**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

**FORM 10-Q**

**x****         ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

**For the quarterly period ended September 30, 2006**

**OR**

**o****          ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Commission File Number 1-15319**

**SENIOR HOUSING PROPERTIES TRUST**

| **Maryland**             | ** ** | **04-3445278**                     |
|--------------------------|------------|------------------------------------|
| (State of  Organization) |       | (IRS Employer  Identification No.) |

 

**400 Centre Street, Newton, Massachusetts 02458**

**617-796-8350**

Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has been subjectto such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act.  (Check one):
| Large Accelerated  Filer  x |   | Accelerated Filer   o |   | Non-Accelerated Filer   o |
|---------------------------------------|--------|--------------------------------------|--------|------------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  x

Number ofregistrant’s common shares outstanding as of November 8, 2006:  71,859,527.

 

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SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

September 30, 2006

INDEX
| PART I  |   | Financial Information                                                                            |   |   |
|---------|--------|--------------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                             |   |   |
| Item 1. |   | Financial Statements  (unaudited)                                                                |   |   |
|    |   |                                                                                             |   |   |
|    |   | Consolidated Balance  Sheet – September 30, 2006 and December 31, 2005                      |   |   |
|    |   |                                                                                             |   |   |
|    |   | Consolidated  Statement of Income – Three and Nine Months Ended September 30, 2006 and 2005 |   |   |
|    |   |                                                                                             |   |   |
|    |   | Consolidated  Statement of Cash Flows – Nine Months Ended September 30, 2006 and 2005       |   |   |
|    |   |                                                                                             |   |   |
|    |   | Notes to  Consolidated Financial Statements                                                      |   |   |
|    |   |                                                                                             |   |   |
| Item 2. |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |   |   |
|    |   |                                                                                             |   |   |
| Item 3. |   | Quantitative  and Qualitative Disclosures about Market Risk                                      |   |   |
|    |   |                                                                                             |   |   |
| Item 4. |   | Controls and  Procedures                                                                         |   |   |
|    |   |                                                                                             |   |   |
|    |   | Warning  Concerning Forward Looking Statements                                                   |   |   |
|    |   |                                                                                             |   |   |
|    |   | Statement  Concerning Limited Liability                                                          |   |   |
|    |   |                                                                                             |   |   |
| PART II |   | Other Information                                                                                |   |   |
|    |   |                                                                                             |   |   |
| Item 1. |   | Legal Proceedings                                                                                |   |   |
|    |   |                                                                                             |   |   |
| Item 2. |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                     |   |   |
|    |   |                                                                                             |   |   |
| Item 5. |   | Other Information                                                                                |   |   |
|    |   |                                                                                             |   |   |
| Item 6. |   | Exhibits                                                                                         |   |   |
|    |   |                                                                                             |   |   |
|    |   | Signatures                                                                                       |   |   |

 

*In this Quarterly Report on Form10-Q, the terms “SNH”, “Senior Housing”, “the Company”, “we”, “us” and “our”refer to Senior Housing Properties Trust and its consolidated subsidiaries,unless otherwise noted.*

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SENIOR HOUSING PROPERTIES TRUST

**PARTI.  Financial Information**

**Item 1.       Financial Statements**

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)
| ** **                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                            | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                |       |                   |       |                  |       |
| Real estate properties,  at cost:                                                                     |       |                   |       |                  |       |
| Land                                                                                                  |       | $                      | 198,828    |                  | $          | 185,819 |   |
| Buildings  and improvements                                                                           |       | 1,568,219              |       | 1,500,350             |       |
|                                                                                                  |       | 1,767,047              |       | 1,686,169             |       |
| Less  accumulated depreciation                                                                        |       | 265,065                |       | 239,031               |       |
|                                                                                                  |       | 1,501,982              |       | 1,447,138             |       |
|                                                                                                  |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                            |       | 1,527                  |       | 14,642                |       |
| Restricted cash                                                                                       |       | 21,860                 |       | 2,529                 |       |
| Deferred financing  fees, net                                                                         |       | 7,409                  |       | 9,968                 |       |
| Other assets                                                                                          |       | 26,967                 |       | 25,371                |       |
| Total assets                                                                                          |       | $                      | 1,559,745  |                  | $          | 1,499,648 |   |
|                                                                                                  |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                            |       |                   |       |                  |       |
| Unsecured revolving  bank credit facility                                                             |       | $                      | 222,000    |                  | $          | 64,000 |   |
| Senior unsecured notes  due 2012 and 2015, net of discount                                            |       | 341,634                |       | 394,018               |       |
| Junior subordinated  debentures due 2041                                                              |       | —                 |       | 28,241                |       |
| Secured debt and  capital leases                                                                      |       | 78,841                 |       | 70,141                |       |
| Accrued interest                                                                                      |       | 8,598                  |       | 13,089                |       |
| Other liabilities                                                                                     |       | 14,239                 |       | 12,182                |       |
| Total liabilities                                                                                     |       | 665,312                |       | 581,671               |       |
|                                                                                                  |       |                   |       |                  |       |
| Commitments and  contingencies                                                                        |       |                   |       |                  |       |
|                                                                                                  |       |                   |       |                  |       |
| Shareholders’ equity:                                                                            |       |                   |       |                  |       |
| Common  shares of beneficial interest, $0.01 par value:                                               |       |                   |       |                  |       |
| 80,000,000  shares authorized, 71,859,527 and 71,812,227 shares issued and outstanding,  respectively |       | 718                    |       | 718                   |       |
| Additional  paid-in capital                                                                           |       | 1,094,125              |       | 1,093,480             |       |
| Cumulative  net income                                                                                |       | 310,966                |       | 267,196               |       |
| Cumulative  distributions                                                                             |       | (516,949               | )          | (447,289              | )          |
| Unrealized  gain on investments                                                                       |       | 5,573                  |       | 3,872                 |       |
| Total  shareholders’ equity                                                                      |       | 894,433                |       | 917,977               |       |
| Total liabilities and  shareholders’ equity                                                      |       | $                      | 1,559,745  |                  | $          | 1,499,648 |   |

 

*See accompanying notes.*

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SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(in thousands,except per share amounts)

