Diversified Healthcare Trust (DHC) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Senior Housing Properties Trust Fourth Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Senior Housing Properties Trust call covering the fourth quarter and full year 2017 results. Joining me on today's call are David Hegarty, President and Chief Operating Officer; 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 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 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 the 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 in 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.

Thank you, Brad, and good morning, everyone. Before we begin our prepared remarks, I'd 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've 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 SNH, and I'm confident he will continue to lead us forward 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 common equity market by completing a joint venture, harvesting gains from significantly appreciated asset sales and issuing attractive debt. The Vertex joint venture in March 2017 was a milestone for SNH, and the pricing was extremely favorable as it was one of only a handful of real estate transactions in the Boston market that had traded above $1,000 per square foot mark. And 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 were also able to realize meaningful value creation in our senior housing portfolio by entering into agreements to sell our 4 Sunrise Senior Living leased communities at a price of $368 million, realizing a $308 million gain. Most of these transactions exemplify the value of SNH's portfolio that is not being recognized in the public market and our willingness to be resourceful.

I'd also like to highlight that subsequent to quarter end, we issued $500 million of 4.75% senior unsecured notes. This is yet another example of how we're taking advantage of opportunities where the cost of capital is most beneficial to us. As we move into 2018, we're enthusiastic that the spread between these efficient transactions 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 health care-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 per building. At this size, we're not competing against our larger public health care REIT peers for these assets due to the investment size relative to those peers' portfolios. We are focused on acquisitions of life science properties and traditional MOBs valued in the $10 million to $50 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. And health care, as we all know, is a 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 6-story, 150,000 square-foot Class A MOB, 100% leased to an A-rated health care services tenant through June 2019. We're currently in negotiations with that tenant for a long-term lease at equal or higher rents. In Durham, North Carolina, we purchased a 4-story, 105,000 square-foot Class A MOB built in 2001 and 100% leased for 13 tenants, the majority of which are in the life science industry and includes lab space. This property is located 1 mile south of the Research Triangle Park. In San Mateo, just south of San Francisco, we purchased a 3-story, 63,000 square-foot Class A MOB leased to a publicly traded pharmaceutical company. This investment is a toehold in the South San Francisco life science market. And finally, in the fourth quarter, in Norfork, Virginia, we purchased a 3-story, 136,000 square-foot Class A MOB, 81% leased to 10 medical tenants. This building is located between 2 MOBs that we already own 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 6 senior living communities for an aggregate purchase price of approximately $104 million, and now 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 was located within a 5,000 acre planned active adult retirement community where we already own an assisted living and memory care building. We are currently developing a 91-unit independent living building at this location, which is already 45% pre-leased. 2 of these 6 buildings were acquired in December, 2 more were acquired subsequent to year-end and the final 2 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 composition as a diversified health care REIT. In 2017, approximately 43% of our cash NOI was attributable to triple net leased senior 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 NOI 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 health care real estate has been emulated by some of our peers in recent past. SNH remains stable with a high-quality portfolio of life science and traditional medical office buildings, with modest direct exposure to senior living operations compared to other diversified health care REITs.

Turning to our performance for the quarter and for the year. Today, we reported normalized funds from operations, or normalized FFO, per share of $0.25 for the fourth quarter. Our reported normalized FFO includes a $55.7 million business management incentive fee paid to RMR for the year ended December 31, 2017, as a result of SNH's total return out-performance relative to the SNL Healthcare REIT Index over the last 3 years of approximately 9%. Several research analysts consider the incentive fee a nonrecurring expense due to its variable nature and the fact that it's not guaranteed. Consequently, some estimates do not include the expense in their per share numbers while others do.

Excluding the incentive fees, we would have reported normalized FFO of $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 $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 2017. The receipt of the equity portion of the joint venture immediately reduced our quarterly FFO by approximately $0.03 per share per quarter. Some of this was offset by savings created by paying off higher-priced debt, which Rick will talk about later, and a modest amount of new investment. We expect this joint venture transaction will be accretive to our sales as we continue to reinvest the proceeds externally.

