** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

** **

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2004**

 

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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 mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.   Yes  ý   No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).   Yes  ý   No  o

 

Number of registrant’s common shares outstanding as of October 26, 2004:  **63,495,909**

 

 

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SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2004

 

INDEX

 
| PART I  | Financial Information                                                                       |   |
|---------|---------------------------------------------------------------------------------------------|--------|
|    |                                                                                        |   |
| Item 1. | Financial Statements (unaudited)                                                            |   |
|    |                                                                                        |   |
|    | Consolidated Balance Sheet - September 30, 2004 and December 31, 2003                       |   |
|    |                                                                                        |   |
|    | Consolidated Statement of Income - Three  and Nine Months Ended September 30, 2004 and 2003 |   |
|    |                                                                                        |   |
|    | Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2004 and 2003   |   |
|    |                                                                                        |   |
|    | 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 2. | Unregistered Sales of Equity Securities and  Use of Proceeds                                |   |
|    |                                                                                        |   |
| Item 5. | Other Information                                                                           |   |
|    |                                                                                        |   |
| Item 6. | Exhibits                                                                                    |   |
|    |                                                                                        |   |
|    | Signatures                                                                                  |   |

 

*Referencesin this Quarterly Report on Form 10-Q to “the Company”, “we”, “us”, “our” and “SeniorHousing” refer to Senior Housing Properties Trust and its consolidatedsubsidiaries, unless otherwise noted.*

 

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SENIOR HOUSING PROPERTIES TRUST

 

**PARTI.   Financial Information**

 

**Item1     Financial Statements**

 

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

 
| ** **                                                                                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
|                                                                                                                                                                |       |                    |       |                   |       |
| ASSETS                                                                                                                                                              |       |                    |       |                   |       |
| Real estate properties, at cost:                                                                                                                                    |       |                    |       |                   |       |
| Land                                                                                                                                                                |       | $                       | 166,828    |                   | $          | 162,512 |   |
| Buildings and improvements                                                                                                                                          |       | 1,281,046               |       | 1,255,729              |       |
|                                                                                                                                                                |       | 1,447,874               |       | 1,418,241              |       |
| Less accumulated depreciation                                                                                                                                       |       | 188,946                 |       | 160,426                |       |
|                                                                                                                                                                |       | 1,258,928               |       | 1,257,815              |       |
|                                                                                                                                                                |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                           |       | 2,894                   |       | 3,530                  |       |
| Restricted cash                                                                                                                                                     |       | 5,183                   |       | 10,108                 |       |
| Deferred financing fees, net                                                                                                                                        |       | 9,854                   |       | 11,311                 |       |
| Other assets                                                                                                                                                        |       | 23,314                  |       | 21,336                 |       |
| Total assets                                                                                                                                                        |       | $                       | 1,300,173  |                   | $          | 1,304,100 |   |
|                                                                                                                                                                |       |                    |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                           |       |                    |       |                   |       |
| Unsecured revolving bank credit facility                                                                                                                            |       | $                       | 30,000     |                   | $          | 102,000 |   |
| Senior unsecured notes due 2012 and 2015,  net of discount                                                                                                          |       | 393,734                 |       | 393,612                |       |
| Junior subordinated debentures due 2041                                                                                                                             |       | 28,241                  |       | 27,394                 |       |
| Secured debt and capital leases                                                                                                                                     |       | 26,299                  |       | 31,817                 |       |
| Accrued interest                                                                                                                                                    |       | 10,582                  |       | 12,468                 |       |
| Other liabilities                                                                                                                                                   |       | 12,781                  |       | 8,903                  |       |
| Total liabilities                                                                                                                                                   |       | 501,637                 |       | 576,194                |       |
|                                                                                                                                                                |       |                    |       |                   |       |
| Commitments and contingencies                                                                                                                                       |       |                    |       |                   |       |
|                                                                                                                                                                |       |                    |       |                   |       |
| Shareholders’ equity:                                                                                                                                          |       |                    |       |                   |       |
| Common shares of beneficial interest, $0.01  par value:  80,000,000 shares  authorized, 63,495,909 and 58,453,338 shares issued and outstanding,  respectively |       | 635                     |       | 585                    |       |
| Additional paid-in capital                                                                                                                                          |       | 940,685                 |       | 853,858                |       |
| Cumulative net income                                                                                                                                               |       | 191,978                 |       | 151,749                |       |
| Cumulative distributions                                                                                                                                            |       | (339,248                | )          | (281,776               | )          |
| Unrealized gain on investments                                                                                                                                      |       | 4,486                   |       | 3,490                  |       |
| Total shareholders’ equity                                                                                                                                     |       | 798,536                 |       | 727,906                |       |
| Total liabilities and shareholders’ equity                                                                                                                     |       | $                       | 1,300,173  |                   | $          | 1,304,100 |   |

 

See accompanying notes

 

1

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SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

(unaudited)

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Revenues:                             |       |                                  |       |                                 |       |   |   |   |   |
| Rental income                         |       | $                                     | 35,426     |                                 | $          | 31,805 |   | $ | 105,444 |   | $ | 93,647 |   |
| Interest and other income             |       | 318                                   |       | 296                                  |       | 2,349 |   | 1,646 |   |
| Total revenues                        |       | 35,744                                |       | 32,101                               |       | 107,793 |   | 95,293 |   |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Expenses:                             |       |                                  |       |                                 |       |   |   |   |   |
| Interest                              |       | 10,285                                |       | 10,147                               |       | 30,910 |   | 27,659 |   |
| Depreciation                          |       | 9,743                                 |       | 9,013                                |       | 29,015 |   | 26,557 |   |
| General and administrative            |       | 2,797                                 |       | 2,492                                |       | 8,858 |   | 7,608 |   |
| Total expenses                        |       | 22,825                                |       | 21,652                               |       | 68,783 |   | 61,824 |   |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Income from continuing operations     |       | 12,919                                |       | 10,449                               |       | 39,010 |   | 33,469 |   |
| Gain (loss) on sale of property       |       | —                                |       | —                               |       | 1,219 |   | (1,160 | ) |
| Net income                            |       | $                                     | 12,919     |                                 | $          | 10,449 |   | $ | 40,229 |   | $ | 32,309 |   |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average shares outstanding   |       | 63,477                                |       | 58,453                               |       | 63,102 |   | 58,443 |   |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted earnings per share: |       |                                  |       |                                 |       |   |   |   |   |
| Income from continuing operations     |       | $                                     | 0.20       |                                 | $          | 0.18 |   | $ | 0.62 |   | $ | 0.57 |   |
| Gain (loss) on sale of property       |       | —                                |       | —                               |       | 0.02 |   | (.02 | ) |
| Net income                            |       | $                                     | 0.20       |                                 | $          | 0.18 |   | $ | 0.64 |   | $ | 0.55 |   |

