** **

**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 June 30, 2005**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Commission File Number 1-15319**

 

**SENIORHOUSING PROPERTIES TRUST**

 
| **Maryland**                                        | ** ** | **04-3445278**                     |
|-----------------------------------------------------|------------|------------------------------------|
| (State of Organization)                             |       | (IRS Employer  Identification No.) |
|                                                |
| **400 Centre Street, Newton,  Massachusetts 02458** |
|                                                |
| **617-796-8350**                                    |

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.Yes ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).    Yes ý  No o

 

Number of registrant’scommon shares outstanding as of August 2, 2005:  **68,537,927**

 

 

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SENIOR HOUSING PROPERTIESTRUST

 

FORM 10-Q

 

June 30, 2005

 

INDEX

 
| PART I  | Financial  Information                                                                           |   |
|--------------|--------------------------------------------------------------------------------------------------|--------|
|         |                                                                                             |   |
| Item 1.      | Financial Statements (unaudited)                                                                 |   |
|         |                                                                                             |   |
|         | Consolidated Balance Sheet – June 30, 2005 and  December 31, 2004                 |   |
|         |                                                                                             |   |
|         | Consolidated Statement of Income  – Three and Six Months Ended June 30,  2005 and 2004 |   |
|         |                                                                                             |   |
|         | Consolidated Statement of  Cash Flows – Six Months Ended June 30,  2005 and 2004  |   |
|         |                                                                                             |   |
|         | 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 4.      | Submission of Matters to a  Vote of Security Holders                                             |   |
|         |                                                                                             |   |
| Item 6.      | Exhibits                                                                                         |   |
|         |                                                                                             |   |
|         | Signatures                                                                                       |   |

 

*In thisQuarterly Report on Form 10-Q, the terms “SNH”, “Senior Housing”, “theCompany”, “we”, “us” and “our” refer to Senior Housing Properties Trust and its consolidated subsidiaries,unless otherwise noted.*

 

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SENIOR HOUSING PROPERTIESTRUST

 

**PART I.  Financial Information**

 

**Item1.    Financial Statements**

 

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

 
| ** **                                                                                                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                      | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                          |       |                    |       |                        |       |
| Real estate  properties, at cost:                                                                                               |       |                    |       |                        |       |
| Land                                                                                                                            |       | $                       | 180,283    |                        | $          | 178,353 |   |
| Buildings and  improvements                                                                                                     |       | 1,447,948               |       | 1,422,599                   |       |
|                                                                                                                            |       | 1,628,231               |       | 1,600,952                   |       |
| Less accumulated  depreciation                                                                                                  |       | 220,195                 |       | 199,232                     |       |
|                                                                                                                            |       | 1,408,036               |       | 1,401,720                   |       |
|                                                                                                                            |       |                    |       |                        |       |
| Mortgage  investments                                                                                                           |       | 24,000                  |       | —                      |       |
| Cash and cash  equivalents                                                                                                      |       | 7,207                   |       | 3,409                       |       |
| Restricted cash                                                                                                                 |       | 2,087                   |       | 6,176                       |       |
| Deferred  financing fees, net                                                                                                   |       | 8,396                   |       | 9,367                       |       |
| Other assets                                                                                                                    |       | 23,687                  |       | 27,058                      |       |
| Total assets                                                                                                                    |       | $                       | 1,473,413  |                        | $          | 1,447,730 |   |
|                                                                                                                            |       |                    |       |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                      |       |                    |       |                        |       |
| Unsecured  revolving bank credit facility                                                                                       |       | $                       | 84,000     |                        | $          | 37,000 |   |
| Senior unsecured  notes due 2012 and 2015, net of discount                                                                      |       | 393,857                 |       | 393,775                     |       |
| Junior  subordinated debentures due 2041                                                                                        |       | 28,241                  |       | 28,241                      |       |
| Secured debt and  capital leases                                                                                                |       | 71,077                  |       | 76,162                      |       |
| Accrued interest                                                                                                                |       | 12,702                  |       | 12,519                      |       |
| Other  liabilities                                                                                                              |       | 7,902                   |       | 9,366                       |       |
| Total  liabilities                                                                                                              |       | 597,779                 |       | 557,063                     |       |
|                                                                                                                            |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                  |       |                    |       |                        |       |
|                                                                                                                            |       |                    |       |                        |       |
| Shareholders’  equity:                                                                                                     |       |                    |       |                        |       |
| Common shares of  beneficial interest, $0.01 par value: 80,000,000 shares authorized,  68,537,927 shares issued and outstanding |       | 685                     |       | 685                         |       |
| Additional  paid-in capital                                                                                                     |       | 1,035,055               |       | 1,034,686                   |       |
| Cumulative net  income                                                                                                          |       | 237,380                 |       | 208,491                     |       |
| Cumulative  distributions                                                                                                       |       | (403,417                | )          | (359,567                    | )          |
| Unrealized gain  on investments                                                                                                 |       | 5,931                   |       | 6,372                       |       |
| Total  shareholders’ equity                                                                                                |       | 875,634                 |       | 890,667                     |       |
| Total  liabilities and shareholders’ equity                                                                                |       | $                       | 1,473,413  |                        | $          | 1,447,730 |   |

 

*See accompanying notes.*

 

1

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SENIOR HOUSING PROPERTIESTRUST

 

CONSOLIDATED STATEMENT OFINCOME

(in thousands, except per share amounts)

(unaudited)

