**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 the quarterly period ended September 30, 2009**

** **

**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 PrincipalExecutive 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 November 4, 2009:127,377,665.

 

 

 

----

 

SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2009

 

INDEX

 
| ** **   | ** **                                                                                                       | **Page** |
|--------------|------------------------------------------------------------------------------------------------------------------|----------|
| PART I  | Financial Information                                                                                            |     |
|         |                                                                                                             |     |
| Item 1.      | Financial Statements  (unaudited)                                                                                | 1        |
|         |                                                                                                             |     |
|         | Condensed Consolidated Balance Sheets –  September 30, 2009 and December 31, 2008                 | 1        |
|         |                                                                                                             |     |
|         | Condensed Consolidated Statements of Income – Three  and Nine Months Ended September 30, 2009 and 2008 | 2        |
|         |                                                                                                             |     |
|         | Condensed Consolidated Statements of Cash Flows – Nine  Months Ended September 30, 2009 and 2008       | 3        |
|         |                                                                                                             |     |
|         | Notes to Condensed Consolidated Financial Statements                                                             | 4        |
|         |                                                                                                             |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 14       |
|         |                                                                                                             |     |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 25       |
|         |                                                                                                             |     |
| Item 4.      | Controls and  Procedures                                                                                         | 27       |
|         |                                                                                                             |     |
|         | Warning Concerning Forward Looking Statements                                                                    | 28       |
|         |                                                                                                             |     |
|         | Statement Concerning Limited Liability                                                                           | 31       |
|         |                                                                                                             |     |
| PART II | Other Information                                                                                                |     |
|         |                                                                                                             |     |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 32       |
|         |                                                                                                             |     |
| Item 5.      | Other Items                                                                                                      | 32       |
|         |                                                                                                             |     |
| Item 6.      | Exhibits                                                                                                         | 32       |
|         |                                                                                                             |     |
|         | Signatures                                                                                                       | 34       |

 

*In this Quarterly Report on Form 10-Q,the terms “SNH”, “Senior Housing”, “the Company”, “we”, “us” and “our” refer toSenior Housing Properties Trust and its consolidated subsidiaries, unlessotherwise noted.*

 

----

 

**PART I.  Financial Information**

 

**Item 1.    FinancialStatements**

** **

SENIOR HOUSING PROPERTIESTRUST

CONDENSED CONSOLIDATEDBALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 
| ** **                                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ASSETS                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Real estate properties:                                                                                                                                                                                                |       |                   |       |                  |       |
| Land                                                                                                                                                                                                                   |       | $                      | 357,508    |                  | $          | 319,591 |   |
| Buildings and improvements                                                                                                                                                                                             |       | 2,844,036              |       | 2,487,665             |       |
|                                                                                                                                                                                                                   |       | 3,201,544              |       | 2,807,256             |       |
| Less accumulated depreciation                                                                                                                                                                                          |       | 435,310                |       | 381,339               |       |
|                                                                                                                                                                                                                   |       | 2,766,234              |       | 2,425,917             |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                              |       | 72,487                 |       | 5,990                 |       |
| Restricted cash                                                                                                                                                                                                        |       | 4,728                  |       | 4,344                 |       |
| Deferred financing fees, net                                                                                                                                                                                           |       | 14,703                 |       | 5,068                 |       |
| Acquired real estate leases, net                                                                                                                                                                                       |       | 44,554                 |       | 30,546                |       |
| Other assets                                                                                                                                                                                                           |       | 52,330                 |       | 25,009                |       |
| Total assets                                                                                                                                                                                                           |       | $                      | 2,955,036  |                  | $          | 2,496,874 |   |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                              |       |                   |       |                  |       |
| Unsecured revolving credit facility                                                                                                                                                                                    |       | $                      | —     |                  | $          | 257,000 |   |
| Senior unsecured notes due 2012 and 2015, net of  discount                                                                                                                                                             |       | 322,124                |       | 322,017               |       |
| Secured debt and capital leases                                                                                                                                                                                        |       | 662,116                |       | 151,416               |       |
| Accrued interest                                                                                                                                                                                                       |       | 10,894                 |       | 11,121                |       |
| Acquired real estate lease obligations, net                                                                                                                                                                            |       | 10,071                 |       | 7,974                 |       |
| Other liabilities                                                                                                                                                                                                      |       | 33,766                 |       | 15,988                |       |
| Total liabilities                                                                                                                                                                                                      |       | 1,038,971              |       | 765,516               |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Shareholders’ equity:                                                                                                                                                                                             |       |                   |       |                  |       |
| Common shares of beneficial interest, $0.01 par  value: 149,700,000 shares authorized, 127,377,665 and 114,542,584 shares  issued and outstanding at September 30, 2009 and December 31, 2008,  respectively |       | 1,274                  |       | 1,145                 |       |
| Additional paid in capital                                                                                                                                                                                             |       | 2,226,473              |       | 2,000,865             |       |
| Cumulative net income                                                                                                                                                                                                  |       | 607,927                |       | 530,318               |       |
| Cumulative distributions                                                                                                                                                                                               |       | (923,255               | )          | (797,639              | )          |
| Unrealized gain on investments                                                                                                                                                                                         |       | 3,646                  |       | (3,331                | )          |
| Total shareholders’ equity                                                                                                                                                                                        |       | 1,916,065              |       | 1,731,358             |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                        |       | $                      | 2,955,036  |                  | $          | 2,496,874 |   |

 

*See accompanying notes.*

 

1

----

 

SENIOR HOUSING PROPERTIESTRUST

 

CONDENSEDCONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                |       |                                       |       |                                      |       |   |   |   |   |
| Rental income                            |       | $                                          | 72,010     |                                      | $          | 58,844 |   | $ | 209,785 |   | $ | 160,591 |   |
| Interest and other income                |       | 355                                        |       | 829                                       |       | 750 |   | 2,025 |   |
| Total revenues                           |       | 72,365                                     |       | 59,673                                    |       | 210,535 |   | 162,616 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Expenses:                                |       |                                       |       |                                      |       |   |   |   |   |
| Property operating expenses              |       | 4,112                                      |       | 1,024                                     |       | 10,286 |   | 1,124 |   |
| Interest                                 |       | 15,949                                     |       | 9,606                                     |       | 37,432 |   | 28,934 |   |
| Depreciation                             |       | 19,689                                     |       | 15,859                                    |       | 56,713 |   | 43,235 |   |
| Acquisition costs                        |       | 517                                        |       | —                                    |       | 1,911 |   | — |   |
| General and administrative               |       | 5,284                                      |       | 4,303                                     |       | 15,335 |   | 12,506 |   |
| Impairment of assets                     |       | 11,249                                     |       | —                                    |       | 11,249 |   | 2,940 |   |
| Total expenses                           |       | 56,800                                     |       | 30,792                                    |       | 132,926 |   | 88,739 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Income before gain on sale of properties |       | 15,565                                     |       | 28,881                                    |       | 77,609 |   | 73,877 |   |
| Gain on sale of properties               |       | —                                     |       | 266                                       |       | — |   | 266 |   |
| Net income                               |       | $                                          | 15,565     |                                      | $          | 29,147 |   | $ | 77,609 |   | $ | 74,143 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average shares outstanding      |       | 121,665                                    |       | 114,493                                   |       | 120,005 |   | 102,004 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Earnings per share:                      |       |                                       |       |                                      |       |   |   |   |   |
| Income before gain on sale of properties |       | $                                          | 0.13       |                                      | $          | 0.25 |   | $ | 0.65 |   | $ | 0.72 |   |
| Net income                               |       | $                                          | 0.13       |                                      | $          | 0.25 |   | $ | 0.65 |   | $ | 0.73 |   |

 

*Seeaccompanying notes*.

 

2

----

 

SENIOR HOUSING PROPERTIESTRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Nine Months Ended********September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                          |       |                                            |       |   |   |
| Net income                                                                     |       | $                                               | 77,609     |   | $ | 74,143 |   |
| Adjustments to reconcile net income to cash  provided byoperating  activities: |       |                                            |       |   |   |
| Depreciation                                                                   |       | 56,713                                          |       | 43,235 |   |
| Amortization                                                                   |       | 2,521                                           |       | 953 |   |
| Impairment of assets                                                           |       | 11,249                                          |       | 2,940 |   |
| Gain on sale of properties                                                     |       | —                                          |       | (266 | ) |
| Equity in losses of Affiliates Insurance Company                               |       | 133                                             |       | — |   |
| Change in assets and liabilities:                                              |       |                                            |       |   |   |
| Restricted cash                                                                |       | (384                                            | )          | (801 | ) |
| Other assets                                                                   |       | (6,580                                          | )          | 1,181 |   |
| Accrued interest                                                               |       | (227                                            | )          | (2,751 | ) |
| Other liabilities                                                              |       | 19,505                                          |       | 15,091 |   |
| Cash provided by operating activities                                          |       | 160,539                                         |       | 133,725 |   |
|                                                                           |       |                                            |       |   |   |
| Cash flows from investing activities:                                          |       |                                            |       |   |   |
| Acquisitions                                                                   |       | (423,866                                        | )          | (688,821 | ) |
| Investment in Five Star Quality Care, Inc.                                |       | (8,960                                          | )          | — |   |
| Investment in Affiliates Insurance Company                                     |       | (5,110                                          | )          | — |   |
| Proceeds from sale of real estate                                              |       | 3,171                                           |       | 21,336 |   |
| Cash used for investing activities                                             |       | (434,765                                        | )          | (667,485 | ) |
|                                                                           |       |                                            |       |   |   |
| Cash flows from financing activities:                                          |       |                                            |       |   |   |
| Proceeds from issuance of common shares, net                                   |       | 223,974                                         |       | 522,907 |   |
| Proceeds from issuance of mortgage debt                                        |       | 512,934                                         |       | — |   |
| Proceeds from borrowings on revolving credit  facility                         |       | 134,000                                         |       | 314,000 |   |
| Repayments of borrowings on revolving credit  facility                         |       | (391,000                                        | )          | (221,000 | ) |
| Repayment of other debt                                                        |       | (2,234                                          | )          | (14,149 | ) |
| Deferred financing fees                                                        |       | (11,335                                         | )          | — |   |
| Distributions to shareholders                                                  |       | (125,616                                        | )          | (104,328 | ) |
| Cash provided by financing activities                                          |       | 340,723                                         |       | 497,430 |   |
|                                                                           |       |                                            |       |   |   |
| Increase (decrease) in cash and cash equivalents                               |       | 66,497                                          |       | (36,330 | ) |
| Cash and cash equivalents at beginning of period                               |       | 5,990                                           |       | 43,521 |   |
| Cash and cash equivalents at end of period                                     |       | $                                               | 72,487     |   | $ | 7,191 |   |
|                                                                           |       |                                            |       |   |   |
| Supplemental cash flow information:                                            |       |                                            |       |   |   |
| Interest paid                                                                  |       | $                                               | 35,850     |   | $ | 30,737 |   |
|                                                                           |       |                                            |       |   |   |
| Non-cash investing activities:                                                 |       |                                            |       |   |   |
| Acquisitions funded by assumed debt                                            |       | —                                          |       | (61,282 | ) |
|                                                                           |       |                                            |       |   |   |
| Non-cash financing activities:                                                 |       |                                            |       |   |   |
| Assumption of mortgage notes payable                                           |       | —                                          |       | 61,282 |   |
| Issuance of common shares pursuant to our  incentive share award plan          |       | 1,763                                           |       | 1,497 |   |

 

*See accompanying notes.*

 

3

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTESTO CONDENSED CONSOLIDATED 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 the Company, have been preparedwithout audit.  Certain information anddisclosures required by generally accepted accounting principles, or GAAP, inthe United States for complete financial statements have been condensed oromitted.  We believe the disclosures madeare adequate to make the information presented not misleading.  However, the accompanying condensedconsolidated financial statements should be read in conjunction with the consolidatedfinancial statements and notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008. In the opinion of our management, all adjustments, which include onlynormal recurring adjustments, considered necessary for a fair presentation havebeen included.  All intercompanytransactions and balances between us and our consolidated subsidiaries havebeen eliminated.  Operating results forinterim periods are not necessarily indicative of the results that may beexpected for the full year. Reclassifications have been made to the prior year’s financialstatements to conform to the current year’s presentation.  These reclassifications had no effect on netincome or shareholders’ equity.  Inpreparing these condensed consolidated financial statements, we evaluatedevents that occurred through November 4, 2009 for potential recognition ordisclosure, the date these financial statements are issued.

 

InJune 2009, the Financial Accounting Standards Board, or FASB, issued *The FASB Accounting Standards Codification**TM*, or the Codification.  The Codification is the single source ofauthoritative non-governmental U.S. GAAP and is effective for financialstatements issued for interim and annual periods ending after September 15,2009.  The adoption of the Codificationdid not cause any change to our current accounting practices.

 

EffectiveJune 30, 2009, we adopted the Subsequent Events Topic of theCodification.  This topic establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before the financial statements are issued.  It requires the disclosure of the datethrough which an entity has evaluated subsequent events and whether that daterepresents the date the financial statements are issued or are available to beissued.