(unaudited)
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                             |       |                             |       |                            |       |   |   |   |   |
| Rental income                         |       | $                                | 41,983     |                            | $          | 39,506 |   | $ | 123,727 |   | $ | 117,489 |   |
| Interest and other income             |       | 334                              |       | 738                             |       | 1,034 |   | 1,588 |   |
| Total revenues                        |       | 42,317                           |       | 40,244                          |       | 124,761 |   | 119,077 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Expenses:                             |       |                             |       |                            |       |   |   |   |   |
| Interest                              |       | 11,833                           |       | 11,911                          |       | 34,751 |   | 34,585 |   |
| Depreciation                          |       | 10,978                           |       | 10,923                          |       | 32,631 |   | 32,428 |   |
| General and administrative            |       | 4,088                            |       | 3,281                           |       | 10,870 |   | 9,762 |   |
| Impairment of assets                  |       | —                           |       | —                          |       | 1,420 |   | — |   |
| Loss on early extinguishment of debt  |       | —                           |       | —                          |       | 1,319 |   | — |   |
| Total expenses                        |       | 26,899                           |       | 26,115                          |       | 80,991 |   | 76,775 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Income from continuing operations     |       | 15,418                           |       | 14,129                          |       | 43,770 |   | 42,302 |   |
| Gain on sale of property              |       | —                           |       | —                          |       | — |   | 717 |   |
| Net income                            |       | $                                | 15,418     |                            | $          | 14,129 |   | $ | 43,770 |   | $ | 43,019 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding   |       | 71,824                           |       | 68,543                          |       | 71,818 |   | 68,525 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted earnings per share: |       |                             |       |                            |       |   |   |   |   |
| Income from continuing operations     |       | $                                | 0.21       |                            | $          | 0.21 |   | $ | 0.61 |   | $ | 0.62 |   |
| Gain on sale of property              |       | —                           |       | —                          |       | — |   | 0.01 |   |
| Net income                            |       | $                                | 0.21       |                            | $          | 0.21 |   | $ | 0.61 |   | $ | 0.63 |   |

 

*Seeaccompanying notes*.

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SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(in thousands)(unaudited)
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                                            | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                |       |                            |       |   |   |
| Net income                                                                            |       | $                               | 43,770     |   | $ | 43,019 |   |
| Adjustments to reconcile net income to cash provided  by operating activities:        |       |                            |       |   |   |
| Depreciation                                                                          |       | 32,631                          |       | 32,428 |   |
| Impairment of assets                                                                  |       | 1,420                           |       | — |   |
| Loss on early  extinguishment of debt                                                 |       | 1,319                           |       | — |   |
| Gain on sale of  properties                                                           |       | —                          |       | (717 | ) |
| Amortization of  deferred financing fees and debt discounts                           |       | 1,355                           |       | 1,728 |   |
| Change in assets and  liabilities:                                                    |       |                            |       |   |   |
| Restricted cash                                                                       |       | 369                             |       | 3,675 |   |
| Other assets                                                                          |       | 107                             |       | 2,975 |   |
| Accrued interest                                                                      |       | (4,491                          | )          | (2,158 | ) |
| Other liabilities                                                                     |       | 2,702                           |       | 1,259 |   |
| Cash provided by  operating activities                                                |       | 79,182                          |       | 82,209 |   |
|                                                                                  |       |                            |       |   |   |
| Cash flows from  investing activities:                                                |       |                            |       |   |   |
| Acquisitions                                                                          |       | (78,921                         | )          | (35,486 | ) |
| Proceeds from sale of  real estate                                                    |       | —                          |       | 4,600 |   |
| Mortgage financing  provided                                                          |       | —                          |       | (24,000 | ) |
| Mortgage financing  repaid                                                            |       | —                          |       | 24,000 |   |
| Cash used for investing  activities                                                   |       | (78,921                         | )          | (30,886 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash flows from  financing activities:                                                |       |                            |       |   |   |
| Proceeds from  borrowings on revolving bank credit facility                           |       | 179,300                         |       | 79,000 |   |
| Repayments of  borrowings on revolving bank credit facility                           |       | (41,000                         | )          | (57,000 | ) |
| Repayment of senior  notes                                                            |       | (52,500                         | )          | — |   |
| Repayment of junior  subordinated debentures                                          |       | (28,241                         | )          | — |   |
| Repayment of other debt                                                               |       | (1,275                          | )          | (5,544 | ) |
| Deferred financing fees                                                               |       | —                          |       | (3,550 | ) |
| Distributions to  shareholders                                                        |       | (69,660                         | )          | (65,782 | ) |
| Cash provided by (used  for) financing activities                                     |       | (13,376                         | )          | (52,876 | ) |
|                                                                                  |       |                            |       |   |   |
| Decrease in cash and  cash equivalents                                                |       | (13,115                         | )          | (1,553 | ) |
| Cash and cash  equivalents at beginning of period                                     |       | 14,642                          |       | 3,409 |   |
| Cash and cash  equivalents at end of period                                           |       | $                               | 1,527      |   | $ | 1,856 |   |
|                                                                                  |       |                            |       |   |   |
| Supplemental cash flow  information:                                                  |       |                            |       |   |   |
| Interest paid                                                                         |       | $                               | 37,890     |   | $ | 35,015 |   |
|                                                                                  |       |                            |       |   |   |
| Non-cash investing  activity:                                                         |       |                            |       |   |   |
| Increase in capital  lease assets                                                     |       | $                               | (9,975     | ) | $ | — |   |
|                                                                                  |       |                            |       |   |   |
| Non-cash financing  activities:                                                       |       |                            |       |   |   |
| Increase in capital  lease obligations                                                |       | $                               | 9,975      |   | $ | — |   |
| Issuance of common  shares                                                            |       | 645                             |       | 657 |   |
| Borrowing under revolving credit facility to fund  restricted cash for an acquisition |       | 19,700                          |       | — |   |

 

*See accompanying notes.*

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SENIOR HOUSING PROPERTIES TRUST

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

**Note1.  Basis of Presentation**

The accompanyingconsolidated financial statements of Senior Housing Properties Trust and itsconsolidated subsidiaries have been prepared without audit.  Certain information and footnote disclosuresrequired by accounting principles generally accepted in the United States forcomplete financial statements have been condensed or omitted.  We believe the disclosures made are adequateto make the information presented not misleading.  However, the accompanying consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes contained in our Annual Report on Form 10-K forthe year ended December 31, 2005.  In theopinion of our management, all adjustments, which include only normal recurringadjustments considered necessary for a fair presentation, have beenincluded.  All intercompany transactionsand balances between us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are notnecessarily indicative of the results that may be expected for the full year.

**Note2.  Real Estate Properties**

At September 30,2006, we owned 193 properties located in 32 states.

During the secondquarter, we entered into a new lease with HealthQuest, Inc., or HealthQuest,for three senior living properties in South Dakota operated by HealthQuest. Thenew lease is effective July 1, 2006 and expires in 2016.  HealthQuest has one ten-year renewal option.The rent payable to us will average $1.3 million per year during the initiallease term; although it will commence at $1.2 million per year and thenincrease during the lease term.  Otherlease terms are substantially the same as those in our prior lease with thistenant.

On August 31,2006, we purchased from an unaffiliated third party, five senior livingproperties with a total of 783 units for $61.5 million.  Residents pay one hundred percent of the chargesat four of these properties and 70% of the charges at one of the propertieswith their private resources.  We addedthese properties to our combination lease for 106 properties with Five StarQuality Care, Inc., or Five Star, that has a current term expiring in2020.  The annual rent under thiscombination lease increased by $5.0 million. Percentage rent based on increases in gross revenues at these propertieswill commence in 2008.

