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Senior Housing Properties Trust  (NASDAQ:SNH)
Q4 2018 Earnings Conference Call
March 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Senior Housing Properties Trust Fourth Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, today's event is also being recorded.

And at this time, I would like to turn the conference over to Mr. Brad Shepherd, Senior Director of Investor Relations. Sir, please go ahead.

Brad Shepherd -- Senior Director, Investor Relations

Thank you. Welcome to Senior Housing Properties Trust call covering the fourth quarter and full year 2018 results.

Joining me today 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.

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, Friday, March 1, 2019. The Company undertakes no obligation to revise or publicly release the results of any revision to 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 operation or normalized FFO 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 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 now like to turn the call over to Jennifer.

Jennifer F. Francis -- President & Chief Operating Officer

Thank you, Brad. Good morning, and thank you for joining us as we discuss SNH's fourth quarter and 2018 annual results.

2018 was a stable year with regard to SNH's financial performance, demonstrated by our same property cash NOI remaining flat as compared to 2017. The year was highlighted by our ability to realize over $260 million in gains from the disposition of a senior living portfolio and reinvestment of a portion of the proceeds into medical office and life science buildings, a strategy I've discussed on prior calls. This investment activity produced cash NOI growth of 1.2% in 2018, despite our selling approximately $150 million more of assets that we purchased.

Our flat same property cash NOI performance in 2018 was accomplished despite our managed senior living portfolio same property cash NOI decreasing by 6.8% as compared to 2017. This was due to the growth in all of our other healthcare real estate segments on a same property basis, including 1.4% cash NOI growth from our triple net leased senior living portfolio. Despite this growth, we reported a decrease in rent coverage to 1.1 times for the 12 months ended September 30, 2018 for this segment and a decrease in coverage to 1.0 times for Five Star Senior Living leases.

In November, our largest tenant and operator of our senior living communities, Five Star Senior Living announced that there is substantial doubt about its ability to continue as a going concern. We are currently engaged in discussions with Five Star about a possible restructuring of our agreements to address its operating and liquidity issues. The boards of both SNH and Five Star have formed Special Committees comprised solely of independent trustees and directors, and they have engaged separate advisors to help facilitate these discussions.

As a result, there may be changes to our agreements with Five Star in the future. If there are any changes to our agreements with Five Star, our current expectations are that it could be announced within the next 60 days. Nevertheless, we cannot be sure that there will be any changes to our agreements with Five Star or whether Five Star will be able to continue as a going concern.

Furthermore, any changes to our agreements with Five Star may negatively impact our cash flows and possibly our distributions to shareholders in the future. Because of the ongoing nature of these discussions, we are not going to comment beyond these prepared statements or answer any questions on the potential, theoretical outcomes that may possibly occur. We will publicly announce the results of these discussions if and when they are completed.

Next, I'd like to recognize a few awards that some of our properties recently received. Last week, three of our managed senior living communities in Florida, Five Star Premier Residences of Hollywood, The Horizon Club in Deerfield Beach, and Five Star Premier residences of Boca Raton achieved J.D. Power senior living certification, the first of this certification ever to be given in the senior living industry. Five Star has partnered with J.D. Power to pilot there senior living certification program, which is designed to provide consumers with valuable information to make an informed decision when choosing a senior living community.

Similarly, a medical office building of ours located north of Atlanta received an award from the Building Owners and Managers Association International or BOMA in the fourth quarter. The Alpharetta Medical Center leased to one of the largest health systems in Georgia was awarded a BOMA 360 Designation for operational best practices in the commercial real estate industry. This award speaks to the high quality of our MOB building and the services provided by our MOB property manager, RMR Real Estate Services.

Now turning to some specifics on the performance of our managed senior living portfolio and our MOB portfolio for the quarter and the year. Our managed senior living portfolio's occupancy increased 30 basis points on a same property basis compared to the fourth quarter of last year, and increased 20 basis points in 2018. Average monthly rates from both comparative periods were down less than 1% on a same property basis. For 2018, this combination have increased occupancy and flat rates resulted in slightly positive revenue on a same-property basis compared to 2017.