 
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                                 |       |                               |       |   |   |   |   |
| Revenues:                              |       |                                 |       |                               |       |   |   |   |   |
| Rental income                          |       | $                                    | 39,094     |                               | $          | 35,189 |   | $ | 77,982 |   | $ | 70,018 |   |
| Interest and  other income             |       | 511                                  |       | 317                                |       | 850 |   | 2,031 |   |
| Total revenues                         |       | 39,605                               |       | 35,506                             |       | 78,832 |   | 72,049 |   |
|                                   |       |                                 |       |                               |       |   |   |   |   |
| Expenses:                              |       |                                 |       |                               |       |   |   |   |   |
| Interest                               |       | 11,443                               |       | 10,255                             |       | 22,675 |   | 20,625 |   |
| Depreciation                           |       | 10,759                               |       | 9,687                              |       | 21,505 |   | 19,272 |   |
| General and  administrative            |       | 3,087                                |       | 2,742                              |       | 6,480 |   | 6,061 |   |
| Total expenses                         |       | 25,289                               |       | 22,684                             |       | 50,660 |   | 45,958 |   |
|                                   |       |                                 |       |                               |       |   |   |   |   |
| Income from  continuing operations     |       | 14,316                               |       | 12,822                             |       | 28,172 |   | 26,091 |   |
| Gain on sale of  property              |       | 717                                  |       | 1,219                              |       | 717 |   | 1,219 |   |
| Net income                             |       | $                                    | 15,033     |                               | $          | 14,041 |   | $ | 28,889 |   | $ | 27,310 |   |
|                                   |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  shares outstanding   |       | 68,537                               |       | 63,471                             |       | 68,516 |   | 62,913 |   |
|                                   |       |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted earnings per share: |       |                                 |       |                               |       |   |   |   |   |
| Income from  continuing operations     |       | $                                    | 0.21       |                               | $          | 0.20 |   | $ | 0.41 |   | $ | 0.41 |   |
| Gain on sale of  property              |       | 0.01                                 |       | 0.02                               |       | 0.01 |   | 0.02 |   |
| Net income                             |       | $                                    | 0.22       |                               | $          | 0.22 |   | $ | 0.42 |   | $ | 0.43 |   |

 

*Seeaccompanying notes*.

 

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SENIOR HOUSING PROPERTIESTRUST

 

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                         |       |                               |       |   |   |
| Net income                                                                     |       | $                                  | 28,889     |   | $ | 27,310 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                               |       |   |   |
| Depreciation                                                                   |       | 21,505                             |       | 19,272 |   |
| Gain on sale of  property                                                      |       | (717                               | )          | (1,219 | ) |
| Amortization of  deferred finance fees and debt discounts                      |       | 1,061                              |       | 1,052 |   |
| Changes in  assets and liabilities:                                            |       |                               |       |   |   |
| Restricted cash                                                                |       | 4,089                              |       | 4,927 |   |
| Other assets                                                                   |       | 2,698                              |       | 2,140 |   |
| Accrued interest                                                               |       | 183                                |       | 49 |   |
| Other  liabilities                                                             |       | (863                               | )          | 471 |   |
| Cash provided by  operating activities                                         |       | 56,845                             |       | 54,002 |   |
|                                                                           |       |                               |       |   |   |
| Cash flows from  investing activities:                                         |       |                               |       |   |   |
| Acquisitions                                                                   |       | (31,704                            | )          | (32,648 | ) |
| Proceeds from  sale of real estate                                             |       | 4,600                              |       | 5,900 |   |
| Mortgage  financing provided                                                   |       | (24,000                            | )          | — |   |
| Cash used for  investing activities                                            |       | (51,104                            | )          | (26,748 | ) |
|                                                                           |       |                               |       |   |   |
| Cash flows from  financing activities:                                         |       |                               |       |   |   |
| Proceeds from  issuance of common shares, net                                  |       | —                             |       | 86,144 |   |
| Proceeds from  borrowings on revolving bank credit facility                    |       | 66,000                             |       | 43,000 |   |
| Repayments of  borrowings on revolving bank credit facility                    |       | (19,000                            | )          | (112,000 | ) |
| Repayment of  debt                                                             |       | (5,085                             | )          | (5,318 | ) |
| Deferred  financing fees                                                       |       | (8                                 | )          | — |   |
| Distributions to  shareholders                                                 |       | (43,850                            | )          | (37,796 | ) |
| Cash used for  financing activities                                            |       | (1,943                             | )          | (25,970 | ) |
|                                                                           |       |                               |       |   |   |
| Increase in cash  and cash equivalents                                         |       | 3,798                              |       | 1,284 |   |
| Cash and cash  equivalents at beginning of period                              |       | 3,409                              |       | 3,530 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                  | 7,207      |   | $ | 4,814 |   |
|                                                                           |       |                               |       |   |   |
| Supplemental  cash flow information:                                           |       |                               |       |   |   |
| Interest paid                                                                  |       | $                                  | 21,430     |   | $ | 19,524 |   |
|                                                                           |       |                               |       |   |   |
| Non-cash  investing and financing activities:                                  |       |                               |       |   |   |
| Issuance of  common shares                                                     |       | 369                                |       | 307 |   |

 

*See accompanying notes.*

 

3

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SENIOR HOUSING PROPERTIESTRUST

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note1.  Basis of Presentation**

 

The accompanying consolidated financial statements ofSenior Housing Properties Trust and our consolidated subsidiaries have beenprepared without audit.  Certaininformation and footnote disclosures required by accounting principlesgenerally accepted in the United States for complete financial statements havebeen condensed or omitted.  We believethe disclosures made are adequate to make the information presented notmisleading.  However, the accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2004. In the opinion of our management, all adjustments, which include onlynormal recurring adjustments considered necessary for a fair presentation, havebeen included.  All intercompanytransactions and balances between us and our consolidated subsidiaries havebeen eliminated.  Operating results forinterim periods are not necessarily indicative of the results that may beexpected for the full year. Reclassifications have been made to prior periodfinancial statements to conform 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 was $775,000 and $1.6 million for the three and sixmonths ended June 30, 2005, respectively, and $794,000 and $1.6 millionfor the three and six months ended June 30, 2004, respectively.

 

**Note2.  Real Estate Properties**

 

At June 30,2005, we owned 184 properties located in 32 states.

 

On June 5, 2005, we purchased from Five StarQuality Care, Inc., or Five Star, four assisted living communities for$24.0 million, which we leased back to Five Star.  These properties contain 299 living units and100% of the revenues at these facilities are paid by residents from theirprivate resources.  These communitieswere added to a combination lease for 97 communities from us to Five Star whichhas a current term ending in 2020, plus tenant renewal options thereafter.  The annual rent under the combined lease wasincreased by $2.2 million and percentage rent based on increases in grossrevenues at the four properties added will commence in 2007.

