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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, DC  20549**

 

**FORM 10-Q**

 

**x****                             ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2008**

 

**OR**

 

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

 

**CommissionFile Number 1-15319**

 

**SENIORHOUSING PROPERTIES TRUST**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

(Address ofPrincipal Executive Offices)  (Zip Code)

 

**617-796-8350**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See thedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of 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 mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Number of registrant’scommon shares outstanding as of November 7, 2008: 114,530,684.

 

 

 

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SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

September 30,2008

 

INDEX

 
| ** **   | ** **                                                                                                        | **Page** |
|--------------|-------------------------------------------------------------------------------------------------------------------|----------|
|         |                                                                                                              |     |
| PART I  | Financial Information                                                                                             |     |
|         |                                                                                                              |     |
| Item 1.      | Financial Statements (unaudited)                                                                                  | 1        |
|         |                                                                                                              |     |
|         | Condensed  Consolidated Balance Sheets – September 30, 2008 and December 31,  2007                 | 1        |
|         |                                                                                                              |     |
|         | Condensed  Consolidated Statements of Income – Three and Nine Months Ended  September 30, 2008 and 2007 | 2        |
|         |                                                                                                              |     |
|         | Condensed  Consolidated Statements of Cash Flows – Nine Months Ended September 30,  2008 and 2007       | 3        |
|         |                                                                                                              |     |
|         | Notes  to Condensed Consolidated Financial Statements                                                             | 4        |
|         |                                                                                                              |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 11       |
|         |                                                                                                              |     |
| Item 4.      | Controls and  Procedures                                                                                          | 18       |
|         |                                                                                                              |     |
|         | Warning Concerning Forward Looking Statements                                                                     | 19       |
|         |                                                                                                              |     |
|         | Statement Concerning Limited Liability                                                                            | 19       |
|         |                                                                                                              |     |
| PART II | Other Information                                                                                                 |     |
|         |                                                                                                              |     |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      | 20       |
|         |                                                                                                              |     |
| Item 5.      | Other Information                                                                                                 | 20       |
|         |                                                                                                              |     |
| Item 6.      | Exhibits                                                                                                          | 26       |
|         |                                                                                                              |     |
|         | Signatures                                                                                                        | 27       |

 

*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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**PART I.  Financial Information**

 

**Item1.**           FinancialStatements

** **

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts inthousands, except share data)

(unaudited)

 
| ** **                                                                                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ASSETS                                                                                                                                                                                                                |       |                   |       |                  |       |
| Real estate  properties, at cost:                                                                                                                                                                                     |       |                   |       |                  |       |
| Land                                                                                                                                                                                                                  |       | $                      | 286,521    |                  | $          | 217,236 |   |
| Buildings and  improvements                                                                                                                                                                                           |       | 2,358,747              |       | 1,723,111             |       |
|                                                                                                                                                                                                                  |       | 2,645,268              |       | 1,940,347             |       |
| Less accumulated  depreciation                                                                                                                                                                                        |       | 364,366                |       | 323,891               |       |
|                                                                                                                                                                                                                  |       | 2,280,902              |       | 1,616,456             |       |
|                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                            |       | 7,191                  |       | 43,521                |       |
| Restricted cash                                                                                                                                                                                                       |       | 4,443                  |       | 3,642                 |       |
| Deferred  financing fees, net                                                                                                                                                                                         |       | 5,098                  |       | 5,974                 |       |
| Acquired real  estate leases, net                                                                                                                                                                                     |       | 23,691                 |       | 2,387                 |       |
| Other assets                                                                                                                                                                                                          |       | 27,717                 |       | 29,914                |       |
| Total assets                                                                                                                                                                                                          |       | $                      | 2,349,042  |                  | $          | 1,701,894 |   |
|                                                                                                                                                                                                                  |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                                                            |       |                   |       |                  |       |
| Unsecured  revolving credit facility                                                                                                                                                                                  |       | $                      | 93,000     |                  | $          | — |   |
| Senior unsecured  notes due 2012 and 2015, net of discount                                                                                                                                                            |       | 321,981                |       | 321,873               |       |
| Secured debt and  capital leases                                                                                                                                                                                      |       | 152,112                |       | 104,979               |       |
| Accrued interest                                                                                                                                                                                                      |       | 8,098                  |       | 10,849                |       |
| Acquired real  estate lease obligations, net                                                                                                                                                                          |       | 7,075                  |       | 4,216                 |       |
| Other  liabilities                                                                                                                                                                                                    |       | 24,156                 |       | 10,567                |       |
| Total  liabilities                                                                                                                                                                                                    |       | 606,422                |       | 452,484               |       |
|                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                        |       |                   |       |                  |       |
|                                                                                                                                                                                                                  |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                                                                                                           |       |                   |       |                  |       |
| Common shares of  beneficial interest, $0.01 par value: 149,700,000 shares authorized, 114,530,684  and 88,691,892 shares issued and outstanding at September 30, 2008 and  December 31, 2007, respectively |       | 1,145                  |       | 887                   |       |
| Additional  paid-in capital                                                                                                                                                                                           |       | 2,000,811              |       | 1,476,675             |       |
| Cumulative net  income                                                                                                                                                                                                |       | 497,950                |       | 423,807               |       |
| Cumulative  distributions                                                                                                                                                                                             |       | (757,553               | )          | (653,225              | )          |
| Unrealized gain  on investments                                                                                                                                                                                       |       | 267                    |       | 1,266                 |       |
| Total  shareholders’ equity                                                                                                                                                                                      |       | 1,742,620              |       | 1,249,410             |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                      |       | $                      | 2,349,042  |                  | $          | 1,701,894 |   |

 

*Seeaccompanying notes.*

 

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SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts inthousands, except per share data)

(unaudited)

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Rental income                             |       | $                                                    | 58,897     |                                                | $          | 44,653 |   | $ | 160,560 |   | $ | 133,361 |   |
| Interest and  other income                |       | 776                                                  |       | 571                                                 |       | 2,056 |   | 1,577 |   |
| Total revenues                            |       | 59,673                                               |       | 45,224                                              |       | 162,616 |   | 134,938 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Expenses:                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Property  operating expenses              |       | 1,024                                                |       | —                                              |       | 1,124 |   | — |   |
| Interest                                  |       | 9,606                                                |       | 9,223                                               |       | 28,934 |   | 28,276 |   |
| Depreciation                              |       | 15,859                                               |       | 11,821                                              |       | 43,235 |   | 35,120 |   |
| General and  administrative               |       | 4,303                                                |       | 3,567                                               |       | 12,506 |   | 10,732 |   |
| Impairment of  assets                     |       | —                                               |       | —                                              |       | 2,940 |   | — |   |
| Loss on early  extinguishment of debt     |       | —                                               |       | —                                              |       | — |   | 2,026 |   |
| Total expenses                            |       | 30,792                                               |       | 24,611                                              |       | 88,739 |   | 76,154 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Income before  gain on sale of properties |       | 28,881                                               |       | 20,613                                              |       | 73,877 |   | 58,784 |   |
| Gain on sale of  properties               |       | 266                                                  |       | —                                              |       | 266 |   | — |   |
| Net income                                |       | $                                                    | 29,147     |                                                | $          | 20,613 |   | $ | 74,143 |   | $ | 58,784 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding      |       | 114,493                                              |       | 83,659                                              |       | 102,004 |   | 82,718 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and  diluted earnings per share:    |       |                                                 |       |                                                |       |   |   |   |   |
| Income before  gain on sale of properties |       | $                                                    | 0.25       |                                                | $          | 0.25 |   | $ | 0.72 |   | $ | 0.71 |   |
| Net income                                |       | $                                                    | 0.25       |                                                | $          | 0.25 |   | $ | 0.73 |   | $ | 0.71 |   |

 

*See accompanying notes*.

 

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SENIORHOUSING PROPERTIES TRUST

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts inthousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                         |       |                                                |       |   |   |
| Net income                                                                     |       | $                                                   | 74,143     |   | $ | 58,784 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation                                                                   |       | 43,235                                              |       | 35,120 |   |
| Amortization of  deferred financing fees and debt discounts                    |       | 984                                                 |       | 1,601 |   |
| Amortization of  acquired real estate leases                                   |       | (31                                                 | )          | — |   |
| Impairment of  assets                                                          |       | 2,940                                               |       | — |   |
| Loss on early  extinguishment of debt                                          |       | —                                              |       | 2,026 |   |
| Gain on sale of  properties                                                    |       | (266                                                | )          | — |   |
| Change in assets  and liabilities:                                             |       |                                                |       |   |   |
| Restricted cash                                                                |       | (801                                                | )          | (575 | ) |
| Purchase of trading  securities                                                |       | —                                              |       | 10,153 |   |
| Sales of trading  securities                                                   |       | —                                              |       | (10,153 | ) |
| Other assets                                                                   |       | 1,181                                               |       | 31 |   |
| Accrued interest                                                               |       | (2,751                                              | )          | (3,538 | ) |
| Other  liabilities                                                             |       | 15,091                                              |       | 4,185 |   |
| Cash provided by  operating activities                                         |       | 133,725                                             |       | 97,634 |   |
|                                                                           |       |                                                |       |   |   |
| Cash flows from  investing activities:                                         |       |                                                |       |   |   |
| Acquisitions                                                                   |       | (688,821                                            | )          | (32,834 | ) |
| Net proceeds  from sale of properties                                          |       | 21,336                                              |       | — |   |
| Cash used for  investing activities                                            |       | (667,485                                            | )          | (32,834 | ) |
|                                                                           |       |                                                |       |   |   |
| Cash flows from  financing activities:                                         |       |                                                |       |   |   |
| Proceeds from  issuance of common shares, net                                  |       | 522,907                                             |       | 151,670 |   |
| Proceeds from  borrowings on revolving credit facility                         |       | 314,000                                             |       | 22,000 |   |
| Repayments of  borrowings on revolving credit facility                         |       | (221,000                                            | )          | (134,000 | ) |
| Redemption of  senior notes                                                    |       | —                                              |       | (21,750 | ) |
| Repayment of  other debt                                                       |       | (14,149                                             | )          | (1,269 | ) |
| Distributions to  shareholders                                                 |       | (104,328                                            | )          | (83,270 | ) |
| Cash provided by  (used for) financing activities                              |       | 497,430                                             |       | (66,619 | ) |
|                                                                           |       |                                                |       |   |   |
| Decrease in cash  and cash equivalents                                         |       | (36,330                                             | )          | (1,819 | ) |
| Cash and cash  equivalents at beginning of period                              |       | 43,521                                              |       | 5,464 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                                   | 7,191      |   | $ | 3,645 |   |
|                                                                           |       |                                                |       |   |   |
| Supplemental  cash flow information:                                           |       |                                                |       |   |   |
| Interest paid                                                                  |       | $                                                   | 30,737     |   | $ | 30,213 |   |
|                                                                           |       |                                                |       |   |   |
| 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          |       | 1,497                                               |       | 1,450 |   |

 

*Seeaccompanying notes.*

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share dataor 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 accounting principles generally accepted in the UnitedStates for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate tomake the information presented not misleading. However, the accompanying condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes contained in our Annual Report on Form 10-K for the year ended December 31,2007.  In the opinion of our management,all adjustments, which include only normal recurring adjustments, considerednecessary for a fair presentation have been included.  All intercompany transactions and balancesbetween us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are notnecessarily indicative of the results that may be expected for the fullyear.  Reclassifications have been madeto the prior year’s financial statements to conform to the current year’spresentation.  These reclassificationshad no effect on net income or shareholders’ equity.

