Good morning, and welcome to the Senior Housing Properties Trust Third Quarter 2019 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would like to now turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Senior Housing Properties Trust call covering the third quarter 2019 results. Joining me on today's call are Jennifer Francis, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management followed by a question-and-answer session. I would like to note that the transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of Senior Housing Properties Trust or SNH. Today's conference call contains Forward-Looking Statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other security laws. These forward-looking statements are based upon SNH's present beliefs and expectations as of today, Thursday, November 7, 2019. 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, EBITDA or Adjusted EBITDA and cash basis net operating income or cash basis NOI. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD are available 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 any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings within 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 Jennifer.

Thank you, Michael. Good morning to our shareholders and call participants and welcome to the third quarter earnings call for Senior Housing Properties Trust. To begin today's call, I'd like to report that with the targeted close date of our restructuring of the business arrangements with Five Star Senior Living just under two months away were on track and are progressing as planned. With Five Star shareholders approving the issuance of Five Start common stocks to SNH and SNH shareholders are only remaining milestone is obtaining the requisite licenses from the state in which our assets are located; a process which is well underway and on schedule. All-in-all, we remain on target from the January 1, 2020 conversion of our triple-net leases to management contracts. In conjunction with the Five Star restructuring, we continue to make headway in our disposition strategy which will both reduce our financial leverage and transform our portfolio to best position SNH for the future. We previously mentioned that we expect to sell or have under agreement to sell assets valued at approximately $900 million by the end of 2019 to reach our target leverage. And we remain on schedule for this objective. There is a pungent capital in the medical assets, Life Science, and senior living acquisitions markets. And we continue to feel comfortable that our pricing and timing goals are achievable. We now have assets valued at over $740 million either sold, under agreement to sell, or the offers received. We're actively marketing the remainder of our disposition portfolio valued at over $240 million which we expect to be under agreement by year-end. As a reminder, on July 01, we also sold our entire equity stake in the RMR for approximately $99 million in that proceeds. The company's third quarter 2019 results reflected a…

Thank you Jennifer and good morning everyone. I will be discussing some of the third quarter financial results beyond what Jennifer just covered. Normalized FFO for the third quarter of 2019 was $70.1 million or $0.29 per share which was down $0.13 per share compared to the same quarter last year. The majority of the decrease in normalized FFO was due to the Five Star rent reduction in our triple-net lease senior living communities that Jennifer mentioned earlier. In October, we declared a $0.15 per share dividend payable in the fourth quarter of 2019. The normalized FFO payout ratio for the third quarter based on this dividend was approximately 52%. General, administrative expenses decreased $21.4 million or almost 70% for the third quarter compared to the last year as a result of lower business management fees. We've incurred no incentive management fee and our manager's base fee continues to be paid on market capitalization and not on a historical cost of assets. We believe the decrease in business management fees demonstrates the strong alignment of interest between RMR and SNH shareholders. As the reduced market capitalization driven by the reduced stock price in the third quarter translated to a reduction based business management fees paid to RMR and annualized run rate of almost $15 million. Turning to capital expenditures, we spent $15.3 million in recurring CapEx and $15.7 million on redevelopment this quarter. The redevelopment capital split fairly evenly between projects in our MOB segment and managed senior living portfolio. In our MOB segment, we continue to make progress on the repositioning in Washington D.C. we discussed on prior calls. In our managing living portfolio, the majority the redevelopment capital expenditures were related to the independent living ground up development at one of our properties in Tennessee that Jennifer mentioned earlier which was substantially completed in September. Going forward, we expect to see increased redevelopment capital expenditures as we work to complete the repositioning in Washington D.C. begin the redevelopment in Torrey Pines and continue to invest in our senior living portfolio. As we have previously mentioned, we also expect to spend about $1500 per unit per year in recurring capital expenditures in our senior living portfolio. Moving to our balance sheet, we entered the third quarter with $49.5 million of cash on hand and $589 million outstanding on our revolving credit facility. Subsequent to quarter end, we reduced our borrowings under the revolving credit facility to $517 million as of today using proceeds from dispositions. As of September 30, our debt to adjusted EBITDA was 7.4 times and debt to growth assets was 42.4%. We mentioned last quarter that we expected our leverage to peak during the third quarter and there is no change in this expectation as asset sale proceeds from our disposition program will be used to pay down debt to reduce leverage to roughly six times or lower. That concludes our prepared remarks. Operator, please open up the line for question.

