** **

**UNITEDSTATESSECURITIES AND 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, 2007** |
| ** **                                                  |
| **OR**                                                      |
|                                                        |
| o                                                           |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number 1-15319**

 

**SENIOR HOUSING PROPERTIES TRUST**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **Maryland**                                                                         | ** ** | **04-3445278**                                   |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| (State or Other Jurisdiction of Incorporation or  |       | (IRS Employer Identification No.) |
| Organization)                                                                        |       |                                             |
|                                                                                 |
| **400 Centre Street, Newton, Massachusetts 02458**                                   |
| (Address  of Principal Executive Offices) (Zip Code)                                 |
|                                                                                 |
| **617-796-8350**                                                                     |
| (Registrant’s  Telephone Number, Including Area Code)                           |

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Checkone):

 

| Large Accelerated Filer x |   | Accelerated Filer o |   | Non-Accelerated Filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

 

Numberof registrant’s common shares outstanding as of October 31, 2007:83,688,712.

 

 

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SENIOR HOUSINGPROPERTIES TRUST

 

FORM 10-Q

 

September 30,2007

 

INDEX

 
| PART I  | Financial Information                                                                                 |   |
|--------------|-------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                  |   |
| Item 1.      | Financial Statements  (unaudited)                                                                     |   |
|         |                                                                                                  |   |
|         | Consolidated Balance Sheet –  September 30, 2007 and December 31, 2006                 |   |
|         |                                                                                                  |   |
|         | Consolidated Statement  of Income – Three and Nine Months Ended September 30, 2007 and 2006 |   |
|         |                                                                                                  |   |
|         | Consolidated  Statement of Cash Flows – Nine Months Ended September 30, 2007 and 2006       |   |
|         |                                                                                                  |   |
|         | Notes to  Consolidated Financial Statements                                                           |   |
|         |                                                                                                  |   |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |   |
|         |                                                                                                  |   |
| Item 3.      | Quantitative  and Qualitative Disclosures about Market Risk                                           |   |
|         |                                                                                                  |   |
| Item 4.      | Controls  and Procedures                                                                              |   |
|         |                                                                                                  |   |
|         | Warning  Concerning Forward Looking Statements                                                        |   |
|         |                                                                                                  |   |
|         | Statement  Concerning Limited Liability                                                               |   |
|         |                                                                                                  |   |
| PART II | Other  Information                                                                                    |   |
|         |                                                                                                  |   |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                          |   |
|         |                                                                                                  |   |
| Item 6.      | Exhibits                                                                                              |   |
|         |                                                                                                  |   |
|         | Signatures                                                                                            |   |

 

*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.*

 

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SENIOR HOUSINGPROPERTIES TRUST

 

**PART I. FinancialInformation**

 

**Item 1.    FinancialStatements**

** **

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

 
| ** **                                                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                                                                             |       |                   |       |                  |       |
| Real estate properties, at cost:                                                                                                                                                                                   |       |                   |       |                  |       |
| Land                                                                                                                                                                                                               |       | $                      | 198,576    |                  | $          | 198,887 |   |
| Buildings and improvements                                                                                                                                                                                         |       | 1,648,616              |       | 1,615,471             |       |
|                                                                                                                                                                                                               |       | 1,847,192              |       | 1,814,358             |       |
| Less accumulated depreciation                                                                                                                                                                                      |       | 311,627                |       | 276,507               |       |
|                                                                                                                                                                                                               |       | 1,535,565              |       | 1,537,851             |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                          |       | 3,645                  |       | 5,464                 |       |
| Restricted cash                                                                                                                                                                                                    |       | 3,010                  |       | 2,435                 |       |
| Deferred financing fees, net                                                                                                                                                                                       |       | 6,461                  |       | 8,173                 |       |
| Other assets                                                                                                                                                                                                       |       | 28,257                 |       | 30,851                |       |
| Total assets                                                                                                                                                                                                       |       | $                      | 1,576,938  |                  | $          | 1,584,774 |   |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                          |       |                   |       |                  |       |
| Unsecured revolving credit facility                                                                                                                                                                                |       | $                      | —     |                  | $          | 112,000 |   |
| Senior unsecured notes due 2012 and 2015, net of discount                                                                                                                                                          |       | 321,837                |       | 341,673               |       |
| Secured debt and capital leases                                                                                                                                                                                    |       | 90,143                 |       | 91,412                |       |
| Accrued interest                                                                                                                                                                                                   |       | 8,156                  |       | 11,694                |       |
| Other liabilities                                                                                                                                                                                                  |       | 11,265                 |       | 8,529                 |       |
| Total liabilities                                                                                                                                                                                                  |       | 431,401                |       | 565,308               |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                      |       |                   |       |                  |       |
|                                                                                                                                                                                                               |       |                   |       |                  |       |
| Shareholders’ equity:                                                                                                                                                                                         |       |                   |       |                  |       |
| Common shares of beneficial interest, $0.01 par value: 86,700,000  shares authorized, 83,688,712 and 77,613,127 shares issued and outstanding at  September 30, 2007 and December 31, 2006, respectively |       | 837                    |       | 776                   |       |
| Additional paid-in capital                                                                                                                                                                                         |       | 1,367,921              |       | 1,214,863             |       |
| Cumulative net income                                                                                                                                                                                              |       | 397,288                |       | 338,504               |       |
| Cumulative distributions                                                                                                                                                                                           |       | (623,933               | )          | (540,663              | )          |
| Unrealized gain on investments                                                                                                                                                                                     |       | 3,424                  |       | 5,986                 |       |
| Total shareholders’ equity                                                                                                                                                                                    |       | 1,145,537              |       | 1,019,466             |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                    |       | $                      | 1,576,938  |                  | $          | 1,584,774 |   |

 

*See accompanying notes.*

 

1

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SENIOR HOUSINGPROPERTIES TRUST