 

In addition to this sale leaseback, we also agreed toprovide a first mortgage line of credit to assist Five Star with financing thepurchase of six assisted living communities located in suburban Pittsburgh,Pennsylvania. The line of credit may be drawn for up to $43.5 million or 75% ofthe purchase price. At closing, $24.0 million of this line of credit wasdrawn.  The balance may be drawn by FiveStar to finance future acquisitions or for its other business purposes.  This mortgage line of credit requires paymentof interest only at 9% per annum until it matures on June 30, 2007.

 

OnMay 18, 2005, we sold a nursing home to Five Star for $4.6 million andrecognized a gain of $717,000.  Thisproperty was leased on a combined basis with 97 other properties we lease toFive Star.  Under the terms of our leasewith Five Star, upon the sale of the property, the annual rent payable underthe combined lease was reduced by 10% of the net proceeds that we received fromthe sale, or $460,000.

 

During the six monthsended June 30, 2005, pursuant to the terms of our leases with Five Star,we purchased $7.7 million of improvements made to our properties leased by FiveStar, and the annual rent payable to us by Five Star was increased by 10% ofthe amounts invested, or $770,000.

 

**Note3.  Unrealized Gain on Investments**

 

On June 30,2005, 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 value of these shares ofHRPT and Five Star

 

4

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calculated byusing quoted market prices on June 30, 2005 ($12.43 and $7.30 per share,respectively) and on the dates they were acquired ($6.50 and $7.26 per share,respectively).

 

**Note4.  Comprehensive Income**

 

The following is areconciliation of net income to comprehensive income for the three and sixmonths ended June 30, 2005 and 2004 (dollars in thousands):

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                |       | $                                    | 15,033     |                               | $          | 14,041 |   | $ | 28,889 |   | $ | 27,310 |   |
| Other  comprehensive income:              |       |                                 |       |                               |       |   |   |   |   |
| Change in  unrealized gain on investments |       | 480                                  |       | (1,272                             | )          | (441 | ) | (80 | ) |
| Comprehensive  income                     |       | $                                    | 15,513     |                               | $          | 12,769 |   | $ | 28,448 |   | $ | 27,230 |   |

 

**Note5.  Indebtedness**

 

On July 29,2005, we amended our unsecured revolving bank credit facility to increase theavailable borrowing amount from $250.0 million to $550.0 million and extend thematurity date from November 2005 to November 2009, with an option toextend the maturity by one additional year upon payment of a fee. The annualinterest payable for amounts drawn under the facility was reduced from LIBORplus 1.45% to LIBOR plus 1.00%.  In certaincircumstances, the amount of unsecured borrowings available under this facilitymay be increased to $1.1 billion. Certain financial and other covenants in the facility were also amendedto reflect current market conditions. The interest rate on this facility averaged 4.6% and 4.4% for the threeand six months ended June 30, 2005, respectively, and 2.7% for the threeand six months ended June 30, 2004.

 

As discussed in Note 2, we sold a property to FiveStar on May 18, 2005. Simultaneous with this sale, we repaid the $4.2million mortgage note that was secured by this property.  This mortgage note was also secured by $4.3million of restricted cash, which became unrestricted when the mortgage notewas prepaid.

 

#### **Note 6. Shareholders’ Equity**

 

## **On May 20,2005, we paid a $0.32 per share, or $21.9 million, distribution to our commonshareholders for the quarter ended March 31, 2005. On July 5, 2005,we declared a distribution of $0.32 per share, or $21.9 million, to be paid tocommon shareholders of record on July 20, 2005 with respect to our resultsfor the quarter ended June 30, 2005. We expect to pay this distribution onor about August 19, 2005.**

## ** **

Underthe terms of our advisory agreement with Reit Management and Research, LLC, orRMR, on April 4, 2005, we issued 39,019 common shares in payment of anincentive fee for services rendered by RMR during 2004.  These restricted securities were issuedpursuant to an exemption from registration provided under Section 4(2) ofthe Securities Act of 1933, as amended.

 

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

 

Asdescribed in our 2004 Annual Report on Form 10-K, we are in litigationwith HealthSouth Corporation, or HealthSouth. In January 2002, HealthSouth settled adefault under its lease with us by exchanging properties. We delivered toHealthSouth title to five nursing homes which HealthSouth leased from us.  In exchange, HealthSouth delivered to ustitle to two rehabilitation hospitals and we entered an amended lease, reducingthe annual rent from $10.3 million to $8.7 million, extending the lease termand changing other lease terms between HealthSouth and us. A primary factorwhich caused us to lower the rent for an extended lease term was the purportedcredit strength of HealthSouth. In agreeing to lower the rent and extend thelease term,

 

5

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werelied upon statements made by certain officers of HealthSouth, upon financialstatements and other documents provided by HealthSouth, upon public statementsmade by HealthSouth and its representatives concerning HealthSouth’s financialcondition and upon publicly available documents filed by HealthSouth.

 

In March 2003, the SEC accused HealthSouth andsome of its executives of publishing false financial information; since then,according to published reports, at least 15 former HealthSouth executives,including all five of its former chief financial officers, have pled guilty tovarious crimes. In April 2003, we commenced a lawsuit against HealthSouthin the Massachusetts Land Court seeking, among other matters, to reform theamended lease based upon HealthSouth’s fraud by increasing the rent payable tous back to $10.3 million and to change the lease term to its historicalexpiration on January 1, 2006, among other matters. HealthSouth hasdefended this lawsuit and asserted counterclaims against us arising from thisand unrelated matters. This litigation is pending at this time. In June 2004,we declared an event of default under the amended lease because HealthSouthfailed to deliver to us accurate and timely financial information as requiredby the amended lease. On October 26, 2004, we terminated the amended leasebecause of this event of default by sending a notice of lease termination toHealthSouth. On November 2, 2004, HealthSouth brought a new lawsuitagainst us in the Massachusetts Superior Court seeking to prevent ourtermination of the amended lease; on November 9, 2004, after a hearing,the court denied HealthSouth’s request for a preliminary injunction to preventtermination of the amended lease. We are currently seeking an expeditedjudicial determination that the lease termination was valid and we are pursuingdamages against HealthSouth in the lawsuit which we brought in 2003. We havealso begun work to identify and qualify a new tenant operator for thehospitals. Our lease with HealthSouth requires that, after termination,HealthSouth manage the hospitals for our account for a management fee duringthe period of the transition to a new tenant and remit the net cash flow to us.During the pendency of these disputes, HealthSouth has continued to pay us atthe disputed rent amount and we have applied the payments received against thenet cash flow due, but we do not know how long HealthSouth may continue to makepayments.  On June 27, 2005,HealthSouth filed with the SEC a restated Report 10-K for the periods ending December 31,2003.  This restated Report 10-K includesfinancial data which shows HealthSouth to have a substantial negative net worthand a history of substantial operating losses. To date we have been unable to obtain current financial or operatingdata concerning HealthSouth or our hospitals upon which we believe we can rely.

