**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

 

**FORM 10-Q**

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

 

**For thequarterly period ended June 30, 2009**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 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 (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company.  See the definitionsof “large accelerated filer”, “accelerated filer” and “smaller reportingcompany” 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 August 10, 2009: 120,464,198.

 

 

 

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SENIOR HOUSINGPROPERTIES TRUST

 

FORM 10-Q

 

June 30, 2009

 

INDEX

 
| ** **   | ** ** | ** **                                                                                                  | **Page**   |
|--------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| PART I  |       | Financial Information                                                                                       | ** ** |
|         | ** ** | ** **                                                                                                  | ** ** |
| Item 1.      |       | Financial Statements (unaudited)                                                                            | 1          |
|         | ** ** | ** **                                                                                                  |       |
|         |       | Condensed  Consolidated Balance Sheets – June 30, 2009 and December 31, 2008                 | 1          |
|         | ** ** | ** **                                                                                                  | ** ** |
|         |       | Condensed  Consolidated Statements of Income – Three and Six Months Ended June 30,  2009 and 2008 | 2          |
|         | ** ** | ** **                                                                                                  |       |
|         |       | Condensed  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2009  and 2008       | 3          |
| ** **   | ** ** | ** **                                                                                                  |       |
|         |       | Notes to Condensed Consolidated Financial Statements                                                        | 4          |
|         |       |                                                                                                        |       |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 | 14         |
|         |       |                                                                                                        |       |
| Item 3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                 | 24         |
|         |       |                                                                                                        |       |
| Item 4.      |       | Controls and  Procedures                                                                                    | 26         |
|         |       |                                                                                                        |       |
|         |       | Warning Concerning Forward Looking Statements                                                               | 27         |
|         |       |                                                                                                        |       |
|         |       | Statement Concerning Limited Liability                                                                      | 30         |
|         |       |                                                                                                        |       |
| PART II |       | Other Information                                                                                           |       |
|         |       |                                                                                                        |       |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                | 31         |
|         |       |                                                                                                        |       |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders.                                                       | 31         |
|         |       |                                                                                                        |       |
| Item 5.      |       | Other Information                                                                                           | 31         |
|         |       |                                                                                                        |       |
| Item 6.      |       | Exhibits                                                                                                    | 33         |
|         |       |                                                                                                        |       |
|         |       | Signatures                                                                                                  | 35         |

 

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

 

----

 

**PART I.  Financial Information**

 

**Item1.    Financial Statements**

** **

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts inthousands, except share data)

(unaudited)

 
| ** **                                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ASSETS                                                                                                                                                                                                            |       |              |       |                  |       |
| Real  estate properties, at cost:                                                                                                                                                                                 |       |              |       |                  |       |
| Land                                                                                                                                                                                                              |       | $                 | 339,511    |                  | $          | 319,591 |   |
| Buildings  and improvements                                                                                                                                                                                       |       | 2,557,223         |       | 2,487,665             |       |
|                                                                                                                                                                                                              |       | 2,896,734         |       | 2,807,256             |       |
| Less  accumulated depreciation                                                                                                                                                                                    |       | 416,697           |       | 381,339               |       |
|                                                                                                                                                                                                              |       | 2,480,037         |       | 2,425,917             |       |
|                                                                                                                                                                                                              |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                        |       | 5,373             |       | 5,990                 |       |
| Restricted  cash                                                                                                                                                                                                  |       | 4,589             |       | 4,344                 |       |
| Deferred  financing fees, net                                                                                                                                                                                     |       | 6,340             |       | 5,068                 |       |
| Acquired  real estate leases, net                                                                                                                                                                                 |       | 31,834            |       | 30,546                |       |
| Other  assets                                                                                                                                                                                                     |       | 32,025            |       | 25,009                |       |
| Total  assets                                                                                                                                                                                                     |       | $                 | 2,560,198  |                  | $          | 2,496,874 |   |
|                                                                                                                                                                                                              |       |              |       |                  |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                                                        |       |              |       |                  |       |
| Unsecured  revolving credit facility                                                                                                                                                                              |       | $                 | 235,000    |                  | $          | 257,000 |   |
| Senior  unsecured notes due 2012 and 2015, net of discount                                                                                                                                                        |       | 322,089           |       | 322,017               |       |
| Secured  debt and capital leases                                                                                                                                                                                  |       | 149,931           |       | 151,416               |       |
| Accrued  interest                                                                                                                                                                                                 |       | 10,866            |       | 11,121                |       |
| Acquired  real estate lease obligations, net                                                                                                                                                                      |       | 8,509             |       | 7,974                 |       |
| Other  liabilities                                                                                                                                                                                                |       | 24,230            |       | 15,988                |       |
| Total  liabilities                                                                                                                                                                                                |       | 750,625           |       | 765,516               |       |
|                                                                                                                                                                                                              |       |              |       |                  |       |
| Commitments  and contingencies                                                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                                              |       |              |       |                  |       |
| Shareholders’  equity:                                                                                                                                                                                       |       |              |       |                  |       |
| Common  shares of beneficial interest, $0.01 par value: 149,700,000 shares  authorized, 120,464,198 and 114,542,584 shares issued and outstanding at  June 30, 2009 and December 31, 2008, respectively |       | 1,205             |       | 1,145                 |       |
| Additional  paid-in capital                                                                                                                                                                                       |       | 2,098,521         |       | 2,000,865             |       |
| Cumulative  net income                                                                                                                                                                                            |       | 592,362           |       | 530,318               |       |
| Cumulative  distributions                                                                                                                                                                                         |       | (879,888          | )          | (797,639              | )          |
| Unrealized  gain on investments                                                                                                                                                                                   |       | (2,627            | )          | (3,331                | )          |
| Total  shareholders’ equity                                                                                                                                                                                  |       | 1,809,573         |       | 1,731,358             |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                  |       | $                 | 2,560,198  |                  | $          | 2,496,874 |   |

 

*Seeaccompanying notes.*

 

1

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SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME

(amounts inthousands, except per share data)

(unaudited)

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                            |       |                                  |       |                                |       |   |   |   |   |
| Rental  income                       |       | $                                     | 69,399     |                                | $          | 52,708 |   | $ | 137,776 |   | $ | 101,747 |   |
| Interest  and other income           |       | 186                                   |       | 682                                 |       | 394 |   | 1,196 |   |
| Total  revenues                      |       | 69,585                                |       | 53,390                              |       | 138,170 |   | 102,943 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Expenses:                            |       |                                  |       |                                |       |   |   |   |   |
| Property  operating expenses         |       | 3,219                                 |       | 100                                 |       | 6,174 |   | 100 |   |
| Interest                             |       | 10,707                                |       | 9,810                               |       | 21,483 |   | 19,328 |   |
| Depreciation                         |       | 18,635                                |       | 14,327                              |       | 37,024 |   | 27,376 |   |
| Acquisition  costs                   |       | 1,282                                 |       | —                              |       | 1,394 |   | — |   |
| General  and administrative          |       | 5,231                                 |       | 4,533                               |       | 10,051 |   | 8,203 |   |
| Impairment  of assets                |       | —                                |       | 2,940                               |       | — |   | 2,940 |   |
| Total  expenses                      |       | 39,074                                |       | 31,710                              |       | 76,126 |   | 57,947 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Net  income                          |       | $                                     | 30,511     |                                | $          | 21,680 |   | $ | 62,044 |   | $ | 44,996 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Weighted  average shares outstanding |       | 120,455                               |       | 100,302                             |       | 119,161 |   | 95,691 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Earnings  per share:                 |       |                                  |       |                                |       |   |   |   |   |
| Net  income                          |       | $                                     | 0.25       |                                | $          | 0.22 |   | $ | 0.52 |   | $ | 0.47 |   |

 

*See accompanying notes*.

 

2

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SENIOR HOUSING PROPERTIESTRUST

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 
| ** **                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                         |       |                                |       |   |   |
| Net  income                                                                    |       | $                                   | 62,044     |   | $ | 44,996 |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |       |                                |       |   |   |
| Depreciation                                                                   |       | 37,024                              |       | 27,376 |   |
| Amortization                                                                   |       | 1,487                               |       | 963 |   |
| Impairment  of assets                                                          |       | —                              |       | 2,940 |   |
| Equity  in losses of Affiliates Insurance Company                              |       | 109                                 |       | — |   |
| Change  in assets and liabilities:                                             |       |                                |       |   |   |
| Restricted  cash                                                               |       | (245                                | )          | 87 |   |
| Other  assets                                                                  |       | (1,461                              | )          | 1,166 |   |
| Accrued  interest                                                              |       | (255                                | )          | (154 | ) |
| Other  liabilities                                                             |       | 9,217                               |       | 5,984 |   |
| Cash  provided by operating activities                                         |       | 107,920                             |       | 83,358 |   |
|                                                                           |       |                                |       |   |   |
| Cash  flows from investing activities:                                         |       |                                |       |   |   |
| Acquisitions                                                                   |       | (95,257                             | )          | (386,356 | ) |
| Investment  in Affiliates Insurance Company                                    |       | (5,074                              | )          | — |   |
| Proceeds  from sale of real estate                                             |       | 3,090                               |       | — |   |
| Cash  used for investing activities                                            |       | (97,241                             | )          | (386,356 | ) |
|                                                                           |       |                                |       |   |   |
| Cash  flows from financing activities:                                         |       |                                |       |   |   |
| Proceeds  from issuance of common shares, net                                  |       | 96,717                              |       | 523,138 |   |
| Proceeds  from borrowings on revolving credit facility                         |       | 119,000                             |       | 210,000 |   |
| Repayments  of borrowings on revolving credit facility                         |       | (141,000                            | )          | (210,000 | ) |
| Repayment  of other debt                                                       |       | (1,485                              | )          | (13,464 | ) |
| Deferred  financing fees                                                       |       | (2,279                              | )          | — |   |
| Distributions  to shareholders                                                 |       | (82,249                             | )          | (64,257 | ) |
| Cash  (used for) provided by financing activities                              |       | (11,296                             | )          | 445,417 |   |
|                                                                           |       |                                |       |   |   |
| (Decrease)  increase in cash and cash equivalents                              |       | (617                                | )          | 142,419 |   |
| Cash  and cash equivalents at beginning of period                              |       | 5,990                               |       | 43,521 |   |
| Cash  and cash equivalents at end of period                                    |       | $                                   | 5,373      |   | $ | 185,940 |   |
|                                                                           |       |                                |       |   |   |
| Supplemental  cash flow information:                                           |       |                                |       |   |   |
| Interest  paid                                                                 |       | $                                   | 20,659     |   | $ | 19,482 |   |
|                                                                           |       |                                |       |   |   |
| Non-cash  financing activities:                                                |       |                                |       |   |   |
| Issuance  of common shares pursuant to our incentive share award plan          |       | $                                   | 1,002      |   | $ | 974 |   |

 

*Seeaccompanying notes.*

 

3

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

(dollar amounts in thousands, except per share data oras 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 adequateto make the information presented not misleading.  However, the accompanying condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008. In the opinion of our management, all adjustments, which include onlynormal recurring adjustments, considered necessary for a fair presentation havebeen included.  All intercompanytransactions and balances between us and our consolidated subsidiaries havebeen eliminated.  Operating results forinterim periods are not necessarily indicative of the results that may beexpected for the full year. Reclassifications have been made to the prior year’s financialstatements to conform to the current year’s presentation.  These reclassifications had no effect on netincome or shareholders’ equity.  Inpreparing these condensed consolidated financial statements, we evaluatedevents that occurred through August 10, 2009 for potential recognition ordisclosure.

 

In May 2009, theFinancial Accounting Standards Board, or FASB, issued Statement of FinancialAccounting Standards No. 165, “SubsequentEvents”, or SFAS No. 165.  SFAS No. 165 establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date, but before financial statements are issued or areavailable to be issued.  SFAS No. 165 is effective for interim andannual fiscal periods ending after June 15, 2009.  We have adoptedSFAS No. 165 effective April 1, 2009.

 

In June 2009, theFASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles”, or SFAS No. 168,or the Codification, and, in doing so, authorized the Codification as the solesource for authoritative U.S. Generally Accepted Accounting Principles, orGAAP.  SFAS No. 168 will be effective for financial statementsissued for reporting periods that end after September 15,2009.  Once it’s effective, it will supersede all accountingstandards in U.S. GAAP, aside from those issued by the Securities and ExchangeCommission, or SEC.  SFAS No. 168 replaces SFAS No. 162 toestablish a new hierarchy of GAAP sources for non-governmental entities underthe Codification.  We have evaluated the effect of SFAS No. 168 andhave concluded that it will have no material effect on our financial positionor results of operations.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations”, or SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements forhow the acquirer shall recognize and measure in its financial statements theidentifiable assets acquired, liabilities assumed, any noncontrolling interestin the acquiree and goodwill acquired in a business combination.  SFAS No. 141(R) is effective forfiscal years beginning after December 15, 2008.  The adoption of SFAS No. 141(R) doesaffect our consolidated financial statements, principally by requiring us toexpense acquisition costs.

 

On January 1,2008, we adopted Statement of Financial Accounting Standards No. 157, “FairValue Measurements”, or SFAS No. 157, for our financial assets andliabilities, primarily investments in available for sale securities and seniornotes (see Note 7).  The provisions ofSFAS No. 157 relating to non-financial assets and liabilities that are notrequired or permitted to be measured at fair value on a recurring basis wasdelayed in February 2008 with the issuance of Financial AccountingStandards Board Staff Position No. 157-2, “Effective Date of FASBStatement No. 157”, or FSP FASB No. 157-2.  Fair value measurements identified in FSPFASB No. 157-2 were effective for our fiscal year beginning January 1,2009.  The adoption of FSP FASB No. 157-2primarily resulted in additional disclosures in our consolidated financialstatements with respect to our properties classified as held for sale.

 

4

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

(dollar amounts in thousands, except per share data oras otherwise stated)

 

In April 2009, the FASB issued FASB StaffPosition No. FAS 157-4 “Determining Fair Value When the Volume and Levelof Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly”, or FSP FAS 157-4, FASB StaffPosition No. FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments”, or FSP FAS 115-2 and FAS 124-2, and FASBStaff Position No. FAS 107-1 and APB 28-1 “Interim Disclosures about FairValue of Financial Instruments”, or FSP FAS 107-1 and APB 28-1.  FSP FAS 157-4 provides additional guidancefor estimating fair value in accordance with SFAS No. 157, when the volumeand level of activity for the assets or liabilities have significantlydecreased. FSP FAS 157-4 also includes guidance on identifying circumstancesthat indicate a transaction is not orderly. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairmentguidance in GAAP for debt securities to make the guidance more operational andto improve the presentation and disclosure of other-than-temporary impairmentson debt and equity securities.  FSP FAS107-2 and APB 28-1 amend FASB Statement No. 107, “Disclosures about FairValue of Financial Instruments” to require disclosures about fair value offinancial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements, and also amend APB OpinionNo. 28, “Interim Financial Reporting” to require those disclosures insummarized financial information at interim reporting periods.   Each of these FSPs is effective for interimand annual reporting periods ending after June 15, 2009. The adoption ofthese FSP’s does not result in any significant changes to our disclosures inour consolidated financial statements.