In the fourth quarter, our total portfolio 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 a 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 leased senior living portfolio continues to produce the 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 an occupancy of 83.4% for the 12 months ended September 30, 2017, down 40 basis points from the 12 months ended June 30, 2017. Rent coverage was 1.21x for the 12 months ended September 30, 2017, just a slight decrease from 1.22x coverage that we reported last quarter. Rent coverage and other statistics related to the 4 Sunrise leased communities have been excluded from all of our numbers.

Similar to recent quarters, 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 6 CCRCs. While IL, AL and memory care revenues have been stable the past 4 quarters at our leased CCRCs, skilled nursing revenues have continued to decline.

As we've mentioned in prior calls, Five Star is addressing the skilled nursing challenges in 2 ways. First, they're 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 freestanding 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 to participation in all the organized health care programs.

Second is the rehab-to-home program, which converts existing skilled nursing beds in the CCRCs to high-end private rehab suites. Medicare-eligible patients generally have options for shorter rehabilitation stays, and these units are attractive to those consumers. Some of the drop-off and lease coverage over the past year has been due to disruption at the skilled nursing portions of the CCRCs due to construction for rehab-to-home units. Three of the larger individual decreases in rent coverage relates specifically to rehab-to home units under construction while 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 110 basis points in occupancy. It's 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. This includes a 9% decrease in Medicare revenues in our skilled nursing units. We had one skilled nursing unit at a CCRC in California that was down $1.5 million in revenues. We closed the SNF unit to convert it 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 SNF operations. We also have 2 new rehab-to-home units in our TRS portfolio and are assessing what communities may benefit from additional ones.

We saw a 1.4% increase in operating expenses on a same-store basis in 2017 mostly due to the 8% increase in real estate taxes compared to 2016. We have mentioned the real estate taxes on past calls as there were 2 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've been emphasizing that we're investing extensively in our TRS portfolio to be competitive to new competition and changing demand in our markets. Much of this investment has been through renovations, which disrupts operations but ultimately better position the properties in their respective markets. one property we mentioned located north of Chicago that had a grand reopening late in the third quarter saw a year-over-year improvement in the fourth quarter. We recently visited another property in Fort Myers where renovations were recently completed, and we look forward to seeing some growth at that community in the near future. one major renovation in Dallas that we've 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 a CCRC in Laguna Hills, California that's currently still under major renovation. As a reminder, we do not remove properties that may be considered unstabilized, undergoing renovations or repositions 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'll discuss our medical office building portfolio.

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 2 single tenant buildings Dave mentioned on our third quarter earnings call. We had a tenant in the southwest suburb of Boston renew in 2 of 3 buildings, vacating approximately 84,000 square feet and we provided concessions associated with the renewal for a tenant north of Chicago in 2 buildings containing approximately 200,000 square feet.

Our life sciences portfolio contained 23 properties and 4.5 million square feet at year-end. 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 nonrenewal 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 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 markets, with life sciences-related improvements that make them attractive to second- or even third-generation users.

In 2017, the Boston Seaport life science building 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 5 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 a typical lease, this is a very valuable and stable asset that makes up almost half of our life science portfolio.

I'd like to highlight in our life science portfolio the 8 California buildings 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 consist of 3 buildings in Silicon Valley and 5 buildings in Southern California, including 3 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 102 properties and 7.6 million square feet at year-end. The year-end 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 decreased to our NOI at a medical office building located in downtown Washington, D.C. In the fourth quarter of 2016, we had a tenant vacate the top floor surgery center of this 8-story medical office building. This 130,000 square-foot building is well located in an IPO area for medical office, and we have since relet the vacant space to a tenant that will also use it as a surgery center. This property created a $1.2 million negative variance year-over-year due to the unexpected length of time required for the 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 happen 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 health care tenant through 2035. And the building on Long Island is advantageously located near NYU Winthrop 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 2 buildings, located in Beverly Hills, California, saw a 2.2% increase in cash NOI in 2017. These multi-tenant buildings are consistently fully occupied as they are physically connected by a pedestrian bridge to the Cedars-Sinai Medical Center, one of the nation's premier hospitals. In the past 2 years, we invested approximately $8.2 million of common area CapEx into these buildings. As a result, today we're achieving double-digit rent growth on new and renewal leases.