 

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

(unaudited)

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                             | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental income                         |       | $                                                    | 44,653     |                                                | $          | 41,983 |   | $ | 133,361 |   | $ | 123,727 |   |
| Interest and other income             |       | 571                                                  |       | 334                                                 |       | 1,577 |   | 1,034 |   |
| Total revenues                        |       | 45,224                                               |       | 42,317                                              |       | 134,938 |   | 124,761 |   |
|                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Expenses:                             |       |                                                 |       |                                                |       |   |   |   |   |
| Interest                              |       | 9,223                                                |       | 11,833                                              |       | 28,276 |   | 34,751 |   |
| Depreciation                          |       | 11,821                                               |       | 10,978                                              |       | 35,120 |   | 32,631 |   |
| General and administrative            |       | 3,567                                                |       | 4,088                                               |       | 10,732 |   | 10,870 |   |
| Impairment of assets                  |       | —                                               |       | —                                              |       | — |   | 1,420 |   |
| Loss on early extinguishment of debt  |       | —                                               |       | —                                              |       | 2,026 |   | 6,526 |   |
| Total expenses                        |       | 24,611                                               |       | 26,899                                              |       | 76,154 |   | 86,198 |   |
|                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                            |       | $                                                    | 20,613     |                                                | $          | 15,418 |   | $ | 58,784 |   | $ | 38,563 |   |
|                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding   |       | 83,659                                               |       | 71,824                                              |       | 82,718 |   | 71,818 |   |
|                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted earnings per share: |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                            |       | $                                                    | 0.25       |                                                | $          | 0.21 |   | $ | 0.71 |   | $ | 0.54 |   |

 

*See accompanying notes*.

 

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SENIOR HOUSINGPROPERTIES TRUST

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

 
| ** **                                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                 |       |                                                |       |   |   |
| Net income                                                                            |       | $                                                   | 58,784     |   | $ | 38,563 |   |
| Adjustments to reconcile net income to cash provided by operating  activities:        |       |                                                |       |   |   |
| Depreciation                                                                          |       | 35,120                                              |       | 32,631 |   |
| Impairment of assets                                                                  |       | —                                              |       | 1,420 |   |
| Loss on early extinguishment of debt                                                  |       | 2,026                                               |       | 6,526 |   |
| Amortization of deferred financing fees and debt discounts                            |       | 1,601                                               |       | 1,355 |   |
| Change in assets and liabilities:                                                     |       |                                                |       |   |   |
| Restricted cash                                                                       |       | (575                                                | )          | 369 |   |
| Other assets                                                                          |       | 31                                                  |       | 107 |   |
| Accrued interest                                                                      |       | (3,538                                              | )          | (4,491 | ) |
| Other liabilities                                                                     |       | 4,185                                               |       | 6,836 |   |
| Cash provided by operating activities                                                 |       | 97,634                                              |       | 83,316 |   |
|                                                                                  |       |                                                |       |   |   |
| Cash flows used for investing activities:                                             |       |                                                |       |   |   |
| Acquisitions                                                                          |       | (32,834                                             | )          | (78,921 | ) |
| Cash used for investing activities, net                                               |       | (32,834                                             | )          | (78,921 | ) |
|                                                                                  |       |                                                |       |   |   |
| Cash flows from financing activities:                                                 |       |                                                |       |   |   |
| Proceeds from issuance of common shares, net                                          |       | 151,670                                             |       | — |   |
| Proceeds from borrowings on revolving bank credit facility                            |       | 22,000                                              |       | 179,300 |   |
| Repayments of borrowings on revolving bank credit facility                            |       | (134,000                                            | )          | (41,000 | ) |
| Repayment of senior notes                                                             |       | (21,750                                             | )          | (56,634 | ) |
| Repayment of junior subordinated debentures                                           |       | —                                              |       | (28,241 | ) |
| Repayment of other debt                                                               |       | (1,269                                              | )          | (1,275 | ) |
| Distributions to shareholders                                                         |       | (83,270                                             | )          | (69,660 | ) |
| Cash used for financing activities                                                    |       | (66,619                                             | )          | (17,510 | ) |
|                                                                                  |       |                                                |       |   |   |
| Decrease in cash and cash equivalents                                                 |       | (1,819                                              | )          | (13,115 | ) |
| Cash and cash equivalents at beginning of period                                      |       | 5,464                                               |       | 14,642 |   |
| Cash and cash equivalents at end of period                                            |       | $                                                   | 3,645      |   | $ | 1,527 |   |
|                                                                                  |       |                                                |       |   |   |
| Supplemental cash flow information:                                                   |       |                                                |       |   |   |
| Interest paid                                                                         |       | $                                                   | 30,213     |   | $ | 37,890 |   |
|                                                                                  |       |                                                |       |   |   |
| Non-cash investing activity:                                                          |       |                                                |       |   |   |
| Increase in capital lease assets                                                      |       | —                                              |       | $ | (9,975 | ) |
|                                                                                  |       |                                                |       |   |   |
| Non-cash financing activities:                                                        |       |                                                |       |   |   |
| Increase in capital lease obligations                                                 |       | —                                              |       | $ | 9,975 |   |
| Issuance of common shares pursuant to our incentive share award plan                  |       | $                                                   | 1,450      |   | $ | 645 |   |
| Borrowing under revolving credit facility to fund restricted cash for  an acquisition |       | —                                              |       | $ | 19,700 |   |

* *

*See accompanying notes.*

 

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SENIOR HOUSINGPROPERTIES TRUST

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

**Note 1. Basis of Presentation**

 

The accompanying consolidatedfinancial statements of Senior Housing Properties Trust and our consolidatedsubsidiaries have been prepared without audit. Certain information and footnotedisclosures required by accounting principles generally accepted in the UnitedStates for complete financial statements have been condensed or omitted. Webelieve the disclosures made are adequate to make the information presented notmisleading. However, the accompanying consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and notescontained in our Annual Report on Form 10-K for the year ended December 31,2006. In the opinion of our management, all adjustments, which include onlynormal recurring adjustments considered necessary for a fair presentation, havebeen included. All intercompany transactions and balances between us and ourconsolidated subsidiaries have been eliminated. Operating results for interimperiods are not necessarily indicative of the results that may be expectedfor the full year.