 

**Note 2.  Real Estate Properties**

 

At June 30, 2009, weowned 273 properties located in 34 states and Washington, D.C.

 

In May 2008, weentered into a series of agreements to acquire 48 medical office, clinic andbiotech laboratory buildings, or MOBs, from HRPT Properties Trust, or HRP, foran aggregate purchase price of approximately $565,000.  In January 2009, we acquired one ofthese MOBs containing 50,000 square feet for $19,250, plus closing costs.  In May 2009, we acquired two of theseMOBs from HRP containing 192,000 square feet for $50,800, plus closingcosts.  We recorded intangible leaseassets of $4,100 and intangible lease liabilities of $1,100 for these MOBsacquired during the six months ended June 30, 2009.  At the request of a tenant for a propertysubject to a multi-property lease, in May 2009 we sold one of our MOBproperties classified as held for sale to an unaffiliated party forapproximately $3,090 which was its approximate net book value. On August 6,2009, we acquired three of these MOBs from HRP containing 164,000 square feetfor $115,700, plus closing costs.  We nowown 42 of these properties containing 1.9 million square feet for an aggregatepurchase price of approximately $527,600, plus closing costs.  One of the remaining buildings with anallocated value of $3,000 is no longer subject to our purchase agreement andone of the MOBs we acquired from HRP which was subject to a multi-propertylease was sold at the tenant’s request. We expect the closing of the purchase of the remaining four pending MOBsto occur by February 2010. We and HRP may mutually agree to accelerate theclosings of these acquisitions.  Wefunded these acquisitions using cash on hand, proceeds from mortgage financing,proceeds from equity issuances, borrowings under our revolving credit facilityand by assuming three mortgage loans on two properties totaling $10,800 with aweighted average interest rate of 7.1% per annum and a weighted averagematurity in 2018.  Our obligations tocomplete the pending purchase of the remaining four MOBs from HRP are subjectto various conditions typical of commercial real estate purchases.  We can provide no assurance that we willpurchase any or all of these buildings or that the remaining purchases will becompleted in 2010 or sooner.  As of June 30,2009, the MOBs that we acquired from HRP and which remain subject to ourpurchase agreements were 98%****leased toapproximately 210 tenants for an average lease term of 7.6 years.  HRP was formerly our parent company, and bothwe and HRP are managed by Reit Management & Research LLC, or RMR.  Because we and HRP are both managed by RMR,the terms of these transactions were negotiated by special 

 

5

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

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

 

committees of our and HRP’sboards of trustees composed of trustees who were not also trustees of bothcompanies.  For more information aboutour dealings with HRP and RMR and their affiliates and about the risks whichmay arise as a result of these related person transactions, please see ourAnnual Report on Form 10-K for the year ended December 31, 2008, orthe Annual Report, our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2009, or the First Quarter Report, the other Items in thisQuarterly Report on Form 10-Q, and our other filings made with the SEC,and in particular, the section captioned “Risk Factors” in the Annual Report,the sections captioned “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Related Person Transactions” in the Annual Report, First Quarter Report and thisQuarterly Report on Form 10-Q and the section captioned “Related PersonTransactions and Company Review of Such Transactions” in our Proxy Statementdated March 30, 2009 relating to our 2009 Annual Shareholders Meeting.

 

As of June 30, 2009,four of our properties are classified as held for sale.  These four****propertiesare included in real estate properties on our condensed consolidated balancesheets and have a net carrying value of approximately****$5,550at June 30, 2009.  For the three andsix months ended June 30, 2008, we recognized an impairment of assetscharge of $2,940 related to one of these properties.  These properties are currently leased to FiveStar Quality Care, Inc., or Five Star.

 

During the six monthsended June 30, 2009, pursuant to the terms of our existing leases with FiveStar, we purchased $24,240 of improvements made to our properties leased toFive Star, and, as a result, the annual rent payable to us by Five Star wasincreased by approximately $1,940.

 

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

 

On June 30, 2009, weowned 1,000,000 common shares of HRP and 35,000 common shares of Five Star,which are carried at fair market value in other assets on our condensedconsolidated balance sheets. The net unrealized loss on investments shown onour condensed consolidated balance sheets represents the difference between thequoted market prices of such shares on June 30, 2009 ($4.06 and $1.91 pershare, respectively) and our costs on the dates we acquired these shares ($6.50and $7.26 per share, respectively).

 

**Note 4.  Comprehensive Income**

 

The following is areconciliation of net income to comprehensive income for the three and sixmonths ended June 30, 2009 and 2008:

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                          |       | $                                     | 30,511     |                                | $          | 21,680 |   | $ | 62,044 |   | $ | 44,996 |   |
| Other  comprehensive income:                         |       |                                  |       |                                |       |   |   |   |   |
| Change  in net unrealized gain / loss on investments |       | 900                                   |       | (17                                 | )          | 704 |   | (1,085 | ) |
| Comprehensive  income                                |       | $                                     | 31,411     |                                | $          | 21,663 |   | $ | 62,748 |   | $ | 43,911 |   |

 

**Note 5.  Indebtedness**

 

We have an unsecured revolving credit facility thatmatures in December 2010.  Ourrevolving credit facility permits borrowings up to $550,000.  The annual interest payable for amounts drawnunder the facility is LIBOR plus a premium. The weighted average interest ratepayable on borrowings under this revolving credit facility was 1.3% and 3.3% atJune 30, 2009 and 2008, respectively. In addition to interest we pay certain fees to maintain this creditfacility and we amortize certain set up costs. Our revolving credit facility is available for acquisitions, workingcapital and general business purposes. As of June 30, 2009 and 2008, wehad $235,000 and zero amounts outstanding under this credit facility,respectively, and $315,000 and $550,000 available under this credit facility,respectively.  Subject to certainconditions, this credit facility’s maturity date can be extended at our optionto December 31, 2011 upon payment of a fee.

 

6

----

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

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

 

**Note 6.  Shareholders’ Equity**

 

Under the terms of ourbusiness management agreement with RMR, on April 8, 2009, we issued 55,814common shares in payment of an incentive fee of approximately $789 for servicesrendered by RMR during 2008. We issued these shares pursuant to an exemptionfrom registration contained in Section 4(2) of the Securities Act of1933, as amended, or the Securities Act.

 

On May 15, 2009, we paid a $0.35 per share, or$42,160, distribution to our common shareholders for the quarter ended March 31,2009.  On July 1, 2009, we declareda distribution of $0.36 per share, or $43,360, to be paid to common shareholdersof record on July 10, 2009, with respect to our results for the quarterended June 30, 2009. We expect to pay this distribution on or about August 14,2009.

 

On May 18, 2009, we granted 2,000 common sharesof beneficial interest, par value $0.01 per share, valued at $15.45 per share,the closing price of our common shares on the New York Stock Exchange on thatday, to each of our five trustees.  Wemade these grants pursuant to an exemption from registration contained in Section 4(2) ofthe Securities Act.

 

**Note 7. Fair Value of Assets and Liabilities**

 

The table below presentscertain of our assets and liabilities measured at fair value at June 30,2009 categorized by the level of inputs used in the valuation of each asset orliability, in accordance with SFAS No. 157.

 
| **Description**                                        | ** ** | **Total** | ** ** | **Quoted Prices in Active   Markets for Identical  Assets  (Level 1)** | ** ** | **Significant Other   Observable Inputs  (Level 2)** | ** ** | **Significant   Unobservable  Inputs  (Level 3)** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                   |       |      |       |                                                                   |       |                                                 |       |                                              |       |
| Assets  held for sale (1)                              |       | $         | 5,548      |                                                                   | $          | —                                               |       | $                                                 | 5,548      |   | $ | — |   |
| Investments  in available for sale securities (2) |       | 4,127     |       | 4,127                                                                  |       | —                                               |       | —                                            |       |
| Senior  notes (3)                                      |       | 309,536   |       | —                                                                 |       | 309,536                                              |       | —                                            |       |
|                                                        |            |           |            |                                                                        |            |                                                      |            |                                                   |            |  |  |  |  |

 

----

(1) Assets held for sale consist of four of ourproperties that we expect to sell that are reported at fair value.  We used offers to purchase the propertiesmade by third parties or comparable sales transactions (level 2 inputs) todetermine fair value of these properties. As of June 30, 2009, the net carrying value of these properties wasapproximately $5,550.  We have recorded impairmentsto these properties subsequent to their acquisition by us of approximately$8,330 in order to reduce their carrying value to fair value.

 

(2) Our investments in available for salesecurities include our 1,000,000 common shares of HRP and 35,000 common sharesof Five Star. The fair values of these shares are based on quoted prices inactive markets (level 1 inputs).  We haveevaluated the near-term prospects of HRP and Five Star in relation to theseverity and duration of the decline in fair value of their common shares.  Based on that evaluation and our ability andintent to hold these investments for a reasonable period of time sufficient fora recovery of fair value, we do not consider these investments to beother-than-temporarily impaired at June 30, 2009.

 

(3) We estimate the fair values of our seniornotes using as average of the bid and ask price of our two issues of seniornotes at the balance sheet date (level 2 inputs). As of June 30, 2009, thebook value carrying amount of our senior notes was $322,089.

 

In addition to the assets and liabilities described inthe above table, our additional financial instruments  include rents receivable, cash and cashequivalents, restricted cash, secured and unsecured debt and other liabilities.The fair values of these additional financial instruments approximate theircarrying value at June 30, 2009 based upon their liquidity, short termmaturity, variable rate pricing or our estimate of fair value using discountedcash flows analyses and prevailing interest rates.

 

7

----

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

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

 

**Note 8. Segment Reporting**

** **

We have two reportableoperating segments: (i) short term and long term residential carefacilities 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 spaservices to members.  Prior to June 2008,our only operating segments were short term and long term residential carefacilities that offer dining for residents and properties that offer fitness,wellness and spa services to members included in the “All Other” category.

 
| ** **                   | ** ** | **For the Three Months Ended June 30, 2009**       | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **Short and  Long Term   Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental  income               |       | $                                                       | 54,484     |   | $ | 11,004 |   | $ | 3,911 |   | $ | 69,399 |   |
| Interest  and other income   |       | —                                                  |       | — |   | 186 |   | 186 |   |
| Total  revenues              |       | 54,484                                                  |       | 11,004 |   | 4,097 |   | 69,585 |   |
|                         |       |                                                    |       |   |   |   |   |   |   |
| Property  operating expenses |       | —                                                  |       | 3,219 |   | — |   | 3,219 |   |
| Interest  expense            |       | 2,039                                                   |       | 190 |   | 8,478 |   | 10,707 |   |
| Depreciation  expense        |       | 14,983                                                  |       | 2,730 |   | 922 |   | 18,635 |   |
| Acquisition  costs           |       | —                                                  |       | 1,282 |   | — |   | 1,282 |   |
| General  and administrative  |       | —                                                  |       | — |   | 5,231 |   | 5,231 |   |
| Total  expenses              |       | 17,022                                                  |       | 7,421 |   | 14,631 |   | 39,074 |   |
|                         |       |                                                    |       |   |   |   |   |   |   |
| Net  income (loss)           |       | $                                                       | 37,462     |   | $ | 3,583 |   | $ | (10,534 | ) | $ | 30,511 |   |
|                         |       |                                                    |       |   |   |   |   |   |   |
| Total  assets                |       | $                                                       | 1,881,050  |   | $ | 439,545 |   | $ | 239,603 |   | $ | 2,560,198 |   |

 

8

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
| ** **                   | ** ** | **For the Three Months Ended June 30, 2008**      | ** ** |
|------------------------------|------------|--------------------------------------------------------|------------|
| ** **                   | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental  income               |       | $                                                      | 50,844     |   | $ | 232 |   | $ | 1,632 |   | $ | 52,708 |   |
| Interest  and other income   |       | —                                                 |       | — |   | 682 |   | 682 |   |
| Total  revenues              |       | 50,844                                                 |       | 232 |   | 2,314 |   | 53,390 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Property  operating expenses |       | —                                                 |       | 100 |   | — |   | 100 |   |
| Interest  expense            |       | 1,220                                                  |       | — |   | 8,590 |   | 9,810 |   |
| Depreciation  expense        |       | 13,876                                                 |       | 94 |   | 357 |   | 14,327 |   |
| General  and administrative  |       | —                                                 |       | — |   | 4,533 |   | 4,533 |   |
| Impairment  of assets        |       | 2,940                                                  |       | — |   | — |   | 2,940 |   |
| Total  expenses              |       | 18,036                                                 |       | 194 |   | 13,480 |   | 31,710 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Net  income (loss)           |       | $                                                      | 32,808     |   | $ | 38 |   | $ | (11,166 | ) | $ | 21,680 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Total  assets                |       | $                                                      | 1,827,693  |   | $ | 74,942 |   | $ | 296,430 |   | $ | 2,199,065 |   |

 
| ** **                   | ** ** | **For the Six Months Ended June 30, 2009**        | ** ** |
|------------------------------|------------|--------------------------------------------------------|------------|
| ** **                   | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental  income               |       | $                                                      | 108,520    |   | $ | 21,451 |   | $ | 7,805 |   | $ | 137,776 |   |
| Interest  and other income   |       | —                                                 |       | 12 |   | 382 |   | 394 |   |
| Total  revenues              |       | 108,520                                                |       | 21,463 |   | 8,187 |   | 138,170 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Property  operating expenses |       | —                                                 |       | 6,174 |   | — |   | 6,174 |   |
| Interest  expense            |       | 4,069                                                  |       | 374 |   | 17,040 |   | 21,483 |   |
| Depreciation  expense        |       | 29,855                                                 |       | 5,324 |   | 1,845 |   | 37,024 |   |
| Acquisition  costs           |       | —                                                 |       | 1,394 |   | — |   | 1,394 |   |
| General  and administrative  |       | —                                                 |       | — |   | 10,051 |   | 10,051 |   |
| Total  expenses              |       | 33,924                                                 |       | 13,266 |   | 28,936 |   | 76,126 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Net  income (loss)           |       | $                                                      | 74,596     |   | $ | 8,197 |   | $ | (20,749 | ) | $ | 62,044 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Total  assets                |       | $                                                      | 1,881,050  |   | $ | 439,545 |   | $ | 239,603 |   | $ | 2,560,198 |   |

