Diversified Healthcare Trust
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Good day, and welcome to the Senior Housing Properties Trust Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] Please also 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.

[Brad Shepherd:]

Thank you. Welcome to Senior Housing Properties Trust’s call covering the fourth quarter and full year 2017 results. Joining me on today’s call are David Hegarty, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer; and Jennifer Francis, Senior Vice President of RMR and Head of Asset Management. 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, Tuesday, February 27, 2018. 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 like to turn the call over to Dave.

[David Hegarty:]

Thank you, Brad, and good afternoon, everyone. Before we begin our prepared remarks, I would like to take a minute to say we’re deeply saddened by the unexpected passing of Barry Portnoy, our founder and one of our managing trustees. I have worked closely with him for 35 years and I, like all the other RMR employees, will miss his friendship, mentorship and sage advice. I’ve also worked with Adam Portnoy for the past 15 years in his capacity as the President and CEO of the RMR Group and a managing trustee of SNG. And I’m confident he will continue to lead us fully, under the same high standards Barry had set for us. And now, thank you for joining us on SNH’s fourth quarter and year-end 2017 earnings call. 2017 was a very stable year for SNH, highlighted by our ability to raise attractively priced capital outside of the common equity market by completing a joint venture, harvesting gains from significantly appreciated asset sales and issuing attractive gap. The Vertex joint venture in March 2017 was a milestone for SNH and the pricing was extremely favorable as was one of only handful of real estate transactions in the Boston market that had traded above a $1,000 per square foot mark. The Seaport District has really become the new ground zero for growth and development in the Boston area, and we have the foresight to be one of the earliest investors in that market. We’re able to realize meaningful value creation in our senior housing portfolio by entering into agreements to sell our four Sunrise Senior Living leased communities at a price of $368 million, realizing a $308 million gain. Both of these transactions exemplified the value of SNH’s portfolio that has not been recognized in the public market in our willingness to be resourceful. I would also like to highlight that subsequent to the quarter-end, we issued $500 million of 4.75% senior unsecured notes. This was yet another example of how we’re taking advantage of opportunities with the cost of capitals most beneficial to us. As we move into 2018, we’re enthusiastic that the spread between the efficient transaction and the deployment of the proceeds will produce accretive results. In 2017, we remained dedicated to investing in a disciplined manner as evidenced by our acquisition pricing. While our external investment volume was lower in 2017 than in years past, we remain optimistic going into 2018 that this approach will create stable and growing cash flows. We acquired a total of $150 million of healthcare related real estate in 2017, which was down from $217 million of acquisitions in 2016. The majority of our acquisitions, $112 million were life science or medical office buildings that we acquired for a weighted average cap rate of 9.3%. We’ve been able to achieve this extraordinary pricing by competing for these assets in unique situations. Our average MOB acquisition in 2017 was approximately $18 million for building. At this size, we’re not competing against our larger public healthcare REIT peers for these assets due to the investment size relative to those peers’ portfolio. We are focused on acquisitions of life science properties in traditional MOBs, valued in the $10 million to $15 million range and do not limit ourselves to overheated markets competing with some of our dedicated medical office peers. This gives SNH a unique advantage as we successfully compete against small private buyers who are unable or unwilling to offer an all cash bid. Additionally, SNH has the advantage of being able to leverage the national footprint of RMR’s platform, which encompasses over 500 real estate professionals in 48 states, as healthcare as we all know is the national industry and is not limited to only select markets. I’d like to give a bit more detail on our fourth quarter MOB acquisitions that made up more than half of our total acquisitions for 2017. All of our recent acquisitions can be found in our fourth quarter supplemental on page 20. In Minnetonka, Minnesota, we purchased a six-storey 150,000 square foot, Class A MOB, 100% leased to an A rated healthcare services tenant through June 2019. We are currently in negotiations with that tenant, for a long-term lease at equal or higher rents. In Durham, North Carolina, we purchased a four-storey, 105,000 square