 

See accompanying notes

 

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SENIOR HOUSING PROPERTIES TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                          |       |                                |       |   |   |
| Net income                                                                     |       | $                                   | 40,229     |   | $ | 32,309 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                |       |   |   |
| Depreciation                                                                   |       | 29,015                              |       | 26,557 |   |
| Loss (gain) on sale of property                                                |       | (1,219                              | )          | 1,160 |   |
| Amortization of deferred finance fees and  debt discounts                      |       | 1,579                               |       | 1,508 |   |
| Changes in assets and liabilities:                                             |       |                                |       |   |   |
| Restricted cash                                                                |       | (5                                  | )          | 105 |   |
| Other assets                                                                   |       | 335                                 |       | (3,715 | ) |
| Accrued interest                                                               |       | (1,886                              | )          | 369 |   |
| Other liabilities                                                              |       | 4,141                               |       | (2,962 | ) |
| Cash provided by operating activities                                          |       | 72,189                              |       | 55,331 |   |
|                                                                           |       |                                |       |   |   |
| Cash flows from investing activities:                                          |       |                                |       |   |   |
| Real estate acquisitions                                                       |       | (34,809                             | )          | (88,565 | ) |
| Increase in security deposits                                                  |       | —                              |       | 600 |   |
| Proceeds from sale of real estate                                              |       | 5,900                               |       | 288 |   |
| Mortgage financing provided                                                    |       | —                              |       | (6,900 | ) |
| Mortgage financing repaid by mortgagor                                         |       | —                              |       | 849 |   |
| Cash used for investing activities                                             |       | (28,909                             | )          | (93,728 | ) |
|                                                                           |       |                                |       |   |   |
| Cash flows from financing activities:                                          |       |                                |       |   |   |
| Proceeds from issuance of common shares,  net                                  |       | 86,144                              |       | — |   |
| Proceeds from issuance of senior notes, net  of discount                       |       | —                              |       | 149,709 |   |
| Proceeds from borrowings on revolving bank  credit facility                    |       | 53,000                              |       | 123,000 |   |
| Repayments of borrowings on revolving bank  credit facility                    |       | (125,000                            | )          | (180,000 | ) |
| Repayment of debt                                                              |       | (588                                | )          | (59 | ) |
| Deferred financing fees                                                        |       | —                              |       | (3,675 | ) |
| Distributions to shareholders                                                  |       | (57,472                             | )          | (54,352 | ) |
| Cash (used for) provided by financing  activities                              |       | (43,916                             | )          | 34,623 |   |
|                                                                           |       |                                |       |   |   |
| Increase (decrease) in cash and cash  equivalents                              |       | (636                                | )          | (3,774 | ) |
| Cash and cash equivalents at beginning of  period                              |       | 3,530                               |       | 8,654 |   |
| Cash and cash equivalents at end of period                                     |       | $                                   | 2,894      |   | $ | 4,880 |   |
|                                                                           |       |                                |       |   |   |
| Supplemental cash flow information:                                            |       |                                |       |   |   |
| Interest paid                                                                  |       | $                                   | 31,217     |   | $ | 23,703 |   |
|                                                                           |       |                                |       |   |   |
| Non-cash investing and financing  activities:                                  |       |                                |       |   |   |
| Purchases of fixed assets with FF&E  reserve                               |       | —                              |       | (2,086 | ) |
| Issuance of common shares                                                      |       | 733                                 |       | 215 |   |
| Release of restricted cash to us                                               |       | 4,930                               |       | — |   |
| Repayment of debt with cash previously  restricted                             |       | (4,930                              | )          | — |   |

 

See accompanying notes

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note1.  Basis of Presentation**

 

The accompanying consolidatedfinancial statements of Senior Housing Properties Trust and our subsidiarieshave been prepared without audit. Certain information and footnote disclosures required by accountingprinciples generally accepted in the United States for complete financialstatements have been condensed or omitted. We believe the disclosures made are adequate to make the informationpresented not misleading.  However, theaccompanying financial statements should be read in conjunction with thefinancial statements and notes contained in our Annual Report on Form 10-K forthe year ended December 31, 2003.  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 beeneliminated.  Operating results forinterim periods are not necessarily indicative of the results that may beexpected for the full year. Reclassifications have been made to prior period financial statements toconform to the current period presentation.

 

DEFERRED PERCENTAGE RENTS.  We recognize percentage rental incomereceived for the first, second and third quarters in the fourth quarter.  Percentage rent deferred for the three andnine months ended September 30, 2004 and 2003, was $775,000 and $736,000, and$2.4 million and $2.2 million, respectively.

 

**Note2.  Summary of New AccountingPronouncement**

 

During the first quarter of 2004, we adoptedRevised Financial Accounting Standards Board, or FASB, Interpretation No. 46, “Consolidationof Variable Interest Entities” that was issued by the FASB in December2003.  As a result, we no longerconsolidate our wholly owned subsidiary that issued our trust preferredsecurities, or the trust preferred issuer, and we no longer present the trustpreferred securities on our Consolidated Balance Sheet.  Instead, we present our junior subordinateddebentures issued by us to, and held by, the trust preferred issuer asdebt.  These debentures had previouslybeen eliminated in our consolidated financial statements.  In addition, distributions on the trustpreferred securities are no longer presented in our Consolidated Statement ofIncome, but interest on the debentures, which is equal to the distributions onthe trust preferred securities, is included in interest expense.

 

**Note3.  Real Estate Properties**

 

At September 30, 2004, we owned150 properties located in 31 states.

