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Senior Housing Properties Trust (DHC)
Q2Â 2019 Earnings Call
Aug. 08, 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 Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.
Michael Kodesch -- Director of Investor Relations
Thank you. Welcome to Senior Housing Properties Trust call covering the second quarter 2019 results. Joining me on today's call are Jennifer Francis, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answer session. I would like to note that the transcription, recording and retransmission of today's conference call are strictly prohibited without the prior written consent of Senior Housing. 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, Thursday, August 8, 2019. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC.
In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, EBITDA or adjusted EBITDA and cash basis net operating income or cash basis NOI. Reconciliations of net income attributable to common shareholders to these non-GAAP figures and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package found on our website at www.snhreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.
Now I'd like to turn the call over to Jennifer.
Jennifer F. Francis -- President and Chief Operating Officer
Thank you, Michael. Good morning to all of our shareholders and call participants. We're pleased to announce the company's second quarter 2019 results, as this transitional year remains on course to improve the sustainability of revenue, deliver long-term diversified growth and provide reliable returns for our shareholders moving into 2020 and beyond. The progress on completing the restructured business arrangements with our largest tenant, Five Star Senior Living, is advancing as planned. On June 11, 2019, Five Star reached an important milestone in completing this transaction with us. Five Star shareholders voted in favor of issuing Five Star common stock to SNH and SNH shareholders in satisfaction of one of the conditions to restructuring Five Star's business arrangements. Meanwhile, we continue to move through the requisite licensing applications with the states in which our assets are located, in order to transition the assets from triple net lease to RIDEA.
All in all, we remain on target for the January 1, 2020 conversion. In conjunction with the Five Star restructuring, we continue to make headway in our disposition strategy, which will both reduce our financial leverage and transform our portfolio to best position SNH for the future. We've previously mentioned that we expect to sell or have under agreement to sell assets valued at up to $900 million by the end of 2019 to reach our target leverage. There is abundant capital in both the medical office and senior living acquisitions markets, and we continue to feel comfortable that our pricing and timing goals are obtainable. As a reminder, the makeup of our disposition portfolio is weighted toward senior living communities and non-core properties in our MOB segment, and we are currently engaged with brokers on each property. Year-to-date, we've sold 13 assets from our medical office segment and 3 skilled nursing facilities for an aggregate gross sales price of approximately $40 million. Also, we currently have 2 medical office buildings and 32 senior living communities under agreement to sell for almost $160 million.
Additionally, there are 60 properties that are in various stages of the marketing process, which makes up the balance of our disposition program. Also, on July 1, we sold our entire equity stake in the RMR Group for approximately $99 million in net proceeds. This sale gives us increased flexibility in meeting our leverage goals. The second quarter's results reflected continued stability from our MOB segment and definitive transition in our senior living triple net leased portfolio. Earlier this morning, we reported an 11.1% decrease in consolidated same-property cash basis NOI in the second quarter compared to the same quarter last year. This decrease was primarily the result of the $19.4 million reduction in Five Star's rent for the full quarter, as agreed upon in the April transaction. Excluding the triple net leased senior living communities, same-property cash basis NOI was up 50 basis points compared to the same quarter last year. Same-property cash basis NOI in our MOB segment increased 3.4% in the second quarter compared to the same quarter last year, driven by a 7% increase in our life science properties, mainly the result of the base rent increase at our 1 million square foot property in the Seaport District of Boston.
This 15-year lease that commenced in 2013 has an 8% rent increase every five years, one of which took effect on January 1 of this year. The medical office portfolio was roughly flat to prior year quarter on the same-property cash basis. The 190 basis point drop in MOB same-property occupancy was due to 2 properties we've discussed on prior calls, a 140,000 square-foot property in the Minneapolis market and a 94,000 square-foot building located in Fremont, California in the San Francisco Bay Area. We're in advanced discussions with several prospects for the recently repositioned Minneapolis property and believe that we will release a large portion of it in the near term. Despite this temporary drop in occupancy, scheduled rent growth and strong releasing spreads almost entirely offset its effects on our medical office same-store NOI growth. SNH's MOB segment contains approximately 12.4 million square feet, comprised of 7.6 million square feet of medical office buildings and 4.7 million square feet of life science assets with a weighted average lease term of 6.4 years.