foot, Class A MOB, built in 2001, and 100% leased to 13 tenants, a majority of which are in the life science industry and includes lab space. This property is located a mile south of the Research Triangle Park. In San Mateo, just south of San Francisco, we purchased a three-storey 63,000 square foot Class A MOB leased to a publicly traded pharmaceutical company. This investment is toehold in the South San Francisco life science market. And finally, in the fourth quarter, in Norfolk, Virginia, we purchased a three-storey, a 136,000 square foot, Class A MOB, 81% leased to 10 medical tenants. This building is located between two MOBs that we already owned and across the street from a major hospital. Also, subsequent to quarter-end, we acquired another $91 million of similar quality life science and medical buildings at attractive cap rates. On the Senior Housing side, we announced in November that we had entered into an agreement with Five Star to purchase six senior living communities for an aggregate purchase price of approximately $104 million and that we expect to enter management agreements with Five Star to manage these communities as the sales occur. We agreed to purchase the properties at an approximate 7.4% cap rate and the properties have potential growth opportunities, specifically one of the Tennessee properties is located within a 5,000-acre planned active adult retirement community, where we already own assisted living and memory care buildings. We are currently developing a 91-unit independent living building at this locations, which is already 45% preleased. Two of these six buildings were acquired in December, two more were acquired subsequent to year-end, and final two are expected to close in the next 30 to 60 days, depending on timing of lender approval. As we look forward to 2018, we will continue to promote our superior portfolio of composition as a diversified healthcare REIT. In 2017, approximately 43% of our cash NOI was attributable to triple net leasing living communities, 39% to medical office and life science buildings, 15% to managed senior living communities, and 3% to triple net leased wellness centers. This equates to 85% of our cash NOIs coming from leased real estate versus senior housing operations and 97% coming from private pay properties that do not rely on government reimbursement. This exemplary portfolio composition of high-quality healthcare real estate has been emulated by some of our peers in recent times. SNH remains stable with the high quality portfolio of life science and traditional medical office buildings with modest direct exposure to senior living operations compared to other diversified healthcare REITs. Turning to our performance for the quarter for the year. Today, we reported normalized funds from operations for a normalized FFO per share of $0.25 for the fourth quarter. Our reported normalized FFO includes a $55.7 million of business management center fee paid to RMR for the year end December 31, 2017, as a result of SNH’s total return outperformance relative to SNL Healthcare REIT Index, over the last three years of approximately 9%. Several research analysts consider the incentive fee a non-recurring expense due to its variable nature and the fact it’s not guaranteed. Consequently, some estimates do not include the expense in the per share numbers while others do. Excluding the incentive fee, we would have reported normalized FFO $0.48 per share for the quarter and a decrease of $0.02 compared to the fourth quarter last year. For the year, excluding the incentive fee, we would have reported normalized FFO of a $1.82 per share or $0.06 less than 2016. These decreases are a result of the joint venture which was completed in the first quarter of 2017. The receipt of the equity portion of the joint venture immediately reduced that quarterly FFO by approximately $0.03 per share, per quarter. Some of this was offset by savings created by paying off higher price debt, which Rick will talk about later, and a modest amount of new investment. We expect this joint venture transaction will be accretive to shareholders, as we continue to reinvest the proceeds externally. In the fourth quarter, our total portfolio of cash NOI increased $720,000 or 40 basis points compared to the fourth quarter last year. Cash NOI increased $6.4 million or 1% in 2017 as compared to 2016. This increase was primarily result of NOI growth from our triple net leased senior living portfolio as well as the acquisitions made in our life science and medical office building portfolio in 2017. Our triple net lease senior living portfolio continues to produce consistent growth with same store cash NOI, increasing 90 basis points in the quarter compared to the fourth quarter last year and increasing 1.5% in 2017 compared to 2016. This increase year-over-year is a result of the return we received on the $51.9 million of capital improvements that we funded to our senior living tenants at our communities in 2017. The triple net leased senior living portfolio consisting