 

The Business Combinations Topic of the Codificationestablishes principles and requirements for how an acquirer will recognize andmeasure in its financial statements the identifiable assets acquired, liabilitiesassumed and any noncontrolling interest in the acquiree and goodwill acquiredin a business combination principally by expanding the definition of whatconstitutes a business combination, making it more likely that our acquisitionswill be accounted for as business combinations, and by requiring the immediateexpensing of acquisition costs incurred in connection with suchtransactions.  This topic is effectivefor fiscal years beginning after December 15, 2008 and the adoptionaffects our consolidated financial statements, principally by requiring us toexpense acquisition costs.

 

Effective June 30, 2009, we adopted the InterimDisclosures about Fair Value of Financial Instruments subtopic of the FinancialInstruments Topic of the Codification. Please see Note 7, “Fair Value of Assets and Liabilities” for relevantdisclosures.

 

InApril 2009, the FASB issued the following topics: Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly;Recognition and Presentation of Other-Than-Temporary Impairments; and InterimDisclosures about Fair Value of Financial Instruments.  The first topicprovides additional guidance for estimating fair value when the volume andlevel of activity for the assets or liabilities have significantlydecreased.  This topic also includes guidance on identifying circumstancesthat indicate a transaction is not orderly.  The Other-Than-TemporaryImpairments Topic amends existing other than temporary impairment guidancerelated to debt securities to make the guidance more operational and to improvethe presentation and disclosure of other than temporary impairments of debt andequity securities.  The

 

4

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

InterimDisclosures about Fair Value of Financial Instruments Topic requires disclosureabout fair value of financial instruments for interim reporting periods ofpublicly traded companies as well as in annual financial statements.  Eachof these topics was effective for interim and annual reporting periods endingafter June 15, 2009.  The adoption of these topics did not cause anysignificant changes to our disclosures in our consolidated financialstatements.

 

**Note 2.  Real Estate Properties**

 

AtSeptember 30, 2009, we owned 289 properties located in 35 states andWashington, D.C.

 

InMay 2008, we entered into a series of agreements to acquire 48 medicaloffice, clinic and biotech laboratory buildings, or MOBs, from HRPT PropertiesTrust, or HRP, for an aggregate purchase price of approximately $565,000.  As of September 1, 2009, we completedthese transactions with HRP.  During2009, we acquired 10 of these MOBs containing 617,000 square feet for anaggregate purchase price of approximately $214,585, plus closing costs.  We recorded intangible lease assets of $19,281and intangible lease liabilities of $3,553 for these MOBs acquired during thenine months ended September 30, 2009. The allocation of the purchase price of our third quarter 2009acquisitions is based upon preliminary estimates of the fair value of assetsacquired and liabilities assumed. Consequently, amounts preliminarily allocated to assets acquired andliabilities assumed could change significantly from those used in thesecondensed consolidated financial statements. One of the remaining buildings with an allocated value of $3,000 is nolonger subject to our purchase agreement. At the request of a tenant for two properties subject to amulti-property lease, in May and September 2009 we sold two of ourMOB properties for approximately $3,190, which was their approximate net bookvalue, to two unaffiliated parties.  Wenow own 45 of these properties containing 2.1 million square feet for anaggregate cost of approximately $558,150, plus closing costs.  We funded these acquisitions using cash onhand, proceeds from our mortgage financing, proceeds from equity issuances,borrowings under our revolving credit facility and by assuming three mortgageloans, on two properties, totaling $10,800 with a weighted average interestrate of 7.1% per annum and a weighted average maturity in 2018.  As of September 30,2009, the MOBs that we acquired from HRP and continue to own were 98%****leased to approximately 200 tenants for an average leaseterm of 9.2 years.  HRP was formerly ourparent company, and both we and HRP are managed by Reit Management &Research LLC, or RMR.  Because we and HRPhave three trustees in common and we are both managed by RMR, the terms ofthese transactions were negotiated by special committees of our and HRP’sboards of trustees composed of trustees who were not also trustees of bothcompanies. For more information about our dealings with HRP and RMR and theiraffiliates and about the risks which may arise as a result of these and otherrelated person transactions, please see our Annual Report on Form 10-K forthe year ended December 31, 2008, or the Annual Report, our QuarterlyReport on Form 10-Q for the quarters ended March 31, 2009 and June 30,2009, or the Quarterly Reports, the Other Items in this Quarterly Report on Form 10-Q,and our other filings made with the SEC, and in particular, the sectioncaptioned “Risk Factors” in the Annual Report, the sections captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Related Person Transactions” in the Annual Report, Quarterly Reports and thisQuarterly Report on Form 10-Q and the section captioned “Related PersonTransactions and Company Review of Such Transactions” in our Proxy Statementdated March 30, 2009 relating to our 2009 Annual Shareholders Meeting.

 

OnSeptember 30, 2009, we acquired 10 MOBs with a total of 643,000 squarefeet for approximately $169,000, plus closing costs, from an unaffiliatedparty.  These buildings are currently100% leased to one tenant for a lease term of 15 years plus renewaloptions.  We funded this acquisitionusing cash on 

 

5

----

 

SENIOR HOUSINGPROPERTIES TRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

hand,proceeds from our mortgage financing in August 2009 described in Note 5below and proceeds from our equity offering in September 2009 described inNote 6 below.

 

InOctober 2009, we acquired one senior living property for approximately$21,000, plus closing costs, from an unaffiliated party.  We leased this property to Five Star QualityCare, Inc., or Five Star, and added this property to Five Star Lease No. 4,which has a current term expiring in 2017. Percentage rent, based on increases in gross revenues at this property,will commence in 2011.  We funded thisacquisition using cash on hand, proceeds from our mortgage financing in August 2009described in Note 5 below and proceeds from our equity offering in September 2009described in Note 6 below.

 

InOctober 2009, we agreed to acquire 10 senior living properties forapproximately $97,250 from two unaffiliated parties.  We intend to lease these properties to FiveStar.  We expect percentage rent, basedon increases in gross revenues at these properties, will commence in 2011.  We expect to fund these acquisitions usingcash on hand, proceeds from our equity offering in September 2009described in Note 6 below and borrowings under our revolving creditfacility.  The purchase of theseproperties is contingent upon completion of our diligence and other customaryclosing conditions. We can provide no assurance that we will purchase theseproperties.

 

Forthe three and nine months ended September 30, 2009, we recognized an impairmentof assets charge of $11,249 related to eight of our properties, including sixskilled nursing facilities and one assisted living property leased to Five Starand one MOB leased entirely to a single tenant. Two of these properties are classified as held for sale as describedbelow.  For the nine months ended September 30,2008, we recognized an impairment of assets charge of $2,940 related to one ofour assisted living properties classified as held for sale.

 

Asof September 30, 2009, four of our properties are classified as held forsale.  These four****propertiesare included in real estate properties on our condensed consolidated balancesheets and have a net carrying value of approximately****$3,927at September 30, 2009.  Theseproperties are currently leased to Five Star. On October 1, 2009, we sold one of these properties to anunaffiliated party for $500 and on November 1, 2009, we sold another oneof these properties to an unaffiliated party for $1,350.  The two sold properties had been included inFive Star Lease No. 1 and Five Star Lease No. 2, respectively.

 

Duringthe nine months ended September 30, 2009, pursuant to the terms of ourexisting leases with Five Star, we purchased $30,350 of improvements made toour properties leased to Five Star, and, as a result, the annual rent payableto us by Five Star was increased by approximately $2,430.

 

**Note 3.  Net Unrealized Gain onInvestments**

 

OnSeptember 30, 2009, we owned 1,000,000 common shares of HRP and 3,235,000common shares of Five Star, which are carried at fair market value in otherassets on our condensed consolidated balance sheets. The net unrealized gain oninvestments shown on our condensed consolidated balance sheets represents thedifference between the quoted market prices of our HRP and Five Star shares on September 30,2009 ($7.52 and $3.66 per share, respectively) and our weighted costs on thedates we acquired these shares ($6.50 and $2.85 per share, respectively).

 

6

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

**Note4.  Comprehensive Income**

 

Thefollowing is a reconciliation of net income to comprehensive income for thethree and nine months ended September 30, 2009 and 2008:

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                             |       | $                                          | 15,565     |                                      | $          | 29,147 |   | $ | 77,609 |   | $ | 74,143 |   |
| Other comprehensive  income:                           |       |                                       |       |                                      |       |   |   |   |   |
| Change in net unrealized  gain / (loss) on investments |       | 6,273                                      |       | 86                                        |       | 6,977 |   | (999 | ) |
| Comprehensive income                                   |       | $                                          | 21,838     |                                      | $          | 29,233 |   | $ | 84,586 |   | $ | 73,144 |   |

 

**Note 5.  Indebtedness**

 

Wehave an unsecured revolving credit facility that matures on December 31,2010.  Our revolving credit facilitypermits borrowings up to $550,000.  Theannual interest payable for amounts drawn under the facility is LIBOR plus apremium. The weighted average interest rate payable on borrowings under thisrevolving credit facility was 1.1% and 4.5% at September 30, 2009 and2008, 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 September 30, 2009 and 2008, we had zero and$93,000 amounts outstanding under this credit facility, respectively, and$550,000 and $457,000 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.

 

OnAugust 4, 2009, a special purpose subsidiary of ours closed a $512,900mortgage financing with the Federal National Mortgage Association, or FNMA.This mortgage loan is secured by first liens on 28 senior living propertiesthat we own and lease to Five Star with 5,618 living units / beds located in 16states. We used the proceeds from this mortgage financing to repay amountsoutstanding under our revolving credit facility, to purchase the remainingseven MOBs from HRP and to acquire 10 MOBs and one senior living property fromunaffiliated parties as described in Note 2 above.** **In connection with the FNMAtransaction, we realigned our four leases with Five Star.  Lease No. 1 (which is comprised of fourseparate leases) now includes 79 properties (excluding one property soldsubsequent to September 30, 2009 as described in Note 2 above), includingindependent living communities, assisted living communities and skilled nursingfacilities, and expires in 2024.  Lease No. 2now includes 49 properties (excluding one property sold subsequent to September 30,2009 as described in Note 2 above), including independent living communities,assisted living communities, skilled nursing facilities and two rehabilitationhospitals, and expires in 2026.  Lease No. 3now includes the 28 FNMA financed properties, including independent livingcommunities and assisted living communities, and expires in 2028.  Lease No. 4 now includes 26 properties(including one property acquired subsequent to September 30, 2009 asdescribed in Note 2 above), including independent living communities, assistedliving communities and skilled nursing facilities, and expires in 2017.  In connection with the lease realignment andthe FNMA financing, we entered into a lease realignment agreement with FiveStar, or the Lease Realignment Agreement. Pursuant to the terms of the Lease Realignment Agreement, (1) thefour leases, or the Leases, were reconfigured as described above, (2) weacquired certain personal property located at 28properties in 16 states, or the Properties, from subsidiaries of Five Starand pledged that personal property to FNMA, (3) we purchased 3,200,000shares, or the Shares, of Five Star common stock, $.01 par value per share,which represent approximately 9% of its total common stock outstanding, (4) FiveStar assumed certain reporting and other operating obligations required by FNMAand (5) subsidiaries of Five Star pledged certain tangible and intangiblepersonal property, such as accounts receivable and contract rights, located at,or arising from the operations of, the Properties to secure certain obligationsto us and arising under the FNMA loan. To compensate Five Star for its sale of personal property to us, itssale of the Shares to us, the pledge of Five Star’s intangible assets and forthe services and obligations that Five Star has assumed, (1) we reducedthe annual rent payable to us under Lease No. 2 by $2,000 per year for theterm of that Lease; (2) we paid Five Star $18,600; and (3) wereimbursed Five Star for its out of 

 

7

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

pocketexpenses incurred in connection with the negotiation and closing of thistransaction.  Five Star has grantedcertain registration rights to us with regard to the Shares and our futuretransfer of the Shares are subject to certain restrictions. For moreinformation about this FNMA financing and the agreement we entered with FiveStar to facilitate this financing, please see Part II, Item 5 of ourQuarterly Report on Form 10-Q for the quarter ended June 30, 2009.

 

**Note 6.  Shareholders’ Equity**

 

InSeptember 2009, we issued 6.9 million common shares in a public offering,raising net proceeds of approximately $127,160. We used a portion of the net proceeds from this offering to acquire the10 MOBs and one senior living property from unaffiliated parties as describedin Note 2 above.  We intend to use thebalance of these proceeds for general business purposes, including fundingpending acquisitions and for possible future acquisitions.

 

OnAugust 14, 2009, we paid a $0.36 per share, or $43,400, distribution toour common shareholders for the quarter ended June 30, 2009.  On October 5, 2009, we declared adistribution of $0.36 per share, or $45,856, to be paid to common shareholdersof record on October 15, 2009, with respect to our results for the quarterended September 30, 2009. We expect to pay this distribution on or about November 17,2009.

 

OnSeptember 17, 2009, pursuant to our incentive share award plan, we granted63,450 common shares of beneficial interest, par value $0.01 per share, valuedat $19.36 per share, the closing price of our common shares on the New YorkStock Exchange on that day, to our officers and certain employees of ourmanager, RMR.  We made these grantspursuant to an exemption from registration contained in Section 4(2) ofthe Securities Act.