 

6

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

 

The following discussionshould be read in conjunction with our consolidated financial statements andnotes thereto included in this quarterly report and our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

**PORTFOLIO OVERVIEW**

 

**The following tables present an overview of our portfolio:**

 

As of June 30, 2005

(dollars in thousands)

 
| ** **                         | ** ** | **# of  Properties** | ** ** | **# of Units/Beds** | ** ** | **Carrying Value  of Investment (1)** | ** ** | **% of  Investment** | ** ** | **Annualized  Current Rent** | ** ** | **% of  Annualized  Current Rent** | ** ** |
|------------------------------------|------------|----------------------|------------|---------------------|------------|---------------------------------------|------------|----------------------|------------|------------------------------|------------|------------------------------------|------------|
| Facility Type                      |       |                 |       |                |       |                                  |       |                 |       |                         |       |                               |       |
| Independent  living communities(2) |       | 36                   |       | 10,412              |       | $                                     | 903,575    |                 | 55.5       | %                            | $          | 90,612                             |       | 56.3 | % |
| Assisted living  facilities        |       | 85                   |       | 5,636               |       | 462,783                               |       | 28.4                 | %          | 44,625                       |       | 27.7                               | %          |
| Skilled nursing  facilities        |       | 61                   |       | 6,309               |       | 218,320                               |       | 13.4                 | %          | 17,042                       |       | 10.6                               | %          |
| Hospitals                          |       | 2                    |       | 364                 |       | 43,553                                |       | 2.7                  | %          | 8,700                        |       | 5.4                                | %          |
| Total                              |       | 184                  |       | 22,721              |       | $                                     | 1,628,231  |                 | 100.0      | %                            | $          | 160,979                            |       | 100.0 | % |
|                               |       |                 |       |                |       |                                  |       |                 |       |                         |       |                               |       |
| Tenant/Operator                    |       |                 |       |                |       |                                  |       |                 |       |                         |       |                               |       |
| Five  Star/Sunrise (3)             |       | 31                   |       | 7,307               |       | $                                     | 630,162    |                 | 38.7       | %                            | $          | 64,333                             |       | 40.0 | % |
| Five Star                          |       | 101                  |       | 7,906               |       | 431,182                               |       | 26.4                 | %          | 33,974                       |       | 21.1                               | %          |
| Sunrise/Marriott  (4)              |       | 14                   |       | 4,091               |       | 325,473                               |       | 20.0                 | %          | 31,197                       |       | 19.3                               | %          |
| NewSeasons/IBC  (5)                |       | 10                   |       | 1,019               |       | 87,641                                |       | 5.4                  | %          | 9,287                        |       | 5.8                                | %          |
| HealthSouth (6)                    |       | 2                    |       | 364                 |       | 43,553                                |       | 2.7                  | %          | 8,700                        |       | 5.4                                | %          |
| Alterra  Healthcare Corporation    |       | 18                   |       | 894                 |       | 61,126                                |       | 3.8                  | %          | 7,136                        |       | 4.4                                | %          |
| Genesis  HealthCare Corporation    |       | 1                    |       | 156                 |       | 13,007                                |       | 0.8                  | %          | 1,522                        |       | 1.0                                | %          |
| 5 private  companies (combined)    |       | 7                    |       | 984                 |       | 36,087                                |       | 2.2                  | %          | 4,830                        |       | 3.0                                | %          |
| Total                              |       | 184                  |       | 22,721              |       | $                                     | 1,628,231  |                 | 100.0      | %                            | $          | 160,979                            |       | 100.0 | % |

 

**Tenant Operating Statistics (Quarter Ended June 30)(7)**

 
| ** **                      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------|------------|-------------------|------------|---------------|------------|-----------------|------------|--------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                | ** ** |
| ** **                      | ** ** | **2005**          | ** ** | **2004**      | ** ** | **2005**        | ** ** | **2004**     | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Five  Star/Sunrise (3)          |       | 1.17              | x          | 1.12          | x          | 92              | %          | 90           | %          | 84                                          | %          | 85 | % | 12 | % | 11 | % | 4 | % | 4 | % |
| Five Star (8)                   |       | 1.68              | x          | 1.65          | x          | 87              | %          | 87           | %          | 42                                          | %          | 34 | % | 20 | % | 21 | % | 38 | % | 45 | % |
| Sunrise/Marriott  (4)           |       | 1.25              | x          | 1.35          | x          | 89              | %          | 89           | %          | 81                                          | %          | 81 | % | 15 | % | 14 | % | 4 | % | 5 | % |
| NewSeasons/IBC  (5)             |       | 1.10              | x          | 1.12          | x          | 81              | %          | 78           | %          | 100                                         | %          | 100 | % | — |   | — |   | — |   | — |   |
| HealthSouth (6)                 |       | NA                |       | NA            |       | NA              |       | NA           |       | NA                                          |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra  Healthcare             |       | 1.80              | x          | 1.64          | x          | 84              | %          | 81           | %          | 98                                          | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis  HealthCare             |       | 2.03              | x          | 2.13          | x          | 96              | %          | 97           | %          | 23                                          | %          | 24 | % | 29 | % | 35 | % | 48 | % | 41 | % |
| 5 private  companies (combined) |       | 1.89              | x          | 1.89          | x          | 87              | %          | 86           | %          | 24                                          | %          | 25 | % | 21 | % | 22 | % | 55 | % | 53 | % |