of 236 communities had occupancy of 83.4% for the 12 months ended September 30, 2017. It was down 40 basis points from the 12 months ended June 30, 2017. Rent coverage was 1.21 times for the 12 months ended September 30, 2017, just a slight decrease from 1.22 times coverage that we reported last quarter. Rent coverage and other statistics related to four Sunrise leased communities have been excluded from all of our numbers. Similar to recent quarters, for the decline in coverage sequentially was heavily influenced by weaker performance in the skilled nursing operations at our leased continuing care retirement communities or CCRCs. The 10 communities with the largest decreases in rent coverage over sequential quarters included six CCRCs. While IL, AL and memory care revenues have been stable the past four quarters at our leased CCRCs, skilled nursing revenues have continued to decline. As we have mentioned in prior calls, Five Star is addressing the skilled nursing challenges in two ways. First, they are nearly complete with the conversion of the skilled nursing units to an electronic medical records platform. As of the third quarter, they had 85% of their free standing and CCRC skilled nursing units fully converted and up and operational and plan to complete the rest by the end of the first quarter. Having electronic medical records allows them to easily share outcomes with key referral sources, improves communication with physicians and is vital for participation in all the organized healthcare programs. Second is the rehab the home program, which converts existing skilled nursing beds in the CCRCs to high end private rehab suite. Medicare eligible patients generally have options for shorter reallocation stays and these units are attracted to those consumers. Some of the drop off in leased coverage over the past year has been due to disruption at the skilled nursing portion of the CCRCs due to construction for rehab the home units. Three of the larger individual decreases is in rent coverage related specifically to rehab the home units under construction were in transition during the third quarter. On the margin, certain properties in the portfolio are feeling the pressure of new supply opening up but in general revenues in the IL and AL are holding steady. Our managed senior living portfolio same store cash NOI decreased 3.4% in the quarter compared to the fourth quarter last year and decreased 4.6% in 2017 compared to 2016. We saw an increase in average monthly rates of 1.2% in our managed senior living portfolio in 2017 compared to 2016 offset by a decrease of a 110 basis points in occupancy. It is important to note that resident fees and services in our TRS portfolio were only down 20 basis points in 2017 as compared to 2016 on a same store basis. And this includes a 9% decrease in Medicare revenues in our skilled nursing units. We have one skilled nursing unit at a CCRC in California that was down $1.5 million in revenues. We closed the fifth unit to convert to memory care at a CCRC in Arizona towards the end of 2016 and we continue to see systemic managed care changes in Florida that negatively affect those properties’ skilled nursing facility revenues. We expect that the electronic medical records implementation I just mentioned will help improve the operations. We also have two new rehab the home units in our TRS portfolio and are assessing what communities they benefit from additional ones. We saw a 1.4% increase in operating expenses on a same store basis in 2017, mostly due to 8% increase in real estate taxes compared to 2016. We have mentioned the real estate taxes on past calls as there were two real estate tax abatements that we recognized in 2016 for approximately $1 million that account for a majority of this unfavorable variance in 2017. We have been emphasizing that we are investing extensively in our TRS portfolio to be competitive for new competition and changing demand in our markets. Much of this investment has been through renovations which disrupt operations but ultimately better position the properties in their respective markets. One property we mentioned located in north of Chicago that had a grand reopening late in the third quarter saw year-over-year improvement in the fourth quarter. We recently visited another property in For Myers where renovations were recently completed and we look forward to seeing growth at that community in the near future. One major renovation in Dallas that we discussed previously had a fantastic quarter with growth of over 25% compared to the fourth quarter last year. Our largest quarter-over-quarter decrease was at CCRC in Laguna Hills, California that’s currently still under major renovation. As a reminder, we do remove properties that may be considered un-stabilized , undergoing renovations or repositioned from our same store performance, which may make our results not comparable to many of our peers. I would like to turn the call over now to Jennifer Francis who will discuss our medical office building portfolio.