As of September30, 2006, we owned three nursing home properties that are held for sale.  During the second quarter, we recorded animpairment charge of $1.4 million to reduce the carrying value of these assetsheld for sale to their estimated fair values, less costs to sell, of $6.9million.

During the ninemonths ended September 30, 2006, pursuant to the terms of our existing leaseswith Five Star, we purchased $16.8 million of improvements made to ourproperties leased to Five Star, and, as a result, the annual rent payable to usby Five Star increased by an average of 10% of the amounts invested, or $1.7million.

**Note3.  Unrealized Gain on Investments**

On September 30,2006, we owned one million common shares of HRPT Properties Trust, or HRPT, and35,000 common shares of Five Star, which are carried at fair market value inOther Assets on our Consolidated Balance Sheet. The Unrealized Gain on Investments shown on our Consolidated BalanceSheet represents the difference between the market prices of such shares onSeptember 30, 2006 ($11.95 and $10.76 per share, respectively) and their coston the dates they were acquired ($6.50 and $7.26 per share, respectively).

4

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**Note  4.  ComprehensiveIncome**

The following is areconciliation of net income to comprehensive income for the three and ninemonths ended September 30, 2006 and 2005 (dollars in thousands):
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                               |       | $                                                    | 15,418     |                                                | $          | 14,129 |   | $ | 43,770 |   | $ | 43,019 |   |
| Other  comprehensive income:             |       |                                                 |       |                                                |       |   |   |   |   |
| Change in unrealized gain on investments |       | 379                                                  |       | (34                                                 | )          | 1,701 |   | (475 | ) |
| Comprehensive income                     |       | $                                                    | 15,797     |                                                | $          | 14,095 |   | $ | 45,471 |   | $ | 42,544 |   |

 

**Note  5.  Indebtedness**

We have a $550.0 million,interest only, unsecured revolving bank credit facility. Our revolving bankcredit facility matures in November 2009 and may be extended at our option toNovember 2010 upon our payment of an extension fee. The interest rate (6.32% atSeptember 30, 2006) is LIBOR plus a premium. As of September 30, 2006, $222.0million was outstanding and $328.0 million was available under this facility.

OnJanuary 9, 2006, we redeemed $52.5 million of senior notes and paid aredemption premium of $4.1 million, which had been accrued as of December 31,2005, plus accrued, but unpaid interest.

OnJune 15, 2006, we redeemed all $28.2 million of our junior subordinateddebentures at par plus accrued, but unpaid interest.  As a result, we recognized a loss on earlyextinguishment of debt of $1.3 million, which was the unamortized deferredfinance costs related to the debentures.

Wehave two properties that we lease from an unaffiliated third party and accountfor as capital leases.  During the secondquarter, we amended these leases to extend the lease terms from 2016 to 2026and to add a purchase option.  Thecurrent rent payable did not change, but scheduled increases will take effectbeginning in 2012. The amended lease meets the criteria of a capital lease and,as a result, the capital lease asset and liability included in our ConsolidatedBalance Sheet were increased by $10.0 million as of May 1, 2006 to reflect thepresent value of the amended future minimum lease payments.  These capital lease assets and obligationswill be amortized over the amended lease term.

#### **Note 6.  Shareholders’ Equity**

## On August 18, 2006, we paid a$0.33 per share, or $23.7 million, distribution to our common shareholders forthe quarter ended June 30, 2006.  OnOctober 6, 2006, we declared a distribution of $0.33 per share, or $23.7million, to be paid to common shareholders of record on October 20, 2006, withrespect to our results for the quarter ended September 30, 2006. We expect topay this distribution on or about November 17, 2006.

#### **Note 7. Commitments and Contingencies**

As described inour Annual Report on Form 10-K for the year ended December 31, 2005, since 2003we have been in two separate litigations with HealthSouth Corporation, orHealthSouth, seeking to increase the annual rent due under an amended leasewith HealthSouth and to terminate the amended lease and repossess thehospitals.  During the pendency of thelitigations, we have recognized rental income at the $8.7 million annualrate set forth in the amended lease, which represents the minimum amount wewould have been entitled to if HealthSouth prevailed in the litigations and wehave deferred recognition in income of $2.2 million of cash payments receivedfrom HealthSouth that are in excess of the minimum rent required by the amendedlease.

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On November 8,2006, we and HealthSouth agreed to settle our litigations, reinstateHealthSouth’s lease until September 30, 2006 and to increase the annual rentdue under the lease from $8.7 million to $9.9 million for the period fromJanuary 2, 2002 to September 30, 2006. As a result of the settlement, HealthSouth owes us an additional rent of$3.5 million for that period.  Wecollected that amount on November 8, 2006. We will recognize this $3.5 million and the $2.2 million of previouslydeferred income as rental income in the fourth quarter of 2006.  There are no taxes payable with respect tothe additional rent income collected from HealthSouth.

Expenses incurredrelated to our disputes with HealthSouth were $700,000 and $350,000 for thequarters ended September 30, 2006 and 2005, respectively, and $1.4 million and$1.3 million for the nine months ended September 30, 2006  and 2005, respectively, and are included in Generaland Administrative expense.

Effective October1, 2006, Five Star began to operate these hospitals and to lease them from usfor annual rent of $10.25 million for an initial lease term through 2026. 

We have agreed to purchase one assisted living property with 48 units fora purchase price of $4.6 million.  Thepurchase of this property is subject to satisfactory completion of diligence byus and customary closing conditions, and we can provide no assurances that wewill purchase this property in the future.

**Note8.  Subsequent Events**

In October and November 2006, we purchased, from unaffiliated parties in fourseparate transactions, five independent and assisted living properties for $42.6million plus closing costs using proceeds of borrowings under our revolvingbank credit facility and the assumption of mortgage debt.  These properties contain 433 units andresidents pay substantially all of the charges at these properties from theirprivate resources.  We added theseproperties to our combination lease of 111 properties to Five Star which has acurrent term expiring in 2020.  Theannual rent under this combination lease will be increased by $3.6million.  Percentage rent based onincreases in gross revenues at the properties will commence in 2008.  We assumed a $12.8 million mortgage on one ofthe properties acquired, which has a fixed annual interest rate of 7.15% andmatures in 2008.  At September 30, 2006,$19.7 million of borrowing proceeds were included in Restricted Cash for certainof these transactions.

As discussed in Note 7, on October 1, 2006 Five Star began leasing ourtwo rehabilitation hospitals for annual rent of $10.25 million for an initiallease term through 2026 and, on November 8, 2006, we settled ourlitigations with HealthSouth.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

The following discussion should be read in conjunction with ourconsolidated financial statements and notes thereto included in this quarterlyreport and our Annual Report on Form 10-K for the year ended December 31, 2005.