 

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurement”, or SFAS No. 157,which defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurement.  This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The adoption of this standard did not have a material impact on ourfinancial position, operations or cash flow.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations”, or SFAS No. 141(R). SFAS No. 141(R) establishesprinciples and requirements for how the acquirer shall recognize and measure inits financial statements the identifiable assets acquired, liabilities assumed,any noncontrolling interest in the acquiree and goodwill acquired in a businesscombination.  SFAS No. 141(R) iseffective for fiscal years beginning after December 15, 2008.  We expect the adoption of SFAS 141(R) willaffect our consolidated financial statements if we engage in a transaction thatfalls within the scope of this standard.

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles”, or SFAS 162. SFAS 162 identifies sources of accounting principles and a framework forselecting principles to be used in preparation of financial statements ofnongovernmental entities that are prepared in conformity with generallyaccepted accounting principles in the United States (the GAAP Hierarchy).  SFAS 162 is effective 60 days following the Securitiesand Exchange Commission, or SEC’s, approval of the Public Company AccountingOversight Board amendments to auditing standard AU Section 411, “TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples”.  We do not expect thisstandard will result in any change to our current accounting practices.

 

**Note 2.  Real Estate Properties**

 

At September 30,2008, we owned 261 properties located in 34 states.

 

In May 2008, we enteredinto a series of agreements to acquire 48 medical office, clinic and biotechlaboratory buildings, or MOBs, from HRPT Properties Trust, or HRPT, for anaggregate purchase price of approximately $565.0 million.  These buildings are approximately 98% leasedto 220 tenants for an average lease term of 6.7 years.  As of September 30, 2008, we haveacquired 28 of these buildings and expect the closings of the remaining 20acquisitions to occur during the next two quarters.  In addition, because a third party consentwas not received, one of the agreements was amended so that one of theremaining buildings with an allocated value of $3.0 million is no longersubject to our purchase agreement; in the event HRPT obtains the third partyconsent, we may nonetheless purchase that building.  In June 2008, we acquired five medicaloffice, clinic and biotech laboratory buildings from HRPT pursuant to theseagreements for approximately $83.8 million, excluding closing costs.  In July 2008, we acquired threeadditional medical office and clinic properties from HRPT pursuant to theseagreements for approximately $39.1 million, excluding closing costs.  In August 2008, we acquired 20additional clinics from HRPT pursuant to these agreements for approximately$109.9 million, excluding closing costs. On October 31, 2008, we acquired one additional medical officebuilding from HRPT pursuant to these agreements for approximately $29.8million, excluding closing costs.  Wefunded these acquisitions using cash on hand, borrowings under our revolvingcredit facility and by assuming three mortgage loans on two properties totaling

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

$10.8 million with aweighted average interest rate of 7.1% per annum and weighted average maturityin 2018.  Intangible lease assets andliabilities recorded by us for these acquisitions totaled $20.8 million and$2.8 million, respectively.

 

Our obligations to complete the remaining purchases are subject tovarious conditions typical of commercial real estate purchases including, withrespect to certain of these properties, third party consents.  We also have financing contingencies relatingto certain properties.  We can provide noassurance that we will purchase all of these buildings or that the remainingpurchases will be completed in the next two quarters.  In addition, with respect to 45 additionalbuildings (containing approximately 4.6 million square feet of rental space)that are leased to tenants in medical related business which HRPT will continueto own after these transactions, we also acquired rights of first refusal topurchase any such buildings in the event HRPT determines to sell suchproperties or in the event of an indirect sale as a result of a change ofcontrol of HRPT or a change of control of HRPT’s subsidiary which owns such property.  HRPT was formerly our parent company and bothwe and HRPT are managed by Reit Management and Research LLC, or RMR.  Because we and HRPT are both managed by RMR,the terms of these transactions were negotiated by special committees of ourand HRPT’s boards of trustees composed solely of Independent Trustees of eachcompany.

 

On June 30, 2008, werealigned three of our leases with Five Star Quality Care, Inc., or FiveStar.  Lease no. 1 now includes 100properties, including nine properties acquired during the first quarter of2008. This lease includes independent living communities, assisted livingcommunities and skilled nursing facilities, and expires in 2022. Lease no. 2now includes 32 properties, including independent living communities, assistedliving communities, skilled nursing facilities and two rehabilitationhospitals, and expires in 2026. Lease no. 3 now includes 44 properties,including 10 properties acquired during the first quarter of 2008 and 10properties acquired during the third quarter of 2008 and one property acquiredon November 1, 2008 described below. This lease includes independent living communities, assisted livingcommunities and skilled nursing facilities and expires in 2024. The total rentpayable by Five Star to us for these properties was unchanged as a result ofthis lease realignment. The increased rent payable for these three leases withFive Star, if and as we purchase improvements to the leased properties, will bethe greater of 8.0% per annum or the 10 year Treasury rate plus 300 basispoints.  Five Star was formerly oursubsidiary.  In addition to being ourmanager, RMR also provides management services to Five Star.  Because of these and other relationshipsbetween us and Five Star, all transactions between us and Five Star areapproved by our Independent Trustees and Five Star’s Independent Directors.

 

On July 1, 2008, wesold three assisted living properties with 259 living units that were formerlyoperated by NewSeasons Assisted Living Communities, Inc., or NewSeasons,to Five Star for $21.4 million and Five Star assumed the NewSeasons andIndependence Blue Cross, or IBC, lease obligations to us for the remainingseven properties that NewSeasons formerly operated.  The rent payable by Five Star for these sevenproperties is approximately $7.6 million per annum under lease no. 4 between usand Five Star.

 

On August 1, 2008,we acquired, from an unaffiliated party, two senior living properties with atotal of 112 units for approximately $14.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $1.1 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand.

 

On August 21, 2008,we acquired four wellness centers for approximately $100 million, excludingclosing costs, from Life Time Fitness, Inc., or Life Time Fitness.  We leased these wellness centers to Life TimeFitness for initial rent of $9.1 million, plus rent increases of 10% every fiveyears.  This lease has a term expiring in2028 with renewal options thereafter.  Wefunded this acquisition using cash on hand and borrowings under our revolvingcredit facility.

 

On September 1,2008, we acquired, from an unaffiliated party, eight senior living propertieswith a total of 451 units for approximately $62.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $5.0 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand, borrowings under our revolvingcredit facility and by assuming 15 mortgages on these eight properties totaling$50.5 million with a weighted average interest rate of 6.54% per annum andweighted average maturity in 2017.

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)

(amounts in thousands, except per share dataor as otherwise stated)

 

On September 30,2008, we acquired, from an unaffiliated party, one medical office building forapproximately $18.6 million, excluding closing costs.  This building is currently 100% leased to 12tenants for an average lease term of 6.5 years. We funded this acquisition using cash on hand and borrowings under ourrevolving credit facility.  Intangiblelease assets and liabilities recorded by us for these acquisitions totaled $1.3million and $401,000, respectively.

 

On November 1, 2008,we acquired, from an unaffiliated party, a senior living property with a totalof 249 units for approximately $29.0 million. We leased this property to Five Star and added it to our Five Star leaseno. 3, which has a term expiring in 2024, and increased the annual rent under thislease by $2.3 million.  Percentage rent,based on increases in gross revenues at this property, will commence in2010.  We funded this acquisition usingcash on hand and borrowings under our revolving credit facility.

 

As of September 30,2008, two of our properties are classified as held for sale.  At December 31, 2007 and June 30,2008, we recorded impairment charges on one of these properties of $1.4 millionand $2.9 million, respectively, to reduce the carrying value of the property toits estimated fair value.  These twoproperties are included in real estate properties on our condensed consolidatedbalance sheet and have a net carrying value of approximately $6.6 million at September 30,2008.  In September 2008, we enteredinto a purchase and sale agreement to sell one of these properties to anunaffiliated party for approximately $1.3 million.  The sale of this property is subject tovarious contingencies, and we can provide no assurance that we will sell thisproperty.

 

During the nine months endedSeptember 30, 2008 and 2007, pursuant to the terms of our existing leaseswith Five Star, we purchased $42.1 million and $33.1 million, respectively, 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 $3.6million and $3.2 million, respectively.

 

**Note 3.  Net Unrealized Gain on Investments**

 

On September 30,2008, we owned 1,000,000 common shares of HRPT and 35,000 common shares of FiveStar, which are carried at fair market value in other assets on our condensedconsolidated balance sheets. The net unrealized gain on investments shown onour condensed consolidated balance sheets represents the difference between thequoted market prices (level 1 in the fair value hierarchy as defined in SFAS No. 157)of such shares on September 30, 2008 ($6.89 and $3.75 per share,respectively) and their cost on the dates they were acquired ($6.50 and $7.26per share, respectively).

 

**Note 4.  Comprehensive Income**

 

The following is areconciliation of net income to comprehensive income for the three and ninemonths ended September 30, 2008 and 2007:

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                    |       | $                                                    | 29,147     |                                                | $          | 20,613 |   | $ | 74,143 |   | $ | 58,784 |   |
| Other  comprehensive income:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Change in net  unrealized gain on investments |       | 86                                                   |       | (501                                                | )          | (999 | ) | (2,562 | ) |
| Comprehensive  income                         |       | $                                                    | 29,233     |                                                | $          | 20,112 |   | $ | 73,144 |   | $ | 56,222 |   |

 

**Note 5.  Indebtedness**

 

We have an unsecured revolving credit facility thatmatures in December 2010, with our option to extend the maturity by oneadditional year upon payment of a fee. Our revolving credit facility permits borrowings up to $550.0million.  The annual interest payable foramounts drawn under the facility is LIBOR plus a premium. The interest ratepayable on borrowings under this revolving credit facility was****4.5% and 5.9% at September 30, 2008 and 2007,respectively.  Our revolving creditfacility is available for acquisitions, working capital and general businesspurposes. As of September 30, 2008 and 2007, we had $93.0 million and zeroamounts outstanding under this credit facility, respectively.

 

As discussed above in Note 2, during the quarter we assumed $61.3million of mortgage debt with a weighted average interest rate of 6.6% and aweighted average maturity in 2017 relating to our senior living and MOBacquisitions.  We recorded the assumedmortgages at their fair value which approximated their outstanding principlebalances.  Fair value of the assumedmortgages was determined using a market approach based upon level 2 inputs(inputs other than quoted market prices that are observable) in the fair valuehierarchy as defined in SFAS No. 157.

 

6

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Tableof Contents

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or asotherwise stated)

 

**Note 6.  Shareholders Equity**

 

On August 14, 2008, we paid a $0.35 per share, or$40.1 million, distribution to our common shareholders for the quarter ended June 30,2008.  On October 1, 2008, wedeclared a distribution of $0.35 per share, or $40.1 million, to be paid tocommon shareholders of record on October 17, 2008, with respect to ourresults for the quarter ended September 30, 2008. We expect to pay thisdistribution on or about November 14, 2008.

 

On September 22, 2008, pursuant to our incentiveshare award plan, we granted 42,125 common****shares ofbeneficial interest, par value $0.01 per share, valued at $22.09****per share, the closing price of our common shares on theNew York Stock Exchange, or NYSE, on that day, to our officers and certainemployees of our manager, RMR.  We madethese grants pursuant to an exemption from registration contained in Section 4(2) ofthe Securities Act of 1933, as amended.