 

**Tenant Operating Statistics (Six Months Ended June 30)(7)**

 
| ** **                      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------|------------|-------------------|------------|---------------|------------|-----------------|------------|--------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                | ** ** |
|                            |       | **2005**          | ** ** | **2004**      | ** ** | **2005**        | ** ** | **2004**     | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** |   |
| Five  Star/Sunrise (3)          |       | 1.16              | x          | 1.12          | x          | 92              | %          | 90           | %          | 84                                          | %          | 85 | % | 4 | % | 11 | % | 12 | % | 4 | % |
| Five Star (8)                   |       | 1.65              | x          | 1.63          | x          | 87              | %          | 88           | %          | 42                                          | %          | 35 | % | 38 | % | 45 | % | 20 | % | 20 | % |
| Sunrise/Marriott  (4)           |       | 1.25              | x          | 1.33          | x          | 90              | %          | 89           | %          | 81                                          | %          | 81 | % | 4 | % | 14 | % | 15 | % | 5 | % |
| NewSeasons/IBC  (5)             |       | 1.11              | x          | 1.02          | x          | 81              | %          | 79           | %          | 100                                         | %          | 100 | % | — |   | — |   | — |   | — |   |
| HealthSouth (6)                 |       | NA                |       | NA            |       | NA              |       | NA           |       | NA                                          |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Alterra  Healthcare             |       | 1.75              | x          | 1.62          | x          | 84              | %          | 81           | %          | 98                                          | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| Genesis  HealthCare             |       | 1.87              | x          | 1.84          | x          | 96              | %          | 96           | %          | 21                                          | %          | 23 | % | 32 | % | 34 | % | 47 | % | 43 | % |
| 5 private  companies (combined) |       | 1.89              | x          | 1.92          | x          | 87              | %          | 86           | %          | 24                                          | %          | 25 | % | 25 | % | 22 | % | 51 | % | 53 | % |

 

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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)**          These31 properties are leased to Five Star and 30 are managed by Sunrise SeniorLiving, Inc., or Sunrise. Sunrise does not guaranty Five Star’s leaseobligations. Rent coverage is after non-subordinated management fees of $5.6million and $11.1 million, and $4.6 million and $9.2 million in the quarter andsix months ended June 30, 2005 and 2004, respectively.

** **

**(4)**          MarriottInternational, Inc., or Marriott, guarantees the lease for the 14properties leased to Sunrise.

** **

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

** **

(6)          Effective January 2, 2002, we entered anamended lease with HealthSouth for two hospitals. In April 2003, wecommenced a lawsuit against HealthSouth seeking, among other matters, to reformthe amended lease based upon HealthSouth’s fraud by increasing the rent payableto us from the date of amendment forward. This litigation is pending at this time. On October 26, 2004, we

 

7

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terminatedthe amended lease for default because HealthSouth failed to deliver to usaccurate and timely financial information as required by the amendedlease.  On November 2, 2004,HealthSouth brought a new lawsuit against us seeking to prevent our terminationof the amended lease.  On November 9,2004, after a hearing, the court denied HealthSouth’s request for a preliminaryinjunction to prevent the lease termination. We are currently seeking an expedited judicial determination that thelease termination was valid and we are pursuing damages against HealthSouth inthe lawsuit which we brought in 2003.  Wehave also begun work to identify and qualify a new tenant operator for thehospitals.  Our lease with HealthSouthrequires that, after termination, HealthSouth manage the hospitals for ouraccount for a management fee during the period of the transition to a newtenant and remit the net cash flow to us. During the pendency of these disputes, HealthSouth has continued to payus at the disputed rent amount and we have applied the payments receivedagainst the net cash flow due, but we do not know how long HealthSouth maycontinue to make payments.

 

During2003, HealthSouth issued a press release stating that its previously publishedhistorical financial information should not be relied upon.  From then until June 27, 2005,HealthSouth failed to file audited financial information with the SEC. On June 27,2005, HealthSouth filed a restated Report 10-K for periods ending December 31,2003, which shows a substantial negative net worth and a history of substantialoperating losses.  We have been unable toobtain reliable current operating and financial data concerning the operationsof HealthSouth or our hospitals and so we do not disclose any operating orfinancial data for these hospitals or this operator.

 

(7)          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.

 

**(8)**          Includesdata for periods prior to our ownership of certain properties included in thislease.

 

8

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**RESULTS OF OPERATIONS**

 

#### **Three Months EndedJune 30, 2005, Compared to Three Months Ended June 30, 2004:**

 
| ** **                           | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|------------|------------|-------------------|------------|--------------|------------|
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** | ** **        | ** ** |
| Rental income                        |       | $                                            | 39,094     |       | $          | 35,189            |       | $            | 3,905      |   | 11.1 | % |
| Interest and  other income           |       | 511                                          |       | 317        |       | 194               |       | 61.2         | %          |
|                                 |       |                                         |       |       |       |              |       |         |       |
| Interest expense                     |       | 11,443                                       |       | 10,255     |       | 1,188             |       | 11.6         | %          |
| Depreciation  expense                |       | 10,759                                       |       | 9,687      |       | 1,072             |       | 11.1         | %          |
| General and  administrative expense  |       | 3,087                                        |       | 2,742      |       | 345               |       | 12.6         | %          |
| Gain on sale of  properties          |       | 717                                          |       | 1,219      |       | (502              | )          | (41.2        | )%         |
|                                 |       |                                         |       |       |       |              |       |         |       |
| Net income                           |       | $                                            | 15,033     |       | $          | 14,041            |       | $            | 992        |   | 7.1 | % |
| Weighted average  shares outstanding |       | 68,537                                       |       | 63,471     |       | 5,066             |       | 8.0          | %          |
| Net income per  share                |       | $                                            | 0.22       |       | $          | 0.22              |       | $            | 0.00       |   | 0.0 | % |

 

Rentalincome increased because of the full impact of rents from our real estateacquisitions totaling $187.8 million made since April 1, 2004.  Interest and other income for the threemonths ended June 30, 2005 includes $166,000 of mortgage interest incomerelated to the $24.0 million of mortgage financing provided to Five Star in June 2005.