**PORTFOLIO OVERVIEW**

**The following tables present an overview of our portfolio:**
| ** **                                       | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **                      | ** ** | ** **     | ** ** | ** **            | ** ** | **% of**              | ** ** |
|--------------------------------------------------|------------|----------------|------------|-------------------------------|------------|---------------------------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|
| **As of September 30, 2006** | ** ** | **# of**  | ** ** | ** **                    | ** ** | **Carrying Value**         | ** ** | **% of**  | ** ** | **Annualized**        | ** ** | **Annualized**        | ** ** |
| **(dollars in thousands)**             | ** ** | **Properties** | ** ** | **# of Units/Beds** | ** ** | **of Investment (1)** | ** ** | **Investment** | ** ** | **Current Rent** | ** ** | **Current Rent** | ** ** |
| Facility Type                                    |       |           |       |                          |       |                            |       |           |       |                  |       |                  |       |
| Independent  living communities (2)              |       | 40             |       | 11,019                        |       | $                               | 978,758    |           | 55.4       | %                     | $          | 95,721                |       | 55.2 | % |
| Assisted living  facilities                      |       | 90             |       | 6,394                         |       | 525,199                         |       | 29.7           | %          | 51,543                |       | 29.8                  | %          |
| Skilled nursing  facilities                      |       | 61             |       | 6,303                         |       | 219,537                         |       | 12.4           | %          | 17,369                |       | 10.0                  | %          |
| Hospitals                                        |       | 2              |       | 364                           |       | 43,553                          |       | 2.5            | %          | 8,700                 |       | 5.0                   | %          |
| Total                                            |       | 193            |       | 24,080                        |       | $                               | 1,767,047  |           | 100.0      | %                     | $          | 173,333               |       | 100.0 | % |
|                                             |       |           |       |                          |       |                            |       |           |       |                  |       |                  |       |
| Tenant/Operator                                  |       |           |       |                          |       |                            |       |           |       |                  |       |                  |       |
| Five  Star/Sunrise (3)                           |       | 30             |       | 7,275                         |       | $                               | 649,033    |           | 36.7       | %                     | $          | 64,729                |       | 37.3 | % |
| Five Star                                        |       | 111            |       | 9,297                         |       | 551,127                         |       | 31.2           | %          | 45,554                |       | 26.3                  | %          |
| Sunrise/Marriott  (4)                            |       | 14             |       | 4,091                         |       | 325,473                         |       | 18.4           | %          | 31,087                |       | 17.9                  | %          |
| NewSeasons/IBC  (5)                              |       | 10             |       | 1,019                         |       | 87,641                          |       | 5.0            | %          | 9,287                 |       | 5.4                   | %          |
| HealthSouth (6)                                  |       | 2              |       | 364                           |       | 43,553                          |       | 2.5            | %          | 8,700                 |       | 5.1                   | %          |
| Alterra/Brookdale  (7)                           |       | 18             |       | 894                           |       | 61,126                          |       | 3.5            | %          | 7,355                 |       | 4.2                   | %          |
| Genesis  HealthCare Corporation                  |       | 1              |       | 156                           |       | 13,007                          |       | 0.7            | %          | 1,535                 |       | 0.9                   | %          |
| 5 private  companies (combined)                  |       | 7              |       | 984                           |       | 36,087                          |       | 2.0            | %          | 5,086                 |       | 2.9                   | %          |
| Total                                            |       | 193            |       | 24,080                        |       | $                               | 1,767,047  |           | 100.0      | %                     | $          | 173,333               |       | 100.0 | % |

 

**Tenant Operating Statistics (Quarter Ended June 30,)(8)**

 
| ** **                      | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                      | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005**      | ** ** | **2006**             | ** ** | **2005**     | ** ** | **2006**                                                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Five  Star/Sunrise (3)          | ** ** | 1.33                   | x          | 1.43          | x          | 93                   | %          | 92           | %          | 81                                                              | %          | 84 | % | 15 | % | 12 | % | 4 | % | 4 | % |
| Five Star (9)                   | ** ** | 1.35                   | x          | 1.68          | x          | 89                   | %          | 87           | %          | 48                                                              | %          | 42 | % | 17 | % | 20 | % | 35 | % | 38 | % |
| Sunrise/Marriott  (4)           | ** ** | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| NewSeasons/IBC  (5)             | ** ** | 1.21                   | x          | 1.10          | x          | 85                   | %          | 81           | %          | 100                                                             | %          | 100 | % | — |   | — |   | — |   | — |   |
| HealthSouth (6)                 | ** ** | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra/Brookdale  (7)          | ** ** | 1.97                   | x          | 1.80          | x          | 86                   | %          | 84           | %          | 98                                                              | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis  HealthCare             | ** ** | 2.15                   | x          | 2.03          | x          | 97                   | %          | 96           | %          | 19                                                              | %          | 23 | % | 37 | % | 32 | % | 44 | % | 45 | % |
| 5 private companies  (combined) | ** ** | 1.64                   | x          | 1.65          | x          | 89                   | %          | 84           | %          | 27                                                              | %          | 27 | % | 20 | % | 22 | % | 52 | % | 51 | % |

 

TenantOperating Statistics (Six Months Ended June 30,) (8)

 
| ** **                      | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                      | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005**      | ** ** | **2006**             | ** ** | **2005**     | ** ** | **2006**                                                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Five  Star/Sunrise (3)          | ** ** | 1.33                   | x          | 1.16          | x          | 93                   | %          | 92           | %          | 82                                                              | %          | 84 | % | 15 | % | 12 | % | 4 | % | 4 | % |
| Five Star (9)                   | ** ** | 1.45                   | x          | 1.65          | x          | 90                   | %          | 87           | %          | 48                                                              | %          | 42 | % | 17 | % | 20 | % | 35 | % | 38 | % |
| Sunrise/Marriott  (4)           | ** ** | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| NewSeasons/IBC  (5)             | ** ** | 1.18                   | x          | 1.11          | x          | 85                   | %          | 81           | %          | 100                                                             | %          | 100 | % | — |   | — |   | — |   | — |   |
| HealthSouth (6)                 | ** ** | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra/Brookdale  (7)          | ** ** | 1.99                   | x          | 1.75          | x          | 88                   | %          | 84           | %          | 98                                                              | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis  HealthCare             | ** ** | 1.96                   | x          | 1.87          | x          | 97                   | %          | 96           | %          | 18                                                              | %          | 21 | % | 38 | % | 32 | % | 44 | % | 47 | % |
| 5 private companies  (combined) | ** ** | 1.81                   | x          | 1.89          | x          | 88                   | %          | 87           | %          | 27                                                              | %          | 24 | % | 20 | % | 25 | % | 53 | % | 51 | % |

 

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**(1)**   Amountsare before depreciation, but after impairment write downs.

**(2)**   Propertieswhere the majority of units are independent living apartments are classified asindependent living communities.

**(3)**   These30 properties are leased to Five Star. As of September 30, 2006, Sunrise SeniorLiving, Inc., or Sunrise, operated seven of these properties. Sunrise does notguaranty Five Star’s lease obligations. The rent that Five Star pays to us issubordinate to the management fees that Five Star pays to Sunrise, but is notsubordinate to Five Star’s internal management costs.  The rent coverage presented for this leasehas been adjusted to exclude management fees paid to Sunrise during the periodspresented for the 23 properties that Five Star manages. Rent coverage is afternon-subordinated management fees of $1.4 million and $1.3 million for thequarters ended June 30, 2006 and 2005, respectively and $2.7 million and $2.6million for the six months ended June 30, 2006, and 2005, respectively, relatedto the remaining seven properties that Sunrise manages.