 

**Note 7.  Fair Value of Assets andLiabilities**

 

Thetable below presents certain of our assets and liabilities measured at fairvalue at September 30, 2009 categorized by the level of inputs used in thevaluation of 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)                         |       | $          | 3,927      |                                                                        | $          | —                                                     |       | $                                                            | 3,927      |   | $ | — |   |
| Long-lived assets held and used (2)              |       |       | 16,857     |                                                                        |       | —                                                     |       |                                                         | 16,857     |   |   | — |   |
| Investments in available for sale securities (3) |       | 19,360     |       | 19,360                                                                      |       | —                                                     |       | —                                                       |       |
| Senior notes (4)                                 |       | 322,543    |       | —                                                                      |       | 322,543                                                    |       | —                                                       |       |

 

----

(1) Assetsheld for sale consist of four of our properties that we expect to sell that arereported at fair value.  We used offersto purchase the properties made by third parties or comparable salestransactions (level 2 inputs) to determine fair value of these properties.  As of September 30, 2009, the netcarrying value of these properties was approximately $3,927 and we recorded animpairment charge of $1,621 for the three and nine months ended September 30,2009 related to two of these properties. We have recorded cumulative impairments of approximately $9,953 to theseproperties in order to reduce their carrying value to fair value.

 

(2) Long-lived assetsheld and used consist of six of our properties with a carrying amount of$26,485 that were written down to their fair value of $16,857, resulting in an impairment charge of $9,628, which wasincluded in earnings for the period.  Weused broker information and comparable sales transactions (level 2 inputs) todetermine fair value of these properties.

 

(3) Ourinvestments in available for sale securities include our 1,000,000 commonshares of HRP and 3,235,000 common shares of Five Star. The fair values ofthese shares are based on quoted prices in active markets (level 1 inputs).

 

8

----

 

SENIOR HOUSINGPROPERTIES TRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

(4) Weestimate the fair values of our senior notes using as average of the bid andask price of our two issues of senior notes at the balance sheet date (level 2inputs). As of September 30, 2009, the historic book value of our seniornotes was $322,124.

 

Inaddition to the assets and liabilities described in the above table, ouradditional financial instruments include rents receivable, cash and cashequivalents, restricted cash, secured and unsecured debt and other liabilities.The fair values of these additional financial instruments approximate theircarrying values at September 30, 2009 based upon their liquidity, shortterm maturity, variable rate pricing or our estimate of fair value usingdiscounted cash flows analyses and prevailing interest rates.

 

**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.  Prior to June 2008,our only operating segments were short term and long term residential carefacilities that offer dining for residents and properties that offer fitness,wellness and spa services to members included in the “All Other” category.

 
| ** **                  | ** ** | **For the Three Months Ended September 30, 2009** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income               |       | $                                                      | 54,401     |   | $ | 13,706 |   | $ | 3,903 |   | $ | 72,010 |   |
| Interest and other income   |       | —                                                 |       | — |   | 355 |   | 355 |   |
| Total revenues              |       | 54,401                                                 |       | 13,706 |   | 4,258 |   | 72,365 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Property operating expenses |       | —                                                 |       | 4,112 |   | — |   | 4,112 |   |
| Interest expense            |       | 7,475                                                  |       | 185 |   | 8,289 |   | 15,949 |   |
| Depreciation expense        |       | 15,348                                                 |       | 3,419 |   | 922 |   | 19,689 |   |
| Acquisition costs           |       | —                                                 |       | 517 |   | — |   | 517 |   |
| General and administrative  |       | —                                                 |       | — |   | 5,284 |   | 5,284 |   |
| Impairment of assets        |       | 3,784                                                  |       | 7,465 |   | — |   | 11,249 |   |
| Total expenses              |       | 26,607                                                 |       | 15,698 |   | 14,495 |   | 56,800 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Net income (loss)           |       | $                                                      | 27,794     |   | $ | (1,992 | ) | $ | (10,237 | ) | $ | 15,565 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Total assets                |       | $                                                      | 1,866,832  |   | $ | 746,218 |   | $ | 341,986 |   | $ | 2,955,036 |   |

 

9

----

 

SENIOR HOUSINGPROPERTIES TRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
| ** **                                      | ** ** | **For the Three Months Ended September 30, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                                   |       | $                                                      | 51,434     |   | $ | 4,767 |   | $ | 2,643 |   | $ | 58,844 |   |
| Interest and other income                       |       | —                                                 |       | — |   | 829 |   | 829 |   |
| Total revenues                                  |       | 51,434                                                 |       | 4,767 |   | 3,472 |   | 59,673 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Property operating expenses                     |       | —                                                 |       | 1,024 |   | — |   | 1,024 |   |
| Interest expense                                |       | 1,243                                                  |       | 173 |   | 8,190 |   | 9,606 |   |
| Depreciation expense                            |       | 14,025                                                 |       | 1,181 |   | 653 |   | 15,859 |   |
| General and administrative                      |       | —                                                 |       | — |   | 4,303 |   | 4,303 |   |
| Total expenses                                  |       | 15,268                                                 |       | 2,378 |   | 13,146 |   | 30,792 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Income (loss) before gain on sale of properties |       | 36,166                                                 |       | 2,389 |   | (9,674 | ) | 28,881 |   |
| Gain on sale of properties                      |       | 266                                                    |       | — |   | — |   | 266 |   |
| Net income (loss)                               |       | $                                                      | 36,432     |   | $ | 2,389 |   | $ | (9,674 | ) | $ | 29,147 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Total assets                                    |       | $                                                      | 1,856,097  |   | $ | 262,525 |   | $ | 230,420 |   | $ | 2,349,042 |   |

** **
| ** **                  | ** ** | **For the Nine Months Ended September 30, 2009**  | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income               |       | $                                                      | 162,920    |   | $ | 35,157 |   | $ | 11,708 |   | $ | 209,785 |   |
| Interest and other income   |       | —                                                 |       | — |   | 750 |   | 750 |   |
| Total revenues              |       | 162,920                                                |       | 35,157 |   | 12,458 |   | 210,535 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Property operating expenses |       | —                                                 |       | 10,286 |   | — |   | 10,286 |   |
| Interest expense            |       | 11,544                                                 |       | 560 |   | 25,328 |   | 37,432 |   |
| Depreciation expense        |       | 45,203                                                 |       | 8,743 |   | 2,767 |   | 56,713 |   |
| Acquisition costs           |       | —                                                 |       | 1,911 |   | — |   | 1,911 |   |
| General and administrative  |       | —                                                 |       | — |   | 15,335 |   | 15,335 |   |
| Impairment of assets        |       | 3,784                                                  |       | 7,465 |   | — |   | 11,249 |   |
| Total expenses              |       | 60,531                                                 |       | 28,965 |   | 43,430 |   | 132,926 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Net income (loss)           |       | $                                                      | 102,389    |   | $ | 6,192 |   | $ | (30,972 | ) | $ | 77,609 |   |
|                        |       |                                                   |       |   |   |   |   |   |   |
| Total assets                |       | $                                                      | 1,866,832  |   | $ | 746,218 |   | $ | 341,986 |   | $ | 2,955,036 |   |

 

10

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
| ** **                                      | ** ** | **For the Nine Months Ended September 30, 2008**  | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                                   |       | $                                                      | 149,687    |   | $ | 5,000 |   | $ | 5,904 |   | $ | 160,591 |   |
| Interest and other income                       |       | —                                                 |       | — |   | 2,025 |   | 2,025 |   |
| Total revenues                                  |       | 149,687                                                |       | 5,000 |   | 7,929 |   | 162,616 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Property operating expenses                     |       | —                                                 |       | 1,124 |   | — |   | 1,124 |   |
| Interest expense                                |       | 3,909                                                  |       | 173 |   | 24,852 |   | 28,934 |   |
| Depreciation expense                            |       | 40,541                                                 |       | 1,275 |   | 1,419 |   | 43,235 |   |
| General and administrative                      |       | —                                                 |       | — |   | 12,506 |   | 12,506 |   |
| Impairment of assets                            |       | 2,940                                                  |       | — |   | — |   | 2,940 |   |
| Total expenses                                  |       | 47,390                                                 |       | 2,572 |   | 38,777 |   | 88,739 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Income (loss) before gain on sale of properties |       | 102,297                                                |       | 2,428 |   | (30,848 | ) | 73,877 |   |
| Gain on sale of properties                      |       | 266                                                    |       | — |   | — |   | 266 |   |
| Net income (loss)                               |       | $                                                      | 102,563    |   | $ | 2,428 |   | $ | (30,848 | ) | $ | 74,143 |   |
|                                            |       |                                                   |       |   |   |   |   |   |   |
| Total assets                                    |       | $                                                      | 1,856,097  |   | $ | 262,525 |   | $ | 230,420 |   | $ | 2,349,042 |   |

** **

**Note 9. Significant Tenant**

** **

FiveStar is the lessee of 59% of our investments, at cost, as of September 30,2009.  The following tables presentsummary financial information for Five Star for the three and nine months endedSeptember 30, 2009 and 2008, as reported in its Quarterly Report on Form 10-Q.

 

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

**(unaudited)**

 
| ** **                               | ** ** | **For the Three Months Ended September 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| **Operations**                           | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Total revenues                           |       | $                                                 | 297,208    |   | $ | 280,619 |   |
| Operating income                         |       | 1,392                                             |       | 2,957 |   |
| Income (loss) from continuing operations |       | 4,362                                             |       | (1,587 | ) |
| Net income (loss)                        |       | 4,108                                             |       | (2,250 | ) |
|                                          |            |                                                   |            |  |  |  |  |

 

11

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
| ** **                                             | ** ** | **For the Nine Months Ended********September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| Total revenues                                         |       | $                                                       | 887,731    |   | $ | 808,006 |   |
| Operating income                                       |       | 9,020                                                   |       | 16,495 |   |
| Income from continuing operations                      |       | 38,569                                                  |       | 7,177 |   |
| Net income                                             |       | 38,058                                                  |       | 2,856 |   |
|                                                   |       |                                                    |       |   |   |
| **Cash Flows**                                         |       |                                                    |       |   |   |
| Cash provided by operating activities                  |       | 32,509                                                  |       | 44,593 |   |
| Net cash provided by (used in) discontinued operations |       | 611                                                     |       | (1,136 | ) |
| Cash used in investing activities                      |       | (11,036                                                 | )          | (31,842 | ) |
| Cash used in financing activities                      |       | (11,790                                                 | )          | (2,642 | ) |
| Change in cash and cash equivalents                    |       | 10,294                                                  |       | 8,973 |   |
| Cash and cash equivalents at beginning of period       |       | 16,138                                                  |       | 30,999 |   |
| Cash and cash equivalents at end of period             |       | 26,432                                                  |       | 39,972 |   |
|                                                        |            |                                                         |            |  |  |  |  |

 
| ** **                       | ** ** | **As of September 30,** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| **Financial Position**           | ** ** | **2009**                     | ** ** | **2008** | ** ** |
| Current  assets                  |       | $                            | 195,763    |   | $ | 131,424 |   |
| Non-current  assets              |       | 223,825                      |       | 258,096 |   |
| Total  indebtedness              |       | 103,725                      |       | 139,125 |   |
| Current  liabilities             |       | 180,054                      |       | 127,492 |   |
| Non-current  liabilities         |       | 101,199                      |       | 175,824 |   |
| Total  shareholders’ equity |       | 138,335                      |       | 86,204 |   |
|                                  |            |                              |            |  |  |  |  |

 

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 Reporton Form 10-K for the year ended December 31, 2008, especially thesection titled “Risk Factors”.

 

**Note10.  Pro Forma Information**

 

Duringthe three months ended September 30, 2009, we purchased 17 MOBs forapproximately $313,565, sold one MOB for $100 and, pursuant to the terms of ourexisting leases with Five Star, we purchased $6,114 of improvements made to ourproperties leased to Five Star.  Duringthe nine months ended September 30, 2009, we purchased 20 MOBs forapproximately $383,585, sold two MOBs for $3,190 and, pursuant to the terms ofour existing leases with Five Star, we purchased $30,350 of improvements madeto our properties leased to Five Star. During the three and nine months ended September 30, 2009, werecognized an impairment of assets charge of $11,249 related to eightproperties.  In August 2009, weclosed on a $512,900 mortgage financing with FNMA, acquired $8,497 of personalproperty at the FNMA leased properties, acquired 3.2 million shares of FiveStar common stock, reduced the annual rent payable to us under Five Star Lease No. 2by $2,000 per year for the term of that Lease and incurred $11,815 of deferredfinancing fees related to this mortgage financing.  During 2008, we purchased 30 

 

12

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

seniorliving properties, four wellness centers and 38 MOBs for an aggregate of $842,900;we purchased $69,400 of improvements made to our properties leased to FiveStar; we repaid in full a mortgage loan on one of our properties for $12,600 inApril 2008; we assumed $61,300 of mortgage debt in conjunction with our2008 acquisitions; we recorded an impairment charge on four of our propertiesfor $8,380; and we sold three assisted living facilities to Five Star for$21,350 and realized a gain on sale of approximately $266 in July 2008.  During 2009 and 2008, we also issued 12,704and 25,759 of our common shares, respectively. The following table presents ourpro forma results of operations as if all of these acquisitions, dispositionsand financing transactions were completed on January 1, 2008.  This pro forma data is not necessarily indicativeof what actual results of operations would have been for the periods presented,nor does it represent the results of operations for any future period.  Differences could result from, but are notlimited to, additional property sales or investments, changes in interest ratesand changes in our debt or equity capital structure.

 
| ** **                               | ** ** | **Pro Forma Results**                              | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
| ** **                               | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total revenues                           |       | $                                                  | 77,985     |   | $ | 77,891 |   | $ | 233,224 |   | $ | 233,408 |   |
| Income before gain on sale of properties |       | $                                                  | 15,798     |   | $ | 10,577 |   | $ | 69,769 |   | $ | 65,533 |   |
| Net income                               |       | $                                                  | 15,798     |   | $ | 10,843 |   | $ | 69,769 |   | $ | 65,799 |   |
|                                     |       |                                               |       |   |   |   |   |   |   |
| Per common share data:                   |       |                                               |       |   |   |   |   |   |   |
| Income before gain on sale of properties |       | $                                                  | 0.12       |   | $ | 0.08 |   | $ | 0.56 |   | $ | 0.51 |   |
| Net income                               |       | $                                                  | 0.12       |   | $ | 0.09 |   | $ | 0.56 |   | $ | 0.52 |   |

 

**Note11.  Affiliates Insurance Company**

 

Asof September 30, 2009, we have invested $5,110 in AffiliatesInsurance Company, or AIC, an insurance company, that is owned by RMRand other companies to which RMR provides management services. We own 16.67% of the common shares of AIC which has a currentcarrying value of $4,977.  Thisinvestment is included in other assets on our condensed consolidated balancesheets.  Although we own less than 20% of AIC, we use the equity method toaccount for our investment in AIC because we believe that we have significantinfluence over AIC since each of our trustees is a director of AIC and since weexpect to procure some of our insurance from AIC.  Under the equitymethod, we record our percentage share of net earnings from AIC in ourconsolidated statements of income.  Forthe three and nine month periods, our share of AIC’s net losses totaled $23 and$133, respectively, and are included in general and administrative expenses onour condensed consolidated statements of income.  If we determine there isan “other than temporary” decline in the fair value of this investment, wewould record a charge to earnings.  In evaluating the fair value of thisinvestment, we consider, among other things, the assets andliabilities held by AIC, AIC’s overall financial condition and earningtrends, and the financial condition and prospects for the insuranceindustry generally.  Subsequent to September 30,2009, we invested an additional $24 in order to fund our shareof formation and licensing costs for AIC.