 

**Note 2. Real Estate Properties**

 

At September 30, 2007, weowned 196 properties located in 32 states.

 

In March 2007,we agreed to purchase, from an unaffiliated third party, two senior livingproperties with a total of 112 units for approximately $14.1 million. Theseacquisitions had not occurred as of September 30, 2007. Residents of thesecommunities pay all of their charges with their private resources. We intend tolease these properties to Five Star Quality Care, Inc., or Five Star, andto add them to our combined lease for 114 properties with Five Star, which hasa current term expiring in 2020 and we expect the annual rent under thiscombined lease will increase by $1.1 million. Percentage rent, based onincreases in gross revenues at these properties, will commence in 2009. Weexpect to fund this acquisition using cash on hand, by borrowings under ourrevolving credit facility and by assuming two mortgages, one for $3.6 millionat 5.7% per annum and one for $3.6 million at 6.2% per annum. Both mortgagesmature in 2041, but are prepayable beginning in 2008. The purchase of theseproperties is contingent upon approval of mortgage lenders, completion of ourdiligence and other customary closing conditions. We can provide no assurancethat we will purchase either of these properties.

 

In September 2007,we agreed to purchase, from an unaffiliated third party, six wellness centersfor approximately $76.8 million. Members of these wellness centers pay all oftheir charges with their private resources. Prior to and following theacquisition, these wellness centers were and will continue to be leased toaffiliates of Starmark Holdings, LLC, or Starmark, under three separate leases.These affiliates of Starmark will continue to operate each of the wellnesscenters under the brand name “Wellbridge”. These leases have a current termexpiring in 2023, plus renewal options, and require aggregate annual rent of$6.5 million initially, plus consumer price index, or CPI, based increases. Weacquired four of these wellness centers for $42.1 million on October 30,2007 using cash on hand and borrowings under our revolving credit facility. Weexpect to fund the acquisition of the two remaining wellness centers using cashon hand, by borrowings under our revolving credit facility and by assuming amortgage for $14.9 million at 6.9% per annum. This mortgage matures in 2013.The purchase of these two remaining wellness centers is contingent uponapproval of mortgage lenders, completion of our diligence and other customaryclosing conditions. We can provide no assurance that we will purchase the tworemaining wellness centers.

 

In October 2007,we agreed to purchase, from two unaffiliated third parties, six senior livingproperties with a total of 707 units for approximately $78.5 million. Themajority of the residents of these communities pay their charges with theirprivate resources. We intend to lease these properties to Five Star and to addthem to our combined lease for 114 properties with Five Star, which has acurrent term expiring in 2020 and we expect the annual rent under this combinedlease will increase by $6.3 million. Percentage rent, based on increases ingross revenues at these properties, will commence in 2009. We expect to fundthese acquisitions using cash on hand and by borrowings under our revolvingcredit facility. The purchase of

 

4

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these properties iscontingent upon completion of our diligence and other customary closingconditions. We can provide no assurance that we will purchase these properties.

 

During the nine months ended September 30,2007, pursuant to the terms of our existing leases with Five Star, we purchased$33.1 million of improvements made to our properties which are leased by FiveStar, and, as a result, the annual rent payable to us by Five Star increased byapproximately $3.2 million.

 

**Note 3. Unrealized Gain on Investments**

 

On September 30, 2007, we owned one million commonshares of HRPT Properties Trust, or HRPT, and 35,000 common shares of FiveStar, which are classified as available for sale securities and are carried atfair market value in other assets on our consolidated balance sheet. Theunrealized gain on investments shown on our consolidated balance sheetrepresents the difference between the closing market prices of these HRPT andFive Star shares on September 28, 2007 ($9.89 and $8.22 per share,respectively) and their costs on the dates they were acquired ($6.50 and $7.26per share, respectively).

 

**Note 4. Comprehensive Income**

 

The following is a reconciliation of net income tocomprehensive income for the three and nine months ended September 30,2007 and 2006 (dollars in thousands):

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                             | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                               |       | $                                                    | 20,613     |                                                      | $          | 15,418 |   | $ | 58,784 |   | $ | 38,563 |   |
| Other comprehensive income:              |       |                                                 |       |                                                      |       |   |   |   |   |
| Change in unrealized gain on investments |       | (501                                                 | )          | 379                                                       |       | (2,562 | ) | 1,701 |   |
| Comprehensive income                     |       | $                                                    | 20,112     |                                                      | $          | 15,797 |   | $ | 56,222 |   | $ | 40,264 |   |

 

**Note 5. FIN 48**

 

In June 2006, theFinancial Accounting Standards Board issued Interpretation No. 48 “Accountingfor Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how weshould recognize, measure and present in our financial statements uncertain taxpositions that have been taken or are expected to be taken in a tax return.Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likelythan not” that a particular tax position will be sustained upon examination oraudit. To the extent the “more likely than not” standard has been satisfied,the benefit associated with a tax position is measured as the largest amountthat is greater than 50% likely of being realized upon settlement.

 

We are subject to U.S federalincome tax as well as income tax in multiple state and local jurisdictions but,as a real estate investment trust, or REIT, we generally do not pay income taxon our net income distributed to our shareholders. As required, we adopted FIN48 effective January 1, 2007 and have concluded that the effect is notmaterial to our consolidated financial statements. Accordingly, we did notrecord a cumulative effect adjustment related to the adoption of FIN 48.