**(4)**   MarriottInternational, Inc., or Marriott, guarantees this lease.  Sunrise has not filed its Form 10-Q’s withthe SEC in 2006 due to an accounting issue. Because we do not know what impact the resolution of this accountingissue may have on the reported performance of our properties, we do not report operatingdata for this tenant.

**(5)**   IndependenceBlue Cross, or IBC, a Pennsylvania health insurer, guarantees this lease.

(6)   On October 1, 2006, Five Star assumed theoperations of two rehabilitation hospitals and began leasing them from us forannual rent of $10.25 million.  Thesehospitals were formerly operated by HealthSouth.  Because we do not have reliable informationabout the operations of the hospitals by HealthSouth, we do not

7

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report operating data forthese hospitals.  See Note 7 to ourconsolidated financial statements regarding our litigation with HealthSouth andthe income we recognize with respect to these two hospitals.

(7)   Brookdale Senior Living, Inc., or Brookdale,guarantees this lease.

(8)   All tenant operating data presented are basedupon the operating results provided by our tenants for the indicated quarterlyperiods, or the most recent prior period for which tenant operating results areavailable to us from our tenants. Rent coverage is calculated as operating cashflow from our tenants’ facility operations, before subordinated charges andcapital expenditure reserves, divided by rent payable to us. We have notindependently verified our tenants’ operating data.

**(9)**   Includes data for periodsprior to our ownership of certain properties included in this lease.

**RESULTSOF OPERATIONS**

#### **Three Months Ended September 30, 2006,Compared to Three Months Ended September 30, 2005:**

|                                      | ** ** | **2006**                                                              | ** ** | **2005**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                        |       | $                                                                     | 41,983     |       | $          | 39,506     |       | $                 | 2,477      |   | 6.3 | % |
| Interest and  other income           |       | 334                                                                   |       | 738        |       | (404       | )          | (54.7             | )%         |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Interest expense                     |       | 11,833                                                                |       | 11,911     |       | (78        | )          | (0.6              | )%         |
| Depreciation  expense                |       | 10,978                                                                |       | 10,923     |       | 50         |       | 0.5               | %          |
| General and  administrative expense  |       | 4,088                                                                 |       | 3,281      |       | 807        |       | 24.6              | %          |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Net income                           |       | $                                                                     | 15,418     |       | $          | 14,129     |       | $                 | 1,289      |   | 9.1 | % |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Weighted average  shares outstanding |       | 71,824                                                                |       | 68,543     |       | 3,281      |       | 4.8               | %          |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Net income per share                 |       | $                                                                     | 0.21       |       | $          | 0.21       |       | —            |       | — |   |

 

Rental income increased because of rents from our $144.7 million ofreal estate acquisitions since July 1, 2005, offset by rent reductionsresulting from the sale of three properties for $12.5 million during the fourthquarter of 2005. See Note 7 to our consolidated financial statements for anexplanation of our recognition of rental income from HealthSouth.  Interest and other income forthe three months ended September 30, 2005 includes $352,000 of mortgageinterest income related to $24.0 million of financing provided to Five Star inJune 2005 that was repaid in August 2005.

Interest expense decreased as a result of our repayment of $52.5million of our senior notes in January 2006 and $28.2 million of our juniorsubordinated debentures in June 2006, offset by higher interest costsassociated with our revolving bank credit facility. Our weighted averagebalance outstanding and interest rate under our revolving bank credit facilitywas $160.2 million and 6.3% and $74.6 million and 4.7% for the three monthsended September 30, 2006 and 2005, respectively.

Depreciation expense for the third quarter of 2006 increased as aresult of real estate acquisitions totaling $144.7 million since July 1, 2005,offset by the sale of three properties for $12.5 million and the ending ofdepreciation expense on $14.7 million of furniture, fixtures and equipment thatbecame fully depreciated in 2005. General and administrative expensesincreased in the third quarter of 2006 due to acquisitions since July 1, 2005.General and administrative expenses include $700,000 and $350,000 ofHealthSouth litigation costs in the third quarters of 2006 and 2005, respectively.

Net incomeincreased because of the changes in revenues and expenses described above. Netincome per share was unchanged due to an increase in the weighted averagenumber of shares outstanding resulting from our issuance of common shares inDecember 2005.

8

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#### **Nine Months Ended September 30, 2006,Compared to Nine Months Ended September 30, 2005:**

|                                       | ** ** | **2006**                                                              | ** ** | **2005**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                            | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                         |       | $                                                                     | 123,727    |       | $          | 117,489    |       | $            | 6,238      |   | 5.3 | % |
| Interest and  other income            |       | 1,034                                                                 |       | 1,588      |       | (554       | )          | (34.9        | )%         |
|                                  |       |                                                                  |       |       |       |       |       |         |       |
| Interest expense                      |       | 34,751                                                                |       | 34,585     |       | 166        |       | 0.5          | %          |
| Depreciation  expense                 |       | 32,631                                                                |       | 32,428     |       | 203        |       | 0.6          | %          |
| General and  administrative expense   |       | 10,870                                                                |       | 9,762      |       | 1,108      |       | 11.4         | %          |
| Impairment of  assets                 |       | 1,420                                                                 |       | —     |       | 1,420      |       | 100.0        | %          |
| Loss on early  extinguishment of debt |       | 1,319                                                                 |       | —     |       | 1,319      |       | 100.0        | %          |
|                                  |       |                                                                  |       |       |       |       |       |         |       |
| Income from  continuing operations    |       | 43,770                                                                |       | 42,302     |       | 1,468      |       | 3.5          | %          |
| Gain on sale of  property             |       | —                                                                |       | 717        |       | (717       | )          | (100.0       | )%         |
| Net income                            |       | $                                                                     | 43,770     |       | $          | 43,019     |       | $            | 751        |   | 1.8 | % |
|                                  |       |                                                                  |       |       |       |       |       |         |       |
| Weighted average  shares outstanding  |       | 71,818                                                                |       | 68,525     |       | 3,293      |       | 4.8          | %          |
|                                  |       |                                                                  |       |       |       |       |       |         |       |
| Per share  amounts:                   |       |                                                                  |       |       |       |       |       |         |       |
| Income from  continuing operations    |       | $                                                                     | 0.61       |       | $          | 0.62       |       | $            | (0.01      | ) | (1.6 | )% |
| Gain on sale of  property             |       | —                                                                |       | $          | 0.01       |       | $          | (0.01        | )          | (100.0 | )% |
| Net income per share                  |       | $                                                                     | 0.61       |       | $          | 0.63       |       | $            | (0.02      | ) | (3.2 | )% |

 

Rental income increased because of rents from our $176.4 million ofreal estate acquisitions since January 1, 2005, offset by rent reductionsresulting from the sale of three properties for $12.5 million during the fourthquarter of 2005. See Note 7 to our consolidated financial statements for anexplanation of our recognition of rental income from HealthSouth.  Interest and other incomefor the nine months ended September 30, 2005 includes $517,000 of mortgageinterest income related to $24.0 million of financing provided to Five Star inJune 2005 that was repaid in August 2005.

