Good day, and welcome to the Senior Housing Properties Trust First 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, May 2, 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. Thank you for joining us on today’s earnings call. Earlier this morning, we were pleased to report to normalized funds from operations or normalized FFO of $0.43 per share for the first quarter, which was in line with our expectations and consensus. We have made great strides year-to-date in executing our strategic plan of strengthening and diversifying our portfolio making accretive acquisitions and increasing the percentage of private pay assets, which was currently an industry leading 96% of NOI. Our acquisition and disposition activities as well as our investments in the RIDEA assets are the cornerstone of driving normalized FFO and dividend growth and improving shareholder value. Our primary focus this past quarter has been closing on the $1.1 billion acquisition of the Vertex biotech medical office buildings located in Seaport District of Boston. Upon closing this transaction will represent our largest investment in company history and will be transformative to our portfolio. From an asset diversification perspective, MOBs will increase from one-third of our portfolio to over 40% of our NOI. And from the tenant diversification perspective, our largest tenant decreases to approximately mid 30% of our NOI. And finally from a quality perspective, it takes our already high-grade and quality portfolio to next level and be the brand new buildings that is truly state-of-the-art irreplaceable assets set in the premier location. The Vertex acquisition also meets our economic standards for trophy assets such as this. And as we previously disclosed, this acquisition is expected to be immediately accretive to SNH shareholders. As evidenced by our successful disciplined capital raising activities for the past couple of weeks and consistent with our previous guidance, we are executing on our plan to finance Vertex with approximately 75% debt and 25% equity. In April, we…

Thank you, Dave and good afternoon everyone. For the first quarter of 2014, we have generated normalized FFO of $80.1 million, up from $79 million in the first quarter of last year. On a per share basis normalized FFO for the quarter was the same at $0.43 per share quarter-over-quarter and in line with consensus. Rental income for the quarter increased $200,000 to $112 million. The modest increase is due to external growth from investments offset by a reduction in rental income of $2.4 million due to the sale of two inpatient rehab hospitals and two senior living communities. $55 million of rental income was derived from our senior living leased communities, while $53 million was derived from our medical office buildings. Looking at our managed senior living portfolio, resident fees and services increased nearly 6% to $79.4 million during the first quarter. The increase primarily relates to acquiring five senior living communities over the past 12 months. NOI for the first quarter increased 8.8% to $18.7 million and NOI margins were 23.5%. Of the 39 communities that are in the same store comparison year-over-year NOI growth was 4.8% and margins increased 80 basis points to 23.7%. We are pleased with the same store growth in light of the unusually high expenses from the winter months. Operations are becoming more efficient and routine expenses continued to decline. However, this was offset by the winter related expenses in the first quarter. In addition, we believer there is still room to increase occupancy and push rate at these properties. Property operating expenses for the quarter increased to $78 million due to external growth from acquisitions as we added five managed senior living communities and four MOBs to our portfolio since the first quarter of 2013. Approximately $17 million of property operating expenses…

Very good. (Operator Instructions) We will begin with the line of Vikram Malhotra with Morgan Stanley. Please go ahead.

Hi guys. Good afternoon.

Hi.

Could you maybe just talk about both in the RIDEA portfolio and the medical office, just kind of your broad expectation for same-store NOI and I know there were some sequential improvement in medical office, but then there was a dropdown in RIDEA. If you kind of X out the – could you just talk generally about the trends there you see going forward and just if you X out the excess snow removal kind of what the same-store growth would have been?

Sure. Well on the question on RIDEA lot of things, that the trends are very positive, the properties continue to perform better each quarter. And I think as you mentioned we had there particularly a harsh winter this year. I think we thrive in the high single digits as we had non incurred those extra expenses this winter. And I think that there is still significant amount of growth potential there in the assets, really the rates have not been pushed at the properties. I know as of today every property we have down Florida that’s in the RIDEA’s 90% or higher occupancies, including some of the former Sunrise properties. So, there is a lot of positives that are underway. And we will continue to improve from what I can tell. I will turn it Rick on the comments of the MOB side.

Yes. As we have mentioned on the phone and as Dave just mentioned too, the harsh winter has really hit us on the MOB side too. And that it’s probably greater than 700,000 on the expense. So, we have improved it and looked over sequentially from the fourth quarter to the first quarter. We have improved those margins. And it would have been a positive track if we didn’t take care of those extra expenses. So, we do expect moving forward in the second quarter and beyond that those would be positive trends going upwards.