 

9

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 
| ** **                   | ** ** | **For the Six Months Ended June 30, 2008**        | ** ** |
|------------------------------|------------|--------------------------------------------------------|------------|
| ** **                   | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOB** | ** ** | **All Other** | ** ** | **Consolidated** | ** ** |
| Rental  income               |       | $                                                      | 98,135     |   | $ | 232 |   | $ | 3,380 |   | $ | 101,747 |   |
| Interest  and other income   |       | —                                                 |       | — |   | 1,196 |   | 1,196 |   |
| Total  revenues              |       | 98,135                                                 |       | 232 |   | 4,576 |   | 102,943 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Property  operating expenses |       | —                                                 |       | 100 |   | — |   | 100 |   |
| Interest  expense            |       | 2,668                                                  |       | — |   | 16,660 |   | 19,328 |   |
| Depreciation  expense        |       | 26,542                                                 |       | 94 |   | 740 |   | 27,376 |   |
| General  and administrative  |       | —                                                 |       | — |   | 8,203 |   | 8,203 |   |
| Impairment  of assets        |       | 2,940                                                  |       | — |   | — |   | 2,940 |   |
| Total  expenses              |       | 32,150                                                 |       | 194 |   | 25,603 |   | 57,947 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Net  income (loss)           |       | $                                                      | 65,985     |   | $ | 38 |   | $ | (21,027 | ) | $ | 44,996 |   |
|                         |       |                                                   |       |   |   |   |   |   |   |
| Total  assets                |       | $                                                      | 1,827,693  |   | $ | 74,942 |   | $ | 296,430 |   | $ | 2,199,065 |   |

 

10

----

 

SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

**Note 9. Significant Tenant**

 

FiveStaristhelesseeof65%ofourinvestments,atcost,asofJune30,2009.  ThefollowingtablespresentsummaryfinancialinformationforFiveStarforthethreeandsixmonthsendedJune30,2009and2008,asreportedinitsQuarterlyReportonForm10-Q.

 

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

 
| ** **                         | ** ** | **For the  Three Months Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|
| **Operations**                     | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Total  revenues                    |       | $                                             | 297,127    |   | $ | 270,454 |   |
| Operating  income                  |       | 4,071                                         |       | 6,145 |   |
| Income  from continuing operations |       | 9,047                                         |       | 4,307 |   |
| Net  income                        |       | 8,578                                         |       | 3,489 |   |
|                                    |            |                                               |            |  |  |  |  |

 
| ** **                                              | ** ** | **For the Six Months Ended********June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Total  revenues                                         |       | $                                                 | 591,507    |   | $ | 528,520 |   |
| Operating  income                                       |       | 7,465                                             |       | 13,495 |   |
| Income  from continuing operations                      |       | 34,044                                            |       | 8,721 |   |
| Net  income                                             |       | 33,950                                            |       | 5,106 |   |
|                                                    |       |                                              |       |   |   |
| **Cash Flows**                                          |       |                                              |       |   |   |
| Cash  provided by operating activities                  |       | 23,544                                            |       | 22,294 |   |
| Net  cash provided by (used in) discontinued operations |       | 1,028                                             |       | (463 | ) |
| Cash  used in investing activities                      |       | (10,552                                           | )          | (6,829 | ) |
| Cash  used in financing activities                      |       | (8,409                                            | )          | (117 | ) |
| Change  in cash and cash equivalents                    |       | 5,611                                             |       | 14,885 |   |
| Cash  and cash equivalents at beginning of period       |       | 16,138                                            |       | 30,999 |   |
| Cash  and cash equivalents at end of period             |       | 21,749                                            |       | 45,884 |   |
|                                                         |            |                                                   |            |  |  |  |  |

 
| ** **                       | ** ** | **As  of June 30,** | ** ** |
|----------------------------------|------------|--------------------------|------------|
| **Financial Position**           | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| Current  assets                  |       | $                        | 188,049    |   | $ | 137,455 |   |
| Non-current  assets              |       | 227,337                  |       | 243,390 |   |
| Total  indebtedness              |       | 119,545                  |       | 142,393 |   |
| Current  liabilities             |       | 174,121                  |       | 116,315 |   |
| Non-current  liabilities         |       | 117,032                  |       | 172,980 |   |
| Total  shareholders’ equity |       | 124,233                  |       | 91,550 |   |
|                                  |            |                          |            |  |  |  |  |

 

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

 

Five Star is our formersubsidiary and both we and Five Star have management contracts with RMR.  For information about our dealings with FiveStar and about the risks which may arise as a result of these related person transactions,please see our Annual Report on Form 10-K for the year ended December 31,2008, especially the section titled “Risk Factors”.

 

11

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

**Note 10.  Pro Forma Information**

 

During the three monthsended June 30, 2009, we purchased two MOBs for approximately $50,800 andsold one MOB for $3,090.  Also, duringthis three month period, pursuant to the terms of our existing leases with FiveStar, we purchased $11,506 of improvements made to our properties leased toFive Star.  During the six months ended June 30,2009, we purchased three MOBs for approximately $70,000, sold one MOB for$3,090 and, pursuant to the terms of our existing leases with Five Star, wepurchased $24,240 of improvements made to our properties leased to FiveStar.  During 2008: we purchased 30senior living properties, four wellness centers and 38 MOBs for an aggregate of$842,900; we purchased $69,400 of improvements made to our properties leased toFive Star; we repaid in full a mortgage loan on one of our properties for$12,600 in April 2008; we assumed $61,300 of mortgage debt in conjunctionwith our 2008 acquisitions; we recorded an impairment charge on four of ourproperties for $8,380; and we sold three assisted living facilities to FiveStar for $21,350 and realized a gain on sale of approximately $266 in July 2008.  During 2009 and 2008, we also issued 5,853and 25,759 of our common shares, respectively. The following table presents ourpro forma results of operations as if all of these acquisitions, dispositionsand financing transactions were completed on January 1, 2008.  This pro forma data is not necessarilyindicative of what actual results of operations would have been for the periodspresented, nor does it represent the results of operations for any futureperiod.  Differences could result from,but are not limited to, additional property sales or investments, changes ininterest rates and changes in our debt or equity capital structure.

 
| ** **                                | ** ** | **Pro Forma Results**                         | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
| ** **                                | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total  revenues                           |       | $                                             | 70,608     |   | $ | 70,784 |   | $ | 141,222 |   | $ | 141,424 |   |
| Income  before gain on sale of properties |       | $                                             | 30,891     |   | $ | 23,350 |   | $ | 63,206 |   | $ | 56,864 |   |
| Net  income                               |       | $                                             | 30,891     |   | $ | 23,616 |   | $ | 63,206 |   | $ | 57,130 |   |
|                                      |       |                                          |       |   |   |   |   |   |   |
| Per  common share data:                   |       |                                          |       |   |   |   |   |   |   |
| Income  before gain on sale of properties |       | $                                             | 0.26       |   | $ | 0.19 |   | $ | 0.52 |   | $ | 0.47 |   |
| Net  income                               |       | $                                             | 0.26       |   | $ | 0.20 |   | $ | 0.52 |   | $ | 0.47 |   |

 

**Note 11.  Affiliates Insurance Company**

 

As of June 30, 2009,we have invested $5,074 in Affiliates Insurance Company, or AIC, aninsurance company, that is also owned by RMR and other companies towhich RMR provides management services.  We own 16.67% of the commonshares of AIC which has a current carrying value of $4,964.  This investment is included in other assetson our condensed consolidated balance sheets.  Although we own less than20% of AIC, we use the equity method to account for our investment in AICbecause we believe that we have significant influence over AIC since each ofour trustees is a director of AIC and since we expect to procure some of ourinsurance from AIC.  Under the equity method, we record our percentageshare of net earnings from AIC in our consolidated statements of incomeincluded in general and administrative expenses.  If we determine there isan “other than temporary” decline in the fair value of this investment, wewould record a charge to earnings.  In evaluating the fair value of thisinvestment, we have considered, among other things, the individual assetsand liabilities held by AIC, AIC’s overall financial condition and earningtrends, and the financial condition and prospects for the insuranceindustry generally.  Subsequent to June 30, 2009, we invested anadditional $35 in order to fund our share of formation and licensingcosts for AIC.

 

12

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SENIOR HOUSING PROPERTIESTRUST

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

**Note 12.  Subsequent Events**

 

On August 4, 2009, aspecial purpose subsidiary of ours closed a $512,900 mortgage financing withthe Federal National Mortgage Association, or FNMA. This mortgage loan issecured by first liens on 28 senior living properties that we own and lease toFive Star with 5,618 living units / beds located in 16 states. We used aportion of the proceeds from this mortgage financing to repay amountsoutstanding under our revolving credit facility and to purchase three MOBs fromHRP. We intend to use the balance of the proceeds to fund investments,including possibly accelerating the remaining MOB acquisitions from HRP, andfor general business purposes.   Inconnection with the FNMA transaction, we realigned our four leases with FiveStar.  Lease no. 1 (which is comprised offour separate leases) now includes 80 properties, including independent livingcommunities, assisted living communities and skilled nursing facilities, andexpires in 2024.  Lease no. 2 nowincludes 50 properties, including independent living communities, assistedliving communities, skilled nursing facilities and two rehabilitationhospitals, and expires in 2026.  Leaseno. 3 now includes the 28 FNMA financed properties, including independentliving communities and assisted living communities, and expires in 2028.  Lease no. 4 now includes 25 properties,including independent living communities, assisted living communities andskilled nursing facilities, and expires in 2017.  In connection with the lease realignment andthe FNMA financing, we entered into a lease realignment agreement with FiveStar, or the Realignment Agreement. Pursuant to the terms of the Realignment Agreement, (1) the fourleases, or the Leases, were reconfigured as described above, (2) weacquired certain personal property located at 28 properties in 16 states, or the Properties, from subsidiaries ofFive Star and pledged that property to FNMA, (3) we purchased 3,200,000shares, or the Shares, of common stock, $.01 par value per share, whichrepresent approximately 9% of the total common stock outstanding of Five Star, (4) FiveStar agreed to undertake certain reporting and other operating obligationsrequired by FNMA and (5) subsidiaries of Five Star pledged certaintangible and intangible personal property, such as accounts receivable andcontract rights, located at, or arising from the operations of, the Propertiesto secure their obligations under the Lease under which the Properties areleased and certain of their obligations relating to the $512,900 secured termloan.  To compensate Five Star for thesale of its personal property, the sale of the Shares, the pledge of intangibleassets and for the services and obligations that Five Star has assumed, (1) wereduced the annual rent payable to us under one of the Leases, but not thelease under which the Properties are leased, by $2,000 per year for the term ofthat Lease, which will expire in 2026; (2) we paid Five Star a total of$18,600; and (3) we agreed to reimburse Five Star for its out of pocketexpenses incurred in connection with the negotiation and closing of thistransaction.  Five Star has grantedcertain registration rights to us with regard to the Shares.  For more information about this FNMAfinancing and the agreement we entered with Five Star to facilitate thisfinancing please see Part II, Item 5 of this Quarterly Report on Form 10-Q.

 

In July 2009, weagreed to purchase, from an unaffiliated party, one senior living property forapproximately $21,000.  We intend tolease this property to Five Star.  Weexpect to fund this acquisition using cash on hand and borrowings under ourrevolving credit facility, if needed. The purchase of this property is contingent upon completion of ourdiligence and other customary closing conditions. We can provide no assurancethat we will purchase this property.

 

13

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

 

Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and notes thereto included in this quarterly report andour Annual Report on Form 10-K for the year ended December 31, 2008.

 

**PORTFOLIO OVERVIEW**

** **

**The following tables present anoverview of our portfolio (dollars in thousands except per unit/square foot):**

** **

As of June 30,2009

 
| ** **                           | ** ** | **Number of  Properties** | ** ** | **Number of  Units/Beds or  Square Feet** | ** ** | **Investment Carrying  Value ****(1)** | ** ** | **% of  Investment** | ** ** | **Annualized  Current Rent** | ** ** | **% of Annualized  Current Rent** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
|                                 |       |                           |       |                                                     |       |                                             |       |                      |       |                              |       |                                             |       |
| Facility Type                        |       |                           |       |                                                     |       |                                             |       |                      |       |                              |       |                                             |       |
| Independent living  communities (2)  |       | 43                             |       | 11,524                                                   |       | $                                                | 1,108,572  |                      | 38.3%      |                              | $          | 109,631                                          |       | 37.6% |   |
| Assisted living  facilities (2) |       | 120                            |       | 8,472                                                    |       | 909,430                                          |       | 31.4%                     |       | 84,353                            |       | 28.9%                                            |       |
| Skilled nursing  facilities (2) |       | 58                             |       | 5,844                                                    |       | 230,192                                          |       | 7.9%                      |       | 20,355                            |       | 6.9%                                             |       |
| Rehabilitation  hospitals            |       | 2                              |       | 364                                                      |       | 60,175                                           |       | 2.1%                      |       | 11,580                            |       | 4.0%                                             |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |       | 180,017                                          |       | 6.2%                      |       | 17,069                            |       | 5.9%                                             |       |
| MOBs                                 |       | 40                             |       | 1,831,082                                                |       | 408,348                                          |       | 14.1%                     |       | 48,748                            |       | 16.7%                                            |       |
| Total                                |       | 273                            |       |                                                     |       | $                                                | 2,896,734  |                      | 100.0%     |                              | $          | 291,736                                          |       | 100.0% |   |
|                                 |       |                           |       |                                                     |       |                                             |       |                      |       |                              |       |                                             |       |
| Tenant / Operator                    |       |                           |       |                                                     |       |                                             |       |                      |       |                              |       |                                             |       |
| Five Star (Lease  No. 1) (3)    |       | 80                             |       | 5,919                                                    |       | $                                                | 534,517    |                      | 18.5%      |                              | $          | 45,195                                           |       | 15.4% |   |
| Five Star (Lease  No. 2) (3)    |       | 50                             |       | 6,106                                                    |       | 501,699                                          |       | 17.3%                     |       | 51,072                            |       | 17.5%                                            |       |
| Five Star (Lease  No. 3) (3)    |       | 28                             |       | 5,618                                                    |       | 607,337                                          |       | 21.0%                     |       | 61,181                            |       | 21.0%                                            |       |
| Five Star (Lease  No. 4) (3)    |       | 25                             |       | 2,461                                                    |       | 229,435                                          |       | 7.9%                      |       | 21,057                            |       | 7.2%                                             |       |
| Sunrise / Marriott (4)               |       | 14                             |       | 4,091                                                    |       | 325,165                                          |       | 11.2%                     |       | 32,416                            |       | 11.1%                                            |       |
| Brookdale                            |       | 18                             |       | 894                                                      |       | 61,122                                           |       | 2.1%                      |       | 8,114                             |       | 2.8%                                             |       |
| 6 private companies  (combined)      |       | 8                              |       | 1,115                                                    |       | 49,094                                           |       | 1.7%                      |       | 6,884                             |       | 2.4%                                             |       |
| Wellness centers                     |       | 10                             |       | 812,000                                                  |       | 180,017                                          |       | 6.2%                      |       | 17,069                            |       | 5.9%                                             |       |
| Multi-tenant MOBs                    |       | 40                             |       | 1,831,082                                                |       | 408,348                                          |       | 14.1%                     |       | 48,748                            |       | 16.7%                                            |       |
| Total                                |       | 273                            |       |                                                     |       | $                                                | 2,896,734  |                      | 100.0%     |                              | $          | 291,736                                          |       | 100.0% |   |

