medical office building is still doing well. It’s retention rate is excellent as it closed by north of 90% and I am excited that the rent restructuring is pretty much I would say flat to up to a couple of percentage up. As you said there is around that is a one-off and stuff like that we maybe offer some free-rent and make – obtain a longer lease of building some step ups. So maybe our cash rent maybe lower in the first year or two, but on a GAAP basis, we end up with the growth exceeding where we are today. So, it’s clearly not – I mean, in most cases, it’s not your 5% rent increases, I think 3 would probably be the top of the range. Again barring individual cases, but I would say it’s mostly to modest low single digits.

Okay, that’s helpful. Thank you.

You’re welcome.

Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead. Michael your line is open.

Yes. Thanks. Can you guys give us an idea of how your coverage ratios were trending on the Five Star leases?

Well, I mean the only reason that we could not publish it in the supplemental is because they have not publicly reported their results. The last published ones that are based on their obviously filed financials run about 1.2 to 1.25 and that includes properties that are currently being marketed for sale. So that would also pickup from there. I don’t think – I can’t comment on coverage ratios for the last – actually since September 30, 2014 because of non-public information but their occupancies we do publish and those have held pretty steady around in the aggregate about 85% or so 86% and.

So have you had conversations with Five Star about how those properties are currently performing?

Sure we are constantly monitoring the properties and we do get individual property financials and we do have people that do site visits for properties and there really hasn’t been any significant change in those properties.

Okay. And then can you walk us through how decide, how you are going to structure one of the senior housing acquisitions if you are going to play through triple net or a TRS, what – how do you decide that?

Yes. Lot of it has to do with the how much margin there is to structure a rental rate plus coverage ratio, that’s acceptable to us versus just find an out rate. And I think we clearly have since we are providing the capital we have the first choice and what we – how we structure it. And I think in today’s environment we still believe that there is a good amount of increased potential in the RIDEA format though we are biased towards the RIDEA format today.

Are you biased because of the growth outlook or are you biased because of cap rates are too low for triple net?

Both really and we are very positive on the outlook still.

Alright and then finally can you give us some idea on the activity on those assets that you are currently marketing for sale, I mean is that something we should expect that could be completed by the end of this year?

Most of it, yes. I think there is I mean if the assets are being sold off bit by bit to some regional players some national players on the skilled nursing side, we have a couple of properties that I guess are more development disabled people and they more of a challenge to sell, that’s what take it longer, because it’s a very unique buyer. And the MOBs they are selling and will continue to be I believe those will be sold before year end.

Okay, great. Thanks.

Okay.

Our next question comes from the line of Juan Sanabria with Bank of America. Please go ahead.

Hi, good afternoon. I was just hoping you can talk a little bit about the rate growth on the RIDEA portfolio, it doesn’t look like it’s necessarily coming through quite yet and kind of give us a little sense of color as to why that maybe or how that’s going to change going forward? And what your expectations are there?

Good. Well, first I think that there is decent amount of potential to increase the rate, but what is very difficult to convey is that it’s really a revenue per occupied unit and it’s total revenues at that – the facility’s locations. So, couple of things on that, once you mix skilled nursing, assisted living, memory care and independent living, you can have the highest paying components usually the skilled nursing on memory care is pretty close there, but if you have a drop off incentives in skilled nursing, but you pick it up on independent living, it’s going to show a net decrease in average rate. In addition, when you – if you noticed last year, we did a lot of improvement in occupancy. And when you are improving your occupancy, you are getting quite a bit of upfront fees from people coming into your facility. Now, if you hit a stabilization level in the say 95%, you are seeing very little rollover in units and so you are not going to see those fees so much so that it negatively impacts the average per unit revenue. And the other thing is that most of the people have come in, you typically won’t raise their rates for a year that have been there. So, that’s another reason why we expect our rates to move up from here beginning in the near-term. So, it’s a little bit of color, unfortunately it’s a lot color, very difficult to just point to like a hotel room rate or an apartment rental rate.

So, what do you think we should be thinking about rate growth on a RevPAR basis going forward from here now that you can presumably be able to increase rates with the tenants having been there about a year?

I think the rate increases are going to be more comparable to say 3%, maybe 5% in some cases, so – but on average, it’s still going to end up probably around the 2% to 3%, because some properties are still increasing occupancy and probably not likely to raise rates, which I think is actually at or a bit above probably the rental growth rates indicated in the industry by the NIC data.

