**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION****WASHINGTON, DC  20549**

 

**FORM 10-Q**

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

** **

**For thequarterly period ended March 31, 2010**

** **

**OR**

** **
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**Commission File Number 1-15319**

 

**SENIORHOUSING PROPERTIES TRUST**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

(Address of Principal Executive Offices)  (Zip Code)

 

**617-796-8350**

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check markwhether 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 (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check One):

 

| Large Accelerated Filer x                     |   | Accelerated Filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non –Accelerated Filer o                 |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

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

 

Numberof registrant’s common shares outstanding as of May 5, 2010: 127,402,807.

 

 

 

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SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

March 31, 2010

 

INDEX

 
| ** **   | ** **                                                                                               | **Page** |
|--------------|----------------------------------------------------------------------------------------------------------|----------|
| PART I  | Financial Information                                                                                    |     |
|         |                                                                                                     |     |
| Item 1.      | Financial Statements (unaudited)                                                                         | 1        |
|         |                                                                                                     |     |
|         | Condensed  Consolidated Balance Sheets – March 31, 2010 and December 31, 2009             | 1        |
|         |                                                                                                     |     |
|         | Condensed  Consolidated Statements of Income – Three Months Ended March 31, 2010  and 2009     | 2        |
|         |                                                                                                     |     |
|         | Condensed  Consolidated Statements of Cash Flows – Three Months Ended March 31,  2010 and 2009 | 3        |
|         |                                                                                                     |     |
|         | Notes to Condensed Consolidated Financial Statements                                                     | 4        |
|         |                                                                                                     |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              | 10       |
|         |                                                                                                     |     |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                              | 18       |
|         |                                                                                                     |     |
| Item 4.      | Controls and  Procedures                                                                                 | 20       |
|         |                                                                                                     |     |
|         | Warning Concerning Forward Looking Statements                                                            | 21       |
|         |                                                                                                     |     |
|         | Statement Concerning Limited Liability                                                                   | 23       |
|         |                                                                                                     |     |
| PART II | Other Information                                                                                        |     |
|         |                                                                                                     |     |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                             | 24       |
|         |                                                                                                     |     |
| Item 6.      | Exhibits                                                                                                 | 24       |
|         |                                                                                                     |     |
|         | Signatures                                                                                               | 25       |

 

*In this Quarterly Report on Form 10-Q,the terms “the Company”, “we”, “us” and “our” refer to Senior HousingProperties Trust and its consolidated subsidiaries, unless otherwise noted.*

 

----

 

**PART I.  Financial Information**

 

**Item1.    Financial Statements.**

** **

SENIOR HOUSING PROPERTIESTRUST

CONDENSED CONSOLIDATEDBALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 
| ** **                                                                                                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ASSETS                                                                                                                                                                                                             |       |               |       |                  |       |
| Real estate properties:                                                                                                                                                                                            |       |               |       |                  |       |
| Land                                                                                                                                                                                                               |       | $                  | 365,576    |                  | $          | 365,576 |   |
| Buildings and improvements                                                                                                                                                                                         |       | 2,958,769          |       | 2,952,407             |       |
|                                                                                                                                                                                                               |       | 3,324,345          |       | 3,317,983             |       |
| Less accumulated depreciation                                                                                                                                                                                      |       | 475,451            |       | 454,317               |       |
|                                                                                                                                                                                                               |       | 2,848,894          |       | 2,863,666             |       |
|                                                                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | 5,486              |       | 10,494                |       |
| Restricted cash                                                                                                                                                                                                    |       | 4,643              |       | 4,222                 |       |
| Deferred financing fees, net                                                                                                                                                                                       |       | 14,942             |       | 14,882                |       |
| Acquired real estate leases, net                                                                                                                                                                                   |       | 41,032             |       | 42,769                |       |
| Other assets                                                                                                                                                                                                       |       | 51,025             |       | 51,893                |       |
| Total assets                                                                                                                                                                                                       |       | $                  | 2,966,022  |                  | $          | 2,987,926 |   |
|                                                                                                                                                                                                               |       |               |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                          |       |               |       |                  |       |
| Unsecured revolving credit facility                                                                                                                                                                                |       | $                  | 58,000     |                  | $          | 60,000 |   |
| Senior unsecured notes due 2012 and 2015, net of  discount                                                                                                                                                         |       | 322,196            |       | 322,160               |       |
| Secured debt and capital leases                                                                                                                                                                                    |       | 657,862            |       | 660,059               |       |
| Accrued interest                                                                                                                                                                                                   |       | 10,836             |       | 13,693                |       |
| Acquired real estate lease obligations, net                                                                                                                                                                        |       | 9,318              |       | 9,687                 |       |
| Other liabilities                                                                                                                                                                                                  |       | 22,493             |       | 21,677                |       |
| Total liabilities                                                                                                                                                                                                  |       | 1,080,705          |       | 1,087,276             |       |
|                                                                                                                                                                                                               |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                                                                               |       |               |       |                  |       |
| Shareholders’ equity:                                                                                                                                                                                         |       |               |       |                  |       |
| Common shares of beneficial interest, $0.01 par  value: 149,700,000 shares authorized, 127,402,807 and 127,377,665 shares  issued and outstanding at March 31, 2010 and December 31, 2009,  respectively |       | 1,274              |       | 1,273                 |       |
| Additional paid in capital                                                                                                                                                                                         |       | 2,227,061          |       | 2,226,474             |       |
| Cumulative net income                                                                                                                                                                                              |       | 670,017            |       | 640,033               |       |
| Cumulative distributions                                                                                                                                                                                           |       | (1,014,967         | )          | (969,111              | )          |
| Unrealized gain on investments                                                                                                                                                                                     |       | 1,932              |       | 1,981                 |       |
| Total shareholders’ equity                                                                                                                                                                                    |       | 1,885,317          |       | 1,900,650             |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                    |       | $                  | 2,966,022  |                  | $          | 2,987,926 |   |

 

*See accompanying notes.*

 

1

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SENIOR HOUSING PROPERTIESTRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                |       |                                   |       |   |   |
| Rental income                       |       | $                                      | 80,447     |   | $ | 68,377 |   |
|                                |       |                                   |       |   |   |
| Expenses:                           |       |                                   |       |   |   |
| Depreciation                        |       | 22,289                                 |       | 18,389 |   |
| General and administrative          |       | 5,501                                  |       | 4,751 |   |
| Property operating expenses         |       | 4,375                                  |       | 2,955 |   |
| Acquisition costs                   |       | 35                                     |       | 112 |   |
| Total expenses                      |       | 32,200                                 |       | 26,207 |   |
|                                |       |                                   |       |   |   |
| Operating income                    |       | 48,247                                 |       | 42,170 |   |
|                                |       |                                   |       |   |   |
| Interest and other income           |       | 257                                    |       | 208 |   |
| Interest expense                    |       | (18,414                                | )          | (10,776 | ) |
| Equity in losses of an investee     |       | (28                                    | )          | — |   |
| Income before income tax expense    |       | 30,062                                 |       | 31,602 |   |
| Income tax expense                  |       | (78                                    | )          | (69 | ) |
| Net income                          |       | $                                      | 29,984     |   | $ | 31,533 |   |
|                                |       |                                   |       |   |   |
|                                |       |                                   |       |   |   |
| Weighted average shares outstanding |       | 127,380                                |       | 117,853 |   |
|                                |       |                                   |       |   |   |
| Earnings per share:                 |       |                                   |       |   |   |
| Net income                          |       | $                                      | 0.24       |   | $ | 0.27 |   |

 

*Seeaccompanying notes*.

 

2

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SENIORHOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Three Months Ended********March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                          |       |                                         |       |   |   |
| Net income                                                                     |       | $                                            | 29,984     |   | $ | 31,533 |   |
| Adjustments to reconcile net income to cash  provided byoperating  activities: |       |                                         |       |   |   |
| Depreciation                                                                   |       | 22,289                                       |       | 18,389 |   |
| Amortization of deferred financing fees and debt  discounts                    |       | 558                                          |       | 540 |   |
| Amortization of acquired real estate leases                                    |       | 275                                          |       | 160 |   |
| Equity in losses of equity investment                                          |       | 28                                           |       | — |   |
| Change in assets and liabilities:                                              |       |                                         |       |   |   |
| Restricted cash                                                                |       | (421                                         | )          | (433 | ) |
| Other assets                                                                   |       | 747                                          |       | 2,274 |   |
| Accrued interest                                                               |       | (2,857                                       | )          | (2,941 | ) |
| Other liabilities                                                              |       | 1,406                                        |       | 3,119 |   |
| Cash provided by operating activities                                          |       | 52,009                                       |       | 52,641 |   |
|                                                                           |       |                                         |       |   |   |
| Cash flows from investing activities:                                          |       |                                         |       |   |   |
| Acquisitions                                                                   |       | (6,362                                       | )          | (32,252 | ) |
| Investment in Affiliates Insurance Company                                     |       | (20                                          | )          | — |   |
| Cash used for investing activities                                             |       | (6,382                                       | )          | (32,252 | ) |
|                                                                           |       |                                         |       |   |   |
| Cash flows from financing activities:                                          |       |                                         |       |   |   |
| Proceeds from issuance of common shares, net                                   |       | —                                       |       | 96,767 |   |
| Proceeds from borrowings on revolving credit  facility                         |       | 30,000                                       |       | 32,000 |   |
| Repayments of borrowings on revolving credit  facility                         |       | (32,000                                      | )          | (108,000 | ) |
| Repayment of other debt                                                        |       | (2,196                                       | )          | (751 | ) |
| Deferred financing fees                                                        |       | (583                                         | )          | (739 | ) |
| Distributions to shareholders                                                  |       | (45,856                                      | )          | (40,090 | ) |
| Cash used for financing activities                                             |       | (50,635                                      | )          | (20,813 | ) |
|                                                                           |       |                                         |       |   |   |
| Decrease in cash and cash equivalents                                          |       | (5,008                                       | )          | (424 | ) |
| Cash and cash equivalents at beginning of period                               |       | 10,494                                       |       | 5,990 |   |
| Cash and cash equivalents at end of period                                     |       | $                                            | 5,486      |   | $ | 5,566 |   |
|                                                                           |       |                                         |       |   |   |
| Supplemental cash flow information:                                            |       |                                         |       |   |   |
| Interest paid                                                                  |       | $                                            | 21,271     |   | $ | 13,717 |   |
|                                                                           |       |                                         |       |   |   |
| Non-cash financing activities:                                                 |       |                                         |       |   |   |
| Issuance of common shares                                                      |       | 590                                          |       | 28 |   |