And then just lastly from me, as you look out in the acquisition pipeline, you kind of mentioned not really needing to access the markets, but where are you, what levels are you comfortable in the sense as you grow the – as you kind of close on acquisitions, where are you comfortable with taking leverage? And at what point do you say we need to maybe change the way we approach the acquisitions?

Yes. Like I said on the call, we don’t see going to our market in the near future and that’s because of $750 million credit facility will be available to us. And it will take sometime to acquire some properties and to build up enough amount on the credit facility to go to the markets. And with that, we will continue to work on our balance sheet. Right now, where after we finished the transaction with Vertex we will be in line with – our balance sheets and debt will be in line with our peers. So we are comfortable in the range that it will be at. And we will look at the capital markets at the time, the next time we will need to go visit that.

Okay. Thanks guys.

Thank you.

We will now go to the line of Juan Sanabria with Bank of America. Please go ahead.

Hi. Good afternoon.

Good afternoon.

Just a couple of questions, what is the expectations for leasing for the MOB portfolio over the next couple of years, where are you guys relative to market on that?

Well, I would say that the expectation is probably to be – probably flat to modestly up. I think the – I’d say that market depends on obviously which market you are in. Certain markets that are weaker obviously and others are stronger, but I think net-net will determine that. Over the next year or so we probably see flat to modestly positive on the rental side. And then we are continuing to work on the expense side of things to become more efficient and try to fit, save on that side.

What are you focusing on that to drive that efficiency? Can you give us some examples?

Sure. I mean, the real estate tax appeal process, we continue to always appeal the taxes. Energy contracts, we continue to work those and monitor them better and just to look for better opportunities to get more efficiencies. We have also been able to lower our insurance costs in the MOB portfolio. So there are a number of initiatives think that have been ongoing, but we are just not continuing to improve on those.

And on the snow, dealing with the winter weather, etcetera, how did you guys ability to recoup any of that work, is there a lag or is it just some cost or lost costs that you guys have to eat?

Well, we maybe able to recoup some of that. It is the lag, as you would expect many of these situations we can ultimately recoup it over the end, through the end of the year as you go into the year with estimated escalations and build proportionately and then have the true up later on the year. So we are hopeful to recover a good piece of that.

Okay. And then could you give us a sense from an RMR perspective with the loss, there is just a Commonwealth AUM and associated fees, has there been any changes to staffing levels at RMR that could potentially impact SNH and as well as maybe Five Star?

Well, nothing would impact Five Star, but that was the CWH is still managing the properties. And I think at some point, we will realize things, but we are going to be assured that the SNH assets will be well-monitored, well taken care of. And I am really expecting no disruption in the service of the SNH properties.

Great, thanks.

You’re welcome.

We will now go to the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yes, thanks. Looking at the managed senior housing portfolio, I know you guys said that you were impacted by snow there, but the expense growth on the same-store basis year-over-year was flat, I mean, what have you been putting into place that could cause us to go down? I mean, were you expecting expenses to drop in the first quarter?

That’s right. As I think if you were to look at our same-store performance for the last several quarters, the expense has continued to come down. And during our prepared remarks, we did mention that we would have had even a better performance, we would have been in the upper single-digits have we not incurred those extra expenses. So, just so it’s really good, back to the management of the properties by Five Star. And as they are able to improve the performance by one is insurance that’s come down significantly at the properties. Another thing is that they have actually the purchasing power at Five Star and whenever they take over operations, it’s always an initial period where actually expenses most likely go up. And then there will be a couple of quarters before they settle out, get them into the fold, and run them more efficiently. So, I think as time goes on, we just keep seeing the benefits of the efficiencies start to show up. And as we have discussed, the rates have not been pushed aggressively at most of these properties yet, I think occupancy continues to move up and margins moving up, but I think that’s to come soon is to be pushing the rates more aggressively.

Okay. Was the weather, did that impact the top line too, because the top line appeared around what 1% growth?

Not much really. I think it’s the fact that’s just there is, I now think occupancy has held up well. We have several of the RIDEA assets are in Northern states, New York, Chicago, Washington D.C. even, they are all significant, Teaneck, New Jersey. So – but I don’t think the census really was not impacted. So, it’s really the rates have not been pushed and (indiscernible).