Interest expense increased due to higher interest costs associated withour revolving bank credit facility offset by a decrease in interest as a resultof our repayment of $52.5 million of our senior notes in January 2006 and $28.2million of our junior subordinated debentures in June 2006. Our weightedaverage balance outstanding and interest rate under our revolving bank creditfacility was $124.7 million and 6.0% and $55.3 million and 4.5% for the ninemonths ended September 30, 2006 and 2005, respectively.

Depreciationexpense for the nine months ended September 30, 2006, increased as a result ofreal estate acquisitions totaling $176.4 million since January 1, 2005, offsetby the sale of three properties for $12.5 million and the ending ofdepreciation expense on $14.7 million of furniture, fixtures and equipment thatbecame fully depreciated during 2005.  General and administrative expensesincreased in 2006 due to acquisitions since January 1, 2005. General andadministrative expenses include $1.4 million and $1.3 million of HealthSouthlitigation costs in the nine months ended September 30, 2006 and 2005,respectively.

During the ninemonths ended September 30, 2006, we recognized an impairment of assets chargeof $1.4 million related to three properties that are currently being offeredfor sale.  Also, we recognized a loss onearly extinguishment of debt of $1.3 million in connection with our redemptionof our junior subordinated debentures.

9

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Income fromcontinuing operations increased because of the changes in revenues and expensesdescribed above. Income from continuing operations per share decreased becauseof an increase in the weighted average number of shares outstanding resultingfrom our issuance of common shares in December 2005.

During the ninemonths ended September 30, 2005, we recorded a gain of $717,000 from the saleof one property.

Net incomeincreased because of the changes in revenues and expenses described above. Netincome per share decreased due to an increase in the weighted average number ofshares outstanding as a result of our issuance of common shares in December2005.

**LIQUIDITY AND CAPITAL RESOURCES**

Our Operating Liquidityand Resources

Rentsfrom our properties are our principal source of funds for current expenses anddistributions to shareholders.  Wegenerally receive minimum rents monthly or quarterly from our tenants and wereceive percentage rents monthly, quarterly or annually.  This flow of funds has historically beensufficient for us to pay our operating expenses, debt service and distributionsto shareholders.  We believe that thisoperating cash flow will be sufficient to meet our operating expenses, debtservice and distribution payments for the foreseeable future.

Our Investment andFinancing Liquidity and Resources

## In order tofund acquisitions and to accommodate cash needs that may result from timingdifferences between our receipt of rents and our need or desire to payoperating expenses and distributions and to fund acquisitions and capitalexpenditures, we maintain a revolving bank credit facility with a group of commercialbanks. Our revolving bank credit facility matures in November 2009, and we mayextend it to November 2010 upon payment of an extension fee. The revolving bankcredit facility permits us to borrow up to $550.0 million, and includes afeature under which we may expand the maximum borrowing to $1.1 billion, incertain circumstances.  Borrowings underour revolving bank credit facility are unsecured.  We may borrow, repay and reborrow funds untilmaturity. No principal repayment is due until maturity.  We pay interest on borrowings under therevolving bank credit facility at LIBOR plus a premium. At September 30, 2006,the annual interest rate payable on our revolving bank credit facility was6.32%.

On January 9,2006, we redeemed $52.5 million of senior notes and paid a redemption premiumof $4.1 million plus accrued, but unpaid interest.  We funded this redemption with a portion ofthe net proceeds from our December 2005 equity offering, which had beentemporarily used to repay borrowings outstanding under our revolving bankcredit facility.

On June 15, 2006,we redeemed all $28.2 million of our junior subordinated debentures at par plusaccrued, but unpaid interest.  We fundedthis redemption with borrowings under our revolving bank credit facility andcash on hand.

On August 31,2006, we purchased five properties for $61.5 million.  During 2006, we purchased $16.8 million ofimprovements made to some of our properties. We used borrowings under ourrevolving bank credit facility and cash on hand to fund these purchases.

In October andNovember 2006, we purchased five independent and assisted living properties for$42.6 million plus closing costs with proceeds of borrowings under ourrevolving bank credit facility and the assumption of $12.8 million of mortgagedebt.  As of September 30, 2006, $19.7million was funded in escrow.  We have agreed to purchase one additional assistedliving property with 48 living units for a purchase price of $4.6 million.

10

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At September 30,2006, we had $1.5 million of cash and cash equivalents and $328.0 millionavailable under our revolving bank credit facility.  We expect to use cash balances, borrowingsunder our revolving bank credit facility and net proceeds of offerings ofequity or debt securities to fund future working capital requirements, propertyacquisitions and expenditures related to the repair, maintenance or renovationof our properties.

When significant amountsare outstanding under our revolving bank credit facility or as the maturitydates of our revolving bank credit facility and term debts approach, we willexplore alternatives for the repayment of amounts due.  Such alternatives may include incurringadditional debt and issuing new equity securities.  On July 12, 2006, we filed a shelfregistration statement that allows for an indeterminate amount of securities tobe issued by us. This shelf registration statement is effective for threeyears. An effective shelf registration statement allows us to issue publicsecurities on an expedited basis, but it does not assure that there will bebuyers for such securities.  Althoughthere can be no assurance that we will complete any debt or equity offerings orother financings, we believe we will have access to various types offinancings, including debt or equity offerings, to finance future acquisitionsand to pay our debts and other obligations.

On August 18, 2006, wepaid a $0.33 per common share, or $23.7 million, distribution to our commonshareholders for the quarter ended June 30, 2006.  On October 6, 2006, we declared adistribution of $0.33 per common share, or $23.7 million, to be paid to ourcommon shareholders of record on October 20, 2006 with respect to our resultsfor the quarter ended September 30, 2006. We expect to pay this distribution on or about November 17, 2006, usingcash on hand and borrowings under our revolving bank credit facility.

As of November 8, 2006, wehave no off balance sheet arrangements, commercial paper, derivatives, swaps,hedges, joint ventures or partnerships.

## **Debt Covenants**

Our principal debtobligations at September 30, 2006, were our unsecured revolving bank creditfacility, two issues totaling $342.5 million of unsecured senior notes and$63.0 million of mortgage debts and bonds secured by 21 of our properties. Oursenior notes are governed by an indenture. This indenture and related supplements and our revolving bank creditfacility contain a number of financial ratio covenants which generally restrictour ability to incur debts, including debts secured by mortgages on our propertiesin excess of calculated amounts, require us to maintain a minimum net worth,restrict our ability to make distributions under certain circumstances andrequire us to maintain other ratios. As of September 30, 2006, we believe wewere in compliance with all of the covenants under our indenture and relatedsupplements and our revolving bank credit facility.