 

**Note7.  Segment Reporting**

** **

We have tworeportable operating segments: (i) short term and long term residentialcare facilities that offer dining for residents and (ii) properties wheremedical related services are offered 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 spaservice to members.  Prior to October 2007,our only operating segment was short term and long term residential carefacilities that offer dining for residents; and prior to June 2008, ouronly operating segments were short term and long term residential carefacilities that offer dining for residents and the wellness centers included inthe “All Other” category.

 
| ** **                                       | ** ** | **For the Three Months Ended September 30, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Short and Long  Term  Residential  Care Facilities**                | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                                    |       | $                                                                                    | 51,380     |   | $ | 4,874 |   | $ | 2,643 |   | $ | 58,897 |   |
| Interest and  other income                       |       | —                                                                               |       | (107 | ) | 883 |   | 776 |   |
| Total revenues                                   |       | 51,380                                                                               |       | 4,767 |   | 3,526 |   | 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 expense              |       | —                                                                               |       | 310 |   | 3,993 |   | 4,303 |   |
| Total expenses                                   |       | 15,268                                                                               |       | 2,688 |   | 12,836 |   | 30,792 |   |
|                                             |       |                                                                                 |       |   |   |   |   |   |   |
| Income (loss)  before gain on sale of properties |       | 36,112                                                                               |       | 2,079 |   | (9,310 | ) | 28,881 |   |
| Gain on sale of  properties                      |       | 266                                                                                  |       | — |   | — |   | 266 |   |
| Net income  (loss)                               |       | $                                                                                    | 36,378     |   | $ | 2,079 |   | $ | (9,310 | ) | $ | 29,147 |   |
|                                             |       |                                                                                 |       |   |   |   |   |   |   |
| Total assets                                     |       | $                                                                                    | 1,856,097  |   | $ | 262,525 |   | $ | 230,420 |   | $ | 2,349,042 |   |

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or asotherwise stated)

 
| ** **                                       | ** ** | **For the Nine Months Ended September 30, 2008** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Short and Long  Term  Residential  Care Facilities**               | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental income                                    |       | $                                                                                   | 149,523    |   | $ | 5,133 |   | $ | 5,904 |   | $ | 160,560 |   |
| Interest and  other income                       |       | —                                                                              |       | (133 | ) | 2,189 |   | 2,056 |   |
| Total revenues                                   |       | 149,523                                                                             |       | 5,000 |   | 8,093 |   | 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 expense              |       | —                                                                              |       | 336 |   | 12,170 |   | 12,506 |   |
| Impairment of  assets                            |       | 2,940                                                                               |       | — |   | — |   | 2,940 |   |
| Total expenses                                   |       | 47,390                                                                              |       | 2,908 |   | 38,441 |   | 88,739 |   |
|                                             |       |                                                                                |       |   |   |   |   |   |   |
| Income (loss)  before gain on sale of properties |       | 102,133                                                                             |       | 2,092 |   | (30,348 | ) | 73,877 |   |
| Gain on sale of  properties                      |       | 266                                                                                 |       | — |   | — |   | 266 |   |
| Net income  (loss)                               |       | $                                                                                   | 102,399    |   | $ | 2,092 |   | $ | (30,348 | ) | $ | 74,143 |   |
|                                             |       |                                                                                |       |   |   |   |   |   |   |
| Total assets                                     |       | $                                                                                   | 1,856,097  |   | $ | 262,525 |   | $ | 230,420 |   | $ | 2,349,042 |   |

 

**Note8.  Significant Tenant**

** **

As discussed above, FiveStar is our former subsidiary and both we and Five Star have managementcontracts with RMR.  Five Star is thelessee of 68% of our investments, at cost, as of September 30, 2008.  The following tables present summaryfinancial information for Five Star for the three and nine months ended September 30,2008 and 2007, as reported in its Quarterly Report on Form 10-Q.

 

**SummaryFinancial Information of Five Star Quality Care, Inc.**

**(inthousands)**

** **
| ** **                                | ** ** | **For the Three Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                                                   | ** ** | **2007** | ** ** |
| Total revenues                            |       | $                                                                          | 281,942    |   | $ | 244,598 |   |
| Operating income                          |       | 2,926                                                                      |       | 8,826 |   |
| Income (loss)  from continuing operations |       | (1,618                                                                     | )          | 8,596 |   |
| Net income  (loss)                        |       | (2,250                                                                     | )          | 7,761 |   |
|                                           |            |                                                                            |            |  |  |  |  |

 

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands,except per share data or as otherwise stated)

 
| ** **                                                | ** ** | **As of and for the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                                                                       | ** ** | **2007** | ** ** |
| Total revenues                                            |       | $                                                                                              | 811,963    |   | $ | 721,764 |   |
| Operating income                                          |       | 16,356                                                                                         |       | 16,068 |   |
| Income from  continuing operations                        |       | 7,038                                                                                          |       | 19,223 |   |
| Net income                                                |       | 2,856                                                                                          |       | 16,604 |   |
|                                                      |       |                                                                                           |       |   |   |
| Current assets                                            |       | 131,424                                                                                        |       | 185,670 |   |
| Non-current  assets                                       |       | 258,096                                                                                        |       | 176,425 |   |
| Total  indebtedness                                       |       | 139,125                                                                                        |       | 142,567 |   |
| Current  liabilities                                      |       | 127,492                                                                                        |       | 109,323 |   |
| Non-current  liabilities                                  |       | 175,824                                                                                        |       | 170,454 |   |
| Total  shareholders’ equity                          |       | 86,204                                                                                         |       | 82,318 |   |
|                                                      |       |                                                                                           |       |   |   |
| Net cash  provided by operating activities                |       | 44,787                                                                                         |       | 26,235 |   |
| Net cash used in  discontinued operations                 |       | (1,016                                                                                         | )          | (2,535 | ) |
| Net cash used in  investing activities                    |       | (32,156                                                                                        | )          | (21,294 | ) |
| Net cash used in  financing activities                    |       | (2,642                                                                                         | )          | (28,772 | ) |
| Net increase  (decrease) in cash                          |       | 8,973                                                                                          |       | (26,366 | ) |
| Cash and cash  equivalents at the beginning of the period |       | 30,999                                                                                         |       | 46,241 |   |
| Cash and cash  equivalents at the end of the period       |       | 39,972                                                                                         |       | 19,875 |   |
|                                                           |            |                                                                                                |            |  |  |  |  |

 

The summary financial information of Five Star is presented to complywith applicable accounting regulations of the SEC.

 

References in these financial statements to the Quarterly Report on Form 10-Qfor Five Star are included as textual references only, and the information insuch Quarterly Report is not incorporated by reference into these financialstatements.

 

**Note 9.  ProForma Information**

 

During the three months ended September 30, 2008, we purchased 10senior living properties, four wellness centers and 24 MOBs for $343.7 millionand, pursuant to the terms of our existing leases with Five Star, we purchased$14.8 million of improvements made to our properties leased to Five Star.  During the nine months ended September 30,2008, we purchased 29 senior living properties, four wellness centers and 29MOBs for $697.1 million and $42.1 million of improvements made to ourproperties leased to Five Star.  On April 1,2008, we repaid in full a mortgage loan on one of our properties for $12.6million.  During the nine months ended September 30,2008, we recorded an impairment charge on one of our properties for $2.9million.  During the three and ninemonths ended September 30, 2008, we sold three assisted living facilitiesto Five Star for $21.4 million and recorded a gain on sale of $266,000.  During the nine months ended September 30,2008, we issued 25.8 million of our common shares.  During 2007, we purchased six wellnesscenters for $76.8 million and $47.7 million of improvements made to ourproperties leased to Five Star.  Weassumed $14.9 million of mortgage debt in conjunction with the wellness centersacquisition.  We purchased and redeemed$20.0 million of our senior notes in January 2007.  We recorded an impairment charge on one ofour properties for $1.4 million.  In February andDecember 2007, we issued 5.0 million and 6.0 million of our common shares,respectively.  The following table presents our pro forma results of operations as ifall of these acquisitions and related financings were completed on January 1,2007.  This pro forma data is notnecessarily indicative of what actual results of operations would have been forthe periods presented, nor does it represent the results of operations for anyfuture period.  Differences could resultfrom, but are not limited to, additional property sales or investments, changesin interest rates and changes in our debt or equity structure.

 

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands,except per share data or as otherwise stated)

 
| ** **                                | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Total revenues                            |       | $                                                                      | 63,738     |                                                                  | $          | 62,683 |   | $ | 189,891 |   | $ | 188,261 |   |
| Income before  gain on sale of properties |       | $                                                                      | 31,260     |                                                                  | $          | 28,891 |   | $ | 88,989 |   | $ | 87,119 |   |
| Net income                                |       | $                                                                      | 31,526     |                                                                  | $          | 29,157 |   | $ | 89,255 |   | $ | 87,385 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Per common share  data:                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before  gain on sale of properties |       | $                                                                      | 0.27       |                                                                  | $          | 0.25 |   | $ | 0.78 |   | $ | 0.76 |   |
| Net income                                |       | $                                                                      | 0.28       |                                                                  | $          | 0.25 |   | $ | 0.78 |   | $ | 0.76 |   |

 

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

 

The followingdiscussion should be read in conjunction with our consolidated financialstatements and notes thereto included in this quarterly report and our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**PORTFOLIO OVERVIEW**

** **

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

 

**As of September 30,2008**

(dollars inthousands)

 
| ** **                          | ** ** | **# 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                        |       | $1,046,346                                               |       | 39.6                      | %          | $103,765                          |       | 39.7                                         | %          |
| Assisted living  facilities         |       | 121                       |       | 8,531                         |       | 903,338                                                  |       | 34.1                      | %          | 83,788                            |       | 32.1                                         | %          |
| Skilled nursing  facilities         |       | 58                        |       | 5,869                         |       | 227,952                                                  |       | 8.6                       | %          | 19,916                            |       | 7.6                                          | %          |
| Rehabilitation  hospitals           |       | 2                         |       | 364                           |       | 51,744                                                   |       | 2.0                       | %          | 10,905                            |       | 4.1                                          | %          |
| Wellness centers  (3)               |       | 10                        |       | —                        |       | 180,017                                                  |       | 6.8                       | %          | 16,097                            |       | 6.2                                          | %          |
| MOBs(4)                             |       | 29                        |       | —                        |       | 235,871                                                  |       | 8.9                       | %          | 26,792                            |       | 10.3                                         | %          |
| Total                               |       | 261                       |       | 25,977                        |       | $2,645,268                                               |       | 100.0                     | %          | $261,263                          |       | 100.0                                        | %          |
|                                |       |                      |       |                          |       |                                                     |       |                      |       |                              |       |                                         |       |
| Tenant/Operator                     |       |                      |       |                          |       |                                                     |       |                      |       |                              |       |                                         |       |
| Five Star (Lease  No. 1) (5)        |       | 100                       |       | 8,600                         |       | $707,788                                                 |       | 26.8                      | %          | $62,258                           |       | 23.8                                         | %          |
| Five Star (Lease  No. 2) (5)        |       | 32                        |       | 7,639                         |       | 739,422                                                  |       | 28.0                      | %          | 80,776                            |       | 30.9                                         | %          |
| Five Star (Lease  No. 3) (5)        |       | 43                        |       | 2,999                         |       | 280,218                                                  |       | 10.6                      | %          | 20,913                            |       | 8.0                                          | %          |
| Five Star (Lease  No. 4) (6)        |       | 7                         |       | 614                           |       | 66,571                                                   |       | 2.5                       | %          | 7,593                             |       | 2.9                                          | %          |
| Sunrise/Marriott  (7)               |       | 14                        |       | 4,091                         |       | 325,165                                                  |       | 12.3                      | %          | 31,979                            |       | 12.2                                         | %          |
| Alterra/Brookdale  (8)              |       | 18                        |       | 894                           |       | 61,122                                                   |       | 2.3                       | %          | 8,015                             |       | 3.1                                          | %          |
| 6 private  companies (combined)     |       | 8                         |       | 1,140                         |       | 49,094                                                   |       | 1.8                       | %          | 6,840                             |       | 2.6                                          | %          |
| Starmark (3)                        |       | 6                         |       | —                        |       | 80,008                                                   |       | 3.0                       | %          | 6,519                             |       | 2.5                                          | %          |
| Life Time  Fitness (3)              |       | 4                         |       | —                        |       | 100,009                                                  |       | 3.8                       | %          | 9,578                             |       | 3.7                                          | %          |
| Multi-tenant  MOBs (4)              |       | 29                        |       | —                        |       | 235,871                                                  |       | 8.9                       | %          | 26,792                            |       | 10.3                                         | %          |
| Total                               |       | 261                       |       | 25,977                        |       | $2,645,268                                               |       | 100.0                     | %          | $261,263                          |       | 100.0                                        | %          |