A contributing factor to this result was the additional implementation of Five Star's revenue management system in our managed senior living communities throughout the year. By analyzing local market conditions and competitors' rates, Five Star has been able to become more nimble with competitive pricing therefore attracting more leads, resulting in increased move-ins. We are pleased with the progress that Five Star has made with the implementation of this program in our managed portfolio with a little more than half of our communities utilizing the program at this time. We look forward to its implementation across our entire senior living portfolio including the leased communities throughout 2019.

While data suggest that new construction starts are trending (technical difficulty) senior living supply continues to exceed demand and using this tool to determine rent at the micro market level should help them to continue to grow occupancy at the communities.

On the expense side, wages and benefits and repairs and maintenance accounted for approximately 60% of the decrease in our managed senior living portfolio same property cash NOI. One of the biggest challenges in this portfolio has been wage pressure across all employee types and fierce competition for quality leadership at a number of our managed senior living communities. Wages and benefits for the portfolio were up approximately 1% in 2018 on a same property basis, yet accounted for 30% of the reduction in same property cash NOI. Repairs and maintenance increased over 10% in 2018.

As we have discussed over the past several quarters, increased turnover costs are the result of our commitment to investing where needed to keep our units up to the quality standards of today's demand, and in line with new competition. From an investment standpoint, we are pleased with the performance of many of the senior living communities where we have invested capital throughout 2017 and 2018. One example of the success of our capital program is that Five Star Premier Residences of Yonkers in New York. Over the past few years, a major renovation of the community occurred. The combination of this investment and the incredible dedicated professionals that run this community at all levels have brought occupancy to over 95% from 70%.

Similarly, we invested capital at Five Star Premier Residences of Dallas. The capital invested combined with their strong team has occupancy at nearly 100% at year end, up from 83% pre-construction. Our MOB portfolio same property cash NOI increased 1% in the quarter compared to the fourth quarter of last year, and increased 80 basis points in 2018. Overall, occupancy at the end of the quarter was 94.5%, and tenant retention for the full year was close to 80%.

Last quarter, we mentioned two large tenants that we expect will vacate in 2019. The Scripps Research Institute and Reliant Medical Group. Reliant leases 362,000 square feet of medical office properties across 13 buildings in Central Massachusetts, and will be vacating at the expiration of its lease in May. These properties are not located in markets where we believe the capital investment required to position them to attract strong tenants would be accretive. As a result, we are in the process of marketing them for sale.

The three building 164,000 square foot property occupied by Scripps is located in the Torrey Pines submarket of San Diego, one of the three strongest life science market in the country. Scripps vacating provides us the rare opportunity to potentially reposition these buildings into state-of-the-art Class A life science buildings, with a higher return on invested capital than we would likely achieve if we were to acquire similar properties.

While we did not acquire any medical office or life science buildings after the first quarter of 2018, we've been extremely active in underwriting deals. The medical office and life science acquisitions we made toward the end of 2017 and in the first quarter of 2018 were ones that fit well into our existing portfolio, and we were able to achieve an extraordinary pricing for these quality assets.

We remain committed to our investment strategy of increasing the size of our medical office and life science portfolio, but we will continue to be patient and disciplined in doing so. In the meantime, we will continue to deploy capital in our existing medical office, life science and senior living properties, where we expect to see strong returns on capital invested.

Before I turn the call over to Rick for a more detailed discussion on financial results, I just wanted to mention in December Five Star announced the appointment of Katherine Potter as President and Chief Executive Officer. Katie has been with Five Star since 2012 serving as Executive Vice President and General Counsel. We are very excited about what Katie will bring to Five Star as a leader. I know that she will instill a culture of diligence, accountability and innovation at Five Star and we look forward to seeing all that will result from her leadership.