 

13

----

 

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

 

The following discussion should be read inconjunction with our consolidated financial statements and notes theretoincluded in this quarterly report and our Annual Report on Form 10-K forthe year ended December 31, 2008.

 

**PORTFOLIOOVERVIEW**

** **

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

** **
| **(As  of September 30, 2009)**      | ** ** | **Number of  Properties** | ** ** | **Number of  Units/Beds or  Square Feet** | ** **    | **Investment  Carrying Value ****(1)** | ** ** | **% of  Investment** | ** ** | **Annualized  Current Rent** | ** ** | **% of  Annualized  Current  Rent** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|---------------|---------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|
|                                 |       |                           |       |                                                     |          |                                        |       |                      |       |                              |       |                                     |       |
| Facility Type                        |       |                           |       |                                                     |          |                                        |       |                      |       |                              |       |                                     |       |
| Independent living  communities (2)  |       | 43                             |       | 11,524                                                   |          | $                                           | 1,119,530  |                      | 35.1%      |                              | $          | 109,878                                  |       | 34.2% |   |
| Assisted living  facilities (2) |       | 120                            |       | 8,472                                                    |          | 910,129                                     |       | 28.4%                     |       | 84,822                            |       | 26.4%                                    |       |
| Skilled nursing  facilities (2) |       | 58                             |       | 5,844                                                    |          | 228,536                                     |       | 7.1%                      |       | 20,413                            |       | 6.4%                                     |       |
| Rehabilitation  hospitals            |       | 2                              |       | 364                                                      |          | 61,025                                      |       | 1.9%                      |       | 9,648                             |       | 3.0%                                     |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |  sq. ft. | 180,017                                     |       | 5.6%                      |       | 17,069                            |       | 5.3%                                     |       |
| MOBs                                 |       | 56                             |       | 2,867,862                                                |  sq. ft. | 702,307                                     |       | 21.9%                     |       | 79,124                            |       | 24.7%                                    |       |
| Total                                |       | 289                            |       |                                                     |          | $                                           | 3,201,544  |                      | 100.0%     |                              | $          | 320,954                                  |       | 100.0% |   |
|                                 |       |                           |       |                                                     |          |                                        |       |                      |       |                              |       |                                     |       |
| Tenant / Operator                    |       |                           |       |                                                     |          |                                        |       |                      |       |                              |       |                                     |       |
| Five Star (Lease  No. 1) (3)    |       | 80                             |       | 5,919                                                    |          | $                                           | 533,304    |                      | 16.7%      |                              | $          | 45,273                                   |       | 14.1% |   |
| Five Star (Lease  No. 2) (3)    |       | 50                             |       | 6,106                                                    |          | 502,738                                     |       | 15.7%                     |       | 49,294                            |       | 15.4%                                    |       |
| Five Star (Lease  No. 3) (3)    |       | 28                             |       | 5,618                                                    |          | 617,161                                     |       | 19.3%                     |       | 61,564                            |       | 19.2%                                    |       |
| Five Star (Lease  No. 4) (3)    |       | 25                             |       | 2,461                                                    |          | 230,636                                     |       | 7.2%                      |       | 21,144                            |       | 6.6%                                     |       |
| Sunrise / Marriott (4)               |       | 14                             |       | 4,091                                                    |          | 325,165                                     |       | 10.2%                     |       | 32,416                            |       | 10.1%                                    |       |
| Brookdale                            |       | 18                             |       | 894                                                      |          | 61,122                                      |       | 1.9%                      |       | 8,173                             |       | 2.5%                                     |       |
| 6 private companies  (combined)      |       | 8                              |       | 1,115                                                    |          | 49,094                                      |       | 1.5%                      |       | 6,897                             |       | 2.1%                                     |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |  sq. ft  | 180,017                                     |       | 5.6%                      |       | 17,069                            |       | 5.3%                                     |       |
| Multi-tenant MOBs                    |       | 56                             |       | 2,867,862                                                |  sq. ft  | 702,307                                     |       | 21.9%                     |       | 79,124                            |       | 24.7%                                    |       |
| Total                                |       | 289                            |       |                                                     |          | $                                           | 3,201,544  |                      | 100.0%     |                              | $          | 320,954                                  |       | 100.0% |   |

** **

Tenant OperatingStatistics (Quarter Ended June 30)(5)

 
|                                  |   | **Rent  Coverage** |       | **Occupancy** |       | **Annualized Rental Income per Living  Unit,  Bed or Square Foot **(6) |       |
|---------------------------------------|--------|--------------------|------------|---------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
|                                  |   | **2009**           | ** ** | **2008**      | ** ** | **2009**                                                                                                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** |   |
| Five Star (Lease  No. 1) (3)     |   | 1.37x              |       | 1.23x         |       | 87%                                                                                                            |       | 88% |   | $ | 7,649 |   | $ | 7,520 |   |
| Five Star (Lease No. 2)  (3) (7) |   | 1.37x              |       | 1.44x         |       | 82%                                                                                                            |       | 84% |   | $ | 6,905 |   | $ | 6,520 |   |
| Five Star (Lease  No. 3) (3)     |   | 1.52x              |       | 1.56x         |       | 89%                                                                                                            |       | 91% |   | $ | 10,958 |   | $ | 10,670 |   |
| Five Star (Lease  No. 4) (3)     |   | 1.06x              |       | 1.38x         |       | 85%                                                                                                            |       | 90% |   | $ | 8,592 |   | $ | 8,280 |   |
| Sunrise / Marriott (4)                |   | 1.44x              |       | 1.43x         |       | 89%                                                                                                            |       | 90% |   | $ | 7,924 |   | $ | 7,817 |   |
| Brookdale                             |   | 2.14x              |       | 2.19x         |       | 90%                                                                                                            |       | 91% |   | $ | 9,142 |   | $ | 8,965 |   |
| 6 private companies  (combined)       |   | 1.96x              |       | 1.92x         |       | 81%                                                                                                            |       | 83% |   | $ | 6,186 |   | $ | 6,134 |   |
| Wellness centers (8)                  |   | 2.36x              |       | 2.37x         |       | 100%                                                                                                           |       | 100% |   | NA |   | NA |   |
| Multi-tenant MOBs (9)                 |   | NA                 |       | NA            |       | 98%                                                                                                            |       | 99% |   | $ | 28 |   | $ | 22 |   |

 
| ** **                        | ** ** | **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) (3) |       | 60%                                                                                           |       | 60% |   | 14% |   | 14% |   | 26% |   | 26% |   |
| Five Star (Lease  No. 2) (3) |       | 52%                                                                                           |       | 51% |   | 32% |   | 32% |   | 16% |   | 17% |   |
| Five Star (Lease  No. 3) (3) |       | 87%                                                                                           |       | 88% |   | 12% |   | 11% |   | 1% |   | 1% |   |
| Five Star (Lease  No. 4) (3) |       | 67%                                                                                           |       | 69% |   | 14% |   | 14% |   | 19% |   | 17% |   |
| Sunrise / Marriott (4)            |       | 69%                                                                                           |       | 81% |   | 27% |   | 16% |   | 4% |   | 3% |   |
| Brookdale                         |       | 100%                                                                                          |       | 99% |   | — |   | — |   | — |   | 1% |   |
| 6 private companies  (combined)   |       | 24%                                                                                           |       | 26% |   | 24% |   | 23% |   | 52% |   | 51% |   |

** **

**14**

----

 

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

 

TenantOperating Statistics (Six Months Ended June 30)(5)

 
|                                       |   | **Rent  Coverage** | ** ** | **Occupancy** | ** ** | **Annualized Rental Income per Living  Unit,** |       |
|--------------------------------------------|--------|--------------------|------------|---------------|------------|--------------------------------------------------------------------|------------|
|                                       |   | **2009**           | ** ** | **2008**      | ** ** | **2009**                                                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** |   |
|                                       |   |               |       |          |       |                                                               |       |   |   |   |   |   |   |
| Five Star (Lease  No. 1) (3)          |   | 1.35x              |       | 1.34x         |       | 87%                                                                |       | 88% |   | $ | 7,649 |   | $ | 7,520 |   |
| Five Star (Lease  No. 2) (3) (7) |   | 1.33x              |       | 1.47x         |       | 81%                                                                |       | 85% |   | $ | 6,905 |   | $ | 6,520 |   |
| Five Star (Lease  No. 3) (3)          |   | 1.58x              |       | 1.59x         |       | 89%                                                                |       | 92% |   | $ | 10,958 |   | $ | 10,670 |   |
| Five Star (Lease  No. 4) (3)          |   | 1.03x              |       | 1.43x         |       | 85%                                                                |       | 90% |   | $ | 8,592 |   | $ | 8,280 |   |
| Sunrise / Marriott (4)                     |   | 1.45x              |       | 1.52x         |       | 90%                                                                |       | 91% |   | $ | 7,924 |   | $ | 7,817 |   |
| Brookdale                                  |   | 2.18x              |       | 2.21x         |       | 91%                                                                |       | 91% |   | $ | 9,142 |   | $ | 8,965 |   |
| 6 private companies  (combined)            |   | 1.89x              |       | 2.08x         |       | 81%                                                                |       | 85% |   | $ | 6,186 |   | $ | 6,134 |   |
| Wellness centers (8)                       |   | 1.86x              |       | 1.99x         |       | 100%                                                               |       | 100% |   | NA |   | NA |   |
| Multi-tenant MOBs (9)                      |   | NA                 |       | NA            |       | 98%                                                                |       | 99% |   | $ | 28 |   | $ | 22 |   |

 
| ** **                       | ** ** | **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) (3) |       | 49%                                                  |       | 50% |   | 18% |   | 18% |   | 33% |   | 32% |   |
| Five Star (Lease No. 2) (3) |       | 50%                                                  |       | 51% |   | 33% |   | 34% |   | 17% |   | 16% |   |
| Five Star (Lease No. 3) (3) |       | 86%                                                  |       | 88% |   | 13% |   | 11% |   | 1% |   | 1% |   |
| Five Star (Lease No. 4) (3) |       | 68%                                                  |       | 69% |   | 13% |   | 4% |   | 19% |   | 17% |   |
| Sunrise / Marriott (4)           |       | 67%                                                  |       | 67% |   | 29% |   | 29% |   | 4% |   | 4% |   |
| Brookdale                        |       | 100%                                                 |       | 99% |   | — |   | — |   | — |   | 1% |   |
| 6 private companies (combined)   |       | 23%                                                  |       | 27% |   | 25% |   | 24% |   | 52% |   | 49% |   |

 

----

**(1)**          Amounts are before depreciation, but after impairment write downs, ifany.

**(2)**          Properties are categorized by the type of living units / beds whichconstitute a majority of the living units / beds at the property.

**(3)**          On August 4, 2009, in connection with the Federal National MortgageAssociation, or FNMA, transaction, we realigned our four leases with Five StarQuality Care, Inc., or Five Star. The data presented reflects this realignment.

**(4)**          Marriott International, Inc. guarantees this lease.

(5)          All tenant operating data presented are based upon theoperating results provided by our tenants for the indicated quarterly or sixmonth periods, or the most recent prior period for which tenant operatingresults are available to us. Rent coverage is calculated as operating cash flowfrom 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 toour ownership of some of these properties.

(6)          Represents annualized rent by lease divided by thenumber of living units, beds or square feet leased at September 30, 2009and 2008.

(7)          Annualized rental income per living unit, bed orsquare foot excludes the two rehabilitation hospitals because these propertieshave extensive clinic space for services to both overnight patients andpatients who receive treatment and do not stay overnight, and these propertiesare not comparable to residential senior living properties.