 

TenantOperating Statistics (Quarter Ended June 30, 2008)(9)

 
| ** **                                  | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2007**      | ** ** | **2008**             | ** ** | **2007**     | ** ** | **2008**                                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Five Star (Lease  No. 1) (5) (10) |       | 1.31x                  |       | 1.27x         |       | 89%                  |       | 89%          |       | 65%                                                             |       | 64% |   | 13% |   | 14% |   | 22% |   | 22% |   |
| Five Star (Lease  No. 2) (5)           |       | 1.47x                  |       | 1.48x         | ** ** | 88%                  |       | 90%          |       | 70%                                                             |       | 68% |   | 27% |   | 28% |   | 3% |   | 4% |   |
| Five Star (Lease  No. 3) (5) (10) |       | 1.53x                  |       | 2.71x         | ** ** | 86%                  |       | 87%          |       | 46%                                                             |       | 25% |   | 18% |   | 24% |   | 36% |   | 51% |   |
| Five Star (Lease  No. 4) (6)           |       | 1.08x                  |       | 1.47x         |       | 81%                  |       | 83%          |       | 100%                                                            |       | 100% |   | — |   | — |   | — |   | — |   |
| Sunrise/Marriott  (7)                       |       | 1.43x                  |       | 1.26x         | ** ** | 90%                  |       | 89%          |       | 81%                                                             |       | 78% |   | 16% |   | 18% |   | 3% |   | 4% |   |
| Alterra/Brookdale  (8)                      |       | 2.19x                  |       | 2.17x         | ** ** | 91%                  |       | 87%          |       | 99%                                                             |       | 98% |   | — |   | — |   | 1% |   | 2% |   |
| 6 private  companies (combined)             |       | 1.92x                  |       | 1.98x         |       | 83%                  |       | 89%          |       | 26%                                                             |       | 25% |   | 23% |   | 24% |   | 51% |   | 51% |   |
| Starmark (3)                                |       | 2.07x                  |       | NA            |       | 100%                 |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Life Time  Fitness (3)                      |       | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Multi-tenant  MOBs (4)                      |       | NA                     |       | NA            |       | 99%                  |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |

 

Tenant OperatingStatistics (Six Months Ended June 30, 2008)(9)

 
| ** **                                  | ** ** | ** **             | ** ** | ** **    | ** ** | ** **           | ** ** | ** **   | ** ** | **Percentage of Operating Revenue Sources** | ** ** |
|---------------------------------------------|------------|------------------------|------------|---------------|------------|----------------------|------------|--------------|------------|-----------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Rent Coverage** | ** ** | **Occupancy** | ** ** | **Private Pay** | ** ** | **Medicare** | ** ** | **Medicaid**                                                    | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2007**      | ** ** | **2008**             | ** ** | **2007**     | ** ** | **2008**                                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Five Star (Lease  No. 1) (5) (10) |       | 1.28x                  |       | 1.25x         |       | 88%                  |       | 89%          |       | 64%                                                             |       | 64% |   | 14% |   | 13% |   | 22% |   | 23% |   |
| Five Star (Lease  No. 2) (5)           |       | 1.53x                  | ** ** | 1.46x         |       | 89%                  |       | 90%          |       | 69%                                                             |       | 68% |   | 28% |   | 28% |   | 3% |   | 4% |   |
| Five Star (Lease  No. 3) (5) (10) |       | 1.75x                  |       | 2.65x         |       | 85%                  |       | 87%          |       | 37%                                                             |       | 24% |   | 21% |   | 25% |   | 42% |   | 51% |   |
| Five Star (Lease  No. 4) (6)           |       | 1.29x                  |       | 1.47x         |       | 88%                  |       | 88%          |       | 100%                                                            |       | 100% |   | — |   | — |   | — |   | — |   |
| Sunrise/Marriott  (7)                       |       | 1.52x                  |       | 1.24x         |       | 91%                  |       | 89%          |       | 80%                                                             |       | 79% |   | 17% |   | 18% |   | 3% |   | 3% |   |
| Alterra/Brookdale  (8)                      |       | 2.21x                  |       | 2.15x         |       | 91%                  |       | 87%          |       | 99%                                                             |       | 98% |   | — |   | — |   | 1% |   | 2% |   |
| 6 private  companies (combined)             |       | 2.08x                  |       | 1.83x         |       | 85%                  |       | 89%          |       | 27%                                                             |       | 25% |   | 24% |   | 24% |   | 49% |   | 51% |   |
| Starmark (3)                                |       | 1.99x                  |       | NA            |       | 100%                 |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Life Time Fitness  (3)                      |       | NA                     |       | NA            |       | NA                   |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |
| Multi-tenant  MOBs (4)                      |       | NA                     |       | NA            |       | 99%                  |       | NA           |       | NA                                                              |       | NA |   | NA |   | NA |   | NA |   | NA |   |

 

 

----

| **(1)** | **Amounts are before depreciation, but after  impairment write downs, if any.**                                                                                                                                                                                                                                                                                |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **(2)** | **Properties where the majority of units are  independent living apartments are classified as independent living  communities.**                                                                                                                                                                                                                               |
| **(3)** | **In August 2008, we acquired four wellness  centers that are leased to Life Time Fitness. These wellness centers have a  total of 458,000 square feet. In October and November 2007, we  acquired six wellness centers that are leased to affiliates of Starmark  Holdings, LLC. These wellness centers have a total of 354,000 square feet.** |
| **(4)** | **Since June 2008, we acquired a total of 29  MOBs. The carrying value of these investments is before depreciation and  includes intangible lease assets and liabilities. These MOBs have a total of  approximately 1.2 million square feet.**                                                                                                            |

 

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| **(5)** | **On June 30, 2008, we realigned three of our  leases with Five Star. The rent payable by Five Star to us was unchanged as a  result of this lease realignment. The increased rent payable, if and as we  purchase improvements to the leased properties, will be the greater of 8.0%  per annum or the 10 year Treasury rate plus 300 basis points.**                                                                                                                                                                                                                                          |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **(6)** | **On July 1, 2008, we sold three assisted  living properties with 259 living units that were formerly operated by  NewSeasons to Five Star for $21.4 million and Five Star assumed the  NewSeasons and IBC lease obligations to SNH for the remaining seven  properties that NewSeasons formerly operated. The data provided above  represents the seven properties we continue to own.**                                                                                                                                                                                                       |
| **(7)** | **Marriott International, Inc., or Marriott,  guarantees this lease.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **(8)** | **Brookdale Senior Living, Inc., or Brookdale,  guarantees this lease.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (9)     | All tenant  operating data presented are based upon the operating results provided by our  tenants for the indicated quarterly periods, or the most recent prior period  for which tenant operating results are available to us from our tenants. Rent  coverage is calculated as operating cash flow from our tenants’ operations of  our properties, before subordinated charges, divided by rent payable to us.  We have not included operating data for our wellness centers that were  acquired in August 2008. We have not independently verified our tenants’  operating data. |
| (10)    | Excludes data  for periods prior to our ownership of certain properties included in this  lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

**RESULTSOF OPERATIONS**

 

#### **Three Months Ended September 30, 2008, Comparedto Three Months Ended September 30, 2007:**

 
| ** **                                          | ** ** | **2008**                                                              | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                          | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                                       |       | $                                                                     | 58,897     |       | $          | 44,653     |       | $                 | 14,244     |   | 31.9 | % |
| Interest and  other income                          |       | 776                                                                   |       | 571        |       | 205        |       | 35.9              | %          |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Property  operating expenses                        |       | 1,024                                                                 |       | —     |       | 1,024      |       | 100.0             | %          |
| Interest expense                                    |       | 9,606                                                                 |       | 9,223      |       | 383        |       | 4.2               | %          |
| Depreciation  expense                               |       | 15,859                                                                |       | 11,821     |       | 4,038      |       | 34.2              | %          |
| General and  administrative expense                 |       | 4,303                                                                 |       | 3,567      |       | 736        |       | 20.6              | %          |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Income before  gain on sale of properties           |       | 28,881                                                                |       | 20,613     |       | 8,268      |       | 40.1              | %          |
| Gain on sale of  properties                         |       | 266                                                                   |       | —     |       | 266        |       | 100.0             | %          |
| Net income                                          |       | $                                                                     | 29,147     |       | $          | 20,613     |       | $                 | 8,534      |   | 41.4 | % |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Weighted average  shares outstanding                |       | 114,493                                                               |       | 83,659     |       | $          | 30,834     |              | 36.9       | % |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Income before  gain on sale of properties per share |       | $                                                                     | 0.25       |       | $          | 0.25       |       | $                 | —     |   | –– | % |
| Net income per  share                               |       | $                                                                     | 0.25       |       | $          | 0.25       |       | $                 | —     |   | –– | % |
|                                                     |            |                                                                       |            |            |            |            |            |                   |            |  |  |  |  |

 

Rental incomeincreased because of rents earned from our real estate acquisitions since July 1,2007 including our acquisition of 29 medical office, clinic and biotechlaboratory buildings, or MOBs, since June 2008, offset by rent reductionsresulting from our sale of three properties on July 1, 2008.  Interest and other income increased as aresult of higher levels of investable cash in money market funds.

 

Property operatingexpenses for the quarter ended September 30, 2008 is the result of ouracquisition of 29 MOBs since June 2008.

 

Interest expenseincreased because of greater amounts outstanding under our revolving creditfacility offset by lower rates under our revolving credit facility. Thisincrease was also due to $61.3 million of debt assumed as part of our third quarter2008 acquisitions and $14.9 million of debt assumed as part of our fourthquarter 2007 wellness centers acquisition offset by our prepayment of amortgage of $12.6 million on April 1, 2008.  Our weighted average balance outstanding andinterest rate under our revolving credit facility was $32.2 million and 4.0%for the three months ended September 30, 2008.  There were no amounts outstanding for thethree months ended September 30, 2007.

 

Depreciationexpense for the third quarter of 2008 increased because of acquisitions since July 1,2007. General and administrative expenses increased in 2008 principallydue to our acquisitions since July 1, 2007, and higher legal fees, offsetby decreases in accounting fees and state taxes.

 

On July 1,2008, we sold three assisted living facilities for net proceeds of $21.4million.  The carrying value of theseproperties at the time of sale was $21.1 million, resulting in a gain on saleof $266,000.