Okay, great. Thanks. And then just on the dividend, how should we think about that for the balance of the year, with you guys are reiterating your accretion from the Vertex acquisition kind of balancing that with some CapEx still to be spent on the Sunrise assets and just generally how you think about your payout ratio?

Hi, Juan, this is Rick. Yes, that is reviewed on a quarterly basis by the Board. I think the Board will and have taken in consideration of the Vertex acquisition, which we closed in May. So, they will review it for the next quarter. And we believe we are still in that range of accretion, which will help the payout ratios into a more favorable range for the Board to increase the dividend in the next couple of quarters.

And is there a range you feel most comfortable with for that payout ratio?

Well, the Board in the past will have seen the FFO payout ratio, be in the mid 80s, maybe even the upper 80s that they would consider it. And then – and on an FFO, on a CAD basis, you want to see it in the mid 90s if possible, but knowing that the accretions coming we just closed on that, they also take that into consideration.

Okay, great. Thank you.

Thanks.

Next we go to the line of Daniel Bernstein with Stifel. Please go ahead.

Hi, good afternoon.

Hi, Dan.

Hi, Dan.

Can you breakdown the safe components of RIDEA by percentage of units or beds however you want to do it? It doesn’t have to be exact, but if you have some approximation of just trying to understand the breakdown of those asset classes within RIDEA?

Well, it’s probably 40% to 50% independent living and then another probably 30% assisted living and 30% skilled nursing maybe a rough estimate.

Alright. Is it some form of Sunrise?

The Sunrise assets were probably 60:40 assisted living and skilled nursing and then the V portfolio, which was the other larger portfolio was about 75%, 80% independent living.

Right.

In the rest of system.

On the V portfolio you were doing a lot of construction or I guess call it a redevelopment, but certainly some CapEx being put into those facilities, is that mainly done at this point or is there still many being allocated to CapEx improvements?

There is still money.

Yes. We are still putting in investments into these properties just to keep them competitive too in the marketplace stands. So, you will see we have an uptick on CapEx this quarter as that fluctuates quarter-to-quarter depending on the timing of when these can get up and running; two, planning of the projects and permitting applications. So, we expect this to continue into 2015 also.

Okay. How disruptive is their CapEx to the facility?

How destructive?

How disruptive?

Disruptive business, right, it is disruptive, it takes units out of business – out of circulation for occupancy and so on. I think that’s one thing I want to point out about our portfolio is the fact that we have the 39 communities in the same-store results and they stay in the – for the duration. So, we don’t pull out any properties that are undergoing significant redevelopment and so on. I would say there is probably a few hundred units that are unavailable for occupancy during the construction phase. So that definitely is impacting occupancy. And again to – you have construction of any consequence going on you are reluctant to raise rates in the midst of that. So, I think we are getting much closer to the end of the V portfolio and we are still in the midst of the Sunrise portfolio. And I think one of the problems that we have, if any of you have gone through having a home renovated once you do one room over, then all of a sudden, the next room doesn’t look as the other one and then you end up with development creep, construction creep and expanding the scope of the projects. So, we have been experiencing that in many parts of our portfolio. And again, I think in order we are competing against some brand new facilities that just open up. And in order to compete, you really have to offer them a very competitive product for the private consumer. So, while they are willing to put the money in, we just wish it was all done yesterday.

So, it’s really a turnaround and it’s not that the portfolio is not growing I think 5% or 6% year-over-year, but some of the lag in occupancy rate growth, that maybe something that doesn’t turn really until next year?

That’s right. I would say that, we will start to see it later this year, but I think to fully feel the effect of it will be next year.

Thank you. Once again, the first quarter you get seasonality that surprises some of those items? On the MOB assets that you have, you combined life science and MOB, can you talk a little bit about the difference in fundamentals we are seeing in that MOB portfolio between what we consider maybe hospital on-campus affiliated medical office buildings and the life science component. Is there you are seeing any differences in leasing trends between those different types of assets in what you call your MOB portfolio?

Well, I mean, the life sciences is one to talk about, because it’s really one or two occupants per building and there are long-term leases and normally you have approximately 2% per annum increases in those leases. So – and that probably represents about 20 – now the Vertex transaction about a third of the MOB portfolio. In the regular MOB product, we are seeing that – let’s say probably more than 80% of the portfolio is affiliated with the healthcare system, which is the anchored tenant on the campus or across the street or something like that. And those have had very steady reliable tenant fees. And in a few cases, we have been able to raise rates a little bit more than inflation, but most part is held steady and it’s been more trying to control costs, real estate taxes, utilities, and so on. Our – actually real estate tax and insurance are the two that we try to keep down as best we can and less within our control, but I would say we should experience the same-store growth in those assets of low-single digits again.