(8)          Annualized rental income per living unit, bed orsquare foot excludes the wellness centers because these properties haveextensive indoor and outdoor recreation space which is not comparable toproperties where rent is based on interior space only.

(9)          Our medical office, clinic and biotech laboratorybuilding, or MOB, leases include both triple net leases where, in addition topaying fixed rents, the tenants assume the obligation to operate and maintainthe properties at their expense and net and modified leases where we areresponsible to operate and maintain the properties and we charge tenants forsome or all of the property operating costs. A minority of our MOB leases are so-called “full-service” leases wherewe receive fixed rent from our tenants and no reimbursement for our propertyoperating costs.

(10)    Private pay excludes revenues from the Medicare andMedicaid programs.

 

15

----

 

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

 

The following tables setforth information regarding lease expirations as of September 30, 2009(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** | ** ** |
|           |       |                                                  |       |                  |       |                                       |       |   |   |   |   |   |   |
| 2009           |       | $                                                     | —     |                  | $          | 997                                        |       | $ | — |   | $ | 997 |   | 0.3% |   | 0.3% |   |
| 2010           |       | 1,333                                                 |       | 2,392                 |       | —                                     |       | 3,725 |   | 1.2% |   | 1.5% |   |
| 2011           |       | —                                                |       | 2,047                 |       | —                                     |       | 2,047 |   | 0.6% |   | 2.1% |   |
| 2012           |       | —                                                |       | 5,951                 |       | —                                     |       | 5,951 |   | 1.9% |   | 4.0% |   |
| 2013           |       | 32,416                                                |       | 3,658                 |       | —                                     |       | 36,074 |   | 11.2% |   | 15.2% |   |
| 2014           |       | —                                                |       | 6,167                 |       | —                                     |       | 6,167 |   | 1.9% |   | 17.1% |   |
| 2015           |       | 2,072                                                 |       | 5,324                 |       | —                                     |       | 7,396 |   | 2.3% |   | 19.4% |   |
| 2016           |       | 2,888                                                 |       | 6,760                 |       | —                                     |       | 9,648 |   | 3.0% |   | 22.4% |   |
| 2017           |       | 29,317                                                |       | 1,308                 |       | —                                     |       | 30,625 |   | 9.5% |   | 31.9% |   |
| 2018           |       | —                                                |       | 1,896                 |       | —                                     |       | 1,896 |   | 0.6% |   | 32.5% |   |
| 2019 and after |       | 156,735                                               |       | 42,624                |       | 17,069                                     |       | 216,428 |   | 67.5% |   | 100.0% |   |
| Total          |       | $                                                     | 224,761    |                  | $          | 79,124                                     |       | $ | 17,069 |   | $ | 320,954 |   | 100.0% |   |   |   |

 

Average remaining lease term for all properties(weighted by rent) 12.8 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** | ** ** |
|           |       |                                                   |       |       |       |                  |       |   |   |   |   |   |   |
| 2009           |       | —                                                 |       | 15         |       | —                |       | 15 |   | 6.8% |   | 6.8% |   |
| 2010           |       | 1                                                      |       | 23         |       | —                |       | 24 |   | 10.9% |   | 17.7% |   |
| 2011           |       | —                                                 |       | 22         |       | —                |       | 22 |   | 10.0% |   | 27.7% |   |
| 2012           |       | —                                                 |       | 38         |       | —                |       | 38 |   | 17.2% |   | 44.9% |   |
| 2013           |       | 1                                                      |       | 21         |       | —                |       | 22 |   | 10.0% |   | 54.9% |   |
| 2014           |       | —                                                 |       | 22         |       | —                |       | 22 |   | 10.0% |   | 64.9% |   |
| 2015           |       | 2                                                      |       | 18         |       | —                |       | 20 |   | 9.0% |   | 73.9% |   |
| 2016           |       | 2                                                      |       | 18         |       | —                |       | 20 |   | 9.0% |   | 82.9% |   |
| 2017           |       | 2                                                      |       | 12         |       | —                |       | 14 |   | 6.3% |   | 89.2% |   |
| 2018           |       | —                                                 |       | 6          |       | —                |       | 6 |   | 2.7% |   | 91.9% |   |
| 2019 and after |       | 4                                                      |       | 12         |       | 2                     |       | 18 |   | 8.1% |   | 100.0% |   |
| Total          |       | 12                                                     |       | 207        |       | 2                     |       | 221 |   | 100.0% |   |   |   |

 

16

----

** **

**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** | ** ** |
|----------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|------------|
|           |       |                                                                  |       |                                                    |       |                                                                   |       |                     |       |                                  |       |                    |       |                                          |       |                                                      |       |
| 2009           |       | —                                                                |       | 0.0%                                                    |       | 0.0%                                                                   |       | 26,716                   |       | —                                |       | 26,716                  |       | 0.7%                                          |       | 0.7%                                                      |       |
| 2010           |       | 140                                                                   |       | 0.5%                                                    |       | 0.5%                                                                   |       | 73,408                   |       | —                                |       | 73,408                  |       | 2.0%                                          |       | 2.7%                                                      |       |
| 2011           |       | —                                                                |       | 0.0%                                                    |       | 0.5%                                                                   |       | 63,458                   |       | —                                |       | 63,458                  |       | 1.7%                                          |       | 4.4%                                                      |       |
| 2012           |       | —                                                                |       | 0.0%                                                    |       | 0.5%                                                                   |       | 296,708                  |       | —                                |       | 296,708                 |       | 8.2%                                          |       | 12.6%                                                     |       |
| 2013           |       | 4,091                                                                 |       | 15.6%                                                   |       | 16.1%                                                                  |       | 143,974                  |       | —                                |       | 143,974                 |       | 4.0%                                          |       | 16.6%                                                     |       |
| 2014           |       | —                                                                |       | 0.0%                                                    |       | 16.1%                                                                  |       | 157,987                  |       | —                                |       | 157,987                 |       | 4.4%                                          |       | 21.0%                                                     |       |
| 2015           |       | 283                                                                   |       | 1.1%                                                    |       | 17.2%                                                                  |       | 232,520                  |       | —                                |       | 232,520                 |       | 6.4%                                          |       | 27.4%                                                     |       |
| 2016           |       | 517                                                                   |       | 2.0%                                                    |       | 19.2%                                                                  |       | 328,525                  |       | —                                |       | 328,525                 |       | 9.1%                                          |       | 36.5%                                                     |       |
| 2017           |       | 3,355                                                                 |       | 12.8%                                                   |       | 32.0%                                                                  |       | 32,895                   |       | —                                |       | 32,895                  |       | 0.9%                                          |       | 37.4%                                                     |       |
| 2018           |       | —                                                                |       | 0.0%                                                    |       | 32.0%                                                                  |       | 48,174                   |       | —                                |       | 48,174                  |       | 1.3%                                          |       | 38.7%                                                     |       |
| 2019 and after |       | 17,818                                                                |       | 68.0%                                                   |       | 100.0%                                                                 |       | 1,413,562                |       | 812,000                               |       | 2,225,562               |       | 61.3%                                         |       | 100.0%                                                    |       |
| Total          |       | 26,204                                                                |       | 100.0%                                                  |       |                                                                   |       | 2,817,927                |       | 812,000                               |       | 3,629,927               |       | 100.0%                                        |       |                                                      |       |

 

**RESULTSOF OPERATIONS**

 

#### **Three Months Ended September 30,2009 Compared to Three Months Ended September 30, 2008:**

 
| ** **                                         | ** **   | **2009**                                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|----------------------------------------------------|--------------|------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                         | *** *** | **(dollars in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                                      |         | $                                                    | 72,010     |       | $          | 58,844     |       | $            | 13,166     |   | 22.4% |   |
| Interest and other income                          |         | 355                                                  |       | 829        |       | (474       | )          | (57.2)%      |       |
|                                               |         |                                                 |       |       |       |       |       |         |       |
| Property operating expenses                        |         | 4,112                                                |       | 1,024      |       | 3,088      |       | 301.6%       |       |
| Interest expense                                   |         | 15,949                                               |       | 9,606      |       | 6,343      |       | 66.0%        |       |
| Depreciation expense                               |         | 19,689                                               |       | 15,859     |       | 3,830      |       | 24.2%        |       |
| Acquisition costs                                  |         | 517                                                  |       | —     |       | 517        |       | —       |       |
| General and administrative                         |         | 5,284                                                |       | 4,303      |       | 981        |       | 22.8%        |       |
| Impairment of assets                               |         | 11,249                                               |       | —     |       | 11,249     |       | —       |       |
|                                               |         |                                                 |       |       |       |       |       |         |       |
| Income before gain on sale of properties           |         | 15,565                                               |       | 28,881     |       | (13,316    | )          | (46.1)%      |       |
| Gain on sale of properties                         |         | —                                               |       | 266        |       | (266       | )          | —       |       |
| Net income                                         |         | $                                                    | 15,565     |       | $          | 29,147     |       | $            | 13,582     |   | (46.6)% |   |
|                                               |         |                                                 |       |       |       |       |       |         |       |
| Weighted average shares outstanding                |         | 121,665                                              |       | 114,493    |       | 7,172      |       | 6.3%         |       |
|                                               |         |                                                 |       |       |       |       |       |         |       |
| Income before gain on sale of properties per share |         | $                                                    | 0.13       |       | $          | 0.25       |       | $            | (0.12      | ) | (48.0)% |   |
| Net income per share                               |         | $                                                    | 0.13       |       | $          | 0.25       |       | $            | (0.12      | ) | (48.0)% |   |

 

Rentalincome increased because of rents earned from our real estate acquisitionssince October 1, 2008, including $13.7 million of rental income in thethird quarter of 2009 due to our acquisition of MOBs since June 2008.  Interest and other income decreased as aresult of lower levels of investable cash and lower interest rates.

 

17

----

 

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

 

Theincrease in property operating expenses for the quarter ended September 30,2009 is theresult of our acquisition of MOBs since June 2008 and principally includes expenses related toreal estate taxes, utilities, cleaning costs and property management fees paidto Reit Management & Research LLC, or RMR.

 

Interestexpense increased because of interest payments on our $512.9 million mortgagefinancing entered in August 2009 with a weighted average interest rate of6.59%, the amortization of $11.8 million of deferred financing fees incurred inconnection with this mortgage financing and greater amounts outstanding underour revolving credit facility offset by lower interest rates. Our weighted average balance outstanding andinterest rate under our revolving credit facility was $90.4 million and 1.1%,and $32.2 million and 4.0%, for the three months ended September 30, 2009and 2008, respectively.  Interestexpense also increased due to $61.3 million of debt assumed in connection withour third quarter 2008 acquisitions.

 

Depreciationexpense for the third quarter of 2009 increased because of acquisitions since October 1,2008. Commencing January 1, 2009, acquisition costs are expensedunder the Business Combinations Topic of *The FASB AccountingStandards Codification**TM*, or the Codification.  General and administrative expenses increasedin 2009 principally due to our acquisitions since October 1, 2008.

 

Duringthe three months ended September 30, 2009, we recognized an impairment ofassets charge of $11.2 million related to eight properties, including sixskilled nursing facilities, one assisted living property and one MOB.

 

OnJuly 1, 2008, we sold three assisted living facilities for net proceeds of$21.4 million.  The carrying value ofthese properties at the time of sale was $21.1 million, resulting in a gain onsale of $266,000.

 

Net income per share decreased because of the changesin revenues and expenses described above and the effect of an increase in theweighted average number of shares outstanding resulting from our issuance ofcommon shares in February and September 2009.

 

#### **Nine Months Ended September 30,2009 Compared to Nine Months Ended September 30, 2008:**

 
| ** **                                         | ** ** | **2009**                                     | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                         | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                                      |       | $                                            | 209,785    |       | $          | 160,591    |       | $            | 49,194     |   | 30.6% |   |
| Interest and other income                          |       | 750                                          |       | 2,025      |       | (1,275     | )          | (63.0)%      |       |
|                                               |       |                                         |       |       |       |       |       |         |       |
| Property operating expenses                        |       | 10,286                                       |       | 1,124      |       | 9,162      |       | 815.1%       |       |
| Interest expense                                   |       | 37,432                                       |       | 28,934     |       | 8,498      |       | 29.4%        |       |
| Depreciation expense                               |       | 56,713                                       |       | 43,235     |       | 13,478     |       | 31.2%        |       |
| Acquisition costs                                  |       | 1,911                                        |       | —     |       | 1,911      |       | —       |       |
| General and administrative                         |       | 15,335                                       |       | 12,506     |       | 2,829      |       | 22.6%        |       |
| Impairment of assets                               |       | 11,249                                       |       | 2,940      |       | 8,309      |       | 282.6%       |       |
|                                               |       |                                         |       |       |       |       |       |         |       |
| Income before gain on sale of properties           |       | 77,609                                       |       | 73,877     |       | 3,732      |       | 5.1%         |       |
| Gain on sale of properties                         |       | —                                       |       | 266        |       | (266       | )          | —       |       |
| Net income                                         |       | $                                            | 77,609     |       | $          | 74,143     |       | $            | 3,466      |   | 4.7% |   |
|                                               |       |                                         |       |       |       |       |       |         |       |
| Weighted average shares outstanding                |       | 120,005                                      |       | 102,004    |       | 18,001     |       | 17.6%        |       |
|                                               |       |                                         |       |       |       |       |       |         |       |
| Income before gain on sale of properties per share |       | $                                            | 0.65       |       | $          | 0.72       |       | $            | (0.07      | ) | (9.7)% |   |
| Net income per share                               |       | $                                            | 0.65       |       | $          | 0.73       |       | $            | (0.08      | ) | (11.0)% |   |

 

18

----

 

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

 

Rentalincome increased because of rents earned from our real estate acquisitionssince October 1, 2008, including $35.2 million of rental income in thenine months ended September 30, 2009 due to our acquisition of MOBs since June 2008,partially offset by a reduction in rental income resulting from the sale ofthree properties during the third quarter of 2008.  Interest and other income decreased as aresult of lower levels of investable cash and lower interest rates.