We generated strong leasing results during the quarter with over 300,000 square feet of new and renewal leases executed with a weighted average lease term of 15.3 years and a 6.2% roll-up in rent, and average leasing cost of just $0.50 per square foot per year. Furthermore, activity for potential new prospects and tenant renewals is strong, creating a robust leasing pipeline for vacant space or upcoming expirations. As stated in our prior quarters, plans are under way to redevelop the approximate 160,000 square foot rebuilding life science campus located in Torrey Pines within the greater San Diego area. Torrey Pines is considered one of the top markets for life sciences in the country, ranking third behind Boston and San Francisco. The property will undergo a full transformation to both the buildings and the site, which includes complete demolition down to the concrete and steel. Following its estimated completion in late 2020, the property will be a prominent Class A campus, offering flexible lab and office space as well as moderate amenities.
We are already in discussions with possible tenants for the buildings and anticipate an increase to the campus -- the overall campus square footage and a sizable roll-up in rent. Our managed senior living portfolio same-property occupancy decreased 40 basis points compared to the same period in the prior year. As we expected, same-property cash basis NOI was down, primarily due to increased salaries and wages, which were up $1.4 million on a same-property basis. As we've said, some of the biggest challenges in senior living are wage pressure across all employee types and fierce competition for quality leadership. To address this, Five Star has increased its commitment to its team members, which we see as a much needed strategic move. Additionally, high employee turnover in the past led to the increased use of costly contract labor. Five Star hopes to eliminate third-party labor entirely and replace it with higher quality permanent workforce.
We support Five Star's investment in its workforce and believe this will lead to even better services to residents and ultimately, increase occupancy and rent growth. Our triple net leased senior living portfolio had rent coverage of 1.52x for the 12 months ended March 31, 2019. This includes 1.55x coverage from the Five Star leases, which incorporates the new reduced rent resulting from the transaction agreement announced in April. We will continue to report the coverage of these leases until their transition to the new management agreements, which we expect will happen on January 1, 2020.
I'll now turn the call over to Rick to provide further discussions of our financial results for the quarter.
Richard W. Siedel -- Chief Financial Officer and Treasurer
Thank you, Jennifer, and good morning, everyone. I will be discussing some of the second quarter financial highlights beyond what Jennifer just covered. Normalized FFO for the second quarter of 2019 was $81 million or $0.34 per share, which was down $0.10 per share compared to the same quarter last year. $0.09 of the decrease in normalized FFO came from our triple net leased senior living communities, largely due to the full quarter effect of the reduction in Five Star's rent. In July, we declared a $0.15 per share dividend payable in the third quarter of 2019. The normalized FFO payout ratio for the second quarter based on our new dividend was approximately 44%. As we stated on our last call, this dividend is based on a target payout ratio of approximately 80% of projected cash available for distribution after the conversion of the leased communities and after selling assets to meet our leverage target.
General and administrative expenses decreased $20.2 million or almost 70% for the second quarter compared to last year as a result of our lower stock price and, therefore, a reduced base business management fee paid and no estimated 2019 incentive fee accrued to our manager. As our manager is currently being paid on total market capitalization and not the historical cost of assets, we believe this decrease demonstrates the strong alignment of interest between RMR and SNH shareholders as the reduced market capitalization driven by the reduced stock price in the second quarter translated to an annualized run rate of about $15.3 million less in base business management fees paid to RMR. We remind investors that this reduction in the base business management fee is not deferred or recapturable by RMR in any way. Turning to capital expenditures. We spent $9.6 million in recurring capex and $19.1 million on redevelopment this quarter.
The redevelopment capital is split between projects in our MOB and managed senior living portfolios. In our MOB segment, we completed a single-tenant to multi-tenant conversion of a property in Minnesota and made progress on the repositioning in Washington, D.C. that we've discussed on prior calls. In our managed senior living portfolio, the majority of the redevelopment capital expenditures are related to the 91-unit expansion of one of our properties in Tennessee that we've also discussed on prior calls. Going forward, we expect to see redevelopment capital expenditures in our MOB segment as we continue the repositioning in Washington, D.C. and as we begin to redevelop our property in Torrey Pines. In our senior living portfolios, we expect to spend about $1,500 per unit in recurring capital expenditures each year. We are assessing the additional capital needs of the properties being transitioned to the RIDEA structure and look forward to investing in these assets with the goal of growing occupancy and revenue and creating strong returns. Moving to our balance sheet.