Noneof our indenture and related supplements, our revolving bank credit facility orour other debt obligations contain provisions for acceleration which could betriggered by our debt ratings. However, in certain circumstances our revolvingbank credit facility uses our senior debt rating to determine the fees and theinterest rate payable.

Ourpublic debt indenture and related supplements contain cross default provisionswith any other debts of $10.0 million or more. Similarly, a default on our public debt indenture would be a defaultunder our revolving bank credit facility.

11

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## **Related Party Transactions**

OnAugust 31, 2006, we purchased from an unaffiliated third party, five seniorliving properties with a total of 783 units for $61.5 million.  Residents pay one hundred percent of the chargesat four of these properties and 70% of the charges at one of the propertieswith their private resources.  We addedthese properties to our combination lease for 106 properties with Five Starwhich has a current term expiring in 2020. The annual rent under this combination lease increased by $5.0million.  Percentage rent based onincreases in gross revenues at these properties will commence in 2008.

During the ninemonths ended September 30, 2006, pursuant to the terms of our existing leaseswith Five Star, we purchased $16.8 million of improvements made to ourproperties leased to Five Star, and, as a result, the annual rent payable to usby Five Star increased by an average of 10% of the amounts invested, or $1.7million.

On October 1, 2006, we purchased, from unaffiliated parties in twoseparate transactions, three independent and assisted living properties for$31.5 million plus closing costs using proceeds of borrowings under ourrevolver and the assumption of mortgage debt. These properties contain 304 units and residents pay substantially allof the charges at these properties from their private resources.  We added these properties to our combinationlease of 111 properties to Five Star which has a current term expiring in2020.  The annual rent under thiscombination lease will be increased by $2.6 million.  Percentage rent based on increases in grossrevenues at the properties will commence in 2008.  We assumed a $12.8 million mortgage on one ofthe properties acquired, which has a fixed annual interest rate of 7.15% andmatures in 2008.  As of September 30,2006, $19.7 million of borrowing proceeds were included in restricted cash forthese transactions.

As discussed in Note 7 to our consolidated financial statements, onOctober 1, 2006, Five Star began leasing our two rehabilitation hospitals forannual rent of $10.25 million for an initial lease term through 2026.

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

We are exposed to risks associated with market changes in interestrates.  We manage our exposure to thismarket risk by monitoring available financing alternatives.  Our strategy to manage exposure to changes ininterest rates is unchanged since December 31, 2005.  Other than as described below, we do notforesee any significant changes in our exposure to fluctuations in interestrates or in how we manage this exposure in the future. 

Our unsecured revolving bank credit facility accrues interest at floatingrates and matures in November 2009.  AtSeptember 30, 2006, we had $222.0 million outstanding and $328.0 millionavailable for borrowing under our revolving bank credit facility. We may makerepayments and drawings under our revolving bank credit facility at any timewithout penalty.  We borrow in U.S.dollars and borrowings under our revolving bank credit facility accrue interestat LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S.dollar based short term interest rates, specifically LIBOR.  A change in interest rates would not affectthe value of this floating rate debt but would affect our operatingresults.  For example, the interest ratepayable on our outstanding revolving indebtedness of $222.0 million atSeptember 30, 2006, was 6.32% per annum. The following table presents the impact a 10% change in interest rateswould have on our floating rate interest expense at September 30, 2006 (dollarsin thousands):
| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|------------------------------------------------------------------|------------|
| ** **             | ** ** | **Interest Rate  Per Year**                            | ** ** | **Outstanding  Debt** | ** ** | **Total  Interest Expense  Per Year** | ** ** |
| At September 30,  2006 |       | 6.32                                                             | %          | $ | 222,000 |   | $ | 14,030 |   |
| 10% reduction          |       | 5.69                                                             | %          | $ | 222,000 |   | $ | 12,632 |   |
| 10% increase           |       | 6.95                                                             | %          | $ | 222,000 |   | $ | 15,429 |   |

 

            The foregoing table shows the impact of an immediatechange in floating interest rates.  Ifinterest rates were to change gradually over time, the impact would be spreadover time.  Our exposure to fluctuationsin floating interest rates will increase or decrease in the future with increasesor decreases in the outstanding amount under our revolving bank credit facilityor other floating rate obligations.

**Item4.  Controls and Procedures**

As of the end ofthe period covered by this report, our management carried out an evaluation,under the supervision and with the participation of our managing trustees,President and Chief Operating Officer and Treasurer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedurespursuant to Exchange Act Rules 13a-15 and 15d-15.  Based upon that evaluation, our managingtrustees, President and Chief Operating Officer and Treasurer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective.

Therehave been no changes in our internal control over financial reporting duringthe quarter ended September 30, 2006, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

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**WARNING CONCERNINGFORWARD LOOKING STATEMENTS**

THIS QUARTERLYREPORT CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHINTHE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHERFEDERAL SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”,“EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WEARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT,BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TOOCCUR AND MAY NOT OCCUR.  ACTUAL RESULTSMAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKINGSTATEMENTS AS A RESULT OF VARIOUS FACTORS.

IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TODIFFER MATERIALLY FROM THOSE IN OUR FORWARD LOOKING STATEMENTS ARE DESCRIBED MORE FULLY UNDER “ITEM 1A. RISKFACTORS” IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,2005.

YOU SHOULD NOT PLACEUNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW,WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTSAS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

**STATEMENTCONCERNING LIMITED LIABILITY**

THE ARTICLES OF AMENDMENTAND RESTATEMENT OF THE DECLARATION OF TRUST ESTABLISHING SENIOR HOUSINGPROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALLAMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATEDEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME “SENIORHOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUSTAS SO AMENDED AND SUPPLEMENTED AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY,AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSINGPROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY,FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST.  ALL PERSONS DEALING WITH SENIOR HOUSINGPROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSINGPROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANYOBLIGATION.

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**PARTII.   Other Information**

**Item 1.**      Legal Proceedings

Asdescribed in Item 3 of our Annual Report on Form 10-K for the year endedDecember 31, 2005, since 2003 we have been in two separate litigations withHealthSouth seeking to increase the annual rent due under an amended lease withHealthSouth and to terminate the amended lease and repossess thehospitals.  On November 8, 2006, we andHealthSouth agreed to settle our litigations, reinstate HealthSouth’s leaseuntil September 30, 2006 and to increase the annual rent due under the leasefrom $8.7 million to $9.9 million for the period from January 2, 2002 toSeptember 30, 2006.  As a result of thesettlement, HealthSouth owes us an additional rent of $3.5 million for thatperiod.  We collected that amount onNovember 8, 2006.