Similar to the Boston Seaport buildings, the Cedars-Sinai medical office buildings are very valuable and stable assets that make up a sizable 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 a premier medical office portfolio that produces stability in both value and performance.

I'd now like to turn the call over to Rick to provide a more detailed discussion of our financial results for the quarter.

Thank you, 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 include a business management incentive fee 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 3 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 results. Had the incentive fee been excluded, normalized FFO per share would have been $0.48 for the fourth quarter and $1.82 for the full year. This is the first time that SNH has paid incentive fees since the business management agreement with RMR was amended and there's no way to know if SNH will continue to outperform the health care 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 5.9x.

As we go into 2018, it may be helpful to note 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 a negative 26% per share return. In 2016, the stock price recovered a bit and we produced a positive 38% per share return. In 2017, we produced a 9% return. When calculating the potential 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 out-performance in 2016, it is very possible that RMR will earn incentive fees for the 3-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 will 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 former employees.

In addition to the incentive fee we've already discussed, SNH's general and administrative expenses include 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 of the historical cost of our real estate or our market capitalization. Again, assuming a share price of around $16, the market cap-based fee results in annual savings to SNH of about $4.6 million, demonstrating the alignment of interests between the manager and common shareholders.

We are not satisfied with the recent valuation of SNH's shares in the 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 5.9x 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 agreements to sell 4 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 3 communities to be completed in the near future. The communities were sold at 4% cap rate, and we'll use the proceeds to further pay down the 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 the sales of Sunrise Senior Living assets as they further demonstrated our ability to raise attractive repriced capital. Since July 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 the 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 over $300 million of mortgages at an average rate of 6.7%. We are very enthusiastic about the investment spread we've 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 on determining our dividend policy. We, as a management team, remain very comfortable that our dividend is securely covered.

And with that, we'd like to turn the call over to the operator for questions.

(Operator Instructions) The first question will be from Drew Babin with Robert W. Baird.

Sorry for your loss.

Thank you.

A quick question on MOBs and life science as we roll into 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 then retention rates as we purchase here?

I don't think we anticipate any major lease expirations in 2018. It's really normal course. So I don't know that there's much to talk about.

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

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

Great, that's helpful. 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 same store is the highest occupancy level you've had in a while. I guess, in terms of year-over-year comps, is there a certain point in 2017 where the year-over-year comps get a lot easier where you might hit a breakeven on that portfolio in terms of NOI growth becoming positive again?

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 was undergoing a tremendous redevelopment project, and that is the property that I mentioned in the prepared remarks that Medicare revenues were up $1.5 million year-over-year because of -- 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 are coming online 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 online and new ones commencing, affecting operations. These rehab-to-home programs are one that definitely affects the skilled nursing component. So I really think that it's probably beginning of 2019 that you'll start to see a normal stabilized growth in revenue and earnings and so on.

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

Just kind of following up that line of questioning a little bit. On the senior living facilities, 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 could continue, admittedly with some noisy numbers, that start to trend back up?

Yes. Well, there's a couple of factors. I guess, with regards to the renovations where we have put in the money, we are seeing improving results coming -- once those are complete. So that's definitely helping us. Of course, some of the improvements, too, are defensive, to me, just to stay even with new competition in the marketplace. But I would say to this quarter, we didn't -- as 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'd say we have about half a dozen or so properties that have been impacted by the flu in the first 2 months of 2018. I really think that these properties, when they're 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 bearing -- it'd bear fruit in, I would say, '19 and thereafter.

(technical difficulty)

life sciences. Is there a preference for one over the another? Or is it just opportunistic?

I'm sorry, part of your question was cut out. Could you repeat the question?

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

Well, I think it actually will probably be 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 a meaningful way. But we do like that space, and we will continue to pursue it. The MOB area, again, it's more opportunistic. I think that we're not going to compete in the hot markets where pricing has gotten very low -- or cap rates very low. But I mean, health care is something that's in 50 states, and we have -- we're currently within the arm of our companies, we have a presence, I believe, in 48 states. So we do -- we can reach other markets and believe that there are health care systems that are perfectly healthy that we want to align ourselves with. But they may not be (inaudible) and so on.