[Jennifer Francis:]

Thanks, Dave. Our medical office building portfolio same store cash NOI, decreased 1.6% in the quarter compared to the fourth quarter last year and decreased 10 basis points in 2017 compared to 2016. Overall occupancy at the end of the quarter was 95%. Tenant retention for the fourth quarter and the full-year was 80%. Separating the performance of our life science and our traditional medical office portfolios for the year, same-store cash NOI in our traditional medical office portfolio increased 40 basis points in 2017 compared to 2016 and our life science portfolio decreased 70 basis points. The decrease year-over-year in the life science portfolio is almost entirely the result of the two single tenant buildings Dave mentioned on our third quarter earnings call. We had a tenant in the Southwest suburb of Boston renew in two of three buildings, vacating approximately 84,000 square feet. And we provided concessions associated with the renewal for a tenant north of Chicago in two buildings, containing approximately 200,000 square feet. Our life sciences portfolio contained 23 properties in 4.5 million square feet at year-end. The year-end occupancy was 97.4% and the retention rate was 90% on the approximately 700,000 square feet that expired in 2017. The only none renewal in the life science portfolio in 2017 was the one building near Boston I just mentioned. This building has had significant interest, and I’m confident it will be leased in 2018. We believe that this strong 90% retention rate in the life science portfolio is the result of our buildings being strategic to our tenants, and improved with infrastructure critical to the operation of their businesses. If a tenant were to vacate at the end of its term, we believe our buildings are well-positioned in their respective market with life sciences related improvements that make them attractive to second or even third generation users. In 2017, the Boston Seaport life science buildings accounted for 48% of the cash NOI in our life science portfolio and 25% of the cash NOI in our total medical office portfolio. This lease is structured so that we receive a rent increase every five years. The first rent bump of 8% commences on January 1, 2019. So, while the built-in rent growth from this asset is somewhat staggered compared to typical lease, this is a very valuable and stable access that makes up almost half of our life science portfolio. I would like to highlight in our life science portfolio the eight California building as they performed very well in 2017 with growth in same store cash NOI basis of almost 3.5%. These assets accounted for 15% of the cash NOI in this portfolio in 2017 and consisted three buildings in Silicon Valley and five buildings in Southern California including three in Torrey Pines, the heart of one of the leading life sciences markets in the nation. Switching now to our traditional medical office building portfolio. This portfolio contained a 102 properties and 7.6 million square feet at year-end. The yearend occupancy was 93.5% and the retention rate for 2017 was 73%. While we achieved same store growth of 40 basis points in this portfolio year-over-year, we had one significant decrease to our NOI at a medical office building located in downtown Washington DC. In the fourth quarter of 2016, we had a tenant vacate the top floor surgery center of this eight-storey medical office building. This 130,000 square-foot building is well located in an IPO area for medical office and we have since re-let the vacant space to a tenant that will use it as a surgery center. This property created $1.2 million negative variance year-over-year due to the unexpected length of time required for this tenant to receive its certificate of need. Without this one property, the traditional MOB portfolio would have realized same store growth of 1.5% in 2017. Two of our best performing traditional medical office buildings in 2017 happened to both be located within 30 miles of New York City, one in White Plains and the other on Long Island. Our White Plains building is leased to an A rated healthcare tenants through 2035 and the building on Long Island is advantageously located NYU [ph] Hospital, which is our major tenant and is consistently 95% occupied. Both are good examples of the typical buildings we own in our medical office portfolio, well-located with strong tenancy. And finally, I’d like to talk about the performance of the Cedars-Sinai medical office buildings that accounted for 15% of our traditional medical office cash NOI in 2017. These two buildings located in Beverly Hills, California, saw a 2.2% increase in cash NOI in 2017. These multitenant buildings are consistently fully occupied as they are physically connected by pedestrian bridge to the Cedars-Sinai Medical Center, one of the nation’s premier hospitals. In the past two years, we invested approximately $8.2 million of common area CapEx into these buildings. As a result today, we are achieving double-digit rent growth on new and renewal leases. Similar to the Boston Seaport building, the Cedars-Sinai medical office buildings are very valuable and stable assets that make up a sizeable portion of our medical office portfolio. These properties are the foundation of our medical office portfolio. But, as I pointed out, they are clearly not our only valuable assets. SNH’s strategic mix of property types and locations has created premier medical office portfolio that produces stability in both value and performance. And now, I’d like to turn the call over to Rick to provide a more detailed discussion of our financial results for the quarter.