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

Richard W. Siedel -- Chief Financial Officer & Treasurer

Thank you, Jennifer, and good morning, everyone. Earlier today, we reported normalized FFO of $0.27 per share for the fourth quarter and $1.59 per share for the full year 2018. Both amounts include a business management incentive fee expense of $40.6 million paid to RMR, our external manager based on SNH's total return per share, exceeding the SNL U.S. REIT Healthcare index by approximately 9.6% over the last three years. This incentive fee was paid in cash in January of 2019.

Excluding the business management incentive fee, general and administrative expenses decreased $1.4 million or 11.5% for the fourth quarter compared to last year. This decrease was driven by a reduction in our base business management fee paid to RMR. As a reminder, our base business management fee is based on the lower of the historical cost of our real estate or our market capitalization. During the fourth quarter of 2018, SNH paid RMR $1.7 million less based on this formula, which we believe highlights the alignment of interests between our manager and our shareholders.

Our balance sheet at year end was generally comparable to where it was at the end of 2017. The most significant change was our closing on $500 million of 4.75% senior notes in early 2018 to term-out the unsecured revolving credit facility balance which had totaled $596 million at the end of 2017. These senior notes were primarily responsible for the $4.8 million increase in interest expense in the fourth quarter of 2018 compared to 2017.

We ended 2018 with just $139 million outstanding on our unsecured revolving credit facility, leaving us with $861 million of drawing capacity. We ended the year with total debt to gross assets of 42.4% and 6.0 times total debt to adjusted EBITDA, when excluding the incentive fee.

In the fourth quarter of 2018, we spent $29.4 million on capital expenditures, of which $15.3 million or 52% was considered recurring and included tenant improvements and leasing costs at our MOBs and building improvements at both our MOBs and manage senior living communities. On average, we spent approximately $1,400 per unit on building improvements at our managed senior living communities in 2018.

The remaining portion of our capital expenditures $14.1 million was spent on development and redevelopment projects split evenly between our MOBs and our managed senior living portfolio. As Jennifer commented earlier, we were able to fund the acquisitions we made in 2018 through our capital recycling plan.

In conclusion, we believe that 2019 will be a transitional year for SNH, with a focus on increasing our MOB segment as a percentage of our total portfolio providing strong asset management oversight at all of our properties, investing in our existing properties in markets where we can expect strong returns, and working to maximize the performance and value of our senior living portfolio.

That concludes our prepared remarks. Operator, please open up the line for questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Our first question today comes from Tayo Okusanya from Jefferies. Please go ahead with your question.

Tayo Okusanya -- Jefferies -- Analyst

Yes, good morning.

Jennifer F. Francis -- President & Chief Operating Officer

Good morning.

Tayo Okusanya -- Jefferies -- Analyst

In regards to lease expirations, you also have lease with Cedars-Sinai that's expiring I believe in 2019. Could you just tell us what the status of that is?

Jennifer F. Francis -- President & Chief Operating Officer

Sure. So Cedars is a tenant of ours and they've got a great deal -- a number of leases in that building, and so they've got staggered expiration. We expect Cedars to stay in that property for a long period, and their connected by a walkway between our buildings and the hospital, so we're expecting they will renew and we also expect that will likely be a roll-up in rent.

Tayo Okusanya -- Jefferies -- Analyst

Okay, that's helpful. And then in regards to the same-store pool and the performance this quarter, I appreciate your comments around supply still being an issue and also kind of operating expense headwinds. Could you just talk a little bit about whether performance during the quarter was also somewhat impacted by a lot of what's just going on generally with Five Star as a company?

Jennifer F. Francis -- President & Chief Operating Officer

I don't think it was. I really do think it's -- wages and benefits and just expenses being higher. We -- occupancy grew, and so, I mean, I think at a community level, I don't think there is a lot of insight or a lot of exposure to what's going on with Five Star.

