Good day, and welcome to the Senior Housing Properties Trust Second Quarter 2017 Financial Results Conference Call and Webcast. [Operator Instructions] Please 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 call covering the second quarter 2017 results. Joining me 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-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, Thursday, August 3, 2017. 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 now like to turn the call over to Dave.

Thank you, Brad, and good morning, everyone. Thank you for joining us on our second quarter 2017 earnings call. Today, we reported normalized funds from operations or normalized FFO of $0.44 per share, which was $0.03 lower than second quarter of 2016. This quarter was the first quarter we recognize the full effect of the joint venture of the Boston Seaport medical office building. As we have pointed out on our last call, on a temporary basis, the joint venture will reduce our quarterly FFO by up to $0.03 per share until we can accretively reinvest the proceeds. However, this transaction, together with the changes we made to our balance sheet this quarter, and subsequent to quarter-end, has strengthened our balance sheet and has positioned us to grow. That being said, we remain disciplined with our capital allocation and continue to believe that the most attractive return on investment for us in this competitive environment is in our current portfolio. Specific highlights to the second quarter were that we improved our already industry-leading high occupancy to 96.5% in the MOB portfolio, continued to generate 97% of our revenues from private pay properties, prepaid secured debt of almost $300 million with the weighted average interest rate of 6.7%. Subsequent to the quarter end, we amended our $1 billion revolving credit facility, extending its maturity to 2022 and lowering the interest rate. We amended our $200 million unsecured term loan due in 2022, lowering that interest rate, acquired one life science medical office building located in Maryland for $16.4 million and entered an agreement to acquire another medical office building located in Minnesota for $16.7 million. Approximately 42% of our NOI in the second quarter was attributable to triple net leased senior living communities, 14% to managed senior living communities, 41% to…

Thank you, Dave, and good morning, everyone. Our normalized FFO was $103.6 million for the second quarter or $0.44 per share, and we declared a $0.39 per share dividend subsequent to quarter end. Rental income for the quarter increased $2.7 million or 1.6% from the second quarter of last year to $166.6 million. This increase is primarily due to rents from the nine triple net leased senior living communities and three medical office buildings we acquired since the end of the first quarter of 2016. As a reminder, we 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 recognize any percentage rent in the first or second quarters. Resident fees and services revenue totaled $98.4 million for the quarter. This represents an increase of approximately $1 million or 1% over last year and is largely attributable to the two communities added to the managed senior living portfolio since April 1, 2016. Property operating expenses from our MOBs and managed senior living communities increased 5.5% in the second quarter to $102.8 million compared to the same period last year. This increase was due to increases in real estate taxes within both our medical office buildings and managed senior living communities totaling $1.8 million. We also incurred a total of $643,000 of costs for the implementation of electronic medical records at our managed CCRCs and other noncapital investments at our medical office buildings that we have made in order to generate future savings. General and administrative expenses increased approximately $200,000 or 1.6% this quarter compared to the second quarter of last year after adjusting for the $10.8 million accrual for the estimated business management incentive fee. The incentive fee accrued this…

[Operator Instructions] Your first question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Thanks. David, can you talk a little bit about the triple net Five Star lease portfolio? Maybe quantify the outside factors that's impacting those coverage ratio such as renovation. How many communities are being renovated? What's the total budget of those projects? And how disruptive are those renovation projects?

Great. Good morning, Mike. Well, they have been undergoing significant renovations throughout the whole portfolio, but the largest dollars are pretty much in the top about 10 and 12 properties. And I would say that it's - well, what's interesting is, depending on the nature of it, it can be extremely disruptive, sometimes it can be actually attractive to draw in new customers or existing ones to raise rates because they see that money is being spent on their property and they are more willing to accept a little bit higher rate increase. But that still does not show up until the next time a rent is reset for the residents. But if we were able to pull out, say, the seven that we mentioned in the prepared remarks as well as a couple of skilled nursing facilities, we would be back up in that 1.2 to 1.23 coverage that we historically have run, so it does have a meaningful impact on the coverage, and we understand why. But I guess dollar-wise, I think we've been indicating that we're funding approximately $60 million to $75 million of those types of capital improvements over the course of this year. So it's a meaningful number.

Okay. And when did the bulk of these projects, I guess, commenced? And when do you expect that, that will be completed?