So when do you plan on start pushing those rates?

Well, part of it is, I mean, really Five Star has the best handle on when people’s anniversary dates are, when you can push the rates, you can stop this. And many of the contracts were inherited from the prior offerings too. So in my opinion, burn off if we can push rates, but I would say going up to 2014 and into early ’15, it’s when we will significantly do pushing the rates.

Okay. And then how should we think about your investment activity going forward? And are you looking at any other deals that are similar to the Seaport acquisition that’s currently pending?

Well, I consider that a once-in-a-lifetime transaction. So, I don’t envision any more $1 billion transactions, especially about high-quality. So, I think you can look more towards the medical office building we acquired this quarter. And we will still be buying individual assets in that portfolio looking for that $10 million to $50 million size transactions and trying to achieve cap rates at least north of 7%, hopefully more in the 7.5% to 8%. That again, it depends in the particularly hit this MOB. We actually have been working on for a good while. And that was 50% levered with debt at 6.3%. So, I think that not got a lot of potential buyers, because it was – you could not put a second mortgage on it and say the same amount of equity involved. So I think that’s how we were able to get such a high-quality Class A MOB at such an attractive rate. So, we are going to continuing to look for those transactions. And I would probably say we are looking at around say $200 million of transactions for the rest of this year. That may include some of the capital funding if there is tenants we have that, we can charge a return on.

Okay, great. Thank you.

Okay.

We will now go to the line of Daniel Bernstein with Stifel. Please go ahead.

Good afternoon.

Hi, Dan.

Hi, Dan.

Hi. So, I want to go back to the rate question on the Senior Housing operating portfolio, it looked to me like your rates were up about 3% sequentially. So, is it and like you said you took a lot of legacy leases, was it this legacy assets there with resident contracts? So, is it correct to say that a lot of the rents were raised on January 1 and then even if you and Five Star put your heads together and wanted to raise rates saw the portfolio occupancy up and wanted to push rates, you really couldn’t push resident rates until the first quarter of 2015, would that be the correct way to think about it?

Yes, I mean, I wish it was black and white like that, but unfortunately, every property certainly applied from different operators have the different anniversary date and policy on to when they can raise rates. So, some rates could be raised January 1, others on just people’s anniversary dates when they moved into a facility, but now like I think we have 35 properties in Q4 and 39 in Q1. And what has been added on are more of the Sunrise properties that we said typically 40% to – 50% to 60% skilled nursing beds. And of course, a sequestration kicked in at the first of last year. So, Q1 last year had the full benefit of Medicare rates and this year had a bit lower rates. So that was the offsetting part of it to rates being raised this quarter.

Right, that looks like it was sequentially higher, I mean, it wasn’t just something year-over-year, but definitely….

Numbers of properties like Dave said, it’s 35 properties, in the fourth quarter the 39 properties from the first quarter.

Okay.

And maybe the rates will continue.

Okay. And then also, just looking to trying to figure out the growth thesis going forward? I mean, you alluded to it a little bit that the prior caller, but if I take a $250 million or $300 million of acquisitions at 7.5%, 50% or so levered, I only get a $0.01 or $0.02 accretion or something like that, so what kind of investment volume should we be thinking about for you guys going forward and just trying to understand the growth thesis?

Yes. I will go broad picture, because we don’t exactly give guidance, but in the RIDEA portfolio, I would expect that to continue to do very well and probably even better than it did this quarter, because of rates, occupancy and hopefully not the expenses that we incurred for the weather. And margins should move up from what – from where they are today. And then you have got the same-store the triple net leased portfolio went up 1.9% on a same-store basis. So that again, that hopefully drops to the bottom line. And then on the MOBs, we also incurred good amount of extra cost this quarter which again hopefully won’t repeat. And I think the trending should do a little bit better in the MOB portfolio. And the Vertex acquisition is closing next week and as we have constantly said, we do expect $0.06 to $0.08 of FFO accretion that would kick in early on May 7. All of our capital has been raised and lines of credit are paid off. So we are starting off from square one of the, I think a pretty improved base to start from after the Vertex closes.

Then what kind of investment volumes and clearly after the same period you are a much bigger company I mean looking that you are trying to doing $500 million a year and that’s not as guidance, it’s hard guidance but you are now looking to do $500 million of your acquisitions or?

