Good day and welcome to the Senior Housing Properties Trust Fourth Quarter Financial Results Conference Call. This conference is being recorded. I would like to turn the call over to 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 retransmission 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, February 26, 2015. 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 and cash based net operating or cash NOI. A reconciliation of these non-GAAP figures 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 these 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 [indiscernible] Massachusetts. Thank you for joining us on today's fourth quarter earnings call. Earlier this morning, we were pleased to report normalized funds from operations, our normalized FFO of $0.45 per share for the fourth quarter, up 4.7% from $0.43 per share for the same period last year and in line with consensus. For the full-year, normalized FFO increased 3.6% to a $1.75 per share compared to last year. Our portfolio continues to perform well during the fourth quarter at same-store NOI grew across all of our property segments. I'll discuss each segment in more detail in a moment, but first I’d like to review our 2014 accomplishments. During the year, we completed and announced private pay acquisition that further strengthen and diversify our portfolio in tenant base. In 2014, we closed on $1.2 billion of acquisitions, the vast majority of which was the trophy assets in the Boston Seaport innovation district lease to Vertex Pharmaceuticals for approximately $1.1 billion. The Vertex acquisition was transformative investment for SNH, which not only met all of our investment criteria but also accelerated our strategic objective to increase our MOB exposure, which for SNH includes biotech an industry poised for continued growth. In 2014, we also closed on three one-up acquisitions for a combined purchase price for approximately $80 million, one MOB and two private pay senior living communities. In addition we announced two portfolio acquisitions agreement in 2014. In September, we announced the agreement to acquire the Cole Corporate Income Trust or CCIT, medical office portfolio for $539 million, which consists of 23 - occupied Class A properties. The 23 MOBs are of the highest quality from both an asset and tenant perspective as the average age of the building it's just under 10 years…

Thank you, Dave, and good afternoon everyone. For the fourth quarter of 2014, we generated normalized FFO of $91.3 million, up from $80.5 million in the fourth quarter of last year. On a per share basis, normalized FFO for the quarter increased 4.7% to $0.45 per share up from $0.43 per share for the same period last year. For the year ended December 31, 2014 we generated Normalized FFO of $348 million an increase of $30 million over 2013 and an increase of 3.6% on a per share basis. Rental income for the quarter increased $26 million to $149 million. The increase is primarily due to external growth from investments in five medical office buildings for approximately $1.2 billion offset by a reduction in rental income due to the sale of two rehab hospitals, six senior living communities and three MOBs since October 1, 2013, $65 million of rental income was derived from our senior living communities, while $79 million was derived from our medical office buildings. Looking at our managed senior living portfolio, resident fee in service revenues from our 46 managed properties increased nearly 4% to $80 million during the fourth quarter. The increase primarily relates to acquiring six managed senior living communities for approximately $88 million since October 1, 2013. Property operating expenses increased 9.5% in the fourth quarter to $84 million due to external growth from acquisitions of $1.3 billion as we added six managed senior living communities in five MOBs to our portfolio since October 1, 2013, offset by dispositions during the same period. Approximately $22 million of property operating expenses were derived from our medical office buildings and approximately $62 million were derived from our managed senior living communities. General and administrative expenses for the quarter were at $10.7 million compared to $8 million…

[Operator Instructions] And our first question today comes from the line of Mike Carroll with RBC Capital Markets. Please go ahead.

David, can you give us an update on the Company's investment strategy, historically SNH is really focused on small transaction, but the Company has recently completed three large transactions. Do you still consider doing these small deals or are you still out there looking for the larger portfolios?

Mike, well we are still looking at both opportunities, the individual assets as well as the portfolios. As you said, historically, we've been focused on the smaller one-offs, we're refining is that the competition is just as competitive at the individual levels down the portfolios. And I think we do feel that we wanted to refresh some of the portfolio and bring on some - take advantage of the fact that a number of high-quality assets and portfolios are trading in the last couple of years and I think it's important for our long-term vision to acquire some of those portfolios. And I think we're getting, the Vertex acquisition obviously with an outstanding asset in the Boston area, the portfolio medical office buildings, again nice outstanding buildings with excellent credit tenants on a long-term basis and then you have the latest transaction which is CNL properties and again the newer assisted living independent living type properties, we believe still have a good amount of internal growth to go on them. So I think just to maintain our competitive position, we have to participate in some of these high quality portfolios. We are now still continuing to focus on that $10 million to $50 million transaction, but I have to admit that there is significant amount of competition out there for those types of assets too.