 

*See accompanying notes.*

 

3

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 

**Note 1.  Basis of Presentation**

 

Theaccompanying condensed consolidated financial statements of Senior HousingProperties Trust and its subsidiaries, or we, us, or our, have been preparedwithout audit.  Certain information anddisclosures required by U.S. generally accepted accounting principles, or GAAP,for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequateto make the information presented not misleading.  However, the accompanying condensed consolidatedfinancial statements should be read in conjunction with the consolidated financialstatements and notes contained in our Annual Report on Form 10-K for theyear ended December 31, 2009, or our Annual Report.  In the opinion of our management, alladjustments, which include only normal recurring adjustments, considerednecessary for a fair presentation have been included.  All intercompany transactions and balancesbetween us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are notnecessarily indicative of the results that may be expected for the fullyear.  Reclassifications have been madeto the prior year’s financial statements to conform to the current year’spresentation.  These reclassificationswere made to separately state on our condensed consolidated statements ofincome our equity in losses of an investee and income tax expense that werepreviously included in general and administrative expenses.  These reclassifications had no effect on netincome or shareholders’ equity.

 

**Note 2.  Recent AccountingPronouncements**

 

InJanuary 2010, the Financial Accounting Standards Board, or FASB, issued anaccounting standards update requiring additional disclosures regarding fairvalue measurements. The update requires entities to disclose additionalinformation regarding assets and liabilities that are transferred betweenlevels within the fair value hierarchy. The update also clarifies the level ofdisaggregation at which fair value disclosures should be made and therequirements to disclose information about the valuation techniques and inputsused in estimating Level 2 and Level 3 fair values. The update iseffective for interim and annual reporting periods beginning after December 15,2009 except for the requirement to separately disclose purchases, sales,issuances and settlements in the Level 3 roll forward that becomeseffective for fiscal periods beginning after December 15, 2010.

 

InFebruary, the FASB issued an update to the disclosure requirements relating tosubsequent events to exclude the requirement to disclose the date through whichan entity has evaluated subsequent events and whether that date represents thedate the financial statements were issued or available to be issued.

 

Theadoption of these updates does not, and is not expected to, cause any materialchanges to the disclosures in our condensed consolidated financial statements.

 

**Note 3.  Real Estate Properties**

 

AtMarch 31, 2010, we owned 298 properties located in 35 states andWashington, D.C.

 

Duringthe three months ended March 31, 2010, pursuant to the terms of ourexisting leases with Five Star Quality Care, Inc., or Five Star, wepurchased $6,180 of improvements made to our properties leased to Five Star,and, as a result, the annual rent payable to us by Five Star was increased byapproximately $495.

 

Asof March 31, 2010, two of our properties are classified as held forsale.  These two****propertiesare included in real estate properties on our condensed consolidated balancesheets and have a net carrying value of approximately****$2,612at March 31, 2010.  These propertiesare currently leased to Five Star.

 

InApril 2010, we acquired a medical office building located in Colorado with14,695 rentable square feet 

 

4

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 

forapproximately $4,450, excluding closing costs. We funded this acquisition using cash on hand and by assuming a mortgageloan totaling $2,458 with an interest rate of 6.73% per annum.

 

InApril 2010, we entered into a purchase and sale agreement to acquire amedical office building located in Texas with approximately 55,800 rentablesquare feet for approximately $12,175, excluding closing costs.  We expect to fund this acquisition using cashon hand and borrowings under our revolving credit facility, if necessary.  The purchase of this property is contingentupon completion of our diligence and other customary closing conditions; accordingly,we can provide no assurance that we will purchase this property.

 

**Note 4.  Unrealized Gain onInvestments**

 

OnMarch 31, 2010, we owned 1,000,000 common shares of HRPT Properties Trust,or HRP, and 3,235,000 common shares of Five Star, which are carried at fairmarket value in other assets on our condensed consolidated balance sheets. Theunrealized gain on investments shown on our condensed consolidated balancesheets represents the difference between the quoted market prices of our HRPand Five Star shares on March 31, 2010 ($7.78 and $3.05 per share,respectively) and our weighted costs on the dates we acquired these shares($6.50 and $2.85 per share, respectively).

 

**Note 5.  Indebtedness**

 

We have an unsecuredrevolving credit facility that matures on December 31, 2010.  Our revolving credit facility permitsborrowings up to $550,000.  The interestpayable for amounts drawn under the facility is LIBOR plus a premium.  We can borrow, repay and reborrow untilmaturity, and no principal repayment is due until maturity.  The interest rate payable on borrowings underthis revolving credit facility was 1.0% and 1.3% at March 31, 2010 and2009, respectively.  In addition tointerest, we pay certain fees to maintain this credit facility and we amortizecertain set up costs.  Our revolvingcredit facility is available for acquisitions, working capital and generalbusiness purposes. As of March 31, 2010 and 2009, we had $58,000 and$181,000 outstanding under this credit facility, respectively, and $492,000 and$369,000 available under this credit facility, respectively.  Subject to certain conditions, this creditfacility’s maturity date can be extended at our option to December 31,2011 upon payment of a fee.  Our revolving credit facility containsfinancial covenants and requires us to maintain financial ratios and a minimumnet worth.  We believe we were incompliance with these covenants during the periods presented.

 

In April 2010, we sold$200,000 of senior unsecured notes.  Thenotes require interest at a fixed rate of 6.75% per annum and are due in2020.  Net proceeds from the sale of thenotes, after underwriting discounts and other expenses, were approximately$195,000.  Interest on the notes ispayable semi-annually in arrears.  Noprincipal payments are due until maturity. We used a portion of the net proceeds of this offering to repay $58,000in borrowings under our revolving credit facility and we intend to use theremaining net proceeds of this offering to fund the redemption of our $97,500outstanding 7.875% senior notes due 2015 and for general business purposes,including pending and possible future acquisitions.  In April 2010, we called all of theoutstanding 7.875% senior notes due 2015 for redemption on May 17, 2010.  As a result of this redemption, we expect torecord losses on early extinguishment of debt of approximately $2,300consisting of the debt prepayment premium and the write-off of unamortizeddeferred financing fees.

 

**Note 6.  Shareholders’ Equity**

 

On February 16, 2010,we paid a $0.36 per share, or $45,856, distribution to our common shareholdersfor the quarter ended December 31, 2009. On April 1, 2010, we declared a distribution of $0.36 per share, or$45,865, to be paid to common shareholders of record on April 15, 2010,with respect to our results for the quarter ended March 31, 2010. Weexpect to pay this distribution on or about May 14, 2010.

 

5

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 

Under the terms of ourbusiness management agreement with Reit Management & Research LLC, orRMR, on March 25, 2010 we issued 25,142 common shares in payment of anincentive fee of approximately $557 for services rendered by RMR during 2009.We issued these shares pursuant to an exemption from registration contained in Section 4(2) ofthe Securities Act of 1933, as amended.

 

Thefollowing is a reconciliation of net income to comprehensive income for thethree months ended March 31, 2010 and 2009:

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net income                                           |       | $                                      | 29,984     |   | $ | 31,533 |   |
| Other comprehensive  income:                         |       |                                   |       |   |   |
| Change in net unrealized  gain (loss) on investments |       | (49                                    | )          | (197 | ) |
| Comprehensive income                                 |       | $                                      | 29,935     |   | $ | 31,336 |   |

 

**Note7.  Fair Value of Assets and Liabilities**

 

Thetable below presents certain of our assets and liabilities measured at fairvalue at March 31, 2010 categorized by the level of inputs used in the valuationof each asset or liability.

 
| **Description**                                  | ** ** | **Total** | ** ** | **Quoted Prices in Active  Markets for Identical  Assets********(Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable********Inputs********(Level 3)** | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|
|                                             |       |      |       |                                                                        |       |                                                |       |                                                         |       |
| Assets held for sale (1)                         |       | $         | 2,612      |                                                                        | $          | —                                              |       | $                                                            | 2,612      |   | $ | — |   |
| Investments in available for sale securities (2) |       | 17,647    |       | 17,647                                                                      |       | —                                              |       | —                                                       |       |
| Senior notes (3)                                 |       | 332,775   |       | —                                                                      |       | 332,775                                             |       | —                                                       |       |
|                                                  |            |           |            |                                                                             |            |                                                     |            |                                                              |            |  |  |  |  |

 

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(1) Assets held forsale consist of two of our properties that we expect to sell that are reportedat fair value.  We used offers topurchase the properties made by third parties or comparable sales transactions(level 2 inputs) to determine fair value of these properties.  We have recorded cumulative impairments ofapproximately $8,338 to these properties in order to reduce their carryingvalue to fair value, or $2,612 at March 31, 2010.

 

(2) Our investments inavailable for sale securities include our 1,000,000 common shares of HRP and3,235,000 common shares of Five Star. The fair values of these shares are basedon quoted prices at March 31, 2010 in active markets (level 1 inputs).

 

(3) We estimate thefair values of our senior notes by using an average of their bid and ask prices(level 2 inputs). As of March 31, 2010, the carrying value of our seniornotes was $322,196.

 

In addition to the assetsand liabilities described in the above table, our additional financialinstruments  include rents receivable,cash and cash equivalents, restricted cash, secured and unsecured debt andother liabilities. The fair values of these additional financial instrumentsapproximate their carrying values at March 31, 2010 based upon theirliquidity, short term maturity and / or variable rate pricing.