 

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Netincome increased because of the changes in revenues and expenses describedabove. Income before gain on sale of properties per share and net income pershare remained the same because of the changes in revenues and expensesdescribed above were essentially offset by the effect of an increase in theweighted average number of shares outstanding resulting from our issuance ofcommon shares in December 2007 and in February and June 2008.

 

#### **Nine Months Ended September 30, 2008, Compared toNine Months Ended September 30, 2007:**

 
| ** **                                          | ** ** | **2008**                                                              | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                          | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental income                                       |       | $                                                                     | 160,560    |       | $          | 133,361    |       | $                 | 27,199     |   | 20.4 | % |
| Interest and  other income                          |       | 2,056                                                                 |       | 1,577      |       | 479        |       | 30.4              | %          |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Property  operating expenses                        |       | 1,124                                                                 |       | —     |       | 1,124      |       | 100.0             | %          |
| Interest expense                                    |       | 28,934                                                                |       | 28,276     |       | 658        |       | 2.3               | %          |
| Depreciation  expense                               |       | 43,235                                                                |       | 35,120     |       | 8,115      |       | 23.1              | %          |
| General and  administrative expense                 |       | 12,506                                                                |       | 10,732     |       | 1,774      |       | 16.5              | %          |
| Impairment of  assets                               |       | 2,940                                                                 |       | —     |       | 2,940      |       | 100.0             | %          |
| Loss on early  extinguishment of debt               |       | —                                                                |       | 2,026      |       | (2,026     | )          | (100.0            | )%         |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Income before  gain on sale of properties           |       | 73,877                                                                |       | 58,784     |       | 15,093     |       | 25.7              | %          |
| Gain on sale of  properties                         |       | 266                                                                   |       | —     |       | 266        |       | 100.0             | %          |
| Net income                                          |       | $                                                                     | 74,143     |       | $          | 58,784     |       | $                 | 15,359     |   | 26.1 | % |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Weighted average  shares outstanding                |       | 102,004                                                               |       | 82,718     |       | 19,286     |       | 23.3              | %          |
|                                                |       |                                                                  |       |       |       |       |       |              |       |
| Income before  gain on sale of properties per share |       | $                                                                     | 0.72       |       | $          | 0.71       |       | $                 | 0.01       |   | 1.4 | % |
| Net income per  share                               |       | $                                                                     | 0.73       |       | $          | 0.71       |       | $                 | 0.02       |   | 2.8 | % |

 

Rental incomeincreased because of rents earned from our real estate acquisitions since January 1,2007 including our acquisition of 29 MOBs since June 2008, offset by rentreductions resulting from our sale of three properties on July 1, 2008.Interest and other income increased as a result of higher levels of investablecash in money market funds.

 

Property operatingexpenses for the nine months ended September 30, 2008 is the result of ouracquisition of 29 MOBs since June 2008.

 

Interest expenseincreased because of greater amounts outstanding under our revolving creditfacility, offset by lower rates under our revolving credit facility. Thisincrease was also due to $61.3 million of debt assumed as part of our thirdquarter 2008 acquisitions and $14.9 million of debt assumed as part of ourfourth quarter 2007 wellness centers acquisition, offset by our prepayment of amortgage of $12.6 million on April 1, 2008.  Our weighted average balances outstanding andinterest rates under our revolving credit facility was $48.2 million and 3.8%and $18.3 million and 6.2% for the nine months ended September 30, 2008and 2007, respectively.

 

Depreciationexpense for the nine months of 2008 increased as a result of real estateacquisition since January 1, 2007. General and administrative expenses increased in 2008 due principally toour acquisitions since January 1, 2007, and higher accounting fees in thenine months of 2008 than in the 2007 period, offset by decreases in legal feesand state taxes.

 

During the ninemonths ended September 30, 2008, we recognized an impairment of assetscharge of $2.9 million related to one property that we intend to sell.  In January 2007, we purchased andretired $20.0 million of our 8 5/8% senior notes due 2012 and recognized a losson early retirement of debt of $2.0 million in connection with thistransaction.

 

On July 1,2008, we sold three assisted living facilities for net proceeds of $21.4million.  Our carrying value of theseproperties at the time of sale was $21.1 million, resulting in a gain on saleof $266,000.

 

Netincome increased because of the changes in revenues and expenses describedabove. Income before gain on sale of properties per share and net income pershare increased because of the changes in revenues and

 

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expenses describedabove offset by the effect of an increase in the weighted average number ofshares outstanding resulting from our issuance of common shares in February andDecember 2007 and in February and June 2008.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our OperatingLiquidity and Resources

 

Rentsfrom our properties are our principal source of funds for current expenses,debt service and distributions to shareholders. We generally receive minimum rents monthly or quarterly from our tenantsand we receive percentage rents monthly, quarterly or annually.  This flow of funds has historically beensufficient for us to pay our operating expenses, debt service and distributionsto shareholders.  We believe that this operatingcash flow will be sufficient to meet our operating expenses, debt service anddistribution payments for the foreseeable future.

 

Our Investment andFinancing Liquidity and Resources

 

## **In order to fund acquisitions andto accommodate cash needs that may result from timing differences between ourreceipts of rents and our need or desire to pay operating expenses anddistributions to our shareholders, we maintain a revolving credit facility witha group of institutional lenders. Our revolving credit facility matures in December 2010,and we may extend it to December 2011 upon payment of an extension fee.The revolving credit facility permits us to borrow up to $550.0 million, andincludes a feature which may permit us to increase the maximum borrowing to$1.1 billion, in certain circumstances. Borrowings under our revolving creditfacility are unsecured. We may borrow, repay and reborrow funds until maturity.No principal repayment is due until maturity. We pay interest on borrowingsunder the revolving credit facility at LIBOR plus a premium. At September 30,2008, the annual interest rate payable on our revolving credit facility was4.5%.  As of September 30, 2008, wehad $93.0 million outstanding under this credit facility.**

## ** **

In February 2008,we issued 6.2 million common shares in a public offering, raising net proceedsof $129.4 million. We used the net proceeds from this offering to repayborrowings outstanding on our revolving credit facility and for generalbusiness purposes, including funding, in part, the acquisitions describedbelow.

 

Duringthe three months ended March 31, 2008, we purchased 19 senior livingproperties with a total of 1,692 units for approximately $272.3 million fromfive unaffiliated parties. We leased these properties to Five Star for initialrent of $21.8 million and added them to what we now refer to as Five Star leaseno. 1 and lease no. 3, which have current terms expiring in 2022 and 2024,respectively.  Percentage rent, based onincreases in gross revenues at these properties, will commence in 2010. Wefunded these acquisitions using cash on hand, proceeds from equity issuancesand borrowings under our revolving credit facility.

 

On April 1,2008, we paid in full a mortgage loan on one of our properties for $12.6million.  We used cash on hand andborrowings under our revolving credit facility to fund this payment.

 

In June 2008,we issued 19.6 million common shares in a public offering, raising net proceedsof $393.7 million. We used the net proceeds from this offering to repayborrowings outstanding on our revolving credit facility and for general businesspurposes, including funding, in part, the acquisitions described below.

 

In May 2008, we entered into a series of agreements to acquire 48medical office, clinic and biotech laboratory buildings for an aggregatepurchase price of approximately $565.0 million from HRPT.  These buildings are approximately 98% leasedto 220 tenants for an average lease term of 6.7 years.  As of September 30, 2008, we haveacquired 28 of these buildings and expect the closings of the remaining 20acquisitions to occur during the next two quarters.  In addition, because a third party consentwas not received, one of the agreements was amended so that one of theremaining buildings with an allocated value of $3.0 million is no longersubject to our purchase agreement; in the event HRPT obtains the third partyconsent we may nonetheless purchase that building.  In June 2008, we acquired five medicaloffice, clinic and biotech laboratory buildings pursuant to these agreementsfor approximately $83.8 million, excluding closing costs.  In July 2008, we acquired threeadditional medical office and clinic properties for approximately $39.1million, excluding closing costs.  In August 2008,we acquired 20 additional clinics for approximately $109.9 million, excludingclosing costs.  On October 31, 2008,we acquired one additional medical office building for approximately $29.8million, excluding closing costs.  Wefunded these acquisitions using cash on hand, borrowings under our revolvingcredit facility and by assuming three mortgage loans on two properties totaling$10.8 million with a weighted average interest rate of 7.1% per annum andweighted average maturity in 2018.

 

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Our obligations to complete the remainingpurchases are subject to various conditions typical of commercial real estatepurchases including, with respect to certain of these properties, third partyconsents.  We also have financingcontingencies relating to certain properties. We can provide no assurance that we will purchase all of these buildingsor that the remaining purchases will be completed in the next two quarters.  In addition, we also acquired rights of firstrefusal to purchase any of 45 additional buildings (containing approximately4.6 million square feet of rental space) that are leased to tenants in medicalrelated business which HRPT will continue to own after these transactions.  HRPT was formerly our parent company, andboth we and HRPT are managed by RMR. Because we and HRPT are both managed by RMR, the terms of thesetransactions were negotiated by special committees of our and HRPT’s boards oftrustees composed solely of Independent Trustees of each company.

 

On June 30, 2008, we realigned three of ourleases with Five Star.  Lease no. 1 nowincludes 100 properties, including nine properties acquired during the firstquarter of 2008. This lease includes independent living communities, assistedliving communities and skilled nursing facilities, and expires in 2022. Leaseno. 2 now includes 32 properties, including independent living communities,assisted living communities, skilled nursing facilities and two rehabilitationhospitals, and expires in 2026. Lease no. 3 now includes 44 properties,including 10 properties acquired during the first quarter of 2008 and 10properties acquired during the third quarter of 2008 and one property acquiredon November 1, 2008 described below. This lease includes independent living communities, assisted livingcommunities and skilled nursing facilities and expires in 2024. The total rentpayable by Five Star to us for these properties was unchanged as a result ofthis lease realignment. The increased rent payable for these three leases withFive Star, if and as we purchase improvements to the leased properties, will bethe greater of 8.0% per annum or the 10 year Treasury rate plus 300 basispoints.  Five Star was formerly our subsidiary.  In addition to being our manager, RMR alsoprovides management services to Five Star. Because of these and other relationships between us and Five Star, alltransactions between us and Five Star are approved by our Independent Trusteesand Five Star’s Independent Directors.

 

On July 1, 2008, wesold three assisted living properties with 259 living units that were formerlyoperated by NewSeasons to Five Star for $21.4 million and Five Star assumed theNewSeasons and IBC lease obligations to us for the remaining seven propertiesthat NewSeasons formerly operated.  Therent payable by Five Star for these seven properties is approximately $7.6million per annum under lease no. 4 between us and Five Star.

 

On August 1, 2008,we acquired, from an unaffiliated party, two senior living properties with atotal of 112 units for approximately $14.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $1.1 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand.

 

On August 21, 2008,we acquired four wellness centers for approximately $100 million, excludingclosing costs, from Life Time Fitness. We leased these wellness centers to LifeTime Fitness for initial rent of $9.1 million, plus rent increases of 10% everyfive years.  This lease has a termexpiring in 2028 with renewal options thereafter.  We funded this acquisition using cash on handand borrowings under our revolving credit facility.

 

On September 1,2008, we acquired, from an unaffiliated party, eight senior living propertieswith a total of 451 units for approximately $62.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $5.0 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand, borrowings under our revolvingcredit facility and by assuming 15 mortgages on these eight properties totaling$50.5 million with a weighted average interest rate of 6.54% per annum andweighted average maturity in 2017.