[Rick Siedel:]

Thanks, Jennifer, and good morning, everyone. Earlier today, we reported normalized FFO of $59 million for the fourth quarter or $0.25 per share, and normalized FFO of $375 million for the full year 2017 or $1.58 per share. Both of these amounts included business management incentive fees of $55.7 million paid to RMR, our external manager, based on SNH’s total return per share, exceeding the SNL Healthcare REIT index by approximately 9% cumulatively over the past three years. This incentive fee was paid in cash in January of 2018. As Dave mentioned, several of the 11 analysts that provide research coverage on SNH view this incentive fee as unique or not part of normalized result. As the incentive fees have been excluded, normalized FFO per share would have been $0.48 for the fourth quarter and a $1.82 for the full-year. This is the first time that SNH has paid a incentive fees since the business management agreement with RMR was amended, and there is no way to know if SNH will continue to outperform the Healthcare REIT index on a go forward basis. Therefore, in our supplemental we’ve noted what our payout ratio and some of our debt metrics are, with and without the incentive fee. For example, excluding the business management incentive fee, our normalized FFO payout ratio for the quarter would have been 81.3% and our debt to adjusted EBITDA would have been 5.9 times. As we go into 2018, it may be helpful to know what the potential incentive fee expense could be for SNH this year. Looking back at SNH’s total return, in 2015, we underperformed the index and produced the negative 26% per share return. In 2016, stock price recovered a bit and we produced a positive 38% per share return. And in 2017, we produced a 9% return. When calculating the potential of 2018 business management incentive fee, the negative performance of 2015 will roll out of the measurement period and be replaced with 2018’s performance. At this point, due to our significant outperformance in 2016, it is very possible that RMR will earn its incentive fee for the three-year period from 2016 to 2018. If the share price stays around the $16 level and SNH continues to outperform the index, the maximum incentive fee for 2018 would be $57 million as there is a cap based on SNH’s equity market capitalization. Excluding the business management incentive fee, general and administrative expenses increased $0.5 million in the quarter compared to the fourth quarter of 2016, primarily due to an increase in share-based compensation related to the accelerated vesting of certain outstanding awards to formal employees. In addition to the incentive fee, we’ve already discussed, SNH’s general and administrative expenses included the business management fee, share-based compensation and other public company costs. It’s important to note that the business management fee is based on the lower and historical cost of our real estate or our market capitalization. Again, assuming a share price of around $16, a market cap based fee results in annual savings to SNH of $4.6 million, demonstrating the alignment of interest between the manager and common shareholders. We’re not satisfied with the recent valuation of SNH shares in public market and will continue to highlight our high-quality, stable portfolio, and the disconnect between the value of our portfolio and the share price while continuing to look for additional ways to create shareholder value. We were able to manage our balance sheet very well in 2017, which included the extension of our $1 billion revolving credit facility into 2022 and a reduction of the interest rate. We ended the year with total debt to gross assets of 42%, down from 43.4% a year ago, and 5.9 times debt to EBITDA excluding the incentive fee. Interest expense decreased $3.1 million or 7.1% this quarter compared to the fourth quarter of 2016, and we’ve reduced the number of our properties encumbered by secured debt substantially. Borrowings on our credit facility at the end of 2017 totaled $596 million. However, we were able to term out the majority of that balance by closing on $500 million of 4.75% senior notes earlier this month. Also subsequent to the end of the year, we announced that we’ve entered into agreement to sell four senior living assets leased to Sunrise and expect to realize gains of approximately $308 million. The sale of one of these communities was completed in December and we expect the sale of the additional three communities to be completed in the near future. The communities were sold at 4% cap rate and we will use proceeds to further pay down balance on the revolving credit facility until they could be reinvested accretively. We were pleased with the execution and the pricing of both the notes and sale of the Sunrise Senior Living assets as they further demonstrated our ability to raise attractively price capital. Since July of 2016, SNH has been able to raise over $1.7 billion in capital at an exceptional weighted average cost of just 4.4%. This includes the debt and equity portion of a Boston Seaport property, the recycling of the senior living assets and this most recent debt issuance. We remain disciplined and have deployed or invested about half of this capital at an average cap rate of 7.6%, which is inclusive of paying down $300 million of mortgages at an average rate of 6.7%. We are very enthusiastic about the investment spread we have created as a result of these transactions and will continue to deploy capital to generate returns for our shareholders. Lastly, I wanted to mention that subsequent to quarter-end, we declared another $0.39 per share dividend for the fourth quarter. As I mentioned earlier, excluding the incentive fee expense, the normalized FFO payout ratio for the fourth quarter would have been 81.3% or 85.7% for the full year 2017. These are important measures as it is these ratios among other factors that the Board takes into consideration when determining our dividend policy. We as a management team remain very comfortable that our dividend is securely covered. With that, we’d like to turn the call over to the operator for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Drew Babin with Robert W. Baird. Please go ahead.