 

During 2003, we agreed to sell to Five Star Quality Care, Inc., or FiveStar, two nursing homes in Michigan that we leased to Five Star.  The purchase price for both properties is $10.5million, the appraised value of the properties. On April 19, 2004, we sold one of these properties to Five Star for $5.9million and recognized a gain of $1.2 million. The properties were leased on a combined basis with 66 other propertieswe lease to Five Star.  Under the termsof our lease with Five Star, upon the sale of each property, the annual rentpayable under the combined lease is reduced by 10% of the net proceeds that wereceive from the sale.  We expect thesale of the second property to occur in the fourth quarter of 2004.  However, this sale is contingent upon FiveStar’s obtaining Department of Housing and Urban Development, or HUD, insuredfinancing for its purchase. This sale may not close because of a failure ofthis condition or for some other reason.

 

In 2003, we evicted a nursing home tenant that had defaulted on itsobligations to us.  Until May 2004, FiveStar managed this nursing home for our account. Effective on May 1, 2004, we and Five Star agreed to add this nursinghome to the Five Star lease of independent and assisted living facilities andnursing homes and to increase the annual rent by $180,000.  All other lease terms remained unchanged.

 

4

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One of our properties leased to Five Star was subject to a ground leasewith an unaffiliated third party.  FiveStar has been responsible for paying the ground rent of $307,000 per year.  On June 3, 2004, we exercised an option topurchase this land for $3.6 million and we acquired the landlord’s rights andobligations under the ground lease.  FiveStar remains obligated for the ground lease payments to us.

 

During 2004, pursuant to the terms of our leases with Five Star, wepurchased $6.5 million of improvements made to our properties leased by FiveStar and the annual rent payable to us by Five Star was increased by 10% of theamounts invested, or $646,000.

 

**Note4.  Unrealized Gain on Investments**

 

On September 30, 2004, we ownedone million common shares of HRPT Properties Trust, or HRPT, and 35,000 commonshares of Five Star, which are carried at fair market value in Other Assets onour Consolidated Balance Sheet.  TheUnrealized Gain On Investments shown on our Consolidated Balance Sheet representsthe difference between the market value of these shares of HRPT and Five Starcalculated by using quoted market prices on September 30, 2004 ($10.99 and$7.15 per share, respectively) and on the 

date they were acquired ($6.50and $7.26 per share, respectively).

 

**Note5.  Comprehensive Income**

 

The following is areconciliation of net income to comprehensive income for the three and ninemonths ended September 30, 2004 and 2003 (dollars in thousands):

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine months Ended  September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                     |       |                                  |       |                                 |       |   |   |   |   |
| Net income                               |       | $                                     | 12,919     |                                 | $          | 10,449 |   | $ | 40,229 |   | $ | 32,309 |   |
| Other comprehensive income:              |       |                                  |       |                                 |       |   |   |   |   |
| Change in unrealized gain on investments |       | 1,076                                 |       | (37                                  | )          | 996 |   | 928 |   |
| Comprehensive income                     |       | $                                     | 13,995     |                                 | $          | 10,412 |   | $ | 41,225 |   | $ | 33,237 |   |

 

**Note6.  Indebtedness**

 

We have a $250.0 million,interest only, unsecured revolving bank credit facility.  Our revolving bank credit facility matures inNovember 2005 and may be extended at our option to November 2006 upon ourpayment of an extension fee.  Theinterest rate (3.1% at September 30, 2004) is LIBOR plus a spread.  As of September 30, 2004, $30.0 million wasoutstanding and $220.0 million was available under this facility.

 

As discussed in Note 3, we solda property to Five Star on April 19, 2004. Simultaneous with this sale, we repaid the $4.9 million mortgage notethat was secured by this property using $4.9 million of our cash previouslyrestricted for that purpose.

 

5

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**Note7.  Shareholders’ Equity**

 

OnJuly 20, 2004, we paid a $0.31 per share, or $19.7 million, distribution to ourcommon shareholders for the quarter ended June 30, 2004.  On October 4, 2004, we declared adistribution of $0.32 per share, or $20.3 million, to be paid to common shareholdersof record on October 21, 2004.  We expectto pay this distribution on or about November 22, 2004.

 

**Note8.  Commitments and Contingencies**

 

Asmore fully described in our 2003 Annual Report on Form 10-K, on April 16, 2003,we filed a complaint in the Land Court of the Commonwealth of Massachusetts,seeking that our lease with HEALTHSOUTH Corporation, or HEALTHSOUTH, bereformed to increase the rent payable to us under this lease, among othermatters.  We have had settlementdiscussions with the new management of HEALTHSOUTH, but a final settlement wasnot achieved.  This litigation remainspending and no trial date has been set. On October 26, 2004, we sent a notice of lease termination toHEALTHSOUTH.  Our lease with HEALTHSOUTHrequires it to manage the properties for a transition period for a managementfee.  A copy of our notice of leasetermination is being filed as Exhibit 99.1 to this Report on Form 10-Q.  Through October 2004, HEALTHSOUTH hascontinued to pay monthly rent to us at the rate of $8.7 million per year, butwe can not predict how HEALTHSOUTH may respond to the notice of leasetermination.

 

In December 2003, we agreed to purchase four properties from NewSeasonsAssisted Living Communities, Inc., subject to certain conditions.  These four properties are encumbered bymortgage debts.  We were unable to reachmutually acceptable terms to assume or prepay the debt on these properties and,consequently, we have determined not to proceed with these purchases.

 

As discussed in Note 3, we have agreed to sell one nursing home to FiveStar if and when Five Star is able to secure HUD insured financing for itspurchase.

 

On September 23, 2004, we agreed to purchase 35 independent andassisted living communities with resident capacity of 1,880 for $165.0 millionfrom Five Star.  We made this commitmentto support Five Star’s agreement to acquire LTA Holdings, Inc. (formerly knownas LifeTrust America, Inc.), or LTA, a privately owned company that owns andoperates senior living communities in the southeastern United States.  Simultaneous with our purchase of theseproperties, Five Star will lease them from us and the annual rent payable to usby Five Star for the 35 communities will be $14.9 million, plus a percentage offuture revenue increases at these communities. Substantially all of the revenues at these communities are paid byresidents from their own resources.  Weexpect to fund this acquisition using cash on hand, borrowings under ourunsecured revolving bank credit facility and by the assumption of $49.5 millionof mortgage debt.  The mortgage debt issecured by some, but not all, of the properties.  The mortgage debt matures in 2012 and 2013and has a weighted average annual interest cost of 6.75 %.

 

Five Star’s acquisition of LTA and our commitment to the sale and leasetransaction are contingent upon various conditions customary in multi-facilitytransactions, including approvals from lenders and licensing.  Nonetheless, we expect the closing of thistransaction to occur during the fourth quarter of 2004.