 

Interestexpense increased due to our assumption of $48.8 million of debt in connectionwith an acquisition during the fourth quarter of 2004 and higher interest costsassociated with our revolving bank credit facility.  Our weighted average balance outstanding andinterest rate under our revolving bank credit facility was $52.3 million and4.6% and $29.9 million and 2.7% for the three months ended June 30, 2005and 2004, respectively.

 

Depreciation expense forthe second quarter of 2005 increased as a result of depreciation on our realestate acquisitions totaling $187.8 million made since April 1,2004.  General and administrative expenses include $500,000 of HealthSouthlitigation costs in the second quarter of 2005.  General andadministrative expenses, exclusive of litigation costs, decreased in 2005 by$155,000, or 5.7%, due to a reduction in estimated incentive fees under ouradvisory contract accrued in 2005, offset by acquisitions since April 1,2004 and accounting and other costs associated with the Sarbanes-Oxley Act of2002 and related SEC rules.

 

Net income increased because of the changes inrevenues and expenses described above. Net income per share was unchanged because of the increase in theweighted average number of shares outstanding that resulted from our issuanceof common shares in December 2004.

 

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#### **Six Months Ended June 30,2005, Compared to Six Months Ended June 30, 2004:**

 
| ** **                           | ** ** | **2005**                                     | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|------------|------------|-------------------|------------|--------------|------------|
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** | ** **        | ** ** |
| Rental income                        |       | $                                            | 77,982     |       | $          | 70,018            |       | $            | 7,964      |   | 11.4 | % |
| Interest and  other income           |       | 850                                          |       | 2,031      |       | (1,181            | )          | (58.1        | )%         |
|                                 |       |                                         |       |       |       |              |       |         |       |
| Interest expense                     |       | 22,675                                       |       | 20,625     |       | 2,050             |       | 9.9          | %          |
| Depreciation  expense                |       | 21,505                                       |       | 19,272     |       | 2,233             |       | 11.6         | %          |
| General and  administrative expense  |       | 6,480                                        |       | 6,061      |       | 419               |       | 6.9          | %          |
| Gain on sale of  properties          |       | 717                                          |       | 1,219      |       | (502              | )          | (41.2        | )%         |
|                                 |       |                                         |       |       |       |              |       |         |       |
| Net income                           |       | $                                            | 28,889     |       | $          | 27,310            |       | $            | 1,579      |   | 5.8 | % |
| Weighted average  shares outstanding |       | 68,516                                       |       | 62,913     |       | 5,603             |       | 8.9          | %          |
| Net income per  share                |       | $                                            | 0.42       |       | $          | 0.43              |       | $            | (0.01      | ) | (2.3 | )% |

 

Rentalincome increased because of the full impact of rents from our real estateacquisitions totaling $211.9 million made since January 1, 2004.  Interest and other income for the six monthsended June 30, 2004 includes a $1.25 million settlement payment we receivedfrom Marriott in January 2004.

 

Interestexpense increased due to our assumption of $48.8 million of debt in connectionwith an acquisition during the fourth quarter of 2004 and higher interest costsassociated with our revolving bank credit facility.  Our weighted average balance outstanding andinterest rate under our revolving bank credit facility was $45.5 million and4.4% and $38.3 million and 2.7% for the six months ended June 30, 2005 and2004, respectively.

 

Depreciation expense forthe first half of 2005 increased as a result of depreciation on our real estateacquisitions totaling $211.9 million made since January 1, 2004. General and administrative expenses include $900,000 and $50,000 of HealthSouthlitigation costs for the six months ended June 30, 2005 and 2004,respectively, and in 2004, $775,000 of due diligence costs incurred inconnection with a failed potential acquisition.  General andadministrative expenses, exclusive of due diligence and litigation costs,increased in 2005 by $344,000, or 6.6%, due to acquisitions made since January 1,2004 and accounting and other costs associated with the Sarbanes-Oxley Act of2002 and related SEC rules, offset by a reduction in estimated incentive feesunder our advisory contract accrued in 2005.

 

Net income increased because of the changes inrevenues and expenses described above. Net income per share decreased because of the increase in the weightedaverage number of shares outstanding that resulted from our issuance of commonshares during 2004.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our Operating Liquidity and Resources

 

Rents from our propertiesare our principal sources of funds for current expenses and distributions toshareholders.  We generally receiveminimum rents monthly or quarterly from our tenants and we receive percentagerents monthly, quarterly or annually. This flow of funds has historically been sufficient for us to pay ouroperating expenses, debt service and distributions to shareholders.  We believe that our operating cash flow willbe sufficient to meet our operating expenses, debt service and distributionpayments for the foreseeable future.

 

10

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Our Investment and Financing Liquidity and Resources

 

## **In order to fund acquisitions and to accommodate cash needsthat may result from timing differences between our receipt of rents and ourneed to pay operating expenses and our desire to make distributions to ourshareholders, we maintain a revolving bank credit facility with a group of commercialbanks and other lenders. In July 2005, we amended our existing revolvingbank credit facility to extend its maturity from November 2005 to November 2009,with an extension option to November 2010 upon payment of an extensionfee.  Availability under the revolvingbank credit facility increased from $250.0 million to $550.0 million, and theamended facility includes a feature under which we may expand the maximumborrowing to $1.1 billion, in certain circumstances.  Borrowings under our revolving bank creditfacility are unsecured.  We may borrow,repay and reborrow funds until maturity. No principal repayment is due untilmaturity.  We pay interest on borrowingsunder the revolving bank credit facility at LIBOR plus a margin.**

 

In June 2005,we purchased four assisted living communities for $24.0 million and provided amortgage financing line of credit for up to $43.5 million secured by sixassisted living facilities.  As of June 30,2005, $24.0 million of this mortgage financing was drawn and due to us. Theseinvestments, totaling $48.0 million, were funded with borrowings under ourrevolving bank credit facility and cash on hand.

 

In May 2005,we sold one nursing home for $4.6 million. We used the proceeds to repay borrowings and for general businesspurposes.  We prepaid one of our mortgageobligations for $4.2 million in connection with the sale of this property.