[Drew Babin:]

Good morning. Sorry for your loss. A quick question on MOBs and life science as we roll in 2018. I was just hoping you could talk about the anticipated expirations into this year, anything that might be chunky in there and kind of where you expect leasing spreads to come out and retention rates as we approach this year?

[Jennifer Francis:]

I don’t think we anticipate any major lease expirations in 2018; it’s really normal course. So, there’s -- I don’t think there’s much to talk about.

[Rick Siedel:]

I think to the extent we have some little bit of vacancy that came up during this most recent quarter, we would be working on re-letting that space, and otherwise there’s nothing anticipated over the rest of 2018. We have a couple of properties in 2019 that we will be evaluating what the likelihood of renewal or redevelopment of some of those properties but we still have some time to work through that.

[David Hegarty:]

And Drew, just to address your question on leasing spreads, I think this quarter on the leasing activity, we did have our -- leasing spreads were up 4.1% year-over-year versus prior leases.

[Drew Babin:]

And quickly on the managed senior living portfolio, obviously there’s been some CapEx related occupancy loss that occurred throughout ‘17 and it looks like 4Q ‘17 among same store highest occupancy level you have had in a while. I guess, in terms of year-over-year comps, is there a certain point in 2017 where year-over-year comps get a lot easier where you might have a breakeven [ph] on that portfolio in terms of NOI growth becoming positive again?

[David Hegarty:]

Yes. There’s a lot of activity going on within the portfolio, and unlike most of our peers, we just give you the numbers as they are, so we don’t adjust -- for instance, one of our properties in California is undergoing a tremendous redevelopment projects and that is the property that I mentioned in the prepared remarks that Medicare revenues were up $1.5 million year-over-year, partly because of improvements going on and so on. And as projects get completed and properties begin to fill up, for instance the Dallas premier property is up in the lower 90% occupancy level at this point, we see the benefit but it’s delayed. And then, there are other projects that coming on line now that are affecting the ongoing numbers. So, I’d say probably, ‘18 is probably still going to be a bit volatile for projects coming on line and new ones commencing, affecting operations, these rehab the home programs are one that definitely affects the skill nursing component. So, I really, think that it’s probably beginning of 2019 that starts to see normal, stabilized growth in revenue and earnings and so on.

[Operator:]

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

[Bryan Maher:]

Just kind of following up that line of questioning a little bit, on the senior living facility, seeing the occupancy tick up, that was certainly welcome to see. Can you talk about how you feel that the renovations are impacting occupancy in the face of new supply? And do you think we can continue admittedly with some noisy numbers that start to trend back up?

[David Hegarty:]

It’s a couple of factors. I guess, with regards to the renovations, where we have put in the money, we’re seeing improving results coming -- once those are complete. So, that’s definitely helping us. Of course, some of the improvements too are defensive to meet, just to say even with new competition in the marketplace. But, I would say too, this quarter we didn’t -- you noticed in the prepared remarks we did not comment on the flu, because really in our managed portfolio, I think we had one week of impact from the flu and that was it. But, we are seeing it affecting our first quarter ‘18 numbers. And I would say we have a half of dozen or so properties that have been impacted by the flu in the first two months of 2018. I really think that these properties when they are completed, we do see a meaningful increase in performance. I think we continue with the direction we’re headed in completing the rest of the projects and seeing it would be approved in, I would say ‘19 and thereafter.

[Bryan Maher:]

Is there preference for one on other or is just opportunistic?

[David Hegarty:]

Sorry, part of your question was cut out, could you repeat the question?