 

**Note 6. Indebtedness**

 

We have a $550.0 million,interest only, unsecured revolving credit facility. Our revolving credit facilitymatures in December 2010 and may be extended at our option to December 2011upon our payment of an extension fee. The interest rate is LIBOR plus a premium(5.9% at September 30, 2007). As of September 30, 2007, we had noamounts outstanding and $550.0 million was available for borrowing under thiscredit facility and as of October 31, 2007, we had $30.0 millionoutstanding under this credit facility.

 

5

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#### **Note 7. Shareholders’ Equity**

 

## **On August 16,2007, we paid a $0.34 per share, or $28.4 million, distribution to our commonshareholders for the quarter ended June 30, 2007. On October 11,2007, we declared a distribution of $0.35 per share, or $29.3 million, to bepaid to common shareholders of record on October 22, 2007, with respect toour results for the quarter ended September 30, 2007. We expect to paythis distribution on or about November 15, 2007.**

 

6

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and notes thereto included in this quarterly report andour Annual Report on Form 10-K for the year ended December 31, 2006.

 

**PORTFOLIO OVERVIEW**

** **

**The following tables presentan overview of our portfolio:**

** **
| **As of September 30, 2007  (dollars in thousands)** | ** ** | **# of  Properties** | ** ** | **# of Units/Beds** | ** ** | **Carrying Value  of Investment (1)** | ** **      | **% of   Investment** | ** ** | **Annualized   Current Rent** | ** ** | **% of   Annualized   Current Rent** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|------------------------------------------------------|-----------------|---------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------|------------|
| Facility Type                                                                      |       |                      |       |                          |       |                                                 |            |                            |       |                                    |       |                                                     |       |
| Independent living communities (2)                                                 |       | 41                        |       | 11,213                        |       | $                                                    | 1,019,596       |                            | 55.2       | %                                       | $          | 98,816                                                   |       | 54.4 | % |
| Assisted living facilities                                                         |       | 95                        |       | 6,535                         |       | 560,888                                              |            | 30.4                            | %          | 54,751                                  |       | 30.1                                                     | %          |
| Skilled nursing facilities                                                         |       | 58                        |       | 5,869                         |       | 221,412                                              |            | 12.0                            | %          | 17,788                                  |       | 9.8                                                      | %          |
| Rehabilitation hospitals                                                           |       | 2                         |       | 364                           |       | 45,296                                               |            | 2.4                             | %          | 10,264                                  |       | 5.7                                                      | %          |
| Total                                                                              |       | 196                       |       | 23,981                        |       | $                                                    |  1,847,192 |                            | 100.0      | %                                       | $          | 181,619                                                  |       | 100.0 | % |
|                                                                               |       |                      |       |                          |       |                                                 |            |                            |       |                                    |       |                                                     |       |
| Tenant/Operator                                                                    |       |                      |       |                          |       |                                                 |            |                            |       |                                    |       |                                                     |       |
| Five Star (Lease No. 1)                                                       |       | 114                       |       | 9,344                         |       | $                                                    | 616,655         |                            | 33.4       | %                                       | $          | 50,229                                                   |       | 27.7 | % |
| Five Star (Lease No. 2) (3)                                                   |       | 30                        |       | 7,275                         |       | 662,219                                              |            | 35.9                            | %          | 66,068                                  |       | 36.4                                                     | %          |
| Five Star Rehabilitation Hospitals (4)                                             |       | 2                         |       | 364                           |       | 45,296                                               |            | 2.4                             | %          | 10,264                                  |       | 5.7                                                      | %          |
| Sunrise/Marriott (5)                                                               |       | 14                        |       | 4,091                         |       | 325,165                                              |            | 17.6                            | %          | 30,815                                  |       | 17.0                                                     | %          |
| NewSeasons/IBC (6)                                                                 |       | 10                        |       | 873                           |       | 87,641                                               |            | 4.7                             | %          | 9,298                                   |       | 5.1                                                      | %          |
| Alterra/Brookdale (7)                                                              |       | 18                        |       | 894                           |       | 61,122                                               |            | 3.3                             | %          | 7,827                                   |       | 4.3                                                      | %          |
| 6 private companies (combined)                                                     |       | 8                         |       | 1,140                         |       | 49,094                                               |            | 2.7                             | %          | 7,118                                   |       | 3.8                                                      | %          |
| Total                                                                              |       | 196                       |       | 23,981                        |       | $                                                    |  1,847,192 |                            | 100.0      | %                                       | $          |  181,619                                            |       | 100.0 | % |

** **

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

 
| ** **                             | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|----------------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                             | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                             | ** ** | **2007**               | ** ** | **2006**      | ** ** | **2007**             | ** ** | **2006**     | ** ** | **2007**                                                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Five Star (Lease No. 1)(9)        |       | 1.34                   | x     | 1.45          | x          | 89                   | %          | 89           | %          | 54                                                              | %          | 50 | % | 16 | % | 15 | % | 30 | % | 35 | % |
| Five Star (Lease No. 2)(3)        |       | 1.61                   | x          | 1.50          | x          | 91                   | %          | 93           | %          | 80                                                              | %          | 81 | % | 17 | % | 15 | % | 3 | % | 4 | % |
| Five Star Rehabilitation Hospitals (4) |       | 0.67                   | x          | NA            |       | 60                   | %          | NA           |       | 31                                                              | %          | NA |   | 63 | % | NA |   | 6 | % | NA |   |
| Sunrise/Marriott (5)                   |       | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| NewSeasons/IBC (6)                     |       | 1.16                   | x          | 1.21          | x          | 83                   | %          | 85           | %          | 100                                                             | %          | 100 | % | — |   | — |   | — |   | — |   |
| Alterra/Brookdale (7)                  |       | 2.06                   | x          | 1.97          | x          | 87                   | %          | 86           | %          | 98                                                              | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| 6 private companies (combined)         |       | 2.07                   | x          | 2.00          | x          | 89                   | %          | 90           | %          | 25                                                              | %          | 26 | % | 24 | % | 24 | % | 51 | % | 50 | % |