 

6

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 

**Note 8. Segment Reporting**

** **

Wehave two reportable operating segments: (i) short term and long termresidential care facilities that offer dining for residents and (ii) propertieswhere medical related activities occur but where residential overnight stays ordining services are not provided, or MOBs. Properties in the short term and long term residential care facilitiessegment include independent living facilities, assisted living facilities,skilled nursing facilities and rehabilitation hospitals.  Properties in the MOB segment include medicaloffice, clinic and biotech laboratory buildings.  The “All Other” category in the followingtable includes amounts related to corporate business activities and theoperating results of certain properties that offer fitness, wellness and spaservices to members.

 
| ** **                              | ** ** | **For the Three Months Ended March 31, 2010**     | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                              | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                           |       | $                                                      | 57,018     |   | $ | 19,559 |   | $ | 3,870 |   | $ | 80,447 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Expenses:                               |       |                                                   |       |   |   |   |   |   |   |
| Depreciation expense                    |       | 16,461                                                 |       | 4,906 |   | 922 |   | 22,289 |   |
| General and administrative              |       | —                                                 |       | — |   | 5,501 |   | 5,501 |   |
| Property operating expenses             |       | —                                                 |       | 4,375 |   | — |   | 4,375 |   |
| Acquisition costs                       |       | —                                                 |       | 35 |   | — |   | 35 |   |
| Total expenses                          |       | 16,461                                                 |       | 9,316 |   | 6,423 |   | 32,200 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss)                 |       | 40,557                                                 |       | 10,243 |   | (2,553 | ) | 48,247 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Interest and other income               |       | —                                                 |       | — |   | 257 |   | 257 |   |
| Interest expense                        |       | (10,243                                                | )          | (169 | ) | (8,002 | ) | (18,414 | ) |
| Equity in losses of an investee         |       | —                                                 |       | — |   | (28 | ) | (28 | ) |
| Income (loss) before income tax expense |       | 30,314                                                 |       | 10,074 |   | (10,326 | ) | 30,062 |   |
| Income tax expense                      |       | —                                                 |       | — |   | (78 | ) | (78 | ) |
| Net income (loss)                       |       | $                                                      | 30,314     |   | $ | 10,074 |   | $ | (10,404 | ) | $ | 29,984 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Total assets                            |       | $                                                      | 1,959,151  |   | $ | 733,703 |   | $ | 273,168 |   | $ | 2,966,022 |   |

 

7

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 
| ** **                              | ** ** | **For the Three Months Ended March 31, 2009**     | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                              | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                           |       | $                                                      | 54,037     |   | $ | 10,446 |   | $ | 3,894 |   | $ | 68,377 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Expenses:                               |       |                                                   |       |   |   |   |   |   |   |
| Depreciation expense                    |       | 14,873                                                 |       | 2,594 |   | 922 |   | 18,389 |   |
| General and administrative              |       | —                                                 |       | — |   | 4,751 |   | 4,751 |   |
| Property operating expenses             |       | —                                                 |       | 2,955 |   | — |   | 2,955 |   |
| Acquisition costs                       |       | —                                                 |       | 112 |   | — |   | 112 |   |
| Total expenses                          |       | 14,873                                                 |       | 5,661 |   | 5,673 |   | 26,207 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Operating income (loss)                 |       | 39,164                                                 |       | 4,785 |   | (1,779 | ) | 42,170 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Interest and other income               |       | —                                                 |       | — |   | 208 |   | 208 |   |
| Interest expense                        |       | (2,030                                                 | )          | (184 | ) | (8,562 | ) | (10,776 | ) |
| Income (loss) before income tax expense |       | 37,134                                                 |       | 4,601 |   | (10,133 | ) | 31,602 |   |
| Income tax expense                      |       | —                                                 |       | — |   | (69 | ) | (69 | ) |
| Net income (loss)                       |       | $                                                      | 37,134     |   | $ | 4,601 |   | $ | (10,202 | ) | $ | 31,533 |   |
|                                    |       |                                                   |       |   |   |   |   |   |   |
| Total assets                            |       | $                                                      | 1,885,213  |   | $ | 392,770 |   | $ | 230,559 |   | $ | 2,508,542 |   |

 

**Note 9. Significant Tenant**

 

FiveStar is the lessee of 57% of our annualized rents as of March 31,2010.  The following tables presentsummary financial information for Five Star for the three months ended March 31,2010 and 2009, as reported in its Quarterly Report on Form 10-Q.

 

**Summary Financial Information of Five Star QualityCare, Inc.**

**(unaudited)**

 
| ** **                                              | ** ** | **For the Three Months Ended********March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Total revenues                                          |       | $                                                    | 310,331    |   | $ | 293,846 |   |
| Operating income                                        |       | 4,937                                                |       | 3,450 |   |
| Income from continuing operations                       |       | 4,306                                                |       | 25,053 |   |
| Net income                                              |       | 4,085                                                |       | 25,372 |   |
|                                                    |       |                                                 |       |   |   |
| **Cash Flows**                                          |       |                                                 |       |   |   |
| Cash provided by operating activities                   |       | 15,459                                               |       | 21,791 |   |
| Net cash (used in) provided by discontinued  operations |       | (221                                                 | )          | 1,442 |   |
| Cash used in investing activities                       |       | (5,142                                               | )          | (6,170 | ) |
| Cash used in financing activities                       |       | (2,831                                               | )          | (4,775 | ) |
| Change in cash and cash equivalents                     |       | 7,265                                                |       | 12,288 |   |
| Cash and cash equivalents at beginning of period        |       | 11,299                                               |       | 16,138 |   |
| Cash and cash equivalents at end of period              |       | 18,564                                               |       | 28,426 |   |
|                                                         |            |                                                      |            |  |  |  |  |

 

8

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts inthousands, except per share data or as otherwise stated)

 
| ** **                      | ** ** | **As of March 31,** | ** ** |
|---------------------------------|------------|--------------------------|------------|
| **Financial Position**     | ** ** | **2010**                 | ** ** | **2009** | ** ** |
| Current assets                  |       | $                        | 182,574    |   | $ | 116,305 |   |
| Non-current assets              |       | 230,412                  |       | 298,535 |   |
| Total indebtedness              |       | 98,458                   |       | 129,679 |   |
| Current liabilities             |       | 175,315                  |       | 135,797 |   |
| Non-current liabilities         |       | 93,216                   |       | 167,272 |   |
| Total shareholders’ equity |       | 144,455                  |       | 111,771 |   |
|                                 |            |                          |            |  |  |  |  |

 

The summary financialinformation of Five Star is presented to comply with applicable accountingregulations of the SEC.  References inthese financial statements to the Quarterly Report on Form 10-Q for FiveStar are included as textual references only, and the information in Five Star’sQuarterly Report is not incorporated by reference into these financialstatements.

 

FiveStar is our former subsidiary and both we and Five Star have managementcontracts with RMR.  For informationabout our dealings with Five Star and RMR and about the risks which may ariseas a result of these related person transactions, please see our Annual Report,especially the section titled “Risk Factors”.

 

**Note10.  Related Person Transactions**

 

Inconnection with our property management agreement with RMR, we recognizedexpenses of $549 and $294 for the three months ended March 31, 2010 and2009, respectively.  These amounts areincluded in property operating expenses in our condensed consolidated financialstatements.  In connection with ourbusiness management agreement with RMR, we recognized expense of $4,218 and$3,729 for the three months ended March 31, 2010 and 2009,respectively.  These amounts are includedin general and administrative expenses in our consolidated financialstatements.

 

Asof March 31, 2010, we have invested $5,154 in Affiliates InsuranceCompany, or Affiliates Insurance, concurrently with RMR and other companies towhich RMR provides management services. All of our trustees are currently serving on the board of directors ofAffiliates Insurance.  At March 31,2010, we owned approximately 14.29% of Affiliates Insurance.  We expect to procure some of our insurancefrom Affiliates Insurance.  Although weown less than 20% of Affiliates Insurance, we use the equity method to accountfor this investment because we believe that we have significant influence overAffiliates Insurance because each of our trustees is a director of AffiliatesInsurance.  This investment is carried onour balance sheet in other assets and had a carrying value of $4,992 and $5,000as of March 31, 2010 and December 31, 2009, respectively.  During the first quarter of 2010, werecognized a loss of $28 related to this investment.

 

9

----

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

The following discussion should be read inconjunction with our condensed consolidated financial statements and notesthereto included in this Quarterly Report on Form 10-Q and our AnnualReport on Form 10-K for the year ended December 31, 2009, or ourAnnual Report.

 