 

During 2005, we purchased$7.7 million of improvements made to some of our properties. We borrowed on ourrevolving bank credit facility and used cash on hand to fund these purchases.

 

At June 30, 2005, wehad $7.2 million of cash and cash equivalents and $166.0 million available forborrowing under our then existing 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 property acquisitions and expendituresrelated to the repair, maintenance or renovation of our properties.

 

When significantamounts are outstanding on our revolving bank credit facility or as thematurity dates of our revolving bank credit facility and term debts approach,we will explore alternatives for the repayment of amounts due.  Such alternatives may include incurringadditional debt and issuing new equity securities. As of June 30, 2005, wehad $1.5 billion available on an effective shelf registration statement. Aneffective shelf registration statement allows us to issue public securities onan expedited basis, but it does not assure that there will be buyers for suchsecurities.  Although there can be noassurance that we will complete 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 May 20,2005, we paid a $0.32 per common share, or $21.9 million, distribution to ourcommon shareholders for the quarter ended March 31, 2005.  On July 5, 2005, we declared adistribution of $0.32 per common share, or $21.9 million, to be paid to ourcommon shareholders of record on July 20, 2005 with respect to our resultsfor the quarter ended June 30, 2005. We expect to pay this distribution on or about August 19, 2005,using cash on hand and borrowings under our revolving bank credit facility.

 

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**As of June 30, 2005, our contractualobligations were as follows (dollars in thousands):**

 
| ** **                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| **Contractual  Obligations**   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-Term Debt  Obligations(1) |       | $                          | 571,510    |   | $ | 84,503 |   | $ | 2,200 |   | $ | 2,491 |   | $ | 482,316 |   |
| Capital Lease  Obligations     |       | 6,808                      |       | 434 |   | 1,905 |   | 2,209 |   | 2,260 |   |
| Ground Lease  Obligations      |       | 3,140                      |       | 142 |   | 284 |   | 284 |   | 2,430 |   |
| Total                          |       | $                          | 581,458    |   | $ | 85,079 |   | $ | 4,389 |   | $ | 4,984 |   | $ | 487,006 |   |

 

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(1)          Our term debt maturities are as follows: $84.0 million in 2009 (in July 2005, our credit facility wasextended from November 2005 to November 2009); $282.1 million in2012; $12.5 million in 2013; $150.0 million in 2015; $14.7 million in 2027; and$28.2 million in 2041.

 

On June 3,2005, we agreed to provide Five Star a line of credit secured by firstmortgages on six assisted living properties. The maximum borrowing under this line of credit is $43.5 million.  At June 30, 2005, $24.0 million wasdrawn and funded by us and we are contractually obligated to fund up to anadditional $19.5 million.  The sixfacilities which secure our mortgage were purchased by the borrower, Five Star,simultaneously with our providing this line of credit.  The purchase price paid by the borrower, FiveStar, was $58.0 million.  Our contractualfunding obligations under this mortgage line of credit continues until it isrepaid or matures on June 30, 2007, when Five Star is obligated to repayall amounts then outstanding.

 

As of August 2, 2005,we have no commercial paper, derivatives, swaps, hedges, joint ventures orpartnerships.  We have no off balancesheet arrangements other than our trust preferred securities issued by anunconsolidated subsidiary of ours. The junior subordinated debentures due in2041 which fund these trust preferred securities are included on our balancesheet.

 

## **Debt Covenants**

 

Our principal debtobligations at June 30, 2005, were our unsecured revolving bank creditfacility, two issues totaling $395.0 million of unsecured senior notes and our$28.2 million of junior subordinated debentures.  Our senior notes are governed by anindenture.  This indenture and relatedsupplements and our revolving bank credit facility contain a number offinancial ratio covenants which generally restrict our ability to incur debts,including debts secured by mortgages on our properties in excess of calculatedamounts, require us to maintain a minimum net worth, restrict our ability tomake distributions under certain circumstances and require us to maintain otherratios.  Our junior subordinateddebentures are governed by an indenture which is generally less restrictivethan the indenture governing our senior notes and the terms of our revolvingbank credit facility.  As of June 30,2005, we believe we were in compliance with all of the covenants under ourindentures and related supplements and our revolving bank credit facility.

 

In addition to ourunsecured debt obligations, we had $71.1 million of mortgage debt and securedbonds outstanding at June 30, 2005. Our mortgage debt and secured bonds are secured by 21 of our properties.

 

Noneof our indentures and related supplements, our revolving bank credit facilityor our other debt obligations contains provisions for acceleration which couldbe triggered by our debt ratings. However, in certain circumstances ourrevolving bank credit facility uses our senior debt rating to determine thefees and the interest 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 or junior subordinateddebentures indenture would be a default under our revolving bank creditfacility.

 

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## **Related Party Transactions**

 

On June 5, 2005, wepurchased from Five Star Quality Care, Inc., or Five Star, four assistedliving communities for $24.0 million, which were leased back to Five Star.  These properties contain 299 living units and100% of the revenues at these facilities are paid by residents from their privateresources.  These communities were addedto a combination lease for 97 communities from us to Five Star which has acurrent term ending in 2020, plus tenant renewal options thereafter.  The annual rent under the combined lease wasincreased by $2.2 million and percentage rent based on increases in grossrevenues at the four properties added will commence in 2007.

 

In addition to this saleleaseback, we also agreed to provide a first mortgage line of credit to assistFive Star with financing the purchase of six assisted living communities in suburbanPittsburgh, Pennsylvania.  The line ofcredit may be drawn for up to $43.5 million, or 75% of Five Star’s purchaseprice.  At closing, $24.0 million of thisline of credit was drawn.  The balancemay be drawn by Five Star to finance future acquisitions or for its otherbusiness purposes.  This mortgage line ofcredit requires payment of interest only at 9% per annum until it matures on June 30,2007.

 

On May 18, 2005, wesold one property to Five Star for net proceeds of $4.6 million and recognizeda gain of $717,000.  This property wasleased on a combined basis with 97 other properties we lease to Five Star.Under the terms of our lease with Five Star, the annual rent payable to us wasreduced by 10% of the net proceeds we received from this sale, or $460,000.