 

6

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

 

The following discussion shouldbe read in conjunction with our consolidated financial statements and notesthereto included in this quarterly report and our 2003 Annual Report on Form10-K.

 

**PORTFOLIOOVERVIEW**

 

RESULTS OF OPERATIONS.

The following tables present anoverview of our portfolio as of September 30, 2004 (dollars in thousands)

 
| ** **                        | ** ** | **# of   Properties** | ** ** | **# of Units/Beds** | ** ** | **Investment:  carrying value   before  depreciation** | ** ** | **% of  Investment** | ** ** | **Annualized  Current Rent** | ** ** | **% of  Annualized  Current Rent** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|--------------------------------------------------------|------------|----------------------|------------|------------------------------|------------|------------------------------------|------------|
| Facility Type                     |       |                  |       |                |       |                                                   |       |                 |       |                         |       |                               |       |
| Independent living communities(1) |       | 36                    |       | 10,412              |       | $                                                      | 898,585    |                 | 62.1       | %                            | $          | 90,247                             |       | 62.3 | % |
| Assisted living facilities        |       | 51                    |       | 3,724               |       | 282,964                                                |       | 19.5                 | %          | 29,099                       |       | 20.1                               | %          |
| Skilled nursing facilities        |       | 61                    |       | 6,433               |       | 222,772                                                |       | 15.4                 | %          | 16,989                       |       | 11.6                               | %          |
| Hospitals                         |       | 2                     |       | 364                 |       | 43,553                                                 |       | 3.0                  | %          | 8,700                        |       | 6.0                                | %          |
| Total                             |       | 150                   |       | 20,933              |       | $                                                      | 1,447,874  |                 | 100.0      | %                            | $          | 145,035                            |       | 100.0 | % |
|                              |       |                  |       |                |       |                                                   |       |                 |       |                         |       |                               |       |
| Tenant/Operator                   |       |                  |       |                |       |                                                   |       |                 |       |                         |       |                               |       |
| Five Star/Sunrise (2)             |       | 31                    |       | 7,307               |       | $                                                      | 625,569    |                 | 43.2       | %                            | $          | 63,876                             |       | 44.1 | % |
| Sunrise/Marriott (3)              |       | 14                    |       | 4,091               |       | 325,473                                                |       | 22.5                 | %          | 31,204                       |       | 21.6                               | %          |
| Five Star                         |       | 67                    |       | 6,118               |       | 255,517                                                |       | 17.6                 | %          | 18,324                       |       | 12.6                               | %          |
| NewSeasons/IBC (4)                |       | 10                    |       | 1,019               |       | 87,641                                                 |       | 6.1                  | %          | 9,287                        |       | 6.4                                | %          |
| HEALTHSOUTH(5)                    |       | 2                     |       | 364                 |       | 43,553                                                 |       | 3.0                  | %          | 8,700                        |       | 6.0                                | %          |
| Alterra Healthcare                |       | 18                    |       | 894                 |       | 61,126                                                 |       | 4.2                  | %          | 7,225                        |       | 5.0                                | %          |
| Genesis HealthCare                |       | 1                     |       | 156                 |       | 13,007                                                 |       | 0.9                  | %          | 1,522                        |       | 1.0                                | %          |
| 5 private companies (combined)    |       | 7                     |       | 984                 |       | 35,988                                                 |       | 2.5                  | %          | 4,897                        |       | 3.3                                | %          |
| Total                             |       | 150                   |       | 20,933              |       | $                                                      | 1,447,874  |                 | 100.0      | %                            | $          | 145,035                            |       | 100.0 | % |

 

TenantOperating Statistics (Quarter Ended September 30) (6)

 
| ** **                     | ** ** | ** **        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|--------------------------------|------------|-------------------|------------|---------------|------------|-----------------|------------|--------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                | ** ** |
| ** **                     | ** ** | **2004**          | ** ** | **2003**      | ** ** | **2004**        | ** ** | **2003**     | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Five Star/Sunrise (2)          |       | 1.0               | x     | 1.0           | x     | 90              | %          | 89           | %          | 85                                          | %          | 86 | % | 11 | % | 10 | % | 4 | % | 4 | % |
| Sunrise/Marriott (3)           |       | 1.2               | x     | 1.2           | x     | 91              | %          | 87           | %          | 82                                          | %          | 83 | % | 14 | % | 13 | % | 4 | % | 4 | % |
| Five Star (7)                  |       | 2.2               | x     | 1.6           | x     | 89              | %          | 89           | %          | 31                                          | %          | 33 | % | 22 | % | 17 | % | 47 | % | 50 | % |
| NewSeasons/IBC(4)  (7)    |       | 1.2               | x     | 1.1           | x     | 80              | %          | 80           | %          | 100                                         | %          | 100 | % | — |   | — |   | — |   | — |   |
| HEALTHSOUTH(8)                 |       | NA                |       | NA            |       | NA              |       | NA           |       | NA                                          |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra Healthcare(7)          |       | 1.6               | x     | 1.6           | x     | 82              | %          | 85           | %          | 98                                          | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis HealthCare             |       | 1.9               | x     | 1.6           | x     | 97              | %          | 97           | %          | 22                                          | %          | 25 | % | 33 | % | 31 | % | 45 | % | 44 | % |
| 5 private companies (combined) |       | 2.2               | x     | 2.2           | x     | 85              | %          | 85           | %          | 25                                          | %          | 24 | % | 19 | % | 19 | % | 56 | % | 57 | % |

 

TenantOperating Statistics (Nine Months Ended September 30) (6)