Well, it's pretty much an ongoing process. We spent - several other projects were started during the course of last year. And as we mentioned, a number of them are just wrapping up now. There's property out in the Chicago area, it just had its reopening a couple of weeks ago. We had about 3 or 4 other properties open up new improvements within the past month, and so it's an ongoing process. We mentioned that we just prepaid some of the debt on 17 CCRCs, and those properties needed - need capital. And so those - that process will just commence. So it's an ongoing process. It will take a while, but every place we've spent significant capital, we've seen outsized returns once they bounce back.

Okay. And just my last question is who's funding these deals? Is it Five Star or is it SNH? And what's the expected yield that you guys underwrote on the projects?

Right. Well, I'll let Rick can speak to the yield and...

Yes, sure. So as far as funding goes, it's a little bit of both. Obviously, if it's in the managed portfolio, it's on us, but if it's in the triple net portfolio, it's primarily the responsibility of the tenant, but they can come to us and ask us to fund it. Later today, you'll see in our 10-Q some disclosures. Five Star did come to us with a couple of interesting proposals. There was two particular leased communities where the underwriting to do the project was compelling, but the return that was left for them after our typical 8% increase was less than they desired in order to take on the project. So we did agree for those two communities to give them a temporary reduction on that additional funding, the capital funding, I'd say, for these improvements. So in this case, we're going to basically provide almost construction financing for the expansions, and then it'll go back up to the 8% return 12 months after the project is completed to give them a chance to fill up the additional units. So again, in that case, we're going to do 2% over our revolver kind of cost of - short-term cost of capital, but long-term, these are 8% plus returns.

Right. Typically, when the tenants - we have this with Five Star, but we also have it with Brookville and a number of the private operators. And generally, they're penciling in a total return of somewhere between 10% and, say, 13% return. So our funding cost then typically 8% of the amount funded, and that's true with all of our tenants, except for these two carve-outs that Rick just mentioned. So they start paying rent at 8% immediately upon funding, and they may not realize that double-digit return. Now that's double-digit total return. So after you deduct the 8%, they're earning roughly 5% to 8% on that investment once it's occupied, stabilized and they can charge the rates.

Okay great, thank you.

You’re welcome.

Your next question comes from Tayo Okusanya with Jefferies.

This is Austin Caito on for Tayo. How are you?

Good. Good morning Austin.

I just wanted to first ask about the same-store NOI slowdown in the shop portfolio and if you see that bouncing back sometime in the back half of 2017.

Well, yes, we did experience a slowdown, although our occupancy was only 10 basis points sequentially from Q1 to Q2. So, we are seeing occupancy holding up pretty good, rates need to be pushed more, and I think our expenses were higher than normal this quarter, particularly for the real estate taxes, of which some of it was truly up of some prior periods. So, I think this quarter was outsized, but also electronic medical records was a significant chunk this quarter on expense side. So, I do think some of those costs will dissipate, and I believe that a lot of these new improvements will significantly enhance our performance going forward.

I was just going to add. As David mentioned in the prepared remarks, if you strip out just a handful of properties that were down the most this quarter, I mean, the rest of the portfolio performed pretty well. It was up about 4.7% or so, and that's considering last year was the year that we were up about 8.5% on a same-store basis. So it was a fairly tough comp. And again, most of the portfolio performed fairly well despite new competition.

Great, thank you. And the last one for me. It's just more generically for Five Star. Their coverage has gone a little worse. They reported a weak 2Q 2017. Their cash flow position is worsening. How do you guys assess that risk in regards to their ability to keep up its rent payments?

Well, Austin, we constantly monitor the performance of the properties in the portfolio, and our asset management group is constantly badgering them with questions about their performance and the executive directors and competition in the area, and so on. So, I think we feel we have a pretty good handle on the actual assets themselves. I think the - obviously, as a company they've gone through a fair amount with the new competition and a lot of moving parts. I think - and implemented a number of programs that should help them on both the marketing and pricing side of things. But also, I think the Number 1 problem in our industry that's kind of a byproduct of the new construction is the constant need for filling Executive Director and sales personnel positions. And a Five Star head has successfully recruited a number of those positions, but they've also lost some of those positions, and that's usually the way you see it on a property-specific basis. Also, we talked about, during the prepared remarks, that they're incurring significant costs implementing electronic and medical records, and that's all being expensed. Once that's complete, that should significantly improve the SNF performance or skilled nursing performance in the CCRCs as well as standalone ones. So - and then in the interim, we also look at the fact that Five Star itself has $100 million line of credit that is virtually untapped. They do have 25 assets that they own on their balance sheet. So, I think they have a number of resources that are available to them, which gives us comfort that they will continue to pay the rent.