 

On September 30,2008, we acquired, from an unaffiliated party, one medical office building forapproximately $18.6 million, excluding closing costs.  This building is currently 100% leased to 12tenants for an average lease term of 6.5 years. We funded this acquisition using cash on hand and borrowings under ourrevolving credit facility.

 

On November 1, 2008, we acquired, from anunaffiliated party, a senior living property with a total of 249 units forapproximately $29.0 million.  We leasedthis property to Five Star and added it to our Five Star lease no. 3, which hasa term expiring in 2024, and increased the annual rent under this lease by $2.3million.  Percentage rent,

 

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based on increases in gross revenues at this property, will commence in2010.  We funded this acquisition usingcash on hand and borrowings under our revolving credit facility.

 

At September 30, 2008, we had $7.2 million ofcash and cash equivalents and $457.0 million available under our revolvingcredit facility.  We expect to use cashbalances, borrowings under our revolving credit facility and net proceeds of offeringsof equity or debt securities to fund future working capital requirements,property acquisitions and expenditures related to the repair, maintenance orrenovation of our properties.

 

When significant amounts are outstanding under ourrevolving credit facility or as the maturity dates of our revolving creditfacility and term debts approach, we explore alternatives for the repayment ofamounts due.  Such alternatives mayinclude incurring additional debt and issuing new equity securities.  We have an effective shelf registrationstatement that allows us to issue public securities on an expedited basis, butit does not assure that there will be buyers for such securities.

 

Recent capitalmarkets conditions have been challenging. The availability and cost of credit have been and may continue to beadversely affected by illiquid capital markets and wide credit spreads, andequity markets have been extremely volatile. While we believe we will have access to various types of financings,including debt or equity offerings, to fund our future acquisitions and to payour debts and other obligations, there can be no assurance that we will be ableto complete any debt or equity offerings or that our cost of any future publicor private financings will be reasonable. If current market conditions continue or worsen, one or more lendersunder our revolving credit facility may be unable or unwilling to fund advanceswhich we request or we may not be able to access additional capital.  Impacts such as these would impair ourability to make future acquisitions and make our current growth plansunachievable.  Also, the current marketconditions have led to materially increased credit spreads which, if theycontinue, may result in material increase in indexes, such as LIBOR, whichdetermine the interest rate under our floating rate debts and our costs when werefinance our fixed rate debts may materially increase.  These interest cost increases could havematerial and adverse impact on our results of operations and financialcondition.

 

On February 15,2008, we paid a $0.35 per common share, or $31.0 million, distribution to ourcommon shareholders for the quarter ended December 31, 2007.  On May 15, 2008, we paid a $0.35 percommon share, or $33.2 million, distribution to our common shareholders for thequarter ended March 31, 2008.  On August 14,2008, we paid a $0.35 per common share, or $40.1 million, distribution to ourcommon shareholders for the quarter ended June 30, 2008.  On October 1, 2008, we declared adistribution of $0.35 per common share, or $40.1 million, to be paid to ourcommon shareholders of record on October 17, 2008 with respect to ourresults for the quarter ended September 30, 2008. We expect to pay thisdistribution on or about November 14, 2008, using cash on hand andborrowings under our revolving credit facility.

 

As of November 5, 2008,we have no off balance sheet arrangements, commercial paper, derivatives,swaps, hedges, joint ventures or partnerships.

 

## **Debt Covenants**

## ** **

Ourprincipal debt obligations at September 30, 2008, were our unsecuredrevolving credit facility, two public issues totaling $322.5 million ofunsecured senior notes and $136.8 million of mortgage debts and bonds securedby 33 of our properties. Our senior notes are governed by an indenture. Thisindenture and related supplements and our revolving credit facility contain anumber of financial ratio covenants which generally restrict our ability toincur debts, including debts secured by mortgages on our properties in excessof calculated amounts, require us to maintain a minimum net worth, restrict ourability to make distributions under certain circumstances and require us tomaintain various financial ratios.  As ofSeptember 30, 2008 we believe we were in compliance with all of thecovenants under our indenture and related supplements and our revolving creditfacility.

 

None of our indenture and related supplements, ourrevolving credit facility or our other debt obligations contains provisions foracceleration which could be triggered by our debt ratings. However, in certaincircumstances our revolving credit facility uses our senior debt rating todetermine the fees and the interest rate payable.

 

Our public debt indenture and related supplementscontain cross default provisions to 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.

 

**Related Person Transactions**

 

HRPT is our former parent company and both we and HRPT are managed byRMR.  Because of these and other relationshipswe and HRPT may be considered related persons. As discussed above, in May 2008, we entered into a series ofagreements to acquire 48 medical office, clinic and biotech laboratorybuildings from HRPT for an aggregate purchase price of approximately $565.0million.  As of September 30, 2008,we have acquired 28 of these buildings and expect the closings of the remaining20 acquisitions to occur during the next two quarters.  Because a third party consent was notrecieved, one of the agreements was amended so that one of the properties is nolonger subject to such agreement. Nonetheless, we may recieve such third party consent and may ultimatelysell that property.  In June 2008,we acquired five medical office, clinic and biotech laboratory buildings fromHRPT pursuant to these agreements for approximately $83.8 million, excludingclosing costs.  In July 2008, weacquired three additional

 

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medicaloffice and clinic properties from HRPT pursuant to these agreements forapproximately $39.1 million, excluding closing costs.  In August 2008, we acquired 20additional clinics from HRPT pursuant to these agreements for approximately$109.9 million, excluding closing costs. On October 31, 2008 we acquired one additional medical officebuilding from HRPT pursuant to these agreements for approximately $29.8million, excluding closing costs.  Wefunded these acquisitions using cash on hand, borrowings under our revolvingcredit facility and by assuming three mortgage loans on two properties totaling$10.8 million with a weighted average interest rate of 7.1% per annum andweighted average maturity in 2018.

 

Our obligations to complete the remaining purchases from HRPT aresubject to various conditions typical of commercial real estate purchasesincluding, with respect to certain of these properties, third party consentsand financing contingencies to certain properties.  Accordingly, the purchase price may change,these purchases may be accelerated or delayed or these purchases may not occur. We can provide no assurance that we willpurchase all of these buildings or that the remaining purchases will becompleted in the next two quarters.  Inaddition, with respect to 45 additional buildings (containingapproximately 4.6 million square feet of rental space) that are leased totenants in medical related business which HRPT will continue to own after thesetransactions, we also acquiredrights of first refusal to purchase any such buildings in the event HRPTdetermines to sell such properties or in the event of an indirect sale as aresult of a change of control of HRPT or a change of control of HRPT’ssubsidiary which owns such property. For more information about the terms ofthe transaction between us and HRPT, please read the documents evidencing thistransaction, copies of which were filed as exhibits to our Current Report onForm 8-K, dated May 9, 2008.  Because weand HRPT are both managed by RMR, the terms of these transactions werenegotiated by special committees of our and HRPT’s board of trustees composedsolely of Independent Trustees of each company. For more information about the terms of our relationship with RMR,please refer to our Annual Report on Form 10-K for the year ended December 31,2007 filed on February 29, 2008 and to our Current Report on Form 8-K dated May9, 2008 and to our definitive proxy statement filed on April 21, 2008.

 

Five Star is our largesttenant.  Five Star is our formersubsidiary.  In addition to being ourmanager, RMR also provides management services to Five Star.  Because of these and other relationships weand Five Star may be considered related persons.  Also, because of these relationships all ofour transactions with Five Star are approved by our Independent Trustees andFive Star’s Independent Directors.  SinceJune 30, 2008, we have had several transactions with Five Star.

 

On June 30, 2008, werealigned three of our leases with Five Star. Lease no. 1 now includes 100 properties, including nine propertiesacquired during the first quarter of 2008. This lease includes independentliving communities, assisted living communities and skilled nursing facilities,and expires in 2022. Lease no. 2 now includes 32 properties, includingindependent living communities, assisted living communities, skilled nursingfacilities and two rehabilitation hospitals, and expires in 2026. Lease no. 3now includes 44 properties, including 10 properties acquired during the firstquarter of 2008 and 10 properties acquired during the third quarter of 2008 andone property acquired on November 1, 2008 described below.  This lease includes independent livingcommunities, assisted living communities and skilled nursing facilities andexpires in 2024. The total rent payable by Five Star to us for these propertieswas unchanged as a result of this lease realignment. The increased rent payablefor these three leases with Five Star, if and as we purchase improvements tothe leased properties, will be the greater of 8.0% per annum or the 10 yearTreasury rate plus 300 basis points.

 

On July 1, 2008, wesold three assisted living properties with 259 living units that were formerlyoperated by NewSeasons to Five Star for $21.4 million and Five Star assumed theNewSeasons and Independence Blue Cross, or IBC, lease obligations to us for theremaining seven properties that NewSeasons formerly operated.  The rent payable by Five Star for these sevenproperties is approximately $7.6 million per annum under lease no. 4 between usand Five Star.

 

On August 1, 2008,we acquired, from an unaffiliated party, two senior living properties with atotal of 112 units for approximately $14.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $1.1 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand.

 

On September 1,2008, we acquired, from an unaffiliated party, eight senior living propertieswith a total of 451 units for approximately $62.1 million, excluding closingcosts.  We leased the properties to FiveStar until 2024 under our Five Star lease no. 3 described above and increasedrent under that lease by $5.0 million. Percentage rent, based on increases in gross revenues at theseproperties, will commence in 2010.  Wefunded this acquisition using cash on hand, borrowings under our revolvingcredit facility and by assuming 15 mortgages on these eight properties totaling$50.5 million with a weighted average interest rate of 6.54% per annum andweighted average maturity in 2017.

 

On November 1, 2008,we acquired, from an unaffiliated party, a senior living property with a totalof 249 units for approximately $29.0 million. We leased this property to Five Star and added it to our Five Star leaseno. 3, which has a term expiring in 2024, and increased the annual rent underthis lease by $2.3 million.  Percentagerent,

 

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based on increases in gross revenues at this property,will commence in 2010.  We funded thisacquisition using cash on hand and borrowings under our revolving creditfacility.

 

During the three monthsended September 30, 2008, pursuant to the terms of our existing leaseswith Five Star, we purchased $14.8 million of improvements made to ourproperties leased to Five Star, and, as a result, the annual rent payable to usby Five Star was increased by approximately $1.2 million.

 

**Item 4.  Controls andProcedures**

 

As of the end of theperiod covered by this report, our management carried out an evaluation, underthe supervision and with the participation of our managing trustees, Presidentand Chief Operating Officer and Treasurer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures pursuant to ExchangeAct Rules 13a-15 and 15d-15.  Basedupon that evaluation, our managing trustees, President and Chief OperatingOfficer and Treasurer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

 

There have been nochanges in our internal control over financial reporting during the quarterended September 30, 2008 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

** **

THIS QUARTERLY REPORTCONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIESLAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”,“INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARDLOOKING STATEMENTS.  THESE FORWARDLOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS,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 QUARTERLY REPORT STATESTHAT WE HAVE AGREED TO PURCHASE MEDICAL OFFICE, CLINIC AND BIOTECH LABORATORYBUILDINGS.  OUR OBLIGATIONS TO COMPLETETHE CURRENTLY PENDING PURCHASES IS SUBJECT TO VARIOUS CONDITIONS TYPICAL OFLARGE COMMERCIAL REAL ESTATE PURCHASES, INCLUDING, WITH RESPECT TO CERTAINPROPERTIES, OBTAINING THIRD PARTY CONSENTS. ALSO, WE HAVE FINANCING CONTINGENCIES RELATING TO CERTAINPROPERTIES.  AS A RESULT OF ANY FAILUREOF THESE CONDITIONS, SOME OF THE PROPERTIES MAY NOT BE PURCHASED, THEPURCHASE PRICES PAYABLE BY US MAY BE CHANGED OR SOME OF THESE PURCHASES MAY BEACCELERATED OR DELAYED.