So, is it safe to assume that the smaller transaction volumes is going to be a little bit lighter than normal than everyone still while you'll take one of these larger portfolios?

I think that would be an honest assessment of it, we still pursue it, but frankly right now we’re mostly focused on the sale out transaction to close that to work out all of our relationships with the individual managers and tenants. So I would say even in the short-term this probably - you won’t see a lot of volume on individual assets or portfolios.

Okay. And then, Rick can you give us an update on your leverage target? How higher you willing to push those numbers?

Yes, well at year end we’re about on a total book capital about 48% as I mentioned on the gross real estate, total debt to gross real estate of about 45% and we just finished the equity offering in February to have fund the two portfolios, we do expect to go out and finance the CNL portfolio with debt and expect that our leverages wont change meaningfully it would still be in about the same range that its in today.

So is your goal still in the mid 40% and are you willing to push it above 50% in the near term?

If we had to put it above 50%, we would, I think we would still say below 50% and as you saw we paid about $74 million of secured debt in 2014 and we still look for opportunities to continue to pay down debt whenever possible and bring that leverage down.

Okay, great. Thank you.

Thanks.

And we do have a question from the line of Juan Sanabria with Bank of America. Please go ahead.

Hi, thanks for the time.

Hi Juan.

I was just hoping you could speak a little bit to on continuing on the balance sheet, any pre-payment opportunities to repay some higher cost in debt. I think you referenced that in your prepared statements.

Yes like I just said too, we are continually looking the secured debt to see if we can prepay them before the maturity date, I think we’ve done a great job in 2014 to do that and we will continue that in 2015. We do have one of our secured or unsecured senior note due in January 2016, we will be looking to refinancing that later in 2014 or in January of 2016. So we do look for opportunities to pay down our debt.

Nothing specific or you can point to others than that, 2016 maturity?

There is really nothing, I mean we only have about 50 million, 60 million left in 2015 in mortgage that a lot of them just have high prepayment cost that really is not worth paying off at this time. So we just look for the opportunities where we can pay them off that’s worthwhile for us.

Excellent. And then on the CNL with the operating partners whether you're looking at your options and negotiations, could you just give us a sense of any costs or performance fees or any other expenses that might be incurred by you to change operating partners or bring in Five Star or what you're planning to do there and kind of the financial impact of potential changes in the operating structures?

While our primary objective is to try to work something with the existing operators, so I think right now, the only cost that we should incur would be potentially some termination fees for contracts, but in the grand scheme of things, I think they are less than $1 million and there will be one-time charge.

So, no performance fees that are earned, you have patent on top of those termination fees?

Not that we would have to pay. I think obviously CNL will have to pay through the end of foreclosing, anything it's been earned. But for us, our costs would be just one-time termination fee. And again, I expect it to be less than $1 million.

And could you remind us of the cash and GAAP yield, do you expect on that transaction?

That probably as I said in our prepared remarks we still expect to earn in excess of 7% on a GAAP basis and we probably be about 40 basis points to 50 basis points less than current cash basis.

Great and then, I may have missed us in your introductory remarks, but anything that drove the above average same-store growth for MOBs in the triple net I guess particularly any fees or any seeing that with the 3.5 particularly in the triple net that was it a bit high?

On the triple net, there is nothing there. Just percentage went from our leases with Sunrise and Five Star we had - did have some of the private tenants that we do their leases and increase the rent. So they went from our consumer value.

In revenue producing capital improvement is one of the properties.

Yes, that will be the third ingredient.

What we invest capital improvements of them, rents go up.

So the average bumps on the triple net portfolio is 3.5%?

No, the private operated bumps are normally bumped 2% to 2.5% per annum, but that's just on the private operators. We have percentage rents formulas with Five Star, Sunrise and actually Brookdale where we get afford to one case 10% of the growth in revenues at that properties and to quarterly estimate and the true-up in the fourth quarter, but there's nothing unusual, I think, it was just a very strong.