 

Tenant OperatingStatistics (Quarter Ended March 31, 2009)(5)

 
| ** **                                 | ** ** | **Rent  Coverage** | ** ** | **Occupancy** | ** ** | **Annualized Rental Income per Living  Unit, Bed or Square Foot **(6) | ** ** |
|--------------------------------------------|------------|--------------------|------------|---------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**      | ** ** | **2009**                                                                                                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                       |       |               |       |          |       |                                                                                                               |       |   |   |   |   |   |   |
| Five Star (Lease  No. 1) (3)          |       | 1.23x              |       | 1.22x         |       | 87%                                                                                                                |       | 85% |   | $ | 7,636 |   | $ | 7,103 |   |
| Five Star (Lease  No. 2) (3) (7) |       | 1.20x              |       | 1.41x         |       | 83%                                                                                                                |       | 85% |   | $ | 6,878 |   | $ | 6,344 |   |
| Five Star (Lease  No. 3) (3)          |       | 1.63x              |       | 1.63x         |       | 90%                                                                                                                |       | 92% |   | $ | 10,890 |   | $ | 10,605 |   |
| Five Star (Lease  No. 4) (3)          |       | 1.12x              |       | 1.45x         |       | 86%                                                                                                                |       | 86% |   | $ | 8,556 |   | $ | 7,890 |   |
| Sunrise / Marriott (4)                     |       | 1.45x              |       | 1.61x         |       | 91%                                                                                                                |       | 91% |   | $ | 7,924 |   | $ | 7,760 |   |
| Brookdale                                  |       | 2.22x              |       | 2.23x         |       | 92%                                                                                                                |       | 91% |   | $ | 9,076 |   | $ | 8,806 |   |
| 6 private companies  (combined)            |       | 1.83x              |       | 2.24x         |       | 82%                                                                                                                |       | 87% |   | $ | 6,174 |   | $ | 5,991 |   |
| Wellness centers (8)                       |       | 2.27x              |       | 2.19x         |       | 100%                                                                                                               |       | 100% |   | NA |   | NA |   |
| Multi-tenant MOBs (9)                      |       | NA                 |       | NA            |       | 99%                                                                                                                |       | NA |   | $ | 27 |   | $ | 20 |   |

 

14

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

 

Tenant OperatingStatistics (Quarter Ended March 31, 2009)(5)

 
| ** **                       | ** ** | **Short  and Long Term Residential Care Facilities** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **Percentage  of Operating Revenue Sources**         | ** ** |
| ** **                       | ** ** | **Private  Pay****(10)**                             | ** ** | **Medicare** | ** ** | **Medicaid** | ** ** |
| ** **                       | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Five Star (Lease No. 1) (3) |       | 60%                                                  |       | 51% |   | 14% |   | 18% |   | 25% |   | 31% |   |
| Five Star (Lease No. 2) (3) |       | 52%                                                  |       | 50% |   | 32% |   | 34% |   | 15% |   | 16% |   |
| Five Star (Lease No. 3) (3) |       | 86%                                                  |       | 88% |   | 13% |   | 12% |   | 1% |   | — |   |
| Five Star (Lease No. 4) (3) |       | 67%                                                  |       | 69% |   | 14% |   | 14% |   | 19% |   | 17% |   |
| Sunrise / Marriott (4)           |       | 68%                                                  |       | 79% |   | 28% |   | 18% |   | 4% |   | 3% |   |
| Brookdale                        |       | 100%                                                 |       | 99% |   | — |   | — |   | — |   | 1% |   |
| 6 private companies (combined)   |       | 24%                                                  |       | 29% |   | 25% |   | 24% |   | 51% |   | 47% |   |

 

----

**(1)**   Amountsare before depreciation, but after impairment write downs, if any.

**(2)**   Propertiesare categorized by the type of living units / beds which constitute a majorityof the living units / beds at the property.

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

**(4)**   MarriottInternational, Inc. guarantees this lease.

(5)   All tenant operating data presented arebased upon the operating results provided by our tenants for the indicatedquarterly periods, or the most recent prior period for which tenant operatingresults are available to us from our tenants. Rent coverage is calculated asoperating cash flow from our tenants’ operations of our properties, beforesubordinated charges, divided by minimum rents payable to us.  We have not independently verified ourtenants’ operating data.  Excludes datafor periods prior to our ownership of some of these properties.

(6)   Represents annualized rent by leasedivided by the number of living units, beds or square feet leased at June 30,2009 and 2008.

(7)   Annualized rental income per living unit,bed or square foot excludes the two rehabilitation hospitals as theseproperties have extensive clinic space for services to both overnight patientsand patients who receive treatment and do not stay overnight, and theseproperties are not comparable to residential senior living properties.

(8)   Annualized rental income per living unit,bed or square foot excludes the wellness centers as these properties haveextensive indoor and outdoor recreation space not comparable to propertieswhere rent is based on interior space only.

(9)   Our medical office, clinic and biotechlaboratory building, or MOB, leases include both triple net leases where, inaddition to paying fixed rents, the tenants assume the obligation to operateand maintain the properties at their expense and net and modified leases wherewe are responsible to operate and maintain the properties and we charge tenantsfor some or all of the property operating costs.  A small percentage of our MOB leases areso-called “full-service” leases where we receive fixed rent from our tenantsand no reimbursement for our property operating costs.

(10)Private pay is revenues excludingMedicare and Medicaid revenues.

 

15

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

 

The following tables set forth information regardinglease expirations as of June 30, 2009 (dollars in thousands):

 
| ** **     | ** ** | **Annualized Rent**                                   | ** ** | **Percent of  Total** | ** ** | **Cumulative  Percentage  of  Annualized** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| **Year**       | ** ** | **Short and Long  Term Residential  Care Facilities** | ** ** | **MOBs**              | ** ** | **Wellness  Centers**                      | ** ** | **Total** | ** ** | **Annualized  Current Rent  Expiring** | ** ** | **Current  Rent  Expiring** | ** ** |
|           |       |                                                  |       |                  |       |                                       |       |   |   |   |   |   |   |
| 2009           |       | $                                                     | —     |                  | $          | 1,608                                      |       | $ | — |   | $ | 1,608 |   | 0.6% |   | 0.6% |   |
| 2010           |       | 1,333                                                 |       | 2,558                 |       | —                                     |       | 3,891 |   | 1.3% |   | 1.9% |   |
| 2011           |       | —                                                |       | 1,989                 |       | —                                     |       | 1,989 |   | 0.7% |   | 2.6% |   |
| 2012           |       | —                                                |       | 5,737                 |       | —                                     |       | 5,737 |   | 2.0% |   | 4.6% |   |
| 2013           |       | 32,416                                                |       | 3,596                 |       | —                                     |       | 36,012 |   | 12.3% |   | 16.9% |   |
| 2014           |       | —                                                |       | 5,744                 |       | —                                     |       | 5,744 |   | 2.0% |   | 18.9% |   |
| 2015           |       | 2,072                                                 |       | 5,320                 |       | —                                     |       | 7,392 |   | 2.5% |   | 21.4% |   |
| 2016           |       | 2,875                                                 |       | 3,847                 |       | —                                     |       | 6,722 |   | 2.3% |   | 23.7% |   |
| 2017           |       | 29,171                                                |       | 1,299                 |       | —                                     |       | 30,470 |   | 10.4% |   | 34.1% |   |
| 2018           |       | —                                                |       | 1,793                 |       | —                                     |       | 1,793 |   | 0.6% |   | 34.7% |   |
| 2019 and after |       | 158,052                                               |       | 15,257                |       | 17,069                                     |       | 190,378 |   | 65.3% |   | 100.0% |   |
| Total          |       | $                                                     | 225,919    |                  | $          | 48,748                                     |       | $ | 17,069 |   | $ | 291,736 |   | 100.0% |   |   |   |

 

Average remaining lease term for all properties(weighted by rent) 13.1 years

 
| ** **     | ** ** | **Number of Tenants**                                  | ** ** | ** ** | ** ** | **Cumulative**        | ** ** |
|----------------|------------|--------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| **Year**       | ** ** | **Short and  Long Term  Residential  Care Facilities** | ** ** | **MOBs**   | ** ** | **Wellness  Centers** | ** ** | **Total** | ** ** | **Percent of  Total Number  of Tenants  Expiring** | ** ** | **Percentage  of Number  of Tenants  Expiring** | ** ** |
|           |       |                                                   |       |       |       |                  |       |   |   |   |   |   |   |
| 2009           |       | —                                                 |       | 19         |       | —                |       | 19 |   | 8.8% |   | 8.8% |   |
| 2010           |       | 1                                                      |       | 27         |       | —                |       | 28 |   | 12.9% |   | 21.7% |   |
| 2011           |       | —                                                 |       | 22         |       | —                |       | 22 |   | 10.1% |   | 31.8% |   |
| 2012           |       | —                                                 |       | 36         |       | —                |       | 36 |   | 16.6% |   | 48.4% |   |
| 2013           |       | 1                                                      |       | 20         |       | —                |       | 21 |   | 9.7% |   | 58.1% |   |
| 2014           |       | —                                                 |       | 19         |       | —                |       | 19 |   | 8.8% |   | 66.9% |   |
| 2015           |       | 2                                                      |       | 18         |       | —                |       | 20 |   | 9.2% |   | 76.1% |   |
| 2016           |       | 2                                                      |       | 15         |       | —                |       | 17 |   | 7.8% |   | 83.9% |   |
| 2017           |       | 2                                                      |       | 12         |       | —                |       | 14 |   | 6.5% |   | 90.4% |   |
| 2018           |       | —                                                 |       | 5          |       | —                |       | 5 |   | 2.3% |   | 92.7% |   |
| 2019 and after |       | 4                                                      |       | 10         |       | 2                     |       | 16 |   | 7.3% |   | 100.0% |   |
| Total          |       | 12                                                     |       | 203        |       | 2                     |       | 217 |   | 100.0% |   |   |   |

 

16

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

 

**Number ofLiving Units or Beds or Square Feet with Leases Expiring**

 
| **Year**       | ** ** | **Short and  Long Term  Residential  Care  Facilities  (Units/Beds)** | ** ** | **Percent of  Total Living  Units or  Beds** | ** ** | **MOBs  (Square  Feet)** | ** ** | **Wellness  Centers  (Square  Feet)** | ** ** | **Total Square  Feet** | ** ** | **Percent of  Total Square  Feet** | ** ** |
|----------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|------------------------|------------|------------------------------------|------------|
|           |       |                                                                  |       |                                         |       |                     |       |                                  |       |                   |       |                               |       |
| 2009           |       | —                                                                |       | 0.0%                                         |       | 45,328                   |       | —                                |       | 45,328                 |       | 1.7%                               |       |
| 2010           |       | 140                                                                   |       | 0.5%                                         |       | 81,416                   |       | —                                |       | 81,416                 |       | 3.1%                               |       |
| 2011           |       | —                                                                |       | 0.0%                                         |       | 61,618                   |       | —                                |       | 61,618                 |       | 2.4%                               |       |
| 2012           |       | —                                                                |       | 0.0%                                         |       | 289,628                  |       | —                                |       | 289,628                |       | 11.1%                              |       |
| 2013           |       | 4,091                                                                 |       | 15.6%                                        |       | 141,719                  |       | —                                |       | 141,719                |       | 5.4%                               |       |
| 2014           |       | —                                                                |       | 0.0%                                         |       | 148,963                  |       | —                                |       | 148,963                |       | 5.7%                               |       |
| 2015           |       | 283                                                                   |       | 1.1%                                         |       | 232,520                  |       | —                                |       | 232,520                |       | 8.9%                               |       |
| 2016           |       | 517                                                                   |       | 2.0%                                         |       | 114,227                  |       | —                                |       | 114,227                |       | 4.4%                               |       |
| 2017           |       | 3,355                                                                 |       | 12.8%                                        |       | 32,895                   |       | —                                |       | 32,895                 |       | 1.3%                               |       |
| 2018           |       | —                                                                |       | 0.0%                                         |       | 48,174                   |       | —                                |       | 48,174                 |       | 1.8%                               |       |
| 2019 and after |       | 17,818                                                                |       | 68.0%                                        |       | 607,205                  |       | 812,000                               |       | 1,419,205              |       | 54.2%                              |       |
| Total          |       | 26,204                                                                |       | 100.0%                                       |       | 1,803,693                |       | 812,000                               |       | 2,615,693              |       | 100.0%                             |       |

 

**RESULTS OF OPERATIONS**

 

#### **Three Months Ended June 30, 2009 Compared toThree Months Ended June 30, 2008:**

 
| ** **                           | ** ** | **2009**                                                                           | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **(dollars in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental  income                       |       | $                                                                                  | 69,399     |       | $          | 52,708     |       | $            | 16,691     |   | 31.7% |   |
| Interest  and other income           |       | 186                                                                                |       | 682        |       | (496       | )          | (72.7)%      |       |
|                                 |       |                                                                               |       |       |       |       |       |         |       |
| Property  operating expenses         |       | 3,219                                                                              |       | 100        |       | 3,119      |       | 3,119.0%     |       |
| Interest  expense                    |       | 10,707                                                                             |       | 9,810      |       | 897        |       | 9.1%         |       |
| Depreciation  expense                |       | 18,635                                                                             |       | 14,327     |       | 4,308      |       | 30.1%        |       |
| Acquisition  costs                   |       | 1,282                                                                              |       | —     |       | 1,282      |       | —       |       |
| General  and administrative          |       | 5,231                                                                              |       | 4,533      |       | 698        |       | 15.4%        |       |
| Impairment  of assets                |       | —                                                                             |       | 2,940      |       | (2,940     | )          | —       |       |
|                                 |       |                                                                               |       |       |       |       |       |         |       |
| Net  income                          |       | $                                                                                  | 30,511     |       | $          | 21,680     |       | $            | 8,831      |   | 40.7% |   |
|                                 |       |                                                                               |       |       |       |       |       |         |       |
| Weighted  average shares outstanding |       | 120,455                                                                            |       | 100,302    |       | 20,153     |       | 20.1%        |       |
|                                 |       |                                                                               |       |       |       |       |       |         |       |
| Net  income per share                |       | $                                                                                  | 0.25       |       | $          | 0.22       |       | $            | 0.03       |   | 13.6% |   |

 

17

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

 

Rental income increasedbecause of rents earned from our real estate acquisitions since July 1,2008, including $11.0 million of rental income in the second quarter of 2009due to our acquisition of MOBs since June 2008, partially offset by areduction in rental income resulting from the sale of three properties duringthe third quarter of 2008.  Interest andother income decreased as a result of lower levels of investable cash and lowerinterest rates.