Is it mostly triple net?

No, most are managed, I mean we do have like Aurora that’s triple net, but I would say most of our MOB portfolio is still actively managed.

Okay, thanks a lot. I will talk to you shortly…

You are welcome. Thanks.

Next question comes from the line of Todd Stender with Wells Fargo. Please go ahead.

Hey, guys. Good afternoon.

Hi Todd.

Can we just hear your overarching thoughts on what looks like more of an emphasis on portfolio management just seeing more asset sales lately and just how – about your thinking about upgrading the quality of the overall portfolio?

Well, a couple of thoughts I mean clearly our acquisitions in the last several years have been very high quality investments the Vertex buildings is the prime example, but just even the V portfolio very high quality formerly run by Hyatt, so we would expect them to compete against the high end consumer. And I think all of our acquisitions over the last several years have been really high quality. So as far as recycling assets we are focused on selling off some of those skilled nursing facilities to the standalone predominantly Medicaid facilities. We have some of these single triple net leased MOBs that we would still continue to sell off. And just individual assets that are non-core for one reason or another they are like we sold a couple of skilled nursing facilities that are actually performing okay but they were three hours away from anything else we had. So, there is just sort of a challenge to monitor and look for opportunities for growth there. So, I would say unless quality made us enough for an individual asset that was significantly accretive. I would say we will look for more of our just assets that have given us problems and look to sell them and recycle that capital.

Can you say how far along you are in the process and if there is anyway to quantify maybe volume wise or what you could probably still stand to sell?

Let’s see, not really, I mean, we have – we will continue to look for individual investments where I think…

We just currently have the 7 senior living right now and the 2 MOBs with the net book value of about $13 million today but that’s something that we continually look at all of our portfolio, let’s see if we can add anymore to the list. And we will do that on a monthly basis.

Thanks Rick. Are those seven facilities are they operated by Five Star?

Yes. All seven are – most of them are skilled nursing facilities.

And do you have what the pro forma Five Star exposure would be post asset sales?

Yes. They usually get a net – they will get a percentage of the net sales price reduction in the leases or depending on their sales prices of those. They will get a net reduction like I have said total line net book value right now is around for those that’s about $10 million or so.

Okay .And then you mentioned with the closing of the Boston asset of course, is this reshuffling and just putting some assets having an impact on the board’s ability or desire to raise a dividend, could we be thinking about this a few quarters further perhaps, I mean is this a 2015 event or the Board raises the dividend?

Again, we can’t speak for the board, but I think that just the fact that we have completed the Vertex transaction, the accretion that it’s going to give to us, it’s going to bring the payout ratio back within the range that it historically has been and a few of these slower acquisitions and other things I think will make us feel good about where the dividend is going to be? So, it may not be 2015, but I can’t guarantee that at this time on the call, but the asset sales are not that material, at the moment, to give – affect the dividend really one way or another?

Okay, thank you.

You are welcome.

Our next question comes from the line of Tayo Okusanya with Jefferies. Please go ahead.

Yes, thanks for taking my follow-on. Just wanted to follow-up on Juan’s line of questioning about the dividend, I mean when you take a look at coverages today on an FFO and FAD, you mean they are pretty high relative to those guidelines you discussed earlier on. So, is it still realistic to expect a dividend increase at this point or it’s more of a world that we are just keeping the dividend stable once you kind of grow into it?

No, I think as you see FFO move, you would see us look for the opportunity to increase the dividend. I think our Board is very proactive as far as they are looking for opportunities to raise the dividend, but our FFO certainly as you know the first half of this year has been very much focused on just acquiring the Vertex properties raising the capital for and so on. And even this past quarter, we – you raised the capital a bit in advance of the closing, so we have probably a good month of excess capital on hand to fund that acquisition. And even today, we are sitting on $80 million of cash in the bank in the lines of credit un-drawn. So, we are in excellent position today, but we certainly would like to see our FFO another $0.01 or $0.02 for raising the dividend.

Okay, thank you very much.

You are welcome.

Thanks.

At this time, we have no further questions in queue. Please continue.

Right. Well, thank you all very much for joining us today and we look forward to attending, seeing some of you at the Jefferies Healthcare REIT Summit in Chicago in September and have a good day. We will catch up later.