Okay. Anything in the MOBs?

On the MOBs, first just play out there. We're at 95.3% occupancy and I think people forget that we - how much of the portfolio is multi- tenanted with vacancies to fill and I think our property management team and asset management team have done an outstanding job with being able to increase the occupancy in these buildings when they're ready at 95% occupancy and achieving increasing rents and high tenant retention level. The tenant retention levels are over 80%. So, what it would contributed to this quarter was fourth quarter was escalation income was a piece of it. I know we had some tenants that had some free rent that on a cash basis and are now kicking in.

Occupancy growth – and rental.

Okay. And anything on the dividend lastly, sorry, I know you've grown the portfolio, it seems about 25% since the fourth quarter of 2012, but the dividends remained flat.

Well, if you don't look at it like in the last several quarters, say four or five quarters, our payout ratio year ago was about – in excess of 90% on an FFO basis. And I think about 103% on a CAD basis. And over these last several quarters, we've managed to bring that down to about 86% right now. And I think on a historical basis, we typically look to raise the dividend when we were in the mid 80%. So I think we are getting close to and we are considering - the Board will consider every quarter. I can't speak on their decision, but I think that we're getting within the range that it's [indiscernible] look at it.

Thank you.

You’re welcome.

Here we do have a question from the line of Tayo Okusanya from Jefferies. Please go ahead.

Hi, good afternoon everyone.

Hi, Tayo.

Hi, good afternoon everyone. Just a follow-up question on the CNL properties, I do know some of the concern investors had initially was that the EBITDA and NOI growth had not been as strong as people would typically see out of Senior Housing assets for most of 2014. Just curious if you could give us a sense whether there was a change in that trend with their fourth quarter results?

No, I mean - talking about our existing portfolio, we historically had greater growth rate. And these last two quarters, I'd say we were not pleased with the results of the two quarters, but I do believe that we will return back to the mid-single digits. And I think that there is still a good amount of growth to go to run on those, because as you recall, we've been putting a lot of capital into these properties. There is still a lot of function at all - and rates held up and pushed our growth, our rate increases been about, it was 1.8% this quarter. We expect to see increases between 3% to 6% in this portfolio for 2015. That would push rates and I think expenses are still pretty manageable and I don’t expect any significant growth in expenses. So I am expecting a better 2015 from this portfolio.

Okay. Dave, I appreciate the comments about that specific portfolio, but I think my question was around the CNL assets that you're trying to acquire.

Right, well that I mean it’s a more occupied portfolio, I should say, in the 90s, but they also I believe have opportunities to expand the physical plant as well as to push rates. Again, I would probably be a little bit more modest in expectations for same-store growth from that portfolio just because they are in - average is 93%. So, until we can in there and see.

I mean but, them knowing that you're trying - when you buy this portfolio, one of things you're looking for is an improvement in the fundamentals. I mean, did we see any improvement at all in fourth quarter? I'm assuming your preview to their fourth quarter results as part of your ongoing due diligence and the first three quarters were pretty tough for them. And I'm just kind of curious where the things have started to changing in fourth quarter because you do have investors asking you, why you're buying this portfolio that's has had below industry average performance for most of 2014.

Well I don’t think it would be right for us to comment on the fourth quarter, Tayo until they publish their numbers and do what they need to do on their side. Like Dave said I think we really need to when we close on that and get in there and see what we can do on the expense side. The environmental side we're where we have room to improve on both sides which like you understand they have not accomplished in 2014, or at least the first three quarters. So until we get in there I think we will have an opportunity improve on any metric we can.

Okay, that's fair. The second question again, when I kind of think about balance sheet and financing needs going forward. You did raise the equity earlier on, you've basically paid down the line the excess cash from the equity deal basically is more than enough to cover the acquisition costs associated with the CCIT portfolio, leaving with a little bit of excess cash, but again, when we think about the CNL portfolio of almost $800 million coming on board in 2Q, how do we think about financing as it pertains to that portfolio?

Well like you said, we do have ample liquidity to close on the CNL deal, we were able with the successful equity offering we had, we were able to pay down our credit facility to zero. And that gives us, an opportunistic about the timing of when we do go to debt markets; we don't know what the debt markets will be to raise the appropriate funds to close on that. We will be assuming about $150 million on that deal with that net 4.7%. So, I think until we know what the market is in a couple months its hard to say.