 

Tenant Operating Statistics (Six Months EndedJune 30,) (8)

 
| ** **                             | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|----------------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                             | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                             | ** ** | **2007**               | ** ** | **2006**      | ** ** | **2007**             | ** ** | **2006**     | ** ** | **2007**                                                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Five Star (Lease No. 1)(9)        |       | 1.33                   | x          | 1.45          | x          | 89                   | %          | 90           | %          | 54                                                              | %          | 48 | % | 16 | % | 17 | % | 30 | % | 35 | % |
| Five Star (Lease No. 2)(3)        |       | 1.53                   | x          | 1.33          | x          | 92                   | %          | 93           | %          | 80                                                              | %          | 82 | % | 17 | % | 15 | % | 3 | % | 4 | % |
| Five Star Rehabilitation Hospitals (4) |       | 0.83                   | x          | NA            |       | 60                   | %          | NA           |       | 32                                                              | %          | NA |   | 62 | % | NA |   | 6 | % | NA |   |
| Sunrise/Marriott (5)                   |       | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| NewSeasons/IBC (6)                     |       | 1.11                   | x          | 1.18          | x          | 83                   | %          | 85           | %          | 100                                                             | %          | 100 | % | — |   | — |   | — |   | — |   |
| Alterra/Brookdale (7)                  |       | 2.05                   | x          | 1.99          | x          | 87                   | %          | 88           | %          | 98                                                              | %          | 98 | % | — |   | — |   | 2 | % | 2 | % |
| 6 private companies (combined)         |       | 1.90                   | x          | 1.98          | x          | 89                   | %          | 91           | %          | 25                                                              | %          | 25 | % | 24 | % | 25 | % | 51 | % | 50 | % |

** **

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**(1)**   Amounts are beforedepreciation, but after impairment write downs.

**(2)**   Properties where the majorityof living units are independent living apartments are classified as independentliving communities.

**(3)**   Historically, some of theseproperties were managed by Sunrise Senior Living, Inc., or Sunrise, until November 30,2006. The rent coverage presented for this lease has been adjusted to excludemanagement fees paid to Sunrise during the periods presented. Some of the dataprovided by Sunrise may not be accurate. See footnote (5) below.However, the data provided by Sunrise does not materially affect the amountspresented.

**(4)**   On October 1, 2006,Five Star assumed the operations of these rehabilitation hospitals. Thesehospitals were formerly operated by HealthSouth Corporation, or HealthSouth.Because we do not have reliable information about the operations of thehospitals by HealthSouth, we do not report operating data for these hospitalsbefore October 1, 2006. The occupancy percentage is based on a 342available beds capacity.

**(5)**   Marriott International, Inc.,or Marriott, guarantees this lease. Sunrise has not filed its Annual Reports onForm 10-K for 2005 and 2006, and Quarterly Reports on Form 10-Q forthe three quarters of 2006 and the first two quarters of 2007 with theSecurities and Exchange Commission due to accounting issues. Because we do notknow what impact the resolution of these accounting issues may have on thereported performance of our properties, we do not report operating data forthis tenant.

**(6)**   Independence Blue Cross, orIBC, a Pennsylvania health insurer, guarantees this lease.

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

(8)   All tenant operatingdata presented are based upon the operating results provided by our tenants forthe indicated periods. Rent coverage is calculated as operating cash flow fromour tenants’ facility operations, before subordinated charges and capitalexpenditure reserves, divided by the minimum rent payable to us. We have notindependently verified our tenants’ operating data.

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

** **

**7**

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** **

**RESULTS OF OPERATIONS**

 

#### **Three Months Ended September 30, 2007, Compared to Three MonthsEnded September 30, 2006:**

 
| ** **                          | ** ** | **2007**                                                              | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                          | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Rental income                       |       | $                                                                     | 44,653     |       | $          | 41,983     |       | $                 | 2,670      |   | 6.4 | % |
| Interest and other income           |       | 571                                                                   |       | 334        |       | 237        |       | 71.0              | %          |
|                                |       |                                                                  |       |       |       |       |       |              |       |
| Interest expense                    |       | 9,223                                                                 |       | 11,833     |       | (2,610     | )          | (22.1             | )%         |
| Depreciation expense                |       | 11,821                                                                |       | 10,978     |       | 843        |       | 7.7               | %          |
| General and administrative expense  |       | 3,567                                                                 |       | 4,088      |       | (521       | )          | (12.7             | )%         |
|                                |       |                                                                  |       |       |       |       |       |              |       |
| Net income                          |       | $                                                                     | 20,613     |       | $          | 15,418     |       | $                 | 5,195      |   | 33.7 | % |
|                                |       |                                                                  |       |       |       |       |       |              |       |
| Weighted average shares outstanding |       | 83,659                                                                |       | 71,824     |       | 11,835     |       | 16.5              | %          |
|                                |       |                                                                  |       |       |       |       |       |              |       |
| Net income per share                |       | $                                                                     | 0.25       |       | $          | 0.21       |       | $                 | 0.04       |   | 19.0 | % |

 

Rental income increased because of rents from our realestate acquisitions totaling $148.0 million since July 1, 2006, offset byrent reductions resulting from the sale of three properties during the fourthquarter of 2006. Interest and other income increased as a result of higherlevels of investable cash and increased yields on our cash and marketablesecurities.

 

Interest expense decreased as a result of our repaymentof $20.0 million of our 8 5/8% senior notes due 2012 in January 2007. Ithas also decreased due to lower amounts outstanding under our revolving creditfacility during the 2007 period versus the 2006 period. Our weighted averagebalance outstanding and interest rate under our revolving credit facility was$160.2 million and 6.3% for the three months ended September 30, 2006 andthere were no amounts outstanding for the three months ended September 30,2007.