 

The increase in propertyoperating expenses for the quarter ended June 30, 2009 is the result ofour acquisition of MOBs since June 2008 and principally includes expenses related to real estate taxes,utilities, cleaning costs and property management fees paid to Reit Management &Research LLC, or RMR.

 

Interest expenseincreased because of greater amounts outstanding under our revolving creditfacility offset by lower interest rates. Our weighted average balance outstanding and interest rate under ourrevolving credit facility was $200.1 million and 1.3%, and $87.6 million and3.6%, for the three months ended June 30, 2009 and 2008, respectively.  Interest expense also increased due to $61.3million of debt assumed as part of our third quarter 2008 acquisitions.

 

Depreciation expense forthe second quarter of 2009 increased because of acquisitions since July 1,2008. Acquisition costs represent the closing costs associated with ouracquisitions that are required to be expensed under U.S. Generally AcceptedAccounting Principles, or GAAP, effective on January 1, 2009.  General and administrative expenses increasedin 2009 principally due to our acquisitions since July 1, 2008, higherlegal fees, taxes and a loss on an equity investment.

 

Net income per share increased because of the changesin revenues and expenses described above offset by the effect of an increase inthe weighted average number of shares outstanding resulting from our issuanceof common shares in June 2008 and February 2009.

 

#### **Six Months Ended June 30, 2009 Compared to SixMonths Ended June 30, 2008:**

 
| ** **                           | ** ** | **2009**                                                              | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                           | ** ** | **(in thousands, except per share amounts)** | ** ** | ** ** | ** ** |
| Rental  income                       |       | $                                                                     | 137,776    |       | $          | 101,747    |       | $            | 36,029     |   | 35.4% |   |
| Interest  and other income           |       | 394                                                                   |       | 1,196      |       | (802       | )          | (67.1)%      |       |
|                                 |       |                                                                  |       |       |       |       |       |         |       |
| Property  operating expenses         |       | 6,174                                                                 |       | 100        |       | 6,074      |       | 6,074.0%     |       |
| Interest  expense                    |       | 21,483                                                                |       | 19,328     |       | 2,155      |       | 11.1%        |       |
| Depreciation  expense                |       | 37,024                                                                |       | 27,376     |       | 9,648      |       | 35.2%        |       |
| Acquisition  costs                   |       | 1,394                                                                 |       | —     |       | 1,394      |       | —       |       |
| General  and administrative          |       | 10,051                                                                |       | 8,203      |       | 1,848      |       | 22.5%        |       |
| Impairment  of assets                |       | —                                                                |       | 2,940      |       | (2,940     | )          | —       |       |
|                                 |       |                                                                  |       |       |       |       |       |         |       |
| Net  income                          |       | $                                                                     | 62,044     |       | $          | 44,996     |       | $            | 17,048     |   | 37.9% |   |
|                                 |       |                                                                  |       |       |       |       |       |         |       |
| Weighted  average shares outstanding |       | 119,161                                                               |       | 95,691     |       | 23,470     |       | 24.5%        |       |
|                                 |       |                                                                  |       |       |       |       |       |         |       |
| Net  income per share                |       | $                                                                     | 0.52       |       | $          | 0.47       |       | $            | 0.05       |   | 10.6% |   |

 

18

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

 

Rental income increasedbecause of rents earned from our real estate acquisitions since July 1,2008, including $21.5 million of rental income in the six months ended June 30,2009 due to our acquisition of MOBs since June 2008, partially offset by areduction in rental income resulting from the sale of three properties duringthe third quarter of 2008.  Interest andother income decreased as a result of lower levels of investable cash and lowerinterest rates.

 

The increase in propertyoperating expenses for the six months ended June 30, 2009 is the result ofour acquisition of MOBs since June 2008 and principally includes expenses related to real estate taxes,utilities, cleaning costs and property management fees paid to RMR.

 

Interest expenseincreased because of greater amounts outstanding under our revolving creditfacility partially offset by lower interest rates. Our weighted average balance outstanding and interest rate under ourrevolving credit facility was $209.3 million and 1.3%, and $56.3 million and3.8%, for the six months ended June 30, 2009 and 2008, respectively.  Interest expense also increased due to $61.3million of debt assumed as part of our third quarter 2008 acquisitions offsetby our prepayment of a mortgage of $12.6 million on April 1, 2008.

 

Depreciation expense forthe six months ended June 30, 2009 increased because of acquisitions sinceJuly 1, 2008. Acquisition costs represent the closing costsassociated with our acquisitions that are required to be expensed under GAAP,effective on January 1, 2009. General and administrative expenses increased in 2009 principally due toour acquisitions since July 1, 2008, higher legal fees, state taxes and aloss on an equity investment.

 

Net income per share increased because of the changesin revenues and expenses described above offset by the effect of an increase inthe weighted average number of shares outstanding resulting from our issuanceof common shares in February and June 2008 and February 2009.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principal source of funds to pay operatingexpenses, debt service and distributions to shareholders is rental income fromour properties. We believe that our operating cash flow will be sufficient tomeet our operating expenses, debt service and distributions on our shares forthe foreseeable future. Our future cash flows from operating activities willdepend primarily upon our ability to:

 

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

 

·                  control operating cost increases at our properties; and

 

·                  purchase additional properties which produce positive cash flows fromoperations.

 

Our Operating Liquidity andResources

 

We generally receive minimum rents monthly orquarterly from our tenants and we receive percentage rents monthly, quarterlyor annually. During the six months ended June 30, 2009, we generated$107.9 million of cash from operations and at June 30, 2009, we had $5.4million of cash and cash equivalents.

 

19

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

 

OurInvestment and Financing Liquidity and Resources

 

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

 

In May 2008,we entered into a series of agreements to acquire 48 MOBs from HRPT PropertiesTrust, or HRP, for a total purchase price of $565.0 million.  Through August 10, 2009, we own 42 ofthese properties for a total purchase price of approximately $527.6 million andone property with a value of approximately $3.0 million was removed from thiscontract.  We have agreed to purchase theremaining four properties for approximately $28.9 million by February 2010;but we and HRP may agree to accelerate these closings.  For more information concerning thesepurchases please see Note 2 to our Condensed Consolidated Financial Statementsabove and the subsection titled “Related Persons Transactions” below.

 

In February 2009,we issued 5.9 million common shares in a public offering, raising net proceedsof approximately $96.8 million.  We usedthe net proceeds from this offering to repay borrowings outstanding on ourrevolving credit facility, to fund the real estate acquisitions described aboveand for general business purposes.

 

During the sixmonths ended June 30, 2009, we purchased $24.2 million of improvementsmade to our properties that are leased to Five Star.  We used cash on hand and borrowings under ourrevolving credit facility to fund these purchases.  As a result of this purchase, the annual rentpayable to us by Five Star increased by approximately $1.9 million.

 

At June 30,2009, we had $5.4 million of cash and cash equivalents and $315.0 millionavailable under our revolving credit facility. As a result of our completion of the FNMA financing on August 4,2009, on August 10, 2009, we had approximately $154.7 million cash onhand, zero amounts outstanding under our revolving credit facility and the full$550.0 million available for drawing.  Weexpect to use cash balances, borrowings under our revolving credit facility andnet proceeds of offerings of equity or debt securities to fund future workingcapital requirements, property acquisitions and expenditures related to therepair, maintenance or renovation of our properties.

 

When significant amountsare outstanding under our revolving credit facility or as the maturity dates ofour revolving credit facility and term debts approach, we will explorealternatives for the repayment of amounts due. Such alternatives may include incurring additional debt and issuing newequity securities.  We have an effectiveshelf registration statement that allows us to issue public securities on an expeditedbasis, but it does not assure that there will be buyers for such securities.

 

Recent capital marketsconditions have been challenging.  Theavailability and cost of credit have been and may continue to be adverselyaffected by illiquid debt markets and wide credit rate spreads, and equitymarkets have been extremely volatile. While we believe we will have access to various types of financings,including debt or equity, to fund our future acquisitions and to pay our debtsand other obligations, there can be no assurance that we will be able tocomplete any debt or equity offerings or that our cost of any future financingswill be reasonable.  If current marketconditions continue or worsen, one or more lenders under our revolving creditfacility may be unable or unwilling to fund advances which we request, ourlenders may be unable or unwilling to renew our credit facilities and we maynot be able to access additional capital. Our ability to continue toaccess capital could be impacted by various factors, including general marketconditions and the continuing recession in the U.S. economy, interest rates,credit ratings on our securities, the market price of our capital stock and thefinancial performance of our tenants. Also, the current market conditions have led to materially increasedcredit spreads which, if they continue, may result in material increases in theinterest costs under our floating rate debts and our fixed rate debts when werefinance or when we incur new debt. These interest cost increases could have a material and adverse impacton our results of operations and financial conditions.

 

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

 

On February 13, 2009, we paid a $0.35 per commonshare, or $40.1 million, quarterly distribution to our common shareholders forthe quarter ended December 31, 2008. On May 15, 2009, we paid a $0.35 per common share, or $42.2million, quarterly distribution to our common shareholders for the quarterended March 31, 2009.  On July 1,2009, we declared a quarterly distribution of $0.36 per common share, or $43.4million, to be paid to our common shareholders of record on July 10, 2009with respect to our results for the quarter ended June 30, 2009. We expectto pay this quarterly distribution on or about August 14, 2009, using cashon hand and, if necessary, borrowings under our revolving credit facility.

 

On August 4,2009, we closed a $512.9 million mortgage financing with FNMA. This mortgageloan is secured by first liens on 28 senior living properties leased to FiveStar. We used a portion of the proceeds from this mortgage financing to repayamounts outstanding under our revolving credit facility and to purchase threeMOBs from HRP.  We intend to use thebalance of the proceeds to fund investments, including possibly acceleratingthe remaining MOB acquisitions from HRP, and for general businesspurposes.  In connection with the FNMAtransaction, we realigned our leases with Five Star, we purchased property andsecurities from Five Star and we reduced the rent payable by Five Star to usand Five Star assumed certain obligations to FNMA.  For more information about the changes in ourrelationship with Five Star resulting from the FNMA transaction, please seeNote 12 to our Condensed Consolidated Financial Statements above and thesubsection titled “Related Persons Transactions” below.

 

In July 2009, weagreed to purchase, from an unaffiliated party, one senior living property forapproximately $21.0 million.  We intendto lease this property to Five Star.  Weexpect to fund this acquisition using cash on hand and borrowings under ourrevolving credit facility, if needed. The purchase of this property is contingent upon completion of ourdiligence and other customary closing conditions. We can provide no assurancethat we will purchase this property.

 

Asof August 10, 2009, we have no off balance sheet arrangements, commercialpaper, derivatives, swaps, hedges, joint ventures or partnerships.

 

## **DebtCovenants**

## ** **

Our principal debt obligations at June 30, 2009,were our unsecured revolving credit facility, two public issues of unsecuredsenior notes totaling $322.5 million and $134.9 million of mortgages secured by33 of our properties.  Our senior notesare governed by an indenture.  Theindenture for our unsecured senior notes and related supplements and ourrevolving credit facility contain a number of covenants which restrict ourability to incur debts, including debts secured by mortgages on our propertiesin excess of calculated amounts, require us to maintain a minimum net worth,restrict our ability to make distributions under certain circumstances andgenerally require us to maintain certain other financial ratios. As of June 30,2009, we believe we were in compliance with all of the covenants under ourindenture and related supplements, our revolving credit facility and our otherdebt obligations.

 

None of our indenturesand related supplements, our revolving credit facility or our other debtobligations contains provisions for acceleration which could be triggered byour debt ratings.  However, in certaincircumstances, our revolving credit facility uses our senior debt rating todetermine the fees and the interest rate payable.

 

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

 

Our public debt indentureand related supplements contain cross default provisions to any other debts of$10.0 million or more.  Similarly, ourrevolving credit facility contains a cross default provision to any other debtsof $25.0 million or more that are recourse debts and to any other debts of$75.0 million or more that are non-recourse debts.

 

**RelatedPersons Transactions**

 

In May 2008, weentered into a series of agreements to acquire 48 MOBs from HRP for anaggregate purchase price of approximately $565.0 million.  In January 2009, we acquired one ofthese MOBs containing 50,000 square feet for $19.3 million, plus closingcosts.  In May 2009, we acquired twoof these MOBs from HRP containing 192,000 square feet for $50.8 million, plusclosing costs.  We recorded intangiblelease assets of $4.1 million and intangible lease liabilities of $1.1 millionfor these MOBs acquired during the six months ended June 30, 2009.  At the request of a tenant for a propertysubject to a multi-property lease, in May 2009 we sold one of our MOBproperties classified as held for sale to an unaffiliated party forapproximately $3.1 million which was its approximate net book value. On August 6,2009, we acquired three of these MOBs from HRP containing 164,000 square feetfor $115.7 million, plus closing costs. We now own 42 of these properties containing 1.9 million square feet foran aggregate purchase price of approximately $527.6 million, plus closingcosts.  One of the remaining buildingswith an allocated value of $3.0 million is no longer subject to our purchaseagreement and one of the MOBs we acquired from HRP which was subject to amulti-property lease was sold at the tenant’s request.  We expect the closing of the purchase of the remainingfour pending MOBs to occur by February 2010. We and HRP may mutually agreeto accelerate the closings of these acquisitions.  We funded these acquisitions using cash onhand, proceeds from mortgage financing, proceeds from equity issuances,borrowings under our revolving credit facility and by assuming three mortgageloans on two properties totaling $10.8 million with a weighted average interestrate of 7.1% per annum and a weighted average maturity in 2018.  Our obligations to complete the pendingpurchase of the remaining four MOBs from HRP are subject to various conditionstypical of commercial real estate purchases. We can provide no assurance that we will purchase any or all of thesebuildings or that the remaining purchases will be completed in 2010 orsooner.  As of June 30, 2009, theMOBs that we acquired from HRP and which remain subject to our purchaseagreements were 98%****leased toapproximately 210 tenants for an average lease term of 7.6 years.  HRP was formerly our parent company, and bothwe and HRP are managed by RMR.  Becausewe and HRP are both managed by RMR, the terms of these transactions werenegotiated by special committees of our and HRP’s boards of trustees composedof trustees who were not also trustees of both companies.