Okay. But I mean if I think about the portfolio at $790 million, again you are assuming a $150 million of debt when I kind of take a look at where your balance sheet should be in January based on the equity rate on closing of the CCIT deal, you know I kind of come up with excess cash of about $125 million or so. So you are still talking about a need to fund slightly over $500 million which I think would be a fairly large debt deal. I mean does that - you expect that to fully be debt based on where your leverage targets are; do you think you might do another slug of equity?

Yes, we do expect that to be debt. We have always said that we have appropriate mix of debt and equity for both portfolios and we wanted to go out to the equity market and just go out there once and try to get what we needed in February and I think we successfully did that. So whatever we do need to close on this it would be the debt component and it could be, like you said, it could be around $500 million.

Okay.

It could be different tranches.

And we do have a line of credit of [$700 million to $750 million] is available to us totally. So we did our expectation is we will try to accomplish all the debt financing at one-time probably in a couple of different tranches, but if we up with the residual couple 100 million of line of credit, that's bad.

Yes.

A problem need.

Okay. I got it. Thank you very much.

Thank you.

You’re welcome.

And we do have a question from the line of Nick Yulico with UBS. Please go ahead.

Thanks. On the CNL transaction, I want to make sure I understood this. You're saying you're talking to the managers and operators of the individual buildings and is your intent to keep them in place or to put Five Star in it as the operator?

I can only give you broad parameters because we're still in discussions with them. So I couldn't give you any final conclusions. But ultimately, I think we have a preference for leasing properties, but we also if we can't do that we want to accomplish something would be under management arrangement that would at least give us some the right incentives for them to perform the way we prefer going forward. So we're in different discussions with different operators and I think it's premature at this point to determine how it's going to shake out.

Okay. So it sounds like you're saying the opportunity might be to redo arrangements with existing operators. That's the opportunity more so than bring Five Star in as an operator to run these better?

I think they're all on the table, the current contracts both of them only have in year or two left to run on them. So something has to be done. So we'll look at all the options, including Five Star as a manager we do know the economics should manage for us at the end of the day, but there is still a lot of motion at the moment.

And how do we balance Five Star, what's going on with their coverage in the triple net portfolio you have with them continues to go down each quarter, the occupancy was down year-over-year and yet you are using them as your main operator on the managed portfolio. What's the big difference between those two as far as the triple net continuing to go down and the managed occupancy being up a bit, but not much year-over-year?

Yes, that was a couple different kind of characteristics for the two different portfolios. On the triple-net, they still have a considerable amount of skilled nursing in there, and they – what you're seeing in the coverage ratio is now the full effect of the sequestration coming out from portion of revenues, which is a direct bottom line. The occupancy has been pretty much flat about 84.5% across for the last year. And another thing is that, every time we fund capital improvements, the rate goes up on the rent by 8% on the amount funded. So that's an additional cost that they have to cover and that's factored into the coverage ratio. So it is a more challenging thing for them to make that coverage ratio move up in a meaningful way, but it's still a very strong coverage at 1.2 level. With managed properties, I would say that there are - the makeup of them is significant amount of independent living and assisted living and relatively small amount of skilled nursing. So I think that’s one reason why their performance has been better, the occupancy has moved up considerably by 90 basis points at that portfolio. So and I think the good part of that is - it has independent living has bounced back from the recession at a faster clip. If you look at net data, the rates being charged are increasing faster in Independent living than they are in the assist-to-living, definitely in skilled nursing. They are not barely going anywhere in skilled nursing. So I think those two - those are differentiating between the two portfolios I think.

And I guess just one another question going back to CNL transaction as you did mention it's a higher occupancy portfolio. I think you said it was 93% how you're viewing that as a potential risk given that you're talking about management agreements expiring with existing operators over the next couple of years. Possibly bringing in Five Star, having new operator coming in and maybe residents not liking that change over situation I mean this is kind of an unusual - it’s a much more unusual situation you are dealing with here then the rest of your portfolio which is just lower occupancy, here you have some higher occupancy that maybe has some potential occupancy downside risk.