Well, I think I mean the challenge is there is competition out there. I mean I clearly love to do more and maybe we will. I mean it’s very difficult to predict what the success rate will be on our bidding and so on. We will still show – certainly see a good amount of acquisition opportunities on both MOB and senior housing fronts. But again I personally feel that the private REITs and some of the private equity funds are bidding very aggressively on assets and keep pushing cap rates down, while everybody’s cost of capital is going up. So I don’t think we should chase deals just to meet acquisition target numbers. But I think we have to remain disciplined and prudent on how we use our capital and just try to stay within certain parameters. And something that’s truly Class A asset with decent growth potential we might have bid a bit more aggressively and otherwise some bread and butter Class B assets and stuff. So I think again, we will exercise prudent and care and discipline, so that’s why I have tapered back a bit my acquisition expectations.

Okay. And then one quick last question on the fixed point – on the debt you are assuming with MOB the 6.3% debt, is that pre-payable in the near-term or…?

No, it would – we want to prepay if it was.

It’s a couple of more years to maturity and it’s pre-payable like six months prior to the maturity.

Okay. That’s all for me. Thank you very much.

You’re welcome.

And we will now go to the line of Todd Stender with Wells Fargo. Please go ahead.

Hi. Thanks guys.

Hi Todd.

Hi Todd.

How are you guys?

Good.

Just looking at the impairments on five MOB assets, just trying to get a sense of their age, quality, were these vacant and did they require some CapEx over the years that just wasn’t put in just kind of getting a sense of how they look as pricing for MOBs is still pretty attractive?

Yes, we still have six as we have said six assets out for sale and we took about $721,000 impairment on few of those MOBs. And you have to look at it on each quarter the market value of these, the accounting rules and if there are any market values that there is decline in the market and you have to take the MOBs, you have to take the impairments on them and that’s the driver of these impairments. We still believe we can sell these properties in 2014 and one of the reasons just to remind you are there out there is because they are tougher markets that it’s going to be very hard to relet them. They still have some term left on the lease and we thought maybe we would take advantage of that remaining term on it and sell them with that term, so.

Yes and I will give you a little inside color to like four of the buildings around the campus in Albuquerque and frankly their tenant was a healthcare system that has decide to build their own campus and these properties will become vacant later this year. So it needs, so it’s a single user for that term. And frankly we don’t want to invest the capital into what we think it would take to relet this or have it multi-tenanted or whatever. So we offered it for sale with a limited term less than existing lease. And we had similarly a biotech property in the line we get – we have done tenant and merge and consolidated operations to California and the lease expired and we cannot relet it to another biotech company so that’s going to go from an alternative use. And we decided that’s not bt growth, so initially we thought a little bit of slow but it’s an underperforming to begin this we don’t want to put in the capital that we think is necessary to release it to another party which may or may not be healthcare.

Okay, that’s helpful. Thanks for the details. And any color you can add for the Senior Housing properties, are these net leased assets? Are there any within the RIDEA platform?

These are all leads us with Five Star, leads us mainly leads us number one and number two and there is 9 in total, about 6 of them are the skilled nursing facilities. These are older buildings, 20, 30 years older plus and rolled our markets that we felt us with right time to put off for sale.

Okay, thank you. And just looking how is Five Star’s delay in filing their financial statements? Is that one having any impact on new sourcing capital? I wonder it’s just the banks show any concern for this, and two, your ability to bid effectively on RIDEA deals, just because they are your strategic partner? And then when you go up against other players in competitive deals, just seeing if there is any trickle down effect?

It has had no trickle down effect. We obviously access the equity markets and the debt markets just on the last couple of weeks. So it has had no issue with us raising capital. And we do see lot of financial information about Five Star and they continued to perform well. The restatements just take a lot of time, because of the process, but they did do those statements right through third quarter of 2013 and the net result was to increase net income and increase shareholders’ equity. So it’s – so I think as if I would like to get have them produced them sooner rather than later, but the practical effect has not been negative on us in anyway.

Okay, thanks Dave. And just finally when you look at the $800 million term loan, if you take down $350 million to start, does the remaining $450 million remain available to you any time? Do you have to make the commitment upfront? Does the pricing stay static, how do you kind of tap that going forward?