Tayo Okusanya -- Jefferies -- Analyst

Okay, got it. And then with -- also with those assets, anything new on the skilled nursing side, which I knew that has kind of dragged the numbers down as well?

Jennifer F. Francis -- President & Chief Operating Officer

Yes. We are continuing with our marketing campaign on the stand-alone skilled nursing facilities, and so they are in varying stages of either negotiation or marketing. So that plan remains as we've discussed in the past, and we do have a disposition program in place.

Tayo Okusanya -- Jefferies -- Analyst

Okay. Thank you.

Jennifer F. Francis -- President & Chief Operating Officer

Thank you.

Operator

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

Drew Babin -- Robert W. Baird and Co. -- Analyst

Hey, good morning.

Jennifer F. Francis -- President & Chief Operating Officer

Good morning.

Drew Babin -- Robert W. Baird and Co. -- Analyst

I wanted to ask a question on the MOBs that were sold in Massachusetts, I assume those were the ones vacated by Reliant. Can you talk about the pricing on those on a trailing 12-month basis, and how that might kind of dictate or predict pricing on the rest of those assets?

Jennifer F. Francis -- President & Chief Operating Officer

You know, the pricing is -- these are properties that were occupied by Reliant for 20 years. So it's not -- I don't think that it's a cap rate discussion certainly, and it's -- these are local buyers who are interested in these properties. So it's -- there's not really much to say other than it's their properties that just didn't -- we didn't think investing capital and maintaining have made sense for the portfolio.

Drew Babin -- Robert W. Baird and Co. -- Analyst

Okay.

Richard W. Siedel -- Chief Financial Officer & Treasurer

The one thing I would add, when we file the 10-K later today, it will have a little bit more information. We did take an impairment on these assets as well when we determine that it wasn't worth spending the capital to try to restabilize them. So we took about $46 million of charges related to these particular assets and there will be disclosure on that in the 10-K.

Drew Babin -- Robert W. Baird and Co. -- Analyst

Okay. I'll look for that. And just one question on Scripps. I guess, can you give a little more detail about, as that space vacate, maybe the scope of the capital plans there kind of what the money might be spent on? And any way you can kind of quantify the markup in that market on rents, potentially once any renovations are completed?

Jennifer F. Francis -- President & Chief Operating Officer

Sure. We're still in the planning stages of those -- for those -- repositioning of those assets. So we still need -- we have a certain level of approvals that we go through before we kick off the -- actually kick off the redevelopment. But it would be -- if we go ahead with it, it would be a complete repositioning of the assets. Again Scripps has also been a tenant in those three buildings for 20 years. So the mechanicals, the lab equipments, it's all outdated. And in order to bring it up to a Class A, it's going to take some significant capital. Again, if we decide to move in that direction, we do expect that will see roll ups in rents from where they are currently -- from their current rents. It's a great market.

Drew Babin -- Robert W. Baird and Co. -- Analyst

Okay. That's all from me. Thank you.

Jennifer F. Francis -- President & Chief Operating Officer

Yes.

Operator

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

Bryan Maher -- B. Riley FBR -- Analyst

Yes. Good morning, Jennifer and Rick.

Jennifer F. Francis -- President & Chief Operating Officer

Good morning.

Bryan Maher -- B. Riley FBR -- Analyst

When we look at 2019, it seems like there's kind of a lot going on between the discussion with Five Star, which I'm not asking you to elaborate on. The potential for acquisitions and dispositions, and basically some blocking and tackling with some of the properties you've discussed on the call. Jennifer when you look at the year -- upcoming year, how would you kind of prioritize those things?

Jennifer F. Francis -- President & Chief Operating Officer

It's a good question, because they're all priorities. We've got a really deep bench here. The managers, RMR Group has a quite a deep bench. So I think not -- no one is prioritized over the other and we'll have different people working on different aspects of our challenges for the year. So everybody, it is will be a full-court press all around.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. And you and I have discussed this in the past, you know the name of the REIT Senior Housing Properties, but yet significant exposure to MOBs. How do you think that the REIT and/or RMR can do a better job of getting investors to focus on the valuable MOB portfolio that you guys have? Is it a matter of separating the two out? Is it renaming the REIT? Is it investor outreach? I mean, how do you get these shares out from these pretty depressed levels?