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

Yes, thanks. Jennifer, can you talk to us a little bit about Five Star's labor initiatives that they're pursuing right now? How much is the operator increasing individual wages and are these expenses expected to increase over a multiyear period or should we expect a shorter timeframe of the elevated operating expense growth?

Thanks for your question, Mike. Five Star's as you've said very focused on their labor initiatives through team member engagement, I think Katie Potter their CEO is calling it putting people first with their investing and staff members to provide for a culture of higher standards. There is a few things that are going on as far as their initiatives and wage pressure. Wage pressure isn’t going away any time soon. There is that kind of the macro issue where unemployment hasn’t been this low since 1969 and the senior living industry has been especially challenged. And operators are obviously competing extremely fiercely for qualified employees. So, on top of these market conditions, Five Start has had some challenges with labor as well. But the initiatives they're again they're super focused on hiring and retaining the best employee as possible. There's been some as I said there's been some struggle with them in that. Initially there was some employee uncertainty because of the announcement of their the doubts that existed about their ability to continue as a going concern, that's been solved. So, that issue has gone away. And then there was some uncertainty that was created with the replacement of the of our trustee suite. So, Katie has talked about again this one of these initiatives is building a culture of accountability, transparency and innovation. That caused some disruption because I think there were some employees who decided to lead because they didn’t want to work in that environment of accountability. Next, we announced our disposition program, 900 million of disposition of assets; 60% of which were in the senior living space. We then publicly announced specifically what assets were being sold. So, that caused employee disruption, Five Star had to pay costly over time and contract labor as a result of that. So, I think Katie's initiative, Katie and her team's initiative to bring in the best and the brightest and fill a lot of those open positions that have been created because of this disruption. I don’t think that as I just said some of those disruption factors have wound down. But because they're going to continue to focus on workforce and attracting that highly qualified workforce, it's I don’t think it's any time soon. I don’t, I think it’s well into 2020.

Okay. And then, what drove the weaker trends in your occupancy in our rates this quarter and it seems like the managed portfolio saw the brunt of it versus the Five Star leased portfolio. I guess, is there a reason for the difference and do you expect those trends to continue. Is there something happening in the market price?

I think was a -- we talked about a couple of markets specifically where we really had some issues; the South Carolina and Atlanta markets. They were leadership changes there that causes disruption. And so, it's I'm not sure that it's an overall all community issue, it's really just a couple of markets.

Okay. And now that they could kind of hired to new leadership for those markets, I think we'll see an improvement.

Okay. And then last one from me, are you seeing competitors in your market cutting rates or offering significant concessions in order to drive their own occupancy rates higher. Are you seeing a much more competitive operating environment?

I think that there are certainly those that will give a lot of things away to attract residence. We're trying to our revenue management to Five Star is trying through their revenue management to set the correct rates for specific units within their communities and not offer a great deal of concessions. That's Katie spends a bunch of time talking about that though. So, we're going to be more -- we're going to be a competitive, it may just not be by giving things away.

Okay. And has that changed, has the operating environment been more competitive today as they say versus 12 months ago or is it the same.

I think it's the same which is which means incredibly competitive. I don’t think that it's hard, I think it would be hard for to get more competitive than it's been.

Okay great, thank you.

Thank you.

The next question comes from Todd Stender with Wells Fargo. Please go ahead.

Thanks. I guess just looking at this third quarter sales and then the properties you have teed up for sale I guess here in Q4. So, we've seen a lot of MOBs more coming, I would have thought there may be more assisted living facilities tucked in there. Can you just comment on maybe what's left but Mike can, you said about a $150 million left that's should get you to the $900 million number. What's left, what property type should we see?

It's a real mix, actually. Thanks for your question. It's a mix, the MOBs there are licensing issues that come with the sale of senior living. And so, MOBs are and Life Science's assets are just less complicated to sell. And so, you can go under agreement have relatively quick due diligence and close. So, that maybe why they may have frontloaded some of those MOB Life Science's sales but it's a mix. I don’t know that it's 50/50 but it's not heavily weighted toward one or the other segment.