We ended the second quarter with $48 million cash on hand and $690 million outstanding on our revolving credit facility. Subsequent to quarter end, we reduced our borrowings under our revolving credit facility to roughly $555 million as of today, using proceeds from asset sales and the sale of the RMR shares. The dividend yield on our investment in the RMR shares was 3% based on the June 30 closing price, and we were able to use the proceeds from the disposition of these shares to reduce debt that was costing us 3.6%. During our ownership period, we generated a 283% return on this investment. As of June 30, our reported debt-to-adjusted EBITDA was 6.9x and debt-to-gross assets was just under 43%. As mentioned in previous calls, we expect our debt-to-adjusted EBITDA to peak during the third quarter of 2019. We plan to have assets up to $900 million sold or under agreement to sell by the end of the year, in order to reduce debt-to-adjusted EBITDA to roughly 6x or lower.
That concludes our prepared remarks. Operator, please open up the line for questions.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Michael Carroll of RBC Capital Markets. Please go ahead.
Jason R. Idoine -- RBC Capital Markets -- Analyst
Guys. Good moarning. This is Jason on for Mike. Got a question on the $900 million in asset sales. So is the RMR stake included in that?
Jennifer F. Francis -- President and Chief Operating Officer
No. We've identified -- we've actually, as I said in the past, identified $1.2 billion in assets, so we can hit that $900 million disposition target. The RMR group share sales certainly helps us create flexibility, but we still are on target to sell $900 million in assets.
Jason R. Idoine -- RBC Capital Markets -- Analyst
Okay, got it. And then how do you guys think about senior housing supply moving forward into 2020 and 2021?
Jennifer F. Francis -- President and Chief Operating Officer
Well, kind of turning to the next data, construction starts are continuing to trend lower. That doesn't mean that there isn't still inventory growth, there is. But I think that we're happy to see that construction starts are trending lower. Hopefully, I think it's probably been 5 quarters, 4 or 5 quarters that, that trend has been happening. So hopefully, that will continue on.
Jason R. Idoine -- RBC Capital Markets -- Analyst
Got it. And then I was wondering what your expectations are for the shop in 2020? So if you have construction starts trending lower paired with the elevated labor costs, how do those 2 things balance out? And then what are your expectations for the portfolio?
Richard W. Siedel -- Chief Financial Officer and Treasurer
Jason, this is Rick. I hope we've been fairly clear or transparent that we anticipated double-digit declines in NOI in 2019, and that we expected some continued pressure in 2020. We do -- we have modeled it a little flatter. And just to go a little further into that new supply, within our markets, the current TRS portfolio, we actually saw slightly higher inventory growth this quarter than NIC did. And as a result, that resulted in the 40 basis point decline in occupancy. So we are really happy and confident in the things that Five Star's new management team are doing and investing in the portfolio and the workforce. And we believe they're doing the right things to turn the business around, and it's very much in line with our expectation so far.
Jason R. Idoine -- RBC Capital Markets -- Analyst
Thank you guys.
Operator
The next question comes from Todd Stender of Wells Fargo. Please go ahead.
Todd Stender -- Wells Fargo Securities -- Analyst
Thanks. Just to go back to the disposition volume you're expecting. The language in the release suggests that you may sell or have under contract. Does that suggest that some of that $900 million may bleed into 2020, just from a timing basis?
Jennifer F. Francis -- President and Chief Operating Officer
Thanks, Todd, for your question. Yes, we do think that we'll be under agreement, we'll have closed on a big chunk, but will be under agreement to close by year-end. That's really due to licensing issues in the senior living space. So we -- we're -- with the transition from triple net to RIDEA, SNH is getting licensed in all the -- for all of the senior living communities, and we don't want to put that licensing at risk. And so we've decided that, while we're still marketing those assets, we expect that will be under agreement and then the closing will happen after the first of the year.
Todd Stender -- Wells Fargo Securities -- Analyst
Okay. And then in addition to the $900 million, so there's another $120 million. Is that purely SNFs? And is that in your same timing expectations?
Richard W. Siedel -- Chief Financial Officer and Treasurer
The SNFs are included in our $900 million for the most part, and the vast majority of them are already under agreement. But we've had some progress selling a few, and we expect more to close throughout the end of the -- throughout the rest of this year.
Todd Stender -- Wells Fargo Securities -- Analyst
Okay. And then, Rick, to stick with you. If your, I guess -- on a leverage basis, I guess, it's debt-to-EBITDA will peak this quarter. Does that suggest that timing for dispositions could be sooner than later and because you're going to be using the disposition proceeds to pay down your line?
Richard W. Siedel -- Chief Financial Officer and Treasurer
We will. I think we're likely to have a lot of properties under agreement at the end of the third quarter. It won't surprise me if we have a lot of Q4 closings though. We know a lot of folks are very interested in our execution on our plan. And as Jennifer said, we're very confident that we'll be able to execute as we had planned. But yes, I think from an overall leverage metrics and what we'll report, leverage will peak sometime in Q3. If we can close some of these properties in September versus October, we'll -- we may report lower leverage. But if we wind up with October closings, it will likely peak at $930 million.