**PORTFOLIOOVERVIEW**

** **

**Thefollowing tables present an overview of our portfolio (dollars in thousandsexcept per unit/square foot):**

 
| **(As  of March 31, 2010)**          | ** ** | **Number of  Properties** | ** ** | **Number of  Units/Beds or  Square Feet** | ** **    | **Investment  Carrying Value ****(1)** | ** ** | **% of  Investment** | ** ** | **Annualized  Current Rent****(2)** | ** ** | **% of  Annualized  Current Rent** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|---------------|---------------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
|                                 |       |                           |       |                                                     |          |                                        |       |                      |       |                                     |       |                                    |       |
| Facility Type                        |       |                           |       |                                                     |          |                                        |       |                      |       |                                     |       |                                    |       |
| Independent living  communities (3)  |       | 43                             |       | 11,524                                                   |          | $                                           | 1,124,891  |                      | 33.9%      |                                     | $          | 111,618                                 |       | 33.8% |   |
| Assisted living  facilities (3) |       | 131                            |       | 9,342                                                    |          | 1,029,649                                   |       | 31.0%                     |       | 94,424                                   |       | 28.6%                                   |       |
| Skilled nursing  facilities (3) |       | 56                             |       | 5,707                                                    |          | 226,911                                     |       | 6.8%                      |       | 20,353                                   |       | 6.2%                                    |       |
| Rehabilitation  hospitals            |       | 2                              |       | 364                                                      |          | 64,130                                      |       | 1.9%                      |       | 9,884                                    |       | 3.0%                                    |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |  sq. ft. | 180,017                                     |       | 5.4%                      |       | 17,069                                   |       | 5.2%                                    |       |
| MOBs                                 |       | 56                             |       | 2,867,862                                                |  sq. ft. | 698,747                                     |       | 21.0%                     |       | 76,347                                   |       | 23.2%                                   |       |
| Total                                |       | 298                            |       |                                                     |          | $                                           | 3,324,345  |                      | 100.0%     |                                     | $          | 329,695                                 |       | 100.0% |   |
|                                 |       |                           |       |                                                     |          |                                        |       |                      |       |                                     |       |                                    |       |
| Tenant / Operator                    |       |                           |       |                                                     |          |                                        |       |                      |       |                                     |       |                                    |       |
| Five Star (Lease  No. 1)        |       | 89                             |       | 6,468                                                    |          | $                                           | 630,767    |                      | 19.0%      |                                     | $          | 53,895                                  |       | 16.3% |   |
| Five Star (Lease  No. 2)        |       | 49                             |       | 6,031                                                    |          | 505,687                                     |       | 15.2%                     |       | 49,579                                   |       | 15.0%                                   |       |
| Five Star (Lease  No. 3)        |       | 28                             |       | 5,618                                                    |          | 621,643                                     |       | 18.7%                     |       | 61,991                                   |       | 18.8%                                   |       |
| Five Star (Lease  No. 4)        |       | 26                             |       | 2,720                                                    |          | 252,103                                     |       | 7.6%                      |       | 23,026                                   |       | 7.0%                                    |       |
| Sunrise / Marriott (4)               |       | 14                             |       | 4,091                                                    |          | 325,165                                     |       | 9.8%                      |       | 32,507                                   |       | 9.9%                                    |       |
| Brookdale                            |       | 18                             |       | 894                                                      |          | 61,122                                      |       | 1.8%                      |       | 8,349                                    |       | 2.5%                                    |       |
| 6 private companies  (combined)      |       | 8                              |       | 1,115                                                    |          | 49,094                                      |       | 1.5%                      |       | 6,932                                    |       | 2.1%                                    |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |  sq. ft. | 180,017                                     |       | 5.4%                      |       | 17,069                                   |       | 5.2%                                    |       |
| Multi-tenant MOBs                    |       | 56                             |       | 2,867,862                                                |  sq. ft. | 698,747                                     |       | 21.0%                     |       | 76,347                                   |       | 23.2%                                   |       |
| Total                                |       | 298                            |       |                                                     |          | $                                           | 3,324,345  |                      | 100.0%     |                                     | $          | 329,695                                 |       | 100.0% |   |

 

10

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (continued)**

 

Tenant OperatingStatistics(5)

 
|                              |   | **Rent  Coverage** |       | **Occupancy** |       | **Annualized Rental Income per  Living Unit, Bed or Square Foot **(6) |       |
|-----------------------------------|--------|--------------------|------------|---------------|------------|----------------------------------------------------------------------------------------------------------|------------|
|                              |   | **2009**           | ** ** | **2008**      | ** ** | **2009**                                                                                                 | ** ** | **2008** | ** ** | **2010** | ** ** | **2009** |   |
| Five Star (Lease  No. 1)     |   | 1.28x              |       | 1.21x         |       | 86%                                                                                                      |       | 88% |   | $ | 8,333 |   | $ | 7,691 |   |
| Five Star (Lease  No. 2) (7) |   | 1.30x              |       | 1.33x         |       | 82%                                                                                                      |       | 84% |   | $ | 7,005 |   | $ | 6,922 |   |
| Five Star (Lease  No. 3)     |   | 1.51x              |       | 1.58x         |       | 89%                                                                                                      |       | 92% |   | $ | 11,034 |   | $ | 10,716 |   |
| Five Star (Lease  No. 4)     |   | 1.05x              |       | 1.29x         |       | 85%                                                                                                      |       | 88% |   | $ | 8,465 |   | $ | 8,548 |   |
| Sunrise / Marriott (4)            |   | 1.39x              |       | 1.47x         |       | 89%                                                                                                      |       | 91% |   | $ | 7,946 |   | $ | 8,199 |   |
| Brookdale                         |   | 2.11x              |       | 2.11x         |       | 91%                                                                                                      |       | 93% |   | $ | 9,339 |   | $ | 8,949 |   |
| 6 private companies  (combined)   |   | 1.94x              |       | 1.96x         |       | 84%                                                                                                      |       | 84% |   | $ | 6,217 |   | $ | 6,133 |   |
| Wellness centers (8)              |   | 2.27x              |       | 2.34x         |       | 100%                                                                                                     |       | 100% |   | NA |   | NA |   |
| Multi-tenant MOBs (9)             |   | NA                 |       | NA            |       | 96%                                                                                                      |       | 99% |   | $ | 27 |   | $ | 25 |   |

 
| ** **                      | ** ** | **Short  and Long Term Residential Care Facilities  Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Private  Pay****(10)**                                                                      | ** ** | **Medicare** | ** ** | **Medicaid** | ** ** |
| ** **                      | ** ** | **2009**                                                                                      | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Five Star (Lease  No. 1)   |       | 61%                                                                                           |       | 58% |   | 14% |   | 15% |   | 25% |   | 27% |   |
| Five Star (Lease  No. 2)   |       | 52%                                                                                           |       | 52% |   | 32% |   | 32% |   | 16% |   | 16% |   |
| Five Star (Lease  No. 3)   |       | 87%                                                                                           |       | 88% |   | 12% |   | 12% |   | 1% |   | — |   |
| Five Star (Lease  No. 4)   |       | 67%                                                                                           |       | 69% |   | 14% |   | 13% |   | 19% |   | 18% |   |
| Sunrise / Marriott (4)          |       | 71%                                                                                           |       | 66% |   | 25% |   | 30% |   | 4% |   | 4% |   |
| Brookdale                       |       | 100%                                                                                          |       | 99% |   | — |   | — |   | — |   | 1% |   |
| 6 private companies  (combined) |       | 23%                                                                                           |       | 26% |   | 24% |   | 23% |   | 53% |   | 51% |   |

 

----

| (1)  | Amounts are before  depreciation, but after impairment write downs, if any.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Annualized rent is as  of March 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)  | Properties are  categorized by the type of living units / beds which constitute a majority of  the living units / beds at the property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4)  | Marriott  International, Inc., or Marriott, guarantees this lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5)  | All tenant operating data presented are based upon  the operating results provided by our tenants for the 12 months ended  December 31, 2009 and 2008, or the most recent prior period for which  tenant operating results are available to us. Rent coverage is calculated as  operating cash flow from our tenants’ operations of our properties, before subordinated  charges, divided by minimum rents payable to us. We have not independently  verified our tenants’ operating data. The table excludes data for periods  prior to our ownership of some of these properties.                      |
| (6)  | Represents annualized rent by lease divided by the  number of living units, beds or square feet leased at March 31, 2010 and  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (7)  | Annualized rental income per living unit, bed or  square foot excludes the two rehabilitation hospitals because these  properties have extensive clinic space for services to both overnight  patients and patients who receive treatment and do not stay overnight, and  these properties are not comparable to residential senior living properties.                                                                                                                                                                                                                                                                  |
| (8)  | Annualized rental income per living unit, bed or  square foot excludes the wellness centers because these properties have  extensive indoor and outdoor recreation space which is not comparable to  properties where rent is based on interior space only.                                                                                                                                                                                                                                                                                                                                                             |
| (9)  | Our medical office, clinic and biotech laboratory  buildings, or MOBs, leases include both triple net leases where, in addition  to paying fixed rents, the tenants assume the obligation to operate and  maintain the properties at their expense, and net and modified gross leases  where we are responsible to operate and maintain the properties and we charge  tenants for some or all of the property operating costs. A small percentage  of our MOB leases are so-called “full-service” leases where we receive fixed  rent from our tenants and no reimbursement for our property operating costs. |
| (10) | Private pay excludes revenues from the Medicare and  Medicaid programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

11

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (continued)**

 

The following tables setforth information regarding our lease expirations as of March 31, 2010(dollars in thousands):

 
| ** **     | ** ** | **Annualized Rent**                                   | ** ** | **Percent of  Total** | ** ** | **Cumulative  Percentage  of  Annualized** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| **Year**       | ** ** | **Short and Long  Term Residential  Care Facilities** | ** ** | **MOBs**              | ** ** | **Wellness  Centers**                      | ** ** | **Total** | ** ** | **Annualized  Current Rent  Expiring** | ** ** | **Current  Rent  Expiring** | ** ** |
|           |       |                                                  |       |                  |       |                                       |       |   |   |   |   |   |   |
| 2010           |       | $                                                     | 1,373      |                  | $          | 1,833                                      |       | $ | — |   | $ | 3,206 |   | 1.0% |   | 1.0% |   |
| 2011           |       | —                                                |       | 2,146                 |       | —                                     |       | 2,146 |   | 0.7% |   | 1.7% |   |
| 2012           |       | —                                                |       | 5,999                 |       | —                                     |       | 5,999 |   | 1.8% |   | 3.5% |   |
| 2013           |       | 32,507                                                |       | 3,691                 |       | —                                     |       | 36,198 |   | 11.0% |   | 14.5% |   |
| 2014           |       | —                                                |       | 3,114                 |       | —                                     |       | 3,114 |   | 0.9% |   | 15.4% |   |
| 2015           |       | 2,065                                                 |       | 6,081                 |       | —                                     |       | 8,146 |   | 2.5% |   | 17.9% |   |
| 2016           |       | 2,895                                                 |       | 6,604                 |       | —                                     |       | 9,499 |   | 2.9% |   | 20.8% |   |
| 2017           |       | 31,375                                                |       | 1,715                 |       | —                                     |       | 33,090 |   | 10.0% |   | 30.8% |   |
| 2018           |       | —                                                |       | 1,898                 |       | —                                     |       | 1,898 |   | 0.6% |   | 31.4% |   |
| 2019 and after |       | 166,064                                               |       | 43,266                |       | 17,069                                     |       | 226,399 |   | 68.6% |   | 100.0% |   |
| Total          |       | $                                                     | 236,279    |                  | $          | 76,347                                     |       | $ | 17,069 |   | $ | 329,695 |   | 100.0% |   |   |   |