[Bryan Maher:]

Sure. On your acquisitions going forward between life science and MOB, is there a preference for one over the other, will it be more opportunistic?

[David Hegarty:]

Well, I think, it’s actually probably more opportunistic. We do see quite a bit of product in both spaces. I do think that we can probably compete more effectively in the life science space, because there are only a couple of players that are investing in that space in any meaningful way. But we do like that space and we will continue it. The MOB area, again it’s more optimistic. I think, we are not going to compete in the hot markets where pricing has gotten very low, or cap rate is very low. But I mean, healthcare is something that’s in 50 states and we have -- we are currently -- within the RMR companies, we have a presence I believe in 48 states. So, we do -- we can reach other markets and we believe that there are healthcare systems that are healthy [ph] that we want to align ourselves with, but they may not be…

[Bryan Maher:]

Thank you.

[Operator:]

The next question will be from Michael Carroll with RBC Capital Markets. Please go ahead.

[Michael Carroll:]

I wanted to dive into I guess the Five Star exposure real quick. David, how many renovations is Five Star pursuing right now in the triple net portfolio? And can you remind us how much rent do you expect that to bring online once those facilities are completed and stabilized?

[David Hegarty:]

Well, that is a number that moves around over the course of the year. But, they currently have about six of the rehab the home programs in process within the leasing portfolio. And there are approximately another six or so major projects that are in the neighborhood of $10 million to $20 million per location. Several have just been completed. And those should be benefitting us or benefitting the, hopefully benefits us, and most of the fundings, I believe that’s probably about another $60 million to $75 million this year would be provided by us to fund triple net lease properties with them. And so, that would result in pretty much about a $4 million or so rental increase as it gets funded. And that’s -- and typically [indiscernible] most of it can be funded using our line of credit or other internal funding and we don’t have to do a debt offering or larger capital markets transaction to fund that type of capital.

[Michael Carroll:]

Are they still asking SNH to fund those projects or are they using the proceeds from the asset sales to fund those projects right now?

[David Hegarty:]

The longer term assets are still coming to SNH to be funded, more of the shorter term there, utilizing their own cash.

[Rick Siedel:]

Yes. I mean, generally, they’ve been managing to make sure they have maximum flexibility, the entire senior housing industry has faced pressures, as you are well aware. And again, I think they’re prudently managing their balance sheet carefully. And if it makes sense to sell or improvement [ph] back to us we are more happy to take it. We do look at the underwriting, they generate double digit returns, it makes sense for everybody involved.

[Michael Carroll:]

And then, with regard to the rehab the home projects, how many of those have a finished to-date and have they been successful and bringing in more Medicare patients from those renovations?

[David Hegarty:]

Yes. On the triple net leased portfolio, they have -- six of them complete and they have completed two on the managed portfolio for us. And everyplace that they have put those in place have generated increased Medicare business and it also helps certainly with some -- they do take some Medicaid in certain locations too. But it’s primarily motivation of bringing in more Medicare funding.

[Michael Carroll:]

Okay. And then, can you provide an update? I know, you mentioned this, Dave, in your prepared remarks on the electronic Medical records. Have they finished rolling them out in some of the communities or is that expected to be done this quarter?

[David Hegarty:]

It should be all done this quarter. They are 85% complete as of yearend. The remainder is expected to be done within this quarter.

[Michael Carroll:]

Okay. And then, how much of an impact can that have? So, how much on admissions, and that’s really just coming from the Medicare admissions from -- for the skilled nursing facility units, is that correct?

[David Hegarty:]

Right. I mean, one place that we see that we’ve seen the biggest impact negatively over last year or has been in Florida and managed care programs have grown tremendously within that state. And in order to participate in a lot of those programs, you have to have compatible electronic medical record. So, we expect to see a bounce back of some of that business in Florida but we also know it’s coming -- it’s helped us in Phoenix, Arizona area. And we expect this to become more widespread across the country. So, a good part of it is preventative from losing anymore Medicare business and generating -- and to build that book of business back up. So, I mean, it’s really -- it’s part of their master plan. So, it would be inappropriate for me to comment on the impact that they expect to see from us. But from ours, we’re clearly seeing it in the managed portfolio where it’s being implemented.