Operator
Next question comes from Bryan Maher of B. Riley FBR. please go ahead.
Bryan Maher -- B. Riley FBR Inc -- Analyst
Oh hi. Good morning. Kind of a bigger picture question. When we look at occupancy trends, a lot of the calls we get is what's going on with senior living occupancy in general in the face of new supply. And when we look at your supplemental, we see modest, but still increases for like the last 3 quarters or so, kind of around that 84% blended all in. What is, in your view, kind of the optimal level for senior living occupancy for the assets that you own?
Jennifer F. Francis -- President and Chief Operating Officer
We'd love to see them at 90%. I think that assisted living is dragging the senior living industry down because assisted living is across in all -- all ownership is at an all-time low and independent living, I think, across all ownerships is at about 90%. This is according to NIC data. So if we could pull assisted living up a bit, I think 90% would be a good target.
Bryan Maher -- B. Riley FBR Inc -- Analyst
And how do you weigh because we have noticed also -- there's quarters where rates going up and maybe occupancy is going down a little bit. What type of flexibility do your properties have in managing the rate occupancy variables?
Jennifer F. Francis -- President and Chief Operating Officer
Well, I think that Five Star has been working on revenue management across the portfolio and trying to get that rolled out. And that will give them a great deal of flexibility. And as properties become more occupied, you're able to push rate a bit more. You're also with revenue management able to be a little more dynamic in what you're charging for different types of units across the community. So I think if that continues, just keeping an eye on the market and then the internal market within the communities will help them to hopefully push occupancy and then push rate.
Bryan Maher -- B. Riley FBR Inc -- Analyst
So that's basically a decentralized decision at the property level? Or where along the management food chain are those decisions really being made?
Jennifer F. Francis -- President and Chief Operating Officer
I think it's both local and within corporate, it's a combination of the 2.
Bryan Maher -- B. Riley FBR Inc -- Analyst
Okay. And then shifting gears for a minute over to the Five Star transition. What are the -- would you consider the major hurdles between now and January 1 to get that done? And is there any risk that it doesn't get done on January 1 because I think I recall you guys saying it's kind of like an all or none? If it doesn't happen January 1 of 2020, I think it's pushed out to January 1 of 2021. Is that all still correct?
Jennifer F. Francis -- President and Chief Operating Officer
It is. There were 2 hurdles, really. And the first one was the vote that has already occurred, Five Star shareholder vote. And so that hurdle -- that milestone has been met. The next is licensing the communities with the triple net lease structure, the operator is licensed in the communities and with the RIDEA structure, the -- we, SNH, will be licensed. And so we have a team of experts that are working on that licensing now. And so we feel -- still feel confident that, that we'll hit that milestone as well and be able to have this transition happen at year-end.
Bryan Maher -- B. Riley FBR Inc -- Analyst
Okay. And then just last for me. I think you made the comment, Jennifer, that there was kind of a lot of money out there that gives you confidence you'll be able to get the $900 million sold. Who are the most profound buyers you're running into when you're selling and marketing these assets?
Jennifer F. Francis -- President and Chief Operating Officer
Yes, I think it's across the spectrum. There's a -- I think that there are a lot of private operators or private buyers with operators in hand. We're seeing a lot of that. REITs are still a buyer out there and REITs with a manager in hand or maybe some kind of small JV partnership with an operator. There's still private equity out there. But I think it's the private buyers and the REITs.
Bryan Maher -- B. Riley FBR Inc -- Analyst
Okay. Thanks. That's off to me.
Jennifer F. Francis -- President and Chief Operating Officer
Thank you.
Operator
The next question comes from Bruce Drew Babin of Baird. Please go ahead.
Bruce Babin -- Baird -- Analyst
Good morning. A question on -- if you kind of forecast different scenarios for RIDEA fundamentals or senior housing fundamentals into next year, it would sound like the $900 million in dispositions is sufficient to keep leverage down in a scenario where RIDEA senior housing probably gets less bad and maybe gets closer to flat. Are there any scenarios you're underwriting internally, where the fundamentals remain down high single digits year-over-year next year? Might that necessitate more dispositions to keep leverage low, presuming that remaining investment-grade is a high priority?