And then cap rated expectations going into this, what did you think you've see them and then where have you seeing them now in the latest round of stuff that's teed up?

We thought we were going to see around the seven cap and I would say Todd, I don’t want to talk about the sales to-date and the cap rates because we really are talking about a full portfolio, the full dispositions but we're expecting them to be at or at below a seven.

Okay. And then switching gears to the Torrey Pines project. So, that's a good size, I think you said $100 million.

Yes.

Is that something that's marketable, it's a premier location and I don’t doubt that'll be a class A building but is that the project for you guys right now as you reposition the portfolio and just stabilize things.

Yes. It's a great project for us. It is and then incredibly marketable sub market within San Diego, it's just believed to have lots of interest. There is not a lot of class A vacancy in that market. So, we're getting a great deal of interest and it's, we have a development team who are specifically focused on this asset. So, it's a very different team, then the teams that are focused on some of the other initiatives. So yes, we're excited about it.

So not for sale, that's not the something you would hold on to?

It's not for sale.

Okay. And then Rick, so if you're at a peak or you've seen the peak, I guess for debt to EBITDA number for leverage, you get plenty of proceeds coming in for asset sales but you've got a term loan due in January. Is that something that can be extended or you're going to probably need that maturity and we can see a real precipitous decline in leverage?

Yes. I mean we certainly do have some ability to refinance some or a portion of it. We've got great relationships with our Bank group. At this point though we think we've got more than sufficient capacity between the revolver and the disposition proceeds to take out all the coming maturities. Again to the extent we look to refinance a small portion of it that will just create more flexibility for us to be ready to reinvest once we wind down the disposition program and position the company for growth. But we feel really good about where we are. We expect leverage to tick down again kind of hit the high watermark. We think by the midpoint in next year we should be down around six and then as we continue to spend on some of the redevelopments throughout next year. We'll probably ending next year in the low sixes, 561, six or somewhere in that range. So, again we feel very comfortable with where our leverage is. We've got some really great assets in the disposition programs all made portfolio stronger. So, we feel pretty good about where we are and as the senior living business kind of gets there some of the headwinds and starts to come back. We'll see leverage move even lower.

Okay, thank you.

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

Good morning. This is Alex on for Drew. And on the same store NOI growth continues to be negative. As you alluded to in your prepared remarks, vacancies been a major driver. But given you a material amount of lease is expiring over the coming years. When should we expect occupancy to stabilize or begin to improve, so we can get NOI growth back to in a positive trajectory?

Thanks for your question. I would say it will be stabilized in the near term. We had a couple of buildings, as I mentioned in my prepared remarks that kind of dried us down this quarter. A building in Minneapolis which is we've got a great deal of activity on that probably 60% of the building close to coming to terms. The property in South Carolina that has affected us, we're also in active discussions with the tenant for that building. Our pipeline of new and renewal leases is we probably got 600,000 square feet of new leases that are in discussions over the entire portfolio and close to 700,000 square feet of renewal conversation that we're in. Those are actually conversations that have progressed to the point where we are negotiating LOI as opposed to just a pipeline. So, it we're looking like we're in pretty good shape.

That's a real helpful color, thanks for that. And just one more question from me. Brookdale's EBITDA on coverage has been trending lower a little bit here and basically for now almost two years now. I know 1.95 times there's still plenty of cushion. But can you just lead to your confidence and kind of the stabilization of those assets over the next couple of years. And kind of if just comfortable with where they're performing today?

Hey, I'll take that one. This is Rich. Obviously our senior living communities we used to put down have continued to perform well with over 1.9 times coverage. We have seen some deterioration in that coverage but I really think that's just a function of the wage in supply pressure that the entire industry has faced. We really aren’t concerned about these properties and do you expect them to continue to perform in the future.

Perfect, thanks.

Thank you.

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

Yes, good morning. So, and want just to be clear on the $900 million in asset sales that are targeted. That does not include the roughly $100 million of RMR shares?

That's correct.

Okay. And of the assets that you've been selling, has there been a propensity of a certain buyer for those, is it local buyers, is it private equity, who have you been running into the most looking at your properties?