Jennifer F. Francis -- President & Chief Operating Officer

Yes. I mean investor outreach is obviously extremely important (inaudible) hit the road a lot last year. And I do spend a lot of time talking about the MOB portfolio. It's near and dear to my heart. It's a 12.6 million square feet. It's a big portfolio. You know, I think we've talked about the name change. I think that all of the things that you mentioned, it's getting out, it's talking about the strength of the portfolio, and just trying to get people to understand it a little better.

Bryan Maher -- B. Riley FBR -- Analyst

And then just lastly from me, you guys kind of had a home run when you did the Vertex Pharmaceuticals JV, I forget, a year, year and a half ago, any thoughts to doing something similar to that -- similar like that with maybe Cedars-Sinai?

Richard W. Siedel -- Chief Financial Officer & Treasurer

I personally think the Cedars buildings will be a great candidate for that, but we don't really have a use of proceeds at this point. So it wouldn't make sense to pursue it at this time. We've got some shorter-term challenges that we're working through. We do have $400 million of notes that will come due in May that we're preparing to repay on the revolver for now until our spreads tighten a little bit. The uncertainty related to Five Star, we don't think it's helping the spreads there. So we believe we will eventually go back to the market on the debt side, but it will likely be awhile after we removed some of the uncertainties that's out there. But, yes, at this point, I don't think there's any need for JV Capital.

Bryan Maher -- B. Riley FBR -- Analyst

Right. But if you were to find a, let's say, sovereign wealth fund, who is willing to do a JV with you on that property in an extremely low cap rate with where your shares are trading right now, that might be kind of a good arbitrage situation if you could do a JV in a low single-digit cap rate and then turn around buy your shares, which are extremely depressed relative to the peer group.

Richard W. Siedel -- Chief Financial Officer & Treasurer

Fair point. And we'll certainly run the numbers and discuss it with the Board.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. Thank you. That's all I have.

Jennifer F. Francis -- President & Chief Operating Officer

Thanks.

Operator

Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead with your question.

Michael Carroll -- RBC Capital Markets -- Analyst

Yes. Thanks. Jennifer I want to talk a little bit about Five Star's coverage ratios. I know that in the stop (ph) it says it's about one times right now on EBITDAR basis. But I know Five Star's results drops pretty handily in -- starting in the second quarter. So it's all including about six months of that. So where do you think or where should we assume the stabilized coverage ratio are -- ratios are for that portfolio?

Jennifer F. Francis -- President & Chief Operating Officer

Hard to say. I mean, I think, we weren't surprised that their coverage was at 1.0 as -- it's hard to speculate where they are going to be moving forward.

Michael Carroll -- RBC Capital Markets -- Analyst

But as we roll-in, I guess, the fourth quarter results or maybe the first quarter 2019 results. Is it fair to assume that those ratios would continue to drop from this level?

Jennifer F. Francis -- President & Chief Operating Officer

It's hard to say.

Richard W. Siedel -- Chief Financial Officer & Treasurer

Yes. Just based on the math, I mean, when we put Q4 in, we would expect that it will likely trend lower, just based on what we saw in our own TRS and our managed portfolio, but their call is next week and they'll release earnings at that point.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. And then Rick I know and I think Jennifer you too have said that there is a number of assets at Five Star that's generating negative EBITDA. So by simply selling those assets are giving them away you could see coverage improve. Can you kind of quantify how many of those assets are out there and those assets are being marketed today?