Richard W. Siedel -- Chief Financial Officer and Treasurer
We have certainly modeled it a number of ways, and we feel like we've been fairly conservative with what we've talked about publicly. Again, we don't officially give guidance, but we've tried to be as transparent as possible about expecting double-digit declines this year and kind of flat into next year. So we do take our ratings very seriously. And I know the rating agencies, in particular, are looking to see us execute on our plan. And we still are very confident that we'll be able to do that. Again, I don't think I can stress enough how excited we are about the things that Five Star is doing to kind of turn the business around. Again, also encouraged by some of the slowdown in new construction starts. But no, I don't think we'll need to sell more assets. I mean I think we will have an ongoing regular capital recycling program, but that will be more to fund external growth accretively versus bringing our leverage back in line.
Jennifer F. Francis -- President and Chief Operating Officer
I just like to follow on that, if I may. Rick was saying that we're pleased with what Five Star is doing. They just announced a new CEO or COO, that's been hired. So the new senior management team there with the new CEO, now a new COO, they have a new CFO. I might have talked about this before, but it's a whole new team there. And we're really encouraged by the progress we think they can make with that new senior management team.
Bruce Babin -- Baird -- Analyst
And one more for me. Just circling back to the Torrey Pines property and talking about there being a roll-up upon reoccupancy of that property. Is that on a GAAP basis relative to the prior lease? Or -- I know it was a long-term lease on the prior one that maybe had higher expiring cash rents. How do you expect kind of just on a cash basis, initial rents to trend relative to where scripts expired at?
Jennifer F. Francis -- President and Chief Operating Officer
I've been looking at the GAAP numbers, and it's a substantial roll-up in GAAP rents. I think it's probably flat in cash, but we tend to look at it in a GAAP basis. And again, rents are really ticking up out there. It seems like every quarter, rents are getting pushed up.
Operator
And we have a follow-up from Todd Stender of Wells Fargo. Please go ahead.
Todd Stender -- Wells Fargo Securities -- Analyst
Thanks. Just back to the state licensing. You guys need that to participate in the RIDEA. And is it state by state, so it may not necessarily be an all or none? Can you maybe just kind of flesh that out a little bit?
Jennifer F. Francis -- President and Chief Operating Officer
It is state by state, but it -- we are pushing very hard to have it be all. There's certain timing expectations in how long it takes by state, and our team is very tied into when those applications need to be filed in order to get them in time. So we are really pushing for it to be an all -- getting licensed in all other communities.
Richard W. Siedel -- Chief Financial Officer and Treasurer
That's right. There are some contingency plans in place. We do have some flexibility to the extent it was just a property or 2 or a small list of them. But we are, as Jennifer said, really pushing and planning to get it all done by the end of the year.
Todd Stender -- Wells Fargo Securities -- Analyst
Is that something you'll announce as they happen? Or that's something we just hear on conference calls, I guess, on a quarterly basis?
Richard W. Siedel -- Chief Financial Officer and Treasurer
I mean we can report on progress or if we -- I guess, really, all the licenses we expect to be effective 1/1/20. And if there were to be a bump in the road that was significant, we would certainly talk about it, but I really can't envision that scenario right now.
Todd Stender -- Wells Fargo Securities -- Analyst
But under a positive acceptance or you get the license, would you release that information, I guess -- or announce it?
Richard W. Siedel -- Chief Financial Officer and Treasurer
The license -- we're applying for licenses that will take effect on 1/1. So...
Jennifer F. Francis -- President and Chief Operating Officer
So for instance, if we know that it takes 120 days to get a license, then they're -- they're scheduling that application so that they're applying a few days before that 120 days. So I think that the goal isn't to apply early and get licensed in November. I think the goal is to get licensed so that it lines up with the end of the year, the beginning of 2020.
Todd Stender -- Wells Fargo Securities -- Analyst
Got it. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Francis for any closing remarks.
Jennifer F. Francis -- President and Chief Operating Officer
Thank you, and thank you for joining us on our second quarter earnings call. We've an active quarter of investor events coming up, including non-deal roadshows in Chicago, New York and the Mid-Atlantic, in addition to attending NIC and the BMO Real Estate Conferences. We look forward to seeing many of you at these events. Thank you.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Michael Kodesch -- Director of Investor Relations
Jennifer F. Francis -- President and Chief Operating Officer
Richard W. Siedel -- Chief Financial Officer and Treasurer
Jason R. Idoine -- RBC Capital Markets -- Analyst
Todd Stender -- Wells Fargo Securities -- Analyst
Bryan Maher -- B. Riley FBR Inc -- Analyst
Bruce Babin -- Baird -- Analyst
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