Awesome, thank you so much. That’s it from me.

Okay, thank you.

Your next question comes from Bryan Maher with FBR Capital Markets.

Good morning guys. Two questions really. Can you drill a little bit deeper on what you're seeing with salary and wage expense, particularly as it relates, to not just the directors, but also kind of line employees given the tight labor market? And then secondarily, the property tax expense, you said it was in a handful of markets. Can you tell us what those markets were?

Sure. Actually, with regards to the wages and benefits, we have not seen substantial increase in wages, I'd say, more in line with inflation. Overall, in the portfolio, our managed portfolio, salaries and benefits were up 1%. So that’s not - and which I would say is really a netting of an increase in wages and a reduction in benefit costs. We are seeing somewhat more wage pressures out in California, but again, most of our employees continue to exceed any minimum-wage requirements in the various states. So, I guess we have yet to see meaningful impact to the wage pressures. Rick can comment on the real estate taxes.

Yes, just to comment on the three properties Dave called out are near Dallas and then the other two are in Maryland and Illinois. So, we're hopeful to be successful with the appeals process but we've got to go through that process.

And then just back on the wages and benefits for one second. When it comes to these directors being wooed away to newer properties, what's going on there with respect to it? I mean, are there bidding wars for these types of people? Are you doing something special to keep them from leaving to go to other properties? Can you give us a little more color there? And that's it.

Sure. I mean, it's a constant battle fought by the HR teams and the regional operators around the country. But like - one, for instance, anecdotally, there's a property we have in Wisconsin that we bought, it was 95% or so occupied at the time we bought it and had been running very well. And then a developer built one facility in the same town and lured away our Executive Director by promising them equity in the new venture. So that's really not something we could match. But I will tell you that over the course of six months, it resulted in a drop of about $500,000 in revenue. So clearly, that Executive Director was worth paying a premium for to retain, but that's what the battle's going on out in the field. And I always believe that, we talk a lot about the NIC data and standard for different statistics for around the country, but at the end of the day, if you have a very good Executive Director, marketing and sales team and good physical plant that you're going to outperform anything in the new market, even new construction. So that's the key to it all. Five Star has a program, in their case, and I know Sunrise doesn't and several of the other operators, where they have a rising star program to develop executive directors internally by giving them mentors and on-the-job experiences to bring them up through the ranks and promote them and so on, and that's probably the best type of program you can have to compete in this world.

Thanks, that’s helpful.

Your next question comes from Juan Sanabria with Bank of America.

Hi Juan.

Mr. Sanabria your line is one.

This is Kevin [ph] here in for Juan Sanabria. So I just had a question referring to the average monthly rate. So it increased about 1.3% year-over-year. Is that kind of the expected kind of run rate moving forward? Or could we see it kind of increase out until possibly 2018 once the renovations are being completed?

Well, first of all, I think in general, we would expect the rates to continue to increase at the various properties. One of the things that I think is a bit misleading about the average monthly rate calculation in and of itself is the fact that skilled nursing skews the numbers significantly. And we figure an average resident is paying $10,000 to $12,000 a month in a skilled nursing unit, while assisted living or independent living might be paying $3,500 to $4,000 a month or maybe more. But that independent living resident is much more profitable than that skilled nursing resident. So you might have a margin of, say, 40% or better on that independent living resident, while you may be only earning 10% to 15% on that skilled nursing resident. But your monthly rate is going to look much better higher the more skilled you do. So I think that, that's a little bit misleading on which way that goes. I do think that we've seen typically 2% to 3% increases generally in the independent living and assisted living properties across the country and in our portfolio. And just maybe, there's some discounting in certain markets that pull that down little bit.

I guess I would just add that in some of the buildings where we are spending a fair amount of capital and doing renovations, to Dave's point earlier, it is certainly easier to push rates there because the residents see that they're getting more for their rent, their monthly rent checks. But new competition is obviously impacting the average rate. And again, the dynamic pricing model and making sure that you're pricing appropriately given supply and demand all factors in. So it's hard to say where it'll go, but we're hopeful.

Alright. Thanks guys. That’s all I had.

You’re welcome.

Your next question comes from Jonathan Hughes with Raymond James.