No, it’s a one-time draw. So we have a original commitment of $800 million and that we are working with the banks, because we don’t need the full $800 million. Our intention is just to drive on the $350 million and it’s just the one-time draw.

Got it. Thanks, Rick.

Thank you. We will now go to the line of Tayo Okusanya with Jefferies. Please go ahead.

Yes, good afternoon. Just a quick question on the – for the quarter, the MOB portfolio, tenant improvements on leasing commissions seemed elevated during the quarter, curious if there was something unique to move-ins or leases during the quarter that created that?

No, Tayo, I mean it is unusual looking at – if you look at the supplemental, it’s a little higher this quarter. There is nothing unusual and I don’t think that would the trend going forward. I think it would back to the normal the amount on previous quarters.

Got it, okay. So, that’s helpful. And then on the (indiscernible) and just with the MOB portfolio and I may have missed this earlier, but the large negative mark to market as well? Just give us a sense of what’s kind of going on, whether it’s particularly tenant related, market related and how should we just kind of be thinking about pricing trends to your MOB portfolio going forward?

Yes. You see, once again in that supplemental that we had rolled down to the rents and stuff like that. And one thing I would really want to point out is that the new rents that are being set are being compared to all the rents that also include expense reimbursements. So the new rents do not, so you will see a little roll down on that when the new rents go in and affect, you will have reimbursements that increases the revenue on that side.

Okay. So, I will say, it’s just an optical thing then with the old one having both numbers and the new one just having the base rent number?

The base rent number exactly.

And I guess why don’t you kind of strip out the two to give us a better sense of what the mark to market really is base rent versus base rent?

The industry puts out – the industry database was just put in the new base rent and you just compare it to the old total base and that’s the industry standards.

Yikes. Well, I think the industry needs to improve upon that, because I think it gives a false sense that fundamentals seem to be deteriorating when they really aren’t?

Exactly.

Alright. That’s all for me. Thank you very much guys.

Thank you. (Operator Instructions) We’ll go to the line of Juan Sanabria with Bank of America. Please go ahead.

Hi, guys. Just had a couple of follow-up questions. First, could you either provide the cap rate or the potential lost NOI on both the assets sold and those assets that are still up for sale?

Yes. Well, for the Senior Housing ones, those are ones that are put, they are part of a master lease and the master lease has mechanism where the tenant can market the assets for sale. And generally, they get a rent concession equal to 9% to 10% on the amount of the sales price.

So, a 10% cap rate?

Yes.

Okay.

The MOBs really have some of them are not producing at all and I don’t really know that the cap rate is an appropriate mechanism there.

So, what’s the breakout between the Senior Housing and MOBs in terms of book value, do you have the rough split?

The book value – the net book value is a little higher on the MOBs. Combined, they were going on $21 million, $22 million.

Great. Can you just remind me as a separate question, the difference between the cash and the GAAP rent on the Vertex portfolio? Just your comments at the beginning about the accretion $0.06 to $0.08 FFO, $0.05 to $0.07 AFFO seems a bit tight, those two relative to each other, I thought the cash and GAAP rent spreads were somewhat wider than that would imply just why such a narrow difference, if in fact the cash and GAAP cap rate is six number and eight number?

Yes, it’s not that wide a number differential in the – there is two step ups in the year, one in the year six and one in year 11 at the initial lease term. And it’s about an 8% increase at that time, 8% to 8.5%. So, that probably is 2% a year, but that’s the – what the differential works out to be just works out to state a $0.01 or so differential in the range.

So, what are the GAAP and the cap cash rates then?

To go into your cash cap rates low to mid 6, about 6.3%. And you can’t gap the whole building in there, because there is retail space and parking. So, we say that we would get yields over the lease term of up to 7% or better.

And so that 7% number, that’s what you are using to calculate that FFO accretion?

Yes, right.

Okay. Great, thanks guys.

Thank you.

Okay.

Okay. We have no further questions in queue at this time. I turn it back over to your host for closing remarks.

Okay. Well, thank you all for joining us today. We will be attending the Bank of America Merrill Lynch Healthcare Conference in Las Vegas in two weeks and the Jefferies Global Healthcare Conference in New York and the NAREIT Conference in New York, both in June in New York City. So, we look forward to meeting with many of you at one of those events and have a great day. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.