** **
| ** **                     | ** ** | ** **        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|--------------------------------|------------|-------------------|------------|---------------|------------|-----------------|------------|--------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                | ** ** |
| ** **                     | ** ** | **2004**          | ** ** | **2003**      | ** ** | **2004**        | ** ** | **2003**     | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Five Star/Sunrise (2)          |       | 1.1               | x     | 1.0           | x     | 90              | %          | 90           | %          | 85                                          | %          | 86 | % | 11 | % | 10 | % | 4 | % | 4 | % |
| Sunrise/Marriott (3)           |       | 1.3               | x     | 1.2           | x     | 89              | %          | 87           | %          | 82                                          | %          | 83 | % | 13 | % | 13 | % | 5 | % | 4 | % |
| Five Star  (7)            |       | 1.9               | x     | 1.6           | x     | 89              | %          | 90           | %          | 31                                          | %          | 33 | % | 22 | % | 17 | % | 47 | % | 50 | % |
| NewSeasons/IBC(4)  (7)    |       | 1.1               | x     | 1.1           | x     | 79              | %          | 79           | %          | 100                                         | %          | 100 | % | — |   | — |   | — |   | — |   |
| HEALTHSOUTH(8)                 |       | NA                |       | NA            |       | NA              |       | NA           |       | NA                                          |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra Healthcare(7)          |       | 1.6               | x     | 1.6           | x     | 82              | %          | 86           | %          | 98                                          | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis HealthCare             |       | 1.9               | x     | 1.3           | x     | 96              | %          | 97           | %          | 21                                          | %          | 23 | % | 33 | % | 34 | % | 46 | % | 43 | % |
| 5 private companies (combined) |       | 2.2               | x     | 2.3           | x     | 86              | %          | 86           | %          | 25                                          | %          | 23 | % | 21 | % | 19 | % | 54 | % | 58 | % |

 

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

 

(2)                                  These31 properties leased to Five Star Quality Care, Inc., or Five Star, are managedby Sunrise Senior Living, Inc., or Sunrise. Sunrise does not guaranty our lease with Five Star.  Rent coverage is after non-subordinatedmanagement fees of $5.5 million and $14.6 million and $4.3 million and $12.7million in the quarter and nine months ended September 30, 2004 and 2003,respectively.

 

(3)                                  MarriottInternational, Inc., or Marriott, guarantees the lease for the 14 propertiesleased to Sunrise.

 

(4)                                  IndependenceBlue Cross, or IBC, a Pennsylvania health insurer, guarantees the lease for the10 properties leased to NewSeasons Assisted Living Communities, Inc., orNewSeasons.

 

(5)                                  SinceApril 2003, we have been in litigation with HEALTHSOUTH Corporation.  We are seeking that our lease withHEALTHSOUTH be reformed to increase the rent payable to us under this lease,among other matters.  We have hadsettlement discussions with the new management of HEALTHSOUTH, but a finalsettlement was not achieved.  This litigationremains pending and no trial date has been set.  On October 26, 2004, we sent anotice of lease termination to HEALTHSOUTH. Our lease with HEALTHSOUTH requires it to manage the properties for atransition period for a management fee.  ThroughOctober 2004, HEALTHSOUTH has continued to pay monthly rent to us at the rate of$8.7 million per year, but we can not predict how HEALTHSOUTH may respond tothe notice of lease termination.

 

(6)                                  Alltenant operating data presented are based upon the operating results providedby our tenants for the indicated periods ending September 30, 2004, or the mostrecent prior period tenant operating results available to us from ourtenants.  Rent coverage is calculated asoperating cash flow from our tenants’ facility operations, before subordinatedcharges and capital expenditure reserves, divided by rent payable to us.  We have not independently verified ourtenants’ operating data.

 

(7)                                  Includesdata for periods prior to our ownership of these properties.

 

7

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(8)                                  During2003, HEALTHSOUTH issued a press release stating that its historical financialinformation should not be relied upon. In 2004, HEALTHSOUTH issued a press release stating that auditedfinancial information would not be available until 2005.  Because we have reason to doubt the financialinformation we have from HEALTHSOUTH we do not disclose any operating data forthis tenant.

 

8

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Three MonthsEnded September 30, 2004, Compared to Three Months Ended September 30, 2003

 

Rental income for the threemonths ended September 30, 2004, was $35.4 million compared to rental income of$31.8 million for the three months ended September 30, 2003, an increase of$3.6 million, or 11.3%.  This increase isthe result of our acquisition and lease of 12 properties since July 1, 2003.

 

Interest expense for the threemonths ended September 30, 2004, was $10.3 million compared to interest expensefor the three months ended September 30, 2003, of $10.1 million, an increase of$200,000, or 2%.  The increase was causedby interest on increased amounts outstanding under our revolving bank creditfacility during the three months ended September 30, 2004.

 

Depreciation expense for thethree months ended September 30, 2004, was $9.7 million compared to depreciationexpense for the three months ended September 30, 2003, of $9.0 million, anincrease of $700,000, or 7.8%.  Generaland administrative expense for the three months ended September 30, 2004, was$2.8 million compared to general and administrative expense for the threemonths ended September 30, 2003, of $2.5 million, an increase of $300,000 or12%.  These increases were primarily dueto our investment in 12 properties since July 1, 2003.

 

Net income was $12.9 million, or $0.20 per share, for the three monthsended September 30, 2004, compared to $10.4 million, or $0.18 per share, forthe three months ended September 30, 2003, an increase of $2.5 million, or$0.02 per share.  These changes areprimarily the result of the changes described above in revenues and expensesresulting from our acquisitions since July 1, 2003 and the 5.0 million shareincrease in the weighted average number of shares outstanding between the 2004and 2003 periods which resulted from our issuance of common shares in January2004.

 

Nine monthsEnded September 30, 2004, Compared to Nine months Ended September 30, 2003

 

Rental income for the nine months ended September 30, 2004, was $105.4million compared to rental income of $93.6 million for the nine months endedSeptember 30, 2003, an increase of $11.8 million, or 12.6%.  This increase is the result of ouracquisition and lease of 33 properties since January 1, 2003.

 

Interest and other income increased to $2.3 million in the nine monthsended September 30, 2004, compared to $1.6 million in the nine months endedSeptember 30, 2003, an increase of $700,000, or 43.8%.  For the nine months ended September 30, 2004,it includes the $1.25 million settlement payment we received from Marriott inJanuary 2004; for the nine months ended September 30, 2003, it includes$750,000 of proceeds from the sale of a mortgage note.

 

Interest expense for the nine months ended September 30, 2004, was$30.9 million compared to interest expense for the nine months ended September30, 2003, of $27.7 million, an increase of $3.2 million, or 11.6 %.  The increase was caused by our issuance of$150.0 million of 7 7/8% senior unsecured notes in April 2003 and by intereston increased amounts outstanding under our revolving bank credit facilityduring the nine months ended September 30, 2004.