 

Depreciation expense for thethird quarter of 2007 increased as a result of real estate acquisitionstotaling $148.0 million since July 1, 2006, offset by the sale of threeproperties during the fourth quarter of 2006. General and administrativeexpenses decreased in the third quarter of 2007 due to a decrease in thelitigation costs associated with HealthSouth during the three months ended September 30,2007 offset by an increase in expenses resulting from acquisitions since July 1,2006.

 

Net income increased because ofthe changes in revenues and expenses described above. Net income per shareincreased because of the changes in revenues and expenses described aboveoffset by an increase in the weighted average number of shares outstandingresulting from our issuances of common shares in November 2006 and February 2007.

 

8

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#### **Nine Months Ended September 30, 2007, Compared to Nine Months EndedSeptember 30, 2006:**

 
| ** **                           | ** ** | **2007**                                                              | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Rental income                        |       | $                                                                     | 133,361    |       | $          | 123,727    |       | $                 | 9,634      |   | 7.8 | % |
| Interest and other income            |       | 1,577                                                                 |       | 1,034      |       | 543        |       | 52.5              | %          |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Interest expense                     |       | 28,276                                                                |       | 34,751     |       | (6,475     | )          | (18.6             | )%         |
| Depreciation expense                 |       | 35,120                                                                |       | 32,631     |       | 2,489      |       | 7.6               | %          |
| General and administrative expense   |       | 10,732                                                                |       | 10,870     |       | (138       | )          | (1.3              | )%         |
| Impairment of assets                 |       | —                                                                |       | 1,420      |       | (1,420     | )          | (100.0            | )%         |
| Loss on early extinguishment of debt |       | 2,026                                                                 |       | 6,526      |       | (4,500     | )          | (69.0             | )%         |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Net income                           |       | $                                                                     | 58,784     |       | $          | 38,563     |       | $                 | 20,211     |   | 52.4 | % |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Weighted average shares outstanding  |       | 82,718                                                                |       | 71,818     |       | 10,900     |       | 15.2              | %          |
|                                 |       |                                                                  |       |       |       |       |       |              |       |
| Net income per share                 |       | $                                                                     | 0.71       |       | $          | 0.54       |       | $                 | 0.17       |   | 31.5 | % |

 

Rental income increased because of rents from our realestate acquisitions totaling $151.0 million since January 1, 2006, offsetby rent reductions resulting from the sale of three properties during thefourth quarter of 2006. Interest and other income increased as a result ofhigher levels of investable cash and increased yields on our cash andmarketable securities.

 

Interest expense decreased as aresult of our repayment of $20.0 million of our 8 5/8% senior notes due 2012 inJanuary 2007 and $28.2 million of our junior subordinated debentures in June 2006.It has also decreased due to lower amounts outstanding under our revolvingcredit facility during the 2007 period versus the 2006 period. Our weightedaverage balance outstanding and interest rate under our revolving creditfacility was $18.3 million and 6.2% and $124.7 million and 6.0% for the ninemonths ended September 30, 2007 and 2006, respectively.

 

Depreciation expense for thefirst nine months of 2007 increased as a result of real estate acquisitionstotaling $151.0 million since January 1, 2006, offset by the sale of threeproperties during the fourth quarter of 2006. General and administrativeexpenses decreased in 2007 due to a decrease in the litigation costs associatedwith HealthSouth during the nine months ended September 30, 2007 offset byan increase in expenses resulting from acquisitions since January 1, 2006.

 

During the nine months ended September 30,2006, we recognized an impairment of assets charge of $1.4 million related tothree properties that were sold in the fourth quarter of 2006.

 

During the nine months ended September 30,2007, we purchased and retired $20.0 million of our 8 5/8% senior notes due2012 and recognized a loss on early extinguishment of debt of $2.0 million inconnection with this purchase. During the nine months ended September 30,2006, we recognized a loss on early extinguishment of debt of $1.3 million inconnection with our redemption of our junior subordinated debentures and $5.2million in connection with our redemption of some of our 7 7/8% unsecuredsenior notes due 2015.

 

Net income increased because ofthe changes in revenues and expenses described above. Net income per shareincreased because of the changes in revenues and expenses described aboveoffset by an increase in the weighted average number of shares outstandingresulting from our issuances of common shares in November 2006 and February 2007.

 

9

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our Operating Liquidity andResources

 

Rents from our properties areour principal source of funds for current expenses and distributions toshareholders. We generally receive minimum rents monthly or quarterly from ourtenants and we receive percentage rents monthly, quarterly or annually. Thisflow of funds has historically been sufficient for us to pay our operatingexpenses, debt service and distributions to shareholders. We believe that thisoperating cash flow will be sufficient to meet our operating expenses, debtservice and distribution payments for the foreseeable future.

 

Our Investment and FinancingLiquidity and Resources

## ** **

## **In order to fund acquisitions and toaccommodate cash needs that may result from timing differences between ourreceipt of rents and our need or desire to pay operating expenses anddistributions to our shareholders and to fund acquisitions and capitalexpenditures, we maintain a revolving credit facility with a group of lenders.Our revolving credit facility matures in December 2010, and we may extendit to December 2011 upon payment of an extension fee. The revolving creditfacility permits us to borrow up to $550.0 million, and includes a featurewhich may permit us to increase the maximum borrowing to $1.1 billion, incertain circumstances. Borrowings under our revolving credit facility areunsecured. We may borrow, repay and reborrow funds until maturity. Noprincipal repayment is due until maturity. We pay interest on borrowings underthe revolving credit facility at LIBOR plus a premium. At September 30,2007, the annual interest rate payable on our revolving credit facility was5.9%. As of September 30, 2007, we had no amounts outstanding under thiscredit facility and as of October 31, 2007, we had $30.0 millionoutstanding under this credit facility.**

## ** **

In January 2007, wepurchased and retired $20.0 million of our 8 5/8% senior notes due 2012 andrecognized a loss on early extinguishment of $2.0 million. The loss on earlyextinguishment of debt includes a $1.8 million premium and a $276,000 write offof deferred financing fees and unamortized discounts related to these seniornotes. We funded this purchase with borrowings under our revolving creditfacility.