It varies depending on the segment. So, in senior living, it's probably it's about 45% either regional or national operators. Another 30% of the pool are private equity and then its breaks down into smaller chunks from there. The next biggest interested buyer are [leased]. In the MOB space, it's mostly private equity. We have the rest of it is pretty evenly spread between lease family office, some pension funds.

Okay. And then we think about senior housing supply, as we enter into 2020 and 2021, specifically as it relates to your markets, is that lightening up at all and what are your thoughts there?

Well, I mean it's lightening up across all of the markets. Mike reported in the last quarter that construction as a percentage of inventory, was that 6.3% in Q3 which is near the lot about as low as it spends since Q2 2015. Within the properties or the SNH's properties that are within next covered markets. The units under construction with 7.2%. So, not much higher, a bit higher but not much higher and that for us is the lowest ratio since Q1 2016 and 30 basis points below Q2. So, the things are looking, they're looking better.

When you think about what Five Star's doing with their employee retention efforts etcetera and the cost associated with that and you guys converting with them early next year to the right year format. Has that changed your for lack of a better word, underwriting thought process on going down that road or not really?

Not at all. This was something that me and Five Star had been talking about for a long time. And it's absolutely within our expectations and we're encouraging these employee initiatives.

Okay. And then, just lastly from me Jennifer, it feels like with everything you guys are doing that you're probably in the sixth or seventh inning of for lack of a better word, this transition pain. And then, maybe by mid-2020 things are looking much better. Would you agree or disagree with that?

I'd agree with that.

Okay, thanks. That's all from me.

Thank you.

The next question comes from Jonathan Hughes with Raymond James. Please go ahead.

Hey, good morning.

Do you plan to give 2020 guidance with 4Q'19 results and then managing your living portfolio will comprise 30% 35% 40% of the total portfolio?

Probably not officially. We have our policy is not to give guidance, we have tried to be more transparent than ever with this transition. We've -- I think been very transparent on the labor pressure that we've seen and what our expectations were for the managed portfolio. I think we'll continue to kind of work with Five Star to fine tune our budgets for next year. And we can give some general direction but I don’t think we'll officially give official guidance, though -- changes there.

Okay, fair enough. Could you -- I guess may be one step further. Could you maybe share any expectations on G&A trajectory next year, is that expected to change materially after the Five Star transition?

It really shouldn’t. Our G&A is fairly simple, the lion share of it is the fees paid to RMR manager. And as we said in prepared remarks I mean they're down 70% or so from last year as a result of our lower stock price. I'd like to think as we complete the disposition program, it start positioning the portfolio for growth again that we'll see the stock price come up. I think most of us will be happy to see the fees go back up as long as tied shareholder return which is our goal. So, it's hard to say specifically but again interests are very much aligned between our manager and our shareholders through that G&A line.

Okay. With that guidance [indiscernible] additional color with the next quarterly results would definitely be helpful. I'm sure a lot of listeners feel the same way. Just one more from me. Looking at the contract with RMR, what is the breakup fee payable to RMR if they were to determine it would be this manager of SNH?

I don’t know what it is offhand, I'm sure our SEC filings have all the information necessary if you want to calculate it. But as everyone on the call can imagine we are laser focused on executing on our disposition plan and reducing leverage and improving the portfolio. It's not a small task to restructure the senior living business and positioning this company for growth. So, given the difficult operating environment we've been in, that is clearly getting on our focus. And again as Jennifer mentioned in her prepared remarks, we think RMR is doing a lot of really great things to help position SNH and really all of the mandatories. So again, just not a focus but I'm sure it's in our SEC filings if you need it.

Okay. I mean, as the RMR board looked at, I mean you're selling a lot of assets $900 million or so expected to be on our contract. I mean, when I tell the whole company because of this valuation gap.

I think that everything is considered certainly when we were looking or when the independent committees were looking at the transaction that we announced in April, all kinds of scenarios were considered. Clearly, the scenario that we went with was the one that both groups start making those sense and therefore you know RMR board I would assume supported that.

Okay. I'll jump off, thank you for the time.

Thank you.

This concludes our question and answer session. I would like to now turn the conference over to Jennifer Francis for any closing remarks.

Thank you. And thank you for joining us on our third quarter earnings call. We look forward to seeing many of you at Navy in Los Angeles next week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.