 

Theincrease in property operating expenses for the nine months ended September 30,2009 is the result of our acquisition of MOBs since June 2008 and principally includes expenses related toreal estate taxes, utilities, cleaning costs and property management fees paidto RMR.

 

Interestexpense increased because of interest payments on our $512.9 million mortgagefinancing entered in August 2009 with a weighted average interest rate of6.59%, the amortization of $11.8 million of deferred financing fees incurred inconnection with this mortgage financing and greater amounts outstanding underour revolving credit facility offset by lower interest rates. Our weighted average balance outstanding andinterest rate under our revolving credit facility was $169.2 million and 1.3%,and $48.2 million and 3.8%, for the nine months ended September 30, 2009and 2008, respectively.  Interestexpense also increased due to $61.3 million of debt assumed in connection withour third quarter 2008 acquisitions.

 

Depreciationexpense for the nine months ended September 30, 2009 increased because ofacquisitions since October 1, 2008. Commencing January 1, 2009,acquisition costs are expensed under the Business Combinations Topic of theCodification.  General and administrativeexpenses increased in 2009 principally due to our acquisitions since October 1,2008.

 

Duringthe nine months ended September 30, 2009, we recognized an impairment ofassets charge of $11.2 million related to eight properties, including sixskilled nursing facilities, one assisted living property and one MOB.  During the nine months ended September 30,2008, we recognized an impairment of assets charge of $2.9 million related toone assisted living property.

 

OnJuly 1, 2008, we sold three assisted living facilities for net proceeds of$21.4 million.  The carrying value ofthese properties at the time of sale was $21.1 million, resulting in a gain onsale of $266,000.

 

Net income per share decreased because of the changesin revenues and expenses described above and the effect of an increase in theweighted average number of shares outstanding resulting from our issuance ofcommon shares in February and June 2008 and February and September 2009.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal source offunds to pay operating expenses, debt service and distributions to shareholdersis rental income from our properties. We believe that our operating cash flowwill be sufficient to meet our operating expenses and debt service and paydistributions on our shares for the foreseeable future. Our future cash flowsfrom operating activities will depend primarily upon our ability to:

 

·                  maintain orimprove the occupancy of, and the current rent rates at, our properties;

 

·                  controloperating cost increases at our properties; and

 

·                  purchaseadditional properties which produce positive cash flows from operations.

 

19

----

 

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

 

OurOperating Liquidity and Resources

 

We generally receive minimum rents monthly orquarterly from our tenants and we receive percentage rents monthly, quarterlyor annually. During the nine months ended September 30, 2009, we generated$160.5 million of cash from operations and at September 30, 2009, we had$72.5 million of cash and cash equivalents.

 

Our Investment and Financing Liquidity and Resources

 

In order to fund acquisitions and to accommodate cashneeds that may result from timing differences between our receipts of rents andour need or desire to pay operating expenses and distributions to ourshareholders, we maintain a revolving credit facility with a group ofinstitutional lenders. This revolving credit facility permits us to borrow upto $550.0 million.  Borrowings under ourrevolving credit facility are unsecured. We may borrow, repay and reborrow funds until maturity. No principalrepayment is due until maturity.  We payinterest on borrowings under the revolving credit facility at LIBOR plus apremium.  This facility matures in December 2010.Subject to certain conditions, this credit facility’s maturity date can beextended at our option to December 31, 2011 upon payment of a fee.

 

In May 2008, we entered into a series of agreements to acquire 48MOBs from HRPT Properties Trust, or HRP, for a total purchase price of $565.0million.  As of September 1, 2009,we completed these transactions with HRP. We currently continue to own 45 of these properties, acquired for atotal purchase price of approximately $558.2 million.  One property with a value of approximately$3.0 million is no longer subject to a purchase agreement and we sold twoproperties during 2009.  For moreinformation concerning these purchases please see Notes 2 and 5 to ourcondensed consolidated financial statements above and the subsection titled “RelatedPersons Transactions” below.

 

In February and September 2009, we issued 5.9 and 6.9 millioncommon shares in public offerings, raising net proceeds of approximately $96.8million and $127.2 million, respectively. We used the net proceeds from these offerings to repay borrowingsoutstanding on our revolving credit facility, to fund the real estateacquisitions described above and below and for general business purposes.  We intend to use the balance of the netproceeds from the September offering for general business purposes,including funding pending acquisitions and for possible future acquisitions.

 

On August 4, 2009, we closed a $512.9 million mortgage financingwith FNMA. This mortgage loan is secured by first liens on 28 senior livingproperties leased to Five Star. We used the proceeds fromthis mortgage financing to repay amounts outstanding under our revolving creditfacility, to purchase the remaining seven MOBs from HRP and to acquire the 10MOBs and one senior living property from unaffiliated parties as describedbelow.  In connection with the FNMAtransaction, we realigned our leases with Five Star, we purchased property andsecurities from Five Star and we reduced the rent payable by Five Star to usand Five Star assumed certain obligations to FNMA.  For more information about the changes in ourrelationship with Five Star resulting from the FNMA transaction, please seeNotes 2 and 5 to our condensed consolidated financial statements above and thesubsection titled “Related Persons Transactions” below.

 

During the nine months ended September 30, 2009, we purchased$30.4 million of improvements made to our properties that are leased to FiveStar.  We used cash on hand andborrowings under our revolving credit facility to fund these purchases.  As a result of this purchase, the annual rentpayable to us by Five Star increased by approximately $2.4 million.

 

At September 30, 2009, we had $72.5 million of cash and cashequivalents and $550.0 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

 

20

----

 

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

 

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

 

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 registration statementthat allows us to issue public securities on an expedited basis, but it doesnot assure that there will be buyers for such securities.

 

Recentcapital markets conditions have been challenging.  The availability and cost of credit have beenand may continue to be adversely affected by illiquid debt markets and widecredit rate spreads, and equity markets have been extremely volatile.  While we believe we will have access tovarious types of financings, including debt or equity, to fund our future acquisitionsand to pay our debts and other obligations, there can be no assurance that wewill be able to complete any debt or equity offerings or that our cost of anyfuture financings will be reasonable.  Ifcurrent market conditions continue or worsen, one or more lenders under ourrevolving credit facility may be unable or unwilling to fund advances which werequest, our lenders may be unable or unwilling to renew our credit facilitiesand we may not be able to access additional capital.  Ourability to continue to access capital could be impacted by various factors,including general market conditions and the continuing recession in the U.S.economy, interest rates, credit ratings on our securities, the market price ofour capital stock and the financial performance of our tenants.  Also, the current market conditions have ledto materially increased credit spreads which, if they continue, may result inmaterial increases in the interest costs under our floating rate debts and ourfixed rate debts when we refinance or when we incur new debt.  These interest cost increases could have amaterial and adverse impact on our results of operations and financialconditions.

 

On February 13, 2009, we paid a $0.35 per commonshare, or $40.1 million, quarterly distribution to our common shareholders forthe quarter ended December 31, 2008. On May 15, 2009, we paid a $0.35 per common share, or $42.2million, quarterly distribution to our common shareholders for the quarterended March 31, 2009.  On August 14,2009, we paid a $0.36 per common share, or $43.4 million, quarterlydistribution to our common shareholders for the quarter ended June 30,2009.  On October 5, 2009, wedeclared a quarterly distribution of $0.36 per common share, or $45.9 million,to be paid to our common shareholders of record on October 15, 2009 withrespect to our results for the quarter ended September 30, 2009. We expectto pay this quarterly distribution on or about November 17, 2009, usingcash on hand and, if necessary, borrowings under our revolving credit facility.

 

OnSeptember 30, 2009, we acquired 10 MOBs with a total of 643,000 squarefeet for approximately $169.0 million, plus closing costs, from an unaffiliatedparty for initial cash rent of $15.0 million per year.  These buildings are currently 100% leased toone tenant for a lease term of 15 years plus renewal options.  We funded this acquisition using cash onhand, proceeds from our mortgage financing in August 2009 described aboveand proceeds from our equity offering in September 2009 described above.

 

OnOctober 1, 2009, we acquired one senior living property for approximately$21.0 million, plus closing costs, from an unaffiliated party.  We leased this property to Five Star andadded this property to Five Star Lease No. 4, which has a current termexpiring in 2017, for initial rent of approximately $1.8 million per year.  Percentage rent, based on increases in grossrevenues at this property, will commence in 2011.  We funded this acquisition using cash onhand, proceeds from our mortgage financing in August 2009 described aboveand proceeds from our equity offering in September 2009 described above.

 

InOctober 2009, we agreed to acquire 10 senior living properties forapproximately $97.3 million from two unaffiliated parties.  We intend to lease these properties to FiveStar and expect initial rent to be approximately $8.5 million per year.  We expect percentage rent, based on increasesin gross revenues at these properties, will commence in 2011.  We expect to fund these acquisitions usingcash on hand,

 

21

----

 

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

 

proceedsfrom our equity offering in September 2009 described above and borrowingsunder our revolving credit facility.  Thepurchase of these properties is contingent upon completion of our diligence andother customary closing conditions. We can provide no assurance that we will purchasethese properties.

 

As of November 4, 2009, we have no off balancesheet arrangements, commercial paper, derivatives, swaps, hedges, jointventures or partnerships.

 

## **DebtCovenants**

## ** **

Our principal debt obligations at September 30,2009, were our unsecured revolving credit facility, two public issues ofunsecured senior notes totaling $322.5 million and $647.1 million of mortgagessecured by 61 of our properties.  Oursenior 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 September 30,2009, 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 indenturesand related supplements, our revolving credit facility or our other debtobligations contains provisions for acceleration which could be triggered byour debt 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 $10.0 million or more. Similarly, our revolving credit facility contains a cross defaultprovision to any other debts of $25.0 million or more that are recourse debtsand to any other debts of $75.0 million or more that are non-recourse debts.

 

**Related Persons Transactions**

 

InMay 2008, we entered into a series of agreements to acquire 48 MOBs fromHRP for an aggregate purchase price of approximately $565.0 million.  As of September 1, 2009, we completedthese transactions with HRP.  During2009, we acquired 10 of these MOBs containing 617,000 square feet for anaggregate purchase price of approximately $214.6 million, plus closingcosts.  We recorded intangible leaseassets of $19.3 million and intangible lease liabilities of $3.6 million forthese MOBs acquired during the nine months ended September 30, 2009.  One of the remaining buildings with anallocated value of $3.0 million is no longer subject to our purchaseagreement.  At the request of a tenantfor two properties subject to a multi-property lease, in May and September 2009we sold two of our MOB properties for approximately $3.2 million, which wastheir approximate net book value, to two unaffiliated parties.  We now own 45 of these properties containing2.1 million square feet for an aggregate cost of approximately $558.2 million,plus closing costs.  We funded theseacquisitions using cash on hand, proceeds from a mortgage financing, proceedsfrom equity issuances, borrowings under our revolving credit facility and byassuming three mortgage loans, on two properties, totaling $10.8 million with aweighted average interest rate of 7.1% per annum and a weighted averagematurity in 2018.  As of September 30,2009, the MOBs that we acquired from HRP and continue to own were 98%****leased to approximately 200 tenants for an average leaseterm of 9.2 years.

 

HRP was formerly our parent.  We were spun off to HRP’s shareholders in1999 and, at the time of this spin off, we and HRP entered into a transactionagreement which, among other things, prohibited

 

22

----

 

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

 

us from purchasing MOBs. Concurrently with the execution and delivery of the purchase agreementsdescribed above, we and HRP entered into an amendment to that transactionagreement, or the first amendment agreement, to permit us, rather than HRP, toinvest in medical office, clinic and biomedical, pharmaceutical and laboratorybuildings.  The first amendment agreementis subject, in the case of mixed use buildings, to HRP’s retaining the right toinvest in any mixed use building for which the rentable square footage is lessthan 50% medical office, clinic and biomedical, pharmaceutical and laboratoryuse.  Also, concurrently with theexecution and delivery of the purchase agreements, we entered into a right offirst refusal agreement under which we were granted a right of first refusal topurchase up to 45 additional identified properties (containing approximately4.6 million square feet of rental space) HRP owns which are leased to tenantsin medical related businesses in the event HRP determines to sell suchproperties or in the event of an indirect sale as a result of HRP’s change ofcontrol or a change of control of HRP’s subsidiary which owns such properties.

 

Both we and HRP are managed by RMR; Barry Portnoy and Adam Portnoy ownRMR and are Managing Trustees of both us and HRP; and Frederick Zeytoonjian isan Independent Trustee of both us and HRP. Because of these relationships, the terms of our agreements entered in2008 with HRP were negotiated and approved by special committees of our and HRP’sboards composed of trustees of each company who are not trustees of bothcompanies. For more information about the terms of the purchase agreements, thefirst amendment agreement and the right of first refusal agreement between usand HRP, please read these agreements, copies of which are filed as exhibits toour Current Report on Form 8-K dated May 9, 2008, copies of which areavailable at the SEC website: www.sec.gov.