 

·      THIS QUARTERLY REPORT STATESTHAT WE INTEND TO SELL TWO PROPERTIES THAT ARE CLASSIFIED AS HELD FOR SALE ONOUR CONSOLIDATED BALANCE SHEET AND THAT WE HAVE ENTERED INTO A PURCHASE ANDSALE AGREEMENT FOR ONE OF THESE PROPERTIES. WE MAY BE UNABLE TO FIND QUALIFIED BUYERS TO PURCHASE THESEPROPERTIES ON FAVORABLE, OR ANY, TERMS, AND MAY NOT PROCEED WITH THESESALES DUE TO MARKET CONDITIONS, FAILURE TO SATISFY CONTINGENCIES OR OTHERREASONS.  AS A RESULT, THESE PROPOSEDSALES MAY NOT OCCUR.

 

OTHER IMPORTANT FACTORSTHAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN OUR FORWARDLOOKING STATEMENTS ARE DESCRIBED MOREFULLY UNDER “ITEM 1A. RISK FACTORS” IN OUR ANNUAL REPORT ON FORM 10-K FORTHE YEAR ENDED DECEMBER 31, 2007.

 

YOU SHOULD NOT PLACE UNDUERELIANCE UPON FORWARD LOOKING STATEMENTS.

 

EXCEPT AS REQUIRED BYLAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKINGSTATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

**STATEMENTCONCERNING LIMITED LIABILITY**

 

THE ARTICLES OF AMENDMENTAND RESTATEMENT OF THE DECLARATION OF TRUST ESTABLISHING SENIOR HOUSINGPROPERTIES TRUST, 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 DEALINGWITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETSOF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THEPERFORMANCE OF ANY OBLIGATION.

 

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**PART II.   Other Information**

 

**Item2.**    Unregistered Sales of Equity Securities and Use ofProceeds

** **

On September 22,2008, pursuant to our incentive share award plan, we granted 42,125 common****shares of beneficial interest, par value $0.01 per share,valued at $22.09****per share, the closing price ofour common shares on the NYSE on that day, to our officers and certainemployees of our manager, Reit Management & Research LLC.  We made these grants pursuant to an exemptionfrom registration contained in Section 4(2) of the Securities Act of1933, as amended.

 

**Item5.**    Other Information

** **

On November 5, 2008,our Board of Trustees approved Amended and Restated Bylaws for SNH, whichreflect various revisions to our previous bylaws.  The Amended and Restated Bylaws are effectiveas of November 5, 2008.

 

The changes reflected inthe Amended and Restated Bylaws from our previous bylaws include, among otherthings:

 

·      A number of revisions to theprovisions regarding meetings of our shareholders contained in Article II,including among other things:

 

o     Expresslyproviding that notice of shareholders meetings may be made by electronictransmission;

 

o     Eliminatingthe prescribed time that a notice for a shareholders meeting must be given inadvance of the meeting (previously between 15 and 60 days prior to the annualmeeting and effectively between not less than 10 days or more than 60 days fora special meeting);

 

o     Eliminatingany express bylaw requirement to provide notice of an adjourned shareholdersmeeting or for setting a new record date for an adjourned meeting;

 

o     Expresslyauthorizing the chairperson of a shareholders meeting to adjourn the meetingfor any reason deemed necessary by the chairperson, including if (i) noquorum is present for the transaction of the business, (ii) the Board ofTrustees or the chairperson of the meeting determines that adjournment isnecessary or appropriate to enable the shareholders to consider fullyinformation that the Board of Trustees or the chairperson of the meetingdetermines has not been made sufficiently or timely available to shareholdersor (iii) the Board of Trustees or the chairperson of the meetingdetermines that adjournment is otherwise in our best interests;

 

o     Enumeratingadditional specific actions the chairperson of a shareholders meeting isentitled to take at the meeting for the proper conduct of the meeting,including concluding the meeting and complying with any state and local lawsconcerning safety and security;

 

o     Providingthat shareholders present, either in person or by proxy, at a meeting which hasbeen duly called and convened and at which a quorum was established maycontinue to transact business until adjournment, notwithstanding the withdrawalof enough votes to leave less than a quorum then being present at the meeting;

 

o     Removingthe bylaw expressly providing that the Board of Trustees may adopt byresolution a procedure by which a shareholder may certify in writing to SNHthat any shares registered in the name of the shareholder are held for theaccount of a specified person other than the shareholder, resulting in theperson specified in the certification being regarded as, for the purposes setforth in the certification, the shareholder of record of the specified shares;

 

o     Removingthe bylaw requirement that SNH deliver an annual report to shareholders at orbefore the annual meeting of shareholders, as SNH is separately subject to thereporting requirements of the Securities Exchange Act of 1934, as amended, aswell as reporting requirements under Maryland law and the rules of the NewYork Stock Exchange (the stock exchange on which our shares are listed), whichrequirements obligate SNH to provide annual reports to its shareholders;

 

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o     Revisingthe procedures for submission of nominations for Trustee elections and otherproposals by shareholders for consideration at an annual meeting ofshareholders, including, among other things:

 

<    Requiring a shareholder wishing to make anomination or proposal of other business to be a shareholder of record at thetime of submitting its notice of a nomination or other proposal through andincluding the time of the meeting and that the shareholder submit thenomination or proposal of other business to the Board of Trustees in accordancewith SNH’s Declaration of Trust;

 

<    Providing that the advance notice provisions in Section 2.14.1(a)(ii) arethe exclusive means for a shareholder to submit such business for considerationat an annual meeting of shareholders, except to the extent of matters which arerequired to be presented to shareholders by applicable law which have beenproperly presented in accordance with the requirements of such law;

 

<    Revising the deadline for submitting a notice of anomination or proposal of other business for consideration at an annual meetingof our shareholders to not later than 5:00 p.m. (Eastern Time) on the 120thday nor earlier than the 150th day prior to the first anniversary ofthe date of our preceding year’s proxy statement; and if the date of the proxystatement for the annual meeting is more than 30 days earlier than the firstanniversary of the date of the proxy statement for the preceding year’s annualmeeting, the notice shall be delivered by not later than 5:00 p.m.(Eastern Time) on the 10th day following the earlier of the day on which (i) noticeof the annual meeting is mailed or otherwise made available or (ii) publicannouncement (as defined in the Amended and Restated Bylaws) of the date ofsuch meeting is first made by SNH; and corresponding changes were made to thedeadline for nominations for Trustee elections where we increase the number ofTrustees to be elected at the meeting but only with respect to nominees for anynew positions created by such increase and for special meetings of shareholdersif the Board of Trustees has determined that Trustees shall be elected at thatspecial meeting;

 

·      For purposes of our 2009annual meeting of shareholders, the amendments provide that, to be timely, anotice shall be delivered to the secretary of SNH at our principal executiveoffices not later than 5:00 p.m. (Eastern Time) on December 31, 2008nor earlier than December 1, 2008;

 

<    Expanding the information required to be providedregarding any proposed nominee or certain associates of the proposed nominee bythe proposing shareholder, including, among other things:

 

·      Requiring information as tothe proposed nominee’s qualifications to be a Trustee pursuant to the criteriaset forth in Section 3.1 of the Amended and Restated Bylaws;

 

·      Expanding to 24 months theperiod of time prior to the submission of the notice by the shareholder forwhich disclosure regarding transactions relating to securities of SNH by theproposed nominee or certain associates of the proposed nominee need be providedby the proposing shareholder;

 

·      Requiring disclosure ofcertain performance related fees that the proposed nominee or certain of theproposed nominee’s associates are entitled to based on any increase or decreasein the value of our shares or instrument or arrangement of the typecontemplated within the definition of a Derivative Transaction (as defined inthe Amended and Restated Bylaws), if any, as of the date of such notice;

 

·      Requiring disclosure of anyproportionate interest in our shares or instrument or arrangement of the typecontemplated within the definition of a Derivative Transaction held, directlyor indirectly, by a general or limited partnership in 

 

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which such proposednominee or certain associates of the proposed nominee is a general partner or,directly or indirectly, beneficially owns an interest in a general partner;

 

·      Requiring disclosure of alldirect and indirect compensation and other material monetary agreements,arrangements and understandings during the past three years, and any othermaterial relationships, between or among the proposing shareholder, certain associatesof the proposed nominee, or their respective affiliates and associates, orothers acting in concert therewith, on the one hand, and the proposed nominee,or his or her respective affiliates and associates, or others acting in concerttherewith, on the other hand, including, without limitation, all informationthat would be required to be disclosed pursuant to Item 404 of Regulation S-Kpromulgated by the SEC, if the shareholder making the nomination and certainassociates of the proposed nominee on whose behalf the nomination is made, orany affiliate or associate thereof or person acting in concert therewith, werethe “registrant” for purposes of such rule and the proposed nominee were adirector or executive officer of such registrant; and

 

·      Requiring disclosure of anyrights to dividends on the shares of SNH owned beneficially by the proposednominee or certain associates of the proposed nominee that are separated orseparable from the underlying shares of SNH;

 

<    Expanding the information required to be providedby the shareholder regarding itself and certain of its associates to include,among other things:

 

·      A description of allagreements, arrangements and understandings between the shareholder and certainassociates of the shareholder amongst themselves or with any other person orpersons (including their names) in connection with the proposal of such businessby the shareholder;

 

·      Additional informationregarding transactions by the proposed shareholder and certain associates ofthe shareholder involving our securities, including extending to 24 months theperiod of time prior to the submission of the notice by the shareholder forwhich such information must be provided;

 

·      Disclosure of theshareholder’s investment intent with respect to the shareholder’s acquisitionof our securities;

 

·      All information relating tothe shareholder and certain associates of the shareholder required to bedisclosed in connection with the solicitation of proxies for election ofTrustees in an election contest (even if an election contest is not involved),or is otherwise required, in each case, pursuant to Section 14 (or anysuccessor provision) of the Securities Exchange Act of 1934, as amended, andthe rules and regulations promulgated thereunder;

 

·      Disclosure of certainperformance related fees that the shareholder or certain associates of theshareholder is entitled to based on any increase or decrease in the value ofour shares or instrument or arrangement of the type contemplated within thedefinition of Derivative Transaction, if any, as of the date of such notice;

 

·      Disclosure of anyproportionate interest in our shares or instrument or arrangement of the typecontemplated within the definition of Derivative Transaction held, directly orindirectly, by a general or limited partnership in which the shareholder orcertain associates of the shareholder is a general partner or, directly orindirectly, beneficially owns an interest in a general partner; and

 

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·      Disclosure of any rights todividends on our shares owned beneficially by the proposed nominee or certainassociates of the proposed nominee that are separated or separable from theunderlying shares of SNH; and

 

<    Requiring the shareholder to indicate the class andseries of beneficial interest of SNH entitled to vote for the proposed nomineeand/or other proposal of business, as applicable, if more than one class orseries of beneficial interest in SNH is outstanding;