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

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 you expect that to bring online once those facilities are completed and stabilized?

Well, that is a number that moves around over the course of the year. But they currently have about 6 of the rehab-to-home programs in process within the lease portfolio. And there are approximately another 6 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 benefiting us -- benefiting them, which hopefully benefits us. And most of the funding, I believe it's probably about another $60 million to $75 million this year will be provided by us to fund triple net leased 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, projects of that size hopefully can be funded using our line of credit or other interim funding and that we don't have to do a debt offering or larger capital markets transactions to fund that type of capital.

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?

The longer-term assets are still coming through SNH to be funded. More of the shorter term, they're utilizing their own cash.

Yes. I mean, generally, they've been managing to make sure they have maximum flexibility. The entire senior housing industry faces pressures, as you're well aware. And again, I think they're prudently managing their balance sheet carefully. And if it makes sense to sell an improvement back to us, we're happy to take it. We do look at the underwriting. They generally generate double-digit returns. It makes sense for everybody involved.

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

Yes. On the triple net leased portfolio, they have the 8 -- 6 of them complete, and they've completed 2 on the managed portfolio for us. And every place that they have put those in place have generated increased Medicare business. And it also helps -- they do take some Medicaid in certain locations, too, but it's primarily a motivation of bringing in more Medicare funding.

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

It should be all done this quarter. They were 85% complete as of year-end, and the remainder was expected to be done within this quarter.

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

Right. I mean, one place that we've seen the biggest impact negatively over the last year or so 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 records. So we would 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 it to become more widespread across the country. So a good part of it is preventative from losing anymore Medicaid business and generating and to build that book of business back up. So I mean, it's really -- it's part of the their master plan, so it'd be inappropriate for me to comment on the impact that they expect to see from it. But from ours, we're clearly seeing it in the managed portfolio where it's being implemented.

And our next question comes from Juan Sanabria with Bank of America.

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

Sure. Well, the first question on the revenue per available room -- peroxide room, the increases from people coming off -- the normal increases going in place for renewals has been pretty much between the 2% to 3% range. And it varies very much by market. Florida is our strongest market, and we're seeing 4% to 5% rate increases there. While other states like Arizona, the Phoenix market, it's more likely 0 to 1%. So you have to bring it back to the average, and we're pretty much seeing average of 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 closer to 3% to 5% rates coming in off the street for unoccupied units. But I -- as you can see from our most quarterly results, the actual rate increase was about 1.2% on a 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. Your question was on...

Was it on acquisition?

Acquisition. And again, it's opportunistic. If you look at this past year, it was 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 light 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're not going to stretch to the 5 and 6s for cap rates. So I think normal bread and butter will be a couple hundred million dollars, maybe $200 million this year and hopefully a little more sizable. I think you have a third question. Oh, private equity, you asked. We see private equity coming for the large deals, definitely. It's very difficult for the public REITs to compete against private equity transactions out there. But again, those are -- size in our market that we're pursuing are $10 million to $50 million per transaction. And we're really not seeing a lot of private equity in that particular space.

(Operator Instructions) The next question comes from Vikram Malhotra with Morgan Stanley.

Just wanted to look out maybe '18 and '19. You've done some nice capital recycling and taken advantage of maybe certain types of assets and 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 further recycling?

Well, not -- I mean, not that we can disclose. We haven't publicly announced anything. But we're 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 of, say, skilled nursing facilities and individual assets here and there, but I don't expect any major shift in the portfolio makeup. And again, really not even 15% of our portfolio is up in operations. So we like the triple net lease and having a bit of a buffer between us and the direct line of operations. So again, I don't expect that to change very much either.

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

We did not give a FAD payout. We don't as a rule. We -- in the supplemental, we provide all the components because different analysts calculate it in different ways. So we try to give 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've been pretty clear that our payout ratio is higher this year than it normally would be. We've invested fairly aggressively on our TRS, our 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 are.

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.

Thank you all for joining us today, and have a nice day. Thank you.

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