 

Five Star is our largest tenant and is our former subsidiary.  In addition to being our manager, RMR alsoprovides management services to Five Star. One of our trustees, Barry Portnoy, is currently a Managing Director ofFive Star.  Because of these and otherrelationships we and Five Star may be considered related persons.  As of September 30, 2009, we leased 181****senior living communities and two rehabilitation hospitalsto Five Star for total annual minimum rent of $173.7 million.  Because of the relationships between us andFive Star, all of our transactions with Five Star are separately approved byour Independent Trustees and Five Star’s Independent Directors.

 

During the nine months ended September 30, 2009, pursuant to theterms of our existing leases with Five Star, we purchased $30.4 million ofimprovements made to our properties leased to Five Star, and, as a result, theannual rent payable to us by Five Star was increased by approximately $2.4million.

 

OnAugust 4, 2009, we closed a $512.9 million mortgage financing with FNMA.This mortgage loan is secured by first liens on 28 senior living propertiesthat we own and lease to Five Star with 5,618 living units / beds located in 16states. We used the proceeds from this mortgage financing to repay amountsoutstanding under our revolving credit facility, to purchase the remainingseven MOBs from HRP and to acquire 10 MOBs and one senior living property fromunaffiliated parties.   In connectionwith the FNMA transaction, we realigned our four leases with Five Star.  Lease No. 1 (which is comprised of fourseparate leases) now includes 79 properties (excluding one property soldsubsequent to September 30, 2009 as described above), includingindependent living communities, assisted living communities and skilled nursingfacilities, and expires in 2024.  Lease No. 2now includes 49 properties (excluding one property sold subsequent to September 30,2009 as described above), including independent living communities, assistedliving communities, skilled nursing facilities and two rehabilitationhospitals, and expires in 2026.  Lease No. 3now includes the 28 FNMA financed properties, including independent livingcommunities and assisted living communities, and expires in 2028.  Lease No. 4 now includes 26 properties(including one property acquired subsequent to September 30, 2009 asdescribed above and below), including independent living communities, assistedliving communities and skilled nursing facilities, and expires in 2017.  In connection with the lease realignment andthe FNMA financing, we entered into a lease realignment agreement with FiveStar, or the Lease Realignment Agreement. Pursuant to the terms of the Lease Realignment Agreement, (1) thefour leases,

 

23

----

 

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

 

orthe Leases, were reconfigured as described above, (2) we acquired certainpersonal property located at 28 properties in 16states, or the Properties, from subsidiaries of Five Star and pledged thatpersonal property to FNMA, (3) we purchased 3,200,000 shares, or theShares, of Five Star common stock, $.01 par value per share, which representapproximately 9% of its total common stock outstanding, (4) Five Starassumed certain reporting and other operating obligations required by FNMA and (5) subsidiariesof Five Star pledged certain tangible and intangible personal property, such asaccounts receivable and contract rights, located at, or arising from theoperations of, the Properties to secure certain obligations to us and arisingunder the FNMA loan.  To compensate FiveStar for its sale of personal property to us, its sale of the Shares to us, thepledge of Five Star’s intangible assets and for the services and obligationsthat Five Star has assumed, (1) we reduced the annual rent payable to usunder Lease No. 2 by $2.0 million per year for the term of that Lease; (2) wepaid Five Star $18.6 million; and (3) we reimbursed Five Star for its outof pocket expenses incurred in connection with the negotiation and closing ofthis transaction.  Five Star has grantedcertain registration rights to us with regard to the Shares and our futuretransfer of the Shares are subject to certain restrictions.  The terms of the Lease Realignment Agreementdescribed above were negotiated and approved by special committees of ourIndependent Trustees and Five Star’s Independent Directors, none of whom aretrustees or directors of the other company. Each special committee was represented by separate counsel.  For more information about this FNMAfinancing and the agreement we entered with Five Star to facilitate thisfinancing, please see Part II, Item 5 of our Quarterly Report on Form 10Qfor the quarter ended June 30, 2009.

 

OnOctober 1, 2009, we acquired one senior living property for approximately$21.0 million, plus closing costs, from an unaffiliated party.  We leased this property to Five Star andadded this property to Five Star Lease No. 4, which has a current termexpiring in 2017, for initial rent of approximately $1.8 million per year.  Percentage rent, based on increases in grossrevenues at this property, will commence in 2011.  We funded this acquisition using cash onhand, proceeds from our mortgage financing in August 2009 described aboveand proceeds from our equity offering in September 2009 described above.

 

InOctober 2009, we agreed to acquire 10 senior living properties forapproximately $97.3 million from two unaffiliated parties.  We intend to lease these properties to FiveStar and expect initial rent to be approximately $8.5 million per year.  We expect percentage rent, based on increasesin gross revenues at these properties, will commence in 2011.  We expect to fund these acquisitions usingcash on hand, proceeds from our equity offering in September 2009described above and borrowings under our revolving credit facility.  The purchase of these properties iscontingent upon completion of our diligence and other customary closingconditions. We can provide no assurance that we will purchase these properties.

 

Asof September 30, 2009, we have invested $5.1 million in AffiliatesInsurance Company, or AIC, an insurance company, that is owned by RMRand other companies to which RMR provides management services. We own 16.67% of the common shares of AIC which has a currentcarrying value of $5.0 million.

 

RMR continues to provide both business and propertymanagement services to us with fees calculated based upon our gross investmentsand gross MOB rents, respectively.  RMRis owned by our Managing Trustees, Barry and Adam Portnoy.  For more information about our dealings withour two Managing Trustees, RMR, Five Star, HRP and their affiliates and ourinvestments in AIC and about the risks which may arise as a result of these andother related person transactions, please see our Annual Report on Form 10-Kfor the year ended December 31, 2008, or the Annual Report, our QuarterlyReports on Form 10-Q for the quarters ended March 31, 2009 and June 30,2009, or the Quarterly Reports, the Other Items in this Quarterly Report on Form 10-Q,and our other filings made with the SEC, and in particular, the sectioncaptioned “Risk Factors” in the Annual Report, the sections captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Related Person Transactions” in the Annual Report, Quarterly Reports and thisQuarterly Report on Form 10-Q and the section captioned “Related PersonTransactions and Company Review of Such Transactions” in our Proxy Statementdated March 30, 2009, or our Proxy Statement, relating to our 2009 AnnualShareholders Meeting.

 

24

----

 

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

 

We are exposed to risksassociated 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, 2008. 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.

 

AtSeptember 30, 2009, our outstanding fixed rate debt included the following(dollars in thousands):

 
| **Debt**                | ** ** | **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 |       | 97,500                 |       | 7.875%                    |       | 7,678                         |       | 2015         |       | Semi-Annually              |       |
| Mortgages(1)            |       | 307,760                |       | 6.710%                    |       | 20,651                        |       | 2019         |       | Monthly                    |       |
| Mortgages               |       | 49,584                 |       | 6.54%                     |       | 3,243                         |       | 2017         |       | Monthly                    |       |
| Mortgages               |       | 32,678                 |       | 6.97%                     |       | 2,278                         |       | 2012         |       | Monthly                    |       |
| Mortgage                |       | 14,518                 |       | 6.91%                     |       | 1,003                         |       | 2013         |       | Monthly                    |       |
| Mortgages               |       | 11,647                 |       | 6.11%                     |       | 712                           |       | 2013         |       | Monthly                    |       |
| Mortgage                |       | 4,403                  |       | 6.50%                     |       | 286                           |       | 2013         |       | Monthly                    |       |
| Mortgage                |       | 4,005                  |       | 7.31%                     |       | 293                           |       | 2022         |       | Monthly                    |       |
| Mortgage                |       | 1,957                  |       | 7.85%                     |       | 154                           |       | 2022         |       | Monthly                    |       |
| Bonds                   |       | 14,700                 |       | 5.875%                    |       | 864                           |       | 2027         |       | Semi-Annually              |       |
|                    |       | $                      | 763,752    |                      |       |                          | $          | 56,568       |       |                       |       |   |   |

 

----

(1) Consists of fixed rate portion of our FNMAloan.

 

No principal payments aredue under our unsecured notes or bonds until maturity. Our mortgages requireprincipal and interest payments through maturity pursuant to amortization schedules.Because these debts bear interest at a fixed rate, changes in market interestrates during the term of these debts will not affect our operatingresults.  However, if these debts arerefinanced at interest rates which are 10% higher or lower than shown above,our per annum interest cost would increase or decrease by approximately $2.7 million. Changes in market interest rates also affect the fair value of our fixedrate debt obligations; increases in market interest rates decrease the fair value of our fixedrate debt, while decreases in market interest rates increase the fair value ofour fixed rate debt.  Based on thebalances outstanding at September 30, 2009, and discounted cash flowanalysis through the maturity date of our fixed rate debt obligations, ahypothetical immediate 10% change in interest rates would change the fair valueof those obligations by approximately $26.0 million.

 

Weare allowed to make prepayments of our unsecured senior notes, in whole or inpart, at par plus a premium, as defined. Our mortgages contain provisions that allow us to make repayment at parplus premiums which are generally designed to preserve a stated yield to themortgage holder.  Also, we occasionallyhave the opportunity to purchase our outstanding debt by open marketpurchases.  These prepayment rights mayafford us the opportunity to mitigate the risk of refinancing at maturity.

 

25

----

 

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

 

Our unsecured revolving credit facility accruesinterest at floating rates and matures on December 31, 2010.  Subject to certain conditions, this creditfacility’s maturity date can be extended at our option to December 31,2011 upon payment of a fee. At September 30 and November 4, 2009, wehad zero amounts outstanding and $550.0 million available for borrowing underour revolving credit facility.  We maymake repayments and drawings under our revolving credit facility at any timewithout penalty.  We borrow in U.S.dollars and borrowings under our revolving credit facility accrue interest atLIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollarbased short term interest rates, specifically LIBOR.  A change in interest rates would not affectthe value of this floating rate debt but would affect our operatingresults.  If interest rates were tochange gradually 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, including the floating rate portion of the FNMAmortgage financing described below.  The followingtable presents the impact a 10% change in interest rates would have on ourfloating rate interest expense at September 30, 2009 if we were fullydrawn on our revolving credit facility (dollars in thousands):

 
| ** **                 | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| ** **                 | ** ** | **Interest Rate  Per Year**             | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At September 30, 2009 |       | 1.12%                                   |       | $ | 550,000 |   | $ | 6,160 |   |
| 10% reduction              |       | 1.01%                                   |       | $ | 550,000 |   | $ | 5,555 |   |
| 10% increase               |       | 1.23%                                   |       | $ | 550,000 |   | $ | 6,765 |   |

 

OnAugust 4, 2009, we closed a FNMA mortgage financing for approximately$512.9 million.  A part of this borrowingis at a fixed interest rate and a part is at a floating rate calculated as aspread above LIBOR.  A change in market interestrates will change the value of the fixed rate part of this loan and theinterest expense on the floating rate part of this loan.  For example, at the time we closed this FNMAmortgage loan, our effective weighted average annual interest rate payable onthe full amount of this loan was 6.59%. 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**     | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **Weighted  Average  Interest Rate****(1)** | ** ** | **Fair Value of  Outstanding Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At September 30, 2009 |       | 6.59%                                       |       | $ | 512,934 |   | $ | 33,802 |   |
| 10% reduction              |       | 5.93%                                       |       | $ | 536,180 |   | $ | 31,795 |   |
| 10% increase               |       | 7.25%                                       |       | $ | 489,469 |   | $ | 35,487 |   |

 

----

(1) A portion of the loan requires interest at a fixed rate of 6.71% and a portionof the loan requires interest at a variable rate which was 6.415% at September 30,2009.  This table assumes a 10% interestrate change on the variable portion of the loan.  The fixed rate portion of the loan is alsoincluded in the table above relating to our outstanding fixed rate debt.

 

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 cap arrangement is that the 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 114months of the loan term subject to our paying a standard make whole premium andthereafter for a fixed percent premium of the amount prepaid which is reducedto 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.

 

26

----

 

**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 September 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

27

----

 

**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

 

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THEMEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHERFEDERAL SECURITIES LAWS.  WHENEVER WE USEWORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS.  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:

 

·      OURRESPONSIBILITIES UNDER THE FNMA LOAN;

 

·      OUR ABILITY TOPURCHASE OR SELL PROPERTIES;

 

·      OUR ABILITY TORAISE DEBT OR EQUITY CAPITAL;

 

·      OUR ABILITY TOPAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS;

 

·      OUR ABILITY TO RETAIN OUREXISTING TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES;

 

·      OUR AGREEMENTSTO PURCHASE CERTAIN SENIOR LIVING PROPERTIES;

 

·      OURPARTICIPATING IN THE INSURANCE COMPANY BEING FORMED WITH RMR AND COMPANIES TOWHICH 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 AMATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OURBUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS,CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:

 

·      THE IMPACT OF CHANGES IN THEECONOMY AND THE CAPITAL MARKETS, INCLUDING THE RECENT CHANGES IN THE CAPITALMARKETS, ON US AND OUR TENANTS;

 

·      ACTUAL AND POTENTIALCONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR, HRP, RMR AND THEIRAFFILIATES;

 

·      CHANGES IN FEDERAL, STATEAND LOCAL LEGISLATION, GOVERNMENTAL REGULATIONS, ACCOUNTING RULES, TAX LAWS ANDSIMILAR MATTERS; AND

 

·      COMPETITION WITHIN THE REALESTATE INDUSTRY OR THOSE INDUSTRIES IN WHICH OUR TENANTS OPERATE.