[Operator:]

The next question comes from Juan Sanabria with Bank of America. Please go ahead.

[Unidentified Analyst:]

This is Kevin on for Juan. I just had a question, if you guys to break out RevPAR regarding renewals and new residents as far as [indiscernible] goes? And then, secondly on a different topic, just on -- what should we expect for as far as it goes pace for MOB, and life science acquisitions ‘18 as far as the numbers? And then, have you seen any I guess P/E activity and competitions for those deals at all?

[David Hegarty:]

Sure. Well, the first question on the revenue per available room, per occupied room. The increases from people coming off -- the normal increase is going in place for renewals has been pretty much between the 2% to 3% range. And it varies very much by market. Florida [ph] is our strongest market and we’re seeing 4% to 5% rate increases there, while other states like Arizona, Phoenix market, it’s more likely 0% to 1%. So, you have to bring it back to the average and we are pretty much seeing average about 1.5% to 2% really. People coming in the door, again, it depends on how occupied the facilities are. Again, most of those markets tend to be close to 3% to 5% rates, coming in off the streets through unoccupied units. But, as you can see from our most quarterly results, the actual rate increase was about 1.2% on the same store basis. So, there’s a lot of different pricing by community and it’s very difficult to give you an overall standard. Jennifer can comment on life science. The question was on…

[Jennifer Francis:]

Was on acquisition.

[David Hegarty:]

Acquisition. And again, it is opportunistic if you look at this past year, it is heavily weighted towards the back end of the year. I would say that that’s probably more likely to be the case again this year, coming out of the gate. I think, it’s on the life side, but I expect to see us being a little more aggressive now that our cost of capital from the most recent capital transactions has become more attractive. And we can be a little more aggressive but we are not going to stretch to the 5s and 6s for cap rates. So, I think normal bread and butter will be a couple of $100 million, maybe $200 million this year, and hopefully -- something little more sizeable. Your third question? Oh, private equity you asked. Private equity coming for the large deals, definitely there -- it’s very difficult for the public REITs to compete against the private equity transactions out there. But again, those are of size in our market that we are pursuing $10 million to $15 million per transaction, and we are really not seeing a lot of private equity in that particular space.

[Operator:]

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

I just wanted to look out maybe ‘18 and ‘19. You have done some nice capital recycling and taken advantage of maybe certain types of assets in pricing. Where are we with sort of the repositioning over maybe the next 12 to 18 months? Is there a pool of properties you’ve now identified that warrant maybe need further recycling?

[David Hegarty:]

Well not, I mean, not that we can disclose. We haven’t publicly announced anything. But, we are not doing a major recycling, like some of our peers have done. I think, we like the makeup of the portfolio. I can envision that our investments will be more heavily weighted towards life science and medical office buildings such that we should be at least 50% medical office and 50% senior housing. So, I don’t see us doing a lot of acquisitions on the senior housing side. We will opportunistically sell down a couple, say skilled nursing facilities and individual assets here and there. But, I don’t expect any major shift in the portfolio make up and again we’re only -- not even 15% of our portfolio is in the operation. So, we like the triple net leased and having a bit of a buffer between us and the direct line of operations. So, I can’t expect that to change very much either.

[Vikram Malhotra:]

Got it. That makes sense. And then, just can you clarify -- I think you mentioned -- was it the FFO payout you mentioned on normalize basis or did you also give the FAD payout?

[David Hegarty:]

We did not give a FDA payout, and we don’t as a rule. In the supplemental, we provide all the components because different analysts calculate in different ways. So, we try to keep the components and people can determine their own number for that to make it comparable for their peer group, qualitatively though. I mean, I think we’re been pretty clear that our payout ratio is higher this year than it normally would be. We’ve invested fairly aggressively in our TRS or managed portfolio to make sure that product can compete with anything new coming out of the ground. And again, with the incentive fee being kind of a unique situation, it does skew the numbers a bit towards the end of the year there. But, overall, very comfortable with where we’re.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to David Hegarty for any closing remarks.

[David Hegarty:]

Thank you all for joining us on today. Have a nice day. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.