Richard W. Siedel -- Chief Financial Officer & Treasurer

As Jennifer mentioned, there are a number of those assets that are being marketed today. I think just quick metrics, I think something like the bottom 20 or so properties, which is a fairly small percentage of their portfolio. And generally, these are smaller in scale. I think if they were to just cut the losses there, it would uptick to 1.1 times on this trailing 12-month basis.

Michael Carroll -- RBC Capital Markets -- Analyst

So why haven't those assets been sold yet? Have they -- are you marketing them right now and expect to sell them soon? I guess, what's holding you back?

Richard W. Siedel -- Chief Financial Officer & Treasurer

We generally don't announce that until we've closed, but they are in various stages of marketing at this point.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. And then, I know we've been hearing a lot about the electronic medical record systems at Five Star. I think we've been hearing it for like the past three years. So you only rolled it out or Five Star only rolled it out of the -- for half the portfolio, I guess, what's taking so long there?

Richard W. Siedel -- Chief Financial Officer & Treasurer

No, electronic medical records is used everywhere. They're running in the SNF units. The half -- the little over half is related to the dynamic pricing model.

Jennifer F. Francis -- President & Chief Operating Officer

Yes. Revenue management. So the electronic medical records have been implemented in all of the skilled nursing facilities in our CCRCs and they're now moving forward in using them in the assisted living communities as well.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. So you just started in the assisted living communities that's what your prepared remarks were referring to?

Jennifer F. Francis -- President & Chief Operating Officer

No, I think that my prepared remarks, we were talking about revenue management, which is different. That's the dynamic pricing where you're looking at a kind of -- at a micro market level and adjusting rates for different types of rooms very regularly, similar to what is done in the hotels.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. And you're seeing good results from those right now, and do you think that will start showing up in the P&L as we move into 2019?

Jennifer F. Francis -- President & Chief Operating Officer

I think it will. Yes.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thanks.

Jennifer F. Francis -- President & Chief Operating Officer

Yes. Thank you.

Operator

And our next question comes from Todd Stender from Wells Fargo. Please go ahead with your question.

Todd Stender -- Wells Fargo -- Analyst

Hi, thanks. I know you don't want to talk about Five Star. But I think investors would like just a little more clarity maybe on what the delay is or maybe the perception of the delay in the restructuring, and your stock prices, I think feeling some of the impact today of a delay. Anything more behind that?

Jennifer F. Francis -- President & Chief Operating Officer

Thank you for your question. Unfortunately, we really can't talk about the discussions that are ongoing. I can't add any more color to what we said during the prepared remarks.

Todd Stender -- Wells Fargo -- Analyst

But maybe I guess in the next 60 days, is that a pretty good indication of the committees will be formed or decisions will be made, what's around that 60-day period?

Jennifer F. Francis -- President & Chief Operating Officer

Committees have been formed, discussions are ongoing. So the 60 days is we think that will have an announcement within the next 60 days. So the discussions are actively happening.

Todd Stender -- Wells Fargo -- Analyst

Okay. And if you can comment on what would happen, I guess, in the past we've seen SNH make loans to Five Star. Is that on the table other than maybe rent restructuring, maybe could you outline a couple of things that would be possibilities?

Jennifer F. Francis -- President & Chief Operating Officer

I can't. Just as I said, we're not going to comment on the discussions that are ongoing. We expect to have news that we'll announce publicly at some point in the next 60 days.

Todd Stender -- Wells Fargo -- Analyst

Okay. Excuse me, and then just lastly, because of that, I guess, 60-day period, our investments on hold, would you say, until the Five Star situation is handled?

Jennifer F. Francis -- President & Chief Operating Officer

No, I don't think that -- absolutely not, I think that we -- our acquisitions team is underwriting. I meet with them regularly. So they're looking at anything that -- everything really that hits the market. So no, we have not put acquisitions on hold.

Todd Stender -- Wells Fargo -- Analyst

Okay. Thank you.

Jennifer F. Francis -- President & Chief Operating Officer

Thanks.