 

9

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Depreciation expense for thenine months ended September 30, 2004, was $29.0 million compared todepreciation expense for the nine months ended September 30, 2003, of $26.6million, an increase of $2.4 million, or 9.0%. General and administrative expense for the nine months ended September30, 2004, was $8.9 million compared to general and administrative expense forthe nine months ended September 30, 2003, of $7.6 million, an increase of $1.3million or 17.1%.  These increases wereprimarily due to our investment in 33 properties since January 1, 2003.  During the nine months ended September 30,2004, we incurred $775,000 of due diligence costs in connection with a failedpotential acquisition.

 

Income from continuingoperations was $39.0 million, or $0.62 per share, for the nine months endedSeptember 30, 2004 compared to $33.5 million, or $0.57 per share, for the ninemonths ended September 30, 2003, an increase of $5.5 million, or $0.05 pershare.  Net income was $40.2 million, or$0.64 per share, for the nine months ended September 30, 2004, compared to$32.3 million, or $0.55 per share, for the nine months ended September 30,2003, an increase of $7.9 million, or $0.09 per share.  These changes are primarily the result of thechanges described above in revenues and expenses resulting from ouracquisitions since January 1, 2003, our sale of two properties, our debtissuance in April 2003 and the 4.7 million share increase in the weightedaverage number of shares outstanding between the 2004 and 2003 periods whichresulted from our sale of our common shares in January 2004.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our OperatingLiquidity and Resources

 

Our principal sources of fundsfor current expenses and distributions to shareholders are rents from ourproperties.  We receive minimum rentsmonthly or quarterly from our tenants and we receive percentage rents monthly,quarterly or annually.  This flow offunds has historically been sufficient for us to pay our operating expenses,debt service and distributions.  Webelieve that our operating cash flow will be sufficient to meet our operatingexpenses, debt service and distributions payments for the foreseeable future.

 

Our Investmentand Financing Liquidity and Resources

 

In order to fund acquisitionsand to accommodate cash needs that may result from timing differences betweenour receipt of rents and our need to pay operating expenses and our desire tomake distributions, we maintain a revolving bank credit facility with a groupof commercial banks.  Our revolving bankcredit facility matures in November 2005, but we may extend it to November 2006upon payment of an extension fee.  Therevolving bank credit facility permits us to borrow up to $250.0 million andincludes a feature under which we may expand the maximum borrowing to $500.0million, in certain circumstances. Borrowings under our revolving bank credit facility are unsecured.  We may borrow, repay and reborrow funds untilmaturity.  No principal repayment is dueuntil maturity.  We pay interest onborrowings under the revolving bank credit facility at LIBOR plus a margin.

 

10

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In January 2004, we issued fivemillion of our common shares in a public offering.  We used the net proceeds of $86.1 million torepay borrowings outstanding on our revolving bank credit facility.

 

In April 2004, we sold one ofour nursing home properties for $5.9 million. We used the proceeds to repay borrowings outstanding on our revolvingbank credit facility and for general business purposes.

 

In June 2004, we purchased for$3.6 million the land under one of our properties that we previouslyleased.  During 2004, we purchased $6.5million of improvements made to some of our properties.  We borrowed on our revolving bank creditfacility and used cash on hand to fund these purchases.

 

On September 23, 2004, weagreed to purchase 35 assisted living properties from Five Star for $165.0million.  This purchase may be partiallyfunded by our assumption of $49.5 million of mortgage debt; and we expect topay the balance of this purchase price with cash on hand and borrowings underour revolving bank credit facility.

 

At September 30, 2004, we had$2.9 million of cash and cash equivalents and $220.0 million available underour revolving bank credit facility.  Weexpect to use cash balances, borrowings under our revolving bank creditfacility and net proceeds of offerings of equity or debt securities to fundfuture property acquisitions and expenditures related to the repair,maintenance or renovation of our properties, including the communities we havecommitted to purchase from Five Star for $165.0 million.

 

When significant amounts areoutstanding on our revolving bank credit facility or as the maturity dates ofour revolving bank credit facility and term debts approach, we will explorealternatives for the repayment of amounts due. Such alternatives may include incurring additional debt and issuing newequity securities.  As of September 30,2004, we had $1.6 billion available on an effective shelf registrationstatement.  An effective shelfregistration statement allows us to issue public securities on an expeditedbasis, but it does not assure that there will be buyers for suchsecurities.  Although there can be noassurance that we will consummate any debt or equity offerings or otherfinancings, we believe we will have access to various types of financing,including debt or equity offerings, with which to finance future acquisitionsand to pay our debts and other obligations.

 

On July 20, 2004, we paid a$0.31 per share, or $19.7 million, distribution to our common shareholders forthe quarter ended June 30, 2004.  OnOctober 4, 2004, we declared a distribution of $0.32 per common share withrespect to our 2004 third quarter results. We plan to pay this distribution to shareholders on or about November22, 2004, using cash on hand and borrowings under our revolving bank creditfacility.

 

As of September 30, 2004, ourcontractual obligations were as follows (dollars in thousands):

 
| ** **                    | ** ** | **Payments due by period** | ** ** |
|-------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**   | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt Obligations(1) |       | $                          | 442,111    |   | $ | 4,170 |   | $ | — |   | $ | — |   | $ | 437,941 |   |
| Capital Lease Obligations     |       | 7,429                      |       | 836 |   | 1,870 |   | 2,072 |   | 2,651 |   |
| Ground Lease Obligations      |       | 3,278                      |       | 142 |   | 284 |   | 284 |   | 2,568 |   |
| Purchase Obligations (2)      |       | 165,000                    |       | 165,000 |   | — |   | — |   | — |   |
| Total                         |       | $                          | 617,818    |   | $ | 170,148 |   | $ | 2,154 |   | $ | 2,356 |   | $ | 443,160 |   |

 

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(1)                                  Ourterm debt maturities are as follows: $4.2 million in 2005; $245.0 million in 2012; $150.0 million in 2015;$14.7 million in 2027; and $28.2 million in 2041.

 

(2)                                  Weexpect to assume $49.5 million of mortgage debt in connection with this purchaseobligation.

 

11

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**DebtCovenants**

 

Our principal debt obligationsat September 30, 2004, were our unsecured revolving bank credit facility, twoissues totaling $395.0 million of unsecured senior notes and our $28.2 millionof junior subordinated debentures.  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 ourproperties in excess of calculated amounts, require us to maintain a minimumnet worth, restrict our ability to make distributions under certaincircumstances and require us to maintain other ratios.  Our junior subordinated debentures aregoverned by an indenture which is generally less restrictive than the indenturegoverning our senior notes and the terms of our revolving bank credit facility.  As of September 30, 2004, we believe we werein compliance with all of the covenants under our indentures and relatedsupplements and our revolving bank credit facility.