 

FOREXAMPLE:

 

·      THIS QUARTERLY REPORT ON FORM 10-QSTATES THAT FIVE STAR HAS AGREED TO UNDERTAKE CERTAIN REPORTING AND OTHERREQUIREMENTS UNDER THE 

 

28

----

 

FNMA MORTGAGE LOAN TO US. AN IMPLICATION OF THISSTATEMENT MAY BE THAT WE HAVE BEEN RELEASED OF THESE OBLIGATIONS TO FNMA.IN FACT, WE REMAIN RESPONSIBLE TO FNMA FOR ALL REQUIREMENTS ARISING UNDER THEMORTGAGE AND LOAN DOCUMENTS AND WE WILL BE RESPONSIBLE TO PERFORM THEOBLIGATIONS WHICH FIVE STAR HAS ASSUMED IN THE EVENT FIVE STAR FAILS TO SATISFYTHESE OBLIGATIONS. ALSO, CERTAIN OF THE OBLIGATIONS ARISING UNDER THE MORTGAGEDOCUMENTS RELATE TO FIVE STAR’S OPERATIONS OF THE MORTGAGED PROPERTIES WHICH MAY BEBEYOND OUR CAPACITY TO PERFORM;

 

·      THISQUARTERLY REPORT ON FORM 10-Q STATES THAT WE INTEND TO USE THE PROCEEDS OFOUR SEPTEMBER 2009 EQUITY ISSUANCE, AMONG OTHER PURPOSES, TO FUND ACQUISITIONS.WE ARE CURRENTLY CONSIDERING SEVERAL ACQUISITION OPPORTUNITIES; HOWEVER, THERECAN BE NO ASSURANCE THAT WE WILL CONCLUDE ANY OF THESE ACQUISITIONS OR THATALTERNATIVE ACQUISITIONS WILL BE IDENTIFIED AND CLOSED;

 

·      THISQUARTERLY REPORT ON FORM 10-Q STATES THAT THE TERMS OF THE LEASEREALIGNMENT AGREEMENT BETWEEN US AND FIVE STAR WERE NEGOTIATED BY SPECIALCOMMITTEES OF THE BOARDS OF US AND FIVE STAR COMPOSED ONLY OF OUR TRUSTEES ANDFIVE STAR DIRECTORS WHO ARE NOT ALSO TRUSTEES AND DIRECTORS OF THE OTHERCOMPANY. THE IMPLICATION OF THIS STATEMENT MAY BE THAT THIS AGREEMENT WASNEGOTIATED ON AN ARMS LENGTH BASIS AND MAY NOT BE LEGALLY CHALLENGEDBECAUSE THIS AGREEMENT PROVIDES A FAIR EXCHANGE OF CONSIDERATION BETWEEN US ANDFIVE STAR. IN FACT: (I) FIVE STAR WAS FORMERLY OUR 100% OWNED SUBSIDIARYAND FIVE STAR BECAME A SEPARATELY OWNED PUBLIC COMPANY AS A RESULT OF A SPINOFF TO OUR SHAREHOLDERS IN 2001; (II) RMR PROVIDES MANAGEMENT SERVICES TOBOTH US AND FIVE STAR; (III) THE OFFICERS OF BOTH US AND FIVE STAR AREALSO OFFICERS OF RMR; (IV) RMR AND ITS OFFICERS PROVIDED INFORMATION ANDASSISTANCE TO THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR; (V) THEMEMBERS OF THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR ALSO SERVE ASTRUSTEES OR DIRECTORS OF OTHER COMPANIES MANAGED BY RMR; AND (VI) WE ANDFIVE STAR HAVE EXTENSIVE AND CONTINUING BUSINESS WITH EACH OTHER. ALTHOUGH WEBELIEVE THAT THIS AGREEMENT IS FAIR TO US, IN THE CIRCUMSTANCES OF THE MULTIPLERELATIONSHIPS AMONG FIVE STAR AND US, IT IS POSSIBLE THAT LITIGATION MAY BEBROUGHT ALLEGING THAT THIS AGREEMENT IS UNFAIR TO US OR TO FIVE STAR.LITIGATION MAY BE EXPENSIVE AND DISTRACTING TO MANAGEMENT. WE CAN PROVIDENO ASSURANCE THAT OUR ENTRY INTO THE LEASE REALIGNMENT AGREEMENT WITH FIVE STARWILL NOT CAUSE US TO BECOME INVOLVED IN LITIGATION THAT CHALLENGES THE FAIRNESSOF THE CONSIDERATION WE HAVE EXCHANGED WITH FIVE STAR. SUCH ALLEGATIONS ORLITIGATION COULD CAUSE OUR SHARE TRADING PRICE TO DECLINE AND THE OUTCOME OFSUCH LITIGATION IS IMPOSSIBLE TO PREDICT;

 

·      THIS QUARTERLY REPORT ON FORM 10-Q STATES THATWE HAVE ENTERED INTO PURCHASE AND SALE AGREEMENTS TO ACQUIRE 10 PROPERTIES FROMUNAFFILIATED PARTIES.  OUR OBLIGATION TOCOMPLETE THESE PURCHASES IS SUBJECT TO VARIOUS CONDITIONS TYPICAL OF LARGECOMMERCIAL REAL ESTATE PURCHASES.  AS ARESULT OF ANY FAILURE OF THESE CONDITIONS, THESE PROPERTIES MAY NOT BEPURCHASED.  ALSO, THIS QUARTERLY REPORTON FORM 10-Q STATES THAT IF THESE PROPERTIES ARE PURCHASED THEY WILL BELEASED TO FIVE STAR.  THE FINAL TERMS OFOUR LEASE FOR THESE 

 

29

----

 

PROPERTIES HAVE NOT YET BEEN AGREED AND, BECAUSE OF THE MULTIPLERELATIONSHIPS AMOUNG US, FIVE STAR AND RMR, THESE TERMS WILL BE SUBJECT TOAPPROVAL BY OUR TRUSTEES AND FIVE STAR’S DIRECTORS WHO ARE NOT ALSO TRUSTEES ORDIRECTORS OF THE OTHER COMPANIES. ACCORDINGLY, THIS LEASE MAY NOT BE ENTERED;

 

·      OUR PARTICIPATION IN THEINSURANCE BUSINESS WITH RMR AND ITS AFFILIATES INVOLVES POTENTIAL FINANCIALRISKS AND REWARDS TYPICAL OF ANY START UP BUSINESS VENTURE AS WELL AS OTHERFINANCIAL RISKS AND REWARDS SPECIFIC TO INSURANCE COMPANIES. AMONG THE RISKSTHAT ARE SPECIFIC TO INSURANCE COMPANIES IS THE RISK THAT AIC MAY NOT BEABLE TO ADEQUATELY PAY CLAIMS WHICH COULD LEAVE US UNDERINSURED AND INCREASEOUR FUNDING EXPOSURE FOR CLAIMS THAT MIGHT OTHERWISE HAVE BEEN FUNDED IFINSURANCE WAS PURCHASED FROM FINANCIALLY MORE SECURE INSURERS.  ACCORDINGLY, OUR EXPECTED FINANCIAL BENEFITSFROM OUR INITIAL OR FUTURE INVESTMENTS IN AIC MAY BE DELAYED OR MAY NOTOCCUR AND AIC MAY REQUIRE A LARGER INVESTMENT THAN WE EXPECT;

 

·      IF THEAVAILABILITY OF DEBT CAPITAL REMAINS RESTRICTED OR BECOMES MORE RESTRICTED, WE MAY BEUNABLE TO REFINANCE OR REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE OR ONTERMS WHICH ARE AS FAVORABLE AS WE NOW HAVE;

 

·      OUR ABILITY TO MAKE FUTUREDISTRIBUTIONS DEPENDS UPON OUR FUTURE EARNINGS. WE MAY BE UNABLE TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ANDFUTURE DISTRIBUTIONS MAY BE SUSPENDED OR PAID AT A LESSER RATE THAN THEDISTRIBUTIONS WE NOW PAY;

 

·      OUR ABILITY TO GROW OURBUSINESS AND PAY OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITYTO BUY PROPERTIES AND 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 RENEW EXPIRINGLEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN THEHISTORICAL OCCUPANCY RATES OF OUR PROPERTIES;

 

·      RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE;AND

 

·      OUR TENANTS MAY EXPERIENCELOSSES AND BECOME UNABLE TO PAY OUR RENTS.

 

THESERESULTS COULD OCCUR DUE TO MANY DIFFERENT REASONS, SOME OF WHICH, SUCH ASNATURAL DISASTERS OR CHANGES IN OUR TENANTS’ REVENUES OR COSTS, OR CHANGES INCAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL.

 

OTHER IMPORTANT FACTORS THATCOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN OUR FORWARDLOOKING STATEMENTS ARE DESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS” INOUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008.

 

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.

 

30

----

 

**STATEMENTCONCERNING LIMITED LIABILITY**

 

THEAMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSINGPROPERTIES TRUST, DATED SEPTEMBER 20, 1999, AS AMENDED AND SUPPLEMENTED, ASFILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND,PROVIDES THAT NO TRUSTEE, OFFICER,SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELDTO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, ORCLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST IN ANY WAYSHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THEPAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

31

----

 

**PART II.   Other Information**

 

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

** **

On September 17, 2009, pursuant to ourincentive share award plan, we granted 63,450 common shares of beneficialinterest, par value $0.01 per share, valued at $19.36 per share, the closingprice of our common shares on the New York Stock Exchange on that day, to ourofficers and certain employees of our manager, RMR.  We made these grants pursuant to an exemptionfrom registration contained in Section 4(2) of the Securities Act.

 

**Item 5.****     ****OtherItems**

 

On November 2, 2009,our board approved amended and restated bylaws of the Company.  Those amended and restated bylaws clarify theexisting bylaw provisions imposing liability on shareholders for, andobligating a shareholder to indemnify us and hold us harmless from and against,all costs, expenses , penalties, fines or other amounts arising from theshareholder’s breach of any provision of our declaration of trust or bylaws andother conforming and clarifying changes, and include arbitration provisions forthe resolution of certain disputes, claims and controversies.

 

Section 14.2 of ouramended and restated bylaws now expressly provides that matters for which ashareholder is liable to and obligated to indemnify and hold us harmlessinclude any breach or failure to fully comply with any covenant, condition orprovision of our declaration of trust or bylaws, including the advance noticeprovisions pertaining to shareholder nominations and other proposals, andapplies to derivative actions brought against us in which the shareholder isnot the prevailing party.  Our amendedand restated bylaws also include a new Article XV, which provides thatactions brought against us or any trustee, officer, manager (including RMR orits successor), agent or employee of us, by a shareholder, including derivativeand class actions, shall, on the demand of any party to such dispute, beresolved through binding arbitration in accordance with the procedures setforth in our amended and restated bylaws.

 

The foregoing description ofour amended and restated bylaws is not complete and is subject to and qualifiedin its entirety by reference to the amended and restated bylaws, a copy ofwhich is attached as Exhibit 3.1, and which amended and restated bylawsare incorporated herein by reference.  Inaddition, a marked copy of our amended and restated bylaws indicating changesmade to our bylaws as they existed immediately prior to the adoption of thoseamended and restated bylaws is attached as Exhibit 3.2.

 

**Item 6.**      Exhibits

** **

3.1           Amended and Restated Bylaws, as amended and restatedas of November 2, 2009.

 

3.2           Amended and Restated Bylaws, as amended and restatedas of November 2, 2009 (marked).

 

10.1         Second Amendment to Purchase Agreement, dated as of September 1,2009, by and between Senior Housing Properties Trust and HUB Properties Trust(with respect to Oklahoma Clinics) (*Incorporated by referenceto the Company’s Current Report on Form 8-K dated September 9, 2009*).

 

10.2         Partial Termination of and First Amendment toAmended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1,2009, by and among certain subsidiaries of Senior Housing Properties Trust, asLandlord, and Five Star Quality Care Trust, as Tenant.  (*Filed herewith*).

 

12.1         Computation of Ratio ofEarnings to Fixed Charges. *(Filed herewith)*

 

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

 

32

----

 

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 1350Certification. *(Furnished herewith)*

 

33

----

 

SIGNATURES

 

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

 

 
|   |   | SENIOR  HOUSING PROPERTIES TRUST |
|--------|--------|----------------------------------|
|   |   |                             |   |
|   |   |                             |   |
|   |   | By:                              | /s/  David J. Hegarty |
|   |   |                             | David  J. Hegarty |
|   |   |                             | President  and Chief Operating Officer |
|   |   |                             | Dated:  November 4, 2009 |
|   |   |                             |   |
|   |   |                             |   |
|   |   | By:                              | /s/  Richard A. Doyle |
|   |   |                             | Richard  A. Doyle |
|   |   |                             | Treasurer  and Chief Financial Officer |
|   |   |                             | (principal  financial and accounting officer) |
|   |   |                             | Dated:  November 4, 2009 |

 

34

----