 

HRP was formerly our parent.  We were spun off to HRP’s shareholders in1999 and, at the time of this spin off, we and HRP entered into a transactionagreement which, among other things, prohibited us from purchasing MOBs.  Concurrently with the execution and deliveryof the purchase agreements described above, we and HRP entered into anamendment to that transaction agreement, or the first amendment agreement, topermit us, rather than HRP, to invest in medical office, clinic and biomedical,pharmaceutical and laboratory buildings. The first amendment agreement is subject, in the case of mixed usebuildings, to HRP’s retaining the right to invest in any mixed use building forwhich the rentable square footage is less than 50% medical office, clinic andbiomedical, pharmaceutical and laboratory use. Also, concurrently with the execution and delivery of the purchaseagreements, we entered into a right of first refusal agreement under which wewere granted a right of first refusal to purchase up to 45 additional identifiedother properties (containing approximately 4.6 million square feet of rentalspace) HRP owns which are leased to tenants in medical related businesses inthe event HRP determines to sell suchproperties or in the event of an indirect sale asa result of HRP’s change of control or a change of control of HRP’s subsidiarywhich owns such properties.

 

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

 

Both we and HRPare managed by RMR, Barry Portnoy and Adam Portnoy own RMR and are ManagingTrustees of both us and HRP and Frederick Zeytoonjian is an Independent Trusteeof both us and HRP.  Because of theserelationships, the terms of our agreements entered in 2008 with HRP werenegotiated and approved by special committees of our and HRP’s boards composedof trustees of each company who are not trustees of both companies. For moreinformation about the terms of the purchase agreements, the first amendmentagreement and the right of first refusal agreement between us and HRP, pleaseread these agreements, copies of which are filed as exhibits to our CurrentReport on Form 8-K dated May 9, 2008, copies of which are availableat the SEC website: www.sec.gov.

 

Five Star is ourlargest tenant.  Five Star is our formersubsidiary.  In addition to being ourmanager, RMR also provides management services to Five Star.  One of our trustees, Barry Portnoy, iscurrently a Managing Director of Five Star. Because of these and other relationships we and Five Star may beconsidered related persons.  As of June 30,2009, we leased 181****senior livingcommunities and two rehabilitation hospitals to Five Star for total annualminimum rent of $178.5 million.  Becauseof the relationships between us and Five Star, all of our transactions withFive Star are separately approved by our Independent Trustees and Five Star’sindependent directors.

 

During the sixmonths ended June 30, 2009, pursuant to the terms of our existing leaseswith Five Star, we purchased $24.2 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 $1.9 million.

 

On August 4, 2009,we closed a $512.9 million mortgage financing with FNMA. This mortgage loan issecured by first liens on 28 senior living properties that we own and lease toFive Star with 5,618 living units / beds located in 16 states. We used aportion of the proceeds from this mortgage financing to repay amountsoutstanding under our revolving credit facility and to purchase three MOBs fromHRP.  We intend to use the balance of theproceeds to fund investments, including possibly accelerating the remaining MOBacquisitions from HRP, and for general business purposes.   In connection with the FNMA transaction, werealigned our four leases with Five Star. Lease no. 1 (which is comprised of four separate leases) now includes 80properties, including independent living communities, assisted livingcommunities and skilled nursing facilities, and expires in 2024.  Lease no. 2 now includes 50 properties,including independent living communities, assisted living communities, skillednursing facilities and two rehabilitation hospitals, and expires in 2026.  Lease no. 3 now includes the 28 FNMA financedproperties, including independent living communities and assisted livingcommunities, and expires in 2028.  Leaseno. 4 now includes 25 properties, including independent living communities,assisted living communities and skilled nursing facilities, and expires in2017.  In connection with the leaserealignment and the FNMA financing, we entered into a lease realignmentagreement with Five Star, or the Realignment Agreement.  Pursuant to the terms of the RealignmentAgreement, (1) the four leases, or the Leases, were reconfigured as described above,(2) we acquired certain personal property located at 28 properties in 16states, or theProperties, from subsidiaries of Five Star and pledged that property to FNMA,(3) we purchased 3,200,000 shares, or the Shares, of common stock, $.01 parvalue per share, which represent approximately 9% of the total common stockoutstanding of Five Star, (4) Five Star agreed to undertake certain reportingand other operating obligations required by FNMA and (5) subsidiaries of FiveStar pledged certain tangible and intangible personal property, such asaccounts receivable and contract rights, located at, or arising from theoperations of, the Properties to secure their obligations under the Lease underwhich the Properties are leased and certain of their obligations relating tothe $512.9 million secured term loan, or the Loan.  To compensate Five Star for the sale of itspersonal property, the sale of the Shares, the pledge of intangible assets andfor the services and obligations that Five Star has assumed, (1) we reduced theannual rent payable to us under one of the Leases, but not the lease underwhich the Properties are leased, by $2.0 million per year for the term of thatLease, which will expire in 2026; (2) we paid Five Star a total of $18.6million; and (3) we agreed to reimburse Five Star for its out of pocketexpenses incurred in connection with the negotiation and closing of thistransaction.  Five Star has grantedcertain registration rights to us with regard to the Shares.  For more information about this FNMAfinancing and the agreement we entered with Five Star to facilitate thisfinancing please see Part II, Item 5 of this Quarterly Report on Form 10-Q.

 

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

 

In July 2009, weagreed to purchase, from an unaffiliated party, one senior living property forapproximately $21.0 million.  We intendto lease this property to Five Star.  Weexpect to fund this acquisition using cash on hand and borrowings under ourrevolving credit facility, if needed. The purchase of this property is contingent upon completion of ourdiligence and other customary closing conditions. We can provide no assurancethat we will purchase this property.

 

Underthe terms of our business management agreement with RMR, on April 8, 2009we issued 55,814 common shares in payment of an incentive fee of approximately$789,000 for services rendered by RMR during 2008.

 

As of June 30, 2009,we have invested $5.1 million in Affiliates Insurance Company, or AIC, aninsurance company, that is also owned by RMR and other companies towhich RMR provides management services.  We own 16.67% of the commonshares of AIC which has a current carrying value of $5.0million.  Subsequent to June 30, 2009, we invested an additional$35,630 in order to fund our share of formation and licensing costs.

 

For moreinformation about our dealings with our managing trustees, RMR, Five Star, HRPand their affiliates and our investments in AIC and about the risks which mayarise as a result of these related person transactions, please see our Annual Report on Form10-K for the year ended December 31, 2008, or the Annual Report, our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009, or the First QuarterReport, the other Items in this Quarterly Report on Form 10-Q, and our otherfilings made with the SEC, and in particular, the section captioned “RiskFactors” in the Annual Report, the sections captioned “Management’s Discussionand Analysis of Financial Condition and Results of Operations – Related  Person Transactions” in the Annual Report,First Quarter Report and this Quarterly Report on Form 10-Q and the sectioncaptioned “Related Person Transactions and Company Review of Such Transactions”in our Proxy Statement dated March 30, 2009, or our Proxy Statement, relatingto our 2009 Annual Shareholders Meeting.

 

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

 

We are exposed to risksassociated with market changes in interest rates.  We manage our exposure to this market risk bymonitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates isunchanged since December 31, 2008. Other than as described below, we donot foresee any significant changes in our exposure to fluctuations in interestrates or in how we manage this exposure in the future.

 

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

 

| **Debt**                | ** ** | **Principal  Balance** | ** ** | **Annual  Interest  Rate** | ** ** | **Annual  Interest  Expense** | ** ** | **Maturity** | ** ** | **Interest  Payments Due** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------------|------------|-------------------------------|------------|--------------|------------|----------------------------|------------|
| Unsecured  senior notes |       | $                      | 225,000    |                       | 8.625%     |                          | $          | 19,406       |       | 2012                       |       | Semi-Annually |   |
| Unsecured  senior notes |       | 97,500                 |       | 7.875%                     |       | 7,678                         |       | 2015         |       | Semi-Annually              |       |
| Mortgages               |       | 49,778                 |       | 6.54%                      |       | 3,255                         |       | 2017         |       | Monthly                    |       |
| Mortgages               |       | 33,435                 |       | 6.97%                      |       | 2,330                         |       | 2012         |       | Monthly                    |       |
| Mortgage                |       | 14,896                 |       | 6.91%                      |       | 1,029                         |       | 2013         |       | Monthly                    |       |
| Mortgages               |       | 11,593                 |       | 6.11%                      |       | 708                           |       | 2013         |       | Monthly                    |       |
| Mortgage                |       | 4,421                  |       | 6.50%                      |       | 287                           |       | 2013         |       | Monthly                    |       |
| Mortgage                |       | 4,054                  |       | 7.31%                      |       | 296                           |       | 2022         |       | Monthly                    |       |
| Mortgage                |       | 1,980                  |       | 7.85%                      |       | 155                           |       | 2022         |       | Monthly                    |       |
| Bonds                   |       | 14,700                 |       | 5.875%                     |       | 864                           |       | 2027         |       | Semi-Annually              |       |
|                    |       | $                      | 457,357    |                       |       |                          | $          | 36,008       |       |                       |       |   |   |

 

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk (continued)**

 

No principal payments aredue under our unsecured notes or bonds until maturity. Our mortgages requireprincipal and interest payments through maturity pursuant to amortizationschedules. Because these debts bear interest at a fixed rate, changes in marketinterest rates during the term of these debts will not affect our operatingresults.  If these debts are refinancedat interest rates which are 10% higher or lower than shown above, our per annuminterest cost would increase or decrease by approximately $2.7 million.  Changes in market interest rates also affectthe fair value of our fixed rate debt obligations; increases in market interestrates decrease the fair value of our fixed rate debt, while decreases in marketinterest rates increase the fair value of our fixed rate debt.  Based on the balances outstanding at June 30,2009, and discounted cash flow analysis through the maturity date of our fixedrate debt obligations, a hypothetical immediate 10% change in interest rateswould change the fair value of those obligations by approximately $12.5million.

 

We are allowed to makeprepayments of our unsecured senior notes, in whole or in part, at par plus apremium, as defined.  Our mortgagescontain provisions that allow us to make repayment at par plus premiums whichis generally designed to preserve a stated yield to the mortgage holder.  Also, we occasionally have the opportunity topurchase our outstanding debt by open market purchases.  These prepayment rights may afford us the opportunityto mitigate the risk of refinancing at maturity.

 

 Our unsecured revolving credit facility accrues interest at floatingrates and matures in December 2010. Subject to certain conditions, this credit facility’s maturity date canbe extended at our option to December 31, 2011 upon payment of a fee. At June 30,2009, we had $235.0 million outstanding and $315.0 million available forborrowing under our revolving credit facility. At August 10, 2009, we had no amounts outstanding and $550.0million available for borrowing under our revolving credit facility. We maymake repayments and drawings under our revolving credit facility at any timewithout penalty.  We borrow in U.S.dollars and borrowings under our revolving credit facility accrue interest atLIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollarbased short term interest rates, specifically LIBOR.  A change in interest rates would not affectthe value of this floating rate debt but would affect our operating results.  For example, the weighted average interestrate payable on our outstanding revolving indebtedness of $235.0 million at June 30,2009 was 1.3% per annum.  The followingtable presents the impact a 10% change in interest rates would have on ourfloating rate interest expense at June 30, 2009 (dollars in thousands):

 

| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest Rate  Per Year**             | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per  Year** | ** ** |
| At  June 30, 2009 |       | 1.30%                                   |       | $ | 235,000 |   | $ | 3,055 |   |
| 10%  reduction         |       | 1.17%                                   |       | $ | 235,000 |   | $ | 2,750 |   |
| 10%  increase          |       | 1.43%                                   |       | $ | 235,000 |   | $ | 3,360 |   |

 

The foregoing table shows the impact of an immediatechange in floating interest rates.  Ifinterest rates were to change gradually over time, the impact would be spreadover time.  Our exposure to fluctuationsin floating interest rates will increase or decrease in the future withincreases or decreases in the outstanding amount under our revolving creditfacility or other floating rate debt. The following table presents the impact a 10% change in interest rateswould have on our floating rate interest expense at June 30, 2009 if wewere fully drawn on our revolving credit facility (dollars in thousands):

 

| ** **             | ** ** | **Impact of Changes in Interest Rates** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **Interest Rate  Per Year**             | ** ** | **Outstanding  Debt** | ** ** | **Total Interest  Expense Per   Year** | ** ** |
| At  June 30, 2009 |       | 1.30%                                   |       | $ | 550,000 |   | $ | 7,150 |   |
| 10%  reduction         |       | 1.17%                                   |       | $ | 550,000 |   | $ | 6,435 |   |
| 10%  increase          |       | 1.43%                                   |       | $ | 550,000 |   | $ | 7,865 |   |

 

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

 

On August 4, 2009, weclosed a FNMA mortgage financing for approximately $513.0 million.  A part of this borrowing is at a fixedinterest rate and a part is at a floating rate calculated as a spread aboveLIBOR.  The impact that a change ininterest rate will be the combined impact of that change upon the value of thefixed rate part of this loan and the change in interest expense we would incuron the floating rate part of this loan. For example, at the time we closed this FNMA mortgage loan, oureffective weighted average annual interest rate payable on the full amount ofthis loan was 6.59%.  If interest ratesincrease 10% of current rates, the impact upon us would be to change the valueof this obligation and change our interest expense as set forth in thefollowing table:

 

| ** **              | ** ** | **Impact of Changes in Interest Rates**    | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **Weighted Average  Interest Rate****(1)** | ** ** | **Annual Interest  Expense** | ** ** |
| At  August 4, 2009 |       | 6.59%                                      |       | $ | 33,813 |   |
| 10%  reduction          |       | 6.34%                                      |       | $ | 32,496 |   |
| 10%  increase           |       | 6.85%                                      |       | $ | 35,129 |   |

 

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| (1) | A portion of the loan requires interest at a fixed  rate of 6.71% and a portion of the loan requires interest at a variable rate  of 6.415%. This table assumes a 10% interest rate change on the variable  portion of the loan. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Also, we have arranged withFNMA to cap, or limit, the interest rate increases which will impact theinterest expense we will pay on the floating rate part of this loan.  The net effect of this cap arrangement is thatthe annual effective interest rate on the full amount of this loan we may berequired to pay is 7.79%.