 

Average remaining lease term for all properties(weighted by rent):  12.5 years

 
| ** **     | ** ** | **Number of Tenants**                                  | ** ** | ** ** | ** ** | **Cumulative**        | ** ** |
|----------------|------------|--------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| **Year**       | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOBs**   | ** ** | **Wellness  Centers** | ** ** | **Total** | ** ** | **Percent of  Total Number  of Tenants  Expiring** | ** ** | **Percentage  of Number  of Tenants  Expiring** | ** ** |
|           |       |                                                   |       |       |       |                  |       |   |   |   |   |   |   |
| 2010           |       | 1                                                      |       | 23         |       | —                |       | 24 |   | 11.0% |   | 11.0% |   |
| 2011           |       | —                                                 |       | 24         |       | —                |       | 24 |   | 11.0% |   | 22.0% |   |
| 2012           |       | —                                                 |       | 38         |       | —                |       | 38 |   | 17.4% |   | 39.4% |   |
| 2013           |       | 1                                                      |       | 20         |       | —                |       | 21 |   | 9.6% |   | 49.0% |   |
| 2014           |       | —                                                 |       | 25         |       | —                |       | 25 |   | 11.4% |   | 60.4% |   |
| 2015           |       | 2                                                      |       | 23         |       | —                |       | 25 |   | 11.4% |   | 71.8% |   |
| 2016           |       | 2                                                      |       | 17         |       | —                |       | 19 |   | 8.7% |   | 80.5% |   |
| 2017           |       | 2                                                      |       | 14         |       | —                |       | 16 |   | 7.3% |   | 87.8% |   |
| 2018           |       | —                                                 |       | 6          |       | —                |       | 6 |   | 2.7% |   | 90.5% |   |
| 2019 and after |       | 4                                                      |       | 15         |       | 2                     |       | 21 |   | 9.5% |   | 100.0% |   |
| Total          |       | 12                                                     |       | 205        |       | 2                     |       | 219 |   | 100.0% |   |   |   |

 

12

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

 

**Number of Living Units or Beds or Square Feet with Leases Expiring**

 
| **Year**       | ** ** | **Short and  Long Term  Residential  Care  Facilities  (Units/Beds)** | ** ** | **Percent  of Total  Living  Units or  Beds  Expiring** | ** ** | **Cumulative  Percentage  of Total  Living  Units or  Beds  Expiring** | ** ** | **MOBs  (Square  Feet)** | ** ** | **Wellness  Centers  (Square  Feet)** | ** ** | **Total  Square  Feet** | ** ** | **Percent  of Total  Square  Feet  Expiring** | ** ** | **Cumulative  Percent of  Total  Square  Feet  Expiring** |   |
|----------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|--------|
|           |       |                                                                  |       |                                                    |       |                                                                   |       |                     |       |                                  |       |                    |       |                                          |       |                                                      |   |
| 2010           |       | 140                                                                   |       | 0.5%                                                    |       | 0.5%                                                                   |       | 47,897                   |       | —                                |       | 47,897                  |       | 1.3%                                          |       | 1.3%                                                      |   |
| 2011           |       | —                                                                |       | 0.0%                                                    |       | 0.5%                                                                   |       | 65,702                   |       | —                                |       | 65,702                  |       | 1.8%                                          |       | 3.1%                                                      |   |
| 2012           |       | —                                                                |       | 0.0%                                                    |       | 0.5%                                                                   |       | 288,084                  |       | —                                |       | 288,084                 |       | 8.0%                                          |       | 11.1%                                                     |   |
| 2013           |       | 4,091                                                                 |       | 15.2%                                                   |       | 15.7%                                                                  |       | 143,974                  |       | —                                |       | 143,974                 |       | 4.0%                                          |       | 15.1%                                                     |   |
| 2014           |       | —                                                                |       | 0.0%                                                    |       | 15.7%                                                                  |       | 105,884                  |       | —                                |       | 105,884                 |       | 3.0%                                          |       | 18.1%                                                     |   |
| 2015           |       | 283                                                                   |       | 1.1%                                                    |       | 16.8%                                                                  |       | 261,693                  |       | —                                |       | 261,693                 |       | 7.3%                                          |       | 25.4%                                                     |   |
| 2016           |       | 517                                                                   |       | 1.9%                                                    |       | 18.7%                                                                  |       | 319,831                  |       | —                                |       | 319,831                 |       | 8.9%                                          |       | 34.3%                                                     |   |
| 2017           |       | 3,614                                                                 |       | 13.4%                                                   |       | 32.1%                                                                  |       | 47,866                   |       | —                                |       | 47,866                  |       | 1.3%                                          |       | 35.6%                                                     |   |
| 2018           |       | —                                                                |       | 0.0%                                                    |       | 32.1%                                                                  |       | 55,775                   |       | —                                |       | 55,775                  |       | 1.6%                                          |       | 37.2%                                                     |   |
| 2019 and after |       | 18,292                                                                |       | 67.9%                                                   |       | 100.0%                                                                 |       | 1,437,823                |       | 812,000                               |       | 2,249,823               |       | 62.8%                                         |       | 100.0%                                                    |   |
| Total          |       | 26,937                                                                |       | 100.0%                                                  |       |                                                                   |       | 2,774,529                |       | 812,000                               |       | 3,586,529               |       | 100.0%                                        |       |                                                      |   |

 

**RESULTSOF OPERATIONS**

 

#### **Three Months Ended March 31,2010 Compared to Three Months Ended March 31, 2009:**

 
| ** **                          | ** ** | **2010**                                             | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                          | ** ** | **(dollars in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                       |       | $                                                    | 80,447     |       | $          | 68,377     |       | $            | 12,070     |   | 17.7% |   |
|                                |       |                                                 |       |       |       |       |       |         |       |
| Expenses:                           |       |                                                 |       |       |       |       |       |         |       |
| Depreciation                        |       | 22,289                                               |       | 18,389     |       | 3,900      |       | 21.2%        |       |
| General and administrative          |       | 5,501                                                |       | 4,751      |       | 750        |       | 15.8%        |       |
| Property operating expenses         |       | 4,375                                                |       | 2,955      |       | 1,420      |       | 48.1%        |       |
| Acquisition costs                   |       | 35                                                   |       | 112        |       | (77        | )          | (68.8)%      |       |
| Total expenses                      |       | 32,200                                               |       | 26,207     |       | 5,993      |       | 22.9%        |       |
|                                |       |                                                 |       |       |       |       |       |         |       |
| Operating income                    |       | 48,247                                               |       | 42,170     |       | 6,077      |       | 14.4%        |       |
|                                |       |                                                 |       |       |       |       |       |         |       |
| Interest and other income           |       | 257                                                  |       | 208        |       | 49         |       | 23.6%        |       |
| Interest expense                    |       | (18,414                                              | )          | (10,776    | )          | (7,638     | )          | (70.9)%      |       |
| Equity in losses of an investee     |       | (28                                                  | )          | —     |       | (28        | )          | —       |       |
| Income before income tax expense    |       | 30,062                                               |       | 31,602     |       | (1,540     | )          | (4.9)%       |       |
| Income tax expense                  |       | (78                                                  | )          | (69        | )          | 9          |       | 13.0%        |       |
| Net income                          |       | $                                                    | 29,984     |       | $          | 31,533     |       | $            | (1,549     | ) | (4.9)% |   |
|                                |       |                                                 |       |       |       |       |       |         |       |
| Weighted average shares outstanding |       | 127,380                                              |       | 117,853    |       | 9,527      |       | 8.1%         |       |
|                                |       |                                                 |       |       |       |       |       |         |       |
| Net income per share                |       | $                                                    | 0.24       |       | $          | 0.27       |       | $            | (0.03      | ) | (11.1)% |   |

 

13

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

 

*Rental income.* Rentalincome increased because of rents earned from our property acquisitions since January 1,2009, including $19.6 million of rental income for the three months ended March 31,2010 due to our acquisitions of MOBs since June 2008.  The increase in rental income is partiallyoffset by a reduction in rental income resulting from the sale of fourproperties in 2009.

 

*Total expenses.* Depreciation expense for the period increased because of our propertyacquisitions since January 1, 2009. General and administrative expenses also increased in the first quarterof 2010 principally due to our acquisitions since January 1, 2009.  Theincrease in property operating expenses for the quarter ended March 31,2010 is the result of our acquisition of MOBs since January 1, 2009 andprincipally includes expenses related to real estate taxes, utilities,insurance, cleaning costs and property management fees paid to Reit Management &Research LLC, or RMR.

 

*Interest expense.*  Interestexpense increased because of interest payments on our $512.9 million FederalNational Mortgage Association, or FNMA, mortgage financing entered in August 2009with a weighted average interest rate of 6.59% at the time of issuance, theamortization of $13.3 million of deferred financing fees incurred in connectionwith this mortgage financing, offset by lesser amounts outstanding under ourrevolving credit facility at lower interest rates.  Our weighted average balance outstanding andinterest rate under our revolving credit facility was $59.2 million and 1.0%,and $216.2 million and 1.3%, for the three months ended March 31, 2010 and2009, respectively.

 

*Net income.*  Net income decreased because of the changesin revenues and expenses described above. Net income per share decreased due tothe effect of an increase in our weighted average number of shares outstandingresulting from our issuances of common shares in February and September 2009offset by the net changes in revenues and expenses described above.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal source offunds to pay operating expenses, debt service and distributions to shareholdersis rental income from our properties.  Webelieve that our operating cash flow will be sufficient to meet our operatingexpenses and debt service and pay distributions on our shares for theforeseeable future.  Our future cashflows from operating activities will depend primarily upon our ability to:

 

·                  maintain or improve theoccupancy of, and the current rent rates at, our MOB properties;

 

·                  control operating costincreases at our MOB properties; and

 

·                  purchase additionalproperties of any type which produce cash flows in excess of our cost ofacquisition capital and property operating expenses.

