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Weaker performance in skilled nursing operations at Five Star Senior Living continuing care retirement communities, mirroring industry trends, “heavily influenced” a decline in rent coverage in the triple net lease seniors housing portfolio of Senior Housing Properties Trust (SNH), the real estate investment trust’s president and CEO, David Hegarty, said during a Tuesday fourth-quarter and full-year 2017 earnings call.

Occupancy across the 236 communities in the overall portfolio was 83.4% for the 12 months ended Sept. 30, down 40 basis points from the 12 months ended June 30, he said. Rent coverage was 1.21 times for the 12 months ended Sept. 30.

“The 10 communities with the largest decreases in rent coverage over sequential quarters included six CCRCs,” he said. “While independent living, assisted living and memory care revenues have been stable the past four quarters at our leased CCRCs, skilled nursing revenues continued to decline.”

Five Star is addressing challenges related to skilled nursing in two ways, Hegarty said. First, the company is implementing an electronic medical records platform across its communities.

“As of the third quarter, they had 85% of their freestanding and CCRC skilled nursing units fully converted and up and operational, and they plan to complete the rest by the end of the first quarter,” he said. “Having electronic medical records allows them to easily share outcomes with key referral sources, improves communication with physicians and is vital for participation in all the organized healthcare programs.”

The systems are especially important in places where managed care is growing in long-term care, such as Florida and Arizona, Hegarty said.

“And we expect this to become more widespread across the country,” he added. “So, a good part of it is preventative from losing anymore Medicare business and … to build that … business back up.”

Second, Hegarty said, Five Star is converting existing skilled nursing beds to private rehabilitation suites for its Rehab to Home program. Five Star has discussed this effort on its own calls. Related construction contributed to some of the rent coverage issues, Hegarty said.

“Medicare-eligible patients generally have options for shorter reallocation stays, and these units are attractive to those consumers,” he said. Five Star has completed approximately six Rehab to Home projects in SNH’s leased portfolio and two in the managed portfolio, Hegarty added. “Everyplace that they have put those in has generated Medicare business,” he said.

In November, as previously announced, SNH agreed to acquire six senior living communities from Five Star Senior Living for approximately $104 million. Five Star will manage the communities for the REIT, which acquired two of the communities in December, one in January and one in February. Closings for the remaining two communities are expected to happen before the end of the first quarter.

“The properties have potential growth opportunities,” Hegarty said. “Specifically, one of the Tennessee properties is located within a 5,000-acre planned active adult retirement community where we already own assisted living and memory care buildings.”

Hegarty said the REIT is developing a 91-unit independent living building at the location as well, and it already is 45% pre-leased.

In December, as previously announced, SNH agreed to sell to Welltower four senior living communities with a total of 1,619 living units that were leased to Sunrise Senior Living for $368 million. One sale was completed in December, and SNH said it expects closings for the remaining three senior living communities to occur by the end of the first quarter.

The deals enable the REIT “to realize meaningful value creation,” Hegarty said, adding that the transactions “exemplified the value of SNH’s portfolio that has not been recognized in the public market.”

Hegarty also suggested that the effects of the flu aren’t as apparent in the REIT’s portfolio compared with other REITs. In SNH’s managed portfolio, he said, “I think we had one week of impact from the flu and that was it, but we are seeing it affecting our first-quarter 2018 numbers, and I would say we have a half of dozen or so properties that have been impacted by the flu in the first two months of 2018.”

Regarding the managed portfolio in general, Hegarty said, “I really think that it’s probably the beginning of 2019 that we start to see normal, stabilized growth in revenue and earnings and so on.”