I don’t - there is some downside risk at least in the short-term. When the manager stays on, before and after transactions it's pretty smooth. When there is a change in managers whoever it is, there is disruption for - we find to be a quarter or two of disruption in performance, because of those exact reason the staff, the residents and so on are on - to what to expect from the new people. And but that usually does smooth out and then get back on a trajectory. We have that at the [V portfolio] down - Florida, those properties all over 90% occupancy today and performing very well. So, I think you're correct that there could be a disruption for us - whenever properties change hands, but I think in the longer term there are pretty new assets. I know that a couple of expansions that are in the works, at a couple of the properties. And I think that in the longer term it's a much, a very good investment for us, an excellent investments.

Yes, I guess I just assuming the bigger question I guess I have is, why even bother trying to bring Five Star into this portfolio. I mean when I diversify away from Five Star when you haven't given much details on the operators of some of these facilities, but it seem to be smaller local players and maybe it's an opportunity for you guys to - I mean this is a business that's pretty much an operator business, it's not you just do on the real estate and put in whatever operator and maybe there is an opportunity to actually expand other operator versus Five Star which is underperformed as the operator?

For ideal portfolio they have performed very well. But as far as I think there is a lot of complications. One is, try to structure the right incentives with some of the local operators, but also as a public company, we have to comply with all the Sarbanes-Oxley requirements within total controls. And I think some of these are not necessarily equipped to comply with rules and I don't think we can afford a hiccup if we want to access capital markets or report ourselves at the end of the year. So I think we want to know our risk going into these transactions. I can tell you we’ve had very good experience with Five Star on our idea portfolio and they have tremendous depth and qualifications in liquidity. That's the greatest thing. And I think we are very transparent in all of our relationships in dealing some stuff like that and I'm not sure that to switch operating stuff like that we would spend a lot of our conference call talking about a manager for 1% of our portfolio. We just don't want to be in that position.

Okay. Got it. Thanks.

You are welcome.

And we do have a question from the line of Chad Vanacore with Stifel. Please go ahead.

Hey good morning, I'm pinching in for Dan Bernstein today.

Hi Chard.

Hi Chard.

Hey. So one the things we are seeing is actually pretty heavy flu season stated in December and its going deep into the first quarter. Are you seeing any issues at your properties and what do you expect as far as occupancy in the first half?

Well we are seeing flu showing up pretty much across the board, so I mean its still early, it didn’t really see to show up until I would say the last couple of weeks and we’re just at the end of February, so hopefully that’s not a prolonged period, but I would say we have had an affect of probably maybe up to 40 residence at this point people facilities from an occupancy perspective, we really hope on short-term. We’ve also experienced a little bit of cold weather traveling across the country and we've learned a lot of lessons from a year ago, but I think people are incurring additional costs just because of preventative measures and that we'll have to see how that plays out.

Okay and one of the other things we’re seeing too is some large retailers boost wages and some boost in state minimum wages, do you expect any impact on 2015 results for yourself as far as expenses go?

I would say I'm not expecting it certainly for the first half of the year, it's more difficult to forecast for later in the year because it is kind of spread, but through more states, but I feel confident we can increase rates and so on to compensate for it.

All right and then last question, but your pipeline. Could you give us a look on the size and maybe split between Senior Housing and MOBs maybe cap rate ranges you’re looking at?

Well, we still see large transactions and I think we are focused on closing the P&L first and foremost. But I would say, we're seeing a lot of both types of properties the medical office is what we're winning mostly and I expect to continue to, of course, of this year do another couple $100 million of those type of properties, a little bit of Senior Housing.

All right and what about the cap rate ranges you're looking at?

There pretty much around plus or minus 70%, high 6% to low 7%, we are not pursuing, we are seeing transactions out there that are happening at 5.5, 6 cap rates, but which is not pursuing them. So it's getting pretty frothy, I'd out there.

All right, I appreciate your time.

Okay, you’re welcome.

Thanks Chad. End of Q&A

And at this time, it does appear there are no further questions in queue. Please continue.

Great no I think for us. But thank you all very much for your time and your questions and hope to see you sometime sooner in new conference. Take care. Bye-bye.