 

OurOperating Liquidity and Resources

 

We generally receive minimum rents monthly orquarterly from our tenants and we receive percentage rents from our residentialfacility tenants monthly, quarterly or annually. During the three months ended March 31,2010, we generated $52.0 million of cash from operations and at March 31,2010, we had $5.5 million of cash and cash equivalents.

 

Our Investment and Financing Liquidity and Resources

 

At March 31, 2010, we had $5.5 million of cash and cashequivalents and $492.0 million available under our revolving creditfacility.  We expect to use cashbalances, borrowings under our revolving credit facility and net proceeds ofofferings of equity or debt securities to fund future working

 

14

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (continued)**

 

capitalrequirements, property acquisitions and expenditures related to the repair,maintenance or renovation of our properties.

 

## **In orderto fund acquisitions and to accommodate cash needs that may result from timingdifferences between our receipts of rents and our need or desire to payoperating expenses and distributions to our shareholders, we maintain arevolving credit facility with a group of institutional lenders.  This revolving credit facility permits us toborrow up to $550.0 million.  Borrowingsunder our revolving credit facility are unsecured.  We may borrow, repay and reborrow funds untilmaturity, and no principal repayment is due until maturity.  We pay interest on borrowings under therevolving credit facility at LIBOR plus a premium.  This facility matures in December 2010.  Subject to certain conditions, this creditfacility’s maturity date can be extended at our option to December 31,2011 upon our payment of a fee.  Wecontinue to monitor market conditions for comparable revolving creditfacilities and other financing alternatives. At March 31, 2010, the weighted average interest rate payable onour revolving credit facility was 1.03%. As of March 31, 2010, we had $58.0 million outstanding under thiscredit facility and as of May 5, 2010, we had zero amounts outstandingunder this credit facility.**

## ** **

Whensignificant amounts are outstanding under our revolving credit facility or asthe maturity dates of our revolving credit facility and term debts approach, wewill explore alternatives for the repayment of amounts due.  Such alternatives may include incurringadditional debt and issuing new equity securities.  We have an effective shelf registrationstatement that allows us to issue public securities on an expedited basis, butit does not assure that there will be buyers for such securities.

 

During the three months ended March 31, 2010, we purchased $6.2million of improvements made to our properties that are leased to Five StarQuality Care, Inc., or Five Star. We used cash on hand to fund these purchases.  As a result of these purchases, the annualrent payable to us by Five Star increased by approximately $495,000.

 

In April 2010, we acquired a medical office building located inColorado with 14,695 rentable square feet for approximately $4.5 million,excluding closing costs.  We funded thisacquisition using cash on hand and by assuming a mortgage loan totaling $2.5million with an interest rate of 6.73% per annum.

 

In April 2010, we entered into a purchase and sale agreement toacquire a medical office building located in Texas with approximately 55,800rentable square feet for approximately $12.2 million, excluding closingcosts.  We expect to fund thisacquisition using cash on hand and borrowings under our revolving creditfacility, if necessary.  The purchase ofthis property is contingent upon completion of our diligence and othercustomary closing conditions; accordingly we can provide no assurance that wewill purchase this property.

 

InApril 2010, we sold $200.0 million of senior unsecured notes.  The notes require interest at a fixed rate of6.75% per annum and are due in 2020.  Netproceeds from the sale of the notes, after underwriting discounts and otherexpenses, were approximately $195.0 million. Interest on the notes is payable semi-annually in arrears.  No principal payments are due untilmaturity.  We used a portion of the netproceeds of this offering to repay $58.0 million in borrowings under ourrevolving credit facility and we intend to use the remaining net proceeds ofthis offering to fund the redemption of our $97.5 million outstanding 7.875%senior notes due 2015 and for general business purposes, including pending andpossible future acquisitions.   In April 2010,we called all of the outstanding 7.875% senior notes due 2015 for redemption onMay 17, 2010.

 

Whilewe believe we will have access to various types of financings, including debtor equity, to fund our future acquisitions and to pay our debts and otherobligations, there can be no assurance that we will be able to complete anydebt or equity offerings or that our cost of any future financings will be

 

15

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

 

reasonable.  Also, the current market conditions have ledto increased credit spreads which, if they continue, may result in increasedinterest costs when we renew our revolving credit facility.  These interest cost increases could have amaterial and adverse impact on our results of operations and financialcondition.

 

On April 1,2010, we declared a quarterly distribution of $0.36 per common share, or $45.9million, to our common shareholders for the quarter ended March 31,2010.  This distribution will be paid toshareholders on or about May 14, 2010, using cash on hand and borrowingsunder our revolving credit facility.

 

As of May 5, 2010, we have no off balance sheetarrangements, commercial paper, derivatives, swaps, hedges, joint ventures orpartnerships,******other than interest rate caps in connection with ourFNMA mortgage loan. We have no off balance sheet arrangements.

 

## **DebtCovenants**

## ** **

Our principal debt obligations at March 31, 2010,were our unsecured revolving credit facility, two public issues of unsecuredsenior notes totaling $322.5 million and $643.0 million of mortgages secured by61 of our properties.  Our unsecuredsenior notes are governed by an indenture. The indenture for our unsecured senior notes and related supplements andour revolving credit facility contain a number of covenants which restrict ourability to incur debts, including debts secured by mortgages on our propertiesin excess of calculated amounts, require us to maintain a minimum net worth,restrict our ability to make distributions under certain circumstances andgenerally require us to maintain certain other financial ratios. As of March 31,2010, we believe we were in compliance with all of the covenants under ourindenture and related supplements, our revolving credit facility and our otherdebt obligations.

 

None of our indenture andrelated supplements, our revolving credit facility or our other debtobligations contain provisions for acceleration which could be triggered by ourdebt ratings.  However, in certaincircumstances, our revolving credit facility uses our senior debt rating todetermine the fees and the interest rate payable.

 

Ourpublic debt indenture and related supplements contain cross default provisionsto any other debts of at least $10.0 million or, with respect to certain notesunder such indenture and supplements, higher amounts.  Similarly, our revolving credit facilitycontains a cross default provision to any other debts of $25.0 million or morethat are recourse debts and to any other debts of $75.0 million or more thatare non-recourse debts.  Any terminationof our business management agreement with RMR would cause a default under ourrevolving credit facility, if not approved by a majority of our lenders.

 

**Related Person Transactions**

 

FiveStar is our largest tenant and it is our former subsidiary.  We beneficially own more than 9% of Five Star’scommon shares.  RMR provides managementservices to both us and Five Star.  FiveStar pays us rent based on minimum annual rent amounts plus percentage rentbased on increases in gross revenues at certain properties.  As of March 31, 2010, we leased 190senior living communities and two rehabilitation hospitals to Five Star.  During the three months ended March 31,2010, we purchased $6.2 million of improvements made to our properties that areleased to Five Star.  We used cash onhand to fund this purchase.  As a resultof this purchase, the annual rent payable to us by Five Star increased byapproximately $495,000.  Five Star’stotal minimum annual rent payable to us under those leases as of March 31,2010 was $184.9 million, excluding percentage rent based on increases in grossrevenues at certain properties.  Additional informationregarding our leases with Five Star appears in Item 1 of our Annual Reportunder the captions “Business — Tenants” and “Business — Lease Terms”.

 

16

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

 

RMR continues to provideboth business and property management services to us under a businessmanagement agreement and a property management agreement, each as amended inJanuary, 2010.  Under the terms of ourbusiness management agreement with RMR, on March 25, 2010, we issued25,142 common shares to RMR in payment of an incentive fee for servicesrendered by RMR during 2009.  During thethree months ended March 31, 2010, we invested an additional $20,182 inAffiliates Insurance Company, or Affiliates Insurance, concurrently with RMRand other companies to which RMR provides management services.

 

For more information aboutour related person transactions, including our dealings with Five Star,Affiliates Insurance, RMR, our Managing Trustees and their affiliates and aboutthe risks which may arise as a result of these and other related persontransactions, please see our Annual Report and our other filings made with theSecurities and Exchange Commission, or SEC, and in particular, the sectionscaptioned “Risk Factors” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Related Person Transactions” in theAnnual Report and the section captioned “Related Person Transactions andCompany Review of Such Transactions” in our Proxy Statement dated February 22,2010 relating to our 2010 Annual Meeting of Shareholders and Item 1.01 in ourCurrent Report on Form 8-K filed with the SEC on January 13, 2010.

 

**Impact of GovernmentReimbursement**

 

Approximately 87% ofour current annual rents at our senior living properties come from propertieswhere approximately 80% or more of the operating revenues are derived fromresidents who pay from their own private resources. The remaining 13% of ourrents at our senior living properties come from properties where the revenuesare heavily dependent upon Medicare and Medicaid programs. The operations ofthese senior living properties currently produce sufficient cash flow tosupport our rent. However, as discussed in Item 1 of our Annual Report underthe caption, “Business — Government Regulation and Reimbursement”, we expectthat Medicare and Medicaid rates paid to our tenants may not increase inamounts sufficient to pay our tenants’ increased operating costs, or that theymay even decline. Also, the hospitals we lease to Five Star are heavilydependent upon Medicare revenues.

 

The Patient Protection and AffordableCare Act, or PPACA, enacted in March, 2010, contains insurance changes, paymentchanges and healthcare delivery systems changes intended to expand access tohealth insurance coverage and reduce the growth of healthcare expenditureswhile simultaneously maintaining or improving the quality of healthcare.  It is unclear how or if these somewhat contradictorygoals can be achieved.  Under PPACA,beginning in fiscal year 2012, the Medicare skilled nursing facility, or SNF,and inpatient rehabilitation facility, or IRF, market basket adjustments forinflation will be reduced by a productivity adjustment that may result inpayment rates for a fiscal year being less than for the preceding fiscal year.PPACA also reduces the Medicare IRF market basket adjustment for inflation by0.25% for fiscal year 2010, effective for discharges between April 1, 2010and September 30, 2010.  Future IRF Medicare market basketadjustments will also be reduced, by 0.25% for fiscal year 2011, by amountsranging from 0.1% to 0.3% for fiscal years 2012 through 2016, and by 0.75% forfiscal years 2017 through 2019.  PPACAalso establishes an Independent Payment Advisory Board to submit legislativeproposals to Congress and take other actions with a goal of reducing Medicarespending growth and includes various other provisions affecting Medicare andMedicaid providers, including enforcement reforms and increased funding forMedicare and Medicaid program integrity and fraud and abuse controlinitiatives.