Hi guys, thanks for taking my questions. I apologize if I missed this, but could you just talk about the MOB rent per square foot on leases in the quarter versus last year? I know those aren't same-store, but I mean, they've trended down, and I would've thought they would maybe be flat to slightly up. If you could just talk about that, that would be helpful.

Sure. Well, like you said, they're not same store, so it's a little bit challenging to make the comparison. I think our rates are really running around $31 a foot this past quarter. And this compares very favorable to our peers. I think it all depends, too, on the type of building that it is. So - and again, we have a very broad portfolio, and I think - I know about you and others would benefit from the fact that we did post on the website today a property listing and - with the street addresses and the type of property, if it's life science or medical office and so on. So that would kind of give you -- you could drill down as much as you'd like on that. But if we're doing Cedars-Sinai renewals, they're all between $75 and, say, $82 a square foot, while we may have some other properties that are - a medical equipment manufacturer that might be at $26 or $30 a foot. So it does depend on the mix of what is in that renewal. I'll tell you in this one, we had a significant renewal that was skewing the numbers with AbbVie. We had two properties that are leased to them, and they have threatened to consolidate their locations, and we were nervous about losing them and they - our team's done a great job of renewing them for certainly another five-year period, but that was pretty much at flat to a little bit down in rent, which skews this number.

Right. I would just add that from like a releasing spreads. This quarter, if you take out that one renewal Dave just mentioned, we were up about 6% versus old leases. And if you look back to Q1, again, it was only 230 something thousand square feet, but I think our spreads were about 8% in Q1. So the leasing activity varies quarter-to-quarter because of just the size of the portfolio and the relatively small number of leases expiring at any time.

Sure. Okay. Yes, I'll definitely check on that property list, I appreciate that. I think it may actually be in there, but what percentage of your MOBs are on campus and affiliated with health care systems?

Let's see. Well, that's a...

I guess one way to slice it first, that within our MOB portfolio, about half of it is actually like life science-related. So our kind of patient care properties or a subset of that - of the other half. And then, again, it's hard to define, everybody uses a slightly different definition, but it's a pretty good chunk.

I was about to say 80% of the medical office is leased to - is a health care system affiliate occupied building. So like [indiscernible] at Wisconsin, Cedars obviously, but we also have a number here of that Reliant Medical Group here in Massachusetts and so on. So the number of - we target properties that have a - anchor as a health care system. And it may be a multi-tenanted or might be individual.

Great. And do you have any plans to split out life science from MOBs? They're kind of different in terms of drivers. I mean, I think that would be something we would all find useful, just a suggestion from our standpoint.

It's growing to become a more meaningful part of our portfolio, so I would imagine that we will split it out for information and purposes so you can evaluate that. Again, Vertex is such a huge piece of it, that's a major piece, but we also have obviously quite a bit down in La Jolla and around the Greater Boston market.

Okay. And then just one more for me. Looking at the cap rates on the recent MOB deals does look pretty favorable versus some recent larger portfolio transactions we've seen. Can you just talk about those properties, single versus multitenant in lease terms, and just how you were able to achieve that pricing?

Right. Well, the one that we've disclosed in the supplemental and so on is - it is an attractive lease rate, and that's because it's a multi-tenanted life science property in the Maryland area, and it - one of the key factors is that there's less than four years left on the lease for an average lease term. And as a result, many - based on the size of the property, it's not attracting the major players in Alexandria. But because it's less than a four-year lease - average lease term, a lot of parties bidding on it cannot obtain financing for it. So, we're not so much competing against private equity either. So, I think there are very few qualified bidders in that particular case, and that's why we believe we were able to attain - with the certainty of closure, we were able to obtain such a favorable return. And we would not have - knowing the lease term is only about four years on average, we, part of our diligence processes is to thoroughly vet out the likelihood of renewal and/or replacement tenant in that marketplace, and we feel very strong about the renewal possibilities there, and the leases are below market. So, we're taking that approach of, you know, if you find a unique situation that our downside is covered and hopefully some upside, and we'll bid as we think appropriate. We just are not going to be bidding on the 5 and 6 cap rate transactions.

Right. And you mentioned Alexandria. I mean, is that more of a life science building than what we would call traditional medical office?

This one is, yes.

Okay, that’s it from me. Thanks for taking my questions.

Okay, you’re welcome.

This concludes our question-and-answer session. I would now like to hand the conference back to Mr. Dave Hegarty for any closing remarks.

Thank you very much for joining us today and hope you enjoy the rest of the summer. Thank you.