 

During 2005, pursuant to the terms of our leases withFive Star, we purchased $7.7 million of improvements to our properties leasedby Five Star, and the annual rent payable to us by Five Star was increased by10% of the amounts invested, or $770,000.

 

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**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, 2004.  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 atfloating rates.  The facility was amendedand the maturity date was extended from November 2005 to November 2009.  As of June 30, 2005, we had $84.0million outstanding under our revolving bank credit facility. We may makerepayments under our revolving bank credit facility at any time withoutpenalty.  We borrow in U.S. dollars andborrowings under our revolving bank credit facility accrue 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, theinterest rate payable on our outstanding revolving indebtedness of $84.0million at June 30, 2005, was 4.75% per annum.  The following table presents the impact a 10%change in interest rates would have on our floating rate interest expense at June 30,2005 (dollars in thousands):

 
| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest Rate Per  Year**             | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per Year** | ** ** |
| At June 30,  2005 |       | 4.75                                    | %          | $ | 84,000 |   | $ | 3,990 |   |
| 10% reduction          |       | 4.28                                    | %          | $ | 84,000 |   | $ | 3,595 |   |
| 10% increase           |       | 5.23                                    | %          | $ | 84,000 |   | $ | 4,393 |   |

 

The foregoing table shows the impact of animmediate change in floating interest rates. If interest rates were to change gradually over time, the impact wouldbe spread over time.  Our exposure to fluctuationsin floating interest rates will increase or decrease in the future withincreases or decreases in the outstanding amount under our revolving bankcredit facility or other floating rate obligations.

 

**Item4.  Controls and Procedures**

 

As of the end of theperiod covered by this report, our management carried out an evaluation, underthe supervision and with the participation of our managing trustees, Presidentand Chief 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.  Basedupon that evaluation, our managing trustees, President and Chief OperatingOfficer and Treasurer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

 

There have been no changes in our internal control over financialreporting during the quarter ended June 30, 2005, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

 

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINSFORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS.  THESE STATEMENTS REPRESENT OUR PRESENTBELIEFS AND EXPECTATIONS, BUT THEY MAY NOT OCCUR FOR VARIOUS REASONS.  FOR EXAMPLE, WE ARE CURRENTLY INVOLVED INLITIGATION WITH HEALTHSOUTH.  WE HAVESENT HEALTHSOUTH A LEASE TERMINATION NOTICE AND HEALTHSOUTH HAS DISPUTED THELEASE TERMINATION AND CONTINUED TO PAY US MONTHLY AMOUNTS EQUAL TO THE DISPUTEDAMOUNTS DUE UNDER THE TERMINATED LEASE. WE CANNOT PREDICT HOW OR WHEN OUR DISPUTES WITH HEALTHSOUTH WILL BERESOLVED.  DISCOVERY DURING LAWSUITS ORDECISIONS BY COURTS MAY CREATE RESULTS THAT ARE DIFFERENT FROM ANYIMPLICATIONS HEREIN.  YOU SHOULD NOTPLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. EXCEPT AS MAY BEREQUIRED BY APPLICABLE LAW, WE DO NOT INTEND TO IMPLY THAT WE WILL RELEASEPUBLICLY THE RESULT OF ANY REVISION TO THE FORWARD LOOKING STATEMENTS CONTAINEDIN THIS QUARTERLY REPORT TO REFLECT THE FUTURE OCCURRENCE OF PRESENTLYUNANTICIPATED EVENTS.

 

**STATEMENTCONCERNING LIMITED LIABILITY**

 

THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHINGSENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OFWHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED INTHE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND,PROVIDES THAT THE NAME “SENIOR HOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEESUNDER THE DECLARATION OF TRUST 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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**PART II.                Other Information**

 

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

** **

**On May 10, 2005, we granted each of our threeindependent trustees 1,000 common shares of beneficial interest, par value$0.01 per share, valued at $17.64 per share, the closing price of our commonshares on the New York Stock Exchange on that day.  We made these grants pursuant to an exemptionfrom registration contained in section 4(2) of the Securities Act of1933, as amended.**

 

**Item4.    Submission of Matters to a Vote ofSecurity Holders**

 

At our regular annual meeting held on May 10,2005, our shareholders re-elected Frederick N. Zeytoonjian as trustee(63,593,260 shares voted for and 1,627,189 shares withheld).  The term of office of Mr. Zeytoonjianwill extend until our annual meeting of shareholders in 2008.  Messrs. Frank J. Bailey, John L.Harrington, Gerard M. Martin and Barry M. Portnoy continue to serve as trusteeswith terms of office expiring in 2006, 2007, 2007 and 2006, respectively.

 

**Item 6.    Exhibits**

 
| 10.1   |   | First Amendment  to Second Amended and Restated Master Lease Agreement, dated as of  May 17, 2005, by and among certain subsidiaries of the Company, as  Landlord, and Five Star Quality Care Trust, as Tenant. (*Incorporated by reference to the Company’s Current  Report on Form 8-K dated June 8, 2005*.)                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Second Amendment  to Second Amended and Restated Master Lease Agreement, dated as of  June 3, 2005, by and among certain subsidiaries of the Company, as  Landlord, and Five Star Quality Care Trust, as Tenant. (*Incorporated by reference to the Company’s Current  Report on Form 8-K dated June 8, 2005*.)                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Amended and  Restated Credit Agreement, dated as of July 29, 2005, by and among the  Company, Wachovia Bank, National Association, as Administrative Agent, the  Sole Arranger, the Sole Book Manager, the Syndication Agents and the  Documentation Agents signatory thereto, and each of the financial  institutions initially a signatory thereto as a Lender. *(Incorporated  by reference to the Company's Current Report on Form 8-K dated August 1,  2005.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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.)*                                                                                                                                                                                                                                                                                                                 |

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon 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:  August 3, 2005 |
|   |                             |
|   |                             |
|   | By:                              | /s/ John R.  Hoadley |   |
|   |                             | John R. Hoadley |
|   |                             | Treasurer and  Chief Financial Officer |
|   |                             | (principal  financial officer) |
|   |                             | Dated:  August 3, 2005 |

 

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