 

Changes in market interest rates also affect the fairvalue of our mortgage debt obligation; increases in market interest ratesdecrease the fair value of our fixed rate debt while decreases in marketinterest rates increase the fair value of our fixed rate debt. Based on theinitial balance of the mortgage and discounted cash flow analyses, and usingour current fixed rate interest rate of 6.71%, a hypothetical immediate 10%change in interest rates would change the fair value of the fixed rate portionof this mortgage debt obligation by approximately $14.1 million.

 

We also have the option toprepay our FNMA obligations in order to mitigate the risks of refinancing orfor other reasons.  The fixed rateportion of this loan may be prepaid during the first 114 months of the loanterm subject to our paying a standard make whole premium and thereafter for afixed percent premium of the amount prepaid which is reduced to zero in thelast six months of this ten year loan. The floating rate portion may be prepaid after one year for a fixedpremium percent of the amount prepaid which is also reduced to zero in the lastsix months of this ten year loan.

 

**Item 4.  Controls and Procedures**

 

As of the end of the period covered by this report, our managementcarried out an evaluation, under the supervision and with the participation ofour Managing Trustees, President and Chief Operating Officer and Treasurer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures pursuant to the Securities Exchange Act of 1934, as amended, Rules 13a-15and 15d-15.  Based upon that evaluation,our Managing Trustees, President and Chief Operating Officer and Treasurer andChief Financial Officer concluded that our disclosure controls and proceduresare effective.

 

There have been no changes in our internal control over financialreporting during the quarter ended June 30, 2009 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**WARNING CONCERNING FORWARD LOOKING STATEMENTS**

** **

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTSWHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIESLAWS.  WHENEVER WE USE WORDS SUCH AS“BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAREXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS.  THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OURPRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOTGUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OFOUR BUSINESS, INCLUDING:

 

·      OUR RESPONSIBILITIES UNDER THE FNMA LOAN AND OUREXPECTED USE OF THE PROCEEDS THEREOF;

 

·      OURABILITY TO PURCHASE OR SELL PROPERTIES;

 

·      OURABILITY TO RAISE DEBT OR EQUITY CAPITAL;

 

·      OURABILITY TO PAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS;

 

·      OURABILITY TO RETAIN OUR EXISTING TENANTS AND MAINTAIN OR INCREASE CURRENT RENTALRATES;

 

·      OUR AGREEMENTS TO PURCHASE CERTAIN MOBS;

 

·      OUR AGREEMENTS TO PURCHASE CERTAIN SENIORLIVING PROPERTIES;

 

·      OUR ENTRY INTO AGREEMENTS TO SELLPROPERTIES CLASSIFIED AS HELD FOR SALE ON OUR CONSOLIDATED BALANCE SHEET;

 

·      OUR PARTICIPATING IN THE INSURANCECOMPANY BEING FORMED WITH RMR AND COMPANIES TO WHICH RMR PROVIDES MANAGEMENTSERVICES; AND

 

·      OTHER MATTERS.

 

OUR ACTUAL RESULTS MAY DIFFERMATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTSAS A RESULT OF VARIOUS FACTORS.  FACTORSTHAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS ANDUPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROMOPERATIONS, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITEDTO:

 

·      THEIMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS, INCLUDING THE RECENTCHANGES IN THE CAPITAL MARKETS, ON US AND OUR TENANTS;

 

·      ACTUALAND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR, RMRAND THEIR AFFILIATES;

 

·      CHANGESIN FEDERAL, STATE AND LOCAL LEGISLATION, GOVERNMENTAL REGULATIONS, ACCOUNTINGRULES, TAX LAWS AND SIMILAR MATTERS; AND

 

·      COMPETITIONWITHIN THE REAL ESTATE INDUSTRY OR THOSE INDUSTRIES IN WHICH OUR TENANTSOPERATE.

 

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FOR EXAMPLE:

 
| · | THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT THE  FIXED RATE PORTION OF THE FNMA MORTGAGE LOAN MAY BE PREPAID SUBJECT TO  STANDARD FNMA PREPAYMENT TERMS, THAT THE FLOATING RATE PORTION OF THE LOAN  MAY BE PREPAID AT 101% OF PAR VALUE AFTER ONE YEAR AND THAT, SUBJECT TO  CERTAIN CONDITIONS, COLLATERAL PROPERTIES MAY BE RELEASED FROM THE  MORTGAGE LIEN AS THE LOAN IS PREPAID. THE IMPLICATION OF THESE STATEMENTS  MAY BE THAT WE WILL PREPAY THIS MORTGAGE LOAN. IN FACT, WE HAVE NOT  DECIDED WHETHER OR WHEN TO PREPAY THIS MORTGAGE AND THAT DECISION WILL BE  MADE BASED UPON OUR CIRCUMSTANCES AND MARKET CONDITIONS IN THE FUTURE. THERE  CAN BE NO ASSURANCE THAT THIS LOAN WILL BE PREPAID OR THAT ANY COLLATERAL  WILL BE RELEASED;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| · | THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT  FIVE STAR HAS AGREED TO UNDERTAKE CERTAIN REPORTING AND OTHER REQUIREMENTS  UNDER THE FNMA MORTGAGE LOAN TO US. AN IMPLICATION OF THIS STATEMENT  MAY BE THAT WE HAVE BEEN RELEASED OF THESE OBLIGATIONS TO FNMA. IN FACT,  WE REMAIN RESPONSIBLE TO FNMA FOR ALL REQUIREMENTS ARISING UNDER THE MORTGAGE  AND LOAN DOCUMENTS AND WE WILL BE RESPONSIBLE TO PERFORM THE OBLIGATIONS  WHICH FIVE STAR HAS ASSUMED IN THE EVENT FIVE STAR FAILS TO SATISFY THESE  OBLIGATIONS. ALSO, CERTAIN OF THE OBLIGATIONS ARISING UNDER THE MORTGAGE  DOCUMENTS RELATE TO FIVE STAR’S OPERATIONS OF THE MORTGAGED PROPERTIES WHICH  MAY BE BEYOND OUR CAPACITY TO PERFORM;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| · | THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE  INTEND TO USE THE PROCEEDS OF THE FNMA MORTGAGE LOAN, AMONG OTHER PURPOSES,  TO FUND INVESTMENTS AND POSSIBLY TO ACCELERATE THE REMAINING PURCHASE OF MOBS  FROM HRP. WE ARE CURRENTLY CONSIDERING SEVERAL ACQUISITION OPPORTUNITIES;  HOWEVER, THERE CAN BE NO ASSURANCE THAT WE WILL CONCLUDE ANY OF THESE  ACQUISITIONS OR THAT ALTERNATIVE ACQUISITIONS WILL BE IDENTIFIED AND CLOSED.  ALTHOUGH WE AND HRP HAVE PREVIOUSLY AGREED UPON TERMS FOR OUR PURCHASE OF  CERTAIN MEDICAL OFFICE BUILDINGS, THE CLOSINGS OF THESE SALES REMAIN SUBJECT  TO SATISFACTION OF CUSTOMARY REAL ESTATE CLOSING CONDITIONS AND WE DO NOT  HAVE THE UNILATERAL RIGHT TO ACCELERATE THESE CLOSINGS WHICH ARE NOW  SCHEDULED TO OCCUR BY FEBRUARY 2010. IN PARTICULAR, INVESTORS SHOULD NOTE  THAT WE AND HRP ARE BOTH MANAGED BY RMR AND HAVE CERTAIN COMMON TRUSTEES;  ACCORDINGLY, ANY CHANGE TO ACCELERATE THE CLOSINGS OF SALES BY HRP TO US WILL  REQUIRE THE SEPARATE APPROVALS OF TRUSTEES OF US AND HRP, RESPECTIVELY, WHO ARE  NOT ALSO TRUSTEES OF THE OTHER COMPANY;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| · | THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT THE  TERMS OF THE AGREEMENT BETWEEN US AND FIVE STAR ANNOUNCED IN THIS QUARTERLY  REPORT ON FORM 10-Q WERE NEGOTIATED BY SPECIAL COMMITTEES OF THE BOARDS  OF US AND FIVE STAR COMPOSED ONLY OF OUR TRUSTEES AND FIVE STAR DIRECTORS WHO  ARE NOT ALSO TRUSTEES AND DIRECTORS OF THE OTHER COMPANY. THE IMPLICATION OF  THIS STATEMENT MAY BE THAT THIS AGREEMENT WAS NEGOTIATED ON AN ARMS  LENGTH BASIS AND MAY NOT BE LEGALLY CHALLENGED BECAUSE THIS AGREEMENT  PROVIDES A FAIR EXCHANGE OF CONSIDERATION BETWEEN US AND FIVE STAR. IN FACT:  (I) FIVE STAR WAS FORMERLY A 100% OWNED SUBSIDIARY OF US AND FIVE STAR  BECAME A SEPARATELY OWNED PUBLIC COMPANY AS A RESULT OF A SPIN OFF TO OUR  SHAREHOLDERS IN 2001; (II) RMR PROVIDES MANAGEMENT SERVICES TO BOTH US  AND FIVE STAR; (III) THE OFFICERS OF BOTH US AND FIVE STAR ARE ALSO  OFFICERS OF RMR; (IV) RMR AND ITS OFFICERS PROVIDED INFORMATION AND  ASSISTANCE TO THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR; (V) THE  MEMBERS OF THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR ALSO SERVE AS  TRUSTEES OR DIRECTORS OF OTHER COMPANIES MANAGED BY RMR; AND (VI) WE AND  FIVE STAR HAVE EXTENSIVE AND CONTINUING BUSINESS WITH EACH OTHER. ALTHOUGH WE  BELIEVE THAT THIS AGREEMENT IS FAIR TO US, IN THE CIRCUMSTANCES OF THE  MULTIPLE RELATIONSHIPS AMONG FIVE STAR AND US, IT IS POSSIBLE THAT LITIGATION  MAY BE BROUGHT ALLEGING THAT THIS AGREEMENT IS UNFAIR TO US OR TO FIVE  STAR. LITIGATION MAY BE EXPENSIVE AND DISTRACTING TO MANAGEMENT. WE CAN  PROVIDE NO ASSURANCE THAT OUR ENTRY INTO THE AGREEMENT WITH FIVE STAR  ANNOUNCED IN THIS QUARTERLY REPORT ON FORM 10-Q WILL NOT CAUSE US TO  BECOME INVOLVED IN LITIGATION THAT CHALLENGES THE FAIRNESS OF THE  CONSIDERATION WE HAVE EXCHANGED WITH FIVE STAR. SUCH ALLEGATIONS OR LITIGATION  COULD CAUSE OUR SHARE TRADING PRICE TO DECLINE AND THE OUTCOME OF SUCH  LITIGATION IS IMPOSSIBLE TO PREDICT; |
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| · | OUR OBLIGATIONS TO  COMPLETE THE CURRENTLY PENDING MOB PURCHASES ARE SUBJECT TO VARIOUS  CONDITIONS TYPICAL OF LARGE COMMERCIAL REAL ESTATE PURCHASES.  AS A RESULT OF ANY FAILURE OF THESE  CONDITIONS, SOME OF THE PROPERTIES MAY NOT BE PURCHASED OR SOME OF THESE  PURCHASES MAY BE ACCELERATED OR DELAYED;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| · | THIS  QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ENTERED INTO A  PURCHASE AND SALE AGREEMENT TO ACQUIRE ONE PROPERTY FROM AN UNAFFILIATED  PARTY.  OUR OBLIGATION TO COMPLETE THIS  PURCHASE IS SUBJECT TO VARIOUS CONDITIONS TYPICAL OF LARGE COMMERCIAL REAL  ESTATE PURCHASES.  AS A RESULT OF ANY  FAILURE OF THESE CONDITIONS, THIS PROPERTY MAY NOT BE PURCHASED.  ALSO, THIS QUARTERLY REPORT ON  FORM 10-Q STATES THAT IF THIS PROPERTY IS PURCHASED IT WILL BE LEASED TO  FIVE STAR.  THE FINAL TERMS OF OUR  LEASE FOR THIS PROPERTY HAVE NOT YET BEEN AGREED AND, BECAUSE OF THE MULTIPLE  RELATIONSHIPS AMOUNG US, FIVE STAR AND RMR, THESE TERMS WILL BE SUBJECT TO  APPROVAL BY OUR TRUSTEES AND FIVE STAR’S DIRECTORS WHO ARE NOT ALSO TRUSTEES  OR DIRECTORS OF THE OTHER COMPANIES.   ACCORDINGLY, THIS LEASE MAY NOT BE ENTERED;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| · | OUR  PARTICIPATION IN THE INSURANCE BUSINESS WITH RMR AND ITS AFFILIATES INVOLVES  POTENTIAL FINANCIAL RISKS AND REWARDS TYPICAL OF ANY START UP BUSINESS  VENTURE AS WELL AS OTHER FINANCIAL RISKS AND REWARDS SPECIFIC TO INSURANCE  COMPANIES. AMONG THE RISKS THAT ARE SPECIFIC TO INSURANCE COMPANIES IS THE  RISK THAT AIC MAY NOT BE ABLE TO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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|   | ADEQUATELY  PAY CLAIMS WHICH COULD LEAVE OUR COMPANY UNDERINSURED AND INCREASE ITS  FUNDING EXPOSURE FOR CLAIMS THAT MIGHT OTHERWISE HAVE BEEN FUNDED IF  INSURANCE WAS PURCHASED FROM FINANCIALLY MORE SECURE INSURERS.  ACCORDINGLY, OUR EXPECTED FINANCIAL  BENEFITS FROM OUR INITIAL OR FUTURE INVESTMENTS IN AIC MAY BE DELAYED OR  MAY NOT OCCUR AND AIC MAY REQUIRE A LARGER INVESTMENT THAN WE  EXPECT; |
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| · | IF THE AVAILABILITY OF DEBT CAPITAL REMAINS RESTRICTED  OR BECOMES MORE RESTRICTED, WE MAY BE UNABLE TO REFINANCE OR REPAY OUR  DEBT OBLIGATIONS WHEN THEY BECOME DUE OR ON TERMS WHICH ARE AS FAVORABLE AS  WE NOW HAVE;                                                                                                                                                                                                      |
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| · | OUR  ABILITY TO MAKE FUTURE DISTRIBUTIONS DEPENDS UPON OUR FUTURE EARNINGS.  WE MAY BE UNABLE TO MAINTAIN OUR  CURRENT RATE OF DISTRIBUTIONS AND FUTURE DISTRIBUTIONS MAY BE SUSPENDED  OR PAID AT A LESSER RATE THAN THE DISTRIBUTIONS WE NOW PAY;                                                                                                                                                                  |
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| · | OUR  ABILITY TO GROW OUR BUSINESS AND PAY OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON  OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS WHICH EXCEED OUR  CAPITAL COSTS.  WE MAY BE UNABLE  TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE  PURCHASE PRICES, ACQUISITION FINANCING OR LEASE TERMS FOR NEW PROPERTIES;                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · | SOME  OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE  TO LOCATE NEW TENANTS TO MAINTAIN THE HISTORICAL OCCUPANCY RATES OF OUR  PROPERTIES;                                                                                                                                                                                                                                                            |
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| · | RENTS  THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE; AND                                                                                                                                                                                                                                                                                                                                                                   |
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| · | OUR  TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS.                                                                                                                                                                                                                                                                                                                                                         |

 

THESE RESULTS COULD OCCURDUE TO MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS NATURAL DISASTERS ORCHANGES IN OUR TENANTS’ REVENUES OR COSTS, OR CHANGES IN CAPITAL MARKETS OR THEECONOMY GENERALLY, ARE BEYOND OUR CONTROL.