 

o     Clarifyingand revising the notice obligations for a shareholder nomination or otherproposal that, if approved and implemented by us, would cause us to be inbreach of any covenant of SNH in any existing debt instrument or agreement toextend the provision to cover other material agreements and to apply generallyto our subsidiaries (as defined in the Amended and Restated Bylaws) as well asSNH and to require the proposing shareholder to provide at the same time as thesubmission of its nomination or other proposal evidence of the availability toSNH of substitute credit or contractual arrangements similar to the credit orcontractual arrangements which are implicated by the shareholder nomination orother proposal that are at least as favorable to us, as determined by our Boardof Trustees in its discretion, unless the proposing shareholder instead submitsat such time evidence satisfactory to our Board of Trustees of the lender’s orcontracting party’s willingness to waive the breach of covenant or default;

 

o     Clarifyingand expanding the notice requirements regarding shareholder nominations orother proposals requiring regulatory notice, consent or approval to requirethat the shareholder provide at the same time as the submission of thenomination or proposal of other business evidence satisfactory to the Board ofTrustees that the applicable governmental or regulatory actions have been madeor obtained or if that evidence was not obtainable by the time of suchsubmission despite the shareholder’s diligent and best efforts, a detailed planfor making or obtaining the applicable filings, consents or approvals prior tothe election of any shareholder nominee or the implementation of theshareholder’s proposal, which plan must be satisfactory to our Board ofTrustees in its discretion;

 

o     Clarifyingthe procedures for the verification of information provided by the shareholdermaking the nomination or other proposal of business and expressly providingthat the proposing shareholder is responsible for ensuring compliance with theadvance notice provisions, that any responses of the shareholder to any requestfor information will not cure any defect in the shareholder’s notice and thatneither SNH, our Board of Trustees or any committee of our Board of Trustee norany officer of SNH has any duty to request clarification or updatinginformation or inform the proposing shareholder of any defect in theshareholder’s notice; and

 

o     Providingthat, subject to applicable law, any shareholder proposal for business thesubject matter or effect of which would be within the exclusive purview of theBoard of Trustees or would reasonably likely, if considered by the shareholdersor approved or implemented by us, result in an impairment of the limitedliability status for our shareholders, shall be deemed not to be a matter uponwhich the shareholders are entitled to vote;

 

·      A number of revisions to theprovisions regarding qualifications and meetings of Trustees and processes ofthe Board of Trustees contained in Article III, including among otherthings:

 

o     Expresslyproviding for nonexclusive qualifications that a Trustee must possess toqualify for nomination or election as a Trustee, including that the individual (i) hassubstantial expertise or experience relevant to the business of SNH or itssubsidiaries, (ii) has not been convicted of a felony and (iii) meetsthe qualifications of an Independent Trustee or a Managing Trustee (each asdefined in the Amended and Restated Bylaws), as appropriate;

 

o     Expresslyproviding that, in the case of failure to elect Trustees at an annual meetingof the shareholders, the incumbent Trustees shall hold over and continue todirect the management of the business and affairs of SNH until they may resignor until their successors are elected and qualify;

 

o     Providingthat, if enough Trustees have withdrawn from a meeting of the Board of Trusteesso as to leave fewer than are required to establish a quorum, but the meetingis not adjourned, the action of the majority of that number of Trusteesnecessary to constitute a quorum at the meeting shall be the action of theBoard of Trustees, unless the concurrence of a greater proportion is requiredfor 

 

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suchaction by applicable law, the Declaration of Trust or the Amended and RestatedBylaws;

 

o     Expresslyproviding that any Trustee elected to fill a vacancy, whether occurring due toan increase in size of the Board of Trustees or by the death, resignation orremoval of any Trustee, shall hold office for the remainder of the full term ofthe class of Trustees in which the vacancy occurred or was created and until asuccessor is elected and qualifies;

 

o     Removingthe provision that provided that we may lend money to, guarantee an obligationof or otherwise assist a Trustee;

 

o     Providingthat a Trustee may be removed at any time, with or without cause, by theaffirmative vote either of all the remaining Trustees or, at a meeting of theshareholders properly called for that purpose, by the affirmative vote of theholders of not less than two-thirds of the shares of SNH then outstanding andentitled to vote generally in the election of Trustees;

 

o     Removingthe provision that provided that no Trustee shall be liable for any loss whichmay occur by reason of the failure of the bank, trust company, savings and loanassociation or other institution with whom moneys or share have been deposited;and

 

o     Includingemergency provisions in order to provide for procedural flexibility in theevent of an emergency;

 

·      Revisions were made toArticles IV and V to update the roles and processes of the committees of theBoard of Trustees and the officers of SNH, including permitting committees totake action by written consent executed by a majority of the members ratherthan requiring unanimous written consent for the committees to take writtenaction;

 

·      Revisions were made to Article VIIto provide for certain clarifications and administrative changes, includingexpressly providing that shareholders may request that their shares of SNH bein book entry form;

 

·      A new Article VIII wasadopted which provides for various regulatory and disclosure requirementseffecting SNH or any of our subsidiaries that shareholders of SNH shall complywith, including, among other things:

 

o     Requiringthat shareholders whose ownership interest in SNH or actions affecting SNH,triggers the application of any requirement or regulation of any federal,state, municipal or other governmental or regulatory body on SNH or anysubsidiary of SNH or any of their respective businesses, assets or operations,promptly take all actions necessary and fully cooperate with SNH to ensure thatsuch requirements or regulations are satisfied without restricting, imposingadditional obligations on or in any way limiting the business, assets,operations or prospects of SNH or any subsidiary of SNH;

 

o     Requiringthat, if the shareholder fails or is otherwise unable to promptly take suchactions so as to satisfy such requirements or regulations, then the shareholdershall promptly divest a sufficient number of our shares necessary to cause theapplication of such requirement or regulation to not apply to us or anysubsidiary of ours; and, if the shareholder fails to cause such satisfaction ordivest itself of such sufficient number of our shares by not later than the10th day after triggering such requirement or regulation, then any shares ofSNH beneficially owned by such shareholder at and in excess of the leveltriggering the application of such requirement or regulation shall, to thefullest extent permitted by law, be deemed to constitute shares held inviolation of the ownership limitations set forth in Article VII of ourDeclaration of Trust and be subject to the provisions of Article VII ofour Declaration of Trust and any actions triggering the application of suchrequirements or regulations may be deemed by us to be of no force or effect;

 

o     Requiringthat if the shareholder fails to satisfy the requirements or regulations or totake curative actions within such 10 day period, we may take all other actionswhich our Board of Trustees deems appropriate to require compliance or topreserve the value of our assets; and we may charge the offending shareholderfor our costs and expenses as well as any damages which may result to us;

 

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o     Requiringthat shareholders comply with all applicable requirements of federal and statelaws, including all rules and regulations promulgated thereunder, inconnection with such shareholder’s ownership interest in us and all other lawswhich apply to us or any subsidiary of ours or their respective businesses,assets or operations and which require action or inaction on the part of theshareholder;

 

o     Providingthat, if a shareholder, by virtue of the shareholder’s ownership interest in usor its receipt or exercise of proxies to vote shares owned by othershareholders would not be permitted to vote the shareholder’s shares of SNH orproxies for shares of SNH in excess of a certain amount pursuant to applicablelaw but the Board of Trustees determines that the excess shares or sharesrepresented by the excess proxies are necessary to obtain a quorum, then theshareholder shall not be entitled to vote any such excess shares or proxies,and instead such excess shares or proxies may, to the fullest extent permittedby law, be voted by our advisor (or by another person designated by us) inproportion to the total shares otherwise voted on such matter; and

 

o     Providingthat, to the fullest extent permitted by law, any representation, warranty orcovenant made by a shareholder with any governmental or regulatory body inconnection with such shareholder’s interest in us or any subsidiary of oursshall be deemed to be simultaneously made to, for the benefit of andenforceable by, us and any applicable subsidiary of ours;

 

·      As Section 9.4 of theour Declaration of Trust provides for indemnification of, among others, presentor former shareholders, Trustees or officers of SNH against any claim orliability to which those persons may become subject or which those persons may incurby reason of their status as a present or former shareholder, Trustee orofficer of SNH and as SNH is party to indemnification agreements with Trusteesand officers of SNH, what was formerly Article XI of our bylaws(indemnification and advance of expenses) was removed;

 

·      Former Article IX ofour bylaws (now Article X of the Amended and Restated Bylaws) was amendedby removing the provision expressly authorizing the Board of Trustees, beforepayment of any dividends or other distributions, to set aside out of any fundsof SNH available for dividends or other distributions such sum or sums as theBoard of Trustees may from time to time, in its absolute discretion, thinkproper as a reserve fund for contingencies or for any other purpose as theTrustees shall determine to be in the best interest of SNH;

 

·      As we are a party to anadvisory agreement with our advisor, Reit Management & Research LLC,what was formerly Article XIII of the bylaws was removed as the advisoryagreement directly governs our relationship with Reit Management &Research LLC;

 

·      Former Article XV ofour bylaws (now Article XIV of the Amended and Restated Bylaws) wasamended to add additional provisions, including, among other things:

 

o     Providingthat, in addition to the obligations of shareholders to indemnify us and holdus harmless as set forth in Section 8.7 of our Declaration of Trust, tothe fullest extent permitted by law, each shareholder will be liable to us for,and indemnify and hold harmless us (and any subsidiaries or affiliates thereof)from and against, all costs, expenses, penalties, fines or other amountsarising from such shareholder’s breach of any provision of our Amended andRestated Bylaws or our Declaration of Trust or any action against us in whichsuch shareholder is not the prevailing party;

 

o     Providingprocedures for ratification of past action or inaction on the part of SNH orits officers; and

 

o     Empoweringthe Board of Trustees to make determinations regarding ambiguities in theapplication of our Amended and Restated Bylaws; and

 

·      Various other amendments andmodifications to address various administrative matters, clarify certainprovisions, eliminate certain matters already addressed in our Declaration ofTrust and update some outdated provisions.

 

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To the extent that theamendments to our bylaws, as well as the preexisting provisions of our bylaws,contain provisions which limit the ability of a shareholder to removemanagement or Trustees or restrict the ability to own or transfer our shares,those provisions may have anti-takeover effects.

 

The foregoing summary ofthe amendments to the existing bylaws is qualified in its entirety by referenceto the text of the amendments and the Amended and Restated Bylaws.  The Amended and Restated Bylaws, and a copymarked to show changes from the prior bylaws, are attached hereto as Exhibits3.1 and 3.2, respectively, and are incorporated by reference herein.

 

**Item6.**    Exhibits

** **

3.1           Amended and Restated Bylaws of the Company, as amendedand restated November 5, 2008. *(Filed herewith)*

 

3.2           Amended and Restated Bylaws of the Company, as amendedand restated November 5, 2008 (marked). *(Filedherewith)*

 

10.1         Second Amendment to Amended and Restated Master LeaseAgreement (Lease No. 3), dated as of September 1, 2008, by and amongcertain subsidiaries of the Company, as Landlord, and Five Star Quality CareTrust, as Tenant. *(Filed herewith)*

 

10.2         Third Amendment to Amended and Restated Master LeaseAgreement (Lease No. 3), dated as of November 1, 2008, by and amongcertain subsidiaries of the Company, as Landlord, and Five Star Quality CareTrust, as Tenant. *(Filed herewith)*

 

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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|   | SENIOR HOUSING  PROPERTIES TRUST |
|--------|----------------------------------|
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ David J. Hegarty |
|   |                             | David J. Hegarty |
|   |                             | President and Chief Operating  Officer |
|   |                             | Dated: November 10,  2008 |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ Richard A. Doyle |
|   |                             | Richard A. Doyle |
|   |                             | Treasurer and Chief  Financial Officer |
|   |                             | (principal financial  and accounting officer) |
|   |                             | Dated: November 10,  2008 |

 

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