 

None of our indentures andrelated supplements, our revolving bank credit facility or our other debtobligations contain provisions for acceleration which could be triggered by ourdebt ratings.  However, our revolvingbank credit facility uses our senior debt rating to determine the fees and theinterest rate payable.

 

Our public debt indenture andrelated supplements contain cross default provisions with any other debts of$10.0 million or more.  Similarly, adefault on our public debt or junior subordinated debentures indenture would bea default under our revolving bank credit facility.

 

At September 30, 2004, we hadno commercial paper, derivatives, swaps, hedges, joint ventures orpartnerships.

 

**RelatedParty Transactions**

 

On April 19, 2004, we sold oneof two properties that we had agreed to sell to Five Star for net proceeds of$5.9 million and recognized a gain of $1.2 million.  The sale of the second property is expectedto occur in the fourth quarter of 2004, but remains contingent upon Five Starobtaining HUD insured financing for its purchase.  Under the terms of our lease with Five Star,the annual rent payable to us was, and will be, reduced by 10% of the netproceeds we have received, or may receive, from these sales.

 

In 2003, we evicted a nursinghome tenant that had defaulted on its obligations to us.  Until May 2004, Five Star managed thisnursing home for our account.  Effectiveon May 1, 2004, we and Five Star agreed to add this nursing home to the FiveStar lease for other facilities and to increase the annual rent by$180,000.  All other lease terms remainedunchanged.

 

One of our properties leased toFive Star was subject to a ground lease with an unaffiliated third party.  Five Star has been responsible for paying theground rent of $307,000 per year.  OnJune 3, 2004, we exercised an option to purchase this land for $3.6 million andwe acquired the landlord’s rights and obligations under the ground lease.  Five Star remains obligated for the groundlease payments to us.

 

During 2004, pursuant to theterms of our leases with Five Star, we purchased $6.5 million of improvementsmade to our properties leased by Five Star, and the annual rent payable to usby Five Star was increased by 10% of the amounts invested, or $646,000.

 

On September 23, 2004, weagreed to purchase 35 independent and assisted living communities with residentcapacity of 1,880 for $165.0 million from Five Star.  We made this commitment to support Five Star’sagreement to acquire LTA, a privately owned company that owns and operatessenior living communities in the southeastern United States.  Simultaneous with our purchase of theseproperties, Five Star will lease them from us and the annual rent payable to usby Five Star for the 35 communities will be $14.9 million, plus a percentage offuture revenue increases at these communities. Five Star’s acquisition of LTA and our commitment to the sale and leasetransaction are contingent upon conditions customary in multi-facilitytransactions, including lender approvals and licensing.  Nonetheless, we expect the closing of thistransaction to occur during the fourth quarter of 2004.

 

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

 

We are exposed to risksassociated with market changes in interest rates.  We manage our exposure to this market risk bymonitoring and using available financing alternatives.  Our strategy to manage exposure to changes ininterest rates is unchanged since December 31, 2003.  Other than as described below, we do notforesee any significant changes in our exposure to fluctuations in interestrates or in how we may manage this exposure in the future.

 

Our unsecured revolving bankcredit facility requires interest at floating rates and matures in November2005.  At September 30, 2004, we had$30.0 million outstanding and $220.0 million available for borrowing under ourrevolving bank credit facility.  We maymake repayments under our revolving bank credit facility at any time withoutpenalty.  We borrow in U.S. dollars andborrowings under our revolving bank credit facility require interest at LIBORplus a margin.  Accordingly, we arevulnerable to changes in U.S. dollar based short term interest rates,specifically LIBOR.  A change in interestrates would not affect the value of this floating rate debt but would affectour operating results.  For example, the interestrate payable on our outstanding revolving indebtedness of $30.0 million atSeptember 30, 2004, was 3.1% per annum. The following table presents the impact a 10% change in interest rateswould have on our floating rate interest expense at September 30, 2004 (dollarsin thousands):

 
| ** **            | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|-----------------------|------------|-----------------------------------------|------------|
| ** **            | ** ** | **Interest Rate  Per Year**             | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At September 30, 2004 |       | 3.1                                     | %          | $ | 30,000 |   | $ | 930 |   |
| 10% reduction         |       | 2.8                                     | %          | $ | 30,000 |   | $ | 840 |   |
| 10% increase          |       | 3.4                                     | %          | $ | 30,000 |   | $ | 1,020 |   |

 

The foregoing table shows theimpact of an immediate change in floating interest rates.  If interest rates were to change graduallyover time, the impact would be spread over time.  Our exposure to fluctuations in floating interestrates will increase or decrease in the future with increases or decreases inthe outstanding amount under our revolving bank credit facility or otherfloating rate obligations.

 

**Item4.  Controls and Procedures**

 

As of the end of the periodcovered by this report, our management carried out an evaluation, under thesupervision and with the participation of our managing trustees, President andChief Operating Officer and Treasurer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures pursuant to ExchangeAct Rules 13a-15 and 15d-15.  Based uponthat evaluation, our managing trustees, President and Chief Operating Officerand Treasurer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

 

There have been no changes inour internal control over financial reporting during the quarter endedSeptember 30, 2004, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

 

THIS QUARTERLY REPORT ON FORM10-Q AND OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003,REFERRED TO HEREIN, CONTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OFTHE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIESLAWS.  THESE STATEMENTS REPRESENT OURPRESENT BELIEFS AND EXPECTATIONS, BUT THEY MAY NOT OCCUR FOR VARIOUSREASONS.  FOR EXAMPLE:

 

•                                          WEEXPECT TO COMPLETE A PURCHASE AND LEASE TRANSACTION FOR 35 PROPERTIES INCONNECTION WITH FIVE STAR’S ACQUISITION OF LTA. HOWEVER, FIVE STAR’S ACQUISITION OF LTA IS SUBJECT TO VARIOUSCONDITIONS, INCLUDING THIRD PARTY LENDER CONSENTS AND LICENSES.  IF THIS ACQUISITION DOES NOT OCCUR, WE WILLNOT BE ABLE TO PROCEED WITH THE PURCHASE AND LEASE TRANSACTION.  ALSO, DURING DOCUMENTATION OF LARGEMULTI-FACILITY TRANSACTIONS SUCH AS FIVE STAR’S ACQUISITION OF LTA AND OURPURCHASE AND LEASE OF SOME OF THE LTA FACILITIES, THE CONCERNED PARTIES OFTENMODIFY TERMS, AND THE FINAL TERMS OF OUR PURCHASE AND LEASE TRANSACTION WITHFIVE STAR, IF IT OCCURS, MAY BE DIFFERENT THAN THE TERMS SET FORTH IN THIS FORM10-Q.