 

We are unable to predict the impact onour tenants of the productivity adjustments or other PPACA provisions on futureMedicare rates for SNFs and IRFs or the insurance, payment and healthcaredelivery systems changes contained in and to be developed pursuant to PPACA.The changes

 

17

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations(continued)**

 

implemented or to be implemented under PPACAcould result in the failure of Medicare, Medicaid or private paymentreimbursement rates to cover our tenants’ increasing costs or othercircumstances that could have a material adverse effect on our tenants’abilities to pay rent to us.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

Weare exposed to risks associated with market changes in interest rates.  We manage our exposure to this market risk bymonitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates isunchanged since December 31, 2009. Other than as described below, we donot foresee any significant changes in our exposure to fluctuations in interestrates or in how we manage this exposure in the future.

 

AtMarch 31, 2010, our outstanding fixed rate debt included the following(dollars in thousands):

 
| **Debt****(1)**             | ** ** | **Principal  Balance** | ** ** | **Annual  Interest  Rate** | ** ** | **Annual  Interest  Expense** | ** ** | **Maturity** | ** ** | **Interest  Payments Due** | ** **    |
|-----------------------------|------------|------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------|------------|----------------------------|---------------|
| Unsecured  senior notes     |       | $                      | 225,000    |                       |       | 8.625%                        |       | $            | 19,406     |                       | 2012          |   | Semi-Annually |   |
| Unsecured  senior notes (2) |       | 97,500                 |       |                       | 7.875%     |                          | 7,678      |         | 2015       |                       | Semi-Annually |   |
| Mortgages  (3)              |       | 306,195                |       |                       | 6.71%      |                          | 20,546     |         | 2019       |                       | Monthly       |   |
| Mortgages                   |       | 49,186                 |       |                       | 6.54%      |                          | 3,217      |         | 2017       |                       | Monthly       |   |
| Mortgages                   |       | 32,646                 |       |                       | 6.97%      |                          | 2,275      |         | 2012       |                       | Monthly       |   |
| Mortgage                    |       | 14,686                 |       |                       | 6.91%      |                          | 1,015      |         | 2013       |                       | Monthly       |   |
| Mortgages                   |       | 11,385                 |       |                       | 6.11%      |                          | 696        |         | 2013       |                       | Monthly       |   |
| Mortgage                    |       | 4,364                  |       |                       | 6.50%      |                          | 284        |         | 2013       |                       | Monthly       |   |
| Mortgage                    |       | 3,903                  |       |                       | 7.31%      |                          | 285        |         | 2022       |                       | Monthly       |   |
| Mortgage                    |       | 1,909                  |       |                       | 7.85%      |                          | 150        |         | 2022       |                       | Monthly       |   |
| Bonds                       |       | 14,700                 |       |                       | 5.875%     |                          | 864        |         | 2027       |                       | Semi-Annually |   |
|                        |       | $                      | 761,474    |                       |       |                          |       | $            | 56,416     |                       |          |   |   |   |

 

----

(1)          Excludes $200.0 million principal balance of our6.75% senior notes due 2020 issued by us on April 9, 2010.

(2)          In April 2010, we called all of these notes forredemption on May 17, 2010, utilizing a portion of the net proceeds fromour issuance of the 6.75% senior notes due 2020 described in Note 1 above.

(3)          Consists of fixed rate portion of our FNMA loan.

 

No principal payments are due under our unsecurednotes or bonds until maturity. Our mortgages require principal and interestpayments through maturity pursuant to amortization schedules. Because thesedebts bear interest at a fixed rate, changes in market interest rates duringthe term of these debts will not affect our operating results.  If these debts are refinanced at interestrates which are 10% higher or lower than shown above, our per annum interestcost would increase or decrease by approximately $5.6 million.

 

Changes in market interest rates affect the fairvalue of our fixed rate debt obligations; increases in market interest ratesdecrease the fair value of our fixed rate debt, while decreases in marketinterest rates increase the fair value of our fixed rate debt.  Based on the balances outstanding at March 31,2010, and discounted cash flow analysis through the maturity date of our fixedrate debt obligations, a hypothetical immediate 10% change in interest rateswould change the fair value of those obligations by approximately $24.5million.

 

18

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**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk (continued)**

 

We are generally allowed to make prepayments of ourunsecured senior notes, in whole or in part, at par plus a premium, as defined.For example, in April 2010, we called all of our outstanding 7.875% seniornotes due 2015 for redemption on May 17, 2010.  Our mortgages generally contain provisionsthat allow us to make repayment at par plus premiums which is generallydesigned to preserve a stated yield to the mortgage holder. Also, as we havepreviously done on occasion, we occasionally have the opportunity to purchaseour outstanding debt by open market purchases. These prepayment rights andpurchases may afford us the opportunity to mitigate the risks arising fromchanges in interest rates.

 

Ourunsecured revolving credit facility accrues interest at floating rates andmatures in December 2010.  Subjectto certain conditions, we can extend the maturity for one year upon payment ofa fee.  At March 31, 2010, we had$58.0 million outstanding and $492.0 million available for borrowing under ourrevolving credit facility. At May 5, 2010, we had zero amounts outstanding****and $550.0 million available for borrowing under ourrevolving credit facility. We may make repayments and drawings under ourrevolving credit facility at any time without penalty.  We borrow in U.S. dollars and borrowingsunder our revolving credit facility accrue interest at LIBOR plus aspread.  Accordingly, we are vulnerableto changes in U.S. dollar based short term rates, specifically LIBOR.  In addition, upon renewal or refinancing ofour revolving credit facility, we are vulnerable to increases in credit spreadsdue to market conditions.  A change ininterest rates would not affect the value of our floating rate debt but wouldaffect our operating results.  Forexample, the interest rate payable on our outstanding revolving indebtedness of$58.0 million at March 31, 2010, was 1.03%.  The following table presents the impact a 10%change in interest rates would have on our annual floating rate interestexpense at March 31, 2010 (dollars in thousands):

 
| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest Rate**                       | ** ** | **Outstanding********Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At March 31, 2010 |       | 1.03%                                   |       | $ | 58,000 |   | $ | 597 |   |
| 10% reduction          |       | 0.93%                                   |       | 58,000 |   | 539 |   |
| 10% increase           |       | 1.13%                                   |       | 58,000 |   | 655 |   |
|                        |            |                                         |            |  |  |  |  |  |  |

 

Theforegoing table shows the impact of an immediate change in floating interestrates.  If interest rates were to changegradually over time, the impact would be spread over time.  Our exposure to fluctuations in floatinginterest rates will increase or decrease in the future with increases ordecreases in the outstanding amount under our revolving credit facility orother floating rate debt.  The following tablepresents the impact a 10% change in interest rates would have on our annualfloating rate interest expense at March 31, 2010 if we had fully drawn ourrevolving credit facility (dollars in thousands):

 
| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest Rate**                       | ** ** | **Outstanding********Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At March 31, 2010 |       | 1.03%                                   |       | $ | 550,000 |   | $ | 5,665 |   |
| 10% reduction          |       | 0.93%                                   |       | 550,000 |   | 5,115 |   |
| 10% increase           |       | 1.13%                                   |       | 550,000 |   | 6,215 |   |
|                        |            |                                         |            |  |  |  |  |  |  |

 

OnAugust 4, 2009, we closed a FNMA mortgage financing for approximately$512.9 million.  A part of this borrowingis at a fixed interest rate ($307.7 million) and a part is at a floating rate($205.2 million) calculated as a spread above LIBOR.  A change in market interest rates will notchange the value of the floating rate part of this loan but will change the interestexpense on the floating rate part of this 

 

19

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**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk (continued)**

 

loan.  For example, at March 31, 2010, oureffective weighted average annual interest rate payable on the outstandingvariable amount of this loan was 6.37%. If interest rates increase by 10% of current rates, the impact upon uswould be to change the value of this obligation and change our interest expenseas shown in the following table:

 
| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest  Rate****(1)**               | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At March 31, 2010 |       | 6.37%                                   |       | $ | 204,057 |   | $ | 12,998 |   |
| 10% reduction          |       | 6.35%                                   |       | 204,057 |   | 12,958 |   |
| 10% increase           |       | 6.40%                                   |       | 204,057 |   | 13,060 |   |
|                        |            |                                         |            |  |  |  |  |  |  |

 

----

(1)                     Our variable rate at March 31, 2010 consists of the one month LIBORrate of 0.25% at March 31, 2010 plus a premium that remains constant.  This table assumes a 10% interest rate changeon the one month LIBOR rate.

 

Also, we have arranged with FNMA to cap, or limit,the interest rate increases which will impact the interest expense we will payon the floating rate part of this loan. The net effect of this arrangement is that the maximum annual effectiveinterest rate on the full amount of this loan we may be required to pay is7.79%.

 

Wealso have the option to prepay our FNMA obligations in order to mitigate therisks of refinancing or for other reasons. The fixed rate portion of this loan may be prepaid during the first 96months of the loan term subject to our paying a standard make whole premium andthereafter for a declining fixed percent premium of the amount prepaid which isreduced to zero in the last six months of this ten year loan.  The floating rate portion may be prepaidafter one year for a fixed premium percent of the amount prepaid which is alsoreduced to zero in the last six months of this ten year loan.  We may exercise these prepayment options tomitigate the risks inherent in this FNMA loan arising from changes in interestrates.