**Item 2.**      Unregistered Sales of Equity Securities and Use ofProceeds

On September 20, 2006, pursuant to ourincentive share award plan, our officers and certain employees or our manager,Reit Management & Research LLC, received grants totaling 39,800 commonshares of beneficial interest, par value $0.01 per share, valued at $21.65 pershare, the closing price of our common shares on the New York Stock Exchange,or NYSE, on that day.  All of thesegrants were made pursuant to an exemption from registration contained insection 4(2) of the Securities Act of 1933, as amended.

**Item 5.**      Other Information

The following supplementary federal incometax considerations relating to the acquisition, ownership and disposition ofour shares supplement and update the more detailed description of these mattersin the section of our Annual Report on Form 10-K for the year endedDecember 31, 2005, or 2005 Annual Report, captioned “Federal Income TaxConsiderations”, which we incorporate in this Quarterly Report on Form 10-Q, orForm 10-Q, by reference.  In connectionwith our 2005 Annual Report, Sullivan & Worcester LLP, Boston,Massachusetts, rendered a legal opinion that the discussion in the section ofour 2005 Annual Report captioned “Federal Income Tax Considerations” wasaccurate in all material respects and fairly summarized the federal income taxissues discussed in that section, and that the opinion of counsel referred toin that section represented Sullivan & Worcester LLP’s opinion on thosesubjects.  Specifically, subject toqualifications and assumptions contained in its opinion and in our 2005 AnnualReport, Sullivan & Worcester LLP gave opinions to the effect that we havebeen organized and have qualified as a REIT under the Internal Revenue Code of1986, as amended, or IRC, for each taxable year commencing with our taxableyear ending December 31, 1999 through 2005, and that our then currentinvestments and plan of operation would enable us to continue to meet therequirements for qualification and taxation as a REIT under the IRC.  Those opinions are conditioned upon theassumption that our leases and other contracts, our charter and bylaws, and allother legal documents to which we are or have been a party, have been and willbe complied with by all parties to these documents, upon the accuracy andcompleteness of the factual matters described in our 2005 Annual Report, andupon representations that we have made. The opinion of Sullivan & Worcester LLP was based on the law as itexisted on March 13, 2006.  Also, anopinion of counsel is not binding on the Internal Revenue Service, or IRS, orthe courts, and the IRS or a court could take a position different from thatexpressed by counsel.

TheIRC imposes upon us various REIT qualification tests discussed more fully inour 2005 Annual Report.  While we believethat we have operated and will operate in a manner to satisfy these variousREIT qualification tests, counsel has not reviewed and will not review ourcompliance with these tests on a continuing basis.  Our actual qualification as a REIT willdepend upon our ability to meet and our meeting, through actual annualoperating results and distributions, the various REIT qualification testsimposed under the IRC.

In addition to the discussion in the section of our 2005 Annual Reportcaptioned “Federal Income Tax Considerations” and effective generally from andafter 2006, a special “wash sale” rule applies to a non-U.S. shareholder whoowns any class of our shares if(1) the shareholder owns more than 5% of that class of shares at any timeduring the one-year period ending on the date of the distribution describedbelow, or (2) that class of our shares is not, within the meaning of applicableTreasury Regulations, “regularly traded” on a domestic “established securitiesmarket” such as the NYSE.  Although therecan be no assurance in this regard, we believe that our common shares and eachclass of our preferred shares, if any,has been and will remain “regularly traded” on a domestic “establishedsecurities market” within the meaning of applicable Treasury regulations, allas described in our 2005 AnnualReport.  We thus anticipate this new

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washsale rule to apply, if at all, only to a non-U.S. shareholder that owns morethan 5% of either our commonshares or any class of ourpreferred shares, if any.  Such a non-U.S. shareholder will be treatedas having made a “wash sale” of our shares if it (1) disposes of an interest inour shares during the 30 days preceding the ex-dividend date of a distributionby us that, but for such disposition, would have been treated by the non-U.S. shareholderin whole or in part as gain from the sale or exchange of a United States realproperty interest, and then (2) acquires or enters into a contract to acquire asubstantially identical interest in our shares, either actually orconstructively through a related party, during the 61-day period beginning 30days prior to the ex-dividend date .  Inthe event of such a wash sale, the non-U.S. shareholder will have gain from thesale or exchange of a United States real property interest in an amount equalto the portion of the distribution that, but for the wash sale, would have beena gain from the sale or exchange of a United States real propertyinterest.  As described in our 2005 Annual Report, a non-U.S. shareholder’sgain from the sale or exchange of a United States real property interest cantrigger increased United States taxes, such as the branch profits taxapplicable to non-U.S. corporations, and increased United States tax filingrequirements.

**Item 6.**      Exhibits

10.1         Third Amendmentto Second Amended and Restated Master Lease Agreement, dated as of December 30,2005, by and among certain subsidiaries of the Company, as Landlord, and FiveStar Quality Care Trust, as Tenant.  (*Filed herewith.)*

10.2         LetterAgreement, dated as of March 13, 2006, by and between the Company and Five StarQuality Care Trust.  (*Filed herewith.)*

10.3         Fifth Amendmentto Second Amended and Restated Master Lease Agreement, dated as of October 1,2006, by and among certain subsidiaries of the Company, as Landlord, and FiveStar Quality Care Trust, as Tenant.  (*Filed herewith.)*

10.4         Sixth Amendmentto Second Amended and Restated Master Lease Agreement, dated as of October 1,2006, by and among certain subsidiaries of the Company, as Landlord, and FiveStar Quality Care Trust, as Tenant.  (*Filed herewith.)*

10.5         SeventhAmendment to Second Amended and Restated Master Lease Agreement, dated as ofOctober 1, 2006, by and among certain subsidiaries of the Company, as Landlord,and Five Star Quality Care Trust, as Tenant. (*Filed herewith.)*

10.6         EighthAmendment to Second Amended and Restated Master Lease Agreement, dated as ofNovember 1, 2006 by and among certain subsidiaries of the Company, as Landlord,and Five Star Quality Care Trust, as Tenant. *(Filed herewith.)*

12.1         Computation ofRatio of Earnings to Fixed Charges. *(Filed herewith.)*

31.1         Rule 13a-14(a)Certification. *(Filed herewith.)*

31.2         Rule 13a-14(a)Certification. *(Filed herewith.)*

31.3         Rule 13a-14(a)Certification. *(Filed herewith.)*

31.4         Rule 13a-14(a)Certification. *(Filed herewith.)*

32.1        Section 1350 Certification. *(Furnished herewith.)*

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|        | SENIOR HOUSING PROPERTIES TRUST |
|--------|---------------------------------|
|   |                            |   |
|   |                            |   |
|   | By:                             | /s/ David J. Hegarty |
|   |                            | David J. Hegarty |
|   |                            | President and Chief Operating Officer |
|   |                            | Dated: November 9, 2006 |
|   |                            |   |
|   |                            |   |
|   | By:                             | /s/ John R. Hoadley |
|   |                            | John R. Hoadley |
|   |                            | Treasurer and Chief Financial Officer |
|   |                            | (principal financial and accounting officer) |
|   |                            | Dated: November 9, 2006 |

 

 

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