 

•                                          ASNOTED IN THIS FORM 10-Q, WE ARE CURRENTLY INVOLVED IN LITIGATION WITHHEALTHSOUTH CONCERNING THE AMOUNT OF RENT PAYABLE TO US, OUR SETTLEMENTDISCUSSIONS WITH HEALTHSOUTH HAVE TERMINATED, WE HAVE SENT HEALTHSOUTH A LEASETERMINATION NOTICE AND HEALTHSOUTH HAS CONTINUED TO PAY OUR RENT THROUGH THEDATE OF THE NOTICE OF LEASE TERMINATION AT A DISPUTED AMOUNT.  THE FORWARD LOOKING IMPLICATIONS OF THESESTATEMENTS MAY BE THAT OUR RENT MAY INCREASE, THAT HEALTHSOUTH WILL MANAGE THEPROPERTIES FOLLOWING THE LEASE TERMINATION, THAT WE MAY BE ABLE TO LEASE THESEPROPERTIES FOR HIGHER RENT OR THAT HEALTHSOUTH MAY CONTINUE TO PAY OUR RENT ATTHE CURRENT RATE.  WE CANNOT PREDICT HOWHEALTHSOUTH MAY REACT TO OUR RECENT NOTICE OF LEASE TERMINATION.  DISCOVERY DURING LAWSUITS OR DECISIONS BYCOURTS MAY RESULT IN CONCLUSIONS THAT ARE DIFFERENT FROM ANY OF THESEIMPLICATIONS.

 

YOU SHOULD NOT PLACE UNDUERELIANCE UPON FORWARD LOOKING STATEMENTS.

 

**STATEMENT CONCERNING LIMITED LIABILITY**

 

THE ARTICLES OF AMENDMENT ANDRESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20,1999, TOGETHER WITH ALL AMENDMENTS THERETO, AS DULY FILED IN THE OFFICE OF THESTATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THENAME “SENIOR HOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THEDECLARATION OF TRUST AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THATNO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSINGPROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY 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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**PART II.                OtherInformation**

 

**Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds**

 

On September 15, 2004, pursuantto our incentive share award plan, our officers and certain employees of ourinvestment manager, Reit Management & Research LLC, received grantstotaling 24,000 common shares valued at $17.77 per share, the closing price ofthe our common shares on the New York Stock Exchange on September 15,2004.  All of these grants were madepursuant to an exemption from registration contained in section 4(2) of theSecurities Act of 1933, as amended.

 

**Item 5.    OtherInformation**

 

As more fully described in our2003 Annual Report on Form 10-K, on April 16, 2003, we filed a complaint in theLand Court of the Commonwealth of Massachusetts, seeking that our lease withHEALTHSOUTH Corporation, or HEALTHSOUTH, be reformed to increase the rentpayable to us under this lease, among other matters.  We have had settlement discussions with thenew management of HEALTHSOUTH, but a final settlement was not achieved.  This litigation remains pending and no trialdate has been set.  On October 26, 2004,we sent a notice of lease termination to HEALTHSOUTH.  Our lease with HEALTHSOUTH requires it tomanage the properties for a transition period for a management fee.  A copy of our notice of lease termination isbeing filed as Exhibit 99.1 to this Report on Form 10-Q.  Through October 2004, HEALTHSOUTH hascontinued to pay monthly rent to us at the rate of $8.7 million per year, butwe can not predict how HEALTHSOUTH may respond to the notice of leasetermination.

 

**Item 6.    Exhibits**

 
| 10.1   |   | Letter Agreement among the  Company, Five Star and FVE Acquisition Inc., dated September 23, 2004,  regarding FVE Acquisition Inc.'s merger with LTA Holdings, Inc. *(incorporated by reference to the Company’s Current Report on 8–K  dated September 23, 2004.)* |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                          |   |
| 10.2   |   | Letter  Agreement between the Company and LTA Holdings, Inc., dated  September 23, 2004. *(filed herewith.)*                                                                                                                                                             |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 12.1   |   | Computation  of Ratio of Earnings to Fixed Charges.*(filed herewith.)*                                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 31.1   |   | Certification  Required by Rule 13a–14(a) / 15d – 14(a) of the Securities Exchange Act of  1934, as amended, as adopted pursuant to Section 302 of the Sarbanes–Oxley  Act of 2002.*(filed herewith.)*                                                         |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 31.2   |   | Certification  Required by Rule 13a–14(a) / 15d – 14(a) of the Securities Exchange Act of  1934, as amended, as adopted pursuant to Section 302 of the Sarbanes–Oxley  Act of 2002.*(filed herewith.)*                                                         |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 31.3   |   | Certification  Required by Rule 13a–14(a) / 15d – 14(a) of the Securities Exchange Act of  1934, as amended, as adopted pursuant to Section 302 of the Sarbanes–Oxley  Act of 2002.*(filed herewith.)*                                                         |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 31.4   |   | Certification  Required by Rule 13a–14(a) / 15d – 14(a) of the Securities Exchange Act of  1934, as amended, as adopted pursuant to Section 302 of the Sarbanes–Oxley  Act of 2002.*(filed herewith.)*                                                         |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 32     |   | Certification  Pursuant to 18 U.S.C. Sec 1350, as adopted pursuant to Section 906 of the  Sarbanes–Oxley Act of 2002.*(furnished  herewith.)*                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                          |   |
| 99.1   |   | Notice of  Termination of Lease, dated October 26, 2004 *(filed  herewith.)*                                                                                                                                                                                                  |   |

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto 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:  October 28, 2004 |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ John R.  Hoadley |   |
|   |                             | John R.  Hoadley |
|   |                             | Treasurer  and Chief Financial Officer |
|   |                             | Dated:  October 28, 2004 |

 

16

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