Operator

And our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead with your question.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks. So I know you can't talk about what options you're considering as you deal with or you restructure potentially Five star and agreement you have. But can you maybe give us a sense of what you may not be considering? For example, is this really just dealing with Five Star, you're not sort of thinking about bringing a new operator, you're not just spinning it off, is there something that's just not on the table? Just so we have a sense of like there's so many wide outcomes here, like what are you just not focused on?

Richard W. Siedel -- Chief Financial Officer & Treasurer

I think as Jennifer said, I mean, there could be changes to our agreements with Five Star, but we're certainly not going to try to negotiate publically and we really can't comment on the potential theoretical outcomes that could possibly occur.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. And then just timing wise, you said 60 days, but what -- I'm assuming what you're looking at today, the reason you are sort of focused on this now and formed the committees now, is you don't see any real change in the underlying markets or improvement over the next, call it, 12 months to 18 months as opposed to like some of your peers that have talked about potential bottoming and moves in occupancy up by year-end?

Jennifer F. Francis -- President & Chief Operating Officer

Well, we have had moves in occupancy up. I think that the market has changed and that new construction starts have declined, but there is still a good number of properties that are being constructed. So, well -- so net reported, absorption high, inventory growth is higher still. So I think the market is at its bottom, but is it turning, it's hard to say. Again, the news looks good, but I think there is still time for some of the properties that are under construction to complete and open. So competition will stay high and wages and benefits are continuing --

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. And then just to get more color on the comment you made around risks to potential dividend distribution. I mean it seems like, whether you adjust rents, you sell the asset, you convert RIDEA, you change structure there will be have -- there will have to be an adjustment to the dividend just from a sustainability standpoint. Is that a fair comment?

Richard W. Siedel -- Chief Financial Officer & Treasurer

I mean, Jennifer said in prepared remarks that changes to our agreements may negatively impact our cash flows. And again, beyond that, we really can't comment on the potential theoretical outcomes that could possibly occur.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. And then just turning away from that, just on the MOB side, you made a reference to really wanting to grow the MOB platform. And as a percent of the business, just can you walk us through sort of it from here on, like how do you expect to do that? What are the various strategies over the next sort of 12 months to 24 months?

Jennifer F. Francis -- President & Chief Operating Officer

Well, you know, I've been saying that for sometime and the goal is to acquire MOB and life sciences properties. And we've been actively pursuing acquisitions, but unfortunately the cap rates are lower than we will pay. Our REITs -- properties are trading at numbers that are higher than we will pay. So we're going to continue to be diligent and patient, but look to acquire properties that fit well within our portfolio.

Richard W. Siedel -- Chief Financial Officer & Treasurer

And I will just add a few, if you look at --

Vikram Malhotra -- Morgan Stanley -- Analyst

I was just confused because you mentioned, in 2019 you'd like to grow that. That's why I was just trying to understand what -- like what you're doing?

Richard W. Siedel -- Chief Financial Officer & Treasurer

I mean you could look to 2018. In 2018, we recycled some senior living capital and reinvested into the MOB segment. We'd hope there's continued opportunities to do things like that.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Okay, great. Okay, thank you.

Jennifer F. Francis -- President & Chief Operating Officer

Sure. Thank you.

Operator

And ladies and gentlemen, with that we will end today's question-and-answer session. I'd like to turn the conference call back over to Jennifer Francis for any closing remarks.

Jennifer F. Francis -- President & Chief Operating Officer

Thank you for joining us on today's call. Operator, that concludes this call.

Operator

Ladies and gentlemen, that will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Duration: 36 minutes

Call participants:

Brad Shepherd -- Senior Director, Investor Relations

Jennifer F. Francis -- President & Chief Operating Officer

Richard W. Siedel -- Chief Financial Officer & Treasurer

Tayo Okusanya -- Jefferies -- Analyst

Drew Babin -- Robert W. Baird and Co. -- Analyst

Bryan Maher -- B. Riley FBR -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

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