 

In February 2007, weissued 6.0 million common shares in a public offering, raising net proceeds of$151.7 million. We used the net proceeds from this offering to repay borrowingsoutstanding on our revolving credit facility and for general business purposes.

 

In March 2007,we agreed to purchase, from an unaffiliated third party, two senior livingproperties with a total of 112 units for approximately $14.1 million. Theseacquisitions had not occurred as of September 30, 2007. Residents of thesecommunities pay all of their charges with their private resources. We intend tolease these properties to Five Star and to add them to our combined lease for114 properties with Five Star, which has a current term expiring in 2020 and weexpect the annual rent under this combined lease will increase by $1.1 million.Percentage rent, based on increases in gross revenues at these properties, willcommence in 2009. We expect to fund this acquisition using cash on hand, byborrowings under our revolving credit facility and by assuming two mortgages,one for $3.6 million at 5.7% per annum and one for $3.6 million at 6.2% perannum. Both mortgages mature in 2041, but are prepayable beginning in 2008. Thepurchase of these properties is contingent upon approval of mortgage lenders,completion of our diligence and other customary closing conditions. We canprovide no assurance that we will purchase either of these properties.

 

In September 2007,we agreed to purchase, from an unaffiliated third party, six wellness centersfor approximately $76.8 million. Members of these wellness centers pay all oftheir charges with their private resources. Prior to and following theacquisition, these wellness centers were and will continue to be leased to affiliatesof Starmark under three separate leases. These affiliates of Starmark willcontinue to operate each of the wellness centers under the brand name “Wellbridge”.These leases have a current

 

10

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term expiring in 2023, plusrenewal options, and require aggregate annual rent of $6.5 million initially,plus consumer price index, or CPI, based increases. We acquired four of thesewellness centers for $42.1 million on October 30, 2007 using cash on handand borrowings under our revolving credit facility. We expect to fund theacquisition of the two remaining wellness centers using cash on hand, byborrowings under our revolving credit facility and by assuming a mortgage for$14.9 million at 6.9% per annum. This mortgage matures in 2013. The purchase ofthese two remaining wellness centers is contingent upon approval of mortgagelenders, completion of our diligence and other customary closing conditions. Wecan provide no assurance that we will purchase the two remaining wellnesscenters.

 

In October 2007,we agreed to purchase, from two unaffiliated third parties, six senior livingproperties with a total of 707 units for approximately $78.5 million. Themajority of the residents of these communities pay their charges with theirprivate resources. We intend to lease these properties to Five Star and to addthem to our combined lease for 114 properties with Five Star, which has acurrent term expiring in 2020 and we expect the annual rent under this combinedlease will increase by $6.3 million. Percentage rent, based on increases ingross revenues at these properties, will commence in 2009. We expect to fundthese acquisitions using cash on hand and by borrowings under our revolvingcredit facility. The purchase of these properties is contingent upon completionof our diligence and other customary closing conditions. We can provide noassurance that we will purchase these properties.

 

During 2007, we purchased $33.1million of improvements made to certain of our properties. We used cash on handto fund these purchases.

 

At September 30, 2007, wehad $3.6****million of cash and cash equivalentsand $550.0 million available under our revolving credit facility. We expect touse cash balances, borrowings under our revolving credit facility and netproceeds of offerings of equity or debt securities to fund future workingcapital requirements, property acquisitions and expenditures related to therepair, maintenance or renovation of our properties.

 

When significant amounts are outstandingunder our revolving credit facility or as the maturity dates of our revolvingcredit facility and term debts approach, we will explore alternatives for therepayment of amounts due. Such alternatives may include incurringadditional debt and issuing new equity securities. We have an effective shelfregistration statement that allows us to issue public securities on anexpedited basis, but it does not assure that there will be buyers for suchsecurities. Although there can be no assurance that we will complete any debtor equity offerings or other financings, we believe we will have access tovarious types of financings, including debt or equity offerings, to financefuture acquisitions and to pay our debts and other obligations.

 

On February 16, 2007, wepaid a $0.34 per common share, or $26.4 million, distribution to our commonshareholders for the quarter ended December 31, 2006. On May 16,2007, we paid a $0.34 per common share, or $28.4 million, distribution to ourcommon shareholders for the quarter ended March 31, 2007. On August 16,2007, we paid a $0.34 per common share, or $28.4 million, distribution to ourcommon shareholders for the quarter ended June 30, 2007. On October 11,2007, we declared a distribution of $0.35 per common share, or $29.3 million,to be paid to our common shareholders of record on October 22, 2007, withrespect to our results for the quarter ended September 30, 2007. We expectto pay this distribution on or about November 15, 2007, using cash on handand borrowings under our revolving credit facility.

 

As of October 31, 2007,we had no off balance sheet arrangements, commercial paper, derivatives, swaps,hedges, joint ventures or partnerships.

 

11

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## **Debt Covenants**

## ** **

Ourprincipal debt obligations at September 30, 2007, were our unsecuredrevolving credit facility, two issues totaling $322.5 million of unsecuredsenior notes and $74.5 million of mortgage debts and bonds secured by 22 of ourproperties. Our senior notes are governed by an indenture. This indenture andrelated supplements and our revolving credit facility contain a number offinancial ratio covenants which generally restrict our ability to incur debts,including debts secured by mortgages on our properties in excess of calculatedamounts, require us to maintain a minimum net worth, restrict our ability tomake distributions under certain circumstances and require us to maintain otherratios. As of September 30, 2007, we believe we were in compliance withall of the covenants under our indenture and related supplements and ourrevolving credit facility.