 

**Item 4.  Controls andProcedures.**

 

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 theSecurities Exchange Act of 1934, as amended, Rules 13a-15 and 15d-15.  Based upon that evaluation, our ManagingTrustees, President and Chief Operating Officer and Treasurer and ChiefFinancial Officer concluded that our disclosure controls and procedures areeffective.

 

There have been no changesin our internal control over financial reporting during the quarter ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

20

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** **

**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

** **

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINSSTATEMENTS AND IMPLICATIONS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHINTHE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ANDOTHER FEDERAL SECURITIES LAWS.  ALSO,WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”,“PLAN”, “ESTIMATE”, OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKINGSTATEMENTS.  THESE FORWARD LOOKINGSTATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUTFORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOTOCCUR.  FORWARD LOOKING STATEMENTS INTHIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

 

·                  OUR ABILITY TO PURCHASE ORSELL PROPERTIES,

 

·                  OUR ABILITY TO RAISE DEBT OREQUITY CAPITAL,

 

·                  OUR ABILITY TO PAY INTERESTAND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS, AND PAY THE AMOUNT OF ANY SUCHDISTRIBUTIONS,

 

·                  OUR ABILITY TO RETAIN OUREXISTING TENANTS AND MAINTAIN CURRENT RENTAL RATES,

 

·                  OUR POLICIES AND PLANSREGARDING INVESTMENTS AND FINANCINGS,

 

·                  OUR ABILITY TO RENEW ORREFINANCE OUR REVOLVING CREDIT FACILITY,

 

·                  OUR TAX STATUS AS A REALESTATE INVESTMENT TRUST, OR REIT,

 

·                  OUR BELIEF THAT FIVE STAR,OUR FORMER SUBSIDIARY, WHICH IS RESPONSIBLE FOR 57% OF OUR CURRENT ANNUALIZEDRENTS, HAS ADEQUATE FINANCIAL RESOURCES AND LIQUIDITY TO MEET ITS OBLIGATIONSTO US,

 

·                  OUR EXPECTATION THAT WE WILLBENEFIT FINANCIALLY BY PARTICIPATING IN THE INSURANCE COMPANY WITH RMR ANDCOMPANIES TO WHICH RMR PROVIDES MANAGEMENT SERVICES, AND

 

·                  OTHER MATTERS.

 

OURACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BYOUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.  FACTORS THAT COULD HAVE A MATERIAL ADVERSEEFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS,FINANCIAL CONDITION, FUNDS FROM OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION,CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

 

·                  THE IMPACT OF CHANGES IN THEECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,

 

·                  ACTUAL AND POTENTIALCONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR AND RMR AND ITSRELATED ENTITIES AND CLIENTS,

 

·                  COMPLIANCE WITH, AND CHANGESTO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX RATESAND SIMILAR MATTERS,

 

·                  LIMITATIONS IMPOSED ON OURBUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY ASA REIT FOR U.S. FEDERAL INCOME TAX PURPOSES, AND

 

·                  COMPETITION WITHIN THEHEALTHCARE AND REAL ESTATE INDUSTRIES.

 

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FOREXAMPLE:

 

·                  FIVE STAR MAY EXPERIENCE FINANCIALDIFFICULTIES AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:

 

·                  CHANGES IN MEDICARE ANDMEDICAID PAYMENTS WHICH COULD RESULT IN A REDUCTION OF RATES OR A FAILURE OFTHESE RATES TO MATCH FIVE STAR’S COST INCREASES,

 

·                  CHANGES IN REGULATIONSEFFECTING ITS OPERATIONS,

 

·                  CHANGES IN THE ECONOMYGENERALLY OR GOVERNMENTAL POLICIES WHICH REDUCE THE DEMAND FOR THE SERVICESFIVE STAR OFFERS,

 

·                  INCREASES IN INSURANCE ANDTORT LIABILITY COSTS, AND

 

·                  INEFFECTIVE INTEGRATION OFNEW ACQUISITIONS.

 

·                  IF FIVE STAR’S OPERATIONS BECOMEUNPROFITABLE, FIVE STAR MAY BECOME UNABLE TO PAY OUR RENTS,

 

·                  OUR OTHER TENANTS MAY EXPERIENCE LOSSESAND BECOME UNABLE TO PAY OUR RENTS,

 

·                  OUR PARTICIPATION IN AFFILIATES INSURANCEINVOLVES POTENTIAL FINANCIAL RISKS AND REWARDS TYPICAL OF ANY START UP BUSINESSVENTURE AS WELL AS OTHER FINANCIAL RISKS AND REWARDS SPECIFIC TO INSURANCECOMPANIES.  AMONG THE RISKS THAT ARESPECIFIC TO INSURANCE COMPANIES IS THE RISK THAT AFFILIATES INSURANCE MAY NOTBE ABLE TO ADEQUATELY PAY CLAIMS.  TO THEEXTENT WE PURCHASE INSURANCE FROM AFFILIATES INSURANCE IN THE FUTURE AND AFFILIATESINSURANCE IS UNABLE TO FINANCE CLAIMS, WE COULD BE UNDERINSURED AND FACEINCREASED COSTS FOR CLAIMS THAT MIGHT OTHERWISE HAVE BEEN FUNDED IF INSURANCEWAS PURCHASED FROM FINANCIALLY MORE SECURE INSURERS.  ACCORDINGLY, OUR EXPECTED FINANCIAL BENEFITSFROM OUR INITIAL OR FUTURE INVESTMENTS IN AFFILIATES INSURANCE MAY BEDELAYED OR MAY NOT OCCUR AND AFFILIATES INSURANCE MAY REQUIRE ALARGER INVESTMENT THAN WE EXPECT,

 

·                  IF THE AVAILABILITY OFDEBT CAPITAL BECOMES RESTRICTED, WE MAY BE UNABLE TO RENEW, REFINANCE ORREPAY OUR REVOLVING CREDIT FACILITY OR OUR OTHER DEBT OBLIGATIONS WHEN THEYBECOME DUE OR ON TERMS WHICH ARE AS FAVORABLE AS WE NOW HAVE,

 

·                  OUR ABILITY TO MAKE FUTURE DISTRIBUTIONSDEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS.  WE MAY BE UNABLE TO MAINTAIN OUR CURRENTRATE OF DISTRIBUTIONS AND FUTURE DISTRIBUTIONS MAY BE SUSPENDED OR PAID ATA LESSER RATE THAN THE DISTRIBUTIONS WE NOW PAY,

 

·                  OUR ABILITY TO GROW OUR BUSINESS AND INCREASEOUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIESAND LEASE THEM FOR RENTS WHICH EXCEED OUR CAPITAL COSTS.  WE MAY BE UNABLE TO IDENTIFY PROPERTIESTHAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITIONFINANCING OR LEASE TERMS FOR NEW PROPERTIES,

 

·                  SOME OF OUR TENANTS MAY NOT RENEWEXPIRING LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAINTHE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,

 

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·                  RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE,

 

·                  WE HAVE ENTERED INTO AN AGREEMENT TO PURCHASEONE MEDICAL OFFICE BUILDING.  OUROBLIGATION TO COMPLETE THIS CURRENTLY PENDING ACQUISITION IS SUBJECT TO VARIOUSCONDITIONS TYPICAL OF COMMERCIAL REAL ESTATE ACQUISITIONS.  AS A RESULT OF ANY FAILURE OF THESECONDITIONS, WE MAY NOT ACQUIRE THIS PROPERTY, AND

 

·                  OTHER RISKS MAY ADVERSELY IMPACT US, ASDESCRIBED MORE FULLY IN OUR ANNUAL REPORT UNDER “ITEM 1A. RISK FACTORS”.

 

THESERESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH AREBEYOND OUR CONTROL, SUCH AS THE APPLICATION AND INTERPRETATION OF RECENTLYPASSED OR NEW LAWS AFFECTING OUR BUSINESS, NATURAL DISASTERS OR CHANGES IN OURMANAGERS’ OR TENANTS’ REVENUES OR COSTS, OR CHANGES IN CAPITAL MARKETS OR THE ECONOMYGENERALLY.

 

THE INFORMATION CONTAINEDELSEWHERE IN OUR ANNUAL REPORT AND SUBSEQUENT DOCUMENTS FILED WITH THE SECIDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OURFORWARD LOOKING STATEMENTS.

 

YOUSHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

 

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE ORCHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTUREEVENTS OR OTHERWISE.

 

**STATEMENTCONCERNING LIMITED LIABILITY**

 

THE AMENDEDAND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING PROPERTIES TRUST,DATED SEPTEMBER 20, 1999, AS AMENDED AND SUPPLEMENTED, AS FILED WITH THE STATEDEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE,OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUSTSHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANYOBLIGATION 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.      Unregistered Sales ofEquity Securities and Use of Proceeds.**

** **

Asfurther described in our Annual Report, RMR provides management services tous.  Under the terms of our business management agreement with RMR, on March 25,2010, we issued 25,142 common shares to RMR in payment of an incentive fee forservices rendered by RMR during 2009. We issued these shares pursuant toan exemption from registration contained in Section 4(2) of the SecuritiesAct of 1933, as amended.

 

**Item 6.      Exhibits.**

** **

4.1                                 SupplementalIndenture No. 4, dated as of April 9, 2010, between the Company andU.S. Bank National Association, relating to 6.75% Senior Notes due 2020,including Form thereof. *(Filedherewith)*

 

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

 

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

 

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

 

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

 

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

 

32.1                           Section 1350 Certification. *(Furnished herewith)*

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|   | SENIOR  HOUSING PROPERTIES TRUST |
|--------|----------------------------------|
|   |                             |
|   |                             |
|   | By:                              | /s/  David J. Hegarty |
|   |                             | David  J. Hegarty |
|   |                             | President  and Chief Operating Officer |
|   |                             | Dated:  May 5, 2010 |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/  Richard A. Doyle |
|   |                             | Richard  A. Doyle |
|   |                             | Treasurer  and Chief Financial Officer |
|   |                             | (principal  financial and accounting officer) |
|   |                             | Dated:  May 5, 2010 |

 

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