 

OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUALRESULTS TO DIFFER MATERIALLY FROM THOSE IN OUR FORWARD LOOKING STATEMENTS AREDESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS” IN OUR ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2008.

 

YOU SHOULD NOT PLACE UNDUERELIANCE UPON FORWARD LOOKING STATEMENTS.

 

EXCEPTAS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKINGSTATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

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**STATEMENTCONCERNING LIMITED LIABILITY**

 

THEARTICLES OF AMENDMENT AND RESTATEMENT OF THE DECLARATION OF TRUST ESTABLISHINGSENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH,TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THEOFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND,PROVIDES THAT THE NAME “SENIOR HOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEESUNDER THE DECLARATION OF TRUST, AS AMENDED AND SUPPLEMENTED, AS TRUSTEES, BUTNOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER,EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANYPERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIMAGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY,SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THEPAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

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**PART II.   Other Information**

 

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

** **

Asfurther described in our Annual Report on Form 10-K for the year ended December 31,2008, RMR provides management services to us.  Under the terms of ourbusiness management agreement with RMR, on April 8, 2009, we issued 55,814common shares to RMR in payment of an incentive fee for services rendered byRMR during 2008. We issued these shares pursuant to an exemption from registrationcontained in Section 4(2) of the Securities Act of 1933, as amended,or the Securities Act.

 

On May 18,2009, we granted 2,000 common shares of beneficial interest, par value $0.01per share, valued at $15.45 per share, the closing price of our common shareson the New York Stock Exchange on that day, to each of our five trustees.  We made these grants pursuant to an exemptionfrom registration contained in Section 4(2) of the Securities Act.

 

**Item 4.  Submissionof Matters to a Vote of Security Holders**

** **

**At ourregular annual meeting held on May 18, 2009, our shareholders re-electedJeffrey P. Somers (106,516,997 shares voted for and 6,191,988 shares withheld)as one of our Independent Trustees and re-elected Barry M. Portnoy (100,465,063shares voted for and 12,243,922 shares withheld) as one of our ManagingTrustees.  The term of office of Mr. Somersand Mr. Portnoy will extend until our annual meeting of shareholders in2012.  Messrs. John L. Harrington,Adam D. Portnoy and Frederick N. Zeytoonjian continue to serve as trustees withterms of office expiring in 2010, 2010 and 2011, respectively.**

** **

**Item 5.  Other Information**

 

***Entry into Term Loan***

 

On August 4, 2009,one of our wholly-owned special purpose subsidiaries, or the Subsidiary, closedthe Loan originated by Citibank, N.A. and assigned to FNMA.  A portion of the Loan requires interest at afixed rate and a portion of the Loan requires interest at a floating rate overLIBOR.  The floating rate is capped sothat the maximum interest rate payable during the term of the Loan on the fullamount of the Loan is 7.79%.  The currentweighted average interest rate is 6.59% per annum.  The Loan matures on September 1, 2019and payments of principal and interest are based upon 30-yearamortization.  The fixed rate portion ofthe Loan may be prepaid at any time subject to standard FNMA prepaymentterms.  The floating rate portion of theLoan may be prepaid at any time after the first anniversary of the Loan(including a 1% prepayment premium) and, subject to certain conditions,collateral properties may be released from the mortgage lien upon partialprepayment of the Loan.

 

The Subsidiary, together with twoother special purpose subsidiaries that guaranty the Loan, own the Properties,which are leased and subleased to certain subsidiaries of Five Star.  The Loan is secured by mortgages on theProperties.  The Loan is non-recourse tous and our subsidiaries, other than the Subsidiary and the two guarantorsubsidiaries.  We guaranty certainspecific recourse obligations of the Subsidiary, including losses arising outof the misapplication of rents, and we agreed to indemnify FNMA against certainlosses relating to risks relating to transfers of certain licenses and assetsby Five Star or its subsidiaries or arising from certain misapplications offunds by the applicable Five Star subsidiaries.

 

Wehave agreed to comply with certain net worth and liquidity covenants untilcertain licenses and assets relating to the Properties are transferred by theexisting Five Star subsidiary subtenants to new special purpose Five Starsubsidiaries.  Other affirmative andnegative covenants apply to the Subsidiary and the two guarantor subsidiarieswhich generally restrict their ability to (among other things) incur debt ormake distributions under certain circumstances. Additional covenants prohibit a change in control of us, the Subsidiaryor either of the two guarantor subsidiaries.

 

The entire amount of theLoan was drawn on August 4, 2009. We used a portion of the amount drawn to repay amounts outstanding underour existing unsecured revolving credit facility and to purchase three MOBsfrom HRP.  We intend to use the balanceof the proceeds to fund investments, including possibly accelerating theclosing of remaining MOB acquisitions from HRP, and for general businesspurposes.

 

***Reconfiguration of Leases***

 

Priorto this transaction, we leased 183 senior living communities to Five Star underthe Leases.  In order to assist us in completing the Loan, on August 4,2009, we entered into the Realignment Agreement.  Pursuant to the terms of the RealignmentAgreement, (1) the Leases were reconfigured as described below, (2) weacquired certain personal property located at the

 

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Properties fromsubsidiaries of Five Star and pledged that property to FNMA, (3) wepurchased the Shares, $.01 par value per share, which represent approximately9% of the total common stock outstanding of Five Star, (4) Five Staragreed to undertake certain reporting and other operating obligations requiredby FNMA and (5) subsidiaries of Five Star pledged certain tangible andintangible personal property, such as accounts receivable and contract rights,located at, or arising from the operations of, the Properties to secure theirobligations under the Lease under which the Properties are leased and certainof their obligations relating to the Loan. To compensate Five Star for the sale of its personal property, the saleof the Shares, the pledge of intangible assets and for the services andobligations that Five Star has assumed, (1) we reduced the annual rentpayable to us under one of the Leases, but not the lease under which theProperties are leased, by $2.0 million per year for the term of that Lease,which will expire in 2026; (2) we paid Five Star a total of $18.6 million;and (3) we agreed to reimburse Five Star for its out of pocket expensesincurred in connection with the negotiation and closing of thistransaction.  Five Star has grantedcertain registration rights to us with regard to the Shares.

 

As a result of thistransaction, the Leases were reconfigured so that the Properties, which aremortgaged to FNMA, are all leased under a single Lease which includesindependent living communities and assisted living communities and has aninitial term that expires in 2028.  Lease no. 1 (which is comprised of four separateleases) now includes 80 properties, including independent living communities,assisted living communities and skilled nursing facilities and has an initialterm that expires in 2024.  Leaseno. 2 now includes 50 properties, including independent livingcommunities, assisted living communities, skilled nursing facilities and tworehabilitation hospitals and has an initial term that expires in 2026.  Lease no. 4 now includes 25 properties, including independent livingcommunities, assisted living communities and skilled nursing facilities and hasan initial term that expires in 2017.

 

Theterms of the Realignment Agreement described above were negotiated and approvedby special committees of our Independent Trustees and Five Star’s independentdirectors, none of whom are trustees or directors of the other company.  Each special committee was represented byseparate counsel.

 

For more information aboutour dealings with our managing trustees, RMR, Five Star, HRP and theiraffiliates and about the risks which may arise as a result of these relatedperson transactions, please see our Annual Report, our First Quarter Report,the other Items in this Quarterly Report on Form 10-Q, and our otherfilings made with SEC, and in particular, the section captioned “Risk Factors”in the Annual Report, the sections captioned “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Related PersonTransactions” in the Annual Report, First Quarter Report and this QuarterlyReport on Form 10-Q and the section captioned “Related Person Transactionsand Company Review of Such Transactions” in our Proxy Statement relating to our2009 Annual Shareholders Meeting.

 

The descriptions above are qualified in their entirety by reference to thecopies of the Master Credit Facility Agreement, the Realignment Agreement, the Leases and otherdocuments filed as exhibits to this Quarterly Report on Form 10-Q andincorporated herein by reference.

 

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**Item 6.  Exhibits**

** **

10.1         Summary of Trustee Compensation.  (Incorporated by reference to the Company’sCurrent Report on Form 8-K dated May 19, 2009)

 

10.2         Second Amendment to Purchase Agreement dated May 20,2009 by and between Hub Properties Trust and Senior Housing Properties Trust(Amelia Building, Norfolk, Virginia). (Incorporated by reference to the Company’s Current Report on Form 8-Kdated July 7, 2009)

 

10.3         Second Amendment to Purchase Agreement dated May 20,2009 by and between Hub Properties Trust and Senior Housing Properties Trust(1145 19th Street, N.W., Washington, D.C.).  (Incorporated by reference to the Company’sCurrent Report on Form 8-K dated July 7, 2009)

 

10.4         Master Credit Facility Agreement, dated as of August 4,2009, by and between SNH FM Financing LLC and Citibank, N.A., and acknowledgedand agreed to by SNH FM Financing Trust and Ellicott City Land I, LLC. *(Filed herewith)*

 

10.5         Key Principal Guaranty and Indemnity Agreement, datedas of August 4, 2009, by Senior Housing Properties Trust for the benefitof Citibank, N.A. *(Filed herewith)*

 

10.6         Lease Realignment Agreement, dated as of August 4,2009, by and among Senior Housing Properties Trust and certain of itsaffiliates, and Five Star Quality Care, Inc. and certain of itsaffiliates. *(Filed herewith)*

 

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10.7         Amended and Restated Master Lease Agreement (Lease no. 1),dated as of August 4, 2009, by and among certain affiliates of SeniorHousing Properties Trust, as Landlord, and Five Star Quality Care Trust, asTenant. *(Filed herewith)*

 

10.8         Amended and Restated Guaranty Agreement (Lease no. 1),dated as of August 4, 2009, made by Five Star Quality Care, Inc., asGuarantor, for the benefit of certain affiliates of Senior Housing PropertiesTrust. *(Filed herewith)*

 

10.9         Amended and Restated Master Lease Agreement (Lease no.2), dated as of August 4, 2009, by and among certain affiliates of SeniorHousing Properties Trust, as Landlord, and FS Commonwealth LLC, FS Patriot LLC,FS Tenant Holding Company Trust and Five Star Quality Care Trust, as Tenant. *(Filed herewith)*

 

10.10       Amended and Restated Guaranty Agreement (Lease no. 2),dated as of August 4, 2009, made by Five Star Quality Care, Inc., asGuarantor, for the benefit of certain affiliates of Senior Housing PropertiesTrust. *(Filed herewith)*

 

10.11       Amended and Restated Master Lease Agreement, dated asof August 4, 2009, by and among SNH FM Financing LLC, SNH FM FinancingTrust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc.,as Tenant. *(Filed herewith)*

 

10.12       Amendment No. 1 to Amended and Restated MasterLease Agreement, dated as of August 4, 2009, by and among SNH FM FinancingLLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVEFM Financing, Inc., as Tenant. *(Filedherewith)*

 

10.13       Amended and Restated Guaranty Agreement, dated as of August 4,2009, made by Five Star Quality Care, Inc., as Guarantor, for the benefitof SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC. *(Filed herewith)*

 

10.14       Amended and Restated Master Lease Agreement (Lease no.4), dated as of August 4, 2009, by and among certain affiliates of SeniorHousing Properties Trust, as Landlord, and Five Star Quality Care Trust, FiveStar Quality Care-NS Tenant, LLC and FS Tenant Holding Company Trust, asTenant. *(Filed herewith)*

 

10.15       Amended and Restated Guaranty Agreement (Lease no. 4),dated as of August 4, 2009, made by Five Star Quality Care, Inc., asGuarantor, for the benefit of certain affiliates of Senior Housing PropertiesTrust. *(Filed herewith)*

 

10.16       Second Amendment to Purchase Agreement, dated as ofAugust 6, 2009, between HUB Properties Trust, as Seller, and Senior HousingProperties Trust, as Purchaser (with respect to Torrey Pines, 3030-50 SciencePark Road, San Diego, California). *(Filedherewith)*

 

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)*

 

99.1         Registration Rights Agreement, dated as of August 4,2009, between Five Star Quality Care, Inc. and Senior Housing PropertiesTrust. *(Filed herewith)*

 

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SIGNATURES

 

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

 

 
|   | SENIOR HOUSING  PROPERTIES TRUST |
|--------|----------------------------------|
|   |                             |
|   |                             |   |
|   | By:                              | /s/ David J. Hegarty |
|   |                             | David J. Hegarty |
|   |                             | President and Chief  Operating Officer |
|   |                             | Dated: August 10,  2009 |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ Richard A. Doyle |
|   |                             | Richard A. Doyle |
|   |                             | Treasurer and Chief  Financial Officer |
|   |                             | (principal financial  and accounting officer) |
|   |                             | Dated: August 10,  2009 |

 

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