 

None of our indenture andrelated supplements, our revolving credit facility or our other debtobligations contains provisions for acceleration which could be triggered byour debt ratings. However, in certain circumstances our revolving creditfacility uses our senior debt rating to determine the fees and the interestrate payable.

 

Our public debt indenture and related supplementscontain cross default provisions with any other debts of $10.0 million or more.Similarly, a default on our public debt indenture would be a default under ourrevolving credit facility.

 

## **RelatedPerson Transactions**

## ** **

Five Star is our former subsidiary. In March 2007,we agreed to purchase, from an unaffiliated third party, two senior livingproperties for approximately $14.1 million. These acquisitions had not occurredas of September 30, 2007. In October 2007, we agreed to purchase,from two unaffiliated third parties, six senior living properties forapproximately $78.5 million. When these purchases are completed, we intend tolease these properties to Five Star and to add them to our combined lease for114 properties with Five Star, which has a current term expiring in 2020 and weexpect the aggregate annual rent under this combined lease will increase byapproximately $7.4 million. Percentage rent, based on increases in grossrevenues at these properties, will commence in 2009. The purchase of these propertiesis contingent upon approval of mortgage lenders, completion of diligence by usand Five Star and other customary closing conditions. We can provide noassurances that we will purchase these properties.

 

Duringthe nine months ended September 30, 2007, pursuant to the terms of ourexisting leases with Five Star, we purchased $33.1 million of improvements madeto certain our properties leased by Five Star, and, as a result, the annualrent payable to us by Five Star increased by approximately $3.2 million.

 

**Item 3. Quantitative and Qualitative Disclosures about MarketRisk**

 

We are exposed to risksassociated with market changes in interest rates. We manage our exposure tothis market risk by monitoring available financing alternatives. Our strategyto manage exposure to changes in interest rates is unchanged since December 31,2006. Other than as described below, we do not foresee any significant changesin our exposure to fluctuations in interest rates or in how we manage thisexposure in the future.

 

Our unsecured revolving creditfacility accrues interest at floating rates and matures in December 2010,and we have an option to extend the maturity by one additional year upon thepayment of a fee. At September 30, 2007, we had no amounts outstanding and$550.0 million was available for borrowing under our revolving credit facility.We may make repayments and drawings under our revolving credit facility atany time without penalty. We borrow in U.S. dollars and borrowings under ourrevolving credit facility accrue interest at LIBOR plus a premium. Accordingly,we are vulnerable to changes in U.S.

 

12

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dollar based short term interest rates, specifically LIBOR. A change ininterest rates would not affect the value of this floating rate debt, but wouldaffect our operating results, if we have any floating rate debt outstanding atthat 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 obligations.

 

**Item 4. Controls and Procedures**

 

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

 

Therehave been no changes in our internal control over financial reporting duringthe quarter ended September 30, 2007, that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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**WARNINGCONCERNING FORWARD LOOKING STATEMENTS**

 

THIS QUARTERLY REPORT CONTAINSFORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. ALSO,WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”,“ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESEFORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OREXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOTOCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN ORIMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.

 

FOR EXAMPLE, THIS QUARTERLYREPORT STATES THAT WE HAVE ENTERED INTO AGREEMENTS FOR $92.6 MILLION TOPURCHASE EIGHT SENIOR LIVING PROPERTIES AND TO LEASE THEM TO FIVE STAR AND TOPURCHASE TWO WELLNESS CENTERS LEASED TO STARMARK HOLDINGS, LLC. OUR DILIGENCEREGARDING THESE TRANSACTIONS HAS NOT YET BEEN COMPLETED AND WE MAY DECIDENOT TO PROCEED WITH THESE PURCHASES. CERTAIN OF THESE PURCHASES ARE CONTINGENTUPON APPROVALS FROM THIRD PARTY MORTGAGES, WHICH APPROVALS MAY NOT BEOBTAINED. AS A RESULT, ONE OR MORE OF THESE PROPOSED PURCHASES AND LEASES MAY NOTOCCUR.

 

OTHER IMPORTANT FACTORS THATCOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD LOOKINGSTATEMENTS ARE DESCRIBED MORE FULLYUNDER “ITEM 1A. RISK FACTORS” IN OUR ANNUAL REPORT ON FORM 10-K FOR THEYEAR ENDED DECEMBER 31, 2006.

 

YOU SHOULD NOT PLACE UNDUERELIANCE UPON FORWARD LOOKING STATEMENTS.

 

EXCEPT AS REQUIRED BY LAW, WEUNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS AS ARESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

**STATEMENTCONCERNING LIMITED LIABILITY**

 

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

 

14

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** **

**PART II. Other Information**

 

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

 

On September 18, 2007, pursuant to our incentiveshare award plan, we granted 34,800 common****shares ofbeneficial interest, par value $0.01 per share, valued at $21.86****per share, the closing price of our common shares on theNew York Stock Exchange, or NYSE, on that day to our officers and certainemployees or our manager, Reit Management & Research LLC. All of thesegrants were made pursuant to an exemption from registration contained in Section 4(2) ofthe Securities Act of 1933, as amended.

 

**Item 6.**    Exhibits

** **

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

 

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

 

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

 

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

 

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

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf 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 1, 2007 |
|   |                            |   |
|   |                            |   |
|   | By:                             | /s/ Richard A. Doyle |   |
|   |                            | Richard A. Doyle |
|   |                            | Treasurer and Chief Financial Officer |
|   |                            | (principal financial and accounting officer) |
|   |                            | Dated: November 1, 2007 |
|        |                                 |  |  |  |

 

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